Missouri audit blasts state-sponsored insurer

2012-02-28T00:05:00Z 2012-04-16T18:45:05Z Missouri audit blasts state-sponsored insurerBY VIRGINIA YOUNG • vyoung@post-dispatch.com > 573-635-6178 AND JIM DOYLE • jdoyle@post-dispatch.com > 314-340-8372 stltoday.com
February 28, 2012 12:05 am  • 

JEFFERSON CITY • A state-sponsored workers’ compensation company has given out huge severance checks to former executives and hefty bonuses to other employees, according to a state audit released today.

The company, Columbia-based Missouri Employers Mutual Insurance Co., also has bankrolled lavish business jaunts to Hawaii and Mexico, along with sports tickets and suites for its board members, executives, employees and guests, the auditor found.

The audit paints a picture of a firm that operates like a private entity, while enjoying federal tax-exempt status and other advantages that its private competitors lack. In an afternoon news conference, Missouri state auditor Tom Schweich likened the company's unique advantages to "having your cake and eating it, too."

As an “independent public corporation,” the insurer has avoided about $50 million in federal taxes since 1993, the audit revealed. That tax exemption has enabled the company to accumulate a surplus of $163 million and the state's largest market share, 16 percent. The firm has never paid any dividends to its members.

The entity “compensates officers and employees at rates that are in excess of public sector entities, incurs expenses that are not considered acceptable in the public sector, and does so without complying with state open records laws,” the audit states.

Schweich undertook the audit after the Post-Dispatch raised questions last year about MEM’s public records policy and the legal status of its board members, along with its executive compensation and other expenditures. The auditor concluded that MEM is a “quasi-public governmental body for purposes of the Sunshine Law,” and thus subject to public records requests.

Schweich said he will present his audit Wednesday to a Senate committee chaired by Sen. Jim Lembke, R-Lemay, who held a hearing on the state-created insurer last year. Lembke has introduced legislation that would require the insurer to sever its close ties to state government, which could threaten the company's nonprofit status and its lucrative tax breaks.

In a formal response filed with the audit, the company said: “The auditor’s report raises some immaterial, questionable expenditures that MEM already had identified and addressed prior to the audit. MEM’s new management has strengthened governmental policies to be sure that expense policies are clearly understood and followed and that the company follows best practices.”

In a news release, the company challenged the state auditor’s conclusion that it must comply with the Sunshine Law. As for its large surplus, the company might issue dividends or lower premiums “when financially appropriate.”

The audit is likely to raise additional questions in the Legislature about whether Missouri Employers Mutual should continue to enjoy tax-free status. Originally, the company was supposed to become a private firm after the governor appointed the original five board members. But instead, the state has retained control. The governor appoints three of the firms’ five board members, based on nominations from the board and policyholders.

The Legislature established Missouri Employers Mutual in 1993 to encourage competition and lower workers’ compensation premiums for employers, particularly small businesses. The state provided a start-up loan of $5 million, which was repaid in 1999 with interest.

The firm’s inner workings drew questions last spring after two former board members were indicted separately for alleged theft and fraud involving other organizations. Questions mounted in June when the company forced out its chief executive officer, former Missouri Gov. Roger Wilson, without explanation.

In August, the board agreed to a one-time audit by Schweich. Amid swirling controversy, both indicted board members – Doug Morgan and Karen Pletz – died late last year. Morgan died of illnesses. Pletz's death was ruled a suicide, according to the medical examiner in Broward County, Fla. The company is now run by chief executive officer Jim Owen, a law school classmate and close friend of Gov. Jay Nixon’s.

According to the audit, MEM paid about $1.58 million in severance benefits or settlement payments to four former top executives and employees who either resigned or who left the company in 2009 and 2010.

Schweich’s audit does not name names, so it is impossible to tell who received the severance money. Former state Sen. Dennis Smith served as the company’s first chief executive from 1994 through June 2009, when he became “CEO emeritus.”

The audit called the severance benefits “excessive” and said that “recent discussions with a MEM official indicate that any future severance benefits paid to executives will be substantially reduced, or eliminated.”

Executive compensation at MEM also “appears significantly higher" than typical public-sector salaries. During 2010, MEM’s top 10 compensated employees made salaries totaling $1.8 million. The top salary was $312,820.

In addition, MEM paid its top 10 executives a total of $659,405 in incentives, for an average bonus of $65,940. In other words, when bonuses are included, the top 10 employees were paid an average of almost $250,000 apiece.

Lower-level MEM employees also received substantial bonuses, based on the company’s “performance benchmarks” such as premium growth.

“Compensation and employee incentive bonuses for 2010 totaled over $17 million for approximately 200 employees, an average total payout of approximately $85,000 per employee,” the audit said.

MEM executives also received valuable perks such as the use of company cars, paid health insurance coverage for spouses, five weeks paid time off, paid dues in professional societies and paid memberships in golf and athletic clubs.

Responding to the audit, MEM wrote that its “compensation and expenses are reasonable and necessary for a mutual insurance company. … MEM’s employee compensation averages in the 50th percentile” of other private insurers.

The audit also highlights numerous miscellaneous expenditures that MEM paid:

  • A total of $300,000 for an all-inclusive “Presidents Trip” for 64 invitees including MEM board members, top executives, top performing employees, and other guests to Lanai, Hawaii, from Feb. 20 through Feb. 25, 2010. In 2009, MEM’s board chairman, vice chairman and their guests attended the company’s President’s Trip to Cabo San Lucas, Mexico.
  • About $17,000 for St. Louis Cardinals suite tickets. The suite was used to entertain insurance agents as an incentive to doing business with MEM. The tickets were purchased from an unnamed associate of a former board member.
  • About $60,000 for a suite, tickets, and parking passes for University of Missouri football games; an additional $12,000 for basketball tickets and parking passes; and about $5,000 to cater its tailgate party at the university’s homecoming in 2010.
  • $80,000 for company functions in 2010, including $10,000 for a board of directors retreat in Ridgeville, Mo.; $16,000 for MEM’s annual golf tournament; about $8,800 for 15-year anniversary jackets; and about $7,000 for a 15-year anniversary luncheon.

In addition, the audit challenges MEM’s $7.2 million purchase of a for-profit subsidiary. Under state law, the auditor concluded, it is unclear whether the company may legally insure workers who work outside the state.

The audit also noted that MEM conducted an internal inquiry, which revealed that company funds were used for $8,000 in political contributions to the Missouri Democratic Party; $7,400 in cash and in-kind donations to the Insurance Coalition Political Action Committee; $4,000 in donations to gubernatorial inaugural festivities in 2005 and 2009; and $8,000 for a former top executive’s personal legal fees.

Owen and Schweich both said they could not detail the firm's political contributions to the Missouri Democratic Party because those donations are the subject of a federal investigation.

In an interview, Owen said the auditor's report was "pretty much a rehash of our own internal investigation. ... There were questionable expenditures, but they were immaterial for a company our size." He said the firm's leadership has "tightened the new controls and policies."

He said the $50 million saved on federal taxes has been invested in the state of Missouri, and that it is the policy of the firm's current board of directors to conduct its board meetings inside the state.

Owen said the insurer's trips to Hawaii and Mexico were "legitimate business trips for industry representatives and our top producers. They were not vacations."

EDITOR'S NOTE: The story was updated Tuesday to clarify Pletz's cause of death.

Read more from Jim Doyle, who covers the business of health care for the Post-Dispatch. On Twitter, follow the Business section @postdispatchbiz.   

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