CONCORD — The Local Government Center has to refund $50 million to cities and towns, according to ruling by a special hearings officer for the Secretary of State's Office.
The organization will also have to reorganize within 90 days or lose its non-profit status and pay the state insurance tax.
The LCG has been under fire for several years over its retained surplus money it claimed helped keep rates for its members stable, but critics claimed the money should have been returned to its members, which includes municipalities and school districts, and instead was used to start a workers compensation insurance program to compete with Primex, another risk pool operator.
Two weeks of administrative hearings were held in May, and on Thursday hearings officer Donald Mitchell issued his 81-page order.
Mitchell ruled that the organization violated state risk pool statutes in using surplus money from its health insurance program to institute a workers compensation insurance program and for other purposes.
Mitchell wrote the LGC, “improperly accrued and retained unnecessary surplus funds, improperly transferred assets and improperly expended funds for purposes beyond those permitted in the statute, and fail(ed) to return excess funds to political subdivisions which are members.”
He also ruled that state law governs the operations of its risk pools and the organization's board of directors may no longer solely determine operations and reserve levels.
The LGC took issue with Mitchell's finding that the board could not act with sole discretion. “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 group said in a statement.
Mitchell noted that the LGC doubled its surplus in 2002, and then in 2006 increased it by $7.1 million when it was not needed “The LGC, Inc. and its entities take an obvious position that the more capital, or net assets, an entity has the better for that entity.
“However, the purpose of the state is not to allow LGC, Inc. and its entities to acquire and retain unlimited millions of dollars in excessive earnings and surplus, building equity as a private for-profit corporation might,” 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.”
Mitchell noted that the LGC reorganization in 2003 essentially created a business conglomerate and not a non-profit organization serving its members.
He said the organization had a single board of directors that managed the different insurance pools instead of independent boards and bylaws for each pool as the statute requires.
“It does not matter whether it was through ignorance, poor counsel, poor consultant advice or design that the LGC, Inc. and its entities did what they did,” Mitchell wrote. “By abolishing each program's respective board and substituting the LGC, Inc. board of directors, the political subdivision members of each pooled risk management program were deprived of the governance previously maintained for their benefit.”
However, Mitchell did dismiss all counts accusing the LGC of violating state securities statutes and also dismissed allegations against Executive Director Maura Carroll and Board Member Peter Curro.
In its statement the LGC said “It will take some time to review the Order in detail, but we are pleased that three out of the five counts against the Local Government Center, all counts regarding the securities claims, were dismissed by the Hearing Officer.”
House Speaker William O'Brien, R-Mont Vernon, praise Mitchell's decision, saying it will benefit people who pay the state's property tax.
“This ruling is a significant victory for the hardworking property taxpayers across the state. By overcharging communities across New Hampshire for insurance products, LGC artificially increased tax rates for its member communities,” O'Brien said. “This ruling should mean a one-time tax rate reduction through this payment, as well as lower rates in the long term, as LGC brings the rates it charges its members more in line with actual costs.”
Senate Minority Leader Sylvia Larsen, D-Concord, also praised the decision, noting Democrats pushed to have the LGC return the surplus to cities and towns.
“I am pleased that property taxpayers will receive a welcome boost in the return of over $50 million in improperly retained funds,” Larsen said. “This represents an important step toward transparency and accountability and it is my hope that the LGC will fully comply with the order.”
Mitchell also ordered the LGC to no longer require member municipalities to join and pay dues to the New Hampshire Municipal Association. And he required the LGC to again purchase re-insurance for its risk pools, something the group stopped doing in 2010.
The LGC must pay the fees and costs of the litigation. Additional proceedings may be held if the parties do not agree on reasonable amounts. No fines were levied in the decision.
The LGC has 30 days to file a request for reconsideration of the decision and following the reconsideration decision the order can be appealed to the state Supreme Court. The LGC said it is exploring its options.
Investigators for the Bureau of Securities had said the LGC should refund about $100 million to the cities and towns in surplus funds in its health insurance pool, but the LGC claimed it returns surpluses to its members through lower premiums.
Earlier this year, two other insurance risk pool operators — Primex and SchoolCare — agreed to return $30 million to its members in settlements with the Bureau of Securities.