- Associated Press - Tuesday, June 10, 2014

FRANKFORT, Ky. (AP) - The Kentucky Retirement System Board of Trustees will have a private meeting Wednesday to decide whether to appeal a recent bankruptcy ruling that could threaten the financial future of the system and its more than 300,000 participants.

A federal bankruptcy judge ruled last month that Seven Counties, a private community mental health center that has filed for bankruptcy, is free to leave the Kentucky Employees Retirement System. State officials fear the decision will allow the other 12 community mental health centers to also leave the system and require taxpayers to cover the cost.

“It’s a major problem for the state,” said state Rep. Brent Yonts, D-Greenville, co-chairman of the legislative committee that oversees the pension system.

The Kentucky Employees Retirement System is one of five plans administered by Kentucky Retirement Systems. It includes state government employees and non-teaching staff at state universities. It also includes employees of 13 community mental health centers - quasi-governmental entities that joined the system decades ago in what U.S. Bankruptcy Judge Joan Lloyd called “a legal wrinkle.”

The Kentucky Employees Retirement System is the worst-funded public pension system in the country, according to Fitch Ratings. It has an unfunded liability of $17.1 billion. Its money comes from investments and employee and employer contributions - including taxpayers.

With retirement costs soaring, many of those private centers are trying to leave the system. If Seven Counties leaves the system without paying its share of the liability, it would force taxpayers to contribute an additional $1 billion over the next 20 years, according to Kentucky Retirement Systems Executive Director William Thielen. If all 13 community mental health centers leave the system, it would force taxpayers to pay an extra $2.4 billion over the next 20 years.

“It certainly would put strain on the state,” Thielen said.

But U.S. Bankruptcy Judge Joan Lloyd blamed most of the system’s problems on state lawmakers. She noted lawmakers chose not to fully fund the pension system in 15 out of the past 22 years. In 2013, state lawmakers required employers to fully fund the system each year - including Seven Counties.

Lloyd said that put Seven Counties “in an impossible position.”

“The System simply cannot force a private entity to pay its employer contributions if it cannot afford to stay in business,” Lloyd wrote in her May 30 ruling. “Seven Counties can perform its charitable mission or pay System contributions that will force it to terminate operations. It cannot do both.”

State Sen. Chris McDaniel, R-Taylor Mill, sponsored a bill earlier this year that would have allowed organizations such as Seven Counties to leave the system - but only if they paid their share of the system’s unfunded liability.

The bill passed the Senate, but did not make it to the House floor.

“We have got to find a way for these troubled agencies to exit,” McDaniel said. “I’ll be filing a similar piece of legislation (next year) … to try to make this a more orderly process.”

State Rep. Brent Yonts, D-Greenville, called McDaniel’s bill a “trial balloon” that “sounded good, but in reality it didn’t solve any problems.”

“The question is, ‘How do you solve that problem?’” he said. “I don’t have the answers.”

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