An entity selling property insurance coverage to school districts, which paid more than $1.5 million to the Oklahoma State School Boards Association for endorsements, is going out of business at the end of June, leaving dozens of districts facing significant liability even as they search for new coverage.

The Oklahoma Schools Risk Management Trust is a self-insurance pool, commonly referred to as an “interlocal,” that provides property and casualty insurance for public school districts in the state.

Records show the executive director of the Oklahoma State School Boards Association (OSSBA) also served on the governing board of the Oklahoma Schools Risk Management Trust for several years, including years in which the organization paid hundreds of thousands of dollars in endorsement fees to the OSSBA.

In addition, the physical address listed for the Oklahoma Schools Risk Management Trust on its website is the same building listed as the address for the Oklahoma State School Boards Association on its website. The trust is listed as being housed in 2801 North Lincoln Boulevard, Suite 219, in Oklahoma City, while the Oklahoma State School Boards Association’s physical address is listed as 2801 North Lincoln Boulevard, Suite 125.

On its website, the trust still declares, “The Oklahoma State School Boards Association endorses the Oklahoma Schools Risk Management Trust (OSRMT). As an alternative to commercial insurance, OSRMT allows member public schools to come together and jointly self-insure against the property and casualty exposures they face today. OSRMT is governed by public school officials in Oklahoma.”

The organization states that its Board of Trustees “is made up of school superintendents, school business officials and local school board members.”

Currently, that board consists of only two publicly identified members: Brenda Burkett, chief financial officer for Norman Public Schools, and Jason Sternberger, who is listed as superintendent of Kingfisher Public Schools but now serves in that position in the Hennessey district.

However, Shawn Hime, executive director of the Oklahoma State School Boards Association, has also been listed as a member of Oklahoma Schools Risk Management Trust’s Board of Trustees going back to at least 2017.

The “Wayback Machine” on the Internet Archive website, which maintains archives of other websites, shows that Hime was still listed online as a member of the Oklahoma Schools Risk Management Trust as recently as Nov. 27, 2020.

Hime’s service on the governing board of the trust coincided with payment of large endorsement fees to OSSBA. Annual reports filed with the Oklahoma Insurance Department show that the Oklahoma Schools Risk Management Trust paid the Oklahoma State School Boards Association $55,000 as part of a royalty agreement in 2020; $131,000 in 2019; $292,000 in 2018; $252,000 in 2017; $234,000 in 2016; $225,000 in 2015; $165,000 in 2014; and $148,394 in 2013.

For a member of the trust’s governing board to also be a prominent official with a beneficiary of the trust’s spending is not illegal, but experts say it raises ethics concerns.

John M. Holcomb, a professor of business ethics and legal studies at the University of Denver, said the arrangement “sounds like the executive director is in a classic conflict of interest situation.”

“Did he recuse himself from the decision for the trust to pay the $300,000 or from the OSSBA’s decision to receive the $300,000?” Holcomb wrote in an email. “He likely should have recused himself from one or both decisions.”

Oklahoma Insurance Commissioner Glen Mulready, whose agency does not currently have direct regulatory authority over “interlocals” like the Oklahoma Schools Risk Management Trust, also said recusal would be the typical ethical standard in such situations.

“There’s no statute forbidding that,” Mulready said. “By my way of thinking, it would be your typical ‘conflict of interest, I need to recuse myself on this vote’ sort of thing.”

Hime’s tenure on the board and the OSSBA’s continued endorsement of the Oklahoma Schools Risk Management Trust coincided with the trust’s financial decline.

The most recent independent auditor’s report filed with the Oklahoma Insurance Department shows that the number of schools participating in the trust has plunged dramatically in recent years, declining from 159 schools in 2018 to 88 in 2020. The trust served as many as 179 school districts in 2016.

The 2020 report showed that the Oklahoma Schools Risk Management Trust’s assets had fallen from $4.8 million in 2018 to $723,216 in 2020. The association had $3.1 million in total liabilities in 2020, giving it a negative net position of $2.4 million in 2020.

Mulready said the reason for the decline is straightforward.

“Not to oversimplify it, but clearly they just were not charging enough premium for the risks that they had,” Mulready said. “And then they end up, as they’re trying to recover from that—if they are—then you end up chasing people off too, and so you end up in this death spiral of less and less clients.”

Evidence that the Oklahoma Schools Risk Management Trust’s policies were severely underpriced is seen in a recent Facebook post by Clinton Public Schools Superintendent Tyler Bridges, who wrote to complain that school premiums for property insurance have increased by 150 percent to 200 percent in some districts in recent years.

School districts that participated in the Oklahoma Schools Risk Management Trust this year will likely face significant financial costs as a result.

An April 6 story by news site NonDoc reported that the Oklahoma Schools Risk Management Trust had sent an email to 78 member districts saying the program needed an additional $850,000 to operate for the rest of the 2020-2021 school year. The email said that would translate into districts paying an additional amount equal to 11 percent of their current-year premium.

In addition, NonDoc reported the email said the trust would not be able to continue operation unless it had at least 100 member districts by the end of the school year. If the trust ceased operations, the email indicated districts would be invoiced for an additional 42 percent of their 2020-2021 plan contribution to pay for the estimated $4 million “run-off” cost of the program.

The website of the Oklahoma Schools Risk Management Trust lists nearly 90 school districts as members.

Sternberger, one of the two remaining board members publicly listed on the Oklahoma Schools Risk Management Trust’s website, confirmed in an interview that the trust is ceasing operations.

“We sent out kind of a rough questionnaire of how many schools felt like they were going to be able to retain with us,” Sternberger said. “We didn’t get enough indication that would allow us to be able to maintain and reinsure and do the things to be a viable option.”

Mulready said officials have long expected the trust to cease operations.

“I’ve not received official word about that, but I’ve known for months now that the end of June it was going to be done,” Mulready said.

For much of its existence, the Oklahoma Schools Risk Management Trust existed with limited transparency, as did similar entities.

During his prior service in the Oklahoma House of Representatives, Mulready authored legislation that required interlocals to “use standard accounting practices” in reporting their financials for the first time, he noted, and that legislation also required those reports to be publicly posted on the website of the Oklahoma Insurance Department.

Prior to the 2021 legislative session, Mulready said he was approached by officials about enacting additional reforms that would allow the Insurance Department “to step in when things do get, not necessarily insolvent, but in bad condition,” due to concerns about entities like the Oklahoma Schools Risk Management Trust.

That resulted in passage of Senate Bill 738. That bill allows the state insurance commissioner to publicly notify participants in an interlocal if the Insurance Department has “substantial reason” to believe the insurer “is insolvent” or in a financial condition that would “render the continuance of its business hazardous to the public or to holders of its policies.”

SB 738 takes effect on Nov. 1. Under current law, Mulready could not notify school districts about the Oklahoma Schools Risk Management Trust’s financial problems.

“I knew they were in a little bit of trouble, but I didn’t really have any authority to do anything about it,” Mulready said. “I thought, y’know, if I communicate out to schools, we send out some blast that ‘hey this group’s in trouble,’ we may end up in a lawsuit from them suing us over that because we don’t really have any authority to do that.”

Under the new law, the insurance commissioner can now require an interlocal organization to file a plan to address financial shortcomings and the law allows the interlocal to be placed under supervision or placed in conservation, rehabilitation, or liquidation proceedings.

State Sen. John Michael Montgomery, who authored the law, said SB 738 was advanced due to immediate concern about the Oklahoma Schools Risk Management Trust, but noted similar issues have arisen with other interlocals.

“At the end of the day, these ‘not-for-profit’ deals are supposed to function as insurance, and the reality has been—quite consistently—that they’re not meeting that expectation,” said Montgomery, R-Lawton. “That’s the issue here and that’s what 738 is supposed to allow is for the insurance commissioner to be able to step in and analyze if something is up to snuff.”

Montgomery agreed with Mulready’s observation that the Oklahoma Schools Risk Management Trust failed to price its insurance coverage at an appropriate level, leading to financial problems once it had to cover claims following bad weather events.

“The reports pretty well suggest that they’ve had financial issues for years now, and it was just kind of a matter of time for an adverse event to kick things over the edge,” Montgomery said.

Even without SB 738, Mulready said officials at all school districts could review the Oklahoma Schools Risk Management Trust’s annual reports before signing up for coverage through the trust. But he said such a review may not have occurred.

“You’d like to think that every school is doing their due diligence and they’re going to our website to look at their financials, but I’m not sure I’m convinced that that does happen,” Mulready said. “They see a lower premium, and there’s a bunch of schools in there, so it must be okay, right?”

OSSBA did not respond to requests for comment for this story.