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June 27 2003 To: LMCIT member cities and agents From: LIMIT Ike: City budget cuts and L1 Cff premiums Reductions in state aid and the imposition of new levy limits will mean significant budget reductions cities � c ons for many cities for 003 and/or 004. Since city expenditures are an important element in rating liability premiums, many cities are asking how their budget cuts will affect their premiums. In this memo, we'll try to answer that question. we'll also give you our best (but VERY preliininary) guess for what might happen with property, liability, auto, and work comp rates for next year. And a } 11 offer some suggestions for things to consider, and things net to consider, if you're looking for ways to reduce the city's premium . Budget cuts and liability premiums City expenditures are an important element in liability premium rating, so if the city reduces expenditures it will mean lower premiums, all else being equal. However, it does tale a fairly sizeable change in the city's budget to make a significant difference in the premiums. Isere are some ports to keep in mind: 1. A reduction ofMlo in the city rs budget will not translate into the same percentage reduction in the city Js premiums. The liability premium is typically about half of the city's total premium. Property and auto premiums make up the rest, and budget changes don't affect the raging for those risks* Also, while city expenditures are an Mmportant element in calculating iiabWty premiums, it's just one of seven elements. Other rating lasses — miles of sheets, annual water system volume in gallons, etc, - also are part of the liability premium calculation, and they presumably won't change. 2. Reductions in capital expenditures will have a much smaller effect on premiums than reductions in operating expenditures. City expenditures actually enter into the premium calculation, in two ways; A basic rate is applied to city expenditures excluding construction projects, significant capital purchases (i.e., those exceeding the budget), certain contract expenditures, and expendrtm for certain operations; and a second, much smaller rate is applied to total expenditures including g capital and contract expenditures. Thus for example, a dollar savings from i eliminating a street department staff position will have a much greater effect on