|Budget Issue:||California Health Facility Construction Loan Insurance Program|
|Finding or Recommendation:||A continuous appropriation for this loan insurance program is reasonable, but the administration's focus should be on ensuring that the Cal-Mortgage program's fund is maintained with sufficient reserves so that such an appropriation never becomes necessary.|
State Program Insures Certain Loans. The California Health Facility Construction Loan Insurance Program (Cal-Mortgage Program) is administered by the Office of Statewide Health Planning and Development (OSHPD) and insures loans taken out by operators of nonprofit and public health-related facilities. The Cal-Mortgage Program collects fees and insurance premiums from the entities it insures, which are deposited into the Health Facility Construction Loan Insurance Fund (HFCLIF). When insured entities default on their loans, the state makes payments instead of the insured entity. Under existing law, these repayments are supported by the HFCLIF. However, if there are not sufficient monies in the fund to make required payments, the insured loans would be guaranteed by the full faith and credit of the state—meaning the loans would be repaid by the state similar to general obligation bonds. State law requires that the State Treasurer’s Office (STO) make these payments from the General Fund. Since the inception of the Cal-Mortgage Program in 1972, HFCLIF has remained solvent and never required General Fund payments.
Fiscal Summary. The Cal-Mortgage Program produces monthly summaries of loan activity, annual financial reports, and an actuarial study every other year. As of October 2014, the program insured 110 loans totaling $1.8 billion, and the HFCLIF had a cash balance of $170 million. According to the most recent actuarial study published in 2014 (using data through 2012), the fund is anticipated to have a positive fund balance through 2041-42. However, the actuarial study finds that there is a possibility that the HFCLIF could require General Fund support in advance of that date.
The Governor proposes budget trailer legislation to specify that loan payments made from the General Fund in place of insured entities are continuously appropriated without further legislative action if HFCLIF does not have sufficient funding to meet its obligations. According to STO, this would ensure that state obligations are repaid without interruption, which is important in terms of protecting the state’s credit rating and overall borrowing costs.
We find that a continuous appropriation is reasonable in this case in order to ensure that payments of obligations related to the Cal-Mortgage Program are made without interruption. However, the intent of the Cal-Mortgage Program is to be self-sustaining and not require General Fund payments. Thus, the administration’s primary focus should be on continuing to ensure that the HFCLIF is maintained with a reserve that is sufficient to meet all reasonably anticipated needs. To that end, well in advance of requiring General Fund payments, OSHPD should take any necessary steps to ensure the program’s financial soundness, such as requesting statutory changes to the program’s structure or funding, as relevant.