Judge Harlan Bockman’s decision regarding the city’s dispute with the Colorado Public Employees Retirement Association (PERA) couldn’t be worse news for the city.
The facts of the case are simple.
When the city leased Memorial Health Systems to the University of Colorado Health in 2012, it received a payment of $259 million to cover potential liabilities to PERA.
“The issue to be determined,” Judge Bockman wrote, “is whether MHS is required by statute to pay into PERA a reserve to fund retirement benefits for vested employees and former employees who are presently or in the future will receive retirement benefits from PERA.”
The City argued that it had no such liability, arguing that since UCH is a private entity provisions of state law that govern PERA withdrawals are inapplicable.
PERA’s attorneys dismissed the city’s claims and countersued, demanding that the city pay the association $190 million to satisfy its claims, plus 8 percent interest accruing from the time that Memorial’s 4,000 employees exited the system.
In a remarkably short opinion, Judge Bockman peremptorily dismissed the city’s claims. Citing the applicable statutes, he noted that the city’s interpretation would “render them meaningless” and “is inconsistent with the fundamental nature of a defined benefit plan.”
“The mandatory process,” Bockman wrote, “ensures that a withdrawing employer pays for the accrued unfunded benefits of its retirees and employees before leaving PERA.”
The judge did not issue summary judgment, essentially inviting the two parties to settle. But his decision was so forceful that it appears unlikely that PERA will give an inch in their claims.
And that 8 percent interest rate? That’s not an arbitrary number, but one established by PERA’s actuaries as the Association’s long-term targeted average return on investment. The number could have been higher – PERA’s ROI during its last fiscal year was more than 12 percent.
Had the city simply negotiated a payoff with PERA of, say, $180 million without going to court, the Memorial Foundation would have had an initial capitalization of $79 million.
But the city, like a crazed gambler who just hit a big jackpot, decided to double down, risking a big payoff for an even bigger hit.
Will the city appeal? Will Hogan Lovells, the hotshot outside counsel that went down to ignominious defeat, get another spin of the wheel? Will the city take the dispute all the way to the Supreme Court, and put the foundation at risk yet again?
In an October 28 filing, PERA claimed that the city already owed $15 million in accrued interest, putting the total at $205 million. If the lawsuit drags on for another two years, that would put the city’s potential liability at close to $250 million. If PERA prevails, the Memorial Foundation would be virtually defunded.
Way to go, guys!
City Council will meet in executive session to decide on a course of action later this month. Here’s a suggestion: Fold your cards, leave the table, cash your chips, and get out of Vegas. You’re out of your league. And if anyone asks you why you chose to blow $30 million or so on a fruitless lawsuit, you know what to say:
“It wasn’t us – it was former City Attorney Chris Melcher. He made us do it! So it’s not our fault!”
(To read Judge Bockman’s full report, click here.)