RENDERED: AUGUST 29, 2019

TO BE PUBLISHED

2018-SC-000461-CL

IN RE:

KENTUCKY EMPLOYEES RETIREMENT

SYSTEM AND BOARD OF TRUSTEES OF

KENTUCKY RETIREMENT SYSTEMS

ON CERTIFICATION FROM

V. UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NOS. 16-5569 AND 16-5644

SEVEN COUNTIES SERVICES, INC.

OPINION OF THE COURT BY JUSTICE HUGHES

CERTIFYING THE LAW

By order entered November 1, 2018, this Court granted the United States

Court of Appeals for the Sixth Circuit ’ s request for certification of law on the

following issue:

Whether Seven Counties Services, Inc. ’ s participation as a department in and its contributions to the Kentucky

Employees Retirement System are based on a contractual or

a statutory obligation.

After careful consideration, we hold that Seven Counties Services, Inc. ’ s

participation in and its contributions to the Kentucky Employees Retirement

System (KERS) are based on a statutory obligation.FACTS AND PROCEDURAL HISTORY

This case arises from the efforts of Seven Counties, a non-profit provider

of mental health services, to reorganize and rehabilitate its finances under

Chapter 11 of the Bankruptcy Code. At its request, in 1979 Governor Julian

Carroll designated Seven Counties a “ department ” for purposes of participating

in KERS, a public pension system. Subsequently Seven Counties paid into

KERS to secure retirement benefits for its employees. Because the rate of

required employer contributions has increased dramatically in recent years,

Seven Counties initiated bankruptcy proceedings in April 2013, primarily to

reject its relationship with KERS as an executory contract. With KERS

maintaining that Seven Counties has statutory as opposed to contractual

obligations to KERS, the nature of the parties ’ relationship is central to a

pending appeal in the Sixth Circuit. To address adequately the question

certified to this Court, a brief history of both Seven Counties and KERS is

necessary.

I. Seven Counties Services, Inc.

Historically, states were responsible for treating the mentally ill, and this

often resulted in their institutionalization. In 1963 Congress passed the

Community Mental Health Act which provided federal funding to establish

Community-Based Mental Health Centers (CMHCs) designed to begin the

privatization of mental health services. Using the federal funding, Kentucky

chose to provide services through CMHCs, passing laws that enabled their

creation and regulation. To become a CMHC in Kentucky, an entity first has to

2be a non-profit organization and receive designation from the Kentucky Cabinet

for Health and Family Services. 1

One of the first CMHCs to incorporate in the state was River Region

Mental Health-Mental Retardation Board, Inc. 2 Most River Region employees

were former employees of the Kentucky Department of Mental Health, and

reluctant to leave the state system and give up retirement benefits accrued

through KERS. In response, Governor Edward Breathitt issued an executive

order in 1966 declaring that CMHCs “ are permitted to become and are

participating agencies ” in KERS. 3 Executive Order 66-378. This expansion

applied to all CMHC employees, not just those transitioning from state

employment. River Region became a participating department in KERS by an

August 6, 1974 executive order. Executive Order 74-587.

In 1978, River Region filed a petition for Chapter 11 bankruptcy. 4 The

Kentucky Department of Human Resources intervened, urging the Bankruptcy

1 Prior to the designation of an organization as a CMHC, the Kentucky Cabinet

for Health and Family Services (Cabinet) reviews an organization ’ s bylaws, board

composition and operations to determine whether they meet minimum standards.

CMHCs are regulated by the Cabinet pursuant to Kentucky Revised Statutes (KRS)

Chapter 210.

2 When established, this CMHC was named Region Eight Mental Health-Mental

Retardation Board, Inc., and was known as “ Region Eight. ” It was later renamed River

Region.

3 At the time the executive order was entered, three CMHCs declined to

participate in KERS and instead created their own retirement programs. KERS sued

these entities, and ultimately the state ’ s high court determined that CMHCs were not

required to participate in KERS. Ky. Region Eight v. Commonwealth, 507 S.W.2d 489

(Ky. 1974). Region Eight is discussed infra.

4 Interestingly, as outlined in the Bankruptcy Court opinion, an employee group

twice challenged River Region ’ s right to be adjudicated bankrupt and contended that it

was operated by the Commonwealth. In a 1980 opinion the Bankruptcy Court held

that River Region was not a state agency or instrumentality. In re Seven Ctys. Serv.,

3Court not to immediately declare River Region bankrupt, as termination of its

business would cut off mental health services in the region it serviced. Soon

thereafter, Seven Counties, a newly-formed entity, purchased the assets of

River Region through the bankruptcy process and agreed to assume

responsibility for providing services in the areas formerly served by River

Region. Even though Seven Counties is the direct successor of River Region, it

was not automatically drawn into KERS.

In 1978, Seven Counties sought an Attorney General Opinion that it

could qualify as a “ department ” capable of participating in KERS. The Attorney

General acknowledged Seven Counties ’ eligibility pursuant to KRS 61.510(3):

“ Any other body, entity or instrumentality designated by Executive Order by

the Governor, shall be deemed to be a department [for purposes of KERS]

notwithstanding whether said body, entity or instrumentality is an integral part

of state government. ” Subsequently, Governor Carroll entered Executive Order

79-78 allowing Seven Counties to participate in KERS.

Today, Seven Counties is a Kentucky non-profit organization that has

provided mental health services in Louisville, Kentucky, and surrounding areas

for over 30 years. In its role as a CMHC, Seven Counties provides services to

approximately 33,000 people annually, including adults and children with

Inc., 511 B.R. 431, 441 (Bankr. W.D. Ky. 2014) (citing Greenberg v. River Region

Mental Health-Mental Retardation Bd., Inc., (In re River Region Mental Health-Mental

Retardation Bd., Inc.) slip op. at *4, Case No. 78-00 193-L (Bankr. W.D. Ky. Jan 8,

1980)). On appeal, the United States District Court for the Western District of

Kentucky and the Court of Appeals for the Sixth Circuit affirmed the Bankruptcy

Court ’ s decision.

4mental illnesses, emotional or behavioral disorders, disabilities, and alcohol or

drug addictions.

II. The Kentucky Employees Retirement System (KERS)

In 1956, the Kentucky General Assembly established KERS and a board

of trustees to administer the system. 1956 Ky. Acts ch. 35. Today, Kentucky

Retirement Systems (Systems) 5 is a statutorily-created agency of Kentucky ’ s

executive branch that, through its board of trustees, administers three of

Kentucky

’ s retirement systems

— the County Employees Retirement System,

the State Police Retirement System, and KERS. KRS 61.645. The goal of KERS

is to provide a secure means of retirement savings for the employees of the

Commonwealth, its departments, agencies and instrumentalities. KERS is a

cost-sharing, multiple-employer, defined-benefit retirement plan. Participating

employers and employees pay into KERS at a set rate and, upon retirement,

KERS pays out the employee ’ s defined benefit based on the number of years

served, a “ benefit factor, ” and an employee ’ s final compensation. See KRS

61.510 et seq.

KERS implements two plans: hazardous and non-hazardous plans that

are best described as different tiers within a single defined benefit plan. 6

5 We refer to the Kentucky Retirement Systems as “ Systems ” to avoid confusion

with the initials commonly used to designate the Kentucky Revised Statutes (KRS).

KERS and Systems are referred to generally as simply KERS where appropriate.

6 In general, employees eligible for the hazardous plan are police officers,

firefighters, and corrections officers. Hazardous duties that qualify for the hazardous

plan are determined by state law. See KRS 61.592.

5Generally, employees contribute 5% of their compensation. 7 The employer

contribution consists of the cost of funding the benefit earned that year, plus

the amount needed to fund the actuarially accrued liability. 8 This actuarially

required contribution rate is known as the ARC and is a payment made by

employers toward past unfunded liability in order to ensure KERS has the

resources needed to pay benefits. The ARC is important because the solvency

of KERS to meet future payment obligations depends on consistent payment of

the ARC. Ky. Emp. Ret. Sys. v. Seven Ctys. Serv., Inc., 550 B.R. 741, 749 (W.D.

Ky. 2016). As the District Court pointed out in its opinion in this case, “ [i]t

does not take an expert to conclude that KERS ’ s non-hazardous plan is in poor

shape. ” Id

.

in the early 2000s, KERS became underfunded for three primary

reasons: (1) market losses in 2000-01 and 2008-09 diminished the fund ’ s asset

values by 17%; (2) the General Assembly approved increased retirement

benefits to keep up with inflation without providing additional appropriations

to fund the increase; and (3) the General Assembly consistently failed to

7 KRS 61.560(4) requires each employer to “ pick up ” employees ’ contributions,

resulting in employees ’ contributions being withheld before taxes.

8 KRS 61.565(l)(a) states that each employer “ shall contribute annually to the

respective retirement system an amount determined by the actuarial valuation

completed in accordance with KRS 61.670

. . . . ” Employer contributions “ shall be

equal to the sum of the ‘ normal cost contribution ’ and the ‘ actuarially accrued liability

contribution. ’ ” Id. At the time Seven Counties filed for bankruptcy, the employer

contribution rate was 23.61% of each employee ’ s compensation.

6require contribution rates commensurate with the ARC. 9 Seven Ctys., 550 B.R.

at 749-50. The burden of this shortfall in funding falls on the employers

participating in KERS. 10

Kentucky ’ s General Assembly responded to the funding crisis by

increasing employer contribution rates in 2008 and in 2013 it required

employers participating in KERS

— including the State itself

— to contribute at

the full, actuarially required rate going forward. Recognizing the burden this

placed on some participating employers, the legislature provided assistance to

CMHCs, keeping their rates somewhat lower than those of other employers in

KERS and capping the contribution rate at 24%. Nevertheless, as of April

2013, Seven Counties ’ contribution rate rose well above its historic single-digit

rate. The Bankruptcy Court noted that with the required contribution rate of

24% of wages, Seven Counties could either perform work in furtherance of its

charitable mission or pay its KERS contributions and be forced to terminate

operations. 11 KERS estimates that if Seven Counties is permitted to withdraw

from the pension system, it will leave behind a shortfall of over $90 million, to

9 In its opinion, the District Court noted that the General Assembly had failed to

set an employer contribution rate meeting the ARC in fifteen of the previous twentytwo years.

10 Employee contribution rates, which provide KERS ’ s other source of income,

are capped by statute

. See KRS 61.560(1).

11 Other employers ’ rates increased to almost 27% beginning in July 2013. The

Bankruptcy Court determined that even with the 24% employer contribution cap, the

employee expense would account for two-thirds of Seven Counties ’ gross revenues,

leaving it with insufficient funds to provide its services. In re Seven Ctys., 511 B.R. at

453.

7be picked up by other employers in the pension system and, ultimately,

Kentucky taxpayers.

III. Procedural History of the Parties ’ Litigation

On April 4, 2013, Seven Counties filed a Chapter 11 bankruptcy petition

seeking to reject its obligation to participate in KERS. As the Bankruptcy

Court noted, the procedural history of this case is “ involved and extensive ”

. In

re Seven Ctys., 511 B.R. at 437. KERS objected to the Chapter 11 petition and

on April 29, 2013, Seven Counties filed an adversary proceeding. 12 The

adversary proceeding sought a declaration that Seven Counties was ineligible

to participate in KERS or that KERS was not a governmental plan, which would

permit Seven Counties to withdraw under the Employee Retirement Income

Security Act (ERISA). 13 KERS filed a motion to dismiss the adversary

proceeding, which was denied. KERS appealed the denial, and that appeal is

currently stayed pending this Court ’ s decision.

KERS also commenced its own adversary proceeding, contending that

Seven Counties is a “ governmental unit, ” and therefore ineligible to file under

12 In bankruptcy court, an adversary proceeding is a “ lawsuit that is brought

within a bankruptcy proceeding, governed by special procedural rules, and based on

conflicting claims usually between the debtor (or the trustee) and a creditor or another

interested party. ” B lack ’ s L aw D ictionary (11th ed. 2019). A party in interest,

including a creditor, “ may raise and appear and be heard on any issue in a case

under ” Chapter 11.11 U.S.C. § 1109.

13 ERISA is a federal law that sets minimum standards for most retirement and

health plans to protect individuals working in the private sector. It does not cover

plans established or maintained by the government. ERISA requires retirement and

health plans to keep members informed about important aspects of their plans; sets

standards for benefits and funding; and establishes a grievance and appeals process

to ensure benefits are provided. See 29 U.S.C. §§ 1001-1461.

8Chapter 11, and that Seven Counties should be required to comply with its

statutory obligations to contribute to KERS. Seven Counties countered that it

is not a “ governmental unit ” and that it has an executory contract with KERS

that may be rejected pursuant to 11 U.S.C. § 365. 14

The trial began on March 11, 2014, and on May 30, 2014, the

Bankruptcy Court found in favor of Seven Counties, holding that it is not a

“ government unit ” and is eligible to file for Chapter 11 bankruptcy; that it is

not compelled to continue participation in KERS; and that it is entitled to reject

the unwritten executory contract it has with KERS in the exercise of its sound

business judgment. Simply put, the Bankruptcy Court determined that

because Seven Counties ’ relationship with KERS was contractual, it could

reject the contract in bankruptcy and leave the retirement system. KERS

appealed the decision to the United States District Court for the Western

District of Kentucky and requested that the District Court certify a question to

this Court.

On appeal, KERS argued (1) that there was no evidence of a contract

between it and Seven Counties, and that, even if there was a contract, it was

14 Seven Counties ’ executory contract argument required the Bankruptcy Court

to first determine whether Seven Counties and KERS entered a contract under

Kentucky law, and then determine whether the contract is executory under federal

law. The Bankruptcy Court found all elements of a valid contract

— offer and

acceptance, full and complete terms, and consideration

— to be present. In re Seven

Ctys. Serv., Inc., 511 B.R. at 477. After determining that Seven Counties has a

continuing future obligation to contribute to KERS, and that doing so is impossible

and will result in termination of its operations, the Bankruptcy Court concluded that

the contract is executory, and thus can be rejected under 11 U.S.C. § 365.

9not executory, i.e., not subject to rejection in the bankruptcy proceeding; (2)

the Bankruptcy Court erred in determining that Seven Counties was not a

“ governmental unit, ” and (3) the Bankruptcy Court mischaracterized the KERS

system. The District Court determined that certifying a question was

unnecessary and largely upheld the Bankruptcy Court ’ s decision, affirming

most of the analysis. The District Court reversed only as to the Bankruptcy

Court ’ s finding that KERS is a “ multi-employer plan, ” because it is actually a

“ multiple-employer plan. ” KERS appealed the District Court ’ s decision to the

United States Court of Appeals for the Sixth Circuit.

The Sixth Circuit reviews the Bankruptcy Court ’ s decision directly,

affording no deference to the intervening District Court opinion. Ky. Emp. Ret.

Sys. v. Seven Ctys. Serv., Inc., 901 F.3d 718, 724 (6th Cir. 2018). In a 2-1

decision, the Sixth Circuit affirmed the Bankruptcy and District Courts ’ finding

that Seven Counties is eligible to file for Chapter 11 bankruptcy by holding that

it is not a “ governmental unit ” within the meaning of the Bankruptcy Code.

The Sixth Circuit also determined that the issue of the legal relationship

between Seven Counties and KERS is a question of law properly certified to this

Court. Noting the determinative nature of the issue, the Sixth Circuit stated

that this Court ’ s decision on the nature of the relationship between the two

entities will influence the final resolution of the case in the federal courts. The

Sixth Circuit certified the question of whether Seven Counties ’ contributions to

KERS were based on a statutory or contractual obligation and held the

remaining federal law issues in abeyance pending this Court ’ s decision.

10Both parties have briefed the certified question and presented oral

arguments. KERS insists that Seven Counties ’ participation in KERS is

pursuant to statute, not a contract, relying primarily on the plain language of

the Kentucky statutes and the unmistakability doctrine. Seven Counties

counters that its relationship with KERS is solely contractual, that KERS

cannot compel Seven Counties ’ participation without violating Kentucky and

federal law, and that it is not even eligible to participate in KERS.

ANALYSIS

I. Employer Participation in KERS Is Exclusively Statutory

KERS, as noted, is a creature of statute established by the Kentucky

General Assembly in 1956. 1956 Ky. Acts ch. 110. Participation in KERS has

always been controlled by statute and has always entailed the Governor issuing

an executive order. In 1956, newly enacted KRS 61.520 provided: “ Each

department will participate in the system when the Governor by appropriate

executive order, the authority to issue such executive order being hereby

granted, permits such department to participate in the system. ” 1956 Ky. Acts

ch. 110 at § 3. A department was defined as “ any state department, board or

agency participating in the system in accordance with appropriate executive

order

. . . . ” Id. at § 1. Thus, from its inception and continuing through to

2019, even traditional departments of state government have gained entrance

to the KERS only by executive order as mandated by statute. 15

15 KRS 61.520(1) currently provides in relevant part: “ Each department

determined by the board to be eligible and qualified for participation shall participate

in the system when the Governor by appropriate executive order, the authority to

11In 1976, just prior to Seven Counties joining KERS, KRS 61.520 provided

in relevant part:

(1) Each department shall participate in the system when the

governor by appropriate executive order, the authority to issue

such executive order being granted, directs such department to

participate in the system. The effective date of such

participation shall be fixed by the governor in his executive

order.

(3) All executive orders issued under authority of this section

since July 1, 1956 are hereby ratified by the General Assembly

and each participating and contributing department, board,

agency, corporation, mental health-mental retardation board, or

entity participating since that date under such executive order

is hereby declared to be a participating department under the

Kentucky employes [sic] retirement system.

(4] Once a department participates it shall thereafter continue

to participate.

“ Department ” was defined in KRS 61.510(3) as

any state department or board or agency participating in the

system in accordance with appropriate executive order, as provided in KRS 61.520. For purposes of KRS 61.510 to

61.700, the members, officers, and employes [sic] of the general

assembly and any other body, entity, or instrumentality

designated by executive order by the governor, shall be deemed

to be a department notwithstanding whether said body, entity

or instrumentality is an integral part of state government.

Against this statutory backdrop, Seven Counties, through its legal

counsel, in the fall of 1978 requested an opinion from the Kentucky Attorney

issue such executive order being granted, directs such department to participate in

the system. ” Although since 2003 the Systems board has had a role in determining

eligibility, 2003 Ky. Acts ch. 169, an executive order is still required in order for a

department to participate in KERS.

12General 16 “ with regard to the eligibility for participation in [KERS] by Seven

Counties

... in the event that the Governor should direct their inclusion in the

KERS by Executive Order. ” Ky. OAG 78-685. The Attorney General noted that

Seven Counties was a newly created successor to River Region and that it had

been designated by the Secretary of the Department for Human Resources “ as

the agency to assist in administering mental health-mental retardation

programs and clinics pursuant to applicable Kentucky statutes. ” After citing

the language from KRS 61.510(3) defining a department for KERS purposes to

include any entity “ designated by Executive Order by the Governor

. . . notwithstanding whether said

. . . entity

... is an integral part of state

government, ” id., the Attorney General opined that Seven Counties, like River

Region before it, was eligible to participate in KERS.

Following the October 4, 1978 Opinion of the Attorney General, Governor

Julian Carroll issued Executive Order 79-78 on January 14, 1979. The

executive order provides in its entirety:

WHEREAS, the Kentucky General Assembly in its 1974

session amended KRS 61.510(3) to permit any body, entity or instrumentality designated by Executive Order by the Governor

to be a department for purposes of participating in the

Kentucky Employes [sic] Retirement System, notwithstanding

whether said body, entity or instrumentality is an integral part

of state government; and

WHEREAS, the Board of Directors of Seven Counties

Services, Inc. has requested that an Executive Order be issued

that would bring Seven Counties Services, Inc. into the

Kentucky Employes [sic] Retirement System; and

16 The record does not contain the letter from Seven Counties ’ counsel and

KERS indicates that it was “ not found in the course of discovery. ”

13WHEREAS, the Office of the Attorney General has issued

an official opinion, OAG 78 685, expressing the opinion that

Seven Counties Services, Inc. employes [sic] may begin to

participate in the Kentucky Employes [sic] Retirement System

upon the issuance of an Executive Order from the Governor to

that effect.

NOW, THEREFORE, I, JULIAN M. CARROLL, Governor of

the Commonwealth of Kentucky, pursuant to the authority

vested in me by Chapter 128 of the 1974 Kentucky Acts

amending Section 61.510(3) of the Kentucky Revised Statutes,

hereby designate Seven Counties Services, Inc. as a

participating department in the Kentucky Employes [sic]

Retirement System.

Although the executive order refers to a request from Seven Counties ’ Board of

Directors, the record contains no correspondence that would constitute a

request. 17 The Bankruptcy Court referred to a February 14, 1979 letter from

the former executive director of Seven Counties, Howard Bracco, Ph.D., to

KERS regarding participation but that two-sentence letter obviously postdates

the executive order and, in any event, relates only to criteria for employee

participation and the employee and employer contribution levels.

Analyzing the statutory framework and the interaction between KERS

and Seven Counties at the inception of their relationship in 1979, as we must,

we cannot possibly conclude that the two parties were negotiating and entering

into a contract. KRS 61.520 outlined a mandatory statutory route to be

followed by all employers desiring to be a “ department ” participating in KERS,

17 The minutes of Seven Counties ’ November 10, 1978 Board of Directors ’

meeting refer to “ the petitioning of the Governor to sign an Executive Order to allow

[Seven Counties] to join KERS. ”

14regardless of whether the “ body, entity, or instrumentality is an integral part of

state government. ” KRS 61.510(3). In examining that statutory route

identified by our General Assembly, as oft noted, “ our foremost objective is to

determine the legislature ’ s intent

. . . . ” Maze v. Bd. of Dir. for the Comm.

Postsecondary Educ. Prepaid Tuition Tr. Fund, 559 S.W.3d 354, 363 (Ky. 2018).

We determine legislative intent, “ if at all possible, from the language the

General Assembly chose, either as defined by the General Assembly or as

generally understood in the context of the matter under consideration. ”

Shawnee Telecom Res., Inc. v. Brown, 354 S.W.3d 542, 551 (Ky. 2011). Always,

“ we look first to the language of the statute, giving the words their plain and

ordinary meaning. ” Richardson v. Louisville/Jefferson Cty. Metro Gov ’ t, 260

S.W.3d 777, 779 (Ky. 2008).

The plain language analysis of KRS 61.520 precludes any finding that

the Governor was authorized to contract with any department (including any

“ body, entity, or instrumentality ” that is not an “ integral part of state

government, ” KRS 61.510(3)) for participation in KERS. The statute authorized

the Governor to issue an executive order

— not to negotiate or execute a

contract. The word “ contract ” and the concepts of offer, acceptance and

consideration are never used in KRS 61.520. In construing statutes, we are

“ not at liberty to add or subtract from the legislative enactment or interpret it

at variance from the language used. ” Johnson v. Branch Banking & Tr. Co., 313

S.W.3d 557, 559 (Ky. 2010). Recognizing authority in the Governor to contract

15on behalf of KERS would indubitably require either adding language to the

statute or interpreting it in a way contradictory to its plain meaning.

In addition to violating our plain language approach to statutes, that

construction would violate Kentucky law providing that “ (t]he Governor has

only such powers as are vested in him by the Constitution and the statutes

enacted pursuant thereto. ” Martin v. Chandler, 318 S.W.2d 40, 44 (Ky. 1958).

Decades ago, in Royster v. Brock, 79 S.W.2d 707, 709 (Ky. 1935), this Court

noted that the office of governor was “ unknown to common law ” and created

solely by our state constitution. The governor “ has only such powers as the

Constitution and Statutes, enacted pursuant thereto, vest in him, and those

powers must be exercised in the manner and within the limitations therein

prescribed ” Id. (emphasis added).

Moreover, the legislature purposefully uses the word “ contract ” in other

parts of KRS Chapter 61, most notably in the “ inviolable contract ” provision

codified at KRS 61.692. Subsection (1) of that statute states:

For members who begin participating in the Kentucky Employees

Retirement System prior to January 1, 2014, it is hereby declared

that in consideration of the contributions by the members and in

further consideration of benefits received by the state from the

member ’ s employment, KRS 61.510 to 61.705 shall constitute an

inviolable contract of the Commonwealth, and the benefits provided

therein shall not be subject to reduction or impairment by

alteration, amendment, or repealf.].

. .

(Emphasis added). The relationship between a member and KERS is clearly

and unequivocally identified as a contract, an “ inviolable contract ” at that. 18 In

18 Seven Counties begins its “ Summary of the Legal Principles Germane to this

matter by stating: “ State statutory law itself acknowledges the contractual nature of

16addition, contracts are referred to in several other provisions of KRS Chapter

61 including, for example, KRS 61.645(2)(d) which authorizes the Systems

board to “ contract for investment counseling, actuarial, auditing, medical, and

other professional or technical services ” and KRS 61.702(l)(a)l which requires

the board to “ arrange by appropriate contract ” for group hospital and medical

insurance for KERS participants. The absence of any reference to a contract or

even contract principles such as offer, acceptance and consideration in KRS

61.520 leads us to conclude that our General Assembly has dictated that

participation in KERS is only by virtue of the statutory mechanism outlined in

that statute, i.e., by executive order allowing such participation.

The only case from this Court that touches on the nature of the

relationship created when a department seeks designation pursuant to KRS

61.520 is Kentucky Region Eight v. Commonwealth, 507 S.W.2d 489 (Ky. 1974),

involving three CMHCs, then known as mental health-mental retardation

boards. The previously-noted executive order from Governor Edward T.

Breathitt provided that such boards “ are permitted to become and are

participating agencies in the [KERS]. ” Id. at 490. Three boards that did not

wish to participate in KERS brought suit seeking a determination that entry

into KERS was permissive not mandatory. Without reaching that issue, the

Court held that the boards could not be KERS-participating employers because

the relationship between KERS and Seven Counties, KRS 61.692

. . . ” This is patently

erroneous. KRS 61.692 does not address the employer ’ s relationship with KERS, only

the contractual relationship between KERS and a member.

17they did not qualify as “ departments ” as the term was then defined in KRS

61.510 ( “ ‘ any state department or board or agency ’ participating in the

system ” ). Id. The Governor ’ s executive order was insufficient to create a

relationship between the boards and KERS because the statutes alone

governed entry and participation. The 1974 General Assembly responded to

Region Eight by amending the definition of “ department ” to include entities

“ notwithstanding whether [they are] an integral part of state government ” and

by adding subsection (3) to KRS 61.520, quoted supra p. 12, ratifying expressly

the prior executive orders regarding “ mental health-mental retardation

board[s]. ” The Court scrutinized the Governor ’ s authority vis-a-vis KERS by

looking carefully at the provisions of KRS Chapter 61 and offered no suggestion

that the Governor had some broader “ contracting ” authority.

Resolution of the certified issue obviously turns on Kentucky law but we

note that in similar circumstances, courts in other states have looked first to

the statutes creating their retirement system. In New York State Employees ’

Ret. Sys. v. Bd. of Sup ’ rs, 283 N.Y.S. 405 N.Y. (Sup. Ct. 1935), affd, 296 N.Y.S.

286 N.Y. (App. Div. 1937), affd, 15 N.E.2d 434 N.Y. (1938), the New York

statute allowed county officers and employees to participate in the retirement

system upon adoption of a resolution by the county ’ s board of supervisors.

When Tioga County opted in but later sought to withdraw, the Supreme Court

(later affirmed on appeal by the Appellate Division and the New York Court of

Appeals) stated:

18But the relation between the state and the county here was not

created by contract. It was created by legislation. The State

Legislature created the Retirement System. Each county was permitted to say whether it would participate. When it elected

to do so, the legislation became effective as to it. True, certain

obligations grew out of its election, but these obligations were

not contractual.

283 N.Y.S. at 409. Similarly Seven Counties elected to participate in KERS and

pursued the route authorized by statute, KRS 61.520, creating a statutory

— not

contractual

— relationship with the attendant benefits and obligations.

By contrast, California allows municipalities to participate in its state

retirement system, California Public Employees Retirement System (CalPERS)

by contract. See In re City of Stockton, Cal. 526 B.R. 35, 40 n.5 (Bankr. E.D.

Cal 2015) ( “ In addition to acting as the pension system for employees of the

State of California, CalPERS contracts with California municipalities in

competition with other pension administrators to administer local pensions for

municipalities. ” ) Similarly, Pennsylvania statutes allow municipalities to

“ negotiate a contract ” with the retirement system board. 53 Pa. Cons. Stat. §

881.402 (2004). The Bankruptcy Court cited case law from these states as

recognizing a contractual relationship between the retirement system and a

participating employer, but that is true only because the controlling statute

expressly authorized contracts with certain employers. Kentucky statutes

contain no such authorization.

II. Neither the Facts Nor Kentucky Law Supports the Contract

Theory

Just as the statutes provide no support for the proposition that the

Seven Counties/KERS relationship was contractual, the controlling documents

19likewise give no indication whatsoever that in 1979 the parties intended to

enter into a contract or perceived themselves as creating contractual

obligations. As mentioned, the record does not contain any correspondence

from Seven Counties purportedly relevant to the “ contract formation ” theory

beyond a February 14, 1979 letter from Dr. Bracco, a letter written three weeks

after Governor Carroll ’ s executive order designating Seven Counties a

department for purposes of KERS. 19 The letter not only post-dates the

executive order, but simply contains two sentences about employee

participation and contribution levels, nothing about an impending or recently

concluded contract or any offer or acceptance. As for documentation on the

KERS side of the alleged contract, the record consists of (1) Attorney General

Opinion 78-685 issued October 4, 1978, recognizing Seven Counties ’ eligibility

to seek designation for KERS participation from the Governor via executive

order and (2) Executive Order 79-78 issued January 24, 1979, quoted in its

entirety supra, granting the request of the Seven Counties ’ Board of Directors

for an “ Executive Order

. . . that would bring Seven Counties

. . . into the

Kentucky Employes (sic) Retirement System. ” Again, the language used

provides no basis for concluding that anyone involved in 1979 thought a

contract was being formed. Seven Counties sought a designation recognized by

Kentucky statute as the means of entry into KERS, the Attorney General

19 The letter states in its entirely: “ Employees who work 100 hours per month or

more who have completed six months temporary status must participate in the

Kentucky Employees Retirement System. Employees contribute 4% of gross earnings

and Seven Counties Services contributes 774% of gross earnings. ”

20opined that Seven Counties was eligible for that designation and Governor

Carroll granted that designation by executive order, bringing Seven Counties

and its employees into the retirement system pursuant to KRS 61.520.

The contract analysis adopted by the Bankruptcy and District Courts

and advocated by Seven Counties disregards the controlling statutory language

regarding KERS participation and attributes to the contemporaneous

documents and interaction of the parties the characteristics of offer and

acceptance, weight they cannot bear. As all parties acknowledge, and the

federal courts have recognized, whether a contract exists between Seven

Counties and KERS is a matter of state law. See Butner v. United States, 440

U.S. 48, 54 (1979). The fundamental elements of a contract in Kentucky (as in

other jurisdictions) are “ offer and acceptance, full and complete terms, and

consideration. ’ ” Energy Home, Div. of S. Energy Homes, Inc. v. Peay, 406

S.W.3d 828 (Ky. 2013). Seven Counties articulates the alleged offer and

acceptance as follows:

In this matter, Seven Counties became a participant in KERS

through a voluntary arrangement that began with an inquiry

by Seven Counties into whether it was eligible to join KERS.

The State responded that Seven Counties was eligible. Seven

Counties then voluntarily informed KERS of its desire to

become a participant. This manifestation of intent constituted

an offer to provide ongoing payments (contributions) to KERS

in exchange for pension benefits that would accrue to Seven

Counties ’ employees. This offer was then accepted by KERS

when the Kentucky Governor issued an executive order

formally allowing Seven Counties to participate in KERS. The

Governor ’ s executive order did not alter or modify the terms of

Seven Counties ’ offer. Instead, the parties understood that the

terms were contained and described in the statutory and

regulatory framework that governs KERS and its participants.

21The “ voluntary arrangement ” identified allegedly became a contract (subject to

establishing contract terms and consideration) when Seven Counties ’ “ offer ” 20

was accepted by the Governor via executive order. This analysis, however,

runs pell-mell into the language of KRS 61.520 which, as discussed, reflects no

authority on the part of the Governor to contract for entry into KERS; his

authority is limited to designation at which point the statutory provisions

supply the terms of Seven Counties ’ and its employees ’ participation.

Even if the Governor had authority to contract, the “ full and complete

terms ” element is problematic. Seven Counties maintains that “ while the

parties signed a written ‘ offer ’ and a written ‘ acceptance, ’ in the form of Seven

Counties ’ letter requesting to join KERS and the Governor ’ s executive order

respectively, the other terms of their agreement are set forth in the relevant

statutes and regulations

. . . . ” In short, the contract analysis requires

converting state statutes and regulations regarding KERS into the terms of a

binding contract. That proposition is a bridge too far.

Although this Court has never had occasion to consider the

unmistakability doctrine, it is a natural corollary of our plain language

approach to statutory construction. The United States Court of Appeals for the

Sixth Circuit cogently articulated the doctrine in Puckett v. Lexington-Fayette

20 We note again that the record contains no document that can be construed

as an offer. The correspondence from Seven Counties to the Attorney General and

later the Governor ’ s office was never produced.

22Urban County Government, 833 F.3d 590, 600-01 (6th Cir. 2016), from which

we quote at length:

In order for a legislative enactment to be deemed a contract for

the purposes of the Contract Clause, there must be a clear

indication that the legislature intends to bind itself in a

contractual manner. See Nat ’ I R.R. Passenger Corp. v. Atchison

Topeka & Santa Fe Ry. Co., 470 U.S. 451, 465-66, 105 S.Ct.

1441, 84 L.Ed.2d 432 (1985) ( “ [A]bsent some clear indication

that the legislature intends to bind itself contractually, the

presumption is that ‘ a law is not intended to create private

contractual or vested rights but merely declares a policy to be

pursued until the legislature shall ordain otherwise. ” ’ (quoting

Dodge v. Bd. of Educ., 302 U.S. 74, 79, 58 S.Ct. 98, 82 L.Ed. 57

(1937)));

*******

The presumption that a law is not intended to create private

contractual rights is known as the “ unmistakability doctrine. ”

United States v. Winstar Corp., 518 U.S. 839, 871, 116 S.Ct.

2432, 135 L.Ed. 2d 964 (1996). In Winstar, the Supreme Court

explained that the purpose of the doctrine is to avoid

unnecessarily infringing on a state legislature ’ s ability to

legislate regarding state sovereign rights unless it is clear

beyond any doubt that the legislature meant to give up that

right. Id. at 873-76, 116 S.Ct. 2432.

*******

To determine whether a legislature intended to bind itself

contractually, courts examine both the language of the statute

itself and the circumstances surrounding its enactment or

amendment

— such as its apparent purpose, context, legislative

history, or any other pertinent evidence of actual intent. U. S.

Trust Co., 431 U.S. at 17-18 n.14, 97 S.Ct. 1505; see, e.g., Me.

Ass ’ n of

Retirees v. Bd. ofTrs. of Me. Pub. Ret. Sys., 758 F.3d

23, 29-30 (1st Cir. 2014). Our role, therefore, is to determine

whether the Act evinces a clear intent on the part of the

Kentucky legislature to create contractual rights against the

modification of a specific COLA formula. It is the burden of the

party asserting the contract to overcome the presumption that

a law is not intended to create private contractual or vested

23rights. Nat ’ l R.R. Passenger Corp., 470 U.S. at 466, 105 S.Ct.

1441.

Given our primary emphasis on discerning and implementing the intent of the

legislature, Maze, 559 S.W.3d at 363, and focus on the plain language of

statutes, Shawnee Telecom, 354 S.W.3d at 551, the unmistakability doctrine

fits naturally into our jurisprudence. If the General Assembly “ intends to bind

itself in a contractual manner, ” Puckett, 833 F.3d at 600, it must clearly say so

The only instance in KRS Chapter 61 where the legislature has clearly

indicated an intent to contract is KRS 61.692, quoted supra, where it explicitly

states that for members participating in KERS prior to January 1, 2014, “ KRS

61.510 to 61.705 shall constitute an inviolable contract of the

Commonwealth

. . . . ” (Emphasis added). Nothing about KRS 61.520 indicates

a clear intent to contract with participating employers nor do the statutes

governing an employer ’ s relationship with KERS and the Systems board ever

indicate such intent.

Seven Counties does not address the unmistakability doctrine but

suggests that it misses the point, positing that the issue is whether the parties ’

relationship is, contractual in nature, “ not whether any particular statute that

regulates that arrangement is itself a contract. ” In this manner, the focus is

changed from the initial argument that the statutes and regulations supply the

terms of the contract, to the proposition that they merely regulate the contract.

But, in fact, the contract theory relies on an offer from Seven Counties (not

contained in the record) and an executive order making a statutory designation

24for KERS participation as an “ acceptance ” of that offer creating a contract the

terms of which are set forth in the statutes. While Seven Counties likens the

situation to the Uniform Commercial Code, which inter alia statutorily

regulates contracts for the sale of goods and can supply some contract terms,

see KRS Chapter 355, here the statutes are offered up as the actual contract

itself, i.e., the terms of the contract between Seven Counties and KERS are in

the statute books and the administrative regulations. Our longstanding plain

language approach to statutory construction and the unmistakability doctrine

preclude that result. 21

Finally, the element of consideration is, at best, debatable. The

Bankruptcy Court concluded “ The parties voluntarily entered into a bargain

that seemed beneficial to each: [Seven Counties] could attract and retain

employees by offering them a KERS pension, and KERS could obtain

contributions that improved the actuarial position of the state pension fund as

a whole. ” 511 B.R. at 477. As KERS emphasizes, the Court cited no evidence

that KERS ’ s status improved actuarially as a result of Seven Counties ’

participation. While the employer and employee contributions were flowing in,

21 Further complicating the contract theory is the fact that all “ departments ”

enter KERS in an identical manner, via the designation process in KRS 61.520. If

Seven Counties had a contract with KERS then every other department would

arguably also have a contract. To the extent Seven Counties suggests that

departments of state government under control of the executive, legislative or judicial

branches fall in a different category, i.e., have a statutory arrangement, then the

provisions of KRS Chapter 61 are contract provisions for some but not for others, an

unsustainable result.

25KERS was also undertaking obligations to Seven Counties ’ employees so the

actuarial improvement assumption is not necessarily valid.

In any event, public retirement systems are actually trusts created by

statute. See R estatement (T hird ) of T

rusts

, §§ 4 and 10. 22 As one court has

observed, “ [t]he statutory provisions creating the Fund

. . . are, in effect, the

‘ terms of the trust. ” ’ Caruso v. N.Y. City Police Dept. Pension Funds, 72 N.Y.2d

568, 574 (1988). KRS 61.515(2) creates a “ Kentucky Employees Retirement

Fund ” and provides that “ [a]ll assets received in the fund shall be deemed trust

funds to be held and applied solely as provided in KRS 61.510 to 61.705. ” KRS

61.650 establishes the Systems board as “ trustee ” of KERS funds and imposes

fiduciary duties on the trustees and employees to act “ [s ] olely in the interest of

the members and beneficiaries. ” KRS 61.650(l)(a); (l)(c)l. By virtue of

Kentucky statutes, the right to participate in KERS was extended to entities

and organizations such as Seven Counties upon issuance of an appropriate

executive order and the monies subsequently sent to KERS by Seven Counties

were the contributions required of all employers participating in the retirement

system, not

consideration for a contract negotiated by Governor Carroll. 22 * * * 26

22 “ Some forms of trusts that are created by statute, especially public

retirement systems or pension funds,

. . . are administered as express trusts,

the terms of which are either set forth in the statute or are supplied by the

default rules of general trust law. ”

R estatement (T

hird ) O f T

rusts § 4, Comment (g).

“ Public retirement systems or pension funds are invariably created by

statute with no other trust instrument delineating the powers and duties of the

boards of trustees that administer them, or the rights of the members as

beneficiaries. ” Id. at § 10, Reporter ’ s Notes, Comment (b).

26III. The Payments to KERS Are Statutorily Mandated Assessments

The Bankruptcy Court also backed into its contract conclusion by

deciding that the payments from Seven Counties to KERS were not “ regulatory

fees, assessments, or taxation ” and therefore “ [t]o resolve the anomaly ” the

obligation “ must be contractual in nature. ” 511 B.R. at 475. KERS never

suggested that the employer contributions that Seven Counties made were in

fact taxes and, indeed, nothing remotely suggests that they were. In Klein v.

Flanery, 439 S.W.3d 107, 114 n.6 (Ky. 2014), we discussed the distinction

between taxes and “ particularized exactions ” :

In a broad sense, perhaps, any monetary exaction by a governmental entity could be thought a tax, but a “ tax ” in the

strict sense of monies levied to meet the general expenses of

government has been distinguished in a variety of contexts

from more particularized exactions, such as fines, user fees

— tolls, for example

— infrastructure assessments, or regulatory

fees, such as those at issue here. In making the distinction,

courts often sketch “ a spectrum with a paradigmatic tax at one

end and a paradigmatic [fine or] fee [or assessment] at the

other. ” San Juan Cellular Tel. Co. v. Pub. Serv. Comm'n of

Puerto Rico, 967 F.2d 683, 685 (1st. Cir. 1992) (citations

omitted). They then attempt to locate the exaction at issue

along the spectrum. The classic “ tax ” is “ imposed by a legislature upon many, or all, citizens. It raises money,

contributed to a general fund, and spent for the benefit of the

entire community

.... The classic ‘ regulatory fee ’ is imposed

by an agency upon those subject to its regulation

. . . . ”

This passage quickly illustrates that the monies remitted to KERS are neither

taxes nor regulatory fees, the latter being impossible because Seven Counties is

not regulated by KERS. 23 The monies are, however, “ particularized exactions ”

23 By contrast, Klein dealt with classic regulatory fees paid by building

contractors to the Kentucky Department of Housing, Buildings and Construction and

27that may properly be described as assessments (as KERS proposes) without

running afoul of any Kentucky law.

“ Assessment ” simply denotes “ imposition of something, such as a tax or

fine, according to an established rate. ” B lack ’ s L aw D ictionary (11th ed. 2019).

See, e.g., Scalise v. Sewell-Scheuermann, 566 S.W.3d 539 (Ky. 2018)

(addressing “ sanitation assessment ” imposed monthly per household by a

former fifth-class city). Although assessments are often associated with the

construction of sewers and storm water drainage, Long Run Baptist Ass ’ n v.

Louisville & Jefferson Co. Metro. Sewer Dist., 775 S.W.2d 520, 522-23 (Ky. App.

1989), nothing in Kentucky law dictates that an assessment must be exacted to

“ improve the general conditions of health and comfort, ” as suggested by the

Bankruptcy Court. 511 B.R. at 473-74. Seven Counties ’ payments to KERS

were statutorily-based assessments, but more precisely, they were “ employer

contributions ” to the KERS trust fund from which Seven Counties ’ employees

would receive their retirement benefits, with the contributions constituting

statutory obligations Seven Counties voluntarily assumed in order to obtain

those pension benefits.

In another form of reasoning backwards, Seven Counties posits that the

parties ’ relationship must be contractual because allowing Kentucky statutes

to “ compel ” Seven Counties ’ participation in KERS violates federal law.

the consolidated matter, Louisville Soccer Alliance, Inc. v. Beshear, dealt with fees paid

by non-profit organizations to the Department of Charitable Gaming. See 439 S.W.3d

at 109.

28Initially, we note that participation was not compelled but rather a voluntary

act in 1979, i.e., a request by Seven Counties to be designated by executive

order for participation in a statutorily-created pension system. As for ERISA

requirements, such as 29 U.S.C. § 1002(32), and the federal law consequences

to KERS from this answer to the certified question, those issues are beyond the

scope of this Opinion. More pertinently, those issues cannot dictate the nature

of the Seven Counties/KERS relationship which simply is what it is, both in

fact and in law.

CONCLUSION

The Kentucky General Assembly in unmistakable language identified the

relationship between KERS and its members as an “ inviolable contract. ” 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.

As for the contract theory, 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. Payments by an employer to KERS pursuant to

KRS Chapter 61 are essentially assessments, 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.

All sitting. All concur.

29COUNSEL FOR KENTUCKY EMPLOYEES

RETIREMENT SYSTEM AND BOARD OF

TRUSTEES OF KENTUCKY RETIREMENT

SYSTEMS:

Mark C. Blackwell

Katherine I. Rupinen

Joseph Patrick Bowman

KENTUCKY RETIREMENT SYSTEMS

Daniel R. Swetnam

Victoria E. Powers

Tyson A. Crist

ICE MILLER LLP

COUNSEL FOR SEVEN COUNTIES

SERVICES, INC.:

David Marcus Cantor

SEILLER WATERMAN LLC

Paul Joseph Hershberg

PAUL HERSHBERG LAW, PLLC

G. Eric Brunstad, Jr.

DECHERT LLP

COUNSEL FOR AMICUS CURIAE,

COMMUNITY CARE AND DEVELOPMENT

MANAGEMENT, INC.:

Douglas L. McSwain

Courtney Ross Samford

Thomas Travis

WYATT, TARRANT & COMBS, LLP

30COUNSEL FOR AMICUS CURIAE,

THE COMMONWEALTH OF KENTUCKY,

EX REL. MATTHEW G. BEVIN, GOVERNOR:

Mark Stephen Pitt

Stephen Chad Meredith

Matthew Kuhn

OFFICE OF THE GOVERNOR

COUNSEL FOR AMICUS CURIAE,

ROBERT STIVERS, PRESIDENT OF THE SENATE;

DAVID OSBORNE, SPEAKER PRO TEMPORE

OF THE HOUSE OF REPRESENTATIVES;

MORGAN MCGARVEY, SENATE MINORITY

FLOOR LEADER; AND ROCKY ADKINS, HOUSE

OF REPRESENTATIVES MINORITY FLOOR LEADER:

David E. Fleenor

General Counsel

OFFICE OF THE SENATE PRESIDENT

R. Vaughn Murphy

Deputy General Counsel

OFFICE OF THE SENATE PRESIDENT

Rebecca Rudd Barnes

OFFICE OF THE SENATE MINORITY FLOOR LEADER

Joanna Poole Decker

OFFICE OF THE HOUSE MINORITY FLOOR LEADER

Tyler Peavler

OFFICE OF THE SPEAKER OF THE HOUSE OF

REPRESENTATIVES

Deborah S. Hunt

Clerk of Court

UNITED STATES COURT OF APPEALS

SIXTH CIRCUIT

31