California State Auditor Report Number : 2015-042

Children’s Hospital Program
The California Health Facilities Financing Authority Has Generally Complied With Laws and Regulations and Resolved Its Issue Related to High Fund Balances

Audit Results

The California Health Facilities Financing Authority Has Awarded and Disbursed Most of the Hospital Bond Funds

The California Health Facilities Financing Authority (authority) has awarded 78 percent and disbursed 74 percent of the bond proceeds authorized by the Children’s Hospital Bond Acts of 2004 (2004 act) and 2008 (2008 act). As of February 2015, in the three-year period since our last review, the authority has awarded $346 million in 17 new grants and made 37 disbursements amounting to $395 million for 20 grants. Since the inception of the Children’s Hospital Program (program), the number of grants awarded totals 55, consisting of 32 grants funded by the 2004 act and 23 funded by the 2008 act.

As of February 28, 2015, the authority had awarded $674.1 million in program grants from the $750 million authorized by the 2004 act, including $1.3 million for administrative and bond issuance costs, and the authority had disbursed $672.8 million to grantees. In addition, the authority had awarded $675.6 million of the $980 million authorized by the 2008 act, including $3.5 million for administrative and bond issuance costs, and it had disbursed $607.1 million to grantees. Table 3 depicts the total awards, disbursements to grantees, and administrative and issuance costs under the 2004 and 2008 acts as of February 28, 2015, by grantee.

Table 3

Total Awards, Disbursements, and Administrative and Issuance Costs for the Children’s Hospital Bond Acts of 2004 and 2008 as of February 2015 (In Millions)

		BOND ACTIVITY
GRANTEE HOSPITAL	MAXIMUM FUNDING AVAILABLE*	AMOUNT AWARDED	ADMINISTRATIVE AND BOND ISSUANCE COSTS †	AMOUNT DISBURSED	FUNDS AWAITING AWARD OR DISBURSEMENT
CHILDREN’S HOSPITAL BOND ACT OF 2004
University of California Hospitals Specifically Identified as Eligible for Funds
University of California, Davis, Children’s Hospital	$30.00	$30.00	$ 0.17	$29.83	-
University Children’s Hospital at University of California, Irvine	30.00	30.00	0.17	29.83	-
Mattel Children’s Hospital at University of California, Los Angeles	30.00	30.00	0.17	29.83	-
University of California, San Diego, Children’s Hospital	30.00	30.00	0.17	29.83	-
University of California, San Francisco, Children’s Hospital	30.00	30.00	0.17	29.83	-
Hospitals Eligible for Funds Under Specific Requirements of the Children’s Hospital Bond Act of 2004
Children’s Hospital and Research Center Oakland	$74.00	$74.00	$0.06	$73.94	-
Children’s Hospital Central California	74.00	74.00	0.06	73.94	-
Children’s Hospital Los Angeles	74.00	74.00	0.06	73.94	-
Children’s Hospital of Orange County	74.00	74.00	0.06	73.94	-
Loma Linda University Children’s Hospital ‡	74.00	6.10	0.01	6.09	$67.90
Lucile Packard Children’s Hospital Stanford	74.00	74.00	0.06	73.94	-
Miller Children’s Hospital (Long Beach Memorial)	74.00	74.00	0.06	73.94	-
Rady Children’s Hospital–San Diego	74.00	74.00	0.06	73.94	-
Totals	$742.00	$674.10	$1.28	$672.82	$67.90
CHILDREN’S HOSPITAL BOND ACT OF 2008
University of California Hospitals Specifically Identified as Eligible for Funds
University of California, Davis, Children’s Hospital	$39.20	$18.81	$0.11	$18.70	$20.39
University Children’s Hospital at University of California, Irvine	39.20	-	-	-	39.20
Mattel Children’s Hospital at University of California, Los Angeles	39.20	25.00	0.14	24.86	14.20
University of California, San Diego, Children’s Hospital	39.20	39.20	0.23	38.97	-
University of California, San Francisco, Children’s Hospital	39.20	39.20	0.23	38.97	-
Hospitals Eligible for Funds Under Specific Requirements of the Children’s Hospital Bond Act of 2008
Children’s Hospital and Research Center Oakland	$98.00	$94.69	$0.54	$94.03	$3.43
Children’s Hospital Central California	98.00	32.79	0.19	32.60	65.21
Children’s Hospital Los Angeles	98.00	98.00	0.56	97.44	-
Children’s Hospital of Orange County	98.00	98.00	0.56	97.44	-
Loma Linda University Children’s Hospital	98.00	-	-	-	98.00
Lucile Packard Children’s Hospital Stanford	98.00	98.00	0.56	97.44	-
Miller Children’s Hospital (Long Beach Memorial)	98.00	42.61	0.08	13.06	84.86
Rady Children’s Hospital–San Diego	98.00	89.33	0.31	53.60	44.09
Totals	$980.00	$675.63	$3.51	$607.11	$369.38

As Table 3 shows, two University of California (UC) hospitals and three non-UC hospitals have received the maximum funding available to them under the 2004 and 2008 acts for various projects. Projects completed at these hospitals include construction and renovation of medical facilities as well as the purchase of medical equipment. For example, the Lucile Packard Children’s Hospital Stanford used one of its grants to fund construction of a 20-bed cardiovascular pediatric intensive care unit and a surgical suite. The hospital also purchased equipment, such as digital X-ray systems and an ultrasound machine, with grant funds. In another instance, a grant awarded to UC San Francisco Children’s Hospital contributed to the construction of a children’s hospital building that houses 183 pediatrics beds and a pediatric emergency department.

The University Children’s Hospital at UC Irvine (UC Irvine) has yet to receive any of the $39.2 million in funding available to it under the 2008 act. According to the authority’s program manager, UC Irvine submitted an application in January 2015 but subsequently withdrew it. As of August 2015, according to the authority’s operations manager, UC Irvine had not yet submitted another application.

Recent Regulations Affecting the Grant Application Process Conflict With the 2004 Act

Like UC Irvine, Loma Linda University Children’s Hospital (Loma Linda) has been slow to apply for funds, leading the authority to amend program regulations in a way that conflicts with the 2004 act. Loma Linda has not received most of the $74 million in funding that was available to it from the 2004 act. As Table 3 indicates, Loma Linda has received a combined total of only about $6.1 million. This funding related to two separate grants for equipment that were awarded in 2009 and 2010. The authority found issues with Loma Linda’s subsequent draft applications for grants; therefore, as of July 2015, the authority had not approved any additional grants for Loma Linda.

As noted in the Introduction, the 2004 act gives every eligible hospital approximately 10 years to apply for funds up to the applicable grant award limit, until June 30, 2014. Once a hospital reaches the limit during this period, it may not apply for further funding and the authority may not award it additional grants. After this period ends, however, the grant award limits lift. If funds remain after June 30, 2014, any eligible hospital may then apply for them and the authority is required to make the remaining funds available for this purpose.

In May 2014, however, to address Loma Linda’s situation, the authority adopted amendments to its program regulations that directly conflict with these provisions of the act. The authority amended the regulations so eligible hospitals that had not received the maximum allowable funds by June 30, 2014, would get an additional four years to apply for grant funds up to a limit of $74 million. However, an eligible hospital that already received awards up to the grant limit continues to be prohibited from submitting any applications for the entire period. The next opportunity for it to apply, assuming funds remain, will not be until July 1, 2018—four years later than specified in the 2004 act. The result of the authority’s amendments to the program regulations was that it effectively reserved $67.9 million in remaining 2004 act funds for Loma Linda—the only hospital awaiting a 2004 act award as of June 30, 2014.

According to the authority’s counsel, the amended regulations fulfill the act’s purposes and fairly award funds to any hospital that has not yet been able to receive its share of funds by June 30, 2014. Moreover, the authority’s counsel asserts that the state’s Office of Administrative Law approved the regulations, and no public comments or objections were made. Further, its counsel emphasized that the proposed amendments were supported by the California Children’s Hospital Association, which represents the eight eligible hospitals. According to the authority’s operations manager, Loma Linda submited in August 2015 an application for a project that will use up the remaining 2004 act funds as well as its earmarked funds related to the 2008 act, totaling $166 million.

Despite the authority’s assertions, while the authority may adopt regulations to carry out the provisions of the voter approved 2004 act, it is not empowered to adopt regulations that conflict with it. By adopting regulations that prohibit eligible hospitals from applying for the funds that currently remain after June 30, 2014, as authorized by the 2004 act, the authority’s regulations are in conflict with the 2004 act. For this reason, if challenged, the regulations would likely be deemed null and void by a court.

The Authority Consistently Applied Grant Award Procedures Covering All Eligibility Requirements, and It Disbursed Funds According to Law

The evaluation process for project applications established and carried out by the authority is sufficient to properly award grants to eligible hospitals. The authority uses grant award checklists to evaluate applications by hospitals, ensuring that the applications are complete and that the projects meet the eligibility requirements of the program. Our review of five grant applications showed that the authority properly evaluated the applications and awarded the grants. The projects described in the applications we reviewed met the requirements established in regulation, and the application files for these grants contained adequate documentation, such as completed checklists and approvals. The authority processed these applications within the 60-day time frame, as required by regulation.

The authority also followed its procedures to ensure that it disbursed bond proceeds in accordance with the requirements stipulated in the 2004 and 2008 acts and the grant agreements. It uses grant disbursement checklists to ensure adherence to regulations for the release of funds. To ensure that it pays only for eligible costs, the authority reviews invoices and other support that hospitals submit to document project expenditures associated with each disbursement request. Our review of 10 disbursement transactions showed that the authority properly evaluated and processed these disbursement requests. Our review of 19 invoices related to these disbursements found that payments were for allowable costs, as specified in regulation.

Finally, the authority adequately monitored projects to ensure their timely completion. The authority monitors progress toward grant completion during the disbursement process and obtains documentation supporting project closure. Our review of four grants found that the related projects were completed in a timely manner. Documentary evidence—such as closing checklists and certificates of occupancy—also demonstrated project completion.

Grantee hospitals we visited used bond proceeds in a manner that is consistent with statutes. We conducted site visits at four grantee hospitals and found appropriate uses of program funds for capital improvement projects that benefit the health and welfare of California’s critically ill children. The University of California, Davis, Children’s Hospital used grant money to fund the children’s portion of its expanded Comprehensive Cancer Center, including five examination rooms and 13 infusion chairs for chemotherapy treatment of its pediatric cancer patients. The Children’s Hospital and Research Center Oakland and Rady Children’s Hospital–San Diego used grants to acquire and install electronic medical records systems that integrate and centralize patients’ medical records to allow timely coordination between care providers for effective patient care. Children’s Hospital Central California and Children’s Hospital and Research Center Oakland renovated their facilities and purchased patient care equipment for detecting and treating acute diseases, including a computerized tomography (CT) scanner, bacteria analyzer, patient monitors, echocardiograph machines, and a neuro-microscope. Figures 1 through 3 depict examples of a project and equipment items funded by the program.

Figure 1

Expansion Project at University of California, Davis, Children’s Hospital

Figure 2

Computerized Tomography (CT) Scanner at Children’s Hospital Central California

Figure 3

Echocardiograph Machine at Children’s Hospital and Research Center Oakland

The Authority Has Resolved Its Issue Related to High Fund Balances

In our July 2012 audit, we reported excessive fund balances as an issue and found that the authority’s estimates of cash needs had far exceeded actual disbursements, resulting in a fund balance of $355 million as of January 2012. This pattern, as well as some hospital project delays that it could have anticipated, indicated that the authority needed to revise its process for projecting its cash needs. We recommended that the authority limit future bond sales to the level of disbursements that it reasonably expected to make during the following six-month period. We also recommended that the authority reduce its fund balance by continuing to make disbursements to hospitals while refraining from requesting additional bond sales.

Our current review found that the authority has revised its process for forecasting cash needs to ensure a reasonable fund balance. The authority now obtains from each hospital quarterly fund disbursement estimates for a 15-month period. Using these quarterly estimates, the authority prepares a cash needs estimate for the upcoming six-month period, and twice a year submits that estimate to the California Department of Finance (Finance) for approval. Upon approval by Finance, the Public Finance Division of the California State Treasurer’s Office raises the cash necessary for the program’s short-term needs either through bond issuances or through use of the State’s general obligation commercial paper program. Under the commercial paper program, the authority can use proceeds from the issuance of short-term unsecured promissory notes, known as commercial paper, for up to 270 days. The commercial paper is subsequently retired with proceeds from the issuance of general obligation bonds. As a result of this process, the authority’s fund balance declined from $355 million as of January 2012 to approximately $36.3 million as of February 28, 2015, and now appears reasonable for the program.

Recommendation

The authority should amend its regulations to bring them into accord with the 2004 act, thus allowing any eligible hospital to apply for the 2004 act’s funds that remained as of June 30, 2014.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

Date: September 15, 2015

Staff:
Jim Sandberg-Larsen, CPA, CPFO, Audit Principal
Nasir Ahmadi, CPA
Michelle O’Connor, CPA
April Ramos, CPA

Legal Counsel:
Amanda Saxton, Sr. Staff Counsel

For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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