OGC Op. No. 04-04-19

The Office of General Counsel issued the following opinion on April 21, 2004, representing the position of the New York State Insurance Department.

Re: Municipal Cooperative Health Benefit Plans, Withdrawal of Participant


May a Municipal Cooperative Health Benefit Plan (Muni-Coop), after a participant withdraws from the Muni-Coop, retain funds paid in by the participant?


If the Municipal Cooperation Agreement entered into by the participant so permits, the Muni-Coop may retain such funds.


On or about November 1, 1981, the inquirer’s client, a Central School District, joined the Area Schools Employees’ Benefit Plan (Plan). The Plan was, as required by applicable Opinions of the State Comptroller (Comptroller), on a "pay as you go" basis. The inquirer’s client, as well as other participating school districts, was obligated to pay an assessment based upon the census of employees. The 1981 Agreement was silent as to any financial rights and obligations of a participating school district upon withdrawal.

After the enactment, in 1994, of New York Insurance Law Article 47 (McKinney 2000 and 2004 Supplement), the Plan secured a Certificate of Authority from the Department as a Muni-Coop on June 1, 2001. Prior to the granting of the Certificate of Authority, on June 22, 1996, the inquirer’s client executed a Municipal Cooperation Agreement in accordance with New York Insurance Law § 4705 (McKinney 2000 and 2004 Supplement), that provided, inter alia:

The [Governing] Board shall be authorized to establish a joint fund or funds to finance all Plan expenditures, including claims, reserves, surplus, administration, stop-loss insurance and other expenses.

. . .

The Board shall be authorized to refund amounts in excess of reserves and surplus required by §4706 of the Insurance Law and anticipated expenses or to retain such excess amounts (or portion thereof) and apply such amounts in preparing the Plan’s budget for the following year.

. . .

Should Participants choose to withdraw, written notice shall be sent . . . prior to March 31 in any year prior to the next ensuing fiscal year [July 1 to June 30] membership. The exiting Participant is not entitled to any part of the accumulated reserves. The Plan will disperse no funds to the clients of the exiting Participant after June 30 of that year. It is incumbent upon the exiting district to obtain at their expense, some type of interim coverage between the termination of our claims payment and the commencement of their new plan.

The inquirer’s client gave notice of its intention to withdraw from the Plan, as of June 30, 2004, and estimates that the Plan will be retaining approximately $300,000 in reserves attributable to the inquirer’s client’s contribution. The inquirer has referenced several Opinions of the State Comptroller to the effect that the use of one municipality’s funds to pay the claims of another municipality is improper (although such funds could be used to pay administrative expenses of a joint self-insurance fund) and question whether it is equitable to require that the inquirer’s client forfeit a substantial sum of money in order to administer the Plan during a substantial period of time for the benefit of the remaining participants.



It has long been the position of the State Comptroller that, given the general authorization of New York General Municipal Law § 92-a (McKinney 1978) and the specific authorization of New York Education Law § 1709(34-a) (McKinney 1978) (dealing with Union Free School District and made applicable to Central School Districts by New York Educational Law § 1804(1) (McKinney 1978), for the purchase by municipalities of health insurance for the benefit of their employees, that the power to insure necessarily implied the power to self-insure and that two municipalities could join together in a joint venture.

In response to a query by a legislator inquiring about a program in his district, the Comptroller indicated, inter alia, Opinion 78-405 (October 3, 1978), that there was no statutory authorization for either reserve funds or the moneys of one municipality being used to pay the claims of another municipality. The Opinion continued:

Because existing statutory law does not specifically authorize either a joint reserve fund or use of moneys contributed by one municipality to pay claims arising in another municipality, the advantage of a joint self-insurance plan appears to be mainly administrative in nature. It appears that, apart from the pooling of administrative resources, each participating municipality could accomplish the same objectives by establishing its own self-insurance plan.

That same day, in Opinion 78-636, addressed to a City Corporation Counsel who had inquired about a joint insurance agreement for liability risk drafted under Florida law, the Comptroller indicated that such joint agreements were allowable, subject to a number of restrictions. In conclusion, the Opinion stated:

We note that, in our opinion, moneys contributed by one municipality could not be used to pay claims against another participating municipality, although joint funds may be used to pay for administrative costs.

The impediment to self-insurance caused by a lack of statutory authorization for a reserve fund was removed by the enactment, 1979 N.Y. Laws 684, of New York General Municipal Law § 6-n (McKinney 1979). That statute has, however, since its first enactment excluded health insurance equivalents from the objects of such a reserve fund.

The prohibition on utilization of one municipality’s funds for the claims of another municipality in the context of self-insurance of employee benefits was again considered by the Comptroller in Opinion 82-197 (July 26, 1982), addressed to a County Attorney. In that Opinion, the Comptroller cited New York

Constitution Art. VIII, § 1 (McKinney 1982, which provided a exception to the general prohibition on a municipality giving its credit to another for joint undertakings, and New York General Municipal Law §

119-o(2)(a) (McKinney 1982), which allowed an agreement for joint services to equitably allocate resources and revenue, and concluded that the portion of Opinion 78-405 dealing with use of one municipality’s funds being used for another municipality’s claims was superseded. The 1982 Opinion stated, inter alia:

The risk of contributing more to a joint fund than one gets in return is similar to an insurance contract. If a rational contribution policy is adopted, then the participating municipalities should receive approximately equal benefits in the long run. Of course, since a reserve fund is not permissible and contributions are based on yearly estimates, the cooperative agreement may provide for yearly adjustment of the contribution formula, or may even call for a settling of accounts among participants based on the previous year’s experience. The content of the agreement is up to the participants themselves.

Notwithstanding the inability to have a reserve fund, several municipal cooperative agreements to self-fund employee benefits were entered into, including the one the inquirer’s client initially joined. In 1994, by 1994 N.Y. Laws 689, the Legislature enacted New York Insurance Law Article 49 in an effort to regularize municipal cooperation agreements.

New York Insurance Law Article 47

New York Insurance Law § 4705(f) (McKinney 2000 and 2004 Supplement), regulating municipal cooperation agreements, provides:

The municipal cooperation agreement shall specify the rights and obligations of a municipal corporation withdrawing from a municipal cooperative health benefit plan to any contribution (or premium equivalent) refund or reserve fund or for any contingent assessment liability or other obligation.

The existence of a reserve fund for municipal employee health benefits, previously held to be ultra vires, is specifically required by New York Insurance Law § 4706 (McKinney 2000). New York Insurance Law § 4706(g) provides:

If a municipal corporation withdraws from a municipal cooperative health benefit plan operating under a certificate of authority, the governing board shall, in accordance with the municipal cooperation agreement, determine the amount, if any, of the plan's reserve funds attributable to such municipal corporation, after considering all plan liabilities, and dispose of such amount in the manner provided in the municipal cooperation agreement

In accordance with the agreement entered into by the inquirer’s client in accordance with New York Insurance Law § 4705, an exiting municipal corporation is not entitled to any part of the accumulated reserves. Similarly, had the inquirer’s client joined the health insurance plan established pursuant to New York Civil Service Law Article 11 (McKinney 1999 and 2004 Supplement), which joinder is permitted by New York Civil Service Law § 163(4) (McKinney 1999), and had its experience been better than other participating employers, it would not have been able to withdraw any reserve funds attributable to its contributions.

Accordingly, based upon the provisions of New York Insurance Law Article 47 and the Plan’s Municipal Cooperation Agreement and consistent with those Opinions of the State Comptroller that have not been supplanted by New York Insurance Law Article 47, the inquirer’s client is not entitled to any refund.

For further information one may contact Principal Attorney Alan Rachlin at the New York City Office.