School Board Grappling With ‘Risky’ Cut To Health Insurance Reserve Fund

Just weeks after the town slashed the New Canaan Board of Education’s health insurance reserve account by $1.1 million for the fiscal 2015-2016 year, members of the board are now discussing how they would deal with a potential worst case scenario in which claims exceed the amount budgeted and eat into the reserves.

During Monday’s Board of Education meeting at New Canaan High School, Dionna Carlson, who heads up the board’s educational resources sub-committee, said, “Through our work on the health insurance account we have identified a problem with our health insurance reserve as it relates to the health insurance reserve policy that was put into place in April 2014.”

That policy, crafted in cooperation with the Board of Selectmen, calls for the board to maintain 60% of the approximately $3 million health insurance reserve, known as the stop loss health corridor, as part of its budget, while the town maintains the other 40% in a special reserve on the town’s books. (To save money, the Town of New Canaan self insures as opposed to using full insurance.)

On top of this, the town maintains a special “incurred but not reported” (IBNR) reserve account, of about $1 million, that is used to cover claims that occurred in the fiscal year but which are not processed until after the fiscal year has ended.

Members of the Board of Education and the school administration feel that the recent deep cut to the board’s reserve account puts the board at risk of defaulting on claims in the rare event that a high volume of claims draw down the health insurance budget and eat into the reserves. The town’s rationale for making the cut was basically that the board’s health insurance reserve fund is routinely overfunded at the end of each fiscal year.

“Based on the town’s underfunding of our health insurance reserve by $1.1 million for fiscal 2015-2016 … we will no longer be in compliance with the [Board of Education’s insurance reserve] policy,” Carlson said, adding that her committee has been has “been working closely with the town bodies so they understand the board’s insurance needs” and to potentially work out a solution should claims exceed what the board has in reserve in the upcoming fiscal year.

Carlson said in working with Town Council member Kathleen Corbet, Finance Director Dawn Norton and Budget Director Jennifer Charneski, they concluded that the best course of action – in the event that insurance claims for the year exceed the budgeted amount and bring the board’s reserve account below the required 60% – would be to have some or all of the funds restored by way of a special appropriation.

Such a measure, however, would have to be approved by the Board of Selectmen and the Board of Finance. What’s more, it could not be approved until it is determined that the all claims have been processed for the year and that an accurate reserve amount can be calculated – which can’t happen until September, as claims that come late in the fiscal year can still be in the processing stage for up to two months after the fiscal year ends on July 31.

However because the request for a special appropriation could take take up to two months to approve, due to the requirement for special meetings which must be warned, it means the Board of Education could be at risk of not being able to pay out claims during that period.

Board vice chairman Scott Gress said although “the risk of burning through 125% of expected claims [including 25% total reserve in the two reserve accounts] is relatively small … it would take months to get a special appropriation … and during that course of that time we could not only fall out of compliance, but we could literally be without the money to pay insurance claims.”

Gress said in his opinion “it’s not fair for the town to put the school board in a position where that could occur.”

Board member Alison Bedula, however, said in her view the debate isn’t so much about “dollar amounts and percentages,” as it is a matter of philosophy as to what policy should be in place with regard to the school district and the town sharing the responsibility for reserves.

“We have to look conceptually at what we’re doing – because as a board we’ve had a long standing practice of covering our own risk – and we’re shifting away from that now,” Bedula said. “We’ve been shifting way from that for the past several years – because the town is now saying ‘we’ll cover your risk.’ And I’m sure they will – but the question is, how are they going to cover that risk, under the agreement [that’s already in place]?”

“We’ve always covered our health insurance claims – and it’s been the town and the board’s policy to underfund that [account] because we’ve been carrying a significant reserve balance,” Bedula said. “We all agreed that we wanted to bring that down – and we’ve done that during the past several years. But we’re reaching a point where we are no longer able to do business as usual. Now we’re [practically] running on reserves.”

Bedula added that because of the $1.1 million cut, the reserve policy that was crafted last year “no longer stands.”

“We [might not] be in compliance with that policy next year – and as a board that’s really what we need to be discussing,” Bedula said. “Where is our comfort level? Because the risk is ultimately ours – and our superintendent’s. We’ve all seen from the Friday notes that we cannot go over our budget. And we’ve always had the money here to protect ourselves from going over budget. But if we don’t have those reserves in our account, that possibility exists.”

“So, to me, this is more of a philosophical question – because whether its 10%, 15% or 25%, it doesn’t really matter – it’s whether or not we have a policy in place that we agree with and that the town agrees with,” she continued. “We’re changing a longstanding practice that previous boards have felt very comfortable with – and we have to understand that this is going to affect other boards going forward. This isn’t just about this year or next year, it’s about five years from now, ten years from now.”

Steve Rinaldi, the town’s health insurance consultant, said although the town’s experience has been “relatively consistent” during the past ten years or so, “it can fluctuate…” He said should the town exceed the amount budgeted for claims (currently around $14 million) “and you hit the trigger point, you will no longer have enough money [to cover additional claims]. He estimated that in a worst case scenario, the board could end up facing a shortfall of up to $600,000, which could in turn have a devastating impact on the school budget.

Bedula pointed out that because the town has not had any real bad experiences in recent years, it has perhaps resulted in some complacency, “in the sense that we’re too comfortable cutting the reserves.” She and the other board members agreed that it is not in the district’s nor the town’s best interest to cut the reserve accounts to near-minimum levels based on previous years’ experiences.

Gress agreed with Bedula that the school board should be able to decide for itself whether it wants to take on that risk. “That’s the question – is do we want to control 100% of our risk,” he said.

Gress said that for the town to cut the school board’s reserves and have the board take on the additional risk is tantamount to the town “taking out a loan” from the school district “and saying that at the end of time they will pay it back to us.”

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