The privatization of Louisiana's lines of insurance and loss prevention services, initiated in 2010, is on track to save the state millions of dollars over the next few years, the Louisiana Legislative Auditor says. But due to an increase in contract costs as well as a dependence on old data, he warned the Jindal administration might need to pick...
The privatization of Louisiana's lines of insurance and loss prevention services, initiated in 2010, is on track to save the state millions of dollars over the next few years, the Louisiana Legislative Auditor says. But due to an increase in contract costs as well as a dependence on old data, he warned the Jindal administration might need to pick up the pace to remain on schedule to reach the total estimated savings.
The contract awarded to F.A. Richard & Associates has been projected by the Office of Risk Management to save the state $22 million by the time the pact ends in 2015, according to a report released Monday by the state Legislative Auditor's Office. But the audit is based on old numbers and dependent on an acceleration in savings in the last two years of the contract, Legislative Auditor Daryl Purpera said.
"They're so slow in getting the numbers out," said Purpera, who noted the audit was based on costs-savings data from a year ago. "We really won't know whether it's successful until it's over. We really won't know if it was a reasonable thing to do until then."
Michael DiResto, the spokesman for the Division of Administration, called Purpera's remarks "inconsistent and confusing," adding they didn't reflect the positive message expressed in the auditor's report.
"The bottom line is this has been a very, very successful privatization. The quality of services is continuing, the savings have been substantial and way ahead of schedule," DiResto said Monday afternoon after hearing of Purpera's comments.
"It's unfortunate that the legislative auditor's comments to the media don't seem to reflect what's in the report prepared by his own staff," he said, adding the Office of Risk Management, under the umbrella of the Division of Administration, worked closely with audit staff on the report.
In 2010, F.A. Richard was awarded the then $68 million contract to take over insurance services from the Division of Administration's Office of Risk Management over the course of five years. A year later, the contract was amended to include a 10 percent increase in costs, for a total of $74,930,868.
In return, F.A. Richard projected a $50 million savings to claims and litigation payments and and a total of $22 million in savings to the state.
Purpera said the administration continues to state it is on track to reach the $22 million regardless of the uptick in contract costs. But he also noted the numbers, from last year, demonstrate administrative cost savings are lagging significantly.
The audit stated claims and litigation payment savings stands at $20.3 million of the total $50 million as of June 2012, the most recent numbers provided by the Office of Risk Management. But savings on the administrative side amount only to $6.6 million of a $40 million target.
All said, Monday's audit put the savings to date at $10.3 million (46.8 percent of total). But, Purpera said, "realistically they're really only about a third of where they need to be."
DiResto said the administration provided audit staff with the most up-to-date information -- the current fiscal year ends July 1 -- and that this information never included a savings goal for administrative costs. He said his office is tracking progress along the stated goal by watching only total savings and savings to claims and litigation payments.
He added the report already states management is halfway to the latter goal, so the addition of the administrative cost savings into the equation "doesn't seem right" and was a mistake made on the part of audit staff with which his office disagrees.
Purpera also expressed concern with the $6.8 million increase in contract costs. If the privatization does result in a $22 million savings, without factoring in the increased costs, the total savings could be up to 31 percent less than originally estimated.
DiResto said this was not a cause for concern. He said the nearly $7 million was needed to accelerate the entire process, which, in turn, accelerates the savings. He said this sum is already built into the progress made toward the savings goal mentioned in the report.
DiResto said his office will continue to work with the auditor on the contract. Purpera, meanwhile, said all his office can do is continue to monitor the situation.
But he cautioned the company should have anticipated the increase contractual costs, which were due to short staffing and a need to accelerate privatizing the lines of insurance. Risk management has cut 61 people from the payroll since 2010, with a further 19 planned cuts.
When asked whether he believed it was possible the $22 million in projected savings could be met considering the short time frame, the outdated numbers and the increase in costs, Purpera was unsure.
"I don't have a crystal ball to see how well they're going to do with it," he said, adding, "I think that management should be ... monitoring this very closely."
As an aside, Purpera said all privatization contracts -- including the controversial public-private partnerships currently underway for LSU's hospitals -- should receive the same level of scrutiny as the risk management deal. However, this is up to the management team at the office.
"Management is really going to have to be the leader in that," he said. "But (Monday's audit) does put a little bit of sunshine on these situations where we are privatizing."
See the full audit report below.