California’s SB 222: What a Statutory Lien Means for California Health Care Districts

By Jenna Magan and Thomas Mitchell

New legislation (SB 222) was signed into law by Governor Brown on July 13, 2015 that will improve the security for California Health Care District General Obligation Bonds. The law will go into effect January 1, 2016.

General obligation bonds are voter-approved long-term debt instruments which are secured by the legal obligation to levy and collect ad valorem property taxes sufficient to pay annual debt service on the bonds.  Because general obligation bonds are secured by the taxing power of the health care district, they are considered by many to pose the lowest risk to the investor and, therefore, provide the lowest borrowing cost to the health care district when compared to any of the other types of debt financing that a health care district is authorized to issue under California law.

In addition, health care district general obligation bonds are also payable from district revenues if ad valorem property taxes are insufficient.  This is different from school district general obligation bonds, which are payable solely from property taxes.

SB 222 provides that general obligation bonds issued by a local agency, including health care districts, shall be secured by a “statutory lien” on all revenues received pursuant to the levy and collection of the ad valorem property tax.  Under the federal bankruptcy code, a statutory lien is a lien that arises solely by statute and not as a result of the parties’ agreement.  Previously, the governing statutes relating to the issuance of general obligation bonds by health care districts required that all taxes levied and collected be used for the payment of principal and interest on general obligation bonds and for no other purpose, but did not provide for a statutory lien.

The benefit of a statutory lien under the federal bankruptcy code is that the bondholders are secured creditors and their lien continues to apply to revenues received after the district files for bankruptcy. As secured creditors, the bondholders have superior rights to those of any unsecured creditors.  If the bondholders had only a consensual pledge of revenues, then under the federal bankruptcy code, it is possible that the pledge would not extend to revenues received after the bankruptcy filing.  Thus, SB 222 should materially improve the position of bondholders should the issuer file for bankruptcy. While the provisions of the federal bankruptcy code relating to the automatic stay may apply regardless of the statutory lien, there is very little incentive for a bankrupt district to use the automatic stay to interrupt payment of general obligation bonds secured by a statutory lien given that the creditors and the district recognize that the funds can be used for no purpose other than paying debt service on the general obligation bonds.

Due to bankruptcy concerns, rating agencies currently analyze health care districts' general fund credits as part of their ratings evaluation.  SB 222 strengthens health care district general obligation bondholders' rights in bankruptcy by granting them a statutory lien on the taxes collected to pay the bonds, which ought to result in better ratings and lower interest rates.

Jenna Magan and Thomas Mitchell are partners with the global law firm of Orrick, Herrington & Sutcliffe LLP.  Jenna focuses on all aspects of municipal and health care finance, including the issuance of general obligation bonds and revenue bonds by health care districts.  Thomas focuses on the areas of bankruptcy and creditors rights. Jenna can be reached at and Thomas can be reached at

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