Top Germantown leaders benefit from generous insurance policies

July 17--Germantown taxpayers have paid more than $1.5 million on premiums for generous life insurance policies purchased over the past 15 years for a handful of aldermen and top administrators.

As word trickles out of City Hall about the policies, critics are calling them a mistake -- including former Mayor Sharon Goldsworthy, who had a policy worth $200,000. In 15 years, taxpayers paid more than $55,000 in premiums on her AXA Advisors policy. She did not pay a cent.

Last Tuesday, Goldsworthy notified the city in writing that she wanted the policy canceled. The policy would have paid her survivors $150,000, according to files the city began releasing early this month from open records requests filed by residents Sarah Wilkerson-Freeman and Jon Thompson.

It's unclear whether any other area cities have similar situations. It does, however, seem clear from documents that Germantown officials came to consider the policies a "misguided investment" and not a good use of taxpayer money.

The issue began as the economy was sputtering to a crawl after the Sept. 11 attacks. City leaders were looking for a way to quietly gird key members of the administrative team when they retired. Within a month or two, they had settled on a plan: They would give whole-life insurance policies that not only included generous death benefits to their survivors but would also return money to the city.

Ed Barnett, a longtime insurance vendor for the city of Germantown, represented AXA Advisors and recommended their products to meet the city's goal after city leaders reached out to him. Once the package was in place for employees, aldermen were eligible too as long as the value of their policies did not exceed that of the employees. There's no record the Board of Mayor and Aldermen voted to approve the change in insurance in meeting minutes from 2001 and early 2002.

The city made the first quarterly payment of $26,204.27 on Feb. 28, 2002.

The policies currently have a cash value of $801,761, according to spreadsheet city HR director Steve Wilensky sent to The Commercial Appeal last week.

Of the 18 people originally covered, five were elected officials. Besides Goldsworthy, they include Carole Hinely, Bob Parrish, Gary Pruitt and Frank Uhlhorn.

John Drinnon, a former alderman, was also covered. He died in August 2015. His family collected death benefits of $100,000. City Administrator Patrick Lawton and Mayor Mike Palazzolo surrendered their policies in April 2015.

At one time, most department heads and others key to running the city had coverage under what the city called "key man" policies. What Germantown actually bought are more commonly known as split-dollar policies that were set up to pay the city a $50,000 death benefit, plus the surrender value, when the insured died.

Hinely was added to the list in 2007 after she was elected in 2006; she ran unopposed. Palazzolo and Ernest Chism were eligible in 2009 after winning second terms in 2008. Palazzolo got a policy, and Chism was deemed ineligible due to health reasons, according to a cache of documents obtained by The Commercial Appeal late last week that show both how the policies came to be and the lengths the city went to in the fall of 2015 to reduce their value or get cash out.

By then, a cadre of citizens were raising questions about finances at City Hall, specifically side deals that may have enriched Lawton's pay.

Public records from the citizens' requests show Lawton surrendered his $500,000 policy, twice the size of the policies given to others, in the spring of 2015 and enrolled in the city's term-life insurance.

The city coverage is capped at $300,000, which means he forfeited $200,000 in coverage and $450,000 in death benefits to his wife. The city's insurance also will not cover him after he retires. The city-mandated retirement age is 62.

The $69,000 surrender value of the policy in Lawton's name was deposited in the city's general fund.

Palazzolo forfeited his policy at the same time. He provided paperwork showing an $8,817.88 surrender value had been deposited in the city's account.

"Mike and I studied it long and hard," Lawton said. 'Is this a benefit that either one of us should take when we leave office?' We decided it wasn't necessary."

Goldsworthy doesn't remember who suggested how much individual policies should be worth.

"I do not remember how the amounts were established," she said. "It came as a recommendation, I imagine from the city staff. I don't have a clear recollection."

Alderman Rocky Janda, past liaison to the Personnel Advisory Commission, first heard of the "key man" policies in the fall of 2014. He says he was a driving force to get rid of them.

"It took three to four months for me to figure it out," he said. "It was insurance for key people in our system, but it wasn't key man insurance, which does not follow you when you retire."

When it became clear to him that the holders had been told the policies were a benefit of their service or job, he says he gave up trying to get people to surrender them.

"I quit. I am not going to take away a benefit they were told they could take with them," he said.

In January, the city quietly stopped paying the premiums from the general fund; they are now paid from the cash value of each policy.

"The rationale," Palazzolo said, was "to not make payments with taxpayer dollars nor burden the general fund."

Records obtained by The Commercial Appeal show city officials were having serious misgivings about the policies in August 2015. Not only were the investments from policies performing well below expectations in money market accounts, but the city was having a hard time justifying the use of taxpayer money "in what it sees as a misguided investment," according to an email from Robert Hale, its attorney on the issue at GlankerBrown, to an executive at AXA Advisors.

The No. 1 concern, according to Hale's email, was that it made "little or no sense" to insure elected officials as key men when they serve at the "whim of the voters. " The second issue was that it also didn't make sense to provide taypayer-funded death benefits of $150,000 to aldermen who had been paid $6,000 a year.

After years of lackluster performance, the city for a time was also alleging that Barnett had improperly advised it on both the purchase and performance and threatened to file a complaint with the Financial Industry Regulatory Authority. The city later dropped all allegations against Barnett.

The questions the city was raising, Lawton said last week, were "to better understand the policies. They had been sitting sorta dormant. We were getting a better idea of what was contained in them."

The plan always was that the city would recoup its outlay through investments and death benefits. The investments had performed nowhere near goal, Hale said in the email. To make matters more serious, the death benefit accrual to the city had somehow been omitted from the original policies. According to information Hale had from the city, only one policyholder had signed the statement allowing $50,000 death benefits to flow to the city.

Lawton says the issue has been resolved. But a spreadsheet with information on each policy from Wilensky last week indicates the death benefits to both the city and the beneficiaries could not be verified.

Wilensky did not respond to emailed requests for more information.

"The fact that city seems unclear about the death benefit to the city speaks volumes," Wilkerson-Freeman said. "If these are indeed key man policies, the first consideration would have been the benefit to the city. The fact that it to this day cannot verify the death benefits to the city is an egregious failure of their responsibilities, and in my opinion, suggests strongly malfeasance."

According to an affidavit signed Oct. 7, 2015, by Pat McConnell, head of HR at the time and covered by a policy, the idea of policies for key employees was suggested in 2001 by Drinnon. Lawton gave approval for McConnell to talk to Barnett, who later shared concepts for moving forward with Lawton and Goldsworthy. Lawton, according McConnell's testimony, approved the people who would be covered.

She also said the city had received quarterly statements on each policy; she said she placed the statements in the appropriate files.

Last fall, the city made an effort to have recipients surrender the policies, Hinely said.

"I was never called to say, 'We are canceling your policy.' I was called by someone who also was going to be affected by it," she said.

"Seven of us got together and hired a lawyer and sent a letter to the city, saying this is not fair," Hinely said.

"Frankly, Patrick Lawton and Mike Palazzolo didn't want this reported," she said, although she did not speak directly with either.

"Other people let us know that they didn't want anyone to know they were taking this away from us. They wanted us to keep it very, very quiet."

Lawton says Hinely is incorrect.

"There has been no communication between the city and the named insured regarding the surrender of these life insurance policies."

In January, Hinely and the six others received a letter from City Hall informing them that the policies would remain in effect.

"But they could not promise that another administration wouldn't take them away," Hinely said.

These current and former employees and aldermen in 2015 had whole-life insurance policies funded by Germantown taxpayers. The amount is the base face value.

Samuel Beach, $250,000

George Brogdon, $250,000

Jerry Cook, $250,000

John Dluhos, $250,000

John Drinnon, $150,000

Harvey Faust, $250,000

Sharon Goldsworthy, $200,000

Richard Hall, $250,000

Carole Hinely, $150,000

Patrick Lawton, $500,000

Pat McConnell, $250,000

Mike Palazzolo, $150,000

Robert Parrish, $150,000

Albert Pertalion, $250,000

George Pouncey, $250,000

Gary Pruitt, $150,000

Frank Uhlhorn, $150,000

Harold Wolf, $250,000

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