Program Review and Investigations Committee


Minutes <MeetNo1>


<MeetMDY1> October 11, 2007


The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> October 11, 2007, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Ernie Harris, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Ernie Harris, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Charlie Borders, Vernie McGaha, Joey Pendleton, and Dan Seum; Representatives Sheldon E. Baugh, Dwight D. Butler, and Rick Rand.


Guests:  Bill Scott, Executive Director; and Myron Thompson, Director of Risk Management; Kentucky School Board Association; Don Sever, Chief Financial Officer, Kentucky School Board Insurance Trust; and Dr. Larry Stinson, Associate Commissioner, Kentucky Department of Education.


LRC Staff:  Greg Hager, Committee Staff Administrator; Rick Graycarek; Jim Guinn; Christopher Hall; Margaret Hurst; Colleen Kennedy; Van Knowles; Perry Papka; Rkia Rhrib; Tara Rose; Cindy Upton; and Karen Wirth, Committee Assistant.


Minutes of the September 13, 2007 meeting were approved, without objection, upon motion made by Sen. Pendleton and seconded by Rep. Baugh.

A motion to initiate studies of 1) state pension accounting, including teachers’ pensions and rate of return; 2) planning for drug use prevention program (KYASAP);    3) cost of college and high school textbooks; and 4) cost to Kentucky of illegal aliens was approved by roll call vote, upon motion made by Sen. Pendleton and seconded by Sen. Borders.


Rick Graycarek and Margaret Hurst presented the report School Insurance.


Mr. Graycarek stated that the study covered three objectives: describe school insurance in Kentucky, explain the relevant regulatory process, and review the Kentucky School Board Insurance Trust (KSBIT).


Mr. Graycarek said there were six major conclusions from this study: district insurance decisions are unmonitored, districts carry different combinations of insurance and coverage amounts, districts solicit insurance bids at different intervals using different methods, insurers cannot eliminate all risks, deficits in KSBIT’s workers’ compensation and liability funds do not reflect current inability to pay claims, and a fund created by KSBIT was used to support workers’ compensation.


Mr. Graycarek stated that school districts are required to carry workers’ compensation, unemployment insurance, auto liability, property, and boiler insurance. Other insurance coverage is optional.


Mr. Graycarek explained that districts are required by the Kentucky Department of Education  (KDE) to use property replacement rates defined by building type. The report recommended that KDE use the most recent RSMeans data and adjust its property replacement rates by a standard inflation measure to account for the RSMeans data being typically more than one year old; use regional cost indices available through RSMeans to calculate the cost of construction; and include estimated amounts for architect and engineer fees, bond sale costs, and other contingencies.


Mr. Graycarek stated that school districts must supply unemployment insurance benefits to their eligible employees and pay all claims. Most districts participate in the KSBIT fund. Other optional insurances commonly carried by districts are general liability, educator’s legal liability, and vehicle collision and comprehensive. Districts carry different deductible amounts. Generally, the higher the deductible, the lower the premium.


Mr. Graycarek said that coverage limits reflect the maximum insured loss that an insurer will pay. District insurance policies have different coverage limits in part because few state requirements exist. The report recommends KDE consider actively monitoring the types and amounts of insurance that school districts carry.


Districts use different methods for soliciting bids and most receive only 1 or 2 bids. Relatively few insurers underwrite school insurance policies in Kentucky. The report recommends KDE make available to school districts a document identifying how districts should procure insurance services.


Mr. Graycarek stated that districts can insure property and casualty risks through a commercial insurer, risk pool, or by self-insuring. Few districts self-insure due to the greater financial risks to the district. Commercial insurers and risk pools are regulated by the Kentucky Office of Insurance. Districts that self-insure workers’ compensation are regulated by Office of Workers’ Claims.


He said that KSBIT operates 3 funds: workers’ compensation, liability and property, and unemployment insurance. In 2004, KSBIT created a guaranty fund using funding from the unemployment and liability insurance funds. There are concerns about transferring unemployment insurance funds into a risk-bearing workers’ compensation fund because school districts contribute to their own account for employee unemployment benefits. The report recommends KSBIT provide written notification to all affected school districts if a guaranty or similar fund is created.


Mr. Graycarek said that Kentucky School Board Association (KSBA) operates 19 programs. Most expenses are allocated to the various programs, however, some expenses are allocated solely to KSBIT. The report recommends  KSBA consider developing a method by which program expenses are proportionately allocated to KSBIT.


Sen. Harris asked what educator’s legal liability insurance was.


Mr. Graycarek said it was coverage against claims of discrimination or sexual harassment.


Sen. Harris asked if differences in the workers’ compensation coverage limits were due to the different job classifications and whether positions were classified as hazardous or nonhazardous.


Mr. Graycarek said yes, the coverage limits are divided into 3 groups: professional, maintenance, and other, which includes bus drivers.



Sen. Harris asked if there was feedback from districts regarding having KDE monitor the insurance amounts a district must have.


Mr. Graycarek said that while local officials do have more knowledge of district need, without monitoring by KDE, the district could be inadequately insured.


Sen. Harris asked if KSBIT received most of the insurance business.


Mr. Graycarek said yes.


Sen. Harris asked if KSBIT has insurance experts on their board.


Mr. Graycarek said the board is comprised of school board members.


Rep. Baugh asked how there is no problem with KSBIT paying claims if  premiums are not sufficient to cover claims.


Mr. Graycarek said KSBIT collects sufficient premiums to pay current year claims but not enough to continue paying those claims in future years.


Rep. Baugh asked if KSBIT is held to a different standard than insurance companies.


Mr. Graycarek said there are different reporting standards between the two, but no difference in how they are regulated.


Sen. Borders asked if the school districts pay all unemployment claims and if they are reimbursed by the state for any amount.


Mr. Graycarek said that districts pay all the unemployment claims and receive no reimbursement from the state.


Sen. Seum asked if classified employees can draw unemployment benefits for the days not included in their contract.


Mr. Graycarek said staff did not look at that for this report.


Sen. Seum asked if educator’s legal liability covered teachers as well as administrators.


Mr. Graycarek said it could vary from one insurer to another.


Sen. Seum asked if there was any oversight of the bid solicitation process.


Mr. Graycarek said no state agency tells school districts which insurances to bid. Local school districts determine which insurances should be bid.


Rep. Rand asked how it was possible that insurance costing more than $20,000 would not be required to be bid.


Mr. Graycarek said the $20,000 limit is under the Model Procurement Code. Districts may also negotiate insurance directly.


Rep. Rand explained that districts could be separating insurance bids by line of insurance to keep the cost less than $20,000.


Rep. Rand asked if unemployment insurance should fall under KSBIT.


Mr. Graycarek said KSBIT collects and holds the funds from the school districts until a claim is made. The payment is made from each individual district’s funds.


Rep. Rand asked if the unemployment fund could make a school district think KSBIT’s financial position is better than it is.


Mr. Graycarek said he did not know.


Margaret Hurst said, in response to Rep. Baugh’s question, that a 2006 audit of KSBIT’s liability fund determined that its deficit should be brought to the attention of vested parties. KSBIT did this and then, with approval from the Office of Insurance, merged its liability and property funds.


Ms. Hurst said, in response to Sen. Seum’s question about unemployment insurance, the state must be in compliance with certain federal laws.   


Rep. Baugh made the motion to adopt the report and Sen. Borders seconded. The report School Insurance was adopted without objection by roll call vote.


Sen. Harris introduced Dr. Larry Stinson, Bill Scott, Myron Thompson, and Don Sever.


Dr. Stinson discussed KDE’s response to the report’s recommendations. On recommendation 2.1, KDE has already begun to incorporate changes in determining the property replacement rates. KDE will continue to use RSMeans to calculate the construction costs. On recommendation 2.2, KDE agrees that additional guidelines be developed for the kinds of insurances the school districts need to have. The final decision should be left at the local level; the guidelines can be incorporated into the audit process already in place.  


Mr. Scott said that KSBA does offer guidelines and requirements to districts to determine what types and levels of insurance the district would need.


Dr. Stinson said KDE will address recommendation 3.1 and feels KDE can make a document available to districts on how to procure insurance services.


Sen. MaGaha asked if the replacement rates are a minimum, maximum or a flat number that must be used.


Dr. Stinson said the numbers are what it will cost to replace the property.


Mr. Scott said KSBIT covers the property replacement cost.


Sen. MaGaha asked about having replacement costs vary by region.


Dr. Stinson said that was addressed in the report; KDE will continue to give consideration to this issue.


Rep. Rand asked what prompted the projected increase in KSBIT’s workers’ compensation fund deficit.


Mr. Scott said part of it was inadequate reserving practices in the past.


Mr. Sever said an actuarial study is done twice each year to determine projection figures.


Rep. Rand asked if KSBIT conducts inspections of school buildings.


Mr. Thompson said they do not assess the replacement costs but are looking at buildings for risk exposures. They are working with KDE to get an actual appraisal of buildings and the contents.


Mr. Scott discussed how and why KSBIT was started. KSBIT members contribute premiums to a common pool to pay claims; the representatives oversee the program; and pools can operate at lower costs than other insurers, and those savings can be passed on to the members. He said KSBIT has a new underwriting system, has outsourced the claims operation, lowered fees and royalties, reduced reinsurance costs, increased marketing efforts, and merged the property and liability pools.


He said the workers’ compensation deficit was reduced from $5 million in fiscal year 2004 to $3.5 million in fiscal year 2007. The merger of property and liability pools provides greater financial stability to both pools, brings the property pool under the oversight of the Office of Insurance, and reduces operational costs. The combined pool has a surplus of $1.4 million.


Mr. Scott stated that KSBIT is already using a cost allocation process as recommended in the report. The report also recommends that if KSBIT recreates its guaranty fund, it notify all affected districts with written notification. KSBIT agrees completely and has no intention of reopening the guaranty fund.


Sen. Harris asked what percentage of districts insure through KSBIT.


Mr. Thompson said 55 to 60%.


Sen. Harris asked if the larger districts tend to go with KSBIT.


Mr. Thompson said it varies but that KSBIT does insure several of the smaller independent districts.


Mr. Scott said that often KSBIT is the only bid for the smaller districts.


Sen. Harris asked about splitting the lines of insurance for purposes of soliciting bids.


Mr. Thompson said most districts do operate under the model procurement code; districts can negotiate educator’s legal liability and workers’ compensation; property coverage must be bid.


Sen. Harris asked what the average insurance cost is to a district.


Mr. Thompson said it was approximately $90 per student as measured by average daily attendance.


Rep. Rand asked if the low percentage of districts being covered by KSBIT reflects bad claims service or high premiums and what the relationship is between KSBIT and the Office of Insurance.


Mr. Sever said that KSBIT has been reporting to the Office of Insurance since March 2005 and submits quarterly reports.


Mr. Thompson said in the past, market share was top priority. The new management team is willing to forego business if KSBIT is going to lose money. He said that may be why the number of districts covered by KSBIT has decreased.


Rep. Rand asked if KSBIT has outside financial counsel.


Mr. Scott said there is an investment firm that consults with them on all investments. They also have actuaries and auditors, in addition to the Office of Insurance audit.


Mr. Sever said that all the investments are government-backed.


Sen. MaGaha asked if Indiana Insurance does onsite risk assessments.


Mr. Thompson said yes.


Sen. MaGaha asked if that information could be made available to the legislators in determining needs for school facilities.


Mr. Thompson said that they partner with the Center for School Safety and provide risk management support to the districts. He said that information could be made available.


Sen. Harris said that committee members should let him or Rep. Nelson know of any additional study topic requests.


The meeting adjourned at 11:50 AM.