Aldersgate United Methodist Retirement Community originated in 1945 as a retirement home for Methodist clergy who often lacked the wherewithal on their own. That’s a worthy cause, and the initiative was well-intentioned. Many continuing care retirement homes, euphemistically called life-plan communities, have similar origins.
Ignoring the Warning Signs
This is a story that I’ve been following over the past several months. The trigger for that interest was a regulatory finding in January 2023, a year-and-a-half ago, that Aldersgate is “in imminent danger of becoming insolvent and in a hazardous financial condition.” No one can fulfill a praiseworthy mission and purpose if the business trends toward insolvency.
An article about this situation in the Wall Street Journal now brings the story to public attention nationwide. Although this is just one situation, it reveals cracks in some of the fundamental tenets that have been commonplace, especially in the not-for-profit senior living sector, though closely held for-profits are not wholly exempt.
It Wasn’t Sudden
As it turns out, the Aldersgate difficulties have evolved over a period of years. The causes are common:
- Unwise expansion
- Undercapitalization
- Slow reaction to emerging adversity
- Inadequate preparation (reserving) for crises
- An assumption that business will continue as expected
- Inadequate talent in the executive suite and on the board
CCRCs are often local operations with boards comprised of local luminaries: an affordable housing nonprofit executive, an aging local physician, a retired wealth adviser, a local real estate investor and politician, a realtor, an architect and interior designer, and others. There is no evidence of effective residents on the board, though residents are reported to have been instrumental in calling the insurance department’s attention to the financial situation and to have pushed for the ouster of the CEO at the time.
While in senior living, typically most residents are content, compliant, even obsequious; there are often a few with skills beyond those of the directors management typically recruits to the board. Most residents at Aldersgate are said to be happy with their living situation.
Playing the Blame Game
When trouble happens, it’s tempting to blame someone or something. For Aldersgate it was easy to blame COVID and an ill-considered expansion that had to be discontinued. It’s also tempting to blame people. These are not wrongdoers. Sometimes folks like Thomas Riley are just in the wrong place at the wrong time. Mr. Riley got his CPA in 2015 and was Aldersgate’s CFO until August 202,2 when the gathering financial storm forced him out.
Suzanne Pugh, former CEO, is a career marketer who gave 27 years of her life to Aldersgate, only to have to leave when it was announced that boards of directors of both the Aldersgate community and its umbrella organization, Aldersgate Life Plan Services, “made the mutual decision to go in a different direction with the CEO position, effective immediately.”
Both Mr. Riley and Ms. Pugh are talented people, and with the right support and some good advice, they might have steered Aldersgate successfully. It takes expertise, experience, and good sense to steer these communities to be the safe haven for life that their residents believe in.
Accepting Responsibility
What’s missing is any acceptance of responsibility by the boards for their lack of direction that might have averted the fiasco. It’s easiest for people to divert responsibility from themselves to others. These are local luminaries. They are each accomplished in their own way, but few if any have any experience with the complexities of an enterprise like a bootstrapped nonprofit CCRC. For such enterprises, it’s common to use entrance fees as though they were equity investments rather than contract considerations.
Des Moines based Life Care Services provides management services to communities like Aldersgate and, as far as I can tell, their track record for avoiding circumstances like those that have befallen Aldersgate is stellar. In fact, Life Care Services has taken several failing communities out of bankruptcy. If Aldersgate’s insurance department has the authority, they might have brought in Life Care Services to help as things spun off the rails, or they might have recommended to the board that they retain outside assistance. For now, things appear to just be continuing to drift in the hope of a resolution.
What’s to Be Done
That astute leaders are able to avert the kind of hapless fate that Aldersgate is now struggling with, suggests that ultimate responsibility rests the with industry and its trade associations that have long resisted developing high standards. This brings me to several insights that I hope that the industry will seriously consider:
- The unreserved putatively “refundable” contracts that are now common in the not-for-profit sector of the industry, and which have proven to be a cash challenge for Aldersgate, should be discontinued or put onto a workable basis, as are the cash refunds associated with insured annuity contracts.
- The industry should work with its investment bankers to make the tolerance for “negative net assets” a thing of the past, as they are for most industries, especially industries like senior living that invite people to trust their financial stewardship.
- Any enterprise that is trending negatively over a period of a year or two, even if it has a positive net asset position, should have a plan of rehabilitation, a turnaround plan, before it careens into a position of deepening insolvency.
- Ideally, the industry through its trade associations, would work with the wider community and with a nationwide consortium of regulators, to develop standards that could ensure the public that the industry can be trusted.
Click here for a deep dive into the specifics of the Aldersgate situation, from Business North Carolina. It’s often said that those who don’t learn from history are destined to repeat it. It’s appropriate that the North Carolina Department of Insurance is involved. The senior living industry’s finances and contracts are only lightly regulated. At one time that was true as well for the life insurance industry. Like entrance fee CCRCs, life insurance companies take money in return for a promise of future benefits.
Before the 1870s, the life insurance industry operated as the CCRC industry does now. The result was that there were many insurance company failures during that decade, the largest of which was probably the Charter Oak Life Insurance Company. It took the life insurance industry the better part of five decades, from the 1871 founding of the National Association of Insurance Commissioners through the first two decades of the 20th century, before life insurance was considered a steward for people’s trust.
Moreover, it wasn’t until the 1980s that insurers developed a system of consumer guarantees comparable to those that bank depositors have had through the FDIC since the 1930s. CCRCs still have no such guarantees, and, while residents often stay in residence after bankruptcy, there’s no guaranty, and residents often take huge losses both of money and services. The life insurance parallel shows that need not be.
The senior living industry is now poised on that popular trust precipice, and it remains to be seen whether its leaders will act with the wisdom that saved the life insurance industry.
Click here for the story of the Charter Oak Life Insurance Company to see the obvious parallels with the messy situation emerging at Aldersgate.
