LOUISVILLE — A nonprofit organization that provides behavioral health and development services in the Louisville area has filed for bankruptcy. Company officials cited unsustainable mandatory employer contribution rates to the state retirement system as the reason.
Seven Counties Services filed for protection from creditors on Thursday in federal bankruptcy court in Louisville. Company spokesman Dean Johnson said Seven Counties projects an operating loss of more than $2 million for the fiscal year ending July 1.
Johnson said another increase next year in the contributions to the Kentucky Employees Retirement System pushes the projected loss for 2014 to $8.5 million, with all cash reserves for operations wiped out in 12 to 18 months.
The nonprofit is facing a sudden leap in annual retirement contributions that will cost $15.9 million — about 40 percent of payroll — in fiscal 2015.
Company officials say two measures pushed during the most recent legislative session did nothing for non-governmental entities like Seven Counties. The organization employs 1,400 health care, support and administrative staff and serves more than 32,000 individuals and families each year.
Seven Counties is seeking the court's assistance in protecting the organization's vital services and the interests of its consumers by relieving it of the financial burden imposed by the KERS contribution requirements.
The company's attorney, David Cantor, said Seven Counties has operated "with small, but positive margins" for most of the past 35 years.
"However, the enormous financial burden brought on by escalating retirement benefit costs brings this concern to a financial position that justifies the request we are making today," Cantor said.
Kentucky's community mental health centers, like Seven Counties, were created in 1966 as not-for-profit entities, rather than government agencies, to open more options to secure funding and encourage service development based on regional needs and wishes. Although community mental health centers are not public agencies and their workers are not public employees, an offer to join the Kentucky Employees Retirement System occurred as an effort to make the difficult and low-wage positions of the community mental health care workers more attractive to qualified candidates.
Eligible employees of thirteen of the fourteen regional community mental health centers have been participants in the KERS plan for decades, including Seven Counties, which joined under Executive Order in 1979.
Central Kentucky's state-backed provider of mental health services is watching what Seven Counties does, but it doesn't intend to follow.
"Our board has had no discussion at this point about bankruptcy," said David Hanna, interim president of Lexington-based Bluegrass.org, formerly known as the Bluegrass Regional Mental Health-Mental Retardation Board.
However, Bluegrass.org and another mental health provider, Kentucky River Community Care, based in Jackson, are suing the Kentucky Retirement Systems in Franklin Circuit Court for the right to place employees in private 401(k) plans. The agencies say they can't afford more steep increases in state pension contributions, which in 2012 equaled nearly one-fourth of their total payrolls. Opposing them, KRS argues that employers cannot legally exit the state pension system once they are enrolled.
"The increasing pension obligation is placing a growing burden on the quasi-governmental organizations like Bluegrass," Hanna said Friday.
A combination of factors pushed the retirement system toward insolvency six years ago. Lawmakers and the governor responded by approving a schedule of increases in the employer contribution rate. Employer contribution rates climbed from 5.89 percent of wages in 2006 to 23.61 percent of wages in the current state fiscal year. They will rise again to 26.79 percent on July 1, 2013. Senate Bill 2 and House Bill 440 assume an increase to 40 percent on top of every payroll dollar, effective July 1, 2014.
"It is an impossible business model," Seven Counties President and CEO Tony Zipple said.