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HomeMy WebLinkAboutStaff Report 2507-4955CITY OF PALO ALTO Finance Committee Regular Meeting Tuesday, October 21, 2025   Agenda Item     1.Review Risk Management and Insurance Program, Including Funding Status of the General Liability Fund and Recommend the City Council Approve Amendments in the FY 2026 General Liability Fund Budget; CEQA Status - Not a Project Staff Presentation Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: October 21, 2025 Report #:2507-4955 TITLE Review Risk Management and Insurance Program, Including Funding Status of the General Liability Fund and Recommend the City Council Approve Amendments in the FY 2026 General Liability Fund Budget; CEQA Status - Not a Project RECOMMENDATION Staff recommends that the Finance Committee review the report and recommend the City Council amend Fiscal Year 2026 Budget Appropriation for the General Liability Fund within the Mid-Year Report. EXECUTIVE SUMMARY For more than 40 years, the City has managed liability risk by participating in the Authority for California Cities Excess Liability (ACCEL) risk pool. This shared pool approach, supported by the City’s low number of claims and strong funding practices, has helped maintain a balanced budget, even when a few larger claims arose. Careful cost control and responsible planning continue to protect the City’s General Fund, public services, and capital projects. Today, public agencies, especially those that operate utilities, face challenges such as rising costs, large court verdicts, and a decline in insurers willing to take on their risk. These challenges have prompted risk pools like ACCEL to raise insurance premium deposits for member cities to fund higher reserves for future claims against them.1 Member cities, such as Palo Alto, are also seeing an increase in the exposures the City must insure due to its payroll growth, and how these factors affect insurance costs.2 Furthermore, the City’s broker estimates insurance costs will continue to rise 15–25% each year through FY2028. These sustained increases may push annual costs to over $9 million for excess liability insurance in the General Liability Fund. 1 Reserves are money that is set aside to pay for insurance claims that have already happened but are not fully paid yet or claims that may still be reported in the future. 2 Exposures are the people, property, or activities that could be harmed or cause a loss, and that an insurance policy protects. To prepare for these rising costs, City staff will: Propose using available fund balances to offset Fiscal Year 2026 increased expenses and keep enough reserves for future claims; and Propose a 20% increase in revenue and expenses for the General Liability Insurance Fund for Fiscal Years 2027 and 2028 within the Long Range Financial Forecast. Propose rebalancing the Workers’ Compensation and General Liability Funds to help offset the projected 20% increase in liability costs and support future budget sustainability across all funds. Continue following actuarial guidelines to maintain appropriate reserves to fund liability and workers compensation claims. BACKGROUND The City of Palo Alto runs a comprehensive risk management and insurance program to protect City employees, property, and public funds. Under the municipal code, the City Manager has the authority to obtain and maintain insurance coverage.5 The City follows a careful and conservative approach to funding its General Liability Insurance Fund. For the past several years, the City has maintained a funding level of 85%. This is the top recommended range for public entities. Because Palo Alto is a full-service city with its own electric, gas, water, wastewater, and fiber utilities, it faces more risks than most cities of its size. To manage this, the City has been a member of the ACCEL risk pool for over 40 years. ACCEL is a risk pool, also known as a joint powers group, which was formed in the 1980s when insurance was expensive and difficult to obtain. By pooling liability risk with 12 other cities, the City can share costs, gain more stable coverage, and use collective buying power in the insurance market.6 This model has consistently provided the City with broader protection and lower long-term costs than if it purchased insurance alone. Importantly, when the City recently experienced two larger claims, ACCEL covered the costs above the City’s self-insurance, thereby allowing the City to avoid using additional city funds. To help run the risk pool and guide member cities, ACCEL works with Alliant Insurance Services. Alliant Insurance Services serves as the administrator for ACCEL—the board of 13 cities votes on this role. Alliant helps run the program, manages brokerage services, and provides expert advice on renewals and coverage. Alliant also helps the pool buy excess liability insurance from the commercial market.7 This partnership enables ACCEL and its members to strike a balance between sound financial protection and affordable costs, while addressing the challenges of 5 Palo Alto Municipal Code 2.28.170 Insurance - https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-61670 6 ACCEL member cities are Anaheim, Bakersfield, Burbank, Modesto, Monterey, Mountain View, Ontario, Palo Alto, Salinas, Santa Barbara, Santa Cruz, Santa Monica, and Visalia. 7 Excess liability insurance is extra coverage that pays after regular insurance is used up, helping protect against very large claims or lawsuits. public sector insurance. While ACCEL and Alliant focus on regional risk-sharing, the City also organizes its own risk management responsibilities within its departments. ANALYSIS City Risk Management 11. Above that, the City participates in the ACCEL risk-sharing pool with 12 other cities, which provides an additional $9.0 million in coverage. Through ACCEL and commercial insurance companies, the City maintains an additional $55.0 million in excess liability insurance. The City has a total of $65.0 million in liability insurance. 11 General Liability covers accidents and incidents that result in bodily injury, property damage, medical expenses and personal/advertising injury; SIR means the City chooses to retain the risk, rather than transfer it to an insurance company, which would be very costly. $70.0M $65.0M $65.0M $60.0M $60.0M $55.0M $55.0M $55.0M $50.0M $40.0M $30.0M $20.0M $15.0M Excess Insurers Layer #1 Excess Insurers Layer #1 Excess Insurers Layer #1 Excess Insurers Layer #1 Excess Insurers Layer #1 Excess Insurers Layer #1 $10.0M $5.0M $1.0M 2021 2022 2023 2024 2025 2026 Fiscal Year Fiscal Year ACCEL Pooled Layer City Self-Insured Retention Excess Insurers Additional Layers Av a i l a b l e L i m i t s o f L i a b i l i t y Table 1: Historical Limits of Liability Insurance available to the City through different layers ACCEL Pooled Layer ACCEL Pooled Layer ACCEL Pooled Layer ACCEL Pooled Layer ACCEL Pooled Layer Excess Insurers Additional Layers Excess Insurers Additional Layers Excess Insurers Additional Layers Excess Insurers Additional Layers Excess Insurers Additional Layers This layered strategy effectively covers the types of claims the City typically faces. Most claims are handled well within the City’s $1.0 million retention, pooled coverage and excess insurance. By maintaining $65.0 million in total coverage, the City balances the need for financial safeguards to avoid excessive costs associated with rare, catastrophic claims. This approach protects the City’s various funds, including the General and Enterprise Funds, while supporting the long-term stability of a full-service city. 13. For earthquake risk, the City pays the first $1.0 million of damages but does not buy separate earthquake insurance, as the cost is high and the coverage is limited. Additionally, the City carries $50.0 million in Airport and Terrorism insurance, $2.0 million in Pollution and Foreign Travel insurance, and $1.0 million in Crime insurance14. These additional insurance coverages are standard for local governments, providing protection for critical services and addressing risks such as property damage, cyber incidents or specialized exposures. 13 Cyber risk is the chance of hacking, data theft, or system damage; Business interruption insurance helps replace lost income and pay expenses if a disaster forces the City to close and pause services temporarily; Breach response is fast action to handle and fix a data hack. 14 Foreign travel insurance protects city staff and council members when they travel abroad to a sister city, covering emergencies like illness, accidents, or lost belongings. Table 2: Insurance coverage limits carried by the City in Fiscal Year 2026 $1.5B $1.25B $1.0B $500.0M $250.0M $100.0M $65.0M $65.0M $50.0M $50.0M $50.0M $10.0M $5.0M $4.0M $3.0M $2.0M $2.0M $2.0M $2.0M $1.0M $1.0M $1.0M $0 General and Excess Liability Automobile Liability Property Cyber Liability Earthquake Pollution Liability Crime Terrorism Foreign Travel Airport Fiscal Year Co v e r a g e L i m i t s Insurance Coverages While the City maintains broad insurance coverage, it must also navigate external market forces that are driving up costs and reshaping how all public agencies manage risk. Risk Management and Current Trends 17. 18. For Fiscal Year 2026, the Board voted to maintain higher reserves given the economic landscape at the time. All of the reserve increases have kept the ACCEL pool financially stable; however, they have also inevitably increased insurance premium costs for each member city. Alongside these broad trends, the City’s own claims history and payroll size also influence its share of costs. 19 . The City’s ex- mod has remained below 1.0 for many years, ranging from 0.80-0.86. This is lower than the national average and one of the lowest in the ACCEL risk pool. A low ex-mod shows that the City’s strong safety and risk management practices are effective. 17 “Nuclear verdicts” are court cases where the jury awards more than $10 million, or where settlements are far higher than the actual damages - The Rise of “Nuclear” Outcomes in Public Entity Civil Liability Actions 18 An actuary is a professional who studies data and risk to predict how likely certain events are and how much they might cost. The City and ACCEL rely on actuaries to determine how much money to set aside for future claims, so they stay protected and the budget in balanced. 19 The Experience Modification Rate is a factor that increases or decreases general liability insurance premiums, based on the City‘s claims history. Below 1.0 means claims are lower, therefore insurance costs are lower. Above 1.0 means claims and costs are higher. Only in the last three years has the City faced two large claims, resulting in higher insurance costs. These costs are applied through assessment fees23. The City was allocated $230K in assessment fees for Fiscal Year 2026. Early forecasts show sustained increases in allocated assessment fees over the next two fiscal years. 24. Currently, the City has the third largest payroll in the ACCEL pool, mainly due to the City operating its own utilities. This means the City has more staff than many other cities of its size. In Fiscal Year 2026, payroll grew by more than 20% due to cost-of-living adjustments and staffing increases. Recruitment process improvements resulted in filling vacancies and a corresponding increase in payroll expenses. This growth raises both the City’s exposure and its share of insurance costs. FISCAL/RESOURCE IMPACT In Fiscal Year 2026, the General Liability Insurance Fund started with a $2.2 million balance after setting aside $5.1 million for excess liability insurance costs. However, the actual cost for Fiscal Year 2026 was $1.5 million higher, increasing the total excess liability insurance costs to $6.6 million. To offset this increase, City staff recommends: Preparing for a 20% yearly increase in excess liability costs through FY 2028. A 20% yearly increase for Excess Liability insurance is derived from what the City’s insurance broker and municipal risk pools are currently seeing across California. Recent renewals for cities of similar size have shown premium increases ranging from 15% to over 25%. By using 20%, we are aligning with those current market trends and choosing a conservative approach with the goal of “avoiding a shortfall” or “achieving a balanced budget”. Using available fund balances to cover increased insurance expenses in Fiscal Year 2026. Staff recommends appropriating $0.9 million from the General Liability Fund Ending Fund Balance to increase funding for liability claims to $1.5 million as part of the FY 2026 Mid-Year Review to fund up to the first $1.0 million of each claim through its Self- Insured Retention (SIR) and cover the costs of a settlement that is anticipated to be paid out in FY 2026. The remaining fund balance in the General Liability Insurance Fund would be approximately $1.2 million. Following actuarial recommendations for reserves to pay for future claims within the City’s Self-Insured Retention layer. 23 Assessments are additional payments the city must make to its insurance pool, ACCEL, when the cost of claims exceeds expectations. These fees help cover the gap so that all claims can still be paid. 24 See footnote 2 The projected excess liability expenses, as shown in Graph 1 below, may impact the long-range financial forecast (LRFF) and will be incorporated into the upcoming LRFF development. Prior forecasts reflected an average increase in excess liability expenses of 5%. STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW APPROVED BY: Lauren Lai, Administrative Services Director paloalto.gov Review Risk Management and Insurance Program ​October 21, 2025 Finance Committee​ OVERVIEW City Risk Management Liability Risk is effectively managed through: •Layered self, pooled, and commercial coverage •Low claim frequency and severity •Strong funding practices Insurance Premium Outlook 15–25% annual premium increase expected •Hardening liability insurance market •Higher claim reserve requirements •Filling staff vacancies increases insurable exposures Addressing increased premiums Strategic Response •20% annual fund adjustment proposed •Use fund balance strategically and prudently •Cross-fund rebalancing to stabilize costs 2 BACKGROUND The City: Runs a comprehensive risk management and insurance program Protects City employees, property, and public funds Follows a careful and conservative approach to funding Faces higher-than-average risks being a full-service City 3 BACKGROUND Share claims costs Procure stable coverage Increase collective buying power in the insurance market Strong underwriting profile Cost-effective purchase of coverage Expert guidance on renewals and trends To manage risk effectively, the City has been: Both ACCEL risk pool and Alliant provide many benefits to the City: A member of the (ACCEL) risk-pool program since 1986. A partner with Alliant Insurance Services for 25 years. 4 BACKGROUND •ACCEL is a mid-size JPA covering over $1.7B of California payroll.•ACCEL includes geographically diverse members across California.•Each ACCEL member is of comparable size and operational scope. Modesto Anaheim Monterey Bakersfield Mountain View Burbank Palo Alto Ontario Salinas Santa Barbara Santa Cruz Santa Monica Visalia 5 ANALYSIS City risk management strategy: •For FY26, The City obtained a total of $65M of layered liability coverage. •$65M is the highest limit available. •This ensures strong, cost-effective protection for all utility operations. $65.0M Excess Excess $60.0M Excess Insurance Insurance $55.0M Excess Excess Excess Insurance Layers Layers $50.0M Insurance Insurance Insurance Layers $45.0M Layers Layers Layers $40.0M $35.0M $30.0M $25.0M $15.0M $10.0M $5.0M Pooled Layer $1.0M 2021 2022 2023 2024 2025 2026 Fiscal Year City Self-Insured Retention Layer Av a i l a b l e L i m i t s o f L i a b i l i t y Layered approach of Coverage Limits Pooled Layer Pooled Layer Pooled Layer Pooled Layer Pooled Layer Fiscal Year 6 ANALYSIS The City maintains a broad range of insurance coverages designed to protect City operations from exposures typically faced by public entities. $1.25B $50.0M $50.0M $2.0M $2.0M $2.0M $1.0M 7 ANALYSIS Several key components determine the City’s liability insurance costs. Risk Management and Current Trends: Payroll Claims History Claims Rate (Ex Mod) Market Conditions Reserve Level Cost of Liability Insurance 8 ANALYSIS Some liability insurance cost components have been favorable to the City Claims History •Consistently low frequency/low severity claims •Some years of zero claims •Strong safety practices and effective risk management Claims Rate (Ex-Mod) •Low rate of 0.80-0.86 •15-20% better than the national standard •Earns the City discounts on premiums 9 ANALYSIS Three main components affecting City Insurance Premiums in FY2026: Payroll Reserve Level Market Conditions •20% increase from FY25-FY26 •Payroll increase due to concerted effort to fill vacancies •85% at City level •Modified reserve strategy for risk pools •Hard Insurance Market •Diminished insurer capacity •Major lawsuit verdicts 10 FISCAL IMPACT ($, in millions) Starting Fund Balance 2.1 Adopted Insurance Cost 5.1 Actual Insurance Cost 6.6 Variance 1.5 Reallocation in Fund 0.6 Appropriation from Fund Balance 0.9 Total Funding Adjustment 1.5 Estimated Ending Fund Balance 1.2 The impact on the FY2026 General Liability Insurance Fund was a variance of $1.5M. To offset this variance, funding adjustments are proposed for consideration: 11 FISCAL IMPACT Excess Liability Insurance costs are projected to reach over $9 million in FY2028. Fiscal Year 12 STAFF RECOMMENDATION Staff recommends that the Finance Committee review the report and recommend the City Council amend Fiscal Year 2026 Budget Appropriation for the General Liability Fund within the Mid-Year Report. 13