RD76 - Report to the General Assembly of the Stakeholder Review of Current and Alternative Liability Coverage Programs for Constitutional Officers and Regional Jail – January 24, 2018

Executive Summary:

• Virginia’s VARisk General Liability program for Constitutional Officers and Regional jails incurred expenditures over the 10-year period of FY07 to FY16 of $57,684,477, with premium amounts charged of $42.6 million. Not included in this amount is the actuarially determined reserve for future costs of $28,938,000 as of the end of FY16, and projected to be $32,566,000 in FY18.

• The VARisk liability program is not a traditional insurance program, but is a self-funded “pay-as-you-go" type plan that operates on a cash basis and does not maintain traditional reserves. Not using state funds for reserves historically kept costs lower than a traditional reserve based plan, however this approach can produce more volatility in year over year premium rates based on recent losses.

• From the introduction of VARisk in 1987 through FY2008, the Commonwealth of Virginia funded 100% of the cost of the VARisk program. Due to declining appropriations, from FY2009 the Commonwealth and localities each funded 50% of the cost; beginning in FY2010, localities funded 100% of the cost of coverage. Up through FY2013, the total for liability program premiums had not exceeded $3.1 million annually. Premiums were raised from $3.1 million to $6.0 million to $10.6 million in the most recent four-year period.

• The shifting of premium costs to localities and the significant increase in annual premium amounts caused localities to seek to understand the program’s financial position and to question whether alternatives to the VARISK program in its present form might better fulfill the need to provide liability coverage in a manner where localities could better control costs they now incur.

• After assembling a stakeholder group of individuals representing constitutional officer, regional jail, and local government associations, extensive study of the issues, presentations by many interested parties, and significant discussion, stakeholder group representatives discussed whether current and available alternative liability and related policy coverages would be better suited to the needs of each group of constitutional officers and regional jails and better address local government fiscal concerns. Also, to determine if the financial benefits of using the Commonwealth VARisk’s program in its current form, remained advantageous to the stakeholders, as well as the Commonwealth.

Stakeholder Conclusions Summarized

• While the potential for reducing premiums and providing earlier premium information for budgeting purposes would be attractive to localities, there may not be a clear path forward to changing this coverage from the Division of Risk Management’s VARisk program to an alternative provider or to a competitive environment given the negative financial position of the program and the potential fiscal impact of up to $35 million to the Commonwealth in unfunded liabilities.

• While many stakeholder representatives recognized general similarities in most coverage areas between the VARisk program and alternative coverages, the areas of guaranteed coverage and direct relationship between the constitutional officer and the provider are not a given with alternative providers; Constitutional officers and regional jails are mostly satisfied with the VARisk program in its current form and are very unlikely to recommend action resulting in the termination of the program; sheriffs’ offices representatives do not feel alternative coverage to VARisk is in the best interest to them, the Commonwealth, and the citizens of Virginia.

• Constitutional officers and localities believe that under the current funding mechanism, where localities are responsible for premium costs but do not have a role in determining coverage and managing costs, it is unfair to ask each locality to blindly accept the annual premiums charged to them; the Commonwealth should pay all or part of the funding of premiums for constitutional officers.

• As an alternative to the Commonwealth accepting responsibility for the costs of coverage for constitutional officers and regional jails, or fully funding the unfunded liabilities, localities believe that a competitive environment would be preferable, that an independent analysis should confirm the accuracy of the unfunded liabilities, and that the VARisk plan should be considered for consolidation with the VARisk2 liability self-insurance plan that presently serves other agencies within local governments.