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HomeMy WebLinkAbout07-16-2013 c7 retrospective deposit pmt & pmt plan FROM: Monica Irons, Human Resources Director Wayne Padilla, Finance and Information Technology Director Prepared By: Monica Irons, Human Resources Director SUBJECT: RETROSPECTIVE DEPOSIT PAYMENT AND PAYMENT PLAN RECOMMENDATION 1. Accept a credit in the amount of $452,294 from the California Joint Powers Insurance Authority (CJPIA). 2. Authorize an initial payment of $1,096,378 to the CJPIA for the retrospective deposit balance due July 2013. 3. Direct staff to notify the CJPIA of the City’s intent to participate in a five installment payment plan with a fee of 1.990% on the remaining retrospective deposit balance. DISCUSSION Background The City of San Luis Obispo became a member of the CJPIA in 2003 for participation in the liability program. The CJPIA was formed in 1977 by thirty-three cities to provide liability protection when the insurance industry abandoned local government agencies. Today, the CJPIA is composed of and governed by 121 member agencies, including 98 cities, 16 Joint Powers Authorities, and 7 special districts. The CJPIA provides the City with insurance coverage for liability, workers’ compensation, all-risk property, commercial crime, special events, and pollution and remediation legal liability. Another incentive for joining the CJPIA was the healthy and extensive training program available through the CJPIA for City staff. CJPIA also provides workshop and academies that offer innovative risk management solutions for public agencies. Membership in the CJPIA means sharing risk with other member agencies. However, the risk is shared among a large number of agencies that share common goals of risk avoidance, claims control and transfer of risk in order to eliminate or reduce exposure. By following proven practices of risk management, member agencies assist each other in keeping the cost of claims down. By sharing risk, the cost to an agency for a year with significant claims experience is somewhat mitigated and spread out over a number of years. For several years the CJPIA used a funding model that included a primary deposit contributed by each member at the beginning of the coverage period (fiscal year) and retrospective adjustments made subsequently to reconcile each member’s share of costs based upon actual experience and exposure. These retrospective adjustments consisted of a “rolling retro” where only a portion (at one point a quarter and later an eighth) of the retrospective adjustment calculated each year was charged to the member in that year and the remaining balance was “rolled” forward to be recalculated in the Meeting Date Item Number 7/16/13 C7 - 1 Retrospective Deposit Payment Page 2 next year based on actual experience and exposure. While this methodology lessened the annual impacts for individual member agencies, it became problematic for the pool when several coverage periods with adverse loss development occurred sequentially. Recognizing the challenging financial position that was developing for the pool as a result of the rolling retrospective methodology, the large losses, and other elements of the funding model, the CJPIA Executive Committee approved a prospective funding model. The prospective funding model aims at prospectively funding coverage periods sufficiently, providing budgetary predictability for members by requiring one annual contribution and eliminating the retrospective adjustments, and rewarding effective loss control and risk management efforts with lower rates. Coverage years under the prospective formula (beginning in 2013-14) will not be adjusted retrospectively on an annual basis. However, if net asset levels become insufficient, an assessment may be needed in the future. The new funding model is intended to provide overall financial strength and security for the pool, and rate stability and fairness for the members. A transition plan was established by the CJPIA to move from the retrospective funding model to the prospective funding model by June 2013, with any remaining retrospective balances due in July 2013. Recognizing that some members could have significant retrospective balances, the Executive Committee of the CJPIA approved the development of payment plans that offer members the flexibility to pay-down balances over time. Direction from Council Staff alerted Council to the retrospective deposit balance of $3,121,571 during the Mid-Year Budget Briefing in February 2013. At that time, Council directed staff to review the retrospective calculation in detail, confirm the amount, and request consideration by the CJPIA Executive Committee for a reduction in the amount due. Staff worked with CJPIA staff to confirm the amount and appealed to the Executive Committee for consideration of reducing the retrospective deposit balance and eliminating the fee associated with the payment plan. Staff presented the attached request (Attachment 1, Payment Modification Request) to the Executive Committee on May 22, 2013. The Executive Committee felt the City’s excellent loss history should be recognized but was concerned about changing established policies and therefore, referred the matter to an Ad Hoc Committee that was involved in reviewing the retrospective formula and developing the prospective formula. The Ad Hoc Committee was likewise impressed with the City’s loss history and felt strongly that it was important to recognize the City’s excellent loss history as well as the magnitude of its financial contributions over the past ten years. The Ad Hoc Committee sought a mechanism that would not establish a precedent, but that could provide meaningful relief for the City. In the City’s letter requesting a reduction to its retrospective balance, it outlines how the City obtained a defense verdict and was awarded costs, attorney fees, and penalties from the plaintiff (Pacific Mechanical Corporation) in an amount exceeding $900,000. The City pursued the action on behalf of itself and the CJPIA and was able to recover $452,294.10 in defense attorney fees and costs that the Authority had paid. The remaining amount received from the judgment reimbursed the Water Enterprise Fund for the cost of legal fees and a portion of the staff time that had been devoted to this case along with penalties that were awarded in the judgment. While the City submitted the $452,294.10 recovery to the Authority promptly, this occurred shortly after the most recent retrospective calculation was concluded, so the benefit of the reimbursement has yet to be recognized in the calculation. Further, C7 - 2 Retrospective Deposit Payment Page 3 because of the retrospective formula and the age of the claim, staff from the CJPIA have indicated that the value of any adjustment made to the retrospective deposit balance as a result of this recovery would have been minimal (less than $15,000). City staff negotiated with the Ad Hoc Committee to recommend to the Executive Committee that the City should be credited with the $452,294 as recognition of the City’s excellent loss history and extraordinary efforts in recovering these costs. The Executive Committee considered and approved this recommendation on June 26, 2013. They felt this was sufficient recognition of the City’s excellent loss history and the reimbursement to the City will not affect other pool members as it had not yet been allocated through the retrospective calculation. This is equivalent to approximately a 14.5% reduction in the $3.1 million retrospective deposit balance. Retrospective Deposit Payment During the 2013-15 Financial Plan process, staff recommended making an initial retrospective deposit payment of $644,084 to the CJPIA in July 2013. This amount represents the enterprise fund portion of the total retrospective deposit amount of $3.1 million. With the news that the City will be receiving a credit of $452,294 from the CJPIA, staff recommends increasing the initial retrospective payment by that amount to $1,096,378, thus making a General Fund payment as well. The resulting unpaid balance due will be $2,025,193 and can be paid off in five years, instead of the six years anticipated during the development of the 2013-15 Financial Plan. The five-year payment plan has a lower financing fee of 1.990% instead of 2.115%, which reduces the financing fees by approximately $64,000 over the term of the repayment program. FISCAL IMPACT The fiscal impact of applying the credit of $452,294 to the General Fund portion of retrospective balance is that it reduces the financing fees on the remaining amount and lowers the overall cash outlay that must be made by the City. The 2013-18 Fiscal Forecast contains sufficient funding to pay down the remaining balance within this timeframe. ALTERNATIVES Council could direct staff to not apply the $452,294 to the retrospective deposit balance and to potentially use the money for some other purpose. Staff does not recommend this alternative as it would result in the City needing to make six payments to the CJPIA instead of five, while paying $64,000 more in finance charges. ATTACHMENT 1. Payment Modification Request t:\council agenda reports\2013\2013-07-16\retrospective deposit payment and payment plan (irons)\e-car retro deposit.docx C7 - 3 ATTACHMENT 1 C7 - 4 ATTACHMENT 1 C7 - 5 ATTACHMENT 1 C7 - 6 ATTACHMENT 1 C7 - 7 ATTACHMENT 1 C7 - 8 ATTACHMENT 1 C7 - 9 Page intentionally left blank. C7 - 10