EDITOR'S NOTE: This story is the second of a two-part series. Read part one here.
A group of current and former Erlanger Health System employees who are now unable to take their pension benefits as an up-front lump-sum payment are looking to the courts for possible solutions.
On Sept. 24, 2020, the Erlanger Board of Trustees voted during a public meeting to immediately suspend lump-sum payments from the hospital's pension until it's brought to 80% funding, which could take roughly seven to 10 years - or more - to achieve. The plan was 36% funded, or $83.5 million underfunded, at the end of fiscal year 2020.
Before the September meeting, about 85% of vested employees chose to receive their pension benefits from the public health system as a lump sum rather than spread out in monthly payments, making it by far the preferred option. Many longtime workers said they mapped out their retirement plans based on having their lump sums and were blindsided when the option was suddenly stripped away.
Every other resolution presented that evening was listed on the meeting's agenda except for the one concerning the pension. A group of Chattanooga attorneys who are representing several current and recently retired Erlanger employees are now investigating the legality of that decision.
Although the document that outlines the rules of Erlanger's pension plan states certain amendments to the plan are allowed, buried within Article VIII of that document a series of clauses reads, "No such amendment shall cause any reduction in the Accrued Benefit of any Participant ... a plan amendment which has the effect of ... eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits."
Jonathan Guthrie, a partner at Patrick, Beard Schulman and Jacoway, is one of the attorneys acting as co-counsel in the investigation. Guthrie said that suspending the lump-sum option for retirees effectively eliminated that benefit, so the legal team is studying whether Erlanger's decision was in compliance with the Tennessee Open Meetings Act, in addition to whether the decision violates the pension plan or other state laws.
"We believe the plan does not allow amendments that reduce benefits and that the plan expressly states that eliminating benefits such as the lump sum would be a reduction of benefits," Guthrie said. "Erlanger made that decision in their September board meeting without providing any notice that that issue would be taken up on their published agenda."
Erlanger employees who are vested can still receive their pension benefit in monthly payments, but those who want a lump sum will have to wait until the pension reaches 80% funding, at which point that option will be restored. Participants have until age 70.5 to decide how to receive their funds, and they're locked in once they choose. Therefore, employees who are closest to retirement will likely run out of time before the lump sum option is no longer suspended.
Eric Oliver, one of Guthrie's partners, said that every individual case is different, but part of the investigation involves exploring the practical impact of the word "suspend" as it applies to certain beneficiaries.
"In our early investigation, we don't believe that the word 'suspension' gets around the plain terms of the plan, because those benefits are effectively eliminated," Oliver said. "We think that this was significant. Many of these long-term and loyal Erlanger employees relied upon that option in making a lot of life decisions about retirement - whether to stay at Erlanger, whether to continue working at Erlanger, or whether to take another job. So, the human aspect of it is real."
Appeal hearings over the issue are scheduled for January and March, Guthrie said.
Paul Secunda, a Milwaukee-based attorney whose expertise is labor and employment law, said what Erlanger is doing "seems to be consistent" with what would happen if this were an underfunded private pension, as opposed to a public one.
"Even under ERISA, which is the federal law that applies to private pensions, generally speaking, pension plans that are underfunded are not permitted to give lump-sum payments until they get to a certain funding threshold, which, not surprisingly, is 80%," Secunda said. "The reason is fairly straightforward. They can't afford a run on the pension plan with lump sums, because of the severe underfunding, and so it's easier for them to catch up if they're just paying [benefits] on a monthly basis."
While every situation is unique, Secunda said that employees typically face an uphill battle in these cases. That's because, in general, the pension plans at issue are in "dire straits" by the time an entity takes action to improve its funding.
"Therefore, the courts are generally amenable for plans to be able to take action to save or preserve what funding they have ... 36% funding is really, highly problematic when it comes to paying existing obligations to those who are already in retirement," he said.
Under private pension law, Secunda said, changing the way that a benefit can be paid out is permitted as long as it's prospective.
"Although you have to give certain notices to participants that you're planning to do so," he said. "I haven't looked at Tennessee, but my suspicion is that what they're trying to do here is permitted in these circumstances, even though it's highly unpopular with the pension participants."
Because Erlanger is county-owned, its plan is public and generally subject to different rules and requirements than private pension plans.
The Tennessee Attorney General's office issued an opinion on March 12, 2015, that sheds some light on how Erlanger's pension situation could be interpreted under state law.
"A public employee's rights in a pension and retirement plan are a matter of contract. They 'are subject to the terms and conditions of the pension plan,' and any contractual rights of the employee are 'those conferred by the plan,'" the opinion states, citing the 1981 case Blackwell v. Quarterly County Court.
"The Court held that a public employer could make 'reasonable modifications when necessary to protect or enhance actuarial soundness of the plan,'" the opinion states. "In doing so, however, the employer could not make modifications that adversely affected employees whose rights under the plan had vested. The Court's holding in Blackwell protects not only benefits that have accrued as of the date of the plan's modification, but also the vested employee's right to continue accruing benefits in accordance with the terms of the plan as they stood before modification."
Contact Elizabeth Fite at efite@timesfreepress.com or follow her on Twitter @ecfite.
This article was written with the support of a journalism fellowship from The Gerontological Society of America, The Journalists Network on Generations and the RRF Foundation for Aging.