The U.S. Bankruptcy Court for the Western District of Kentucky recently ruled that Seven Counties Services, a community mental health center serving Louisville, Kentucky, is permitted to leave the KRS due to rising pension costs, which the court deemed as an unsustainable financial burden for Seven Counties. That burden would have required the center to dedicate at least 20% of its budget, $15 million, on pension obligations in 2015, the news reports say. This compares with only $3.5 million in 2007. 

The bankruptcy court ruled Seven Countries is considered to be private, nonprofit corporation rather than a government entity, and is therefore not required to stay with the Kentucky Retirement System. The court supported its ruling by pointing out that the Kentucky state government has treated Seven Counties as a private corporation already, requiring it to obtain licenses and funding via contracts. Seven Counties has already moved its employees to a 403(b) retirement plan. 

The court found that the underfunded KRS had required Seven Counties to more than quadruple its pension contributions over the past seven years and ruled that “the system [KRS] simply cannot force a private entity to pay its employer contributions if it cannot afford to stay in business.” 

According to the news reports, Seven Counties filed for Chapter 11 bankruptcy with the court in April 2013 and the recent ruling allows Seven Counties to move forward in that bankruptcy process without permission from the state of Kentucky. Had it been ruled a government agency, Seven Counties would have been required to file for Chapter 9 bankruptcy instead, which would have required permission from the state to restructure its debt. 

The potential precedent being set, say the news reports, is that 12 other community mental health centers and dozens of quasi-governmental agencies in Kentucky, such as health departments and certain crisis programs, which are dealing with pension funding obligations, may now be able to exit the KRS as well. 

The concern by the KRS is that more exits from the retirement system could increase costs for the system. For example, if all community mental health centers in the state where to exit the KRS, the employer contribution rates would increase 6.5% or $2.4 billion in additional costs over the next 20 years. The KRS already has more than $17.6 billion in unfunded liabilities due to underperforming investments and a state shortfall in pension contributions. 

The full text of the court’s decision is here.