HomeMy WebLinkAboutFS 2012-04-03 Item 2B - Update - Self-Insured Health Care Plan ReserveCity of Tukwila
Jim Haggerton, Mayor
INFORMATIONAL MEMORANDUM
TO: Mayor Haggerton
Finance and Safety Committee
FROM: Peggy McCarthy, Finance Director
DATE: March 28, 2012
SUBJECT: Self- Insurance Reserve Requirements
ISSUE
For the self- insured healthcare plans, revise the contingency reserve balances and incorporate
the contingency reserve policy into the existing Reserve Policy, 300 -15.
BACKGROUND
Prior guidance from the Washington Administrative Code (WAC) Chapter 82 -65 for Local
Government self- insurance health and welfare programs required a local government self
insured healthcare plan to establish an IBNR (incurred but not reported claims) reserve in an
amount equal to 8 weeks of program expenses and recommended establishment of a
contingency reserve equal to an additional 8 weeks of program expenses for a total reserve of
16 weeks, or 30% of expenses. The City established such a reserve, equal to 30% of annual
expenses, for each of its self- insured plans, the plan /Fund 502 for active employees and the
plan /Fund 503 for retired LEOFF 1 employees. The 2010 reserve amounts were as follows:
Plan 2010 Combined
Reserve (a)
502 Self- insured plan, active $1,155,647
503 Self- insured plan, LEOFF 1, retired 70,300
(a) 30 of annual healthcare expenditures before recording of changes in reserves.
The WAC Chapter 82 -65 was modified in October 2010 with an effective date of calendar year
2011. Pursuant to the modified guidelines in WAC 82 -65 -040 (2), the City obtained an
independent actuarial study for each plan to determine the reserve funding requirements. The
study was performed by Healthcare Actuaries during the 3d quarter of 2011. The necessary
IBNR reserves determined by the actuary are as follow:
Plan 2011 IBNR
Reserve (b)
502 Self- insured plan, active $430,600
503 Self- insured plan, LEOFF 1, retired 55,200
(b) Actuarially determined.
21
INFORMATIONAL MEMO
Page 2
WAC 82 -65 -040 (3) recommends the governing body establish an additional contingency
reserve, in addition to the actuarially determined IBNR reserve.
DISCUSSION
The City will record an IBNR reserve in the amounts determined by the actuary. To establish
the contingency reserve, a common practice has been to use a multiple of the IBNR reserve as
a basis. Certain neighboring jurisdictions establish their contingency reserves as follows:
Kent 2 times IBNR
Redmond 2.5 times IBNR
Renton 30% of expenses, which equates to approximately 2 times IBNR.
Staff recommends establishing a contingency reserve equal to 2.5 times, or 250 of the IBNR
reserve which is a fiscally conservative policy, consistent with other City financial policies.
The proposed contingency reserve policy would be added to the existing Reserve Policy, 300-
15, as section 8.0 "Self- Insured Healthcare Plan Contingency Reserve The IBNR reserve and
the contingency reserve would be combined and recorded as one liability in each of the self
insured healthcare plan funds, Fund 502 and Fund 503, consistent with prior accounting
treatment.
A comparison of the prior year reserve amounts and the proposed reserve amounts follows:
Each of the self- insured funds has sufficient fund balance to cover the proposed reserve
amounts.
RECOMMENDATION
The Council Finance and Safety Committee is being asked to consider and approve the
proposed Section 8.0, "Self- insured Healthcare Contingency Reserve" addendum to the existing
Reserve Policy, 300 -15.
ATTACHMENTS
City of Tukwila Renewal Report 2012 Actives (Actuarial report), page 14
City of Tukwila Renewal Report 2012 Retirees (Actuarial report), page 14
Reserve Policy, 300 -15 with proposed addition of section 8
22 C:1 Temp \Content.Outlook\CBK0060U11nfo Memo Self- Insurance Reserve Requirements 3- 28- 2012.doc
2010
2011
Plan
Combined
IBNR
Proposed
Proposed
Reserve
Reserve
Contingency
Combined
Reserve
Reserve
502 Self- insured plan, active
$1,155,647
$430,600
$1,076,500
$1,507,100
503 Self- insured plan, LEOFF 1,
70,300
55,200
138,000
193,200
retired
Each of the self- insured funds has sufficient fund balance to cover the proposed reserve
amounts.
RECOMMENDATION
The Council Finance and Safety Committee is being asked to consider and approve the
proposed Section 8.0, "Self- insured Healthcare Contingency Reserve" addendum to the existing
Reserve Policy, 300 -15.
ATTACHMENTS
City of Tukwila Renewal Report 2012 Actives (Actuarial report), page 14
City of Tukwila Renewal Report 2012 Retirees (Actuarial report), page 14
Reserve Policy, 300 -15 with proposed addition of section 8
22 C:1 Temp \Content.Outlook\CBK0060U11nfo Memo Self- Insurance Reserve Requirements 3- 28- 2012.doc
CITY OF TUKWILA
Estimated IBNR — Actives
Medical /Rx, Dental, and Vision
lot! d -3
Average claim lag in days ( Gz;
Divided by the number of days in the 12 months ending 7/31/2011
Portion of year
Net adjusted paid claims for the 12 months ending 7/31/2011*
Enrollment Adjustment
Estimated IBNR as of 7/31/2011 (excluding administration)
Trend at 10.1%, 5.8 %, and 3.6% for 5 months
Estimated IBNR as of 12/31/2011, rounded, w/o administration
Administrative fees**
Total estimated IBNR as of 12/31/2011, rounded, w/o admin.
Number of actives and retirees as of 7/31/2011
Medical /Rx Dental Vision Total
53.2 20.0 23.4
- 365.00 365.00 365.00
= 0.1458 0.0549 0.0640
x $3,604,556 $607,013 $28,105 $4,239,673
x 0.7888 0.7888 0.7888
_ $414,575 $26,288 $1,419 $442,283
x 1.0411 1.0237 1.0149
= $431,614 $26,911 $1,440 $459,966
+ $20,786 $4,603 $439 $25,827
= $452,400 $31,514 $1,879 $485,793
343 361 195
Number of actives as of 7/31/2011 x
Estimated!BNR as )f.12/31/2011, includingadmin, rounded 401,000 :_
Estimated'IBNit as o 21311202includin admio roundd 1.7
Estimated IBNR as.of 12/31/2413, including admen, rounded 5486,504
EstitIBR as o12312014, ncuding admin, ronded $53580 $33;200 $'1,800 me.Nf , i •
304 322 156
8,100 51;500 $430;600.-
$473,000
$519,600.;
570,800.,;
700 51;600
1,400 $1,700 ':
Notes:
Paid claims are net of stop -toss recoveries.
" HMA charges 3 months of administrative fees (excluding APO access fees) to adjudicate 12 months of run -out claims. This is the basis for the
administrative fees included above. Stop -loss premiums are not included.
City of Tukwila Renewal Report 2012 — Actives 14
Exhibit 1
11/10/2011
CITY OF TUKWILA
Estimated IBNR — LEOFF 1 Retirees
Medical/Rx, Dental, and Vision
Average claim lag in days
Divided by the number of days in the 12 months ending 7/31/2011
Portion of year
Net adjusted paid claims for the 12 months ending 7/31/2011*
Enrollment Adjustment
Estimated 1BNR as of 7/31/2011 (excluding administration)
Trend at 10.1 %, 5.8 %, and 3.6% for 5 months
Estimated 1BNR as of 12/31/2011, rounded, w/o administration
Administrative fees"
Total estimated 1BNR as of 12/31/2011, rounded, w/o admin.
Number of actives and retirees as of 7/31/2011
Number of retirees as of 7/31/2011
Estiriiated iB1 R as,of 12/3:
Index: 300 -15
CITY OF TUKWILA
ADMINISTRATIVE MANUAL
Page 1 of 5
TITLE RESERVE POLICY
1. PURPOSE:
To establish a Reserve Policy for the City which pable of addressing the
various ty (categories) cate ories of the City's Fand ret- tricted use funds. The
Y' s p eratin 9 N;
objectives of this Policy are to (i) provide a clear understM;N, Jn of the goals and
objectives of reserve establishment, (ii) offer g nce and lim a
tlpns regarding the
establishment, use and replenishment of City, reserves, and (iii) es ablish a process
for periodic reporting and review of City reserves.
2. ORGANIZATION AFFECTED:
All City funds.
3. REFERENCES:
4. GENERAL FUND RESERVE POLICY:
4.1. The General Fun
specifically levied
providing 9# eral
applies to thee
Fund with a minim
however, shall the
specifically 5We d
4 2`'The Contingency
General Fund rev
thanl pal year 20
his used to accoun�or all g rYeral revenues of the City not
or c�[ected for oth City funds, and for expenditures related to
services by the City For the purpose of this policy and as it
neral 04 d only, the City will establish a Contingency Reserve
urra bala ice >af 8% of aR General Fund revenues. At no time,
FFi
691 hce in the Gortngency Reserve Fund fall below 4% unless
by th,e City Council because of an unforeseen emergency.
f23eserve F a�n *shall initially be set at a minimum of 4% of annual
enues. The City shall reach the targeted minimum of 8% no later
14according to the following schedule:
2% byDecember 31, 2011
4 December 31, 2012
M 1 y December 31, 2013
8% by December 31, 2014
4.3. If actual expenditures in the General Fund are less than budgeted expenditures,
and the General Fund does not end the year at a deficit, at least 25% of the
difference between budgeted and actual expenditures will revert to the
Contingency Reserve Fund and may then be re- appropriated in a subsequent year
at the discretion of the City Council.
4.4. The City will annually direct a minimum of 25% of sales tax receipts from new
construction (NAICS Industry Classification Code 23) to the Contingency Reserve
Fund.
25
Index: 300 -15
TITLE: RESERVE POLICY
Page 2 of 5
4.5. Use of Contingency Reserve Fund To the extent that there is an imbalance in the
General Fund between revenues and budgeted expenditures, City Council and
administration will strive to address the imbalance first with revenue increases,
expenditure reductions, or a combination of the two.
Use of the Contingency Reserve Fund is a one -time, non recurring funding source.
If an imbalance in the General Fund occurs that can not be addressed with
additional revenues or expenditure reductions, a multi plan shall be
developed to address the imbalance concurrently with the planned reserve draw
down of the Contingency Fund. The implementation ofe replenishment plan will
be done in accordance with the guidelines below fsee "Replenishment of
Reserves A planned draw down of the fund's ho a) not exceed
I.
50% of the balance in the Contingency Re ser a -Fund, dn'6111.W not reduce the
reserve below 4% of annual General Fund revenues.
Mr.
4.6. Replenishment of Reserves The following criteria will be used to restore the
Contingency Reserve Fund based upon:f remaining fund balance compared to
the minimum reserve guideline:
1. If the reserves are drawn down by 25 50% bf reserve fund balance, then a
budgetary plan shall be implemented to returnfthe reserve level to between
75% and 100% of the minimum balance over a 5 to year period.
2. If the reserves are drawn down by 1r5 !0 of reserve fund balance, then the
budgetary plan to restore the reserveQ over a 3 to 5 year
period.
3. If the reserves are drawn down by 0 -10% of reserve fund balance, then a
solution to.;r.Eplenish to at least the minimum shall be structured over a 1 to 3
year period.
4.7. Annual, S tatus Reporting and `Pe "riodio'Review Annually, after presentation of the
City's Cbmr'ehensive D.nual Financial Report, the Finance Director will prepare
:and present an`�updated Reserve Level Status report by July 1 of the following
At least every five years, the Mayor, based on advice from the Finance Director,
will askAhe City Council to reaffirm or revise this policy, including the percentages
established herein.
5. RISK MANAGEME=NT RESERVE POLICY:
5.1. The City shall maintain a Risk Management Reserve Fund dedicated to mitigation
of the risk of loss arising from potential claims against the City for general liability
purposes as well as claims resulting from natural disasters such as flooding and
earthquakes.
26
Index: 300 -15
TITLE: RESERVE POLICY
Page 3 of 5
5.2. The Risk Management Reserve Fund shall be set initially at a minimum of 4% of
annual General Fund revenues. The City shall reach the targeted minimum of 8%
no later than fiscal year 2014 according to the following schedule:
2% by December 31, 2011
4% by December 31, 2012
6% by December 31, 2013
8% by December 31, 2014
5.3. Legal claims expenses incurred below the City's insurance deductible amounts will
be paid for out of the Risk Management Reserve Uninsured legal claim
expenses will also be deducted from the Risk Management.Reserve Fund.
5.4. Use of the Risk Management Reserve Fund A draw down of the fund's reserves
should: a) not exceed 50% of the balance ,itillhe Risk Management: Reserve Fund,
and b) not reduce the reserve below 4% of annual General Fund revenues.
5.5. Replenishment of Reserves The following`critena J(l be used to restore the Risk
Management Reserve Fund based upon the reim4t fund balance compared to
the minimum reserve guideline:
H
1. If the reserves are drawn down by 25 -50% df reserve fund balance, then a
budgetary plan shall be implemented to return the reserve level to between
75% and 100% of the minimum balance,, over a 507 year period.
2. If the reserves are drawn down by 10-'2 5� of reserve fund balance, then the
budgetary,. lqn to restore the reserve shall: -be structured over a 3 to 5 year
period.
n
3. If the reserves are drawn down by 0 -10% of reserve fund balance, then a
solution to replenis to at least the minimum shall be structured over a 1 to 3
year period:..
Hk
5.6. The City`Council may, di6&re18n and as necessary, transfer funds between
the Contingency Reserve Fund and the Risk Management Reserve Fund. Once
Elie two reserve funds ar` "e fully- funded up to the minimum levels as established
within this policy; of no time will the combined balances of both funds decline
b le ow 8% of annualGenerat` Fund revenues.
REVENUE STABILIZATION FUND POLICY:
6.1. The City shat(mantain a Revenue Stabilization Fund dedicated to mitigating the
impact of una ftipated revenue declines.
6.2. The City shall appropriate, on an annual basis, a transfer of 1% of General Fund
revenue to the Revenue Stabilization Fund beginning with the 2011 -2012 biennial
budget. The Revenue Stabilization Fund will not be utilized by the City unless
actual General Fund revenue is 5% or more below budgeted revenue after six
months through any given calendar year. At no point will the balance in the
Revenue Stabilization Fund decline by more than 50 unless actual General
Fund revenue is more than 20% below budgeted revenue.
27
Index: 300 -15
TITLE: RESERVE POLICY
Page 4 of 5
6.3. In addition to the annual 1% appropriation, the City will transfer a minimum of 25%
of the excess of any actual property tax or sales tax collections above the
respective budgeted amounts. Such transfer shall take place by March 31 of the
following fiscal year.
6.4. Replenishment of Reserves The following criteria will be used to restore the
Revenue Stabilization Fund based upon the remaining fund balance compared to
the minimum reserve guideline:
1. If the reserves are drawn down by 25 -50% of reserve fund balance, then a
budgetary plan shall be implemented to return the reservd %vel to between 75%
and 100% of the minimum balance over a 5 to 7 year�eriod.
2. If the reserves are drawn down by 10 -25% of reserve fund balance, then the
budgetary plan to restore the reserve shall b6�., ctured over a 3 to 5 year
period.
3. If the reserves are drawn down by 0 -10 of reserve fuh balance, then a
fi uct
solution to replenish to at least the mtimum shall be str over a 1 to 3
year period.
6.5. If the accumulated balance in the Revenue Stabilization Fund exceeds 10% of
annual General Fund revenues, such exce shall be transferred to the
Contingency Reserve Fund.'
7. ENTERPRISE FUND RESERVE PO
7.1. The City shall maintain an adequate fund `becen =each of the City's enterprise
funds to provide funding for capital expenses, un'a*ipated revenue declines, and
any other unbudgeted expense. The policy applies to the following funds:
15% by December 31, 2013
20% by December 31, 2014
7.3. Use of the Working Capital Reserve Fund A draw down of the fund's reserves
should: a) not exceed 50% of the balance in the Working Capital Reserve Fund,
and b) not reduce the reserve below 10% of annual operating and capital
expenditures within each fund.
W
Index: 300 -15
TITLE: RESERVE POLICY
Page 5 of 5
7.4. Replenishment of Reserves The following criteria will be used to restore the
Working Capital Reserve Fund based upon the remaining fund balance compared
to the minimum reserve guideline:
1. If the reserves are drawn down by 25 -50% of reserve fund balance, then a
budgetary plan shall be implemented to return the reserve level to between 75%
and 100% of the minimum balance over a 5 to 7 year period.
2. If the reserves are drawn down by 10 -25% of reserve...hApd balance, then the
budgetary plan to restore the reserve shall be structured -over a 3 to 5 year
period.
3. If the reserves are drawn down by 0 -10% of 0t: i rve fund balance, then a
solution to replenish to at least the minimum shall be structured over a 1 to 3
year period.
7.5. The Working Capital Reserve fund shall be maintained within each of the
Enterprise Funds, but shall be separate frd fi the accumulated fund F balance within
each fund.
8. SELF INSURED HEALTHCARE PLAN CONTINGe NCw( RESERVE POLICY:
8.1. The Citv shall maintain a contingencv reserv"alance in each of its self
insured healthcare funds in an amount equal to 23 times. or 250 of the
actuarially determined IBNR lincur'tb'd";but not report edl "reserve.
8.2. The contingencv reserve balance willbe combined with the IBNR reserve
balance and recorded, as one liabilitV each the self- insured healthcare
plan funds.,
Initiating Department:
Finance Department
Mayor's Office Approval Signature:
29