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Top managers and employees at the Maryland Automobile Insurance Fund were having a tough time financially and were in jeopardy of not qualifying for bonuses last year.

So the board that oversees the independent state agency changed the bonus plan so that the employees would qualify. Bonuses to more than 400 workers totaled $1.4 million, most of which would not have been paid out without those changes.

According to a critical state legislative audit released Thursday, the insurance fund bonuses were paid despite the agency's $19.6 million loss that year and the financial strain on the state that has laid off hundreds of employees and subjected the entire work force to furloughs.

"We question the timing and appropriateness of these changes," auditor Bruce A. Myers wrote.

The normally obscure agency, known as MAIF, was created as an insurer of last resort by the General Assembly in the 1970s after lawmakers made auto insurance compulsory. Lawmakers did not intend for the fund to compete with the private sector, though retaining competent insurance professionals who could potentially make more money with private insurers has been a challenge for the agency.

MAIF executive director M. Kent Krabbe called the auditors' characterization of the bonuses "somewhat sensational." He and board chairman James Rowland argued that financial goals became "unattainable" because of the "catastrophic" economic downturn.

"It was a reasonable action by the board to try to recognize the hard work we all do despite the severe economic downturn," Krabbe said in an interview.

Krabbe also noted that the fund is not taxpayer-funded; its operating funds come from premiums on policies. He said if bonus money had been directed to rate reductions, the savings would have amounted to "fractions of cents."

According to the audit, the fund's board in June 2008 revised financial goals so that bonuses could be paid for lower financial results, and bonus pool paid to non-management employees rose to $1 million.

Then in December of that year, the board essentially waived a requirement that the insurer post a profit before bonuses could be paid to 30 management and executive-level employees.

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