As Carol Zoellner reports, US public risk managers will remember 1997 for its plethora of natural disasters, the encroachment of wildlife on communities, the threat of having to pay back millions of dollars in bond refinancings, and major reorganization in the insurance industry.
These protectors of tax-payer dollars at state and local levels have had to balance their roles in risk financing, environmental issues, disaster recovery, insurance and safety and loss control to mitigate recent events.
Year of disasters
For 12 months the nation has been deluged with floods, earthquakes, mud slides, hurricanes, tornadoes and other destructive acts of nature. This natural disaster whirlwind created unnaturally high costs for entities involved in disaster recovery and stretched resources thin.
Expecting financial relief from the Federal Emergency Management Agency (FEMA), many risk managers felt they had fallen into the vortex of yet another storm when trying to deal with the agency, which manages federal disaster relief programs. For instance, "six months after the New Year's Day flood that wreaked havoc on Washoe County, Nev, the county had not received one dime of recovery money," says risk manager, Ray Sibley, "and the county's out-of-pocket costs were $1,431,939." Mr Sibley traversed a maze of requirements and forms in order to be eligible for financial recovery in numerous categories. The cost of debris removal; emergency protective measures; and the rebuilding of road systems, water control/drainage systems, buildings and equipment, utility systems and recreational areas needed to be assessed.
FEMA's goal is to supplement the state or local recovery, to assist their already planned and ongoing recovery effort. The focus of FEMA inspectors is to prepare a scope of work. The risk manager has to point out the total extent of the damages suffered in order to return the road, building, bridge, etc, to its pre-damage condition - a description the risk manager has to establish and justify. Thus they must have appropriate internal cost accounting data to quantify the cost related to the scope of repairs and damage identified. Once the scope of work is agreed upon, the risk manager must document progress in relation to payment. According to Mr Sibley, these assessments usually occur during the disaster, putting an increased burden on the risk manager. In addition to coping with an emergency that may be ongoing, the risk manager has the state knocking on the door asking for damage estimates so it can complete the preliminary damage assessment. "Unfortunately," says Mr Sibley, "most risk managers find that the very folks they would normally use to do those assessments are knee-deep in the emergency itself."
According to the Associated Press, in 1997, FEMA spent $1.38 billion to aid communities hit by violent storms, tornadoes and floods, with massive spring flooding in the Upper Midwest topping the list. Three disasters accounted for more than $1 billion of the agency's spending last year: the Red River Valley floods that hit Minnesota and North and South Dakota in early April, severe winter storms that pummeled western states in January and flooding in the Ohio River Valley in March. The Red River flooding alone cost $466.7 million, including $230.1 million for North Dakota.
Disasters were declared in 27 states and three western Pacific island territories. Minnesota and Washington state led the nation in need for disaster aid. President Clinton declared four disasters in each state in response to severe winter storms and damaging spring and summer floods. Six other states had more than one presidentially declared disaster, including three for South Dakota and two each for Arkansas, Idaho, Illinois, North Dakota and Tennessee.
FEMA provided housing assistance worth $319.4 million to 127,064 disaster victims and another $100 million in grants for transportation, medical and other needs for nearly 50,000 victims.
FEMA director James Lee Witt said in a prepared statement: "We can no longer afford the cost of natural disasters as calculated in personal suffering and economic loss. It's time for America to take a preventive approach to disasters."
Richard W. Krimm, executive associate director of the FEMA Mitigation Directorate in Washington, DC, says: "While the issues are complex, FEMA's vision of the future is simple. The National Mitigation Strategy's cornerstone is the growing acceptance by all Americans of the need to take personal responsibility for making their communities safer. For state and local governments this means developing sustained administrative structures and resources for mitigation programs; adopting and enforcing building codes and land-use measures, and conducting ongoing public information campaigns on natural hazard awareness and mitigation."
The agency is providing seed money and technical assistance to seven pilot sites to prepare for disasters by constructing homes and businesses capable of surviving floods, hurricanes, earthquakes and other hazards. FEMA hopes to have at least one community in every state on board by the end of 1998. Risk managers have their work cut out for them.
Whether nature's violence merely takes a toll on human development or is actually caused by it, it was not merely the elements that took their toll. In 1997, a vast number of wild things made their homes or at least took a holiday in suburbia - with disastrous consequences.
In Montgomery County, Md, the deer population was 10 times what the 3,600 acre habitat at Little Bennett Regional Park could sustain. Habitats reduced by housing and commercial development were forcing the deer to cross the road to forage in gardens and on golf courses. Vehicle/deer accidents increased, as did Lyme disease. Managed hunts, opposed by animal rights activists; contraception at a cost of $500 to $1,000 per animal; and hiring a sharpshooter were proposed to control the fast-breeding herds.
Nationally, experts estimate there were about 36 times the number of deer in 1997 as at the turn of the century. Nearly 15% of all 1997 Michigan vehicle accidents were deer-related; the average claim cost was just under $2,000. Missouri insurance officials estimate $16 million a year in losses due to deer/vehicle accidents. In an effort to reduce the number of deer/vehicle accidents, the state of Iowa has installed special reflectors along its road right-of-way at five test locations. These reflectors divert some light from the vehicle's headlights into the ditches along the roadway in an effort to keep the deer out of the road. Each reflector costs $40 per unit and 175 units are needed for every mile of protected highway.
The US Department of Agriculture's animal damage control department was called in by Leesburg, Va., to rid the town of naked-headed turkeys and black vultures. Two hundred of the avian species roosted in the mayor's backyard. For six years the town had tried every noise-making device imaginable to get rid of the smelly, messy birds. USDA's Martin S. Lowney told The Washington Post that he would set up a room-size trap baited with dead deer to capture 1,000 vultures. Wearing a raincoat, because vultures tend to "throw up when excited," he would transfer the birds one by one to a small cage and truck them 200 miles away to rural Virginia at a cost of $8,000. Mr Lowney says it has worked in Florida and Texas.
The USDA also tried to help Frederick, Md, with its crow infestation. It was the incessant cawing and splattered sidewalks that grated on residents. Tens of thousands of crows crowned treetops and downtown buildings each December. Crows are smart and adaptable. You cannot make the same noise in the same place and scare them off. Thus, the counter attack was provided by two guys who broadcast a crow distress cry from a roving white Jeep. Townspeople were encouraged to join the cacophony by banging on pots; the mayor carried a loaded cap gun.
Yuba City, Calif, tried poisoning 1 million crows many years ago - an option that is no longer acceptable - and it did not work. Illinois had better luck. A conservation crew dynamited 328,000 birds in one fell swoop. But that was 56 years ago; the solution would not fly today.
Illinois had a huge problem with another bird that does not want to fly -away, anyway. Geese. They did not want to migrate. They settled into decorative runoff ponds in Peoria. Jerry Quintiliani says he and fellow residents dream about donating hundreds of succulent main courses to homeless shelters. But they cannot touch the birds because geese are protected by the state of Illinois.
Yield burning goes up in smoke
In addition to external factors, public risk managers have had to deal with numerous internal problems. The Internal Revenue Service is currently looking into at least 36 of what may be hundreds of cases of yield burning, a complex bond-selling technique that allowed some investment banks to mark up municipal bonds refinanced in advanced refundings, keeping profits for themselves. According to a 26 August 1997 article in The Wall Street Journal, the IRS is now looking for cities to pay the Treasury the money it is owed - a figure that could reach $1 billion. The allegation from IRS officials is that state and city financial officers knew what they were doing when they allowed the bonds to be refinanced illegally. Municipal advocacy groups like the National League of Cities disagree, saying the complex financing practices were masterminded and played out by Wall Street deal makers.
In the early 1990s, the process of advance refunding allowed struggling local governments to balance their budgets. New securities sold at lower interest rates were used to replace old debts. Since federal law prevents municipal bonds from being sold at one yield and invested at a higher one, the money governments made on the sale of the new bonds should have been put into low-yield State and Local Government Series Treasury bonds. Instead, investment bankers allegedly bought higher-yield bonds and marked their prices up to bring the yield down. According to federal investigators, since investors did not buy the low-yield, higher-priced SLUGS, the government missed out on millions of dollars, and since brokers raised the price with no regard to the amount of risk involved, the transactions may have been illegitimate.
What this will mean to cities nationwide remains to be seen. In addition to the IRS' investigations in the affected municipalities, the Securities and Exchange Commission has been tracking down suspected Wall Street firms, but recent court decisions have held that markups were not excessive. Many public officials who were unaware of the situation, or who inherited it from a predecessor are concerned that they will be left holding the bill. Macomb County, Mich, director of risk management and safety Rich Gasowski passes along this advice from his financial gurus: re-bidding your brokerage firm every three to five years is an effective way to stay out of bond trouble.
The prosperity of the American marketplace, the continuing decline of unemployment and high consumer confidence levels have led alternately to panic and joy. The intergovernmental pooling market is entering an important era. Because the insurance market is so soft, and thus inexpensive, many entities are reverting to this traditional mode of finance. To maintain members, pools are adding services and benefits. Companies are fighting back with services of their own.
Numerous brokers and insurers have joined forces either through mergers or acquisitions in the past year. Titan Indemnity Co (San Antonio, Texas) that merged with USF&G (Baltimore, Md) only to have USF&G merge with St. Paul Cos. (St Paul, Minn); brokers Johnson & Higgins (Dallas, Texas) merged with Marsh & McLennan (Hartford, Conn); and Coregis Insurance Co. (Chicago, Ill) was purchased by G. E. Capital Financial Services (Stamford, Conn).
Some experts are questioning whether the move to fewer choices will lead to fewer options for goods and services. Others postulate mega companies that could spell trouble for quality, competition, available coverages, pricing, value and competitive position. The companies themselves assure the industry that more options, not fewer, will result as competitors become partners.
So is there a future for the public risk management profession in the United States? As long as the natural world and human nature continue their unpredictable courses, all signs point to yes. The profession has enjoyed a more prominent profile this year for its cost-saving, yet human approach to the risks we all face.
Carol Zoellner is director of risk management, Palm Beach County Board of Commissions, West Palm Beach, Fla, and president of the Public Risk Management Association, Arlington, Va.