BILL ANALYSIS Ó
AB 2737
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
2737 (Bonta)
As Amended June 20, 2016
Majority vote
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|ASSEMBLY: |59-10 |(May 27, 2016) |SENATE: |28-9 |(August 23, |
| | | | | |2016) |
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Original Committee Reference: L. GOV.
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.
The Senate amendments add legal fees to the definition of
"administrative expenses".
EXISTING LAW establishes the Local Health Care District Law that
defines the powers and duties of healthcare districts, including
contracting with and making grants to provider groups and
clinics in the community.
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AS PASSED BY THE ASSEMBLY, this bill:
1)Required 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)Defined "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 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)Required 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
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any annual budget items in 1) above.
4)Defined "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)Defined "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)Provided 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.
FISCAL EFFECT: According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
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
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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
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
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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
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
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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.
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.
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AB 72 (Bonta) of the current legislative session, which 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, was subsequently amended
into a different subject matter. 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
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
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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. 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.
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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."
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:
0003694