The California Health Facilities Financing Authority Act authorizes the California Health Facilities Financing Authority to, among other things, make loans from the continuously appropriated California Health Facilities Financing Authority Fund to participating health institutions for financing or refinancing the acquisition, construction, or remodeling of health facilities. The act requires the authority to, among other things, establish financial eligibility standards by studying the creditworthiness and earning capacity of each project, together with the amount of pledged revenues, debt service coverage, and basic security. Under existing law, participating health institutions are specified entities authorized by state law to provide or operate a health facility and undertake the financing or refinancing of the construction or acquisition of a project or of working capital, as defined. Existing law defines working capital as moneys to be used by, or on behalf of, a participating health institution for specified expenses in connection with the ownership or operation of a health facility, including interest not to exceed two years on any loan for working capital made pursuant to these provisions. Existing law requires a participating health institution that is a private nonprofit corporation or association and that borrows money to finance working capital to repay and discharge the loan within 24 months of the loan date.

This bill would change the definition of working capital to remove the 2-year cap on interest on any loan for working capital. The bill would delete the provision requiring a participating health institution that is a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months. The bill would also further require the authority to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security. The bill would prohibit a participating health institution that is determined by the authority to be in financial distress from being deemed financially eligible.

By expanding the purpose for which the above-described continuously appropriated fund may be used, the bill would make an appropriation from that fund. The bill would make legislative findings relating to the purpose of the bill.

The California Health Facilities Financing Authority Act authorizes the California Health Facilities Financing Authority to, among other things, make loans from the continuously appropriated California Health Facilities Financing Authority Fund to participating health institutions for financing or refinancing the acquisition, construction, or remodeling of health facilities. The act requires the authority to, among other things, establish financial eligibility standards by studying the creditworthiness and earning capacity of each project, together with the amount of pledged revenues, debt service coverage, and basic security. Under existing law, participating health institutions are specified entities authorized by state law to provide or operate a health facility and undertake the financing or refinancing of the construction or acquisition of a project or of working capital, as defined. Existing law defines working capital as moneys to be used by, or on behalf of, a participating health institution for specified expenses in connection with the ownership or operation of a health facility, including interest not to exceed two years on any loan for working capital made pursuant to these provisions. Existing law requires a participating health institution that is a private nonprofit corporation or association and that borrows money to finance working capital to repay and discharge the loan within 24 months of the loan date.

This bill would change the definition of working capital to remove the 2-year cap on interest on any loan for working capital. The bill would delete the provision requiring a participating health institution that is a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months. The bill would also further require the authority to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security. The bill would prohibit a participating health institution that is determined by the authority to be in financial distress from being deemed financially eligible.

By expanding the purpose for which the above-described continuously appropriated fund may be used, the bill would make an appropriation from that fund. The bill would make legislative findings relating to the purpose of the bill.

The California Health Facilities Financing Authority Act authorizes the California Health Facilities Financing Authority to, among other things, make loans from the continuously appropriated California Health Facilities Financing Authority Fund to participating health institutions for financing or refinancing the acquisition, construction, or remodeling of health facilities. Under existing law, participating health institutions are specified entities authorized by state law to provide or operate a health facility and undertake the financing or refinancing of the construction or acquisition of a project or of working capital, as defined. Existing law defines working capital as moneys to be used by, or on behalf of, a participating health institution for specified expenses in connection with the ownership or operation of a health facility, including interest not to exceed two years on any loan for working capital made pursuant to these provisions. Existing law requires a participating health institution that is a private nonprofit corporation or association and that borrows money to finance working capital to repay and discharge the loan within 24 months of the loan date.

This bill would change the definition of working capital to remove the 2-year cap on interest on any loan for working capital. The bill would delete the provision requiring a participating health institution that is a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months.

By expanding the purpose for which the above-described continuously appropriated fund may be used, the bill would make an appropriation from that fund. The bill would make legislative findings relating to the purpose of the bill.

GOVERNOR'S VETO

GV Bill Id:AB 2637

Author:(Schiavo)

As Enrolled Ver:August 19, 2024

2/3 vote

SUMMARY

Deletes the provision of law requiring a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months.

Senate Amendments

Require the California Health Facility Financing Authority (CHFFA) to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security; and, prohibit a participating health institution that is determined by CHFFA to be in financial distress from being deemed financially eligible for working capital loans.

Governor's Veto Message

This bill would repeal existing law that requires a private nonprofit corporation or association that receives a working capital loan from CHFFA to repay and discharge the loan within 24 months of the loan date.

Hospitals are critical to the health and safety of our communities, and it is a priority of my Administration to assist hospitals that are struggling financially. For this reason, together with the Legislature, we authorized $300 million for the Distressed Hospital Loan Program to offer zero-interest loans to eligible financially distressed hospitals. While I support efforts to ensure loan repayment requirements are feasible, this bill would result in an open-ended timeframe without any required end date that loans must be repaid. Extending the timeline for the recoupment of CHFFA loans would be better discussed as a part of the annual budget process.

COMMENTS

Fixed capital refers to the assets or investments required to establish and run a firm, such as property or equipment. Working capital is the cash or other liquid assets that a company utilizes to finance day-to-day activities such as payroll and bill payment.

1. CHFFA. CHFFA was created to be the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. To this end, CHFFA administers the Bond Financing Program (Program) and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program II Financing Program.

In September of 2021, the Governor signed into law the Non-designated Public Hospital Bridge Loan Program to enable CHFFA to issue up to $40 million in working capital loans at zero interest rate to certain hospitals that are affected by financial delays associated with the transition to the Quality Incentive Program. These Non-designated Public Hospital Bridge Loans are required to be paid back in two years, and are secured by Medi-Cal reimbursements. By borrowing through CHFFA's tax-exempt bond financing program, health facilities can likely obtain rates that are 20% lower than they would through taxable financing options. Generally, non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers are eligible for CHFFA financing. Proceeds from CHFFA financings may be used primarily for capital improvements such as project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; working capital for start-up facilities; costs of bond issuance; feasibility studies; and, reimbursement of prior expenses. Not for working capital expenses, such as salaries and benefits.

Under statute, savings resulting from issuance of tax-exempt bonds for borrowers must be transferred to the consuming public through lower or contained costs for delivery of health services. CHFFA states that to enforce this requirement, applicants are required to complete a pass-through savings certification as part of its loan application that demonstrates significant community service.

Since its first bond issuance in 1981, CHFFA's Program has issued 646 bonds for an aggregate total of approximately $47.5 billion, with 275 health facilities availing themselves of this financing.

1. Long-Term Bond Financings. CHFFA serves as a conduit of tax-exempt and taxable bonds under the Program. According to CHFFA, bonds issued by CHFFA are not a debt, liability, or a pledge of the full faith and credit of the taxing power of the state, or any of its political subdivisions, but are payable solely by qualified health facility borrowers ("Borrower" or "Health Facility"). The funding received under the Program is private funding from investors, who are typically sophisticated, and who financially analyze a Borrower's financial positon prior to buying bonds and therefore investing in the Health Facility/Borrower. Borrowers are typically rated by Standard & Poor's Financial Services, Moody's Investor Services, or Fitch Ratings, and based on the credit rating of a Health Facility, an investor would require the terms (including the interest rate) to be paid on the bond funds borrowed by the Borrower (similar to how an individual's interest rate on a loan is determined by their credit score). This Program typically provides funds to hospitals who are creditworthy.
2. CHFFA "Competitors." There are other organizations in California that provide bond financing to health facilities. The California Municipal Finance Authority (CMFA) provides tax-exempt bonds similar to CHFFA. The CMFA provide access to this market for qualified borrowers by acting as the conduit issuer, much the same way CHFFA does. Eligible costs for a CMFA financing may include the purchase of land, project design costs, construction, rehabilitation, improvement, equipment purchase and installation and legal fees. Up to 2% of the proceeds of a CMFA bond offering may be used to pay the cost of issuing bonds, such as for underwriter's and legal fees. Also, the CMFA can issue taxable bonds to cover any additional costs of issuance or for additional undertakings that are not tax-exempt.

The California Infrastructure and Economic Development Bank (I-Bank) was created in 1994 to finance public infrastructure and private development that promote a healthy climate for jobs, contribute to a strong economy and improve the quality of life in California communities. I-Bank has broad authority to issue tax-exempt and taxable revenue bonds, provide financing to public agencies, provide credit enhancements, acquire or lease facilities, and leverage State and Federal funds. Both of these organizations can and do provide financing to health facilities, only at a higher cost than CHFFA.

1. Distressed Hospital Loan Program (DHLP). The DHLP provides hospitals who are financially struggling with loans beyond two years (payments are required to begin after 18 months and the loan to be discharged within 72 months of the date of the loan) and does not limit the loans to capital improvements. Under existing law, CHFFA is only allowed to provide long-term funding to credit worthy health facilities for capital improvements.

According to the Author

Currently CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. The author states that this bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.

Arguments in Support

The California Hospital Association (CHA) supports this bill and states that every day, hospitals throughout California care for the state's most vulnerable populations, who often have no place else to turn for help. However, many of those same hospitals are on the edge of a financial cliff and facing the difficult choice of service reductions, bankruptcy, or closure, and for this reason, CHA, on behalf of its more than 400 hospital and health system members, supports this bill, which would allow CHFFA to issue long-term working capital financings by removing the limitation that loans be repaid within 24 months. CHA states that reimbursement has remained largely stagnant, yet labor expenses have spiked 16% since 2019, pharmaceutical costs have grown by 41%, and the cost of medical supplies has jumped 19%. CHA notes that this bill does not resolve these issues, but by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. During the pandemic, CHFFA was limited in its ability to provide working capital loan assistance to health facilities due to the 24-month maturity restriction and the persistent financial impacts on hospitals from the pandemic. CHA concludes that the financial condition that led to the closure of Madera Community Hospital is not an isolated circumstance, as evidenced by the appropriation and awarding of roughly $300 million from the DHLP. Hospital closures and service reductions are immediate and clear threats to health care in communities throughout California. Without relief, the reality of the hospital closure in Madera County will, without question, be replicated in other parts of California.

Arguments in Opposition

There is no known opposition to this bill.

FISCAL COMMENTS

According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs.

VOTES

ASM HEALTH: 16-0-0

YES: Bonta, Waldron, Aguiar-Curry, Arambula, Wendy Carrillo, Flora, Haney, Jones-Sawyer, Maienschein, McCarty, Joe Patterson, Rodriguez, Sanchez, Santiago, Schiavo, Weber

ASM APPROPRIATIONS: 15-0-0

YES: Wicks, Sanchez, Arambula, Bryan, Calderon, Wendy Carrillo, Dixon, Mike Fong, Grayson, Haney, Hart, Jim Patterson, Pellerin, Ta, Villapudua

ASSEMBLY FLOOR: 71-0-9

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

ABS, ABST OR NV: Calderon, Cervantes, Megan Dahle, Friedman, Gabriel, Holden, Mathis, Papan, Luz Rivas

SENATE FLOOR: 38-0-2

YES: Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Wahab, Wiener, Wilk

ABS, ABST OR NV: Allen, Umberg

ASSEMBLY FLOOR: 76-0-3

YES: Addis, Aguiar-Curry, Alanis, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Connolly, Megan Dahle, Davies, Dixon, Essayli, Flora, Mike Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, Mathis, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Luz Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

ABS, ABST OR NV: Alvarez, Chen, Holden

UPDATED

VERSION: August 19, 2024

CONSULTANT: Lara Flynn / HEALTH / (916) 319-2097 FN: 0005092

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2637

Author:(Schiavo)

As Amended Ver:June 5, 2024

Majority vote

SUMMARY

Deletes the provision of law requiring a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months.

Senate Amendments

Require the California Health Facility Financing Authority (CHFFA) to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security; and, prohibit a participating health institution that is determined by CHFFA to be in financial distress from being deemed financially eligible for working capital loans.

COMMENTS

Fixed capital refers to the assets or investments required to establish and run a firm, such as property or equipment. Working capital is the cash or other liquid assets that a company utilizes to finance day-to-day activities such as payroll and bill payment.

1. CHFFA. CHFFA was created to be the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. To this end, CHFFA administers the Bond Financing Program (Program) and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program II Financing Program.

In September of 2021, the Governor signed into law the Non-designated Public Hospital Bridge Loan Program to enable CHFFA to issue up to $40 million in working capital loans at zero interest rate to certain hospitals that are affected by financial delays associated with the transition to the Quality Incentive Program. These Non-designated Public Hospital Bridge Loans are required to be paid back in two years, and are secured by Medi-Cal reimbursements. By borrowing through CHFFA's tax-exempt bond financing program, health facilities can likely obtain rates that are 20% lower than they would through taxable financing options. Generally, non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers are eligible for CHFFA financing. Proceeds from CHFFA financings may be used primarily for capital improvements such as project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; working capital for start-up facilities; costs of bond issuance; feasibility studies; and, reimbursement of prior expenses. Not for working capital expenses, such as salaries and benefits.

Under statute, savings resulting from issuance of tax-exempt bonds for borrowers must be transferred to the consuming public through lower or contained costs for delivery of health services. CHFFA states that to enforce this requirement, applicants are required to complete a pass-through savings certification as part of its loan application that demonstrates significant community service.

Since its first bond issuance in 1981, CHFFA's Program has issued 646 bonds for an aggregate total of approximately $47.5 billion, with 275 health facilities availing themselves of this financing.

1. Long-Term Bond Financings. CHFFA serves as a conduit of tax-exempt and taxable bonds under the Program. According to CHFFA, bonds issued by CHFFA are not a debt, liability, or a pledge of the full faith and credit of the taxing power of the state, or any of its political subdivisions, but are payable solely by qualified health facility borrowers ("Borrower" or "Health Facility"). The funding received under the Program is private funding from investors, who are typically sophisticated, and who financially analyze a Borrower's financial positon prior to buying bonds and therefore investing in the Health Facility/Borrower. Borrowers are typically rated by Standard & Poor's Financial Services, Moody's Investor Services, or Fitch Ratings, and based on the credit rating of a Health Facility, an investor would require the terms (including the interest rate) to be paid on the bond funds borrowed by the Borrower (similar to how an individual's interest rate on a loan is determined by their credit score). This Program typically provides funds to hospitals who are creditworthy.
2. CHFFA "Competitors." There are other organizations in California that provide bond financing to health facilities. The California Municipal Finance Authority (CMFA) provides tax-exempt bonds similar to CHFFA. The CMFA provide access to this market for qualified borrowers by acting as the conduit issuer, much the same way CHFFA does. Eligible costs for a CMFA financing may include the purchase of land, project design costs, construction, rehabilitation, improvement, equipment purchase and installation and legal fees. Up to 2% of the proceeds of a CMFA bond offering may be used to pay the cost of issuing bonds, such as for underwriter's and legal fees. Also, the CMFA can issue taxable bonds to cover any additional costs of issuance or for additional undertakings that are not tax-exempt.

The California Infrastructure and Economic Development Bank (I-Bank) was created in 1994 to finance public infrastructure and private development that promote a healthy climate for jobs, contribute to a strong economy and improve the quality of life in California communities. I-Bank has broad authority to issue tax-exempt and taxable revenue bonds, provide financing to public agencies, provide credit enhancements, acquire or lease facilities, and leverage State and Federal funds. Both of these organizations can and do provide financing to health facilities, only at a higher cost than CHFFA.

1. Distressed Hospital Loan Program (DHLP). The DHLP provides hospitals who are financially struggling with loans beyond two years (payments are required to begin after 18 months and the loan to be discharged within 72 months of the date of the loan) and does not limit the loans to capital improvements. Under existing law, CHFFA is only allowed to provide long-term funding to credit worthy health facilities for capital improvements.

According to the Author

Currently CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. The author states that this bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.

Arguments in Support

The California Hospital Association (CHA) supports this bill and states that every day, hospitals throughout California care for the state's most vulnerable populations, who often have no place else to turn for help. However, many of those same hospitals are on the edge of a financial cliff and facing the difficult choice of service reductions, bankruptcy, or closure, and for this reason, CHA, on behalf of its more than 400 hospital and health system members, supports this bill, which would allow CHFFA to issue long-term working capital financings by removing the limitation that loans be repaid within 24 months. CHA states that reimbursement has remained largely stagnant, yet labor expenses have spiked 16% since 2019, pharmaceutical costs have grown by 41%, and the cost of medical supplies has jumped 19%. CHA notes that this bill does not resolve these issues, but by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. During the pandemic, CHFFA was limited in its ability to provide working capital loan assistance to health facilities due to the 24-month maturity restriction and the persistent financial impacts on hospitals from the pandemic. CHA concludes that the financial condition that led to the closure of Madera Community Hospital is not an isolated circumstance, as evidenced by the appropriation and awarding of roughly $300 million from the DHLP. Hospital closures and service reductions are immediate and clear threats to health care in communities throughout California. Without relief, the reality of the hospital closure in Madera County will, without question, be replicated in other parts of California.

Arguments in Opposition

There is no known opposition to this bill.

FISCAL COMMENTS

According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs.

VOTES:

ASM HEALTH: 16-0-0

YES: Bonta, Waldron, Aguiar-Curry, Arambula, Wendy Carrillo, Flora, Haney, Jones-Sawyer, Maienschein, McCarty, Joe Patterson, Rodriguez, Sanchez, Santiago, Schiavo, Weber

ASM APPROPRIATIONS: 15-0-0

YES: Wicks, Sanchez, Arambula, Bryan, Calderon, Wendy Carrillo, Dixon, Mike Fong, Grayson, Haney, Hart, Jim Patterson, Pellerin, Ta, Villapudua

ASSEMBLY FLOOR: 71-0-9

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

ABS, ABST OR NV: Calderon, Cervantes, Megan Dahle, Friedman, Gabriel, Holden, Mathis, Papan, Luz Rivas

SENATE FLOOR: 38-0-2

YES: Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Wahab, Wiener, Wilk

ABS, ABST OR NV: Allen, Umberg

UPDATED

VERSION: June 5, 2024

CONSULTANT: Lara Flynn / HEALTH / (916) 319-2097 FN: 0003869

 CONSENT  

Bill No: AB 2637

Author: Schiavo (D)

Amended: 6/5/24 in Senate

Vote: 21

SENATE HEALTH COMMITTEE: 11-0, 6/26/24

AYES: Roth, Nguyen, Glazer, Gonzalez, Grove, Hurtado, Limón, Menjivar, Rubio, Smallwood-Cuevas, Wiener

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 71-0, 5/21/24 (Consent) - See last page for vote

SUBJECT: Health Facilities Financing Authority Act

SOURCE: Author

DIGEST:

This bill repeals the requirement that working capital loans made by the California Health Facilities Financing Authority to health facilities be repaid within two years.

ANALYSIS:

Existing law:

1. Establishes the California Health Facilities Financing Authority (CHFFA), consisting of nine members, led by the State Treasurer who serves as the chair, and the executive director, who is appointed by the State Treasurer. States the intent of the Legislature to provide financing to health institutions that can demonstrate the financial feasibility of their projects, and that any savings experienced by the health institution be passed on to the consuming public through lower charges or containment of the rate of increase in hospital rates. [Government Code (GOV) §15430, et seq.]
2. Permits CHFFA, among other powers, to make secured or unsecured loans to any participating health institution in connection with the financing of a project or working capital. Requires CHFFA to establish financial eligibility standards by studying creditworthiness and earning capacity of each project, together with the amount of pledged revenues, debt service coverage, and basic security. [GOV §15437 and §15438]
3. Defines “participating health institution,” for purposes of being able to participate in CHFFA financing mechanisms, as a city or county, a district hospital, or a nonprofit corporation that operates a health facility, and that undertakes the financing of the construction, renovation, furnishing, or equipping of, or financing or refinancing the acquisition of, a health facility. [GOV §15432(e) and (f)]
4. Defines “working capital” as moneys to be used by, or on behalf of, a participating health institution to pay or prepay maintenance or operation expenses or any other costs that would be treated as an expense item, under generally accepted accounting principles, in connection with the ownership or operation of a health facility, including, but not limited to, reserves for maintenance or operation expenses, and interest not to exceed two years on any loan for working capital. [GOV §15432(h)]
5. Requires a participating health institution that is a private nonprofit corporation or association and that borrows money to finance working capital, other than as part of the cost of a project, to repay and discharge the loan within 24 months of the loan date. [GOV §15451.5]
6. Prohibits revenue bonds issued under CHFFA from being deemed to constitute a debt or liability of the state, or a pledge of the faith and credit of the state. Requires bonds issued by CHFFA to contain a statement to the effect that neither the State of California nor CHFFA shall be obligated to pay the principal, or the interest, except from the revenues of CHFFA. [GOV §15443]
7. Establishes the California Educational Facilities Authority for the purpose of issuing revenue bonds to assist private nonprofit institutions of higher learning in the expansion and construction of educational facilities. [Education Code (EDC) §94100, et seq.]
8. Establishes the Distressed Hospital Loan Program (DHLP) to provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals, to prevent the closure of, or facilitate the reopening of, those hospitals. Requires the Department of Health Care Access and Information (HCAI) to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP. [HSC §129380, et seq.]

This bill:

1. Repeals the limitation that working capital loans offered by CHFFA be only two years in length.
2. Requires CHFFA to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security.
3. Prohibits a participating health institution that is determined by CHFFA to be in financial distress from being deemed financially eligible for working capital loans.
4. Makes a legislative finding and declaration that the purpose of this bill is to enable nonprofit participating health institutions to finance working capital expenditures, such as those arising as a result of the COVID-19 pandemic, on a long-term basis.

Comments

1. Author’s statement. According to the author, CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. This bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.
2. Background on existing CHFFA programs. CHFFA was created to be the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. To this end, CHFFA administers the Bond Financing Program and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program (HELP) II Financing Program. In September of 2021, the Governor signed into law the Nondesignated Public Hospital Bridge Loan Program to enable CHFFA to issue up to $40 million in working capital loans at zero interest rate to certain hospitals that are affected by financial delays associated with the transition to the Quality Incentive Program. An additional $40 million was allocated as part of the Budget Act of 2022 for a second round of the bridge loans. These Nondesignated Public Hospital Bridge Loans are required to be paid back in two years, and are secured by Medi-Cal reimbursements. Additionally, CHFFA administers several grant programs, including the Children's Hospital Programs, the Community Services Infrastructure Grant Program, and the Investment in Mental Health Wellness Grant Program. Under the Mental Health Wellness grant program, Counties can apply for funding to develop a continuum of crisis services to children and youth up to 21 years of age in four categories: crisis residential treatment, crisis stabilization, mobile crisis support teams, and family respite care. There was an initial allocation of about $40 million for this Mental Health Wellness grant program.
   
   By borrowing through CHFFA’s tax-exempt bond financing program, health facilities can generally obtain lower interest rates than they would through conventional bonds. The types of facilities eligible for CHFFA financing include non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers. Proceeds from CHFFA financing may be used for project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; working capital for start-up facilities; costs of bond issuance; feasibility studies; and reimbursement of prior expenses. Under statute, savings resulting from issuance of tax-exempt bonds for borrowers must be transferred to the consuming public through lower or contained costs for delivery of health services. Since its first bond issuance in 1981, CHFFA’s bond financing program has issued 639 bonds for an aggregate total of approximately $46 billion, with 275 health facilities availing themselves of this financing.
3. DHLP. The DHLP was established through AB 112 (Committee on Budget, Chapter 6, Statutes of 2023), following the closure of Madera Community Hospital, in an effort to prevent further hospital closures and to help facilitate the reopening of Madera. AB 112 initially funded the DHLP at $150 million, but an additional $150 million was later appropriated to make it a $300 million loan program. After development of an application process and reviewing applications from 30 hospitals, HCAI awarded loans to 17 hospitals. Under the terms of the DHLP, the loans are interest free, and hospitals are to begin making monthly payments 18 months following disbursement of the loan. The loans are required to be repaid within 72 months of the date of the loan. The DHLP also required HCAI to develop, in consultation with CHFFA and upon the approval of the Department of Finance, a process for hospitals who received DHLP loans to request forgiveness or loan modifications. According to HCAI, they are currently in the process of developing this application, and hope to have it completed by the end of this summer.
4. Background provided by author and CHFFA. According to the author, working capital financing secured through CHFFA has the potential to provide support to hospitals that need additional financial breathing room to pay for salaries, benefits, lease payments, and more. However, a major limitation for long-term planning and flexibility is the limited term for which these financings must be repaid (24 months). Compared to the financing available through the California Educational Facilities Authority (no time limit) as well as the DHLP (six years), CHFFA is an underutilized tool in the toolbox due to these limitations on financing terms. Applicants usually aim for multi-decade repayment timelines to spread the short term costs across numerous years. Unfortunately, because CHFFA cannot accommodate these applications, health facilities must turn to other lenders who typically have higher interest rates, leading to larger overall costs to the health facility. This bill aims to eliminate the two-year repayment period to allow more hospitals to take advantage of CHFFA as an intermediary to connect health facilities with lenders. In response to the pandemic, CHFFA convened a working group to look at financing tools at its disposal that could be used to assist stakeholders to manage the financial impact of the pandemic. Stakeholders’ most requested financing tool was long-term working capital financing.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: No

SUPPORT: (Verified 8/5/24)

California Council of Community Behavioral Health Agencies

California Hospital Association

California Primary Care Association Advocates

California Special Districts Association

California State Treasurer

District Hospital Leadership Forum

OPPOSITION: (Verified 8/5/24)

None received

ARGUMENTS IN SUPPORT: The California Hospital Association (CHA) states in support that while reimbursement has remained largely stagnant, labor expenses have spiked 16% since 2019, pharmaceutical costs have grown by 41%, and the cost of medical supplies has jumped 19%. While CHA states that this bill will not resolve these issues, by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. CPCA Advocates states that health centers and clinics operate on very thin margins, and finances are often one of the major challenges that prevent health centers from expanding care, providing salary increases to their existing workforce, and attempting to attract new workforce. This bill would give community health centers more time and flexibility to repay and discharge a loan to address operational expenses.

ASSEMBLY FLOOR: 71-0, 5/21/24

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Soria, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NO VOTE RECORDED: Calderon, Cervantes, Megan Dahle, Friedman, Gabriel, Holden, Mathis, Papan, Luz Rivas

Prepared by: Vincent D. Marchand / HEALTH / (916) 651-4111

8/6/24 16:10:58

**** END ****

SENATE COMMITTEE ON HEALTH

Senator Richard Roth, Chair

BILL NO: AB 2637

SUBJECT: Health Facilities Financing Authority Act

SUMMARY:

Repeals the requirement that working capital loans made by the California Health Facilities Financing Authority to health facilities be repaid within two years.

Existing law:

1. Establishes the California Health Facilities Financing Authority (CHFFA), consisting of nine members, led by the State Treasurer who serves as the chair, and the executive director, who is appointed by the State Treasurer. States the intent of the Legislature to provide financing to health institutions that can demonstrate the financial feasibility of their projects, and that any savings experienced by the health institution be passed on to the consuming public through lower charges or containment of the rate of increase in hospital rates. [GOV §15430, et seq.]
2. Permits CHFFA, among other powers, to make secured or unsecured loans to any participating health institution in connection with the financing of a project or working capital. Requires CHFFA to establish financial eligibility standards by studying creditworthiness and earning capacity of each project, together with the amount of pledged revenues, debt service coverage, and basic security. [GOV §15437 and §15438]
3. Defines “participating health institution,” for purposes of being able to participate in CHFFA financing mechanisms, as a city or county, a district hospital, or a nonprofit corporation that operates a health facility, and that undertakes the financing of the construction, renovation, furnishing, or equipping of, or financing or refinancing the acquisition of, a health facility. [GOV §15432(e) and (f)]
4. Defines “working capital” as moneys to be used by, or on behalf of, a participating health institution to pay or prepay maintenance or operation expenses or any other costs that would be treated as an expense item, under generally accepted accounting principles, in connection with the ownership or operation of a health facility, including, but not limited to, reserves for maintenance or operation expenses, and interest not to exceed two years on any loan for working capital. [GOV §15432(h)]
5. Requires a participating health institution that is a private nonprofit corporation or association and that borrows money to finance working capital, other than as part of the cost of a project, to repay and discharge the loan within 24 months of the loan date. [GOV §15451.5]
6. Prohibits revenue bonds issued under CHFFA from being deemed to constitute a debt or liability of the state, or a pledge of the faith and credit of the state. Requires bonds issued by CHFFA to contain a statement to the effect that neither the State of California nor CHFFA shall be obligated to pay the principal, or the interest, except from the revenues of CHFFA. [GOV §15443]
7. Establishes the California Educational Facilities Authority for the purpose of issuing revenue bonds to assist private nonprofit institutions of higher learning in the expansion and construction of educational facilities. [EDC §94100, et seq.]
8. Establishes the Distressed Hospital Loan Program (DHLP) to provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals, to prevent the closure of, or facilitate the reopening of, those hospitals. Requires the Department of Health Care Access and Information (HCAI) to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP. [HSC §129380, et seq.]

This bill:

1. Repeals the limitation that working capital loans offered by CHFFA be only two years in length.
2. Requires CHFFA to establish financial eligibility standards for working capital loans by studying the creditworthiness of a participating health institution, together with the amount of pledged revenues, debt service coverage, and basic security.
3. Prohibits a participating health institution that is determined by CHFFA to be in financial distress from being deemed financially eligible for working capital loans.
4. Makes a legislative finding and declaration that the purpose of this bill is to enable nonprofit participating health institutions to finance working capital expenditures, such as those arising as a result of the COVID-19 pandemic, on a long-term basis.

FISCAL EFFECT:

According to the Assembly Appropriations Committee, no costs to CHFFA.

PRIOR VOTES:

COMMENTS:

1. Author’s statement. According to the author, CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. This bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.
2. Background on existing CHFFA programs. CHFFA was created to be the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. To this end, CHFFA administers the Bond Financing Program and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program (HELP) II Financing Program. In September of 2021, the Governor signed into law the Nondesignated Public Hospital Bridge Loan Program to enable CHFFA to issue up to $40 million in working capital loans at zero interest rate to certain hospitals that are affected by financial delays associated with the transition to the Quality Incentive Program. An additional $40 million was allocated as part of the Budget Act of 2022 for a second round of the bridge loans. These Nondesignated Public Hospital Bridge Loans are required to be paid back in two years, and are secured by Medi-Cal reimbursements. Additionally, CHFFA administers several grant programs, including the Children's Hospital Programs, the Community Services Infrastructure Grant Program, and the Investment in Mental Health Wellness Grant Program. Under the Mental Health Wellness grant program, Counties can apply for funding to develop a continuum of crisis services to children and youth up to 21 years of age in four categories: crisis residential treatment, crisis stabilization, mobile crisis support teams, and family respite care. There was an initial allocation of about $40 million for this Mental Health Wellness grant program.
   
   By borrowing through CHFFA’s tax-exempt bond financing program, health facilities can generally obtain lower interest rates than they would through conventional bonds. The types of facilities eligible for CHFFA financing include non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers. Proceeds from CHFFA financing may be used for project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; working capital for start-up facilities; costs of bond issuance; feasibility studies; and reimbursement of prior expenses. Under statute, savings resulting from issuance of tax-exempt bonds for borrowers must be transferred to the consuming public through lower or contained costs for delivery of health services. Since its first bond issuance in 1981, CHFFA’s bond financing program has issued 639 bonds for an aggregate total of approximately $46 billion, with 275 health facilities availing themselves of this financing.
3. DHLP. The DHLP was established through AB 112 (Committee on Budget, Chapter 6, Statutes of 2023), following the closure of Madera Community Hospital, in an effort to prevent further hospital closures and to help facilitate the reopening of Madera. AB 112 initially funded the DHLP at $150 million, but an additional $150 million was later appropriated to make it a $300 million loan program. After development of an application process and reviewing applications from 30 hospitals, HCAI awarded loans to 17 hospitals. Under the terms of the DHLP, the loans are interest free, and hospitals are to begin making monthly payments 18 months following disbursement of the loan. The loans are required to be repaid within 72 months of the date of the loan. The DHLP also required HCAI to develop, in consultation with CHFFA and upon the approval of the Department of Finance, a process for hospitals who received DHLP loans to request forgiveness or loan modifications. According to HCAI, they are currently in the process of developing this application, and hope to have it completed by the end of this summer.
4. Background provided by author and CHFFA. According to the author, working capital financing secured through CHFFA has the potential to provide support to hospitals that need additional financial breathing room to pay for salaries, benefits, lease payments, and more. However, a major limitation for long-term planning and flexibility is the limited term for which these financings must be repaid (24 months). Compared to the financing available through the California Educational Facilities Authority (no time limit) as well as the DHLP (six years), CHFFA is an underutilized tool in the toolbox due to these limitations on financing terms. Applicants usually aim for multi-decade repayment timelines to spread the short term costs across numerous years. Unfortunately, because CHFFA cannot accommodate these applications, health facilities must turn to other lenders who typically have higher interest rates, leading to larger overall costs to the health facility. This bill aims to eliminate the two-year repayment period to allow more hospitals to take advantage of CHFFA as an intermediary to connect health facilities with lenders. In response to the pandemic, CHFFA convened a working group to look at financing tools at its disposal that could be used to assist stakeholders to manage the financial impact of the pandemic. Stakeholders’ most requested financing tool was long-term working capital financing.
5. Related legislation. AB 2098 (Garcia) extends the repayment period for specified bridge loans for district hospitals, made through the California Health Facilities Financing Authority under authorization and funding from the 2022 Budget Act and which are required to be repaid within two years of the date of the loan, to instead require hospitals to make monthly payments within 24 months of the date of the loan, and for the loan to be repaid within 72 months of the date of the loan. AB 2098 is set for hearing on June 26, 2024 in this Committee.
   

AB 2271 (Ortega) requires the loan of $17.65 million that St. Rose Hospital in Hayward received from the DHLP to be forgiven, if Alameda Health System acquires the hospital and the Department of Finances approves of the loan forgiveness. AB 2271 passed the Senate Health Committee by a vote of 11-0 on June 19, 2024.

1. Prior legislation. AB 112 (Committee on Budget, Chapter 6, Statutes of 2023), established the DHLP to provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals. Requires HCAI to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP.
   
   SB 45 (Roth of 2022) would have established the California Acute Care Psychiatric Hospital Loan Fund to provide zero-interest loans to qualifying county applicants for the purpose of constructing or renovating acute care psychiatric hospitals or psychiatric health facilities, or renovating or expanding general acute care hospitals in order to add or expand an inpatient psychiatric unit. SB 45 was held on the Assembly Appropriations Committee suspense file.
2. Support. The California Hospital Association (CHA) states in support that while reimbursement has remained largely stagnant, labor expenses have spiked 16% since 2019, pharmaceutical costs have grown by 41%, and the cost of medical supplies has jumped 19%. While CHA states that this bill will not resolve these issues, by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. CPCA Advocates states that health centers and clinics operate on very thin margins, and finances are often one of the major challenges that prevent health centers from expanding care, providing salary increases to their existing workforce, and attempting to attract new workforce. This bill would give community health centers more time and flexibility to repay and discharge a loan to address operational expenses.

SUPPORT AND OPPOSITION:

Support: California Hospital Association

California Primary Care Association

California Special Districts Association

District Hospital Leadership Forum

Oppose: None received

-- END --

Date of Hearing: May 15, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 2637

Author:(Schiavo) – As Introduced Ver:February 14, 2024

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill changes the definition of “working capital” in the Health Facilities Financing Act to remove the two-year cap on interest on any loan for working capital, and deletes the provision requiring a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months.

FISCAL EFFECT:

No costs to the California Health Facilities Financing Authority (CHFFA).

COMMENTS:

1. Purpose. The sponsor of this bill is State Treasurer Fiona Ma. According to the author:

Currently CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. The author states that this bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.

1. Background. CHFFA is the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. CHFFA administers the Bond Financing Program (Program) and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program II Financing Program.
   
   By borrowing through the Program, health facilities likely obtain rates that are 20% lower than they would through taxable financing options. Generally, non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers are eligible for CHFFA financing. Proceeds from CHFFA financings may be used primarily for capital improvements such as project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; costs of bond issuance; feasibility studies; and, reimbursement of prior expenses – but not for working capital expenses, such as salaries and benefits. Borrowers must transfer savings resulting from issuance of tax-exempt bonds to the consuming public through lower or contained costs for delivery of health services.
   
   Since its first bond issuance in 1981, the Program has issued 646 bonds for an aggregate total of approximately $47.5 billion to 275 health facilities.
2. Support. The California Hospital Association (CHA) supports this bill, stating that by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. CHA argues that during the pandemic, CHFFA was limited in its ability to provide working capital loan assistance to health facilities due to the 24-month maturity restriction and the persistent financial impacts on hospitals from the pandemic. CHA concludes that without relief, the reality of the hospital closure in Madera County will, without question, be replicated in other parts of California.
   
3. Related Legislation. AB 2098 (Garcia) extends repayment requirements for non-designated public hospitals that received cash-flow loans from the CHFFA Fund due to the financial impacts of the COVID -19 public health emergency.
4. Previous Legislation. AB 112 (Committee on Budget), Chapter 6, Statutes of 2023, establishes DHLP, until January 1, 2032, which will provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals. The bill also requires HCAI to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP.

Analysis Prepared by: Allegra Kim / APPR. / (916) 319-2081

Date of Hearing: April 23, 2024

ASSEMBLY COMMITTEE ON HEALTH

Mia Bonta, Chair

ABPCA Bill Id:AB 2637

Author:((Schiavo) – As Introduced Ver:February 14, 2024

SUBJECT: Health Facilities Financing Authority Act.

SUMMARY: Changes the definition of “working capital” in the Health Facilities Financing Act to remove the two year cap on interest on any loan for working capital. Deletes the provision of law requiring a private nonprofit corporation or association to repay and discharge a loan for working capital within 24 months.

EXISTING LAW:

1. Establishes California Health Facilities Financing Authority (CHFFA) within the office of the State Treasurer to be the State's vehicle for providing financial assistance to public and non-profit health care providers through loans, grants, and tax-exempt bonds. [Government Code (GOV) § 15430 et seq.]
   
2. Defines “Health facility,” for purposes of CHFFA eligibility, to mean a facility, place, or building that is licensed, accredited, or certified and organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, or physical, mental, or developmental disability, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, including, but not limited to, a general acute care hospital that is a health facility having a duly constituted governing body with overall administrative and professional responsibility and an organized medical staff that provides 24-hour inpatient care, including the following basic services: medical, nursing, surgical, anesthesia, laboratory, radiology, pharmacy, and dietary services. [GOV § 15432]
   
3. Defines “working capital” to mean moneys to be used by, or on behalf of, a participating health institution to pay or prepay maintenance or operation expenses or any other costs that would be treated as an expense item, under generally accepted accounting principles, in connection with the ownership or operation of a health facility, including, but not limited to, reserves for maintenance or operation expenses, interest for not to exceed two years on any loan for working capital made pursuant to this part, and reserves for debt service with respect to, and any costs necessary or incidental to, that financing. [GOV § 15432]
   
4. Authorizes CHFFA to make secured or unsecured loans to, or purchase secured or unsecured loans of, any participating health institution in accordance with an agreement between CHFFA and the participating health institution to refinance indebtedness incurred by that participating health institution or a participating health institution that controls or manages, is controlled or managed by, is under common control or management with, or is affiliated with that participating health institution, in connection with projects undertaken or for health facilities acquired or for working capital. [GOV § 15438 (j)]
5. Requires a participating health institution that is a private nonprofit corporation or association that borrows money to finance working capital, other than as part of the cost of a project, to repay and discharge the loan within 24 months of the loan date. [GOV §15451.5]
   
6. Establishes the Distressed Hospital Loan Program (DHLP), until January 1, 2032, which will provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals. Requires the Department of Health Care Access and Information (HCAI) to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP. [Health and Safety Code 129380-129387]
   
7. Defines working capital for the purposes of the California Educational Facilities Authority Act without a 24 month limitation. [Education Code §94110]

FISCAL EFFECT: Unknown. This bill has not yet been analyzed by a fiscal committee.

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, currently CHFFA acts as a conduit for hospitals to secure bond financing for things such as wages, leases, and other operational costs. Under federal tax law, the State can issue long-term tax-exempt bonds to finance working capital, including funding to address a temporary cash flow or operating deficit, such as those arising because of the COVID-19 pandemic. However, state law limits bonds offered through CHFFA for these uses to only two years, much shorter than similar financing offered to educational facilities or distressed hospitals. This has resulted in some hospitals seeking financing being turned away. The author states that this bill remedies this by extending the bond terms as allowed in federal law and aligning CHFFA with other financing programs, enabling more hospitals to secure the funds they need to navigate difficult times.
   
2. BACKGROUND. Fixed capital refers to the assets or investments required to establish and run a firm, such as property or equipment. Working capital is the cash or other liquid assets that a company utilizes to finance day-to-day activities such as payroll and bill payment.
   1. CHFFA. CHFFA was created to be the state's vehicle for providing financial assistance to public and nonprofit health care providers primarily through loans funded by the issuance of tax-exempt bonds. To this end, CHFFA administers the Bond Financing Program (Program) and the Tax-Exempt Equipment Financing Program. CHFFA also provides direct loans to small and rural health facilities through the Healthcare Expansion Loan Program II Financing Program.

In September of 2021, the Governor signed into law the Non-designated Public Hospital Bridge Loan Program to enable CHFFA to issue up to $40 million in working capital loans at zero interest rate to certain hospitals that are affected by financial delays associated with the transition to the Quality Incentive Program. These Non-designated Public Hospital Bridge Loans are required to be paid back in two years, and are secured by Medi-Cal reimbursements.

By borrowing through CHFFA’s tax-exempt bond financing program, health facilities can likely obtain rates that are 20% lower than they would through taxable financing options. Generally, non-profit, licensed health facilities in California, including adult day health centers, community clinics, skilled nursing facilities, developmentally disabled centers, hospitals, and drug and alcohol rehabilitation centers are eligible for CHFFA financing. Proceeds from CHFFA financings may be used primarily for capital improvements such as project-related costs, including: construction; remodeling and renovation; land acquisition (as part of the proposed project); acquisition of existing health facilities; purchase or lease of equipment; refinancing or refunding of prior debt; working capital for start-up facilities; costs of bond issuance; feasibility studies; and, reimbursement of prior expenses. Not for working capital expenses, such as salaries and benefits.

Under statute, savings resulting from issuance of tax-exempt bonds for borrowers must be transferred to the consuming public through lower or contained costs for delivery of health services. CHFFA states that to enforce this requirement, applicants are required to complete a pass-through savings certification as part of its loan application that demonstrates significant community service.

Since its first bond issuance in 1981, CHFFA’s Program has issued 646 bonds for an aggregate total of approximately $47.5 billion, with 275 health facilities availing themselves of this financing.

• 1. Long-Term Bond Financings. CHFFA serves as a conduit of tax-exempt and taxable bonds under the Program. According to CHFFA, bonds issued by CHFFA are not a debt, liability, or a pledge of the full faith and credit of the taxing power of the state, or any of its political subdivisions, but are payable solely by qualified health facility borrowers (“Borrower” or “Health Facility”). The funding received under the Program is private funding from investors, who are typically sophisticated, and who financially analyze a Borrower’s financial positon prior to buying bonds and therefore investing in the Health Facility/Borrower. Borrowers are typically rated by Standard & Poor’s Financial Services, Moody’s Investor Services, or Fitch Ratings, and based on the credit rating of a Health Facility, an investor would require the terms (including the interest rate) to be paid on the bond funds borrowed by the Borrower (similar to how an individual’s interest rate on a loan is determined by their credit score). This Program typically provides funds to hospitals who are creditworthy.
     
  2. CHFFA “Competitors.” There are other organizations in California that provide bond financing to health facilities. The California Municipal Finance Authority (CMFA) provides tax-exempt bonds similar to CHFFA. The CMFA provide access to this market for qualified borrowers by acting as the conduit issuer, much the same way CHFFA does. Eligible costs for a CMFA financing may include the purchase of land, project design costs, construction, rehabilitation, improvement, equipment purchase and installation and legal fees. Up to 2% of the proceeds of a CMFA bond offering may be used to pay the cost of issuing bonds, such as for underwriter’s and legal fees. Also, the CMFA can issue taxable bonds to cover any additional costs of issuance or for additional undertakings that are not tax-exempt.
     
     The California Infrastructure and Economic Development Bank (I-Bank) was created in 1994 to finance public infrastructure and private development that promote a healthy climate for jobs, contribute to a strong economy and improve the quality of life in California communities. I-Bank has broad authority to issue tax-exempt and taxable revenue bonds, provide financing to public agencies, provide credit enhancements, acquire or lease facilities, and leverage State and Federal funds. Both of these organizations can and do provide financing to health facilities, only at a higher cost than CHFFA.
     
  3. DHLP. The DHLP provides hospitals who are financially struggling with loans beyond two years (payments are required to begin after 18 months and the loan to be discharged within 72 months of the date of the loan) and does not limit the loans to capital improvements. Under existing law, CHFFA is only allowed to provide long-term funding to credit worthy health facilities for capital improvements. This bill would allow all health facilities to finance working capital expenditures for the long-term as allowed by federal tax law on a tax-exempt basis.
  4. AB 1888 (Bronzan), Chapter 1426, Statutes of 1987. AB 1888, among other provisions permitted non-profit private institutions access to CHFFA working capital loans and requires such institutions to repay working capital loans within 15 months. The Department of Finance analysis in opposition to AB 1888 noted that, “Incurring long-term, tax-exempt debt to finance everyday operating (non-capital) expenses is not desirable. Operating expenses should be financed on a “pay-as-you-go” basis. Otherwise, tomorrow’s clients’ end up paying costs associated with services provided today.”

1. SUPPORT. The California Hospital Association (CHA) supports this bill and states that every day, hospitals throughout California care for the state’s most vulnerable populations, who often have no place else to turn for help. However, many of those same hospitals are on the edge of a financial cliff and facing the difficult choice of service reductions, bankruptcy, or closure, and for this reason, CHA, on behalf of its more than 400 hospital and health system members, supports this bill, which would allow CHFFA to issue long-term working capital financings by removing the limitation that loans be repaid within 24 months. CHA states that reimbursement has remained largely stagnant, yet labor expenses have spiked 16% since 2019, pharmaceutical costs have grown by 41%, and the cost of medical supplies has jumped 19%. CHA notes that this bill does not resolve these issues, but by allowing for longer CHFFA working capital loan periods, hospitals will have more options to address increased costs. During the pandemic, CHFFA was limited in its ability to provide working capital loan assistance to health facilities due to the 24-month maturity restriction and the persistent financial impacts on hospitals from the pandemic. CHA concludes that the financial condition that led to the closure of Madera Community Hospital is not an isolated circumstance, as evidenced by the appropriation and awarding of roughly $300 million from the DHLP. Hospital closures and service reductions are immediate and clear threats to health care in communities throughout California. Without relief, the reality of the hospital closure in Madera County will, without question, be replicated in other parts of California.
   
2. RELATED LEGISLATION. AB 2098 (Garcia) extends repayment requirements for non-designated public hospitals that received cash-flow loans from the CHFFA Fund due to the financial impacts of the COVID -19 public health emergency.
3. PREVIOUS LEGISLATION.
   1. AB 112 (Committee on Budget), Chapter 6, Statutes of 2023, establishes DHLP, until January 1, 2032, which will provide interest free cash-flow loans to not-for-profit hospitals and public hospitals, as defined, in significant financial distress, or to governmental entities representing closed hospitals. Requires HCAI to administer the DHLP and to enter into an interagency agreement with CHFFA to implement the DHLP.
   2. AB 839 (Addis) Chapter 667, Statutes of 2023, adds residential care facilities for the elderly to the list of facilities eligible to participate in financing and funding programs offered by CHFFA.
4. POLICY COMMENT. This bill will allow CHFFA to provide long-term financing to health facilities for working capital. As this bill moves forward, the author may wish to consider whether allowing hospitals to finance everyday operations over the long term is financially prudent.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Treasurer, Fiona Ma

California Hospital Association

District Hospital Leadership Forum

Opposition

None on file.

Analysis Prepared by: Lara Flynn / HEALTH / (916) 319-2097