Audit: Contractor saves state money

A private contractor is ahead of pace to achieve the savings promised when it took over functions of a state agency, but how the total savings will be achieved by the end of the contract are not detailed, according to the Louisiana legislative auditor.

“They’re a little bit ahead according to their schedule,” said Nicole B. Edmonson, director of Performance Audit Services.

The audit, released Monday, looks at the first year of the five-year contract to pay F.A. Richard & Associates to handle much of the claims processing and management of the state Office of Risk Management.

The state agency oversees state insurance covering property and liability exposure and tort claims against the state.

It is funded primarily through premiums paid by state agencies for coverage; in 2010, the agency’s actual operating costs were around $361 million, according to the audit.

Jindal administration proponents claimed the move to privatization would save millions over the five-year period.

The first year of the five-year contract was expected to cost more than it did, Edmonson said.

The Office of Risk Management expected to see a net increase in costs of around $659,000 during the first year, but ended up exceeding original expectations by more than $2 million.

“Therefore, net program savings are ahead of schedule based on ORM’s projection,” the audit said.

F.A. Richard & Associates saved the state a net amount of $1.4 million in its first year. Those savings are ahead of schedule for the 2011 fiscal year.

FARA’s $68.1 million contract is for a five-year period from July 1, 2010, through June 30, 2015. FARA guarantees $50 million in claims and litigation payment savings.

If FARA fails to achieve the $50 million savings, it will owe the state a 3 percent refund of the shortfall, up to $1.5 million.

In addition, Jindal administration officials promised $22 million in savings.

In order to realize the $22 million in net program savings, the Office of Risk Management would need to realize $40 million in administrative and other cost savings, according to the audit.

The agency said the additional savings would come generally from reductions in contract costs, salaries, software licenses and such, but the table breaking out the program’s estimated costs and savings detailed the $22 million saved each year through Fiscal Year 2015 but not the additional amounts needed, according to the audit.

State Risk Director J.S. “Bud” Thompson Jr. did not return two calls seeking comment Monday.

A Division of Administration spokeswoman, Christina Stephens, referred reporters to Thompson’s written response late Monday.

Thompson’s four-page written response did not address the auditor’s calculation that additional savings were needed to achieve the promised savings. He did write about the successes of the first year.

“I am happy to see that your report confirms that the results to date have already exceeded expectations,” Thompson wrote.

As of May, the agency had reduced its staff by 52 people to 88. According to the audit, once all the lines of insurance have been transferred to FARA, the staff will drop to 50 employees.