Greg Andrews, The IBJ

The National Education Association said today that it is taking over its Indiana affiliate, a stunning comeuppance for what long had been one of the most powerful union forces in the state.

The Indiana State Teachers Association, perhaps the most feared lobbying interest at the Statehouse, said in an e-mail to members it will cede complete control to the NEA. The move follows problems with its insurance trust that landed the teachers' union in financial trouble and spurred FBI and state investigations.

The NEA appointed trustee Edward Sullivan, retired executive director of the Massachusetts Education Association, to run ISTA. In the e-mail, ISTA President Nathan Schnellenberger said Sullivan will try to keep ISTA running smoothly while exploring financial options for the union and making corrections as needed.

Schnellenberger said ISTA's board held a special meeting on Saturday and unanimously agreed to ask NEA to step in.

The Indiana Department of Insurance estimates the ISTA Insurance Trust has assets of just $19 million but liabilities of $87 million - leaving a $68 million deficit.

The trust provides long-term disability coverage for about one-third of the state's 300 school districts and provides health insurance for about 30 districts.

Department officials say the trust's investments were highly inappropriate, with 88 percent placed in high-risk vehicles, such as hedge funds and real estate limited partnerships. The percentage has increased as the trust sold off more liquid investments to pay expenses.

Consultants for the department estimate that the trust's long-term disability business is $40 million short and its health business is $6 million short. The trust also lacks the wherewithal to make good on $21 million in credits it provided school districts with good claims experience, the department says. Districts are supposed to be able to tap those credits to blunt future premium increases.

Late last week, the trust was on the verge of completing the transfer of its health business to UnitedHealthcare, but state insurance Commissioner Jim Atterholt said this morning that Sullivan wants to examine the pending deal before proceeding. The transaction would require that the trust transfer $4.7 million to UnitedHealthcare.

"We are a little concerned with their hesitation," Atterholt said.

Morgan Stanley's David Karandos was the ISTA Insurance Trust's point person for investments.

Morgan Stanley said in a statement that the investment firm will fully cooperate with investigators. The statement says that Karandos began advising the trust prior to joining Morgan Stanley in February 2008 and that ISTA moved its accounts to the firm that year.

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