KEMI In the Quasi-Public Spotlight

Just a little over a year after a state audit critical of its spending on what was considered “insider benefits,” Kentucky Employers’ Mutual Insurance (KEMI) is once again in the news. This time, however, it is because the governing board is in part directly reversing actions it took last year in response to the audit. Specifically, KEMI voted to award “incentive payouts” of about $30,000 to $51,000 to several top executives while at the same time voting to remove executive salary information from the Kentucky’s transparency website.

Were they right to do so? I suppose it depends on who you ask. Personally, I would say, “yes, and no.”

In April of 2019 it was reported that State Auditor Mike Harmon found Kentucky Employers' Mutual Insurance maintained numerous questionable spending practices, “including a lack of competitive bidding and cost controls, inaccurate reporting of its contracts and business funds used for expensive meals, liquor, gifts and entertainment for insiders' personal benefit.”

His report cited numerous examples, from an annual event at Keeneland (a horse racing complex) to questionable real estate deals to “giving hundreds of University of Kentucky basketball and football tickets to senior managers for no identifiable business purpose.” In an interview after the report’s release, Harmon said, “They acted as if it was their own money rather than policyholders' money or taxpayers' money.” 

In response, KEMI cut their CEO’s $445,438 salary and replaced his long-term job contract with year-to-year probation.

This year, just 16 or so months later, the CEO will receive a $51,000 bonus for meeting pre-defined objectives for the organization. To be fair, even with the bonus, his annual compensation is still far below its previous level.

What seems to have really rankled critics beyond the bonuses, however, is the decision to remove employee salary information from the state’s transparency website. They are accusing KEMI of violating commitments made during the response to the audit, as well as violating state requirements that all state employee salaries be published. 

KEMI’s position? Simple. We are not state employees, and, according to KEMI president and CEO Jon Stewart, “All we are looking to do is protect our talent at the top level.” Stewart acknowledges critics concerns, but said in an interview, “I understand the perception. But we’re trying to run a competitive insurance company here.”

And he has a point. KEMI isn’t a state agency. But it is, sort of. KEMI employees are not state employees, but they are, sort of. If you are confused by all this, there is a simple explanation. KEMI exists in that rare bubble of quasi-private enterprise; an organization started and initially funded by the state, overseen by government officials and a governor appointed board, yet is a private, not for profit mutual insurance company, technically owned by the businesses it serves. 

KEMI must continually navigate in the rarified air of a “private like;” a supposedly independent organization with an umbilical cord attached to the state Executive branch, and that makes for a very difficult management situation with unprecedented navigational challenges.

If KEMI were truly independent, the audit that started all of this would never have occurred and would not be an issue. Management would be accountable to owners and the whims of the market, but not beholden to a politically appointed oversight board (KEMI’s board is largely appointed by the governor, with three members being state cabinet secretaries). 

And they wouldn’t be required to advertise to competitors and headhunters what they are paying their top executives. 

KEMI was established in Kentucky to serve as the insurer of last resort, which makes its function similar to that of a “state fund” (We have had to modify our use of the term in recent years, as employees of similar agencies bristle at the suggestion they work for a “state fund”). The intent and function is not dissimilar to other state borne organizations such as Oregon’s SAIF or Maryland’s Chesapeake Employers Insurance. They were created to serve a specific need and intended to function independently of government. Except that the ties to government are never actually severed, with the result that the rules they play by are different than their truly independent counterparts.

Some would say that is fair play, since these quasi-private or quasi-governmental – depending on your glass half full or half empty perspective – have advantages not seen in the private sector. They generally are not burdened with the need to pay taxes, which gives them a competitive advantage in premium and costs. But the costs of political oversight can be high, as evidenced a few years ago with the firing of SAIF’s John Plotkin and the disruptive aftermath that followed. 

For his part, the auditor that filed his initial findings is not happy with KEMI’s latest actions.

State Auditor Mike Harmon said last week, “When we released our examination 16 months ago that resulted in 10 findings and provided what I believe were sound recommendations, my office was hopeful KEMI’s leadership would follow those in the spirit of accountability and transparency. By taking these actions, it appears KEMI’s board is taking a step back from being transparent to the customers they serve as an insurer of last resort. It is our hope these actions don’t lead to negative results for businesses served by KEMI, who are already dealing with financial issues due to the current pandemic.”

Another critic, a former KEMI board member appointed under Republican Governor Matt Blevin, expressed concern over the apparent lack of transparency, stating, “The taxpayers of the commonwealth have a right to know how these resources are being managed.”

Except the taxpayers are not funding KEMI, and the resources technically are not theirs. That designation and privilege goes to KEMI’s insured employers. It is only the political umbilical cord, tying the organization to the public realm that continues to be its ultimate master. And that makes for a very difficult balancing act for these types of organizations. As long as these structures remain bound to political oversight, we will continually question the actions they take in a manner not afforded their truly private competition. And the correct answer will always be dependent on to whom the question was directed.

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