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
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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,
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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
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