CSAC Excess Insurance Authority Proposal to Eliminate the Public Entity Participation Fee June 7, 2013

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1 Proposal CSAC Excess Insurance Authority Proposal to Eliminate the Public Entity Participation Fee June 7, 2013 Public entity members are charged a ½ percent participation fee in 7 out of the EIA s 10 major programs. Participation fees are not charged in EIAHealth, Dental, and MR OCIP programs. The EIA Board of Directors will consider eliminating this participation fee in all programs, effective July 1, 2014 that is, effective for all payments due and payable, on or after July 1, Background At the 2000 Spring Strategic Planning Retreat, the concept of expanding membership (via a separate JPA called the CPEIA) to all public entities was born. Over the next year, the concept was researched and refined consistent with guiding principles based upon county control, controlled growth, maintaining our relationship with CSAC, flexibility and creativity, and leadership. At the 2001 Spring Retreat, several concepts were finalized and the concept of the Public Entity (PE) participation fee surfaced for the first time. The 2001 Retreat notes indicate that, Participants discussed the importance of being able to show our member counties a direct benefit of developing the CPEIA. It was noted that CPEIA members will pay their fair share of administrative expenses, but in the early stages of development the expense of developing and operating the CPEIA will exceed the revenue. Over time and with modest growth, the CPEIA members will not only pay their own expenses, but will also reduce the administrative burden on the member counties. Following the 2001 Retreat, in order to show a tangible benefit to members, the Executive Committee approved the ½ percent participation fee at their meeting on May 31, The following day (June 1, 2001), the Board of Directors was advised of the Executive Committee s action and gave final approval to launch the CPEIA. The first dividend to be declared was considered at the October 1, 2004 Board meeting for the three periods of 2001/02, 2002/03, and 2003/04. Instead of simply returning the dividend to the county members, the Board approved the Executive Committee s recommendation to establish a policy of distributing the dividends through the counties risk management funds. Effective January 1, 2008, the Executive Committee approved an exemption for the EIAHealth Program based upon the fact that there were significant dollars involved and because employees pay part of the premium, part of the fee is effectively paid by employees. The Dental Program was also exempted when it incepted in 2010, for the

2 same reason. MR OCIP was also granted an exemption at inception, by the Executive Committee, in 2013 because the participation fee has become controversial. Fiscal Impact Over the last 11 years, $4.2M has been collected from PE members and distributed to county members through their risk management subsidy funds. Attached is a spreadsheet showing the collection and distribution by year and by program. If the recommendation to eliminate the PE fee is approved, fees will still be collected in FY 2013/14, and two more dividends will be declared for fees collected in 2012/13 and 2013/14 of approximately $450k to $500k each. PE member premiums will be reduced by ½ percent ($450k - $500k) beginning in fiscal year 2014/15 (program year 3/31/14-15 for the Property Program). All members (PE and County) will continue to receive an annual deposit of $1,000 into their risk management fund for each program, unless they have chosen to opt-out. Rationale The relationship between county and PE members has evolved over the past 12 years. Initially, the CPEIA had its own Board, but no vote in the governance of the EIA or its programs. The CPEIA President had a non-voting seat on the EIA Executive Committee. Then CPEIA members were given one voting seat on EIA program committees. In 2006, we restructured the EIA to create one organization that included both county and PE members. PE members were given 7 voting seats on the Board, and 2 voting seats on the Executive Committee. There is no limitation on the number of seats that can be held by PE members on the program committees. Our PE members are actively involved through our committees, and even hold the positions of Chair and Vice Chair on some committees. Because the PE membership has shown themselves to be loyal and valuable participants, the PE fee paid to counties has become a controversial distraction that threatens to divide the organization. Many county members believe the PE fee has served its purpose, but now only serves to unnecessarily highlight the differences between the two classes of members. The original purpose of the PE participation fee was to show a tangible benefit to the county members for opening up program participation. There were many other benefits anticipated, but they were hard to prove and were somewhat intangible. In the beginning, it was anticipated that this would be a mutually beneficial relationship for both the EIA and CPEIA. All members would benefit from a larger volume that should produce lower costs and greater stability, lower costs of administration by spreading the

3 cost of services to a larger membership base, provide a risk management solution for local public entities affiliated with member counties, and provide an overall benefit to taxpayers by creating the most efficient delivery of insurance protection possible. Now that we have the benefit of hindsight, we can look back and definitively say that these intangible benefits have become tangible. In fact, when we considered the restructure of the EIA in 2006, we reported that benefits of the CPEIA have been realized in the following ways over the past four years ( ): It is estimated that counties have realized at least $41.5 million in economic benefit due to the CPEIA. In addition, counties are receiving the benefit of lower costs of services in excess of $1.6 million annually from administrative contributions made by the CPEIA members. It is estimated that CPEIA members have saved more than $116 million through the hard market over the last four years by joining the EIA pool. The EIA s Primary W.C. (PWC) Program twice would have terminated, or would have had to be significantly restructured to continue to exist, had it not been for the CPEIA premium volume. The EIA s Primary General Liability (PGL) Program has attracted a reinsurance partner that it would not otherwise have attracted because of the combined volume of the EIA and CPEIA. County affiliated entities have been well served by the CPEIA. Of the 206 member units in CPEIA, 62 are county related or affiliated entities including IHSS entities, and county operations where county risk management has some involvement in the risk management of the entity. The tangible benefits shown above were calculated as of Today, these benefits are even greater. The bottom line is that by increasing the membership, we are better able to retain more risk and transfer less risk to the commercial insurance market. We have also been able to attract new reinsurers based upon our larger size and the reinsurance has been dramatically cheaper on a per member basis. The original purpose of the PE fee was to show a tangible benefit to the county members for opening up program participation. Twelve years later, the benefits of increased buying power, increased pooling power, greater stability, and reduced administrative costs have been proven, so the original purpose of the participation fee (a tangible benefit) is no longer necessary. Process The vote on elimination of the PE fee will be set for the October 4, 2013 Board meeting. There is a review and comment period for members leading up to the October Board vote. If the Board approves the elimination of the fee, it will be effective July 1, 2013

4 (including the 2014/15 Property Program, which renews 3/31/14, but members are not billed until 7/1/14). The fees collected during 2012/13 and 2013/14 will be distributed to county risk management funds in the normal fashion, subject to Board approval at the October 2013 and 2014 meetings, respectively.

5 Risk Management Dividend History Fees Paid in Fiscal Year EWC PWC EIAHealth GL-1 GL-2 PGL Property Med Mal Total ,450 2, , ,369 70,095 10,020 3,427 5,756 11, , , ,686 17,133 10,419 4,671 13, , , ,281 16,979 28,748 10,419 6,241 17, , , ,762 51,452 27,974 27,856 5,923 14, , , , ,609 27,955 37,387 4,642 19, , , , ,230 28,992 34,481 4,016 25, , , , ,771 40,806 38,333 4,526 28, , , ,945 48,445 41,029 3,871 33, , , ,456 44,590 34,154 2,629 44, , , ,808 44,714 32,212 2,905 70, ,577 Total 1,375,062 1,434, , , ,717 47, , ,213,272