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HomeMy WebLinkAboutMay 2, 2005 Agenda AGENDA CITY OF DENTON CITY COUNCIL May 2, 2005 After determining that a quorum is present, the City Council of the City of Denton, Texas will convene in a Special Called Meeting on Monday, May 2, 2005 at 11 :30 a.m. in the Council Work: Session Room, 215 E. McKinney, Denton, Texas at which the following items will be considered: 1. Receive a report, hold a discussion, and give staff direction regarding the associated service impact due to the proposed staff reductions included in the five-year financial forecast. 2. Receive a report, hold a discussion and give staff direction regarding the City of Denton's self- funded work:ers' compensation and liability programs. NOTE: The City Council reserves the right to adjourn into a Closed Meeting on any item on its Open Meeting agenda consistent with Chapter 551 of the Texas Government Code, as amended, including without limitation, Sections 551.071-551.086 of the Texas Open Meetings Act. CERTIFICATE I certify that the above notice of meeting was posted on the bulletin board at the City Hall of the City of Denton, Texas, on the day of , 2005 at o'clock: (a.m.) (p.m.) CITY SECRETARY NOTE: THE CITY OF DENTON COUNCIL WORK SESSION ROOM IS ACCESSIBLE IN ACCORDANCE WITH THE AMERICANS WITH DISABILITIES ACT. THE CITY WILL PROVIDE SIGN LANGUAGE INTERPRETERS FOR THE HEARING IMPAIRED IF REQUESTED AT LEAST 48 HOURS IN ADVANCE OF THE SCHEDULED MEETING. PLEASE CALL THE CITY SECRETARY'S OFFICE AT 349-8309 OR USE TELECOMMUNICATIONS DEVICES FOR THE DEAF (TDD) BY CALLING 1-800-RELAY-TX SO THAT A SIGN LANGUAGE INTERPRETER CAN BE SCHEDULED THROUGH THE CITY SECRETARY'S OFFICE. AGENDA INFORMATION SHEET AGENDA DATE: May 2, 2005 D EP AR TMENT: City Manager's Office CM: Mik:e Conduff, City Manager SUBJECT Receive a report, hold a discussion, and give staff direction regarding the associated service impact due to the proposed staff reductions included in the five-year financial forecast. BACKGROUND The Council Agenda Committee has requested that this item be placed on the May 2, 2005 agenda. Respectfully submitted: Jennifer Walters City Secretary AGENDA INFORMATION SHEET DEP ARTMENT: Fiscal Operations Questions concerning this report may be directed to Scott Payne, 349-7836 AGENDA DATE: May 2, 2005 ACM: Kathy DuBose ~ SUBJECT Receive a report, hold a discussion and give staff direction regarding the City of Denton's self- funded work:ers' compensation and liability programs. BACKGROUND On January 25, 2005, a presentation was made to the City Council regarding the City of Denton's self-funded work:ers' compensation program. Following that presentation, Council requested additional information regarding the funding methodology for this program. The attached white paper discusses both self-funded and fully insured options for the City's work:ers' compensation and liability programs, evaluates the viability of these options and presents staff s recommendation. FISCAL INFORMATION Funds for work:ers' compensation and general liability are carried in each operating fund. EXHIBITS Attachment 1 - White Paper on Self-Funded Work:ers' Compensation and Liability Programs Respectfully submitted: - W~ Diana G. Ortiz Director of Fiscal Operations City of Denton White Paper Self-Funded Workers' Compensation and Liability Programs May 2, 2005 Prepared By: Risk Management Di visi on Introduction The City of Denton has operated a self- funded work:ers' compensation and liability program for a number of years. Although the exact date is not available, it is estimated that the City has been self-funding the exposures associated with work:ers' compensation and liability since at least 1995. The purpose of this paper is to examine the City's current programs and analyze whether or not continuing to self-fund work:ers' compensation and liability is the most economical and efficient method. Workers' Compensation Pro2ram The City of Denton is required under Chapter 504, Subchapter B, section 504.011, of the Labor Code to provide work:ers' compensation coverage for City employees injured in the course and scope of their employment. This section establishes that a political subdivision can meet this requirement by purchasing an insurance policy, becoming a member of an insurance pool or by becoming a self-insurer (self- funding). It has been the policy of the City to provide this coverage on a self-funded basis. Instead of paying premiums to an insurance company, or insurance pool, in exchange for them assuming the City's work:ers' compensation exposure, the City contracts wi th a Third - P arty A dmini s tra tor (TP A) to handle work:ers' compensation claims on our behalf and the City funds the actual cost of those claims. This independent relationship allows us to utilize the expertise and economies of scale of the TP A while providing a buffer between the injured work:er and the City. In this way, City employees are not handling the work:ers' compensation employees. claims City other of We currently contract with CCS Holdings, Inc. to provide work:ers' compensation TP A services. The contract with CCS began on March 1, 2001, and will expire on February 28, 2006. The City pays CCS $9,450 per quarter or $37,800 annually to provide full- service claims management. In the past year, we have conducted two outside audits of CCS: one by an independent company and one by the City's excess work:ers' compensation and liability insurance carrier. Both audits have indicated that CCS is an outstanding TP A. Historical Data: Table 1 below shows the number of work:ers' compensation claims the City of Denton has had over the previous five years. Table 1 - Number of Workers' Compensation Claims 200 150 100 50 0 99/00 00/01 01/02 02/03 03/04 Table 2 below illustrates the total cost of work:ers' compensation claims over the last five years. It should be noted that approximately $265,000 of the total cost in FY 03/04 was due to one claim. 2 Table 2 - Workers' Comp Claims Cost $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 99/00 00/01 01/02 02/03 03/04 The City's five-year average cost for work:ers' compensation claims has been $551,477. If we include the administrative costs for our TP A, the total average work:ers' compensation costs are $589,277. The data shown in Table 2 above is the actual amount the City paid for all open and active work:ers' compensation claims during each respective fiscal year, regardless of when the injury occurred. This is essentially a measurement of the cash flow necessary to pay for claims during a given fiscal year but are not necessarily related solely to injuries that happen in that fiscal year. Although the average life span of a work:ers' compensation claim is six to eight years, the City currently has active work:ers' compensation claims that date back: to 1994. Fullv Insured Data: - In order to provide a level of comparison, the City's consultant for property, casualty, and work:ers' compensation insurance approached several work:ers' compensation ~ark:ets to obtain a cost indication on a fully Insured program. Only Texas Political Subdivisions (TPS), an insurance pool for public entities, was willing to provide us with a figure outside of a formal RFSP process. !PS provided a cost indication for a fully Insured work:ers' compensation program at approximately $2,700,000. TPS was provided with payroll and historical claims data for their evaluation. It is important to note that while the data presented in Table 2 are for claims reported and paid in the fiscal year, the $2,700,000 premium would be for claims incurred in the fiscal year but paid out during the entire life of the file. Work:ers' compensation claims can have a very long "tail" and be active for many years or become active after several years of being closed. Regardless of how long a claim stays open, the City has essentially "pre-paid" the cost of that claim with the premium it would pay during the fiscal year in which the claim occurred. By contrast, Table 3 break:s down the City's total claims and reserves on an incurred by fiscal year basis. The "Paid" column shows the total amount paid on all claims that occurred within that fiscal year. The "Reserve" is the amount of additional expenses the adjuster reasonably believes will be spent on claims from that fiscal year before the claims are finally closed. The "Total" column is the ultimate expected costs for work:ers' compensation claims for each fiscal year. Table 3 - Workers' Comp Claim Costs by Year of Injury Occurrence Year Paid Reserve Total 94/95 $408,734 $0 $408,734 95/96 $210,852 $0 $210,852 96/97 $482,209 $0 $482,209 97 198 $314,243 $51,136 $365,379 98/99 $167,662 $0 $167,662 99/00 $586,031 $0 $586,031 00101 $799,916 $162,287 $816,203 01/02 $468,138 $15,438 $483,576 02/03 $409,625 $218,734 $628,359 03/04 $673,025 $1,005,373 $1,678,398 3 The Table 3 data illustrates that even if we proj ect the total cost for all claims that occurred in FY 03/04, the total expenses would not equal the estimated fully insured $2,700,000 premium. This is a significant point in considering that FY 03/04 is proj ected to be the most expensive year in the City's work:ers' compensation history. The majority of the "Paid" and "Reserve" costs are due to one claim. Another significant point is that the estimated premium of $2,700,000 would be expended in addition to the actual cost of claims for those open work:ers' compensation claims (80+ ) that occurred prior to the start of the fully insured policy term. Furthermore, the City would also continue to pay administrative expenses to process these open claims (called "runoff' claims). Comparison with Other Metroplex Cities: Additionally, the practice of using self- funding as a mechanism to pay for work:ers' compensation expenses is fairly standard among cities the size of Denton. Table 4 lists various metroplex cities and what type of work:ers' compensation program they currently have. Table 4 - Metroplex Cities Comparison City Status Arlington Self-funded Carrollton Self-funded Garland Self-funded Grand Prairie Self-funded Grapevine Fully-insured Hurst Fully-insured Irving Self-funded Mesquite Self-funded North Richland Hills Self-funded Piano Self-funded Richardson Self-funded Workers' Compensation Summary: Being self-funded for the City's work:ers' compensation program has been a cost effective mechanism in the past and should continue to be so in the future. Our historical work:ers' compensation costs have been far less than the premiums quoted for a fully insured program. Additionally, our excess work:ers' compensation and liability policy limits the City's potential work:ers' compensation expense to $500,000 per occurrence. By remaining self-funded, the City has the opportunity to "win" when our safety and loss control programs are successful and our work:ers' compensation claim costs go down. Liability Pro2ram Much lik:e the City's approach to handling work:ers' compensation claims, the City has chosen to self-fund our various liability exposures. However, unlik:e work:ers' compensation, where the City contracts with a TP A to handle claims, the City also self- administers the liability claims handling. All liability claims are currently handled by licensed adjusters in the Risk: Management division and by attorneys and staff in the City Attorney's office. Where work:ers' compensation TP A's bring expertise to the table, most independent liability and property adjusters do not have the extensive lrnowledge of public entities that is necessary. Additionally, they are not well versed in the nuances of the Texas Tort Claims Act, which establishes the framework: for which that a municipality can be liable, how it can be sued, and the monetary caps on damages. The City's self-funded liability program encompasses those risk:s typically covered under insurance policies of General 4 Liability, Automobile Liability, Law Enforcement Liability, Public Officials Liability, Errors & Omissions, Professional Liability, and Employment Practices Liability. In addition to these self-funded liabilities, the City also purchases Airport Liability, Emergency Medical Services (EMS), Professional Liability, and Commercial Crime coverage. While the City relies heavily on the protections and damage award limitations contained within the Texas Tort Claims Act ($250,000 per person, $500,000 per occurrence for bodily injury and $100,000 for property damage), the City does purchase an Excess Liability and Work:ers' Compensation policy. This insurance has a $500,000 deductible and provides coverage up to $5,000,000. This insurance is purchased since many employment and law enforcement related claims are filed under Federal Law and are not protected under the Texas Tort Claims Act. Additionally, the operation of a utility (Denton Municipal Electric) is specifically excluded from the Act so no caps on damages exist. Historical Data: Table 5 below shows the total cost for liability claims over the last five years. Table 5 - Liability Claims Cost $200,000 $150,000 $100,000 $50,000 $0 99/00 00/01 01/02 02/03 03/04 The City's five-year average for all liability claims is $142,528. While the five-year average for actual claims costs has been fairly consistent, Table 6 below shows that litigation expenses (legal fees, expert witness fees, outside legal counsel) to defend many of these claims has trended upward over the last three years. However, in FY 03/04, approximately $105,480 was spent in defense of one claim. Table 6 - Litigation Fees for Liability Claims $200,000 $150,000 $100,000 $50,000 $0 01/02 02/03 03/04 I- All Other - Robi nson I Over the past three years, litigation expenses have averaged approximately $74,863 per year ($36,225 average without Robinson). In addition to these costs, Table 7 shows the estimated staff expenses for self- administering the City's liability claims over the last three years. Table 7 - Estimated Staff Expense Fiscal Year Estimated Expense FY 01/02 $130,795 FY 02/03 $158,531 FY 03/04 $194,233 Average $161,186 Even if the City were to purchase insurance for our liability exposures, some staff time would still be associated with reporting claims, assisting the adjuster with 5 investigation efforts. and monitoring litigation It should be noted that staff expenses were not used in the comparisons within the work:ers' compensation section. This is due to the fact that almost all of the administrative task:s (reporting claims, assisting in investigation and overseeing the claims handling) would be performed regardless of whether a self-funded or fully insured pro gram. Table 8 shows the estimated total cost of self- funding liability claims for the City over that past three years. Table 8 - Total Cost of Self-Funding Liability Claims 01-02 02-03 03-04 Average Claims $137,606 $93,767 $169,447 $133,607 Litigation $974 $64,198 $159,418 $74,863 Staff $130,795 $158,531 $194,233 $161,186 TOTAL $269,375 $316,496 $523,098 $369,656 Fullv Insured Data: - As a basis for comparison, the City's consultant for property, casualty and work:ers' compensation insurance also approached several liability mark:ets to obtain a cost indication on a fully insured pro gram. Although no one was willing to provide a formal quote outside of an RFSP process, both St. Paul and Texas Municipal League (TML) indicated that the cost for General, Automobile, Law Enforcement and Public Officials liability with a $1,000 deductible and policy limits of $1,000,000 per occurrence and $2,000,000 aggregate, would be approximately $750,000. Since this fully insured program offers $1,000,000 occurrence, $2,000,000 aggregate in coverage the City would still need to k:eep in force the excess liability policy we currently purchase. However, by moving our current deductiblelretention, from $500,000 to $1,000,000, the City could save approximately $25,000 in premium. Additionally, since the fully insured coverage does not cover the risk:s associated with airports and ambulance services, the City would need to continue to purchase separate liability polices for these exposures. Table 9 below summarizes the total estimated costs associated with both a fully insured and self-funded liability program. Table 9 - Liability Comparison Summary Self - Fully funded Insured Claims $133,607 Included in . premI urn Litigation $74,863 Included in . premI urn Premium NIA $750,000 Staff $161,186 $67,105 Excess Liab. $182,580 $157,580 Airport $8,958 $8,958 EMS Prof $26,618 $26,618 TOTAL $587,812 $1,010,261 Comparison with Other Metroplex Cities: As with work:ers' compensation, the practice of using self-funding as a mechanism to pay for liability claims expenses is fairly standard among metroplex cities similar in size to Denton. Table 10 lists various cities and their current liability funding status. Table 10 - Metroplex Cities Comparison City Status Arlington Self-funded Carrollton Self-funded Garland Self-funded Grand Prairie Fully insured Grapevine Fully insured 6 Hurst Fully insured except auto liability Irving Self-funded Lewisville Fully insured Mesquite Self-funded North Richland Hills Self-funded Piano Self-funded I Richardson Fully insured Liabilitv Summary: - As with the work:ers' compensation analysis, self- funded for the City's liability exposure has been effective. Factoring in all related expenses, our historical costs associated with liability claims have been far less than the premiums quoted for a fully insured program. Pros & Cons Self-funded Pros: - - . Proven cost effective mechanism Greater control over claims handling Continued opportunities to save money in future years with advantageous claims history Light-duty/alternate duty and safety programs directly benefit the City's cost City does not have to be responsible for insurance company margins or profits . . . . Self-funded Cons: - - . City has the ultimate liability for work:ers' compensation and liability expenses The City has the final word on claims handling decisions and must deal with citizens whose claim has been denied . Fullv Insured Pros: . Work:ers' compensation and liability costs are "capped" at premium amount Decisions regarding claim handling are the responsibility of the . Insurance company Elimination of excess work:ers' compensation premium . . Fullv Insured Cons: - . Premium amounts include margin and profit The insurance company, not the City, saves money if claims are lower than expected Control over both the work:ers' compensation and liability programs are in the hands of the insurance company Work:ers' compensation run-off claim costs in addition to annual premium costs . . . Conclusion and Recommendations Comparing historical claims experience for both work:ers' compensation and liability claims with cost indications for insurance coverage, it appears that self-funding is the most cost effective method of administering both programs. It is staff s recommendation that the City of Denton continue to self-fund work:ers' compensation and utilize the services of a TP A to handle claims. Additionally, staff recommends that the City continue to self- fund and self-administer the liability pro gram. 7