Government Pension Underfunding Threatens U.P. Hospital’s Future

A county-owned hospital in Michigan’s Upper Peninsula, carrying $20 million in unfunded pension liabilities, is seeking approval for a $24.6 million federal loan in a bid to stave off insolvency.

The Dickinson County Healthcare System in Iron Mountain, the area’s largest employer, considered entering bankruptcy in 2018. That was after two potential buyers backed out and efforts to secure private bank loans were rejected.

The hospital is beset with many problems common to rural hospitals, including declining patient counts. But local government watchdog Brian Smeester believes the system’s substantial pension debt is a significant obstacle to achieving long-term financial stability.

Smeester recently obtained information about the hospital’s loan application to the U.S. Department of Agriculture, as well as its financial statements, all of which he posted to his own website. The documents paint a bleak picture of substantial operating losses in 2017-18, partially offset by an improving balance sheet in 2019. But the most recently audited financial statement, from Dec. 31, 2018, suggests that “conditions still exist that raise substantial doubt as to the Healthcare System’s ability to continue as a going concern” over the next year.

The hospital system is in default on one of its previous loans, with a $9.4 million balloon payment due in March 2020. The requested community facilities loan from the USDA would be used, in part, to refinance that debt. Much of the rest is targeted for new and replacement imaging equipment. Hospital officials have repeatedly assured concerned citizens and employees that they intend to keep the hospital open and that the pension system is adequately funded.

And steps have been taken over the last decade to stabilize it. The hospital’s pension plan, which covers nearly 750 active and retired personnel, was closed to new hires in 2013, when they were moved into a defined contribution retirement system. Last year, benefits for current employees still covered by the defined benefit plan were frozen, a move that netted an $8.2 million savings in long-term liabilities, according to the financial statements.

Those moves decreased the level of underfunding from 46% in 2016 to 35% in 2018. But the pension obligations, secured by the state constitution under any circumstance short of bankruptcy, remain a drag on the system’s overall financial health.

“These kinds of (debts) are really problematic,” said James Hohman, the Mackinac Center’s director of fiscal policy. “They’ve made some progress, but it might not be enough. When you’re on the brink of insolvency, the last thing you want to use your cash for is paying down debt.”

Smeester said he believes the current situation at the hospital resulted from years of mismanagement, poor planning and ill-advised building and expansion projects. But it may be hospital retirees or local taxpayers who end up paying the price, he said.

“It would be better for the community to keep (the hospital) open,” Smeester said, “but the unfunded liability ... and their other debts are an economic apocalypse. It’s just sad. It’s a sad situation.”