Public hospital CEO got severance 3 years before he retired

A Salinas public hospital district, already under fire for granting its outgoing chief executive $3.9 million in retirement payments, also gave him nearly $1 million as part of an unusual severance agreement, according to records obtained by The Times.

The payment fattened what was already considered one of the more generous public pensions ever given in California. Its disclosure prompted the state Assembly earlier this month to order an audit of the hospital district’s finances.

The Salinas Valley Memorial Healthcare System board gave Samuel Downing a cash payment of $947,594 in 2008, according to a hospital report on his compensation. The money came from a special severance fund set aside for when Downing ended his employment with the agency.

But the board decided to award him the money while he was still CEO.

By the time Downing retired last month, he had received a series of supplemental retirement benefits totaling $3.9 million, in addition to the severance payment. He will also be paid a regular pension of $150,000 a year. He earned about $670,000 in base salary during his final years of employment, along with other benefits such as a car allowance and paid time off.

Downing said he felt he deserved the pay after a long and successful career at the hospital, where he started in 1972.

“It sounds like a lot of money to everybody … but I know what the industry is and I know the board did an independent study,” he said. “The board did an excellent job. They made sure we had competitive salaries.”

He also noted that because of the timing of the severance payment, he was taxed at a higher rate. “I’m getting taxes at the 44% level,” Downing said. “It doesn’t feel real good to me.”

But several outside experts said it is unusual for an entity to award severance to someone who remains an employee.

Typically, they said, severance is promised to employees only in the event that they are pushed out of their jobs. Downing’s severance was also atypical because he was entitled to it even if he retired of his own accord rather than being forced to leave.

“It’s absolutely outside of the industry standard to pay a severance upon retirement,” said Jeff Christenson, a compensation consultant at the firm Integrated Healthcare Strategies. “The theory of severance pay is to protect an executive or an employee from an unforeseen termination.”

Salinas Valley officials said the severance payment stemmed from a handshake agreement in the 1980s between Downing and a previous president of the board of directors. In 2000, the hospital’s board agreed to a contract in which Downing would be paid 18 months’ salary upon the end of his employment. In 2008, the board voted to give Downing that money, which totaled nearly $948,000.

It’s unclear exactly why the board of directors decided to grant Downing the cash-out. The five board members, who are elected at-large by residents of the hospital district, didn’t return calls seeking comment.

Mike Profumo, one of the hospital’s financial consultants, said the board’s intent was to remove the severance from its books in 2008 by giving Downing the money rather than waiting until he left. The idea was proposed by a different financial consultant working for the board, he added.

“They looked at this liability and said ‘If we get rid of this now, we won’t have to worry about it when Sam retires,” Profumo said, adding that there were also concerns about how the money would be taxed after Downing turned 65. A hospital district spokeswoman released a statement Wednesday saying the current hospital directors were “obligated by a previous board” to pay out Downing’s severance.

Details of Downing’s lucrative retirement package, reported by The Times last month, sparked debate in Salinas and led Assemblyman Luis Alejo (D-Watsonville) to request an audit.

“I’m concerned about the financial operation of this hospital.... This audit is crafted to guarantee that public dollars are being spent in the best way possible,” Alejo said at a May 11 hearing. His request was approved on a 10-2 vote.

Pension experts said Downing’s retirement package was unusual because of its size and complexity. The package included several different accounts through which Downing was compensated, including a “Post-65” retirement plan that was created specifically for him in 2009.

Profumo said the package was designed to avoid IRS limits on deferred compensation and that the practice is not uncommon.

The hospital had thrived for years under Downing’s leadership, he added, but was hard-hit by the recession in 2009.

A state-mandated retrofit project has required deep cuts into the hospital’s reserve fund, he said, and declining revenues and patient admissions have forced the reduction of about 600 staff positions since January 2010.

Profumo also said the board gave Downing the $948,000 after a particularly successful year for the district, just prior to the recession.

One compensation expert said Downing walked away with a good deal.

“It sounds like this board decided to take very good care of him,” said Mark Lipis, a Los Angeles-based consultant.

sam.allen@latimes.com