April 21, 2004

Firms with close ties to New Castle County officials have been providing the county with insurance services under exclusive contracts for seven years, a disputed internal audit disclosed. The county administration said the arrangement has proven very beneficial financially.

Because County Council specifically authorized the deal at its outset, the arrangement is legal. However, auditor Robert Hicks said he will ask the Ethics Commission to rule on its propriety and urged Council to expand the section of the county code covering conflicts of interest to include business arrangements involving brothers and sisters of county employees.

According to the audit, the professional services contract to handle insurance claims, risk management, loss control and safety -- all having to do with workers compensation for on-the-job injuries -- was awarded in 1997, six months after the Gordon administration took office, without there having been any competitive bidding, to A.I.S. Risk Management Services. Although the published report does not say so, that firm is owned by Lynn Moroz, the county's risk manager.

The audit report said the county has paid the firm fees totaling $2.6 million through Mar. 16.

The report said there has been no subsequent review of the contract nor any determination that the county "is receiving the best possible service at the lowest possible cost."

A.I.S., it goes on to say, subcontracted related legal work to Freebery & Houghton. Michael Freebery, one of the law's firm's principals, is the brother of Sherry Freebery, the county's chief administrative officer, the second-ranking position in the administration, and Joseph Freebery, general manager of the county Department of Special Services.

Legal fees have totaled $1.5 million, according to the report. They were paid by A.I.S. out of the fees it received.

In a response to the findings published with the audit, the county does not dispute existence of the arrangement nor its reported cost. "Those expenditures were not, however, expended without a substantial benefit being realized," it said. The response is not specifically attributed to any person.

It goes on to say that in the five fiscal years prior to A.I.S.'s taking on the business, the county spent $9.49 million on workers compensation. In the five fiscal years since, spending amounted to $5.67 million.

Moreover, it goes on to say, the backlog of unsettled compensation claims has been significantly reduced, thus improving the county's balance sheet. Although not stated in the response, that would be a factor in the county's having received high bond ratings which, in turn, has enabled it to borrow capital funds at less cost.

Employee lost time attributed to workers compensation claims management was reduced from 5,645 man-days in 1996 to 464 in 2003. That, the response said, is equivalent to not having to hire 24 additional full-time employees at a cost of $1.5 million a year.

The response said "the entire panoply of savings is the result of a team effort between the county, the risk manager [firm] and the risk manager's legal team." But it also credits the law firm with having contributed additional cost-savings benefits. For instance, it said, Freebery & Houghton determined that county pension benefits could be partly offset by workers compensation and that ruling resulted in a one-time savings of $1.5 million on future pension expense.

The audit report also said that two Jeep vehicles were leased without there having been competitive bidding although the aggregate cost over the term of the leases exceeded $25,000, the maximum amount allowed without bidding. The county responded that it counts expenditures as they are made and that payments on those leases were below the limit in each year. The dealer which leased the trucks is not identified.

The actual audit was conducted by and the report prepared by Moorestown, N.J.-based Outsourcing Partnership L.l.c. Hicks previously said that the press of other duties and lack of staff did not allow him to personally conduct the audit. But, he said, he reviewed and stands behind the work. The report is signed by Brian Kerr, identified as director of Outsourcing Partnership.

It was the first internal audit since Hicks was hired by County Council a year ago.

The report lists 13 areas having to do with county government's procurement practices that it said were investigated Findings in areas other than the one example of contractual services and the leasing of the Jeep are not disclosed nor is there any indication of how extensive the audit was. Other areas listed as having been studied include purchase requisitions and orders, emergency purchases, add-ons and overruns, and sale of surplus property.

Publication of the report was delayed after County Executive Tom Gordon, Sherry Freebery and other administration officials objected to some of its contents. Follow a private conference with them Hicks agreed to some modifications to the report. He did not say what those changes were.

The body of the report does not identify the risk management firm. It refers to an "understanding that a principal of the law firm is related to a [sic] senior county official." In a cover memorandum, Hicks identifies both firms.

Following publication of the report on Apr. 20, County Council's executive committee agreed to to get moving on complying with one of its recommendations; namely, that it find people to serve on the advisory board for the special services department. The board was authorized by county ordinance but never actually established. The administration response to the audit said that it actually is not necessary because its function would be purely advisory and Council has an active committee-of-the-whole related to the department.

2004. All rights reserved.

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