BILL ANALYSIS Ó
AB 2737
Page 1
Date of Hearing: April 20, 2016
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Susan Talamantes Eggman, Chair
AB 2737
(Bonta) - As Amended April 11, 2016
SUBJECT: Nonprovider health care districts.
SUMMARY: Requires a "nonprovider healthcare district" to spend
at least 80% of its annual budget on community grants awarded to
organizations that provide direct health services, and prohibits
more than 20% of its annual budget to be spent on administrative
expenses. Specifically, this bill:
1)Requires a "nonprovider healthcare district" to spend at least
80% of their annual budget on community grants awarded to
organizations that provide direct health services, and
prohibits more than 20% of their annual budget to be spent on
administrative expenses.
2)Defines "nonprovider health care district" to mean a
healthcare district that meets all of the following criteria:
a) The district does not provide direct health care
services to consumers;
b) The district has not received an allocation of real
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property taxes in the past three years;
c) The district has assets of $20 million dollars or more;
d) The district is not located in a rural area that is
typically underserved for health care services; and,
e) The district, in two or more consecutive years, has
dedicated an amount to community grants that is less than
twice the total administrative costs and overhead not
directly associated with revenue-generating enterprises.
3)Defines "direct health service" to mean "ownership or direct
operation of a hospital, medical clinic, ambulance service,
transportation program for seniors or persons with
disabilities, a wellness center, health education, or other
similar service."
4)Defines "administrative expenses" to mean "expenses relating
to the general management
of a healthcare district, such as accounting, budgeting,
personnel, procurement, legislative advocacy services, public
relations, salaries, benefits, rent, office supplies, or other
miscellaneous overhead costs."
5)Provides that, if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
reimbursement to local agencies and school districts for those
costs shall be made, pursuant to current laws governing state
mandated local costs.
EXISTING LAW:
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1)Establishes the Local Health Care District Law that defines
the powers and duties of healthcare districts, including, but
not limited to, the following:
a) Operating health care facilities, such as hospitals,
clinics, skilled nursing facilities (SNFs), nurses'
training schools, and child care facilities;
b) Operating ambulance services within and outside of the
district;
c) Operating programs that provide chemical dependency
services, health education, wellness and prevention,
rehabilitation, and aftercare;
d) Carrying out activities through corporations, joint
ventures, or partnerships;
e) Establishing or participating in managed care;
f) Contracting with and making grants to provider groups
and clinics in the community; and,
g) Other activities that are necessary for the maintenance
of good physical and mental health in communities served by
the district.
FISCAL EFFECT: This bill is keyed fiscal.
COMMENTS:
1)Healthcare Districts. Near the end of World War II,
California faced a severe shortage
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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
dollars.
1)Bill Summary. This bill requires specified healthcare
districts to spend at least 80% of their annual budget on
community grants awarded to organizations that provide direct
health services, and prohibits more than 20% of their annual
budget to be spent on administrative expenses. This bill only
applies to "nonprovider healthcare districts," which must meet
all
of the following criteria: a) the district does not provide
direct health care services to consumers; b) the district has
not received an allocation of real property taxes in the past
three years; c) the district has assets of $20 million or
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more; d) the district is not located in a rural area that is
typically underserved for health care services; and, e) the
district, in two or more consecutive years, has dedicated an
amount to community grants that is less than twice the total
administrative costs and overhead not directly associated with
revenue-generating enterprises. Additionally, this bill
defines "administrative expenses" and "direct healthcare
service." The parameters of this bill were established to
address one healthcare district, Eden Township Healthcare
District (District). This bill is sponsored by the City of
San Leandro.
1)Author's Statement. According to the author, "The Eden
Township Healthcare District was established to serve the
health needs of Castro Valley, San Leandro, San Lorenzo,
Hayward and other nearby communities. At one point, Eden
owned and operated a hospital and provided direct healthcare
services to the community. Currently, Eden no longer owns or
operates a hospital and does not provide any direct health
services to the public. Aside from managing buildings they
own, Eden primarily serves as a grant making entity with the
purpose of providing grants to community non-profits to
provide healthcare services to the public. In 2013 and 2014,
Eden spent almost twice as much on salaries and benefits for
its three employees compared to what it gave out in community
grants for healthcare services. The basic foundation for a
healthcare district's existence is to provide healthcare
services to the community it serves. When that basic premise
[is not] being followed, rules need to be set in place for the
benefit of the community."
2)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
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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
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 City of Dublin by the District; b)
dissolution; and, 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
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office space, and an indication from the District of their
willingness to provide direct services in the future.
3)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
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.
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
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(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. AB 2418 sought to
exclude salaries and benefits paid to staff, benefits provided
to board members, and expenses of hiring a consultant from the
definition of community healthcare benefit. AB 912 (Gordon)
Chapter 109, Statues of 2011, created an expedited process for
the dissolution of special districts.
4)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 2471 (Quirk), pending in this Committee, would require
LAFCO to order the dissolution of a healthcare district
without an election, if the district meets specified criteria.
The District meets the criteria established by AB 2471. The
Committee may wish to consider the necessity of this bill, if
AB 2471 is signed into law.
5)Policy Considerations. The Committee may wish to consider the
following:
a) Identifying the Problem. This Committee has heard
several bills aiming to address many of the same issues
raised by the proponents of this bill in regards to the
District. These issues include healthcare districts that
1) do not operate hospitals; 2) do not expend adequate
funds on community needs; and, 3) expend funds on
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administrative costs, instead of providing benefits to the
community. The Committee may wish to consider,
if it is necessary to legislate how an independent special
district expends its revenue to a specified percentage. If
so, then the Committee may wish to consider whether the
author and proponents of the bill should more appropriately
address these issues, pursuant to the local process
provided by existing law, to initiate the dissolution of
the District.
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 Committee may wish to
consider, beyond the scope of this individual bill, if
there is a need to more clearly define the relationship
between LAFCOs and healthcare districts, and undertake a
closer examination of healthcare district's 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) Compliance. The Committee may wish to consider the
logistical challenges the District may encounter when
trying to comply with the provisions of this bill.
i) Other Costs. The Committee may wish to consider how
costs not defined by this bill will be addressed. For
example, the District must comply with requirements in
the Ralph M. Brown Act, elections for board positions, or
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any outstanding debt for construction or maintenance of
District owned facilities.
In the 2010-11 fiscal year, the District's Board voted to
temporarily suspend grants to offset legal expenses over
the dispute with Sutter Health over the closure of the
San Leandro Hospital. Following that case the District
is legally required to make specified payments to Sutter.
Additionally, in 2011 the District made a $3 million
loan to St. Rose Hospital to fund their operating
expenses. St. Rose is an independent hospital located in
Hayward and has experienced significant operating losses.
The Committee may wish to consider how the requirements
established by this bill would affect scenarios like
these recent examples.
ii) 80/20. Some costs included in the definition
provided for administrative costs are easier to determine
than others. For example, due to compensation reporting
requirements for local agencies, including healthcare
districts' salary and benefits are easy to access and
determine. According to the State Controller's website,
in 2014 the District reported eight employees with total
wages at $318,231 and total retirement and health costs
at $23,401. Reported in the number of employees are
five board members. The total wages for the three
employees of the District,
Chief Executive Office, Senior Accountant, and Executive
Officer's Assistant are $312, 131. The Committee may
wish to consider that the 20% cap on administrative costs
must include all other expenditures of the District
because 80% of the budget must be expended on community
grants.
6)Arguments in Support. According to the City of San Leandro,
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"?one of the top priorities for the City of San Leandro is a
legislative solution to help address the financial
sustainability of San Leandro Hospital. With the resolution
of the six-year lawsuit between Eden Township Healthcare
District and Sutter regarding San Leandro Hospital, it is
imperative to activate Eden's obligation to the San Leandro
community and create a sustainable environment for the
hospital. The basic foundation for a healthcare district's
existence is to provide healthcare services. When a
healthcare district isn't following that basic premise, rules
need to be put in place. Fortunately, AB 2737 serves to
create an appropriate set of rules to address this issue."
7)Arguments in Opposition. According to the Association of
California Healthcare Districts, "While we can appreciate that
there may be local concerns about the level, type, and cost of
services provided, we assert that the best approach to
addressing those concerns is through engagement with the duly
elected trustees of the district. Statewide measures like AB
2737 have the effect of bypassing an important local discourse
and are likely to impose unintended consequences on other
local agencies not involved in the controversy."
REGISTERED SUPPORT / OPPOSITION:
Support
City of San Leandro [SPONSOR]
Opposition
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Association of California Healthcare Districts
California Special Districts Association
Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958