Earthquake safety extension for California hospitals vetoed

California hospitals won’t have extra time to retrofit hospitals against earthquakes after Gov. Gavin Newsom vetoed a bill that would have given them some leeway.

Senate Bill 1432 was approved by lawmakers unanimously in both chambers in August. Newsom announced his veto on September 12.

Under existing regulations, hospitals will be forced to close if they don’t complete earthquake-safety work by a 2030 deadline, according to a state law originally drafted in the wake of the 1994 Northridge earthquake.

Bloomberg News

Invoice three years beyond the current 2030 deadline to meet requirements if following the hospital’s compliance plan, and an additional five-year extension depending on the project.

Nearly two-thirds of the state’s hospitals will miss the 2030 deadline for hospitals to be fully operational after a major earthquake, Jan Emerson-Shea, vice president of external affairs for the California Hospital Association, told Bond Buyer in June.

In his veto messageNewsom said “any extensions considered for the 2030 deadline must balance the increased risk to patients, hardworking hospital staff, emergency responders and people living in that community.”

He said any extended deadline “should be limited in scope” and granted only on a case-by-case basis to hospitals with a demonstrated need and a clear path to compliance, along with strong accountability and enforcement mechanisms.

Michael Burger, director at Fitch Ratings US Public Finance Group, noted that the 2030 deadline is still quite far away, and that gives lawmakers time to come back with something more in line with the governor’s thinking. He noted that Newsom does not appear to be signing any broad waivers.

In theory, the governor’s veto can be overridden, but California lawmakers a veto of more than four decades.

Fitch rates very few standalone or non-investment-grade hospitals, Burger said, and those are the hospitals that prefer not to have deep pockets to meet mandates.

“For many of our rated borrowers, there is some confidence that they will meet the deadline,” he said. “I also can’t imagine that the governor wants decommissioned hospitals that provide patient care.”

As for whether more debt could be issued to speed up progress, Burger said “it’s hard to say.”

“It’s definitely an option,” he said. “I can’t imagine anyone issuing debt to the gills to meet the deadline, but they will have to show urgency about compliance. But every borrower is different, it depends on how well they’ve planned for it.”

California hospitals — like the entire health care industry — have struggled to recover from higher care costs brought on by the pandemic and health worker shortages.

Fitch’s year-end 2023 healthcare report said the industry is expected to continue to battle headwinds related to the pandemic recovery and labor shortages in 2024.

The industry continues to struggle with labor shortages and wage/salary/benefits pressures that still squeeze margins for a sizeable portion of the sector, even as other lending fundamentals, notably volumes and overall liquidity, begin to improve, wrote Fitch analysts.

“Technically the outlook is ‘deteriorating,’ but that outlook was from last year,” Burger said. “We haven’t revised that. We’ll do that in November or December. We’ve seen an improvement, but it’s too early to say whether the outlook could be revised to stable.”

“We recently issued our FY 2023 medians report,” Burger said. “Hospitals have shown some improvement operationally, and we’re starting to see some signs that they’ve turned a corner, but they haven’t quite turned that corner.”

He added that Fitch is seeing an improvement in the ratio of downgrades to upgrades and we hope this will continue as the year progresses.

Municipal Market Analytics said in a June report that hospital sector finances appear to be showing signs of stabilization on average, according to S&P medians for 2023.

But progress has not been uniform and overall sector credit quality is arguably less sustainable as it emerged from the pandemic with a higher cost base, a host of growing challenges and deferred capital needs, MMA wrote.

In California, the state approved a bailout program for bankrupt or financially troubled hospitals.

The 2030 seismic deadline was triggered by the 1994 Northridge earthquake that devastated the San Fernando Valley in Los Angeles. It led to stricter standards for hospitals. By 2030, all hospital buildings in California must be able to remain fully operational after an earthquake.

California Hospital Association CEO Carmela Coyle said in a statement provided Becker’s Hospital Review that the veto “is disappointing and puts California communities at risk of losing access to vital emergency and acute care services.”

She said the bill passed by the Legislature provides a practical approach to complying with seismic building standards. “Now, without this change to a 30-year-old law, California communities have few guarantees that hospitals can stay open, workers can keep the jobs they rely on, and patients can continue to access the medical services they need ”, she. the statement said.

California Nurses Association upheld Newsom’s veto.

“This is an important victory for nurses and patients across the state,” CNA President Michelle Vo said in a Sept. 13 news release. “Hospitals have had over three decades to ensure they remain open and fully operational in the event of a major earthquake.”

MMA wrote that it expects the hospital sector’s operating environment to remain challenging in the near and medium term as providers adjust to weaker historical performance and capital needs, address issues related to changing payer mixes, face a continued labor shortages and high inflation, while facing increased administrative burdens.

Fitch Ratings

In an August 14 report, MMA characterized the hospital sector as still challenged but improving from a terrible 2023.

“During the entire week of August, nine hospitals have become affected to date, affecting $1.47 billion of the associated face value. That pace, if it continues through Dec. 31, would make 2024 the second-worst year for hospital defaults in a But because 2023 was perhaps the worst year for hospital borrowers, this year can only be seen as an improvement.”

The difference in 2024, “in particular, is a relative lack of large systems entering the MMA database for violations of the agreement. The hospital sector is at the forefront of a general municipal lending trend towards divergence in credit outcomes – strong loans outpacing weaker performers – as the latter faces higher costs and less consistent revenue, with a financial write-off and/or less diversification. It follows that investors should trade in hospital credit quality as much as possible to avoid risks from smaller providers.

Among those continuing to pay us was Beverly Hospital in California, which “now, after a series of distributions, has paid 60% of the principal owed to bondholders. The final recovery is to be determined,” MMA wrote in a September 18 report.

After filing for bankruptcy in April, Beverly Hospital in Montebello was purchased by Adventist Health in September 2023, according to the Whittier News.

“It is preferable to invest in providers with experienced, proactive management teams that adhere to above-average disclosure practices, given the higher likelihood of sector stress and uncertainty that could lead to negative headlines, spread widening or more bad,” MMA said in May.

Relentless cyber attacks have also been a problem for hospitals as well as federal mandates, according to MMA’s May report.