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The Montana State Fund board has voted to drop a lawsuit against the state over a 3 percent management fee charged on some Fund investments that would have cost $30 million.

The vote was 5-2 and came a week and a half after Gov. Steve Bullock appointed two new board members who voted Wednesday to end the lawsuit.

Bullock, who had to appoint new board members by the end of the year, has said he was unaware of the lawsuit filed Nov. 17, the same day he made the appointments.

On Wednesday after the vote, state legislator Rep. Greg Hertz, a Republican from Polson who strongly opposes the fee and is a State Fund ratepayer, said a group of about 20 stakeholders plans to file a lawsuit in the coming weeks in another effort to stop the fee from being charged.

State Fund CEO and president Laurence Hubbard, who supported the lawsuit, said after the vote he was disappointed but respects the wishes of the board and would direct the Fund's attorney to file papers to drop the lawsuit.

The management fee arose during a special legislative session held earlier this month, called by Bullock to address an anticipated $227 million shortfall in the state budget. 

The fee was part of a package including budget cuts and fund transfers proposed by Bullock and passed by a majority of lawmakers to balance the budget.

It will be charged on State Fund investments of over $1 billion with the state Board of Investments. State Fund has about $1.5 billion that is being managed by the Board of Investments. Last fiscal year it paid $334,000 in fees on those investments.

Montana State Fund is a workers compensation insurance organization established in the state constitution. It acts as an insurer of last resort for companies that cannot get coverage elsewhere, including many high-risk industries such as construction.

Many from that industry spoke in support of the lawsuit at the board's hearing Wednesday.

William Johns, president of Summit Roofing in Missoula and a policyholder with State Fund, told the board to oppose the fee and continue the lawsuit.

"If we have $30 million the Legislature can scrape off, we've been overcharged," he said.

Hertz said if the Fund did not use this lawsuit as a "hill to die on" and defend money it has collected from ratepayers, lawmakers would come back to tap reserves in the future. He also said it's time for State Fund to get a legal opinion on the ability of lawmakers to look to the Fund in tight fiscal periods.

"Is $30 million a big enough hill? Is $60 million, is it $100 million? How big does it need to get before we tell the Legislature enough is enough? We need an answer here whether we win or lose. If we lose, we need to strengthen the law because this money should not be accessible as a piggy bank to the Legislature."

Though most who testified, including former board members and policyholders, spoke in favor of continuing the lawsuit, some did not.

That included state Rep. Jim Keane, a Democrat from Butte. Keane said the Fund collects more than it should in premiums because it wants to privatize and is opposed to paying the management fee because it would take away from money set aside to do so.

"Why do they need so much money? To pay off the liabilities to form a mutual company," Keane said. "Let's let these people keep the money in their pocket to pay higher wages, to maybe buy health care instead of sitting here in the Board of Investments and throwing them back a little bit (in dividends) when they think they're doing good."

Chris Cavazos, the political director for Montana AFLI-CIO, said the characterization that the management fee amounts to pilfering State Fund money is not accurate.

“This is not a takings,” Cavazos said. “This is paying for a service they have received that has been state-subsidized.”

On Nov. 17, the State Fund filed a lawsuit over the fee and asked a Helena District Court judge for a temporary restraining order to stop the state from charging the fee while the case proceeded.

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That order was denied and in his denial, Judge Michael McMahon also questioned whether the Fund had a legitimate case going forward, writing that "the court is concerned whether (Montana State Fund) has established a legitimate cause of action or that it is likely to succeed on the merits of its claims."

The State Fund board, before the special session even convened, had authorized Hubbard on a 6-0 vote to take legal action if necessary. Hertz pointed to two new board directors, plus what he said was a lobbying effort of other board members on behalf of the governor, as to why board support had shifted by Wednesday.

The two new board members, Jim Molloy and Cliff Larsen, joined chairman Lance Zanto, Jack Owens and Lynda Moss in voting to end the lawsuit. Matt Mohr and Jan VanRiper voted to continue the lawsuit.

Molloy said he didn't feel the management fee would put the State Fund's financial status at risk and losing the lawsuit could put the Fund in a worse situation.

"I don't believe this is the hill worth taking the risk of dying on. I believe that is a battle saved for a better day," Molloy said. "My view right now is it's not the time. Over the long-term it will be better to have a more constructive relationship with the state."

VanRiper said even though the judge denied the temporary restraining order, nothing had changed since the board decided at the start of the month to authorize legal action if the bill passed.

"I don't see how now we can say we have plenty of money to fork over $30 million for (something) other than policyholders," VanRiper said.

A spokeswoman for Bullock said Wednesday the governor was pleased with the vote.

"The governor’s office is pleased the board is fulfilling their responsibility to follow the law passed by the Legislature. We look forward to a collaborative relationship with the State Fund going forward."

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