On July 8, Frankfort legislators in the Government Contract Review Committee voted 6-0 to terminate a $3.7 million contract that Seven Counties Services held with the state for 27 years. Under the contract, the Louisville-based nonprofit specializing in mental health and substance abuse treatment provided in-home care to hundreds of at-risk youth and families in the region to prevent them from going to foster homes.
Despite the hopes of Seven Counties that Gov. Steve Beshear’s administration would override the committee and keep the contract in place, this did not happen. Instead, Finance and Administration Cabinet Secretary Lori Flanery finalized their rejection, but allowed Seven Counties to continue their contract until Oct. 31, giving the state time to find another provider to take over these services.
However, this action taken against Seven Counties was not because anyone thought they were doing a poor job providing services. Rather, based on public statements of legislators in the committee, this was purely retaliation against the organization for declaring bankruptcy last year and recently winning their case to pull out of the deeply troubled Kentucky Retirement Systems (KRS), as their growing pension contributions were too large for them to stay in business.
“Why give contracts to Seven Counties?” asked Rep. Brent Yonts, D-Greenville. “That is wrong, wrong. They left us $90 million in pension obligations. That is a wrong process.”
Seven Counties — serving 31,000 individuals each year, including 12,000 children — was one of many nonprofits allowed to join KRS over the past few decades, hoping to lure qualified employees who would overlook meager salaries due to the security of a good pension after retirement. Up until 2006, this arrangement appeared to work, as the employer contribution rate for pensions was only 5.9 percent of payroll. However, after a decade of Frankfort severely underfunding the required employer contribution, the growing unfunded liability of KRS — especially the Kentucky Employee Retirement System, which houses those nonprofits and is now the worst-funded public pension in the country — led to ballooning costs. By 2012, the contribution rate grew to 20 percent; last year it was 27 percent, and for the current year, it is almost 39 percent.
While the pension reform legislation SB 2 passed in 2013 aimed to solve this crisis by requiring full payment by employers, for nonprofits such as Seven Counties, it only exacerbated the problem. Unable to make such pension payments and stay afloat financially, they declared bankruptcy and filed suit to pull out of KRS. In May, the judge ruled in their favor, saying that the state is obligated to pay out KRS pension benefits to the employees of Seven Counties who paid into it.
Gwen Cooper, spokeswomen for Seven Counties, tells LEO that those who voted to cancel their contract are openly retaliating against Seven Counties — and the families they serve — based on a decision they had no other choice to make.
“They’re putting children’s needs secondary to their anger over us filing Chapter 11,” says Cooper. “They point blank said that’s why they’re doing it. But we feel that the two issues — filing bankruptcy and services to our consumers — shouldn’t be in the same sentence … because that doesn’t solve anything.”
Cooper assumes those legislators were attempting to send a message to Seven Counties — and other nonprofits contemplating a similar escape from KRS — but believes they didn’t really think Beshear would go through with their wishes. Seven Counties now fears that the same committee might attempt to pull more of their contracts next month — under the false impression that other qualified providers will be lined up at their door — and is reaching out to legislators and Beshear to let them know this would not help their constituents.
“It would devastate not only Seven Counties, but it would devastate the community, and that’s not what anyone wants,” says Cooper.
In the meantime, Seven Counties is prepared to do everything possible to help whatever provider is chosen to replace them make sure no kids fall through the cracks, but adds that their experience will not be easily replaced overnight.
“We don’t think anyone can do as good of a job as we can,” says Cooper. “We’ve had the contract for 27 years, and we have a 90 percent success rate with families staying together, even a year after they’ve been in the program.”
Pamela Trautner, spokeswoman for the Finance Cabinet, did not directly answer LEO’s inquiry on why the Beshear administration didn’t choose to keep the contract, saying they followed the recommendation of the Cabinet for Health and Family Services. Asked if their contract was pulled due to poor performance or retaliation, she answered, “This question needs to be directed to Government Contract Review Committee.”
Seven Counties was not alone among nonprofits within KRS facing a financial crunch. Some mental health organizations have fired staff and created new structures to rehire them outside of KRS, while others are dramatically cutting staff and services in order to stay afloat.
With the threat of such nonprofits going bankrupt — including children’s advocacy groups, domestic violence shelters and rape crisis centers — Beshear’s two-year budget passed this year delivered enough funds to fill the gap of the 12 percent increase in pension costs for most of these social service groups, an increase that would have exacerbated years of budget cuts.
Eileen Recktenwald, the executive director of the Kentucky Association of Sexual Assault Programs, tells LEO that without this funding, several rape crisis centers likely would have been forced to close. However, as pension costs continue to climb, there is no guarantee a new governor or legislature in two years will be willing to devote such funds from the budget.
Recktenwald hopes that nonprofits smaller than Seven Counties may be able to maneuver by cutting staff and merging groups in order to avoid bankruptcy. She says they also want to stay within KRS, as they need the lure of a good pension to attract qualified staff. But in order to do so, Frankfort needs to solve the pension crisis, as was clearly not accomplished by SB 2.
“There are other avenues besides filing for bankruptcy,” says Recktenwald. “But we’re going to have to figure out some kind of funding avenue to be able to keep us in the system … I can’t tell you for sure what we would do in two years.”