There will be no public vote to transfer Palomar Health’s remaining assets to the joint powers authority with UC San Diego Health, which finalized its agreement with the inland North County medical provider on July 1.
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In a unanimous vote Monday, the final day of the legislative session, the state Senate unanimously approved a health-related trailer bill that, among many other items, approved moving the remaining 51% of Palomar’s assets, including Palomar Medical Center Escondido, into the possession of the Palomar UC San Diego Health Authority. The joint operating entity received 49% of Palomar’s assets, including Palomar Medical Center Poway, when the deal closed nearly two months ago.
State law requires for-profit or nonprofit companies receiving more than 49% of a public healthcare district’s assets to get such a transfer approved by voters in a ballot referendum; executives said Monday morning that voter approval is not required because the transfer is between two public entities.
“We had three ways of unifying the assets,” said Patricia Maysent, chief executive officer of UC San Diego Health. “We could do a public referendum, we could get a judicial ruling or we could do legislation.”
Voters living in the Palomar Healthcare District will continue to support those assets, with general obligation bonds appearing on property tax bills for decades to come.
Jeffrey Scott, an attorney and the preeminent expert on California’s healthcare district law, said that it is indeed the case that UCSD, as a public agency, does not fit into the usual public vote requirement for transfers to private companies.
“The state Legislature has plenary power over special districts,” Scott said. “I like to say that healthcare districts are ‘creatures of the Legislature’; they are created, and all of their powers emanate from the Legislature, which also has the power to dissolve them for any reason.”
The public vote requirement, he added, was intended to provide an additional measure of public control in the late 1990s, when legislation allowed leases and transfers of district assets.
A university official said that UCSD did not control the timing that led to the bill’s last-minute appearance. But, more broadly, Maysent said the urgency comes down to refinancing Palomar’s $700 million of revenue bond debt.
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Palomar, she said, owes a $28 million payment to bondholders at the end of 2027, an amount, often called a “bullet” or “balloon” payment, that would shred the organization’s thin financial cushion. Palomar’s most recent quarterly financial disclosure to bondholders showed just under $30 million in cash reserves through March 31.
Refinancing could eliminate the balloon payment, but getting a finance package together, the executive said, requires all of Palomar’s assets to be held by the authority, which she called “unifying the assets.”
“It’s going to take at least six to nine months to build the case and get it done,” Maysent said.
She added that this is not a case where the University of California’s credit rating and bond brokering capabilities will help. Palomar, she said, will have to make the case to lenders itself, with a credit rating that has slipped significantly in recent years, to refinance revenue bonds at an interest rate that the cash-strapped organization can afford.
Is this enough time to convince lenders that the UCSD-Palomar partnership has strengthened the organization’s finances enough to remove risk from refinancing? Maysent said that she believes that turnaround operations that have already been underway can assuage doubts.
“We’ve got three medical oncologists starting there; we have a CT [cardiothoracic] surgeon who will be there sometime this month, we’re beginning to build out services there for them,” Maysent said. “To some extent, especially for something like cancer, we’ll be able to decant La Jolla, particularly for patients that live up there.”
While the transfer of Palomar’s remaining assets to the joint powers authority will not require another board vote, legislation approved Monday does require the authority to explain the action to the public during two public hearings before the transfer occurs. Maysent said that she expects those meetings to be held toward the end of the year.
Should the authority fail, through violation of existing agreements or financial insolvency, UC San Diego Health has the option to buy the assets at fair market value. Palomar officials said Monday afternoon that the appraised value of Palomar’s assets was not immediately available.
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