RESOLUTION SCHOOLS SELF-INSURANCE OF CONTRA COSTA COUNTY

Transcription

1 RESOLUTION SCHOOLS SELF-INSURANCE OF CONTRA COSTA COUNTY Resolution of the Executive Committee of the Contra Costa County Schools Insurance Group Declaring Membership in the Schools Self Insurance of Contra Costa County WHEREAS, school districts in the State of California have determined there is a need for affordable self-funded dental and vision plans by combining their respective efforts to establish, operate and maintain a Joint Power Agency for such coverages; and WHEREAS, Title I, Division 7, Chapter 5, Article I (Section 6500 et seq.) of the Government Code of the State of California authorizes joint exercise by two or more public agencies of any power common to them, NOW, THEREFORE, BE IT RESOLVED that the Executive Committee of Contra Costa County Schools Insurance Group declares its membership in the Schools Self Insurance of Contra Costa County and instructs its duly authorized agent to execute on behalf of Contra Costa County Schools Insurance Group the attached Joint Powers Agreement. IT IS FURTHER RESOLVED THAT the Executive Committee of Contra Costa County Schools Insurance Group appoints and, as its official representatives to the Schools Self Insurance of Contra Costa County. PASSED AND ADOPTED by the Executive Committee of Contra Costa County Schools Insurance Group this October 24, 2013 (for an effective date of January 1, 2014), by the following vote: AYES: NOES: ABSENT: STATE OF CALIFORNIA COUNTY OF CONTRA COSTA COUNTY I, Margaret Kruse, Clerk of the Executive Committee of Contra Costa County Schools Insurance Group, do hereby certify that the foregoing is a full, true, and correct copy of a resolution adopted by the Executive Committee at a regularly called and conducted meeting held on said date. Clerk of Executive Commitee

2 Contra Costa County Schools Insurance Group June 30, 2013 Audit Presented by James Marta CPA, ARM, ARPM James Marta & Company LLP Certified Public Accountants 1

3 Audit The audit process is a process of accountability to the Board, Members and the Public Page 1; our opinion is unqualified The audit report format has been revised It is intended to provide more clarity 2

4 Management Discussion and Analysis Pages 3-8 It addresses the financial highlights, important trends and the issues CCCSIG is facing. This is an excellent resource for you and your members to assess how the pool is doing. 3

5 Financial i Results Overall, member contributions increased by $2.4M or 5.7% Health Benefits revenues decreased by $1.04M or 4.5% WC premiums increased by $3.43M or 21.4% Investment t income decreased d by $555K or 55%- (decrease in FMV). Expenses decreased by $1.25M or 2.8%, Decrease in claims expense of $296K or 2% Decrease in Insurance premiums of $1.04M or 4.4% 4% (decrease in HB premiums) Increase in Other G&A Expenses of $73k or 9.15% (mostly due to increase in State WC assessment fees) Small changes among other expenditures Net loss of $21k, compared to $3.1M loss in prior year Total assets is $93.6M Net Position at $14.6M 4

6 Condensed Statement of Net Position Assets: s: Current Assets $ 14,753,768 $ 17,038,661 $ 30,686,518 Long-Term Investments 74,579,348 70,182,128 57,248,048 Capital Assets, net 4,322,044 4,535,031 4,777,632 Total Assets 93,655,160 91,755,820 92,712,198 Liabilities: Current Liabilities i 16,728,320 14,928,771 17,193, Noncurrent Liabilities 62,266,133 62,145,252 57,732,917 Total Liabilities 78,994,453 77,074,023 74,926,034 Net Position: Invested in Capital Assets 4,322,044 4,535,031 4,777,632 Unrestricted 10,338,663 10,146,766 13,008,532 Total Net Position $ 14,660,707 $ 14,681,797 $ 17,786,164

7 Condensed Statements of Revenues, Expenses and Changes in Net Position Operating Revenue: Member Contributions $41,668,746 $39,278,220 $40,126,570 Operating Expenses: Provision for Claims and Claims Adj. Expenses 14,789,387 15,084,946 18,118,628 Insurance Premiums and Assessment 22,776,434 23,817,790 25,389,388 Program Salaries and Benefits 2,067,385 2,022,172 2,002,028 Dividends Expense General and Administrative Expenses 2,511,874 2,467,968 2,538,438 Total Operating Expenses 42,145,080 43,392,876 48,048,482 Other Income: Investment Income 1,385,659 1,110,443 1,154,624 Change in Fair Value of Investments -930, ,154-24,034 Total Other Income 455,244 1,010,289 1,130,590 Increase in Net Position (21,090) (3,104,367) (6,791,322) Net Position-Beginning of Year 14,681,797 17,786,164 24,577,486 Net Position-End of Year 14,660,707 14,681,797 17,786,164

8 Revenues Other income; $242,313; 1% Investment income; $455,244; 1% Member contributions; $41,426,433; 98% 7

9 Expenses Provision for Claims and Cliams Expenses, $14,789,387, 35% Other general and admin, $876,606, 2% Depreciation Expense, $229,778, 1% Other Salaries and Benefits, $1,249,770, 3% Profession and Consulting Fees, $155,720, 0% Program Salaries and Benefits, $2,067,385, 5% Insurance Premiums, $22,776,434, 54% 8

10 Claims Liabilities Unpaid Claims and Claim Adjustment Expense at Beginning gof Year $ 70,908,740 $ 68,002,585 Incurred Claims and Claim Adjustment Expenses: Provision for Insured Events of the Current Year 12,037,122 11,411,041 Increase (Decrease) in Provision for Insured Events of fpi Prior Fiscal lyears ,601,018 3,513, Change in Provision for ULAE in Current Year 151, ,754 Total Incurred Claims and Claim Adjustment Expenses 14,789,387 15,084,946 Payments: Claim and Claim Adjustment Expenses Attributable to Insured Events of the Current Year 1,858,590 1,621,346 Claim and Claim Adjustment Expenses Attributable to Insured Events of the Prior Years 10,228,759 10,557,445 Total Payments 12,087,349 12,178,791 Total Unpaid Claims and Claims Adjustment Expenses $ 73,610,778 $ 70,908,740 9

11 Past Fiscal and Policy Year Ended June 30, Total Required Contributions and Investment Revenue $ 14,592,919 $ 13,950,189 $ 12,393,169 $ 12,128,369 $ 13,898,894 $ 17,124,791 $ 17,500,529 $ 18,168,212 $ 22,192,292 $ 25,004,287 Ceding assessments $ (305,274) $ (343,939) $ (584,856) $ (555,830) $ (486,029) $ (311,917) Ceded (150,224) (146,844) (158,255) (129,766) (160,879) (148,619) (104,075) (696,718) (876,359) (940,932) (1) Net Earned Required Contribution and Investment Revenues 14,137,421 13,459,406 11,650,058 11,442,773 13,251,986 16,664,255 17,396,454 17,471,494 21,315,933 24,063,355 (2) Unallocated Expenses 1,805, ,019,466 2,241, ,223, ,659,723 3,288,704 2,942,371 3,388, ,897,163 5,053,918 (3) Estimated Incurred Claims and Expense End of Year 6,880,349 5,025,479 5,326,719 6,855,860 7,409,704 9,077,580 11,625,223 14,520,986 15,851,298 16,377,174 Ceded Net Incurred 6,880,349 5,025,479 5,326,719 6,855,860 7,409,704 9,077,580 11,625,223 14,520,986 15,851,298 16,377,174 (4) Paid (Cumulative as of): End of Policy Year 1,212,002 1,280,926 1,590, ,293,731 1,527,629 1,952,435 2,037,501 2,283, ,137,696 1,590,767 One Year Later 2,898,389 3,244,739 3,448,858 3,553,592 4,189,473 5,324,732 5,501,912 5,935,500 5,529,632 Two Years Later 4,452,578 4,751,152 5,024,376 5,467,425 6,061,105 8,419,232 8,368,085 8,583,574 Three Years Later 5,443,160 5,625,564 6,274,685 7,140,791 7,956,722 10,690,041 10,050,490 Four Years Later 6,225,092 6,325,579 7,077,153 8,799,882 9,185,138 12,280,043 Five Years Later 6,701,090 7,094,992 7,921,704 9,881,227 10,349,849 Six Years Later 7,259,181 7,519,743 8,359,976 10,449,362 Seven Years Later 7,853,835 7,913,070 8,664,382 Eight Years Later 8,087, ,164,367 Nine Years Later 8,368,410 (5) Re-Estimated Ceded Claims and Expense: , (6) Re-Estimated Incurred Claims and Expense: End of Policy Year 6,880,349 5,025,479 5,326,719 6,855,860 7,409,704 9,077,580 11,625,223 14,520,986 15,851,298 15,423,137 One Year Later 6,033,236 6,139,085 6,266,100 74,631,125 9,560,626 11,813,425 13,778,610 15,121,323 16,532,634 Two Years Later 7,079,612 7,096,587 7,647,592 9,284, ,557,244 14,103, ,260, ,677, Three Years Later 7,384,218 7,604,751 8,667,860 10,128,923 11,573,052 15,594,526 15,945,590 Four Years Later 7,768,036 7,927,881 9,167,710 11,641,430 11,935,271 18,308,199 Five Years Later 8,280,219 8,495,272 9,675,818 12,054,626 13,355,258 Six Years Later 8,774,271 8,728,638 9,487,320 12,577,839 Seven Years Later 8,987,809 8,652,161 10,035,517 Eight Years Later 9,114,249 9,351,767 Nine Years Later 10,050,935 (7) Increase (Decrease) in Estimated Incurred Claims and Expenses from the End of Program Year $ 3,170,586 $ 4,326,288 $ 4,708,798 $ 5,721,979 $ 5,945,554 $ 9,230,619 $ 4,320,367 $ 2,156,475 $ 681,336 $ (954,037) 10

12 Present Fiscal and Policy Year Ended June 30, Total Required Contributions and Investment Revenue $ 22,192,292 $ 25,004,287 $ 26,006,839 $ 29,707,940 $ 21,220,176 $ 25,849,230 $ 22,363,074 $ 17,288,050 $ 17,311,436 $ 20,191,212 Assessments/(dividends) (3,500,000) Ceded (876,359) (940,932) (992,734) (1,816,733) (1,766,127) (1,249,295) (774,150) (1,436,227) (850,029) (848,815) (1) Net Earned Required Contribution and Investment Revenues 21,315,933 24,063,355 25,014,105 27,891,207 19,454,049 24,599,935 18,088,924 15,851,823 16,461,407 19,342,397 (2) Unallocated Expenses 4,897,163 5,053,918 5,203,816 4,737,069 4,874,143 4,481,556 4,620,326 4,537,741 4,486,640 3,984,603 (3) Estimated Incurred Claims and Expense End of Year 15,851,298 16,377,174 14,938,246 16,114,242 12,665,543 11,761,235 11,409,355 11,094,765 11,411,041 12,037,122 Ceded Net Incurred 15,851,298 16,377,174 14,938,246 16,114,242 12,665,543 11,761,235 11,409,355 11,094,765 11,411,041 12,037,122 (4) Paid (Cumulative as of): End of Policy Year 2,137,696 1,590,767 1,871,810 1,457,205 1,401,956 1,631,020 1,406,107 1,496,994 1,621,346 1,858,590 One Year Later 5,529,632 3,797,602 4,908,583 4,049,567 3,673,776 3,738,658 3,573,493 3,350,076 3,733,996 Two Years Later 7,729,145 5,580,622 6,640,034 5,860,962 4,975,672 5,474,141 4,962,733 4,640,561 Three Years Later 9,803,456 7,229,768 8,175,633 7,170,766 6,644,860 6,549,742 5,936,079 Four Years Later 11,328,748 8,202,332 9,457,318 8,453,243 7,341,334 7,558,242 Five Years Later 12,383,189 9,306,492 10,607,515 9,326,646 7,969,688 Six Years Later 13,123,716 10,114,190 11,264,388 9,946,475 Seven Years Later 14,326,218 10,669,535 11,883,129 Eight Years Later 14,885,799 10,975,839 Nine Years Later 15,387,653 (5) Reestimated Ceded Claims and Expense: (6) Reestimated Incurred Claims and Expense: End of Policy Year 15,851,298 16,377,174 14,938,246 16,114,242 12,665,543 11,761,235 11,409,355 11,094,765 11,411,041 12,037,122 One Year Later 16,532,634 15,216,959 16,436,108 13,691,150 11,452,519 11,150,284 10,675,662 10,997,025 11,407,335 Two Years Later 17,305,029 15,179,894 14,782,402 12,629,141 10,770,834 11,404,120 11,357,390 11,023,523 Three Years Later 18,738,602 14,106,345 14,814,631 12,185,722 11,439,830 12,142,277 11,329,498 Four Years Later 17,529,874 13,385,662 15,036,598 12,732,616 11,681,224 12,052,692 Five Years Later 17,928,436 13,394,810 15,764,894 13,003,522 11,577,366 Six Years Later 18,026,662 14,001,567 15,776,397 13,716,090 Seven Years Later 18,661,127 13,866,299 16,038,502 Eight Years Later 19,067,949 13,739,428 Nine Years Later 19,108,747 (7) Increase (Decrease) in Estimated Incurred Claims and Expenses 11 from the End of Program Year $ 3,257,449 $ (2,637,746) $ 1,100,256 $ (2,398,152) $ (1,088,177) $ 291,457 $ (79,857) $ (71,242) $ (3,706) $ -

13 Net Position Over Past 10 Years $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 -$5,000, $10,000,000 -$15,000,000 12

14 Graphical Summary of Claims $18,000,000 $20,000,000 $14,000,000 $16,000,000 $,, $8,000,000 $10,000,000 $12,000,000 $ $4,000,000 $6,000,000 $0 $2,000, Paid Reserved IBNR

15 Letters Along with the audit report, there are 2 corresponding letters: SAS 117 Report- Report on Internal Control over Financial Reporting and on Compliance No Material weaknesses identified No instances of noncompliance or other matters Communication to those Charged with Governance Significant accounting estimates: Claim liabilities and related interest assumptions Significant accounting policies No matters identified No disagreements with management Audit conducted as planned without material modifications 14

16 Analysis Short-term investment earnings have not kept up. with the long-term investment assumptions There will be about $1.5 million of unwinding claims adjustment annually. There are cost pressures for WC You have not materially eroded net position this year based on strengthened funding You may need to strengthen funding of the long run based on the cost pressures. 15

17 Conclusion Long-term loss control and claims management have greatly improved CCCSIG claims. CCCSIG continues to be in a strong financial position with equity bringing the program over the 85% confidence level. l You would not want to erode this significantly. We would like to thank CCCSIG staff for their help in the audit process 16

18 Questions? James Marta CPA, ARPM Principal James Marta & Company LLP Certified Public Accountants ext

19 Contra Costa County Schools Insurance Group Portfolio Review October 24, 2013

20 Taper Talk FOMC Press Conference, June 19 If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year. FOMC Press Conference, September 18 In evaluating whether a modest reduction in the pace of asset purchases would be appropriate p at this meeting, however, the Committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook... the extent of the effects of restrictive fiscal policy policies remain unclear, and upcoming fiscal debates may involve additional risks to financial markets and the broader economy. Source: Federal Reserve PFM Asset Management LLC 1

21 Impact of Taper Talk Over the last two quarters, market volatility has primarily been driven by the Fed s public statements regarding the tapering of their bond purchase program. 1.0% 0.8% Yield on 3-year U.S. Treasury Note September 1, 2012 September 30, 2013 Bernanke Indicates Fall Tapering Timetable Yields Rise on Fed Taper Concerns 06% 0.6% Fed Taper Talk Begins Taper Does Not Begin 0.4% Strong June Jobs Report 0.2% 9/1/12 11/1/12 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 Source: Bloomberg PFM Asset Management LLC 2

22 Yield Curve Steepens in Mid-2013 The increase in rates during the second quarter, especially in the 3- to 5-year maturity range, steepened the yield curve. During the third quarter, short-term term rates fell, but maturities between 2 and 5 years remained largely unchanged quarter-over-quarter. 1.6% 1.4% 1.2% 1.0% U.S. Treasury Yield Curve March 31, 2013 June 30, 2013 September 30, /31/13 6/30/13 9/30/13 3 Month 0.07% 0.03% 0.01% 6 Month 0.10% 0.09% 0.03% ld Yiel 0.8% 1 Year 0.12% 0.15% 0.09% 0.6% 2 Year 0.24% 0.36% 0.32% 0.4% 02% 0.2% 0.0% 3 M 6 M 1 Y 2 Y Maturity 3 Y 5 Y 3 Year 0.38% 0.68% 0.63% 5 Year 0.77% 1.40% 1.38% Source: Bloomberg PFM Asset Management LLC 3

23 Twelve Month Recap At the beginning of 2013, our investment strategy was based on the view that interest rates would likely remain low for the foreseeable future due to the Federal Reserve s statements that accommodative interest rate policy through 2015 would remain appropriate. Our strategy for this time period included: Keeping the portfolio s duration close to the benchmark s duration to take advantage of longer maturity, higher yielding securities. Adding corporate notes, negotiable CD s, and municipals that offered value over U.S. Treasuries and Federal Agencies. During July, our investment strategy changed because we believed that interest rates would likely trend higher. As modest economic expansion in the U.S. continued, the Federal Reserve would curtail its bond purchases and rates would begin to normalize from artificially low levels. The key components of our strategy t were: Keeping duration a bit shorter and more conservative than the benchmark s. Taking advantage of the market s volatility by making investments when rates were near the top of their recent range. Emphasizing credit instruments (e.g., corporate notes, negotiable CDs, and municipal securities) that will benefit from favorable credit market conditions and improving fundamentals. Much of PFMAM s decision-making focused on identifying relative value seeking those sectors, maturities and issues that offered the best potential for favorable returns in the context of the overall portfolio. PFM Asset Management LLC 4

24 Portfolio Characteristics Sector Distribution Security Type Market Value Percentage of Portfolio Permitted by Policy In Compliance U.S. Treasuries Federal Agencies Commercial Paper Certificates of Deposit Municipal Obligations Corporate Notes $33,014,787 42% 100% $17,303,126 22% 100% $1,029,688 1% 25% $11,063, % 30% $2,191,605 3% 100% $12,446,944 16% 30% LAIF $2,218,220 2% $50 Million Totals $79,267, As of September 30, 2013 Funds in Contra Costa County Pool are not included PFM Asset Management LLC 5

25 Portfolio Characteristics Issuer Distribution Corporate Issuers (16%) General Electric 4% IBM 2% Pfizer 2% Wells Fargo 2% Berkshire Hathaway 1% Chevron Corp 1% Toyota 1% Apple Inc. 1% PepsiCo 1% Procter & Gamble 1% Mitsubishi CP 1% LAIF 2% Certificates of Deposits (14%) Bank of Nova Scotia (Houston) 3% Standard Chartered Bank 3% Svenska Handelsbank 3% Rabobank 3% Credit Suisse NY 2% Municipal Issuers (3%) University of California 2% State of California 1% FHLB 3% FNMA 7% FHLMC 12% U.S. Treasury 42% As of September 30, 2013 Funds in Contra Costa County Pool are not included PFM Asset Management LLC 6

26 Portfolio Characteristics Credit Distribution A 6% Not Rated A-1+ (LAIF) (Short-term) 2% 7% AA 85% As of September 30, 2013 Ratings by Standard & Poor s Funds in Contra Costa County Pool are not included PFM Asset Management LLC 7

27 Portfolio Characteristics Maturity Distribution The portfolio s maturities remain concentrated in the 1- to 3-year maturity range, consistent with the City s performance benchmark. Portfolio Maturity Distribution ¹ 75% June 30, 2013 Percentage of Tota al Portfolio 50% 25% 56% 50% 32% 37% September 30, % 7% 6% 3% 3% 4% 2% 0% Under 6 Months 6-12 Months 1-2 Years 2-3 Years 3-4 Years 4-5 Years Note: Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. As of September 30, 2013 Funds in Contra Costa County Pool are not included PFM Asset Management LLC 8

28 Strategy: Allocate Portfolio to Corporate Sector As corporate financial fundamentals improved, we gradually added investments in non-government securities corporate notes and certificates of deposit to the portfolio. 100% 80% 60% Sector Allocation vs. 2-Year (AA) Corporate Yield 2% 1% 10% 12% 12% 14% 16% 9% 9% 13% 1% 2% 12% 2% 2% 14% 28% 27% 3% 23% 29% 22% 40% 20% 42% 50% 52% 49% 44% 0% Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 U.S. Treasuries Federal Agencies Municipals Certificates of Deposit Corporate Notes Commercial Paper Source: Bloomberg As of September 30, 2013 Funds in Contra Costa County Pool are not included PFM Asset Management LLC 9

29 Strategy: Actively Manage Portfolio Duration During the prolonged period of low interest rates, which lasted from September 2011 through April 2013, we maintained the portfolio s duration at close to 100% on the benchmark s duration. With the rise in interest rates, between May and September, we shortened the portfolio s duration to protect the portfolio s market value. 2-Year U.S. Treasury yield vs. Portfolio Duration as % of Benchmark Duration 60% 100% 99% 98% 99% 99% 50% 91% 90% 40% 30% 20% 80% 70% 60% 50% 10% Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 40% 2-Year U.S. Treasury Yield (Left Axis) Source: Bloomberg Funds in Contra Costa County Pool are not included Portfolio Duration as % of Benchmark (Right Axis) PFM Asset Management LLC 10

30 Portfolio Performance The portfolio has consistently exceeded the return of the performance benchmark the Bank of America Merrill Lynch 1-3 Year U.S. Treasury index. Effective Duration 3Q 2013 Third Quarter Return 1,2,3,4,5 Quarter Ended September 30, 2013 Past Year Return Past 3 Years Return Since Inception CCCSIG % 0.49% 1.01% 4.50% BAML 1-3 Year UST % 0.37% 0.71% 4.24% 1. Performance on trade date basis, gross (i.e., before fees), in accordance with the CFA Institute s Global Investment Performance Standards (GIPS). 2. Merrill Lynch Indices provided by Bloomberg Financial Markets. 3. Quarterly returns are presented on an unannualized basis and annualized basis. Performance numbers for periods greater than one year are presented on an annualized basis. 4. Excludes LAIF and Contra Costa County Pool from performance, earnings, and duration computations. 5. Portfolio Inception date as of December 31, PFM Asset Management LLC 11

31 Fed Rate Guidance Indicates Continued Low Rates Through at Least % Unemployment Rate 30% 3.0% Core Inflation (PCE Price Index) 10.0% 9.0% 2.5% 20% 2.0% 2.5% High Forecast 8.0% 7.0% High Forecast 1.5% Low Forecast 6.0% 6.5% Low Forecast 5.0% 1.0% 0.5% 4.0% Nov-07 Nov-09 Nov-11 Nov-13 Nov % Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Source: Bloomberg; Federal Reserve PFM Asset Management LLC 12

32 Job Growth Remains Modest Only 148,000 jobs were created in September, missing analysts expectations of 185,000 jobs. The unemployment rate fell from 7.6% to 7.2% during the third quarter, a decline resulting from the decreased labor participation. Growth in jobs has been primarily driven by the private sector. Thousands Non-Farm Payrolls (Public and Private Sector) vs. Unemployment Rate September 2008 September Million Jobs Gained Unemployment Rate: 7.2% Million Jobs Lost 0% Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Non-Farm Payrolls - Private Sector - (Left Axis) Non-Farm Payrolls - Public Sector - (Left Axis) Unemployment Rate (Right Axis) Source: Bureau of Labor Statistics 12% 10% 8% 6% 4% 2% PFM Asset Management LLC 13

33 U.S. Economic Growth Accelerates GDP for the second quarter was revised up to 2.5% from the initial estimate of 1.7%. The revision exceeded economists estimates of 2.2%. 8.0% U.S. GDP Q Q % 0.0% -4.0% -8.0% 80% Bloomberg Survey of Economists Projecting Slow Growth -12.0% Q208 Q408 Q209 Q409 Q210 Q410 Q211 Q411 Q212 Q412 Q213 Q413 Q214 Source: Bloomberg PFM Asset Management LLC 14

34 Inflation Below Target Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) are the two most commonly utilized measures of inflation. Inflation remains well below the Fed s threshold. 3.5% 3.0% 2.5% 20% 2.0% 1.5% 1.0% 0.5% Core PCE and Core CPI Inflation Fed s Easy Money Inflation Resistance Point Fed s Long Term Inflation Target Start of Quantitative Easing Programs 0.0% Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Core PCE Core CPI Source: Bureau of Economic analysis, Bureau of Labor Statistics, Bloomberg PFM Asset Management LLC 15

35 Fed Rate Guidance Indicates Continued Low Rates Through at Least 2015 Since unemployment remains at uncomfortably high levels, and inflation remains at low levels, the Federal Reserve Open Market Committee is expected to keep interest rates low until FOMC Participant Votes on Appropriate Timing of Policy Firming as of September 18, % 4% Targeted Federal Funds Rate at Year-End FOMC Participant Forecasts as of September 18, % 3 2 2% 1% % Individual FOMC participant s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year. Source: Federal Reserve Open Market Committee PFM Asset Management LLC 16

36 Fourth Quarter 2013 Investment Outlook and Strategy We expect U.S. economic growth will continue, but think the Fed s projections may prove too optimistic. We believe that Janet Yellen will continue Bernanke s accommodative monetary policies. Treasury yields will likely be range-bound due to the unevenness of the economic recovery. The range for Treasury yields will gradually rise as monetary policy accommodation is slowly removed. The current modestly conservative duration posture for the portfolio will likely be maintained for the foreseeable future. Bouts of market weakness may be used to match monthly index extensions at favorable levels, when deemed appropriate. We generally find the yield advantage of corporate notes fair compensation for the credit risk being assumed. Corporate profits are firm, borrowing costs are low, and economic conditions are reasonably favorable. PFM Asset Management LLC 17

37 Disclaimer This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guarantee of future results. The information contained in this presentation is not an offer to purchase or sell any securities. PFM Asset Management LLC

38 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR S REPORT FOR THE FISCAL YEARS ENDED JUNE 30, 2013 AND 2012

39 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP TABLE OF CONTENTS Independent Auditor's Report 1 Management s Discussion and Analysis 3 Financial Section Statement Net Position 9 Statement of Revenues, Expenses, and Changes in Net Position 10 Statement of Cash Flows 11 Notes to the Financial Statements 12 Required Supplementary Information Claims Development Information 24 Notes to the Supplementary Information 25 Supplementary Information Combining Statement of Net Position 26 Combining Statement of Revenues, Expenses, and Changes in Net Position 27 Graphical Summary of Claims 28

40 James Marta & Company LLP Certified Public Accountants Accounting, Auditing, Consulting, and Tax Board of Directors Contra Costa County Schools Insurance Group Pleasant Hill, California Report on the Financial Statements INDEPENDENT AUDITOR'S REPORT We have audited the accompanying Statement of Net Position of Contra Costa County Schools Insurance Group (Group) as of June 30, 2013 and 2012, and the related Statement of Revenues, Expenses, and Changes in Net Position, and Statement of Cash Flows for the years then ended, and the related notes to the financial statements. Managements Responsibility for the Financial Statements Management is responsible for the preparation and presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the State Controller s Minimum Audit Requirements for California Special Districts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Contra Costa County Schools Insurance Group as of June 30, 2013 and 2012 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America, as well as accounting systems prescribed by the State Controller s Office and state regulations governing special districts. 701 Howe Avenue Suite E3, Sacramento, California Phone: Fax: jmarta@jpmcpa.com 1

41 Other Matters Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 3 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board (GASB) who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with the auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Group s basic financial statements. The Claims Development Information and Notes to the Supplementary Information are not required parts of the basic financial statements but are supplementary information required by GASB. The Combining Statement of Net Assets, Combining Statement of Revenues, Expenses and Changes in Net Assets, and Graphical Summary of Claims are presented for purposes of additional analysis and are not required parts of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 18, 2013 on our consideration of Contra Costa County Schools Insurance Group s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entities internal control over financial reporting and compliance. James Marta & Company LLP Certified Public Accountants October 18,

42 MANAGEMENT S DISCUSSION AND ANALYSIS

43 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 Organization: Contra Costa County Schools Insurance Group (the Group ) is a public entity originally formed in 1977 as a workers compensation self-insurance program in Contra Costa County pursuant to a Joint Exercise of Powers Agreement (JPA) and Section 6500 of the California State Government Code. Under such an agreement, two or more public agencies may jointly exercise any power common to the contracting parties. The Group currently provides workers compensation self-insurance and administration to its 19 member Districts (17 public school districts, a community college district, and a county office of education) and an insured health benefit program to 9 member districts. Financial Highlights: Total operating revenues were $41.7 million, an increase of 6.1% or $2.4 million from prior year. This increase is due to the Workers Compensation program revenues increasing $3.4 million (last years Workers Compensation revenues were reduced with the intent of using equity growth/equity to return $3.8 million to our members. This year another rate reduction was done with the intent of using equity growth/equity to return an additional $2.1 million to our members. This $1.7 million increase, along with an approximately $400 thousand increase from higher covered payroll, and a higher actuarial base rate which added approximately $1.3M, make up the $3.4 million increase for Workers Compensation revenues), which was offset by a decrease in the Health Benefits program revenues of $1.0 million. Total non-operating revenues were $455 thousand, a decrease of 54.9% or $555 thousand from prior year. This decrease is due to a negative change in Fair Market Value of the portfolio, $819 thousand lower than last years change, which was offset by an increase in interest earnings of $264 thousand, both due to rising interest rates. Total expenses were $42.1 million, a decrease of 2.9% or $1.2 million over last year. This comparative decrease was due to a decrease in Workers Compensation expenses of $204 thousand and a decrease in the Health Benefit program expenses of $1.0 million. Outstanding claims liabilities were $73.6 million, an increase of 3.8% or $2.7 million in comparison to the prior year. Overview of the Financial Statements: The basic financial statements include the Statement of Net Position as of June 30, 2013 and 2012, Statement of Revenues, Expenses, and Changes in Net Position and Statement of Cash Flows for the fiscal years ended June 30, 2013 and These statements provide the overall financial picture of the Group in comparison to the prior year and may be used to assess the financial performance over the reported fiscal year. The financial statements are presented on the accrual basis of accounting in accordance with Governmental Accounting Standards Board statements. Under the accrual basis, revenues and the related assets are recognized when earned, and expenses and the related liabilities are recognized when the obligations are incurred. 3

44 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 The Statement of Net Position provides information on all assets and liabilities, with the difference reported as Net Assets. The Statement of Revenues, Expenses, and Changes in Net Position presents information showing total revenue and expense and the resulting effect on Net Position. These two statements report the Group s net position and changes in them. Over time, increases or decreases in the Group s net position can be one indicator of whether its financial health is improving or deteriorating. The Statement of Cash Flows presents information about the cash receipts and cash payments during the year. The notes to the financial statements are an integral part of the financial statements and provide detailed information on accounting policies, investments, claims liabilities, and other relevant information. Condensed Financial Information: Comparative Condensed Statements of Net Position June 30, 2013, 2012, and Assets: Current Assets $ 14,753,768 $ 17,038,661 $ 30,686,518 Long-Term Investments 74,579,348 70,182,128 57,248,048 Capital Assets, net 4,322,044 4,535,031 4,777,632 Total Assets 93,655,160 91,755,820 92,712,198 Liabilities: Current Liabilities 16,728,320 14,928,771 17,193,117 Noncurrent Liabilities 62,266,133 62,145,252 57,732,917 Total Liabilities 78,994,453 77,074,023 74,926,034 Net Position: Invested in Capital Assets 4,322,044 4,535,031 4,777,632 Unrestricted 10,338,663 10,146,766 13,008,532 Total Net Position $ 14,660,707 $ 14,681,797 $ 17,786,164 Assets The Total Assets as of June 30, 2013 increased from the prior year by 2.1% or $1.9 million. The net increase was mainly due to the investment earnings and additional assets being funded to provide for coverage of the new claims year. The Group s investments, cash and cash equivalents position increased by 2.0%, to $86.6 million, compared to the prior year s position of $84.9 million. The Total Assets as of June 30, 2012 decreased from the prior year by 1.0% or $956 thousand. The net decrease was due to the return of equity growth/equity ($3.8 million), which was offset by additional assets being funded to provide for coverage of the new claims year, and a decrease in claims payments over last year due 4

45 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 partially to a drop in Compromise and Release settlements. The Group s investments, cash and cash equivalents position decreased in 11/12 to $84.9 million, compared to the prior year s position of $86.2 million. Liabilities The Group s liabilities and related claims expenses continue to be impacted by rising medical costs and indemnity benefits which are consistent with industry trends. The Group is self administered with the number of claims administered remaining relatively stable, although the average severity of each claim has increased mainly due to the rising medical costs and indemnity benefits. As a matter of policy, the Group determines its member contributions at a level to fund each year s claims at an 80% confidence level rather than at the low range of the actuarially acceptable rate of 70%. By funding at this increased level, an additional margin is created for the fiscal year and is reflected in the Net Assets. This margin, in addition to some of the Group s equity, has been returned in the past three years to assist our members during these difficult financial times. The Group s liabilities resulting from unpaid claims and claim adjustment expenses are based on actuarial estimates (performed annually) of the ultimate cost of claims, including future claim adjustment expenses that have been reported but not settled, and of claims that have been incurred but not reported. The latest actuarial estimate was as of June 30, Unallocated claim adjustment expenses, basically the Group s expected administrative expenses necessary in the future to complete the settlement of all remaining claims, increased the liability. Because actual claims costs depend on such complex factors as inflation, changes in doctrine of legal liability, and damage awards, the process used in computing unpaid claims and claim adjustment expenses does not necessarily result in an exact amount. For the fiscal year ending June 30, 2013 the total provision for claims incurred was $14.8 million compared to $15.1 million in the prior year and $18.1 million the year before that. The total payments on insured events during fiscal year 2013 were $12.1 million compared to $12.2 million in the prior year and $14.8 million the year before that. The Group changed providers for its excess workers compensation (reinsurance) from Schools Excess Liability Fund (SELF) to Safety National Insurance Co. ($5M in excess of $1M SIR) and National Union (AIG/Chartis) ($144M in excess of $6M) in fiscal year In Liberty Mutual was chosen to replace Safety National in the $5M excess of $1M layer. Safety National replaced Liberty Mutual in the $5M excess of $1M layer in fiscal year Beginning April 1 st 2011, Safety National was chosen to provide coverage of Statutory excess of $750k (reducing the Groups SIR). The decision was based on economics and stability of the carriers. SELF has assessed the Group for additional premiums resulting from adverse claims development costs for prior years in which the Group was covered for excess workers compensation insurance through SELF. The assessment from SELF for fiscal year was $3.8 million, of which $304 thousand was paid, with an additional $3.5 million due over the next 10 years, which has been recorded in the Group s financial statements. 5

46 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 Comparative Condensed Statements of Revenues, Expenses and Changes in Net Position For Years Ended June 30, 2013, 2012, and 2011 Operating Revenue: Member Contributions $41,668,746 $39,278,220 $40,126,570 Operating Expenses: Provision for Claims and Claims Adj. Expenses 14,789,387 15,084,946 18,118,628 Insurance Premiums and Assessment 22,776,434 23,817,790 25,389,388 Program Salaries and Benefits 2,067,385 2,022,172 2,002,028 Dividends Expense General and Administrative Expenses 2,511,874 2,467,968 2,538,438 Total Operating Expenses 42,145,080 43,392,876 48,048,482 Other Income: Investment Income 1,385,659 1,110,443 1,154,624 Change in Fair Value of Investments -930, ,154-24,034 Total Other Income 455,244 1,010,289 1,130,590 Increase in Net Position (21,090) (3,104,367) (6,791,322) Net Position-Beginning of Year 14,681,797 17,786,164 24,577,486 Net Position-End of Year 14,660,707 14,681,797 17,786,164 Revenues The Executive Committee establishes member district contributions each year. Each member district s contribution for the Workers Compensation program is based on their annual covered payroll multiplied by a base rate which is adjusted by the member districts experience modification factors (ex-mods). During fiscal year , the Board authorized member premium contributions of $19.2 million based on their estimated payrolls. The Group collected a net of $348 thousand more in premiums from the member districts after the final payroll figures were determined. Each member districts initial rate for the Health Benefits program was calculated by the insurer based on each districts respective merits and demographics. For renewals, future rate increases will be determined as a participant in a blind pool ; meaning that individual district experience will not be available and all districts will be rated together as a group. Six districts initiated the pool in October 2004, an additional district joined in January 2005, another district joined in October 2009, and another district joined in June For the fiscal year, the Health Benefit program generated $22.0 million in revenues. 6

47 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 The Group derives other income from various activities including strength testing for individuals offered employment with our member districts to determine appropriate fitness for the job to be performed, fees for reviewing medical bills for accuracy and compliance with negotiated rates and miscellaneous fees for services performed for our member districts, and Contra Costa County Risk Management. These revenues are not significant and represent under 1.0% of total revenues. Expenses Expenses decreased by $1.2 million over last year mainly due to a decrease in the Insurance Premiums related to the Health Benefits program of $1.0 million, and a decrease of $204 thousand in Workers Compensation expenses. Factors Bearing on the Future: SELF Assessment: As noted in our financial statements, the Group recorded a liability of $3.5 million for the assessments made by SELF. CCCSIG s approximate pro rata share of SELF s assessable deficit ranges between 7% and 8%. Based on the actuarial study as of June 30, 2012, SELF s undiscounted expected liability for the Workers Compensation program totals $136,166,000. If one considers SELF s ultimate liabilities at an 80% confidence level and not discounted, they rise to approximately $156 million according to the actuarial study noted above. Based on this information, the assessment to the Group has the potential of reaching over $12 million. If the Group were to become subject to an assessment of this size, the impact would be material but the payments would most likely be due over a period of many years which would minimize the impact to the Group and ultimately to member districts budgets. SELF Lawsuit: On June 11, 2004, the Group filed a lawsuit against SELF in Sacramento County Superior Court. This lawsuit was settled in July of The terms of settlement include: 1) Assessment computation will not include ceded insurance costs in any fashion 2) The pro rata share will be based solely upon member contributions to the pooled layer only 3) Neither total contribution (Denominator) nor the member contribution (Numerator) of the formula will be based upon the cost of the insurance purchased by SELF 4) Computation formula will be effective for any assessment computed after July 1, Additionally, SELF is to provide the Group a credit of $500,000 toward future assessments (see Note 5). The credit will be applied over not more than 15 years in equal amounts. Discount Rate: A discount rate of 2.89% was used for the actuary report as of June 30, 2013 and was also used as the basis for developing the fiscal year 2014 member premiums. This was ultimately adjusted to 2.79% for the claims liabilities as of June 30, 2013, due to the current investment market and short-term to mid-term market forecasts. With the assistance of the Group s investment manager, auditor, actuary and other public agencies, CCCSIG is responsible for determining this factor and periodically updating it as needed. A lower discount rate will result in increased liabilities. 7

48 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP MANAGEMENT S DISCUSSION AND ANALYSIS JUNE 30, 2013 Health Benefits Program: CCCSIG s Health Benefits Program with Blue Cross of California became effective October 1, 2004 with six initial member districts, a seventh district joined in January 2005, an eighth member joined in October 2009, with a ninth member joining in June Kaiser coverage was added as an option to the participating districts during the fiscal year. One objective of the Health Benefits Program is growth by adding additional member districts at renewal. A marketing plan has been established that includes obtaining quotes for a number of the non-participating districts in Contra Costa County and interested districts in other counties. Beyond the Health Benefits Program, there are other opportunities for program expansion which could be of great benefit to the Group s members in future years including dental and vision, property & liability, bill review services to other public agencies and adding out-of-area districts to the Workers Compensation program. 8

49 FINANCIAL SECTION

50 CONTRA COSTA COUNTY SCHOOLS INSURANCE GROUP STATEMENT OF NET POSITION JUNE 30, 2013 AND 2012 ASSETS Current Assets Cash and cash equivalents $ 9,543,141 $ 9,945,760 Investments maturing within one year 2,451,029 4,749,631 Interest receivable 374, ,652 Accounts receivable 1,335,712 1,043,010 Prepaid expenses 1,049,787 1,044,608 Total Current Assets 14,753,768 17,038,661 Noncurrent Assets Investments, less portion maturing within one year 74,579,348 70,182,128 Capital assets, net 4,322,044 4,535,031 Total Noncurrent Assets 78,901,392 74,717,159 Total Assets 93,655,160 91,755,820 LIABILITIES Current Liabilities Accounts payable 1,771,139 2,001,585 Accrued expenses 93,378 99,085 Deferred revenue 15,040 3,101 Current portion of assessment payable 348, ,000 adjustment expenses 14,500,000 12,500,000 Total Current Liabilities 16,728,320 14,928,771 Noncurrent Liabilities Unpaid claims and claim adjustment expenses 59,110,778 58,408,740 Assessment payable 3,155,355 3,736,512 Total Noncurrent Liabilities 62,266,133 62,145,252 Total Liabilities 78,994,453 77,074,023 NET POSITION Net investment in capital assets 4,322,044 4,535,031 Unrestricted 10,338,663 10,146,766 Total Net Position $ 14,660,707 $ 14,681,797 The accompanying notes are an integral part of these financial statements. 9