Auditor Questions Tax-Exempt Status of Missouri Employers Mutual

Releasing an audit of a tax-exempt workers’ compensation insurer in Missouri, State Auditor Tom Schweich called for the legislature to investigate whether its tax-exempt status should be retained.

Schweich released the audit of the Missouri Employers Mutual Insurance Co.(MEM) but did not assign a rating to the carrier.

MEM was created by state statute to provide Missouri employers, particularly small businesses, with a means to obtain workers’ compensation liability at a reasonable cost. The governor appointed the initial board of directors, after which the policyholders were to elect new directors.

In 1997, MEM amended its bylaws to require the majority of its future directors be approved by the governor. MEM maintains that this allows it to remain a tax-exempt public corporation.

The Columbia-based insurer is a quasi-public company founded by the state in 1993 to help businesses get workers’ compensation insurance at reasonable rates. The company had previously asserted it was exempt from state public records laws, according to the Associated Press.

It agreed last August to undergo what it described as a voluntary review after the auditor’s office threatened to file a public records lawsuit.

The audit came after former Gov. Roger Wilson was replaced as the company’s CEO without any public explanation.

MEM enjoys an advantage over its private-sector competitors by virtue of its tax-exempt status as a public corporation, although it does have certain statutory obligations not required of other private entities, the auditor’s office said. It appears MEM has saved approximately $50 million in federal taxes since 1993 and has accumulated a surplus in excess of $160 million.

MEM holds the dominant market share in Missouri, approximately 16 percent.

Despite its tax-exempt status, MEM essentially operates as a private entity. MEM compensates its 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 not comply with state open records laws.

In 2010, MEM paid a total of over $15 million in compensation and $2 million in employee incentive bonuses for approximately 200 employees. Its top 10 highest paid employees received an average of nearly $250,000 in salaries and incentive payments totaling $2,460,924. Incentive payments are generally prohibited for public employees.

MEM paid approximately $1.58 million in severance benefits or payments to four former executives and employees who resigned or were terminated in 2009 and 2010. These payments may not comply with the law or be in the best interest of the company.

The audit found that MEM made a number of other expenditures in 2010 which would be considered excessive or unreasonable for a public-sector entity, including:

• More than $300,000 for an all-inclusive retreat to Hawaii for 64 invitees
• $280,000 to sponsor, donate or contribute to various events and entities
• $80,000 for tickets and tailgating for University of Missouri athletic events
• $80,000 for other company functions, such as retreats and golf outings, and jackets
• $17,000 for St. Louis Cardinals suite tickets, some of which went unused

MEM also made political contributions totaling $8,000 to the Missouri Democratic Party, monetary and in-kind donations to a Political Action Committee, $4,000 in contributions for gubernatorial festivities, and payments for a former executive’s legal fees.

MEM paid $7.2 million for a for-profit insurance company with insurance licenses in other states, but it is not clear whether state law allows MEM to provide coverage to Missouri companies that employ workers in other states. In addition, the MEM board has not established a dividend policy, and it has yet to declare a dividend to its members despite having accumulated a surplus of approximately $163 million.

The audit recommends the General Assembly determine if MEM is operating and performing as initially intended, determine whether MEM continues to fulfill a necessary public mission, and clarify state law as is deemed appropriate.

Specifically, the legislature should determine whether:

• 1) It is appropriate for MEM to continue as a “public corporation” and maintain a tax-exempt status, and if so, whether additional restrictions regarding employee compensation and operating expenditures are needed;
• 2) MEM is subject to the Sunshine Law; and
• 3) It is permissible for MEM to participate in “other state programs” through the purchase of its taxable subsidiary.

To read the full audit report, visit: http://auditor.mo.gov/press/201211.pdf.

Source: Missouri State Auditor’s Office