By Eugene Ngai
New amendments to California’s local health care district law require districts to obtain a fair market value appraisal if the district transfers fifty percent or more of its assets (in sum or by increment) to one or more nonprofit corporations for less than fair market value, and disclose the fair market value of such assets to the voters for approval of the transfer. These amendments were enacted by SB 804, which Governor Brown signed into law on September 28, 2012.
The existing law permits a district to transfer its assets to a nonprofit corporation “in the absence of adequate consideration” only if the transfer is “for the benefit of the communities served by the district.” If the transfer involves fifty percent or more of the district’s assets, whether by one or multiple transfers, the transfer(s) are deemed to benefit the communities served by the district only if certain conditions are met. These conditions include (1) the requirement to fully discuss the transfer agreement and all arrangements in at least five open and public meetings, (2) the requirement that the district approve all initial members of the nonprofit corporation and any subsequent board members, (3) the requirement that all transferred assets revert back to the district upon termination of the transfer agreement, (4) the requirement that the nonprofit corporation operate and maintain the district’s health care facilities and its assets for the benefit of the communities served by the district, and (5) the requirement that any funds received by district as a result of the transfer be used only to reduce district indebtedness, to acquire needed equipment, to operate or improve the district’s health care facilities, to provide supplement health care services or facilities for the communities served by the district, or to conduct other activities that would further a valid public purpose if undertaken directly by the district.
The amendments enacted by SB 804 impose two additional conditions. In order to show that the transfer is for the benefit of the communities served by the district, the district must (1) obtain a fair market value appraisal of the assets from an independent consultant with expertise in methods of appraisal and valuation, in accordance with applicable governmental and industry standards for appraisal and valuation, and (2) the fair market value appraisal must occur less than six months before the date the district approves the transfer agreement.
Existing requirements also mandate that the elected board of the district submit to the voters, by resolution, a measure proposing the transfer of assets. Now, SB 804’s amendments require that the resolution must also identify the assets proposed to be transferred, the appraised fair market value of those assets, and the full consideration that the district is to receive in exchange for the assets.