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

Introduction

Background

In November 2004 California voters approved Proposition 61, the Children’s Hospital Bond Act of 2004 (2004 act), establishing the Children’s Hospital Program (program) and authorizing the State to sell $750 million in general obligation bonds to fund the program. In November 2008 California voters approved Proposition 3, the Children’s Hospital Bond Act of 2008 (2008 act), which authorized an additional $980 million in general obligation bonds for the program. The purpose of the program is to improve the health and welfare of California’s critically ill children by providing funds for capital improvement projects for qualifying children’s hospitals. (See the text box for hospitals’ eligibility requirements.) Eligible projects include those to construct, expand, improve, or finance children’s hospitals, including their furnishings and equipment.

Under both the 2004 and 2008 acts, two groups of general acute care hospitals are eligible for the program: five enumerated University of California (UC) hospitals and eight non-UC hospitals that the California Health Facilities Financing Authority (authority) identified by applying the acts’ eligibility criteria. Of the total funds available under both acts, 20 percent is earmarked for grants to the five UC hospitals. Each of these hospitals may receive more than one grant, but the total for all grants awarded to each UC hospital is limited to $30 million for the 2004 act and $39.2 million for the 2008 act, for a total of $69.2 million per UC hospital. The remaining 80 percent of the total bond funds is earmarked for the eight other hospitals that are eligible for the program based on the eligibility requirements in the 2004 and 2008 acts. These hospitals may also receive more than one grant, but the total for all grants awarded to each hospital is limited to $74 million for the 2004 act and $98 million for the 2008 act, for a total of $172 million per hospital. The 2004 act allowed each grantee hospital to apply for funds up to the grant award limit by June 30, 2014. The 2008 act has a similar provision, but its cutoff date for applying for earmarked funds is June 30, 2018.

The 2004 and 2008 acts authorize the authority to award grants for the purpose of funding eligible projects. Established in 1979, the authority administers the State’s programs to provide loans and grants, funded through the issuance of tax-exempt bonds, to public and nonprofit health care providers. The authority employs a process to review applications for grants, evaluate proposed projects, and make recommendations to its governing board for approval or rejection of grant applications.

In addition to the program requirements contained in the 2004 and 2008 acts, regulations also govern the program. These regulations include more specific requirements related to eligibility, applying for funding, and closing out grants. To carry out program activities, the authority uses commercial paper—short-term unsecured promissory notes—to meet its short-term cash needs, and the Public Finance Division of the State Treasurer’s Office issues bonds when market conditions are favorable.

Scope and Methodology

The 2004 and 2008 acts state that the California State Auditor (state auditor) may conduct periodic audits to ensure that bond proceeds are awarded in a timely fashion and in a manner consistent with the requirements of the acts. These periodic audits also make certain that grantees of bond proceeds are using funds in compliance with applicable provisions. The state auditor previously conducted two reviews of the program and issued related audit reports in May 2009 and July 2012. This current review constitutes our third review of the program. Table 1 summarizes the audit objectives and the methods used to address the requirements of the 2004 and 2008 acts.

Table 1

Audit Objectives and the Methods Used to Address Them

	AUDIT OBJECTIVE	METHOD
1	Review and evaluate the laws, regulations, and rules significant to the audit objectives.	Reviewed the laws and regulations relevant to the Children’s Hospital Program (program). Interviewed key management and staff of the California Health Facilities Financing Authority (authority).
2	Determine the current status of the program and any other relevant information on the program.	Interviewed authority management. Obtained and reviewed the authority’s master grant and disbursement spreadsheets for the Children’s Hospital Bond Acts of 2004 and 2008. Determined the total number of grant applications submitted since our last review in January 2012 through February 28, 2015. Reviewed minutes of the authority’s board meetings for evidence of approvals of grant applications. Determined the total number of grants awarded and the total amounts awarded and disbursed as of February 28, 2015.
3	Determine whether the authority awards bond proceeds in a manner consistent with applicable laws and regulations.	Interviewed the authority’s key management and reviewed relevant documents to identify and assess the controls for awarding bond proceeds. For a selection of five grant applications, we did the following: Determined whether the hospitals applying for grants were eligible to receive bond funds. Determined whether the authority processed the applications within 60 days. Determined whether the authority addressed the eligibility requirements when processing the applications by tracing items from the completed checklists to the applications and supporting documentation. Determined whether the information in the staff reports regarding project evaluations presented to the authority’s board was consistent with the information in the applications. Determined whether the authority’s board approved the grants and created grant agreements that contain elements required by regulation.
4	Determine whether disbursements for program projects agree with the approved grant.	Interviewed the authority’s key management to obtain an understanding of the disbursement process and the process that the authority uses to ensure adherence to the funding thresholds of the acts. Calculated the total disbursement for 10 selected grants to ensure that the amounts disbursed did not exceed the maximum allowable for the hospitals. Selected a disbursement from each of the 10 selected grants. For nine of these grants, we reviewed the largest two invoices along with their related grant agreements and contracts. For the tenth grant, we reviewed the sole invoice for the entire project plus the related grant agreement and contract. From the 10 grants selected for disbursement testing, identified and selected hospitals with equipment disbursements for site visits. Performed site visits at four hospitals to determine whether equipment purchased with program funds exists and was put to its intended use, as stipulated in the statutes and award agreements.
5	Determine the effectiveness of the monitoring and closeout procedures for grants.	Interviewed the authority’s key management and obtained supporting documentation to gain an understanding of the monitoring and closeout procedures for grants. For a selection of four projects completed since our last review, we did the following: Reviewed dates of grant disbursements for evidence that the projects finished on schedule. Determined whether the authority received certifications from hospitals that the projects had been completed. Determined whether the authority took appropriate action when projects did not finish on schedule. Determined whether hospitals’ requests for funds included offsets for investment earnings on advance payments, if any.
6	Determine whether the authority maintains a reasonable and appropriate fund balance to pay for project disbursements.	Interviewed the authority’s key management and obtained relevant documentation to gain an understanding of the authority’s process for estimating cash needs. Verified the authority’s fund balance as of February 28, 2015.

Assessment of Data Reliability

In performing this audit, we relied on electronic data files extracted from the information systems listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer-processed information that we use to support our findings, conclusions, or recommendations. Table 2 describes the analyses we conducted using data from these information systems, our methodology for testing them, and the conclusions we reached as to the reliability of the data.

Table 2

Methods Used to Assess Data Reliability

INFORMATION SYSTEM	PURPOSE	METHOD AND RESULT	CONCLUSION
California Health Facilities Financing Authority (authority) Master grant and disbursement spreadsheets for the Children’s Hospital Bond Acts of 2004 and 2008 Authority’s spreadsheets containing all grant awards and disbursements it has made as of February 28, 2015, under each bond act	To identify the grant awards and disbursements the authority has made as of February 28, 2015.	To test the accuracy of the authority’s grant award and disbursement data, we traced key data elements for a selection of 29 grant awards and disbursements to supporting documentation and found no errors. To test the completeness of the disbursement data, we traced 29 haphazardly selected disbursement request forms to the disbursement data and found no errors.	Sufficiently reliable for the purposes of this audit.

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