Compliance September 23, 2016

Pittsburgh-Area Hospital System Files Provider Lawsuit

A UPMC hospital system subsidiary in Altoona, Pennsylvania, filed a lawsuit claiming plan service provider CBIZ Benefits & Insurance Services made costly actuarial errors in projecting pension liabilities.
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Plaintiffs in the latest example of retirement plan litigation claim a contracted pension actuary failed to accurately assess forward-looking liabilities, resulting in more than $100 million in alleged damages.

UPMC is a Pennsylvania non-profit corporation, organized and operated for charitable purposes and recognized by the Internal Revenue Service (IRS) as exempt from federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code. UPMC operates health care facilities in and around Pittsburgh, Pennsylvania; the organization is also the parent and supporting organization for numerous other non-profit health care providers, each existing as a separate and distinct corporate entity,

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Plaintiff UPMC Altoona is one such subsidiary of UPMC, court documents show. Until July 1, 2013, the Central Pennsylvania Health Services Corporation (CPHSC), also a non-profit Pennsylvania corporation, owned 100% of the membership interest in Altoona, which was then known as Altoona Regional Health System. Other than its membership interest in Altoona, CPHSC owned no other material assets or interests, according to plaintiffs.

On July 1, 2013, CPHSC merged into Altoona; UPMC acquired Altoona Regional Health System; which was immediately re-named “UPMC Altoona.” As part of the acquisition of Altoona, UPMC agreed to acquire all of Altoona’s outstanding assets and liabilities, including its pension and benefit plan debt. UPMC is currently the sole corporate member of Altoona.

The plaintiffs allege that, from 2002 through February 2015, defendant CBIZ Benefits & Insurance Services served as actuarial consultants for UPMC Altoona’s two largest pension benefit plans (an individual actuary and the CBIZ parent corporation are also named in the suit).

“In this capacity, defendants represented that they were experienced, qualified, and capable in the actuarial valuation of pension benefit plans,” the complaint suggests. “Each year, defendants prepared actuarial valuations of the plans’ benefits to allow Altoona to fund the plans in compliance with regulatory requirements; to certify the funded status of the plans in order to allow for the plans’ operation and administration; to file PBGC premiums; and to account for the plans in its financial statements in accordance with generally accepted accounting standards.”

CBIZ was paid substantial fees to perform this work, plaintiffs add, yet “during the course of this engagement, from at least July 1, 2008 through February 2015, defendants failed to adhere to actuarial standards of practice and consequently materially erred in valuing the obligations and liabilities of Altoona’s pension benefit plans for funding, compliance, and accounting purposes … Defendants’ multiple errors caused the Altoona Plans’ Projected Benefit Obligation (PBO) to be falsely stated on Altoona’s balance sheet at $240 million. In fact, Altoona’s PBO was then $373 million: Defendants had understated the liability by approximately $132.5 million.”

NEXT: Details from the complaint 

The complaint also points out that “UPMC was induced to purchase Altoona in reliance upon the actuarial valuations prepared by defendants for the plan year ending June 30, 2012, which understated Altoona’s pension expense for that year—and consequently vastly overstated Altoona’s profitability for the same period as measured by its Earnings Before Interest Depreciation and Amortization—by at least $18 million.”

Thus, according to the complaint, defendants’ failure to value the Altoona Plans in accordance with actuarial standards of practice materially changed Altoona’s overall financial picture such that, had the true state of affairs been known, UPMC likely would not have acquired Altoona, or in the very least, would have negotiated and structured a different deal for Altoona. “Now, UPMC owns an entity, Altoona, whose obligations are substantially greater than UPMC had bargained for,” plaintiffs suggest.

Beyond these claims, plaintiffs argue CBIZ is responsible for keeping Altoona from freezing its pension plan at a prudent point: “Under ERISA and the Internal Revenue Code, when the plan’s funded ratio … drops below a certain level, the plan must be completely frozen such that no new participants may join; no new benefits may be earned; and payment of certain other benefits is prohibited. Here, for example, it is likely that the two Altoona Plans, Bargaining and Non-Bargaining, should have been fully frozen by October 1, 2011 and October 1, 2012 respectively, if correct actuarial valuations had been used instead of CBIZ’s wholly inaccurate ones.”

Important to the complaint, plaintiffs assert that the defendants knew their actuarial services would serve as key components of UPMC’s decisionmaking with regard to the Altoona acquisition as well as the subsequent management of the pensions in question.  Also important, plaintiffs claim they had no way of discovering the problems “because the errors were the result of erroneous assumptions and methodologies undisclosed in the GAAP and Funding Reports prepared by defendants.”

“In fact, Altoona and UPMC only learned of the errors when another CBIZ actuary … reviewed the funding calculation for the plans after [defendant Jon Ketzner] retired. Specifically, sometime in November 2014 defendant Ketzner informed UPMC Treasury Department employee Erin Klinger that the estimated contribution required to be made to the plans in order to eliminate PBGC variable rate premiums, due in March 2015, was $6.5 million. Around February 2015, Klinger called defendant CBIZ-B&I to confirm the Plans’ PBGC funding contribution. By that time, Ketzner had retired. On March 6, 2015, Alvin Winters notified Klinger that the plans’ actual contribution necessary to eliminate PBGC variable rate premiums for the year was $66.6 million, $60 million more than Ketzner had estimated. Shortly thereafter, on March 11, 2015, Winters disclosed to UPMC the errors he had discovered in Ketzner’s assumptions and methodology.”

CBIZ general counsel Mike Gleespen shared the following response with PLANADVISER: “We have defenses that will be presented at the appropriate times, and we plan to vigorously contest the litigation.  We can’t comment on the allegations in the complaint or on facts of the matter because we don’t want to prejudice the proceedings against UPMC and UPMC Altoona.”  

The full text of the complaint is available here.

Compliance September 22, 2016

Court Hearings on Fiduciary Litigation Offer Little Clarity

ERISA specialist Erin Sweeney recently attended a key hearing in one of the five ongoing pieces of litigation filed against the DOL fiduciary rule reforms; she offers an update for PLANADVISER readers. 
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Erin Sweeney, of counsel with Miller & Chevalier, has an impressive background when it comes to understanding complex pieces of employee benefits law and regulation, even for an Employee Retirement Income Security Act (ERISA) attorney.

Previously in her career, Sweeney was senior benefits law specialist for the Office of Regulations and Interpretations at the U.S. Department of Labor (DOL). In the role she was a primary architect of the DOL’s default investment regulations that have dramatically reshaped the way mutual funds, investment managers, employers and plan trustees interact. In addition, she received an exceptional achievement award for her direct participation in drafting the Pension Protection Act.

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Even with a background steeped in difficult regulatory processes, Sweeney counts herself among those who feel a little exasperated by the battle that has raged around the DOL fiduciary rulemaking, culminating this year in the filing of no fewer than five separate pieces of litigation. These lawsuits are playing out in several district courts across the U.S. and have already seen a number of important hearings come and go, she explains, and yet little clarity has emerged in terms of how successful plaintiffs may ultimately be in slowing or even outright stopping implementation of the fiduciary rule.

“In the most recent hearing in one of these cases, the one involving an insurance company known as Market Synergy and focused very particularly on questions about fixed-index annuities, I certainly got the sense that the judge wants to move quickly,” Sweeney says. “But even here the judge asked for supplemental briefs due towards the end of September, and then the parties will have other actions stretching out to a November timeframe at the absolute earliest.”

Sweeney suggests the litigation filed by annuity firm Market Synergy “is actually only a minor challenge that is very focused on whether fixed-index annuity providers will be able to use the so-called 84-24 exemption, rather than the best-interest contract exemption [BIC].” Specifically, plaintiffs in the Market Synergy case feel they will never be able to make the BIC workable given the distribution arrangements traditionally used underlying fixed-index annuities, Sweeney explains, and so they want the DOL to be forced to allow annuity providers to work under the 84-24 exemption, as had been initially proposed by DOL.

“The specific details of the case get fairly complicated, but I bring this up to show that even this fairly limited challenge to the DOL rulemaking is going to take real time to unfold,” she adds. “I do believe that the plaintiffs in the Market Synergy case stand the best chance at arguing the rule will cause immediate and irreparable harm, and so they stand the best chance of seeing an injunction put on the rule—even it is only limited to fixed-index annuities.”

Pressed to speculate, Sweeney said that based on what she heard directly during court proceedings, there is a “roughly 60% chance the judge could order an injunction in the fixed-index annuity matter.” She says any injunction in this case “will almost certainly be very limited in its application. In other words, it would not be likely to halt the implementation of the BIC regime or the wider rule as a whole.”

NEXT:  Far from resolution 

According to Sweeney, the cases that were consolidated in the Northern District of Texas are much more broad and they make fundamental challenges to the whole rulemaking.

“Those are the kitchen-sink cases, as we say, in which plaintiffs are going to throw anything and everything they possibly can at defendants to try to get the judge to stay large portions of the rulemaking, or even the entire rule,” she explains. “Frankly it’s a very long shot to imagine one judge agreeing to all their arguments and to put a nation-wide stay on the rulemaking, but this is what plaintiffs are after.”

Thinking ahead to the time when key decisions are actually made by the judges in these cases, Sweeney cautioned that a lengthy appeals process can be anticipated in all of these matters.

“In the Market Synergy case, for example, the judge made clear his understanding that he expected the losing party to file an immediate appeal of his decision whether the preliminary injunction is granted or denied,” Sweeney explains. “Accordingly, the judge’s focus on resolution of the entire action is an apparent effort to streamline the litigation in anticipation of appeal. Given that the parties are not required to complete coordination on the underlying lawsuit for several weeks yet, it appears unlikely that the judge will render a decision prior to the next fiduciary regulation battleground—oral argument on motions for summary judgment filed in the consolidated action in the United States District Court for the Northern District of Texas.”

Right now that hearing is slated for November 17, 2017, before Judge Barbara M.G. Lynn, Sweeney observes.

“I have no doubt that the decision in the Texas case could easily take months, so then we are looking at early next year at the absolute earliest to see a decision on the wider-ranging challenge to the fiduciary rule,” Sweeney concludes. “And then you could easily imagine additional appeals reaching all the way to the Supreme Court, I think it’s fair to say. Whatever is eventually going to happen in these cases, we are still quite far from the resolution.”  

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