Kentucky's choice: Have a mental health agency close or further damage the pension fund?

04/24/2013 09:14 PM

Seven Counties Services Inc.‘s decision to go to bankruptcy court to escape the Kentucky Employee Retirement System has created the Kentucky policy version of Sophie’s choice.

If nothing changes, one of the commonwealth’s largest mental health services agency that serves more than 30,000 adults and children in the Louisville area could close its doors in 2014. Or, if the federal bankruptcy court, gives Seven Counties its wish, it could seriously weaken the already financially rickety pension fund that lawmakers just managed to prop up.

“The only two paths this can go is we could stay in KERS until we have given them our last nickel, which is a year (or) year-and-a-half from now … (and) we close the doors and go out of business and KERS gets no more money because we’re out of business,” said Dr. Tony Zipple, president of Seven Counties. Or, he said, the mental health agency can leave the pension system without having to pay another nickel but still live on to serve more patients.

Should the federal bankruptcy court grant Seven Counties a get-out-of-the-pension-system-free card, then the Kentucky Employee Retirement System will be out an employer on whom it was counting on making increased payments into the fund. And many other — if not all — of the 12 other non-profit mental health agencies who participate in the public pension system could follow suit.

That fund, which covers state workers and those with quasi-governmental organizations and non-profits that have been allowed to join, is just 27 percent funded. And it owes $18 billion more in health care and retirement benefits to retirees and current workers than what it has in assets.

On Wednesday’s edition of Pure Politics, Zipple explained what he envisions as the best-case scenario for the mental health center:

The pension system got in such a mess because of a combination of underfunding by legislators and governors dating back to 2003, under-performing investments and more generous health and retirement benefits than what the state could afford.

Last month, lawmakers passed reforms aimed at changing the benefit structure for future employees and requiring all employers that are part of the system — chiefly the state government, itself — to make full payments into the system. That called for coming up with at least $100 million more for the state.

But it also would sharply increase what other agencies, such as Seven Counties, would have to pay. The mental health center’s pension payments would jump from being 13 percent of its payroll costs this year to 40 percent by fiscal year 2015, which starts July 1, 2014.

That’s just not do-able, Zipple said. And neither is a more than $200 million pay-out to cover what the agency would owe for retired former workers and current employees who would still be left in the system if Seven Counties bolts.

Lawmakers, such as Republican Sen. Jimmy Higdon of Lebanon, have said more still needs to be done on the pension front.

Democratic House Speaker Greg Stumbo confirmed to Pure Politics that he would support an effort to allow non-profit employers that are part of the Kentucky Employee Retirement System to leave — but with stipulations.

“I have always believed that if any quasi-government agency would like to remove itself from the state retirement system, it should have the right to do so, but only if it removes all of its employees as well,” Stumbo said in a statement. “There should be a formula that would allow them to leave the system without putting an undue burden on other contributors. If we need to pass that legislation, I would support it.”

On Pure Politics, Zipple answered questions about why the agency shouldn’t have to pay for employees it leaves in, as well as whether its compensation of some employees has outgrown the need for the agency to be in the public pension system. When Seven Counties and 12 of the 13 other non-profit mental health agencies across the state joined the retirement system in 1979 it was to beef up compensation packages for psychiatrists and other staff who otherwise would be making less than if they were in the private sector.

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