McGeorge School of Law

Proposition 61

Proposition 61:
The Children's Hospital Bond Act of 2004.

By Julia Blair

Copyright © 2004 by University of the McGeorge School of Law

JD, McGeorge School of Law, University of the Pacific
to be conferred December 2005
B.A., International Relations, University of California, Davis, June 2002

Table of Contents

I. Executive Summary
II. The Law
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion

I. Executive Summary

Proposition 61, the Children's Hospital Projects Bond Act, authorizes $750 million general obligation bonds for grants to eligible children's hospitals. Legislative Analyst's Office, Children's Hospital Bond Act of 2004 http://www.lao.ca.gov/ballot/2004/61_11_2004.htm (accessed Sept. 12, 2004). The money raised from the bond sales could be used by eligible children's hospitals for the construction, expansion, remodeling, renovation, furnishing, equipping, financing, or refinancing of the hospitals. Id.

Proposition 61 specifically identifies the five University of California children's hospitals as eligible recipients of the bond-funds, and provides that there are other children's hospitals that would likely meet the eligibility requirements specified in the measure, which include providing at least 160 licensed beds for infants and children. Id. Twenty percent of the monies would be available to the University of California children's hospitals; the remaining eighty percent would be available to nonprofit children's hospitals. Id.

In order to receive the funds, children's hospitals would be required to apply in writing to the California Health Facilities Financing Authority [hereinafter CHFFA], an existing state agency. Id. The agency would be required to develop the grant application, and process the submitted applications and award the grants within sixty days. Id. CHFFA's decision to award the grant would be based on several factors, including whether the grant would contribute toward the expansion or improvement of health care access for children who are eligible for governmental health insurance programs, or who are indigent, underserved, or uninsured; whether the grant would contribute to the improvement of child health care or pediatric patient outcomes; and whether the applicant hospital would promote pediatric teaching or research programs. Id. The funds provided by the grant could not exceed the total cost of a project, and funded projects would have to be completed "within a reasonable period of time." Id.

Proposition 61 follows the introduction of Senate Bill 953, the Children's Hospital Bond Act of 2004, by Senator Dunn in 2003. Telephone Interview with Charity Bracy, California Children's Hospital Association Vice President of Government Relations (Sept. 10, 2004) (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). According to Charity Bracy, concerned parents initiated the effort to place Proposition 61 on November's ballot after SB 953 stalled in the legislative process. Id. But, the language and purpose of the proposed bill and the ballot initiative are the same. Id. The goals of Proposition 61 are to provide children's hospitals with the funds necessary to increase bed capacity and ensure that sick and injured children have access to a regional facility. California Secretary of the State, California Official Voter Information Guide, Argument in Favor of Proposition 61 (2004). The monies will allow enlarging of facilities and the purchase of needed state-of-the-art medical equipment. Telephone Interview with Charity Bracy (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy).

Proposition 61 is a general obligation bond and therefore the state would be required to pay back the principle and interest costs of the bonds. California Secretary of the State, California Official Voter Information Guide, Text of Proposed Law, Proposition 61 (2004). General Fund revenues, received through state income and sales tax, would be used to pay these costs. Legislative Analyst’s Office, An Overview of State Bond Debt http://www.lao.ca.gov/ballot/2004/bond_11_2004.htm (accessed Sept. 12, 2004). The state’s cost for using bonds depends primarily on their interest rate and the time period over which they are repaid. Id. Today, most bonds are paid over a thirty year period. Id. Assuming a tax-exempt interest rate of about 5.25 percent, the cost of paying off these bonds over thirty years is about $2 for each $1 borrowed ($1 for the amount borrowed and $1 for interest). Id. Since the cost is spread over the entire thirty year period, after adjusting for inflation, the cost is actually closer to $1.25 for each $1 borrowed. Id. The total cost of Proposition 61 over the next thirty years will be approximately $1.5 billion to pay off both the principal and the interest of the bond. Legislative Analyst's Office, Children's Hospital Bond Act of 2004, Analysis by the Legislative Analyst http://www.lao.ca.gov/ballot/2004/61_11_2004.htm. The average payment each year for principle and interest together would be about $50 million per year. Id. The administrative costs would be limited to the lesser of CHFFA’s actual costs or one percent of the bond funds. Id.

II. The Law

A. Existing Law

1. Current Funding

According to Ms. Bracy, children’s hospitals currently provide children medical services regardless of their family’s ability to pay for these services and many of the children they treat cannot pay for the treatment. Telephone Interview with Charity Bracy (Sept. 10, 2004). Furthermore, the reimbursement rates paid by Medi-Cal usually only cover about a third of the cost to treat acutely ill children, and since children’s hospitals typically do not have the less expensive patients to offset the higher cost patients, the reimbursement for care does not balance out. Id. The Children’s Hospital and Health Center in San Diego, states that the reimbursement rates from the California government are the lowest in the nation and more than fifty percent of their patients are on Medi-Cal. The Children’s Hospital and Health Center in San Diego, Proposition 61: Children’s Hospitals Bond Act http://www.chsd.org/blank.cfm?id=2192 (accessed Sept. 11, 2004). The hospital also cites unprecedented growth in patient volume, increase in medication and technology costs, and increase in labor costs as other reasons why the bond funds are needed at this time. Id. At Children’s Hospital Central California, between seventy to seventy-five percent of the care is paid by Medi-Cal, and according to Dr. James Kratzer, a Fresno pediatrician, “the state is horribly underfunding Medi-Cal. Barbara Anderson, Emergency Expansion; Families Support Proposition 61 to Ease Growing Numbers at Children’s Hospitals, The Fresno Bee (Aug. 16, 2004). The hospital Chief Executive Officer, William P. Haug, also said that in past five years the hospital has had a four percent increase in patient days every year and they expect that trend to continue. Id. Miller's Children's Hospital would use the grant money to help finance a $250 million expansion of the hospital, including four-level inpatient wing of 129,000 square feet and a five-level outpatient wing of 80,000 square feet, over the next eight years. Yes on Proposition 61; General Californians can Spare a Little More for Children’s Hospitals, Long Beach Press-Telegram (Sept. 19, 2004). Most of the balance will come from private donations. Id. "Children's hospitals face the same problems as many other medical facilities in the state: overcrowding, aging facilities, stretched budgets. Because they provide specialized care, dealing with children with leukemia, cancer, cystic fibrosis, heart defects and more, these hospitals don't move patients in and out as quickly, which calls for larger facilities to house them." Vote Yes on Prop 61, Contra Costa Times (October 8, 2004). Without the bond money the hospitals will have to borrow money to increase bed capacity to ensure that children have access to a regional facility with specialized equipment and the latest medical technology. Emergency Expansion; Families Support Proposition 61 to Ease Growing Numbers at Children’s Hospitals, The Fresno Bee (Aug. 16, 2004); League of Women's Voters of California Education Fund, Proposition 61, Children's Hospital Projects Grant Program http://ca.lwv.org/lwvc/edfund/elections/2004nov/pc/prop61.html (accessed Oct. 17, 2004).

2. SB 953 (Dunn)

Prior to the qualification of Proposition 61 as an initiative measure for the November 2004 ballot, there was an attempt in the State legislature to pass a bill allowing for the Children’s Hospital Bond Act of 2004 to be submitted to the voters. Telephone Interview with Charity Bracy (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). Senate Bill 953, introduced in 2003 by Senator Dunn, attempted to enact the Children’s Hospital Act of 2004. Cal. Sen. Health & Human Serv. Comm., Analysis of AB 953, at 1 (April 23, 2003). The purpose of the bond was to fund capital expenditure projects for the children’s hospitals through the issuance of general obligation bonds in an unspecified amount. Id. The language of SB 953 was almost identical to the language in Proposition 61. Cal. SB 953, 2003-2004 Regular Session (April 21, 2003); Telephone Interview with Charity Bracy (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). Although the bill received eleven ayes and only one no vote in committee, in May 2003 it was sent to the Senate Committee Suspense file and did not continue on to be considered before the entire Senate or Assembly in the State of California. Cal. Sen. Health & Human Serv. Comm., Vote on SB 953 (April 23, 2003); California Bill Tracking, Senate Bill 953 (Feb. 2, 2004).

B. The Effects of Proposition 61

Proposition 61 will result in the authorization of the sale of bonds in the total amount of seven hundred and fifty million dollars for the purpose of providing financing for improving and expanding services in California’s Children’s Hospitals. Children’s Hospital of San Diego, Proposition 61: Children’s Hospitals Bond Act http://www.chsd.org/blank.cfm?id=2192 (accessed Sept. 12, 2004). The proposition provides that these funds should be awarded through grants administered by the CHFFA, through a written application developed by CHFFA. California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004).

Further, Proposition 61 provides that twenty percent of the bonds should be available to the five University of California children’s hospitals and that the remaining eighty percent should be available to the approximately eight non-profit children’s hospitals throughout California that meet the requirements under section 1180.1(b)(2) of the Act. Id. The specified requirements for these hospitals include, providing at least 160 licensed beds in the categories of pediatric acute, pediatric intensive care and neonatal intensive care in the fiscal year ending between June 30, 2001 and June 29, 2002; providing over 30,000 total pediatric patient days; and providing medical education of at least eight full-time equivalent pediatric or pediatric subspecialty residents. Id.

Also, Proposition 61 specifies the meaning of “projects” within the language of the Act. Id. The Act states that “project” means “constructing, expanding, remodeling, renovating, furnishing, financing, or refinancing of a children’s hospital to be financed or refinanced with funds provided in whole or in part pursuant to this part.” Id. The Act further specifies that the grant to finance a project shall not exceed the total cost of the project as determined by the children’s hospital and approved by CHFAA. Id. Furthermore, the projects must be completed “within a reasonable time” and if CHFAA determines that the project has not been completed under the terms specified in awarding the grant, they may require remedies, including the return of all or a portion of the grant. Id. Proposition 61 also provides that the Bureau of State Audits may conduct periodic audits to ensure that the bond proceeds are awarded in a timely manner and that the hospitals are using the funds in compliance with the applicable provisions of the act. Id.

Additionally, the Act states that the University of California hospitals identified in section 1180.1(b)(1) shall not apply for or be awarded a grant exceeding one-fifth the total funds available to all children’s hospitals identified in that section. Id. Also, the non-profit children’s hospitals identified in section 1180.1(b)(2) shall not apply for or be awarded a grant that would exceed $73 million from the funds available for grants for all the children’s hospitals pursuant to section 1180.5(b). Id. Both of these limitations provide that any remaining funds for the University of California children's hospitals and the eligible non-profit children's hospitals after June 30, 2014, shall become available for an application from any of the other hospitals identified in sections 1180.1(b)(1) and 1180.1(b)(2); after June 30, 2014 any of the specified University of California hospitals could apply for any remaining portion of the twenty percent set aside for these hospitals, and any of the eligible non-profit children's hospitals could apply for any remaining portion of the eighty percent set aside for eligible non-profit hospitals. Id.

Proposition 61 also provides for the creation of the Children’s Hospital Bond Act Finance Committee for the purpose of authorizing the issuance and sale of the bonds authorized by the Act. Id. The Act states that the committee shall be made up of the Controller, Director of Finance, and the Treasurer, and that the Treasurer shall serve as the chairperson of the committee. Id. The committee shall determine the whether or not it is desirable to issue the bonds, and if so, the amount of bonds to be issued and sold. Id. Furthermore, the Act provides that not all of the bonds need to be issued or sold in any one year. Id.

III. Drafting Issues

A. Ambiguous Terms

At first glance, there does not appear to be any significant drafting issues. However, upon further reflection, there exists ambiguous terminology within the text of Proposition 61, therefore making it difficult to fully grasp the effects of Proposition 61, despite its clear intentions.

As indicated above, Proposition 61 provides that the hospital projects for which CHFFA awards the bond money must be completed within a “reasonable time.” California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004). One concern regarding ambiguous language is what is the meaning of a “reasonable time.” Also, since the proposition doesn’t specify the meaning of the term, does the CHFAA have authority to draft regulations to define terms used in the act or are there existing definitions that the agency uses in other contexts?

The language of the proposition gives some answers to these ambiguities. Proposition 61 states that if the CHFFA determines that the children’s hospital fail to complete the projects under the terms specified in awarding the grant, the CHFFA “may require remedies, including the return of all or a portion of the grant.” Id. This language suggests that the CHFFA has the authority under this proposition to determine what a reasonable time is and to determine the remedies required for not completing the project within their determination of a reasonable time. The statutory language creating the CHFFA may also be useful in determining the CHFFA’s power to define the ambiguous term. Under California Government Code § 15437 the CHFFA “shall have and is hereby vested with all the powers reasonably necessary to carry out the powers and responsibilities expressed granted or imposed under this part.” Cal. Gov. Code Ann. § 15437 (LEXIS L. Publg. 2004). This language suggests that the CHFFA would have the power to determine the meaning of a “reasonable time” since this would be necessary to carry out its responsibility of awarding grant funds to hospitals and determining whether the hospitals are completing the proposed project within a “reasonable time.” California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004). Under similar statutory language granting the CHFFA the power to award grants to eligible clinics, the statute states, “all projects that are awarded grants shall be completed within a reasonable period of time, to be determined by the authority.” Cal. Gov. Code Ann. § 15438.6(g). Since the statutory language establishing the CHFFA and similar statutes relating to the authority of the CHFFA to award grants, both impliedly and explicitly give the CHFFA the authority to determine the meaning of a reasonable time, it is unlikely that Proposition 61 will be challenged on the ground that it contains ambiguous language.

B. Severability

Proposition 61 contains a severability clause in chapter 3, section 1181.9 which allows provisions later found invalid to be severed from the valid portions. California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004). Therefore if an initiative contains a section that is found to be invalid, the court will look to three factors in determining whether the remaining provision(s) can be severed from the invalid sections of the bill. Gerken v. Fair Political Practices Comm’n, 6 Cal. 4th 707 (1993). In order for the court to find the provision(s) severable, they must be grammatically, functionally, and volitionally separable. Id.

The severability clause of Proposition 61 states:
Notwithstanding any other provision of this part, the provisions of this part are
severable. If any provision of this part or its application is held invalid, that
invalidity shall not affect other provisions or applications that can be given effect
without the invalid provision or application. Id.

The provisions of Proposition 61 appear to be clearly drafted and to meet the criteria to render no part unconstitutional, but if the proposition did face a future constitutionality challenge, a court would look to the provisions in determining severability. The purpose of the bond act is to provide funds for capital improvement of children's hospitals, and therefore even if a portion of the act was found to be unconstitutional, a court could still find the remaining portions to fulfill the purpose of the act. The provisions of the bond initiative are also written in a way such that the sections could be separated and still effective in fulfilling the purpose of the act. Therefore even if there were portions of the act that were found unconstitutional, depending on which sections these were, the court could find the remaining sections to be severable under the Gerken test.

IV. Constitutional Issues

A. Federal Constitution

Proposition 61 does not raise any Federal Constitutional issues.

B. State Constitution

On its face, there do not appear to be any state constitutional issues expressly raised by Proposition 61. However there is an area of interest that will be discussed.

1. General Obligation Bond

California Constitution Article XVI, section 1.5 allows the Legislature to create and establish a “General Obligation Bond Proceeds Fund” in the State Treasury, and provides for the funds of the sale of general obligation bonds to be paid into or transferred to this fund. Cal. Const. art. XVI, § 1.5. Bonds are a type of long-term borrowing used by the state to raise money for various purposes. Legislative Analyst’s Office http://www.lao.ca.gov/ballot/2004/bond_11_2004.htm. The state obtains money by selling bonds to investors and in exchange the state agrees to repay this money, with interest, according to a specified schedule. Id. General obligation bonds are paid from the state’s General Fund, which is largely supported by taxes. Id.

The Constitution further provides under Section 1.5 of article XVI, that an account shall be maintained in the “General Obligation Bond Proceeds Fund” of all monies deposited in the State Treasury to the credit of that fund, and that proceeds of each bond issued shall be maintained as a separate and distinct account to be paid out only in accordance with the law authorizing the issuance of the particular bond for which the proceeds were obtained. Cal. Const. art. XVI, § 1.5. Section 2, of article XVI of the Constitution requires that each measure providing for the preparation, issuance, and sale of bonds in the State of California be submitted to the voters in the form of a bond act or statute. Id. at § 2.

Proposition 61 appears to adhere to the California Constitution. Proposition 61 provides that the bonds in the total amount of seven hundred fifty million dollars may be issued and sold, and the proceeds are to be used for carrying out the purposes expressed in the Proposition and to reimbursed the General Obligation Bond Expense Revolving Fund. California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004). Furthermore, Proposition 61 adheres to section 2 of Article XVI of the Constitution because it is being submitted to the voters for the November 2004 ballot in the form of a bond act. Id.

V. Public Policy Considerations

A. Proponents

Proponents of Proposition 61 claim that California’s Children’s Hospitals are in significant need of financing to increase bed capacity and ensure that sick and injured children have access to a regional facility. California Secretary of the State, California Official Voter Information Guide, Argument in Favor, Rebuttal to Argument in Favor, Proposition 61 (2004). Proponents cite increases in the services provided to children at these hospitals in recent years and the numbers of California’s children that are provided specialized care at these hospitals throughout California. Id. For example, Proponents state that regional Children’s Hospitals provide ninety-five percent of all surgery for children who need organ transplants. Id. Furthermore, these services are provided to children regardless of their family’s income or ability to pay. Id.

Supporters also say that Proposition 61 will allow children’s hospitals to purchase the latest medical technologies and special equipment, and will not raise taxes. League of Women Voters of California Education Fund, Proposition 61, Children’s Hospital Projects Grant Program http://ca.lwv.org/lwvc/edfund/elections/2004nov/id/prop61.html (accessed Sept. 12, 2004).

The Proponents of Proposition 61 include the California Children’s Hospital Association, the Children's Advocacy Institute, the California Parent-Teacher Association, the California Democratic Party, the California Federation of Teachers, the California Nurses Association, and the California Chamber of Commerce. Annette Wells, Hospital gives funds to Prop. 61 Loma Linda University facility donates $125,000 to campaign, The San Bernardino Sun (Sept. 5, 2004); Yes on Proposition 61; General Californians can Spare a Little More for Children’s Hospitals, Long Beach Press-Telegram (Sept. 19, 2004); California Children's Hospital Association, Yes 61, Children's Hospital Bond Act http://www.savethechildrenshospitals.com/voters.html (accessed Oct. 17, 2004). There is also bipartisan support for the Act, including Democratic U.S. Senator Barbara Boxer and U.S. Congresswoman Anna Eshoo, and Republican U.S. Congressmen George Radanovich and Adam Schiff. Michael Doyle, Children’s hospitals lobby for cash in D.C., Modesto Bee (June 19, 2004).

B. Opponents

In opposition to Proposition 61, attorney Gary B. Wesley writes that raising money at a time of deficits and high debt by more borrowing is not responsible. California Secretary of the State, California Official Voter Information Guide, Proposition 61 (2004). Furthermore, not only would the principal have to be repaid, but also decades of interest. Id. In the Rebuttal to Argument in Favor of Proposition 61, attorney Gary B. Wesley, writes that the problem in California is that people do not have access to insurance. Id. He argues that the current system of health care in California is wasteful and unfair and needs to be changed, not ignored. Id.

Opponents argue that California voters have already approved billions of dollars in bond debt this year, and that taking on additional debt at this time is not responsible. League of Women Voters of California Education Fund http://ca.lwv.org/lwvc/edfund/elections/2004nov/id/prop61.html. Furthermore, some argue that rebuilding hospitals does not guarantee health care for any child, and that California’s current system should first be made more efficient. Id.

Proposition 61 is opposed by the California Republican Assembly and the Orange County Taxpayer’s Association. Id.

VI. Conclusion

In November 2004, voters will decide whether to enact Proposition 61, the Children’s Hospital Bond Act of 2004. Proposition 61 would provide funds to qualified California Children’s hospitals for capital project improvements. Legislative Analyst’s Office http://www.lao.ca.gov/ballot/2004/bond_11_2004.htm. These funds would be obtained through the sale of general obligation bonds and granted to hospitals through the CHFAA. Id.

Proponents of the Act claim that it is vital to the support of medical care for California’s children. League of Women Voters of California Education Fund http://ca.lwv.org/lwvc/edfund/elections/2004nov/id/prop61.html. While Opponents are concerned with the state accruing more debt at a time of deficit and high debt in California. Id.