Report 2009-042 Summary - May 2009

Children's Hospital Program:

Procedures for Awarding Grants Are Adequate, but Some Improvement Is Needed in Managing Grants and Complying With the Governor's Bond Accountability Program


Our review of the administration and use of bond proceeds from the Children's Hospital Bond Act of 2004 (2004 act) revealed the following:

  • The 2004 act's restrictive requirements limit the number of hospitals that can use the funds.
  • The California Health Facilities Financing Authority (authority) did not always recover interest earnings on funds paid to the hospitals in advance of actual expenditures-we identified more than $34,000 of interest due to the State.
  • The authority's regulations do not require grantees that are not in the UC system to deposit fund advances in interest-bearing accounts.
  • The authority has not finalized and implemented procedures to close out program grants.
  • Although the authority desires to voluntarily comply with the governor's 2007 executive order regarding accountability for bond proceeds, it is uncertain of its timeline to do so.


The Children's Hospital Bond Act of 2004 (2004 act) established the Children's Hospital Program (program) and authorized the State to sell $750 million in general obligation bonds to fund it. The purpose of the program is to improve the health and welfare of California's critically ill children by funding capital improvement projects for qualifying children's hospitals. Eligible projects include those to construct, expand, improve, or finance children's hospitals, including their furnishings or equipment. Because of the act's restrictive requirements, only 13 hospitals are eligible for the program: five specific University of California (UC) hospitals and eight children's hospitals throughout the State that are also members of the California Children's Hospital Association. In November 2008 California voters approved an additional $980 million for the program (2008 act); however, these funds have not been available to the hospitals because of the State's recent budget crisis.

The California Health Facilities Financing Authority (authority) is authorized by both the 2004 act and the 2008 act to award grants for the purpose of funding eligible projects. Established in 1979, the authority was created to administer the State's programs that provide loans, funded through the issuance of tax-exempt bonds, to public and nonprofit health care providers. The authority employs a process to review applications for grants, evaluate the proposed projects, and make recommendations to its governing board for approval or rejection of the grant applications. As of February 2009 the authority had awarded about $404 million in program grants authorized by the 2004 act and disbursed about $339 million to the grantees.

Although it has procedures to provide reasonable assurance that program funds are awarded to eligible hospitals for eligible projects, we found that the authority could improve its management of those grants. For example, the authority did not always comply with its regulations by failing to recover interest totaling more than $34,000 the hospitals had earned on program funds. Moreover, although the authority's regulations state that any interest earned on advances of program funds to hospitals other than UC children's hospitals will be recovered by the authority, they do not require these grantees to deposit those advances in interest-bearing accounts.

We also found that for six grants with completed projects the authority did not promptly perform procedures to close out the grants to ensure compliance with regulations designed, in part, to certify completion of projects and to gain an accounting of project costs and the use of grant funds. Further, it has not identified all the steps it should take to close out grants. Finally, although the program manager stated that the authority desires to voluntarily comply with the governor's 2007 executive order regarding accountability for bond proceeds, it is uncertain of its timeline to implement the bond accountability structure to provide assurance that bond proceeds are properly used and to offer the public easily accessible information regarding their use.


The authority should verify that it has the legal authority to require grantees that are not in the UC system to deposit grant funds paid in advance of project expenditures in an interest-bearing account and, if it has such authority, require that grantees earn interest on grant funds. In addition, the authority should develop and implement procedures to ensure that it promptly identifies and collects interest earned on those advances.

To ensure that it meets the objectives contained in the program regulations for the completion of grant-funded projects, including gaining certification that projects are completed and grants do not exceed project costs, the authority should take the steps necessary to ensure that it promptly executes its project completion checklist, determines any additional steps it needs to perform to close out grants, and finalizes and implements the necessary steps to ensure that grant closeout procedures are followed.

As the authority has decided that it desires to comply with the governor's executive order to provide accountability for the use of bond proceeds, it should develop and submit to the Department of Finance (Finance) an accountability plan for its administration of the program bonds. In addition, it should take the necessary steps to periodically update Finance's bond accountability Web site to provide public access to information regarding its use of the bond proceeds.


Authority staff recognizes the need to continually evaluate its processes and to look for ways to make improvements. The report highlights areas that can be improved and provides valuable feedback to that effect.