Veto means no relief for hospitals from California earthquake safety deadline

California hospitals will get no extra time to retrofit hospitals against earthquakes after Gov. Gavin Newsom vetoed a bill that would have given them some breathing room.

Senate Bill 1432 was approved by lawmakers with unanimous votes in both houses in August. Newsom announced his veto Sept. 12.

Under existing regulations, hospitals will be forced to close if they don’t finish required earthquake safety work by a 2030 deadline under a state law originally crafted following the 1994 Northridge earthquake.

The bill would have given hospitals three years beyond the current 2030 deadline to complete the requirements if they follow the hospital compliance plan, and an additional five-year extension depending on the project.

Almost two-thirds of the hospitals in the state will not meet the 2030 deadline, which requires hospitals to be fully operational after a major earthquake, Jan Emerson-Shea, vice president of external affairs for the California Hospital Association, told the Bond Buyer in June.

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

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

Michael Burger, director in Fitch Ratings U.S. Public Finance Group, noted that the 2030 deadline is still pretty far out, and that gives lawmakers time to come back with something more in line with the governor’s thinking. He noted that Newsom seem disinclined to sign any broad exemption.

The governor’s veto can in theory be overridden, but California lawmakers have not overridden a veto for more than four decades.

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

“For many of our rated borrowers, there is some confidence they will meet the deadline,” he said. “I also can’t imagine the governor wanting hospitals taken off line that are providing patient care.”

As for whether they might take on more debt to speed up progress, Burger said “that’s hard to say.”

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

California hospitals – like the entire healthcare industry – have struggled to recover from the higher costs brought by pandemic care and a shortage of healthcare workers.

Fitch’s year-end 2023 report on healthcare said it expected the industry to continue to struggle against headwinds related to pandemic recovery and worker shortages in 2024.

The industry continues to struggle with labor shortages and salary/wage/benefit pressure that is still compressing margins for a sizable portion of the sector, even as other core credit drivers, specifically volumes and overall liquidity, begin to improve, Fitch analysts wrote.

“Technically the outlook is still ‘deteriorating,’ but that outlook was from last year,'” Burger said. “We haven’t revised that. We will do that in November or December. We have seen improvement, but it’s too soon to say if the outlook could be revised to stable.”

“We did recently issue our medians report for fiscal 2023,” Burger said. “Hospitals showed some improvement operationally, and we are beginning to see some signs they have turned a corner, but that haven’t fully gotten around that corner.”

He added Fitch is seeing improvement in the ratios of downgrades to upgrades and hopefully that will continue to track as the year progresses.

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

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

In California, the state approved a bailout program for hospitals in bankruptcy or struggling financially.

The 2030 seismic deadline was sparked by the 1994 Northridge earthquake that devastated Los Angeles’ San Fernando Valley. 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 to Becker’s Hospital Review that the veto “is disappointing and places communities across California at risk of losing access to vital emergency and acute healthcare services.”

She said the bill passed by the legislature offered a practical approach to compliance with seismic construction standards. “Now, without this change to a 30-year-old law, communities throughout California have little assurance that hospitals can stay open, workers can retain the jobs they rely upon, and patients can continue to access the healthcare services they need,” her statement said.

The California Nurses Association supported 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 that they remain open and fully functioning in the event of a major earthquake.”

MMA wrote that it expects that the hospital sector’s operating environment will remain difficult for the near-to-medium term as providers adjust to historically weaker performance and capital needs, address issues related to shifting payor mixes, confront a continued labor shortage and elevated inflation while facing greater administrative burdens.

Fitch Ratings

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

“Through the full week of August, nine hospitals have become impaired year-to-date, affecting $1.47 billion of related par. That pace, if it continues through Dec. 31, would make 2024 the second-worst year for hospital impairments in a decade. But, because 2023 was perhaps the worst year for hospital borrowers ever, this year can only be seen as an improvement.”

The difference in 2024, “most notably, is a relative lack of large systems entering the MMA database for covenant violations. The hospital sector is foremost on an overall municipal credit trend toward divergence in credit outcomes — strong credits outperforming smaller strugglers — as the latter face higher costs and less consistent revenues with less financial cushioning and/or diversification. It follows that investors should be trading up in hospital credit quality as possible to avoid risks from smaller providers.”

Among continuing defaulters was Beverly Hospital in California, which has “now, after a series of distributions, paid out 60% of principal owed to bondholders. Ultimate recovery is still to be determined,” MMA wrote in a Sept. 18 report.

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

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

Unrelenting cyberattacks have also been an issue for hospitals as well as federal mandates, according to MMA’s May report.