LOUISVILLE, Ky. (WDRB) -- Kentucky taxpayers have already spent a half-million dollars – and could spend much more in coming weeks – in a court fight to keep a nonprofit Louisville mental health agency from fleeing the state's troubled pension system.

Seven Counties Services filed bankruptcy last year to avoid escalating pension contributions that it claims would soon drive it out of business.

But the Kentucky Retirement Systems, the arm of state government that runs the main pension plan for state workers, doesn't want to let Seven Counties out of the system and has called the effort an "attack" on Kentucky's sovereignty.

The stakes are high. The pension plan is already $10.4 billion short of the money it needs to pay all benefits and health insurance promised to current and future government retirees. Seven Counties' exit could add to the problem by as much as $2.4 billion over the next 20 years, according to a financial analysis the state produced for the case.

The two sides have fought in court for the last 10 months, with Kentucky using outside lawyers billing as much as $400 hourly, state records show. As of Feb. 10, the state had spent $544,422.81 on the case, according to invoices obtained under the Kentucky Open Records Act.

In addition to Seven Counties' bankruptcy case, the state and the nonprofit agency have each sued the other, and all the issues are set to be hashed out in a two-week trial starting March 3 before U.S. Bankruptcy Judge Joan Lloyd in federal court in Louisville.

Seven Counties has won some opening battles in the case, including a ruling by Lloyd that the state has waived its "sovereign immunity" protection from being taken to court.

The plan that covers Seven Counties workers' retirement benefits -- the non-hazardous fund of the Kentucky Employees Retirement System –– is among the worst financed state pension funds.

It covers 118,325 people, including 37,240 retirees. Last year, workers in the plan made an average salary of $38,943, and retirees drew an average benefit of $21,698.

As of June 30, 2013, the KERS non-hazardous fund had racked up $13.5 billion in liabilities for benefits and insurance earned by state workers, but with only $3.1 billion in assets to pay those liabilities, according to an actuarial report released in November.

The state fears that Seven Counties' exit from the plan could pave the way for other quasi-governmental organizations to leave – including the 12 other regional mental health agencies around the state that participate in KERS.

Seven Counties' exit alone would mean other employers in KERS would have to pay an additional $997 million over 20 years to deal with the unfunded benefits.  If all the mental health agencies were to leave, the remaining plan employers would need to pay an additional $2.4 billion, according to the state's expert.

"It would be a house of cards," said Jim Carroll, a state retiree behind the Kentucky Government Retirees advocacy group on Facebook.

Starting to deal with the problem

The case comes as Kentucky lawmakers are beginning to wrestle with the consequences of years of allowing the pension system to rack up benefits earned by workers without giving the system enough money for investments to cover those benefits.

Combined with other factors like unfunded cost of living increases for retirees and poor investment returns during the recession, KERS' funding level for pensions has plummeted from 50 percent in 2008 to 23 percent in 2013, according to a January presentation by Bill Thielen, executive director of the Kentucky Retirement Systems.

To climb out of that financial hole, the state agencies that participate in KERS will have to make elevated retirement contributions on behalf of their employees over the next 30 years. Thielen likens it to paying off a mortgage.

Next year, the employers of KERS will have to put in an amount equal to about 39 percent of each employee's compensation, up from 27 percent currently. If it weren't for all the unfunded benefits that need to be paid off, the contribution would need to be only 12 percent, according the KRS presentation. (Employees contribute 5 or 6 percent of their compensation to their pensions and retiree insurance, depending on their hire date.)

In a court filing last year, Seven Counties noted that pension and insurance costs have skyrocketed since 2006, when KERS employers had to pay only 5.89 percent of their employees' compensation.

Last year, Gov. Steve Beshear and the Kentucky General Assembly resolved to begin paying off the pension shortfall by cobbling together tax changes meant to generate about $100 million in additional state revenue.

Beshear's proposed budget, which lawmakers are currently considering, includes an additional $101 million in the next fiscal year and $106 million in the year after for contributions to KERS and another Kentucky Retirement Systems plan, the State Police Retirement System.

But Seven Counties and the other regional mental health units are nonprofit organizations and not direct agencies of state government, like the Kentucky Parks or Education departments. So, when the pension costs go up, the agencies like Seven Counties have to figure out how to pay the bill from their existing funds.

"This is a really thin-margin business for everybody, and there is just not money" to pay the higher contributions needed to fix the pension system, said Seven Counties executive director Tony Zipple.

The agencies are primarily funded by Medicaid dollars doled out by managed care organizations, like Passport Health Plan in Louisville, said Steve Shannon, executive director of the Kentucky Association of Regional Mental Health-Mental Retardation Programs, Inc.

Shannon said higher pension contributions mean the mental health agencies have trouble expanding their staffs, giving employees raises and even winning grant funding because their overhead costs are so high.

Zipple puts it in starker terms, saying Seven Counties "cannot continue to exist" without relief from the pension costs, which are set by the General Assembly and which the agency itself has no control over.

"Seven Counties Services does not remotely have the wherewithal to pay the kind of rates the commonwealth wants us to pay," Zipple said.

Recognizing the plight of the agencies like Seven Counties, Beshear in his proposed budget included $24.8 million each year to help the mental health organizations pay pension contributions. The money would go to all the agencies except Seven Counties, which has already taken most of its employees out of the system while the court fight is pending.

The special appropriation from Beshear – if left untouched by lawmakers – would cover the full pension increase the agencies are facing in the next two years plus some additional support.

Still, Seven Counties' Zipple said pension contributions are already at a level that is "just not sustainable," even if the help the governor proposes makes it through the General Assembly.

Thielen, the executive director of the Kentucky Retirement Systems, said Seven Counties is attempting to abandon its responsibility to help finance the benefits its own employees have earned, and to leave it to the state agencies remaining in the system to pay more.

Zipple said Seven Counties never had control of the pension system and shouldn't have to be crippled by efforts to make it financially sound.

"The pension problem in the state of Kentucky is not a Seven Counties Services problem," he said. "This is a massive, complicated, very difficult (problem) that the whole state has."

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