Riley: St. Joseph Pension Collapse Was Negligence or Malfeasance by Kilmartin

Wednesday, August 30, 2017


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Peter Kilmartin

One thing we can all agree on in the St. Joseph Pension collapse is that retirees were misled, uninformed, lied to and then abandoned. Upon becoming an orphaned fund in 2014, by all rights, retirees and participants in the plan should have been fully informed of their status.

Either negligence or possibly malfeasance are the only explanations for the RI Attorney General to place employees into a rudderless orphan fund destined to fail. I join other public voices in calling for an independent investigation into the Attorney Generals actions.

What is an Orphan Plan?

An “orphan plan” is a plan that no longer has a plan sponsor. The sponsor, usually a private sector entity, may no longer be in existence or may have abandoned the plan before proper plan termination and disbursement of trust assets have taken place. The most common reasons an orphan plan is created are the death of the lone sponsor, bankruptcy or corporate merger.

What is a “Church Plan”?

Almost all private retirement plans are required to comply with federal pension and tax laws. There is only one major exception: Church pension plans. Employees covered by church pension plans are denied the basic protections provided to virtually all other private-sector workers who participate in pension plans.

Church plans:

  • Do not have to give employees information about their benefits or about plan investments.
  • Are not required to pay benefits fairly.
  • Are not required to adequately fund the pension plan.
  • Are not covered by the federal pension insurance program that guarantees most private pension benefits.

“Church plans” like St Joseph's are NOT covered by ERISA. Also, not covered by ERISA are public pension plans like the Providence pension plan, which is currently funded at about 24% vs St. Joseph’s approximately 66% upon receivership. Sponsors like the Catholic Church or Mayor Elorza can arbitrarily decide when and how much to fund the pension plan for their employees because they are not governed by ERISA.         

What is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) is intended to protect the retirement assets of American workers by setting minimum standards for pension plans in the private sector.

ERISA protects employee plans from mismanagement and misuse of assets through its fiduciary provisions. Plan fiduciaries include plan trustees, plan administrators, and members of a plan's investment committee.

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must avoid conflicts on behalf of the plan that benefits parties related to the plan, such as other fiduciaries, service providers, or the plan sponsor.

Fiduciaries who fail to follow these rules of conduct may be personally liable to restore any losses to the plan, or any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA, including their removal.

Government plans are exempt from ERISA’s reporting, disclosure, and funding requirements (Title I) and plan termination insurance (Title IV).

Facts of the case

It appears, in the words of the court appointed receiver Mr. Del Sesto “the Diocese of Providence failed to properly contribute and retirees were never told of the shortfalls. While records are incomplete, between 2008 and time of the sale of the hospital in 2014 the Diocese repeatedly underfunded retirement payments or made no payment."

“Because church plans are not subject to ERISA, they are not subject to PBGC oversight and are therefore exempt from paying PBGC insurance fees, which are set to rise to at least 4.1 percent by 2019, from 3.4 percent in 2017 and as low as 0.9 percent in 2013,” a Moody’s report stated.

The typical pattern has been that Church plans, often associated with healthcare and hospital groups, have reduced or eliminated funding retirement plans because of financial troubles. This could not happen in an ERISA plan without significant repercussions, yet Church plans and Providence pension plan can decide not to fund or delay without disclosing the fact to retirees.

Moral Obligation?

In the opinion of many, all plan Sponsors and Fiduciaries have a moral obligation to carefully look after employees and promises made to those employees. In the private sector, due to ERISA, there is a legal obligation backed by Pension Benefit Guarantee Corporation a privately funded US agency.

"The Catholic Church and Diocese of Providence should be ashamed of themselves," said former Rhode Island Attorney General Arlene Violet in an interview with Go Local Sunday night. The Diocese appears to be a sponsor and a fiduciary and should be involved in any investigation. The St Joseph’s case is an example of negligence and a lack of understanding of the cost of pension promises. The Attorney General’s Office seemed very confused about the extent of the obligations and their obligation to inform non-ERISA retirees about changes in their status.

Financial Obligation?

My estimate for how much should be contributed to St. Joes Pension Plan annually to adequately fund the next 20 years is approximately $ 5 million. Maybe the various entities involved as sponsors and or fiduciaries will come up with a monetary plan but in no way, do Rhode Island taxpayers have any obligation to bail out these type of “church plans." Quoting Ted Siedle:

“To restore the public trust, as well as potentially recover ill-gotten gains, taxpayers should demand a relentless investigation into the wreckage at the pension. 

Whether a Republican, Democrat, Green Party or Independent, the new Attorney General as the state’s top legal official must have the skills and be prepared to fight corruption at the highest levels involving billions of pension dollars.”   

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Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC. 


Related Slideshow: 10 Things to Know About One of Biggest Pension Failures in RI - St. Joseph Bankruptcy

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Biggest Pension Failure Ever in Rhode Island?

There is not a record book, but according to a number of top bankruptcy attorneys, the failure of the St. Joseph Health Services Pension Fund impacts the most individuals and the adverse financial impact will be the highest percentage impact to the retirees' monthly payments in Rhode Island history. 

In Central Falls, by 2014 then-Governor Lincoln Chafee signed legislation that upped police and fire beneficiaries to 75 percent of their benefits. The cost of the legislation —  post-Central Falls bankruptcy — was $4.8 million.

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Kilmartin’s Role in the Hospital Conversion Act

Attorney General Peter Kilmartin won’t answer questions about his role in the approval of the Hospital Conversion of St. Joseph Health Services to CharterCare. GoLocal has repeatedly reached out to Kilmartin to answer questions, without response.

As part of the review of the deal, Kilmartin, as Attorney General, had the responsibility to review and approve the financial viability of the transaction. The Hospital Conversion law is very specific to the responsibilities of Kilmartin and his office.

"The department of attorney general [is] to preserve and protect public and charitable assets in reviewing both hospital conversions which involve for-profit corporations and hospital conversions which include only not-for-profit corporations.”

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Number Impacted

The bankruptcy of St. Joseph Health Services pension fund will impact between 3,600 and 3,800 existing or future pensioners — and the loss of pension payments may be 40 percent, according to court-appointed receiver Steven Del Sesto, a partner at Donoghue Barrett & Singal.

However, Del Sesto said the plan for winding down the pension fund is only in the preliminary phase. 

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How Many Are Presently Receiving Benefits

According to the receiver, attorney Stephen Del Sesto, there are 1382 active/vested who have reached retirement date; 639 active/vested who reached early retirement, for a total of 2,021.

On average, retirees are receiving just $425 between the two classes. The retirees are facing a 40 percent reduction — thus, the average retiree would receive just $255 per month.

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Kilmartin Called the Plan "Best Interest of...Employees"

At the time of the agreement in 2014, Kilmartin said, “The transacting parties have worked diligently to provide regulators with the necessary documentation and information throughout this review process to make this decision, a decision I believe is in the best interest of Rhode Island’s healthcare marketplace, the community, the employees, and most importantly, the patients.”

Kilmartin said in his statement, “Conducting a hospital conversion review requires the commitment of a substantial amount of resources for the Office of Attorney General. I commend my staff for the time and careful consideration put into this review process.” Kilmartin's office has refused to respond to questions from GoLocal regarding the collapse of the fund.

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How Much Will the Receiver be Paid?

Stephen Del Sesto, the receiver for the St. Joseph Health Services Pension Fund, said he will be paid $375.00 per hour -- which is more than the average retiree will receive per month after the 40 percent cut in benefits.

“My fees will not be paid from the plan assets,” said Del Sesto in an email to GoLocal.

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Role of the Diocese of Providence

According to to the document filed with the court seeking bankruptcy protection, the fund or petitioner “has been affiliated with the Catholic Church — “as an affiliate of the Catholic Church, the Plan Qualified as a 'church plan,' which is exempt from the provisions of the Employment Retirement Income Securities Act of 1974 (ERISA) governing defined benefit pension plans.”

And, as a “church plan” the fund and the Diocese were not required to make a minimum contribution to the Plan, or “make pension insurance payments to the Pension Benefit Guaranty Corp."

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Will the Receiver Seek a New Actuarial and an Independent Audit?

Stephen Del Sesto, the receiver, said he does not know yet if he will seek an independent actuarial and call for a forensic audit.

He is less than a week in his role and told GoLocal that he would need the court's approval to move forward with both steps.

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Big Date

The big date for this case is October 11 -- at that time the receiver Stephen Del Sesto will present the full plan of action.

Payment levels and payment dates will continue at present level, "nothing will change until October 11," said Del Sesto.

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Big Question

The biggest question swirling over the sale of St. Joseph's to CharterCARE and the bankruptcy is how could Attorney General Peter Kilmartin approve the sale with the only condition relating to the pension fund was a one-time $14 million payment in 2014 as part of the approval process -- and then just three years later -- the fund collapses.

The present fund has a balance of approximately $85 million. According to court documents filled as part of the bankruptcy petition, the actuarial claims the fund has a shortfall of $43 million.


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