Memorial’s way forward lies in uncharted territory

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While hospital actuaries crunch their own numbers, Memorial Health System and the Public Employees Retirement Association are at a standstill about how much the hospital should pay to become an independent, nonprofit system.

The two organizations entered uncharted territory when the Memorial Citizens Commission recommended the change last year. To make it happen, the hospital system would have to exit the public pension plan.

Not only would Memorial be the largest group to ever leave the plan, it would be the first one to try to do so in more than 20 years.

PERA told Memorial it would have to pay $246 million to cover its obligations to the fund. The high price stunned Memorial officials — their own estimates were much lower, between $25 million and $50 million — and forced them to cancel plans to let voters decide the hospital’s fate in April. The issue has been tabled indefinitely.

The standoff stems from clashing interpretations about state law and differing calculations from actuaries.

However, the situation is not completely without precedent. In a neighboring state, Nevada, the Carson-Reno Healthcare System moved from county ownership to independence about a decade ago.

To solve the pension problem, the hospital, which has about 1,000 employees, created a defined-benefit plan of its own, but it also adopted a solution for 50 employees who wanted to remain in the state system, said Ed Epperson, the system’s CEO.

“We had them — on paper — become employees of another entity that was still in the state system,” he said. “And then they leased them to us. They still worked here, and we still paid their benefits, but it was a way to let them stay in the state system.”

Carson-Tahoe did not pay Nevada any money when it left the retirement system, he said.

“And $246 million — that would be a show-stopper,” Epperson said. “Even now, we couldn’t have left the county’s ownership.”

Back in Colorado, a PERA spokeswoman Katie Kaufmanis, believes the pension plan’s position is supported by state regulations.

PERA must cover all workers — those who currently work at Memorial, as well as those who worked there in the past, she said.

“There’s not much room for discussion in the way it’s handled,” Kaufmanis said. “It’s pretty strictly laid out by state law. Our actuaries have to determine the future benefit both of retirees, and of people who are fully vested in the program.”

The actuaries determined the future benefit based on the number of vested employees, their average age, how long they worked at Memorial and how long they are expected to receive state benefits.

PERA divides its money into trust funds to be invested together. Memorial falls into the local government fund, and it is the largest employer there. Without Memorial’s contribution, the fund provides less money to be invested to benefit the programs as a whole.

Memorial has 4,183 employees, who represent 25 percent of the local government group. The next largest group is Boulder County, which has only 1,980 employees.

The report from PERA said that $217.4 million is needed so the “disaffiliation will not have an adverse financial impact on the actual soundness of the local government division trust fund.”

PERA’s actuaries also decided that the health care trust fund, which pays a portion of the health insurance premiums for retirees, would suffer if Memorial left. It is requiring Memorial to pay an additional $28.8 million to that fund as well.

But Memorial officials think PERA has it wrong, and that it is applying laws to Memorial that simply aren’t applicable. Those laws, argue Memorial officials, are only for agencies that want to opt out of PERA, but not change their governmental status.

Memorial thought the employees would be counted as if they had left the hospital system and been rehired at the new nonprofit. When employees leave jobs or are terminated, no more benefits are paid into the system.

“We assumed it would be handled as if the employee had just left Memorial completely,” said spokesman Brian Newsome. “So we estimated we would only have to pay to maintain benefits for current retirees.”

For its part, Memorial is having its own actuaries investigate the numbers, in hopes that they will come up with a different, more palatable result. Those calculations are expected by the middle of March.

“We think there must be a way to handle this,” Newsome said. “We’re hoping that we can have a talk with PERA and come up with a solution.”

Memorial plans to take its numbers and start the appeals process with PERA. If there is no resolution after the appeal, then the issue is taken to the state attorney general, John Suthers, Newsome said. After the attorney general, Memorial could ask the legislature to step in, and the final option is a lawsuit in federal court.

“We don’t want to take it that far,” he said. “That could take years, and we’re kind of in a pickle operationally. So much is on hold until this gets settled — hiring, strategic planning. We’d like this settled very soon, so the issue can go on the ballot in November.”

Memorial officials aren’t the only ones who were surprised by the large amount.

“I’ve never heard of a number this big,” said Chicago-based hospital consultant Larry Singer, who was hired by the Memorial Commission to guide them through the complex conversion process. “I have a couple of hospitals I’m working with now, and they’re looking at numbers in the $50 million range.”

But those lower figures could become a thing of the past, he said.

“State pension plans are in trouble,” he said. “Their investments took a big hit, and many of them have benefit payouts that are higher than what people are paying in. We might see many states take this approach to bolster their plans.”

How PERA crunched its numbers

Step 1 Memorial’s portion of employer contribution reserve* $58.3M
Step 2 Reserve required to fully fund pension benefits 159.1M
Step 3 Amount Memorial needs to pay to ensure health care trust fund stays solvent $28.8M
Total (rounded) $246M

*25 percent of employer reserve for all employers in the local government fund. Memorial, as the largest contributor, has to pay the largest amount.