BILL ANALYSIS �
SB 134
Page 1
Date of Hearing: June 14, 2011
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
SB 134 (Corbett) - As Amended: March 31, 2011
SENATE VOTE : 23-14.
SUBJECT : Health care districts: transfers of assets.
SUMMARY : Imposes conditions on transfer agreements, when a
health care district (district) transfers more than 50% of the
district's assets at less than fair market value to other
entities to operate one or more health facilities owned by the
district. Specifically, this bill :
1)Provides that, when a district transfers more than 50% of the
district's assets at less than fair market value to other
entities to operate one or more health facilities owned by the
district, the transfer is deemed to be for the benefit of the
communities served by the district only if the transfer
agreement includes the appraised fair market value of any
asset transferred.
2)Requires the appraisal for fair market value, referenced in 1)
above to be conducted by an independent consultant with
expertise in methods of appraisal and valuation and in
accordance with applicable governmental and industry standards
for appraisal and valuation of any asset transfer.
3)Requires that the appraisal referenced in 1) above is
performed within the six months preceding the date on which
the district approves the transfer agreement.
4)Requires the district board, before the district transfers 50%
or more of the district's assets to other entities, to submit
a resolution to the district's voters that identifies the
asset proposed to be transferred, its appraised fair market
value, and the amount under consideration that the district is
to receive in exchange for the transfer.
EXISTING LAW :
1)Establishes the Local Health Care District Law which
authorizes communities to form special districts to construct
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and operate hospitals and other health care facilities to meet
local needs.
2)Authorizes, until January 1, 2011, a district to transfer
ownership, at fair market value, of any part of its assets to
one or more corporations to operate and maintain the assets.
Prior to the district transfer of 50% or more of the
district's assets to one or more corporations, requires the
elected district board to submit to the voters of the district
a measure proposing the transfer.
3)Requires, after January 1, 2011, the provisions in 2) above to
restrict these transfers to only nonprofit corporations.
4)Authorizes a district to transfer, at less than fair market
value, any part of the assets of the district to one or more
nonprofit corporations to operate and maintain the assets, if
the transfer benefits the communities served by the district.
Requires that for a transfer of 50% or more of a district's
assets to be deemed to benefit a district's communities, a
district must:
a) Fully discuss the transfer agreement in at least five
properly noticed public meetings before the district
board's decision to transfer the assets;
b) Provide, in the transfer agreement, that the district
must approve all initial board members of the nonprofit
corporation and any subsequent board members as may be
specified in the transfer agreement;
c) Provide, in the transfer agreement, that specified
assets are to be transferred back to the district upon
termination of the transfer agreement;
d) Commit the nonprofit corporation, in the transfer
agreement, to operate and maintain the district's health
care facilities and its assets for the benefit of the
communities served by the district; and,
e) Require, in the transfer agreement, that any funds a
corporation receives from the district be used only for
specified activities that would further a valid public
purpose if undertaken directly by the district.
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5)Requires the district to report to the California Attorney
General (AG), within 30 days of any lease of district assets
to one or more corporations, the type of transaction and the
entity to whom the assets were leased.
FISCAL EFFECT : None
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill is
intended to provide the public with more information about the
value of district assets that are proposed to be sold or
transferred to one or more corporations for less than fair
market value. The author maintains that current law
authorizes a district to transfer its assets, for the benefit
of the communities it serves, to one or more nonprofit
corporations at less than fair market value. However, under
current law, according to the author, for a transfer of 50% or
more of a district's assets to be deemed to benefit a
district's communities, a district must meet specified
conditions, including approval of the transfer agreement by
district voters, but does not require an independent appraisal
of the fair market value of the assets that are proposed to be
transferred. The author argues that unfortunately, in too
many case, these relationships end with assets being
transferred out of the district to the benefit of the
contracting private corporation and to the detriment of the
local community. The author maintains that of the 85
districts that have formed since 1945, almost a third have
closed, leased, or sold their hospitals. Some, according to
the author, have declared bankruptcy and many have changed or
expanded their historic role as providers of acute care. This
bill, the author asserts, addresses the growing concern that
some districts are entering into contracts that reduce the
district's assets and financial security.
2)DISTRICTS . Districts were formed under state law to meet
local health needs not satisfied by other health care
resources or government programs in a given geographical area.
Districts formed pursuant to state law are financed by
assessments on real and personal property within the district.
A 2006 report published by the California Healthcare
Foundation found that 85 health care and hospital districts
have been formed in California since the first hospital
district enabling legislation was passed in 1946.
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Districts operate medical facilities, including hospitals,
public health clinics, and skilled nursing facilities. Some
also provide community-based education programs to the
residents of their districts. Given the volatile health care
market in recent decades, districts have contemplated service
changes, leasing arrangements, and affiliations with both
nonprofit and for-profit health care corporations as means or
providing health care services to residents.
Responding to changes in health care delivery, districts explore
economic and organizational alternatives, including leasing or
selling their assets to nonprofit corporations or even to
for-profit companies. If a district wants to transfer 50% or
more of its assets to any corporation, the transfer needs
majority-voter approval from the district board.
3)ASSET TRANSFERS . The author states that this bill intends to
protect district assets when district hospitals are operated
by an outside entity and cites the following incidents as
examples of the need for this bill:
a) Eden Township Health Care District - The Eden Township
Health Care District was formed in 1948 to serve the
Alameda County communities of San Leandro, San Lorenzo,
Hayward, and Castro Valley. In 1954, the Eden District
opened Eden Township Hospital. In 1997, the Eden
District's voters approved a merger agreement between the
Eden District and Sutter Health. Under the 1997 agreement,
the Eden District created a nonprofit, in conjunction with
Sutter Health, known as the Eden Medical Center (EMC), to
operate the hospital.
In 2004, the Eden District purchased San Leandro Hospital and
leased it to EMC to operate. The amended hospital lease
and operating agreement stated that Sutter could assign its
interests, or any portion of its interest, in the purchase
option without the landlord's consent.
In 2008, the Eden District entered into an agreement with
Sutter Health to replace EMC with a newly-constructed
hospital that would comply with the state's seismic safety
law. The 2008 agreement also gave Sutter the option to
purchase San Leandro Hospital. The purchase option allowed
Sutter to deduct specified losses and capital expenditures
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from the hospital's net book value and, if the deductions
exceeded the net book value, allowed Sutter to exercise its
purchase option with no balance due. The Eden District and
Sutter are currently litigating the terms of the 2008
agreement.
b) Marin Healthcare District - The Marin Healthcare
District built Marin General Hospital (MGH), which opened
in 1952. In 1985, the Marin District entered into a
30-year lease for the operation of the hospital by the MGH
Corporation, a nonprofit corporation created in conjunction
with Sutter Health of which Sutter Health was the sole
corporate member. According to an August 2010 article in
the North Bay Business Journal, it is alleged that between
2006 and June 2010 Sutter Health transferred more than $120
million out of MGH jeopardizing the hospital's financial
stability and hindering MGH's operations. A settlement and
transfer agreement returned control of MGH to the Marin
District on June 30, 2010. The Marin District is currently
the sole corporate member of the nonprofit corporation.
4)PREVIOUS LEGISLATION .
a) SB 1240 (Corbett) of 2010, would have imposed conditions
on contracts between districts and other entities to
operate one or more health facilities owned by the
district. SB 1240 was vetoed by Governor Arnold
Schwarzenegger, who stated that SB 1240 (Corbett) would
have limited the discretion of a district when entering
into a contract with another operating entity and would
have created the unintended consequence of reducing the
incentive for such arrangements when hospitals are
struggling to remain open.
b) SB 1351 (Corbett) of 2008, would have required voter
approval before a district can transfer, for the benefit of
the communities served by the district and in the absence
of adequate consideration, any part of the assets of the
district to one or more nonprofit corporations to operate
and maintain the assets, as opposed to 50% or more of the
district's assets. SB 1351 would have also expanded the
AG's ability to review and comment on proposed transfers
and prohibited a district from relinquishing its membership
on the board of a nonprofit corporation to which the
district has transferred or leased its assets without a
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vote of the district electorate. SB 1351 was vetoed by
Governor Arnold Schwarzenegger, who stated that he could
not support placing additional restrictions on a district,
especially when they are elected by, and accountable to,
their local community.
c) SB 460 (Kelley), Chapter 18, Statutes of 1998,
permitted, until 2001, a district to transfer at fair
market value its assets to for-profit corporations, as
specified.
d) SB 1508 (Figueroa), Chapter 169, Statutes of 2000,
extended the authority for districts to transfer or lease
assets to a for-profit until January 1, 2006.
e) AB 1131 (Torrico), Chapter 194, Statutes of 2005,
extends the January 1, 2006 sunset date to 2011, permitting
districts to transfer or lease assets to for-profit
corporations, as specified.
f) SB 1771 (Russell and Kopp), Chapter 1359, Statutes of
1992, defines the terms and conditions under which a
district may transfer, without adequate consideration, any
part of its assets to one or more nonprofit corporations,
including that the transfer must be for the benefit of the
community served by the district, provide for the transfer
back to the district of the assets at the end of the lease,
and be approved by a majority of the voters in the district
if the transfer is of 50% or more of the district's assets.
5)DOUBLE REFERRAL . This bill is double referred. Should it
pass out of this committee, it will be referred to the
Assembly Committee on Local Government.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
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None on file.
Analysis Prepared by : Tanya Robinson-Taylor / HEALTH / (916)
319-2097