BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 2471 |Hearing |6/22/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Quirk |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |5/10/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- Health care districts: dissolution Requires the Alameda County Local Agency Formation Commission to order the Eden Township Healthcare District's dissolution if the District meets specified criteria. Background The Cortese-Knox-Hertzberg Act controls how local officials change the boundaries of cities and special districts, putting local agency formation commissions (LAFCOs) in charge of the proceedings. LAFCOs' boundary decisions must be consistent with spheres of influence (SOIs) that LAFCOs adopt to show the future boundaries and service areas of the cities and special districts. Before LAFCOs can adopt their spheres of influence, they must prepare municipal service reviews (MSRs) which analyze population growth, public facilities, and service demands. LAFCOs may also conduct special studies of local governments. Most boundary changes begin when a city or special district applies to LAFCO, or when registered voters or landowners file petitions with a LAFCO. In limited circumstances, LAFCO can initiate some special district boundary changes: consolidations, dissolutions, mergers, subsidiary districts, or reorganizations (AB 1335, Gotch, 1993). Boundary changes, including district dissolutions, require four (sometimes five) steps: First, there must be a completed application to LAFCO, AB 2471 (Quirk) 5/10/16 Page 2 of ? including a petition or resolution, an environmental review document, and a property tax exchange agreement between the county and the district. Second, LAFCO must hold a noticed public hearing, take testimony, and may approve the proposed district dissolution. LAFCO may impose terms and conditions that spell out what happens to the district's assets and liabilities. If LAFCO disapproves, the proposed dissolution stops. Third, LAFCO must hold another public hearing to measure protests. In general, LAFCO must order an election on the proposed dissolution, but there are many statutory exemptions. For example, if a district has been inactive for three years, no election is required. Fourth, if state law requires an election, it occurs among the district's voters. A successful dissolution requires majority-voter approval. Finally, LAFCO's staff files formal documents to complete the dissolution. In response to concerns that these complex procedures posed an obstacle to dissolving special districts that have outlived their usefulness, the Legislature enacted an expedited process for dissolving special districts (AB 912, Gordon, 2011). If a proposed dissolution of a special district is consistent with a LAFCO's prior action regarding a special study, SOI, or MSR, the expedited process allows LAFCO to order the dissolution either: Without an election or protest proceedings if the dissolution was initiated by the district's board, or After holding a noticed public hearing and protest proceedings if the dissolution was initiated by an affected local agency, LAFCO, or a petition. If a majority-protest exists at the hearing, LAFCO must stop the dissolution. Absent a majority-protest, LAFCO must order the dissolution without an election. The Eden Township Healthcare District (ETHD) was established by the voters in 1948 to finance construction of Eden Hospital, which opened in 1954. ETHD is governed by a five-member board AB 2471 (Quirk) 5/10/16 Page 3 of ? of directors elected to four-year terms and serves a 130 square mile area that includes the City of San Leandro, most of the City of Hayward, and the unincorporated areas of Castro Valley and San Lorenzo. In 1998, ETHD transferred all of the net operating assets and operations of Eden 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 ETHD 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. ETHD 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. ETHD does not receive any property tax, special tax, or benefit assessments. The main source of revenue is rental income. ETHD's 2016 budget allocates $340,000 for salaries and benefits provided to district employees, while allocating $250,000 to grants to health service providers. The $219,000 that ETHD has budgeted in 2016 for consulting legal, accounting, and public relations costs is nearly as much as it budgeted for grants. Alameda County LAFCO's 2012 MSR identified three governance structure options for ETHD: annexation of the City of Dublin by ETHD; dissolution; or, consolidation with Washington Township Healthcare District. The MSR found that while ETHD no longer owns and operates a hospital, it is premature to dissolve it, pointing to the grant funding, leased office space, and an indication from ETHD of their willingness to provide direct services in the future. Because ETHD provides no direct services, receives no property tax revenues, and devotes a relatively small share of its expenditures towards funding for health care providers, some Alameda County officials want to require LAFCO to order ETHD's dissolution through an expedited dissolution process. Proposed Law AB 2471 (Quirk) 5/10/16 Page 4 of ? Assembly Bill 2471 requires the Alameda County LAFCO to review ETHD's compliance with specified criteria and, if all of the criteria are met, order ETHD's dissolution. AB 2471 specifies four criteria that, if they are all met, would require the Alameda County LAFOC to order ETHD's dissolution: The district does not currently receive a property tax allocation. The district has substantial net assets. The district does not provide a direct health care service, which the bill defines as the ownership or operation of a hospital, medical clinic, wellness center, or ambulance service. The district fails to comply with a requirement that it must spend at least 80% of its annual budget on community grants awarded to organizations that provide direct health services and must not spend more than 20% of its annual budget on administrative expenses, if that requirement is enacted by AB 2737 (Bonta, 2016). AB 2471 requires that, if LAFCO orders the district's dissolution pursuant to the bill's provisions, the dissolution must be subject to the expedited dissolution process, set forth in a specified statute, which requires the commission to order a dissolution after holding at least one noticed public hearing, and after conducting protest proceedings. State Revenue Impact No estimate. Comments 1. Purpose of the bill . AB 2471 narrowly requires Alameda County LAFCO to order the dissolution of a single healthcare district that meets criteria that strongly suggest it is no longer fulfilling the public health purposes for which it was originally established. ETHD provides no direct health care AB 2471 (Quirk) 5/10/16 Page 5 of ? services. According to ETHD's 2015 audited financial statements, all of its operating revenues were derived from rental income and tenant reimbursements associated with leasing of district-owned properties. ETHD has been criticized for the high proportion of its spending that goes towards salaries, administrative, and overhead costs in comparison to the amount that it directly spends on community health needs. Additionally, some of the ETHD's community spending raises questions about the district's priorities and purpose. For example, in recent years ETHD has spent district funds on sponsorships of community organizations and events that appear to have relatively tenuous connections to community health care needs, including the Hayward Area Historical Society's "Martini-Madness Gala," a Rotary Club "Lobsters for Literacy" fundraiser, charity golf tournaments, and a community rodeo parade. By eliminating high salaries, inefficient overhead costs, and questionable spending, dissolving ETHD could allow more of its financial resources to be focused on providing direct health benefits to residents within the area it currently serves. 2. Premature ? State law makes LAFCOs responsible for encouraging orderly formation and development of local agencies based on local conditions and circumstances. The local officials who sit on the Alameda County LAFCO, not 120 legislators from throughout California, are in the best position to evaluate the local conditions and circumstances that should determine the governance of ETHD. Recent experience demonstrates that LAFCOs can act decisively to reorganize disfunctional special districts without legislative interference. For example, the Contra Costa LAFCO's successful reorganization of the Mount Diablo Healthcare District in 2012 was initiated at the local level and involved circumstances that have some parallels to ETHD's. At its June 14, 2016 meeting, the Hayward City Council approved a resolution authorizing the City Manager to make application to Alameda County LAFCO asking the Commission to consider the question of the possible dissolution of ETHD. The staff report accompanying that resolution noted that bypassing LAFCO by pursuing dissolution through state legislation had disadvantages and stated that, "Legislation may have a role in the process should the community decision be made to dissolve the District, but it appears premature at this point." In light of these efforts to evaluate dissolution through the existing LAFCO process, the Committee AB 2471 (Quirk) 5/10/16 Page 6 of ? may wish to consider whether it is appropriate for the Legislature to override local control by inserting itself into this local boundary dispute. 3. Precedent . AB 2471 is one of several bills that the Legislature has considered in recent years that limit the discretion and authority that state law generally grant to LAFCOs over boundary changes and reorganizations. For example, AB 1232 (Huffman, 2010) allowed for the consolidation of the Sewerage Agency of Southern Marin and its member districts, after notice and hearing, but without protest hearings, AB 2453 (Achadjian, 2014) established a special process for forming the Paso Robles Water District, and AB 3 (Williams, 2015) created a special process for forming the Isla Vista Community Services District. Continuing to enact special legislation circumventing the LAFCO process for individual local government boundary changes and reorganizations may set a precedent that invites regular legislative involvement in all manner of disputes over local service delivery and boundary issues. 4. Definition . One of the criteria that AB 2471 requires Alameda LAFCO to review is whether ETHD has "substantial net assets." However, the bill provides no guidance for what constitutes a "substantial" amount of net assets. This ambiguity may make it difficult for LAFCO to make a determination about this criterion that would not be subject to challenge. The Committee may wish to consider amending AB 2471 to specify a threshold amount of net assets or a ratio of net assets to expenditures on health services that would meet the definition of "substantial net assets." 5. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because AB 2471 imposes additional duties on Alameda County LAFCO officials, Legislative Counsel says that it imposes a new state mandate. AB 2471 requires the state to reimburse local agencies if the Commission on State Mandates determines that the bill imposes a reimbursable mandate. 6. Special legislation . The California Constitution prohibits special legislation when a general law can apply (Article IV, §16). AB 2471 contains findings and declarations explaining the need for legislation that applies only to Eden Township AB 2471 (Quirk) 5/10/16 Page 7 of ? Healthcare District. 7. Related legislation . AB 2737 (Bonta), which is awaiting a hearing in the Senate Health Committee, 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 spending more than 20% of their annual budgets on administrative expenses. AB 2910 (Assembly Local Government Committee, 2016) adds a statutory cross-reference to clarify that the expedited dissolution process for special districts enacted by AB 912 (Gordon, 2011) applies to all special districts, including health care districts. AB 2414 would require Riverside County LAFCO to submit to voters a proposal to expand the Desert Healthcare District. Assembly Actions Assembly Local Government Committee:8-0 Assembly Floor: 69-0 Support and Opposition (6/16/16) Support : Alameda County. Opposition : Alameda Local Agency Formation Commission; Association of California Healthcare Districts; California Association of Local Agency Formation Commissions; California Special Districts Association; Eden Township Healthcare District. -- END -- AB 2471 (Quirk) 5/10/16 Page 8 of ?