Presenters James Marta CPA, ARPM Principal James Marta & Company LLP Jake O’Malley

1. What you need to Know to Make Decisions During Tough TimesLevel - Board GovernanceExecutive DirectorsFinance Presenters James Marta CPA, ARPM Principal James Marta & Company LLP Jake O’Malley Executive Director Municipal Pooling Authority

2. Session • Boards have had to make conscious decisions to trade off certain long-term objectives to meet member short-term needs. Do you know when you are going into the red zone? How can the board manage these short-term tradeoffs and meet long-term objectives?

3. Objective • Assist boards members and managers to understand what the board should monitor and what needs to be communicated to help the board make decisions. Ensuring board members are involved, informed and the pool is meeting funding and stability targets.

4. Our current environment • Economy • Political • Benefit costs

5. How is your JPA facing tough times? • Is your pool cutting its funding margin? • Is your discount rate your using much larger than what you will be earning in the next few years? • Are you returning net assets? • Are your members cutting back on risk management? • Increasing SIR? • Were these suppose to be short-term conditions that are now the “New Normal?”

6. What are the consequences? • Potential Effect • Dangerous Combination • Lowering your confidence level puts you at more risk against large or multiple claimsReturning equity that was earned over many years instead of gradually may quickly change the pool’s resistance to large changes in claims, or premium expenses • Discounting at a rate higher than future projected treasury rates can become a hidden expense as the actuary continues to “unwind” the discounted liabilities, you may not have the earnings to offset the recognized costs. You could be in a deficit and not know it if your discount rate is too high. The revenue wouldn’t be enough to cover the discounted claim liability.

7. Member Expectations • Understand that there may be a gap between Members: • What they want vs. what they need • E.g. broad coverage, at low rates, with dividend stream • Remind directors they wear two hats JO

8. Mission Statement Partnering to protect the human and financial resources of our Member Cities, thereby allowing Members to continually improve their level of community services. By: • Stabilizing rates and operational costs • Providing responsive, innovative and professional risk management services; • Exercising pro-active loss control and risk prevention programs to control costs and provide a safe work environment; • Maintaining a leadership role in the JPA community JO

9. Typical Pool Board of Directors • Highly placed & educated at their Agency (e.g. City Managers, Asst. City Managers, City Attorneys, Finance Directors, Risk Managers) • They are part time to Pool management • Stable within the Public Sector, but do move around • Very little experience in Pool financing, such as rating plans, retrospective formulas, ex-mods, etc. • Work their way through Pool Board / Committee structure, then rotate out of key positions JO

10. Where you need to be • Do members understand where you need to be? • Are you making this information regularly available to make decisions. • Are your target benchmarks part of your regular rate setting process? • Are you trending losses and equity?

11. How do you measure up? • Rates • Financial position • Benchmarks (targeted equity) • How have you faired in the past • What is on your horizon • Members • Happy, content, they understand

12. Financial Information

13. Combination of Tests

14. What should you look at? • Information over time • Claims • How elements are changing • Liability settlements • Medical costs • Statutory benefits • Financial • Efforts • Social economics • Other

15. Internal Benchmarks: Workers’ Comp LOST WORK DAYS PER CLAIM PER FISCAL YEAR RATES VERSUS DIVIDENDS JO

16. Internal Benchmarks: Risk Control Injury Rates Police Injury History JO

17. CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET Internal Benchmarks: Financials Equity Position Analysis by Program JO

18. How are you forecasting the future? • Losses • Equity • Members • Exposures

19. How do you look at this information • Compare to your benchmarks • Compare to where you have been over time • Figure out the direction

20. Internal Benchmarks: Risk Control Police Injuries Bend, stoop lift carry, push, pull, reach, walk,run, slip, fall, Cum. Trauma

21. External Benchmark: CIPRA Loss Rate / Incident Rate Average Cost Per Claim JO

22. What next • Are you where you need to be? • What can you do to change? • What must you do? • What are the realities?

23. Funding Your Claims In risk financing your learn you can fund claims at different points • Before the loss • During the loss • After the loss

24. Risk financing and sharing allows pools to smooth losses • Among members • Through fiscal years • This smoothes costs over time

25. Balancing wants and needs

26. Pooling for long-term stability

27. Taking the Mystery out of Pool Administration • Communication, education and training • Make your operation transparent • Demonstrate you and your staff know what you’re doing • Give the Directors the requisite skills to make intelligent, informed decisions JO

28. How Much do Directors Need to Know? • They understand organization governance – from their own work experience • Provide an understanding of risk management, risk financing, pool capitalization and funding • Introduce enough knowledge, so they can ask staff the right questions JO

29. What you need to consider • The financing: the impact of short-term decisions on the long-term position • Lower confidence level • Higher retention • Returning equity through dividends • Returning equity through rate discounts • Discount level not consistent with earnings • Zero rate increases

30. What financial information the board should monitor • Benchmarks • Strengths and weaknesses of benchmarks • Tracking these benchmarks over time; are they eroding?

31. Loss Control – Real Time Numbers JO

32. Claim information • What is changing, what isn’t

33. In this cycle where do you think you are going and what does this mean in making decisions while balancing members wants and needs • What is the financial position? • What is the direction? • What is the GASB 68 impact? (recording pension liabilities) • Where does the pool need to be going? • What does the pool need to do to meet its goals; are you in the green, yellow or red zone?

34. Take a fresh look at equity targets • Set targets for equity that consider • Confidence level • Self-insured retention • Rate Stabilization considerations • Watch the growth in medical insurance costs and analyze how medical costs would translate into increased workers’ compensation costs. • Analyze trends

35. Summary of basic tests

36. What you should be doing now • Understand the cyclical nature of the markets “pragmatically look forward” • Keep sufficient reserves . . . “when you have money you have options” • Not succumb to cash flow budgeting and rate setting • Anticipate trends • “The will to do what is needed”

37. What does the pool manager need to be telling the board? • We don’t want to be one of your problems. • Being stable and reliable is what you need. • Underfunding the pool will have long-term consequences • We might be put into a position where we don’t have choices.

38. Are you putting your pool at risk? • Low rates • Dividends • Lower confidence levels • Is your discount rate achievable?

39. Conclusions • Remember: • be conservative • think long-term stability • don’t fall behind by ratcheting down rates overtime • don’t get caught off guard

40. Questions? • What will you do now? James Marta CPA, ARPM Principal James Marta & Company LLP Certified Public Accountants 916-993-9494 jmarta@jpmcpa.com www.jpmcpa.com