Legal decision could leave KRS with huge liability

Judge says Seven Counties can proceed with Chapter 11 bankruptcy, leaving $90.7M to cover

By Kevin Wheatley, Published:

The Kentucky Retirement Systems’ Board of Trustees will have plenty to discuss behind closed doors Wednesday, as recent legal actions could send shockwaves through the underfunded pension program.

Most pressing is a judgment in federal court allowing Seven Counties Services to proceed with Chapter 11 bankruptcy and thus abandon the Kentucky Employees Retirement System, the fund covering state workers, public health departments, regional mental health agencies and quasi-governmental groups.

The KERS non-hazardous plan is among the worst funded public pension plans in the country, with a funding ratio of 23.2 percent and unfunded liabilities totaling $10.4 billion. If U.S. Bankruptcy Judge Joan Lloyd’s decision stands, Seven Counties would leave behind $90.7 million in liabilities for others to cover and drive up projected employer contributions from 33.49 percent to 36.24 percent in fiscal year 2033, attorneys for KRS claimed in court filings.

Lloyd, in her May 30 order, said the non-profit behavioral health organization’s pension contributions in 2014 would exceed $70 million, about 70 percent of its $100 million in gross revenues.

“Seven Counties can perform its charitable mission or pay system contributions that will force it to terminate operations,” she wrote in the 85-page order. “It cannot do both.”

KRS Executive Director Bill Thielen said the pension systems’ board would decide Wednesday whether to appeal Lloyd’s ruling. Trustees are scheduled to meet behind closed doors to discuss pending litigation at the 9:30 a.m. meeting.

“I won’t know what the board decides until our attorneys present the case to them,” Thielen said.

Kentucky leaders have offered their opinions on whether the $15.7 billion KRS should appeal the court’s ruling, which would substantially impact the pension system if it survives an appeal.

“The Kentucky Retirement System must decide whether to appeal, as the commonwealth is not a direct party to this suit,” Gov. Steve Beshear said in a statement Friday. “However, I would urge the KRS to appeal. The issues in this case are fundamental to the structure and financial viability of the system.”

House Speaker Greg Stumbo said the judge’s order brings many issues to light, such as how Seven Counties’ employees who are vested in the system with at least eight years of credit will be treated if the bankruptcy case proceeds.

“I’ve always taken the position, look, if you want to leave, leave, but you take your liabilities with you,” Stumbo, D-Prestonsburg, told reporters. “You have to get all your employees to go with you because you can’t just leave a few and take the ones that are costing you out and end up costing the system, because the system has to perpetuate itself.”

Senate President Robert Stivers said his office has been discussing the court decision’s impact with Stumbo’s and Beshear’s staff. He, too, hopes the KRS files an appeal because the ruling raises many pertinent questions that must be answered.

“I think it’s something, I don’t want to say gives great concern, but I think it’s something that puts a blip on the radar screen that we have to watch,” said Stivers, R-Manchester.

Public officials are not the only ones keeping close watch of the judicial process in this case. Gwen Cooper, spokeswoman for Seven Counties, said the organization is evaluating the court order as it develops a reorganization plan and will follow Lloyd’s direction in the matter.

Whether the decision will be appealed by the KRS is “completely out of our hands,” she said.

Kentucky Public Retirees, a group of retired public sector workers, is also monitoring the situation. Paul Guffey, KPR’s president, said his organization would discuss the Seven Counties case at its annual conference Thursday and Friday in Louisville.

“We’re becoming increasingly concerned about the viability of the KERS pension fund unless the Legislature and the executive branch decide to go ahead and do something that’s going to be a long-term remedy,” Guffey said. “Obviously we need more than just each biennium paying the full (actuarially required contribution).”

The KRS was dealt a second blow this week as Fort Wright, a fourth-class city of about 5,700 in Kenton County, filed a class-action lawsuit against the system, alleging it mismanaged contributions in the County Employees Retirement System to invest in alternative assets, such as private equity and hedge funds.

The city is seeking a jury trial, an order barring such investments with CERS funds and restitution equaling all management fees paid to alternative asset managers. Ronald Parry, a Cincinnati attorney representing the city, pegged the minimum figure at $50 million based on an audit performed by former state Auditor Crit Luallen.

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