Judgment and Claims Fund to get better management

This afternoon the Council held a discussion on a persistent nuisance in the city budget: the Judgment and Claims Fund. After the Council directed the City Attorney’s Office and the City Budget Office last fall to come up with a better plan for how to budget and manage the fund, they presented four key recommendations today for how to do just that.

As I’ve explained previously, the Judgment and Claims Fund is an account used by FAS and the City Attorney’s Office to pay off legal claims filed against the city, court rulings against the city, and settlements of claims and lawsuits. The fund is also used sometimes to pay for external legal assistance where the City Attorney’s Office either doesn’t have the capacity to litigate a case, or doesn’t have the required expertise given the topic and nature of the case.

Since it’s impossible to predict with certainty what claims and lawsuits will get filed against the city, budgeting the Judgment and Claims Fund is a challenge. The current approach uses a five-year rolling average, e.g. the 2019 budget would be the average annual expenditure for 2013 through 2018. The expectation is that by doing so, half the time there will be more funds than required, and the excess will be rolled into a reserve fund to cover the other half the time when there is a shortfall in the annual budget.

It was a great way to manage the budget, so long as the average spend remains steady or goes down. But in the last few years the actual expenditure has trended substantially up, and in that case the rolling average is always trailing reality and consistently under-budgets, quickly depleting the reserve fund and leading the city to scramble for money mid-year to cover the shortfall. Two months ago, the city was already covering a $10 million shortfall for 2018, and was planning ahead to supplement the 2019 and 2020 budgets with an additional $10 million each year.

Why the big increase in expenditures? According to Joseph Groshong from the City Attorney’s office speaking in the hearing this afternoon, it’s a combination of factors. First, there have been a string of big cases that have either settled or awarded large judgments against the city. They include a $13 million settlement in May in the case of a drunk driver on probation from Seattle Municipal Court, an $8 million police department discrimination case, and a 2016 case where a bicyclist was killed in a collision with a car. In an amazing piece of municipal/legal doublespeak, Groshong said, “We have had a particularly challenging set of facts these past few years in our big cases.”

Second, Groshong says that the City Attorney’s Office is seeing an increasing need for legal services across city departments. They are looking to see if they can save the city money by hiring more attorneys on the city payroll and reduce their use of outside counsel, just as City Attorney Pete Holmes did early in his tenure when he brought in-house all police-related defense cases. Hiring more in-house attorneys only makes sense where there is enough work to keep them occupied fulltime; that means there will always be piecemeal use of outside counsel for special expertise on individual cases, or if there is short-term increases in workload.

Council member Bagshaw asked whether the city, including the Council, has done anything in particular to increase the amount of legal work, and acknowledged that some of their legislative efforts were undertaken with full knowledge that they would end up in court — such as the income tax and the recent gun safety ordinances.

The city has addressed the budgeting issues with the Judgment and Claims Fund by creating a special Finance Committee; that committee developed some specific recommendations on changes:

1. Change the budgeting process from a 5-year average to an actuarial model. In other words, acknowledging that things are changing, the budgeting process needs to look forward rather than backward for insight as to what the appropriate funding level should be. In addition, rather than model at a “50% confidence level” where half the time it will overspend and the other half it will underspend, instead budget at a 90% confidence level, where in 9 out of 10 years sufficient annual funds have been allocated to cover the expenses. The finance committee obtained an actuarial report on its likely future spend, at a range of confidence levels. The current difference between a 50% confidence budget and a 90% confidence budget is about $6 million, and the finance committee recommended phasing it in by 10% (confidence) per year so that it’s fully in effect by 2023.
   
2. Change the way the reserve fund balance is managed. Rather than letting the reserve fund balance float up and down as the annual budget overspends and underspends, establish a set level for the fund balance and keep it there. The city’s insurance covers payouts after a certain deductible, currently $6.5 million (in municipal parlance, the deductible is called a “self-insured retention” or SIR). The finance committee recommended setting the target fund balance at twice the SIR; starting at $13 million but growing over time as the city’s SIR grows as set by its underwriters. As with the new annual budget target, the target fund balance would be phased in over years so that it wouldn’t have an outsized short-term effect on the city budget.
3. Make a stronger distinction between legal support for policy efforts and legal support for litigation. Outside legal support for litigation, by policy, can be paid for from the Judgment and Claims Fund; outside legal support for policy efforts cannot. But as Council member Gonzalez pointed out today, this is a grey area when the policy initiative is anticipated to attract litigation, as in the case of the city’s local income tax which invited a lawsuit from the beginning so as to bring a case to the state Supreme court to overturn constitutional limitations on graduated income taxes. So at what point in the policy development effort, knowing full well that the city will get sued over a piece of legislation, is it ok to start using funds from the Judgment and Claims Fund? At the end of the day, that’s a policy decision; the City Council passed the existing rules, and it can change them.
4. Formalize the Judgment and Claims Fund Finance Committee. The existing committee, representing the City Attorney’s Office, the City Budget Office, and FAS (which is where most claims against the city get initially handled), have found it valuable to meet regularly to monitor the fund and its spend rate. They proposed to meet quarterly to continue that work and to engage in gathering ongoing actuarial advice to better predict future funding needs.

Generally speaking, the recommendations were received warmly by the council members. The Judgment and Claims Fund Finance Committee committed to submitting legislation to the Council in the coming weeks to formally adopt the new rules, and to applying them to the Mayor’s 2019-2020 proposed budget this fall.