CHICAGO — Nonprofit hospitals have suffered a nearly 22% drop in pension plan median funding levels since 2007, a situation that could put further strain on the balance sheet of struggling facilities, according to a new report on pension challenges facing the sector by Standard & Poor's.
In fiscal 2009, the median funded status for nonprofit hospitals was 68.6%, compared to 82.9% in fiscal 2008 and 90.4% in fiscal 2007. Standard & Poor's defines funding status as the pension plan assets as a percentage of the projected benefit obligation.
The declines in funding levels, combined with the impact of federal legislation that was passed in 2006, will likely mean a sharp rise in pension costs over the near term, analysts warned in "Pension Funding Woes Escalate for U.S. Not-for-Profit Hospitals and Health Systems," released Wednesday.
"While we expect pension expenses to rise sharply in fiscal 2010 and 2011 for many organizations, in our view it remains a relatively small portion of total expenses," analyst Liz Sweeney noted in the report. "Still, for hospitals and health systems grappling with compressed operating margins, the additional expenses will further strain their budgets."
Pension costs alone do not typically lead to upgrades or downgrades. But for a sector already facing a host of challenges, and the uncertainty of health care reform, rising pension costs will be a key credit factor over the long term, according to the report. "In some cases, the increase will be sharp, straining income statements and balance sheets," it said.
Declines in funding levels since 2007 are due largely from the overall weakness in the investment markets that peaked in late 2008. Pension funds saw big drops just over the last few months of 2008.
Hospitals with a fiscal year that ended June 30, 2008, had a median funded status of 86.4%, and those with a Sept. 30, 2008, year-end had a median funded status of 87%, Standard & Poor's said. But the median status dropped to 62.9% for hospitals with a Dec. 31, 2008 fiscal year end.
"Even hospitals and health systems that weren't subject to negative ratings actions now have less financial flexibility, in our view, as a result of increased pension contributions," Sweeney wrote. "And that can constrain ratings that may have otherwise improved."
As they try to make up investment losses, hospitals, like other plan sponsors, will also face challenges from other relatively recent pension-related changes.
A 2006 accounting change requiring defined-benefit plan sponsors to recognize the status of their funds as assets or liabilities — and to recognize changes in the funding status as changes in unrestricted net assets — has led to a big reduction in many health care issuers' unrestricted fund balance, Standard & Poor's said.
At the same time, the federal Pension Protection Act of 2006 requires a phased-in funding target schedule of 100% in 2011 for single-employer defined-benefit pension plan sponsors. Analysts warned that many issuers will likely miss the target and be subject to a so-called cliff provision requiring that they must fund to the 100% level in one year.
Unlike other credit factors, pension funding levels don't always mirror a hospital's rating. "Organizations across the rating spectrum have varying pension funding strengths and weaknesses," Sweeney wrote.
