Wis insurance for local govt going broke, likely needs bailout

Here’s yet another example of how a relatively small document might tell a bigger story. Today, I noticed the Legislative Audit Bureau sent a letter to Wisconsin’s Joint Legislative Audit Committee discussing the status of the state’s Local Government Property Insurance Fund. The letter describes is a program that is now drowning in debt, will likely be dissolved in the near future and will likely need a taxpayer bailout to pay off its costs.

So what is the Local Government Property Insurance Fund? It’s been around for decades, and is basically a “public option” for local governments, Here’s how the LAB described it in their full audit of the Property Fund last year.

The Property Fund makes property insurance available for local government property such as municipal buildings, schools, libraries, and motor vehicles. It covers property losses except, among other things, those resulting from flood, earthquake, wear and tear, extremes in temperature, mold, war, nuclear reactions, and embezzlement or theft by an employee. Examples of covered property losses include large-scale wind damage to a building and minor accidental damage to a car. The Property Fund does not advertise or pay sales commissions to insurance agents and does not actively solicit business. Units of local government generally become aware of the Property Fund by word of mouth or from information available on OCI’s website. As of June 30, 2014, the Property Fund insured $51.9 billion in property owned by 983 units of local government, as shown in Table 1.

The fact that the Local Property Insurance Fund is now in debt is a remarkable drop from the $41.2 million it had in cash in 2009. The LAB described two big reasons behind this turnaround from surplus to deficit - a one-time move by the Doyle Administration to cushion local governments in tough economic times, and a number of disasters that followed, forcing large insurance payouts.

In recognition of the increasing surplus balance and challenging economic conditions during the last recession, the Legislature considered the establishment of a premium holiday for policyholders. In response, the Commissioner of Insurance declared a one-time $12.0 million dividend in FY 2009-10. As a result, the Property Fund’s net position declined.

After the $12.0 million dividend was declared, significant insurance losses occurred in FY 2010-11, FY 2011-12, and FY 2013-14. As a result, net losses and other expenses significantly exceeded net premiums and other revenues, and the Property Fund’s net position further deteriorated.

The biggest of these disasters was the 2013 fire at the Milwaukee County Courthouse, which resulted in total losses that are currently near $20 million, and a complication of that Courthouse fire was mentioned in this week’s LAB letter to the Audit Committee.

The Property Fund is supposed to be able to have losses limited to $1.8 million in one event and $22 million in one year, but the LAB said that the Property Fund’s attempt to recover $11.5 million of those losses from the Fund’s excess-loss provider (the insurance for the insurers) is still tied up in court, as the private insurers don’t believe that some of the fire’s circumstances allows the state to cut its losses under that excess-loss policy.

The recent financial difficulties for the Property Fund led Governor Walker to try to phase it out in his 2015-17 budget, and move any local governments that are getting insured over to the private sector or self-insurance. That effort was shot down in the Legislature during budget deliberations, and in response, the LAB noted that Office of the Commissioner of Insurance raised premiums that local governments had to pay to the state by 73.4% starting on July 1, 2015, in an attempt to have the Fund stay afloat.

This spike in premiums led many Wisconsin local governments to stop using the fund, which the LAB letter said was a main cause behind the Property Fund losing 88% (!) of premium income in 2 years.

In its July 28, 2016 letter, OCI reported a decrease in the number of insured entities from 983 as of July 1, 2014 to 231 as of July 1, 2016. OCI also reported outstanding losses of $10.7 million and a decline of premiums in force from $27.1 million as of July 1, 2014, to $3.2 million as of July 1, 2016. The letter also discussed actions taken by OCI to increase the Property Fund’s net position, which included decreasing the deductible for claims made through its reinsurance programs, increasing premiums, and making other policy changes.

And since July 1, OCI told the LAB that over 20% of the remaining entities had dropped coverage with the property fund, leaving only 174 with policies. Needless to say, this means that the financial outlook for the Property Fund (and cost to Wisconsin taxpayers) looks even worse.

In October 2015, the Property Fund repaid the $2.0 million it had previously borrowed in September 2015 from the state’s General Fund. However, the Property Fund borrowed an additional $15.1 million from the state’s General Fund from November 2015 through October 2016, none of which was repaid by November 30, 2016. The Property Fund reported, in its draft unaudited financial report, a liability of $8.4 million for the amount borrowed from the General Fund as of June 30, 2016.

With the continued decline in the amount of insured entities, the Property Fund will likely earn less in premiums in FY 2016-17 than was earned in FY 2015-16. Because the Property Fund’s resources available to pay claims have continued to decline, the Property Fund may need to borrow additional amounts from the state’s General Fund, and the ability of the Property Fund to repay the state’s General Fund, is not known.

With these losses piling up, no wonder why the Office of the Insurance Commissioner asked to get rid of the Local Government Property Insurance Fund in its 2017-19 budget request. It’s a sensible move, given that events and actions over the last 7 years have made the Property Fund a money-loser for the state, and with such a small number of participants remaining, the disruptions would be significantly less than what we would have seen if it happened two years ago.

Now the question falls to this- how much time do you give to phase out the Property Fund program to allow local governments to adjust, and how many taxpayer dollars are going to have to be set aside to pay off the current deficit and future claims? This is what will likely have to be determined and hammered out in the upcoming budget debates.

No funds were designated in the OCI budget request for such a bail-out of the Property Fund, which means you can add those costs to the $588 million General Fund deficit, and the $880 million Transportation Fund deficit, and 2016’s weather-related disaster costs that FEMA won’t recover. As the countdown begins to Gov Walker’s formal release of the 2017-19 budget, complications like the demise of the Property Fund keep making a rough budget picture even trickier.