Hospital did business with firms tied to its CEO, board members

A Monterey County public hospital district did $21 million in business over the last five years with firms in which its chief executive and board members held financial interests, according to a state audit released Thursday.

The audit was launched in response to a series of articles in The Times last year that highlighted the huge supplemental pension and severance package, totaling nearly $5 million, that the hospital’s former chief executive received.

The audit found that the Salinas Valley Memorial Healthcare System regularly did business with firms that the board and top officials had financial stakes in — in some cases in apparent violation of state conflict-of-interest laws.

The report stated that Salinas Valley lacks sufficient safeguards against making decisions that violate conflict-of-interest laws, and that the district therefore can’t guarantee “that it’s board members and executives do not experience personal financial gain from its transactions with businesses.”

The audit found 11 instances between 2006 and 2010 in which board members had reported economic ties — including stocks, salaries and other types of payments — to vendors with which the district did business.

Not all the cases represented violations of conflict-of-interest rules, state auditors said, but in two cases they found that officials may have broken the law.

One case involved former Chief Executive Samuel Downing, who had $50,000 in investments with 1st Capital Bank, an institution Salinas Valley and the executive agreed to deposit $1 million into.

In another case, the hospital made $5.6 million in disbursements to Rabobank, where a board member, Harry Wardwell, serves as a regional president and receives a salary of more than $100,000, according to his most recent statement of economic interest.

State auditors referred both cases to the Monterey County district attorney’s office for further investigation.

Officials also recommended that Salinas Valley have an independent investigator review the hospital’s business relationships with companies that have economic ties to board members and executives.

“This sheds light on some of the most egregious fiscal practices I’ve ever seen, and which were certainly the norm at the hospital for many years,” said Assemblyman Luis Alejo (D-Watsonville), who called for the audit.

Wardwell has also served as the executive director of the California International Airshow, to which the hospital has given over $100,000 in recent years.

Hospital officials said they would implement recommendations made by the state auditors. The hospital has already discontinued the controversial supplemental retirement plan, according to spokeswoman Adrienne Laurent. And in their response to the auditor’s report, board members said they would take steps to update policies on executive compensation, contracting decisions and community grants.

But the hospital strongly defended specific contracting decisions that the auditors called into question.

“The audit report irresponsibly alleges serious violations of conflict of interest rules without conducting a thorough consideration of the laws and how they might apply,” the board members wrote in a response to the state’s findings. In the case of the board member who worked at Rabobank, the hospital insisted he had “at most … a remote” interest in the deal, making him exempt from conflict-of-interest laws. And when Downing signed off on the 2008 agreement with a bank he held stock in, the district said he was simply carrying out “ministerial duties delegated to him.”

The hospital district also criticized auditors’ listing of nine other cases where it paid money to entities with which its board or executives had a financial interest, saying there was no evidence of impropriety in those instances.

John Borsos, a vice president for the National Union of Healthcare Workers, which represents many of the hospital’s employees, called the audit “just a scathing report” and a validation of concerns going back the better part of two years.

Last year, The Times reported that Downing received a $3-million retirement payment from Salinas Valley but continued working at his $668,000-a-year job for two more years. He also received a severance payment of $1 million. When he finally retired in April 2011, he collected $900,000 in extra benefits along with his annual pension of $115,000. In interviews, Downing said he felt he deserved the compensation — one of the largest public pensions in California history —- after a long and successful career at the hospital.

The payments drew attention to Salinas Valley’s unusual and complex supplemental retirement packages, which critics said were overly generous. State auditors said many of the decisions leading to fat compensation packages appeared to be made in virtual secrecy and in violation of open meeting laws meant to keep the public informed.

Last month, in response to public records requests by The Times and other news outlets, the hospital district announced that several other top officials were receiving generous pensions, including a $1.3-million supplemental retirement package for Salinas Valley’s chief operating officer on top of a $97,000 annual pension. Its chief financial officer will collect a supplemental retirement payment of $1 million plus an annual pension of $108,000.

sam.allen@latimes.com

hector.becerra@latimes.com