CSG: Municipal Impact - The Risk of School Shootings on School Finances and Credit
By CSG Partner Joseph Krist
Every year, states confront budgeting and how much funding should go to schools. Local school districts are among the most prolific issuers of municipal debt, much of which is backed by programs that direct state aid to support the timely repayment on bonds issued. As just reported this weekend in a front page story in the New York Times, schools are now confronting safety, asking how they can secure their buildings and students, and how to address the costs of doing so. It has been especially highlighted by the efforts of students nationwide to campaign for greater security measures. The shooting at Marjory Stoneman Douglas High School in Parkland, Florida, and the shooting later at the Santa Fe High School in Texas, have created implications for local school districts nationwide, especially in jurisdictions that have open-carry gun laws. The Municipal Impact Coalition and Court Street Group examine the issue of school safety and its effects for insuring against the risk in an era of tight school budgets.
Recent school shootings have raised many questions and one that has gotten limited attention is the potential financial impact of these events on district finances. Districts and their risk managers -- directly, through sponsored pool providers, and reinsurers -- are paying attention not only to the management of the physical safety of their students, teachers, and administrators, but also to reassessing their liability position, given the costs associated with these events that might ultimately be borne by the local taxpayer.
Given that backdrop, we thought it prudent to see how insurers are thinking of the issue. We also wanted to look at the idea of arming teachers and what credit implications that might have. We believe those behind that idea did not consider the insurance risks of introducing guns into classrooms. Lastly, we explain who in the end pays for these such things.
So we spoke with various participants in the field.
To date, the majority of the input we have received has been from the insurers. We spoke with insurance brokers and underwriters to understand their view of the insurance process from the standpoints of supply and demand. We sought to determine the level of that demand for insurance, its frequency, its geographical concentration, if any, and the relationship to state and local gun laws to the underwriting of insurance.
To the extent there were surprises in what we found, probably the greatest misplaced notion was the idea that the nature of state and local gun laws had any bearing on the willingness to underwrite insurance. All of the parties we spoke to said that these laws were not relevant to their underwriting process. It appears, if anything, that if some districts are being penalized by their gun laws it is because of a perception by the insurers as to the general availability of guns on a nationwide basis. That is to say that effectively a worst-case opinion is taken for the ability of a motivated perpetrator to obtain a firearm from anywhere in the country. So there is not much of a cost or premium available to school districts in states with restrictive gun laws.
However, there is more to the story.
So what is it that allows underwriters and brokers to provide active shooter liability insurance?
The insurers we spoke with said they assess individual situations on a variety of factors and most seem to be about prevention and planning. That mechanism does not rely on physical factors as much as it does on more subjective, or softer factors, such as training and procedure in identifying and anticipating potential perpetrators.
The reality is that the vast majority of schools remain physically open environments. The kind of barriers and detection devices that would be necessary to effectively secure the typical American school simply do not currently exist. This is true for a variety of reasons -- pedagogical, emotional, cultural, and political. Then there is the issue of cost. More on the cost below.
This reality is overcome by the actuarial approach that is the bedrock of the insurance and risk-management disciplines. From an actuarial point of view, the events in Florida and Texas are considered to be infrequent. While they are horrific and rightly engender a highly emotional public response, they do not happen often enough to become an impediment to the underwriting of insurance. They also have not resulted in a significant enough financial impact to the providers, so as to render the risk uninsurable.
Numbers vs. Perception
The risk associated with mass shootings is typically not covered through the general liability policy-writing process. Its coverage stems from the insurance industry's experience with the provision of kidnap and terrorism insurance. Once again, this is an instance of numbers versus perception. In spite of the occasionally spectacular nature of their visibility and/or scale, they are not as frequent as one may perceive them to be. Again, the reality is that there is a manageable body of experience and data on which to base an underwriting decision. The result is a favorable impact on the cost of this insurance based on an actuarial assessment.
We asked directly whether there had been any particular inflection point after which the demand for so-called active shooter insurance for schools increased. There seems to be no one particular event (no, not even Sandy Hook), but the providers did indicate that overall demand has increased in the past 12-24 months. There are obvious spike points in the aftermath of large-scale high-profile gun events, but that is not surprising. There was an increase in queries and writings in the weeks immediately after Parkland. According to insurance brokers and underwriters, there has not been an associated price increase.
Here the actuarial approach mutes basic supply and demand impacts on price.
Reality intrudes. The school districts do not have access to limitless amounts of funding. Consequently, insurers’ ability to price the product at competitive levels sufficient to make it economically practical for districts is limited.
At the same time, an increased number of insured within the constraints of maintained insurability standards -- unlike municipal bond insurance, which took on increased risk at the same time it was engaged in a vicious discounting war -- dampens any price increases. What also guides insurers is that this class of insurance is a more discretionary purchase than general liability insurance. Once it is purchased, it is typically renewed, hence there is less need to maximize the price impact of the initial purchase of the product. For FBI data on shootings in 2016 and 2017, see the Appendix.
Let’s Get Back to The Arming of Teachers -- An Unattractive Concept
From the insurers' standpoint, they don’t really like it, and there are a number of considerations that lessen its appeal. Away from the general issue of introducing a geometrically higher number of guns into the classroom, training and psychology are significant ones. The attributes that make an individual a good fit for the role of a security provider, peace officer, or other law enforcement agent are not the same as a vast majority of teachers. The ability and willingness to shoot at a target without consequence requires a huge personal step to extend that willingness to shoot at another human being, regardless of whether he/she is armed. The special nature of the teaching profession does not lend itself to the special nature of engagement with an active shooter. So the risk of unintended consequences from the presence of additional arms seems to offset any perceived benefit.
Nonetheless, there are provisions under state-sponsored insurance programs for a situation in which teachers are armed. In one state, insurance policies related to staff weapons have not changed since they were enacted by trustees in 2013. In that state, (which the insurance provider we spoke to asked that we not identify) ideally its schools will contract with a local city police department or local county sheriff’s office for security, because of the higher level of training required of these officers/deputies.
If they do this and the municipality assumes the liability for the actions of their personnel, then the insurance provider charges no additional premium.
If they do this but the insurer is responsible for providing the liability, it charges $1,500 per full-time employee or FTE. Either way the insurer will potentially have some liability exposure for the actions of security.
If the school decides to arm their own staff and make it part of their job description, the insurer requires a higher level of training (Department of Public Safety Standards and Training (DPSST) Certification) and charges $2,500 per FTE.
If they aren’t DPSST certified then coverage is excluded.
Lastly if the district is silent (has no policy), their employees are permitted to exercise their right to carry a weapon on campus provided that they have a valid conceal-carry permit.
This particular program does not charge any additional contribution or premium. Coverage will be excluded for the employee if the employee has a negligent mishap with their firearm.
The insurance provider’s policy was enacted to motivate the schools to contract with a municipality if they want an armed presence on campus. If they choose to take it in-house, then a higher level of training than just a concealed-carry permit is required.
It’s About the Data
Right now the insurers are supported by the lack of definitive data to support a relationship between state gun laws and active shooter insurance rates, however, it’s possible that might change. Substantial federal funding for research on gun violence has been essentially eliminated. It dates back to Congressional action under an NRA-backed piece of legislation known as the Dickey Amendment. It was first inserted as a rider into the 1996 federal government omnibus spending bill which mandated that “none of the funds made available for injury prevention and control at the Centers for Disease Control and Prevention (CDC) may be used to advocate or promote gun control.”
In the absence of federal funding, the private sector has not significantly responded since then. However, Kaiser Permanente, the nation’s largest integrated health system, is investing $2 million in research to prevent gun injuries and death. The Kaiser Permanente Task Force on Firearm Injury Prevention will conduct clinician-guided research that aims to identify evidence-based tools to guide clinical and community prevention efforts. Their physicians and nurses treated more than 11,000 victims of gunshot wounds in 2016 and 2017. The system has pledged to make the research results publicly available and to serve as a model for addressing and effectively disseminating findings in communities nationwide.
This could lead to other privately financed research efforts in the field, the results of which could incorporate more wide-ranging and current data than is presently available.
All of this is not to say that there will be no financial impact because of the recent shooting incidents. Reuters reports that at least 10 U.S. states have introduced measures to increase funding for hardening of school buildings and campuses, add resource officers, and increase mental health services. Physical actions include bulletproof windows, panic buttons, and armored shelters in classrooms. The National Conference of State Legislatures (NCSL) cites two hundred bills or resolutions that would address some aspect of school safety in 39 different states. Half of them were introduced—in 27 states—since the events in Parkland on Feb. 14, 2018. 37 bills—in 17 states—expressly deal with the possession of firearms in K-12 schools.
Eleven states have proposed expanding concealed carry rights in K-12 schools, including six that do not currently permit the practice.
Above reflects the overall gun ownership laws in the U.S.. The red-colored states have what would be considered the most restrictive open carry laws. The level of restriction lowers through the color spectrum with orange being a bit less restrictive, the yellow even less restrictive, through to the shades of green with the darkest being the least restrictive. According to the Wall Street Journal, eight states allow teachers to carry guns and at least six states, including Florida, Alabama, Mississippi, Missouri, Maryland, and Oklahoma, are considering legislation to let school personnel carry weapons. There is no correlation between the current situation of open carry states and the consideration of arming teachers.
Thirteen states have proposals like Minnesota Senate Bill 3471 to strengthen school building security through infrastructural improvements, including metal-detectors, alarm systems, and reinforced doors. Eighteen states are considering proposals to increase access to mental health services. These proposals would require a mental health professional in K-12 schools, provide mental health training for teachers and counselors, collaborate with local mental health professionals, and/or implement a mental health awareness curriculum.
New Jersey has taken a significant step with a recent decision by the State Legislature decision to add $500 million to a general-obligation bond sale to pay for security upgrades at K-12 schools. The authorization awaits approval by voters in November.
Bond issues have been proposed in a number of localities spurred on by overall physical plant issues but given increased impetus by the Parkland shooting. Nearly every significant bond proposal we have reviewed has included installation or upgrade of existing security components as a part of its financing request.
The effective close of the legislative season enables us to assess the steps taken as the result of the Parkland incident. Additional firearms in schools have not been the answer. The concentration of actions has centered on increased training, physical strengthening of existing structures, and new procedures regarding the control of access to school buildings and property as we discussed earlier. The effort to arm teachers has been greeted with widespread skepticism and a lack of support on the part of the electorate and the public at large. Bond initiatives which have received approval to date have concentrated in the aforementioned areas.
What Does It All Mean for Investors and Issuers?
Recall what we indicated about the impact of arms in schools versus the existence of procedures and protocols on the insurance underwriting process. The best mitigation measures are seen as those that provide for anticipation and observation and mitigation pre-event.
The key will be how the extra services will be funded for investors. Some legislation clearly assigns the cost of some measures to the state. This includes the cost of state police assigned to schools in Georgia; a formula for state funding in Minnesota; and authorization for state funding in Maryland.
So for now, the initial impact of school gun violence will, like so many other issues, initially fall on the states. As much as anything, this reflects the huge role that states play in the funding of education. State funding, often based on attendance-based formulae, is regularly the primary source of local education funding. Local property taxes are typically used as a backfill for reduced state funding. This is not to say that the local property tax burden is insubstantial for many taxpayers where school taxes are likely the primary source for taxation. Given the generally strained status of state finances and the increasing competition for funds driven by employee-related costs (current and legacy, i.e. pensions), it is likely that states will seek to mitigate the cost of safety-related expenses by slowing the rate of growth or actually cutting state aid to local schools not improving their safety.
Who Pays In the End?
Ultimately, the pressure will find its way to local taxpayers. This will likely pressure local school finances and increased local revenue demands. State aid has not kept up with inflation as well as increasing demands for increases for absolute increases in state aid. While education is a major consideration when voters go to the polls as is the case in several ongoing gubernatorial races, this trend has continued. This reflected in the job actions undertaken by teachers across the country. These efforts have generally received high levels of public support.
This makes the outlook for school district finances uncertain as school tax increases often require voter approval, either for outright increases or for increases beyond overall property tax limitations. In an environment increasingly resistant to increased taxation, this will result in many instances of lower overall underlying credit quality. The one saving grace for investors is the existence of many credit mechanisms by which state-generated revenues may be accessed or diverted for debt service in the case of revenue inadequacies or payment defaults on bonds. Often it is these programs that allow local districts to finance their school capital needs at relatively favorable borrowing costs that reflect the state's credit rather than their own underlying creditworthiness.
In spite of the ebb and flow of media interest, political activism, and public interest, school safety will remain at or near the top of concerns related to public education. So long as the country retains its cultural and political affinities toward access to and ownership of guns, it will generate real issues of resource devotion in an era of resistance to taxation. As such, it will retain a position of prominence in any discussion of municipal credit, especially as it regards the finances of local school districts across the country
Appendix: More Food for Thought: Fed Data
The FBI has designated 50 shootings in 2016 and 2017 as active shooter incidents. Twenty incidents occurred in 2016, while 30 incidents occurred in 2017. Seven of the 50 incidents occurred in educational environments, resulting in five killed and 19 wounded. Two incidents occurred in elementary schools, resulting in two killed (including a first-grade student) and eight wounded (one teacher shot, three students shot, four wounded from shrapnel). One of the shooters killed his father prior to heading to his former school. A volunteer firefighter tackled the 14-year-old shooter and restrained him at gunpoint until law enforcement officers arrived and arrested him. In the other incident, the 44-year-old shooter killed his wife at their home, then killed and wounded a number of people the next day at multiple locations before and after he opened fire at the school.
One incident occurred in a junior/senior high school, resulting in none killed, four wounded (two from shrapnel, all students). The 14-year-old shooter, a current student, was apprehended near the school by law enforcement officers. Four incidents occurred at high schools (one outside a school during a prom), resulting in three killed (all students) and seven wounded (all students). Two shooters (15 and 17 years old) were current students, and two shooters (18 and 21 years old) were former students. Two shooters were arrested after being subdued by school staff members. One shooter was wounded during an exchange of gunfire with law enforcement officers and died a few hours later at a nearby hospital, and one shooter committed suicide before police arrived at the scene.