Trends in U.S. Interstate Compacts: State Compact Adoptions in 2011 Were Well Above Average

By Crady deGolian, Council of State Governments

Currently, out of approximately 215 existing active interstate compacts, each state belongs to 25 different agreements, on average.

The use of interstate compacts has evolved considerably throughout the course of American history.   Dating back to their first use in colonial America through World War II, most of the compacts  into which states entered were bi-state agreements to resolve border disputes.  Since then, however, compacts have grown into regional and national agreements with both advisory and regulatory responsibilities.  In the last half century, interstate compacts have become more sophisticated and are being used to create administrative agencies to solve ongoing state policy challenges.

The creation of the Port Authority of New York and New Jersey in 1922 through an interstate compact signaled a significant shift in the use and application of interstate compacts.  For the first time, states began using compacts to establish regulatory agencies with the authority to act on the state’s behalf.  While the formation of the port authority ushered in a new era for interstate compacts, in 1955, states really began using compacts as a means to resolve challenging policy questions. 

Since then, the use of interstate compacts has grown dramatically, including:

• States’ adoption of nearly 1,300 compacts, averaging 23 per-state annual adoptions;
• The creation of interstate administrative agencies, including compacts in interstate transportation, taxation, environmental matters, regulation, education, corrections, public safety

The past four decades have seen some fairly dramatic ebbs and flows in the use of compacts.  In a 26- year period from 1974 to 2000, state adoptions were above the annual average of 23 only four times.  Compact adoptions were above average in none of the eight years of the Clinton administration. Conversely, from 2001 to 2011, the number of state adoptions was above average in seven legislative cycles.

While the exact reasons for the increased use of compacts over the course of the past decade is impossible to determine, one possible explanation may be attributed to recent Republican electoral successes.  Both the Bush administration and the recent shift to a Republican controlled U.S. House of Representatives have resulted in calls for a less centralized federal government and more emphasis on state-driven solutions.

This argument seems to carry more water when analyzing compact adoptions during the past two periods of state legislative sessions.  In 2010, there were 17 pieces of compact legislation adopted by state legislatures across the country.  While this number is not extremely low when looking across the past 57 years, it is well below the annual average number of state adoptions.

Conversely, there were 29 adoptions of compacts by state legislatures in the first half of 2011, which is well above the annual average.  These include compacts relating to surplus lines insurance, health insurance, insurance product regulation, horse racing, juvenile justice and education.

Such a dramatic jump in the use of compacts from 2010 to 2011 is difficult to explain.  It seems reasonable to conclude that the November 2010 elections, which resulted in Republicans gaining control of the U.S. House of Representative and making significant gains in the number of gubernatorial seats held and the number state houses and senates controlled, have played a significant role.

NIMA/SLIMPACT Update

Kentucky Insurance Commissioner Sharon Clark was recently voted interim Chair of the new Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”) Commission.   Nine states have joined SLIMPACT and have begun work on the adoptions of rules, bylaws and an allocation formula.  Commission business will officially begin once a tenth state joins the compact.

Meanwhile, the Nonadmitted Insurance Multi-State Agreement (“NIMA”) states elected their first Governing Committee.  The inaugural NIMA Chairman will be Insurance Commissioner Mike Chaney from Mississippi, the Vice-Chairman of NIMA will be Director of Insurance Merle Scheiber of South Dakota, and Florida Insurance Commissioner Kevin McCarty will serve as NIMA Secretary.

Both NIMA and SLIMPACT provide a mechanism to report, collect, allocate and distribute surplus lines tax revenues consistent with the Non-admitted and Reinsurance Reform Act, part of the 2010 Dodd-Frank Wall Street Reform legislation that allows only the home state of the insured to require premium tax payments for non-admitted insurance in the absence of an agreement among states.