State's Mental Health System Has Experienced Severe Funding Shortfalls

Discussion of the news that Seven Counties Services, a community mental health center in Louisville, plans to file for bankruptcy should include a look at the chronic lack of state funding for behavioral health over the last couple decades. The state's community mental health centers have been hit by a combination of state General Fund budget cuts, frozen Medicaid reimbursements and the underfunding of pension liabilities.

In 1966, Kentucky passed legislation to implement President John F. Kennedy's Community Mental Health Act. The state established local centers that provide treatment and recovery services for people struggling with mental illness and substance abuse and those with developmental and intellectual disabilities. The system serves 179,000 Kentuckians—or one in every 25 residents.

The centers rely heavily on state and federal dollars and have been deeply underfunded in recent years. Funding from the Department of Behavioral Health, one major source of support, goes primarily to provide services for low-income Kentuckians who cannot afford them. That stream of funding has not increased in 14 years, and thus has failed to keep up with inflation or the growth in demand for services—which has been especially high due to the bad economy.

A second critical source of funding is Medicaid. The Medicaid rates paid to community mental health centers have been frozen since 2001 based on 1999 cost estimates. On top of that, the state’s move to managed care in the Medicaid program—made in order to save money in the state budget—has increased administrative costs for the centers and resulted in lower revenues.

In addition to cuts and freezes, state funding is just low. In 2001, a state commission recommended that funding for the centers be increased by $25 million a year over 10 years so Kentucky could reach the national average in mental health funding, but the recommendation was never implemented. In its most recent report card, Kentucky was one of six states to receive a grade of "F" from the National Alliance on Mental Illness for its poor funding of behavioral health services. The state ranks 45th in per capita mental health services expenditures.

Also, mental health centers have gotten caught up in the state’s underfunding of its pension system in recent years. When the state didn’t make its full required payments to employees’ retirement in order to balance the budget with meager revenues, it only required that community mental health centers make the same partial payments. Lost investment returns resulting from the partially funded retirement system have compounded the liability.

The deep funding challenge in the state’s mental health system is another reason the revenue bill just passed by the General Assembly is sorely inadequate. That bill only generates $31.7 million in net new state funds, while the latest estimate of the additional dollars needed to make the full pension contribution totals $253 million.* A good portion of that extra needed money comes from quasi-public agencies—like the community mental health centers—that rely heavily on state dollars.

The story of Seven Counties and its pension funding challenge must trace the symptoms back to their source: Kentucky’s inadequate revenue and continued unwillingness to act on needed tax reform.

For more on Kentucky’s behavioral health funding challenges, read Dr. Sheila Schuster’s memo to fellow members of the Governor’s Blue Ribbon Commission on Tax Reform and this story in the Louisville Courier-Journal.