4.1 Staff Report

Analysis

Overview

In March 2019, Sonoma LAFCO deemed sufficient an application from Elisabeth Martin and Arnold Garza, property owners and voters within the Palm Drive Health Care District (PDHCD or District), seeking detachment of the Bodega Bay community from the District.

The applicants cited a number of reasons for seeking detachment, including:

• Ongoing, poor management of the district and hospital
• Continued fiscal failures of the hospital, leading to increasing district debt
• Closure of the emergency services at the hospital

The affected territory consists of all parcels within the boundaries of the Bodega Bay Fire Protection District. The District boundaries were chosen solely for mapping purposes; the District is in no way a party to the application.

The petition included signatures representing more than 25% of the registered voters within the affected territory. As required by state law, the Sonoma County Registrar of Voters verified the voting status of the petition signers, allowing the issuance of a Certificate of Sufficiency.

This was followed by issuance of a Certificate of Filing, indicating receipt of a complete application. In accordance with state law, the Commission must formally consider a proposal no more than 90 days after the Certificate of Filing is issued.  

Staff issued a Notice of Public Hearing for the proposal on April 5, 2019, setting the Commission’s consideration for May 1, 2019. The Notice was published in the Press-Democrat, and the newsrooms of other media outlets were notified. The District, as well as other affected agencies, were also notified.

Staff has prepared an Addendum to the Municipal Service Review (“Addendum”, Attachment 1) that was adopted by the Commission in October of 2016. The Addendum provides updated information and new Determinations in three of the seven areas evaluated in the MSR.

Staff has also prepared material regarding the application for detachment for the Commission’s consideration.

The balance of this report addresses:

• The Addendum to the MSR for the District
• The Proposal for Reorganization of the District, including:
  • Justifications cited by the applicants
  • Effects of detachment
  • Process for adjudication of the application
  • Environmental determination for the proposal

Staff is recommending that the Commission review and adopt the Addendum to the Municipal Service Review for the Palm Drive Health Care District, and subsequently, that the Commission conduct a public hearing and consider the application for reorganization of the District.

Municipal Service Review Addendum

The Commission adopted a Municipal Service Review for the District in 2016 (available at Commission web site). The condition of the District and its provision of health care services have changed dramatically in the ensuing period.

Staff has prepared an Addendum to the original report that is intended to serve as information to support Commission deliberations regarding the detachment proposal and any other actions the Commission may consider undertaking.

The Addendum features:

• Additions to the Agency Profile, reflecting recent developments.
• Updates, with new Determinations, for three of the MSR subject areas:
  • Capacity and Adequacy of Public Facilities and Services
  • Financial Ability to Provide Services
  • Accountability, Structure and Efficiencies
• The Addendum includes a staff report from the Commission meeting of October 2018 as an attachment; the report outlines how proposals for reorganization of the District can be initiated.

Proposal for Reorganization of the District (Detachment)

The applicants are proposing that the territory defined by the boundaries of the Bodega Bay Fire Protection District be detached from PDHCD, (The boundaries of the Fire District were employed to obviate mapping requirements; the Fire District is not in any way a party to the application).

The affected territory includes the unincorporated communities of Bodega Bay and Carmet, generally north of Bodega, south of Jenner, and ranging from the coastal range crest to the East and the Pacific Ocean to the West.

The territory is generally rural, with agricultural, residential, visitor-serving commercial, and park and open space land uses.

Justifications Cited By Applicants

In their application for detachment, the proponents provided a brief description of their reasons for seeking detachment from the District (Attachment 2).

A summary of the applicants’ reasons for the proposal is as follows:

• Ongoing, poor management of the district and hospital
• Continued fiscal failures of the hospital, leading to increasing district debt
• Closure of the emergency services at the hospital

The applicants point to the long-running financial difficulties of the District as justification for their proposal. The District remains obligated for debt incurred both at its formation and after an earlier bankruptcy, has an impending but unquantified debt to resolve its current bankruptcy, and is incurring debt with its current partner which is operating a long-term acute care operation at the former hospital.

The applicants also believe that the purpose the District, broadly acknowledged as maintaining a hospital in West County with emergency care services, can no longer be sustained. The District, through a contract with American Advanced Medical Group (“AAMG”), has opted for a service model that features an emergency care clinic but not a 24-hour emergency room.

While the applicants acknowledge that they would continue to pay their obligation for District debt that has already been incurred, including obligations for settlement of the current bankruptcy and accrued liabilities with AAMG, they do not want to be responsible for additional debt, should that be encumbered by the District in the future.

Regarding the financial condition of the District and the potential for further liabilities and debt, staff concludes that:

• The District intends to refinance existing debt to taxable status to meet financial regulations that apply when the District leases or sells the hospital. It is unknown what the refinance terms may be, or whether the District through the refinancing will seek additional debt to meet financial obligations such as the bankruptcy settlement.
• The agreement with AAMG expressly exposes the District to any debts or losses incurred by AAMG until such a time as the hospital facility is leased or sold to the company. Additionally, AAMG is owed a $100,000 per month management fee from the District, which was being accrued as a District debt obligation. AAMG and the District have entered into a lease of the facility, with a stated combination of financial losses and unpaid management fees of approximately $2.4 million.
• The District has has gained voter approval for sale of the facility. The proceeds of an eventual sale are expected to be on the order of $5 million, an amount that would satisfy only a modest portion of existing and accumulating debt.
• Detachment of the Affected Territory would marginally reduce the District’s financial resources that could be devoted to providing health care services in West County.

Effects of Detachment

Approval of the detachment application would affect the registered voters and landowners within the detachment area and within the remaining District boundary; as well as the District, particularly with regard to its financial resources.

Registered Voters Residing within the Detachment Area

Registered voters within the affected territory would lose their right to run for the District board of directors and to vote in District elections.

Landowners within the Detachment Area

Landowners within the affected territory would remain responsible to pay for their share of debt that the District has incurred, up to the date of detachment.

This includes existing bond obligations of the District, payments for the eventual settlement of the current bankruptcy (because that liability had been incurred prior to the date of detachment), and debt to AAMG.

These categories of debt are described here:

• The 2016 MSR describes existing District debt and the payment schedule. In nominal terms, about half of parcel tax revenues are being used by the District to pay existing bond obligations; that amount drops by about half in 2030 and all debt should be relieved by 2035. 
  It should be noted that the District retains the ability to restructure existing debt (including taking on additional debt) at its discretion, and is planning to restructure debt within the next few months.
• The District has filed a bankruptcy settlement plan with the court, with a total settlement in the $7 million range. Previously, the District projected making annual payments to creditors of approximately $1 million per year over a multi-year period.
• The District has also accumulated obligations to AAMG of approximately $2.4 million, which include financial losses incurred by AAMG and management fees that the District has not paid.

Landowners within the affected territory should expect to continue to pay a parcel tax, though nominally it could be reduced to a lower rate than is paid currently. The District is responsible for determining apportionment of parcel tax levies that are then collected on behalf of the District by the County Tax Collector.

Voters and Landowners within the Remaining District Boundary

Should the Commission approve detachment, voters and landowners within the remaining District would see no change to their rights with regard to District elections, and no change in the level of their parcel tax assessments.

The District

Revenue from parcel taxes represents almost all of the District’s income of approximately $4.2 million per year. Of that amount, almost half is currently committed to paying existing debt service, and a quarter may be allocated to bankruptcy settlement payments for a multi-year period.

Should the affected territory be detached, property owners in the detachment area would still be responsible to pay their apportioned share of existing debt, bankruptcy settlement payments, and payments to AAMG, as described in the previous section.

Those apportionments will change over time as debt is paid off and bankruptcy creditor payments are discharged.

Parcel taxes generated in the Bodega Bay area account for approximately XX% of District revenue, so post-detachment the District would lose that proportion of revenue that can be used to fund activities other than debt service.

In summary, the effects of detachment of the Bodega Bay community from the District would have the following implications for the District:

• Detachment of the affected territory would reduce the District’s income that could be devoted to programs other than debt service.
• Approval of detachment would not preclude the District from continuing as an agency or make the District insolvent, but it would reduce the District’s ability to provide health services in the West County.

Process of Commission’s Adjudication of the Proposal

The process of adjudicating a proposal for a change of organization involving detachment from a special district is established in state law (the Cortese-Knox-Hertzberg Act).

Staff has provided the following “roadmap” for the Commission as well as members of the public regarding consideration of this proposal.

Public Hearing

Because not all owners and voters within the area proposed for detachment from the District have provided their written consent to the proposal, state law requires that the Commission conduct a noticed public hearing on the merits of the proposal.

The Commission published a Notice of Public Hearing, as noted above, and set the hearing date on the proposal for May 1, 2019.

Commission’s Determination; Reconsideration

Once the Commission hears public testimony and deliberates, it will make a determination to approve, with or without conditions, or disapprove the proposal.

Within thirty days of the Commission’s adoption of a resolution making determinations, any person or affected agency may file a written request for reconsideration. The request must state the specific desired change to the Commission’s determination.  It must also indicate what new or different facts that could not have been presented previously are claimed to warrant the reconsideration.

The Executive Officer will include any timely reconsideration requests on the agenda of the Commission’s next meeting, and is required by state law to notice consideration of the request in the same manner as the original notice was made. The Commission must consider requests no more than thirty-five days from the date specified in the published notice.

(Therefore, evaluation of a reconsideration request would delay the finality of the Commission’s determination by two to three months, depending on filing dates and the Commission’s meeting schedule.)

After the Commission considers a request for reconsideration, it would either amend its determination or let it stand. The Commission’s determinations would then be final and conclusive.

Commission Determination: Disapproval of Proposal

The Commission may disapprove the proposal for detachment of the affected territory from the District. If the Commission’s disapproval of the proposal is not altered by reconsideration, as described above, no similar proposal involving the same or substantially the same territory shall be initiated for at least one year after the Commission adopts a resolution terminating the proceedings.

Commission Determination: Approval of the Proposal

The Commission may approve the proposal, with or without conditions. If the Commission approves the proposal, the reconsideration period and process described above must be followed. If the Commission’s approval of the proposal is not challenged or altered by reconsideration, the decision is affirmed, subject to a protest proceeding.

Legal Requirement If Proposal Is Approved: Protest Proceeding

If the Commission approves the proposal, the Commission must hold a protest hearing, because not all landowners and voters within the affected territory have provided their written consent to the proposal. This allows landowners and voters within the affected territory the opportunity to protest the detachment.

State law directs the Executive Officer to set a date for a protest hearing and provide public notice within thirty-five days of the Commission’s adoption of a resolution approving the proposal. The hearing would be conducted not less than twenty-one days or more than sixty days after the date the notice is given.

At any time prior to the conclusion of the protest hearing, any owner of land or registered voter within the affected territory may file a written protest.

For protests to be considered in ascertaining their value, they must be written; contain identifying information about the signer, as required by state law; be signed and dated; and be submitted between the date of publication of the hearing notice and the close of the protest proceeding.

At the conclusion of the protest hearing, the Commission must determine the value of written protests. For inhabited territory (defined in state law as territory in which twelve or more registered voters reside), approval of the proposal would be confirmed unless the Commission receives protest from:

• at least 25% of registered voters residing within the affected territory; or
• at least 25% of the number of landowners within the affected territory who own at least 25% of the assessed land value of land within the affected territory

If more than 25% of owners or voters protest, an election by registered voters must be conducted. If more than 50% of registered voters or landowners submit written protests, the proposal is terminated.

Factors for Consideration

California Government Code section 56668 describes sixteen factors to be considered in the Commission’s review of a proposal. The review must include, but is not limited to, consideration of these factors which are outlined and addressed in Attachment 5. (A number of the factors are not relevant to the subject proposal.)

Environmental Determination

LAFCO is the lead agency for this proposal, pursuant to the California Environmental Quality Act (CEQA), because the Commission has principal responsibility for approving the proposal.

Staff recommends that the Commission, as lead agency, find the proposal exempt from CEQA, under Section 15061(b)(3) of the State CEQA Guidelines. This section states:

…CEQA applies only to projects which have the potential for causing

a significant effect on the environment. Where it can be seen with

certainty that there is no possibility that the activity in question

may have a significant effect on the environment, the activity

is not subject to CEQA.

Staff recommends that the Commission find that no physical changes to the environment are anticipated, planned, or reasonably foreseeable as a result of detachment of the affected territory from the District, thus finding the proposal exempt from CEQA.

Recommendation 

Staff recommends that the Commission conduct two actions:

• Consider the adoption of the Addendum to the Municipal Service Review for the Palm Drive Health Care District.
• Consider the proposal to reorganize the Palm Drive Health Care District; specifically to detach the Bodega Bay community from the District.

For the first item, staff recommends taking public testimony regarding the Addendum, and either adopting the report or adopting the report with specified changes. Staff has prepared a draft resolution indicating adoption of the report and its determinations for consideration by the Commission.

For the detachment proposal, Staff recommends that the Commission conduct a public hearing, as required by state law, to allow comment from the applicants, representatives of the District, members of the public, and interested parties.

Staff further recommends that, subsequent to the close of the public hearing, Commissioners deliberate the merits of the proposal for detachment, based on the justifications presented by the applicants.

Staff has prepared a draft resolution indicating Commission approval of the reorganization proposal, should the Commission take that action.

Attachments 

1. Draft Addendum to the Municipal Service Review and Sphere of Influence Study of the Palm Drive Health Care District
2. Page 2 of Application Submitted to Sonoma LAFCO by Proponents
3. Draft Resolution Adopting Determinations of Addendum to Municipal Service Review for Palm Drive Health Care District
4. Draft Resolution Approving Detachment of Bodega Bay Community from the Palm Drive Health Care District 
5. Factors for Consideration