Raise your hand if you have heard of the “Self-Insurance Fund?” I am guessing mostly crickets, but because this is in fact a budget blog there might be some hands. Why start here? Because it is an example of something that nearly nobody knows about which can actually can really hurt OUSD’s students.
Spoiler – OUSD has a serious problem that requires immediate attention and that will impact the budget.
(See below for more explanation on what Self-Insurance is)
What is the issue? OUSD uses their Self-Insurance Fund to cover a number of issues such as workman’s comp and executive settlements. To fund 100% of their liabilities, OUSD should have roughly $35 million in this account. Many comparable districts can pay 70-80% of their liabilities. IF OUSD did that, it would mean that OUSD would have between $24.5 and $28 million in the account.
As of the end of last year, OUSD has $6.8 Million (see page 9) or 15% of the recommended amount.
See where this is going? So it you don’t have enough money in the account and you have to pay out more money than you expected, you will run out of money and still owe for the damages. In that case, OUSD would have to use its education revenue to pay the claim.
Additionally, OUSD could lose its ability to self-insure, which would actually be more expensive that self-insuring. Districts self-insure because it saves them money.
How did we get here? Well, there is a longer history, but we started the 2016-17 school year with $14.8 million in the Self-Insurance Fund and ended with $6.8 million. There are three big factors at play:
- $1 million in executive payouts: OUSD paid $1 million to executives (think Chief of Staff) who left the district before their contracts were up. More on this practice in a future blog.
- $3.8 million in legal fees from 2015-16: To help make it through last year, OUSD used this fund to pay some legal fees from past years, which had to be paid during the 2016-17 school year. As was shared in the Budget and Finance Committee, this is not the type of expense for which this fund has been used in the past.
- OUSD paid $2.0 million less into the fund last year: In order to help make it through last year, OUSD put $2.0 million less in that it usually does. There are constantly worker compensation claims being paid by the district, so money is always flowing out of the fund. That means that money also has to constantly be flowing into the fund. At the end of last year, OUSD put $2.0 million less into the fund than it normally does.
Again, why does the Self-Insurance rate matter? The Self-Insurance Fund won’t teach a single kid to read. However, if the fund is mismanaged, it will will get in the way of the teachers and other educators who do. The danger is that if OUSD faces big claims this year and the fund runs out of money, OUSD will still owes a debt. That money will have to come from somewhere (such as classrooms).
If the community does not know what the fund is and the real risk that its current low balance poses for Oakland students, then it is easy/makes sense to push back on the need to build the fund when it requires making cuts elsewhere. Nobody wants to fund the Self-Insurance Fund if you don’t know what it is.
Like many things, this is not the programmatic core of the district, but if it is not taken care of, then it can suck the oxygen out of our schools.
How much needs to be paid back this year and next year? That remains to be seen, but we will keep you up to date!
Still not sure how the Self Insurance fund works? Imagine if instead of having regular auto insurance with Geico, you had a “catastrophic auto insurance policy” which only covered expenses over $150,000 AND you had to keep an account with enough money in it to pay for any medical bills or damages for your auto accidents up to that point. The benefit is that it should be cheaper because you don’t have to pay for Geico’s profit margin. The risk is that if you are not disciplined enough to make sure you keep putting this money away and don’t touch it—you may find yourself in trouble if a real emergency comes up.
How much should you have in your account? If you were to do this, you would hire somebody to tell you how much money you should have in your account based on your driving history and how much you drive. If you commute to the South Bay every day and have a bunch of accidents, this person will tell you to put a lot more money in the account than the person who lives a mile from their job and doesn’t get into any accidents. More risk, more money.
Stay tuned for our next Budget Chronicles post soon.