I was the Chief Administrative Officer of Butte County, California. Butte is a rural county in northern California, about 70 miles north of Sacramento. It has a population of 226,466 and an annual budget of $586.6 million. Butte County employs 2,332 people.
Butte County was facing a huge increase in worker’s compensation insurance costs. Butte had joined an insurance pool and had a 4-year lock on rate increases. As that lock was about to expire, Butte faced a rate increase of $2.2 million in fiscal year. I began looking for alternative approaches to avoid that significant rate increase.
I was familiar with the advance funding model, having previously worked with the Carlisle Group and Miller Schroeder on a transaction in San Bernardino County. San Bernardino used the advance funding model to reduce their costs of employee health care; one of the first transactions of its kind in the nation. I knew Jeff Bemoras, Apex Management Group, from working on that transaction.
In analyzing the issues faced in our worker’s compensation program, I recognized many similarities with the advance funding of employee health insurance. Working with Jeff, we were able to apply the model to worker’s compensation.
Although complex, the model enabled Butte County to move to a self-insured worker’s compensation environment, avoided the cost spikes associated with the former contract, and developed a more aggressive stance towards management of the worker’s compensation program while keeping the overall costs of the program to the County to a minimum.
Butte County issued an aggregate of $19.8 million in notes with security for the notes being a remittance agreement with the Trustee and a lease of certain real property owned by Butte County (asset transfer). The proceeds of the notes were used to repay Butte County for $4.53 million in insurance premiums paid for the then current fiscal year and established a self-funding trust. The plan was amortized over a 42-month period. Using assets to secure the transaction bought down interest costs and enabled the bonds to be rated Aaa. The $4.53 million was retained in the Workers Compensation Trust and invested. Over the amortized life of the transaction, those funds help to defray program costs. The self-funded trust was enough to provide for two additional employees within the Risk Management budget to manage workers compensation activity, provide for the third-party services necessary in the program and pay anticipated claims at a 90% confidence level. The financing generated a $6.4 million surplus at the end of the 42-month amortization to cover outstanding claims over their life and incurred-but-not-reported costs. In addition, this approach avoided $2.2 million in additional insurance costs that would be incurred if Butte County remained with the former insurance pool.
Reference:
Paul McIntosh
Ex Executive Director of the California Sate Association of Counties (CSAC)
Mr. McIntosh has more than 30 years of local government experience