BILL ANALYSIS Ó AB 582 Page 1 Date of Hearing: May 7, 2014 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT K.H. "Katcho" Achadjian, Chair AB 582 (Levine) - As Amended: February 24, 2014 SUBJECT : Palm Drive Health Care District: certificates of participation: lien. SUMMARY : Enacts a statutory lien to secure certificates of participation issued by the Palm Drive Healthcare District. The Senate amendments delete the Assembly version of this bill, and instead: 1)Require all certificates of participation (COPs) executed and delivered by the Palm Drive Healthcare District (District) between January 1, 2005, and December 31, 2014, including COPs executed and delivered or revenue bonds issued before 2035 to refund the revenue bonds or COPs, to be secured by a statutory lien on all of the revenue generated from parcel taxes levied pursuant to Measure W, approved by the voters on November 2, 2004. 2)Require the lien to arise automatically without the need for any action or authorization by the District. 3)Specify that the lien shall be valid and binding from the time the COPs are executed and delivered or the revenue bonds are issued. 4)Require the parcel tax to be immediately subject to this lien. 5)Require the lien to immediately attach to the parcel tax revenue to be effective, binding, and enforceable against the District, its successors, purchasers of those revenues, creditors, and all others asserting the rights therein, irrespective of whether those parties have notice of the lien. 6)Contain an urgency clause. 7)Find and declare that a special statute is necessary because of the unique circumstances applicable only to the District. 8)Find and declare that in order to enable the District to AB 582 Page 2 complete its financing, meet its obligations to employees, vendors, and other creditors in a timely manner it is necessary for this act to take effect immediately. EXISTING LAW : 1)Defines "bonds" as any bonds, note, bond anticipation notes, commercial paper, or other evidences of indebtedness, or lease, installment purchase, or other agreements, or COPs therein, that are not issued pursuant to a statutory authority containing a provision governing the perfection and priority of pledges of collateral unless the provision provides that this chapter shall govern. 2)Defines "pledge" as, and as used in any pledge document shall be deemed to create, a grant of a lien on and a security interest in and pledge of the collateral referred to in a pledge document. 3)Requires a pledge of collateral by any public body to secure, directly or indirectly, the payment of the principal or redemption price of, or interest on, any bonds, or any reimbursement or similar agreement with any provider of credit enhancement for bonds, which is issued by or entered into by a public body, to be valid and binding in accordance with the terms of the pledge document from the time the pledge is made for the benefit of pledgees and successors thereto. 4)Requires the collateral to immediately be subject to the pledge, and the pledges constitute a lien and security interest which shall immediately attach to the collateral and be effective, binding, and enforceable against the pledgor, its successors, purchasers of the collateral, creditors, and all others asserting the rights therein, to the extent set forth, and in accordance with, the pledge document irrespective of whether those parties have notice of the pledge and without the need for any physical delivery, recordation, filing, or further act. FISCAL EFFECT : None COMMENTS : 1)Purpose of this bill . This bill enacts a statutory lien to secure COPs issued by the District. Under this bill the District's obligations in connection with COPs executed and AB 582 Page 3 delivered, or revenue bonds issued, by or on behalf of the District between January 1, 2005, and December 31, 2014, must be secured by a statutory lien on all of the revenues generated from parcel taxes approved by voters in 2004. This bill specifies that COPs executed and delivered or revenue bonds issued before 2035 to refund the District's revenue bonds or COPs must be secured by a statutory lien on all of the revenues generated from parcel taxes approved by voters in 2004. This bill requires this statutory lien to arise automatically without the need for any action or authorization by the District or its board of directors. Under this bill the lien will be valid and binding from the time the COPs are executed and delivered or the revenue bonds are issued. Additionally, this bill requires that the parcel tax revenue must immediately be subject to this lien, and that the lien must immediately attach to the parcel tax revenue and be effective, binding, and enforceable against the District, its successors, purchasers of those revenues, creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without the need for any physical delivery, recordation, filing, or further act. This bill is author-sponsored. 2)Author's statement . According to the author, "The interest rate on those outstanding bonds is nearly 5% and 7.5% respectively. With the statutory lien that this bill would put in place it is estimated that the District will save over $6.5 million on the interest payments over the life of the existing bonds, because this will allow the District to refinance its existing bonds at what is estimated to be a 4% interest rate. It is important to point out that the change in law made in the bill does not create a new tax or increase existing taxes. This bill puts in place the necessary assurances that lenders are requiring for the district to refinance the existing bonds allowing the savings on interest to go to paying for care instead of to Wall Street." 3)Palm Drive Healthcare District . The District was formed in 2000 to prevent the closure of the Palm Drive Hospital in Sebastopol (Sonoma County). The District owns and operates Palm Drive Hospital, which provided essential inpatient, outpatient, and emergency services to residents in western AB 582 Page 4 Sonoma County. In November 2004, more than 69% of district voters approved Measure W, allowing the District to impose a parcel tax that generates nearly $4 million in annual revenues. In 2005, the District issued revenue bonds secured by the parcel tax. In 2007, the District filed for bankruptcy protection. The bankruptcy court subsequently approved a plan of adjustment that required the District to sell COPs and use the proceeds to satisfy its obligations under the plan and finance other specified expenses. The District issued $11 million in COPs in 2010, allowing it to exit from bankruptcy. On April 7, 2014, the District's governing board declared a fiscal emergency and voted to close the Palm Drive Hospital on April 28, 2014. According to information posted on Palm Drive Hospital's website, "While the current operation at PDH is not financially feasible, we are committed to looking at all possible options for the future. This will include ways of rethinking options to provide vital West County services. With your help, we can reimagine our future. Our plan for the next few months is to work with the community to develop a relevant vision for the future - one that is in line with what the community wants and needs, and what can be financially viable on a long-term basis." Supporters argue despite the unclear future of the District in terms of providing services, the debt will continue to exist, therefore this bill is necessary to refinance the existing debt. The parcel taxes passed by the voters in 2004 to keep the Palm Drive Hospital open will continue to be levied and used to pay off debt despite the hospital's closure. Additionally, the District recently requested financial assistance from Sonoma County to assist with the orderly wind down of their operations. 4)Healthcare districts . Recent controversy surrounding several healthcare districts has brought greater media and legislative scrutiny on several issues including their fiscal management. The Assembly Committee on Accountability and Administrative Review conducted several hearings regarding healthcare districts, and focused specifically on healthcare districts that do not operate hospitals. Additionally, the LAO produced a report entitled, "Overview of Health Care Districts", in April 2012 in response to several healthcare districts that have declared bankruptcy since 2000. Healthcare districts point to several challenges which vary depending on the economic profile of the community being served, but among some AB 582 Page 5 of the more common include physician, technical and professional staff shortages (especially in rural areas), state mandates (including seismic requirements), managed care, and the general economic downturn. 5)Municipal bankruptcy under federal law . The list of eligibility requirements for a "municipal debtor" in federal law under Chapter 9 is contained in U.S.C. Section 109 (c). First, an entity may be a debtor under Chapter 9 only if such entity: (a) is a municipality; (b) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by state law, or by a governmental officer or organization empowered by state law to authorize such entity to be a debtor; (c) is insolvent; (d) desires to effect a plan to adjust such debts; and, (e) has obtained the agreement of creditors holding at least a majority in the amount of the claims of each class that such entity intends to impair under a plan, as specified. A municipality or local public entity must meet all of these conditions for the bankruptcy petition to be accepted by the court. According to the sponsor of the bill, the court has not accepted the District's bankruptcy petition. Additionally, the deadline for submitting objections related to the District's eligibility for bankruptcy is at the end of May. If objections are filed with the court, then a hearing on eligibility may not occur until sometime later this summer. However, if no objections are filed, supporters state that eligibility should be found very quickly. According to the U.S. Courts, "The purpose of Chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan." According to a primer written by John Knox and Marc Levinson, on behalf of Orrick, Herrington & Sutcliffe, LLP, entitled Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress , "One of the most important and immediate advantages of a bankruptcy filing is the protection against actions that might be taken by creditors or others against the AB 582 Page 6 municipality, its officers, elected officials, employees and even its inhabitants. Filing a bankruptcy petition invokes an automatic stay - basically a federal court injunction - against any action that could otherwise be taken against the municipality or its officer or employees. The stay lasts during the pendency of the Chapter 9 case, but the bankruptcy judge retains the right to modify or terminate the stay for cause shown." "Bankruptcy gives the debtor breathing space in which to function while it tries to work out its creditor and cash flow problems. Raising new revenues, renegotiating contracts and restructuring debt obligations takes time. If a municipality is forced to breach contracts or face other legal claims caused by fiscal stress outside of bankruptcy, it may have to spend time fighting off creditors trying to seize assets or collateral, or be forced into regulatory or other states to answer for such actions and redress grievances before it is able to fashion a workable solution for the benefit of all creditors and residents. The bankruptcy case allows all of these disputes to be addressed in one forum, and the automatic stay provides the municipality the opportunity to focus on a comprehensive solution rather than simultaneously fighting multiple brushfires. "Most people see the ability to adjust debts and other obligations as the prime benefit of a bankruptcy filing. If a plan of adjustment can be confirmed in a Chapter 9 case, it may provide that unpaid claims of creditors be either reduced and/or extended or restructured. There are limitations on how these adjustments can be made, and it may be possible for creditors to block a debtor from making the adjustments they would like to make. Nevertheless, in situations where it is not possible to fully repay all creditors absent some sort of debt relief, the plan of adjustment can provide a fresh start and the ability to achieve long-term financial stability for the municipality by deferring and/or reducing past obligations. "Municipalities that seek bankruptcy relief (and even those that seriously consider filing) should expect the immediate suspension and/or downgrade of their credit ratings. Particularly if bondholders are not fully repaid, this credit stigma may last for many years." Federal bankruptcy law defines a "lien" as a charge against or AB 582 Page 7 interest in property to secure payment of a debt or performance of an obligation. A "statutory lien" is a distinct type of lien that arises solely by force of statute, without any prior consent between the parties or judicial action. Unlike other types of liens, a statutory lien remains enforceable even after a bankruptcy filing. The Committee may wish to weigh the benefit of allowing a healthcare district that may no longer operate a hospital to try to refinance at a lower rate versus state intervention for a district that has filed for bankruptcy and legislation that will provide some creditors with more security than others prior to the bankruptcy process. 6)Previous legislation . This bill is substantially similar to SB 644 (Hancock), Chapter 742, Statutes of 2011, which required all COPs executed and delivered by the West Contra Costa Healthcare District between June 8, 2004, and December 31, 2012, to be secured by a statutory lien on all the revenues generated from a parcel tax passed by the District voters in 2004. The West Contra Costa Healthcare District continues to struggle to keep open the Doctors Medical Center in San Pablo. In order to remedy some of the financial issues, the District placed Measure C on the May 2014 ballot, another parcel tax to try to keep the hospital open. 7)Policy considerations . The Committee may wish to consider the following: a) The Senate Governance and Finance Committee heard this bill prior to the District declaring a fiscal emergency and filing a bankruptcy petition. The Committee analysis dated March 19, 2014, raises the following concern. "Next in line? [This bill] contains language that is substantially the same as language enacted for the West Contra Costa Health Care District by SB 644 (Hancock, 2011). As with SB 644, enacting [this bill] could invite similar requests for statutory liens from other financially struggling local governments. In anticipation of future proposals to enact statutory liens backed by voter-approved parcel tax revenues, legislators may want to consider whether any general criteria should guide their decisions on those proposals. For example, should the Legislature enact statutory liens backed by voter-approved parcel tax revenues only for public agencies that have recently AB 582 Page 8 emerged from bankruptcy or that lack the ability to obtain municipal financing without the lien? Legislators may wish to consider asking the State Treasurer's Office to review future proposals to enact statutory liens on local taxes to evaluate: The local agency's ability to obtain financing through the capital markets with, and without, the enactment of a statutory lien. The expected net cost savings that the local agency can expect to obtain through a proposed financing, or refinancing, that relies on the enactment of a statutory lien. Whether a proposed financing, or refinancing, that relies on the enactment of a statutory lien is necessary to either avoid insolvency or restore a local agency's solvency following a recent bankruptcy." a) The Committee may wish to ask the author and sponsor to explain the difference in treatment of a bondholder and the priority of payment of obligations secured by a statutory lien versus obligations secured by lien resulting from a voluntary contractual agreement. 1)Arguments in support . Supporters argue that this bill will allow the District to refinance its existing debt at a lower interest rate which will lessen the District's current financial burdens. 2)Arguments in opposition . None on file. 3)Urgency clause . This bill contains an urgency clause and requires a two-thirds vote on the Assembly Floor. REGISTERED SUPPORT / OPPOSITION : Support Palm Drive Healthcare District [SPONSOR] Association of California Healthcare Districts Opposition AB 582 Page 9 None on file Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916) 319-3958