Fiscal Note

Each piece of legislation that appropriates funds, creates position authority, or will create a financial impact through policy direction or otherwise, requires a fiscal note. The fiscal note should be drafted by department staff and should include all relevant financial information. After preparation by departmental staff, the Department of Finance will review and make necessary revisions before transmittal to Council.

Department:	Contact Person/Phone:	DOF Analyst/Phone:
Personnel	Raquel Gonzalez/4-0945	Ellen Schroer/3-9841

Legislation Title:

AN ORDINANCE relating to the Health Care Subfund of the General Fund; amending Seattle Municipal Code Section 4.50.020.

Summary of the Legislation:

In earlier legislation, the City provided that a Reserve equivalent to two months and 10 days of projected medical claims and non-City administrative costs would be adequate to comply with State regulations relative to the financial solvency of local government self-insured medical plans. This legislation (1) clarifies that the Reserve is set based upon the program’s actuarially determined incurred but not reported liability (which is currently two months and 10 days of projected health care claims and non-City administrative costs under the self-insured plans), and (2) delays attaining the Reserve requirement until the 2005-2006 biennium.

Appropriations (in $1,000’s):

Fund Name and Number	Department	Budget Control Level*	2002 Appropriation	2003 Anticipated Appropriation
			0	0
TOTAL			0	0

* This is line of business for operating budgets, and program or project for capital improvements

Notes:

Expenditures (in $1,000’s):

Fund Name and Number	Department	Budget Control Level*	2002 Expenditures	2003 Anticipated Expenditures
			0	0
TOTAL			0	0

* This is line of business for operating budgets, and program or project for capital improvements

Notes:

Anticipated Revenue/Reimbursement (in $1,000’s):

Fund Name and Number	Department	Revenue Source	2002 Revenue	2003 Revenue
			0	0
TOTAL			0	0

Notes:

Total Permanent Positions Created Or Abrogated Through Legislation, Including FTE Impact; Estimated FTE Impact for Temporary Positions:

Fund Name and Number	Department	Position Title*	2002 FTE	2003 FTE
			0	0
TOTAL			0	0

* List each position separately

Do positions sunset in the future? (If yes, identify sunset date):

N/A

Background (Include brief description which states the purpose and context of legislation and include record of previous legislation and funding history, if applicable):

In 2001, the Council created a new SMC Section 4.50.020, codifying the financial policies for the Health Care Subfund and establishing a Reserve equal to two months and ten days of projected health care claims and non-City administrative costs under the self-insured plans. Because of shortfalls to the Subfund in 2001 and 2002 due to higher-than-anticipated claims costs on the self-insured programs, the City will not meet its Reserve in 2003-04. Instead, the City plans on covering the 2001 shortfall in the 2003 health care rates and charges, and covering the 2002 shortfall in the 2004 health care rates. The current estimates of these shortfalls are $2.3 million in 2001 and $12.3 million in 2002.

The financial cost of not implementing the legislation (Estimate the costs to the City of not implementing the legislation, including estimated costs to maintain or expand an existing facility or the cost avoidance due to replacement of an existing facility, potential conflicts with regulatory requirements, or other potential costs if the legislation is not implemented):

If we were to set 2003-04 rates to maintain a two month and ten day Reserve in addition to recovering the 2001-02 shortfalls, we would need to increase the Health Care Subfund revenue requirement by $6.3 million in the 2003-04 biennium.

Possible alternatives to the legislation which could achieve the same or similar objectives (Include any potential alternatives to the proposed legislation, including using an existing facility to fulfill the uses envisioned by the proposed project, adding components to or subtracting components from the total proposed project, contracting with an outside organization to provide the services the proposed project would fill, or other alternatives):

Is the legislation subject to public hearing requirements (If yes, what public hearings have been held to date):

One alternative would be to make the two month and 10 day Reserve beginning in 2005-06 a goal rather than a requirement. The current economic environment and the continuing uncertainty in future health care costs and utilization may undermine the City’s ability to predict with certainty that it can meet this requirement. However, the State Risk Manager is firm that the City needs to make this Reserve a requirement.

Other Issues (including long-term implications of the legislation):

State law governing the self insured health care plans of local governmental entities requires that programs are operated in a fiscally sound manner. The law delegates the authority to the State Risk Manager’s office to approve or disapprove the local government self-insured status. The Risk Manager’s office, in turn, has developed guidelines and policies governing the operation of a self funded plan, including the establishment of a reserve fund.

There is no specific requirement regarding the size of the reserve, but the rule of thumb is that the reserve should at least equal the anticipated runout from claims incurred, but not reported, from the prior year. The City’s lag in claims incurred and claims reported is about two months and 10 days, and both the City’s benefits consultant and the State Risk Manager accept this as an appropriate reserve goal.

The State Risk Manager understands that Seattle and many other jurisdictions have faced unexpectedly large increases in health care costs and utilization, and are consequently below fund balance reserve requirements. The Risk Manager has reviewed the language in the Ordinance, and is comfortable that the City is complying with state requirements.