HomeMy WebLinkAboutCJPIA - Retrspctv Calculatn 4 Liability Pgrm FY 2009/10 CITY OF PALM DESERT
FINANCE DEPARTMENT
STAFF REPORT
REQUEST: CONSIDERATION OF CITY PAYMENT TO CALIFORNIA JOINT
POWERS INSURANCE AUTHORITY FOR RETROSPECTIVE
CALCULATION FOR LIABILITY PROGRAM FOR FISCAL YEAR
ENDING 2009-2010.
SUBMITTED BY: Paul S. Gibson, Finance Director
DATE: August 26, 2010
CONTENTS: (1) Discount Incentives for Early Repayment of Aggregate
Retrospective Deposit Balances
(2) Graph of Large Losses Incurred by Authority 1989-2009
(3) Retrospective Computations — All Cities
(4) Frequently Asked Questions about Revisions to the Funding
Model
Recommendation
By Minute Motion, approve payment of $701,585 to California Joint
Powers Insurance Authority (the Authority) and appropriate funds from the
unobligated Liability Self Insurance Fund 575.
Executive Summary
By authorizing the payment to the Authority and appropriating the funds will allow the
City to receive a discount of 6%, thereby lowering our liability cost by $44,782.
Backqround
On June 30, 1996, City Council approved the transfer of our liability and workers
compensation program to the Authority.
The program is run by City Council members acting as the executive committee to
review claims, administer programs, approve budgets and pay claims that have been
approved by the Authority. The Authority also has several subcommittees to review all
items prior to executive committee actions. They consist of City Managers, Finance
Directors, Risk Managers/Safety and Claims review committees.
The Authority currently has two methods for collecting funds from the member agencies:
Staff Report
Consideration of Payment to Calif. JPIA for Retrospective Calculation-Liability Program.
August 26, 2010
Page 2 of 3
(1) Primary Deposit based on historical costs intended to sufficiently fund the
upcoming coverage period. Limited year-to-year change in primary deposit to +/-
10% (current method).
(2) Retro Deposit to reconcile prior deposits based upon individual member
experience. Initially a four-year installment plan, which was hoped to dampen
impact of "good" years and "bad" years claim history.
In the past five years the Authority has experienced a high rate of claims (see attached
graph) that were in the settlement range of $750,000 or higher and exceeded the
amount of funds collected as a primary deposit for the individual programs of liability
and workers compensation for each fiscal year. The Authority became a creditor to its
members, where the members owe more than the primary deposits within the Authority.
It should be noted that the Courts have ruled against Cities at a higher rate than in the
past and with much higher punitive damages. The Authority is asking members to
consider proposing new legislative language to address this growing lawsuit-happy
court process for Cities.
Typically, every three years the Authority has an independent actuarial perform a review
of their claims and premium collection to determine if they are meeting their desired
premium coverage of 75%. This year's actuarial study indicates that the Authority is at
a level of 50% which dictates that the Authority must increase either the current
premiums or the long-term retrospective collection to achieve the higher 75% coverage
of actual claims.
Presently, the Authority has a receivable from the 122 member cities and special
districts of $75.7 million as shown in the attachment. Our portion of the receivable is
$746,367 (calculation represents claim history of fiscal years from 01/02 thru 08/09) of
which we have the option to receive a discount of 6% (44,782) for paying immediately
(September 1, 2010), or forgo the discount and spread the full payment out for the next
four years.
It should also be mentioned that our Workers Compensation program will be providing
us with a refund of $389,104. As a result, the net amount owed after our refund is
received would be $312,481.
The Authority will have a representative at the Council meeting to answer any questions
you may have about the Authority and the reasons for such a high retrospective
payment due this year versus past years. Below is a table of our yearly premiums
versus our retrospective refunds or balance owed.
2
�taff Report
Consideration of Payment to Calif. JPIA for Retrospective Calculation-Liability Program.
August 26, 2010
Page 3 of 3
Palm Desert Primary Retro Primary Retro
De osits: Liabilit Deposit(Refund) Workers Comp Deposit Refund)
.����....��:���,��: rt
2003-04 ; 404,856 � (19,870) 282,996 (12,993) �
2004-05 F 489,722 (82,162) 272,537 (98,118) �
2005-06 6 533,465 - 299,789 - 1
2006-07 ? 480,119 - 269,810 -
2007-08 � 432,107 (127,783) 242,829 (117,772)
2008-09 � 475,318 - 267,112 -
2009-10 � 442,340 746,367 # 144,248 (389,104) # �
2010-11 3 449,264 - 53,285 - ,
#-FY 01/02 thru O8/09
Fiscal Impact
The retrospective payment is due as of June 30, 2010 and will be reflected on the City's
Financial Statements this year as an expense for the City and Redevelopment Agency.
Staff feels that a 6% discount is significant enough to recommend paying immediately
versus waiting three to four years to pay off the amount due. The discount will result in a
savings of $44,782.
Submitted by: Approval:
�%�l .
L
aul S. Gibson, Finance Director J n M. Wohlmuth, Ci an ger
CITY CC1iTNCTL ACTinN
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Qri�innl on Fiie with City Clerk's Office
3
California JPIA
Discount Incentives for Early Repayment
of Aggregate Retrospective Deposit Balances
This exhibit assumes that the full amount ofall aggregate retrospective deposits owed,will be paid by 9/1/2010. Please note,the incentive program is
voluntary and members may choose to make no payment at this time,a full payment,or a partial payment. In the case of partial payments,the discount
rate will be applied to the amount of the partial payment. This exhibit is only intended to illustrate one of the options under the discount incentive plan.
Li�bility Warkcrs'Gom ensatian
Aggregate Aggregate
Retrospective Payment Amount Rehospective Payment Amount
Balance 3/31/2010 if Paid in Full by 6% Balance 3/3 U2010 if Paid in Full by 10%
Member (Deposits)/Refunds 9/I/2010 Savings (Deposits)/Refunds 9/1/2010 Savings
aa Guadalupe (44,764) 42,078 2,686 79,9I1
as' Hawaiian�rardens (236,874} 222,662 14,212 31'1,263 Na "a
� . ma ;: >� fJa.
aa Hidden Hills (13,260) 12,464 796
- �,
a� Imperiat (i,UU?,895} 447,421 60,474 (427,561) 384,805 42,756'
�� ae Indian Wells (651,879) 612,766 39,113 54,938
N, �i,
.-� d4' Indio ` �Z,, 776,t43� 2,6�,574 ` t66,5b9 (Y,56� 1,405,731 156,192
so Irwindale (I,056,483) 993,094 63,389 (308,5 l3) 277,662 30,851
s�` La CaBada Flintridge (623,785) 586,358 37,4Z7 ($2,7Q4) '74,434 8,27R
sz La Habra Heights (192,493) 180,943 11,550 (74,328) 66,895 7,433
sa La Mirada (556,356} 522,975 33,38i (188,342} 169,St18 18,834
sa La Palma (I 64,290) I 54,433 9,857 425,616
11/L �i�
5s< La fsuentC (98,502� 92,592 5,410 1(,04$ Na , Na
sa La Quinta (29,883) 28,090 1,793 136,301
��
s7' La Verne (8$2,137) 829,?09 52,428 �89,A25 n�
.. . Na �.�:Na�:�
ss Laguna Niguel (241,788) 227,281 14,507 65,649
N:, �i,
sv; L.aguna Waads (i9Z,426} 1$4,640 II,786 13,4$S
��� �u
en Lake Elsinore (518,521) 487,410 31,111
N= �m
aE I,ake Fozest 9$,S6t nta '-Na (96',226) $b,6Q3 4,623:
bz Lakewood (630,667) 592,827 37,840 3g7,2gg No
n3 Las Virgenes COG (32,249} 30,314 1,935 �g tia
�a Lawndale (567,729) 533,665 34,064 15,574
es Lacal Govt Serviczs (87,940) &2,664 5,2'T6 i4;734 ,�„ ,�a
ee Loma Linda (351,031) 329,969 21,062 91,211 � � �
( ) 82,090 9,121
e� ; Lomita (74,172) �i9,722 454SQ 189,8$7 me " �ra
fix LosAlamitos (455,L59) 427,849 27,310 46,992
e9 �;Malibu �' (I,252;6?Sj 1,177,515 75,1b0 122>G47 da � ,��,
�o Mammoth Lakes (1,141,333) 1,072,853 68,480 639,449
� ( ) 575,504 63,945
�i MarinCountyMCTF i,U�9 ,u:� Ne - �da „i�
�z MARTA (346,112) 325,345 20,767
(44,708) 4Q237 4,471
�s ;Maywoad (7,OS0',623) 6>627,58G 423,03? (959,61Q) 413,649 45,961
�a Midpeninsula ROSD (599,087) 563,142 35,945 (116,803) 105,123 11,680
�s ;Missian Viejo {561,541) SZ7,849 33�642 36&;642 ,�, '`
n/a
�F Monterey Peninsula RP (68,582) 64,467 4,115 ((6,75�) 15,081 1,676
n ',Moorpark (503,>54I} A73,291 30,210 18i;62t Na ,Ua
ix MorroBaY (292,104) 274,578 17,526 251,100 „i.,
�9 :Needles (41�,�84j 3�,084 2,495 419,837 �,;, ��,p
Ho Norwalk (2,851,818) 2,680,709 171,109 � (1,766,365) 1,589,729 176,636
g' :�j�� ((69,167� 159,ak7 t0,1�0 - (IS4,136} 138,722 15,414`�
-/f xz Palm Desert (746,367) 701,585 44,782 389,104 r�_�
�✓�
e3 Palos Verdes�states (168,149} 1r58,tp7 1U,492 � 7q�� N��
... . Na ..Na':
xa PalosVerdesTA (6,178) 5,807 371
xs Paramount {937,498} 88E,248 56,Z5U 333,386 . ,�� a
xn Paso Robles (1,91I,625) 1,796,928 114,697 445,835 N�
Nn �
3/31/10
2of3
California JPIA
Discount Incentives for Early Repayment
of Aggregate Retrospective Deposit Balances
This exhibit assumes that the full amount ofall aggregate retrospective deposits owed,will be paid by 9/l/2010. Please note,the incentive program is
voluntary and members may choose to make no payment at this time,a full payment,or a partia]payment. (n the case of partial payments,the discount
rate will be applied to the amount of the partial payment. This exhibit is only intended to illustrate one of the options under the discount incentive plan.
�,iabili Workers'Campensation
Aggregate Aggregate
Retrospective Payment Amount Retrospective Payment Amount
Balance 3/31/2010 if Paid in Full by 6% Balance 3/31/2010 if Paid in Full by 10%
Member (Deposits)/Refunds 9/1/2010 Savings (Deposits)/Refunds 9/U2010 Savings
xr Pico Rivera (1>U32,321) 970,382 61;939 352,825 ,�a
' �b
sx PismoBeach (1,409,420) 1,324,855 84,565 152,319
N, �i�
xs POmot1A ValleyTtt ,4,7,38 n/e n�n 4,895
�� �a
9a Port Hueneme (4l I,130) 386,462 24,668 323,062
Na
9� Fow�y' (655,7t6) b16,373 34,343 (380,{W2) 34Z,Q02 38000
� �
9� Rancho Palos Verdes 84,429 ni� N,� 77,155
vs RegionatGovtServices (64,019j (r0,17$ 3,841 (1,712} 1,541� t7tJ
9a Rolling Hills (49,442) 46,475 2,967 7,244 �
NJ ili:l
as-` Rotling Hit1�Estates (263,583) 2a9,fi48 15,935 2i,928
tJa n/x
er, Rosemead (556,344) 522,963 33,381 (163,207) 146,886 16,321
v7' San Clemente (536,2t4) 564,a4i 32 173 - ma M�,
�x San Dimas (123,398) 115,994 7,404 z�g
Na n/u
9s;' SanGabriet (237,4Sx) Z23,ZF1 14,�47 424,1t5
. . .. �.. N� �� Na
ioo San Juan Capistrano (428,467) 402,759 25,708 (21,150) f 9,035 2,115
�ai�; SanLuis ObisPo �' �3,S6U,fr34? 3,3�[6,977 2k3,f,3? 2,318,29D ,�a
�ta
im San Marcos (1,924,874) 1,809,382 115,492 ��� �
�os ` San Marinv ($12,0$4� 85?,�59 54,725 _ n,.�
.. . '. rva �.N�;
ioa Santa Fe Springs (1,068,031) 1,003,949 64,082 174,147 N�
ius SantaP�ula (2,70�,039) 2,59S,S57 16Z,482 68�,109 Ns n/�
�g
ioe SCAG (835,618) 785,481 50,137 339,542 � �
�v;� �,
to7 ' SE[�ACA 1�,229 nra Nu 29,083 Na � `�n�a;
iox Seal Beach (1,088,043) 1,022,760 65,283 (214,87t) 193,384 21,487
ion a 3easide' (I,lOZ,59�� 1,�36,439 66,1�a6 42h,344 ,�„ �a
i io Seaside CSD (72,672) 68,312 4,360 �
�ki SierraMadre (2,0&6,427j 1,96i,24f 125,186 (303;32U} 272,988� 3U,332'
iia SignalHill (48Q384) 451,561 28,823 313,998
Na n/a
ii3 Solvang (147,b44j 185,785 tt,$59 IQ7',826
Na �..��nia(
iw South E]Monte (48,209) 45,316 2,893 121,197
NJ p/ll
us , South Pasaden� (1,i6�,337) 1,4�3,47? 69,$'6Q ����77b ,�a �a
ne TempleCity ((18,133) 111,045 7,088 1I9,421 � �
N:� �;�
i�� 'Ventura Port District (147,032} 138,210 8,822 �g,g47
Nfl ��nJfl�:�
iiH VillaPark (54,053) 50,810 3,243 3,138
iis Wainut (17;8ot) 1.6,733 t,068 134,.745 � �„�
. . .. . �. nra �...Na.
izo WestHollywood (1,772,475) 1,666,(27 106,348 (112,954) 101,659 1],295
iz� West-Comm �2y579 �✓a �✓a n�a �e
i�z Westlake Village (396,960) 373,142 23,S18 6,352 �„ N�
Total (75,352,612) 71,114,619 4,539,235 6,386,1'�l 8,304,704 922,744
Total(Deposits) (75,653,854) (9,227,448)
Total Refunds 301,242 15,613,569
3/3 U 10
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Staff Report
Consideration of Payment to Calif. JPIA for Retrospective Calculation-Liability Program.
August 26, 2010
Page 3 of 3
Palm Desert Primary Retro Primary Retro
De osits: Liabilit De osit(Refund) Workers Com De osit Refund)
� �
2003-04�� ` 404,856 � � � �� �� �
( (19,870) 282,996 (12,993) '
2004-05 ; 489,722 (82,162) 272,537 (98,118)
2005-06 � 533,465 299 789
2006-07 � '
� 480,119 269,810
2007-08 � 432,107 (127,783) 242,829 (117,772)
2008-09 = 475,318 267,112
2009-10 � 442,340 746,367 # 144,248
2010-11 � 449,264 _ (389,104) # �
#-FY 01/02 thru 08/09 53,285 _
Fiscal Impact
The retrospective payment is due as of June 30, 2010 and will be reflected on the City's
Financial Statements this year as an expense for the City and Redevelopment Agency.
Staff feels that a 6% discount is significant enough to recommend paying immediately
versus waiting three to four years to pay off the amount due. The discount will result in a
savings of $44,782.
Submitted by: Approval:
_ ,�%1v1 • L
aul S. Gibson, Finance Director J n M. Wohlmuth, Ci an ger
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California JPIA
Frequently Asked Questions (FAQ)
about Revisions to the Funding Model
March 23,2010
In the past five years, Authority members have incurred eighteen claims in excess of one million
dollars. In addition, a significant burden has been placed on the Authority's financial resources
due to increasing excess insurance costs, the low interest rate environment, and growing long-
term receivables resulting from the "rolling retro."
In the fall of 2008, the Executive Committee established an ad hoc committee of managers and
finance officers to study the Authority's funding and allocation formulas and to provide
recommendations designed to safeguard the financial integrity of the Authority and protect the
members.
As a result of the ad hoc committee's extensive study and deliberation, the Authority will be
implementing an updated funding model beginning with the 2010-11 coverage period. The new
funding model will reflect many of the positive elements of the prior model, and it will eliminate
some of its unnecessary complexities. This document provides a brief overview of the changes
in the form of FAQs.
1) Question: Please summarize the proposed changes.
Answer: There are several main components to the changes:
• Each new coverage period will be funded through annual contributions.
The annual contributions will be funded at the 75% confidence level to
assure that the funds collected each year are adequate to pay all losses and
expenses related to that year.
• Each member's annual contribution will be based on a formula that
reflects that member's exposures and loss experience, relative to the
others in the pool. Importantly, a credibilitv weighting factor is being
introduced, based on member size, to assure rough equity among members
over the long run. Smaller members' exposure (payroll) will be more
heavily weighted, while larger members' experience (losses) will receive
more weight.
• The rolling retrospective receivables (owed to the Authority by members)
will be suspended for the next several years as the annual contribution
grows to a fuily adequate level.
• Once the annual contribution reaches full funding far the then-current year
—which is estimated to take three years—the collection of prior years'
retrospective payments will be re-instituted, with the total receivable from
members expected to be paid off in the ensuing eight to ten years.
Revised March 23,2010 Page 1 of 12
2) Question: What is credibility weighting?
Answer: Credibility weighting is a well-tested industry standard used to avoid adverse
selection. More specifically, it is a method used in the formula to determine
how much weight should be given to a member's experience (losses) vs. their
exposure (payroll). The histarical losses of a small agency are not a
statistically reliable (credible) indication of that agency's future losses. The
new formula recognizes this by assigning various credibility weightings to
each member based on the size of their payroll. The minimum weight is 20%,
the maximum is 80%. The smallest member's losses will weigh 20% and
their payroll 80%. Conversely, the largest member's losses will weigh 80%,
and their payroll 20%. All other members will slide on the scale between
20%and 80%, based on the size of their payroll.
The outcome will be that smaller members will have an annual contribution
that is less loss-sensitive, while larger members will have an annual
contribution that is more loss-sensitive. The use of credibility weighting is
considered to be a best practice among public entity risk pools. It is
anticipated that allocating costs among members in this way will make the
annual contribution a more accurate estimate of the ultimate losses for each
member within the coverage period.
3) Question: What is an off-balance factor?
Answer: An off-balance factor is a factor applied to an individual contribution amount
to equitably adjust each individual amount in such a way that an overall
desired contribution is achieved.
By using an off-balance factor, we are able to ensure that no other aspect of
the calculation results in changing the total amount collected. For example, if
the funding requirement is $47 million yet after we run the calculation it
results in the collection of$46 million, then the off-balance factor would be
applied to adjust the annual contribution amount of individual members up
2% so that an additional $1 million is collected, and the full $47 million
funding requirement is achieved.
4) Question: What factors are used in the current formula?
Answer: Both pooled programs use experience (losses)and exposure (payroll) factors
in the cost allocation formulas as well as a funding target determined by the
actuary's estimate of funding needs. That funding target is allocated to
members based on a percentage of their experience and exposure relative to
the pool. Since the Authority's inception, simple weightings of both have
been used to balance the factors.
Revised March 23,2010 Page 2 of 12
The funding mechanism includes a prospective calculation(used to determine
each member's primary deposit) and a retrospective calculation(used to
collect additional amounts required and reallocate costs among the members).
Police and non-police exposures (Liability Program), and public safety and
non-public safety exposures (Workers' Compensation Program) are separated
in the retrospective calculation. A separate workers' compensation excess
pool deposit of.OS%of payroll is also collected. Property damage only
claims under$2,000 are excluded from the experience factors in the Liability
Program.
5) Question: What factors will be used in the formula that will be implemented in July
2010?
Answer: The new formula continues to use experience (losses) and exposure (payroll)
to determine each agency's annual contribution. Experience factors include
losses from $0 - $30,000 and losses from $30,000- $750,000. Weights given
to experience and exposure are more fully detailed in an earlier answer.
Funding estimates are calculated separately for police and non-police
exposures (Liability Program), and public safety and non-public safety
exposures (Workers' Compensation Program). The workers' compensation
excess pool deposit will be incorparated into the new fiznding estimate (and no
longer invoiced separately). Smaller claims will no longer have a
disproportionate impact on the formula. Therefare property damage only
claims under$2,000 will be included in the experience factors in the Liability
Program because the multiplier effect in the previous formula has been
eliminated. Once the annual contribution is being funded at the 75%
confidence level, the need for retrospective calculations will be eliminated for
future coverage periods.
6) Question: What is included in the annual contribution formula?
Answer: The annual contribution formula includes the following: the actuary's
estimate of the ultimate claim costs, excess and reinsurance premiums,
corridor/reinsurance self-funding(if applicable), expenses associated with the
third party administrators, and Authority operating expenses.
7) Question: What is the cost impact going to be?
Answer: The liability formula changes are being implemented in order to manage the
average increase to a level not to exceed 10% in any one year during the
transition period. The formula review ad hoc committee has modeled the
implementation such that annual cost increases are anticipated to be at or
below the rate of the pool's payroll inflation. Of course, for any individual
Revised March 23,2010 Page 3 of 12
member, the actual annual charge will vary based on exposures, experience,
and retrospective adjustments due to prior years.
8) Question: Without the retrospective adjustments, how will I know that my agency's
annual contribution is fair?
Answer: In order to ensure the financial integrity of the Authority and improve annual
budgetary stability for members, the new formulas reflect a philosophy of
"rough equity in the long run." The Authority has worked with actuaries and
pooling experts to design an approach which will reward good risk
management practices,penalize bad risk management practices, and achieve
rough equity, as this is in the long term best interest of all of the members.
The Executive Committee has adopted this approach, based on the work of the
Ad Hoc Committee, and believes it is both fair and consistent with the
Authority's member-focused philosophy.
9) Question: It appears the Authority has plenty of net assets. Why does the Authority
need more money?
Answer: Much of the Authority's net assets are currently in the form of receivables
from members, and the receivables are growing. The new annual contribution
formula will stop their growth by adequately funding each coverage period in
advance as originally intended. The goal is to maintain net assets as outlined
in the Net Asset and Refund to Members Policies.
10) Question: What is the Authority's cash position?
Answer: The growth in member contributions in recent years has not matched the
increase in claims and other expenses. From a long-term perspective the
overall cash position has been declining; however the Authority's cash
position should be sufficient to support the proposed temporary suspension of
retrospective deposits when coupled with the average annual increase of 10%
in annual contributions.
11) Question: Will there be retrospective calculations in the future?
Answer: Yes and no.
• Coverage periods between 1978-1979 and 2009-2010 will continue to
have a retrospective calculation performed until all claims are closed
in each coverage period.
• A retrospective calculation will also be performed on the coverage
periods during the transition period designed to fully fund the pool. A
Revised March 23,2010 Page 4 of 12
three-year transition is estimated and would thus include the 2010-
2011 through 2012-2013 coverage periods.
• Once the annual contribution reaches full funding at the 75%
confidence level, the retrospective calculation will no longer be
necessary on future coverage periods.
12) Question: What is the anticipated repayment schedule for the outstanding retrospective
deposits receivable, and how long does the Authority intend to suspend the
retrospective deposits?
Answer: The plan is to suspend invoicing of the receivables during the transition
period, which is anticipated to be three years, and then have the members
repay them over the next eight to ten years. The repayment schedule could
lengthen or shorten, however, depending on how losses develop. The actual
retrospective deposits receivable will be recalculated annually, so each
member will know exactly how their respective obligation is changing.
13) Question: Do you intend to freeze the retrospective refunds due to some members?
Answer: No. Refunds due will be paid to members in July for the coverage periods
through 2008-2009. Refunds will be distributed based upon the net
outstanding retrospective adjustment of each member. The formula review ad
hoc committee recommended the decision to provide refunds be made
annually in conjunction with the retrospective calculations, and that the
amount of the refund also be determined annually.
14) Question: My agency is able to pay its outstanding retrospective contribution now. May
we pay it now rather than waiting?
Answer: Yes. Your agency can pre-pay the receivable owed at any time, which could
provide an advantage in your budgetary process. While pre-payment is
appreciated and encouraged, incentives are not being offered for pre-payment.
15) Question: What happens if my agency withdraws from the Authority or a program?
Answer: Members that withdraw will not enjoy the benefit of paying retrospective
deposits in installments as is provided under the"rolling retro,"nor would
payment obligations be deferred during the transition period. Thus any
receivable due will be due and payable upon withdrawaL Members that
withdraw from a program will continue to have retrospective obligations
annually until the all claims close for each coverage period of program
participation.
Revised March 23,2010 ,Page 5 of 12
16) Question: What coverage alternatives does my agency have if we decide to withdraw
from the Authority?
Answer: The Authority has a one-year withdrawal notification, and withdrawal from a
program may only be made at the end of a fiscal year. Commercial markets
and other pools may offer alternative coverage options for your agency.
Authority staff can provide appropriate assistance to your agency should you
wish to conduct a comparison of alternatives.
17) Question: What are the Authority's financial targets? How will we know when there is
enough money?
Answer: Consistent with the existing Net Asset and Refund to Members Policies, the
Authority has adopted a target to build up to, and then maintain, net assets
equal to a 95% confidence level. The exact dollar amount will change, over
time, reflecting each program's accumulated loss experience. Both policies
will be reviewed in conjunction with the implementation of the formula
revisions.
18) Question: What will happen if the Authority becomes "over" funded?
Answer: Net assets will be evaluated annually, and any excess will be handled in
accardance with the Net Asset and Refund to Members Policies.
19) Question: How will the members' loss prevention efforts be recognized?
Answer: The new formulas still reflect each member's annual loss experience—from
20% weight for the smallest members to 80%weight for the largest members.
� Your agency's actual costs will continue to be significantly influenced by
your loss prevention efforts. Also, for past coverage periods, the retrospective
payments due will be materially impacted by how the claims actually resolve,
so continued diligence and cooperation with the claims management process
is critical.
20) Question: My agency's losses have been trending downward. Will our costs increase?
Answer: As you may be aware, the Authority's members have sustained a number of
large losses over the past few years. In addition, the reinsurance market has
hardened and Authority has experienced reduced investment income. These
elements combined have negatively affected our actuary's estimate of future
Revised March 23,2010 Page 6 of 12
• funding requirements as well as increased the premiums for insurance the
Authority is able to secure from the marketplace. It is anticipated that these
developments will lead to increased contributions by the members.
21) Question: How will members that join the pool after July 1, 2010, be treated?
Answer: They will pay annual contributions as determined by the new funding
formulas.
22) Question: Has the Autharity's growth over the past ten years caused this problem?
Answer: Na The addition of inembers to the pool during the past ten years has
actually benefited existing pool members as costs have been spread over more
agencies. Our strict underwriting process assures this and the Authority will
continue to entertain"good"growth opportunities.
23) Question: If only 20%of a small member's annual contribution is based on their loss
history, does this mean that effective loss control at their agency no longer
makes a difference?
Answer: Effective loss control continues to make a difference. Members can and do
influence their share of the funding estimate by maintaining or establishing
best risk management practices in their locale. The best way to minimize
future increases is to do everything possible to avoid costly claims. Adoption
of best risk management practices will reduce claim severity in most cases. A
reduction in future funding estimates is directly tied to a reduction in the
severity of claims experienced by the pool and its members. Also, for past
coverage periods, the retrospective payments due will be materially impacted
by how the claims actually resolve, so continued diligence and cooperation
with the claims management process is critical.
24) Question: Where does my agency fall on the sliding credibility weighting scale? Is my
agency categorized as small, medium, or large?
Answer: The 2010-2011 Coverage Period Annual Contribution spreadsheets, located at
httn://members.cj in a.or�/Resources/Retro aspx, contains the credibility
weighting scale for each member.
25) Question: Are claim reserves included in the loss data used to calculate the annual
contribution?
Revised March 23,2010 Page 7 of 12
Answer: Yes. The annual contribution formula takes into consideration the most recent
five years of Net Incurred Losses.
Net Incurred Losses=Actual Paid+ Reserves- Recoveries
The maximum amount counted per occurrence is limited to $750,000 in the
liability program and $100,000 in the workers' compensation program. The
Authority utilizes the same third party administrators for all claims within
each coverage program; as a result, reserving practices are consistently
applied to all members. In addition, reserves are periodically reviewed and
evaluated by both staff and the claims committee for sufficiency and
consistent application.
26) Question: If the aggregate funding target for 2010-11 will not be achieved at the 75%
confidence funding level through the annual contribution, and on a pool-wide
basis we actually plan to collect less than the target, why is the total not at
least equal to the amount that would have been collected under the old
formula?
Answer: The ad hoc committee focused on long-term solutions,particularly the desire
to fund upcoming coverage periods at higher confidence levels. The proposed
funding formula achieves that when compared to the current funding model.
The lower cash collection is due to the suspension of the collection of
retrospective receivables. This suspension was a conscious decision in
recognition of the current economic conditions.
27) Question: Some members have participated in the pool for over 25 years and have
experienced relatively few claims, with minimal incurred costs with the
exception of the most recent few years, in which their losses have increased
dramatically. Since the annual contribution only includes five years of claims
experience in the calculation, are these long-time members with good overall
claims experience, being penalized strictly based on their most recent few
years of claims activity?
Answer: Stellar loss experience is recognized under the current formula, and the
benefits have already been realized by members for past coverage years
through retrospective refunds and lower primary deposits. Unfortunately the
past several years of adverse loss experience are not isolated to one or two
members; loss trends pool-wide have been negative. Industry standards
include the recognition of the previous five years of loss experience as a
reliable predictor of future loss experience(the Authority's excess and
reinsurance carriers request the previous five years of loss experience). In
addition, extraneous factors, such as the legal environment, make the previous
five years the most relevant far the purposes of estimating future costs.
Revised March 23,2010 Page 8 of 12
28) Question: Is there a correlation between deferred maintenance/poorly maintained streets
and public facilities and the rising cost of claims?
Answer: Deferred maintenance and aging infrastructure is playing a role in claims
under$750,000. Causes for the multi-million dollar claims are varied, and in
many instances the member involved had a slim percentage of liability. Joint
and several liability and the absence of another responsible party with assets,
however, resulted in the pool being responsible for the settlements/judgments.
29) Question: Does the annual contribution establish a new higher baseline for subsequent
calculations in future years? Is it possible for it to come down, given the
planned pool-wide increase of 10% each year? Will my agency be able to
influence that number and make it lower?
Answer: It is expected that the Liability Program cost, at the pool level, will increase
10% each year for the next three years. In the third year, it is projected that
the program will be collecting its actuarially determined funding estimate at a
75% confidence level. Due to the fact that the funding estimate will include a
provision for adverse fluctuations in claim costs (e.g. moving from 50%to
75% confidence level funding), the baseline for subsequent calculations will
be higher. Prefunding at a higher confidence level diminishes the potential for
large retrospective deposits during the transition period as well as future pool
assessments.
Over the same time period, individual member's contributions may or may not
increase by the amount the pool must increase. Some may experience
increases beyond that of the pool as a whole, while others will increase less,
and some may see no increases. Factars that will determine how much
individual increases will be include 1) an agency's payroll growth relative to
the pool's payroll growth, 2) an agency's loss history relative to the pool's
loss history and relative to its own loss history, 3)the volatility bands used to
limit individual member's annual increases, and 4) the off-balance factors
used to ensure the full collection of the funding estimate.
Ultimately, the pool's losses are the largest component of the actuary's
funding estimate. As the pool's relative loss history improves, the actuary's
funding estimate will flatten out and may even decline. An example of this
was seen in the Worker's Compensation program funding estimates from
2004/OS through 2009/10. Assuming that were to happen in the liability
program, the relative performance of each agency,using the factars noted
above, against the pool will determine the answer to whether a member will
see a decrease in their liability program cost.
Revised March 23,2010 Page 9 of 12
Finally, members can and do influence their share of the funding estimate by
maintaining or establishing best risk management practices in their locale.
The best way to minimize future increases is to do everything possible to
avoid costly claims. Adoption of best risk management practices will reduce
claim severity in most cases. A reduction in future funding estimates is
directly tied to a reduction in the severity of claims experienced by the pool
and its members.
30) Question: Should there be consequences for members who do not report claims?
Answer: All members are obligated to report claims. The Memorandum of Liability
Coverage states the following in Section 5 Conditions and Responsibilities:
C. (ii). If a Claim is made against a Protected Party, the Protected Party
shall immediately forward to the Authority's Claims Administrator every
demand, notice, summons or other process received by the Protected Party
of the Protected Party's representative.
In addition, the Autharity consistently reviews the members'risk and
exposures, and has developed a systematic system to ensure the members are
performing due diligence. Through the Risk Management Evaluation process
and the Loss Control Action Plan, members receive individual assistance in
identifying potential liability,property, and warkers' compensation issues and
are reminded of pool protocol such as the obligation to report claims.
31) Question: The retrospective balances are calculated separately far liability and workers'
compensation, and it is possible for a member to have a retrospective deposit
due in liability, yet have a refund in workers' compensation. While the
programs are calculated separately, will the invoice still combine them in such
a way I can make a single payment? When will we be invoiced for the 2010-
11 coverage year?
Answer: The invoice will combine both self-insured programs (liability and workers'
compensation), and will net the total amounts due with applicable refunds.
The 2010-11 invoices will be distributed to members in May.
32) Question: At present, the economic environment is very challenging for most members.
Why do the formula changes need to happen now?
Answer: The current model is not sustainable. The cash flow implications of the
current model could compromise the Authority's ability to pay claims within
the next few years.
Revised March 23,2010 Page 10 of 12
33) Question: How can we protect the pool from members who consistently have bad losses
year after year, and who do not demonstrate a commitment to risk
management?
Answer: The Authority actively assists the members by identifying, assessing, and
assisting the members in controlling risk and exposures, A combination of
systematic and ad hoc methods are incorparated into both methods to perform
risk management due diligence. Systematic methods include the Risk
Management Evaluation(RME), Loss Control Action Plan, training
opportunities, and our annual Risk Management Awards. Ad hoc methods
include the provision of risk management consulting services,review of
incident reports and underwriting report submissions,provision of white
papers, legal review and assistance, and so on. Loss analysis and trends are
integral parts of the systematic methods. Since the RME is member-specific,
analysis of individual losses is provided to give greater clarity and focus to
areas of liability or worker safety that are most in need of attention.
In some instances, it may be appropriate for the Authority to actively
intervene in the member's risk management efforts, or even require the
member to address serious operational issues through a Performance
Improvement Plan (PIP). For any member that was unsuccessful in
completing the PIP, recommendations may be made to the Executive
Committee to endorse the Memarandum of Coverage excluding coverage for
activities or conditions of the member deemed to impose unreasonable risk on
the Authority. This may include the imposition of specific copayments,
deductibles, coverage limitations, or program participation cancellation.
When every effort fails to improve the perfortnance of a member, the
Authority's Joint Powers Agreement has a mechanism by which to cancel
member participation in either a program or the pool. The primary interest in
cancelling a member stems from a common belief that the other members will
pay more if poor-performing members are allowed to remain in the pool.
Also of concern is the pool's perceived image and the members' desire to have
well-managed and respected members participating.
34) Question: Under the new annual contribution formula, will small members end up
subsidizing large members ar vice versa?
Answer: No. Small members will not subsidize large members, and large members
will not subsidize small members. Variable credibility weighting is
specifically included within the new annual contribution formula to ensure
that rough equity is achieved on a long-term basis, and that each member
Revised March 23,2010 Page 11 of 12
receives a fair estimate of cost allocation using their relative share of both
experience and exposure.
35) Question: Should interest be charged to members on their retrospective deposit
balances?
Answer: Members with significant deferred balances are benefiting to a larger degree
than members with smaller balances. Charging interest is one way to address
this question of relative fairness, with the added benefit of supplementing the
Authority's interest income from the inveshnent portfolio. This option may
also serve as an effective incentive for early re-payment of outstanding
balances. The formula review ad hoc committee and Executive Committee
will continue to analyze this concept in the coming months.
36) Question: Would a more simple approach to changing the formula be equally as
effective at addressing the core problems, such as removing the caps on the
primary deposit or eliminating the rolling retro?
Answer: The ad hoc committee considered these options, however, it was determined
that completely removing the caps would result in unwanted excess volatility
at the member level. By keeping the caps in place yet widening them, and
shifting them upward, an effective balance was reached between preventing
excess volatility, attaining aggregate funding sufficiency, and allowing the
claims experience of individual members to impact their cost.
In light of the difficult economic environment, the ad hoc committee decided
that all retrospective deposits due to the Authority should be temporarily
suspended until the annual contribution reaches target funding levels over the
next three to five years, at which time repayment of retrospective deposits
should resume. It is anticipated that the combination of inembers paying a
higher annual contribution under the new formula, and simultaneously being
required to pay down aggregate retrospective balances would be too heavy of
a burden,particularly given the severity of fiscal challenges which many
members are facing.
In addition, a simple approach does not address other important issues that
were uncovered through the modeling and analysis conducted by the ad hoc
committee,particularly the fairness of the old cost allocation model as it
relates to its exclusion of losses in the second layer, and its application of
equal credibility weighting to all members despite their non-homogeneous
payrolls. �
Revised March 23,2010 Page 12 of 12