Fayette County Public Schools will have to pony up at least $3.1 million to help pay off a longstanding deficit in an insolvent school board insurance pool — the most of any school district in the state.
The school district will have to pay $867,789 this year, and the rest over the next five years, Superintendent Tom Shelton said.
The school system has set aside $2 million in its 2014-15 budget, but the bite will hurt, he said.
"It will be a fiscal impact that we hadn't planned on over the next five years," Shelton said. "Of course, we would prefer to be spending this money on students, but we were aware that a decision was pending, so we adequately budgeted to cover the amount that will be due this year."
Fayette County Schools aren't alone.
The Madison County district owes $1,229,661 to help offset the insurance deficit, according to estimates by the Kentucky Department of Insurance.
"That's $1.2 million that would be going toward our kids, our students in the Madison County Schools," Superintendent Elmer Thomas said. "That's the difficulty for us."
Like Fayette, Madison County plans to pay off the bill over time.
School districts all over Kentucky have to make similar payments to resolve the deficit in the Kentucky School Board Insurance Trust, a program that provided low-cost insurance to many of the state's school districts for workers' compensation coverage and insurance on school buildings.
The expense is coming at a time when many school districts face tight budgets.
Kentucky Education Commissioner Terry Holliday said that while being able to repay the money over time is a positive, in some cases "these costs come at a time where our school districts just don't have the funds."
"Some of our school districts are having to be conservative with hiring," Holliday said.
School officials have been aware of the looming hit since January 2013, when the Kentucky League of Cities, which operated the insurance trust, announced that the program would be dissolved and that participating school districts would be assessed to pay off the deficit.
Since then, most districts have budgeted money for that purpose.
Fayette County Schools had participated in KSBIT since 1979, shortly after the program was created to help schools meet their insurance needs through self-insured pools for workers' compensation, property and liability compensation.
KSBIT stopped offering insurance coverage in 2013 after incurring a $45 million deficit, said Ronda Sloan, a spokeswoman for the Kentucky Department of Insurance.
The state insurance department has taken over the KSBIT insurance programs and has placed them in rehabilitation to collect money owed by former participants.
An assessment plan has been approved in Franklin Circuit Court. Additional litigation also is pending that could affect the final amount owed.
The Fayette County board is expected to vote on how to pay its assessment at the regular meeting on Aug. 25, Shelton said.
Payments that individual districts owe are based on a formula that considers past claims, premiums, and the number of years they've been in the insurance program.
School districts and other education-related entities that were in the workers' compensation fund from 1990 to 2013, and those in the property and liability fund from 2007 to 2013, are subject to the assessment to eliminate the deficit, Sloan said.
Fayette's assessment amounts include $2,537,694 for the workers' compensation fund and $583,416 for the property and liability fund assessment, she said.
The Fayette Schools' total assessment of $3.1 million is the largest of any school system in the state, Sloan said. District officials have estimated that the final number could be even higher. The Fayette Schools were the largest participant in the KSBIT pool, Shelton said. Fayette now gets its insurance on the private market.
Last year, the Herald-Leader reported that, since 1990, all 174 school districts had been members of the insurance trust at one time or another. In 2013, there were 73 members in the workers' compensation section.
The assessment plan offers districts several payment options, ranging from paying in full by Aug. 31, 2014, to using a 20-year bond issue.
In 2009, the Kentucky League of Cities, an advocacy organization for city governments, took over operation of the insurance trust and lent the program $8 million, thinking that was the deficit. Jonathan Steiner said that after he became executive director of KLC in late 2010, he found that the amount was higher.
In November 2013, the Kentucky League of Cities Insurance Services filed a lawsuit against the state Department of Insurance, saying it was owed $8 million.
In May 2014, 12 cities joined the lawsuit. In addition, 88 cities have provided letters of support, KLC spokeswoman Terri Johnson said.
Herald-Leader reporter Jim Warren contributed to this article. Valarie Honeycutt Spears: (859) 231-3409. Twitter: @vhspears.