Making the Difficult Decision to Assess AGRIP 2017 Fall Educational Forum Renaissance Baltimore Harborplace Hotel Baltimore, MD

Why this topic? Start a discussion on a issue potentially facing some pools Share our steps of a successful assessment story Provide proof an assessment is survivable

Overview What does your pool administration and governance structure look like? How often and what do you communicate with your membership? What indicators present a need for an assessment? What is the legality of an assessment in your state/pool? Rebuilding trust with the membership

Governance Structure What is your board make up? Elected Officials Administrators or employees of your pool members A mix of each The frequency of board meetings? What is the pool administration reporting to the board? If there are sub-committees are they being utilized? What are the current board policies in place?

Our Story The governing board wasn’t being updated on the pool at least quarterly Board approved rate increases weren’t being implemented Weren’t having annual membership meetings The sub-committees in by-laws weren’t being used Audit reports (technically financial reviews at that time) were not being shared with our membership Cash flow was being supported with loans from another fund to support weekly claim costs

Assessment Indicators *Not an exhaustive list* Review results of annual benchmark financial ratios or use a Risk Based Capital approach performed by your actuary or auditors Consider auditor’s opinion on the pool’s audit if they insert an on-going concern Anticipation of future statute or policy changes that might drive projected costs into an unfavorable financial position or put additional regulatory oversight on a pool AGRIP’s Financial Benchmark Ratios are also a resource to measure the fiscal soundness of your pool

Our Ending Net Positions FY 2017 $4,400,343 FY 2016 -$12,110,588* FY 2015 -$13,576,263** FY 2014 -$11,231,172 *First time since FY 2009 the fund increased its Net Position **First year of a full scope audit rather than financial review FY 2013 -$8,581,581 FY 2012 -$7,847,041 FY 2011 -$7,357,068 FY 2010 -$5,439,339 FY 2009 -$5,174,874 FY 2008 -$5,791,011 FY 2007 -$2,557,027 FY 2006 -$2,878,052 FY 2005 -$1,448,135

Assessment Preparation Is there support from the governing board to assess How prepared or informed is your membership of a pending assessment? How urgent is the assessment? Balance sheet vs. cash flow deficit Assess before it gets into a cash flow situation Use the previously discussed financial ratios to determine how much Discuss various assessment payment options Give members choice

Our Story Members were made aware of the fund deficit the year prior to our assessment via regional in-person meetings Region meetings held in July 2014 July 1, 2015 we switched health TPAs and the fund had a Change in Net Position in excess of $1 million. First time in 7 years the fund had a positive Change in Net Position The initial plan was communicated in March 2015 we were going to eliminate the deficit over many years by funding contributions at a higher confidence level

Assessment Execution Remember: Communication with the membership is key Assessment message must be clear and concise Anticipate questions and have them answered beforehand In person meeting vs. e-mail or phone call notification Governing board will take official action to assess Know your by-laws and state statutes surrounding pooling and assessing the membership Official action before or after assessment discussion

Our Story In October 2016 we brought together our entire membership to announce an $11.2 million assessment after we provided the FY 2016 audit to show the program increased its Net Position and the program had indicated it can stand on its own. After two years of discussing the assessment to the sub-committee they agreed to abandon the confidence level plan and do an assessment New South Dakota legislation capping school district fund balances was going into effect later that year. Half the schools in the pool would’ve been impacted by the new legislation What is a better way to use one-time money than for a one-time assessment expense!

Assessment Execution Give the membership options on how to pay the assessment Is the board going to allow: Straight one-time lump sum payment Multiple year repayment plan with or without an interest rate Maybe it means funding at a very high CL for a set number of years

Assessment Execution Depending on the size of the assessment and pool members perception there is a potential for negative publicity out of it and the media might attempt to run with it How involved is your state’s legislature in pooling? Preface your members with talking points to the media or if you are comfortable have your members refer all media questions to a single pool staff member (or board member if he or she is comfortable) Get ready for criticism from our commercial agent friends.

Our Story Our board made the assessment official on October 31, 2016 and allowed districts to pay their assessment in a one-time lump sum or over four years with a small interest rate. A Memorandum of Understanding was required to be signed and returned by each district and all MOUs returned by end of February 2017. Why did we want the board to have MOUs signed and returned? US GAAP would allow us to accrue the receivable on the balance sheet and push us into positive Net Position

Our Story What happened in FY 2017: Beginning Net Position-July 1, 2016 -$12,110,588 Net operating revenue 35,969,801 Claims, Claims Adj Exp, G&A, etc. 31,109,035 Net Income 4,860,766 Assessment Received/Receivable 11,691,304 Ending Net Position-June 30, 2017* $4,441,482 *Per RBC we would be out of any type of regulatory control if we were a commercial carrier

Re-building Trust Your members are going to ask what the pool is going to do to ensure this doesn’t happen again. Our responses: Surplus Policy Assessment Policy Continued financial benchmarking to governing body Continued transparency and membership communication Continued pool governing board & staff professional development Coverage revision(s) if applicable

Our Story For FY 2018 we retained 100% of our membership and added two new school districts to the health fund The negative publicity has blown over and our members are extremely happy with the new TPA We have not been asked to return and testify to a legislative sub-committee

Our Story There was some related fallout: Assessing the health fund, as we anticipated, impacted our membership in the property/liability fund Our property/liability fund had negative Net Position two years ago and we continue to strengthen the balance sheet without an assessment so far, but have reduced certain limits.

Conclusion An assessment is survivable! Always maintain open communication and transparency with the governing board and pool members Keep your fiscal house in order to attract new membership and even new pool employees An assessment is survivable!

Contact Information Matt Flett Chief Financial Officer Director of Protective Trust Services Associated School Boards of South Dakota 306 E. Capitol Avenue, Suite 100 Pierre, SD 57501 605-773-2515 mflett@asbsd.org

Thank you! Open Forum/Questions