BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2737


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          ASSEMBLY THIRD READING


          AB  
          2737 (Bonta)


          As Amended  May 24, 2016


          Majority vote


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Local           |7-0  |Eggman, Waldron,      |                    |
          |Government      |     |Alejo, Chiu, Cooley,  |                    |
          |                |     |Gordon, Linder        |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Appropriations  |17-3 |Gonzalez, Bloom,      |Bigelow, Patterson, |
          |                |     |Bonilla, Bonta,       |Jones               |
          |                |     |Calderon, Daly,       |                    |
          |                |     |Eggman, Gallagher,    |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |Eduardo Garcia,       |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |Roger Hernández,      |                    |
          |                |     |Holden, Obernolte,    |                    |
          |                |     |Quirk, Santiago,      |                    |
          |                |     |Wagner, Weber, Wood   |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |








                                                                    AB 2737


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          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 healthcare 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  
               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  








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               directly associated with revenue-generating enterprises.  


          3)Requires a "nonprovider healthcare district," notwithstanding  
            1) above, to pay any amount required to be paid in the  
            district's annual budget year by a final judgment, court  
            order, or arbitration award, as specified, prior to payment of  
            any annual budget items in 1) above.  


          4)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."


          5)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."  


          6)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:  


          1)Establishes the Local Health Care District Law that defines  
            the powers and duties of healthcare districts, including, but  
            not limited to, the following:  










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             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)   Establishing or participating in managed care;


             e)   Contracting with and making grants to provider groups  
               and clinics in the community; and,


             f)   Other activities that are necessary for the maintenance  
               of good physical and mental health in communities served by  
               the district.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, there are unknown costs to the District, likely  
          minor, to comply with the administrative requirements in the  
          bill.  Any costs are potentially reimbursable, should the  
          District choose to submit a claim to the Commission on State  
          Mandates and the Commission determines the costs are  
          reimbursable.


          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  








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            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, purchase property, and issue debt.  


            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)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 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  








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            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).  


            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.  This bill  
            requires the District to make these payments prior to any  
            annual budget item.  This bill is sponsored by the City of San  
            Leandro.  


          3)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."  


          4)Eden Township Healthcare District.  According to Alameda  
            County Local Agency Formation Commission's (LAFCO) 2012  








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            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  
            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 office space, and an indication from the  
            District of their willingness to provide direct services in  
            the future.  









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          5)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.  


            AB 2418 (Gordon) of 2012 would have required healthcare  
            districts to expend 95% of any property tax revenue on current  
            community healthcare benefits.  AB 912 (Gordon) Chapter 109,  
            Statues of 2011, created an expedited process for the  
            dissolution of special districts.   


            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) of the  
            current legislative session, pending in the Senate, would  
            require Alameda LAFCO to order the dissolution of the  
            District, if the District meets specified criteria.  


          6)Policy Considerations.  The Legislature may wish to consider  
            the following:  


             a)   Identifying the Problem.  The Assembly Local Government  
               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 administrative costs, instead of providing  
               benefits to the community.  The Legislature may wish to  








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               consider, if it is necessary to legislate how an  
               independent special district expends its revenue to a  
               specified percentage.  If so, then the Legislature 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 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 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 Legislature 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 Legislature 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 any outstanding debt for construction or maintenance  
                 of District-owned facilities.  Additionally, in 2011 the  
                 District loaned St. Rose Hospital $3 million to fund  








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                 their operating expenses.  St. Rose is an independent  
                 hospital located in Hayward and has experienced  
                 significant operating losses.  The Legislature may wish  
                 to consider how these costs, some of which are required  
                 by law, are different from the costs resulting from  
                 litigation with Sutter which are addressed by this bill. 


               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 Web site,  
                 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 Legislature 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.  


          7)Arguments in Support.  According to the City of San Leandro,  
            "?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."   









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          8)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."  




          Analysis Prepared by:                                             
                          Misa Lennox / L. GOV. / (916) 319-3958  FN:  
          0003056