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LGC ordered to give back $50 million

Last modified: 8/17/2012 12:00:00 AM

The New Hampshire Local Government Center has been ordered to refund its member towns and school districts $50 million as a result of financial mismanagement that the hearing officer called an "insult" to the municipalities the nonprofit represents.

The state Bureau of Securities Regulation had accused the LGC of failing to return surplus funds from its pooled risk programs that provide local governmental bodies in New Hampshire with health and property insurance. The LGC said it was building up its reserves to protect against unforeseen disaster and argued state law does not specify how much surplus is too much.

The LGC "improperly accrued and retained unnecessary surplus funds, improperly transferred assets and improperly expended funds for purposes beyond those permitted" by state law, hearing officer Don Mitchell wrote in an 81-page order issued yesterday. As an example, he noted that after the LGC's board of directors voted in July 2002 to double its total surplus - referred to as "risk-based capital" - it later decided to increase that by $7.1 million in 2006.

The money was not needed, as the LGC's accounts were experiencing "obvious overflow," Mitchell wrote.

"Yet, its thirst was such that it was going to hold on to the additional $7.1 million . . . because from the chief financial officer's testimony it appears they were going to do something with the money without knowing specifically what amount they were going to spend, or when they were going to specifically spend it," Mitchell wrote. "The insult to the health trust program members here is that they very well could have used funds to improve any of their own buildings or improved their own technology systems or set it aside in their own respective lapsed fund accounts, as some eventually indicated that they did want funds returned."

Andru Volinsky, special counsel for the securities bureau, said yesterday in a statement that Mitchell's decision was "detailed and well-reasoned." On top of the $50 million the LGC is ordered to return to its members, Volinsky noted the state has previously negotiated $30 million in refunds from the state's other two risk pools, Primex and SchoolCare.

During the May hearings, former LGC executive director John Andrews testified that attempts by the nonprofit to compete with Primex resulted in some of the financial practices that came under investigation by the state. Andrews testified as part of a deal with prosecutors that excused him as an individual defendant in the case.

Mitchell said in his decision that the LGC participated in "numerous administrative practices" that may not directly violate state law but "reflect the irony common to the operation of the LGC, Inc. and its entities." He noted that an LGC consultant, explaining why the nonprofit felt it needed to reorganize in 2003 and maintain control over its pooled risk programs in the market against Primex, testified that "monopolies are scary things."

"Yet the LGC, Inc. makes decisions related to its own health pooled risk management programs that are monopolistic in design," Mitchell said. His order states that the LGC may no longer require municipalities participating in its risk pools to join and pay dues to another of its entities, the New Hampshire Municipal Association. Additionally, the LGC must reorganize its pooled risk programs within 90 days or forfeit its state tax exemption and its exemption from state insurance regulations.

Mitchell dismissed three charges brought by the state that accused the LGC of various violations of the New Hampshire Securities Act. He also dismissed individual charges against LGC Executive Director Maura Carroll and board member Peter Curro.

Mitchell found Carroll did not violate state law because she "did not have sufficient influence over the board that she inherited from her predecessor (Andrews) who may well have had sufficient influence as a result of holding the position for 34 years." And while Curro voted in favor of several policies that Mitchell found improper, Curro himself did not personally violate state law, Mitchell said.

A statement released yesterday by the LGC said the nonprofit was pleased with the dismissal of the individual and securities charges.

"We are, however, disappointed Hearing Officer Mitchell did not agree that our Board of Directors has discretion to make decisions in running the risk pools in an efficient manner and in setting prudent, conservative reserves," the statement said. "After hearing extensive testimony from actuaries and risk pool experts it is hard to understand how he could question the soundness of our Board's actions."

The LGC noted it has 30 days to file a request for reconsideration of Mitchell's decision.

"Following that decision, we have the right to file a Notice of Appeal with the New Hampshire Supreme Court, the next level in this dispute, should we choose to move this case to a court of law," according to the statement.

(Matthew Spolar can be reached at 369-3309 or mspolar@cmonitor.com or on Twitter @mattspolar.)'


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