Shredding the safety net

How pension system solutions just might kill community mental health in Ky.

By Dean L. Johnson

Just which important policy issues the 2013 Kentucky General Assembly will attempt to tackle is anyone’s guess. The menu for the short, 30-day session is extensive—tax reform, gaming, prescription drug abuse, special taxing districts and more. Regardless of which issues see action, one overshadows all others in its size and scope—the state pension system. No problem is in greater need of a solution and no issue as packed with potential catastrophic consequences as the insolvency of the state’s retirement system for its public (and certain other) employees. For the community mental health centers of Kentucky, including Seven Counties Services, solving the problem in the right way is a matter of survival.

A special task force of KY House and Senate members, charged with studying the predicament and recommending solutions, spent months working with experts from local, regional and national think tanks. According to expert sources, only the state of Illinois faces a pension calamity comparable to Kentucky’s; and Kentucky’s is getting worse by the minute.

The Kentucky Public Pensions Task Force recommendations, which await legislative and executive action, include measures that will radically and rapidly increase the contribution that employers must pay to restore the system to solvency. While the question of how the state will create or divert the funds needed to cover their portion of this obligation is getting ink, the matter of how the non-governmental entities who participate in the Kentucky Employees Retirement System, including community mental health centers, will survive such changes, has been largely ignored.

A Look Back
Kentucky’s community mental health centers were created by the state 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 center workers are not public employees, an offer to join the Kentucky Employees Retirement System (KERS) came in the late 1970s in an effort to make the difficult and low-wage positions of the CMHC workers more attractive to qualified candidates.

Eligible employees of fourteen of the state’s fifteen regional community mental health centers (CMHCs) have been participants in the KERS plan since 1979, including the leading provider of mental health, addictions and developmental services in the Louisville region—Seven Counties Services, Inc. –whose participation became official via Executive Order 79-88 signed by Governor Julian M. Carroll.

KERS benefits are derived 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, the combination of factors mentioned above propelled the system towards insolvency. In response, the powers that be approved a schedule of astronomical increases in the employer contribution rate in an attempt to stop or at least slow the bleeding. Employer contribution rates climbed from 5.89 percent of wages in 2006 to an astonishing 23.61 percent of wages in the current state fiscal year. Fully funding the obligations (including all the catch-up) requires a rate of 42.6 percent—an unimaginable fiscal burden on any enterprise. Yet, this is the rate that the Kentucky Public Pensions Task Force recommends we adopt, beginning July 1, 2014.

How Increased Rates Effect Non-governmental Entities
These rates have, and will continue to have, a uniquely negative effect on non-governmental entities within the system, like community mental health centers. Unfortunately, even with dire warnings from mental health leaders across the state, the task force members have failed to consider the centers’ plight.

The single largest employer in the system—the state itself—is able to raise and/or appropriate more cash from the state budget to cover the increasing costs. However, for the mental health centers there are no additional appropriations from the state. There is no state support to compensate for the calamity of a 20 plus percent pension cost (and climbing) for entities like Seven Counties Services. In fact, over the past 14 years, state support for services provided by Seven Counties and other mental health agencies has been stagnant.

The assault on our budget is vicious. The amount Seven Counties pays to KERS for our share of our employees’ retirement rose from 7.75 percent in FY 2007 to 23.61 percent in FY 2013 (the current fiscal year), more than tripling our cost in six years. Nearly one of every four dollars we spend on personnel (our No. 1 cost) goes to funding employee retirement. In FY 2007, the corporate contribution for KERS was $3.49 million—4.3 percent of our overall budget. In FY 2013, $13.8 million or 13 percent of our entire budget will be for a retirement benefit for our employees. At a 42.6 percent rate, the KERS-required contribution consumes more than 20 percent of our entire enterprise budget. It is an impossible business model.

Seeking Relief
Seven Counties sought relief from the escalating rates as early as January of 2009, asking that the state increase our annual contract amount to cover them. Despite the request, our annual contract with the state, intended to fund services for those most in need and with the least ability to pay, remains unchanged. Legislative efforts to soften the burden, and there have been some substantial efforts, have stalled out in administrative and federal channels.

In our region, Seven Counties serves more than 32,000 individuals with mental illness, addictions or developmental or intellectual disabilities annually. The Seven Counties’ workforce is comprised of 1,400 team members.

The KERS burden affects every aspect of our enterprise—from access to services, to program offerings, to employee salaries and benefit levels necessary to remain competitive with other healthcare providers and more. For Seven Counties, this means less service for teens with addictions, cuts in respite care for families caring for loved ones with disabilities, reductions in therapeutic programs for persons with severe mental illnesses and higher healthcare costs and other benefit reductions for the workers.

The path we are on will lead to bankruptcy. In the end, there are no winners. Community safety diminishes without our services and the people we serve go untreated and appear in more costly and less effective places.

Moreover, the Kentucky Employee Retirement System receives not a dime of employer contribution from a bankrupt company. Whatever solution the 2013 General Assembly negotiates for the solvency of the state’s retirement system, it would be a great benefit to the hundreds of thousands of Kentuckians across the Commonwealth served by community mental health centers should that plan contain a path for the safety net agencies to escape the burdens of an unbearable retirement expense.

Dean L. Johnson is vice president, community relations at Seven Counties Services, Inc.