BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: SB 198 HEARING: 5/6/09
AUTHOR: Cogdill FISCAL: No
VERSION: 4/29/09 CONSULTANT:
Weinberger
FREMONT HEALTH CARE DISTRICT'S BORROWING
Background and Existing Law
The California Constitution prevents counties and cities
from creating multi-year general obligation debt without
2/3-voter approval. School districts need 55% voter
approval. Because the constitutional ban doesn't mention
special districts, the Legislature has allowed special
districts to use a variety of debt financing tools without
voter approval.
California's 80 local health care districts find themselves
pulled in two different directions. As operators of
hospitals, they must survive by competing with
profit-oriented companies. As public agencies, they must
adhere to the state laws which require specific procedures
and which impose limits on their activities. The districts
must be aggressive in securing financing.
By 4/5 vote of the local health care district's board, a
district can issue securitized limited obligation notes
(SLONs) and borrow up to $2 million to be paid back from
designated revenues, over 10 years (SB 1770, Senate Local
Government Committee, 2004).
By resolution adopted by a majority of the district board,
local health care districts can issue negotiable promissory
notes, which are debts that are not backed by a guaranteed
source of revenue, to acquire funds for any district
purposes (SB 1956, Maddy, 1986). A district must repay its
notes within ten years. The aggregate value of a
district's notes outstanding at any one time may not exceed
85 percent of all estimated income and revenue for the
current fiscal year.
By resolution adopted by a majority of the district board,
a local health care district may enter into a line of
credit with a commercial lender that is secured, in whole
SB 198 -- 4/29/09 -- Page 2
or in part, by the accounts receivable or other intangible
assets of the district, including anticipated tax revenues,
and thereafter borrow funds against the line of credit to
be used for any district purpose (SB 776, Runner, 2005).
Any money borrowed under a line of credit must be repaid
within five years from each separate borrowing or draw upon
the line of credit. A district may enter into a new and
separate line of credit to repay a previous line of credit.
The John C. Fremont Health Care District operates a
hospital, skilled nursing facility, hospice, and three
clinics that provide vital medical services in Mariposa
County. District officials want to reduce the District's
annual debt load by consolidating and refinancing its
current debts into a long-term line of credit.
Proposed Law
Senate Bill 198 extends the repayment period for local
health care districts' lines of credit from five years to
20 years provided that the line of credit is:
Established on or after January 1, 2010, and
Established for the sole purpose of consolidating
debts incurred by a district prior to January 1, 2010.
SB 198 imposes a $2 million limit on the total amount of
debt a district can have outstanding at any one time under
the line of credit.
Comments
1. Vital financing for a vital community asset . Health
care districts confront a rapidly changing and competitive
marketplace. In meeting these substantial challenges, the
districts need a variety of financing tools to maintain
their fiscal well-being. By allowing health care districts
to consolidate up to $2 million in debt into a credit line
that can be repaid over 20 years, SB 198 enacts a narrow
expansion of health care districts' existing borrowing
powers. Using a 20-year line of credit, the John C.
Fremont Health Care District will be able to lower its
annual debt load, which will make more funds available to
pay for the vital medical services that the District
SB 198 -- 4/29/09 -- Page 3
provides to residents and visitors in Mariposa County.
2. The long and the short of it . The 2005 Runner bill let
health care districts establish lines of credit to borrow
money for any district purpose, including operating
expenses, for up to five years. Generally, public agencies
use long-term borrowing to purchase, construct, or
rehabilitate tangible assets that have a useful life equal
to or greater than the terms of the loans used to finance
them. SB 198 lets health care districts refinance debts,
which may have been incurred to pay for payroll, services,
or consumable supplies, over 20 years. The Committee may
wish to consider whether the Legislature should expand the
Runner bill's authorization for health care districts to
use long-term borrowing to pay for short-term expenses.
3. Setting limits . When the 2005 Runner bill allowed
health care districts to establish lines of credit for any
purpose, the Legislature didn't limit the total amount of
debt that districts can finance through a line of credit
and didn't put firm limit on how long such debts can be
carried because new lines of credit can be established to
repay previous lines of credit. The lack of limits invites
districts to borrow too much, for too long, for imprudent
purposes. By contrast, the borrowing authority that SB 198
creates is for a narrowly defined purpose and a maximum
amount of $2 million. The credit lines authorized by the
Runner bill were apparently intended to allow districts to
borrow money to solve cash-flow problems created by delays
in receiving payments for insurance claims, particularly
from Medi-Cal. The Committee may wish to consider amending
SB 198 to apply this narrower purpose and a specific debt
limit to the unrestricted lines of credit authorized by the
Runner bill.
Support and Opposition (4/30/09)
Support : John C. Fremont Health Care District, Association
of California Healthcare Districts.
Opposition : Unknown.