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.
Commercial paper (CP) is now issued instead of upfront general obligation (GO) bond funds. This process allows CHFFA to limit CP sales to the level it reasonably expects to make in two months, exceeding the auditor's recommendation.
Bond funds are later issued to cover actual costs.
The first CP ($10.5 million) was issued at the end of June, 2013.
Since the Authority's 60 day response, the Authority has not requested any additional bond funds and has continued efforts to reduce its existing cash balance by continuing to make disbursements from its existing cash balance. The Authority agrees to limit future bond sales to the level of disbursements it reasonably expects to make during the following six-month period following the sale, or as otherwise directed by the Department of Finance in its twice-yearly cash needs survey.
The California Health Facilities Financing Authority has not provided documentation to support its assessment. As such, we cannot yet assess the authority's implementation of this recommendation.
The authority indicates it has not requested additional bond funds. (See 2013-406, p. 89)
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.
The Authority has determined that no contingency reserve or percentage margin will be required due to the new system of issuing commercial paper, rather than utilizing upfront general obligation bond sales.
By continuing to make disbursements to hospitals while refraining from receiving additional bond proceeds, fund cash available to the Authority for Proposition 61 grants has been reduced to $33.2 million, and fund cash available to the Authority for Proposition 3 grants has been reduced to $22 million as of June 30, 2013.
As mentioned in the Authority's 60-day response, the Authority asked its financial advisor, Sperry Capital, Inc. (Sperry), to help determine an appropriate reserve for the two children's hospital programs. Sperry concluded, and the Authority concurs, that a fixed reserve does not fit the dynamics of the program, in which disbursement amounts and timing vary widely and without a pattern. Instead, Sperry recommended a contingency margin (perhaps 10 percent initially) in the Authority's funding requests to the Department of Finance. However, rather than a fixed reserve amount or the contingency margin recommended by Sperry, the Authority will evaluate whether a specific dollar amount margin is needed at the time of each funding request in light of currently-identified uncertainties and conditions at the time of the request. Because the Authority will be able to tap the State's $1.6 billion commercial paper program for quick access to funding in the event of a shortfall in available funds, this approach seems most prudent.
As noted above, the authority indicates that it has not requested additional bond funds, and that it continues to process requests for disbursements of grant funds received from hospitals. The authority reports it has undertaken an analysis with its financial advisor to identify an appropriate reserve level, and expects to report on the results of this analysis and the resulting implementation plans in its six-month response. (See 2013-406, p. 89)
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.
The Authority no longer requests bond funds for projects not yet approved by the Authority. Commercial paper is generally issued monthly, allowing quick turnaround once disbursement requests are received on grants that have been approved, so delays in disbursements are unlikely.
The Authority has not received bond funds since December 2010.
Based on a review of the historical data of the program's grant disbursements, CHFFA's financial advisor concluded that because bond funding requests are made at six-month intervals and many disbursements are made within six months of grant approval, bond funding requests need to include anticipated applications in addition to approved grants. However, the Authority agrees that it should refrain from requesting additional bond funds for projects that have not yet received project approval from the Authority unless the Authority has documentation from the hospital showing the likelihood of project approval and disbursement within the six month window used to provide estimates to the Department of Finance.
As part of the analysis described in Recommendation 2, the authority indicates its financial advisor will provide guidance in forecasting grant disbursement needs. It further indicates it will not request bond funds for projects that have not yet received project approval from the authority. (See 2013-406, p. 90)
For hospitals with existing projects, the authority should request written confirmation from hospitals that detail when the hospitals will submit disbursal requests for approved funds.
Hospitals with active grants that have not been fully disbursed are asked to provide written projections of disbursement requests covering four quarters, and to update those projections at least twice a year.
The Authority is developing a system whereby, for each approved grant, hospitals will outline in writing and then regularly confirm estimates of grant disbursement amounts and timelines. In addition, the Authority will maintain a forecasting spreadsheet that aggregates all of the disbursement estimates and use it as a basis for bond funding requests.
The authority indicates that, upon execution of new grant agreements, it will request that the grantee provide in writing the projections of timing and the amount of disbursement requests. (See 2013-406, p. 90)
Agency responses received after June 2013 are posted verbatim.