Asset and Risk Management
This chapter reviews the asset and risk management function of Venus Independent School District (VISD) in the following sections:
B. RISK MANAGEMENT
An effective risk management program can limit a district’s exposure to loss. The objectives of a school risk management program should include conserving district resources so more money can be available for education, protecting school district’s assets and improving the quality of decision-making.
A risk management program includes a decision-making and management process. The decision-making process involves the following steps:
- identifying risk exposures to property, liability, finances and personnel within the district;
- analyzing the risk exposures;
- selecting and applying the proper risk management technique, loss control and/or risk financing; and
- monitoring and making adjustments as needed.
An effective risk management program controls costs by ensuring that the district is adequately protected against significant losses with the lowest possible insurance premiums. To protect itself against significant losses, the district must have accurate insurable values through annual appraisals of property values and documentation for all district-owned property through annual fixed assets inventories. Districts also assess hazards and implement programs to reduce those losses to minimize claims and reduce premiums for workers’ compensation.
VISD protects itself against loss for real and personal property, liability, school legal liability, vehicle loss or damage and crime by participating in the Texas Association of School Boards’ (TASB) Risk Management Fund through interlocal agreements for property, liability and unemployment compensation coverage. The district requested proposals during the summer of 2002 for property and casualty coverages. Coverage was awarded to TASB based on the evaluation of competitive proposals submitted to the district.
A summary of VISD’s property and casualty coverage is presented in Exhibit 5-7.
VISD Property and Casualty Insurance/Coverage
Insurance/Coverage Policy Policy Period Coverage Limits Deductible Premium Company Property – Blanket Replacement Cost limit on Buildings, Personal Property and Auxiliary Structures 9/1/02-9/1/03 $26,284,972 $1,000 $67,553 TASB Property - Wind, Hurricane and Hail 9/1/02-9/1/03 $26,284,972 $25,000 Included Above TASB Equipment Breakdown 9/1/02-9/1/03 $26,284,972 $1,000 $1,714 TASB Miscellaneous Property – Band Equipment 9/1/02-9/1/03 $150,000 $250 $450 TASB Miscellaneous Property – EDP Equipment, Data and Media, EDP Extra Expense 9/1/02-9/1/03 $1,250,000 $250 $4,000 TASB General Liability 9/1/02-9/1/03 $1,000,000 per occurrence $1,000 $1,225 TASB School Professional Legal Liability 9/1/02-9/1/03 $1,000,000 per occurrence, $1,000,000 annual aggregate $1,000 $3,736 TASB Fleet Liability 9/1/02-9/1/03 $100,000 per person $300,000 per occurrence bodily injury limits.
$100,000 per occurrence property damage limits
$1,000 $11,820 TASB Fleet Physical Damage – Comprehensive private passenger vehicles 9/1/02-9/1/03 Actual cash value $500 $5,893 TASB Physical damage – all other vehicles Specified Perils, Collision 9/1/02-9/1/03 Actual cash value $500 $2,208 TASB Mobile Equipment – Comprehensive 9/1/02-9/1/03 Actual cash value $500 $1,857 TASB Employee Crime Coverage 9/1/02-9/1/03 $175,000 $1,000 $429 TASB Public Employee Dishonesty Form 11/13/02-11/13/03 $100,000 $0 $1,038 Western Surety Company Student Insurance –Blanket Catastrophic Student Insurance
All Sports Coverage and All School Coverage
8/1/02-8/01/03 $2,000,000 medical per insured $25,000 $22,788 Columbia Life Insurance
Source: VISD’s superintendent’s office.
VISD has initiated the risk management process to protect the district against future losses by identifying property values. TASB recently completed an appraisal of the district’s property. The appraisal report provides district staff a tool for making a general estimate of replacement costs of specific construction types for buildings. In addition, the district has contracted for a comprehensive fixed asset management program that has identified the district’s fixed assets and will continue to track fixed asset values. The district has documented its property values for future loss exposures through this process.
School districts must provide unemployment compensation benefits to former employees who qualify for benefits under the Texas Unemployment Compensation Act. To finance these benefits, VISD participates in the TASB Risk Management Fund Unemployment Compensation Program through an interlocal agreement. This risk pool program provides a maximum contribution based on an approved rate for the fiscal period. Exhibit 5-8 shows VISD’s annual contributions and claims for 1997-98 through 2001-02.
VISD Unemployment Compensation Program Summary
1997-98 through 2001-02
Year Payroll Contribution Claim Number Benefit Paid 1997-98 $5,046,303 $4,939 6 $271 1998-99 $6,280,493 $6,684 2 $582 1999-2000 $6,055,592 $7,139 0 $0 2000-01 $6,812,662 $3,773 8 $4,360 2001-02 $7,308,828 $4,527 8 $1,902
Source: TASB Risk Management Fund Unemployment Compensation Program Annual Account Summary Report.
In addition to insurance coverage, the fund provides claims assistance and hearing representation. Each year the district’s fund contribution is capped at a specified dollar amount based on the previous year’s gross wages. This information makes it easier to budget for these costs annually. TASB provides training so that districts know how to handle complex unemployment compensation issues. TASB also offers loss control assistance. District employees can attend informal regional workshops to learn effective unemployment compensation and loss control strategies.
School districts are required by law to extend workers’ compensation benefits to employees. A district can provide these benefits through self-funding, purchasing an insurance policy or entering into an interlocal agreement with other political subdivisions providing self-insurance. VISD has chosen to provide workers’ compensation through the third option. In 1996, VISD entered into an interlocal agreement with other political subdivisions to participate in the Workers’ Compensation Self-Insurance Joint Fund. The fund contracts with Claims Administrative Services, Inc. (CAS) for third party claims services.
The district does not have a risk manager. The director of Operations, Maintenance and Transportation manages the district’s workers’ compensation and safety program. The Public Education Information Management System (PEIMS) coordinator processes all workers’ compensation claims using an online reporting system. Employees report accidents to their supervisors. Schools complete an injury form and fax it to central office. The PEIMS coordinator reviews the form for missing information, completes it and enters the information online for the third party administrator, CAS. The form is sent via Internet to CAS in Tyler, Texas. The district receives confirmation with a claim number within a day. The injured employee receives a form letter authorizing medical treatment and prescriptions.
VISD implemented a district safety program to reduce workers’ compensation costs and address a previous hazardous employer classification. In 1994, the Texas Workers’ Compensation Commission identified the district as a “hazardous employer.” A hazardous employer is an employer whose injury frequencies substantially exceed those that may reasonably be expected in that employer’s business or industry.
VISD initiated a districtwide safety program to reduce accidents in the district. The director of Operations, Maintenance and Transportation said the commission removed the “hazardous employer” classification in April 1995. The ongoing safety program includes monthly building inspections conducted and documented by the school principals and the director of Operations, Maintenance and Transportation. In addition, the program requires each school administrator to conduct seven-minute monthly safety meetings with employees at each district location. Exhibit 5-9 provides a list of safety topics for the current year. Employees sign attendance rosters, which are sent to the director of Operations, Maintenance and Transportation for documentation.
VISD Monthly Safety Meetings
Month Topic August Preparing for Emergency Evacuation September First Aid for Stopped Breathing October Fire Extinguishers – Types and Uses November Check the Label for Key Information December Hand Trucks and Dollies January Dealing with Work Stress February Good Housekeeping Practices March Working Safely with Ladders April Slips, Trips and Falls May Horseplay Is No Laughing Matter
Source: VISD director of Operations, Maintenance and Transportation.
In addition to the monthly meetings, VISD conducts an annual employee training on district-adopted safety policies and procedures to eliminate accidents, workers’ compensation procedures, drug free schools policy and pest management policy.
VISD’s employee safety program seeks to reduce employee accidents.
VISD has not requested proposals for workers’ compensation coverage to evaluate other district options for the most comprehensive and cost effective program. In 1996, VISD chose to provide workers’ compensation through the Workers’ Compensation Self-Insurance Joint Fund. Through an interlocal agreement, the district pays claim costs in addition to a fixed cost that includes payment for the administration of claims, loss control, record keeping and the cost of excess insurance.
VISD has not evaluated the financial status of its workers’ compensation program. On March 28, 2002, the board adopted a five-year workers’ compensation plan with Claims Administrative Services, Inc. This extended the interlocal agreement through August 31, 2007. The district did not request proposals from other self-funded pools or carriers. Claims Administrative Services, Inc. submitted a proposal for a five-year plan that included a 12 percent discount applied to the fixed cost rate the first year and a five percent discount calculated for the subsequent years. No documentation can be found that indicates the legal counsel reviewed the interlocal agreement, or that the district reviewed the audited financial status of the self-insurance fund, for which the district has assumed liability as a “plan sponsor.”
A plan sponsor means the school district has adopted the plan and assumes liability for the payment of workers’ compensation benefits to its employees directly and not through insurance. The district’s renewal rates do not include any information on the district’s experience modifier, fixed costs, excess insurance or how the district’s “proportionate contribution” is calculated for the year. The experience modifier is the average of the first three years of the loss experience (actual losses divided by contributions) for the last four-year period. The proportionate contribution is the total amount a plan sponsor must contribute in fixed costs and in the loss fund maximum. As a member of a pool, the district assumes an ownership interest in the program and should have a full understanding of all financial risks so that it may be addressed appropriately.
Exhibit 5-10 provides VISD claims experience for its seven years with the Workers’ Compensation Self-Insurance Joint Fund.
VISD Workers’ Compensation Claims History
1996-97 through 2002-03
Year Number of Claims Number of Open Claims Incurred Losses Paid to Date Losses 1996-97 16 1 $58,314 $55,895 1997-98 14 0 $18,223 $18,223 1998-99 6 0 $1,618 $1,618 1999-2000 12 0 $9,834 $9,834 2000-01 13 0 $18,699 $18,699 2001-02 8 1 $9,601 $3,253 2002-03* 9 6 $2,138 $238
Source: Claims Administrative Services, Inc. Claims Cost Detail Report.
*As of 01/31/2003.
Exhibit 5-11 provides VISD workers’ compensation contributions summary for 1996-97 through 2002-03.
VISD Workers’ Compensation Contributions
1996-97 through 2002-03
Years Incurred to Date Contributions 1996-97 $58,314 $44,952 1997-98 $18,223 $56,331 1998-99 $1,618 $60,647 1999-2000 $9,834 $60,744 2000-01 $18,699 $67,810 2001-02 $9,601 $46,630 2002-03* $2,138 $39,058
Source: Claims Administrative Services, Inc., Analysis Detail Report.
*As of 01/31/2003.
VISD has participated in the Workers’ Compensation Self-Insurance Joint Fund for seven years. The incurred to-date amount is the amount of VISD losses actually paid by the fund plus related administrative expenses and reserves set aside in anticipation of future losses for the claims already reported for that claim year. The contribution includes the fixed cost and total claims payment VISD has paid to the fund for the plan year.
Under the general provisions of the Interlocal Agreement, the district may terminate after the initial term, “by giving the plan supervisor and the Board of Trustees written notice on or before the first day of July preceding any successive term. Such timely termination will be effective at the end of the one-year term in which written notice was given. A plan sponsor who attempts to terminate its participation in the plan without giving timely and proper notice of termination, shall be liable to the plan for all fixed cost and liabilities due under Article 6.4 through the end of the next full successive term.” The district’s interlocal agreement further states:
- Upon termination of a plan sponsor’s participation in the plan “all liabilities at the time of termination” means all liabilities of the plan sponsor or its loss fund maximum for all claims, whether known, unknown, accrued, unaccrued, reported, unreported, fixed, contingent, reserved, unreserved, or underserved; the plan sponsor’s self-insurance liability; all liabilities to the self-insurance joint fund, including any liabilities for benefits for employees of another plan sponsor; and any other liabilities of the plan sponsor or its loss fund maximum for workers’ compensation benefits arising under this plan: occurring, arising or existing prior to midnight on the date the plan sponsor’s participation is voluntarily or involuntarily terminated or occurring, arising or existing prior to midnight on the date the plan is terminated.
- Each plan sponsor’s loss fund maximum shall remain obligated after termination to satisfy all liabilities at the time of termination until such loss fund maximum is exhausted or until all liabilities at the time of termination are satisfied, whichever occurs first as determined by the board.
- Each plan sponsor shall pay to the plan supervisor all fixed cost, fees, commitments and obligations through the date of termination, plus any attorney’s fees and collection costs incurred by the plan supervisor.
Effective organizations review their insurance programs periodically to ensure they balance the best coverage with an optimum price.
Successful districts conduct research on the financial status of pools and ask the following when deciding to participate in self-funded pools:
- How does the pool treat accrued liabilities?
- What is the financial condition of the program?
- Does the program use acceptable data to project future claims and costs for currently accrued losses?
- Is the program audited with appropriate standards?
- Are annual reports and financial statements made available to participating districts in a timely manner? (School boards need to know about the financial condition of the pool and whether problems are developing.)
- Does the program provide each district with information about how its contributions are spent?
- How much notice must be given if a school board wants to terminate its membership in the pool?
- Does the program provide information on your district to the rating bureau?
- What is the amount of stop-loss or excess coverage and what is the attachment point for each district as well as the pool as a whole?
- Does the program offer assistance in reducing insurance hazards in your district?
Request proposals for workers’ compensation coverage to ensure the district obtains the most comprehensive coverage at the most competitive price.
The district should review the interlocal agreement with legal counsel to identify existing liability exposures and available options.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent directs the business manager to request the latest financial audit and actuarial analysis of the workers’ compensation fund to determine financial status. September 2003 2. The superintendent requests legal counsel to review the interlocal agreement for the workers’ compensation fund and any amendments to identify the district’s liabilities. September 2003 3. The superintendent and the business manager identify the financial and legal liability exposures resulting from the workers’ compensation program and identify the worker compensation options available to the district. October 2003 4. The superintendent directs the business manager to request proposals for workers’ compensation coverage. October 2003 5. The business manager develops specifications for workers’ compensation coverage and requests for proposals. October 2003 6. The business manager evaluates proposals for workers’ compensation coverage and makes a recommendation to the superintendent. January - February 2004 7. The superintendent recommends the workers’ compensation program to the board for approval. February 2004 8. The business manager and director for Operation, Maintenance and Transportation meet with the workers’ compensation carrier to coordinate implementation of program. March 2004
The district spent $274,889 in contributions for workers compensation between 1998-99 and 2002-03 (through January 2003), for an average annual cost of $54,978. The district has incurred losses during that same period of $41,890, or an average of $8,378. Incurred losses represent 15 percent of the annual contribution. While it is difficult to estimate a savings in the absence of the responses to a request for proposals, because of its low annual incurred losses the district could realize a 25 percent reduction in annual costs, or $13,745.
Recommendation 2003-04 2004-05 2005-06 2006-07 2007-08 Request proposals for workers’ compensation coverage to ensure the district obtains the most comprehensive coverage at the most competitive price. $0 $13,745 $13,745 $13,745 $13,745
VISD cannot verify compliance with certain requirements of Section 125 of the Internal Revenue Service (IRS) Code. Section 125 allows employers to provide the option of purchasing some fringe benefits before calculating taxes, saving both the employer and employees on taxes. These plans are called Section 125 or cafeteria plans.
VISD offers a flexible spending account cafeteria plan that includes a medical care expense reimbursement plan and a dependent care expense reimbursement plan. Employees also have the option of electing to pay dental, cancer and life insurance premiums under the plan. The cafeteria plan allows employees to take a voluntary reduction in wages equaling the amount they otherwise would pay for their portion of the premiums, eliminating federal income, social security and other taxes on their contributions. The IRS sets certain requirements for employers to offer a Section 125 or cafeteria plan. A district is required to adopt and maintain a document that includes the following:
- a description of each benefit available under the plan and the period of coverage;
- a description of the eligibility rules for participants;
- procedures for holding elections under the plan, including when elections may be made and revoked, with elections referring to a period when the employees make decisions about enrollment for example;
- the manner in which employer contributions may be made, such as by salary reduction agreement between the employer and employee, by non-elective employer contributions or by both;
- a statement regarding the maximum amount of employer contributions available to any participant; and
- the plan year.
In addition, the IRS requires summary plan descriptions for employees and salary reduction agreements. VISD contracts with a third-party administrator (TPA), American Family Life Assurance Company (AFLAC), for administration of the Section 125 Plan. If a district outsources its cafeteria plan administration through a TPA, the following is recommended:
- the district verifies the TPA is licensed to do business in Texas;
- the district verifies the TPA has a good track record and history of cafeteria plan administration;
- a contract is developed stating what the district wants accomplished and the TPA or representative accepts the responsibility for its administration; specifically the contract should exclude any hold harmless agreement regarding the TPA’s failure to administer the plan in accordance with the IRS Section 125 rules;
- the district ensures the representative enrolling employees in the cafeteria plan is not a marketer, meaning insurance and annuity products, for example, are not offered for sale by the representative;
- the TPA is responsible for calculating salary reduction contributions and guaranteeing they are correct; and
- the TPA protects the district employees’ rights.
The district’s TPA conducts the annual open enrollment for the employees in August. An AFLAC representative meets with employees. During the meeting with the employee, the AFLAC representative markets benefits that include accident, cancer and life insurance.
Upon request by the review team, VISD did not have a current Section 125 Plan Document or a copy of board minutes approving the adoption of the cafeteria plan. The reimbursement services agreement with American Family Life Assurance Company (AFLAC) states the district will be responsible for the following:
- interpreting the plan and its provisions, its terms, conditions and operations;
- notifying plan participants of their ability to apply for reimbursement benefits and supply them with request forms (to be provided by AFLAC) and request filing instructions;
- providing AFLAC with the names, addresses, social security numbers and elected amounts of all participants in the plan;
- informing AFLAC of new participants and any change of status that affects a participant’s election; and
- providing AFLAC with eligibility information of participants on a timely basis.
The reimbursement services agreement states AFLAC shall:
- provide the district with a cafeteria plan document to be reviewed by the district and its legal counsel;
- provide the district with a flexible benefits summary plan description plan to distribute to each plan participant;
- assist the district in explaining the flexible spending account features to employees;
- assist with annual open enrollment; and
- provide the district with monthly reports on account activities.
There are administrative duties the Reimbursement Services Agreement has delegated to the district regarding IRS Code Section 125 compliance. These responsibilities were recently assigned to the business manager. Failure to comply with IRS Code Section 125 requirements can result in penalties to the district. When the district has not met compliance requirements, employees can also be adversely affected.
Ensure compliance with Internal Revenue Service rules for cafeteria plans.
A cafeteria plan document in compliance with the IRS Code Section 125 and a summary plan document for employees with a corresponding election agreement should be developed with legal assistance. Board approval for the cafeteria plan document and benefit options is required. A request for proposal should be issued for benefits marketed by the current third party administrator under the cafeteria plan.
IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent directs the business manager to work with legal counsel to draft a revised cafeteria plan document. September 2003 2. The business manager submits the revised cafeteria plan document to the superintendent for approval. September 2003 3. The superintendent submits the revised cafeteria plan document to the board for approval. September 2003 4. The superintendent directs the business manager to review the third party administrator (TPA) service agreement with legal counsel to identify liability exposures. September 2003 5. The business manager prepares a list of liability issues identified with the TPA plan service agreement and responsibilities delegated to the district for plan administration. September 2003 6. The superintendent and business manager develop a plan to address the liability exposures with the TPA service agreement and cafeteria plan administration responsibilities. October 2003 7. The business manager implements the plan to address the liability exposures and cafeteria administration responsibilities. October 2003 8. The business manager monitors the third party administrator and cafeteria plan administration for compliance with IRS Code Section 125 regulations. Ongoing
This recommendation can be implemented with existing resources.