A potentially bitter legal battle shaping up between a municipal hospital and Colorado’s public pension fund demonstrates the likely pressures that underfunded funds face as they are caught up in local and state government efforts to slash their budgets.
Colorado’s Public Employees’ Retirement Association fund is facing a potential lawsuit from the Colorado Springs Memorial Health System after negotiations over the cost of the hospital exiting the scheme broke down in acrimony recently.
PERA had provided an actuarial estimation that it would cost $246 million for the city-owned hospital to leave its fund.
Memorial estimates this cost at less than $50 million and is reported to be preparing to sue the fund.
When PERA revealed the potential pension liability, it blew a hole in plans by the Colorado Springs Council to convert the city-owned hospital to either a privatised entity or a non-profit healthcare provider.
Facing pressure from local politicians and the community, PERA issued a statement last week standing by its analysis of the cost, despite the local outcry.
“PERA operates under Colorado State statutes, which provide guidance on how a local government employer such as Memorial can withdraw its employees from PERA and how the cost is calculated for doing so,” the fund said in the statement.
“PERA must follow the law and cannot negotiate this cost with Memorial because every dollar in reduction from the statutory calculation will have to be paid by the other participating employers.”
This position has been hotly contested by the hospital and local politicians who have disputed PERA’s cost analysis and called for greater transparency in the fund’s processes.
Memorial CEO Dr Larry McEvoy and then-Mayor Lionel Rivera (pictured) have said the PERA’s estimation would be too costly for the proposed non-profit to afford. It would act as a considerable disincentive to any potential private healthcare provider wanting to take over the hospital.
PERA argued that it produced a cost calculation at the request of the hospital using 2009 year-end financial statements and again using 2010 year-end financial statements.
Costs would be incurred, the fund claims, until the date Memorial’s former and current employees ceased to be covered by PERA.
Market volatility and demographic changes up to this date would also impact the final cost.
With no agreed road map for the hospital exiting the system, and the fund at loggerheads with Memorial and the local council, the dispute seems headed to courts.
The ramifications of this would be a court interpretation of the statutory regulations of the fund pertaining to the exit of members.
If this decision were to go against the fund, it could further exacerbate Colorado’s underfunded liabilities in providing for the retirement of its public employees.
The Pew Charitable Trust in its April report, “The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs”, found that Colorado was one of 31 states with less than 80 per cent of its liabilities funded.
The trust estimated that the state’s public pension liabilities were only 69 per cent funded.
If Memorial were to leave the fund with little cost it would further exacerbate funding pressures and put the onus on other government employers in the fund to contribute more to make up any shortfall, PERA claimed.
“If Memorial were to leave PERA and not fully pay the costs of the benefits earned by its current and former employees, the other public employers in the Local Government Division would see an increase in their respective liabilities to make up the shortfall,” the fund said.
“Presently, Memorial claims that it should not pay any amount to address unfunded liabilities.”
PERA’s analysis estimates that five other local authorities would be facing between $6.3 million and $49 million in additional contributions to make up the costs of the benefits earned by Memorial’s current and former employees.
“PERA’s responsibility is to administer the plan as called for in the statute and prevent one employer from shifting its pension costs to others,” the fund said.
“PERA believes that the position it has taken throughout this process is the approach required by statute and will be sustained by the court if it is litigated.”