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Millions in health care district deals involve firms with ties to officials

Michael Wallace, president of the Washington Township Health Care District board, is also the chairman of the board of Fremont Bank. The bank has received more than $1.2 million in fees from the district over the past decade.
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Michael Wallace, president of the Washington Township Health Care District board, is also the chairman of the board of Fremont Bank. The bank has received more than $1.2 million in fees from the district over the past decade.
 
Concerns arise over conflicts of interest in taxpayer-funded agencies

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.

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.

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