FRANKFORT — Kentucky's $15 billion public pension system, regarded as one of the nation's weakest because of its huge unfunded liability, has a new problem.
Some of the state's 14 regional mental health boards, which pay into the Kentucky Retirement Systems, are shifting their employees into new non-profit companies that don't offer state pensions.
The boards say they can't afford more steep increases in pension contributions, which now equal nearly one-fourth of their payroll. But if thousands of mental health workers exit the pension system, it will erode their own future retirement benefits and erase tens of millions of dollars in contributions that were expected to support current state retirees. Other public agencies may follow suit. The resulting squeeze could divert tax money meant for roads, schools, parks and other services.
At Kentucky River Community Care in Jackson, for example, the agency last year fired "almost its entire staff," more than 400 employees who had been eligible for state pensions that required employer contributions, according to a lawsuit filed by KRS. The agency immediately rehired them through a company it had formed months earlier, Go-Hire Employment and Development, and Kentucky River continues to direct their daily activities, according to the suit.
Go-Hire offers the employees 401(k) defined-contribution retirement plans, but it's not part of KRS and does not provide state pensions. Just weeks before the switch, Kentucky River's executive director, Louise Howell, who made $240,182 in 2010, retired while her agency still was in the pension system, according to public records.
"I would love to talk to you but I can't," Howell said Friday. "I am not supposed to talk to you about this because everything is in litigation."
KRS calls such maneuvers "a sham." In two separate suits, it's asking Franklin Circuit Judge Thomas Wingate to intervene. State law does not permit public employers to leave the pension system once they're enrolled, said William Thielen, KRS' interim executive director. The mental health boards are trying to wiggle out, Thielen said.
"When you're just taking your employees and moving them from one entity to another, it's pretty clear the sole purpose is to avoid the state retirement system," Thielen said in an interview.
As a matter of fairness, he said, if KRS must support a public employer's retirees, then the employer should stay and help. Kentucky River left about 70 retirees in the system when it quit. They are entitled to pensions and health care coverage for the rest of their lives. With Kentucky River no longer contributing, other employers in the system — all funded by taxpayers — will have to make up the difference, Thielen said.
"There are about 6,000 mental health-mental retardation employees statewide," Thielen said. "We asked our actuaries what the impact would be if they all left. The actuaries said the result would be a 4 to 5 percent payroll increase for all remaining employers over a 20-year period. Basically, it's going to ratchet up the costs for everyone else."
Kentucky River referred questions to its attorney, J. Whitney Wallingford, who said Go-Hire is a legitimately independent company that cannot be forced into the state pension system against its wishes. Wallingford would not discuss the job terminations at Kentucky River or the subsequent new hires at Go-Hire.
In April, Wingate sided with KRS by denying Kentucky River's requests to dismiss the lawsuit and halt the discovery of evidence.
"The facts of this case require greater investigation," Wingate wrote, allowing the case to proceed.
KRS manages separate benefits funds for state government, local governments and the Kentucky State Police.
The pension fund in the worst shape, by far, is the $4 billion Kentucky Employees Retirement Fund, which includes the regional mental health boards among its nearly 116,000 state workers and retirees in non-hazardous jobs. That fund has only 33 percent of the money it's expected to need for future pension checks as the state work force ages and retires.
Experts generally consider a funding level of less than 80 percent to be worrisome. Already, KRS is sometimes forced to cash out investments just to keep state pension checks in the mail, which in turn weakens the fund's investment returns.
Pressured to ease the shortfall, the General Assembly in recent years has ordered sharp increases in employer contributions to the fund. That pinches the budgets of the employers enrolled, most of which are simultaneously struggling with flat or reduced state funding.
This fiscal year, employers in the state pension fund must contribute 23.61 percent of their payroll, up from 19.82 percent last year — an almost impossible burden, some mental health boards say.
"At the time we joined the pension system, it was beneficial. But now the economics are such that it's harmful economically to us. We want to be able to continue providing services that are needed in our area," said Julie Paxton, in-house counsel at Mountain Comprehensive Care, the mental health board based in Prestonsburg.
Mountain Comprehensive Care hasn't forced any of its existing workers out of the state pension system, Paxton said, but it created a company — Mountain Plus Services — to employ anyone hired after the end of last year. The new company offers 401(k) plans and is not part of KRS.
Bluegrass Regional Mental Health-Mental Retardation Board, in Lexington, created a similar company outside the pension system for newly hired employees in Somerset, where it manages residential facilities for mentally disabled adults, and for existing Somerset employees who choose to switch. Bluegrass is suing KRS in Franklin Circuit Court to establish its right to do so. A hearing in that case is scheduled July 18.
Bluegrass did not return calls seeking comment. Meeting minutes for the agency's board of directors show that it has worked with its lawyers since at least 2009 to establish a new company that could employ Bluegrass workers without incurring "the tremendous financial impact" of the pension system, starting with one part of its operations and then possibly expanding.
KRS also is hearing complaints from employees of Four Rivers Behavioral Health, based in Paducah, Thielen said. The employees say they're worried about being forced into a situation where they could lose their state pensions, which many of them have been counting on, he said.
Someone vested in the state pension system wouldn't lose all retirement benefits just because she moved to an outside company, he said. However, her benefits would be reduced because they're based on years of service in the system and her highest wages in the system, which typically come at the end of a career. And in some instances, he said, the mental health boards are urging employees to divest from the system, in an attempt to take their nest eggs with them.
"We are investigating these situations as we are being contacted," Thielen said.
Four Rivers did not return calls from the Herald-Leader seeking comment.
At some mental health boards, employees get a choice: Stay with the original public agency and keep a state pension, or transfer to the newly formed company and get a 401(k) plan with a relatively small matching contribution from the employer and perhaps a one-time cash bonus. But employees say they sometimes are pressured to jump to the new company, KRS officials said.
"Many of them feel threatened, or so they have told us," said Jennifer Jones, KRS general counsel.
At the state Capitol, the mental health boards lobbied during the 2012 General Assembly for a law that would let them opt out of the state pension system for employees hired after July 1. They were able to get a Senate bill introduced, but it went nowhere.
Lawmakers, already grappling with a massive public pension shortfall, say they're not inclined to let contributing employers off the hook.
"I understand the public agencies' complaints about the costs," said state Rep. Derrick Graham, D-Frankfort. He is a member of the Task Force on Kentucky Public Pensions, which is meeting this year to study the funding shortfall.
"But I also can remember when many of these public agencies were asking to join the pension system," Graham said. "When they did, they made a commitment both to the financial integrity of the system and to the security of their own employees and retirees. So I just can't accept this diversion now that things have gotten difficult."