Fresno’s self-funded pool shrinks after $1.3m payout to Vargas family [The Fresno Bee, Calif.]

Jan. 09--Fresno City Hall is facing a crisis with its self-funded insurance pool, and last week's $1.3 million payout to the family of Steven Anthony Vargas is only part of the reason.

Looming just as large are skyrocketing costs for outside lawyers and more than three dozen pending lawsuits against the city -- including several more high-profile lawsuits involving the Police Department.

City Hall's problem is that any costs to its self-insurance system beyond the normal almost certainly will cause a ripple effect throughout the organization. This worries top city officials, who already are debating whether to close fire stations and curtail the hot-meals program to balance the budget.

There is "nothing simple about our budgeting trade-offs," City Manager Mark Scott wrote in an email Friday. "We continue to look at all options, including those that have potentially unpleasant consequences."

The self-insurance system's budget this fiscal year is about $11 million. Each department, such as police, public works and fire, pays a share of this money -- in essence, premiums.

The size of each department's annual premium is based on three years of past experience. Some departments, such as Fresno Area Express which serves thousands of bus riders every day, have more liability claims than others with less contact with the public. The premiums for these high-risk departments are highest.

Assistant City Manager Renena Smith said $3.2 million of the $11 million is earmarked for claims. Of the $3.2 million, $2 million is for liability claims and $1.2 million for things like theft claims.

With the Vargas settlement, Smith said, the $2 million for liability claims is wiped out -- and there still is nearly six months left in the fiscal year. There is about $800,000 left for theft claims. Smith said this money could be used for liability claims.

But dip into that pot and there's less money to replace stolen items such as copper wire that keeps the streetlights going.

The self-insurance system budgets $4.8 million for operations. This includes $1.4 million to hire outside lawyers for complex or unique lawsuits that the City Attorney's Office (which also has been hit hard by cutbacks) chooses not to handle.

The city, however, is facing a surge of lawsuits requiring outside legal experts. According to a Dec. 8 staff report, the city in each of the last three years budgeted about $1.4 million for outside lawyers. But the actual expenditures rose from $1.14 million in Fiscal Year 2009 to $1.59 million in Fiscal Year 2011 -- a nearly 40% jump.

That's nothing compared to this fiscal year. The staff report said $1,406,700 was budgeted for outside lawyers. As of Nov. 17, all but $110,276 had been spent.

"Presently, there are 41 Risk Management related matters being handled by outside contract counsel at an average cost of $27,936," the staff report said. "One matter has been litigated and eight are expected to go to trial before the end of the fiscal year."

City Attorney James Sanchez last week said four of the biggest cases requiring outside lawyers involve the Police Department.

One of them was the Vargas case. A federal jury last month found that Sgt. Mike Palomino had used excessive and unreasonable force in an October 2009 incident during which he killed Vargas, who was unarmed.

The others are:

--A lawsuit filed by former Fresno police officers Richard Gaines and his wife, Jaimy, who allege wrongful termination from the department. Their trial is scheduled to start today in Fresno County Superior Court.

--A federal civil rights lawsuit filed by Guadalupe Fonseca and his mother, Paula Fonseca. The lawsuit alleges that in December 2008, a Fresno officer along with a California Highway Patrol officer used excessive force in arresting Guadalupe Fonseca, who is mentally disabled. The lawsuit claims he had done nothing wrong.

--A lawsuit filed by deputy chiefs Robert Nevarez and Sharon Shaffer, who say Chief Jerry Dyer creates a hostile work environment with his demeaning and mocking comments about blacks, Asians and women. The suit also says Dyer mocks Mayor Ashley Swearengin and her female administrators, saying City Hall is run like a "sorority."

The $11 million self-insurance pool has one more part -- a $3 million reserve. The reserve can be tapped if liability claims exceed the budgeted amount. It also can be tapped if there are shortfalls in other budgeted areas.

The Dec. 8 staff report was written to support a request by the Swearengin administration that the City Council approve tapping the reserve for $1.5 million. The report said the money would pay for extra outside lawyers needed to handle unanticipated complex lawsuits.

The item was pulled from the agenda before the council could discuss it. City officials last week said the proposal could go to the council this month.

The city's financial risk is clear. Lawsuits requiring outside lawyers probably will soon eat into the reserve, which almost certainly will be needed because the Vargas settlement depleted the last of the money budgeted for a full year of liability claims.

If the reserve is depleted before the end of the fiscal year, then City Hall must find the money to pay the plaintiffs. Only in rare cases involving judgments higher than $3 million would the city be able to call on a supplemental policy with an insurance company.

If the lawsuits involve enterprise departments, money from ratepayers might be used to foot the bill. If the lawsuits involve general fund departments such as police, the money might come from the general fund.

The pain doesn't end there. In the spring, the City Council will begin budget hearings for the 2012-13 fiscal year. That will mean re-funding the self-insurance liability system, including the $3 million reserve.

Since the biggest premiums are paid by the departments which generate the most awards, that could mean higher premiums for a Police Department that already has a $1.3 million settlement against it and several potentially expensive lawsuits in front of it.

"I would love it if the legal costs associated with Public Safety were zero," City Manager Scott wrote in his email. "But that's not the world we live in."

Council Member Lee Brand said there is no way for a municipal government serving a half-million residents to eliminate all liability claims. "Stuff is going to happen," Brand said.

In the Vargas situation, Brand said, Palomino was one of the best trained officers on the force but was put into a situation where he had to make a split-second decision.

Now, the loser will be city services, Brand said.

"That's the irony in this whole thing," he said. "In the end, it's the taxpayer who suffers."

The reporters can be reached at [email protected], [email protected] or(559)441-6330.

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