BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2471


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          ASSEMBLY THIRD READING


          AB  
          2471 (Quirk)


          As Amended  May 10, 2016


          Majority vote


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          |Committee       |Votes|Ayes                  |Noes                |
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          |----------------+-----+----------------------+--------------------|
          |Local           |8-0  |Eggman, Waldron,      |                    |
          |Government      |     |Mullin, Bonilla,      |                    |
          |                |     |Chiu, Cooley, Gordon, |                    |
          |                |     |Linder                |                    |
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          SUMMARY:  Requires the Alameda County local agency formation  
          commission (Alameda LAFCO) to order the dissolution of the Eden  
          Township Healthcare District (District), if the District meets  
          specified criteria.  Specifically, this bill:  


          1)Requires Alameda LAFCO to order the dissolution of the Eden  
            Township Healthcare District, if the healthcare district meets  
            all of the following criteria:










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             a)   The District does not currently receive a property tax  
               allocation;  


             b)   The District has substantial net assets; 


             c)   The District does not provide a direct healthcare  
               service; and,


             d)   The District fails to comply with the specified  
               provisions of AB 2737 (Bonta) of the current legislative  
               session.   


          2)Requires Alameda LAFCO to review the compliance of the  
            District with the criteria in 1) above.  


          3)Requires the dissolution, if Alameda LAFCO orders the  
            dissolution of the District subject to 1) above, to be subject  
            to the provisions for the expedited dissolution process,  
            pursuant to existing law.  


          4)Defines "Direct healthcare service" to mean the ownership or  
            operation of a hospital, medical clinic, wellness center, or  
            ambulance service.  


          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).









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          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.  


          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:  This bill is keyed fiscal.  


          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,  








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            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  
            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  








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            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  
            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 Alameda LAFCO to order the  
            dissolution of the District, if the healthcare district meets  
            specified criteria.  The criteria established by this bill  
            would require the expedited dissolution of the District if the  
            District:  a) does not currently receive property tax; b) has  
            substantial net assets; c) does not own or operate a hospital,  
            medical clinic, wellness center, or ambulance service; and, d)  
            fails to comply with the provisions of AB 2737 (Bonta).  If  
            Alameda LAFCO orders the dissolution of the District, the  
            expedited dissolution process pursuant to AB 912 (Gordon),  
            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.   
            This bill is sponsored by Alameda County.  








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          4)Author's Statement.  According to the author, "?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."  


          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  
            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  








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            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  
            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  








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            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  
            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) 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  








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            (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) of the current legislative session, pending in  
            the Assembly, would require specified healthcare districts to  
            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 Legislature 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.  The Legislature has seen an  
               increasing number of bills seeking to bypass the LAFCO  
               process, therefore, they 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 Legislature may also 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  








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          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)   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 Legislature 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.  


             c)   Net Assets.  Opposition argues that the bill does not  
               define "substantial net assets" and leaves open the  
               opportunity for wide interpretation.  


          10)Arguments in Support.  Supporters argue that many healthcare  
            districts still exist that no longer own a hospital or provide  
            direct healthcare services to the community and therefore may  
            not be fulfilling their original intent.  


          11)Arguments in Opposition.  Opposition argues that the existing  








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            local process should be fully utilized before resorting to  
            state action.  




          Analysis Prepared by:                                             
                          Misa Lennox / L. GOV. / (916) 319-3958  FN:  
          0002944