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Health Fund Deficit

Understanding the deficit, the actions taken to date, and outlining the action plan

Overview

Prior to fiscal year 2015, HCPSS maintained a healthy fund balance in the Employee Health and Dental Fund to account for year-to-year changes in the total amount of health claims. However, from FY 2015 through FY 2018, the employee Health and Dental Fund was underfunded to meet operating budget priorities, contributing to an accumulated deficit of $39.2 million. This deficit is not the fault of hardworking employees, but a consequence of past budget decisions, which the Superintendent first raised in May 2017 during his first month as Interim Superintendent.

The Comprehensive Annual Financial Report (CAFR) for Fiscal Year End June 30, 2019, contains a modified adverse opinion for the General Fund and the Health and Dental Fund. The independent auditors issued this opinion for the following reasons:

  • The Health and Dental Fund owes the General Fund $20.7 million (because of the underfunding) and HCPSS has not demonstrated its ability to repay the amount in a reasonable amount of time. This $20.7 million makes up about one-half of the $39.2 million deficit in the fund. In FY 2018, the auditors did not issue an adverse opinion because HCPSS staff indicated there will be a plan to pay down the deficit by $10 million per year. However, to date, plans have been discussed but a plan has not been formally adopted or approved;
  • To avoid the adverse opinion, HCPSS needed to demonstrate the intent and ability to address the repayment and deficit prior to the end of the fiscal year end June 30, 2019.

The Board demonstrated intent when it took specific actions in FY 2019 and FY 2020 to contain the deficit by reducing spending in other areas so that actuarially estimated health care costs were fully funded in the adopted budgets. These actions have had positive effects and enabled us to begin providing stability to the fund. In addition, HCPSS has committed to continuing to use savings from turnover and spending freezes as well as any other savings to begin reducing the deficit. However, HCPSS does not have sufficient financial ability through these type of ad-hoc actions alone to completely pay back the Health and Dental Fund and eliminate the deficit. Demonstrating the financial ability to solve the deficit will require a comprehensive and collaborative plan.

Understanding the Deficit

A fund develops a deficit when the expenditures exceed the total revenues plus the available fund balance. There are two ways of looking at a deficit: 1) a current year deficit (operating loss), and 2) an ending fund balance deficit. The easiest way to understand the difference is when a fund has “savings in the bank,” i.e., an opening fund balance that can be used to pay expenses when expenditures are higher than revenues. This is a current year deficit. However, when the fund runs out of “savings in the bank” (fund balance) and expenditures exceed revenues this creates an ending fund balance deficit. The example in Table 1 illustrates the difference. Column 1 shows a deficit that is result of current year expenditures being greater than current year revenues. Fortunately, there is sufficient fund balance to offset the difference. Column 2, also shows a current year deficit. Unfortunately, there is no fund balance available to cover the difference. As result, the fund ends up with a negative fund balance (deficit).

Table 1: Examples of Deficit Types

  Column 1 Column 2
  Example of Current Year Deficit Example of Fund Balance Deficit
Beginning Fund Balance $20
Revenues $100 $100
Expenditures $110 $110
Current Deficit ($10) ($10)
Ending Fund Balance $10 ($10)

It is important to layout both kinds of deficits because the Health and Dental Fund has experienced both kinds. Periodic current year deficits are not uncommon. Persistent current year deficits (structural operating deficits) are less common, and when left unattended cause a negative ending fund balance (deficit). This is what has happened in the Health and Dental Fund. What started out as periodic became persistent, and as of June 30, 2019, the Fund has a negative ending fund balance of $39.2 million. This deficit along with the lack of progress to reduce the deficit in FY 2019 or FY 2020 and the absence of an approved plan to resolve it are the reasons the auditors issued an adverse opinion. Table 2 shows the finances of the Health and Dental Fund and how the deficit has grown over the fiscal years.

Table 2: Financial Actuals for the Health and Dental Fund Fiscal Years 2014 to 2019

  FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Operating Revenues
Charges for services – internal $92,088,243 $90,014,257 $92,049,713 $101,881,998 $95,391,580 $110,487,771
Miscellaneous revenue $35,997 $163,457 $137,715 $309,580 $11,125,530
Contributions fom employees and retirees $21,276,122 $22,065,013 $23,303,756 $23,892,346 $25,264,743 $27,431,050
Total operating revenues $113,400,362 $112,242,727 $115,491,184 $126,083,924 $120,656,323 $149,044,351
Operating Expenses
Administrative expenses $8,643,701 $11,674,253 $11,662,752 $9,056,807 $6,383,928 $4,605,701
Claims and related expenses $104,270,127 $112,008,923 $121,941,600 $122,740,727 $129,142,522 $146,642,110
Total operating expenses $112,913,828 $123,683,176 $133,604,352 $131,797,534 $135,526,450 $151,247,811
Operating income (loss) $486,534 $(11,440,449) $(18,113,168) $(5,713,610) $(14,870,127) $(2,203,460)
Non-Operating Revenues
Interest income $17,131 $14,167 $38,925 $18,089 $15,214 $26,221
Non-operating income $17,131 $14,167 $38,925 $18,089 $15,214 $26,221
Changes in Net Position $503,665 A $(11,426,282) A $(18,074,243) $(5,695,521) $(14,854,913) $(2,177,239) B
Total Net Position, Beginning of Year $12,527,992 $13,031,657 $1,605,375 $(16,468,868) $(22,164,389) $(37,019,302)
Total Net Position, End of Year $13,031,657 A $1,605,375 $(16,468,868) B $(22,164,389) $(37,019,302) $(39,196,541) B

A In FY14, there was no deficit and there was a fund balance of $13M. Current year deficits began in FY15. In that year, however, there was sufficient fund balance available to absorb it.

B Deficits continued to grow measurably from FY16-FY18. Fund balance was exhausted and by FY19, the fund deficit grew to $39.2M, although the current year deficit slowed to $2.2M.

Causes of Deficits in the Health and Dental Fund

The Health and Dental Fund is an internal service fund. An internal service fund is used to budget and account for activities that are being delivered back to government. In this case, the Health and Dental Fund is used to budget and account for the cost to provide health insurance to the employees and retirees of HCPSS.

The primary sources of revenue to pay for the health insurance cost are the premiums paid by the employees/retirees and the amount paid by HCPSS. Premium costs are shared between the two. For the majority of staff, HCPSS pays for 85% of the premium and the employee/retiree pays 15%. Most of the revenue to pay the HCPSS share comes from the General Fund.

The largest expenditures of the Health and Dental Fund are the claims paid to maintain the health and wellness of our staff. Each year, HCPSS uses a certified actuary to estimate insurance claim costs for the coming year. This amount is used to develop the budget and fund the costs. The costs to administer the health insurance program are also included.

Current year deficits in a health insurance fund are not uncommon. It is very difficult to estimate health care costs. The amount and type of health care needed from employee to employee is highly variable within a year and from year to year. Some years, claims experience is positive (better than projected). Other years, claims experience can be much higher than projected due to events such as a bad flu season or employees who need catastrophic health care. Managing this variation is the biggest financial challenge of operating a health insurance fund. Often, management uses mid-year budget actions such as directing budget savings from other areas to cover unbudgeted costs occurring the Health and Dental Fund. HCPSS has deployed these approaches recently with increased frequency to stem the growth of the deficit.

The annual adopted budget for the Health and Dental Fund should be balanced. This means the adopted budget should include sufficient revenues to be received from the General Fund and from employees/retirees to pay for the projected costs of the health insurance program. However, the most significant reason the Health and Dental Fund deficit has grown and persisted since it began in FY 2015 is that the adopted budget did not provide enough funding until FY 2019

This underfunding took two forms. First, when the fund went into deficit in FY 2016, no budget action was taken to channel additional funding to eliminate the deficit. That is, an appropriation of one-time funding to remove the negative fund balance was not made. Second, the adopted budgets did not always contain enough funding from the General Fund to pay for the actuarially estimated insurance claims for the coming year. In particular, the adopted budgets for fiscal years 2015 to 2018 overestimated[1] the amount of beginning fund balance available to pay for these costs, which in effect created an artificially balanced budget. A consequence of this over estimation was that the amount of revenue needed from the General Fund was under-estimated and the Health and Dental Fund did not receive enough revenue from the General Fund. These budget decisions compounded the deficit problem. It is important to note that our teachers and staff have paid their insurance premiums and their negotiated share of the actuarially projected costs.

Beginning with the FY 2019 Budget, HCPSS made difficult budget decisions to stop growing the budgeted deficit and the County provided a one-time $11.1 million appropriation to help close the gap between expenses and appropriation. The adopted budgets for FY 2019 and FY 2020 fully funded the actuarially estimated costs for health insurance. This was a positive start but, as mentioned previously, budget to actual can vary greatly with health insurance costs. In FY19, claims were higher than budgeted and the fund ran a modest current year deficit of $2.2 million. Were there not an existing $37 million fund deficit, a current year deficit of this amount is usually manageable through the budget process. Table 3 provides the adopted budgets for the Health and Dental Fund since FY 2014.

Table 3: Health and Dental Fund Adopted Budgets Fiscal Years 2014 to 2020

Approved FY 2014 Approved FY 2015 Approved FY 2016 Approved FY 2017 Approved FY 2018 Approved FY 2019 Approvod FY 2020
Sources of Funds
Use of Fund Balance $15,511,760 $12,408,780 $5,347,445 $35,728,021 $19,456,502
Employee withholdings $17,162,260 $16,507,140 $17,868,440 $18,404,493 $17,800,000 $18,227,200 $21,808,465
Retiree payments $4,200,000 $4,538,000 $5,700,000 $5,700,000 $6,544,915 $6,872,161 $7,291,363
COBRA, leave, refunds, etc. $200,000 $280,000 $300,000.00 $360,500 $286,439 $300,761 $350,000
Payment from Food Services $2,007,000 $2,007,000 $2,020,000 $2,080,600 $2,060,000 $2,101,000 $2,185,040
Payment from Transportation $600,000 $670,000 $691,000
Payment from General Fund-Budgeted $75,877,910 $76,000,000 $82,500,000 $68,321,679 $74,007,346 $101,875,203 $112,975,623
Additional General Fund Contributions $2,000,000
Year End Transfer $1,000,000 $1,500,000
Rebates $500,000 $2,300,000 $3,800,000 $3,914,000 $11,393,595 $7,088,451 $8,352,000
Miscellaneous Revenue $140,000 $1,001,597 $100,000 $110,700 $246,045 $258,347 $275,000
Payment from Grants $1,200,000 $1,500,000 $1,700,000 $1,751,000 $1,030,000 $1,710,942 $1,800,000
Subtotal user Charges $101,887,170 $107,803,737 $116,179,440 $100,642,972 $113,368,340 $138,434,065 $155,037,491
Total Sources of Funds $117,398,930 $120,212,517 $121,526,885 $136,370,993 $132,824,842 $138,434,065 $155,037,491
Uses of Funds
Non-Election Benefits $3,888,930 $3,920,000 $3,920,000 $3,800,000 $7,994 $2,916,060
Recovery of fund balance $500,000
Administrative Fees $6,006,100 $6,140,150 $7,356,550 $7,021,918 $5,692,235 $5,874,738 $6,234,705
Increase/Decrease to fund reserve $186,412 $186,412 $122,247
Payment of claims $105,133,850 $106,053,957 $106,281,060 $121,982,511 $124,891,506 $130,575,368 $144,381,097
PPACA Fees $929,370 $647,830 $226,058 $43,000
Wellness Program $1,848,000 $2,026,500 $1,991,110 $2,006,000 $617,000
Other Expenses $338,320 $963,010 $1,066,177 $1,334,506 $1,429,695 $1,297,547 $1,340,382
Payment to Tech Fund $182,890 $178,090 $262,194
Payment to Printing Fund $840 $1,440 $1,964
Total Uses of Funds $117,398,930 $120,212,517 $121,526,885 $136,370,993 $132,824,842 $138,434,065 $155,037,491
Fund Balance
Annual Summary
Beginning Fund Balance $5,876,234 $11,239,052 $232,862 $(16,468,865) $(20,493,202) $(37,019,302) $(37,019,302)
Excess (Deficit) Revenue Over Expenditures $(15,511,760) $(12,408,780) $(5,347,445) $(35,728,021) $(19,456,502)
Ending Fund Balance $(9,635,526) $(1,169,728) $(5,114,583) $(52,196,886) $(39,949,704) $(37,019,302) $(37,019,302)
Ending Fund Balance Summary
Unrestricted $(9,635,526) $(1,169,728) $(5,114,583) $(52,196,886) $(39,949,704) $(37,019,302) $(37,019,302)
Total Ending Fund Balance $(9,635,526) $(1,169,728) $(5,114,583) $(52,196,886) $(39,949,704) $(37,019,302) $(37,019,302)

Actions Taken to Date

The Superintendent was first made aware of the situation in the Health and Dental Fund in May 2017, right after beginning his tenure. By that time, the FY 2018 Budget was nearly finalized. Therefore, immediate focus was placed on beginning to correct the situation during the fiscal year.

In FY 2018, the following steps were taken to help pay down the deficit:

  • Staff worked with vendors to realize $2 million in increased rebates;
  • A savings strategy was enacted in the General Fund allowing a categorical budget transfer from the General Fund of $1.9 million; and
  • Savings of $450,000 were achieved by eliminating the Wellness Program

In FY 2019, additional actions were taken with the goal to make sure that health care costs estimated by the actuary were fully budgeted. These actions included:

  • The County approved a one-time amount of $11 million toward current health care costs; and
  • The Board cutting the FY 2019 Proposed Budget by $19.2 million in operating areas so that health care costs could be funded.

However, in FY 2018 and FY 2019, negotiated health credits of $420 per enrolled employee were not budgeted but were given, which cost about $7.2 million over the course of both years. This was not a direct oversight. As a cost savings measure, HCPSS planned to reduce the credit to a minimal amount. The decision was subsequently made not to make this change and the funds were not put back into the budget. The FY 2020 Budget includes the funding for benefit credits.

In the FY 2020 Budget, the Board once again made difficult reductions to the operating budget in order to fully fund the actuarially projected health care costs.

Outline of the Action Plan

Our action plan aims to first stabilize the Health and Dental Fund and then make it sustainable. Stabilizing the plan consists of eliminating the deficit and ensuring the actuarially projected health care costs are fully funded in the budget. Making the fund sustainable requires building a fund balance and establishing a reserve policy. Sustainability also requires addressing the embedded cost pressures of health insurance, which grow annually at a higher rate than revenues. This is not unique to HCPSS. Governmental jurisdictions throughout the country face this challenge.

Create Stability Create Sustainability
Continue cost reduction measures to generate savings Establish Fund Reserve Policy
Apply budget savings to help pay down deficit Align cost growth pressure with revenue growth
Continue to fully fund actuarial health care cost projections Build fund balance through strategic budget plans
Work with County for additional funding to help pay down deficit  
Eliminate the deficit  

To avoid impacting the core mission of HCPSS by suddenly redirecting resources, this action plan will need to be executed incrementally over multiple fiscal years. Staff will be working on specific targets for the plan. These targets will be factored in the FY 2021 Proposed Budget development and presented to the Board when complete. Preliminarily, while we cannot project the dollar amounts, the following tentative schedule outlines a potential timeline to use current year savings and fund balance amounts to demonstrate reductions to the deficit:

  • December 2019: Use of FY 2019 Fund Balance to reduce deficit by $15,168,948*
  • June 2020: Transfer of savings within FY 2020 current year budget to reduce deficit. Amount undetermined and subject to cost to complete estimates which will be completed in May 2019. *
  • November 2020: Use of FY 2020 Fund Balance to reduce deficit, subject to audited amounts*

*Subject to Board and County Council Approval