HARTFORD, Conn.—High-ranking state officials and a private consulting firm made questionable and ill-informed decisions that led to an overpriced $80 million deal involving state employees' worker compensation claims, Connecticut Attorney General Richard Blumenthal said Thursday.
In 2001, officials with the Department of Administrative Services, including then-Commissioner Barbara Waters, completed the deal with ACE Financial Solutions, which agreed to assume up to $150 million in potential liability from 660 workers' compensation claims.
The state, by privatizing the handling of the claims, reduced the number of workers' compensation cases it was handling and saved $13.5 million in both 2002 and 2003, Blumenthal said, announcing the results of his office's investigation into the dealings.
But a private consultant's analysis that resulted in the $80 million figure was seriously flawed, Blumenthal said, leading him to assume that the state overpaid ACE and wasted taxpayers' money. Much of the analysis was done by unqualified college students, he said.
"The state should have paid and could have paid less money to resolve these workers' compensation claims," Blumenthal said. "We will take whatever action we can under the law to hold accountable anybody who made excessive amounts of profit or remuneration as a result of this set of events."
A review by the nonpartisan state Office of Fiscal Analysis concluded that although the state saved $13.5 million in 2002 and 2003, it was unlikely to save money over the long run as it paid down the cost of bonds used to pay part of the contract, Blumenthal said.
It is not clear exactly how much money the state allegedly overpaid ACE. Blumenthal said ACE has already settled 545 of the 660 claims for about $60 million, leaving $20 million for the remaining cases. He said ACE also has benefited by earning interest on the money it received from the state.
A phone message was left Thursday with a spokeswoman for ACE Financial Solutions, a subsidiary of Bermuda-based ACE Group of Companies, which provides insurance and reinsurance worldwide.
ACE has already paid the state $40,000 to settle a lawsuit by Blumenthal's office that alleged the company paid an illegal $50,000 commission to brokerage giant Marsh & McLennan to get the workers' compensation contract. A similar lawsuit by the state against Marsh & McLennan over the deal is pending.
Blumenthal's investigation of the workers' compensation deal stemmed from information collected by a whistleblower who took it four years ago to state Sen. Anthony Guglielmo, R-Stafford, who brought it to the Attorney General's Office.
The probe found no evidence of criminal wrongdoing, but Blumenthal said it showed possible "incompetence and neglect."
The Attorney General's Office is recommending that the state establish a special fund to settle employees' worker compensation cases, consider a new program for settling the cases and improve the monitoring of state agencies' adherence to state contracting laws.
The state paid for the deal with ACE by borrowing $60 million through bonding and using $20 million from the state surplus. Blumenthal also questioned the use of state bonding for such a contract.
The private analysis that led to the deal was performed by Westport-based MRM Consulting Inc.
Waters, who retired as Administrative Services commissioner at the end of 2004, apparently violated state policy by not putting the analysis out to bid, Blumenthal said. The deal increased the value of MRM's contracts with the state to just over $700,000.
Waters could not be reached. Her home phone number could not be found, and current agency officials said they didn't know her whereabouts.
Blumenthal said MRM lacked the experience and expertise needed to analyze and select claims for privatization. In fact, he said, the firm hired college interns, including friends of MRM founder and President Adrien Theriault's son, to do much of the complicated analysis for $105 an hour.
Theriault could not be reached Thursday. A message for him was left at the company's headquarters.
When the Department of Administrative Services found out about the students, instead of protesting it told MRM to label the students "junior staff" instead of "interns," Blumenthal said.
MRM's analysis was plagued by "misinformation and misadvice" that led to "unfounded overestimates and payments," Blumenthal said.
For example, he said, MRM initially based the $80 million figure on ACE's handling 726 workers' compensation claims. But the number of claims given to ACE decreased to 660 after last-minute revelations that some of the initial cases had already been closed, the investigation found.
Despite the number of claims decreasing from 726 to 660, the total deal with ACE remained at $80 million.
"Privatization spawned inefficiency, incompetence and increased costs," Blumenthal said. "We must reform conditions -- lack of funding and procedures -- that led to this bungled deal."
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