The role of today's public entity risk manager is challenged by the effects of the economic downturn of 2007-2009, but the job may be more necessary than ever. Public entity risk managers should continue to be proactive in searching for improvement opportunities, says Bradley York, vp of business development for OneBeacon Government, who outlines pitfalls and strategies unique to government bodies.

Government entities often lag when it comes to the economy, in recession as well as recovery. While some areas of the economy are currently beginning to experience growth, the fact is that it will be some time before those benefits reach public entities.

Most will continue to face significant fiscal challenges and tight budgets, forcing them to do more with less. As a result, a very important role within government entities—the risk manager—may forever be changed and in some instances, eliminated.

Entities and future risk managers face serious challenges to find funding, coordinate roles and, in many cases, integrate other functions such as human resources or finance into the risk manager function—all changes that ultimately could shift the effectiveness of risk management for an entity.

The role of a public entity risk manager requires a specialized set of skills and a diverse background. Incumbents must achieve efficiency without sacrificing effectiveness, establish a culture of risk management across many departments and, ultimately, determine how much uncertainty and risk an entity is willing to accept while simultaneously enhancing services effectively, efficiently and safely.

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Even before the current economic and insurance environments, risk managers faced enduring challenges year after year. And now, after years of a lingering soft insurance market, during which budget savings were allocated away from insurance programs, public entities are again faced with a strengthening market as terms and conditions once again align to more accurately reflect risk tolerance and sound underwriting principles. Simultaneously, public entities continue to struggle to emerge from the national recession while the recovery of their tax base continues to lag private industry.

Because most public entities1 gain a significant amount of revenue from property taxes and state transfers—generally at least 50%, whereas on a national basis property taxes make up 26% of all local government revenue, as estimated by the Census Bureau—they tend to experience a “last in, last out” phenomenon during times of recession. In other words, although a majority of consumers experienced the recession as it was happening, the impact on public entities' tax bases was delayed and lagged at least one year. Local governments are responding by increasing tax rates wherever possible as they struggle to restore previous funding levels.2

Further, the “last in, last out” lag generally doesn't begin its recovery for 12 to 24 months after the economy starts to recover, and it may still take years to re-establish a prior year's tax base. But despite and throughout those tough fiscal realities, public entities are expected by their communities to increase or at least maintain existing services.

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To meet these challenges, entities are faced with difficult options, including consolidation of resources and staff, downsizing and early retirement programs. These difficulties become even greater given that certain essential services are typically off limits from such tactics, such as police and fire protection—which, from a proportionate share, happen to be the largest budget allocations for most local governments.

In the case of the risk manager, fundamental programs that take years to implement and perfect are suddenly at risk. When funding is reduced or eliminated, departments are forced to reprioritize already competing demands and limited resources, with risk management often the first on the chopping block, as its benefits are recognized based on long-term results. This is further compounded in the hands of a less experienced manager who may not recognize the long-term cost-benefit of the role and instead opts to defer or eliminate risk management investments for immediate, short-term cost savings.

Prior to the recession, entities (especially larger ones) very rarely thought about integrating or consolidating individual functions across departments and the entity as a whole, such as human resources, legal, risk management and finance. This was partly due to the recognition of the unique and specialized skills required to perform effectively in each of these areas.

But as fiscal and economical circumstances have changed, it is the role of the risk manager, not just their programs, that is being consolidated with other functions, decentralized or simply eliminated. Unfortunately, this trend likely will continue until public entities fully emerge from the recession and can restore a healthy budget.

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Although it may seem like a quick way to realize immediate cost savings, consolidating or merging the risk management role into other key functions likely will add significant costs in the long run. Those costs can come in many forms and may not be recognized fully for years. Specifically, there is the high probability of ineffectiveness in a key functional area for public entities. There are very few individuals who possess the experience or have the background to absorb and effectively step into more than one diverse and important role. And even if an entity is lucky enough to have that one expert to handle each of those key disciplines, will he or she have the time and resources to perform well across all these areas? Or to put it another way, can an entity afford to be ineffective in so many key functions?

Like consolidation, decentralization within public entities also likely will yield inconsistent results across departments. Programs that take years to successfully implement and monitor run the risk of abandonment as responsible parties are shifted away or let go, or programs are taken over by those lacking the know-how or understanding of the long-term effects and consequences. Potentially, this can leave communities and government entities exposed to increased turnover, employee injury, decreased public safety and a potentially negative image within the community.

These risks also extend to entities that eliminate risk managers entirely.

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Ultimately, entities may see some short-term savings from reduced spending on salary and benefits through consolidation, decentralization and elimination of roles, but at what cost to their proficiency as an entity and to their community at large? It is very important that entities maintain the discipline and commitment to risk management. Prior to consolidating or eliminating functional areas, public entities should proactively determine and isolate duplication within programs and evaluate whether a process truly can be improved through consolidation. While doing more with less is not always a viable option, recognizing and evaluating the costs and effectiveness of a current risk management program and whether it is sustainable for the long term should be a priority for every entity to reduce its exposure to risk and, in the end, avoid costly and perhaps needless claims or losses.

In today's turbulent economic environment, the role of the risk manager is evolving. In the face of fiscal pressures, public entities are proactively searching for improvement opportunities across all disciplines and departments, often leading to shifts in the roles and responsibilities of the typical risk manager.

But risk managers should continue to be strategic about setting high-level, long-term goals, ensuring compliance and implementing programs with precision and ethical considerations, all the while capturing and measuring effectiveness for continuous refinement. Even as the economy improves, risk managers will be called upon to defend and advocate their roles and recommendations to elected officials and other stakeholders, such as department leadership. Therefore it is wise to be prepared to effectively and persuasively provide the value proposition for risk management along with any recognizable costs and benefits, both in the short and long term.

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When evaluating alternatives due to limited funding and resources, public entities hopefully will consider the whole picture. If handled incorrectly, an entity may realize a decision for short-term savings may have long-lasting, serious consequences, including loss and trend development and increased costs through frequency and severity in loss costs, all of which translate to the entity's insurance experience and premiums. The costs associated with improper management of a public entity's most valuable resources—its employee base and the service and safety of its constituents—are of utmost importance. The savvy risk manager will recognize the changing environment and attitude of public entities, adapt, evolve and strive to continue to serve a vital function within the entity and community.

Bradley York is vp of business development for OneBeacon Government Risks and leads the team with more than 20 years of experience in insurance, almost exclusively in the public sector. He also has extensive experience in public entity legal issues and claims management. He can be reached at byork@onebeacongov.com.

¹ Not all states impose property taxes.

² Felix, Alison. “What is the Outlook for Local Government Revenues in the Tenth District?” http://www.kc.frb.org/publicat/econrev/pdf/11q3Felix.pdf, Federal Reserve Bank of Kansas City