BILL ANALYSIS Ó
AB 2471
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Date of Hearing: May 4, 2016
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Susan Talamantes Eggman, Chair
AB 2471
(Quirk) - As Introduced February 19, 2016
SUBJECT: Health care districts: dissolution.
SUMMARY: Requires a local agency formation commission (LAFCO)
to order the dissolution of a healthcare district without an
election, if the healthcare district meets specified criteria.
Specifically, this bill:
1)Requires a LAFCO to order the dissolution of a healthcare
district without an election, if the healthcare district meets
all of the following criteria:
a) The healthcare district does not currently receive a
property tax allocation;
b) The healthcare district has substantial net assets; and,
c) The healthcare district does not provide a direct
healthcare service.
2)Requires the dissolution, if a LAFCO orders the dissolution of
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a healthcare district subject to 1) above, to be subject to
the provisions for winding up the affairs of a dissolved
district, pursuant to existing law.
3)Provides the following definitions:
a) "Direct healthcare service" to mean the ownership or
operation of a hospital, medical clinic, wellness center,
or ambulance service.
b) "LAFCO" to mean the commission in whose sphere of
influence the healthcare district exists.
EXISTING LAW:
1)Establishes the procedures for the organization and
reorganization of cities, counties, and special districts
under the Cortese-Knox-Hertzberg Local Reorganization Act of
2000 (Act).
2)Defines "dissolution" to mean the dissolution,
disincorporation, extinguishment, and termination of the
existence of a district and the cessation of all its corporate
powers, except as the LAFCO may otherwise provide, pursuant to
existing law, or for the purpose of winding up the affairs of
the district.
3)Defines "sphere of influence" to mean a plan for the probable
physical boundaries and service area of a local agency, as
determined by LAFCO.
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4)Provides any resolution adopted by LAFCO on or after January
1, 1986, ordering the dissolution of a healthcare district is
subject to confirmation by the voters.
FISCAL EFFECT: None
COMMENTS:
1)Healthcare Districts. Near the end of World War II,
California faced a severe shortage of hospital beds. To
respond to the inadequacy of acute care services in the
non-urban areas of the state, the Legislature enacted the
Local Hospital District Law, with the intent to give rural,
low-income areas without ready access to hospital facilities,
a source of tax dollars that could be used to construct and
operate community hospitals and health care institutions in
medically underserved areas, to recruit physicians and support
their practices. The Local Hospital District Law (now called
the Local Health Care District Law) allowed communities to
create a new governmental entity, independent of local and
county jurisdictions that had the power to impose property
taxes, enter into contracts, purchase property, issue debt,
and hire staff. In general, the process of creating a
hospital district started with citizens in a community
identifying the need for improved access to medical care.
According to the Association of California Healthcare
Districts, there are currently 78 districts, of which three
have stand-alone skilled nursing facilities; 54 are rural; 34
hospitals, 20 of which are critical access; and, five have
stand-alone clinics. These institutions provide a significant
portion of the medical care to minority populations and the
uninsured in medically underserved regions of the state and
are mainly funded by Medicare, Medi-Cal, and district tax
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dollars.
2)LAFCOs and District Dissolution. LAFCOs are responsible for
coordinating logical and timely changes in local governmental
boundaries, conducting special studies that review ways to
reorganize, simplify, and streamline governmental structures,
and preparing a sphere of influence for each city and special
district within each county. The courts refer to LAFCOs as
the Legislature's "watchdog" over local boundary changes. The
Act establishes procedures for local government changes of
organization, including special district dissolution. LAFCOs
regulate boundary changes through the approval or denial of
proposals by other public agencies or individuals for these
procedures.
The Act prescribes a process for the dissolution of special
districts, which is similar to most boundary changes that
require numerous steps: a) Initiation of LAFCO process, by
petition
of property owners or registered voters in the district or
resolution of an affected agency;
b) Noticed public hearing, testimony, and approval or
disapproval by LAFCO; c) Additional public hearing for
protests and in specified cases LAFCO must order an election
on the proposed dissolution; d) Dissolution election, if
required, among district's voters, which requires a majority
vote approval; and, e) LAFCO staff files documents to complete
the dissolution.
AB 912 (Gordon), Chapter 109, Statutes of 2011, created an
expedited process for the dissolution of special districts.
Under this expedited process, if the proposed dissolution is
initiated by the special district's board and dissolution is
consistent with a prior action of LAFCO regarding a special
study, sphere of influence, or municipal service review, LAFCO
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can order dissolution without protest or election. If the
dissolution was initiated by an affected local agency, LAFCO,
or petition, LAFCO must hold a public hearing to consider
protest, and if there is no majority protest LAFCO, must order
the dissolution without an election. Existing law also
requires that a resolution adopted by LAFCO ordering the
dissolution of a healthcare district to be subject to
confirmation by the voters. Due to this provision and the
expedited dissolution process put in place by AB 912, there is
some ambiguity in existing law about a LAFCO's ability to
order the dissolution of a healthcare district without an
election.
3)Bill Summary. This bill requires a LAFCO to order the
dissolution of a healthcare district without an election, if
the healthcare district meets specified criteria. The
criteria established by this bill would require the
dissolution of a healthcare district that a) does not
currently receive property tax; b) has substantial net assets;
and, c) does not own or operate a hospital, medical clinic,
wellness center, or ambulance service. The criteria
established by this bill only currently apply to one district
- Eden Township Healthcare District (District). This bill is
sponsored by Alameda County.
4)Author's Statement. According to the author, "With the right
focus of delivering direct health services and/or providing
substantial financial support to various healthcare providers
and organizations in a community, healthcare districts have
the potential to improve and promote the health status of
underserved communities. Yet, there are significant
variations in the way healthcare districts operate and the
rules that govern them. Due to this, many healthcare
districts still exist that no longer own a hospital or provide
any direct healthcare services to the community and therefore,
may not be fulfilling their original intent and commitment to
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the residents of the district.
"For example, in Alameda County, Eden Township Healthcare
District (ETHD) does not provide any direct healthcare
services. Their revenue source is mostly derived from
commercial property rental income which, along with cash and
securities, has a net value of $45.6 million. In 2015, ETHD
spent 85% of its budget on administrative expenditures, such
as salaries, benefits, utilities and other professional
services, while only disbursing 15% of their budget on grants
to service providers and sponsorships. Furthermore, ETHD pays
less than half of 1% of its annual net assets towards
charitable activities. AB 2471 will order the dissolution of
a health care district without an election when it meets all
of the following criteria... Currently ETHD in Alameda County
is the only healthcare district that meets these criteria."
5)Eden Township Healthcare District. According to Alameda
County Local Agency Formation Commission's (LAFCO) 2012
municipal service review (MSR), the District was established
by the voters in 1948 to finance construction of Eden
Hospital, which opened in 1954. In 1998, the District
transferred all of the net operating assets and operations of
the hospital to Sutter Health. In 2004, the District
purchased San Leandro Hospital and leased it to Sutter Health.
In order to comply with seismic safety laws, the District
entered into an agreement with Sutter Health to replace Eden
Medical Center. The agreement also gave Sutter the option to
purchase San Leandro Hospital. On December 21, 2011, an
appellate court ruled in favor of Sutter in litigation over
the terms of the 2008 agreement. On October 31, 2013, Sutter
transferred San Leandro Hospital to the Alameda Health System,
the public health authority that operates Alameda County's
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health care system.
Currently, the District provides grant funding to
health-related organizations through a Community Health Fund
and owns three office buildings, where it leases office space
to healthcare providers. The District does not receive any
property tax, special tax, or benefit assessments. The main
source of revenue is rental income. The District consists of
130 square miles and includes the City of San Leandro, most of
the City of Hayward, and the unincorporated areas of Castro
Valley and San Lorenzo, and is governed by a five-member board
of directors elected to four-year terms.
Alameda LAFCO's MSR identified three governance structure
options for the District:
a) Annexation of the City of Dublin by the District; b)
dissolution; or, c) consolidation with Washington Township
Healthcare District. The MSR found that while the District no
longer owns and operates a hospital, it is premature to
dissolve the District, pointing to the grant funding, leased
office space, and an indication from the District of their
willingness to provide direct services in the future.
6)Controversy and Subsequent Legislation. Recent controversy
surrounding several healthcare districts has brought greater
media and legislative scrutiny on several issues, including
their fiscal management. The Assembly Committee on
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Accountability and Administrative Review conducted several
hearings regarding healthcare districts, and focused
specifically on healthcare districts that do not operate
hospitals. Additionally, the Legislative Analyst Office (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. There
have also been concerns regarding districts maintaining
reserve balances in the tens of millions of dollars. For
example, Peninsula Health Care District and Beach Cities
Health District have each reported over $45 million in
unrestricted net assets (reserves) at the end of June 2011.
Additionally, according to the LAO report, several LAFCOs have
considered dissolving districts. Five districts have been
dissolved or otherwise reorganized since 2000. Since that
time, the Contra Costa County LAFCO consolidated Mount Diablo
Healthcare District into the City of Concord. The Mount
Diablo Healthcare District did not operate a hospital and
similar concerns were expressed about the amount of revenue
spent on administrative costs, instead of on grant funding for
community health needs. Contra Costa LAFCO is currently
undertaking a special study to examine governance options,
including dissolution, for West Contra Costa Healthcare
District. Sonoma LAFCO is also in receipt of an application
to begin the dissolution process for a healthcare district.
A Bureau of State Audits' (BSA) audit of Salinas Valley
Memorial Health Care System found that the District's Board
violated open meeting laws to grant overly generous
compensation, retirement, and benefits to the chief executive
officer. This Committee heard several bills addressing the
employment contract between a healthcare district and hospital
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administrator, including AB 2115 (Alejo) of 2012; AB 2180
(Alejo), Chapter 322, Statutes
of 2012; and, AB 130 (Alejo), Chapter 92, Statutes of 2013.
AB 2418 (Gordon and Dickinson) of 2012 would have required
healthcare districts to expend 95% of any property tax revenue
on current community healthcare benefits.
7)Prior Bills that Established a Modified LAFCO Process. In the
past several years, the Legislature has established a modified
LAFCO process or exempted specified requirements in the LAFCO
process for the formation and consolidation of several special
districts following a history of failed attempts at the local
level including, AB 2453 (Achadjian), Chapter 350, Statutes of
2014, for the creation of the Paso Robles Water District; AB 3
(Williams), Chapter 548, Statutes of 2015, for the formation
of the Isla Vista Community Services District; and, AB 1232
(Huffman), Chapter 518, Statutes of 2010, for the
consolidation of the Sewerage Agency of Southern Marin and its
member districts, after notice and hearing, but without
protest hearings.
8)Related Legislation. AB 72 (Bonta) of 2015, on the Senate
Inactive File, would have authorized the District, until
January 1, 2026, to impose special taxes within the District,
subject to the approval of two-thirds of the District's
voters.
AB 2737 (Bonta), pending in the Assembly Appropriations
Committee, would require specified healthcare districts to
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spend at least 80% of their annual budget on community grants
awarded to organizations that provide direct health services,
and would prohibit more than 20% of their annual budget to be
spent on administrative expenses. The parameters of AB 2737
were also established to address the District.
9)Policy Considerations. The Committee may wish to consider the
following:
a) Limiting LAFCO Powers. The Legislature has delegated
the power to control local boundaries to the 58 LAFCOs.
This bill bypasses LAFCO, and does not require the usual
dissolution process to occur. This Committee has seen an
increasing number of bills seeking to bypass the LAFCO
process, therefore, the Committee may wish to consider if
this bill is going against prior directives from the
Legislature that designated fundamental powers to LAFCOs to
make these types of decisions. The Committee may wish to
ask the author why the current LAFCO process is not a
viable option for the dissolution of the District and why
this bill is necessary.
Opposition argues that this bill disregards prior actions taken
by Alameda LAFCO pertaining to the District. Alameda LAFCO
determined the District still has an indirect role in the
provision of healthcare services within its existing boundaries.
If the author does not agree with prior LAFCO actions or
determinations regarding the District, the Committee may wish to
consider if the LAFCO should be reexamined and altered as
opposed to eliminating LAFCOs discretion outright.
b) Voter Involvement. The dissolution process under LAFCO
contains a number of required steps that allow for public
involvement. For example, the voters have the opportunity
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to weigh in at a publicly noticed hearing, register their
protest, and when enough protest is received, vote in an
election. The Committee may wish to consider that this
bill denies the voters the opportunity to weigh in on the
dissolution of a district that was created by the voters.
c) Statewide Approach. The Committee may wish to consider,
while the criteria established by the bill is aimed at Eden
Township Healthcare District, this bill applies statewide
to any healthcare district that fits the criteria
established by this bill. Because this bill prevents LAFCO
and the public from weighing in on the question of
dissolution, the Committee may wish to consider if
statewide application is appropriate.
d) Healthcare Districts and LAFCO. The relationship
between LAFCOs and healthcare districts is unique in
comparison to other special districts. The Local
Healthcare District Law and the formation of some
healthcare districts predate the Knox Nisbet Act, which
created LAFCOs and formalized the process for establishing
a hospital district. Due to the unique nature of
healthcare services and the long history of healthcare
district's principal act, the Committee may wish to
consider if there is a need to more clearly define the
relationship between LAFCOs and healthcare districts, and
undertake a closer examination of healthcare districts'
service boundaries, the process of dissolution for
healthcare districts, and the considerations LAFCOs are
required to make when doing an MSR and determining the
sphere of influence for healthcare districts.
e) Definitions. Local agencies, not LAFCOs, have a sphere
of influence; therefore, the Committee may wish to
encourage the author to correct the definition in the bill
for LAFCOs. Further, opposition argues that the bill does
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not define "substantial net assets" and leaves open the
opportunity for wide interpretation.
10)Committee Amendments. In light of the considerations raised
above, the Committee may wish to ask the author to take the
following amendments:
a) Narrow the scope of the bill down to Eden Township
Healthcare District.
b) Specify that the bill's provisions apply to Alameda
LAFCO to order the dissolution of Eden Township Healthcare
District if specified criteria in the bill are met.
c) Require Alameda LAFCO to review compliance with AB 2737
(Bonta) and with all criteria in the bill.
d) Add to the list of criteria that the District does not
comply with AB 2737 (Bonta).
e) Insert the expedited dissolution process pursuant to AB
912 (Gordon), if the criteria established by the bill are
met, which would require Alameda LAFCO to hold at least one
noticed public hearing, and after conducting protest
proceedings, order an election only if majority protest is
registered.
11)Arguments in Support. Supporters argue that the criteria for
dissolution included in
AB 2471 will dissolve healthcare districts in California that
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are no longer serving their original purpose when approved by
the voters of the district. Supporters argue that this bill
is very narrow, and therefore, would not affect the vast
majority of healthcare districts in California who are
continuing to service their communities, as promised.
12)Arguments in Opposition. Opposition argues that the existing
local process should be fully utilized before resorting to
state action. Opposition suggests amendments to address the
process of dissolving a healthcare district without voter
approval, but incorporates a local LAFCO process that provides
an opportunity for community input.
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REGISTERED SUPPORT / OPPOSITION:
Support
Alameda County [SPONSOR]
Opposition
Alameda Local Agency Formation Commission
Association of California Healthcare Districts (unless amended)
California Association of Local Agency Formation Commissions
(unless amended)
Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958
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