Report 2012-042 Summary - July 2012

Children's Hospital Program: Fund Disbursements Are Appropriate, but Estimates of Cash Needs Have Been Consistently High

HIGHLIGHTS

Our review of the California Health Facilities Financing Authority's (authority) efforts to award 2004 and 2008 bond act funds, highlighted the following:

RESULTS IN BRIEF

In accordance with the Children's Hospital Bond Acts of 2004 and 2008, the California Health Facilities Financing Authority (authority) administers the Children's Hospital Program (program), which provides grants for eligible hospitals to construct or improve children's facilities. The authority's activities related to awarding grants complied with laws and regulations. Further, the authority has a process for monitoring grants and has processed payments to grantees in accordance with the law. However, the authority's administration of the program could be more efficient. The authority, like many other state agencies and departments, has not distributed proceeds promptly from its bond sales. Specifically, the authority, which had a program fund balance of $355 million as of January 2012, requested bonds sales that were in excess of its cash needs at a time when California's credit rating was low and interest-rate volatility was high. Consequently, the State paid as much as $16 million in interest annually on the idle capital while it was facing cash shortfalls.

Although the authority could not have foreseen or mitigated all of the circumstances that led to the excessive fund balance, its estimates of cash needs have consistently been well above actual disbursements. This pattern, as well as some hospital project delays that it could have anticipated, indicate that the authority needs to revise the way it makes yearly projections of cash needs. In particular, the authority currently includes in its estimates the projected cash needs of hospitals that have not yet submitted a project application for approval. Lacking the scrutiny associated with the application process, the authority has requested and obtained multimillion-dollar bond sales for projects that are later delayed or found not to meet regulatory requirements. Further, for hospitals with approved projects, the authority does not currently require written commitments indicating when the hospitals plan to spend awarded funds.

RECOMMENDATIONS

To avoid contributing to the State's financial strain, the authority should limit future bond sales to the level of disbursements it reasonably expects to make during the following six-month period. Further, the authority should reduce its current cash balance by continuing to make disbursements to hospitals while refraining from requesting additional bond sales.

If the authority believes it needs to retain a portion of its cash balance as a contingency reserve for unforeseen circumstances, it should perform and document an analysis demonstrating the appropriateness of the reserve level it adopts.

To allow for more accurate planning of upcoming cash needs, the authority should refine its cash-projection process to more accurately reflect its near-term cash needs. Specifically, the authority should refrain from requesting additional bond sales for projects that have not yet received project approval from the authority.

For hospitals with existing projects, the authority should request written confirmation from hospitals that details when hospitals will submit disbursal requests for approved funds.

AGENCY COMMENTS

The authority agrees with our recommendations and will take various corrective actions to implement them.