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E-mails reveal breakdown in Memorial PERA negotiations

August 30, 2011

A review of correspondence between Memorial Health System and the state Public Employees’ Retirement Association going back to November 2010 reveals escalating urgency and acrimony over how to calculate how much the hospital would have to pay to leave the public pension system.

The e-mails and letters, obtained by The Gazette through a Colorado Open Records Act request, show Memorial’s leaders to be in a rush to resolve the dispute in time to get a plan to turn the city-owned Memorial into an independent nonprofit on first the April and then the November ballot, and PERA to be unwilling to negotiate over its methodology.

The ongoing debate over whether to spin the city-owned Memorial off as an independent nonprofit or lease it to an outside hospital group has foundered on the tens or hundreds of millions of dollars it would require to leave the state pension plan. PERA’s first estimate to Memorial in January was $246.3 million, a sum that killed plans to put turning the hospital into a nonprofit on the April ballot. A new council task force plans to collect bids to lease Memorial from the hospital’s leadership and outside hospital systems and ask voters to approve or reject a winner in early 2012.

Since the $246 million January bombshell, e-mails from lawyers and actuaries flowed back and forth between Memorial and PERA, but show few signs of finding common ground. Finally, Aug. 17, Memorial CEO Dr. Larry McEvoy sent a letter offering PERA $50 million to leave the system and threatening legal action if the pension plan rejected the offer. On Aug. 22, PERA did just that, although it seemed to leave the door open for more discussion.

The insurmountable obstacle seems to be whether state statutes covering how members can leave, or disaffiliate, from PERA apply to Memorial becoming nonprofit. Memorial’s leaders have publicly argued that if all 4,000 of the hospital’s employees quit or were fired, it would not owe PERA anything and so the entire hospital system becoming private should leave no liability. For its part, PERA has not budged from its contention that those statutes do apply and tie its hands on how to calculate Memorial’s liability.

The e-mails, however, appear to show some openness from Memorial on the issue.

In July, Arlene Stein, chair of Memorial’s board, sent a letter stating that “Both PERA and MHS have the common goal of facilitating the highest quality medical care for Colorado Springs and the surrounding communities while, at the same time, assuring that PERA receives fair payment for MHS liabilities.” The letter goes on to state that, if a for-profit company were to buy Memorial, it would argue it owes PERA nothing: “In other words, PERA risks receiving no payment if we do not reach an agreement to define the MHS liability promptly before August 13.”

Memorial spokesman Brian Newsome said Tuesday that the hospital’s position has not changed.

“We’ve maintained all along that we owe nothing, but we’ve also been making an effort to negotiate with PERA to get this resolved,” he said. “I don’t think that’s changed.”

In response to Stein’s letter, PERA CEO Meredith Williams wrote, “While I understand your perspective, I believe it is important to understand that the PERA believes that any change to the Memorial operating structure that would change the status of the organization as a PERA employer would also give rise to a liability flowing to PERA.”

After PERA’s $246 million estimate in January, Memorial commissioned its own actuarial firm to come up with an estimate of what a fair number would be for its liabilities — provided that the disaffiliation statutes don’t cover the nonprofit conversion. That firm, October Three Consulting Group, came up with a figure of $55.9 million. October Three said that, because Memorial has higher salaries and fewer retirees than other members of PERA’s Local Government Division, the hospital is subsidizing the rest of the division.

“The net result is that (Memorial) is subsidizing other employers participating in the plan, but receiving none of that subsidy back in the form of allocated assets,” Memorial’s attorneys wrote, summarizing the report.

PERA had its actuaries, Cavanaugh Macdonald Consulting, review the Memorial report and their response argued that October Three used old data. Using newer numbers, Cavanaugh Macdonald wrote, October Three should have come up with a figure of $92.8 million. In addition to disputing Memorial’s math, Cavanaugh Macdonald also repeatedly stated that it doesn’t agree with the basic premise.

“It appears the latest approach is an attempt to develop a figure much less than the disaffiliation calculations require,” Cavanaugh Macdonald wrote.

“While we of course cannot offer a legal opinion, it would appear to us that the PERA Board of Trustees would be ignoring its fiduciary duty to the trust participants if it accepted the (October Three) approach,” the company wrote.

PERA did eventually update its original, $246 million estimate with 2010 financial information (the original estimate was based on 2009 data), which reduced Memorial’s liability to $191 million because of improvements in the economy and stock market. PERA also provided two alternate scenarios, based on more optimistic assumptions about how many Memorial employees would keep their PERA accounts — those estimates were $158 million and $150 million.

By Aug. 17, it was Memorial arguing that it owed PERA nothing. McEvoy’s letter states that “based on our analysis, MHS has concluded that it has no liability whatever to PERA” and “moreover, PERA has never cited any statutory authority that MHS has any liability in this matter.”

McEvoy did offer to pay $50 million, but said, “This offer should be viewed, not as an offer to pay money owed, but rather as an attempt by the City to facilitate the reorganization of MHS that is being unfairly jeopardized by PERA’s inappropriate demand.”

Williams’ response Aug. 18 was just as sharp: “Terminating participation is much different than the scenario you describe with employers who remain in the system and terminate some of their employees in the normal course of business,” he wrote. “PERA has continuously articulated this distinction to you and your team and we have never indicated that Memorial would be able to participate in a cost sharing pension plan for almost 60 years and one day elect to leave the system and not have to pay its share of the unfunded liability.”

Williams also took a final shot at Memorial’s argument, writing that, if Memorial’s switch doesn’t fall under state law, it would only make things worse because PERA would use a lower estimate for its future investment returns: “In the event your contention that the disaffiliation statutes do not apply is successful, we believe it serves to ultimately require a substantially larger payment for terminating affiliation.”

In a statement on its website posted Aug. 26, PERA said that allowing Memorial to leave without paying anything would increase what other members of the local government group would owe, including adding $49 million to Colorado Springs Utilities’ liability and $28 million to the city’s liability.

“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 statement 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.”

In the final communication to Memorial obtained by The Gazette, dated Aug. 22, PERA’s Williams formally rejected Memorial’s offer, but also took a somewhat conciliatory tone. “As we have expressed to you from the outset, the only viable resolution would involve agreement to a methodology to ultimately calculate the required payment as of the transaction effective date,” Williams wrote. “We remain open to continued dialogue regarding a methodology agreeable to both parties.”

A PERA spokeswoman said the Aug. 26 statement and the information in Williams’ Aug. 22 letter speak for themselves.

Memorial’s Newsome said the hospital didn’t see any wiggle room in the statement.

“We took that there’s no room for negotiation — that they’re refusing the offer and that’s that,” he said.

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