Some rural hospitals say doctored numbers are killing their books
For years, North Sunflower Medical Center has gained national attention, as it bounced back from nearly closing its doors in the early 2000s to being an example to rural hospitals nationwide on how to regain and hold its financial stability.
A recent report issued by the office of State Auditor Stacey Pickering paints the picture of a hospital that is in poor financial health, but NSMC officials say this is due to a new statement from the Governmental Accounting Standards Board (GASB-68), which has apportioned the unfunded liabilty which used to exist only on the financial statement of the Public Employees’ Retirement System (PERS) to its participants. That includes 10 rural hospitals in the state, with NSMC and South Sunflower County Hospital in Indianola being two of them.
Pickering says the new rule gives a more accurate reflection of these hospitals’ and other government entities’ books, but the hospitals, namely NSMC, say it has created accounting and publicity nightmares.
Hospitals feel the pain from new accounting standard
North Sunflower Medical Center has been one of the nation’s greatest success stories for rural hospitals.
Nearly shuttered in 2004, its board of directors took a chance and handed over operations to a local real estate developer and farmer who not only transformed the facility’s tattered financials into a profitable balance sheet but also used the hospital as an economic engine to revive a dying downtown Ruleville.
Today, the image and reputation Billy Marlow (executive director) spent years developing for NSMC is threatened by a new governmental accounting standard that is not only wreaking havoc on his books but other hospitals as well, including Indianola’s South Sunflower County Hospital.
Misissippi’s Public Employees Retirement System (PERS) once had an unfunded liability on its balance sheet that was tens of millions of dollars.
The Governmental Accounting Standards Board’s Issue Statement 68, which took effect in Fiscal Year 2014, forces any entity tied to PERS to report its calculated share of that unfunded liability on its balance sheet.
The item is not an actual expense, but to auditors and potential lenders, it is treated as one.
Some, including NSMC’s attorney, argue the liability is a state obligation, as state statute seems to indicate, but GASB-68 requires it to be on the balance sheet anyway.
Marlow said the new standard is not only affecting NSMC’s books, but it is hurting the hospital’s image nationwide.
This was compounded, he said, by a recent report issued by the office of State Auditor Stacey Pickering.
“Assessing the Financial Health of Mississippi’s Independent County-Owned Rural Hospitals,” released earlier this month, paints a grim fiscal picture for some of the state’s 19 county-owned rural hospitals, NSMC and SSCH included.
Of those 19 hospitals, 10 are PERS participants, according to the pension’s most recent Comprehensive Annual Financial Report.
The report gives a financial score to each hospital based on its current financial outlook, and the report notes on the 10 hospitals still operating under PERS that GASB-68 has impacted these facilities’ balance sheets.
“All hospitals in state retirement were affected by that, and it affected their balance sheets,” Pickering told The Enterprise-Tocsin in a phone interview.
South Sunflower CEO Courtney Phillips said his hospital felt the effects of GASB-68 almost immediately.
Phillips said when the standard took effect in 2014, SSCH’s debt financing score in Pickering’s report for that year jumped from 7 percent to 82 percent, year-over-year. The target for that benchmark is below 50 percent.
This happened as the hospital was paying cash for a $9.5 million renovation to its facilities, carrying zero debt on that project.
In the May 2017 minutes of NSMC’s board of directors meeting, Jerry Gammel, CPA with Watkins Ward & Stafford’s Eupora office (hospital auditor) noted GASB-68 decreased net income at the hospital by around $7 million.
“I’ve worked really hard the last 13 years to make sure North Sunflower stays strong and viable,” Marlow said during an interview with The Enterprise-Tocsin.
Pickering said the standard, which is geared toward making the unfunded liabilities of retirement systems like PERS more public and transparent, paints a more accurate financial picture of not only hospitals under PERS but also entities like city and county governments.
Pickering also noted that each hospital provided its own financial report for the review.
“These are the financials their CEO signed off on,” Pickering said.
Both Gammel and the hospital’s attorney, Lawson Holladay, indicate that the institution, by law, had to submit its financials to Pickering and had to include the liability on its balance sheet. There was no choice in the matter, they said.
“The problem with the report that came out about all hospitals in the state is that you’ve got about eight governmental hospitals that the county owns, or the city owns or a combination of the two, who are members of PERS,” Gammel told The E-T. “Everybody else had gotten out years ago. You’ve got eight hospitals who’ve had to report this liability, this unfunded pension liability, and they have to report that on their books. All of these other hospitals don’t.”
The majority of the hospitals Pickering’s office noted that were affected by GASB-68 had “poor” financial health scores this year.
Hospitals like Greenwood-Leflore and Magnolia Regional Health not only were in the “poor” range but dropped sharply from 2015 to 2016.
NSMC: In the Red or in the Black?
Just about every rural hospital struggles with issues like reimbursements from Medicaid and Medicare, along with the rising cost of drugs and supplies, but for the most part, North Sunflower had been able to mitigate those expenses over the years, its auditor said.
“North Sunflower’s books are not bad,” Gammel said of the financial picture, absent the PERS liability. “But you have this huge liability reported.”
Between April and June of 2017, NSMC reported in its board meetings a cash flow of anywhere between $15 million and $17 million with as much as $60 million in assets and a fund balance of $38 million.
With GASB-68 now on the books, the hospital is routinely reporting a net loss instead of its typical net profit.
SSCH: In the Red or in the Black?
South Sunflower County Hospital’s financial standing remains stable with a scoring in the “fair” range.
Pickering’s report noted the hospital took on millions in liabilities due at least partly to the GASB standard.
“The hospital’s increase in total liabilities in FY2016 is part of a cumulative increase of $15.7 million from pensions related to the application of Governmental Accounting Standards Board (GASB) Statement Numbers 68 and 71,” the report said.
SSCH’s Phillips said the dip for any hospital in PERS was unavoidable.
“You’re going to go down at least one level, if not two,” Phillips said.
SSCH, while managing to avoid a “poor” score, was still hit hard, according to Phillips.
“It hits your income statement, so it lowers your profit,” Phillips said. “It jacks up your average daily expenses.”
Phillips said the hospital recently recalculated its financial position, taking out the PERS adjustment, and he said the institution looked “good” on the three benchmarks affected by the unfunded liability.
Those benchmarks were total cash, debt financing and total margin.
The report said SSCH did not meet the individual component targets of “Financial Leverage (Debt Financing), which stands at 80 percent and Physical Facilities (Accumulated Depreciation),” which was at 67 percent.
The line indicating its trend over the past several years is in a downward trajectory but overall, stable compared to other GASB-68-affected hospitals.
State Code Versus GASB
North Sunflower Medical Center is not the only hospital up in arms about GASB-68.
Franklin County Hospital, which also took a hit on its books, received an opinion from the state Attorney General’s office in March about the legality of the standard.
While Attorney General Jim Hood’s office did not comment on “accounting principles,” it did offer an opinion on whether hospitals have statutory responsibility to fund any deficit in PERS.
“As a participating employer in the Public Employees’ Retirement System of Mississippi, the hospital is responsible for paying the employer contributions as established by the Board of Trustees under Section 25-22-123,” the response said. “Additionally, the Hospital is responsible for causing the employee contributions to be deducted and remitted to PERS on behalf of the employee. The hospital has no obligation above or beyond the proper payment of these contributions.”
Holladay, who believes Mississippi code should prohibit the forced reporting of the liability, said he believes the GASB-68 standard skews the balance sheets and income statements of every entity tied to PERS, and none of these, whether governmental or healthcare, can submit financials without the liablity attached.
“The CPA says ‘we understand what you’re saying about state law,’” Holladay said in reference to Mississippi Code that specifies the liability is a state obligation, “’but we can’t give you a clean audit without applying it.”
Pickering Stands By Report
The state auditor recognizes that the unfunded liability does hurt some of the financial statements of PERS participating hospitals, but he says this makes the statements more accurate and transparent.
Also, Pickering said that even if GASB-68 did not exist, and hospitals and governments did not have to report their share of the unfunded liability, that does not mean that the liability doesn’t exist.
While Gammel does not believe Pickering’s report is comparing “apples to apples,” he does understand the argument for better transparency on the books.
“That’s hard for an accountant to argue with,” Gammel said. “That’s a huge unfunded liability out there.”
Each hospital in the report has a trajectory chart that includes a dotted line that shows whether the hospital is trending in an upward or downward direction in terms of financial health.
“That is a good indication of the trajectory of each individual hospital,” Pickering said, later adding, “It shows a truer picture of the financial health of every government entity at every governmental level.”
NSMC, according to the report, does show a downward trajectory in financial health, even prior to the introduction of GASB-68, Pickering noted.
That decline may have been exasperated starting in 2014, due to GASB-68.
Moving Forward
If GASB-68 remains in effect, there is a chance North Sunflower Medical Center may be in the red more months than not, due to the unfunded liability on its books.
Marlow said this could be devastating if the hospital ever needs a line of credit for projects or other matters.
“If we wanted to borrow money for any reason, we couldn’t,” Marlow said.
SSCH’s Phillips said this hurts the credit potential of any entity tied to PERS.
“They don’t have the borrowing power anymore,” Phillips said, noting that footnotes in the financials exist, but it is very difficult to overcome that item when it is on the balance sheet.
Phillips said that he accepts this is now the standard and is preparing to move SSCH forward in spite of the adverse effect it has had on the hospital’s books.
“We have to tighten our belts up and figure out a way to improve our position, based on what is going on right now,” Phillips said.
NSMC’s doors are open as they always have been, and its cash flow seems sound, but it must learn to live with the financial albatross it now shares with all of the other PERS participants.
