Falling interest rates would seem to be a nice thing for some. The cost of owning a home has rarely been within reach of so many (omitting of course that little no-money-down-abysmal-credit-score-buying-a-$700k-house fiasco from a few years back), refinancing is now an attractive option for existing homeowners, and the cost of capital is lower than it’s been in years. Unfortunately, those same low interest rates can cause massive headaches for organizations whose obligations are pinned to them.This has been the problem for BH1, the entity that was formed by the sale of Baptist Hospital and administers the pension fund of the institution’s retirees. Thanks to historically low interest rates, designed to stimulate the nation’s economy, it has struggled with a rapidly increasing pension liability — nearly $30 million according to 2009 documents — which climbs as interest rates remain low.
When a nonprofit is sold, very often there is, counter to its classification, a profit involved. The law requires those proceeds be used to form various other nonprofit entities that are designed either serve the public good or the handle the remaining business of the nonprofit.
Such was the case with Baptist Hospital, which sold to Saint Thomas Health Services in 2001. The proceeds from that deal went to fund two nonprofits: Baptist Healing Trust and BH1.
And now, almost 10 years to the day after it was formed, BH1 is struggling.
BH1’s mission, according to the nonprofit’s IRS filings, is to be “a responsible steward of certain not-for-profit assets and liabilities remaining after the sale of the Baptist Hospital System in Nashville, Tennessee. The company proactively manages a defined benefit pension plan for the current and former employees of the not-for-profit Baptist Hospital System. Management includes directing pension investments, administering payments and benefits, and directly communicating with pensioners.”
Additionally BH1 was saddled with some of Baptist’s less-than-favorable real estate investments. As was reported by Nashville Post in 2003, “Because the deal between Saint Thomas and Baptist was an asset purchase agreement, Saint Thomas was able to pick and chose what it wanted to take into the combined entity. Baptist’s real estate investment trusts were not on the list.”
During its existence, the BH1 nonprofit has also established a for-profit arm that has joined with the likes of Saint Thomas Health Services and Clayton Associates in a variety of investments. The primary function, however, has remained the administration of the pension. And with the economy in the state its in, times have been tough for BH1.
According to BH1, the decline has been a result of falling interest rates. As the economy has struggled, interest rates have continued to fall, which, according to the nonprofit, causes the value of BH1’s pension liability to increase dramatically. This has, in turn, caused the decrease in net assets.
On the heels of such struggles, rumors have swirled recently that the nonprofit is in danger of collapsing under the weight of its obligations, compounded by a sour economy. To hear various sources tell it, BH1 is in real and immediate trouble.
The company’s net assets have fallen significantly in recent years. BH1’s annual filings with the IRS show that between 2007 and 2009, net assets from the nonprofit fell from $5.13 million to minus-$16.2 million. BH1’s filing for 2010 has yet to be made public.
In recent weeks, some BH1 employees have been scrambling for the exit. Sources who have met with them have told The City Paper that BH1 workers are making the networking rounds looking for jobs, with some privately indicating that the nonprofit won’t survive another six months. Others have opined that a bankruptcy filing is imminent.
As to the bankruptcy rumors, BH1 representatives said they hold no validity. Interestingly, however, the nonprofit’s lawyers, Craig Gabbert and Glenn Rose, both specialize in bankruptcy law.
Reached by The City Paper, Rose — an attorney with Harwell, Howard, Hyne, Gabbert & Manner — reiterated that neither shutdown nor bankruptcy is imminent. And while acknowledging that the nonprofit is experiencing financial trouble, Rose said options are still being explored. Through Rose, BH1 offered the following comment, outlining some of the nonprofit’s history and sources of current troubles:
“In 2001, Baptist Healthcare System of Nashville sold its assets. After this sale, the hospital system, renamed BH1, had substantial unresolved liabilities, including outstanding pension plan obligations for the hospital system’s employees. Between the time of the sale and 2007, the value of the assets in the BH1 pension plan increased, due to both substantial cash contributions made by BH1 to the pension plan as well as positive returns generated on assets already in the plan.
“After the financial crisis of 2008, the performance of the plan’s investments suffered as a result of the broad market decline, and interest rates dropped to historically low levels, thereby increasing dramatically the yearly calculation of the minimum contribution due to the pension plan in order to fund its estimated future obligations.
“Every pension plan in the country was negatively impacted by these two factors, and many, including the BH1 pension plan for former Baptist Health System employees, are now materially underfunded on an actuarial basis. This underfunding could be reversed through a combination of increased interest rates, additional cash contributions or a change in the laws governing how a pension plan’s minimum contribution is calculated or must be paid.
“BH1 also believes that the Baptist Healing Trust, a not-for-profit corporation that received the majority of the proceeds from the sale of the Baptist Healthcare System in 2001, has an on-going obligation to fund the pension plan for former employees. BH1 continues to examine all options for dealing with the issues related to its pension plan, but does not expect those issues to be resolved in the near term.”
Sources familiar with BH1’s business have said that despite the drop in its assets, BH1 executives have likely been good stewards of the fund and that the fund has, very simply, been negatively affected by circumstances. In fact, sources said, officers have poured millions from investments into the pension during their tenure. BH1’s investments, according to the sources, have performed comparatively well in light of the struggling economy.
“On an actuarial basis, BH1’s recorded actuarial liability for its future pension plan obligations increased dramatically during this period because of the steep decline in interest rates,” Rose told The City Paper. “This drop in interest rates increased every company’s liability for future pension obligations and had nothing to do with the financial performance of BH1.”
Echoing this sentiment, others who spoke with The City Paper pointed to the difficulties faced by pensions nationwide owing to the current state of the economy, indicating the problem is not uncommon. The chief example is General Motors, which despite having a fully funded pension during the past decade has experienced a dramatic shortfall, nearly $17 billion as of last year, during the recession.
BH1 has petitioned sister nonprofit Baptist Healing Trust to step in and help shoulder some of the financial burden, and as the statement mentions, BH1 has said that negotiations are ongoing. But the counsel for Baptist Healing Trust told The City Paper that they recognize no obligation to BH1.
“Baptist Healing Trust engaged us to evaluate BH1’s claims on its pension obligations. Baptist Healing Trust donates nearly $4 million annually to nonprofits that work with the most vulnerable citizens of our community,” said attorney James Bristol. “The amount claimed by BH1 would severely curtail that mission. We carefully reviewed all agreements from the 2002 transaction and listened to BH1 with an open mind. After thoroughly analyzing all documents and every potential legal liability we concluded that there was no support for BH1’s claim.”
To some observers, however, what has raised eyebrows are large payouts to BH1’s top executives between 2007 and 2009, during the period that net assets were struggling. Between ’07 and ’09, three executives — Randy Starkweather, James O’Keefe and Stephanie Zembar — received total compensation of approximately $2 million each.
Despite the large-dollar figures represented, however, Rose said that those payments were the result of deferred compensation packages created at the formation of BH1 in 2001.
“In order to retain qualified executives who could handle appropriately the many issues remaining after the sale of the hospital system’s assets, the departing Board of Trust of the Baptist Hospital System at the time of the sale and the new BH1 board determined that a long term deferred compensation program was needed. AON, a nationally-recognized executive compensation firm, created the program for BH1, which required that qualifying executives remain in their positions for five years and meet other performance goals. Three executives fulfilled those goals. Two received their long term payout in 2007, and one received his in 2008.”
When asked if the compensation structures set up with AON were based on comparisons with nonprofit leaders or for-profit hospital executives, Rose said he couldn’t be sure.
In the end, the future of BH1 still remains a series of open-ended questions. Will interest rates rebound? Will Baptist Healing Trust step in to assist? Will the pension remain funded for the foreseeable future? At this point, it is impossible to say.
And while the problems faced by BH1 are not uncommon nowadays, Baptist’s pensioners are likely to need their money for some years to come.
Full Disclosure: Chris Ferrell, CEO
of The City Paper’s parent company
SouthComm, also sits on the board
of the Baptist Healing Trust.