TO: Mayor and City Council
THROUGH: Keith Stahley, City Manager
FROM: Josh Eggleston, Chief Financial Officer
SUBJECT:
title
Transfer of appropriations in multiple funds to support a mid-year liability insurance rate increase.
Ward(s): All Wards
Councilor(s): All Councilors
Neighborhood(s): Neighborhoods
Result Area(s): Good Governance; Natural Environment Stewardship; Safe and Healthy Community; Safe, Reliable and Efficient Infrastructure; Strong and Diverse Economy; Welcoming and Livable Community.
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SUMMARY:
summary
A transfer of appropriation authority in multiple funds is needed to facilitate a mid-year liability insurance rate adjustment. This adjustment will increase revenue in the City’s Self-Insurance Risk Fund to avoid ending the Fiscal Year with a negative fund balance. With this adjustment, all other city funds would pay more than budgeted in FY 2025 for liability insurance premiums.
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ISSUE:
Shall the City Council Adopt Resolution No 2025-4 authorizing transfer of appropriations in multiple funds to support a mid-year liability insurance rate adjustment?
RECOMMENDATION:
recommendation
Adopt Resolution No 2025-4 authorizing transfer of appropriations in multiple funds to support a mid-year liability insurance rate adjustment.
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FACTS AND FINDINGS:
Multiple factors in recent years have significantly impacted the financial condition of the City’s Self-Insurance Risk Fund. In particular, the City’s Self Insured Liability program has experienced several years of escalating cost increases and claims activity that have continued to deplete the Fund’s reserves despite substantial rate increases.
Significant unexpected costs in the current fiscal year require immediate action to sustain the health of the fund. To avoid ending Fiscal Year 2025 with a negative fund balance, approval of this budget action is needed to allow for a mid-year internal rate increase that would charge other city funds an additional $2M Citywide.
Four funds (Tax Allocation Improvement Fund, City Services Fund, Self Insurance Benefits Fund, and Self Insurance Risk Fund) will receive a liability insurance rate increase as indicated in Attachment 1 but do not require a transfer of appropriation authority. The additional expense can be accommodated within existing budget authority. The proposed appropriation transfers are enumerated in the attached Resolution.
BACKGROUND:
Each year, the Budget Office calculates a liability rate that anticipates the current and future cost of the City’s Self Insured Liability program. The estimated need is determined by considering a five-year picture of the Liability program’s portion of the Self Insurance Risk Fund which allows the City to normalize the rate over time and avoid large jumps or dips in rates.
Despite these efforts, the scale and pace of cost increases in recent years have required
significant rate increases. Even so, cost increases have continued to outpace increases in rates. As such, the Liability portion of the Self Insurance Risk Fund has depleted $4M in fund balance since FY 2022, ending FY 2024 with negative $1M in fund balance that was covered by a positive fund balance in the Workers’ Compensation portion of the Self Insurance Risk Fund.
While staff originally hoped that the 63% rate increase in FY 2025 would help rebuild the Fund’s reserve, several factors have recently made it clear that without a mid-year rate adjustment, the City will end the year with not only a negative balance in the Liability portion of the Fund, but a negative fund balance overall.
Listed are several factors that have contributed to the current challenge with the Fund’s financial health:
Insurance Costs: Over the last four years, insurance costs have risen an average of 20% per year, from $1.48M in FY 2022 to $3.29M in FY 2025, an increase of 122% over the period. While the City anticipated significant increases, the size and speed of the increases outpaced predictions which has contributed to the immediate need for funding.
Claims: Claims have also increased at a higher rate than anticipated. A handful of claims between $500K-$1M have been settled in the last two years which has placed significant strain on the Fund. FY 2022 and FY 2023 saw historically average claims activity of around $550K per year. However, $2.3M was spent on claims in FY 2024 and an additional $2.3M is anticipated to be spent in FY 2025. While settling some of the City’s older, large claims improves the outstanding liability, and potentially mitigates claims expenses in the future, it has had an immediate negative impact on the Fund’s cash position.
Actuary Study: Finally, City Council Policy C-17 requires a claims reserve which “shall be equal to the actuarial review of the program at the 80% confidence level for unpaid losses and loss adjustment expenses.” That reserve amount based on the actuarial report completed two years ago was $1.78M. This year’s report brought that number up to $6.75M, a 279% increase in the reserve requirement. The Fund is now targeted to meet its City Council Fund Balance Policy by 2030 with this mid-year payment and future rate increases.
The mid-year adjustment is proportional to each cost center’s original rate such that if a cost center was originally responsible for 10% of the overall liability rate, it is now being adjusted to reflect 10% of the additional $2M needed, or an additional $200K.
James Wharton-Hess
Senior Fiscal Analyst
Attachments:
1. Resolution No. 2025-4