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By DAN REYNOLDS, senior editor of Risk & Insurance®

Wayne Salen remembers the good old days, even though they weren't really the good old days.

The request was utterly outside Salen's power to fulfill, even if Salen had been disposed to do so.

Salen remembers turning to the politician's attorney, who had accompanied the lawmaker to the meeting, and asked the attorney whether he understood what the good public servant was asking him.

"He is asking me to do something that is contrary to workers' comp law and has been set by his personal physician," Salen remembers telling the attorney.

Only then did it dawn on the attorney that maybe he and his client had sashayed into the wrong man's office.

"There's been no request for anything here," the attorney said, according to Salen's recollection. "We were just dropping by to say 'hello.' " With that, the lawmaker and the attorney were out the door.

What Salen, now the director of risk management for Labor Finders International Inc., a temporary staffing company based in Palm Beach Gardens, Fla., recounts was an instance of political pressure being placed on a public sector risk manager.

For the New York state politician, the requests didn't strike him as anything out of the ordinary.

Salen ultimately left that job for the private sector and then returned to his public sector role for a time after his successor, a political patronage hire, was determined to have mismanaged the department to the tune of several million dollars.

Risk managers that try to move from the public sector to the private sector battle a stigma that they are not quite good enough for risk management in the private sector, Salen said.

These are impressions, perhaps, that many in public sector risk management say are unfounded, and wish were nonexistent.

PUBLIC CONTROVERSY

Recent headlines involving alleged corruption, however, may reinforce the stigma that public sector risk managers play second fiddle to their risk management peers in the private sector.

The accusations are damning. They involve verbal agreements around broker selection, shadow risk departments constructed for the alleged purposes of committing fraud within public sector risk departments, and risk management departments that were so disorganized that even prosecutors and auditors are unable to determine whether missteps are due to fraud or plain incompetence.

Exhibit A: Stephen Hill, former risk manager for the Detroit Public Schools. In 2008, the school district filed suit against Hill alleging that he mismanaged millions of dollars in school contracts. Hill has not made public statements in response to the charges.

Exhibit B: In July 2010, Washington D.C.'s risk manager Kelly Valentine was placed on administrative leave when audits revealed her department's record keeping was shoddy. Valentine did not respond to requests for comment when she was placed on leave.

Exhibit C: In 2010, audits of the Delaware River Port Authority, which manages bridges and public transit for New Jersey and Pennsylvania, revealed that the agency had no written policies for procuring insurance brokerage services, and had constructed a controversial "true-up" arrangement for brokerages based in the two states to share fees.

According to a port authority spokesman, the authority has since issued four requests for proposals for brokering work for its owner-controlled insurance program, its health and welfare benefits plan, its bridge property/casualty and its pollution legal liability program.

It would, of course, be unfair to generalize about the state of public sector based on a few cases, so we won't.

But just as there can be distinct classes of risk management competency in the private sector, so are there in the public sector, said Aliso Viejo, Calif.-based John Chino, an area senior vice president and long-time broker for Arthur J. Gallagher & Co.

Chino, who works with a lot of public sector risk pools in California, said he has seen real progress in the competence of large public agency risk managers and the staffs of the large risk pools that so many California municipalities and school districts belong to.

"There has been an evolution there and I believe what has happened is that their knowledge, their reach, their scope, has changed quite a bit," Chino said.

But he said there are plenty of examples where smaller municipalities treat risk management and insurance as an off-the-cuff exercise. Not surprisingly, in these communities the art of managing risk and hedging the risk through transfer mechanisms is sorely lacking. "They tend to know nothing," Chino said.

"These are the people who may have a job, say human resources, facilities, something other than risk management, and somebody appoints them and says 'You are a risk manager now,' " Chino said.

"In terms of that basic group, the people who are the facilities person, the human resources person who gets the job of risk manager, we see almost no evolution."

But in 25 years, Chino said he has seen a lot happen in terms of the education of those public sector risk managers who have access to resources to improve themselves.

"I think that gap (in the perceived competence of public sector risk managers and private sector risk managers) is narrowing quite a bit," said Dot Hedman, a senior vice president of Roach, Howard Smith & Barton based in Dallas.

"I would say that the gap isn't totally closed but I would say it is almost closed in many different respects," Hedman said.

"The more I succeed, the more they succeed," said Laura Peterson, president of the Public Risk Management Association (PRIMA), as she explained the capacity for public sector risk managers to share information and improve themselves.

For public risk managers, there are burdens that come with managing risk in the public eye that private-sector risk managers don't have to contend with, Peterson said.

But the transparency that should inform much of what government does can also translate to transparency in education and information sharing, she also said.

"If somebody wants to know my salary, they can call and get it because it is a public record," said Peterson, who is the director of risk management and insurance for the University of Wyoming.

"So there is no reason for me not to share my successes and even my failures for that matter with somebody else who can benefit from them," Peterson said.

Peterson said she sees little difference in the competence levels of public sector and private sector risk management. As in walks of life you will find good and bad on both sides of the fence, she said.

"I think the public sector and the private sector are the same in that you have people who are wonderful and experience and knowledgeable in both, and you have people who are not so great in both," Peterson said.

Like Chino, Peterson said that there are a lot of very small public entities that may have only one person with three responsibilities rolled into one: the city clerk, the human resource officer and the risk manager. "And to that extent they are never going to be an expert in risk management," she said.

"I think you have high achievers in both sectors and you have some bad actors in both sectors so I wouldn't generalize on that," said Scott Rohr, a managing director of public entity for Markel Corp. based in Richmond, Va.

"I see a lot of clients and most of the people that I associate with are very competent and are upgrading their competency on a regular basis," Rohr said.

"It would be easy to point to some of the missteps the private sector has taken, especially recently, that make the public sector malfeasance pale in comparison."

Indeed, the outsized risks taken by some financial institutions in the United States make Stephen Hills' alleged fraud look like a rounding error.

Even with the gargantuan errors made by private-sector risk managers, it doesn't mean that public sector risk managers can't learn from their own mistakes. "I think there are all sorts of good things that have come out of maybe, some of the bad headlines of the past," Peterson said.

"There is a significant amount of awareness now and there are a lot more procurement laws and transparency laws that really insulate risk managers or other program directors at the government level from the kinds of political pressures that there might have been in the old days," she said.

"The public sector has become more and more controlled about these kinds of procurement processes."

While that opinion seems to be supported by other voices, there is something unfolding in the public sector that is more threatening than the discipline's evolution on moral grounds: the increasingly straightened public purse.

The weak economy has cut into tax revenues across the board for local, state and federal governments, while entitlements for public employees continue to expand pursuant to collective bargaining contracts.

The results are dire budget shortages in many states.

"I wouldn't say that risk management is being proportionally hurt more than other public sector programs but certainly whenever there is a look to cut budgets, risk management is suffering their fair share," Peterson said.

"For the private sector clients the economic difficulties peaked about a year ago," said Roach, Howard, Smith & Barton's Hedman. "For the public sector they were freezing hires. Now we are actually starting to see the cuts, budget cuts, cuts in the number of hires, cutting of programs so I would say the difficulties are peaking this year."

"There is a strain on the whole (insurance) purchasing side," Markel's Rohr said. "Obviously, in an environment like this insurance costs have to be analyzed.

"I think the budgetary crisis is really starting to hit the public sector in a deep way that may have hit the private sector earlier," Rohr also said. "We are all dealing with it in different ways but we all have to do more with less and what that means are cuts in everything from hours of operation to personnel and each program has got to handle that in different ways."

In smaller municipalities where the risk manager might not have had that many resources to begin with, the situation is dire, said Chino, but there are measures risk managers in the public sector can take, in good times and in bad, to help their fellow public sector risk managers.

Think of it as the "risk manager for hire" approach. Some of the large risk pools in California are renting or leasing risk managers to the smaller municipalities who either never had one to begin with or lost one due to budget cuts, Chino said.

Though the approach is not necessarily new, it's a good idea.

Small municipalities have access to the expertise of a full-time risk manager from a much larger organization. In exchange, and in theory, the municipality is less likely to make a big mistake that could affect the entire pool, whose role it is to accept and spread the risk transferred to it from a smaller municipality.

"In many cases the pools will step in to sort of implement some of the programs that have been put in place over the years (in the smaller municipality), Chino said.

"They (the pool's professional staff) can keep return-to-work alive," Chino said, citing an example in workers' compensation risk management. "At least you won't have to go backward."

"I would say that a lot of the pools that we work with have risk management departments that work with their smaller members and historically have done that or they have third-party administrators that provide that same type of service," Rohr said.

In some cases, he said, Markel is stepping in to help sponsor workshops for pool members suffering from reduced budgets.

PRIMA is stepping up as well, Peterson said, waiving fees for webinars to members this year. Because, as we all know, two of the first things that gets cut when governments, and companies for that matter, get to cutting are travel budgets and education.

"That includes staffing cuts and cuts for training and for travel which ultimately can have an impact on the education of staff," Peterson said.

"I think you'll see a lot of public sector risk management associations focusing on adding scholarships that they didn't provide before for members who have had cuts in their travel budgets."

This is also a time for the public sector brokers to get creative, Hedman said.

"Because their insurance program, beside payroll, is probably their second largest expenditure to go through," Hedman said.

"That's when it is my job to help them decide what is the best way that we can maximize our resources and minimize our liability by transferring that liability or maybe looking at the trending of their losses so that we can change limits, deductibles, being a little more creative on their programs to cut costs."

May 1, 2011

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