Kentucky Retirement System's Strategy to Get Legal Victory Against Agency

In September, The Kentucky Retirement Systems (KRS) moved closer to a legal victory against Seven Counties Services, Inc., a quasi governmental agency that sought to avoid paying its employer contributions to the Kentucky Employees Retirement System (KERS) by filing for Chapter 11 bankruptcy protection.

Kentucky’s Supreme Court issued an opinion that supported KRS’ legal argument that Seven Counties’ participation in, and its contributions to, KERS are based on a statutory obligation, not a contractual obligation, and therefore cannot be avoided.

KERS estimates that if Seven Counties is allowed to withdraw from the pension system, it will leave behind a shortfall of over $90 million, which it said would have to be paid by other employers in the pension system, and taxpayers.

In 1979, then Gov. Julian Carroll designated Seven Counties, a non-profit provider of mental health services, a department of the state government for the purposes of participating in KRS. It then paid into KERS to secure retirement benefits for its employees. However, because the rate of required employer contributions had increased sharply over the years, Seven Counties initiated bankruptcy proceedings in April 2013, primarily to reject its relationship with KERS as an executory contract, according to court documents.

The bankruptcy court said that with the required contribution rate of 24% of wages, Seven Counties could either perform work toward its charitable mission, or pay its KERS contributions and be forced to terminate operations.

While KERS argued that that Seven Counties should be required to pay its employer contributions to the retirement system, the bankruptcy court determined that Seven Counties’ relationship with KERS was contractual. This meant that Seven Counties could reject the contract in bankruptcy and leave the retirement system. However, the state’s Supreme Court disagreed with this ruling, and said in an opinion that the contract between KERS and Seven Counties was statutory.

“The Kentucky General Assembly in unmistakable language identified the relationship between KERS and its members as an ‘inviolable contract,’” wrote Deputy Chief Justice Lisabeth Hughes in the court’s opinion. “The statute by which employers join KERS contains no such contract language and implying it would violate both our plain language approach to statutory construction and Kentucky law regarding the limitations on a governor’s power.”

Hughes added that “the parties’ contemporaneous documentation contains not a hint of an intent to contract, leaving the theory with no support in either the facts or the law.”

The opinion went on to say that payments by an employer to KERS are essentially assessments, and are statutorily-imposed contributions to the KERS trust fund required of the employer in order for its employees to be members of KERS.

“The relationship between KERS and Seven Counties is and always has been purely statutory,” said the court.

The case now heads back to the Sixth Circuit Court of Appeals to resolve the remaining issues on appeal, which had been put on hold pending the state Supreme Court’s opinion.