Missouri Audit Criticizes State-Created Insurance Firm

A state-created insurance company has built a competitive advantage by enjoying a best-of-both-worlds scenario – avoiding federal income taxes by claiming to be a public corporation yet generally operating as a private entity and shelling out big bucks for executive perks, according to a report Monday by the Missouri auditor.

The federal tax-exempt status has saved Missouri Employers Mutual Insurance Co. an estimated $50 million since it was created under a 1993 state law, helping it to build a surplus of more than $160 million and become a dominant workers’ compensation insurance provider in Missouri, auditor Tom Schweich said. The Columbia-based firm qualifies for the tax break by categorizing itself as an “independent public corporation.”

But MEM denies it is a public entity subject to Missouri’s open-records-and-meetings law or the state auditor’s office. Schweich recommended that lawmakers clarify whether it is appropriate for MEM to continue as a “public corporation” and, if so, whether restrictions should be imposed on employee pay and expenses.

“It is sort of a situation of having your cake and eating it too, but it’s not illegal as long as the Legislature wants that,” Schweich said.

The company said in a written statement attached to Schweich’s report that it voluntarily agreed to a one-time review by the auditor’s office “to clearly demonstrate that the company has proper internal controls in place.”

Although Schweich’s review found no significant problems with the company’s internal controls, it said the company needs to improve its management practices. Schweich cited several cases of employee salaries, bonuses, severance payments, expenses and junkets that he said would be excessive or unreasonable for a public entity. For example, the company:

• Paid nearly $1.6 million in severance or settlement payments to four former employees who resigned or were fired in 2009 or 2010 under employment agreements that Schweich said may have violated the Missouri Constitution.
• Spent more than $300,000 on a “President’s Trip” for 64 people to go to Lanai, Hawaii, in February 2010. Attendees included top insurance agency performers as well as company executives and board members and their guests.
• Spent about $90,000 on suites and tickets to St. Louis Cardinals and University of Missouri athletics events in 2010, including some suite tickets – purchased through an associate of a former board member – that went unused.
• Contributed $8,000 to the Missouri Democratic Party, and $4,000 for gubernatorial inaugural festivities in 2005 and 2009. The company also contributed $5,000 to inaugural events in 2001, though that’s not noted in the audit because the review did not go back that far.

Some of the expenses were noted by an internal company investigation, the results of which were made available to auditors. The audit said MEM is pursuing reimbursement of the political contributions and a refund of unused Cardinals tickets, and has taken several confidential personal actions.

CEO Jim Owen said Monday that he could not discuss the political contributions because they are part of a federal investigation. Schweich said he also had agreed with the FBI not to elaborate on the contributions. The Kansas City Star first reported last September that investigators were focusing on whether money was funneled from MEM – or its then-CEO, former Gov. Roger Wilson – through a law firm to the Democratic Party.

Owen defended the company’s expenses for trips and sports tickets as an essential part of the insurance business. But Owens added that, under his leadership, MEM has significantly scaled back its annual president’s outing – holding the last two in Branson and Columbia.

The auditors “think we should be paying salaries and compensation of a state agency but, if we did that, we never would have been in business and wouldn’t have been able to have solved the workers comp crisis in Missouri,” Owens said.

The company said its federal tax advantage is offset by additional operating costs it must incur under the state law. Unlike most private insurers, MEM said it must give preference to small business owners with annual premiums not to exceed $10,000 and must implement work safety programs for all of its policyholders.

The company recently has undergone a couple rounds of executive turnover. Its first CEO, former state Sen. Dennis Smith, retired in 2009 and was succeeded by Wilson, who was placed on administrative leave and then removed from the position in 2011. Owen, who had been the board chairman, took over as interim CEO following Wilson’s departure and was permanently named to the job in December.

Two former MEM board members also faced federal indictments last year. Former chairman Douglas D. Morgan was indicted in April on allegations he defrauded a bank in a casino deal. Morgan, who was ill, died in November before going to trial. Former board member Karen Pletz was charged last March with embezzling more than $1.5 million from the Kansas City medical school where she was president. Pletz died in November in Florida in what a coroner ruled was a suicide.