Few in the field of community behavioral health — especially here at the National Council’s 2013 conference —are unfamiliar with Seven Counties Services (Lousiville), Kentucky’s largest community behavioral health center (CMHC). Yet, the agency’s solid reputation and leadership have proven no match—at least not yet—against the risk of bankruptcy.
The not-for-profit organization, which employs 1,400 health care, support and administrative staff who serve more than 32,000 individuals and families each year, filed Thursday, April 4 for Chapter 11 protection in the United States Bankruptcy Court, Western District of Kentucky. Seven Counties is seeking relief from what it calls “the wholly unrealistic financial burden imposed by the contribution requirements of the Kentucky Employees’ Retirement System (KERS),” the state-run employee pension system which Seven Counties joined in 1979.
Seven Counties’ bankruptcy filing—which it has made in a bid to establish its own employee-retirement system following huge annual pension funding increases mandated by the state-run KERS—is bad news for behavioral health providers and service recipients alike, since Seven Counties is just one of 12 community behavioral health providers across the state who are facing essentially the same financial crunch.
“Seven Counties, a not-for-profit entity, has operated with small, but positive margins for most of its 35 years of life. However, the enormous financial burden brought on by escalating retirement benefit costs brings this concern to a financial position that justifies the request we are making today,” says David Cantor, attorney with Seiller/Waterman LLC, the firm representing Seven Counties in this action.
Seven Counties projects an operating loss of more than $2 million for the fiscal year ending July 1, 2013. With another increase in contribution rates coming July 1, the projected loss for fiscal year 2014 jumps to $8.5 million. Seven Counties projects that, without relief, all cash reserves for operations will be wiped out in 12 to 18 months.
Seven Counties intends to continue the operation of all services and all service locations.
Funding requirements called "impossible"
Kentucky’s community mental health centers, like Seven Counties, were created in 1966 as not-for-profit entities, rather than government agencies, to open more options to secure funding and encourage service development based on regional needs and wishes. Although community mental health centers are not public agencies and their workers are not public employees, an offer to join the Kentucky Employees Retirement System (KERS) occurred as an effort to make the difficult and low-wage positions of the community mental health care workers more attractive to qualified candidates.
Eligible employees of thirteen of the fourteen regional community mental health centers (CMHCs) have been participants in the KERS plan for decades, including Seven Counties, which joined under Executive Order in 1979. Two other centers - Bluegrass.org and Kentucky River Community Care - are in litigation with KERS in state courts on related issues.
KERS benefits derive from a combination of employee and employer contributions, both set as a percentage of employee wages and investment earnings on those pooled contributions. Six years ago, a combination of factors propelled the KERS system towards insolvency. In response, legislative and executive branch officials approved a schedule of huge increases in the employer contribution rate in an attempt to slow or stop the financial bleeding.
Since that time, employer contribution rates climbed from 5.89% of wages in 2006 to 23.61% of wages in the current state fiscal year. According to Seven Counties, they will rise again to 26.79% on July 1, 2013. Two recent pieces of legislation passed by state legislators to address the problem — Senate Bill 2 and House Bill 440 — assume an increase to 40% on top of every payroll dollar, effective July 1, 2014.
In FY 2007, the corporate contribution made by Seven Counties for KERS was $3.49 million - 4.3% of its overall budget. In FY 2013, $13.8 million, 13%, of the Seven Counties’ budget will go toward the same benefits. At next year’s 40% rate, Seven Counties says that the KERS-required retirement-fund contribution will consume approximately 20% of its entire enterprise budget.
“It is an impossible business model,” says Seven Counties President and CEO Tony Zipple. “Beyond that, it represents massive lost opportunity to serve the needs in our community. We cannot, with good conscience, continue to send over $360,000 every two weeks to KERS,when those dollars are desperately needed to maintain and expand the services our 32,000 clients need to live to their fullest potentials. This burden, combined with the downward revenue pressures brought on by the introduction of Medicaid Managed Care in our region, threatens our ability to continue serving citizens of this region who have immense and complicated needs.“
“For the past 35 years, Seven Counties made every required employer contribution to KERS. We have kept our end of the bargain to our employees and to the system,” asserts Abby Drane, Seven Counties’ Chief Financial Officer. “We have cut services, reduced other employee benefits, frozen employees’ pay rates, delayed infrastructure investments, and examined every area of spending in our attempt to make the books balance under the weight of a pension contribution that is more than six times the industry norm. We simply can’t continue to operate for the benefit of those we serve under such an enormous and unsustainable debt.”