STUMP » Articles » Pensions at the Supreme Court: Church Plans » 30 March 2017, 02:10

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Pensions at the Supreme Court: Church Plans  


30 March 2017, 02:10

This is mostly going to be a round up of stories, but a pension-related case made it to the Supreme Court on Monday.

This surrounds “church plans”, but specifically DB pension plans started by various healthcare entities owned/operated by various churches. Church plans are exempt from ERISA, the pension-related law that makes requirements regarding covered plans, especially with regards to required contributions to the pensions and also being covered by the PBGC if the pension’s sponsor goes belly-up.

I’m not a lawyer type, so let me go to one who is to explain the legal issue:

Devil in the Details as Justices Mull Church Pension Cases:

Statutory Interpretation

Although the cases involve eye-catching sums of money and the retirement security of hundreds of thousands of workers, they’ve so far turned on a seemingly banal question of statutory interpretation: Must a pension plan be both “established and maintained” by a qualifying church-connected entity to claim the legal exemption, or is the exemption available to plans merely “maintained” by a qualifying entity?

“I really think the statutory interpretation argument is going to dominate the issues before the justices,” Edna S. Kersting, an employee benefits attorney and partner in Wilson Elser’s Chicago office, told Bloomberg BNA.

Kersting said the hospital employees likely have the better reading of the statute, but the practical effect of a ruling in their favor could be financially ruinous for the hospitals.

All three appellate courts that have considered these cases devoted significant attention to statutory interpretation. Finding the statute unambiguous, they ruled that church plans must be established by churches—and the hospital defendants don’t qualify.

Given I’m Catholic, and the Catholic Church (under the auspices of various dioceses) does own several hospitals in the U.S., I have a direct interest.

Here are some more round-ups of the legal issues before Monday’s hearing:

That was before. How did the arguments actually go?


NYT (AP): High Court Struggles Over Hospital Pension Dispute

WASHINGTON — The Supreme Court seemed to struggle on Monday over whether some of the nation’s largest hospitals should be allowed to sidestep federal laws protecting pension benefits for workers.

Justices considered the cases of three church-affiliated nonprofit hospital systems being sued for underfunding pension plans covering about 100,000 employees. But the outcome ultimately could affect the retirement benefits of roughly a million employees around the country.

The hospitals — Advocate Health Care Network, Dignity Health and Saint Peter’s Healthcare System — say their pensions are “church plans” exempt from the law and have been treated as such for decades by the government agencies in charge. They want to overturn three lower court rulings against them.

Workers suing the health systems argue that Congress never meant to exempt them and say the hospitals are shirking legal safeguards that could jeopardize retirement benefits.

“I’m torn,” Justices Sonia Sotomayor said at one point during the hour-long argument. “This could be read either way in my mind.”

Justice Anthony Kennedy said the Internal Revenue Service issued hundreds of letters over more than 30 years approving the hospitals’ actions. That shows they were “proceeding in good faith with the assurance of the IRS that what they were doing was lawful,” he said.

The case could affect dozens of similar lawsuits over pension plans filed across the country.

Much of the argument focused on how to read a federal law that generally requires pension plans to be fully funded and insured. Congress amended that law in 1980 to carve out a narrow exemption for churches and other religious organizations.

Blatt said a ruling against the hospitals would “jettison 30 years of settled expectations” and open the hospitals to billions in liability.

Justice Elena Kagan said if Congress wanted a broader exemption, it used “very odd language” instead of being more straightforward.

I am not a lawyer, but this is pretty bad that it was allowed to go along in uncertainty for so long.

But there’s a reason it was never brought up legally before now.

It’s because now, many of these pensions are bankrupt. And the pensioners are finding they have no backstop whatsoever, unlike with regular private pension plans, which provide cover via ERISA and the PBGC.

There’s also the issue of multiple mergers, orphaned plans, etc.


John Bury has his own remarks:

For me, the pertinent arguments are those that could not be uttered in open court:

1. Of course church plans should be covered by ERISA. Are they so much holier than thou that regulation is unnecessary.

2. The IRS sent out all those letters saying these plans were not covered because it was the path of least resistance and would lighten their workload not to have to oversee all these plans.

3. After 30 years of no ERISA coverage many of these plans are severely underfunded and would both create a massive amount of extra work for government agencies (at a time when multiemployer plans have already created a lot more work) and monetary liability since, if the court rules these plans are subject to ERISA, the sensible move for plans that could well be 20% funded (if not pay-as-you-go already) would be to file distress terminations with PBGC before their remaining assets are eaten up by PBGC premiums.

My own comment is that while the Justices make comments about the expense of all this, that really should be irrelevant re: the law. As Mr. Bumble noted: the law is a[n] ass. There can be bad law and bad legal interpretation.

But there’s a problem if they undercut the IRS letters. Because tax policy is a huge part of the controlling bureaucracy of the federal government, and if the IRS letters do not hold, then that calls into question all sorts of regulatory actions.

I’m fine with cutting down the various departments making new law via their rules-making (and the wiggle room people have found is that the letters aren’t official offical rules-making. Though they come from the IRS. And interpret the rules.) But many government-career-types might not like this.

I am not looking forward to millions if not billions of increased liabilities on Catholic parishoners in the case of an adverse ruling, but if they really are church plans, the Church needs to be fulfilling its promises.

Argument analysis from a legal type:

Argument analysis: Justices hesitant about extending ERISA to church-affiliated pension plans

Monday’s argument in Advocate Health Care Network v. Stapleton took the justices back to their roots, with a straightforward textual question about the breadth of coverage under the Employee Retirement Income Security Act. ERISA imposes a variety of requirements on the plans to which it applies. Churches seeking to avoid that regulatory burden were able to obtain an exemption from ERISA for their pension plans. Organizations affiliated with churches operate a large share of the hospitals in this country. For more than 30 years, the three federal agencies that administer ERISA have treated the pension plans of those hospitals as exempt from ERISA. In each of the three cases consolidated for this oral argument, employees of health-care providers filed suit alleging that the pension plans provided by their employers do not qualify for the church-plan exemption. Specifically, the question is whether ERISA’s rules apply to pension plans operated by affiliates of churches, such as hospitals, if the church itself did not create the pension plan.

The text of ERISA directly addresses the question. The only problem is that, at least until the justices decide these cases, it is unclear what ERISA has to say about it. For now, two phrases of the statute are relevant. First, ERISA does not apply to any plan “established and maintained for its employees by a church.” Second, a 1980 amendment provides that a “plan established and maintained for its employees … by a church … includes a plan maintained by an organization … controlled by or associated with a church.” The question is whether that revision means that a plan “maintained by an [affiliated] organization” is automatically treated as one “established … by a church.”

By the end of the argument, several of the justices seemed to coalesce around a likely outcome, reflecting an unwillingness to extend ERISA to cover plans that have been treated as exempt by the Internal Revenue Service and other federal agencies for 30 years. As a textual matter, each party’s position has an obvious weakness, and the justices explored those weaknesses when questioning the advocates.

The justices were also troubled by the adverse financial consequences of a ruling against the health-care providers. During her argument, Blatt asserted that the employees’ complaints sought penalties from her clients of $66 billion. Although the point did not seem to impress the justices at the time, it became a major focus of Feldman’s presentation when he suggested that the justices should not be overly concerned about reliance interests because the “cases are about primarily overwhelmingly forward-looking remedies.” That comment struck a nerve with Justice Samuel Alito, who interrupted to ask whether Blatt had been correct “when she said that the complaints seek billions of dollars in penalties?” Feldman started to respond that it was too early to be sure what the total amount of any penalties might be, but Alito would not let go: “What is the answer to my question?” When Feldman replied that he didn’t think the complaints named “a dollar figure for the penalty,” Alito asked: “Well, … if you figured out the penalties, would they be billions of dollars?” After Feldman demurred again, Alito switched to another tack: “[Y]ou said … don’t worry about the penalties; this is primarily about forward-looking things. And yet the complaints asked for the penalties. Are you willing on behalf of your clients to disavow any requests for penalties?” When Feldman predictably declined to waive any claim for penalties, Alito concluded: “Then how can you say it’s primarily about forward-looking things?”

Well, you can’t pin down the dollar amount, because what they really want are the pension benefits paid in full, as promised.

And we all know how pesky it can be to pin down that cost.

As Bury notes, even if SCOTUS rules that these plans are covered by ERISA, that’s not necessarily going to make these retirees whole. The reasons these plans are being sued in the first place is because they’re severely underfunded.

What does PBGC do with these bankrupt plans, especially when these liabilities would add billions to the balance sheet?

Checking out the PBGC’s most recent annual report, they had $97 billion in assets in the single employer plan, that are supposed to be backing $114 billion in liabilities.

Throwing in more bankrupt pensions on a bankrupt agency isn’t really going to help a huge amount in the long term. Some retirees may get covered in the short term, though.


I have been collecting church plan info in my Actuarial Outpost threads on non-public pensions. One particular plan caught my eye in January of this year — St. Clare’s Hospital in Schenectady New York.

Employees of former St. Clare’s Hospital face pension insolvency

A pension fund for employees of the former St. Clare’s Hospital in Schenectady is likely to run out of money in the next decade, leaving more than 1,100 beneficiaries uncertain about their retirement income.

In a letter from St. Clare’s Corp. Board of Directors, beneficiaries were notified in October that the funds would be exhausted between 2024 and 2028. The board is what remains of the 166-bed Catholic hospital shuttered nine years ago, after a state panel called for consolidation of health facilities in Schenectady County.

At the end of 2015, the pension fund had a deficit of $36 million, the letter to employees said, meaning its future obligations exceeded its assets by that much.
Once the money is gone, there may be no way for former employees to collect the pensions they were expecting. Because the Catholic hospital’s pension fund had been set up as a “church plan,” it was not subject to federal rules and is not backed by the federal Pension Benefit Guarantee Corp.

Between 250 and 300 former St. Clare’s retirees collect pensions of an average $540 a month, said St. Clare’s Corp. Board President Joseph Pofit. The other 800-plus have yet to retire and begin collecting.
But in the case of St. Clare’s, even if the pension plan were found to be illegal, there is no entity obviously on the hook to replenish the fund or set it back on the right course. The hospital is closed, without revenues coming in. And it was separate from the Roman Catholic Diocese of Albany, Pofit and a spokeswoman for the diocese both said. (The address for St. Clare’s Corp. is the same as the diocesan administrative offices, however.)

Here is something older on St. Clare’s, from 2008. St. Clare’s Hospital to end years of service

St. Clare’s Hospital will surrender its operating license after 60 years of service and consolidate with Ellis Hospital, using a $50 million state grant announced Thursday.

Ellis will use the $50 million grant to fully cover St. Clare’s employee pension obligations, totaling $28.5 million, and to settle St. Clare’s debts, for employee severance and medical malpractice costs and to cover operating costs associated with the McClellan Street campus.

St. Clare’s unfunded pension obligation was a sticking point toward further consolidation talks between the two hospitals. With the grant, Perry said the state “has recognized the good service of the people here. The pension is unfunded because St. Clare’s cares for the poor and it couldn’t make the contributions.”

Ellis asked the state to cover the full pension obligation in an application it submitted last summer. The state had promised to award grants by the end of the year and the delays that followed caused concern among the medical staff and others, Assini said.

“We have been anxious and concerned about the decision and there is an element of relief that a decision has been made,” Assini said.

NOTE: the pension was “made whole”.

In January 2008.

You may remember some stuff happening between January and December 2008.

St. Clare’s was shut down, so there was no additional money forthcoming. I bet the retirees wished that conservative valuation assumptions (and investments) were used, just like with fixed annuities.

Additional coverage from January 2017:

The plan had $33,986,836 in assets as of Dec. 31, 2015, according to the letter, after it lost nearly $3 million for the year. Its deficit — the difference between its assets and its estimated future payment obligations — was $35,367,644.

The takeover of St. Clare’s by Ellis took place in 2008, following a report from the Berger Commission on ways to eliminate service duplication and increase efficiencies in the state’s health care system. As part of the arrangement, the state Health Department paid the pension fund $28.5 million to make up for past underfunding.

The money was invested, and the investments were badly impacted by the stock market crash in the fall of 2008 and the the subsequent recession, St. Clare’s officials said. But pension participants said the letter in October was the first they had heard about a problem.

The Pension Rights Center said it is looking at the situation to determine whether any other entity could be held responsible for covering the shortfall. Some of the pensioners have been in contact with Assemblyman Phil Steck, D-Colonie, who represents part of Schenectady.

Pratt, the Albany law professor, said it’s possible that either Ellis or the state Health Department could be held responsible, since they have assets.

“Any litigation involving the old St. Clare’s would be totally meaningless,” he said.

Good luck with that.


Now, the whole religious hospital issue is quite complicated, so let’s look at some plans that are undeniably church plans: pensions for priests and for Catholic school teachers.

Puerto Rico church strips teachers of pension amid crisis:

SAN JUAN, Puerto Rico – After 36 years teaching English at a Roman Catholic school near Puerto Rico’s capital, Norma Cardoza planned to retire with a modest pension she trusted she would get from the Archdiocese of San Juan.

Her faith was misplaced.

Archdiocese officials in recent weeks informed Cardoza and several hundred other current and retired teachers that their pensions will be eliminated because payouts exceeded contributions. Enrollment at Catholic schools in Puerto Rico has plunged with so many families leaving the island for the U.S. mainland amid the island’s economic crunch.

It has been a devastating blow to Catholic school teachers who had counted on those pensions to supplement the Social Security checks they’ll be getting.

The church noted in the letter that its contract with employees allows it to terminate the pension plan at any moment and said the remaining money would be distributed among retired teachers. Officials signed off with, “May God bless you all.”
The archdiocese created the pension plan in 1979 in part to lure teachers who were joining the island’s public school system because of its pension plan. But the island’s population has dropped as much as 10 percent over a decade in the largest exodus in many years.

“It doesn’t cease to surprise me that it came from a Catholic entity, which is supposed to help others,” said Ana Perez, a 53-year-old physical education teacher. “What about those 25 years that we have worked? We lost them.”

It is unclear how much money is in the pension fund. Catholic officials did not respond to requests from The Associated Press for comment on the elimination of the pensions or if the fund was insured.

Ugh. That’s disgusting. That story was from April 2016.

From February 2015: Survey finds serious flaws in diocesan financial management

The Catholic priesthood is aging at an alarming rate, and thousands of U.S. diocesan priests are expected to retire within the next few years. With most diocesan priest pension plans significantly underfunded, questions over where the money comes from to support them may point to a major crisis in the making.

The Catholic priesthood is aging at an alarming rate, and thousands of U.S. diocesan priests are expected to retire within the next few years. With most diocesan priest pension plans significantly underfunded, questions over where the money comes from to support them may point to a major crisis in the making.

Half of all priests currently in active ministry also expect to retire by 2019, and most of them expect to receive the pension payments they’ve been promised. Church leaders have known for decades about the looming priest shortage and its implications for sustaining Catholic parishes as eucharistic communities. Another, more hidden crisis lurks in diocesan pension reserves that are underfunded, many of them seriously.
housands of priests retiring in the next few years could discover that the pension and post-retirement money they expect from their dioceses is not available. I reviewed the results of the USI Consulting Group’s 2012 Diocesan Retirement Survey of priests and lay employees, focusing on priests. USI Consulting Group, founded in 1981 and headquartered in Glastonbury, Conn., provides retirement and employee benefit plan services throughout the United States.

Neither the Department of Labor, nor ERISA, nor the Pension Protection Act offers any pension protection to priests. Dioceses are not required to disclose any pension funding information to enrollees, and the Pension Benefit Guaranty Corporation will not step in to supply benefits if dioceses do not or cannot.

Therefore, I was especially interested in reviewing the funding status of priests’ defined benefit pensions. The USI Consulting Group survey provided this information in the aggregate for all survey respondents.

Table 3 shows that 36.8 percent of diocesan defined contribution plans were in the green zone, while 63.2 percent are in yellow (endangered) or red (critical) zones. If these plans were subject to the Department of Labor requirements, most of them would have to adopt either a funding improvement plan or rehabilitation plan.

I like that label “Secular Status”. (Yes, these colors & numbers – including the dread 80% – come from ERISA terminology).

But here’s an issue with the “real” church plans — I’ve seen this with my own diocese (the Archdiocese of New York). Priests don’t really retire until they’re quite old, and there’s still an expectation that they will celebrate Mass until pretty disabled. Plenty of white heads up at the altar…except for some of the priests we have imported from Africa. I believe one of my parish priests is from Nigeria (he’s from somewhere in Africa, but I forget which county. Africa is a huge place.)

Even when I was a kid, in the Post Vatican II (and, more importantly, post-birth control pills) era, we imported some of our priests from places like Ireland and Vietnam.

The finances of the dioceses have not been growing all that rapidly, and we have smaller families — thinking we could continue to support growth like in my mother’s day (she was 1 of 6 kids, all born in under a decade) just wasn’t happening.

The priests will likely be taken care of, but many of the diocesan non-religious employees may find their plans not quite as sound as they thought. Time to evangelize! Boost those pensions!

But let us think about that old ERISA exemption — Congress deliberately carved that stuff out. That was definitely a choice to be made. While I agree with John Bury that there’s nothing particularly special about church plans — think of all the shrinking churches (the Catholics aren’t in as bad a position as, say, Episcopalians)

Episcopal Church

In 1966, the TEC had 3,647,297 members. By 2013, the membership was 1,866,758, a decline of 49 percent.

(Those numbers should be even lower, though, since those figures by the TEC include breakaway churches trying to leave the denomination.)


Anyway, similar to the “increasing payroll/increasing tax base” assumption in public pensions is that these churches will be able to maintain their contributions.

That’s obviously not true.


But let’s go back to the SCOTUS case: what’s fair there?

I think many people on the outside looking at how these hospitals were actually owned and operated (especially when either private or government entities came in and took them over) don’t really see the religious connection. Why should these be church plans?

But many of these pension plans are in bad shape. Look at that St. Clare’s Hospital example — that was supposedly 100% funded… at the beginning of 2008. Talk about bad timing.

Many of these hospitals are squeezed. If they’re put into regular ERISA oversight, they’re going to have to increase their contributions (which may be onerous), and some may be outright bankrupt.

Okay, so let’s say they get put into the Single Employer Program for PBGC…. after having accrued decades of pension liabilities and never hanging paid premiums to PBGC.

How is that fair to all the ERISA plans that are in the PBGC SEP?

Mind you, I don’t think SCOTUS should be ruling based on the practical issues that would ensue. Either way, it’s a mess.

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