Pasco staff propose $6.5 million internal loan to recapitalize self-insured health plan

City Manager Harold Stewart told the Pasco City Council workshop that the city's self-funded medical plan reserves have been depleted and staff is recommending a 10-year, $6.5 million internal loan to recapitalize the fund.

Stewart said the shortfall resulted from a combination of factors: a post-COVID rebound in medical utilization, medical and pharmacy inflation, a bankruptcy and replacement of the city's third-party administrator that disrupted claims processing, and a backlog that forced the plan to pay prior-year and current claims in the same period. "The combination of the cyber attack and the transition of the TPA created more pressure on your reserves than what was there and available, and it caused those reserves to go negative," Stewart said.

Under the plan staff presented, roughly $2.5 million would address the current negative balance and about $4 million would restore required reserve levels for a self-funded plan. The loan would be sourced from the city's economic development fund and repaid over 10 years with a 4% interest rate; Stewart said this preserves the city's option to remain self-insured while giving time to negotiate premium and plan design changes with employee groups.

Stewart and staff stressed trade-offs and alternatives. He said the Association of Washington Cities (AWC) pooled option would likely cost the city more than remaining self-funded and would limit plan design flexibility. A shorter loan term would reduce total interest paid but require larger premium increases in the near term. "I would still recommend as the city manager that we do option 2, which is the self funded over the 10 year period," Stewart said.

Council members pressed for specifics on timing, the size of the reserve shortfall and whether using the economic development fund would delay projects; staff said the loan would not delay current economic development projects and that the interest payment is required to comply with state law when repurposing restricted funds.

Stewart said final decisions will be requested on the council agenda next Monday so staff can proceed with open enrollment and negotiations with unions and to give employees advance notice of plan changes.

What happens next: staff will return an ordinance for council action on the internal loan and present plan design and premium scenarios during labor negotiations and benefit enrollment.