Newsletter Sign-up

By MARY CAFFREY, a former statehouse reporter and municipal township manager, who covered public issues for more than 20 years

In Baltimore, groups representing unions and the NAACP decried an April plan to slash the $31 million parks budget by more than a third, shutting pools, recreation centers and trimming maintenance staff for each park by more than half.

And in Fresno, Calif., Mayor Ashley Swearengin on May 3 became the latest of her state's mayors to raise the possibility of outsourcing park maintenance, as she seeks to close a $30 million gap in her $213 million budget. Her spending plan calls for limited mowing, landscaping and "noncritical" repairs.

In many cities and states, these are tight times.

The National League of Cities forecasts funding shortfalls for municipalities between $56 billion and $83 billion through 2012.

In Tucson, Ariz., for example, this year's gap is $20 million. The league expects cities to close deficits with job cuts and by delaying maintenance and capital infrastructure projects, choices that have consequences for risk managers.

Compared with previous downturns, "This recession is so deep; it's so prolonged," said Roosevelt Haywood III, who serves as president and CEO of Haywood and Fleming Insurance, in Gary, Ind., and Chicago.

As 2010 began, finance officers in Tucson discovered a deficit in the city's self-insurance fund. In February, the hole deepened when a jury assigned the city one-third of a $40 million award to the family of a man killed by a drunken driver because of poor road design.

In better times, the city might tap the general budget to shore up the fund, then raise assessments on each department for several years to boost reserves.

Municipalities and school districts rely on property tax revenue, so foreclosures and declining values have caused chaos even in relatively healthy places. In Crowley, Texas, two brand-new intermediate schools, built with bond funds approved during the boom, stood largely vacant this year. There were plenty of students; there was no money to open them.

The recession has created unprecedented challenges for public sector managers, and for the insurance professionals who work alongside them. More than a half-dozen brokers, insurance pool executives and others who spoke with Risk & Insurance® say today's hurdles represent more than squeezing out savings to get through a bad budget year or two.

Brokers are helping their government clients prepare for a future with less money and fewer employees, and for dealing with workers who must handle more work with fewer perks.

Without careful attention to management training and documentation, these workers can be expected to file more employment practices liability and workers' compensation claims. Insurance professionals in states like New Jersey and California, home to strong unions, say the groundwork already is being laid.

Recessions expose underlying management weaknesses, the insurance professionals say, because there's no longer enough revenue to paper over problems. On the plus side, tight times have forced long-overdue conversations about good risk management practices because some changes happening today will endure during the recovery:

-- Tuscon awaits state approval for a "tort liability charge" that would be added to the tax rate. Joel Peterson, Tuscon's risk manager, hopes that more accountability comes when the jury pool sees this cost on a tax bill. But critics of Tucson's self-insurance system are calling for it to be farmed out to the private sector.

-- Harold Pumford, CEO of the Association of Government Risk Pools, said there's more emphasis than ever on being a good pool member. Those entities that take risk management seriously are calling for surcharges on members with too many claims, or, in extreme cases, pushing members out. David Grubb, executive director of the New Jersey Municipal Excess Liability Fund, said towns with excessive claims will face surcharges this year for the first time.

-- Haywood said it's much easier to get public entities to require private groups to assume risk when they hold events on public property. That wasn't always so. "Before the economy tightened up, people had the attitude, 'Hey we can do things.'" Now, he said, there's recognition that without transferring the risk, the event can't happen.

Amid the tough times, there is good news for insurance brokers. First, brokers say they are strengthening relationships with public sector clients, by working harder than ever on risk management, especially to prevent claims by stressed-out or laid-off workers.

Second, the public sector insurance market is strong. Across the country, insurers are recognizing that while government may take its time paying, it isn't going out of business. Brokers who represent municipalities and school districts are finding more choices and good prices for their clients.

"The insurance market and the reinsurance market have been very accommodating of the times we are in," said John Chino, of Aliso Viejo, Calif., area senior vice president and regional director for Arthur J. Gallagher. Chino's area covers more than 250 public entities, including San Francisco. "Right now, there are a lot of companies that normally won't write public entities that will."

The challenge, the brokers agree, is helping public sector clients stay focused on best practices and long-term goals--even adding certain types of coverage--while budgets are strained. Doing this, brokers and insurance professionals say, means staying focused on how your role affects the bottom line, especially in the near term.

What challenges do they see?

Experienced brokers say workers' compensation claims always rise in a downturn, but the sheer numbers of public sector layoffs, furloughs, and reassignments make the recent recession stand out. A September 2009 analysis by the Center for Economic Policy Research put the public sector layoff total at 110,000 nationwide; and the number has soared since then. And "layoff" counts do not include other disruptions, like the more than 17,400 San Francisco city employees, who in March were fired and then rehired for shorter work weeks, saving $52 million.

"The economy has contributed to an increase in disgruntled employees," said William Becker, executive vice president for Aon Risk Services in Washington, D.C. For those public sector employees who remain on the job, the working environment has deteriorated. "You're going to see an increase in employment practice claims," he said.

Data are hard to come by, but so far the results may vary depending on a state's legal system. Haywood, in Indiana, and Dot Hedman, senior vice president of Roach, Howard, Smith, and Barton, a Dallas insurance brokerage, said the tort limits in their states appear to be working. But in California, Chino said he has heard reports of employees hinting at discrimination claims, after they were not promoted into a higher-paying position vacated by a retirement.

In New Jersey, where the Wall Street crisis has become a property tax crisis affecting virtually every town and school district, Grubb is projecting an 85 percent increase in reserves for EPL claims. "And that might not be enough," he said.

Douglas Borden of Borden Perlman Insurance in Lawrenceville, N.J., whose client base is 15 percent public sector, said while employment practices liability claims are up in both public and private sectors, so far he is seeing increased workers' comp traffic only in the public sector.

More than ever, training and documentation matter. "We are working hand in hand with the adjusters and the nurses on the workers' compensation side," Chino said.

"You have to be interactive, and work with (clients) year-round," Haywood said. "If you bring the value in risk management, you affect their desire to even go out for other quotes."

Today's budget cut is tomorrow's claim. From his national vantage point, Pumford is concerned about all the deferred maintenance going on, especially after the damage that occurred from the harsh winter in much of the country. From past experience, he knows that claims are on the way.

About 10 years ago, insurance pools he works with started making distinctions between "accidents" and "lack of maintenance," with sewer system claims, refusing to pay those that were due to negligence by the public entity.

When budgets are tight, maintenance is often the first thing to go. "But if you don't fix the playground equipment, eventually it breaks," Pumford said.

Chino agreed, and said property maintenance isn't the only concern. "During a recession, crime goes up. As crime goes up, there are more police on the street, taking them out of the administrative areas," he said. "Your policies and procedures and your hiring practices take a back seat," and eventually this proves costly, he said.

Avoiding new risks. Aon's Becker warns about fidelity claims, and encourages municipal managers to ensure their municipalities are adequately covered for employee theft.

"This economy can cause pressure on employees and their personal finances, which encourages those who already have the inclination to steal," he said.

Both brokers and Pumford warn about cyber-risk, as municipalities in particular look for new ways to communicate with residents and provide online tools to collect taxes and fees. Pumford said the "hacker" incidents he's heard about haven't amounted to large financial losses?yet. But the implications are enormous.

"So many of them take payments online," Hedman said. "With budget constraints, you don't have people jumping up and down to add coverage, but there's a huge exposure out there."

Every dollar is scrutinized. Brokers across the country say premium savings is being achieved with a menu of options: Increased deductibles; higher self-insured retention; and lower short-term coverage limits. These days, there's no single solution for every public entity, said Ann Gergen, director of the NLC Risk Information Sharing Consortium.

What's changed, according to Gergen and others, is the assumption that public entities will ever return to business as usual. In every region, the hunt for savings puts increased scrutiny on insurance costs, which are being weighed politically against bread-and-butter items like police services.

It's still possible, however, to get a public entity to spend money if one can produce savings. For example, Hedman said, a property appraisal that shows a significant decline in value more than pays for itself if the property insurance premium goes down.

Discussions within Gergen's consortium are tackling not only traditional ways of saving money, but also how the evolving landscape?what municipal managers call the "new normal"?will change the very nature of calculating risk.

While Haywood and Hedman transfer liability away from public entities through contract language with vendors, Gergen is taking the conversation to another level:

How will risk be calculated if public services are no longer performed by employees? How does a risk manager's role change when city parks are maintained by contractors who may cost less, but who don't bring the same people to the job site everyday? What happens when city services are performed by volunteers?

"Every decision is under a microscope," Gergen said.

August 1, 2010

Copyright 2010© LRP Publications