Town officials have asked the Board of Education to leave a reserve of $3.1 million in its medical expenses account to offset a deficit of $4.7 million in the town's overall fund for medical expenses.

First Selectman Michael Tetreau and Board of Finance Chairman Tom Flynn on Jan. 24 asked the school board that its reserve of $3,119,960 remain untouched so that the negative balance of $4,738,115 as of June 30, 2011 does not grow any larger. Tetreau said a further increase in the overall fund deficit could negatively affect the town's credit rating, which Moody's has set at AAA with a negative outlook in part due to that particular deficit.

"That's the number that Moody's is looking at," he said prior to the board's vote on the superintendent's proposed 2012-13 budget. "We don't want to see that get more negative."

Tetreau said the $4.7 million deficit is driven by a negative balance of $7,615,678 in the risk management fund, an account funded by the town for the past four or five years that pays primarily for worker's compensation claims by both school and town employees.

Tetreau said a negative impact to the town's credit rating as a result of the overall deficit could cause the town's debt service to go up, ultimately causing school projects to cost more.

"It's in all of our best interests to work together to try to manage this," he said.

Tetreau said the town would like to lower the risk management fund deficit over coming years to reduce the overall fund deficit instead of all at once to prevent a one-year 3 percent tax increase to taxpayers.

"That's our challenge," he said.

Tetreau passed out a table showing that worker's compensation costs for fiscal year 2010-11 totalled $1.25 million for the Board of Education side and over $855,000 for the town side. He said the town's budget for worker's compensation has gone up from $1.5 million in 2010-11 and $2.1 million for the current fiscal year and to $2.65 million projected for 2012-13.

"That's way too much growth, so want to make sure we're doing everything we can on an operational basis to keep that number under control," he said. "While we're doing that we're just asking for board cooperation and from the central office in terms of keeping that number where it is and not drawing it down anymore."

Tetreau also presented a "Memorandum of Intent on Health Insurance" proposing that the board budget its contribution to maintain an estimated health insurance account at the end of the succeeding fiscal year at 200 percent of "incurred but not reported" (IBNR) costs. The document also proposes, among other things, that the town acknowledges the goal of increasing its contribution to its health insurance account for fiscal years 2012-13 and 2013-14 in the town's risk retention fund, which includes worker's compensation claims, with the intent of maintaining a balance of 125 percent of the IBNR.

Board member John Convertito asked why the town does not maintain a 200 percent balance at an additional cost of $1.2 million to $1.4 million to the town while the board maintains a 125 percent balance.

In response, Flynn said the town would just transfer $1.2 million to $1.4 million of board-related worker compensation costs to the board if that were to happen.

Board member Perry Liu asked why there was a need for the memorandum.

Flynn said the document is an attempt to establish "rules of the road" for the town and the board to work together to protect the town's credit rating by keeping the overall funding balance from going too low as it tries to reduce the risk management deficit.

Liu said he is concerned that it protects the town but not the board in case the board's budget is cut, so the document should be agreed upon after the town and board budgets are finalized.

Flynn said the town is not willing to take that risk given the negative effect doing so could have for the town.

Liu questioned the legality of the document in that it proposes in writing setting money set aside for expenses not related to education.

"I don't think we need an MOU (memorandum of understanding) to do what you're asking," he said.

Superintendent of Schools David Title said the document has been reviewed as amenable by two lawyers, but Liu asked why the board has not seen any documentation to that effect.

Flynn said one could argue that the interest saved by maintaining the AAA rating does save money that can be spent on education.

Fattibene said he was concerned that the document is being presented to the board at this point given the town had indicated making possible amendments to the language.

The board postponed approval of the document to allow further review by the boards of Selectmen and Finance.