BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 2471|
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                                   THIRD READING 


          Bill No:  AB 2471
          Author:   Quirk (D), et al.
          Amended:  8/1/16 in Senate
          Vote:     21 

           SENATE GOVERNANCE & FIN. COMMITTEE:  4-1, 6/22/16
           AYES:  Hertzberg, Nguyen, Beall, Pavley
           NOES:  Moorlach
           NO VOTE RECORDED:  Hernandez, Lara

           SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

           ASSEMBLY FLOOR:  69-0, 5/12/16 - See last page for vote

           SUBJECT:   Health care districts:  dissolution


          SOURCE:    Author

          DIGEST:   This bill requires the Alameda County Local Agency  
          Formation Commission (LAFCO) to order the Eden Township  
          Healthcare District's (ETHD's) dissolution if the District meets  
          specified criteria.


          ANALYSIS:  


          Existing law:


          1)Establishes the procedures for the organization and  
            reorganization of cities, counties, and special districts  








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            under the Cortese-Knox-Hertzberg Local Reorganization Act of  
            2000.


          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 a 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.


          This bill:


          1)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. 


          2)Specifies four criteria that, if they are all met, would  
            require the Alameda County LAFOC to order ETHD's dissolution:


             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 health care  
               service, which this bill defines as the ownership or  
               operation of a hospital, medical clinic, wellness center,  
               or ambulance service.


             d)   The District fails to comply with a requirement that it  
               must spend at least 80% of its annual budget on community  







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               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).


          3)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.


          Background


          The Cortese-Knox-Hertzberg Act controls how local officials  
          change the boundaries of cities and special districts, putting  
          local agency formation commissions 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 SOIs, 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, Chapter 1307, Statutes of 1993).  Boundary  
          changes, including district dissolutions, require four  
          (sometimes five) steps:


           First, there must be a completed application to LAFCO,  
            including a petition or resolution, an environmental review  
            document, and a property tax exchange agreement between the  
            county and the district.








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           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, Chapter 109,  
          Statutes of 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.







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          The 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 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  







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          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.


          Comments


          Purpose of the bill.  This bill 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  
          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.


          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  







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          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,  
          legislators may wish to consider whether it is appropriate for  
          the Legislature to override local control by inserting itself  
          into this local boundary dispute.


          Precedent.  This bill 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, Chapter 518, Statutes of 2009) 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, Chapter 350, Statutes of 2014)  
          established a special process for forming the Paso Robles Water  
          District, and AB 3 (Williams, Chapter 548, Statutes of 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.


          Mandate. The California Constitution requires the state to  
          reimburse local governments for the costs of new or expanded  
          state mandated local programs.  Because this bill imposes  
          additional duties on Alameda County LAFCO officials, Legislative  
          Counsel says that it imposes a new state mandate.  This bill  
          requires the state to reimburse local agencies if the Commission  
          on State Mandates determines that the bill imposes a  







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          reimbursable mandate.


          Special legislation.  The California Constitution prohibits  
          special legislation when a general law can apply (Article IV,  
          §16).  This bill contains findings and declarations explaining  
          the need for legislation that applies only to ETHD.




          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   Yes


          SUPPORT:   (Verified8/2/16)


          Alameda County


          OPPOSITION:   (Verified8/2/16)


          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


          ARGUMENTS IN SUPPORT:     Supporters argue that ETHD is no  
          longer fulfilling the public health purposes for which it was  
          originally established and 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


          ARGUMENTS IN OPPOSITION:     Opponents argue that the  
          Legislature should not override local control by inserting  
          itself into this local boundary dispute and that this bill may  
          set a precedent that invites regular legislative involvement in  
          all manner of disputes over local service delivery and boundary  
          issues.







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          ASSEMBLY FLOOR:  69-0, 5/12/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Baker, Bigelow,  
            Bloom, Bonilla, Bonta, Brown, Calderon, Campos, Chau, Chávez,  
            Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman,  
            Frazier, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,  
            Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Roger  
            Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder,  
            Lopez, Low, Maienschein, McCarty, Medina, Melendez, Mullin,  
            Nazarian, Obernolte, O'Donnell, Olsen, Quirk, Ridley-Thomas,  
            Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond,  
            Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
          NO VOTE RECORDED:  Atkins, Brough, Burke, Chang, Dahle, Beth  
            Gaines, Harper, Jones-Sawyer, Mathis, Mayes, Patterson

          Prepared by:Brian Weinberger / GOV. & F. / (916) 651-4119
          8/3/16 19:36:08


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