Local Government Center Owes $50 Million

Well it’s been awhile since I last posted a blog and of course the Final Order for the Bureau of Securities Regulation (BSR) case against the Local Government Center (LGC) is issued while I’m on vacation. It was in May when the case was heard, so it’s taken some time for the hearing officer Donald Mitchell, to come to a conclusion and issue his findings. 

I have read the Final Order, all 81 pages. While I’m not a lawyer and I can’t draw a conclusion as to the reasoning of the legalese, here’s what impresses me about Mitchell’s Final Order. I could understand it. It is written in plain English. The Order, the explanations, the references all make sense to me. You don’t need a degree in law or latin to understand what he is saying.

Throughout the hearing Mitchell would interrupt the testimony when it became mired in legalese mumbo jumbo. It seemed it was important to him, that during the hearings, they were understandable for all those impacted by the hearing. It appeared to me, that Mitchell didn’t allow the hearing to became a battle of lawyers’ egos. 

So for those of you who haven’t yet heard, the LGC must pay back $50 million and reorganize so that their Health Trust and Property Liability Trust each have separate by laws and boards of directors.

Despite the fact that Mitchell didn’t find sufficient evidence that the LGC violated the NH Securities Act and that he dismissed charges against Maura Carroll, the executive director and board member Peter Curro, I believe the actual finding is a huge blow for the LGC.

I stated in a previous post that I didn’t understand the complexities of the the Securities violations as charged by the BSR. Hearing officer Mitchell explains clearly why he came to the conclusion to dismiss the alleged Securities violations. Under something called the “Howey test” there are 4 elements to determine if a contract is a security. In order for a contract to be a security all 4 elements of the “Howey test” must be satisfied. 

Here’s what Mitchell writes: 

“....the four basic elements of the Howey test are: (1) the investment of money; (2) in a common enterprise; (3) with the expectation of profits; and (4) to come solely from the efforts of others. Since the Howey test requires a satisfaction of all four elements, if one element cannot be satisfied, the risk pool contracts are not deemed securities.

Reviewing the third element of Howey, “expectation of profits,” under the preponderance of the evidence offered at hearing the political subdivisions that enter into risk pool contracts do not do so with the expectation of profit. Rather, they enter into these contracts to acquire and use insurance products and insurance coverage,...”

I also stated in a previous blog that I felt the $17.1 million loan to the Workers Comp Trust would need to be repaid to the municipalities. It will be.

Mitchell also determined that according to RSA 5B that the LGC must use the following formula to determine surplus due its members: “...the statute’s formula for returns is straightforward, i.e. Earnings + Surplus – (costs of administration + costs of claims + reserves + cost of reinsurance) = Amount returned to member political subdivisions.”

Mitchell determined that the 24% of claims held by the Health Trust Risk Pool was excessive and that in the future no more then 15% of claims can be held as surplus, without first conferring with and receiving permission from the BSR.

Of the $86.7 million held $33.2 must be returned by September 1, 2013.

The Health Trust must carry reinsurance as required under state law.

Another $3.1 million from the Property and Liability Trust must also be returned.

When the LGC reorganized in 2002 they did not compensate the Health and Property Liability Risk Pools for their investments in LGC Real Estate, Inc. They will now.

The LGC can’t force members of their risk pools to join the New Hampshire Municipal Association as a condition to participate in a risk pool.

And the LGC is responsible for the full costs of the hearing.

To read the Full Order go to:  http://www.sos.nh.gov/LOCGOVCTR/Filings/0237-2012-08-16_FINAL_ORDER.pdf

If you just want to read the Order, what the LGC is on the hook for, go to page 73 of the Full Order.

The irony of it (stealing a line from Mitchell’s report) is that John Andrews, the former executive director of the LGC for 32 years, wrote RSA 5B (with the exception of RSA 5-B:4-a), the statute that defines, organizes and regulates Pooled Risk Management Programs.

So what next. The LGC can ask for a reconsideration from the hearing officer and they can appeal to the NH Supreme Court. Should they? I don’t know.  The issues of repayment of surplus I think are settled. The LGC screwed up. 

Issues surrounding the reorganization, again I’m not a lawyer, but there is a certain amount of ambiguity in RSA 5B.

What would  I do? I think I’d swallow a big piece of humble pie and remind myself and my organization that as it is stated in RSA 5B:1 Purpose - “The purpose of this chapter is to provide for the establishment of pooled risk management programs and to affirm the status of such programs established for the benefit of political subdivisions of the state.”

It’s important to remember who you are working for. Let’s hope that the Local Government Center remembers this as they move forward.