Auditors flag Laf. schools reserve fund

The Lafourche Parish School Board six months ago had $9.5 million in its insurance reserve fund, which if maintained “might be considered excessive” by federal standards, according to an audit of the board published last week.

Auditors from the contracted Baton Rouge-based accounting corporation Postlethwaite and Netterville recommended the board monitor the health insurance fund and take steps to reduce the balance, lightly suggesting that employer and retiree premiums be decreased or kept steady.

The audit, which examined the 2013 fiscal year, further uncovered an instance of the school system violating bid-contract regulations related to a federal grant for students with special needs. Additionally, auditors indicated that the system’s unfunded insurance liability – estimated at $155.5 million – might skew on the lower end of accurate.

Lafourche Parish School System Business Manager Don Gaudet attributed the insurance fund balance to a period of “good claims cost experience” that began in 2009-10. He is leery of changing the board’s self-funded health plan because of cost uncertainty attached to the full rollout of Affordable Care Act regulations. The plan’s cost has increased by 7 percent per year on average since its inception.

“The current plan is to keep contribution rates the same for the foreseeable future,” Gaudet said via email “If this is done and if the Plan experiences a 7 percent growth in claims costs for the next three years, the balance will be within federal guidelines by the end of fiscal year 2015.”

The reserves are attached to the board’s self-funded health insurance plan, created for the 2002 fiscal year with a $2 million board investment to give the fund working capital.

In October 2011, board members increased premiums by 5 percent for active and retired employees, amending its health insurance plan to accommodate a reported $900,000 funding shortfall. Retirees initially saw their rates jump by 10 percent, but the board halved the amount after outcry. Deductibles for prescription drugs rose by 50 percent, and co-insurance on outpatient lab and X-ray benefits dropped by 10 percent. The board also began recommending the use of generic drugs.

At the time, the reserve fund was roughly $7 million. Gaudet said two and a half years ago the buffer was needed in the event enrollees’ claims exceeded seven figures, as has happened in the past, and that the retirees’ 2011 reprieve would be subsidized with $30,000 out of the reserve fund. Still, the fund grew by $2.5 million over one fiscal year.

Should the balance remain high according to federal standards, the board could opt to transfer the money into a prospective Retiree Health and Life Insurance Trust Fund.

Such a fund would be used solely to pay for retiree health and life insurance, and contributions to it would draw down on the $155.5 million the system currently reports in unfunded health insurance liability, a subject also questioned in the audit.

Unfunded liability is the amount of future necessary spending in excess funds present-day funds. In this instance, it is calculated to include payment for retirees’ health insurance until every one in the current system – and has thus been promised retiree insurance – is deceased, Gaudet said.

Among the many variables the board’s actuary uses to calculate the unfunded liability is an expected rate of return on investments – the lower the interest rate used, the higher the unfunded liability.

Gaudet said the school system’s actuary has used an interest rate greater than other agencies Postlewaite and Netterville have audited, so it was flagged. The auditors asked system officials to review it and other underlying assumptions made in the formula.

A recalculation is required every two years. A group that will include a representative of the auditing firm will work to determine unfunded liability this spring, Gaudet said.

The third element auditors flagged concerned the process by which agencies ensure competitive prices when they contract services.

Federal regulations require public bodies to use a sealed-bid process to spend federal funds in excess of $100,000. The Lafourche Parish School Board spent $150,000 in Individuals with Disabilities Education Act funds without publicly soliciting bids to gage pricing, according to the audit.

The contract, which for the third year was given to the Houma-based nonprofit Options for Independence, “provides services to students with disabilities who are in high school to help those students with their transition to the work place,” Gaudet said. “The services were properly obtained according to state law and board policy but not according to federal regulations.”

Dr. Charles Michel, the system’s supervisor of special education curriculum, said the department thought informal bid policies applied because Options offers specialized services and is a nonprofit.

Auditors said formal practices should have been applied and the system’s organizational structure should be realigned to ensure competitive bid policies are followed.

Board management agreed with that assessment and said it would rectify the problem.

“It was an honest oversight,” Michel said.