Kentucky's school districts are facing an unanticipated bill of $50 million to $60 million to pay off a longstanding deficit in a financially troubled insurance trust, a development that officials warn could bring cuts to classroom spending.
Fayette County Public Schools' payment of about $2 million could be the largest in the state.
The Kentucky School Board Insurance Trust provided low-cost insurance to most of the state's school districts for items such as workers' compensation and property. Under a plan devised by the trust's board and the Kentucky League of Cities, which has been operating the trust, the trust will be dissolved, and a bond will be issued to allow school districts to pay off the deficit over 20 years.
The exact amount owed by each school district is not known yet, because payments are based on a complicated formula that considers past claims and the number of years in the program. Those numbers will be announced in the next few weeks.
The new assessment deals another blow to school districts, which have endured several years without state funding increases and could face an additional $60 million funding cut in coming months as Congress tries to reduce federal spending.
"It couldn't be a worse time for it to happen," said Bill Scott, executive director of the Kentucky School Boards Association.
Fayette schools Superintendent Tom Shelton said the district could handle the financial hit, but it might be a bigger strain for other districts. He was scheduled to meet with the district's budget and finance committees Monday afternoon.
"We can certainly handle it," Shelton said. "But we'll have to look and see what makes the most sense. Do we want to take it out of our reserves, which takes away money that we may have set aside for other purposes, or do we want to pay it back over time through the bond sale? I'm asking our staff to look at that."
Fayette County has almost all of its insurance through the trust, including insurance on its vehicle fleet, its school properties and its liability insurance.
Although Jefferson County schools are bigger, its payment will be less because the district was self-insured for workers' comp, Scott said.
In 2009, the Kentucky League of Cities took over operation of the insurance trust, thinking it had a deficit of about $8 million. Closer examination found that the deficit was much higher, said Jon Steiner, executive director of the League.
The deficit has been compounded by rising medical costs, fewer members and tornado damage that affected several districts in recent years. About 45 percent of the insurance trust's costs are due to "slips, trips and falls" by school employees.
"It's a difficult situation, but it's one that needed to be solved," Steiner said.
Assessing school districts for the deficit was the fairest solution because it would take into account the number of claims and the length of time districts used the program, Steiner said. 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.
"I don't think anyone should be surprised there's going to be an assessment," Steiner said.
The 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' comp 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.
"We hope that doesn't happen," Scott said, calling that his "worst fear."
Garrard County Schools hasn't participated in the insurance trust pool for about four years, but Superintendent Donald Aldridge said he fears the district could be assessed for its earlier participation.
Aldridge speculated the assessment could be $200,000 to $250,000.
"You just don't lose that amount of money without it having an impact," he said. "It would affect future programs that could be implemented. From what I'm hearing, KDE (the Kentucky Department of Education) is not going to bail them out, and the legislators are not going to offer assistance to them."
In a statement issued Monday, Kentucky Education Commissioner Terry Holliday said he was concerned about the planned assessment, which he called an "unfunded mandate." He said the education department was "monitoring it closely."
"I am always concerned about situations that have the potential to hinder the education of Kentucky's children," Holliday said.
Aldridge said Garrard County started putting its insurance business out for open bids about four years ago, and it now buys insurance through Ohio Casualty Insurance. He said that has saved the district money.
Jessamine Superintendent Lu Young said her district was in the same boat. The district stopped participating in the pool about nine years ago, but it could face an assessment for its participation in earlier years.
"This is troubling in our position," she said. "Things come at you from all directions, and that there could be some undisclosed liability like this out there that you're not even aware of makes you kind of shaky."
Madison County Schools Superintendent Tommy Floyd said his board already was making plans to put its insurance needs out for open bids starting next fiscal year.
"We're going to do our best to make sure this situation has the least impact on our kids as possible," Floyd said. "However, it seems extremely difficult at this point."