An
Overlooked Use of the Tort Levy
BY:
Walter J. Zukowski, Attorney
Most
districts are familiar with the generally recognized expenditures of
the Tort
Levy: settlement costs, cost of judgment, and self insurance (Ill. Rev.
Stat.
Chap. 85, Para. 9-107). That same section, however, contains a
frequently over-
looked provision which could provide substantial additional revenues to
a
district. The statute allows districts to pay the cost of a "risk care
management program" (hereinafter referred to as RCMP) from the Tort
Levy.
Even
if a district is without a formal RCMP, it is conducting certain
aspects of such
a program. The Superintendent considering altering the specifications
for
insurance, the Business Manager evaluating an insurance pool, or the
Architect
conducting a health and safety inspection pursuant to Part 185 of Title
23, Illinois
Administrative Code, are all conducting risk care management
activities. Thus,
a portion of the salary and related expenses of those persons can be
legitimate
expenditures of the Tort Levy, instead of the financially strapped
Education
Levy.
The
failure of the RCMP to gain wide-spread support has been due in large
part to
the fact that the Illinois General Assembly has failed to define such a
program. A review of case law and regulation also provides little
assistance.
Some insight is gleaned, however, from the legislative debates. They
state in
relevant part:
......
What you really need is a survey to be done. Once a survey is done of
what's
wrong.....course, obviously, there can always be a continuing on-going
survey (Illinois
Legislative Debates, Senator Sangmeister, June 25, 1985 at page 343).
The
debates included an example of an appropriate use of an RCMP. Reference
was
made to an accident, several years ago, in Gary, Indiana, in which a
young
person drowned in a public pool. In that situation an RCMP could have
been used
to:
....tell
you that you really ought not to do that, that that ought to be fenced
off and
that that pool ought to be drained. That's what ......what.....Risk
Care
Management is all about. Private industry has been doing it for years.
And
actually instead of a cost increase, because you can levy....for this
type
of......of a plan, it should be a saving for the simple reason that
your
insurance premiums are going to go down (Illinois Legislative Debates,
Senator
Sangmeister, June 25, 1985, at pages 339- 340).
These
comments indicate that the intention of the General Assembly was to
allow
school districts to develop programs similar to the six-step process
which has
been followed in the risk care industry for numerous years. (See:
Harvard
Business Review, "Risk Management: A New Phase of Cost Control",
Russel B. Gallagher (September - October 1956), pp. 75-86).
An
RCMP is a scientific approach to the problems of dealing with the pure
risks
faced by entities (Fundamentals of Risks and Insurance, Emmett J.
Vaughn,
Wiley, 1986 at pg. 35). It is broader than insurance management in that
it
deals with both insurable and uninsurable risk and the choice of the
appropriate technique for dealing with them. Risk Management is a tool
to make
sure that losses from pure risks do not prevent management from seeking
its
goals. Under this scenario, insurance is viewed as simply one of
several
approaches for managing the pure risks the entity faces.
It
has been suggested that there are three rules to be considered in
creating an
RCMP. They are:
1.
Risk only what the district can afford to lose,
2.
Consider the odds, and
3.
Do not risk great amounts for only small gains.
(Risk
Management in the Business Enterprise, Robert I. Mehr and Bob A.
Hedges, Irwin,
1963 pp. 16-26).
Districts
embarking on such a program should demonstrate their commitment by
adopting an
RCMP policy. Attached to this Article, as Exhibit A, is a proposed
policy and
job description for a risk care management officer. Adopting such a
policy
should assist the district to make proper expenditures from the Tort
Levy as
well as to minimize auditor and taxpayer concerns.
The
process of creating an RCMP begins with determining objectives. The
district
must decide what it wants to accomplish. A common objective is the
avoidance of
financially catastrophic losses that could impede the entity's basic
activities. Another goal could be the protection of employees from
accidents
that might lead to serious injury or death.
The
next step in the process is identification of risk exposures. This
portion of
the process may be foreign to many administrators. Consequently, it
would be
expected that the services of experts, such as insurance consultants,
would be
liberally employed. Close communication should also exist with the
district's
attorney and auditor to be confident that the expenses being
transferred to the
tort levy are permissible.
Other
tools which are frequently used in this area are review of district
insurance
policies, analysis of district financial statements, inspections of the
district's operations, and completion of a risk analysis questionnaire
(one of
the most comprehensive risk analysis questionnaires is published by the
Insurance Division of the American Management Association).
The
third step of the process is to evaluate the risks. The potential size
of the
loss and the probability that it would occur are measured and ranked.
Risks
have traditionally been characterized as:
1.
Critical risks - those exposures involving losses that could result in
imposition of additional taxes,
2.
Important risks - those exposures that would require diversion of
appropriated
funds from planned activities, or
3.
Unimportant risks - those exposures in which losses could be met out of
current
appropriation without modification of planned activities.
The
fourth step is the selection of the appropriate action from among
available
alternatives. This involves the concepts of risk control and risk
financing.
Risk control focuses on minimizing the risk of loss. Risk financing
concentrates on arranging the availability of funds to meet losses from
risks
remaining after the application of risk control techniques.
For
instance, a district may determine that certain risks exist in the area
of athletics.
The district could decide to "retain" that risk, but to reduce the
possible severity of a loss by allocating a larger portion of the
budget to
meet uninsured losses, by deciding to spend additional sums on
continuing
education for the coaching staff, or by deciding to spend greater sums
to hire
additional personnel to supervise such activities. In the alternative,
the
district could decide to "transfer" that risk to others by means of
insurance, or student waivers.
The
final steps of the process are implementation and evaluation. The
district
determines if the program is adequately addressing the objectives. If
not, it
must be changed. The on-going process of evaluation could include
activities
such as: health inspections by governmental agencies, safety patrols by
custodians, or certain functions of the district's architect and
attorney.
Statutory
authority appears to stop short, however, of allowing the Tort Levy to
be used
for expenditures for actual implementation of the recommendations
contained in
the RCMP.
Nonetheless,
such a program can be of significant financial benefit to the district.
The
portion of any employee's or agent's time (and corresponding salary)
spent on
conducting RCMP duties can be sizable.
In
conclusion, the benefits of implementing an RCMP should be several
fold. First,
the analysis process will assist the district to reduce its risk
exposure,
which should eventually result in a better loss experience. Second,
implementation of such a program will demonstrate to your insurance
carrier the
serious nature with which the district treats risk (which should
justify a
reduced insurance premium). Finally, it will relieve pressure on the
district's
financially strapped Education Levy by allowing many items which were
previously paid from that Levy to be paid instead with monies from the
much
less restricted Tort Levy.