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Missouri audit criticizes state-created insurance firm

Monday, February 27, 2012 | 2:59 p.m. CST

JEFFERSON CITY — 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 the predominant workers' compensation insurance provider in Missouri, State 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. 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. It also noted that after the internal review, MEM took several confidential personnel actions.

CEO Jim Owen said Monday that he could not discuss the political contributions because they are part of a federal investigation — a fact first reported last September by The Kansas City Star.

Owen defended the company's expenses for trips and sports tickets as an essential part of the insurance business. But Owen 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," Owen 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. The company's first CEO, former state Sen. Dennis Smith, retired in 2009 and was replaced by former Gov. Roger 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.


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Comments

Michael Williams February 27, 2012 | 3:07 p.m.

Whoa! Where is Occupy-MEM when you need them?

This article doesn't mention it (it avoids it entirely), but another local paper mentions the KC Star says there is a federal investigation into whether Roger Wilson illegally funneled 8 grand to the DNC while he was president of MEM.

What's the status of that, Missourian?

(Report Comment)
John Schultz February 27, 2012 | 5:06 p.m.

Michael, I see mention of the donations in the last bullet point about midway through the story. Perhaps the Missourian updated the AP story after you commented?

(Report Comment)
Michael Williams February 27, 2012 | 5:28 p.m.

JohnS: The bullet was there when I posted. But there is no mention of who may have authorized it. To my knowledge, the Missourian has not edited the story.

The Missourian did print this in the article: "CEO Jim Owen said Monday that he could not discuss the political contributions because they are part of a federal investigation — a fact first reported last September by The Kansas City Star."
___________________

Apparently, the KCStar has confirmed sources unavailable to the Missourian and the latter has no evidence to support a story either way. I'm hoping that's the case, anyway.

I'm hoping the claim is unfounded. It's going to hurt if it's not....a giant statue toppling.

Nonetheless, money was apparently given by MEM to the DNC; that much seems clear even if the identity of the authorizing party is not. I fully expect to read many complaints herein about money in politics by liberals complaining about money in politics.

I also fully expect to see our state government totally change the way MEM does business, and the actions (or lack thereof) of my representatives regarding this situation will be on my mind when I vote next time.

(Report Comment)

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