Before the Kentucky School Board Insurance Trust went belly up last month, it paid millions of dollars in royalties to the Kentucky School Boards Association, which administered the trust and used the profits to subsidize its own programs for decades.
Since 1997, the insurance trust paid KSBA almost $7.5 million in royalties and management fees. Officials said they can't track payments made before then, but because the trust started in 1979, the totals could be millions more.
The subsidies helped the school boards group keep membership dues low and provide services for member districts, but that's not much consolation to school boards that were recently informed that they have to find as much as $60 million to pay off the insurance trust's deficit.
Wayne Young, director of the Kentucky Association of School Administrators, said he has received a steady stream of calls from local district officials who expressed reluctance to pay their estimated share of the deficit.
"I can't help but think this news will make them more reluctant," Young said. "They are concerned they don't have enough details and don't know how it was calculated. They're adopting a wait-and-see attitude."
Knott County Superintendent Kimberly King said "it's very scary to think of what's going to happen" as the district tries to come up with an estimated $1.1 million to pay its portion of the trust's deficit.
Her district has fewer than 3,000 students, and it dropped the insurance trust four years ago to get cheaper rates from another workers' compensation insurer. Still, it is one of eight school districts projected to owe the trust more than $1 million because of the number and severity of workers' comp claims.
Fayette County Schools owe an estimated $2.8 million, by far the largest amount of any school district in Kentucky.
The KSBA started decreasing its royalty subsidies from the insurance trust in 2005, when the trust started to lose money, said executive director Bill Scott, who joined the organization that year.
"My biggest challenge since 2005 has been to reduce the dependency on insurance revenue and also protect the core services of KSBA," Scott said. "We weren't as self-sufficient as we should have been because it was subsidized to a certain degree by these royalties."
The association's reliance on insurance royalties was a common arrangement for such organizations. According to a survey by the National School Boards Association in 2012, the KSBA was among 25 such associations that relied on financing from insurance programs. Many of those self-insured pools were set up in the late 1970s, when it was difficult for public entities to obtain insurance.
Insurance royalties to KSBA had been cut out completely by 2010, when management of the insurance trust was moved to the Kentucky League of Cities. The League agreed to infuse $8 million to keep it afloat, and about 30 people who worked for the insurance program were laid off. However, KSBA received $800,000 from the trust for management and marketing fees between 2010 and 2013.
The more experts examined the trust, the less healthy it seemed, said Jon Steiner, the League's director. That was mostly because the cost of many claims had been estimated to continue for several years, but not a lifetime. Many workplace injuries, however, require claims to be paid out for the duration of someone's life.
The recalculations meant the trust's deficit is closer to $27 million, plus the $8 million that must be paid back to the League. Adding to that $35 million are the costs required for a company to take charge of the debt. Those negotiations are continuing.
Scott and Steiner said it's not clear why previous leaders of the insurance trust and the KSBA did not recognize the trust's financial problems.
"Based on information available to KSBIT management at the time, they made decisions based on what the numbers were," Steiner said. "However, whenever there was an opportunity to build surpluses and charge higher rates, they chose to meet the competition and kick the can down the road."
Former KSBA executive director David Keller was not available for comment.
Steiner has said that charging school districts for the deficit is the fairest solution because it takes into account the number of claims and the length of time districts used the program.
Since 1990, all 174 school districts have been members of the insurance trust at one time or another. Today, there are 73 members of the workers' compensation section of the trust.
The League's plan calls for the trust to be dissolved in June or July. Past liabilities will be taken over by a reinsurance company, and schools will have to find workers' compensation and property insurance on the private market. Because the trust kept prices low, switching to the private market could result in higher premiums for school districts in addition to the assessment.
A statewide bond issue could be used to pay the debt, allowing school districts to make payments over several years.
Education Commissioner Terry Holliday has expressed concern about the plan, and state Insurance Commissioner Sharon Clark said in a statement that she was keeping a close eye on the matter.
"We are certainly sensitive to the financial strains being placed on school districts," Clark said. "Our primary objective is to make sure the injured workers who rely on this fund are protected and receive the necessary payments and medical care. We continue to work with the parties to explore all options, including the bond issue, to lessen the impact on members."
Scott has said repeatedly that he hopes the final assessment will be less than what's predicted.
"The assessment couldn't come at a worse time," Scott said. "We're doing everything we can to make sure that every possible cost is scrutinized and, if possible, eliminated."
Madison County Superintendent Tommy Floyd said he is taking a wait-and-see attitude about his district's predicted $1 million bill as the district puts together its $70 million annual budget.
"If it's any amount, it's another example of the daunting challenges we all face," Floyd said, citing cuts in state funding and the possible federal sequestration that could cut millions of dollars to Kentucky schools. "These kinds of sweeps always hurt the children who need it most."
10 highest deficits
Kentucky school districts with the highest estimated insurance deficit assessments
Linda Blackford: (859) 231-1359. Twitter: @lbblackford.