SUBJECT: General Liability/Property Insurance & Workers Compensation Funding Policies Replacement

Transcription

1 County of Santa Clara Office of the County Executive DATE: June 16, 2015 TO: FROM: Board of Supervisors Greg Iturria, County Budget Director SUBJECT: General Liability/Property Insurance & Workers Compensation Funding Policies Replacement RECOMMENDED ACTION Consider approval of Board Policy Resolution replacing Board Policy Manual Section 4.15 relating to Workers' Compensation and Liability Insurance Funding Policies, effective July 1, (Roll Call Vote) FISCAL IMPLICATIONS There is no fiscal impact to Fiscal Year 2015 and/or Fiscal Year Funding included in the FY 2016 Recommended Budget for the General Liability /Property Insurance and Workers Compensation programs is based on the current funding policies. The recommended action will impact the recommended funding for these programs in Fiscal Year During the Budget Hearing each June, the Board of Supervisors will continue to make all final funding decisions for the County s insurance programs. CONTRACT HISTORY Not Applicable. REASONS FOR RECOMMENDATION SUMMARY: The recommended Worker s Compensation and General Liability Insurance Funding Policies specifies that Administration targets funding for each program at no less than the 70% confidence level and no more than the 80% confidence level as determined by an annual actuarial study, unless the Board of Supervisors approves a lower or higher target for a single fiscal year to accommodate special circumstances for the identified fiscal year. All medical malpractice, automobile and liability claims older than two years will be funded at the expected level (50% confidence level). When actual funding levels fall below the target range Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 1 of 7

2 of 70% to 80% confidence level, then up to a five year phase-in of higher charges to departments is allowed to reach the recommended funding levels. If actual funding levels fall above the target range, then a more aggressive two year phase-out of lower charges to departments will occur to reduce a surplus to the recommended funding levels. Within the General Liability Insurance Funding plan, reserves are recommended for the expected County losses to facilities and infrastructure damage from earthquakes. An annual contribution amount over a period of 20 years is recommended to achieve a funding target for the estimated earthquake losses expected to occur in a 20 year period. Administration is working with actuaries and insurance advisors to develop similar recommended funding policies for the County s unemployment, dental and life insurance programs. It is the intent of Administration to bring these additional components of a comprehensive insurance policy to the Board of Supervisors at a later date in 2015 for review and consideration. CURRENT POLICY: 4.15 WORKER S COMPENSATION AND LIABILITY INSURANCE FUNDING POLICIES (Adopted ) It is the policy of the Board of Supervisors that (a) the workers compensation and liability insurance programs fund 100 percent of their claims lifetime liabilities at a 50 percent confidence level, and (b) the liability insurance programs utilize a three year rolling average funding method. This policy will be re-evaluated by the Board of Supervisors for the fiscal year beginning July 1, RECOMMENDED POLICY: 4.15 SELF-INSURANCE FUNDING POLICIES It is the policy of the Board of Supervisors that: (a) The workers compensation self-insurance program has targeted funding at no less than 70% confidence level and not more than 80% confidence level, unless the Board approves a lower or higher target for a single fiscal year. (b) The general liability, medical malpractice, and automobile claim self-insurance programs have a targeted funding at no less than 70% confidence level and not more than 80% confidence level for the most current two years claims, and all other years claims at the expected level, unless the Board approves a lower or higher target for a single fiscal year. (c) When actual funding is higher or lower than the targeted funding level for workers compensation, general liability, medical malpractice, or automobile claim self- Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 2 of 7

3 insurance program, then Administration will use a two-year rolling average funding method to refund surplus reserves and up to a five-year rolling average funding method to recover a reserve deficit. (d) The property insurance program will include a self-insurance component with targeted funding for an earthquake probable loss of a once in every 20 year earthquake event. The Administration will use a fixed 20 year period to gradually collect contributions to achieve the targeted funding level by FY ANALYSIS: The recommended policy replacement would allow the Administration, in the development of the annual budget, to select the appropriate funding level for these risk management programs within a targeted funding range that corresponds to the County s financial and risk situation in a given budget year. The policy allows flexibility to fund the programs from one fiscal year to another based on a variety of factors such as the ability of each insurance Internal Service Fund (ISF) to meet its financial obligations, the results of yearly actuarial reports, the County s current financial condition, the historical funding levels of each ISF, evaluation of the status of major liability cases, and the predictability of claim payments in the two funds. The main differences between the current and recommended policy: a) Current policy only addresses workers compensation and general liability programs, but the recommended policy is designed to be comprehensive b) Current policy is inflexible and targets funding at only 50% confidence, but the recommended policy is flexible to adjust to changing conditions and risks c) Current policy does not address insurance program surpluses or deficits consistent with more recent direction from the Board or State Controller s Office, but the recommended policy provides clear direction that is consistent d) Current policy does not provide direction for earthquake reserves for retained risk, but the recommended policy provides clear direction The County s accounting for claim reserves and liabilities under current and recommended funding policies is and will continue to be consistent with Governmental Accounting Standards Board requirements. The Administration is recommending that implementation of the policy amendments be deferred to the FY 2017 budget cycle to allow the Administration time to consider the funding level within the targeted funding range that is most viable for the County. Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 3 of 7

4 To illustrate the various funding requirements of the recommended changes to the funding policy, the Administration will use the FY 2016 claim cost data and the actuarial analysis report as of June 30, The total funding for General Liability/Property Insurance and Workers Compensation included in the FY 2016 Recommended Budget is $27.7 million and $50.6 million, respectively. The estimated funding requirement for FY 2016 under the various funding levels would be: FY 2016 REC Budget Expected Level Approx. 50% Level) 70% Level 75% Level 80% Level General Liability/Property Insurance Earthquake Probable Property Loss Workers Compensation $ 27.7 M $ 27.1 M $ 30.1 M $ 32.1 M $ 34.0 M $ 0 $ 1.0 M $ 1.0 M $ 1.0 M $ 1.0 M $50.6 M $ 50.6 M $ 56.8 M $ 59.2 M $61.9 M level is an estimated probability that a given level of funding will be adequate to pay actual claims costs. For example, the 75% confidence level refers to an estimate for which there is a 75% chance that the amount will be sufficient to pay claim costs. Whereas, the expected level refers to an estimate for which there is only about a 50% chance that the amount will be sufficient to pay claims costs. A higher confidence level is warranted in light of the uncertainty that is associated with the assumptions used in the actuarial analysis in determining cost estimates and other factors that may affect the claim outcomes. In 2003, the funding policies for General Liability/Property Insurance and Workers Compensation were amended to reduce the funding level for claim costs in those two programs due to the County s budget deficit situation and made no provisions to fund the reserve deficit in the Workers Compensation Program. Except for medical malpractice which is currently funded at the 75% confidence level for the most recent two years claims, the confidence level in the current policies fund claim costs at the expected level. This is below the actuarial consultant s marginally acceptable 70% confidence level. As the Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 4 of 7

5 County s financial situation has stabilized, the Administration has reviewed the current policies, fund balances, actuarial recommendations and has consulted with the State Controller s Office, to arrive at the recommended target funding range. CHILD IMPACT The recommended action will have no/neutral impact on children or youth. SENIOR IMPACT The recommended action will have no/neutral impact on seniors. SUSTAINABILITY IMPLICATIONS The recommended action will have no/neutral sustainability implications. BACKGROUND At the June 16, 2014 session of the FY 2015 Budget Hearing, the Board requested a report at Mid-Year regarding an update on the surplus balance anticipated for FY 2015 for the Unemployment Insurance and General Liability Insurance programs and whether any budget modifications were necessary. At the FY 2015 Mid-Year review, the Administration reported that it is developing a comprehensive and flexible funding policy for all self insured programs, including Unemployment Insurance, with a prudent target funding range for each program that also provides the Board with further flexibility to establish, on a year to year basis, funding outside of the range when the Board recognizes broader economic or risk conditions warranting a temporary exception to the target funding range. Additionally, the Administration provided an interim report regarding the County s compliance with the State Controller s funding guidelines for the General Liability/Property Insurance Program. The recommendation for establishing a funding policy for the Unemployment Insurance is deferred until the completion of the actuarial analysis. Administration intends to submit recommendations to also establish a funding policy for the self-insured Basic Life Insurance and Delta Dental insurance programs upon the completion of the actuarial analysis for those programs. The Administration will return to the Board with recommendations for those funding policies later in The State Controller s Office approved of the County s use of a two-year rolling average funding method to refund surplus reserve or more years to recover reserve deficit for the selfinsured General Liability/Property Insurance Program. Administration provided the State Controller s Office with the basis for the County s current methods and met with them in March Additionally, the State Controller s Office approved the County s establishment Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 5 of 7

6 of a catastrophic protection reserve for the estimated probable earthquake property loss within deductibles as determined by a third party actuarial consultant. Earthquake poses a significant exposure for the County. In conjunction with the potential establishment of a catastrophic protection reserve for earthquake losses, Administration asked the California State Association of Counties (CSAC) Excess Insurance Authority, through whom the County purchases its property insurance, to provide an earthquake simulation model based on the County s property values and locations to determine potential losses. The actual modeling was performed by AmWins Group, Inc., an insurance broker with experience in earthquake coverage. The results of the earthquake simulation model was provided to the County s liability/property insurance actuary consultant for review and develop an actuarial report on probable losses and funding approaches. Factors considered in the simulation model included county-owned buildings that are covered by earthquake insurance and those that are not earthquake insured, the value of the buildings, insurance deductible amounts, and the buildings locations in respect to the proximity of the earthquake fault lines running through the County. The estimated probable damage loss determined by the consultant is in terms of an earthquake occurring in a given span of time, resulting in specific amount of deductible loss. The table below displays the estimated probable earthquake loss amounts resulting from an earthquake occurring once in every 10, 15, 20, 25, and 30 years. Administration recommends establishing a modest reserve by building up funds over 20 years to achieve the funding target for the estimated probable $19.1 million earthquake losses expected to occur in 20 years. Earthquake Occurrence Once every 10 years Once every 15 years Once every 20 years Once every 25 years Once every 30 years Estimated Deductible Losses $ 2.5 million 9.4 million 19.1 million 27.9 million 70.1 million It is the intention of the Administration to strike a balance between retaining viable risk management programs like General Liability/Property Insurance and Workers Compensation while considering the funding needs of other county programs. In consideration of the recent confirmations received from the State Controller s Office, the recognition that the funding level in the current funding policies is below the actuarial consultant s marginally acceptable funding level, and acknowledging the County has no catastrophic reserve for probable earthquake losses, the Administration recommends replacing the current funding policies. This will allow for funding flexibility of these Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 6 of 7

7 programs to respond to changes in the County s financial and risk situation from year to year and to maintain the viability of the programs while remaining in compliance with State Controller s requirements. CONSEQUENCES OF NEGATIVE ACTION Administration would not have the flexibility of selecting the appropriate funding level within a targeted funding range that corresponds to the County financial and risk situation in a given year during the development of the annual budget for the General Liability/Property Insurance and/or the Workers Compensation programs. Additionally, no reserve would be established to fund the probable earthquake property loss. STEPS FOLLOWING APPROVAL The Clerk of the Board will replace the Board of Supervisors Policy Section 4.15 on the County website. LINKS: Linked From: : Adopt Board Policy Resolution replacing Board Policy Manual Section 4.15 relating to Workers' Compensation and Liability Insurance Funding Policies, effective July 1, 2016 and direct the Clerk of the Board to include Policy in Board of Supervisors' Policy Manual. (Roll Call Vote) Linked To: : Adopt Board Policy Resolution replacing Board Policy Manual Section 4.15 relating to Workers' Compensation and Liability Insurance Funding Policies, effective July 1, 2016 and direct the Clerk of the Board to include Policy in Board of Supervisors' Policy Manual. (Roll Call Vote) ATTACHMENTS: Reolution - Leg file (PDF) Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Ken Yeager, S. Joseph Simitian Page 7 of 7