Risk Management – An Important Part of Your Fiscal Picture
By: Bonnie Kolesar, ARM, CCSA, Risk Consultant, Public Management Group—Sloan Sakai Yeung & Wong
Bob Deis, Senior Consultant, Public Management Group—Sloan Sakai Yeung & Wong
A case for looking deeper
By now, most public agencies with defined benefit retirement systems have seen unprecedented increases in their annual costs. Even with recent retirement reform, most retirement cost trends suggest continuing large increases, anywhere from 25-50% and more over the next 15-20 years. As public agencies tackle this fiscal challenge, employees and their representatives are also asking for help with the heated real estate market and increased health benefit costs by demanding wage increases. While we may appreciate our current budgets, the future fiscal climate is stormy.
Many of your programs and services receive their fair share of scrutiny during budget times. However, one program that typically falls below the budget radar is the risk management program. An informal review of various city budgets and financial statements confirms there is no consistent and transparent way that public agencies account for the activities of their risk management program. Most senior managers can speak to departmental budget amounts and employee counts, but how many know what the annual risk management program expenses and accrued liabilities are? Given the total costs of risk-related activities, managers should know how much of their precious resources are tied up in these activities and how risks are being managed in your agency.
Our informal review found that cities with populations of 30,000-40,000 have annual expenses for risk management programs between $500,000 to $1 million, and cities with populations of 150,000-300,000 have annual expenses ranging between $5 million and $20 million. While all cities are unique in personality, they have one thing in common: the greatest costs and expenses are in the workers’ compensation and general liability programs. And depending on your self-insured retentions and desired “confidence levels” for the future claims reserves, there might be another $2 million to $50 million tied up to ensure adequate funding of losses. Some agencies used some of these reserves to get by during the Great Recession. If this scenario applies to your agency, have those assets been replenished? Are you confident that the attention placed on the activities that generate these costs as well as the programs that can mitigate their impact are commensurate with the resources in play? Has your organization taken advantage of risk management solutions that result in cost savings so that other operational needs can be achieved?
While budgets typically reflect the direct costs of a risk management program, such as claims costs, insurance premiums and loss prevention and control activities; there are ripple effects that can surprise a smaller city. These ripple effects typically fall below the radar and are the indirect costs, such as overtime, backfilling a vacant position, poor morale, and extraneous benefit costs such as the Labor Code 4850 impacts. Do you know the effects of employee absences due to industrial or non-industrial injuries or illnesses? Do you know the number of lost days each year and are you confident that your current processes are designed to cope with these absences? These are but a few questions you should be asking yourself to ensure that your risk management program supports and aligns with your city’s priorities.