Gerston: On hospital purchases, county residents win, employees lose

For most of us, the purchase of O’Connor Hospital and St. Louise Hospital is a fabulous benefit for Santa Clara County.

The $235 million package has already proven its worth, given the quick response and treatment of 13 victims from Gilroy’s July 28 mass shooting. Moreover, the county is investing heavily in bringing the hospitals up to the latest standards. More than $60 million has been appropriated during the 2019-20 fiscal year for the latest information technology, new equipment, surgery rooms and a laundry list of overdue projects.

But what may be a great asset for the county residents has become a source of major distress for the 1,600 employees at the new facility. Lost in the transition were the pension packages for these workers. Chalk it up to hedge fund magic. When the Daughters of Charity sold the hospitals to Verity Health Systems in 2015, at least $300 million were included among the hospitals’ assets, as well as an estimated $1 billion in long-term pension obligations. Admittedly, that’s a tough nut to crack.  Nevertheless, Verity agreed to the terms.

What happened next was an incredible mystery. Over the next couple of years, the two hospitals, along with four in Southern California were managed by Verity and its new owner, BlueMountain Capital Management, a New York Private Equity firm. In 2018, BlueMountain Capital Management was again sold to Los Angeles billionaire Patrick Soon-Strong, and his company NantWorks.

The rest is history. Last December, Verity (still under the management of NantWorks via BlueMountain), put the hospitals up for sale because unfunded pension liabilities, bond debt and growing infrastructure costs.

Business sales and bankruptcies occur all the time. But somehow the assets and obligations of these hospitals changed dramatically during the exchanges. Just where and how is hard to know since so many companies had their hands on the hospitals. We only know that $300 million in pension assets somehow disappeared. So, when the county purchased O’Connor and St. Louise hospitals, there were no pension funds for their employees’ retirements.

This sleight-of-hand “management” may have got the former owners off the hook, but it has pulled the rug out from under O’Connor and St. Louise employees. Many have worked most of their careers at the hospitals and now have to start over with the county’s retirement system. For some, there’s not nearly enough time to build a pension nest egg, leaving them with the need to work longer than they originally expected or face a meaningless retirement foundation.

One exasperated fifteen-year veteran lamented that she had to “start over” at a time in her life when she expected to plan her post-work years. Imagine that problem times 1,600 employees and it’s easy to see why morale would be low.

Through the transfer process, the county’s hands were tied because of a provision in the California Constitution that prevents a local government from picking up the retirement tab associated with purchases. So, the county did the only thing it could do by immediately putting its new employees into its retirement system.

The sad fact is that the O’Connor Hospital and St. Louise Hospital employees have become the pension equivalent to the last person at the end of Musical Chairs. Neither the Daughters of Charity nor the county did anything illegal in the original sale and the last purchase, but somehow the hospital employees were left holding an empty retirement bag.

Larry N. Gerston is political science professor emeritus from San Jose State University.

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