A CAUTIONARY TALE What can we learn about surplus from the New Hampshire Local Government Center situation? Jenny Emery March 11, 2014

The Pool Formerly Known as the New Hampshire Local Government Center

In 2003, Three Boards Took Action to Create One

The Statute: Since 1987 RSA 5–B :1 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.

Key Health Trust Facts in 2010 $392,000,000 in annual contributions 70,000 covered employees Net Assets of $87,000,000 “Target Surplus” RBC: 4.2 to 4.75 Amounts in excess of Target accounted for as “undesignated” in years 2003 to 2008 By 2010, undesignated depleted; “surplus” close to target

Nonprofit's reordering questioned By Shira Schoenberg Created 10/29/ :00 LGC reorganization may be illegal State Sen. Deborah Reynolds, … said the report raises questions about the proper use of taxpayer money and the generation of surpluses. "Since our current law clearly states that surpluses generated by the risk pools shall be returned to the taxpayers, I intend to work with the secretary of state to ensure that that happens," Reynolds said.

From 2011 LGC Fact Book The Pool Board’s Promise: Security and Stability

From 2011 LGC Fact Book The Members’ Perspective: We Like What we are Getting

THE SUPREME COURT OF NEW HAMPSHIRE Bureau of Securities Regulation No APPEAL OF THE LOCAL GOVERNMENT CENTER, INC. &.§:. Argued: November 14, 2013 Opinion Issued: January 10, 2014 Page 1: “The following facts are derived from the presiding officer's report or the certified record, or they are undisputed ” Decision of the New Hampshire Supreme Court

Member-Owned, Member-Governed, but So What? Page 3: 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…. Upon approval of the requested insurance coverage for the coverage year, the political subdivision is assigned a premium rate…..

Reliance of Actuarial Advice Still Found “Arbitrary” Page 8:“The presiding officer found …the board arbitrarily "set [the target] at RBC 4.2.” Additionally, the LGC board decided "to arbitrarily bump" the target RBC ratio "by an additional factor of approximately for future expenses." The presiding officer explained: …. the target RBC ratio was not a "pure RBC ratio," but was "an RBC ratio that would support [the board's] rationale for accumulating an excessive amount of assets."

The Regulator and LGC Both Argued for the Concept of Surplus: the Court Does Not Page 13: the … assumption - that RSA 5- B:5, I(c) confers upon the board of directors …unfettered discretion to determine the amount of funds such a program may retain. This assumption is mistaken…. a pooled risk management program may retain only those amounts that are "required for administration, claims, reserves, and purchase of excess insurance."

Legislative Action is Needed to Establish the Right to Hold Surplus, and then the Amount Page 17: The respondents contend that the presiding officer erred when he mandated that HealthTrust, in the future…maintain net assets equivalent to fifteen percent of claims or an RBC ratio of 3.0. We agree…..

“Best Practice,” and what the Members Prefer, Doesn’t Matter Page 16: The issue here is not whether [rate reduction] is a good way to run an insurance …. The issue is the plain language of the statute says that, if you have a surplus, it is supposed to go back to the political subdivisions.

The is no Mandate for Reinsurance, but Page 18: The respondents argue that because there is no statutory requirement that they purchase reinsurance, the presiding officer erred by requiring HealthTrust to purchase it. We agree. … any decision about reinsurance must be consistent with the mandate that HealthTrust return amounts in excess of its reserves

Recommendations State law should affirmatively allow Pooled “surplus” ▫Adopt and follow policy, including definitions If the authority to do what you are doing is ambiguous, develop a strategy to reduce the ambiguity Build relationships and educate beyond your membership.

A Cautionary Tale TO BE CONTINUED….