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Smoke and Mirrors 

Hype over the Laguna Honda bond issue hides some ugly facts

Wednesday, Sep 1 1999
In November, San Francisco voters will be asked to approve a $299 million bond issue to rebuild Laguna Honda Hospital. Though the actual cost of tearing down and rebuilding the nursing home will be closer to $401 million, city officials say, the additional $100 million or so will be funded from the city's share of the massive payout now pending to settle governmental lawsuits against the tobacco industry.

But city officials, including Mayor Willie L. Brown, are not volunteering everything voters might want to know before deciding how to vote on the bonds. Their public statements, and information contained in the official arguments supporting the bond issue, make it appear as if the $100 million in tobacco money is safely in hand. Fixing up Laguna Honda seems only to await voter approval of the $299 million in bonds.

The funding plan, however, is more speculative than it first appears. Because of two lawsuits filed against the state of California, it may be years -- if ever -- before any tobacco settlement money is actually available to help pay for the Laguna Honda fix-up. And the actual cost of the project may easily rise above the $401 million price tag city officials are now touting.

If either of those things happens, voters could wind up approving $299 million in debt, and still not get a new hospital.

For 70 years, Laguna Honda has been the city's nursing institution of last resort. Its well-built Spanish Revival-style buildings have housed generations of San Francisco's infirm elderly and indigent disabled. But the skilled nursing home suffers from the shabbiness of deferred maintenance, and federal regulators have criticized its outdated, open wards.

Despite many alternatives to demolition and replacement, Mayor Brown and his campaign manager, Jack Davis, are mounting a high-profile push to "save" Laguna Honda and its 1,500 union jobs, a campaign pinned on passing this fall's bond issue. The bond issue, in turn, only works if the city also receives the $100 million or so in tobacco settlement money.

But two lawsuits have been filed challenging what will be done with the money California expects to receive from the tobacco litigation. At the least, the suits could tie up the tobacco money for years, and at worst they could mean that San Francisco never gets its $100 million.

Under the pending settlement of the massive, nationwide lawsuit launched by countless states, cities, and counties against the large tobacco manufacturers, California is to receive $25 billion. The state is supposed to keep half, with the rest being parceled out to local governments, like San Francisco.

Across the state, local leaders are already rubbing their hands and contemplating how to spend this remarkable budgetary windfall.

But the spending sprees could be halted by a class action lawsuit filed in July in Los Angeles Superior Court on behalf of injured smokers. The lawsuit argues that the state may spend its settlement money only on programs for assisting victims of tobacco addiction, or mounting anti-smoking campaigns.

The settlement money belongs to the victims of Big Tobacco, says plaintiff's attorney Robert M. Tessier of Encino. His lawsuit asks for an injunction prohibiting the state from spending any of the settlement money, or distributing it to local jurisdictions like San Francisco. If Tessier gets his way, the state's $12.5 billion share will not be used for building stadiums, gambling casinos, or hospitals. And the $12.5 billion that is meant for local governments may be held up indefinitely as the case is hashed out.

A second lawsuit, filed in February in U.S. District Court in San Francisco, poses a potentially greater threat to the settlement bonanza. The suit, filed by an international assortment of pro-smoking groups, wants to block the settlement completely, meaning California -- and San Francisco -- would receive no money.

The second suit was filed by cigarette smokers from Force Action Project LLC and New Zealand's Smokers of the World Unite, who argue that the state of California does not have the authority to sign away their individual rights to sue the tobacco companies. Tessier's group wants the money to be used to stop smoking. Force Action's attorney, Donald W. Ricketts, says he represents smokers who admit to no health problems but are incensed that the settlement money is being generated by increases in the price of cigarettes.

Ricketts says he has similar lawsuits going in San Diego and New York state, and that he will use the appeals process to hold up the distribution of tobacco settlement funds for up to two years. Tessier evinced interest in using the courts to stall payments for as long as necessary for him to win for his clients, who include the families of deceased smokers.

Both lawsuits could wind up as losers. But if either lasts beyond next spring -- and keeps the money from beginning to flow into San Francisco's coffers -- the delicately contrived Laguna Honda financing scheme could go into the tank. In that case, San Franciscan property owners could be left with $299 million in bonds to pay off -- at a total cost of $530 million when interest is added in -- and no new Laguna Honda.

The city does not appear to have a fallback plan should the tobacco money vanish in a puff of smoke, or be delayed by court action. In the meantime, the actual costs of rebuilding Laguna Honda may rise to well over $401 million, a figure that seems to spring more from a desire to low-ball voters than from sound public policy.

Eight years ago, a city study concluded it would cost between $727 million and $950 million -- in today's dollars -- to build a new hospital.

Last year, a proposed bond issue that fizzled before it even made it to the ballot set the figure at $500 million. This year, the Department of Public Health formed a new planning committee, led by Brown campaign manager Davis and City Attorney Louise Renne. Faced with negative public opinion polls, they struggled to reduce the cost of a new Laguna Honda to a publicly acceptable level. In March, they pegged the cost at $498 million. In May, it lost weight and became $428 million. Now it has thinned out to $401 million. Furnishings, equipment, and paint are extra.

These savings were achieved in a variety of ways, including architectural changes that lessen patient privacy. Since the new hospital will take seven years to build, the city plans an intricate scheme to earn interest on the $299 million in bond proceeds -- and $14 million a year in tobacco money -- over time, while staggering payment of construction contracts.

Worried officials have floated several schemes to fill gaping holes in a budget that seems to be sinking under its own thriftiness. Renne suggested selling revenue bonds -- supported by future income from the tobacco settlement. It was later determined that there is no market for these bonds. Renne is now "looking for private philanthropists" to step into the empty spaces in the budget. Other stopgaps being seriously considered by officials are issuing tens of millions in non-voter-approved bonds, and selling off Laguna Honda's 62 acres of prime urban real estate.

What the 43 pro-Prop. A ballot arguments in the Voter Handbook do not say is that there are acceptable alternatives to tearing down and rebuilding Laguna Honda. Janice Caldwell, regional head of the federal Health Care Financing Administration, insists that the feds are not pressuring San Francisco to build a new hospital. In fact, says Caldwell, federal regulators are quite content with the progress being made to fix up the existing one.

On the city's DPH Web site, Laguna Honda's planners cheerfully admit that they can do a fine renovation for well under $200 million. They also admit that the national trend in care of the frail elderly is toward independent living, and that institutions like Laguna Honda are being phased out across the country.

About The Author

Peter Byrne


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