Kathy Romstad figures that the city's move to yank Memorial Health System workers from a statewide retirement plan in 2012 will cost her up to $800,000 in pension benefits during her lifetime.
When the city leased the city-owned hospital to University of Colorado Health on Oct. 1, 2012, Romstad and roughly 4,000 other Memorial workers lost out on millions of dollars in future benefits from the Public Employees' Retirement System.
For Romstad, it meant being about six years short of her goal of retiring after 30 years in PERA. So she's taking the city to court, alleging the city's move was illegal, because steps required by statute — including a vote of employees — weren't followed.
She and fellow plaintiff Margarethe Bench are representatives in a class action lawsuit filed in federal court last month. It alleges the city's decision cheats employees out of pension benefits they otherwise would have earned.
And if Romstad's own shortfall seems like a big number, consider the estimate for all 4,000 workers: "We believe the total dollar amount could exceed $100 million," says Brian Matise of Englewood, attorney for Romstad and Bench.
The lawsuit, filed last month, is the latest litigation to arise over Memorial's lease, which was billed as a win for everyone. Its proceeds would supply millions of dollars to a nonprofit foundation dedicated to community health, advocates promised.
Thayer Tutt Jr., board member and treasurer of Colorado Springs Health Foundation, the nonprofit created to dole out the money, expressed disappointment when told of the lawsuit last Thursday by the Independent. But as the foundation prepares to interview finalists for the executive director position later this month, he says, "We're moving forward to do everything we can to be a grantmaking organization to serve Teller and El Paso counties."
Romstad's case is the third lawsuit against the city and the second involving PERA stemming from the hospital lease.
In April 2013, the city paid $995,000 to Memorial bondholders after they alleged the city's early redemption of the bonds had caused them to lose $18.6 million in interest they would have earned had the bonds gone to term.
Then, last September, the city agreed to pay PERA $190 million in a lawsuit in which PERA said it needed more than $200 million to assure benefits already earned by Memorial's employees would be covered in years to come. The settlement capped two years of litigation and also cost the city $2.3 million in legal bills to outside law firm Hogan Lovells.
The settlement money came from UCHealth's $259 million up-front lease payment, which was held in escrow pending the lawsuit's outcome. Of the $70 million that remains after the settlement, the city is holding $50 million in escrow, as required by the lease, to fund any potential liabilities from when the city ran the hospital. Within three years, that money will be transferred to the foundation, which now has about $30 million available for grants and also is receiving $5.6 million a year for 30 years in lease payments.
The PERA lawsuit will play a role in the Romstad case, because, as their attorney explains, a federal judge ruled Feb. 10 that the city failed to follow the law in removing Memorial employees from PERA. Under the law, the city had to conduct a vote of employees, with 65 percent approval; perform an actuarial study to determine unfunded pension liability and payment of that liability, and obtain approval from the PERA Board.
There was no vote conducted, and the PERA board wasn't asked for its approval.
"These employees had a right to vote," Matise says.
Because employees earn higher benefits with more years of service, the lawsuit contends, removing Memorial's workers from PERA resulted in their retirement benefits being "frozen" at levels based on their years of service as of September 2012, "without any ability to achieve credit for continued employment at Memorial after September 30, 2012."
The suit further states that the benefit plan for Memorial workers provided by UCHealth after Oct. 1, 2012, offers retirement benefits that are "substantially less than under PERA."
UCHealth spokesman Dan Weaver says UCHealth offers both a defined benefit pension plan and a defined contribution plan, but didn't provide details.
Matise says UCHealth's defined benefit plan pays 1.5 percent of annual pay per year of service based on the average of five years at an employee's highest salary, compared to 2.5 percent paid by PERA based on the highest three years' salary.
"Veteran employees under the new plan would not have sufficient years of work left to accumulate significant benefits to offset the reduced PERA benefits," the lawsuit states.
For example, a worker enrolled in PERA for 30 years collects 75 percent of his or her highest three years of salary upon retirement, meaning a worker with an average high salary of $50,000 on PERA would collect $37,500 a year after 30 years. If that worker, though, was disenrolled from PERA on Oct. 1, 2012, after only 15 years (with the same $50,000 average high salary), the retirement pay would come to only $15,350, a difference of $22,150. Assuming the worker lives 20 years after retiring, the lost benefit would total $443,000. (This example also assumes no benefit from the UCHealth pension plan.)
The case is not without hurdles, however. The plaintiffs have to prevail through motions to dismiss and other legal maneuvering. Matise also has to convince a federal judge to certify the class of employees, which, if approved, would mean Memorial workers wouldn't have to take an action to benefit from the suit. Romstad and Bench are acting as their representatives, he says, meaning any settlement or judgment would be shared with other employees based on each one's specific circumstances.
So if the plaintiffs prevail, the money left from the UCHealth lease could evaporate pretty quickly. And it's unclear where that would leave the foundation.
"Since we aren't part of the lawsuit, we don't know all the intricacies of what this means," Tutt says. "If it impacted us, that would be unfortunate, but we'll have to wait to see what the city's choice of action is."
Since Romstad, 58, was laid off in July, she hasn't found another job. The same is true of Bench, who fell just a few months short of 20 years in the PERA system when the lease kicked in, Romstad says in an interview.
Romstad, who's drawing her PERA benefit to keep a roof over her head, says she's angry about how the city handled the PERA issue. And though the lawsuit could decimate the foundation, Romstad isn't dissuaded.
"For them to violate state statute and not take into consideration what the employees wanted is just not OK," she says. "I actually have quite a bit of pride in standing up and saying, 'This isn't right.' We were supposed to be allowed to have a voice, and that didn't occur. This is for the benefit of all the employees who were wronged."
City Council met in closed session Monday to discuss the case. The city is due to file its answer to the lawsuit at the end of January, Matise says.
Council President Pro Tem Merv Bennett declined to comment, citing pending litigation. The city has hired the Denver firm of Vaughan & DeMuro to assist the City Attorney's Office in the case.