Appeal of the Local Government Center, Inc. & a . (New Hampshire Bureau of Securities Regulation)
Argued: November 14, 2013.
[Copyrighted Material Omitted]
Bureau of Securities Regulation.
Ann M. Rice, deputy attorney general ( Suzanne M. Gorman, senior assistant attorney general, on the brief), and Bernstein, Shur, Sawyer, & Nelson, P.A., of Manchester ( Andru H. Volinsky, Roy W. Tilsley, Jr., and Christopher G. Aslin on the brief, and Mr. Volinsky orally), for the petitioner.
Preti Flaherty, PLLP, of Concord ( William C. Saturley and Brian M. Quirk on the brief, and Mr. Saturley orally), David I. Frydman, of Concord, on the brief, and Ramsdell Law Firm, PLLC, of Concord ( Michael D. Ramsdell on the brief), for the respondents.
Howard & Ruoff, P.L.L.C., of Manchester ( Mark E. Howard on the brief), for Harold J. Pumford, as amicus curiae.
LYNN, J. DALIANIS, C.J., and HICKS and CONBOY, JJ., concurred.
The respondents, The Local Government Center, Inc. (LGC), Local Government Center Real Estate, Inc., Local Government Center Health Trust, LLC, Local Government Center Property-Liability Trust, LLC, Health Trust, Inc., New Hampshire Municipal Association Property-Liability Trust, Inc., LGC-HT, LLC,
and Local Government Center [165 N.H. 794] Workers' Compensation Trust, LLC, appeal a final order of a presiding officer of the petitioner, the New Hampshire Bureau of Securities Regulation (Bureau), finding that they violated RSA 5-B:5, I(c) (2013) and requiring, among other things, HealthTrust to return $33.2 million to its members, P-L Trust to return $3.1 million to its members, and P-L Trust to transfer $17.1 million to HealthTrust. We affirm in part, vacate in part, and remand.
A. LGC and Related Entities
The following facts are derived from the presiding officer's report or the certified record, or they are undisputed. LGC is the successor to the New Hampshire Municipal Association, Inc. (NHMA), which was a non-profit New Hampshire corporation that provided lobbying, legal counsel and training for its members (comprised of various municipalities) and administrative support to certain affiliated associations. HealthTrust is the successor to NHMA Health Insurance Trust, which NHMA created in 1985, and P-L Trust is the successor to NHMA Property Liability Trust, which NHMA created in 1986. Workers' Compensation Trust is the successor to a similar program created by NHMA. When it was first established, it was " housed" in NHMA Property Liability Trust. It became a separate trust in 2000.
HealthTrust, P-L Trust, and Workers' Compensation Trust are pooled risk management programs. See RSA ch. 5-B (2013). HealthTrust is the largest pooled risk management program operated by LGC. As of December 31, 2010, HealthTrust had revenues of $392,244,000, P-L Trust had revenues of $10,254,000, and Workers' Compensation Trust had revenues of $6,517,000. According to the respondents, HealthTrust provides health insurance benefits to " more than 70,000 individual public employees, their dependents, and retirees, with 36 medical plans and 25 prescription drug plans. HealthTrust handles approximately $360 million in claims each year." According to the respondents, P-L Trust provides property liability insurance that " covers over 4,000 buildings and their contents with a value [165 N.H. 795] of nearly four billion dollars in its Property-Liability risk pool, and also covers 26,000 public employees in its Workers' Compensation risk pool."
Pooled risk management programs are alternatives to traditional, single employer insurance programs. A pooled risk management program allows political subdivisions such as cities, counties, and school districts, to combine or " pool" so that they are considered as one customer for purposes of insurance coverage and risk management. As the presiding officer found, " The steps involved in the acquisition of insurance coverage by a political subdivision from, for instance, ... [H]ealth [T]rust[,] would appear quite basic." Political subdivisions apply to be members of a pooled risk management program. Information about the group of individuals to be insured is then submitted for evaluation and rating. Upon approval of the requested
insurance coverage for the coverage year, the political subdivision is assigned a premium rate and assigned to either a January or a July pool of program members, depending upon the political subdivision's fiscal year or requested coverage year. LGC then collects the premiums, and a third party administrator, such as Anthem Blue Cross/Blue Shield, handles any claims.
Generally, HealthTrust, P-L Trust, and Workers' Compensation Trust operate similarly to a mutual insurance company with the net assets of each program considered the property of its respective members. Earnings and surplus of each trust are determined annually at the end of the coverage year by subtracting certain expenditures from the program's total revenue (consisting of income from investments and combined premiums paid by the program's members). The year-end statements for years 2008 through 2010 report that HealthTrust had net assets of $92,687,000 in 2008, $79,481,000 in 2009, and $86,782,000 in 2010. P-L Trust had net assets of $10,093,000 in 2008, $10,838,000 in 2009, and $10,225,000 in 2010. The Workers' Compensation Trust had net assets of $829,000 in 2008, a negative net asset level expressed as ($992,000) in 2009, and net assets of $177,000 in 2010.
Until 2003, HealthTrust, P-L Trust, and Workers' Compensation Trust operated as organizations separate from each other and from LGC. Each organization -- HealthTrust, P-L Trust, Workers' Compensation Trust, and LGC -- had its own corporate by-laws and its own board of directors. In addition, the members of each organization were not identical; thus, for example, a political subdivision that was a member of HealthTrust was not necessarily also a member of P-L Trust. In 2003, LGC took control of the assets of HealthTrust, P-L Trust, and Workers' Compensation Trust. [165 N.H. 796] Sometime thereafter, LGC eliminated the separate boards that previously had governed those entities. After 2003, a single board of directors governed LGC, HealthTrust, P-L Trust, and Workers' Compensation Trust. See Prof'l Firefighters of N.H. v. Local Gov't Ctr., 159 N.H. 699, 701, 992 A.2d 582 (2010). In effect, after the 2003 reorganization, LGC became the " parent" to its " subsidiaries," HealthTrust, P-L Trust, and Workers' Compensation Trust. See id. In 2007, LGC merged Workers' Compensation Trust with P-L Trust.
Historically, Workers' Compensation Trust has collected insufficient insurance premiums to cover its costs. To remedy this problem, beginning with the 2003 reorganization, LGC transferred funds from HealthTrust and P-L Trust to Workers' Compensation Trust. Between 2003 and 2010, LGC transferred approximately $18.3 million from HealthTrust to Workers' Compensation Trust. After the Bureau investigated this practice, the LGC board voted to execute a promissory note for approximately $17.1 million payable to HealthTrust, although the board made the note interest-free.
B. RSA chapter 5-B
Until the legislature enacted RSA chapter 5-B in 1987, there were no specific laws addressing pooled risk management programs operated by non-profit organizations. The stated purpose of RSA chapter 5-B " 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." RSA 5-B:1. In its
declaration of purpose, the legislature stated that " pooled risk management is an essential government function" that provides " focused public sector loss prevention programs, accrual of interest and dividend earnings which may be returned to the public benefit and establishment of costs predicated solely on the actual experience of political subdivisions in the state." Id. Pursuant to RSA chapter 5-B, " pooled risk management programs which meet the standards established" by that chapter are " not subject to insurance regulation and taxation by the state." Id.; see RSA 5-B:6.
From its inception, RSA chapter 5-B has required pooled risk management programs to file certain information with the secretary of state's office. RSA 5-B:4. However, it was not until 2010 that the legislature vested that office with the authority to enforce RSA chapter 5-B by bringing administrative actions and imposing penalties for violations of its provisions. See Laws 2010, 149:3 (codified as RSA 5-B:4-a). RSA 5-B:5, I, sets forth the following standards that pooled risk management programs must meet to comply with RSA chapter 5-B:
Each pooled risk management program shall meet the following standards of organization and operation. Each program shall:
[165 N.H. 797] (a) Exist as a legal entity organized under New Hampshire law.
(b) Be governed by a board the majority of which is composed of elected or appointed public officials, officers, or employees. Board members shall not receive compensation but may be reimbursed for mileage and other reasonable expenses.
(c) Return all earnings and surplus in excess of any amounts required for administration, claims, reserves, and purchase of excess insurance to the participating political subdivisions.
(d) Provide for an annual audit of financial transactions by an independent certified public accountant. The audit shall be filed with the department and distributed to participants of each pooled risk management program.
(e) Be governed by written bylaws which shall detail the terms of eligibility for participation by political subdivisions, the governance of the program and other matters necessary to the program's operation. Bylaws and any subsequent amendments shall be filed with the department.
(f) Provide for an annual actuarial evaluation of the pooled risk management program. The evaluation shall assess the adequacy of contributions required to fund any such program and the reserves necessary to be maintained to meet expenses of all incurred and incurred but not reported claims and other projected needs of the plan. The annual actuarial evaluation shall be performed by a member of the American Academy of Actuaries qualified in the coverage area being evaluated, shall be filed with the department, and shall be distributed to participants of each pooled risk management program.
(g) Provide notice to all participants of and conduct 2 public hearings for the purpose of advising of potential rate increases, the reasons for projected rate increases, and to solicit comments from members regarding the return of surplus, at least 10 days prior to rate setting for each calendar year.
C. Procedural History
The underlying matter arises from a petition submitted and later amended by Bureau staff alleging that the respondents
violated both RSA chapter 5-B and RSA chapter 421-B. On September 2, 2011, the secretary of state issued an order commencing an adjudicative proceeding and appointed a presiding officer for that proceeding. See RSA 421-B:26-a, V [165 N.H. 798] (2006). From September 2, 2011, through April 30, 2012, the presiding officer issued approximately fifty prehearing and preliminary orders addressing various topics. The final evidentiary hearing was conducted from April 30, 2012, to May 11, 2012. The presiding officer issued an eighty-one page narrative order on August 16, 2012. Because the presiding officer dismissed the claims under RSA chapter 421-B, those claims are not at issue in this appeal. Although the respondents were found to have violated three provisions of RSA 5-B:5, I, see RSA 5-B:5, I(b), (c), (e), they have appealed only the finding that they failed to return " all earnings and surplus in excess of any amounts required for administration, ...