San Diego’s legislative delegation probing Palomar’s loss of $50 million grant

San Diego County’s legislative delegation — three state senators and five Assembly members — plan to meet soon with top leaders at Palomar Health to “discuss the circumstances” surrounding the state’s recent decision to rescind a $50 million grant earmarked to help build a 120-bed mental health hospital on the campus of Palomar Medical Center Escondido.

The California Department of Health Care Services notified the North County medical provider’s charitable foundation on Aug. 18 that the grant would be withdrawn after Palomar did not submit proof that it could meet a $4.9 million “cash match amount” necessary to secure the grant, which was among $3.3 billion in awards statewide announced in May. The funds are part of the $6.4 billion in bonds that voters approved for mental health care and substance use treatment infrastructure when they narrowly passed the Proposition 1 ballot measure in 2024.

When it became clear last week that the state had decided to end its award to Palomar, the county’s behavioral health department said in a statement that it hoped the $50 million could remain in the region even if the funding is no longer allocated to Palomar’s project. After all, the county wrote recommendation letters for applications made by a total of 31 local organizations seeking awards in the first round of the grant program. But the DHCS said in a recent statement that it has no plans to simply award the $50 million to the other local applicants whose proposals scored highest among the remaining 24 who did not get awards.

“The $50 million will be repurposed to be awarded in the Proposition 1 … Round 2: Unmet Needs Grant Program,” a DHCS emailed response said.

The state began taking applications for the second round of Prop. 1 funding — said to allocate more than $800 million statewide — on June 2. The deadline for all requests is Oct. 28.

Returning $50 million to the statewide pool of available funds for round two did not seem to sit well with local legislators.

Their recent letter to Palomar executives, including Chief Executive Officer Diane Hansen, governing board Chair Jeff Griffith, and Kristin Gaspar, chief executive officer of the Palomar Health Foundation, said the rescission “represents a serious setback for expanding mental health treatment capacity in San Diego County, where the need is both urgent and growing.”

Adding inpatient hospital beds in North County is a significant regional priority as both Tri-City Medical Center in Oceanside and Palomar have closed their units in recent years, requiring patients who need overnight treatment in locked facilities to travel south for care.

While the state’s rescission letter notes that Palomar Health can reapply for Prop. 1 funds through the round two process, the letter sent to Palomar by San Diego County’s legislative delegation seems to hold out some hope that there may yet be some way to keep the award, stating that local legislators “are committed to ensuring our region does not fall behind in delivering essential behavioral health services.” The reason for the requested meeting with Palomar’s top brass is said to be “to discuss the circumstances surrounding the grant withdrawal and to better understand Palomar’s plans.”

The letter’s signatories, listed alphabetically, include state Sens. Catherine Blakespear, Brian Jones and Akilah Weber Pierson, and Assemblymembers David Alvarez, Tasha Boerner, Darshana Patel, LaShae Sharp-Collins and Christopher Ward. Patel, whose 76th Assembly District includes much of inland North County, including Escondido, is taking point on setting up the meeting.

Asked to elaborate on the collective goal of the delegation’s meeting with Palomar, Patel said in an email that “we need to understand how it was that money was left on the table, which would have benefitted a struggling hospital.”

“My office took swift action this year to facilitate a bridge loan extension for Palomar Hospital,” Patel’s statement continued. “We remain committed to bringing Palomar into solvency and providing the community the health care it needs and deserves.”

Patel supported a bill before the Assembly Committee on Health in April to extend the repayment period on existing zero-interest bridge loans, including an $8.6 million payment to Palomar, approved in 2022 that would have come due for repayment on Dec. 20, 2024.

Had the Legislature not extended the repayment period, hospitals’ Medi-Cal reimbursements would have been garnished, an event that had it occurred would have been extremely dire for Palomar, which at the time was negotiating a forbearance agreement with private lenders.

Had the state tried to collect on the loan, a state policy analysis states “it could potentially trigger actions by other debt-holders” that could have put Palomar “in a precarious financial situation with other (lenders).”

The meeting, Patel added, is likely to be convened this fall after the current legislative session ends.

Palomar’s budget troubles stem from a confluence of financial turmoil, which started with heavy borrowing to build Palomar Medical Center Escondido, a facility that cost nearly $1 billion. Like all medical providers, Palomar has also struggled with reimbursement rates that have not kept pace with inflation. Palomar’s reserves dwindled so much that its cash on hand no longer met lender guidelines, forcing the organization to approve a forbearance agreement to prevent default on more than $700 million in outstanding revenue bonds.

None of the local legislators, asked individually by email through their staff members on Wednesday, addressed whether their involvement is an effort to push back against the state’s rescission decision.

Asked again on Tuesday to share its plans for how it will build the mental health hospital without the grant, Palomar said through a spokesperson that it has no comment. However, Gaspar said in an opinion letter published by the Times of San Diego on Wednesday that the rescission was due to a “technical glitch.” Gaspar said in the letter that Palomar intends to submit the project for round two approval.

Though Gaspar did not elaborate on the nature of the glitch she cited, the state rescission letter makes it clear that the decision was not made suddenly. The state’s letter indicates that DHCS reached out to Palomar on Aug. 1, granting a “second extension” of the deadline to “submit required match documents substantiating (Palomar’s) minimum cash match amount of $4,999,999.97.” Palomar failed to meet the deadline.