CHICAGO — Rising pension costs facing many nonprofit health care providers could mean less money to spend on other needs, such as capital projects, Standard & Poor’s warned in a new report.
Pension funding levels across the nonprofit health care sector have dropped for three straight years, declining to a median funded level of 68% as of fiscal 2010, analysts said.
The median status as of 2007, in contrast, was 90%.
“While overall credit quality in the sector was stable in 2010 and should remain so this year, high pension contributions could crowd out other cash needs like capital projects and force more health systems to change their plan design,” Standard & Poor’s analyst Liz Sweeney wrote in the report, “Pension Funding Remains an Uphill Climb for the U.S. Not-For-Profit Health Care Sector.”
“In our view, many providers continue to struggle to balance pension contribution requirements with other demands on cash, including capital expenditures and working capital,” she said.
Despite the three-year decline in pension funding levels, the rate of the decline slowed significantly last year, Sweeney said. The median funded level fell to 67.8% from 70.2% in fiscal 2010 compared to 10% drops in each of the two previous years.
The decline will likely lead to rising pension expenses and cash requirements over the next few years, according to Sweeney. Pension funding levels do not have a high correlation to ratings, but are beginning to contribute to overall credit pressure, the report said. As long-term obligations whose values tend to rise and fall, pensions are only one of several factors taken into account by analysts.
In some cases, however, pension pressures can lead to credit actions indirectly. In 2009, for example, Standard & Poor’s cut its rating to A-plus from AA-minus on Sutter Health in California after its already-thin unrestricted liquidity fell, in part because the hospital made a $505 million contribution to its pension plan.
But the market’s 2009 rebound led to an increase in the asset value of Sutter’s plan, resulting in an overfunded status and the lack of contribution need in 2010. The result was an upgrade back to AA-minus earlier this year.
Rising pension requirements are prompting many hospitals to consider changes to their plans, according to Standard & Poor’s. Most nonprofit hospitals have defined-benefit pension plans, though more have switched or are considering switching to less costly defined-contribution plans.
Several major systems announced plan changes last year, including the Sisters of Mercy Health System in Missouri, Trinity Health in Michigan, and the University of Pennsylvania Health System.
Despite the pressures, contributions were considered strong last year, analysts said. Most hospitals in the study increased their absolute contribution funding level in 2010 over 2009.
The report marks Standard & Poor’s third annual analysis of nonprofit health care systems’ pension plans.
