Millions in Health Care District Deals Involve Firms with Ties to Officials

Jennifer Gollan and Katharine Mieszkowski, The Bay Citizen

Board of directors president Michael Wallace at the district board meeting held at Washington Hospital in Fremont, CA Monday May 21st, 2012. (MichaelShort: California Watch)

Michael Wallace, president of the Washington Township Health Care District board which does business with Fremont Bank, is also the chairman of the board of the Bank. (Michael Short: California Watch)

A financial review of more than 20 health care districts in California found millions of dollars in transactions involving companies and nonprofits with ties to top district officials.

The findings raise questions about the adequacy of state and local scrutiny of the taxpayer-funded districts, which operate nursing homes and hospitals, distribute grants to health programs and manage their own real estate portfolios. The elected boards that run California health care districts oversee more than $4 billion annually in public and private funds from sources including state and local taxpayers, investments, real estate holdings and, in some cases, hospital revenues.

In one example, since 1990, Michael Wallace has served on the board of directors of the Washington Township Health Care District – which banks with Fremont Bank and, over the past decade, has paid the Alameda County-based financial institution more than $1.2 million in fees.

Some of the transactions uncovered … underscore the often opaque and cozy relationships between public officials and contractors.

During that same period, Wallace has held various leadership roles at Fremont Bank and is now its board chairman.  As recently as last year, his salary as chairman was more than $100,000, and he held more than $1 million of stock in the bank’s parent company.

In a statement issued through the district, Wallace defended his actions, saying he has followed legal requirements. “I did not participate in the district’s selection of Fremont Bank in 2001 and abstained from the board’s vote,” the statement said.

The Bay Citizen and California Watch review of contracts, vendor payments, tax filings and financial disclosures filed from 2006 through 2011 from 22 of the state’s 74 health care districts uncovered eight questionable transactions involving millions of dollars, including some that appeared to break conflict-of-interest laws. Among the findings:

  • A board member of the Sequoia Healthcare District in Redwood City voted to approve a grant to a nonprofit where his wife worked, while another board member held stock in two banks with district ties.
  • In the San Gorgonio Memorial Healthcare District in Riverside County, a then-board member lobbied his colleagues to continue doing business with his family’s moving and storage company.
  • The board of the Washington Township Health Care District in the East Bay approved payments of $350,000 to a nonprofit now run by the husband of the district’s health care CEO.

These little-known public agencies have been facing added scrutiny from lawmakers, in part because some health care districts have amassed huge reserves while diverting funds into administrative overhead and programs far removed from their original mission.

In March, the California State Auditor found that the Salinas Valley Memorial Healthcare System had paid $21.6 million between 2006 and 2010 to businesses in which board members or executives had a financial stake. Auditors said the former CEO or the board might have violated conflict-of-interest laws. The Monterey County district attorney’s office and California Fair Political Practices Commission are determining whether to file charges.

The examination included all of the Bay Area health care districts and a cross-section of others statewide. The review follows a Bay Citizen investigation in March into spending practices at some of the roughly 30 health care districts that no longer run hospitals.

Under the state’s Political Reform Act and state conflict-of-interest laws that apply to government contracting, public officials are prohibited from voting on transactions with companies or nonprofits in which they have a financial stake, including ventures affecting a spouse’s income. Potential penalties range from fines to voided decisions and felony prosecution.

Some of the transactions uncovered by California Watch and The Bay Citizen underscore the often opaque and cozy relationships between public officials and contractors.

For instance, when the Washington Township board approved its relationship with Fremont Bank in 2001, Wallace, the bank’s board chairman and health district board president, abstained from voting. He also abstained when the district board reaffirmed the relationship in 2005, documents show.

But state conflict-of-interest laws prohibit public boards and commissions from entering into a contract that could benefit any member financially, even if that member does not participate in the decision.

To ethics watchdogs, the handling of payments by board members and administrators raises questions about potential violations of the state’s conflict-of-interest laws and about whether the public officials involved are making objective decisions on behalf of their constituents.

“The people of the state who pay the taxes are losing,” said Judy Nadler, a senior fellow in government ethics at the Santa Clara University Markkula Center for Applied Ethics. “This is alarming. It indicates a pattern of not abiding by the law and by good ethical principles.”

In the Riverside County city of Banning, San Gorgonio Memorial Hospital paid $98,641 in 2009 and 2010 to Burgess North American, a moving and storage business co-owned by Todd Burgess and his father, Frank Burgess, a district board member during much of that time.

Frank Burgess wasn’t on the board when the original contract was approved. But when the hospital board, which includes all of the district board, voted on whether to hire a different contractor in April 2010, he lobbied members to continue the financial arrangement with his company, said Jerilynn Kaibel, chairwoman of San Gorgonio Memorial Hospital’s board of directors. Frank Burgess distributed a handout about the business before the meeting, then abstained from the vote, documents show.

Frank Burgess denied any wrongdoing.

“There was no lobbying before the board meeting,” he said, “and by laying out my pamphlets at each of their desks, there was no intention on my part to influence the board of directors.”

The board ended up voting to hire another company to replace Burgess North American. Kaibel said Burgess’ lobbying had crossed the line.

“It was inappropriate,” she said in an interview. “Not only did we admonish him, we filed a complaint with the Fair Political Practices Commission and the Riverside district attorney’s office.”

The district attorney filed no criminal charges in the case. An FPPC official said the agency referred the complaint to the state attorney general’s office. But a spokesman for the attorney general said the office had no record of the complaint.

Close ties to nonprofits

Nonprofits with connections to health care district board members also have benefited.

In the Sequoia Healthcare District, which also serves the Peninsula, board member Gerald Shefren voted in April 2011 to approve a $60,000 grant to Pathways Home Health, Hospice and Private Duty, a nonprofit where his wife, Joyce, works part time.

It marked the first time the district had provided a grant to the nonprofit, according to Lee Michelson, the district’s CEO.

Last year, Shefren served on a district committee that recommended Pathways and other groups receive funding from the health care district, documents show. Shefren said he recused himself from that decision. There are no records of the meeting, nor is the district required by the state to keep them, Don Shoecraft, spokesman for the Sequoia district, said in an email.

But soon after, at a full district board meeting, Shefren voted to advance the $60,000 grant for the nonprofit where his wife works, meeting minutes show. He seconded a motion to vote on a package of grants, then joined the 4-to-1 majority in approving it.

Questioned by The Bay Citizen about his vote, Shefren said: “In talking with our CEO and legal counsel, I think that this is an oversight. This probably should have been pulled out separately, so that I could recuse myself from the Pathways grant and vote on the other ones.”

Michael Short/California WatchNancy Farber, CEO of the Washington Hospital Healthcare System, attends a district board meeting in Fremont in May. The district approved payments of $350,000 to a nonprofit now run by Farber’s husband.

By contrast, Nancy Farber, CEO of the Washington Hospital Healthcare System, maintains that she followed the state’s conflict-of-interest rules. With compensation of more than $912,500 in 2010, Farber was one of the highest-paid executives within a health care district in California. As CEO of the health care system, Farber reports to the Washington Township district’s board, which oversees Washington Hospital and various outpatient clinics that serve residents primarily in southern Alameda County.

Since April 2010, Farber’s husband, Peter Farber-Szekrenyi, has played a leading role at the George Mark Children’s House, a nonprofit organization that provides care for children facing serious illnesses.

That was not his first involvement with the San Leandro nonprofit, either. He began volunteering for the organization in January 2009 before joining the nonprofit’s board of directors in May 2009.

In July 2009, the health district board voted to authorize Farber to provide a $100,000 grant to the George Mark Children’s House, documents show. The district board then voted to give the nonprofit an additional grant of $250,000 on March 10, 2010, documents show. Less than a month later, Farber-Szekrenyi became a consultant, earning $12,800 per month as executive director, while the Children’s House closed for roughly six months to reorganize its finances. In April 2011, he became the Children’s House CEO, earning $208,000 a year.

Farber did not vote on either grant because she does not sit on the district board. But she participated in a discussion about the second transaction, telling board members that the $250,000 grant would be awarded in installments based on “agreed upon milestones,” meeting minutes show.

Under state law, public officials are not permitted to participate in a decision in which they have a financial interest.

Despite repeated requests for an interview left at her office and with the district’s public relations staff, Farber declined to respond directly to questions about her role in awarding the grants. However, a written statement from the district’s spokeswoman said that two weeks after the board awarded the second grant, Farber notified board members that her husband had been asked to become the organization’s executive director.

“The matter of the $250,000 grant recently acted upon by this Board can no longer be allocated at my discretion as originally conceived,” Farber wrote in her letter to the board, dated March 24, 2010.

The district in its statement to The Bay Citizen maintains that Farber “stepped away from dealing with matters relating to George Mark Children’s House” after her husband took the job.

However, as CEO, she continued to run the system, which provides ongoing logistical help to the Children’s House, which reopened in fall 2010. The hospital has donated billing services to the small facility, which typically cares for three to four patients at a time, who stay an average of two weeks.

The Washington Hospital Healthcare Foundation provided more than $55,000 between 2009 and January of this year to support the nonprofit’s operating costs, events and fundraisers, documents show. As CEO, Farber approved at least a portion of those payments, according to the district.

Both Farber and her husband also serve on the health care foundation’s board of trustees.

In a promotional video about George Mark Children’s House posted on YouTube, Farber-Szekrenyi said his wife suggested he help the facility because it might close.

“See if you can get on the board and help them,” he said she told him.

Farber-Szekrenyi says his organization did not receive any special treatment.

“Washington Hospital’s and Nancy Farber’s initial assistance predated my role as CEO of George Mark Children’s House,” he wrote in an email to The Bay Citizen, adding that after he became CEO, “Nancy Farber declared her conflict and refrained from further participation in the grant process.”

Business relationships

While some of California’s health district officials fostered close ties with nonprofits, others helped advance the interests of financial institutions where they held stock.

Arthur Faro, the now-retired CEO of Sequoia Hospital and a board member in the Sequoia district, indicated on his 2009 disclosure forms that he had a financial interest worth between $10,001 and $100,000 in locally owned United American Bank. In February 2009, he seconded a motion to establish a business relationship with the bank, allowing it to come to the board for a vote, then abstained from that final vote, which was 3 to 1 in favor of the United American Bank deal, according to minutes from a board meeting.

Faro defended his decision to advance the bank’s contract.

“Of course, I’m aware of the state’s conflict-of-interest laws,” Faro said in a telephone interview. “I don’t think that’s a conflict. Seconding a motion doesn’t endorse the motion; it simply says you want it to go to a vote.”

Under the California Political Reform Act, however, public officials are prohibited from participating in any way in a decision in which they hold a financial interest. The law says: “No public official at any level of state or local government shall make, participate in making or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest.”

Several months later, the district announced it would bank with Wells Fargo instead because it had determined United American could not handle the size of the account, which has ranged from $1 million to $5 million since at least February 2008, according to Michelson, the district’s chief executive.

But here, too, Faro held a financial stake. In 2009, records show, Faro reported holding Wells Fargo stock worth between $100,001 and $1 million.

The vast scale of Wells Fargo’s assets – about $1.2 trillion – compared with that of United American – $265 million – means that Faro’s investment in Wells Fargo was not likely affected by the district’s decision.

While conflict-of-interest laws require a strict separation between board votes and any financial interests of board members, such transactions may present a lower priority for ethics watchdogs, said Nadler, the senior government ethics fellow at Santa Clara University. At the same time, public officials must be called to account for these transactions because they violate the public’s trust, Nadler added.

In the Kern Valley Healthcare District northeast of Bakersfield, for example, then-board member Brad Armstrong held stock worth between $2,000 and $10,000 in General Electric when he voted on three occasions to approve transactions involving the company’s subsidiaries, meeting minutes show.

In 2004, Armstrong joined the board in voting to approve a $275,000, five-year contract with GE Capital, Healthcare Financial Services to lease a CT scan machine for the district’s hospital, meeting minutes show. Months later, in October 2004, Armstrong joined the board in approving a separate five-year contract with GE Capital worth $61,250 for maintenance services on three X-ray machines in the hospital.

The market for shares of General Electric, one of the world’s largest companies, undoubtedly never noticed that the Kern Valley Healthcare District had approved the contracts – and Armstrong’s relatively small holdings in the company likely did not change.

Armstrong said he did not realize his decisions might present a conflict. “That never actually crossed my mind,” he said. “The correlation between the two never occurred to me.”

Inconsistent oversight

Oversight of the state’s health care districts falls to the local agency formation commissions, the Legislature’s county-level watchdogs.

But enforcement is spotty at best. The watchdog commissions in Riverside and Kern counties have never conducted reviews of the San Gorgonio or Kern Valley districts, officials from the commissions said. Between 2006 and 2010, board members in the Mt. Diablo Health Care District in Contra Costa County failed to file their annual financial disclosures.

And a 2004 review of the Washington Township district by the Alameda County Local Agency Formation Commission found that it had “relatively high costs compared with other hospitals.” Yet that fact prompted no additional scrutiny.

William Chiat, executive director of the California Association of Local Agency Formation Commissions, which represents the state’s 58 commissions, said they don’t normally investigate conflicts of interest unless there are major red flags.

But Jessica Levinson, an associate clinical professor at Loyola Law School in Los Angeles, said health care districts need “some sort of checks to know what these officials are up to.”

“All of these activities raise important questions,” she said. “If you are a public official, all you should be doing is serving the public, not yourself or your spouse.”

This story was produced by The Bay Citizen, a project of the Center for Investigative Reporting. Learn more at www.baycitizen.org.

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