PASSAIC, N.J. -- Working at St. Mary's Hospital was all about making do.
When supply shelves emptied, respiratory therapist Lori-Ann Ligon made frantic calls to compatriots at nearby medical centers, arranging meetings on the fly to barter for blood gaskets. For a couple of years, she and other managers were told the endless budget squeeze left no room for raises.
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But when St. Mary's outlasted two competitors to become this city's lone hospital, executives heralded a new era: "Not just health care. Human care."
That care, though, only went so far.
"Presently, the retirement plan's trust is severely underfunded," the CEO wrote to employees in early 2011, blaming investment losses and the hospital's decision not to put any money into one of its pension plans for more than a decade. "As a federally recognized church plan," he continued, St. Mary's had the right to do that -- and there was no government pension insurance to fall back on.
The news angered many St. Mary's workers, but their situation is not unique. Pension shortfalls at some religiously affiliated hospitals, businesses and social service agencies are raising new alarms and spotlighting a largely overlooked gap in the law protecting Americans' retirement benefits.
"I felt betrayed, not only by the health care system, but by the Sisters of Charity, and I got betrayed by the church," said Armantina Pelaez, a former crisis counselor at St. Mary's, which quietly converted its federally insured pension plan to an uncovered church plan in 2001. The hospital's pending purchase by a for-profit company will see Pelaez and others get a fraction of their expected pensions. "They don't practice what they preach."
A pension is, essentially, a promise. For millions of workers counting on pension checks for retirement security, that promise comes with protections. Even as many companies move to freeze the benefits and eliminate them for younger workers, federal law requires most private employers with pension plans to contribute to them and insure them, in case they fail to honor their obligations.
But as the situation at St. Mary's shows, those protections do not cover all workers or pensions. Because of a legal loophole, there are actually parallel pension systems. One comes with safeguards. The other, while it may be backed by good faith and honorable intentions, has no safety net.
Congress set it up that way by crafting an exemption in benefits law to protect churches from government interference in their finances. But the exemption applies to religiously affiliated employers like hospitals and service agencies, including some that have let pension funds dwindle.
It's not clear how these employers thought they'd meet their obligations. Some point out that they continue to pay all pensions and fully intend to make good on retirement promises, though they won't say how. The bottom line, though, is that some workers aren't going to get the pension checks they were counting on.
Some religiously affiliated employers have long had church pension plans. But others with federally insured plans have embraced consultants' pitches to switch, observers say, to escape costs and duties required by law and get refunds of insurance premiums. Until the Internal Revenue Service changed rules recently for employers requesting church plan status, some kept the change hidden from workers.
While it is difficult to estimate how many people are covered by church plans, five new lawsuits against some of the nation's largest Catholic hospital chains show the designation is embraced by employers whose scale and finances are very different from houses of worship or religious denominations. Some of their independently maintained pension plans cover tens of thousands of workers and are significantly underfunded.
The fact that an employer has a church pension plan does not necessarily diminish its capacity to deliver on retirement promises. But pension advocates are skeptical.
"We'd like to hope that everything will be fine, but experience suggests that there's a real risk here that people could lose a very significant portion of the benefits they have earned and were promised," said Karen Ferguson, director of the Washington, D.C.-based Pension Rights Center.
In April, Augsburg Fortress, the Minneapolis publishing house for the Evangelical Lutheran Church in America, reached a $4.5 million settlement with about 500 people in its underfunded pension plan, covering less than a third of a shortfall in expected benefits.
Last year, about 600 former workers at Franciscan St. Anthony Health in Crown Point, Ind., learned they would get only a portion of expected benefits when the hospital's church pension plan was terminated.
In New Jersey, workers and retirees from three hospitals have been battling to secure their benefits.
A decadelong fight by former employees of the Hospital Center at Orange ended this spring when the IRS agreed to reverse its 2003 ruling allowing the hospital to switch to a church plan. The federal Pension Benefit Guaranty Corp. then announced it would step in to insure the pension plan, which was nearly out of money.
"This is one of the measures that desperate institutions consider: How do you cut your pension costs?" said Josh Gotbaum, director of the PBGC.
But the hospital, which closed in 2004, had unique circumstances. It was a nonreligious institution for nearly all its existence and paid insurance premiums to the PBGC for four decades.
At St. Mary's, in nearby Passaic, 13 miles west of New York City, about 500 workers and retirees have been pushing executives and state officials to make pension funding part of a pending sale. The latest terms announced appear to show that little more than half the shortfall would be covered.
St. Mary's would not answer questions about the hospital's management of its pensions or details of the pending acquisition. The Sisters of Charity of Saint Elizabeth, the Convent Station, N.J., order that sponsors the hospital, referred all questions to St. Mary's.
Meanwhile, workers and retirees from St. Peter's Healthcare System in New Brunswick, N.J., were dismayed in August when the IRS approved the hospital's request for church plan status. That came despite letters to the tax agency from former executives, noting the pension plan "was not established by a church and is not and has never been maintained by a church."
St. Peter's asked regulators in 2006 to let it operate a church plan, but workers said they weren't informed until 2011. For years, they had been told that their pensions were federally insured and maintained according to the Employee Retirement Income Security Act, or ERISA.
"Their word doesn't hold any value for me," said Susan Fritz, 65, a former nursing care manager at St. Peter's for 25 years. The hospital "gave us pamphlets and documents upon first employment that ensured us that there was an ERISA plan and that our pensions were secure. And now they're saying that wasn't their intent? So how am I to believe that they're protecting my interests from here on out?"
St. Peter's pension was underfunded by about $73 million as of September 2012, or just over a third of its accumulated benefit obligation, a financial statement shows. It is facing a lawsuit by an employee seeking class-action status.
A lawyer for the hospital, Jeffrey Greenbaum, said St. Peter's had the right to make the change because of its association with the Catholic Church, and it is not breaking its promises to workers and retirees.
"The health care system is committed to continuing funding of the plan and it continues to make payments toward funding every week and no employee has been denied benefits and all employees who are eligible for benefits are receiving what they are entitled to receive," Greenbaum said.
The tensions at St. Peter's and elsewhere are rooted in the 1974 law regulating private employer pension plans. Lawmakers amended it in 1980 to give churches and religious denominations, as well as institutions they control, wide leeway in running their pension plans.
But there's growing disagreement over whether the exemption should apply to hospitals and other affiliated employers with separate pension plans, not backed by religious orders. It sounds arcane, but it can have real-life implications.
"A (religiously affiliated) hospital that has to compete against other hospitals ... in the dog-eat-dog world of American capitalism is subject to the same ups and downs of the economy that a pizza joint is," said Thomas E. Clark Jr. of FRA Plan Tools, a consultant to investment advisers and other pension service providers.
"On one hand you want to protect churches, and on the other hand you want to protect employees," Clark said. "Somebody in Washington in their wisdom has to make that choice."
The choice now belongs to the IRS, which says it has issued 600 rulings to employers on church plans. The agency would not answer questions about how it deals with the issue, saying only that "federal law prohibits the IRS from commenting on specific tax-exempt entities."
The questions could be settled in court. This spring, a pair of law firms sued five Catholic hospital chains on behalf of employees, alleging that they are not entitled to run their pensions as church plans.
The suits target chains including Ascension Health, the nation's largest nonprofit hospital network, with more than 80 hospitals and 122,000 employees in 21 states. Its pension plan was 93 percent funded as of June 2012. Another target, Dignity Health, operates 40 hospitals in California, Nevada and Arizona, along with 300 other facilities, and has 60,000 employees. All the hospital networks have asked judges to dismiss the suits as groundless.
But details of their operations highlight the complex questions surrounding church plans.
Dignity, for example, operates 25 Catholic hospitals but also 15 non-Catholic hospitals. As part of a 2012 restructuring, the network noted that it is "rooted in Catholic tradition, but is not an official ministry of the Catholic Church." Financial statements show that, at the end of last year, Dignity's pensions were underfunded by $1.28 billion, or about 34 percent.
"We value the contributions our employees make to our mission and we remain committed to ensuring our retirees and beneficiaries receive the benefits they have earned," San Francisco-based Dignity said in a statement, declining to answers questions. "We believe we have complied with the law, including the applicable requirements for our retirement plans."
Another target of a suit, Catholic Health East, based in Newtown Square, Pa., includes hospitals whose individual pension plans were once covered by federal law before they were folded into the parent's church plan. The chain did not respond to requests for comment. At the end of last year, CHE's pensions were underfunded by about $417 million, or 31 percent, according to financial statements.
There's no justification for allowing the hospital chains to operate outside the law requiring other private employers to fund and insure pensions, said Karen Handorf of Cohen Milstein Sellers & Toll, one of the attorneys representing workers in the lawsuits.
"Their answer is that would expose their finances, but it's not the church's finances that are being exposed," Handorf said.
Some hospitals have long administered church pension plans. But others, searching for savings, have followed the advice of paid consultants and embraced the idea more recently.
"Historically pension plan has been treated as though subject to ERISA," says a 2001 presentation for Hospital Center at Orange executives, obtained by The Associated Press. "Deloitte and Touche identified opportunity to designate plan as a `church plan.' Allows greater freedom in funding requirements."
Deloitte declined to answer questions about its work advising employers on church plans.
In addition to freeing employers from funding and insurance requirements, employers switching pensions to church plans win the right to refunds of insurance premiums. The PBGC said it has refunded $43.26 million in dues to over 170 employers since 1994, after they reclassified their pensions as church plans.
Many employers have struggled in recent years to keep pension plans funded because of investment losses and very low interest rates. But rebounding financial markets have eased the challenge. On average, the largest corporate pension funds are now 89 percent funded, up from 77 percent at the end of 2012, according to the Milliman actuarial firm.
Workers at St. Mary's knew for years it was struggling, confirmed by its 2009 bankruptcy filing. But budget pressures were the trade-off for being at a place where colleagues, many who worked alongside one another for years, felt like family.
"Sometimes you're rich in terms of a paycheck, and sometimes you're rich in other ways, and St. Mary's provided a lot more than a paycheck could," said Ligon, who started there a year out of college and stayed for 27 years, eventually becoming director of cardiopulmonary and neurodiagnostics.
When St. Mary's merged with another hospital, administrators promised profits from the sale of its old building would bolster the underfunded pension plan, she and others said. The sale didn't bring as much as expected. Jobs were cut. But workers and retirees say they never realized money supposedly earmarked for pensions might be redirected.
"When we finally figured out that the pension was gone, I got the sense that I was violated, that somebody stole from me," Ligon said. "It was almost like a Ponzi scheme. You get these statements saying you're doing OK. And then it's like it's all a big joke."