AGRiP Governance & Leadership Conference March 6 – 9, 2016 Nashville, TN LAWSUIT AGAINST A HEALTH POOL BY RENEGADE MEMBERS DEMANDING SURPLUS DISTRIBUTIONS 1

INTRODUCTION  Two school districts which had withdrawn from the N.E. Pennsylvania School Districts (Health) Trust filed suit against the Trust seeking to recover their “equitable” share of the Trust’s surplus The trial court ordered the Health Trust to disgorge that portion of the surplus that the school district plaintiffs claimed was attributable to their participation in the Trust. The school districts had argued that the Health Trust was “unjustly enriched” by retaining that part of the surplus which represented the “profit” earned by the Health Trust because the plaintiffs’ contributions far exceeded their claims during their membership in the Trust. The total judgment came to $7.4 million, including interest 2

INTRODUCTION (Cont.)  The Health Trust appealed to the Pennsylvania Commonwealth Court which accepted an amicus brief from AGRiP and other parties, including the Delaware Valley Municipal Management Association and the Pennsylvania League of Cities  On April 17, 2013 in Dallas School District v. Northeast Pennsylvania School Districts (Health) Trust, 67 A.3d 102 (Pa. Cmwlth. 2013) the Commonwealth Court reversed the trial court’s decision and found in favor of the Health Trust. In so doing, the appellate court recognized the unique nature of the Health Trust as a “pooled trust” and found that the school district plaintiffs were not entitled to recover their alleged “fair share” of the Trust’s surplus upon their withdrawal  With that victory the Health Trust narrowly escaped insolvency 3

THE SIGNIFICANCE OF THIS CASE  In claiming their right to a substantial part of the Health Trust’s surplus the school district plaintiffs challenged the legality of public employer health pools under Pennsylvania law. Indeed, the trial court found that “[t]o construe the Health Trust as a pooled trust would not only inaccurately represent the spirit of the [Trust] Agreement but would also violate public policy”  The trial court made its “public policy” finding without citing any legal authority but nevertheless injected this issue into the appeal. It was therefore necessary for AGRiP and the other amicus parties to submit a brief in support of the Health Trust addressing this very issue 4

THE PLAINTIFFS’ ARGUMENTS  The school district plaintiffs argued, and the trial court agreed, that: -The court should impose a “constructive trust” upon the plaintiffs’ share of the surplus which they claimed represented the difference between the contributions paid by them since the inception of the Trust less their total claims (paid and IBNR) and associated administrative expenses and costs. In so arguing, the plaintiffs seized upon language in the Trust Agreement which prohibited the use or diversion of the Trust Fund for any purposes “other than for the exclusive benefit of the Participants or their beneficiaries”; 5

THE PLAINTIFFS’ ARGUMENTS (Cont.) - The plaintiffs’ entitlement to those surplus funds was in part supported by the fact that the Health Trust’s contribution formula recognized that each school district participant had different benefit plans and distinct claims experience, both of which were taken into account in establishing their contributions; and -It was unreasonable to assume under the Trust Agreement that each Health Trust participant was expected to subsidize the health care benefits of the other school district participants and therefore the Health Trust was not a “pooled trust” 6

THE ROLE OF AGRiP AND THE OTHER AMICUS PARTIES  The amicus brief filed by AGRiP and the other amici focused on the public policy issue raised by the trial court in arguing that: -As attested by AGRiP, public entity risk pools and trusts are not unique to Pennsylvania because there are several hundred of them in the United States -Public entity risk pools are well established and widely accepted in Pennsylvania and include the Delaware Valley Health Trust (formerly the Delaware Valley Health Insurance Trust) which was established in 1999 as a self-funded municipal multiple employer welfare association (MEWA) under the Intergovernmental Cooperation Law and which operates as a “pooled trust” in which all the public entity participants share in the cost of maintaining health benefits for their employees and their dependents. 7

THE ROLE OF AGRiP AND THE OTHER AMICUS PARTIES (Cont.) -Pennsylvania public policy strongly promotes the establishment of public entity risk pools as expressed in the following state statutes:  The Intergovernmental Cooperation Law, 53 Pa. C.S.A. §§ 2301 et seq., which expressly authorizes local governments in Pennsylvania to enter into intergovernmental agreements in the exercise and performance of their respective governmental functions, powers and responsibilities; 8

THE ROLE OF AGRiP AND THE OTHER AMICUS PARTIES (Cont.)  The Political Subdivision Tort Claims Act, 42 Pa. C.S.A. §§ 8541, et seq., which acknowledges the right of two or more local agencies to pool their public liability insurance risks under the Pennsylvania Intergovernmental Cooperation Law and any other applicable statutes;  The Workers’ Compensation Act, 77 P.S. §§1, et seq., which authorizes the creation of “group self-insurance funds” by public employers to pool their workers’ compensation liabilities; 9

THE ROLE OF AGRiP AND THE OTHER AMICUS PARTIES (Cont.)  The Municipality Authorities Act, 53 Pa. C.S.A. §§5601, et seq., which permits municipalities and other local government agencies to establish authorities empowered to make contracts with an insurance company, an association, or to provide financing for insurance reserves; and  The Public School Code and the other codes applicable to townships, boroughs and home rule communities which provide for intergovernmental cooperation and affirm the power of local government agencies to obtain insurance for themselves and their public officials and employees 10

THE ROLE OF AGRiP AND THE OTHER AMICUS PARTIES (Cont.) - The absence of any Pennsylvania statute, regulation, common law rule or court decision which prohibits intergovernmental agreements creating public entity risk pools or trusts 11

THE COMMONWEALTH COURT DECISION  As noted, the Commonwealth Court reversed the trial court and made the following findings in favor of the Health Trust: -The Trust Agreement did indeed establish a “pooled trust” under Pennsylvania law because certain provisions in that agreement established the common purpose of the Trust in providing health benefits for all of its participating school districts on a pooled self-funded basis such that all contributions to the Trust Fund be used for the payment of health benefits on behalf of all their participants without vesting any right in any participant to recover any share of the surplus upon their withdrawal; 12

THE COMMONWEALTH COURT DECISION (Cont.) - The Trust Agreement did not require the Trustees to provide a report of individual accounts or segregate the funds contributed by the participating school districts, but actually created a unified Trust Fund to be used for the exclusive purpose of providing health benefits for all participants; and - All contributions made by the public school participants to the Trust Fund were “irrevocable” under the Trust Agreement, subject to certain exceptions which did not apply 13

THE COMMONWEALTH COURT DECISION (Cont.)  The Commonwealth Court dismissed the trial court’s “public policy” finding in a footnote, noting that the trial court failed to cite any legal basis for its conclusion and the fact that the school district plaintiffs did not raise the issue on appeal. It did, however, acknowledge that “all parties agree that multiple employer benefit plans, whereby employers pool their resources for the benefit of all participants, are not per se illegal or void for public policy”  The Commonwealth Court’s decision is attached as Appendix “A”. 14

LESSONS LEARNED  The need to maintain close communication among Trust participants and to effectively manage their expectations  The need for a focused, clearly worded Trust Agreement which unambiguously establishes the “pooled” nature of the Trust and the common obligation of all Trust participants to jointly fund the payment of claims  The need for a withdrawal provision that unambiguously states the rights and obligations of the Trust and the withdrawing participant  The value of including a mandatory arbitration or mediation clause in any Trust Agreement to forestall costly lawsuits 15