Title
Resolution Appropriating $9,099,893.00 from the Risk Management Fund Unrestricted Net Balance to the Risk Management Fund Operating Budget to Cover a Shortage Due to Unanticipated Claims in FY2015 as well as Additional Reservations for Existing Claims that will be Paid Out in Future Fiscal Years
Purpose
PURPOSE/BACKGROUND:
The Risk Management Fund (the Fund) was established separate from the General Fund to manage and account for various insured and uninsured risks of loss for the City Departments and Hampton City Schools, related to torts such as: theft of, damage to, and destruction of assets; errors and omissions; injuries to employees including Line of Duty Act, insurance payments and liabilities; and natural disasters. Income for the Fund comes from an assessed annual insurance premium charged to the City departments and Hampton City Schools. The Fund has a component which holds funds in reserve for known and unknown past and current fiscal year claims which are not anticipated to be paid out within the current fiscal year.
The annual Risk Management Operating Budget is a component of the Fund that has been appropriated via the annual budgeting process and results in a City Council approved Risk Management Fund Operating Budget.
During the fiscal year one or more large claims may be incurred that had not been budgeted. The recording of these claims on the books may create a situation where operating expenditures for the fiscal year will exceed the City Council approved operating budget. In that case, an appropriation of funds from the Fund’s reserve component to the Risk Management Operating Budget must be requested by the Risk Manager and approved by the City Council. An extraordinary number and size of unanticipated claims and liabilities incurred in FY15 necessitates such a request of City Council.
Discussion:
During FY 15 the operating expenditures exceeded the City Council approved operating budget. A transfer of funds from the Risk Management Fund to the Risk Management Operating Budget for FY15 is required.
FY15 Risk Management Operating Budget Shortfall.1 (See Notes on following page)
Actual budget shortfall due to current year expenditures not listed below.2 $ 155,102
Line of Duty Liabilities Expensed3 $ 871,473
FLSA Police Settlement4 $ 3,864,717
Other Workers Comp and Liability Claims and Future Liabilities5 $ 4,208,601
Total6 $ 9,099,893
Upon adoption of the Resolution, the requested funds will be transferred from the Fund’s reserves to the Risk Management Fund Operating Budget. Total Appropriation: $9,099,893.00
FY15 Risk Management Operating Budget Shortfall Notes
1 This shortfall is a combination of unexpected expenditures as well as timing of the FLSA settlement in relation to the end of the fiscal year. The funds for the FLSA settlement had been reserved in the Risk Fund. Permission by resolution is required from Council to appropriate those funds into the FY15 Operating Budget. Concern regarding the effect the openness of the funding process might have on the negotiations going on at that time resulted in delaying the request for appropriation. This is the first opportunity since the final approval of the settlement for Council action on an appropriation resolution. The balance of the request is the result of un expected expenditures as addressed in the notes below. The funds appropriated will not come from the General Fund but from the Risk Fund which has been established for such a situation.
2 These losses represent the effects of mostly workers’ compensation claims that had to be reopened in order to pay for medical procedures for former employees who have life time medical benefits for their covered injuries.
3 Line of Duty Liabilities were not provided for in the FY15 Risk Management Budget but were charged to the Risk Management Operating Budget.
4 Held in Risk Fund see Note 1.
5 Large liability claims that were settled during the fiscal year and other claims that had developed as a future financial liability caused the FY15 expenses to greatly exceed the approved operating budget While many of the claims such as the Police Department FLSA issue were not a surprise, other claims surfaced that were unexpected. These would include settlements that were negotiated in a confidential setting without Risk Management involvement. There also are general liability cases with high reserves and some old workers' compensation claims for the City and HCS that had to be reopened in order to pay for medical procedures for former employees who have life time medical benefits for their covered injuries. There also were a few injuries occurring in FY 15 which required costly surgery and related medical services. Please note this is a total for the expenses of liability settlements, workers’ compensation payments, and future liabilities for both general liability and workers’ compensation that had to be expensed in FY15 for which the FY15 approved budget did not have sufficient funds.
6 This appropriation of $9,099,893, reduces the Risk Fund’s Unrestricted Net Position (Funds unencumbered) at the end of FY 15 to $7,229,641. This is sufficient to protect the interests of the City at this time. The high value claims we have experienced in FY15 and the future liabilities that accompany them are outside what we have experienced historically. Thus far in FY16 we do not see a similar situation developing nearly half way through the fiscal year. Unfortunately, the costs of medical care will do nothing but increase and will affect the value of future liabilities for which we have planned. There most likely will be continued increases in the medical services area due to the unsettled nature of Affordable Care Act. Other medical related issues before Congress and the Virginia Legislature will also effect the increases in cost.
Impact:
Requested action will fully fund the FY15 Risk Management Operating Budget.
Recommendation:
Rec
Approve the Resolution
Body
WHEREAS, the Risk Management Fund (the “Fund”) was established to manage and account for various insured and uninsured risks of loss related to torts, such as, theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters;
WHEREAS, income to the Fund derives from a direct contribution from the City for Line of Duty Act obligations as well as an assessed annual insurance premium charged to the City department and Hampton City Schools to cover the costs of claims and other operating expenses;
WHEREAS, a component of the Fund, the Unrestricted Net Position, which holds funds in reserve for known and unknown past and current fiscal year claims, is not anticipated to be paid out in the current fiscal year;
WHEREAS, during fiscal year 2015, a number of large unanticipated claims were paid in excess of the Council approved budget, thus creating a shortage in the Risk Management Fund Operating Budget; and
WHEREAS, this shortage has necessitated an appropriation of $9,099,893.00 from the Fund to the Risk Management Fund Operating Budget.
NOW, THEREFORE, BE IT RESOLVED by the City Council of Hampton, Virginia, that the sum of $9,099,893.00 is hereby appropriated from the Risk Management Fund Unrestricted Net Balance to Risk Management Fund Operating Budget to cover costs related to unanticipated claims in Fiscal Year 2015.