The state Commerce Department has ruled that the city of Duluth's group health-care fund for active and retired employees has been illegally managed, the Duluth News Tribune reports today.

Now city officials may have to change how the fund is managed and regulated, and they may have to transfer $500,000 from an investment account, the paper says.

The city is self-insured, paying its own health-care claims. It oversees the group health fund through a committee made up of city managers and union representatives. But it also  pays the health-care claims of employees with the Duluth Housing and Redevelopment Authority, the Duluth Airport Authority and the Duluth Entertainment Convention Center — though those entities do not have say in how the fund is managed.

The Commerce Department said those agencies should have had a say and be treated as a “pool,” meaning the Commerce Department must oversee the fund to ensure compliance with state regulations.

Under state regulations, a board of trustees would have to be set up to oversee the fund, a certified public accountant must audit the pool annually, and any investment of money from the fund has to be done by an outside investor with no ties to the city or pool participants.

The city has begun efforts to resolve the problems.