News Column

Red ink leads to state probe of school insurance

April 30, 2014

By Joseph Ryan and Diane Rado, Chicago Tribune

May 01--Troubling events began unfolding last fall in the arcane world of public school insurance: red ink, questions over loans and an unprecedented visit by state examiners to one of Illinois' largest insurance pools for school districts.

The regulators showed up at the high-rise Chicago office demanding to look at the pool's books. Insurance executives refused.

The standoff has snowballed into a legal fight with the state. Meanwhile, school districts now find themselves on the hook for about $9 million to cover pool deficits, the Tribune has found. At the core of the controversy is the little-regulated but lucrative industry of school insurance pools largely funded by taxpayers.

Close to 200 districts are in the pool to help cover claims for school employees hurt on the job. Under the rules, most of those districts, and some former members, will have to chip in to cover the deficits -- a hardship now as budgets run low toward the end of the school year.

"I feel that we have been blindsided," said DJ Skogsberg, superintendent of the one-school Taft School District 90 in Lockport. "I don't have any money to pull out of thin air."

The pool, called the Workers' Compensation Self-Insurance Trust, sent letters about the bills earlier this month. The amounts for each district are still being tallied, but pool officials said the tabs could run as high as hundreds of thousands of dollars, depending on district size and other factors. The average bill is expected to be $36,000.

Pool officials say deficits are simply part of the cyclical nature of a costly and hard-to-predict business. They said they held off as long as they could before charging districts more, and they expressed surprise at the state's probing.

It's not clear what, specifically, stirred the Illinois Department of Insurance to put a laser focus on the pool, called WCSIT for short, and what examiners expected to find. The department has declined to discuss the issue.

But the Tribune reviewed 10 years of the pool's financial reports and other records, finding that:

--WCSIT posted deficits three years in a row, ballooning to $7.24 million in the last fiscal year, the largest in at least a decade. The state also questioned the pool's accounting of two $2 million loans, which bolstered its bottom line. The pool was ultimately forced to report higher deficits.

--The pool's membership has plummeted, from 365 districts in 2003 to 193 in 2013, draining the chief source of revenue: contributions from districts. Meanwhile, two school organizations that endorsed the pool continued to get five- to six-figure "royalties" for their sponsorship. Last month, one of the organizations decided to drop its sponsorship.

--The pool's refusal to turn over documents to the state has prompted a stern rebuke. One Insurance Department lawyer wrote in a letter that the refusal "has created a high level of concern" about the business conduct of the pool's managing company.

Pool lawyers say they don't believe regulators have the authority to examine the pool's books. In a letter to the state, one attorney called the state's efforts unprecedented and accused the state insurance director of "trying to bully" the companies that run the pool.

Pool board member Roger Eddy is a former lawmaker and downstate school superintendent who heads the Illinois Association of School Boards, a pool sponsor.

Eddy said he supports WCSIT, in part, because "it provides an important option for school districts." But he said he understands the frustration of school officials who got a letter this month saying bills were on the way.

"If I would have gotten a letter at this time of year, I would have been upset," Eddy said. "Now, hopefully after I calmed down, I would have understood the factors involved."

'Propaganda' warnings

Staff salaries make up most of school district budgets. But insurance, from health to property and casualty to workers' compensation, is also a big-ticket item. For example, Burr Ridge-based School District 181 and Glenview School District 34 were both billed almost $300,000 for premiums by WCSIT this year, while Oswego'sSchool District 308 is paying nearly $1 million, records show.

Workers' comp covers medical bills and other expenses when employees get hurt on the job, from employees falling to getting injured while helping young athletes.

Governments can save money on such insurance by joining together in pools that share the burden of covering claims. There are more than 40 government pools in Illinois that handle various kinds of insurance, but only a handful deal with workers' compensation for school districts. For more than 30 years, WCSIT has been a leading pool for schools in Illinois. It is a government cooperative overseen by a board of school officials and has long been run by a web of for-profit companies led by veteran insurance executive James Sandner. Management fees to administer the pool have ranged from about $1.1 million to $1.4 million a year for the last decade, according to financial reports.

The majority of WCSIT's districts are downstate, but about two dozen are in the Chicago region, including several large districts.

Competition has been increasing from other government pools as well as private companies such as Mesirow Financial, which has been making inroads in the insurance business for educators, according to school districts.

Last summer, WCSIT sent a letter warning districts against buying into "propaganda created by competitors." The letter said the unnamed competitors "would want you to believe" that WCSIT and an associated pool were "bankrupt."

While officials say current claims are being paid, the pool's mounting deficits mean it does not have enough money on hand to pay all future claims.

Jenny Emery, director of the national Association of Government Risk Pools, said deficits -- particularly for costly workers' comp claims -- are not unheard of, but they make budgets unpredictable for districts that have to cover shortfalls.

In the fall, the state's chief insurance examiner sent a letter to a WCSIT attorney questioning the budget year 2012 deficit and a $2 million loan -- borrowed from a Sandner-related company -- that was reported in a way that made the pool's bottom line look better. The pool reported a deficit of $4.2 million, but the insurance department said it was $6.2 million.

The pool's manager, James Woodard, president of the for-profit Sandner Group, said acceptable accounting methods were used.

On Oct. 21, over the protest of pool executives, two examiners hired by the state showed up at the Sandner Group's 37th-floor office on Wacker Drive. They were backed by a "financial examination warrant" issued by the Insurance Department's director that allowed them to "examine the business and affairs" of the companies that run the pool.

The state wanted a litany of documents, from investment and bank statements to cash flow projections, insurance agreements and marketing materials, records show.

"I thought, 'What is this all about?'" Woodard later told the Tribune.

When the examiners left that day without the records, the state followed up with another financial warrant. By month's end, WCSIT and several Sandner-related companies filed suit in Cook County to block the state and ask a judge to determine if the insurance department had such authority. The suit is ongoing.

Pool attorney Dean Conlin said the state's push to pore over records is highly unusual. WCSIT isn't trying to hide anything, he said; it is taking a stand against what it views as an overreach by regulators. Money is also at issue because the pool's manager has to pay for the financial examination.

The Insurance Department has long had clear authority to regulate private insurance companies, like those that sell home or car insurance to the average person. But self-insurance pools for governments are a different animal and for years operated with little state oversight.

But then a major pool for school districts in Kentucky rocked the industry when its deficits ballooned to the point that the state insurance department had to step in and take it over last year.

Around the same time the Illinois Insurance Department prodded lawmakers to pass legislation that gave it more authority over self-insurance pools. The law took effect Jan. 1 -- after WCSIT's legal fight started with the state. It is unclear what effect the new regulations will have on that dispute.

"If these pools go belly up, it's back on the taxpayers to pay these claims," said state Sen. John Mulroe, D-Chicago, who sponsored the legislation.

This year, Mulroe said, there's been lobbying to scale back the Insurance Department's authority over pools. In fact, a bill was filed to do just that, but it has stalled.

The department declined to discuss WCSIT and its lawsuit. A spokeswoman issued a statement saying the department backed last year's legislation for more authority because it protected "consumers in these pools and the taxpayers who are responsible for funding them."

Bills and confusion

With all the controversy swirling, one of WCSIT's two sponsors -- the Illinois Association of School Administrators -- decided to back out late last month.

Executive Director Brent Clark said he reviewed his group's business relationship with WCSIT and "no longer believed it was suitable" based on "a combination of elements that emerged over the last couple months."

That would have been during the time WCSIT's numbers were under scrutiny and the pool filed its lawsuit.

With few exceptions, school districts interviewed by the Tribune said they had no idea of the turmoil.

In south Cook County'sWest Harvey-Dixmoor School District 147, business manager Tonisha Sibley said, "We don't have a clue." She said any additional bills -- the district paid $111,672 this year in premiums -- at this point "would be devastating for us. ... We couldn't afford it."

Richland School District 88A in Will County was aware of some of WCSIT's troubles because school officials were price-shopping for insurance several months ago, said Supt. Michael Early. The district ultimately dropped WCSIT.

"There were some questions there, but we did not have a lot of answers," Early said.

WCSIT's April 1 letter asking for a "supplemental contribution" from districts allows for an interest-free payment plan of three yearly installments, with the first payment due June 15.

Such assessments are not uncommon. WCSIT imposed $4.5 million in special assessments in 2004-05. Other pools in Illinois also have charged assessments, including the Collective Liability Insurance Cooperative, a WCSIT competitor that issued a $5.5 million assessment this year.

Woodard, of the Sandner Group, said WCSIT's assessment of about $9 million is enough to bring the pool back into the black. The deficit stems from claims in 2008 and 2009 that cost more than expected, so districts in the pool during those years are getting the bills.

Several large WCSIT districts in the Chicago area don't have to pay extra because they're in a different type of self-insurance category. Those include Plainfield'sDistrict 202 and East Aurora School District 131. District 181 in DuPage also doesn't have to pay more because it joined the pool after 2009, records show.

In tiny Taft School District 90, Skogsberg, the superintendent, said his district is now looking for new insurance. The district's premium for WCSIT was about $24,000 this year. Meanwhile, he doesn't expect to pay WCSIT's assessment until after the school budget year ends June 30.

"They're not getting a dime until after July 1," he said.

Overall, "I am very freaked. I'm a one-building district. I can't imagine what other districts are like," Skogsberg said. "(The assessment) is definitely going to kick all of our butts. It's crazy."


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