Public Risk January 2012

Published by the Public Risk Management Association

www.primacentral.org

JANUARY 2012

ON THE PATH TO A SAFER FLEET:

Best Practices for Hiring and Retaining the Safest Drivers The Proliferation of Public-Private Partnerships:

HOW TO PROTECT YOUR ENTITY AND REAP THE BENEFITS TO SELF-INSURE OR NOT TO SELFINSURE, THAT IS THE QUESTION

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Volume 28, No. 1 | January 2012 | www.primacentral.org

The Public Risk Management Association promotes effective risk management in the public interest as an essential component of public administration.

PRESIDENT Cindy B. Mallett, AIC, CWCP, ARM-P Risk Manager City of Gainesville Gainesville, GA

CONTENTS

PAST PRESIDENT Laura Peterson, JD, MPA Director of Risk and Insurance University of Wyoming Laramie, WY PRESIDENT-ELECT Dan Hurley, CSP, ARM-P, MS Senior Director, Risk Management & Safety Norfolk Public Schools Norfolk, VA

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DIRECTORS Ed Beecher Risk Manager City of Pompano Beach Pompano Beach, FL

6 On the Path to a Safer Fleet:

Betty Coulter Risk Management Director City of Asheville Asheville, NC

BEST PRACTICES FOR HIRING AND RETAINING THE SAFEST DRIVERS

Matt Hansen, MPA Director, Risk Management Division City & County of San Francisco San Francisco, CA

By Kevin Warczyglowa

Dave Parker, ARM-P Risk Manager Pima County Sheriff’s Department Tucson, AZ

10 The Proliferation of Public-Private Partnerships: HOW TO PROTECT YOUR ENTITY AND REAP THE BENEFITS

By Joseph G. Jarret, Esquire

Marilyn Rivers, CPCU, ARM, AIC Director of Risk and Safety City of Saratoga Springs Saratoga Springs, NY Regan Rychetsky, ABCP Director, HHS Enterprise Risk Management and Safety Texas Health and Human Services Commission Austin, TX

16 TO SELF-INSURE OR NOT TO SELF-INSURE, THAT IS THE QUESTION

EXECUTIVE DIRECTOR Marshall W. Davies, Ph.D. EDITOR Jennifer Ackerman, CAE Deputy Executive Director 703.253.1267 • jackerman@primacentral.org

By Victoria Nolan, ARM, CSP

ADVERTISING Donna Stigler 888.814.0022 • donna@ahi-services.com

Public Risk is published 10 times per year by the Public Risk Management Association, 700 S. Washington St., #218, Alexandria, VA 22314 tel: 703.528.7701 • fax: 703.739.0200 email: info@primacentral.org • Web site: www.primacentral.org

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Opinions and ideas expressed are not necessarily representative of the policies of PRIMA. Subscription rate: $140 per year.

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IN EVERY ISSUE 4 News Briefs | 19 Advertiser Index | 20 Member Spotlight

Copyright 2012 Public Risk Management Association Reprints: Contact the Reprint Outsource at 717.394.7350.

JANUARY 2012 | PUBLIC RISK

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I’m a PRIMAtalker.

R U? If you are a PRIMA member and you are not signed up for PRIMAtalk, you are missing out on one of PRIMA’s most popular member benefits! PRIMAtalk is PRIMA’s member-only listserv that puts more than 500 industry specialists at your fingertips.

PRIMAtalk is the easiest way to get an answer to your risk management-related questions as well as exchange ideas and information. This forum gives members quick feedback on issues that are important to risk managers and their work.

For more information or to join PRIMAtalk, visit www.primacentral.org.

Message from PRIMA President Cindy B. Mallett

OUT WITH THE OLD

I

t hardly seems possible that 2012 is here already.

January is a time to say farewell to the old and hello to the new, to let go of old habits and behaviors and create positive change. Charles Lamb once said, “New Year’s Day is every man’s birthday.” With the celebration of another year, we have an opportunity to begin anew. It is at the turn of the calendar that many of us make a resolution or two—looking our weaknesses squarely in the eyes and announcing (maybe to no one but ourselves) our intentions to exercise more, eat less, get organized or the like.

The year lies before us, inviting us to make a fresh start.

How can you embrace the philosophy of a fresh start at work? One of my resolutions is to look for new approaches to old problems, with the intent to shake things up a bit in my program—repackaging it in a way that feels fresh, generates enthusiasm and (hopefully) nudges us out of our routine to ensure we aren’t just going through the motions.

This means I will be on the hunt for new policies, programs and ideas that I can adapt to fit my organization. I am confident that both the Cybrary and PRIMAtalk will be valuable resources for this kind of information, and I plan to tap into both as the new year unfolds. I encourage you to do the same.

One of the biggest decisions before me in the coming weeks is a possible change in my workers’ compensation program.

This decision could potentially impact budget, morale, workload and even staffing, so the recommendation requires careful analysis and thought. I found this month’s article on

self-insurance considerations to be very helpful in providing insight into the decision-making process.

I want to remind you about another invaluable source of support for your program—networking with fellow PRIMA members. The people I have come to know through PRIMA, here in my chapter and throughout the country, are smart, dedicated professionals who are always willing to share their successes and offer their support.

I hope you will join us at the 2012 Annual Conference in Nashville, Tennessee, to benefit from this type of networking. If you haven’t visited Nashville, you’re in for a treat. Registration opens this month. I hope to see you in the Music City!

The time for a fresh new start is upon us. As you begin tackling the challenges of 2012, I want to remind you that PRIMA is here to serve as a resource for you. I wish you and yours a year filled with health, happiness and success!

One of my resolutions is to look for new approaches to old problems, with the intent to shake things up a bit in my program— repackaging it in a way that feels fresh, generates enthusiasm and

Sincerely,

(hopefully) nudges us out of our routine to ensure we aren’t

Cindy B. Mallett, AIC, CWCP, ARM-P 2011–2012 PRIMA President Risk Manager City of Gainesville, Ga.

just going through the motions.

JANUARY 2012 | PUBLIC RISK

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News Briefs

NEWS

BRIEFS ARKANSAS WILL NOT ESTABLISH ITS OWN HEALTH INSURANCE EXCHANGE Arkansas will not establish its own state-run health insurance exchange program, as opposition from the state legislature has stalled efforts to plan the state’s program, Arkansas Insurance Commissioner Jay Bradford announced.

Governing.com reports that, in a statement, Bradford said that the Health Benefits Exchange Planning Steering Committee, a voluntary advisory group appointed last spring to provide policy recommendations for an exchange for the state, which received a $1 million federal planning grant in 2010, had recommended that it and other similar state groups exploring that issue disband. The state would not have been ready to implement its own exchange by the Jan. 14, 2014, deadline, Bradford explained.

Arkansas plans to now use the Federal Health Benefits Exchange, as detailed in the Affordable Care Act, with enrollment to begin on Oct. 1, 2013, Bradford said in his statement. Bradford said the Arkansas Insurance Department would now focus on complying with other elements of the federal health care law.

“The Steering Committee and I believe insurance is local and local regulation is preferable,” Bradford said. “This committee and the work groups have been a committed and wise group of individuals that are clearly driven by what is best for Arkansans,” Bradford continued. “Although disappointed with this outcome, I have accepted the committee’s recommendation.”

Bradford pointed to an option for states that don’t adopt their own exchange program to partner with the federal government, which would allow the state to manage some of the exchange functions that have previously been under state control, as a possible path forward for Arkansas. He also noted that the state Medicaid program must be connected with the federal-run exchange program, a process that would have been paid for by the federal government if the state had developed its own exchange.

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PUBLIC RISK | JANUARY 2012

GOVERNMENTS ABANDON FINGERPRINTING FOR FOOD STAMP RECIPIENTS A decade ago, several states and localities required food stamp recipients to pass a fingerprint test. At least eight states and a handful of cities at one time required fingerprinting as a way to prevent duplicate applications and curb fraud.

Starting in January, however, only two jurisdictions will still have fingerprint requirements on the books—Arizona and New York City, reports Governing. com. Texas ended the practice in 2011, and a recently passed California law ending fingerprinting took effect Jan. 1.

Why the shift? For one thing, critics say fingerprinting is too costly for governments and has never been a proven deterrent to fraud. Moreover, they argue, the requirement scares off many would-be applicants in need of assistance.

As unemployment and the lagging economy have added record numbers of Americans to the rolls for assistance programs, states say that doing away with fingerprinting will help them process applications more quickly, saving money in staff resources and delivering help more quickly.

In New York, officials are at odds over whether fingerprinting should remain in place. City Council Speaker Christine Quinn says the requirement deters some 30,000 low-income residents from accessing the program, depriving them of $54 million in federal benefits. But Mayor Michael Bloomberg remains a staunch advocate of the program, which, according to the city’s Human Resources Administration, helped identify 1,900 cases of duplicate applicants and saved almost $5.3 million last year.

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OREGON TO SEEK POWERFUL ‘CHIEF EDUCATION OFFICER’ TO REVAMP PRESCHOOL, PUBLIC SCHOOLS, COLLEGES Oregon plans to recruit and hire a new “chief education officer” who will have unprecedented power over education, including control of the chancellor of higher education, the next superintendent of Oregon’s public schools and the state community college commissioner.

Gov. John Kitzhaber’s new overarching education board, with control over preschool through universities, unanimously endorsed the general job description for that education officer, reports The Oregonian.

Kitzhaber said he hopes to have the right person in the job by April.

The chosen leader will need the vision to help Oregon streamline, improve and connect all the education programs and institutions that serve or should serve learners from birth through college, he said. He or she will also have to be an education expert, plus be able to motivate those who work in the current system to embrace change. The political challenges will be huge.

Nevertheless, Kitzhaber said, “We are confident we can get a real star.”

The 2011 Legislature called for creation of the chief education officer job as part of approving Kitzhaber’s larger scheme designed to upgrade and coordinate all levels of education so that more Oregonians graduate from high school and earn career certification or college degrees.

A small group of education advocates, led by Nike Government and Public Affairs Director Julia BrimEdwards and the vice president of the state teachers union, has since spent months fleshing out what the education officer would do and what authority the officer would have.

Based on their work, the 13-member statewide education board, formally titled the Oregon Education Investment Board, plans to ask the Legislature to require the chancellor, the community college commissioner and the executive director of Oregon’s college financial aid agency to answer to the chief education officer.

TESTS TO ASSESS FUTURE FRACKING Owners of land sitting atop rich natural gas deposits in central North Carolina will be among the first in the country to receive help that could detect drinking water contamination from drilling and energy exploration, reports the Raleigh News-Observer.

The U.S. Geological Survey and Duke University will test about 75 private and public wells in northern Lee and southern Chatham counties, the areas most likely to be explored if natural gas drilling is permitted in this state.

The free testing program—which would identify levels of methane, chemicals and compounds present in the water—is designed to determine once and for all whether hydraulic fracturing, or “fracking,” can be linked to contamination of drinking water supplies.

“This is a great option for landowners,” said Luke Cranford, a Lee County resident whose family owns about 200 acres in Lee and Chatham counties in the testing zone. “One, testing is expensive, and two, this will make it valid in case something comes up later.”

Natural gas exploration in other states has led to lawsuits and settlements over alleged contamination of wells and aquifers, with at least several documented cases resulting in energy companies buying out private homes and resettling the owners.

The gas industry hotly disputes charges that fracking harms drinking water, even though a Duke University study in 2011 concluded that water methane levels corresponded to proximity to drilling sites. Methane, the primary component of natural gas, is not poisonous but poses a danger of explosion in high concentrations.

Residents in Pennsylvania and elsewhere have complained also of mysterious illnesses and water discoloration, blaming drilling for contamination from chemicals that are used in fracking. As a precaution, some energy companies have supplied households with bottled water deliveries or potable water storage tanks.

Fracking is done under high pressure to force shale rock to rupture underground, using several million gallons of water per well.

JANUARY 2012 | PUBLIC RISK

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ON THE PATH TO A SAFER FLEET:

BEST PRACTICES FOR HIRING AND RETAINING THE SAFEST DRIVERS

By Kevin Warczyglowa

What is the biggest threat to workplace safety for your public entity? Though you may not realize it, vehicle accidents could top the list. According to the Bureau of Labor Statistics (BLS), transportation incidents are the leading cause of occupational deaths. Motor vehicle crashes cause the most costly lost-time workers’ compensation injury claims, according to the National Council on Compensation Insurance. These injuries averaged more than $65,000 per workers’ compensation claim filed in 2009.1 Vehicle accidents are a major risk to your workers’ health, your bottom line and your reputation. This is especially true when you consider that your vehicles most likely have your public entity’s name on them and a crash or incident could end up on the nightly news. Bad press potentially can cost more than physical damage.

Public entities typically operate myriad vehicles, ranging from ambulances and dump trucks, to sewer vehicles and fire trucks, to police cars and other private passenger vehicles. Moreover, operation of these vehicles poses many risks, including working around parked vehicles while plowing or picking up trash, parking and working on uneven surfaces and common transportation hazards, like sideswiping, backing up and intersection crashes. Public entities also have the additional exposures associated with vehicle operation in all types of weather and emergencies.

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Despite these risks, risk managers working in conjunction with human resources, department managers and support staff can lower their organization’s potential risk. According to the U.S. Department of Transportation, poor driving behavior causes 90 percent of vehicle accidents. Though you don’t have control over roads and highways, you can control the hiring, training and retention of safe drivers.

This article offers 10 best practices for selecting and hiring safe drivers, as well as a proactive approach to effective driver coaching and retention.

10 BEST PRACTICES FOR DRIVER SELECTION AND HIRING Whether you hire Commercial Driver’s License (CDL) drivers, commercial vehicle drivers or private passenger drivers, a best practices driver selection and hiring process should be part of your comprehensive risk management plan. The 10 areas outlined are designed to put you on a path to operating a safer fleet.

1. Driver’s Employment Application The driver’s past driving record is one of the top determinants of future performance. Your employment application should gather as much driving history information as possible, including overall driving experience, types of vehicles driven and, if applicable, what types of material they hauled.

2. Motor Vehicle Record (MVR) Review The MVR is one of the best tools to use to evaluate an applicant’s past driving performance and should be considered fully, no matter what type of vehicle the applicant has driven in the past. Notify the applicant that the MVR will be reviewed and get their signed permission to obtain it.

driving job duties and have the ability to resolve questions or issues regarding the information on the application.

The interviewer’s job is to determine the applicant’s past driving experience and attitude toward safe driving. Giving the interviewee ample time to answer questions is key.

Focus on gaps in employment and ask what they were doing during those gaps.

Above all, the most important part of the interview is to review the driver’s MVR with the applicant. Ask the applicant to explain all past accidents that may appear on the MVR, their causes and how the accident could have been prevented. The applicant’s response will help the interviewer evaluate if the potential employee is committed to safely operating your vehicles.

4. Driver’s License Verification Make it a job requirement that drivers have a valid driver’s license for the state in which they reside. Check the license to determine if they are qualified and licensed to operate the type of vehicle they will be driving. Then, make a copy of the license for your records.

5. Reference Check All reference checks should be completed over the phone, not via letter or email. This makes it easier to get a response and gather more detailed information about the applicant.

When doing the reference check, verify an applicant’s information, including their length of employment, their accident record and their job performance, specifically when it comes to operating vehicles. Keep a record of reference checks in the driver’s personnel file.

Even though an MVR may not identify all accidents or violations, it almost always indicates general driving performance. When looking at the MVR, avoid using Department of Motor Vehicle (DMV) points as the main criterion because points are not assigned uniformly across states. It’s more effective to look at the number of violations, number of crashes and the accident record. The employer, not an outside company, should make all MVR decisions.

The driver operates under the employer’s authority and the employer must decide whether to allow the driver to operate.

6. Physical Examination The Federal Motor Carrier Safety Administration (FMCSA) regulations for CDL and commercial drivers requires a medical examination upon employment and every 24 months thereafter to ensure fitness for duty. This is a good control mechanism and you should consider making it a requirement for all drivers. If possible, use one designated licensed physician for all applicants and make sure that they are aware of the physical and emotional demands of the job. It is not wise to allow an applicant to use their family doctor, since the physician’s primary concern may not be your public entity. Consult with your legal counsel as well to ensure that you comply with ADA regulations.

3. Employment Interviews Interviews should be face-to-face. It is easier to conduct an interview over the phone, but there is no replacement for meeting the person you might be putting behind the wheel.

The interviewer must be educated in driving regulations and

7. Substances (Drug) Test The FMCSA requires a substances (drug) test of applicants before employment as a CDL driver. FMCSA also requires random drug testing, testing when there is reasonable suspicion and post-accident drug testing. Consult the

Despite these risks, risk managers working in conjunction with human resources, department managers and support staff can lower their organization’s potential risk. According to the U.S. Department of Transportation, poor driving behavior causes 90 percent of vehicle accidents.

Though you don’t have control over roads and highways, you can control the hiring, training and retention of safe drivers.

JANUARY 2012 | PUBLIC RISK

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On the Path to a Safer Fleet FMCSA regulation on drug testing, a local drug counselor or agency for guidance on substances to be included.

Even if there is no federal regulation for your class of drivers, you should do substances testing on a pre-emptive basis. Random and post-accident drug testing can provide valuable data in the case of a lawsuit.

8. Road Test A road test is one of the best ways to determine if an applicant can perform the tasks required for the job. Road tests should be conducted in the same type of vehicle that the applicant will be driving and on a pre-determined course. Depending on the type of fleet you operate, some aspects of the test may include backing up, changing lanes, hills, city and/or highway driving and vehicle inspection.

Once you have hired safe drivers, what can you do to keep them driving properly and safely? The best partner to the 10 best practices for driver selection and hiring is a comprehensive driver coaching, training and motivation program.

When the same course is used consistently, you can better evaluate if each applicant can perform required tasks.

Always use a formal evaluation sheet for the test and keep a copy in the personnel file.

9. Written Test In addition to a road test, consider using a written test to assess general knowledge and evaluate if an applicant knows and understands the rules of the road. If used, care must be taken to ensure the tests are not discriminatory and are clearly associated with the knowledge and skills necessary for the position.

10. Background Check A background check is most crucial for screening applicants who may be transporting passengers, cash, high-value goods and/or security-sensitive goods. It is critical to ensure these items are in safe hands. Before beginning the process, be certain to receive the applicant’s written authorization to do a background check.

DRIVER TRAINING, COACHING AND MOTIVATION Once you have hired safe drivers, what can you do to keep them driving properly and safely? The best partner to the 10 best practices for driver selection and hiring is a comprehensive driver coaching, training and motivation program.

Even drivers with impeccable records need feedback and coaching. To start, ensure that drivers know and understand your fleet and the regulations you are required to follow. For example, CDL and commercial vehicle drivers must adhere to the FMCSA regulations.

Beyond regulations, there are many types of coaching programs for drivers. In-class and in-vehicle driver training

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PUBLIC RISK | JANUARY 2012

programs highlight the knowledge and skills necessary for a driver to perform the job. Orientation coaching helps introduce new drivers to your public entity and establish the basis of the fleet safety program. Refresher coaching updates drivers on changes in relation to driving routes, cargo, equipment, regulations and policies. Finally, remedial coaching addresses performance issues.

Driver training and coaching varies with the job’s complexity. At a minimum, a training and coaching program should include: • Governmental regulations (following the FMCSA regulations for CDL and commercial drivers) • Policies/procedures/rules • Inspection and maintenance • Routes and scheduling • Defensive driving tactics • Accident investigation Other ways to approach driver training include “check rides” or observations in which you accompany drivers on the road, mentoring programs in which your most trusted drivers are partnered with new employees and web-based programs that help educate drivers on identifying/addressing the most risky behaviors that can lead to costly crashes.

Tell employees that they serve their community and should always be mindful as they go about their everyday work, they are highly visible in their community and their actions are noticed. Each employee, in effect, becomes the face of that public entity and they should always act with that knowledge and responsibility.

DRIVER RETENTION: OVERCOMING A MONUMENTAL CHALLENGE Retaining qualified drivers can be quite a challenge and many employers may underestimate the true cost of driver turnover.

The problem of turnover can compound. If you are losing drivers, you may inadvertently start hiring lower-quality drivers and dilute training for existing drivers just to keep vehicles on the road. It can even affect the accident review process and other functions when most supervisor time is spent on hiring. Employee turnover also impacts morale.

In order to develop a remedy, find out why people are leaving. Once you start asking why, you may learn that money is not always the number one reason drivers leave.

Often it may have more to do with their supervisor and how they are treated. A Florida State University study reports that 40 percent of employees in the study said they work

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for supervisors who have failed to keep promises, invaded employee privacy or made negative comments about an employee to others. Those types of management indiscretions repel good workers.

In addition, watch for red flags. Are there a large percentage of accidents, injuries and driving complaint calls? This may indicate that your drivers are doing too much, too quickly.

Evaluate whether or not your drivers are given enough time to do their jobs. Is the system set up to force them to rush? Do you provide support with directions and route management? It is critical to understand what the driver’s experience is really like.

MEASURING AND SHARING RESULTS The saying, “What gets measured, gets done” applies to your fleet safety program. To enable you to achieve results, it is important to set goals and measure performance. Carefully select key metrics that you will measure, such as the number

of accidents per miles driven or number of accidents per vehicle and evaluate these metrics annually, against your own results from past years. Be sure to share your results with all your partners in your fleet safety program, including human resources and managerial staff.

THE GOOD NEWS Though vehicle accidents are the leading cause of occupational deaths and can cost your organization both its financial security and reputation, the good news is that you can improve the safety of your fleet and lower your drivers’ risk of highway accidents with a comprehensive driver safety program. Implementing best practices in driver hiring, selection, coaching and retention will put your organization on the path to operating a safer fleet.

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National Safety Council Injury Facts, 2011

Kevin Warczyglowa is a risk control specialist at PMA Companies.

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JANUARY 2012 | PUBLIC RISK

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THE PROLIFERATION OF PUBLIC-PRIVATE PARTNERSHIPS:

HOW TO PROTECT YOUR ENTITY AND REAP THE BENEFITS

By Joseph G. Jarret, Esquire

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Problematic public-private partnerships usually result from non-technical challenges that arise in the working relationship.

Lack of executive and project leadership, insurmountable communication issues or deficiencies in planning and defined processes can create barriers to collaboration.

As a result of public sector fiscal stress, the challenges of protecting the public’s coffers while adequately providing for the diverse needs of the citizenry, are becoming increasingly complex. One of the fallouts of decreased revenue is the proliferation of public-private partnerships. Such collaborative agreements, often born of necessity as a result of fiscal crisis or natural disasters, can prove to be valuable mechanisms by which myriad community needs may be met. Even such timely public policy issues as public safety have been subject to public-private partnerships (PPPs).

However, while PPPs are considered to be an attractive way to transfer certain duties and responsibilities to the private sector, there exists no guarantees that the risks inherent in the undertaking are likewise transferred. This article is designed to assist the public risk manager in insuring that their PPPs contain sound risk management principles.

PPPs: THE BASICS To belabor the obvious, a PPP is defined as a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.1 These cooperative ventures most commonly come about as a result of a body politics’ desire to look to a private entity to provide services traditionally performed by government. The most common agreement consists of the public entity funding the provision of services by a private entity with the private entity assuming substantial financial, technological and operational risks in the performance of the service. Some PPPs take the form of a design-build-finance-operate plan. Under such a plan, the government specifies the services it wants the private sector to deliver, then the private partner designs and builds a dedicated asset for that purpose, finances its construction, assumes the risk, and subsequently operates the asset and provides the services deriving from it. This contrasts with

traditional public investment, where the government contracts with the private sector to build an asset, but the design and financing is provided by the government. Such plans are commonly used for new school or public building construction.2 However, the PPP upon which such plans are based, often fail to provide sufficient risk transfer or avoidance language, necessitating that the risk manager be involved at the very formative stages of the process.

POLITICAL CHALLENGES It has been said that a successful partnership between the public and private sectors depends on all of the people involved with the project.

Problematic public-private partnerships usually result from non-technical challenges that arise in the working relationship. Lack of executive and project leadership, insurmountable communication issues or deficiencies in planning and defined processes can create barriers to collaboration.3 Add to the aforementioned challenges the tendency on the part of some individuals to politicize the PPP process, and another layer of challenge appears.

PPPs are popular with elected officials who are under constant pressure from citizens, businesses and investors who are increasingly

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The Proliferation of Public-Private Partnerships

demanding the same high level of service they are receiving from the private sector entities with whom they contract.

Further, private firms are attractive to policy makers due to the commonly accepted belief that the private sector exemplifies efficiency and expertise, brought about by the competitive market forces in which they operate. The catch-phrase, “run government more like a business” often serves as the catalyst for PPPs. Depending upon a private entity’s standing in the community, some elected officials are inclined to create PPPs without entering into formal contracts with the private provider. This is especially true if the private entity is a notfor-profit philanthropic organization or a faith-based entity.

The risk manager is well-advised to resist such suggestions whenever possible. An agreement that clearly and concisely outlines the duties, responsibilities, lines of authority and liabilities of the contracting parties should be reduced to writing like any other contract. This insures enforceability, transfer of risk, remedies for breach of contract and venue, i.e. in which court a conflict will be litigated. Further, due to the reluctance on the part of some elected officials to litigate against not-for-profit or faith-based organizations, a written contract affords you the opportunity to insert a mandatory mediation or arbitration clause prior to a lawsuit being filed. Such clauses often serve to mollify both the private entity and politicians.

IDENTIFYING THE RISKS OF PPPs From the government’s perspective, under the ideal type of PPP, the public sector relinquishes control to the private sector entity and the private sector assumes most or all of the risk. One of the basic mistakes some public entities make when entering into PPPs however, is the misnomer that, once finalized, the government divests itself of the responsibility of insuring the service contracted for is timely and professionally provided.

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Rather, depending upon the service, the government may have to develop the expertise needed to effectively monitor the activities of the private entity. For instance, instead of relying upon private sector accounting processes, the government should insist that fiscal accounting and reporting processes and procedures conform to generally accepted government auditing standards, either their own, or those promulgated by Congress in the form of the U.S. Generally Accepted Accounting Principles (US GAAP).4 It is likewise important to distinguish a PPP from your garden-variety contracts that merely serve to purchase goods or services, and as such, contain standard, boilerplate language and are often in use system-wide.

Rarely are there one size fits all PPPs. PPPs that lack a vision and clearly defined objectives and outcomes diminish the chances of achieving the desired level of performance, control and capability that prompted its creation in the first place.

IDENTIFYING THE COSTS OF PPPs When considering the PPP option, public entities must compare the cost of public investment and government provision of services with the cost of services provided by a PPP. Since risk transfer is key to the increased efficiency of PPPs, the government wants to relieve itself of risks that it believes the private sector can manage better than the government. To do this, the risk manager is often called upon to assess and price these risks, so that management is aware of what it must pay the private sector to assume them. The risk manager will most likely also be called upon to distinguish between project-specific risk and financial risk. In its most basic form, project-specific risk reflects variations in outcomes for individual projects or groups of related projects. For instance, if a public entity is desirous of undertaking a major road project, specific risks could derive

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When considering the PPP option, public entities must compare the cost of public investment and government provision of services with the cost of services provided by a PPP. Since risk transfer is key to the increased efficiency of PPPs, the government wants to relieve itself of risks that it believes the private sector can manage better than the government.

from an interrupted supply of building materials, labor or subcontractor problems, or obstruction by environmental groups. Financial risks, on the other hand, involve the variability in the government’s revenue stream, i.e. costs, fees, ad valorem taxes collected, interest rates, exchange rates and other factors affecting PPP financing costs, which are beyond the control of either party to the PPP.5

THE RISK MANAGER AND THE PPP As has been alluded to earlier, any lack of leadership or project expertise can adversely affect the effectiveness of the PPP. As such, the risk manager should make every effort to assist management in understanding the nuances of the manner in which the private sector operates. Further, the risk manager should insure the public entity’s strategic plans, missions, goals and objectives are shared with the private sector. Further, the risk manager must inculcate in her or his organization that PPPs are not a panacea for all that ails government and as such, not to have unrealistic expectations of the private sector’s expertise and abilities.

Partnerships” The National Association of State Chief Information Officers (NASCIO) Corporate Leadership Council (CLC), 2006 4. Note: US GAAP is not codified as law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly traded companies.

5. See: Managing Contingent Liabilities in Public-Private Partnerships Practice in Australia, Chile, and South America, Edited by: Mayya Revzina, External Affairs, Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC, 20433 - USA

Joseph G. Jarret, Esq., serves Knox County, Tenn., as its chief legal counsel and is the past-president of the Southwest Florida Chapter of PRIMA.

The risk manager must be an integral part of the PPP process from inception, to execution, to ongoing activities.

By assessing the risk, and remaining involved in the crafting of the agreement that serves to transfer the risk, the risk manager is in a position to assist the entity in deriving all the benefits of the PPP while minimizing the risks often inherent in such agreements.

END NOTES: 1. The Canadian Council for Public-Private Partnerships (see ww.pppcouncil.ca/aboutppp.htm) 2. Public-Private Partnerships: Prepared by the Fiscal Affairs Department (In consultation with other departments, the World Bank) by Teresa Ter-Minassian,2004 3. “Keys to Collaboration: Building Effective Public-Private

JANUARY 2012 | PUBLIC RISK

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JUNE 3–6, 2012 • NASHVILLE, TENNESSEE Registration opens in January!

PRIMA’S 2012 ANNUAL CONFERENCE IS THE EDUCATIONAL FORUM FOR RISK MANAGERS IN THE PUBLIC SECTOR. Attendees will have access to leading-edge educational sessions addressing all aspects and levels of public sector risk management and will participate in second-to-none peer-to-peer networking events hosting others in the profession. Risk managers will learn how their counterparts have dealt with the day-to-day as well as extreme challenges faced by entities across the United States.

For more information, visit www.primacentral.org.

PRIMA 2012

WEBINAR SERIES FREE FOR PRIMA MEMBERS! Looking for a cost-effective way to train your staff while avoiding the frustration of budget cuts and travel expenses? The Public Risk Management Association’s Webinar series is designed to help risk management professionals like you excel in the field without leaving your office.

JOIN US FOR THE FIRST WEBINAR OF 2012: JANUARY 18 | 12 P.M. – 1:30 P.M. EST Mitigate Risks with a Social Media Strategy Presenter: Erika Del Giudice, CISA, CRISC Senior Manager, IT Risk Services, Crowe Horwath LLP Many organizations have inserted themselves directly into the social media channel to build brand awareness and customer and employee loyalty. This Webinar is intended for individuals who are looking to further understand the risks (and rewards) associated with social media and how and why it is important to develop a social media strategy to mitigate risks. During this Webinar, the presenter will discuss a six-step process to creating a social media strategy. The presenter will also address items every organization should consider when building their Social Media Risk Management Program.

REGISTER TODAY!

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TO SELF-INSURE OR NOT TO SELF-INSURE,

THAT IS THE QUESTION

By Victoria Nolan, ARM, CSP

For some entities, the use of self-insurance can prove to be a valuable tool for controlling the cost of risk. For other entities, self-insurance may not provide enough benefit to consider it an alternative to traditional commercial insurance products. Making the decision to pursue a self-insured program should involve a thorough and objective evaluation of the existing programs to see if a self-insured option would benefit the organization.

Self-insurance is just one of the risk financing tools an organization may have available to them for financing the losses they incur. By paying directly for losses, an organization may be able to reduce its overall cost of risk by reducing the premiums it pays for commercial insurance, providing incentives to prevent losses and retaining the ability to manage claims. It is also worth noting that some risks may be self-insured by default through exclusions or are uninsurable and for some risks, commercial insurance may not be available or affordable.

Because self-insurance is not for every organization or for every risk, organizations considering a self-insurance program should learn about the options available to them and assess the organization’s “tolerance for risk” or risk appetite. An organization that tends to think of their risk management program as an insurance purchasing function may not have a very high tolerance for risk in that the board or top management may be most comfortable by eliminating the uncertainty of potential losses by covering all losses at first-dollar through commercial insurance. Other organizations may demonstrate a high tolerance for risk by accepting the uncertainty of the potential losses by preferring to invest in loss prevention efforts and accepting a level of financial risk for the losses that may occur. Still other organizations may “live on the edge” and accept the uncertainty of their potential losses but not be inclined to invest in loss prevention. This last type of organization is truly gambling and needs to be carefully managed so that the willingness to take on the risk is balanced with the due diligence to prevent losses.

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A self-insured program can take on many forms, from a simple “pay-as-you-go” deductible plan to a fully self-insured program where all losses are paid directly through an insurance reserve fund. In between, there are several forms of self-insurance that an entity may find useful. The following table identifies the basic forms of self-insured programs that may be available for consideration: TYPE OF PROGRAM

CLAIM PAYMENT SOURCE

CLAIMS MANAGEMENT

DEDUCTIBLE PLANS

Deductible is paid as a current expense

Insurance company manages entire claim

SELF-INSURED RETENTION (SIR)

Claims up to the retention level are paid from reserve funds

Claims are managed by the entity or a contracted thirdparty administrator (TPA) up to the retention amount

SELF-INSURANCE WITH STOP-LOSS OR EXCESS PROGRAM

Claims up to the stop-loss or excess amount are paid from reserve funds

Claims are managed by the entity or TPA up to the stop-loss or excess attachment point

FULLY SELF-INSURED

Claims are paid through reserves or other self-insured financing such as a captive

Claims are managed by the entity, TPA or through a captive

The goals of using a self-insured program may include other aspects than just a reduction in premiums paid. Control over claims may be a significant goal for an organization considering a self-insured program. By self-insuring a comfortable layer of risk and managing the claims within that layer, an organization may be able to reduce its overall cost of risk through premium reductions combined with a reduction in claim settlements or pay-outs. This may be possible if the insurance company’s claims practice is to settle claims based on the cost of defending claims rather than managing the claims to mitigate the final cost of the outcomes.

An example for a public entity could be that the insurance company tends to settle most liability claims for what is viewed as “the cost of doing business,” which may ultimately invite more claims to be filed as word gets out that settlements are fairly easy to get.

So where should one start in assessing if moving to a self-insured program is right for their entity? It is suggested that a feasibility study be conducted as a starting point. A feasibility study is used to evaluate the options, the expected costs and variability of the costs including various retention levels. Depending on the expertise of the risk management staff, a feasibility study can be conducted internally or an independent consultant can be used. Using a consultant may cost anywhere from $10,000 to $50,000, depending on the complexity of the study.

An organization may want to conduct a feasibility study if their self-insured retention (SIR) is lower than 2 percent of their operating budget, less than 1 percent of their total revenue, less than 1 percent of their total assets, their premiums are in excess of $1 million or they have more than 500 employees. The components of a study should include the following: the objectives of the program, a review of the internal culture of the organization, a review of the external context the organization operates in, a regulatory review, a claims analysis, a financial analysis, an analysis of the self-insurance alternatives, a return-on-investment study and a recommendation based on the study’s findings.

The objectives may include the goal of long-term savings, improving claims management, promoting loss prevention and loss control or providing the organization uniform coverages and internal deductibles. The internal culture includes examining the organization to understand if you have knowledgeable and supportive top manage-

CALENDAR OF EVENTS The Public Risk Management Association (PRIMA) hosts or sponsors a wide variety of educational programs for public risk practitioners. These meetings and events provide an optimum forum for public risk professionals to acquire new knowledge or skills, exchange ideas and expand peer networks.

PRIMA’s calendar of events is current at time of publication. For the most up-to-date schedule, visit www.primacentral.org.

WEBINARS 2012 • January 18: Mitigate Risks with a Social Media Strategy • March 21: TBD • May 16: Practical Issues Related to Litigation and Investigation • July 18: Concussion Education and Management in the Student-Athlete • September 19: TBD • November 17: Generational Differences in the Workplace (session presented by Genesis Management and Insurance Services Corporation) PRIMA ANNUAL CONFERENCES June 3–6, 2012 PRIMA 2012 Annual Conference Nashville, TN Opryland Hotel June 2–5, 2013 PRIMA 2013 Annual Conference Tampa, FL Tampa Convention Center June 8–11, 2014 PRIMA 2014 Annual Conference Long Beach, CA Long Beach Convention Center June 7–10, 2015 PRIMA 2015 Annual Conference Houston, TX George R. Brown Convention Center UPCOMING CHAPTER MEETINGS Chapter meetings are listed on a space-available basis. For a complete list of PRIMA chapter meetings, visit www.primacentral.org. For information on a specific meeting, please contact the chapter directly.

North Carolina

Jan. 20, 2012

To have your chapter meeting listed on the PRIMA Website, contact Bles Dones at bdones@primacentral.org.

JANUARY 2012 | PUBLIC RISK

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To Self-Insure or Not to Self-Insure, That is the Question ment, predictable losses and adequate staff to manage the program, in addition to the right processes and technology to implement the program, stable financial conditions, a culture of support from the various departments and solid safety and loss prevention programs and the ability to allocate the cost of risk to the various components of the organization.

While a self-insured program isn’t for every organization, a self-insured program can provide a means for an organization to reduce their overall cost of risk and can have other benefits such as providing the means to maintain control of claims administration, provide incentives for improved loss prevention and provide alternatives to commercial insurance.

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The external context of the study would look at your customers and clients and how they would accept or benefit from the program, the vendors and suppliers with whom you do business and any investors the organization may have. The study should also look at the financial markets the organization does business with, the regulations affecting your specific location and the requirements that your auditors may want on the financial statements for the program as well as how the rating agencies will view the program. Reviewing the regulatory conditions would include what the local jurisdictions require for the various self-insured options, what coverages are required by the jurisdictions where you operate, the initial and ongoing applications, reporting and approvals that may be required, the minimum capital that may be required, the excess insurance that may be required, the collateral that may be required (letter of credit, bonds, etc.), and any minimum number of exposures such as number of lives required before a health plan is eligible to be self-insured.

Analyzing your claims would include looking at the historical and expected severity and frequency of claims, the maximum probable loss, reviewing the loss triangle for claims development (look back 10 years) and what the claims forecast looks like (try to get three years into the future). You will also want to look at what the ongoing funding requirements would be to maintain the program.

If you could use a refresher on statistics, most community colleges offer classes.

Part of the financial analysis should include reviewing what the first-dollar insurance costs are or would be for the expected losses along with the excess insurance cost.

An organization could also look at some alternative risk financing options such as retro programs and include those costs in the analysis. The cost to administer the program and claims should be included as well as any claims information systems, tax impacts such as a reduction in write-offs for premiums paid and increases in write-offs for claims paid.

Financial reporting requirements should be reviewed for both understanding of the requirements and the administrative costs to comply with the requirements. Another piece of the financial analysis includes the initial reserve funding required to pay the claims as well as the ongoing reserves for the claim development costs and claim fluctuations.

PUBLIC RISK | JANUARY 2012

In order to complete a feasibility study, the entity will want to review the various self-insured options available to it in order to identify the options that may provide the best return-on-investment or ROI. One method to identify the viability of a self-insured program is to identify in advance what the ROI needs to be then comparing the results of the financial analysis to the desired ROI. One rule of thumb is to use a 15 percent ROI calculated as:

Premium Savings minus the Expected Losses (increase) divided by the Increase in Deductible or Retention

The last part of a feasibility study should review the findings to show how the recommended alternatives (including not making any changes) meet the stated objectives for the organization’s program along with an explanation of how the recommended alternative can be implemented given the internal and external context for the organization. The recommendation section should also include information of how the recommended alternative can be monitored and evaluated in the future.

Once the feasibility study is delivered, it is time to make a decision. If the answer is yes, then the next step is to plan for implementation of the new program, which may include getting buy-off from a governing board, establishing the insurance claim or reserve funds and writing the “policy” so the entity is able to identify the types of losses that it will pay from the self-insured fund. Once the program is implemented, the entity will want to revisit the performance of the program to make sure it is still meeting the objectives and needs of the organization. This may include the financial performance as well as the claims-handling process and administrative burden of the program.

While a self-insured program isn’t for every organization, a self-insured program can provide a means for an organization to reduce their overall cost of risk and can have other benefits such as providing the means to maintain control of claims administration, provide incentives for improved loss prevention and provide alternatives to commercial insurance. An entity considering a self-insured program should conduct a feasibility study in order to guide it in the decision-making process. Even if a self-insured program does not turn out to be a viable alternative, the organization will most likely learn enough to make improvements that will reduce its cost of risk.

Victoria Nolan, ARM, CSP, is the risk and benefits manager for Clean Water Services in Hillsboro, Ore.

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Has your entity launched a successful program? An innovative solution to a common problem? A money-saving idea that kept a program underbudget? Each month, Public Risk features articles from practitioners like you. Share your successes with your colleagues by writing for Public Risk magazine! For more information, or to submit an article, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

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Keep up with what’s happening at PRIMA and connect with your risk management peers!

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Member Spotlight

MINNESOTA POOL’S PUBLIC WORKS TOOL REDUCES INJURIES AND CLAIMS Each month, Public Risk features a member who has gone above and beyond in a feature column titled “Member Spotlight.” Do you know someone who deserves recognition, has made a contribution or excelled in their profession?

If so, we’d like to hear from you for this exciting column, as PRIMA shines the spotlight on its members.

To be considered for the Member Spotlight column, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

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I

n 2010, a Minnesota public works employee suffered a serious hand injury with total incurred losses of more than $340,000. The injury was the result of using a typical fire hydrant wrench to open and close hydrants during seasonal flushing. The repetitive pressure on the soft tissues of his palm caused severe damage to the artery and the employee underwent an artery transplant in order to save his hand.

“While an unusual claim, hydrant flushing is a physically demanding job and adds to the overall burden of cumulative trauma on a body,” said Pete Tritz, League of Minnesota Cities Insurance Trust (LMCIT) administrator.

“Sprains and strains caused by manual handling in public works is 10.18 percent of LMCIT’s work comp loss picture.

Reducing or eliminating ergonomic hazards is key to reducing workers’ comp injuries in public works.”

LMCIT gathered a team of experts with the intent of developing a tool that would that would assist public works employees with the task of hydrant flushing without compromising safety and speed. Members of public works, human resources, a rehabilitation consultant, an occupational health/ergonomic loss control consultant from LMCIT and an outside engineer developed the Hydrant Buddy, which is designed to operate at a constant speed without straining the operator or causing water hammering.

PUBLIC RISK | JANUARY 2012

The device is ergonomic, cordless and weighs 22 lbs. It is simply placed on a valve cap; a press of a button opens and closes the hydrant valve.

“The engineer bore all of the development costs,” said Tritz.

“Member time and consultant time were the only costs to the pool. The engineer is now collaborating with national and international distributors. The reduction of hazards with use of this product should translate to a reduction of workers’ comp losses for the specific entity, and, if deployed in a substantial number of Minnesota cites, should translate into reduced losses for all pool members.”

Tritz says that reducing ergonomic hazards and making employees’ jobs easier and faster is a hard combination to beat.

A Minnesota city recently spent five days flushing 450 hydrants using LMCIT’s tool. Afterward, the water superintendent said, “We’re really happy with this thing.

The guys liked it a lot. At the end of the day, they weren’t so beat up. I’ve had guys schedule vacation just to get out of hydrant flushing. Now I have one employee that can’t wait to do it again next year.”

The Hydrant Buddy is available to all public entities. For more information, contact Rachel Carlson, LMCIT loss control manager, at rcarlson@lmc.org.

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