SAN FRANCISCO — A nonprofit mental-health service provider in Los Angeles County has gone belly-up, leaving a state-backed insurer on the hook for more than $5 million of bonds.
Verdugo Mental Health, a more than 50-year-old organization with a $5 million yearly budget, filed for Chapter 11 bankruptcy, and as a result the Cal-Mortgage Loan Insurance program this week said it would call the $5.5 million of bonds it insured.
However, another local nonprofit, Didi Hirsch Mental Health Service, is already lined up to buy Verdugo’s assets, and Cal-Mortgage plans to finance its loan to take over the facilities, effectively covering the cost of calling the bonds.
“The state insurance agency is basically becoming the secured lender,” said Andrew Parlen, a lawyer for Verdugo with O’Melveny & Myers LLP, which took the bankruptcy case on a pro bono basis. “If the sale works, the other nonprofit is going to buy the building for $5 million and that $5 million is going to be financed by Cal-Mortgage.”
Cal-Mortgage, which operates under the state’s Office of Statewide Health Planning and Development, or OSHPD, was created to help health facilities in California gain access to tax-exempt financing markets at costs comparable to those of the state.
The bonds are guaranteed by the program’s Health Facility Construction Loan Insurance Fund, with the state’s full faith and credit as the ultimate backing.
The California Health Facilities Financing Authority was the conduit for refunding revenue bonds issued for Verdugo in 2005 and 2007 at annual interest rates between 3% and 5%. Proceeds from the 2007 debt helped fund construction of a new building. The agency’s assets secured the paper.
Servicing patients in Glendale and Burbank, Verdugo employs 64 people, including psychiatrists, psychologists, nurses, social workers, and therapists. It serves about 200 people a day.
Substantial cost overruns on Verdugo’s new buildings, the cancellation of lines of credit, falling donations, and reduced government funding in the wake of the recession helped push the provider into bankruptcy, the agency’s chief executive, William Smith, said in court documents.
As a result, Verdugo had an operating loss of more than $300,000 in fiscal 2010. The agency defaulted on a note from its foundation in September and on its bonds in December.
“It is tough times for a lot of mental health facilities,” said the OSHPD’s Cal-Mortgage staff counsel Donald Morey, who has worked with the agency on the bankruptcy. “These people service a great deal of uninsured and Medi-Cal [patients] and it has been hard on everybody.”
Morey said the OSHPD has been in discussion with Verdugo for a long time and said they have been “very responsible.”
He said the state helped find a buyer because there has been a concern that the services to the community would end.
Joe DeAnda, a spokesman for the California treasurer’s office, said similar financial troubles have only hit a few health care facilities that received loans from the state.
“Obviously, it is uncommon,” DeAnda said.