by Andrew Walden

Where does Hawaii’s multi-billion dollar OPEB deficit come from? 

Part of the answer lies in the 2014 State Supreme Court decision in State v HGEA which, in the words of Justices Paula Nakamura and Richard Pollack, “sanctions illegally inflated insurance premiums.”

HGEA, UPW and other public employees unions are believed to have received millions of dollars in kickbacks 1992-2002 from payments to insurance providers funneled through Royal State Insurance--then controlled by criminal UPW boss Gary Rodrigues.  The $663M “porting” scheme was first publicly detailed by Employer-Union Health Benefits Trust Fund (EUTF) Chair Gregory Saito, March 31, 2003.  The scheme had become the subject of litigation in 2002—and like many politicized cases was slow-walked through the courts.

Eleven years later a 2-1 Intermediate Court of Appeals (ICA) majority ruled:

…there is nothing in the statute or legislative history that required the unions to seek the hoped-for savings, or prohibited any particular level of fees and/or profit by the unions' insurers, or prohibited related-party transactions, or required "bona fide negotiations," bidding, or other procurement procedures….

The 2013 ICA ruling was upheld in 2014 by the State Supreme Court 3-2. 

Dissenting Justices Nakayama and Pollack explain:

…premiums were inflated by fraud, collusion, embezzlement, and other forms of illegality….

…did the legislature agree to pay “the premium charged by and paid to the [insurance] carrier,” no matter what manner or magnitude of corruption permeated that premium?….

…The majority opinion … gives the word “actual” a meaning that would embrace fraudulent expenditures…..

…there is nothing in the legislative history that indicates … the legislature intended that “actual” would embrace manifestly illegal charges….

…the suggestion that the legislature would authorize payments for fraud, collusion, embezzlement, or bad faith tends toward absurdity….

…Under my interpretation of HRS chapter 87, the auditor would have the authority to adjust insurance premiums that are permeated by illegality….

…The majority’s interpretation embraces the view that the legislature has authorized payment for fraud, collusion, embezzlement, and bad faith dealings. But any portion of an insurance premium that was embezzled via sham transactions or that was illegally inflated by fraud, collusion, or bad faith, would have unconstitutionally accrued to the sole benefit of private individuals. The fact that illegal sums may have been baked into the monthly cost of an insurance premium does not insulate them from the reach of the public purpose doctrine….

…And of course, if the legislature had intended to authorize payments for fraud, collusion, embezzlement, or bad faith, that authorization would be unconstitutional because it would not have been made “pursuant to standards provided by law.”….

…In its proposed amended complaint, the State made several allegations that I think are actionable under HRS §§ 87-22.3, 87-22.5 and 87- 23. These include:

33. Defendants HGEA, UPW, RSC, TRIA, and VEBAH used, or allowed the use of, ported funds to make payments to themselves or to related parties for Welfare Benefits Plans in amounts that exceeded the actual cost of coverage. . . .

34. Defendants UPW, RSC, TRIA, and VEBAH used, or allowed the use of, ported funds to make improper payments to Gary W. Rodrigues (“Rodrigues”), who was the executive director of UPW, a director of RSC, and a trustee of VEBAH, to Rodrigues’ daughter Robin Sabatini, and to corporations owned or controlled by them.

35. Some of said payments were paid through MAP or VEBAH in order to disguise or misrepresent their true nature.

36. Amounts paid as aforesaid between March 28, 1996 and December 19, 2000 totaled $446,278.60. Additional amounts were paid to Rodrigues, Sabatini, and/or corporations owned or controlled by them, at Rodrigues’ direction, by insurers that underwrote UPW’s medical and dental plans, including Pacific Group Medical Association (“PGMA”) and Hawaii Dental Service (“HDS”). Those included $146,361.32 paid by PGMA and $231.742.31 paid by HDS.

37. Amounts paid by or on behalf of UPW as aforesaid exceeded the actual cost of providing insurance coverage to the members of UPW[.] . . .

In addition, the State’s expert’s report found evidence of suspiciously high administrative expenses that constituted as much as 45% of the monthly premiums. This report also found evidence of suspiciously high profits that averaged as much as 58.7% of the premiums charged over a nine-year period….

In sum, given the seriousness of the State’s allegations and the defendants’ recalcitrance in submitting to the State’s initial audit, dismissing the State’s complaint will shield these alleged abuses under a shroud of darkness.

And that is exactly what had happened.  The Circuit Court in 2006 refused to allow the State to amend its complaint.  The ICA in 2013 ruled the denial of the amended complaint “is no longer justiciable.”  And the Supreme Court majority in 2014 ruled:

…We cannot rewrite the State's complaint to allege causes of action the State did not pursue. Nor can we rewrite the statutes to include prohibitions that the legislature never contemplated. Even if the State could have asserted a claim for conspiracy to defraud wholly apart from the provisions of chapter 87, it did not do so. The question here, as framed by the State, is a narrow one: do the factual allegations constitute a violation of the provisions of chapter 87? The answer to that question is no.

The State concedes that such a disposition would render moot its second argument regarding the pleadings process. Thus, we do not reach that issue. Accordingly, we affirm the judgment of the ICA.

See how that works?

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2013: Act 268 Hawaii Unfunded Liabilities Plan: Pot of Gold for Corrupt Union Leaders 

2013: Oral Arguments No. SCWC-29352 Thursday, October 17, 2013

2014: Supreme Court Ruling and Dissent