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Kentucky Supreme Court gives the Kentucky Employees Retirement System a major victory

By Tom Latek
Kentucky Today

The Kentucky Supreme Court ruled this week that a quasi-governmental agency, which declared bankruptcy due to higher pension costs, is responsible for paying its unfunded liability to the Kentucky Employees Retirement System.

Centerstone, a nonprofit mental health provider in Louisville formerly known as Seven Counties Services, declared bankruptcy in 2013 and KERS objected to the action, contending that Seven Counties is a “governmental unit” and therefore ineligible to file Chapter 11 bankruptcy protection.

Kentucky Today file photo

KERS also maintains that Seven Counties should be required to comply with its statutory obligations to contribute to KERS. 

KERS estimates that if Seven Counties is permitted to withdraw from the pension system, it will leave behind a shortfall of more than $90 million, be picked up by other employers in the pension system and, ultimately, Kentucky taxpayers.

Seven Counties countered that it is not a “governmental unit” and that it has an executory contract with KERS that may be rejected pursuant to federal law.

After a trial in 2014, the Bankruptcy Court determined that because Seven Counties’ relationship with KERS was contractual, it could reject the contract in bankruptcy and leave the retirement system.

KERS appealed the decision to the United States District Court for the Western District of Kentucky, which largely upheld the bankruptcy court decision, which KERS then appealed to the U.S. 6th Circuit Court of Appeals in Cincinnati.

In a 2-1 decision, the Sixth Circuit affirmed the bankruptcy and District Courts’ finding that Seven Counties is eligible to file for Chapter 11 bankruptcy by holding that it is not a “governmental unit” within the meaning of the Bankruptcy Code.

The Sixth Circuit also determined that the issue of the legal relationship between Seven Counties and KERS is a question of law properly certified to the Kentucky Supreme Court.

KERS insists Seven Counties’ participation in KERS is pursuant to state law, not a contract. Seven Counties counters that its relationship with KERS is solely contractual, that KERS cannot compel Seven Counties’ participation without violating Kentucky and federal law and that it is not even eligible to participate in KERS, even though it became a member in 1979.

The federal appeals court asked Kentucky’s high court to certify state law on the following issue: 

Whether Seven Counties Services, Inc.’s participation as a department in and its contributions to the Kentucky Employees Retirement System are based on a contractual or a statutory obligation. 

Justices unanimously ruled, “After careful consideration, we hold that Seven Counties Services, Inc.’s participation in and its contributions to the Kentucky Employees Retirement System are based on a statutory obligation.”

The court further stated, “Payments by an employer to KERS pursuant to KRS Chapter 61 are essentially assessments, statutorily-imposed contributions to the KERS trust fund required of the employer in order for its employees to be members of KERS. The relationship between KERS and Seven Counties is and always has been purely statutory.”

Reacting to the High Court ruling, House Minority Leader Rocky Adkins, D-Sandy Hook, issued a statement in which he said:

 “Our caucus has always supported the inviolable contract and the legal protections it provides to those public employees who depend on it for their retirement. This ruling helps reinforce this commitment, and at the same time, it also seems to validate the concerns we voiced during this summer’s special session, which ended with a law that could remove 9,000 people from the state retirement system. We’re studying the opinion to see if it would bar the new law from being carried out.”

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