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What you need to Know to Make Decisions During Tough Times

Level - Board GovernanceExecutive Directors

FinancePresenters

James Marta CPA, ARPMPrincipal

James Marta & Company LLPJake O’Malley

Executive DirectorMunicipal Pooling Authority

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Boards have had to make conscious decisions to trade off certain long-term objectives to meet member short-term needs. Do you know when you are going into the red zone? How can the board manage these short-term tradeoffs and meet long-term objectives?

Session

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Assist boards members and managers to understand what the board should monitor and what needs to be communicated to help the board make decisions. Ensuring board members are involved, informed and the pool is meeting funding and stability targets.

Objective

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Economy Political Benefit costs

Our current environment

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Is your pool cutting its funding margin?

Is your discount rate your using much larger than what you will be earning in the next few years?

Are you returning net assets? Are your members cutting

back on risk management? Increasing SIR? Were these suppose to be

short-term conditions that are now the “New Normal?”

How is your JPA facing tough times?

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Potential Effect Dangerous Combination Lowering your confidence level puts you at more risk against large

or multiple claims Returning equity that was earned over many years instead of gradually may quickly change the pool’s resistance to large changes in claims, or premium expenses

Discounting at a rate higher than future projected treasury rates can become a hidden expense as the actuary continues to “unwind” the discounted liabilities, you may not have the earnings to offset the recognized costs. You could be in a deficit and not know it if your discount rate is too high. The revenue wouldn’t be enough to cover the discounted claim liability.

What are the consequences?

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Understand that there may be a gap between Members:

What they want vs. what they need E.g. broad coverage, at low rates, with

dividend stream Remind directors they wear two hats

Member Expectations

JO

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Partnering to protect the human and financial resources of our Member Cities, thereby allowing Members to continually improve their level of community services.

By: Stabilizing rates and operational costs Providing responsive, innovative and

professional risk management services; Exercising pro-active loss control and risk

prevention programs to control costs and provide a safe work environment;

Maintaining a leadership role in the JPA community

Mission Statement

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Highly placed & educated at their Agency(e.g. City Managers, Asst. City Managers, City Attorneys, Finance Directors, Risk Managers)

They are part time to Pool management Stable within the Public Sector, but do move

around Very little experience in Pool financing, such

as rating plans, retrospective formulas, ex-mods, etc.

Work their way through Pool Board / Committee structure, then rotate out of key positions

Typical Pool Board of Directors

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Do members understand where you need to be?

Are you making this information regularly available to make decisions.◦ Are your target benchmarks part of your regular

rate setting process?◦ Are you trending losses and equity?

Where you need to be

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Rates Financial position Benchmarks (targeted equity) How have you faired in the

past What is on your horizon Members

◦ Happy, content, they understand

How do you measure up?

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Financial Information

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2007 2008 2009 2010

Gross Contributions

Insurance / reinsurance premiums

Net Contributions

Net Assets (Equity)

Claim Liabilities (outstanding claims;reserved and IBNR)

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Combination of Tests

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

16,000,000

17,000,000

2007 2008 2009 2010

Claims Liability

Equity

SIR

5 times SIR to Equity

10 times SIR to Equity

(Claims Liab + Prem) x 25%

(Claims Liab + Prem) x 50%

Oregon 25% Prem:Equity

Oregon Req. + 25%

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Information over time◦ Claims

How elements are changing Liability settlements Medical costs Statutory benefits

◦ Financial◦ Efforts◦ Social economics◦ Other

What should you look at?

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Internal Benchmarks: Workers’ Comp

05

10152025

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Num

ber o

f day

sLOST WORK DAYS PER CLAIM PER FISCAL YEAR

0

400,000

800,000

1,200,000

1,600,000

99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-070.000.751.502.253.003.754.505.25

Dividends Rates

$

RATES VERSUS

DIVIDENDS

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Internal Benchmarks: Risk Control

23.527.228.427.331.6

40.1

12.11515.3

12.6

0.0

10.0

20.0

30.0

40.0

50.0

99-00 00-01 01-02 02-03 03-04 04-05 05-06

Per $

10M

Pay

roll

0

5

10

15

20

25

30

Per 100 FTE

189 194215

167 161

$0

$1,000

$2,000

$3,000

$4,000

01-02 02-03 03-04 04-05 05-06

-25

25

75

125

175

225

Cost Freq.

Injury Rates

Police Injury History

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Internal Benchmarks: Financials

CONSOLIDATED BALANCE SHEET

Equity Position Analysis by Program

CONSOLIDATED BALANCE SHEET

-3

0

3

6

9

12

15

Millions

98-99 99-00 00-01 01-02 02-03 03-04 04-05

Liability Work Comp Others

$

JO

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Losses Equity Members Exposures

How are you forecasting the future?

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Compare to your benchmarks Compare to where you have been over time Figure out the direction

How do you look at this information

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Internal Benchmarks: Risk Control

Police Injuries

Combative Persons

28%

Tactical Training

4%

Non Combat Physical Activity

50%

Motor Vehicle

9%

Misc9%

Bend, stoop lift carry, push, pull, reach, walk,run, slip, fall, Cum. Trauma

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External Benchmark: CIPRA

0

2,000

4,000

6,000

8,000

10,000

A B C MPA D E F

02468

1012141618

A B C MPA D E F

Loss Rate Incident Rate

Loss Rate / Incident

Rate

Average Cost Per Claim

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Are you where you need to be? What can you do to change? What must you do? What are the realities?

What next

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In risk financing your learn you can fund claims at different points

Before the loss During the loss After the loss

Funding Your Claims

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Among members Through fiscal years This smoothes costs over time

Risk financing and sharing allows pools to smooth losses

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Balancing wants and needs

Low Rates Program Funding

Stability

"If you have money you have options"

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Market Rates

Optimal pooled rates

Pooling for long-term stability

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Communication, education and training Make your operation transparent Demonstrate you and your staff know

what you’re doing Give the Directors the requisite skills to

make intelligent, informed decisions

Taking the Mystery out of Pool Administration

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They understand organization governance – from their own work experience

Provide an understanding of risk management, risk financing, pool capitalization and funding

Introduce enough knowledge, so they can ask staff the right questions

How Much do Directors Need to Know?

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The financing: the impact of short-term decisions on the long-term position◦ Lower confidence level◦ Higher retention◦ Returning equity through dividends◦ Returning equity through rate discounts◦ Discount level not consistent with earnings◦ Zero rate increases

What you need to consider

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◦ Benchmarks◦ Strengths and weaknesses of benchmarks◦ Tracking these benchmarks over time; are they

eroding?

What financial information the board should monitor

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Loss Control – Real Time Numbers

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• What is changing, what isn’t

Claim information

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◦ What is the financial position?◦ What is the direction?◦ What is the GASB 68 impact? (recording pension

liabilities)◦ Where does the pool need to be going?◦ What does the pool need to do to meet its goals;

are you in the green, yellow or red zone?

In this cycle where do you think you are going and what does this mean in making decisions while balancing members wants and needs

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Set targets for equity that consider◦ Confidence level◦ Self-insured retention◦ Rate Stabilization considerations

Watch the growth in medical insurance costs and analyze how medical costs would translate into increased workers’ compensation costs.

Analyze trends

Take a fresh look at equity targets

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Summary of basic testsLiability

20101 Gross Contributions 21,091,358 2 Less insurance / reinsurance premiums 8,824,917 3 Net Contributions 12,266,441 4 Net Assets (Equity) 14,687,804 5 Invested in building and equipment or other - 6 Net available to fund claims 14,687,804

7 Claim Liabilities (outstanding claims; reserved and IBNR) 10,993,838

8 Self-Insured Retention - (pooled portion of each claim) * 600,000

9 Claim funding (6+7) 25,681,642

Confidence Level Factors Required Margin TotalExpected - 10,993,838 met

70% 2,198,768 13,192,606 met75% - 80% 4,837,289 15,831,127 met85% - 90% 8,003,514 18,997,352 met

LiabilityCalculated

Equity Target Formulas FactorCurrent balance no provision 14,687,804 Contributions to equity less than 3:1 3.0 1.44 MetEquity to SIR 4 2,400,000 MetEquity to SIR 5 3,000,000 MetEquity to SIR 6 3,600,000 MetEquity to SIR 7 4,200,000 MetEquity to SIR 10 6,000,000 MetLoss reserves to equity less than 4:1 4 0.75 MetClaim Liab with Premium Method (Claim liab + Prem) times factor 0.25 8,021,299 NotMetClaim Liab with Premium Method (Claim liab + Prem) times factor 0.50 16,042,598 NotMet

Claim Funding Stress Factor 2.34 Equity to Premium Stress Factor New Pool <5:1 Mature Pool < 2.5:1 and 0 5 0.75 Met Oregon requirement Surplus > 25% of net contributions 0.25 3,066,610 Met

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Understand the cyclical nature of the markets “pragmatically look forward”

Keep sufficient reserves . . . “when you have money you have options”

Not succumb to cash flow budgeting and rate setting

Anticipate trends “The will to do what is needed”

What you should be doing now

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We don’t want to be one of your problems. Being stable and reliable is what you need. Underfunding the pool will have long-term

consequences We might be put into a position where we

don’t have choices.

What does the pool manager need to be telling the board?

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Low rates Dividends Lower confidence levels Is your discount rate achievable?

Are you putting your pool at risk?

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Remember: be conservative think long-term

stability don’t fall behind by

ratcheting down rates overtime

don’t get caught off guard

Conclusions

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What will you do now?

James Marta CPA, ARPMPrincipal James Marta & Company LLPCertified Public Accountants916-993-9494 jmarta@jpmcpa.com www.jpmcpa.com

Questions?