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Duluth illegally managed its employees' health-care fund

DULUTH - The Minnesota Department of Commerce has determined that the city of Duluth's group health-care fund -- which pays the health-care claims of active and retired employees -- has been managed illegally since its inception, the Duluth News Tribune has learned.

Though the city could have made the information public a month ago, it's only now coming to light because of a News Tribune investigation.

The decision could mean a change in the way the fund is managed and regulated, taking it out of the city's hands.

It also might force the city to transfer $500,000 from an investment account, where the city had hoped to earn higher interest, back to the group health-care fund.

A senior city manager argues that, if fund managers had followed Department of Commerce rules all along, the city wouldn't be strapped with a nearly $300 million unfunded retiree health-care burden.

"If we had run things by the book, I don't think we'd be in the mess we're in," John Grandson, the city's director of maintenance, said when told of the Department of Commerce decision.

"There would have been retiree health care, but it would have been at a different level. We wouldn't have this giant unfunded liability."

In October 2000, when Gary Doty was mayor, Grandson said he was assigned by then-chief administrator Mark Winson to study the retiree health-care issue. Grandson said he implored the health insurance committee to explore following the Department of Commerce regulations.

He said one of his failings was not getting the appropriate city personnel to listen.

"There's a reason why there are rules and regulations for governing health insurance," Grandson said, "and there are a lot of mistakes the city of Duluth has made in the past that wouldn't have been made had we followed the rules and statutes we had been required to follow."

The city is self-insured, meaning it pays for its own health-care claims. It oversees the group health fund through a committee made up of city managers and union representatives.

The fund also pays the health-care claims of employees with the Duluth Housing and Redevelopment Authority, the Duluth Airport Authority and the Duluth Entertainment Convention Center -- though those entities do not have say in how the fund is managed.

The commerce department ruled that those agencies should have had a say and be treated as a "pool," meaning the commerce department must oversee the fund to ensure compliance with state regulations.

Under state regulations, a board of trustees would have to be set up to oversee the fund, a certified public accountant must audit the pool annually, and any investment of money from the fund has to be done by an outside investor with no ties to the city or pool participants.

Chief Administrative Officer says city will comply

The city has not yet complied with an order to treat the fund as a pool, said Duluth Chief Administrative Officer Mark Winson, but attempts to do so have begun.

Winson sent an e-mail to senior city staff Friday afternoon informing them about the Department of Commerce determination.

The city also sent a letter to the three authorities that receive health care from the city, and the city is complying with a data and information request made by the department. "We will come into compliance with the state statute that regulates this," Winson said.

He said no attempt has been made to conceal information about the Department of Commerce decision. Brent Bordelon, a commerce department attorney, said the city correctly kept the information private until an internal investigation conducted by the department was completed.

Winson acknowledged that if the city followed the department of commerce regulations, the unfunded health-care liability wouldn't be what it is today, but disagreed that it would be significantly smaller.

"The benefit for retiree health care is based on future payments through contracts," he said. "Had there been a board of trustees in place, there might have been movement toward addressing the unfunded liability quicker."

However, Winson said that the federal rule that forced the city to calculate the retiree health-care burden wasn't in place until 2003.