Local government risk management a unique field

By Michael Kelly
Property and Casualty Program Specialist

The issues confronting a risk manager for a local government entity are in sharp contrast in both origin and design to the issues facing a privately owned company.

While the actual process for managing risk as discussed in previous Managing Your Risk articles is essentially identical for both private and public entities, it is the differences in how these two organizations are structured and their main, operational goals that create the contrast.

Simply stated, the primary ultimate goal in the private sector is to make money sufficient enough to sustain and at least survive; whereas the focus of the public sector is in fact to serve the needs of the public. As such for a local government, the level of success might be more appropriately measured by the magnitude of overall citizen satisfaction instead of the financial bottom line. Further, rather than merely surviving, local government entities must emphasize providing a continuity of operations and/or establishing the restoration of services following a catastrophe as quickly as possible.

The functional focus of public entities is influenced by citizen opinion and can modify quickly, as their governing boards can change with each election. One board member might be interested in building more parks or schools even if that impacts other departments such as law enforcement or public safety, while private sector companies normally remain in the same general business regardless of the CEO.

Further, private sector entities have much more flexibility and freedom to alter their business model, changing as needed to continue to make a profit. Government entities are by statute required to provide a list of public services such as law enforcement, emergency/public safety, health and human services and jails. This list can be exhaustive and by nature poses substantial exposures to risk, all of which cannot simply be avoided by choice, as is often the case in the private sector.

Public entities cannot discontinue or cease to offer certain services, even though providing the services can create substantial additional risk. In addition, good public policy sometimes translates into the assumption of certain risks for the good of the public even though it can not necessarily be justified financially.

Unlike for-profit companies, public entities are not at liberty to simply increase the price of goods and services to offset a decrease in revenues or an increase in mandated expenses from a higher government division. Sources of revenue are typically through taxation, licensing fees and the issuance of bonds. Being forced to work within the constraints of a budget, under public scrutiny, is the basis for checks and balances as well as the ultimate level of trust from the public.

Allowing a local government entity to "do more with less" is the mainstay in the justification and continued utilization of a risk management department. The differences outlined here underscore the importance and perhaps necessity of having an in-house risk manager for the complex exposures facing local governments every day.

By managing a carefully structured and sound program, a risk manager can have a huge impact in making sure the limited financial and human resources available are directed toward the public's benefit – rather than spent on litigation, losses and claims.

NCACC Property and Casualty Program Specialist Michael Kelly writes a regular column on risk management for CountyLines. With more than 32 years of risk management/insurance experience, he holds the Associate in Risk Management for Public Entities, Certified Risk Managers and Certified Insurance Counselors professional designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.