November 16, 1987
Ray E. Woodsend, Chairman
PEPL Board of Control
Office of City Attorney
22 Main Street
Rapid City, South Dakota 57701
Official Opinion No. 87-37
Relationship of the State to the PEPL Fund
Dear Chairman Woodsend:
On behalf of the PEPL Board, you have requested an official opinion concerning the relationship of the State itself to the PEPL Fund established by SDCL ch. 3-22. You have asked the following questions:
QUESTIONS:
1. May the State of South Dakota, either by separate authority or in some manner using the language in SDCL 3-22 establish a self-insurance program. Your particular attention is called to SDCL 3-22-13 wherein it talks about the million dollars appropriated as the State's initial contribution and whether or not that could be used for the purpose of establishing a self-insurance program for the State.
2. Whether or not the Board of Control of PEPL, in an attempt to assist the State, could use the provisions of SDCL 3-22 to create a liability pool for the State of South Dakota alone. The concern is raised over the language contained in SDCL 3-22-25 and whether or not it is necessary that in order for the Board to create a pool for the State that the requirements of 30 public entities filing funding commitments and at least $500,000 in contributions must be satisfied if the only participant is the State of South Dakota. Your attention is drawn to the entire Chapter, but particularly whether or not something could be done pursuant to SDCL 3-22-5(10) without the above limitations.
3. In the event a sub-pool, or other pool, wishes to enter into an agreement with the PEPL Board, must the sub-pool count as one entity or may it be counted as the same number of entities as there are members in the sub-pool? Is the result the same if the other pool is a separate legal entity, or merely an administrative arrangement among the signatories to a joint powers agreement?
BACKGROUND:
In 1986, the South Dakota Legislature established the Public Entity Pool for Liability (PEPL Fund) for the purpose of providing a fund as the sole source for payment of valid tort claims against all public entities choosing to participate in the program. SDCL 3-22-1. The program is of a comprehensive nature and provides methods for resolving claims, assessing contributions, limiting liability, and funding the program in addition to numerous other necessary powers. Although passed as an Emergency Act, the program was essentially put on hold while the State attempted to procure liability insurance through commercial channels. That attempt was not successful.
In 1987, the Legislature made several amendments to the Chapter. These amendments increased the flexibility of the PEPL Board in the operation of the program and created a special relationship between the State and the PEPL Fund. As you know, the Governor has appointed the Board which is now exploring the options available to it.
IN RE QUESTION NO. 1:
SDCL 3-22-13 provides:
There is imposed an initial contribution on all members, who join prior to July 1, 1988, other than the state, to be paid as determined by the board to the PEPL fund in no more than four equal installments throughout the fiscal year. Such assessment shall be one half of one percent of the total annual budget for school district members and one percent of the total annual budget for all other members. If members of an existing risk or liability pool arrangement join the PEPL fund as a sub-pool, their initial contribution shall be established in the agreement between the sub-pool and the board giving consideration to contributions made to the sub-pool and may be more or less than the initial contribution established in this section. The board shall determine a contribution formula for subsequent contributions which allocates pool costs on an equitable basis. The development of the contribution formula shall consider various exposures and rating bases, historical loss experience and discounts from commercial insurance premiums. Any contribution not paid within ten days of the due date established by the board shall accrue interest penalties at the rate of two percent per month. No state warrant for state funds under any provision of law may be issued to any member more than thirty days in arrears in making the contribution payment provided herein. Contributions by the state will be established as follows: one million dollars ($1,000,000) appropriated in this chapter is the state's initial contribution subject to subdivision (10) of § 3-22-5. The remaining eight hundred and fifty thousand dollars ($850,000) is for payment of claims and the funding of reserves. If any of said funds are placed into any reserve fund such amount may not be counted for triggering distribution of surplus pursuant to § 3-22-14 nor may any of this money be distributed as surplus except as provided in § 3‑22‑20. The eight hundred fifty thousand dollar reserve fund, less any amounts paid in satisfaction of claims against the state, shall be repaid to the state general fund upon a determination by the board that other reserve funds are adequate to meet the needs of the fund but in no event later than June 30, 1992. By November first of each subsequent year the director shall report to the Governor the estimated amount of contribution required to extend coverage to the state for the next contribution year including amounts required for reserves. The director shall notify the Governor if the current year's estimate was less than the contribution required and a shortfall exists. If the Legislature fails to appropriate the estimated amount and the shortfall from the previous coverage year reported to the Governor the state's membership in the PEPL shall terminate at the close of the then current coverage year. The board shall notify all remaining members of the state's withdrawal from the fund.
As I read the statute set out above, it appears that the Legislature has appropriated $850,000 to the PEPL Fund for the payment of claims and the funding of reserves. In addition, this section appropriates one million dollars as "the state's initial contribution subject to subdivision (10) of § 3-22-5."
SDCL 3-22-5(10) provides:
The board may:
(1) through (9) not applicable.
(10) Enter into agreements with the state, approved by the Governor or his designee, to establish what areas of coverage, if any, what limits of coverage and what costs for coverage will apply to the state's participation in the PEPL. Any funds remaining from the one million dollars designated in SL 1986, ch. 413 § 14 after funding the agreement provided for in this subdivision is available to the commissioner of administration to purchase insurance for the state pursuant to § 21-32-15.
I do not read the sections set out above to authorize the State to establish a self-insurance program outside the bounds of the PEPL Fund. Of course, there are almost no restrictions upon the agreement that may be entered into between the PEPL Board and the State; therefore, there appears to be no reason why a program, which would amount to a self-insurance program, could not be established through agreement with the PEPL Board. My answer to Question No. 1 is that the State may use the appropriated funds to in effect self-insure through the provisions of the PEPL Fund program.
IN RE QUESTION NO. 2:
SDCL 3-22-25 provides:
Notwithstanding any other provision of this chapter, no part of this chapter providing liability coverages for any public entity or employee shall become effective until the board has filed a statement with the commissioner of administration indicating that at least thirty public entities, other than the state, have filed binding commitments with the board to become members and at least five hundred thousand dollars in contributions have been received by the board.
At first blush, the section set out above appears to prohibit liability coverage from commencing under the chapter until two conditions are met; (1) that thirty public entities have joined, and (2) that the Board has received $500,000 in contributions. A closer reading of the section in pari materia with the rest of the chapter appears to allow a different interpretation.
First, SDCL 3-22-5 itself treats the State separate from the other public entities. Contrary to this conclusion is the definition of "public entities" found in SDCL 3-22-2(1) . That definition includes the State and all of its branches and agencies as public entities. On the other hand, SDCL 3-22-2(10) treats the State separate from the other public entities. SDCL 3-22-7, as amended by the 1987 Legislature, contemplates separate agreements with the State. The same is true of SDCL 3‑22‑8. As previously discussed, the State is treated separately in SDCL 3-22-13. In fact, the final section of the latter statute contemplates that the $850,000 reserve fund appropriated by the section shall be reduced by "any amounts paid in satisfaction of claims against the state...." SDCL 3-22-24 contemplates a separate period of initial membership for the State. Finally, the addition of subsection (10) to SDCL 3-22-5 by the 1987 Legislature evinces a clear intention on the part of the Legislature that the PEPL Board be allowed to enter into separate agreements with the State. In my opinion, the failure to define the State separately in terms of the phrase "public entity" is at most a mere oversight where all other provisions support the intention to treat the State separately.
Regarding the second condition, it would be my opinion that the $850,000 already appropriated by the Legislature for the payment of claims constitutes a contribution sufficient to satisfy the second condition of SDCL 3-22-25.
Accordingly, it is my opinion that the PEPL Board may enter into a separate agreement with the State, approved by the Governor or his designee, to address all or any part of liability claims which may arise against the State. This agreement may limit itself to certain types of claims or certain classes of courts or attorneys' fees only, or almost any agreement the State finds advantageous. Payment for the claims may be made out of the $850,000 appropriation and may, if desired, provide for additional contributions to be made from the one million dollars appropriated in the chapter. My answer to Question No. 2 is Yes.
IN RE QUESTION NO. 3:
SDCL 3-22-2(1) defines public entities as, inter alia, "all other legal entities that public entities are authorized by law to establish." In addition, SDCL 3-22-5(7) through (9) provide:
The board may:
(1) through (6) not applicable.
(7) Establish sub-pools within the PEPL fund whose liability shall extend only to members of the sub-pool, provide the administrative assistance necessary for operation of the sub-pool and enter into agreements with sub- pools regarding funding, passing through reinsurance, purchase pursuant to subdivision (6), or assumption of liability by the PEPL fund within limits established by the board;
(8) Approve existing or future agreements among members establishing nonassessable sub-pools, risk retention arrangements and risk sharing plans which may include agreements with public agencies of other states. However, such agreements with public agencies of other states may not allow assumption of risk liability beyond any amount established as premium or contribution;
(9) Enter into and establish nonassessable risk and liability sharing and pooling arrangements with public agencies and risk pools of other states. However, such agreements with public agencies of other states may not allow assumption of risk liability beyond any amount established as premium or contribution; and
(10) Not applicable.
Clearly, the statutes contemplate agreements between the Board and self- insurance pools or risk sharing pools established by public entities within this State. In my opinion, the Board has authority to treat agreements with the sub-pools as an agreement with the pool itself, where the pool is a separate legal entity. That agreement may provide that the individual members of the sub-pool are members of the PEPL fund as limited by the agreement, or it may provide that only the legal entity, sub-pool is a member.
In the case where the self-insurance pool or the risk retention arrangement is not a separate legal entity, it appears that the PEPL board could only enter into agreements with the public entities making up the self-insurance pool or the risk sharing arrangement. I base this reasoning upon the provisions of SDCL 3-22-2(1).
Accordingly, my answer to Question No. 3 is that the Board, in its agreement, may specify whether the sub-pool is one entity member, or as many entities as there are members in the sub-pool in any case where the sub-pool is a separate legal entity. Where the sub-pool is not a separate legal entity, but is a joint powers arrangement, the Board must count each of the signatories to the joint powers agreement as a distinct member. In addition, in order for any such agreement to be made, the requirement of the 30 public entities members found in SDCL 3-22-25 must be met.
Respectfully submitted,
Roger A. Tellinghuisen
Attorney General
