Washington State Auditor’s Office

Financial Statements Audit Report

Washington Counties Risk Pool

Thurston County

Audit Period

October 1, 2010 through September 30, 2011

Report No. 1007461

Issue Date

April 9, 2012

Washington State Auditor

Brian Sonntag

April 9, 2012

Board of Directors

Washington Counties Risk Pool

Tumwater, Washington

Report on Financial Statements

Please find attached our report on the Washington Counties Risk Pool’s financial statements.

We are issuing this report in order to provide information on the Pool’s financial condition.

Sincerely,

BRIAN SONNTAG, CGFM

STATE AUDITOR

Insurance Building, P.O. Box 40021  Olympia, Washington 98504-0021  (360) 902-0370  TDD Relay (800) 833-6388

FAX (360) 753-0646  http://www.sao.wa.gov

Table of Contents

Washington Counties Risk Pool

Thurston County

October 1, 2010 through September 30, 2011

Independent Auditor’s Report on Internal Control over Financial Reporting and on

Compliance and Other Matters in Accordance with Government Auditing Standards................. 1

Independent Auditor’s Report on Financial Statements.............................................................. 3

Financial Section........................................................................................................................ 5

Independent Auditor’s Report on Internal

Control over Financial Reporting and on

Compliance and Other Matters in Accordance

with Government Auditing Standards

Washington Counties Risk Pool

Thurston County

October 1, 2010 through September 30, 2011

Board of Directors

Washington Counties Risk Pool

Tumwater, Washington

We have audited the basic financial statements of the Washington Counties Risk Pool, Thurston

County, Washington, as of and for the years ended September 30, 2011 and 2010, and have

issued our report thereon dated March 26, 2012. The Pool has not presented all of the

management’s discussion and analysis information that accounting principles generally

accepted in the United States of America has determined is necessary to supplement, although

not required to be part of, the basic financial statements.

We conducted our audits in accordance with auditing standards generally accepted in the

United States of America and the standards applicable to financial audits contained in

Government Auditing Standards, issued by the Comptroller General of the United States.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In planning and performing our audits, we considered the Pool’s internal control over financial

reporting as a basis for designing our auditing procedures for the purpose of expressing our

opinion on the financial statements, but not for the purpose of expressing an opinion on the

effectiveness of the Pool’s internal control over financial reporting. Accordingly, we do not

express an opinion on the effectiveness of the Pool’s internal control over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allow

management or employees, in the normal course of performing their assigned functions, to

prevent, or detect and correct misstatements on a timely basis. A material weakness is a

deficiency, or a combination of deficiencies, in internal control such that there is a reasonable

possibility that a material misstatement of the Pool's financial statements will not be prevented,

or detected and corrected on a timely basis.

Our consideration of internal control over financial reporting was for the limited purpose

described in the first paragraph of this section and would not necessarily identify all deficiencies

in internal control that might be deficiencies, significant deficiencies or material weaknesses.

We did not identify any deficiencies in internal control over financial reporting that we consider

to be material weaknesses, as defined above.

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Washington State Auditor's Office

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COMPLIANCE AND OTHER MATTERS

As part of obtaining reasonable assurance about whether the Pool’s financial statements are

free of material misstatement, we performed tests of the Pool’s compliance with certain

provisions of laws, regulations, contracts and grant agreements, noncompliance with which

could have a direct and material effect on the determination of financial statement amounts.

However, providing an opinion on compliance with those provisions was not an objective of our

audit, and accordingly, we do not express such an opinion.

The results of our tests disclosed no instances of noncompliance or other matters that are

required to be reported under Government Auditing Standards.

This report is intended for the information and use of management and the Board of Directors.

However, this report is a matter of public record and its distribution is not limited. It also serves

to disseminate information to the public as a reporting tool to help citizens assess government

operations.

BRIAN SONNTAG, CGFM

STATE AUDITOR

March 26, 2012

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Washington State Auditor's Office

2

Independent Auditor’s Report on Financial

Statements

Washington Counties Risk Pool

Thurston County

October 1, 2010 through September 30, 2011

Board of Directors

Washington Counties Risk Pool

Tumwater, Washington

We have audited the accompanying basic financial statements of the Washington Counties

Risk Pool, Thurston County, Washington, as of and for the years ended September 30, 2011

and 2010, as listed on page 5. These financial statements are the responsibility of the Pool’s

management. Our responsibility is to express an opinion on these financial statements based

on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the

United States of America and the standards applicable to financial audits contained in

Government Auditing Standards, issued by the Comptroller General of the United States.

Those standards require that we plan and perform the audit to obtain reasonable assurance

about whether the financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,

the financial position of the Washington Counties Risk Pool, as of September 30, 2011 and

2010, and the changes in financial position for the years then ended in conformity with

accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report on our

consideration of the Pool’s internal control over financial reporting and on our tests of its

compliance with certain provisions of laws, regulations, contracts and grant agreements and

other matters. The purpose of that report is to describe the scope of our testing of internal

control over financial reporting and compliance and the results of that testing, and not to provide

an opinion on the internal control over financial reporting or on compliance. That report is an

integral part of an audit performed in accordance with Government Auditing Standards and

should be considered in assessing the results of our audits.

Accounting principles generally accepted in the United States of America require that the

management’s discussion and analysis on pages 6 through 10 and claims development

information on page 26 be presented to supplement the basic financial statements. Such

information, although not a part of the basic financial statements, is required by the

Governmental Accounting Standards Board who considers it to be an essential part of financial

reporting for placing the basic financial statements in an appropriate operational, economic or

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3

historical context. The Pool has not presented all of the management’s discussion and analysis

information that accounting principles generally accepted in the United State of America has

determined is necessary to supplement, although not required to be part of, the basic financial

statements.

We have applied certain limited procedures to the required supplementary

information in accordance with auditing standards generally accepted in the United States of

America, which consisted of inquiries of management about the methods of preparing the

information and comparing the information for consistency with management’s responses to our

inquiries, the basic financial statements, and other knowledge we obtained during the audit of

the basic financial statements. We do not express an opinion or provide any assurance on the

information because the limited procedures do not provide us with sufficient evidence to express

an opinion or provide any assurance.

Our audit was conducted for the purpose of forming opinions on the financial statements that

collectively comprise the Pool’s basic financial statements. The List of Participating Members

and OFM Schedule of Expenses are presented for purposes of additional analysis and are not a

required part of the basic financial statements. Such information has not been subjected to the

auditing procedures applied in the audit of the basic financial statements and, accordingly, we

do not express an opinion or provide any assurance on it.

BRIAN SONNTAG, CGFM

STATE AUDITOR

March 26, 2012

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Washington State Auditor's Office

4

Financial Section

Washington Counties Risk Pool

Thurston County

October 1, 2010 through September 30, 2011

REQUIRED SUPPLEMENTARY INFORMATION

Management’s Discussion and Analysis – 2011

BASIC FINANCIAL STATEMENTS

Statement of Net Position – 2011 and 2010

Statement of Revenues, Expenses and Changes in Fund Net Position – 2011 and 2010

Comparative Statement of Cash Flows – 2011 and 2010

Notes to Financial Statements – 2011 and 2010

REQUIRED SUPPLEMENTARY INFORMATION

Ten Year Claims Development Information – 2011

OTHER SUPPLEMENTAL INFORMATION

List of Participating Members – 2011

OFM Schedule of Expenses – 2011

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Washington State Auditor's Office

5

Management’s Discussion and Analysis

The management of the Washington Counties Risk Pool (“WCRP” or “Risk Pool”) offers this

narrative overview and analysis of the financial activities of the WCRP for the fiscal year that

ended September 30, 2011. We encourage readers to consider the information presented here

in conjunction with the financial statements for Fiscal Year (“FY”) 2011 and the notes to those

financial statements to enhance their understanding of the WCRP financial performance.

Overview of the Financial Statements

This discussion and analysis is intended to serve as an introduction to the basic financial

statements for the Washington Counties Risk Pool. The financial statements pertain solely to the

WCRP, which has no other component units for which it is financially accountable. The Risk Pool

operates as a single proprietary fund in accounting for its member counties’ participation in the

public entity. This type of fund is used for “business type activities” that are intended to recover

all or a significant portion of their costs through user fees and charges.

The primary function for the WCRP is administering a jointly funded, (third-party liability) self-

insurance program for the Risk Pool’s member counties from the state of Washington. Its primary

source of revenue is the fees/assessments paid by its present and former member counties. And

its major expenses are payments of claims and judgments, including their associated fees and

charges, and payments for selected coverage options purchased from superior-rated reinsurance

and excess insurance carriers. The following are some of the recent Risk Pool financial

highlights:



Operating Income was experienced during FY-2011 of nearly $0.8 million, a 58% decrease

from FY-2010 but still 105% more than the average of the past ten years (2001-10).

Substantially contributing to this improvement was the nearly $0.6 million (9.3%) reduction in

the independent actuary’s estimate for the Pool-only layer’s claims reserves. And during the

past five years, nearly $4.4 million has been realized in Operating Income.



Interest Income slipped even further (-17%) due to the nearly non-existent rates available for

municipal investors under Washington State’s regulations and the lowered interest rates

associated with the national and global recessions.

Total Assets grew by $2.2 million (6%) during FY-2011 and $18.6 million (82%) in the past

five years to more than $41.1 million. Specifically, current assets increased $2.3 million (6%)

during FY-2011, while non-current assets decreased 4%.

744 claims (and lawsuits) were added to the Pool’s claims-related database during FY-2011,

a 3% decline in submissions from FY-2010 yet raising the to-date total (Oct 1988 – Sep

2011) of third-party liability claims submitted by WCRP member counties to 17,982. With

17,584 of the claims designated as closed, only 398 claims remained classified as open at

year’s end. Still, the Pool’s independent actuary estimates another 394 claims could be filed

for covered occurrences from all WCRP years through September 2011, bringing the

estimated ultimate claims total to 18,376.

Total claims reserves for the Pool’s direct exposures increased to $15.0 million, up 7% from

FY-2010. That total includes $5.6 million (down 9% from one year ago) for losses in the

Pool-only layer; $8.6 million (up 22% from one year ago) for losses within the (automobile

liability / general liability) “corridor” program’s aggregated stop losses; and $0.8 million (down

5% from one year ago) for unallocated loss adjustment expenses. NOTE: The corridor

program began five years ago with the occurrence coverage maximum increased to one

million dollars beginning with FY-2010, up from the half million dollar level that existed during

the program’s first three years. The program’s occurrence coverage minimum remained the

greater of the applicable member’s deductible or $100,000.



Net Position (also referred to as “Net Assets” or “Members’ Equity”) increased $0.8 million

during FY-2011 and $6.3 million during the past five years to in excess of $11.0 million at

September 30, 2011. Of that total, $5.5 million

is classified as ‘Restricted’ – $0.9 million to

satisfy the present solvency provisions of WAC 82.60.03001 and the remaining $4.6 million to

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Washington State Auditor's Office

6

address the WCRP Board’s 98% confidence factor requirements in Section D of the

Underwriting Policy. Another $0.2 million is invested in a real property recovery and $1.0

million in Capital Assets (net of debt). The remaining $4.4 million is ‘Non-Restricted’ and

available for use. NOTE: Non-Restricted Net Position increased year-over-year by $1.25

million (39%). The WCRP Board of Directors is responsible for deciding if, how much and

when distributions of (Non-Restricted) Net Position are to be made.

The WCRP basic financial statements are comprised of two components, the financial statements

and the notes to the financial statements. To more fully understand the financial position of the

Risk Pool, this narrative must be viewed in context with information contained in the companion

financial statements and their accompanying notes.

Financial Statements

The financial statements are designed to provide readers with a broad overview of the finances of

the Washington Counties Risk Pool. They are prepared using the accrual accounting basis in

accordance with the U.S. generally accepted accounting principles applicable to governmental

enterprise funds.

The Statement of Net Position presents the financial position of the WCRP at September 30^thof

the most recent fiscal year(s). Information is displayed on assets and liabilities, with the

difference between the two reported as Net Position. Over time, the changes in Net Position may

provide a useful indicator regarding how the WCRP is meeting the financial needs and

expectations of its member counties.

The Statement of Revenues, Expenses and Changes in Fund Net Position presents information

detailing the revenues and expenses that resulted in the change (i.e. revenues in excess of

expenses) to Net Position during the fiscal year(s). All revenues and expenses are reported on

an accrual basis, which means that all changes are reported when the underlying event giving

rise to the change actually occurs, regardless of the timing of related cash flows. Revenues and

expenses are reported in this statement for some items that will (or did) result in cash flows in

future or past periods (e.g. accrued investment income, incurred claims costs).

The Statement of Cash Flow presents the cash provided for and used by WCRP operations

categorized by operating, capital and investing activities. The effects of accrual accounting have

been adjusted out, and non-cash activities such as depreciation have been removed. This

statement reconciles the beginning and ending cash balances for the year(s) reflected in the

balance sheet.

Notes to the Financial Statements

The Notes to the Financial Statements follow the basic financial statements and provide

additional information essential to fully understanding the data provided in the financial

statements of the Washington Counties Risk Pool.

COMPARATIVE FINANCIAL INFORMATION – Washington Counties Risk Pool

NET POSITION

09/30/2011

$39,993,492

09/30/2010

$37,703,144

1,033,510

Change $

$2,290,348

(49,662)

Chg %

6.1

Current Assets

Non-current (Capital) Assets

-4.8

983,848

Investment Held for Resale

150,000

0

Total Assets

$41,127,340

$38,886,654

$2,240,686

5.8

Current Liabilities

$30,097,289

5,464,009

150,000

$28,677,285

5,847,409

150,000

$1,420,004

(383,400)

0

4.4

-6.6

0

Restricted Net Position – UW Policy, § D

Restricted Net Position – Investment of Franjo

Beach

Non-Restricted Net Position

Net Investment in Capital Assets

Total Liabilities and Net Position

4,432,194

983,848

$41,127,340

3,178,450

1,033,510

$38,886,654

1,253,744

(49,662)

$2,240,686

39.4

-4.8

5.8

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Washington State Auditor's Office

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REVENUES, EXPENSES and CHANGES IN NET POSITION

FY-2011

FY-2010

Change $

Chg %

-1.3

Operating Revenues

Member JSLIP Assessments

Member WCPP Assessments

Operating Revenues – Miscellaneous

Total Operating Revenues

$11,354,006

2,606,107

106,930

$11,508,205

2,890,723

110,964

$(154,199)

(284,616)

(4,034)

-9.8

-3.6

-3.1

$14,067,043

$14,509,892

$(442,849)

Non Operating Revenues (and Expenses)

Interest Income

Recovery of Franjo Beach Property

Rental Income (net)

Total Non-Operating Revenues

Total Revenues

$55,930

$67,537

150,000

4,794

$(11,607)

(150,000)

(4,794)

$(166,401)

$(609,250)

-17.2

-100.0

-74.8

-4.1

0

$ 55,930

$14,122,973

$ 222,331

$14,732,223

Operating Expenses

Current Year’s Claims Reserve

Current Year’s Aggregate Stop Loss

Prior Years’ Claim Reserve Adjustment

Reserve for ULAE

Reinsurance Premiums (JSILP)

Excess (Liability) Insurance Premiums

WCPP (Property) Premiums

Depreciation Expenses

$1,570,125

2,375,000

(850,922)

(45,092)

5,480,000

525,054

2,535,007

49,662

1,663,458

$13,302,291

$1,502,751

2,475,000

(1,652,831)

(14,850)

5,480,000

579,758

2,787,059

53,666

1,474,664

$12,685,217

$67,374

(100,000)

801,909

(30,242)

0

(54,704)

(252,052)

(4,004)

4.5

-4.0

48.5

-203.6

0

-9.4

-9.0

-7.5

12.8

4.9

Administrative Expenses

Total Operating Expenses

188,794

$617,074

CHANGES IN NET POSITION

$820,682

$2,047,006

$(1,226,324)

-59.9

Beginning Net Position (October 1^st)

Ending Net Position (September 30^th)

$10,209,369

$11,030,052

$8,162,363

$10,209,369

$2,047,006

$820,682

25.1

8.0

CASH FLOWS

09/30/2011

$2,654,816

09/30/2010

$10,215,703

(24,181)

67,536

$10,259,059

Change $

$(7,560,887)

24,181

(11,606)

$(7,548,312)

Chg %

-74.0

100.0

-17.2

-73.6

Net Cash Provided (Used) For Op. Activities

Net Cash Provided (Used) For Cap. Activities

Net Cash Provided (Used) For Investing Act.

Increase (Decrease) in Cash & Cash Equiv.

55,930

$2,710,747

Cash & Cash Equivalents (Beg. of Year)

Cash & Cash Equivalents (End of Year)

$33,026,490

$35,737,238

$22,767,431

$33,026,490

$10,259,059

$2,710,748

45.1

8.2

BUDGETARY VARIATIONS:

Costs for administering the Risk Pool increased 12.3% (nearly $181,200) from the prior fiscal

year. The following summarizes the administrative budget variations during FY-2011.

1. Staffing remained near the level established prior to FY-2005, yet a mid-year promotional

adjustment was incorporated as the initial step in a plan to address the staffing deficiencies

reported in the independent claims audit conducted early in the year. Further implementation

of the Board-approved salary schedule (2006) and cost-of-living-adjustments granted for the

past two years totaling 1.5%, coupled with significant increases in the costs for the

established employee benefits programs, elevated the Payroll and Benefits costs $80,459

(+10.2%).

2. Supply purchases were reduced by $421 (-2.6%).

3. Other Services and Charges costs increased $49,744 (+9.1%). More specifically,

a. Professional Services acquisitions were up $31,528 (+11.2%) with funds actually

used for:

i. Consultant services RFQ/P solicitations for compliance with the State’s new

“pooling” regulations resulted in a new agreement with AJGRMS, Inc. for

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Washington State Auditor's Office

8

insurance producer services that included ‘optional services’ elements. First-

year costs for those optional services totaled $33,875 (+100.0%).

ii. Similar RFQ/P solicitations resulted in a new agreement for independent

claims auditing services with Strategic Claims Direction. First-year auditing

fees totaled $9,500 (+100.0%).

iii. Phase 2 property appraisals for the Washington Counties Property Program

(“WCPP”) were suspended saving $47,000 (-100.0%);

iv. Actuarial services increased $4,300 (+10.3%) due in part to new financial

reporting requirements requiring enhanced actuarial analyses, and from the

new agreement with PwC, L.L.P. for independent actuarial services which

resulted from the required consultant RFQ/P solicitations;

v. Information Technology (hardware and software) system maintenance costs

increased $4,098 (+18.2%). This includes servers/workstations, webpage,

RiskMaster™, and the WCPP Property Inventory Management System;

vi. SAO auditing and SRM oversight fees decreased $825 (-3.9%);

vii. Support costs for administrative (Member Services) operations were reduced

$3,575 (-10.8%);

viii. Legal services including complex public records requests presented to the

Risk Pool, coverage questions, and pre-defense reviews increased $32,695

(+30.3%); and

ix. Support and assistance for MMSEA reporting and compliance decreased

$1,540 (-20.9%);

b. Travel costs were up $12,005 (7.8%); and

c. Combined costs for Communications, Operating Rentals/Leases, Business

Insurances, and Utility Services, Office Maintenance and Miscellaneous categories

were up $6,211 (+12.5%).

4. Training costs increased $51,426 (+41.7%) with another installment from ACE Public Entities,

one of the Pool’s coverage reinsurers, for training program enhancements aimed at lessening

severities and/or frequencies of member counties’ tortuous occurrences, especially those

stemming from employment activities and law enforcement operations.

5. No Capital Outlays were acquired during FY-2011 (-100.0%).

ADMINISTRATIVE BUDGET

Comparative

Actual FY-11

$862,633

15,703

Actual FY-10

$784,783

16,000

Diff $

$77,850

Diff %

9.9

Payroll & Benefits

Supplies

(297)

31,529

(3,232)

12,005

8,452

-1.8

11.2

-18.2

7.8

1895.1

-17.0

41.7

Professional Services

312,099

14,500

166,712

8,898

100,185

174,832

280,570

17,732

154,707

446

120,739

123,404

Communications

Travel, Conference & Meeting Expenses

Repairs & Maintenance

Other Expenditures (including Capital Outlays)

Training

(20,554)

51.428

TOTAL BUDGET EXPENDITURES

Operating Adjustments:

$1,655,562

$1,498,381

157,181

10.5

Capitalized & Depreciated Outlays

Annual/Sick Leave Expense

TOTAL ADMIN. EXPENDITURES

0

7,896

$1,663,458

(28,973)

5,256

$1,474,664

28,973

2,640

$188,794

100.0

50.2

12.8

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Washington State Auditor's Office

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Fiscal Year 2011

Payroll & Benefits

Supplies

Actual

$862,633

15,703

312,099

14,500

166,712

8,898

100,185

174,832

$1,655,562

Budget

$828,298

18,900

Diff $

$34,335

Diff %

4.1

(3,197)

12,299

(5,100)

(12,638)

6,998

(15,665)

(27,418)

$(10,386)

-16.9

4.1

-26.0

-7.0

368.3

-13.5

-13.6

-6

Professional Services

299,800

19,600

179,350

1,900

Communications

Travel, Conference & Meeting Expenses

Repairs & Maintenance

Other Expenditures (incl. Capital Outlays)

Training

TOTAL BUDGET EXPENDITURES

Operating Adjustments:

115,850

202,250

$1,665,948

Capitalized & Depreciated Outlays

Annual/Sick Leave Expense

TOTAL ADMIN. EXPENDITURES

7,896

$1,663,458

Fiscal Year 2010

Payroll & Benefits

Supplies

Professional Services

Communications

Actual

$784,783

16,000

280,570

17,732

Budget

$801,593

18,600

Diff $

$(16,810)

(2,600)

Diff %

-2.1

-14.0

-1.6

285,150

19,000

(4,580)

(1,268)

-6.7

Travel, Conference & Meeting Expenses

Repairs & Maintenance

Other Expenditures (incl. Capital Outlays)

Training

TOTAL BUDGET EXPENDITURES

Operating Adjustments:

154,707

446

120,739

123,404

$1,498,381

181,000

2,600

139,050

286,600

$1,733,593

(26,293)

(2,154)

(18,311)

(163,196)

$(253,212)

-14.5

-82.8

-13.2

-56.9

-13.6

Capitalized & Depreciated Outlays

Annual/Sick Leave Expense

TOTAL ADMIN. EXPENDITURES

(28,973)

5,256

$1,474,664

CAPITAL ASSET AND DEBT ACTIVITIES:

Capital Assets

As earlier noted, the Risk Pool made no Capital Asset purchases in FY-2011.

Long-Term Debt

The Risk Pool also had no long-term debt as of September 30, 2011.

REQUEST FOR INFORMATION:

Once again, this Management’s Discussion and Analysis is provided as a general overview of the

Washington Counties Risk Pool for all those with an interest in the Pool’s finances. Questions

concerning the information provided and the Risk Pool’s financial report, or requests for additional

information, should be addressed to: WASHINGTON COUNTIES RISK POOL, Attn: Executive

Director Vyrle Hill, 2558 R.W. Johnson Road SW, Suite 106, Tumwater, WA 98512-6103, or

telephone 360/292-4495.

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MCAG NO. 0774

Page 1 of 7

WASHINGTON COUNTIES RISK POOL

STATEMENT OF NET POSITION

For the Fiscal Years Ended September 30, 2011 and 2010

ASSETS:

Year Ended

9/30/2011

Year Ended

9/30/2010

CURRENT ASSETS:

Cash and Cash Equivalents

$

35,737,238

782,602

1,055,240

2,139,792

243,299

2,000

$

33,026,490

1,243,646

861,355

1,917,055

535,517

2,850

Members' Deductibles Receivable

Excess/Reinsurance Recoverable

Members' Liability Assessments Receivable

Members' Property Insurance Assessments Receivable

Prepaid Expenses

Other Accounts Receivables

33,322

116,230

TOTAL CURRENT ASSETS

$

39,993,493

$

37,703,143

NONCURRENT ASSETS:

Capital Assets (Net of Accumulated Depreciation)

Investment Held for Resale (Franjo Beach)

TOTAL NON CURRENT ASSETS

$

983,848

150,000

1,133,848

$

1,033,510

150,000

1,183,510

TOTAL ASSETS

LIABILITIES:

$

41,127,341

$

38,886,653

CURRENT LIABILITIES:

Claims Reserves

Reserves for Pool-retained Open Claims

IBNR Pool-retained Claims Reserve

Corridor Reserves (AL/GL xs $100M)

Reserves for Open Claims

IBNR Claims Reserve

Reserve for ULAE

$

3,219,531

2,353,447

$

3,861,864

2,283,272

5,358,868

3,216,068

844,207

3,829,925

3,180,914

889,299

Accounts Payable

496,219

636,229

Accrued Liabilities

85,266

77,370

Unearned Revenue - Members Assessments

14,523,684

13,918,411

TOTAL CURRENT LIABILITIES

$

30,097,290

$

28,677,284

NET POSITION:

Restricted Net Position - Underwriting Policy Section D

Restricted Net Position - Investment of Franjo Beach

Non-Restricted Net Position

$

5,464,009

150,000

4,432,194

983,848

$

5,847,409

150,000

3,178,450

1,033,510

Net Investment in Capital Assets

TOTAL NET POSITION

$

11,030,051

$

10,209,369

TOTAL NET POSTION AND LIABILITIES

$

41,127,341

$

38,886,653

The accompanying notes are an integral part of this financial statements

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Washington State Auditor's Office

11

MCAG NO 0774

Page 2 of 7

WASHINGTON COUNTIES RISK POOL

STATEMENT OF REVENUES, EXPENSES

AND CHANGES IN FUND NET POSITION

Year Ended

9/30/2010

OPERATING REVENUES:

9/30/2011

Members' Assessments -- Liability Coverage

Members' Assessments -- Property Insurance

Member Services - Revenues

$

11,354,006

2,606,106

106,930

$

11,508,205

2,890,723

110,964

Total Operating Revenues

14,067,042

14,509,892

OPERATING EXPENSES:

Current Year's "Claims" Reserve

Current Year's "AL/GL 1st Layer Corridor Reserves"

Adjustment in Prior Years' Claims Reserves

Adjustment in Reserve for ULAE

Liability Reinsurance Premiums

Excess Liability Insurance Premiums

Property Insurance Premiums

$

1,570,125

2,375,000

(850,922)

(45,092)

$

1,502,751

2,475,000

(1,652,831)

(14,850)

5,480,000

525,054

5,480,000

579,758

2,535,007

49,661

2,787,059

53,666

Depreciation Expense

Operating Expenditures

1,663,458

13,302,291

1,474,664

12,685,217

Total Operating Expenses

$

OPERATING INCOME

$

764,751

$

1,824,675

NON OPERATING REVENUES (EXPENSES)

Interest Income

$

55,930

$

67,537

5,322

(527)

Rental Income

0

Rental Expense

0

Recovery of Franjo Beach Property

Miscellaneous Income

Total Nonoperating Revenues (Expenses)

0

150,000

0

$

55,930

$

222,332

CHANGES IN NET ASSETS

TOTAL NET POSITION, Beginning of Year

TOTAL NET POSTION, End of Year

$

820,681

10,209,370

11,030,051

$

2,047,007

8,162,363

10,209,370

The accompanying notes are an integral part of this financial statements

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Washington State Auditor's Office

12

WASHINGTON COUNTIES RISK POOL

COMPARATIVE STATEMENT OF CASH FLOWS

For the Fiscal Years Ended September 30, 2011 and 2010

Year Ended

9/30/2011

Year Ended

9/30/2010

CASH FLOWS FROM OPERATING ACTIVITIES:

Cash received from Members & Insurers

Cash payments for goods and services

Cash payments to employees for services

$

15,091,864

(11,566,518)

(870,530)

$

21,377,105

(10,371,363)

(790,039)

Net Cash Provided (Used) by Operating Activities

2,654,816

10,215,703

CASH FLOW FROM CAPITAL ACTIVITIES:

Purchase of Equipment & Building

Cash from Rental of Office (net)

$

-

$

(28,974)

4,793

Net Cash Provided (Used) by Capital Activities

$

-

$

(24,181)

CASH FLOW FROM INVESTING ACTIVITIES:

Interest received

$

55,930

$

67,536

Net Cash Provided (Used) by Investing Activities

$

Increase (Decrease) in Cash and Cash Equivalents

Cash and Cash Equivalents - Beginning of the Year

Cash and Cash Equivalents - End of the Year

$

2,710,747

33,026,490

35,737,238

$

10,259,058

22,767,431

33,026,490

The accompanying notes are an integral part of this financial statements

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Washington State Auditor's Office

13

MCAG NO. 0774

Page 4 of 7

WASHINGTON COUNTIES RISK POOL

COMPARATIVE STATEMENT OF CASH FLOWS

For the Fiscal Years Ended September 30, 2011 and 2010

Year Ended

9/30/2011

Year Ended

9/30/2010

RECONCILIATION OF OPERATING INCOME TO NET CASH

PROVIDED (USED) BY OPERATING ACTIVITIES

OPERATING INCOME

$

764,751

$

1,824,675

Adjustments to Reconcile Net Operating Income to Net

Cash provided (used) by Operating Activities:

Depreciation Expense

49,661

419,548

(572,158)

1,564,097

(45,092)

605,272

(140,010)

7,896

53,666

7,209,471

(947,550)

1,875,626

(14,850)

(342,257)

555,210

Decrease (Increase) in Accounts Receivable

Increase (Decrease) in Claims Reserves

Increase (Decrease) in AL/GL Corridors Reserves

Increase (Decrease) in Reserve for ULAE

Increase (Decrease) in Unearned Revenue

Increase (Decrease) in Accounts Payable

Increase (Decrease) in Accrued Liabilities

Increase (Decrease) in Prepaid Expenses

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

4,562

850

(2,850)

$

2,654,816

$

10,215,703

The accompanying notes are an integral part of this financial statements

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Washington State Auditor's Office

14

WASHINGTON COUNTIES RISK POOL

NOTES TO FINANCIAL STATEMENTS

October 1, 2010 through September 30, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Washington Counties Risk Pool conform to generally accepted accounting principles

(“GAAP”). The following is a summary of the more significant policies:

a.

Reporting Entity

The Washington Counties Risk Pool (“WCRP”) was organized August 18, 1988 to provide its members with

joint programs pursuant to Chapter 48.62, RCW, including self-insurance, purchase of insurance, and

contracting for or hiring personnel to provide administrative, claims handling and risk management services. It

was established via agreement amongst several Washington’s counties under the Interlocal Cooperation Act

(Chapter 39.34, RCW).

A new member county makes a 60-month commitment when joining the WCRP. After that, a member may

withdraw at the end of any WCRP fiscal year provided the county has given the WCRP written notice of its

intent to withdraw at least twelve months in advance. New members must be approved by a majority vote of

the (WCRP) Board, provided that a majority of the (WCRP) Executive Committee may approve the admission,

fees and premiums of any new member counties with populations of less than 125,000. The membership of

the WCRP during the reporting period included 27 counties with populations ranging from 2,300 to 470,300.

Underwriting and rate-setting policies are modified after consultation with the insurance producer and/or

independent actuary. Annual deposit assessments are adjusted to incorporate actuarial projections and

operational needs, and then approved by the (WCRP) Board. If its assets were depleted, members would be

responsible for outstanding liabilities of the WCRP as pooling members are subject under present regulations

to supplemental assessment(s) in the event of deficiencies.

Twenty or twenty five million dollars (member option) in third-party “per occurrence” liability coverage was

provided via the WCRP to its member counties during Policy Year 2011 for bodily injury, personal injury,

property damage, errors and omissions, and advertising injury. That included jointly self-insured coverage

from the WCRP of ten million dollars, subject to the members’ selected deductibles, along with “following

form” excess insurance coverage of ten or fifteen million dollars. The WCRP is reinsured for losses within its

layer(s) of coverage that exceed the greater of one hundred thousand dollars or the member’s deductible.

Members annually select a “per occurrence” deductible amount of ten, twenty five, fifty, one hundred, two

hundred fifty or five hundred thousand dollars. There are no annual aggregate limits to the payments the

WCRP might make for any one member county or all member counties combined.

The WCRP also offers a jointly-purchased program with extraordinary limits for insuring participating

counties’ real and personal properties. This includes five hundred million dollars “all other perils” coverage

with two hundred million dollars per occurrence/annual aggregate catastrophe limits each for earthquake and

for flood coverage. During the 2011 policy year, there were twenty six counties participating.

b.

Basis of Accounting and Presentation

The accounting records of the WCRP are maintained in accordance with methods prescribed by the State

Auditor’s Office under the authority of Chapter 43.09, RCW. The WCRP also follows the accounting

standards established by the Governmental Accounting Standards Board (GASB) Statement 10, Accounting

And Financial Reporting For Risk Financing And Related Insurance Issues, as amended by GASB

Statement 30, Risk Financing Omnibus, GASB Statement 31, Accounting and Financial Reporting for Certain

Investments and for External Investment Funds.

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Washington State Auditor's Office

15

The Pool has elected to apply Financial Accounting Standards Board (FASB) guidance issued after

November 30, 1989 to the extent that it does not conflict with or contradict guidance of the governmental

Accounting Standards Board (GASB).

The WCRP uses the full-accrual basis of accounting where revenues are recognized when earned and expenses

are recognized when incurred. Capital asset purchases are capitalized, and long-term liabilities are accounted

for within the financial statements.

The principal operating revenues of the WCRP are member assessments (sometimes referred to as premiums or

contributions), while operating expenses include claims paid from current year allowances and adjustments to

prior year’s reserves, insurance (reinsurance, excess and property) premiums, and administrative expenses.

c.

Cash and Cash Equivalents

For the purposes of the Statement of Cash Flows, the WCRP considers all highly liquid investments with

maturities of three months or less when purchased to be cash equivalent.

d.

e.

Capital Assets and Depreciation

See Note 7

Receivables

The WCRP Board of Directors, acting through its Executive Committee, decides if any accounts are deemed

uncollectible. Uncollectible accounts are charged to expense in the period they are deemed uncollectible.

f.

Investments

See Note 3.

g.

Compensated Absences

Compensated absences are absences for which the employees will be paid such as vacation and sick leave. The

WCRP records unpaid leave for compensated absences as an expense and liability when incurred.

Annual Leave may be accumulated up to 30 days and is payable upon resignation, retirement, or death. An

employee with more than sixty days sick leave accrued may convert the days earned in the previous year (less

any sick leave days used in that year) to annual leave days at the rate of four days of sick leave for one day of

annual leave. Sick leave may accumulate up to 130 days. Sick leave does not vest until death or retirement,

and the accrued liability is booked at ½ the amounts earned.

h.

Unpaid Claim Liabilities

The WCRP establishes claim liabilities based upon independent actuarial estimates of the ultimate cost of

claims including future claims adjustment expenses for claims/lawsuits that have been reported but are not

settled and for claims that have been incurred but are not yet reported. The length of time for which such costs

must be estimated varies depending on the coverage type involved. Estimated amounts of salvage and

subrogation and reinsurance recoverable on unpaid claims are deducted from the liability for unpaid claims.

Because actual claims costs depend on such complex factors as inflation, changes in doctrines of legal liability,

and damage awards, the process used in computing claim liabilities does not necessarily result in an exact

amount, particularly for coverage such as general liability.

Claim liabilities are actuarially recomputed periodically using the Jury Verdict Value process and a variety of

techniques and formulas that reflect recent settlements, claims frequencies, and other economic and social

factors to produce current estimates. A provision for inflation in the calculation of estimated future claims

costs is implicit in the calculation because reliance is placed both on actual historical data that reflects past

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Washington State Auditor's Office

16

inflation and on other factors that are considered to be appropriate modifiers of past experience. Adjustments

to claim liabilities are charged or credited to expense in the periods in which they are made.

i.

Reinsurance

The WCRP uses reinsurance agreements to reduce by risk transfer its exposure to large third-party liability

losses. Reinsurance permits recovery of substantial portions of the losses from commercial insurers, although

it does not discharge the primary liability of the WCRP (and its member counties) as the direct insurer of the

risks reinsured. The WCRP does not report reinsured risks as liabilities unless it is probable that those risks

will not be covered by reinsurers.

The cumulative to-date incurred loss amount deducted from claim liabilities as of September 30, 2011 and

2010 as being reinsured were $76,706,656 and $71,192,581 respectively. Premiums ceded to reinsurers during

2011 and 2010 were $5,480,000 and $5,480,000 respectively. The cumulative to-date reinsured amount in

total loss reserves deducted from claim liabilities as of September 30, 2011 was $42,626,925.

j.

Member Assessments and Unearned Member Assessments

Member assessments are collected in advance and recognized as revenue in the period for which insurance

protection is provided. On the balance sheet, member assessments receivables were billed on or about

September 1^stwith up to the amount equivalent to 105% of the prior year’s assessment being due by September

30^th, and any remaining assessments balance(s) due by the following January 31^st. The assessments calculated

were based upon the members’ prior year’s worker hours and licensed units. Investment income is not being

considered for the determination of member assessments.

k.

Unpaid Claims

Claims/Lawsuits are charged to revenues as incurred. Claim reserves represent the accumulation of estimates

for reported, unpaid claims plus a provision for claims incurred but not reported (IBNR). These estimates are

continually reviewed and updated by applying the Jury Verdict Value process, and any resulting adjustments

are reflected in current earnings.

l.

Reserve for Unallocated Loss Adjustment Expense

The reserve for unallocated loss adjustment expenses (ULAE) represents the estimated cost to be incurred with

respect to the settlement of both claims in process and those claims recognized as incurred but not reported

(IBNR). The independent actuary estimates this liability at the end of each year. The change in this liability

each year is reflected in current earnings.

m.

Exemption From Federal And State Taxes

Pursuant to revenue ruling number 90-74, income of Municipal Risk Pools is excluded from gross income

under IRC Section 115(1). Chapter 48.62 RCW exempts the WCRP from state insurance premium taxes and

from business and occupation taxes imposed pursuant to Chapter 82.04 RCW.

NOTE 2 – STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY

This shall serve as a follow up to an aging fraud involving the Washington Counties Risk Pool which was committed by

a former WCRP employee. This matter was investigated by the SAO and initially reported upon as Report No. 1001789

(issued July 20, 2009). It was disclosed that the Mason County Prosecuting Attorney had pursued the former employee

with criminal charges of First Degree Theft, and the former employee pled guilty and was awaiting sentencing.

Following the issuance of the SAO report, Superior Court Judge Toni A. Sheldon sentenced the former employee

August 3, 2009 to 60 months’ confinement in the custody of the state Department of Corrections and taken into custody

immediately. The former employee, to the best of our knowledge, remains in custody and serving the sentence.

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Washington State Auditor's Office

17

Judge Sheldon also included restitution in favor of the Pool in the sentencing order in the amount of $237,053.26 with

payments of not less than $50.00 per month commencing within 60 days following release from confinement. The

order also reserved to the Court jurisdiction to consider additional restitution amounts for potential civil litigation to set

aside a fraudulent conveyance and/or for civil litigation for failure of the property owner to disclose engineering issues

to a buyer, and/or for significant depreciation or diminution in value of the property based upon prevailing market

conditions and/or a reasonable rental value, if sought. Any funds from the sale of the property by WCRP shall offset the

restitution amount.

The Pool immediately commenced civil legal actions to obtain reconveyance of the real property. A Quit Claim Deed

and related papers, signed by the family members to whom the property was fraudulently conveyed, were obtained by

the Pool’s legal counsel and filed in Mason County, Washington. The court later issued a Quiet Title order in favor of

the Risk Pool.

Disposal of the reacquired real property occurred via a public auction process in 2011. The deadline for submission of

bids was September 30^th, and the formal bid opening was conducted by the Pool’s Secretary/Treasurer October 4^th. The

Executive Committee reviewed the auction results October 13^thand agreed to reconsider the minimum value ($150,000)

established in early 2010 and to accept the highest bid of $85,000 received during the recent auction. Closing

documents were signed October 27^thwith monies/keys exchanged shortly thereafter.

To obtain the cooperation needed on the Quit Claim deed and on the lawsuit, the Pool’s counsel agreed that no damages

in the quiet title action would be sought as to anyone other than the former employee. And while the restitution order

against the former employee presently stands as it was issued by the Court at the sentencing hearing, the Pool’s counsel

will be asked soon to report to the court the net proceeds obtained from the property’s disposal. The Pool’s Executive

Committee has also directed that the court be asked to reduce the restitution order to only reflect the added costs the

Pool incurred a) addressing the fraud investigation and criminal proceedings, b) to recover ownership and O&M costs

incurred since recovery, c) arranging for and conducting the public auction and for the final disposal/transfer of the

property’s ownership, and d) to secure the amended restitution order.

NOTE 3 - DEPOSITS AND INVESTMENTS

a.

Deposit

The WCRP deposits and certificates of deposit are entirely covered by federal depository insurance (FDIC) or

by collateral held in a multiple financial institution collateral pool administered by the Washington Public

Deposit Protection Commission (PDPC).

b.

Investments

The WCRP had invested with the Local Government Investment Pool and administered by the State Treasurer

funds on September 30, 2011 and 2010, with a fair value of

$35,330,046 and

$29,274,116 respectively.

NOTE 4 - JOINT SELF-INSURED RETENTION

The WCRP retains responsibility for the payment of claims within specified self-insured retention limits prior to the

application of coverage provided by its reinsurance and excess insurance contracts.

For fiscal years 2011 and 2010, the Pool’s per-occurrence retention limit for liability claims was $100,000 or the

applicable member’s deductible, whichever was greater. For Public Officials Liability, Employment Practices Liability

and Employee Benefits Liability claims exceeding the retention limit but less than $1,000,000, the Pool’s annual

aggregate reinsurance was limited to $20,000,000, and for those same claims between $1,000,000 and $2,000,000, the

Pool’s annual aggregate reinsurance was limited to $10,000,000.

Through pre-funded member assessments (deposit assessments) collected at the beginning of each policy year, the

WCRP committed assets for the years ended September 30, 2011 and 2010 of $1,570,125 and $1,502,751 respectively,

and is committing $1,605,472 for PY-2012, specifically for the purpose of funding its self-insured retentions for those

years.

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Washington State Auditor's Office

18

NOTE 5 – REINSURANCE/EXCESS INSURANCE CONTRACTS

The WCRP, on behalf of and in conjunction with its members, maintains both reinsurance and “following form” excess

insurance contracts with several superior-rated insurance carriers which provide various limits of coverage over the

WCRP third-party liability self-insured retention limits. The limits provided by these reinsurance/excess insurance

contracts for both PY-2011 and PY-2010 are as follows:

I.

An “occurrence-based” Comprehensive Joint Self-Insurance Liability Policy with no aggregates that includes

auto, employment, general, professional, and public officials’ coverage.

WCRP/Member

SIR (*)

Excess

Insurance (***)

$10,000,000

Reinsurance (**)

$9,900,000

Total (***)

$20,000,000

$100,000

*

Counties annually select individual deductible amounts of $10,000, $25,000, $50,000, $100,000,

$250,000 or $500,000.

**

***

The WCRP provides joint, self-insurance for the balance between the member deductibles and

$10,000,000 with reinsurance purchased to protect the WCRP from losses that exceed the SIR.

An additional $5,000,000 “following form” excess insurance policy is available as a county-by-county

option and purchased by the majority of the member counties raising their “occurrence” limits to

$25,000,000.

II. The Washington Counties Property Program (WCPP) was established October 1, 2005. The coverage was

initially purchased by seventeen counties. Five counties were added during the first policy year that ended

September 30, 2006; three more counties joined in the 2006-07 policy year; another county joined at the

beginning of Py2008; a 27^thparticipated March through September 2008; and one more county joined but one

also withdrew in Py2010 leaving the count of participating counties at 26.

specifications and limits are as follows:

WCPP general coverage

LIMITS OF INSURANCE:

PERILS:

$500,000,000; All Indicated Limits are per Occurrence; Subject to Sub-

Limits [below].

All Risks of Direct Physical Loss or Damage Including Equipment

Breakdown, Earthquake and Flood.

PROPERTY COVERED:

Real & Personal Property, Business Interruption, Extra Expense, Rental

Value, Demolition and Increased Cost of Construction, Valuable Papers,

Accounts Receivable, Transit, EDP (Equipment,/Media /Extra Expense),

Newly Acquired Property, Course of Construction, Contractors Equipment,

Errors and Omissions, Offsite Storage and Personal Property of the

Insured’s officers and employees while on the premises of the Insured.

SUBLIMITS:

$200,000,000

$ 25,000,000

Are within, and do not increase, the limits stated in the Limits of Insurance.

Earthquake and Volcanic Eruption – Per Occurrence and Annual Aggregate

Flood – Per Occurrence and Annual Aggregate, except:

Flood for locations wholly or partially within a SFHA – Per Occurrence and Annual

Aggregate

$ 20,000,000

$100,000,000

Terrorism, certified and non-certified

Equipment Breakdown

VALUATION:

A. Real and Personal Property and Mobile Equipment – Replacement Cost

B. Vehicles on Premises – Actual Cash Value

C. Business Interruption and Extra Expense – Actual Loss Sustained

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Washington State Auditor's Office

19

DEDUCTIBLES

A.

B.

C.

All loss, damage, and/or expense arising out of any one occurrence shall be adjusted as one loss, and

from the amount of each such adjusted loss shall be deducted the sum of $5,000 (to $50,000 as

individual county selection) except;

Earthquake: $100,000, except Puget Sound Earthquake (ISO Zone 2) shall be 2% of the total values

at the time of loss at each location involved in the loss subject to a minimum of $ 100,000, for any one

occurrence shall be deducted from any adjusted Earthquake loss; or

Flood: The following sum(s) shall be deducted from any adjusted loss due to Flood;

(1) With respect to locations wholly or partially within Special Flood Hazard Areas (SFHA), areas of

100-year flooding, as defined by the Federal Emergency Management Agency (if these locations

are not excluded elsewhere in this policy with respect to the peril of flood), the deductible shall

be 5% of the total values at the time of loss at each location involved in the loss, subject to a

minimum of $1,000,000 for any one occurrence;

(2) With respect to Named Storms (a storm that has been declared by the National Weather Service

to be a Hurricane, Typhoon, Tropical Cyclone or Tropical Storm), the deductible shall be 5% of

the total values at the time of loss at each location involved in the loss, subject to a minimum of

$100,000 for any one occurrence;

(3) With respect to any other flood loss, the deductible shall be $100,000 any one occurrence.

D.

Windstorm and Hail: All loss, damage, and/or expense arising out of any one occurrence shall be

adjusted as one loss, and from the amount of each such adjusted loss shall be deducted the sum of

$5,000 (to $50,000 as individual county selection);

NOTE: If two or more deductible amounts in this policy apply to a single occurrence, the total to be

deducted shall not exceed the largest deductible applicable.

NOTE 6 - MEMBER'S SUPPLEMENTAL ASSESSMENTS AND CREDITS

RCW 48.62.141 and the WCRP Interlocal Agreement provide for the contingent liability of participants in the program

if assets of the program are insufficient to cover the program's liabilities. Deficits of the WCRP are financed through

supplemental (retroactive) assessments against its affected member counties. During policy year 2011, no additional

retroactive assessments were levied or collected.

NOTE 7 – CAPITAL ASSETS

Capital assets are defined by WCRP policy as having an initial, individual cost of at least $2,500 and an estimated

useful life in excess of one year. Capital assets are recorded at historical cost.

Capital assets activities for the fiscal year ended September 30, 2011 were as follows:

Beginning

Balance

9/30/10

Ending

Balance

9/30/11

Increase

(Decrease)

Capital Assets Being Depreciated:

Building

Office Furnishings and Equipment

Total Capital Assets being Depreciated

$ 1,125,659

330,477

$ 1,456,136

1,125,659

176,689

1,302,348

(153,788)

Less Accumulated Depreciation for:

Building

Office Furnishings and Equipment

Total Accumulated Depreciation

$

139,492

283,135

422,627

37,522

(141,648)

(104,126)

177,014

141,487

318,501

TOTAL CAPITAL ASSETS NET

$ 1,033,509

(49,661)

983,848

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Washington State Auditor's Office

20

When equipment is retired or otherwise disposed of, its cost and accumulated depreciation are removed from the WCRP

asset accounts, and the net gain or loss on disposition is credited to or charged against income.

Capital assets are depreciated using the straight-line method over the following estimated useful lives:

Asset

Buildings

Building Improvements

Vehicles

Years

30

5

Equipment

5

NOTE 8 - PENSION PLANS

a. Public Employees’ Retirement System (PERS) Plans 1, 2, and 3

The Washington Counties Risk Pool’s full-time and qualifying part-time employees participate in one of the following

statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-

sharing multiple-employer public employee defined benefit and defined contribution retirement plans. The Department

of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a

publicly available comprehensive annual financial report (CAFR) that includes financial statements and required

supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement

Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380; or it may be downloaded from the DRS

website at www.drs.wa.gov. The following disclosures are made pursuant to GASB Statement No. 27, Accounting for

Pensions by State and Local Government Employers and No. 50, Pension Disclosures, an Amendment of GASB

Statements No. 25 and No. 27.

Plan Description

PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership

purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined plan with a defined contribution component.

Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and

Superior Courts (other than judges currently in a judicial retirement system); employees of legislative committees;

community and technical colleges, college and university employees not participating in national higher education

retirement program; judges of district and municipal courts; and employees of local governments.

PERS participants who joined the system by September 30, 1977, are Plan 1 members. Those who joined on or after

October 1, 1977 and by either February 28, 2002 for state and higher education employees, or August 31, 2002 for local

government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3.

PERS participants joining the system on or after March 1, 2002 for state and higher education employees, or September

1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or

PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a

choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. Notwithstanding, PERS Plan 2

and Plan 3 members may opt out of plan membership if terminally ill, with less than five years to live.

PERS Plan 1 and Plan 2 defined benefit retirement benefits are financed from a combination of investment earnings and

employer and employee contributions. PERS retirement benefit provisions are established in Chapters 41.34 and 41.40

RCW and may be amended only by the State Legislature.

PERS Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for

retirement after 30 years of service, or at the age of 60 with five years of service, or at the age of 55 with 25 years of

service. The monthly benefit is 2 percent of the average final compensation (AFC) per year of service. (AFC is the

monthly average of the 24 consecutive highest-paid service credit months.) The retirement benefits may not exceed 60

percent of AFC. The monthly benefit is subject to a minimum for PERS Plan 1 retirees who have 25 years of service

and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring

from inactive status prior to the age of 65 may receive actuarially reduced benefits. If a survivor option is chosen, the

benefit is further reduced. A cost-of living allowance (COLA) is granted at age 66 based upon years of service times

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the COLA amount, which is increased 3 percent annually. Plan 1 members may also elect to receive an optional COLA

that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at 3

percent annually. To offset the cost of this annual adjustment, the benefit is reduced.

PERS Plan 1 provides duty and non-duty disability benefits. Duty disability retirement benefits for disablement prior to

the age of 60 consist of a temporary life annuity payable to the age of 60. The allowance amount is $350 a month, or

two-thirds of the monthly AFC, whichever is less. The benefit is reduced by any workers’ compensation benefit and is

payable as long as the member remains disabled or until the member attains the age of 60. A member with five years of

covered employment is eligible for non-duty disability retirement. Prior to the age of 55, the allowance amount is 2

percent of the AFC for each year of service reduced by 2 percent for each year that the member’s age is less than 55.

The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a survivor option.

A cost-of living allowance is granted at age 66 based upon years of service times the COLA amount (based on the

Consumer Price Index), capped at 3 percent annually. To offset the cost of this annual adjustment, the benefit is

reduced.

PERS Plan 1 members can receive credit for military service while actively serving in the military, if such credit makes

them eligible to retire. Members can also purchase up to 24 months of service credit lost because of an on-the-job

injury.

PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for

normal retirement at the age of 65 with five years of service. The monthly benefit is 2 percent of the AFC per year of

service. (AFC is the monthly average of the 60 consecutive highest-paid service months.)

PERS Plan 2 members who have at least 20 years of service credit and are 55 years of age or older are eligible for early

retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to

age, for each year before age 65.

PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of

two provisions:



With a benefit that is reduced by 3 percent for each year before age 65.

With a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter return-to-work

rules.

PERS Plan 2 retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There

is no cap on years of service credit; and a cost-of-living allowance is granted (based on the Consumer Price Index),

capped at 3 percent annually.

The surviving spouse or eligible child or children of a PERS Plan 2 member who dies after leaving eligible employment

having earned ten years of service credit may request a refund of the member’s accumulated contributions. Effective

July 22, 2007, said refund (adjusted as needed for specified legal reductions) is increased from 100 percent to 200

percent of the accumulated contributions if the member’s death occurs in the uniformed service to the United States

while participating in Operation Enduring Freedom or Persian Gulf, Operation Iraqi Freedom.

Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member

contributions finance a defined contribution component. The defined benefit portion provides a benefit calculated at

one percent of the AFC per year of service. (The AFC is based on the greatest compensation during any eligible

consecutive 60-month period.)

Effective June 7, 2006, Plan 3 members are vested in the defined benefit portion of their plan after ten years of service;

or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years

earned in PERS Plan 2 prior to June 1, 2003. Plan 3 members are immediately vested in the defined contribution

portion of their plan.

Vested Plan 3 members are eligible for a normal retirement at age 65, or they may retire early with the following

conditions and benefits:

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

If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that

varies with age, for each year before age 65.

If they have 30 service credit years and are at least 55, they have the choice of a benefit that is reduced by

3 percent for each year before age 65; or a benefit with a smaller (or no) reduction factor (depending on

age) that imposes stricter return –to- work rules.

PERS Plan 3 defined retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option.

There is no cap on years of service credit and Plan 3 provides the same cost-of-living allowance as Plan 2.

PERS Plan 3 defined contribution retirement benefits are solely dependent upon the results of investment activities.

The defined contribution portion can be distributed in accordance with an option selected by the member, either as a

lump sum or pursuant to other options authorized by the Director of the Department of Retirement Systems.

PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for

eligibility. The Plan 2 monthly benefit amount is 2 percent of the AFC per year of service. For Plan 3, the monthly

benefit amount is 1 percent of the AFC per year of service.

These disability benefit amounts are actuarially reduced for each year that the member’s age is less than 65, and to

reflect the choice of a survivor option. There is no cap on years of service of credit. And a cost-of-living allowance is

granted (based on the Consumer Price Index) capped at 3 percent annually.

PERS Plan 2 and Plan 3 members may have up to ten years of interruptive military service credit; five years at no cost

and five years that may be purchased by paying the required contributions. Effective July 24, 2005, a member who

becomes totally incapacitated for continued employment while serving the uniformed services, or a surviving spouse or

eligible children, may apply for interruptive military service credit. Additionally, PERS Plan 2 and Plan 3 members can

also purchase up to 24 months of service credit lost because of an on-the-job injury.

PERS members may also purchase up to five years of additional service credit once eligible for retirement. This credit

can only be purchased at the time of retirement and can be used only to provide the member with a monthly annuity that

is paid in addition to the member’s retirement benefit.

Beneficiaries of a PERS Plan 2 or Plan 3 member with ten years of service who is killed in the course of employment

receive retirement benefits without actuarial reduction, if the member was not at normal retirement age at death. This

provision applies to any member killed in the course of employment, on or after June 10, 2004, if found eligible by the

Department of Labor and Industries.

A one-time duty- related death benefit is provided to the estate (or duly designated nominee) of a PERS member who

dies in the line of service as a result of injuries sustained in the course of employment, or if the death resulted from an

occupational disease or infection that arose naturally and proximately out of said member’s covered employment, if

found eligible by the Department of Labor and Industries.

There are 1,189 participating employers in PERS. Membership in PERS consisted of the following as of the latest

actuarial valuation date for the plans of June 30, 2009:

Retirees and Beneficiaries Receiving Benefits

Terminated Plan Members Entitled to But Not Yet Receiving Benefits

Active Plan Members Vested

Active Plan Members Noninvested

Total

74,857

28,074

105,339

53,896

262,166

Funding Policy

Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and

employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are

established by statute at 6 percent for state agencies and local government unit employees, and 7.5 percent for state

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government elected officials. The employer and employee contribution rates for Plan 2 and the employer contribution

rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of

Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3,

employer contributions finance the defined benefit portion of the plan, and member contributions finance the defined

contribution portion. The Director of the Department of Retirement Systems sets Plan 3 employee contribution rates.

Six rate options are available ranging from 5 percent to 15 percent; two of the options are graduated rates dependent on

the employee’s age. As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a

second tier of employer and employee rates was developed to fund, along with investment earnings, the increased

retirement benefits of those justices and judges that participate in the program. The methods used to determine the

contribution requirements are established under state statute in accordance with Chapters 41.40 and 41.45 RCW.

The required contribution rates expressed as a percentage of the current-year covered payroll as of December 31, 2010,

were as follows:

PERS Plan 1

5.31%**

PERS Plan 2

5.31%**

PERS Plan 3

5.31%***

*****

Employer*

Employee

6.00%****

3.90%****

* The employer rates include the employer administrative expense fee currently set at 0.16%.

**The employer rate for state elected officials is 7.89% for Plan 1 and 5.31% for Plan 2 and Plan 3.

*** Plan 3 defined benefit portion only.

**** Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member.

Both the WCRP and its employees made their required contributions. The WCRP required contributions for the years

ending September 30^thwere as follows:

PERS Plan 1

$10,211

$ 9,176

PERS Plan 2

$20,671

$18,343

PERS Plan 3

$3,099

$2,740

2011

2010

2009

$ 8,662

$30,613

$3,674

b. Qualified Pension Plan

The WCRP also participates in a qualified pension plan created in accordance with Internal Revenue Code Section

401(a). This plan is with the International City/County Management Association (ICMA). Employer contributions to

the Qualified Pension Plan for the years ended September 30, 2011 and 2010 were $36,537 and $35,330, respectively.

NOTE 9 - DEFERRED COMPENSATION PLANS

The WCRP offers its employees a choice of two deferred compensation plans created in accordance with Section 457 of

the Internal Revenue Code. The plans are with the International City/County Management Association (ICMA) and

Nationwide Retirement Solutions (NRS). The plans, available to all eligible employees, permit them to defer a portion

of their salaries until future years. The deferred compensation is not available to employees until termination,

retirement, death, or unforeseeable emergency.

In 1998 NRS and ICMA Deferred Compensation Program plan assets were placed into trust for the exclusive benefit of

participants and their beneficiaries. Pursuant to Governmental Accounting Standards Board (GASB) Statement 32 and

since the WCRP is no longer the owner of these assets, the plan assets and liabilities are no longer reported in the

WCRP financial statements.

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NOTE 10 - RECONCILATION OF CLAIMS LIABILITIES

As discussed in Note 2, the WCRP establishes a liability for both reported and unreported insured events, which

includes estimates of both future payments of losses and related claims adjustment expenses. The following represents

comparative changes in those aggregate liabilities for the WCRP during the past two years:

2011

2010

Unpaid Claims and Claims Adjustment Expenses

Beginning of Year

Incurred Claims and Claims Adjustment Expenses:

Provisions for Insured Events of the Current Year

Increase (Decrease) in Provision for Insured Events

Prior Years

$ 6,145,137

1,570,125

(850,922)

$ 6,864,340

$ 7,092,686

1,502,751

(1,652,831)

$6,942,606

Total Incurred Claims and Claims Adjustment Expenses

Payments:

Claims and Claims Adjustment Expenses Attributable to

Insured Events of the Current Year

Claims and Claims Adjustment Expenses Attributable to

Insured Events of Prior Years

$

42,951

1,248,411

1,291,362

$

41,324

756,145

Total Payments

$

$ 797,469

Total Unpaid Claims and Claims Adjustment Expenses

End of Year

$

5,572,978

$ 6,145,137

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SCHEDULE T-1

PUBLIC ENTITY RISK POOL LIST OF PARTICIPATING MEMBERS

WASHINGTON COUNTIES RISK POOL

AS OF SEPTEMBER 30, 2011

The following is a list of WCRP membership for the fiscal year 2010-2011

Adams County

Benton County

Chelan County

Clallam County

Clark County

Lewis County

Mason County

Okanogan County

Pacific County

Pend Oreille County

San Juan County

Skagit County

Columbia County

Cowlitz County

Douglas County

Franklin County

Garfield County

Grays Harbor County

Island County

Skamania County

Spokane County

Thurston County

WallaWalla County

Whatcom County

Yakima County (*)

Jefferson County

Kittitas County

(*) Not participating in the joint-purchase property program option.

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WASHINGTON COUNTIES RISK POOL

OFM Schedule of Expenses

Schedule T-2

MCAG NO. 0774

Fiscal Year Ended September 30, 2011

Insurance Premiums/Reserve Expense

ULAE Expense

$12,485,185

(45,092.00)

Adjustment to Prior Years' Reserves

(850,921.85)

Contracted Services:

Actuarial

State Audit Expense

State Risk Manager Expenses

Legal Fees

IT Consultants

Other Consulting Fees

Broker Fees

45,900.00

8,674.25

11,734.40

140,513.78

14,160.00

27,842.00

33,875.00

29,400.00

Member Services Consultant

General Administrative Expenses

Employee Salaries and Benefits

Communication

Supplies

Dues and Memberships

Travel - Employee

Committee and Board Meetings

Depreciation

Building and Auto Insurance

Operating Leases

870,529.69

14,499.76

15,577.84

11,320.96

81,507.96

97,108.84

49,661.55

16,967.00

44,649.42

18,432.92

84,636.53

78,290.35

17,837.34

Utilities

Member Services - Training

Grants/Scholarships

Miscellaneous Expenses

Total Operating Expenses

$13,302,291

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ABOUT THE STATE AUDITOR'S OFFICE

The State Auditor's Office is established in the state's Constitution and is part of the executive

branch of state government. The State Auditor is elected by the citizens of Washington and serves

four-year terms.

Our mission is to work with our audit clients and citizens as an advocate for government

accountability. As an elected agency, the State Auditor's Office has the independence necessary to

objectively perform audits and investigations. Our audits are designed to comply with professional

standards as well as to satisfy the requirements of federal, state, and local laws.

The State Auditor's Office employees are located around the state to deliver services effectively and

efficiently.

Our audits look at financial information and compliance with state, federal and local laws on the part

of all local governments, including schools, and all state agencies, including institutions of higher

education. In addition, we conduct performance audits of state agencies and local governments and

fraud, whistleblower and citizen hotline investigations.

The results of our work are widely distributed through a variety of reports, which are available on

our Web site and through our free, electronic subscription service.

We take our role as partners in accountability seriously. We provide training and technical

assistance to governments and have an extensive quality assurance program.

State Auditor

Chief of Staff

Brian Sonntag, CGFM

Ted Rutt

Deputy Chief of Staff

Chief Policy Advisor

Director of Audit

Doug Cochran

Jerry Pugnetti

Chuck Pfeil, CPA

Larisa Benson

Jim Brittain, CPA

Jan Jutte, CPA, CGFM

Ivan Dansereau

Mike Murphy

Mindy Chambers

Mary Leider

(360) 902-0370

(866) 902-3900

Director of Performance Audit

Director of Special Investigations

Director for Legal Affairs

Director of Quality Assurance

Local Government Liaison

Communications Director

Public Records Officer

Main number

Toll-free Citizen Hotline

Website

www.sao.wa.gov

Subscription Service

https://www.sao.wa.gov/EN/News/Subscriptions/

(SAO FACTS.DOC - Rev. 09/11)