September 20, 2016

Audit: NM didn’t collect $193 million in taxes from insurance companies

The state failed to collect nearly $200 million in taxes from health insurance companies during a recent five-year period, according to a report released Tuesday by State Auditor Tim Keller.

The state Office of the Superintendent of Insurance (OSI) should have collected more than $193 million between April 2010 and April 2015, according to the report. OSI’s purpose is to collect premium taxes from insurers who do business in New Mexico.

In the report, Keller noted that the $193 million total is based on a sample representing 26 percent of all premium taxes collected during the time period. In other words, OSI may have failed to collect more than that estimate.

“The ultimate amount due to the State is likely to be far more than the sums identified in the Audit,” Keller wrote.

The revelation of uncollected money comes at a time when the state is grappling with an deficit estimated to be over a half-billion dollars.

But it’s been going on for a long time. Charles Sallee, deputy director of the state Legislative Finance Committee, said his office has been flagging concerns over premium tax administration to OSI since 2005.

State Superintendent of Insurance John Franchini told NM Political Report that the findings didn’t come as a surprise. Two years ago, Franchini requested funding from the Legislature for such an audit.

“We realized we were weak at premium tax collection,” Franchini, who said he fully took over the office three years ago, said. “I honestly believe today it was done intentionally.”

Three of the five people in charge of processing premium taxes “weren’t as competent as they needed to be in doing this job,” Franchini said.

His office is currently conducting “a very serious investigation” of one of the insurance companies suspected of underpaying taxes, Franchini said.

“We were really happy with these results because they justify the investigation we started six months ago,” he said.

He added that the investigation, which he said Attorney General Hector Balderas’ office is assisting in, will be complete soon and could lead to opening investigations on six other insurance companies.

As for collecting the unpaid money owed to the state, Franchini said that would have to wait until the investigations are complete.

“It will take us a year to finish this,” he said. “We haven’t lost any of this money. If it’s there, we will collect it.”

Franchini also criticized Keller for presenting the report publicly the way he did.

“He acts like we’re not a partner, and that bothers me,” he said.

Justine Freeman, a spokeswoman for the state auditor, responded by saying that instead of debating, the state “should step up and collect the taxes that it is owed.’

In the report, Keller emphasized that collecting the money should be one of the state’s first tasks moving forward.

He attributed the problems to insurance companies “reporting inconsistently and submitting inconsistent calculations” and OSI “not recognizing the resulting errors.”

“Some insurance companies were incorrectly applying ‘credits’ that the Medical Insurance Pool issues to health insurance companies,” Keller wrote, “sometimes applying the same credit to multiple reports.”

OSI failed to identify the errors because of “inadequate staffing, poor documentation, problems with internal controls and policies and issues with computer software,” Keller wrote.

OSI responded to the findings in the report by stating that a bigger staff and “better” staff training could help solve the problem, as will evaluating its “organizational structure.”

But the state agency also took issue with some of the report’s findings, particularly with phrases like “approximate calculations” and “potential underpayments.”

Keller took note of OSI’s position, urging the state agency to take the matter seriously.

“We are concerned that the Audit states that OSI management merely ‘will consider’ various corrective measures,” he wrote. “Issues of this magnitude require swift, specific, measureable objectives and accountability at all levels of OSI, including transparency and accountability to the Legislature and the public.”

Could help with budget deficit

Gov. Susana Martinez is expected to call a special session to tackle part of the budget problems later this month.

At least one lawmaker called on the state to be aggressive in collecting the taxes.

“That’s a staggering amount of money that the state is owed,” state Rep. Jeff Steinborn, D-Las Cruces, said in an interview.

Steinborn said collecting the money will “help us avoid cuts” as lawmakers address the budget gap this fall in a special session and next January during the general session. He added that the state must be equally aggressive in preventing insurance companies from using the owed money as an excuse to raise consumer rates.

UPDATED 6:45pm Tuesday with quotes from Superintendent of Insurance John Franchini, Legislative Finance Committee Deputy Director Charles Sallee and State Auditor spokeswoman Justine Freeman. 

Read the audit below:

OSI Audit Report by New Mexico Political Report on Scribd