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Little trust between LGC, state regulators as legal battle heads to high court

The Local Government Center and state regulators have been facing off for years, with legal bills estimated at more than $2.5 million and rising as they spar over the legality of the Concord-based insurance provider’s business practices and corporate structure.

The fight is headed to the New Hampshire Supreme Court, which in a Nov. 13 order said the case “appears to be eligible for mediation.” But officials with the Bureau of Securities Regulation said last week that they simply don’t trust the LGC after several fruitless attempts to negotiate a settlement.

Earle Wingate III, a bureau staff attorney, said he sat down with LGC lawyers for four months of talks before discovering, in April 2011, that the group was seeking legislation at the State House that “would have eliminated, entirely, the investigation that I was doing,” legalizing its past actions.

“After I took the knife out of my back, I realized that this was not an organization with whom you could discuss things,” Wingate said Wednesday during an interview with the Monitor’s editorial board.

For its part, the LGC said it welcomes mediation. The group’s leaders said they don’t know why the securities bureau, which is part of the secretary of state’s office, seems so intent on taking the LGC to the woodshed.

“The frustration that I have with this whole process is, it’s been drawn out over a two-year period, and it feels like the secretary of state’s office has this single-minded desire to make LGC and its associated trusts to be ruined. . . . I just can’t understand why a state agency is hell-bent on causing so much damage to a really great organization,” said Shelagh Connelly, a Holderness selectwoman and a member of the LGC’s board of directors.

Did LGC comply?

The tax-exempt LGC operates risk pools that provide local governments in New Hampshire with medical, property, workers’ compensation and other insurance. The Bureau of Securities Regulation began a formal investigation in 2009, when legislation gave the agency new powers; previously, the LGC had been only lightly regulated, said Andru Volinsky, special counsel to the bureau.

The bureau accused the group of wrongdoing including an illegal corporate reorganization, the improper use of money from its health insurance program to subsidize its workers’ compensation business, and improperly retaining surplus money that should have been refunded to member towns, school districts and other political subdivisions.

After an administrative hearing, a hearing officer in August ordered the LGC to return $52 million to its members and change its operating practices, including its organizational structure.

The Supreme Court last month agreed to hear the LGC’s appeal of the administrative order but declined to stay the order, meaning the LGC was required to implement its provisions.

The LGC’s board met Nov. 20 and voted to make a number of changes, including setting up separate boards for its two risk pools. It also dropped a requirement that local governments purchase membership in the New Hampshire Municipal Association in order to have LGC-run insurance and agreed to purchase reinsurance for its health insurance pool.

That latter move will cost the LGC more than $5 million over the next year, Executive Director Maura Carroll wrote in a Nov. 20 message to members – a figure disputed by state officials and LGC critics like David Lang, president of the Professional Fire Fighters of New Hampshire, which for years battled to gain access to the group’s financial records.

But Volinsky said officials are far from convinced that the LGC’s actions on Nov. 20 actually complied with the August order.

“We are examining whether it complies with the letter of the order,” Volinsky said. “We are confident that it does not comply with the spirit.”

The point, Volinsky said, was to separate the operations of the LGC’s two risk pools. The LGC board created separate boards for each pool, but both boards are made up of LGC board members.

The way it’s set up leaves in place the same basic structure of control and fiduciary responsibility, “just with different labels,” said Adrian Larochelle, a bureau attorney.

Volinsky said the bureau is exploring whether to take action now on that front, or wait until the Supreme Court rules on the August order. Going to court to enforce the order while it’s still under appeal could get “messy,” he said.

The LGC disputes that it did anything other than comply with the August order. David Frydman, the LGC’s general counsel, said the new boards for the two risk pools don’t overlap at all and have direct operational control of their respective risk pools.

Even though those boards are made up of LGC board members, he said, “the LGC board has no control, authority or governance over the risk pools. . . . All the dealings are arms-length at this point.” And in future years, he said, the members of each pool will elect board members.

“I believe that it not only complies with the . . . letter of the order, but the spirit of the order,” Frydman said.

Surplus dispute

State regulators are also unhappy with the LGC’s announcement, back in October, that it would return $22.5 million in surplus money to its members in the form of a “contribution holiday,” a credit against members’ bills over a period of several years.

Volinsky said that essentially forces member towns, cities, school districts and other political subdivisions to remain members of their LGC pools in order to get the money that they are owed.

He said he believes the surplus number should be higher, and “shouldn’t have the handcuffs.”

But he wasn’t ready to say last week that the bureau would be taking action against the LGC on that front. That question, Volinsky said, is not yet determined.

LGC officials defended the contribution-holiday method. For one thing, Frydman said, it’s the same method of returning surplus that the bureau required two other risk-pool operators, Primex and SchoolCare, to implement when those organizations signed settlements with the state.

“That methodology was taken directly from the Primex and SchoolCare agreements that they had with the BSR,” he said.

And Connelly, the Holderness selectwoman and LGC board member, said getting a big lump-sum return isn’t what members want. Instead, she said, members have said they prefer rate stabilization, as provided by the contribution holiday.

“Getting a check back is a nightmare for the accounting side of municipalities. . . . That’s not what our members are asking for, and it really flies in the face of what municipalities have been saying to us,” she said.

‘They need to comply’

Connelly and other LGC officials said they’re eager to reach some sort of agreement with the bureau so they can move on from the years-long battle. For one thing, she said, taxpayers are footing the bill for lawyers on both sides of the dispute; Wingate last week estimated the total at more than $2.5 million, including the LGC’s estimate of $1.9 million for its own costs.

“I’d really like to see mediation and see this thing settled, so we can get back to the good work we need to do with our members,” Connelly said.

Volinsky said he’s not optimistic about mediation, given what he and other state lawyers described as bad experiences with LGC officials.

“We’ve made a number of good-faith efforts,” he said. “Right now they need to comply with the existing order.”

He said he expects a ruling from the Supreme Court on the August order sometime next summer, after oral arguments in the spring.

In the end, Volinsky said, state regulators hope to get LGC board members more involved in actively managing the organization, and perhaps see something on the model of the 2002 Sarbanes-Oxley Act, a federal law that required independent outside audits and greater oversight by corporate boards.

And they want more transparency. After all, he said, the LGC manages roughly $500 million across its two risk pools, and local taxpayers have a lot at stake when the group decides how much to hold in reserve and how much to refund to its members.

“This is why it’s important: Every dollar that’s held in net assets only got there because it was a premium dollar, and every premium dollar came from taxpayer revenue,” Volinsky said, save that “maybe 10 percent comes from employees, with co-pays.”

(Ben Leubsdorf can be reached at 369-3307 or bleubsdorf@cmonitor.com or on Twitter @BenLeubsdorf.)

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