Court Decision Leaves Open Question of Responsibility for Government Plans

In the ongoing saga regarding the termination of the Mississippi-based Singing River Health System’s defined benefit (DB) plan, an appellate court has determined it was proper for a district court to release Jackson County, Mississippi, the owner of the health system, from any further litigation.

The release from litigation was part of a settlement agreement between Singing River Health System (SRHS) and its current and former employees. Objectors to the settlement agreement argue that Jackson County has a continuing duty to cover any shortfall in the plan and guarantee payment of the pension to retirees under the Mississippi Code, which states in part: “The board of supervisors acting for a county . . . are hereby authorized and empowered to levy ad valorem taxes on all the taxable property of such counties . . . for the purposes of raising funds for the maintenance and operation of hospitals.”

Objectors also note that one of the reasons for the plan’s exemption from the Employee Retirement Income Security Act (ERISA), as the retirement plan of a government entity, is that government entities can fulfill their obligations through their taxing power. They also argue that releasing Jackson County provides a “judicially created” blueprint for other government entities to default on their retiree obligations and escape liability.

However, the 5th U.S. Circuit Court of Appeals found that the district court rejected these arguments for good legal reasons, noting that no statute cited by the objectors requires the County to levy taxes to fund hospital pensions; it only provides that the county is authorized to do so. “Neither Objectors nor this court has found definitive legal authority holding a Mississippi county responsible for the debts of its ‘independent’ entities,” the court’s opinion says.

In addition, the appellate court cited a 2nd U.S. Circuit Court of Appeals decision, which says a court may approve a class action settlement that releases non-parties if “the claims against the non-party being released were based on the same underlying factual predicate as the claims asserted against the parties to the action being settled.” In the settlement agreement, Jackson County agreed to make a $13.6 million contribution to SRHS for the stated purpose of assisting with indigent care and to prevent bond default, in exchange for a release of liability for claims that the district court found to have little support or be limited by statute. “Whatever liability Jackson County may have had, or however much more it could have contributed to benefit the class than what amounts to approximately 22% of the Plan’s liability for missed contributions from 2009-14, the Objectors have not demonstrated that this release renders the Settlement Agreement inadequate,” the 5th Circuit says in its opinion.

SRHS created its DB plan as a successor to the Public Employees’ Retirement System of Mississippi in 1983. However, due to bad finances, the health system failed to make all but one of its contributions needed to maintain the plan’s stability from 2009 to 2014. In December 2014, SRHS announced to participants that it was freezing the plan and would officially liquidate the plan “in the coming months.”

The defined benefit pension plan was closed to new employees in 2011, and new employees are offered a defined contribution 403(b) plan. In 2014, SRHS offered DB plan participants the option to receive a lump-sum payment equal to their total prior contributions, with interest calculated at the three month treasury rate over the life of their contributions. They were also presented with the option of rolling their prior contributions into a new DB plan that would provide a defined benefit lower than the one in the old plan.

A Mississippi Chancery judge issued multiple restraining orders to prevent the health system from terminating its plan. Several lawsuits were filed and consolidated.

In April 2016, plaintiffs in the case moved for preliminary approval of a settlement, which provided in part that SRHS would pay a total of $149,950,000 into the retirement trust under a 35-year schedule. However, payment to attorneys is due no later than the end of September 2018. The settlement agreement also provided that if SRHS received payment from any litigation against plan providers KPMG or Transamerica Retirement Solutions, those payments could accelerate SRHS’ payments, not go to the plan.

The 5th Circuit found all of these issues troubling, even going so far as to accuse the attorneys of securing their payment while leaving the plan participants with the uncertainty of whether they would be paid. The appellate court noted that there was no collateral to secure payments by SRHS and no evidence was provided that SRHS would be able to make its payments under the agreement in the near-term, much less over the 35-year period.

While the 5th Circuit did not hold that the settlement should not be approved, or cannot be approved as modified, it vacated and remanded the district court’s approval for further consideration of the following issues:

• How, and how much, the future stream of SRHS’s payments into the plan, together with existing plan assets and prospective earnings, will intersect with future claims of plan participants, including, but not limited to, what effect the settlement has on current retirees;
• What are SRHS’ future revenue projections, showing dollar amounts, assumptions and contingencies, from which a reasonable conclusion is drawn that SRHS has the financial ability to complete performance under the settlement;
• Why any payments from litigation involving KPMG, Transamerica or related entities are permitted to defray SRHS payment obligation rather than supplement the settlement for the benefit of class members; and
• Why class counsel’s fees should not be tailored to align with the uncertainty and risk that class members will bear.