By Anne Freedman
From windstorms and aging infrastructures to motor vehicle accidents, the perils facing officials in the public sector offer a dizzying array of challenges.
And those potential risks don't even take into account the nearly overwhelming burden of workers' comp, and lifetime medical and pension benefits -- debts that are only increasing, even as budgets and tax revenues decline.
"There is no money. That is really the biggest risk," said David Marcus, area president in the Boca Raton, Fla., office of Arthur J. Gallagher & Co. and managing director of the company's Public Entity and Scholastic Division.
State debt this year amounts to $4.19 trillion, according to State Budget Solutions, an Alexandria, Va.-based nonprofit organization that provides information and promotes reform on the "coming fiscal and economic disasters."
That total state debt includes each state's "regular debt, the fiscal year 2013 budget gap, outstanding unemployment trust fund loans, unfunded other post-employment benefit liabilities and the state's unfunded pension liabilities." It ranges from a low of $5.8 billion in state debt in Vermont to a high of $617 billion in California.
Since 2010, 28 municipalities and seven cities and localities have filed for bankruptcy, according to "Governing" magazine.
"Every day you hear this city is in bankruptcy or about to declare bankruptcy," said Mark Stokes, managing director at Wells Fargo Insurance Services in Petaluma, Calif.
But even in bankruptcy, he said, public entities "still have to provide workers' compensation, meet leases and obligations, purchase auto, liability, health [insurance]. They will still have to buy catastrophic coverage. ... They still have to operate as a viable ongoing concern."
Chuck Wright, president at Travelers Public Sector Services in St. Paul, Minn., said: "Because of those [financial] pressures, risk managers within public entities have to ... be more thoughtful about managing their overall risks," he said. "It's not just the risks they may transfer to an insurance company. It's which ones they can avoid ... [or] control."
A lot of public agencies "are barely hanging on due to poor economic conditions," said Martin Brady, executive director of the Schools Insurance Authority, a joint powers authority in Sacramento, Calif., that helps its 34 school-district members in nine Northern California counties meet their risk financing and risk management needs.
Combine budgetary crunches with the rapid escalation of workers' compensation loss ratios and you have a real problem.
Workers' comp "is our biggest program," he said. "You really need to look at it as a mortgage due to the long-term pay-outs of comp. ... I have got claims that are open for 30 or 40 years."
The joint authority helps the school districts reduce insurance costs and offers expertise to help solve common problems, Brady said. When money is not spent on claims, it sends those funds back to the classroom, he said.
Additional areas of exposure include employment practices liability -- and special education has "always been a lightning rod for litigation," he said. Other areas covered by the JPA include auto and property risks. Emerging areas for training include cyber liability and the proper handling of contracts.
Most recently, the school districts are dealing with the impact of the rising price of copper, he said. Thieves driven by high scrap prices have been causing damage to a variety of public and private sector infrastructure in their hunger for the metal.
"When the price of copper goes up, our copper thefts go up through the roof as well. ... A $5 to $10,000 theft of copper could cause a $100,000 loss to an HVAC system," Brady said.
Faced with that sort of risk, pooling may be the only answer for some public sector institutions.
"Risk managers," Stokes said, "can play a critical role in letting the elected officials know [pooling] is a viable way to share risks and reduce costs over the long-term -- and it's been proven."
Pools tend to work best for groups of smaller and similar types of public organizations. Adding a large organization to a pool creates too much exposure for the other players to agree to help cover.
"Most [larger] public entities are self-insured and they assume the risk and they are buying catastrophic coverage to protect themselves against large claims," he said.
The limits vary, depending on type of coverage and type of entity -- such as municipality, school district or even a special district such as for mosquito abatement, he said. Some self-insured entities will retain as much as $1 million for catastrophic coverage.
Retentions for workers' comp, property and liability coverage are generally lower -- maybe $50,000 to $100,000, Stokes said.
Retentions and approaches also vary widely state by state. "The way they buy insurance and deal with risk management issues in California, I can tell you," said Gallagher's Marcus, "is very, very different than the way they do it in Florida.
For example, in Florida, as opposed to California, the concept of sovereign immunity is very strong, he said. States with less protective laws are more exposed to risk and are forced to buy more liability insurance.
In the southeast coastal areas, he said, the biggest worries are hurricanes and floods, with some entities retaining "enormous" amounts -- up to $100 million. "Our clients are retaining a lot of risk because insurance isn't affordable and, in the public sector, you know who is taking that risk: the taxpayers."
Another concern, he said, is that cyber liability "is an enormous untouched exposure ... We know that breaches occur all the time. Rarely do we see public sectors buy cyber-liability insurance."
Saratoga Springs, N.Y., has commercial insurance for property/casualty and belongs to a self-insurance fund for workers' comp, said Marilyn Rivers, director of risk and safety for the historic tourist destination in upstate New York.
Before testing the market each year, she underwrites the city's insurance coverages herself -- reviewing the loss ratio, loss frequency, value of buildings and community needs along with external market factors.
It's "a tremendous challenge" to provide needed municipal services, while managing increasing costs and shrinking budgets, said Rivers, who also is chairwoman of the education committee for the Public Risk Management Association.
One tactic she uses has been to create a multi-disciplinary safety team that includes representatives from police, fire, engineering, accounting, finance and public works departments; labor unions; public officials and others.
"For one-and-a-half hours each month, we come together as a team and talk about the risks associated with our community," Rivers said. "We prioritize the issues that are out there ... . We put together proposals and we literally project-manage facility programs to impact our financial bottom line and our insurance program."
Another project the team oversees is a "very robust" fleet-management program that, for example, not only provides safety training programs, but also monitors motor-vehicle reports to make sure employee access to vehicles is appropriate.
In some communities, Travelers' Wright said, budget priorities mean delays in replacement of equipment or maintenance of infrastructure. And that may cost the entities more in the long run, he said. Effective risk managers have to determine -- and communicate -- the long-term implications of those decisions.
In addition, too many public entities try to save money by delaying employee training, such as training employees on the risks of distracted driving, said Diane Barr, second vice president, specialty underwriting at Travelers Public Sector Services. "But in the long term, how does that affect the total cost of risk for a city? ... There are trade-offs for everything we do."
For some cities, counties and municipalities, doing more with less has meant "consolidating or combining services, privatizing certain services or functions, utilizing volunteers to provide services, cross-training employees in similar functions or simply choosing not to provide the service," said Jeff Richardson, president of Englewood, Colo.-based OneBeacon Government Risks, in an email.
He noted there are "a number of very important considerations to take into account" when doing so. "For example," he said, "an entity needs to consider contractual risk transfer liability issues, mutual aid agreements -- which include a number of policy and procedure considerations, and emergency response ability when consolidating 911/EMS services, among other things."
A 2009 analysis by the School of Public Affairs and Administration at Rutgers University in Newark, N.J., however, found that most consolidations "are not consistently beneficial in terms of long-term financial and political considerations."
As bad as workers' comp is, the biggest looming exposure to public entities is employee retirement and health care benefits "and it's escalating," said Jeff Angello, area president, Gallagher Benefit Services in Boca Raton, Fla.
Before recent accounting rules changes forced public entities to report on long-term liabilities, many cities and states ignored the looming and massive debt resulting from retiree health care and pension promises, he said.
A June 2012 report by the Pew Center on the States found that the shortfall in states' pension and retiree health care benefits grew to at least $1.38 trillion in 2010.
Efforts to address shortfalls in Wisconsin and New Jersey have made the most media splash, but the Pew study found that between 2009 and 2011, "43 states enacted benefit cuts, increased employee contributions, or both."
"Most of the reforms ... mainly affect workers whom states will hire in the future, because it is legally difficult to reduce benefits for current employees and retirees," Pew stated.
Angello said most public entities "don't have a real structure to deal with [the problem]. What it would take is structural changes ... . Practically, it's very difficult because it has a political element to it and a [collective] bargaining element to it."
He noted that many public entities are negotiating increased health care contributions as well as higher deductibles and out-of-pocket expenses with their unionized employees. They are also increasingly linking wellness initiatives -- such as health-risk and biometric assessments -- to premium incentives or penalties.
"I think they are starting to make some progress in the general health benefits at this point," Angello said.
Governments "tend to be slow to move," he said, but they are beginning.
"I do think they are making much more progress now in the last couple of years," Angello said, "than they have in the last 20 as far as keeping current with what private entities do."
ANNE FREEDMAN is senior editor of Risk & Insurance®. She can be reached at firstname.lastname@example.org.
October 11, 2012
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