A federal appeals court has ruled that Louisville-based mental-health nonprofit Seven Counties Services can’t escape tens of millions of dollars in pension obligations to its workers — and to the beleaguered Kentucky Retirement Systems — through a Chapter 11 bankruptcy reorganization in 2013.

The 6th Circuit U.S. Court of Appeals handed down that decision on Monday, following on a similar ruling last year from the Kentucky Supreme Court. The 6th Circuit returned the case to U.S. Bankruptcy Court in Louisville for further action.

“We emphasize that an informal resolution may be appropriate at this stage,” Judge Jane Stranch wrote for the majority. “Kentucky has an interest in avoiding a result that leaves approximately 33,000 Kentucky citizens without safety-net mental health services.”

The bankruptcy efforts of Seven Counties Services, also known for the past few years as Centerstone, have been closely watched by dozens of other nonprofit and quasi-public agencies struggling with the rising costs of their own pension payments owed to KRS.

Seven Counties hoped to walk away from an estimated $130 million in liabilities at KRS, which manages pension funds for the state and local governments.

Seven Counties 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 without making ruinous cuts to its mental health services in metro Louisville.

Judges in other courts approved Seven Counties’ exit from KRS. The Kentucky Supreme Court, however, said that under state law, Seven Counties has a statutory obligation to KRS, not a contractual obligation, and bankruptcy does not erase statutory obligations.

While Seven Counties’ $130 million liability is a hefty sum, the 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 courts allowed it for Seven Counties. Those nonprofits represent about $1 billion of the $14.2 billion in unfunded liabilities faced by the primary state pension fund within KRS.

Several of those nonprofits have been fighting with KRS in court for years, attempting different strategies to move their employees out of the state retirement system and cut their pension contribution costs.

In the meantime, the Kentucky legislature last year passed a pension bill for regional universities and quasi-public agencies, including the mental-health nonprofits, that allows them to leave KRS if they are willing to pay off their existing liabilities.

KRS executive director David Eager declined to comment on the 6th Circuit’s decision on Wednesday, noting that the litigation was still pending.

Seven Counties officials did not return a call seeking comment.

John Cheves is a government accountability reporter at the Lexington Herald-Leader. He joined the newspaper in 1997 and previously worked in its Washington and Frankfort bureaus and covered the courthouse beat.
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