BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 582
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          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  








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            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  








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            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  








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            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  








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            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  








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            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  








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            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  








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               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 








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          None on file
           
          Analysis Prepared by  :    Misa Yokoi-Shelton / L. GOV. / (916)  
          319-3958