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NEA can’t escape responsibility for a disastrous insurance venture that allegedly cheated schools out of millions

May 21, 2013 by

By Victor Skinner –

INDIANAPOLIS – In state after state, public school officials are learning it’s not wise to purchase employee insurance coverage from union-affiliated insurance companies.

In Indiana, the lesson was learned the hard way, after the Indiana State Teachers Association’s  insurance company  – ISTA Insurance Trust – got into financial trouble and was unable to pay a total of $23 million it owed several school districts.

Several lawsuits resulted from the financial collapse of the union insurance company.

The National Education Association, the parent union of the ISTA, was named as a defendant in at least one of the lawsuits, which was filed by the state of Indiana. NEA officials recently tried to avoid their share of responsibility by asking a judge to dismiss the national union as a co-defendant.

Judge Sarah Evans Barker said “no,” pointing to a union document that showed NEA officials oversaw and paid field agents as they peddled ISTA Trust insurance to Indiana schools.

NEA lawyers asked her to reconsider because they said they hadn’t reviewed the document. That was an odd claim, since the attorneys were the ones who introduced the document into the court proceedings in the first place.

“Having placed this document before the court, it is disingenuous of the NEA to argue now that the court’s references to it were improper,” Barker wrote in April when denying the NEA’s motion for reconsideration. “We say again that genuine issues of material fact remain concerning the NEA’s role in the trust collapse.”

The ruling is the most recent twist in a nasty legal saga over a multi-million insurance scam allegedly operated through the ISTA Insurance Trust, which collapsed in 2009 due to shady investment deals that ultimately shorted public schools about $23 million.

The alleged racket spawned a number of lawsuits between the union, investment company Morgan Stanley, and the state, as well as investigations by the Federal Bureau of Investigation and the Indiana Secretary of State.

In the fallout, the NEA – the nation’s largest teachers union – took over the ISTA’s daily operations, loaned its affiliate a boatload of cash, and worked to try to settle the trust’s debt with local schools for pennies on the dollar.

Now, nearly four years after the cards came tumbling down, the NEA is still working to convince the court that it shouldn’t be held liable for the ISTA’s incompetence, despite its clear involvement and status as the ISTA’s parent organization.

It’s really quite pathetic, and should send a message to school officials about trusting teachers unions to play even bigger roles in the day-to-day operations of their districts.

The ripoff

ISTA Insurance Trust was an arm of the ISTA that sold health and disability insurance to dozens of Indiana school districts through the union’s field representatives.

In 2009, the Trust submitted to a review of its struggling insurance program by Indiana’s Department of Insurance.

Through the review, state officials discovered the Trust put nearly 90 percent of its money into high-risk investments in hedge funds and private equities. Trust officials used capital gains from the investments for several years to pay claims and keep premiums low, but when the economy tanked, the investments went bad and the Trust was forced to sell what it could for about half the value.

It wasn’t long before the Trust was in deep financial trouble.

“They got into some real, real sophisticated investments for this type of fund,” Randy Lamberjack, a consultant with Noble Consulting Services, told the Indianapolis Star at the time. “When you have this kind of money and you have insurance liability, you should be dealing in cash, money markets and government-backed bonds.

“It should have been much more conservative.”

The Indiana Insurance Department blamed the poor financial management on former ISTA Executive Director Warren Williams and investment adviser David Karandos, who worked for Morgan Stanley, according to the Indianapolis Business Journal.

“During a nine-month stretch (in 2008), Karandos made 4,000 trades involving the ISTA Trust’s investments,” the Journal reported. “He also put large portions of the trust’s assets in hard-to-sell investments, such as stakes in private-equity deals and hedge funds.”

Ultimately, the state’s investigation showed the Trust’s liabilities were underfunded by $67 million, including $23 million owed to local schools in credits. The situation also left the Trust without the ability to pay long-term disability payments to about 650 school employees – who were also union members –  without the help of the NEA.

Amid the chaos, the Metropolitan School District of Pike Township, just outside Indianapolis, sued the ISTA and the Trust for how it administered benefits, alleging fraud, conspiracy and racketeering. District officials said the ISTA Trust billed them for insurance for people who were not district employees, among other charges. That case was settled in a closed judgment in 2012.

The aftermath

The ISTA and NEA are still feeling the pain four years after the insurance scam came to light.

The NEA expects to lose millions of dollars to bail out ISTA. Union watchdog Mike Antonucci has been tallying the NEA’s losses through data gleaned from the union’s financial statements:

“On March 31, 2010 NEA loaned the Indiana State Teachers Association $3,060,745. In August 2010, NEA increased the aforementioned note balance to $5,386,031.

“… During the fiscal year 2011, NEA provided $7,768,653 in additional support and monies to ISTA which increased the outstanding note balance to $13,154,684. As of August 31, 2011, NEA has recognized a $6,000,000 allowance for doubtful debt against this note,” Antonucci quoted from NEA documents.

That means the ISTA’s insurance debacle is costing the NEA a lot of money, and the union doesn’t expect to recover all of it.

At the same time, the ISTA’s membership numbers took a tumble, down 5 percent between 2009-10 and 2010-11 (the most recent figures available) to just under 44,000, and there’s no indication things are improving.

Union teachers across the nation have been paying ever-increasing NEA dues to unwittingly subsidize ISTA’s operations – despite mob-like allegations of fraud, conspiracy and racketeering.

Indiana’s case against the ISTA is set for a jury trial on Oct. 28, 2013, and it appears the NEA will also be sitting at the defendant’s table.

Hopefully, Hoosier schools, NEA members, taxpayers and everyone else affected by the collapse of ISTA’s shady insurance company will finally get some answers, as well as any money they may have coming.

via NEA can’t escape responsibility for a disastrous insurance venture that allegedly cheated schools out of millions – :: Education Research, Reporting, Analysis and Commentary.

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