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The Local Government Center may have violated state law by reorganizing improperly and by failing to return surplus money from its insurance programs to cities and towns, the Bureau of Securities Regulation wrote in a report released yesterday.
The Local Government Center defended its actions but pledged to work with the Securities Bureau and the Legislature to address any concerns.
"It's never been our intent to skirt the statute," said LGC Executive Director Maura Carroll.
David Lang, president of the Professional Fire Fighters of New Hampshire, which has been battling the LGC in court over the same issues, called for the resignation of the LGC's top officials.
"We are proud to be vindicated and pleased that we are winning this fight; however, we are disappointed and saddened by the misuse of taxpayer money and more importantly their trust," Lang said. "I call on the chair of the LGC board and its executive director to resign immediately. I'm also calling on any public official or employee who knew what was going on and remained silent to resign."
CONCORD — The non profit Local Government Center, formed as a municipal insurance pool to purchase health insurance for public employees, “may not be returning surplus funds to cities and towns as required under state law,” according to a report released Thursday by the Secretary of State's Bureau of Securities Regulation.
The LGC also formed “shell companies” which remain under investigation and spent member contributions on “on a range of items from caterers and hotels to entertainment and charitable contributions,” according to the state findings.
A review of 130 pages of LGC expenditures for 2006 reveals the LGC spent: thousands of dollars of member funds to hire First Impressions Caterer on multiple occasions, $500 for the Mountain Club at Loon, $1,250 at the 100 Club in Portsmouth, $1,083 at the Holiday Inn on the Bay, $1.6 million to Local Government Real Estate, $777 to the United Way of Merrimack County, $200 to North Shore Comedy, $2,760 to Weight Watchers, $156.85 to Big Easy Bagels, $205 to Washington Street Cafe, $1,070 to the Galley Hatch Conference Center, $646 to the Wayfarer Inn, $250 to Aunti Henrietta's Comedy, $1,050 to Gunstock Inn, $12,574 to Gunstock Area, $675 to the Woodstock Inn & Resort, $7,639 to the Red Jacket Mountain View Resort, $582 to the Washington Street Cafe, $12,438 to the Attitash Grand Summit Hotel, $1,500 to the Hilton Garden Inn, $4,870 to the Mountain Club on Loon and $68,628 to the Radisson Hotel in Manchester, among other expenses.
“Similar expenditures” are found for 2007 and 2008, the Bureau found.
The report is described as interim and part of “an ongoing investigation” of the LGC and the insurance pools it operates for New Hampshire municipalities. According to the state, the investigation began to address concerns about funds spent for non health-related purposes and complaints that surplus funds should be returned to communities, but ballooned as the investigation progressed.
Commingling of funds makes it “difficult if not impossible for there to be a meaningful accounting,” the state found.
Further, the LGC can't account for time spent by its staff or the use of equipment as it pertains to health pool matters, or other work related to the corporate parent company. LGC also improperly used member contributions to fund a workers' compensation program which forces retirees to subsidize a program they're ineligible to use, the state found.
On Wednesday the LGC announced it would suspend the practice of funding the workers’ comp program with member contributions and has reduced staff and administrative costs.
The investigation reveals the LGC formed four New Hampshire limited liability corporations and two Delaware LLCs and through a series of transactions conducted mergers based on false statements. The mergers were created with handwritten notes by unknown sources, the state finds.
Calling the companies “shells,” the Bureau reports that for a period of time, two health pools did not exist as legal entities because New Hampshire law doesn't allow merging nonprofits with LLCs, according to Thursday's report.
The Bureau also found “there is a question whether the pools are properly governed” by law because one board oversees all aspects of LGC operations. Further, it found, there are no bylaws overseeing the LGC's LLCs, as required by law.
State investigators found the LGC used one third of its surplus funds as a credit in its rating formula and kept the balance. It notes state law requires the LGC to return all surplus to contributing communities and questions whether the standard used by the LGC to determine how much surplus it should keep is proper.
The Bureau received a complaint in 2009 alleging the LGC's HealthTrust program used member funds for “purposes unrelated to the provision of health benefits and that surplus money has not been returned to members as required by law,” according to the report.
The Bureau says the LGC initially refused to provide information and sued alleging the state did not have the authority to investigate. That claim was overturned by a superior court opinion and the state legislature, according to the Bureau.
The report concludes that a 2003 reorganization of the LGC “may not have followed the law” by forming “a series of businesses.... flowing from New Hampshire to Delaware and back to New Hampshire involving the creation of shell companies.”
“These activities raise serious issues and have serious repercussions,” according to Bureau attorney and report author Earle Wingate, who added that the legal status of those entities remains in question “and must be resolved.”
“The cities and towns of New Hampshire have too much at stake.”
The Bureau reports it is retaining actuarial services to determine how much should be banked by the LGC in a reserve fund and is required to make a recommendation to the state by Jan. 1 “regarding suitable reserve levels.”
David Lang, president of the Professional Fire Fighters Association, brought the controversy to light through a series of Right To Know requests that went to the state Supreme Court. He's alleged the LGC “amassed over $132 million in net assets,” while spending $3.6 million to build and expand the LGC's Concord office and $10 million to fund the LGC workers' compensation pool.
Portsmouth is the largest contributor to the LGC and its human resources director, Dianna Fogarty, is on the LGC board.
On Thursday, Lang called for the resignation of LGC executives and “anyone else that knew what was going on and said nothing.”
“This is not going to take a vacuum or a broom. What needs to occur is a good old fashioned New Hampshire Yankee housecleaning at the LGC,” he said. “Our concern about the fundamental structure, mission and mysterious business and lobbying efforts of the LGC is validated today by the statements of the secretary of state’s office.”
Maura Carroll, LGC’s executive director, told the Herald the resort and entertainment expenses are legitimate, but she was not allowed to explain them to the Bureau. She said part of the LGC’s operations include hosting conferences and seminars, that attendees are fed and expect to be entertained “after two days of work sessions.” She said some of the costs are recovered and she looks forward to providing the Secretary of State with details.
She also issued the following statement:
“We will be spending some time in the days ahead reviewing the report and will offer a more detailed response soon. We appreciate that many of the legal and accounting issues surrounding large risk pools can be complex, and we look forward to responding and working with the Secretary of State’s office to address its questions. To date, the Local Government Center has not had the opportunity to do so; therefore, it is understandable that an interim report might have as many questions as this one does. We are encouraged that, in the next stage of this review, the state regulators will be seeking the expertise of an independent actuary to undertake a more complete review of issues related to the Local Government Center’s risk pools.”