Why Washington County sewer officials may halt annual business trips to Hawaii

Annual business trips to Hawaii could be a thing of the past for top executives of Washington County’s embattled sewer agency.

Hawaii no longer appears to be the best state for Clean Water Services to operate its insurance subsidiary, according to a new consultant’s report prompted by an investigation by The Oregonian/OregonLive.

Consultant Aon has instead identified Arizona as the top spot to locate the insurance enterprise. If the relocation expenses pencil out, that could mean shorter business trips for public officials and big financial savings on the annual junkets that ballooned in cost since they began in 2016.

The location of the sewer agency’s insurance subsidiary came under scrutiny in March in the wake of an Oregonian/OregonLive investigation that found that agency executives on the insurance company board stayed at a rotating cast of five-star resorts for annual board meetings and insurance conferences in Hawaii. Seven trips cost at least $165,000, including at least $41,000 to send seven officials to Kauai last year, records show.

The sewer agency’s board of directors in April called on Diane Taniguchi-Dennis, the chief executive officer, to devise a plan to restore public trust. Taniguchi-Dennis, who traveled annually with others to Hawaii, resigned amid the fallout in June, privately citing a hostile work environment.

Sewer officials had long said that Hawaii was the best location for the insurance company, and insurance company officials argued that scheduling in-person board meetings to coincide with annual conferences enabled board members to gain valuable educational training and insights into industry best practices.

But the case for Hawaii hasn’t always been clear cut, according to earlier consultants’ evaluations obtained by the newsroom through Oregon’s public records law.

In fact, the records show that consultants in 2014 initially recommended that officials consider locating the business in Arizona or Utah before eventually recommending Hawaii, which they touted in part based on the faulty premise that travel costs wouldn’t be expensive. And a 2022 evaluation shows that Hawaii continued to rank highest partly because of the insurance company’s history there, an advantage no other state could offer.

Agency officials say Hawaii ultimately rose to the top in the initial evaluations because it had more experience with certain types of insurance coverage at the time than other states. The later evaluation continued to favor Hawaii using a scoring system that has since been replaced.

The latest domicile review now says Arizona is favorable due to its coverage options, stable regulatory structure and competitive operating costs, including its lack of a tax on premiums collected. Consultants highlighted those same Arizona perks in an analysis for Clean Water Services more than a decade ago, even though local officials ultimately selected Hawaii.

The sewer board, which is made up of the members of the Washington County Board of Commissioners, is set to be briefed on the new report at a July 18 meeting. Clean Water Services is expected to provide more information about the process of potentially relocating the insurance company to Arizona, including whether a move would make financial sense given relocation costs. The enterprise has no employees or offices in Hawaii but officials would need to account for various start-up and administrative expenses, including hiring outside companies to assist with operations in Arizona.

“I’m moving forward with the team to the next phase to understanding the cost and timing of making that type of move,” Rick Shanley, the acting chief executive officer/general manager of Clean Water Services, told the sewer board at a meeting last month.

Choosing Hawaii

The path to Hawaii started in 2014 as officials at Clean Water Services began considering out-of-the-box insurance options to address looming financial risks and gaps in existing policies, including underground pipelines and costly earthquake insurance. They hired consultants to evaluate whether the agency should create a wholly-owned captive insurance company, a form of self insurance that is rare among public agencies.

Even so, captives can be financially beneficial. That’s because any financial surplus that materializes after collecting premiums and paying out claims stays with the subsidiary, rather than disappearing to a third-party insurance company. Officials at Clean Water Services, in other words, would effectively maintain control of surplus funds that could be invested and used to help pay off future catastrophic losses.

Clean Water Services considered placing its insurance company in Oregon. But a May 2014 feasibility study conducted by insurance and risk management company Marsh ruled out Oregon as a viable option because the state had a fledgling market and didn’t allow captives to be set up as limited liability companies. Marsh said that would be the preferred structure for the agency to avoid a 35% federal income tax.

Among four states analyzed, Marsh recommended that “Clean Water consider Arizona or Utah as a domicile” over Hawaii, records show. Among other benefits, the consultants said those two states had competitive startup and operational costs, solid infrastructure and stable and growing captive programs, with 106 captives in Arizona and 342 in Utah compared to 184 in Hawaii. They also noted that neither state imposed domicile premium taxes while other states, including Hawaii, did.

But a follow-up study conducted by Marsh in June 2015 noted that while Arizona allowed public entity captives, none existed in the state. Marsh found that public entity captives were exceedingly rare at the time, with only four states actually having any. Hawaii led the way with two.

Clean Water Services focused on Hawaii, more than 2,500 miles away from Oregon. That was because Hawaii – unlike either Arizona or Utah – had experience with public entity captives and captives writing dental coverage, Clean Water Services spokesperson Julie Cortez wrote in an email.

Former General Manager Bill Gaffi, who retired in 2018, said in an email that he pushed at the time to maximize self insurance to the extent practicable. Arizona’s lack of experience insuring employee benefits, including dental coverage, effectively took it out of the running, said former Clean Water Services Risk and Benefits Manager Victoria Nolan, who was instrumental in helping the agency form the captive and served as its first president.

Victoria Fimea, chief captive analyst at Arizona’s Department of Insurance and Financial Institutions, said nothing in Arizona law has ever prevented a captive from insuring employee benefits provided by public-entity parents, including dental coverage, even though none were doing so in 2015.

Marsh also listed another major benefit of Hawaii: It allowed annual board meetings to be conducted “via telephone with regulatory approval.” That, Marsh contended, would minimize “travel costs for the annual board meetings.”

However, Hawaii would be unlikely to grant such an arrangement unless the company was inactive, according to Ashton Stallings, a spokesperson for Hawaii’s Department of Commerce and Consumer Affairs. Captive insurance companies are required to hold at least one meeting per year where at least one board member is physically present in the state, while others can join electronically, Stallings said. That was the case in 2015 and remains so now.

The board of Clean Water Services voted in 2016 to form its captive insurance company in Hawaii, concluding that only that state could provide “sufficient flexibility to achieve maximum cost-savings opportunities.” Agency executives did not take advantage of the flexibility allowing all but one board member to phone in to annual meetings from Oregon, ultimately opting to send the entire insurance board to Hawaii annually except during the pandemic.

It’s unclear if board members ever received or read the underlying consultants’ reports. Cortez, the spokesperson, said agency officials could not answer questions about the older reports because of staffing turnover. Taniguchi-Dennis, who served as deputy general manager when the agency formed its captive, referred questions about its creation and the selection of Hawaii to Clean Water Services, saying that Nolan, Gaffi and members of the board “were the people involved in the analysis and decision-making.”

Taniguchi-Dennis, who grew up in Hawaii, also said in an email that “innuendo and conjecture linking random information about my life” to the decision to locate the insurance company in Hawaii is “offensive and grossly misleading.”

Gaffi said that he didn’t know who received copies of the reports, but that it would not have been typical “to include such dated background documents” for the board. Gaffi, who was not among the sewer executives who traveled to Hawaii for insurance conferences, praised the agency’s decision to form the captive as part of its forward-thinking approach.

“They embraced a change-ready culture needed to succeed in a dynamic business and regulatory environment,” he wrote in an email. “That greatly benefitted CWS ratepayers.”

Existing relationship helps Hawaii

The initial selection of Hawaii gave the state a competitive advantage that would prove hard to beat.

In February 2022, Clean Water Services hired Aon consultants to conduct a strategic review of its insurance company to determine whether it was still providing a financial benefit and whether Hawaii remained the best domicile.

The review found that the company’s general and administrative fees and expenses were in “an acceptable range” based on benchmark comparisons and Aon’s experience with similar clients, although the report showed that its expense ratio was higher than that of other peer companies and at the edge of the benchmark.

The consultants also determined that Hawaii remained the best location. When compared to four other domiciles – Arizona, Vermont, Bermuda and South Carolina – Hawaii scored the highest on a matrix that considered each locale’s coverage options, regulatory environment, costs and taxes, administrative teams, expertise with captives and convenience.

However, it appears that what ultimately pushed Hawaii over the top was that the agency’s insurance company was already based there.

Consultants gave Hawaii an extra 15 points for “substance and existing relationships,” records show. That nudged it ahead in the final ratings of both Vermont and Arizona, which received no points in that category.

Hawaii finished with 479 points. Vermont scored 474 points while Arizona received 468.

Aon, in a statement provided by Cortez, said that “substance and existing relationships” was a commonly used category when the 2022 study was conducted but that Aon has since removed that criteria from its standard practice based on client feedback.

Cortez noted that the consultants considered the captive’s travel expenses in their analysis and still found that Hawaii was the “most advantageous domicile for the captive based on the coverage needs and the current regulatory environment at that time.”

Cortez said the sewer board was briefed on the 2022 report at a board training in December 2022 and only Commissioner Pam Treece received a copy of the review directly. The Oregonian/OregonLive requested audio or video of that training in order to learn what board members were told. However, Cortez said there was no recording because the agency did not notice trainings as public meetings at the time, a practice that changed only this year to ensure such conversations are recorded.

Clean Water Services prepared a 20-page presentation about its captive insurance subsidiary, named Clean Water Insurance Company, for that 2022 meeting. The presentation included just one page on the location review.

The message relayed to board members: “Hawaii is still the best option.”

Arizona rises to the top

The cost of annual business trips to Hawaii grew significantly until this year’s reckoning.

Sewer officials on the insurance company’s board held annual meetings to coincide with insurance conferences at five-star resorts, often bringing family along at their own cost. Taniguchi-Dennis eventually began flying first class and receiving upgraded rooms, accommodations that Clean Water Services said were made to comply with the Americans with Disabilities Act. At least two others also booked costly room upgrades, and officials in 2023 ordered an $80-per-person robatayaki experience of skewers prepared over hot charcoal.

“Travel to Hawaii to the Hawaii Captive Insurance Conference in conjunction with the captive’s annual meeting allowed the captive board to learn about recent regulatory changes and opportunities to maximize the effectiveness of the captive,” Cortez, the agency spokesperson, said in an email.

Those trips contributed to increasing general and administrative costs incurred by the insurance company. In its 2015 study, Marsh estimated that the insurance company would spend roughly $68,200 annually on operational costs. That held true in its first year but general and administrative costs have risen substantially since then. By 2022, they had more than doubled to $145,000 annually, financial documents show. They more than doubled again to $315,575 in 2024.

Cortez attributed the jump to some coverage line costs showing up under general and administrative fees – which equaled about $36,000 in 2023 and $46,000 in 2024. She said the costs also included an increase in travel costs for in-person conferences, consulting fees and administrative support fees that the insurance company pays to Clean Water Services for captive oversight and business management, among other things.

Cortez defended the decision to form a captive insurance company. Since 2016, the company’s capital has grown to almost $5.55 million that could be applied to future catastrophic insurance events, exceeding expectations consultants set in 2015 when the agency was considering forming the company.

“The current Clean Water Services executive leadership believes it was a good decision that has paid off for CWS and its ratepayers,” she said in an email. “Clean Water Insurance Company LLC continues to provide coverage for the over $1.5 billion of sewer and stormwater infrastructure, some of which wouldn’t be feasible via commercial markets.”

Even so, it appears the business’ days in Hawaii may be numbered.

Clean Water Services tapped Aon to fast-track a so-called domicile review as part of oversight measures implemented by the board in April. The report considered Hawaii, Nevada, Utah, Vermont and Arizona, which now has eight public entity captives. (Oregon still has a tiny captive program compared to other states, with only two businesses currently in operation, making it unworkable for the sewer agency’s subsidiary.)

Consultants used a slimmed-down matrix that no longer benefited Hawaii by including “substance and existing relationships” as a factor, and other categories were also eliminated. Aon also revised its scoring this go round in at least two other crucial ways.

Previously, Hawaii and Arizona each received fours on a five-point scale for geographic proximity and time zone, even though Arizona is far closer and it shares the same time schedule with Oregon for part of the year.

The new report downgrades Hawaii to threes in both categories and elevates Arizona to a five for its time zone.

The consultants also valued those two categories more significantly this time. Proximity scores were multiplied by a factor of five while time zone scores jumped four fold.

Arizona ultimately outscored Hawaii by 13 points in those two categories, pushing its overall score to 412. Hawaii scored 400.

When asked why Arizona and Hawaii’s ratings changed in those two categories, Cortez said, “CWS is following the updated recommendations of our third-party assessment and we defer to their industry expertise and application of their review methodology.”

Authors of the new report did not respond to a request for comment.

Meanwhile, the new analysis did not touch on employee benefit offerings, such as dental insurance. Clean Water Services began obtaining health benefits for non-unionized employees through the Public Employees Benefits Board this year, making state-specific options moot.

The consultants cautioned that while Arizona may save on travel costs and other expenses, Clean Water Services would still need to measure the savings against relocation costs for the insurance company.

One area of savings appears promising.

Hawaii’s annual insurance conference spanned four days. Arizona would offer Washington County sewer officials two conferences to choose from.

Neither runs as long. And Arizona’s only annual event isn’t held at five-star resorts.

— Jamie Goldberg oversees The Oregonian/OregonLive’s politics, education and homelessness coverage. She can be reached at [email protected] or 503-221-8228. You can find her on X at @jamiebgoldberg or Bluesky at @jamiebgoldberg.bsky.social.

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