Novel Plan to Help City Backfires

Gardena leaders, whose city faces possible bankruptcy because of a money-losing insurance company it formed 12 years ago, often speak of the debacle as a mistake from the past.

But the company that left Gardena in debt is still operating -- in the black -- out of a small office in the Bay Area town of Benicia.

Municipal Mutual Insurance Co. has one remaining employee, chief financial officer Dennis Evans, who monitors the remaining accounts while occasionally getting out a broom to tidy up the office.

“I sweep a lot. I get around to dust,” said Evans, 62. “I’ve got to make sure the light bill gets paid. It’s still an office.”

Gardena formed the firm in 1993 to sell insurance to other municipalities. But the concept never took off, and Gardena was left with $26 million in debts that it cannot pay, including $6 million from a failed homeowner’s program. It has only $3 million in reserves.

While the city considers possible default, however, Municipal Mutual Insurance anticipates no such problems.

It has 250 claims and expects its $1.6-million surplus will cover them. As the city talks about cutting services, selling property and seeking debt forgiveness, the company is expected to pay off its obligations and might even have some money left over.

“I want to be able to walk away with a good feeling that we’re paying our claims and taking care of the clients that we’ve still got,” Evans said.

The contrast between the city’s fortunes and those of Municipal Mutual angers some city officials.

“What does the city have to show for it? Nothing. That’s the great shame,” said treasurer Lorenzo Ybarra, a longtime critic of the way Gardena has handled its finances.

Ybarra said that when Municipal Mutual was formed, the city promised that profits from insurance underwriting would cover the debts the city was incurring for forming the business. Instead, the company lured relatively few cities into its fold. And the debt continued to grow.

Even though it was clear by 1995 that the business was not doing well, the City Council refinanced the debt.

The letter of credit on the debt was due in December. The city’s two largest creditors gave the city a five-month extension, but even that came with a price tag.

“We couldn’t go for the touchdown, so we went for the three points instead and paid $60,000 more for the extension,” Ybarra said. “We basically just swept the trash under the carpet.”

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The idea for creating the country’s first municipally owned insurance company was first suggested in 1986 by then-City Councilman Mas Fukai, who had also been top aide to the late Los Angeles County Supervisor Kenneth Hahn.

At the time, insurance companies were charging cities high rates. Fukai, who suffered a stroke years ago and could not be reached for comment, had vowed that the insurance company idea would “put Gardena on the map.”

The city borrowed $14.9 million by selling bonds, with $10 million going to the insurance company, which didn’t get off the ground until 1993.

Current City Manager Mitchell Lansdell said that, in retrospect, one can ask why the city decided to spend so much money when it could have contributed significantly less to start the company, as little as $2.5 million.

“There’s certainly a lot of second-guessing that can go on now,” he said. “The city pushed a lot of things in the hope they were going to lead to a better future. A few of those worked. A couple of big ones didn’t.”

By the time the insurance company got launched, municipal liability pools formed by cooperatives of cities and other governments were firmly established, creating competition for Gardena’s venture. In addition, the insurance industry was struggling through a tough time, with a saturated market undercutting rates.

“You had this company freshly licensed out on the street and not in a position to be competitive for 10 years,” said Evans.

For several years, Municipal Mutual struggled to get customers. Finally, in 1995, it signed on some policyholders. But Lansdell said that what may have seemed like a boon may have cut off one of Gardena’s last avenues to recover money.

That’s because every city that the insurance company was able to attract as a policyholder also became a board member. With every client, Gardena’s control over Municipal Mutual Insurance Co. diminished, Lansdell said.

Between 1993 and 1995, when the company was unable to attract virtually any clients, Gardena could have exerted its influence as majority board member to close down the company and recover whatever money it could, Lansdell said.

Evans said this may have amounted to at least $5 million. But the city didn’t do so, Lansdell said.

Even though Gardena had provided the seed money to start the firm, it had increasing trouble trying to protect its investment.

By 1999, Lansdell said, he asked the state’s Department of Insurance to close the company. But the company’s ability to stay just above water was an obstacle, he said.

“The company was always solvent,” Lansdell said. State insurance officials said that “the only way it was going to close down was if the company’s board of directors voted to do so.”

But the board, which consisted of policyholders, saw little reason to shut down the firm, Lansdell and Evans said.

The company finally jumped into the risky workers’ compensation market in 2000. Within three years, the company decided that if it continued down that path, the surplus from its municipal insurance policies “would be drained, and we wouldn’t be able to take care of our remaining policyholders,” Evans said.

Last year, the company’s president and chief underwriting officer resigned. Municipal Mutual agreed to an offer from the state to have officials from the Conservation and Liquidation Office supervise the company’s run off. The firm is set to close down in two years, when all its policies expire.

The company never became what the city and others had hoped it would: the dominant underwriter of insurance to city and county governments, a pioneer that could one day expand to other states. Instead, the company will ride into the sunset, Evans said.

As for Gardena, the city is in “earnest negotiations” with its two major creditors, Lansdell said. There is a May 31 deadline.

“As long as we’re talking and we both have goals to be reached, there is reason to [be optimistic],” Lansdell said. “Because the alternative for each one of us is very uncertain. And costly.”