WILLMAR -- Pay will be frozen next year for Rice Memorial Hospital employees in an effort to keep the city-owned hospital's balance sheet in the black.
A 5 percent rate increase, effective Jan. 1, also is in store for patients.
The $94 million budget was approved Wednesday by the hospital board of directors. It will now be forwarded to the Willmar City Council for the final stamp of approval.
Hospital officials said they couldn't see any way to balance the budget without implementing a pay freeze.
"It's not a good thing. It's not where we want to be," said Lorry Massa, CEO of the hospital.
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The majority of the hospital's 800-some employees have already been told that they won't receive pay increases next year, he said. Memos also are being issued along with employee paychecks on Friday.
Hospital officials anticipate it's going to be an unpopular decision with many employees. "They're very upset about it," Massa. "I've already had some e-mails about it."
Even the hospital's administrative team wasn't in unanimous agreement about balancing the budget with a pay freeze, he said.
Without the pay freeze and rate increase, however, hospital officials were projecting a financial loss of nearly $3 million by the end of 2006.
The two measures should help Rice break even next year.
Officials aren't pointing to any single cause for the straitened finances. Rather, it's a combination of factors -- relatively flat patient volume, increases in staffing levels, and increased interest and depreciation costs associated with the completion this past year of the major portion of a four-year, $50 million-plus building addition and renovation. Officials also are learning that the new addition is costing more to operate than they thought.
"There are some issues that we've got to figure out," Massa said. "It's a learning experience."
The budget struggles were not completely unexpected. Financial projections in 2002, when the hospital embarked on the massive construction project, showed there would be some lean years once the full cost of interest and depreciation reached the balance sheet, said Leroy Meyering, chief financial officer and associate administrator for financial resources.
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It's anticipated the situation will improve after next year, he said. "Hopefully this is the year that's the bottom of the barrel. But we're really going to have to work with this."
Officials are holding out some hope that the financial situation will improve enough that pay increases can be offered partway through the year.
"I've been telling employees, 'It's our job to try to figure out where to cut something else or come up with the dollars for salary increases,'" Massa said. "We believe that we have to be competitive in our pay rates, but when you don't have the money you can't do the increase. As more information is known, we'll have to stay on top of this. If it looks better at midyear, we'll be back to the board to try and address the situation."
"It's certainly a painful budget," said Gary Nielsen, chairman of the hospital board.
Allowing the hospital to operate at a loss, however, "would be irresponsible," he said. "The service should be able to continue here."
Contract negotiations with Rice's union workers next year could potentially increase any tension over the pay freeze. Contracts expire at the end of 2005 with four of the hospital's five bargaining units; the fifth employee group will be negotiating its first contract next year.
About 45 percent of Rice's workforce is represented by a bargaining unit. The largest such group is the hospital's 196 registered nurses.
Some board members questioned Wednesday whether the pay freeze was considered part of the hospital's upcoming negotiation strategy with the unions.
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Massa said that's not the case. "I think it's about the reality of where this budget is," he said. "We can't afford to give this salary increase."
