In a major decision that could help protect the financial viability of Kentucky’s pension system, the Kentucky Supreme Court on Thursday unanimously ruled that nonprofit Centerstone cannot escape its pension obligations to its past and present employees through a Chapter 11 bankruptcy reorganization.
Kentucky’s beleaguered $2 billion pension fund for state workers, which has only 13% of the assets it needs for future obligations, faced a potential ticking time bomb in the case.
Centerstone, a mental-health provider based in Louisville formerly known as Seven Counties Services, filed for bankruptcy in 2013. It hoped to walk away from an estimated $130 million in liabilities at the Kentucky Retirement Systems, which manages pension funds for the state and local governments and assorted “quasi-governmental” agencies like Centerstone.
Judges in other courts previously have approved of Centerstone’s exit from KRS. The Supreme Court, though, said Centerstone has a statutory obligation to remain at KRS, not a contractual obligation, and bankruptcy does not erase statutory obligations.
“The Kentucky General Assembly in unmistakable language identified the relationship between (KRS) and its members as an ‘inviolable contract,’” Justice Lisabeth Hughes of Louisville wrote for the court.
Centerstone stopped paying KRS when it filed for bankruptcy protection and moved its 1,400 employees into a defined contribution retirement plan, arguing that it no longer could afford the pension fund’s rising contribution rates.
That year, Centerstone was supposed to pay 24 cents on every payroll dollar to cover the cost of pensions, collectively consuming more than two-thirds of its roughly $100 million budget. The agency’s president, Tony Zipple, called this “an impossible business model” because it left too little money to assist its 33,000 clients.
Centerstone is “disappointed” in Thursday’s ruling, but the fight isn’t over, said Abby Drane, president and chief executive. The case is likely to continue in the federal courts, Drane said. The nonprofit and KRS have been arguing bankruptcy law before the U.S. 6th Circuit Court of Appeals in Cincinnati in recent years.
“Our focus has always been and will continue to be on serving the community in all areas of behavioral health. As always, we remain focused on that mission as the case progresses into its next stages,” Drane said.
KRS officials said Thursday they were still reviewing the court’s opinion.
While Centerstone’s $130 million liability is a hefty sum, the even larger concern for state pension officials was whether the dozen regional mental-health nonprofits remaining in KRS would use bankruptcy as their own escape route if the Supreme Court allowed it for Centerstone. Those nonprofits represent about $1 billion of the $15 billion in unfunded liabilities faced by the state pension fund within KRS.
Several of those nonprofits have been fighting with KRS in court for years, attempting different strategies to move employees out of the state retirement system and cut their pension contribution costs. But no one else has tried bankruptcy — yet.
In the meantime, the Kentucky legislature this summer passed a pension bill for quasi-governmental agencies, including the mental-health nonprofits, that allows them to leave KRS if they are willing to pay off their existing liabilities, either in one lump sum or over the next 30 years.
Workers at some of the affected agencies say they worry about what their employers will decide, because they don’t want to see their retirement benefits reduced by an early departure from the pension system.