TO:
Honorable Mayor and Members of the City Council
THROUGH:
Mark Danaj, City Manager
FROM:
Bruce Moe, Finance Director
Teresia Zadroga-Haase, Human Resources Director
SUBJECT:Title
Fiscal Year 2014-2015 Insurance Fund Status Report; Phased Transfer of Funds from the General Fund to the Insurance Fund to Correct Fund Imbalance (Finance Director Moe).
ACCEPT REPORT; APPROVE TRANSFER PLAN
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council: a) accept a report on the Fiscal Year 2014-2015 Insurance Fund performance and steps being taken to improve loss experience; and b) approve a three-year phased transfer plan of $667,000 per year from the unreserved General Fund balance to the Insurance Fund, including a transfer of $667,000 in Fiscal year 2015-2016.
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FISCAL IMPLICATIONS:
Due to higher than expected claims activity during FY 2014-2015, the Insurance Fund ended the fiscal year with a negative fund balance of approximately $1.87 million. The trend to this outcome was first reported to the City Council with the FY 2014-2015 first quarter budget report in November 2014, and again at the mid-year budget report in February 2015. The prediction of the negative fund balance was discussed with the third and fourth quarter budget updates as well.
With the Q3 and Q4 reports, staff recommended that the final results for FY 14-15 be determined before correcting the fund balance issue. With FY 2014-2015 Insurance Fund transactions now substantially completed, a plan of funding needs to be implemented to correct the negative fund balance.
The fund balance as of June 30, 2015, was negative $1.87 million. This can be corrected through a recommended three-year phased transfer from available unreserved General Fund moneys of $667,000 each year starting with FY 15-16 through FY 17-18. This will leave a negative fund balance of approximately $1.2 million in the Insurance Fund and a projected fiscal year end unreserved General Fund balance of approximately $1.6 million (this is in addition to the 20% financial policy reserve as well as the $4 million Economic Uncertainty reserve).
BACKGROUND:
The Insurance Fund was established as a mechanism to track, report, pay and account for liability and workers compensation claims with the City.
As an internal service fund, Insurance Fund revenues are generated primarily through charge-outs to user departments based on recent claims history involving that department. For example, if the Finance department experiences increased workers compensation activity (e.g., on the job injuries) charges to Finance will appear in subsequent budgets to recover the costs associated with those claims until fully recovered, at which time the charges are reduced. In essence, the Insurance Fund serves as the City’s insurance company, with premiums increasing or decreasing based on experience.
Other revenues to the Fund include recoveries from third parties involved in claims, including refunds from excess insurance carriers when the amount of the claims paid exceeds the City’s self-insured retention (SIR, or in simpler terms, the deductible).
Insurance Fund expenditures are primarily from claims paid, which are broken down into two types: current, for which the costs are known and payable, and long term liabilities (also referred to as “incurred but not reported,” or IBNR). For IBNR, because the actual costs are not known, liabilities are estimated by the City staff in conjunction with information from the Third Party Administrator (TPA) who handles both liability and workers compensation claims for the City (those estimates are subject to adjustment both positive and negative based on updated information over time). With both current and IBNR claims, the City either pays the identified claims, or reserves for the IBNR. Either way, these costs are reported as “claims paid” in the budget and financial reports (which are also separately reported as Workers Compensation or Liability).
DISCUSSION:
During Fiscal year 2014-2015, the City’s Insurance Fund expenditures exceeded budget by $1.02 million. This was primarily due to unexpected levels of activity in both liability and workers compensation, which exceeded budgetary estimates by $607,000 and $656,000 respectively. Revenues exceeded budget by approximately $270,000, which along with savings in other areas helped slightly mitigate the imbalance.
As predicted and reported with the Q3 and Q4 budget reports, by year end, expenditures exceeded budget, requiring the use of existing fund balance. In doing so, the Insurance Fund ended FY 2014-2015 with a negative fund balance of approximately $1.87 million (the negative fund balance in this instance is caused by future liabilities, which if fully paid out today, would exceed currently available funds. However, the fund does have sufficient cash available for current liabilities and operations).
An analysis of the causes of the losses for FY 14-15 indicates that IBNR costs for workers compensation and liability claims increased by $301,621 over the prior year - the result of reserves being adjusted for several claims filed with the City. It is not uncommon for workers compensation cases to have increased costs realized (or reserved for) long after the initial claims have been filed; treatment may continue for these injuries, sometimes as long as thirty years beyond initial treatment, and the City is obligated to pay for those injuries for an indefinite timeframe, sometimes for the life of the employee. Liability claims tend to be of much shorter duration by nature, and once completed are final, usually within a few years of the loss at most.
The analysis also indicates that the projected (budgeted) losses (both current and IBNR) exceeded staffs’ estimates which were developed utilizing historical data. And while a budget adjustment was approved by the City Council at mid-year in recognition of the trends, even that adjustment ultimately proved to be insufficient to provide for the full year costs (please note that specific details on reserves for cases, as well as workers compensation claims, are not included in this report due to the need to maintain confidentiality).
For FY 2014-2015, the Insurance Fund started the year with a fund balance of $487,408 (after accounting for all liabilities). Activities during FY 14-15 resulted in a loss of $2,357,187. This results in an estimated fund balance of negative $1,869,779. In order to correct this imbalance, staff recommends a three-year phased equity transfer totaling $2 million ($667, 000 per year) from available unreserved General Fund moneys. The first transfer would occur in the current fiscal year (2015-2016), with subsequent transfers in 2016-2017 and 2017-2018.
Despite the use of fund balance during FY 2014-2015, the Insurance Fund maintained the Financial Policy requirement of $2 million of working capital. Working capital is calculated by taking Current Assets less Current Liabilities; it does not take into account long term liabilities:
Current Assets (cash) $10,249,291
Less Current Liabilities (excludes IBNR) $ 7,985,309
Equals Working Capital $ 2,263,982
Before the transfer of funds from the General Fund, it is important to note that the Insurance Fund has sufficient resources to pay current claims. It is the reserving and accounting for long term liabilities, which totals $4,148,280, that causes the fund balance to become negative. Once the transfers are enacted, all claims, current and IBNR as currently stated, will be fully funded.
Staff recommends a three-year phased approach to recapitalizing the Insurance Fund. While sufficient funds are available within the unreserved General Fund to permit a one-time $2 million transfer, doing so would result in only a minimal unreserved fund balance ($300,000 to $400,000 by fiscal year end). The unreserved fund balance is utilized to accommodate unplanned expenditures that arise during the year, fund future general (non-enterprise) capital improvement projects, and subsidize other funds that have insufficient money including Street Lighting & Landscaping, and Storm Water. As a result, it is important to maintain some level of unreserved fund balance to accommodate these needs. The recommended three-year approach allows for a General Fund cushion while also addressing the Insurance Fund needs.
This approach was discussed with the City’s auditor. While the negative fund balance will be included in the Auditor’s report as an issue, the phased capitalization plan will be recognized as an acceptable solution.
As an alternative, the City Council may direct a one-time full funding plan transfer of $2 million from the General Fund to the Insurance Fund to satisfy the negative fund balance. However, this may cause the use of Economic Uncertainty reserves if the General Fund budget needs any significant adjustments. The phased approach provides greater flexibility with respect to general City operations.
GASB 68 Accounting Standards
The Comprehensive Annual Financial Report (CAFR) for FY 2014-2015 will be issued in early calendar year 2016. This CAFR will incorporate the new Governmental Accounting Standards Board (GASB) Pronouncement No. 68 regarding Accounting and Financial Reporting for Pensions. In short, these standards require public agencies to report in the government wide and proprietary fund statements net pension obligations (NPO) on the Statement of Net Position (balance sheet). In doing so, the NPO will be listed under non-current liabilities and be calculated in the comparison of assets and liabilities to determine the overall net position. Simply put, GASB 68 now requires the assets to be adjusted by the City’s NPO.
Since there exists a net pension liability for the City, the net position in the government wide and proprietary fund statements will be reduced. The exact NPO for the Insurance Fund will be included in the CAFR. Until that amount is determined, we can expect that this new standard will further impact fund balance beyond the current negative $1.87 million. More details about GASB 68 and the exact impacts on fund balances will be discussed when the CAFR is delivered to the City Council in early 2016.
Proactive Management Steps
With the hiring of Teresia Zadroga-Haase as the City’s new Human Resources Director, who oversees the Risk Management function, the City is taking several steps to ensure that the City is proactively addressing loss prevention including liability claims and workplace injuries, whenever possible. While much of the City’s workers compensation costs can be attributed to state laws and presumptions for certain occupations, specifically safety personnel, there are steps the City can take to minimize losses.
Third Party Administrators RFP
The City is evaluating proposals from Third Party Administrators (TPAs) for the handling of claims against the City (liability and workers compensation). The TPA plays a crucial and integral role in the claims management process. This includes reviewing medical bills on workers compensation cases to ensure that the City is paying an appropriate amount for treatment, and receiving the maximum amount of discounts available. It also includes utilization review, which is a legally required process to review treatment to determine if it is medically necessary. By requesting proposals, the City will have an opportunity to review current industry practices and negotiate competitive market rates for services provided.
The TPA also serves as an intermediary between the City, the medical community and our employees, and helps facilitate positive outcomes from treatment. They also help promote our efforts to have employees return to work as soon as possible - a goal that benefits both the City and the employees.
Expansion of Loss Prevention Programs
Additionally, Human Resources (HR) will be expanding on loss prevention programs. For example, the MB Fit program, which focuses on employee health through exercise, diet and other activities, has been a great success. The goal of this and similar programs is to improve wellbeing of our workforce while also reducing healthcare and absenteeism costs. Currently, 225 employees have participated in a MB Fit activity, with an average of 90 employees per month, with the goal of growing that number. In fact, some MB Fit participants entered the Manhattan Beach 10K race as a group in an effort to promote fitness.
Safety Programs
Safety programs are a lynchpin to an effective risk management program as well. HR will be promoting proactive educational programs for employees on workplace safety as well as training on the latest techniques for avoiding injuries and being physically and mentally prepared for work assignments.
HR will be considering other proactive safety plans as part of the City’s efforts to maintain a healthy workforce, a safe environment for residents and employees, and ultimately reduce costs through accident and injury avoidance. Staff will report back to the City Council periodically with those efforts, once the department is fully staffed and the various initiatives around improving the efficacy of our workers’ compensation and general liability programs can be prioritized.
Back to Work Program
The City currently lacks a coordinated, City-wide return to work program. The existing program is unevenly applied through the City, resulting in many employees being unable to return to interim modified duty positions and creating greater indemnity costs.
The key to an effective return to work program is education of department management and staff regarding the negative budget impacts of having employees off work and the positive effects on employee recovery and morale a robust return to work program can have. Coupled with strong oversight of the workers compensation claims process, an effective return to work program will reduce costs and improve service to injured employees.
CONCLUSION:
The City experienced unusually high losses in liability and workers compensation in FY 2014-2015. As a result, funds are needed in the Insurance Fund to appropriately provide resources for liabilities. Several proactive steps are being taken to address the trends in an effort to reduce injuries as well as costs.
Staff recommends that the City Council: a) accept a report on the Fiscal Year 2014-2015 Insurance Fund performance and steps being taken to improve loss experience; and b) approve a three-year phased transfer plan of $667,000 per year from the unreserved General Fund balance to the Insurance Fund, including a transfer of $667,000 in Fiscal year 2015-2016.