Ripple effect from Detroit could reshape pension debate in Kentucky

12/04/2013 02:38 PM

This week’s ruling on Detroit’s pension system by a U.S. bankruptcy court judge in Michigan could cause a ripple effect in Kentucky as quasi-governmental groups seek to leave the Kentucky Retirement System.

It might even have a broader effect giving lawmakers an opening to change benefits for retirees, said a Kentucky bankruptcy lawyer.

Laura DelCotto, who runs a bankruptcy law firm in Lexington, said the decision by Judge Steven W. Rhodes to rule that pensions to retired city workers weren’t protected by any contract will make for some “very interesting” debates in Kentucky.

Retirees in Detroit, as well as Kentucky and elsewhere, have argued that they have an “inviolable contract” with the governments to receive the levels of retirement benefits they have been promised. But Rhodes’ ruling could change that, although it is being appealed.

“The ruling certainly swung the merits one way,” DelCotto told Pure Politics in a phone interview. “Anyone wanting to get out of their pension obligations have that ruling.”

The ruling in Michigan directly affects Kentucky because both states operate in the U.S. 6th Circuit Court. In Kentucky, the most immediate question is what it means for nonprofit organizations, such as mental health agencies, or small quasi-governmental organizations such as public health departments, that are seeking to get out of paying into the Kentucky Retirement System for their current and future retirees.

DelCotto said she believes Rhodes “got it right” in his ruling. DelCotto isn’t currently representing any organizations seeking to get out of the Kentucky Retirement System but said she’s open to working for “anyone who wants to be in bankruptcy.”

At least three organizations in Kentucky have filed for bankruptcy in order to leave the Kentucky Retirement System and leave behind what they would still owe to that retirement system to cover their retired workers and current workers’ pensions. The Seven Counties Services Inc. mental health organization was first to go to bankruptcy court this year seeking to shed its obligations to the pension system. It has argued the increasing contributions it would have to pay will make up nearly half of its payroll in two years, which the nonprofit’s leaders have said is “unsustainable.”

Two small nonprofit housing-related groups, Frontier Housing and Housing Oriented Ministries, also are trying to bail out of the public pension system.

This week’s decision could also make it easier for quasi or municipal government agencies to file bankruptcy and leave the pension system, said Chris Tobe, a pension analyst and former board member of the Kentucky Retirement System.

Nearly 1,000 small non-profits are part of the Kentucky Retirement System, which also covers retired state and local government workers as well as the Kentucky State Police.

“This could really accelerate the Seven Counties case,” said Chris Tobe.

Meanwhile, Kentucky policy makers are paying close attention to the ripple effects from the Detroit case. The New York Times reported that local governments in California facing similar bankruptcy cases could follow Detroit’s lead.

State Sen. Damon Thayer, R-Georgetown, said if other employers like Seven Counties are able to leave the Kentucky Retirement System it would have a “very negative effect” because that they would no longer be paying money into the system, yet the fund would still be stuck with covering the benefits for their retirees.

While Thayer didn’t want to get too “in the weeds” on the on-going legal battle between the retirement system and Seven Counties, he said f the agency leaves the system they should take their debt and current retirees with them.

He said if that’s not the case, it will be retirees in the system and taxpayers who would feel the full burden of the system.

Thayer said it was “too early to tell” how the ruling will affect employees and retirees, but he said there is a lesson for governments to learn.

“This shines a light for governments everywhere that the promises made can be very difficult to keep,” Thayer said in a phone interview.

Shirley Clark who is the Vice-President of the non-profit Kentucky Public Retirees says all of the talk about violating the inviolable contract are “scary.”

“I hope it doesn’t affect us,” Clark said. “We’ve always been told Kentucky has the strongest inviolable contract.”

While the rulings are still under review retirees and lawmakers are keeping the same strategy.

“All we can do is wait and see,” Clark said.


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