New Hampshire’s budget is being balanced this year in part by turning private insurance funds into government money and appropriating the funds for government use. The raid illustrates how fiscal problems can tempt a government to limit property rights and rationalize behavior it would never consider otherwise.

The state’s current financial crisis is well known. During the governor’s budget address, he announced his intention to use $110 million from a little-known medical malpractice fund to balance the budget. His announcement immediately sent policy makers scrambling to find out exactly what the fund was.

No one knew there was $110 million available to the government sitting in an untapped fund. When legislators had passed a bill a few weeks earlier to clear out surpluses in other dedicated funds, they had found only about $16 million. The governor had waved a magic wand and — presto! — a huge chunk of money materialized.

It turned out there was good reason no one knew it was available. That’s because it’s neither state money nor a government program. The medical malpractice fund is a privately funded high-risk insurance pool administered by a private company through a provision in state law for joint underwriting agreements. The state doesn’t pay for it or administer it. It is merely set up through state rules that allow for such joint agreements.

The co-operative fund assesses premiums and holds the money in trust against future charges. When it has a balance, it invests those funds according to a formula set up by its rules. The premiums and investment have been more than enough to pay charges, so the pool has a surplus.

This is exactly how mutual or cooperative insurance works. In the case of a typical mutual insurance cooperative, excess funds not needed to pay premiums are returned as a dividend to those who paid premiums. This may be how your car insurance works. In my case, we pay premiums throughout the year and then receive a check refunding excess premiums.

In fact, the cooperative medical malpractice fund has exactly the same provision. The money is held in trust but must be remitted to members or premium payers should there be a surplus. The wording is available in the rules on the insurance department’s Web site. (It’s rule 1703.07.)

The rule specifically requires that if premiums exceed the amount required to pay losses and expenses, they shall be distributed first to members and then the fund must "distribute the excess to such health care providers covered by the association as is just and equitable."

There’s nothing weird about this. It is how any mutual insurance organization operates. Premiums are held in trust to pay claims. If you don’t have claims, the premiums are not justified and cannot be justified.

The explicit rules of the underwriting agreement don’t provide a third paragraph that says "yeah, but if the state’s having trouble balancing its budget then nobody gets his money back and the state can just take it."

The state has a long memo from the Attorney General’s Office that explains why in the attorney general’s opinion no entity has enough standing "such that it could successfully challenge a legislative act to transfer the funds to the General Fund." Essentially the state argues that because joint agreements are allowed by statute, statute can be used to seize their funds. I’m not sure anyone who set up the fund realized that.

The attorney general also cites cases in other states where the state court allowed the legislature to take the money. In those cases, the agreement did not have rules providing for the distribution of any excess funds.

The governor and the attorney general’s memo have also argued that a disbursement would be an unacceptable distortion of the market despite the rule requiring it. It is difficult to see how the very same disbursement my insurance company makes to me, and yours makes to you, is unacceptable just because the government desires the money. If it is, in fact, an unacceptable practice, then wouldn’t all mutual insurance companies have to be abolished by state law? And wouldn’t the state have made a huge mistake in approving the rules that govern this cooperative?

Ultimately, this is a seizure of private funds justified only by the cash crunch the state finds itself in. Argentina recently did something similar. Faced with a larger crisis than we face, the government nationalized private retirement funds, the equivalent of our 401(k) funds. The government seized billions in private funds to help its own cash flow. It was uniformly attacked as an unacceptable assault on private property. Let’s not follow that bad example.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.

There is no need for depositors to apply for FDIC insurance or even to request it. Coverage is automatic.

To ensure funds are fully protected, depositors should understand their coverage limits. The FDIC provides separate coverage for deposits held in different account ownership categories. The coverage limits shown in the chart below refer to the total of all deposits that an accountholder has in the same ownership categories at each FDIC-insured bank. The chart shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.

Basic FDIC Deposit Insurance Coverage Limits^*

^* On January 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner.

http://www.fdic.gov/deposit/deposits/changes.html