BILL ANALYSIS Ó
AB 582
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 582 (Levine and Chesbro)
As Amended February 24, 2014
2/3 vote. Urgency
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|ASSEMBLY: | |(May 29, 2013) |SENATE: |34-0 |(April 10, |
| | | | | |2014) |
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(vote not relevant)
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|COMMITTEE VOTE: |9-0 |(May 7, 2014) |RECOMMENDATION: |concur |
|(L. Gov.) | | | | |
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Original Committee Reference: HEALTH
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,
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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 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 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
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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
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.
a) 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.
b) 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
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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 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.
a) 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 Web site, "While the current operation at PDH is
not financially feasible, we are committed to looking at all
possible options for the future." 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 Accountability and Administrative Review Committee
conducted several hearings regarding healthcare districts, and
focused specifically on healthcare districts that do not operate
hospitals. Additionally, the Legislative Analyst's Office
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 of the more common
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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 United States Code 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.
a) 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
2014. 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.
b) According to the United States 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."
c) 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 municipality, its officers, elected officials,
employees and even its inhabitants. Filing a bankruptcy
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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.
d) "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. 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.
e) "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."
f) Federal bankruptcy law defines a "lien" as a charge against
or 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.
g) The Assembly Local Government 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
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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. After Measure C failed passage the West Contra
Costa Healthcare District is now discussing the closure of the
Doctors Medical Center.
7)Policy considerations. The Legislature 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), Chapter 742, Statutes of 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.
Legislators may wish to consider asking the State Treasurer's
Office to review future proposals to enact statutory liens on
local taxes to evaluate:
i) The local agency's ability to obtain financing through
the capital markets with, and without, the enactment of a
statutory lien.
ii) 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.
iii) 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."
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b) The Legislature 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.
8)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.
9)Arguments in opposition. None on file.
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958
FN: 0003396