City Attorney s Office: Litigation and Claims Management Performance Audit

City Attorney s Office: Litigation and Claims Management Performance Audit June 2013 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Leslie Mitchell Rudolfo Payan Robert Bishop Jeffrey Hart Timothy O Brien, Vice-Chair Audit Staff Audrey Donovan, Deputy Director, CIA, CRMA Chris Horton, Audit Supervisor, PhD, CGAP, CRMA, CCSA Marcus Garrett, Lead Auditor, CIA, CGAP, CRMA Anna Hansen, Senior Auditor, CICA Bonnie Doty, Senior Auditor, MGPS You can obtain copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705 Denver CO, 80202 (720) 913-5000 Fax (720) 913-5247 Or download and view an electronic copy by visiting our website at: www.denvergov.org/auditor

City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 www.denvergov.org/auditor Dennis J. Gallagher Auditor June 20, 2013 Doug Friednash, City Attorney City Attorney s Office City and County of Denver Dear Mr. Friednash: Attached is the Auditor s Office Audit Services Division s report of its audit of litigation and claims management. The purpose of the audit was to evaluate CAO s management of litigation costs and its performance management. As a result of the audit, we recommend that the stewardship of the Liability Claims Fund be transferred to Cash, Risk, and Capital Funding within the Department of Finance. We also make several recommendations regarding improvements to the litigation management technology and improvements to the management of internal and external costs. I appreciate the time you and your staff made to assist the audit team. If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000. Sincerely, Dennis J. Gallagher Auditor DJG/cnh cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer Ms. Janice Sinden, Chief of Staff Ms. Stephanie O Malley, Deputy Chief of Staff Ms. Beth Machann, Controller Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics Mr. Scott Martinez, Deputy City Attorney To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 www.denvergov.org/auditor AUDITOR S REPORT We have completed an audit of litigation management within the City Attorney s Office (CAO). The purpose of the audit was to evaluate CAO s litigation cost management and performance management. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The audit has three findings. First, we found that assigning CAO authority over the Liability Claims Fund, a self-insurance fund, does not promote Citywide risk management. To allow for better assessment, monitoring, and mitigation of risk, as well as to increase accountability and transparency of the Liability Claims Fund s oversight, we recommend assigning oversight to the Department of Finance. Not only would such a reassignment better match practices in numerous states and municipalities, it would mirror the City s model of collaboration between CAO and the City s Risk Management regarding the Workers Compensation Fund. In addition, we identified ways that CAO could strengthen the management of its litigation management system, Practice Manager. Implementing these recommendations will allow CAO to evaluate effectively whether Practice Manager can meet CAO s needs or if another system is warranted. Finally, we determined that CAO s cost management controls can be improved. Specifically, we recommend a more formal and comprehensive system of evaluating outside legal services providers, as well as requiring internal legal staff to track their time for all cases. We extend our appreciation to management and staff of the City Attorney s Office who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

City and County of Denver Office of the Auditor Audit Services Division REPORT HIGHLIGHTS City Attorney s Office: Litigation and Claims Management Performance Audit June 2013 The audit assessed the efficiency and effectiveness of the City Attorney s Office s litigation management practices, including management of costs and performance. Background The City Attorney s Office (CAO) is responsible for performing a wide variety of legal and risk-related services for the City and County of Denver and its constituent agencies. This audit focuses on one portion of these services: litigation and claims management. The Civil Litigation Section oversees the claims process for both litigation and non-litigation claims. CAO also oversees the Liability Claims Fund, a self-insurance fund from which litigation and claims payments are made. Purpose The purpose of the audit was twofold: To understand how CAO manages litigation costs, including assessments of internal controls, the Liability Claims Fund, and the City s self-insurance practices; and To evaluate CAO s performance management, including assessing the impact of Practice Manager (a litigation management tool) and evaluating the performance management of outside legal services providers. Highlights The audit has three findings: Finding 1: Assigning CAO authority over the Liability Claims Fund does not promote Citywide risk management. CAO and Risk Management share responsibility for reducing the City s liability, but collaboration between the two agencies is inconsistent and fragmented. CAO is the primary steward of liability claims and litigation data. Without the same level of access, Risk Management does not regularly assess or monitor the City s civil liability risks. This arrangement runs contrary to City Charter, which indicates that self-insurance funds should be administered by the Department of Finance. Finding 2: CAO s litigation management system, Practice Manager, requires additional support and evaluation. The system is generally used as a document repository, rather than a comprehensive litigation management tool. Its limitations result in inefficiencies such as the inability to provide timely response to external parties, limited search functionality, and the inability to synchronize with other software systems, such as Microsoft Office s Outlook calendar. CAO does not have the internal support to make improvements. Finding 3: CAO could benefit from improved cost management practices. CAO uses outside counsel and other vendors to help defend their cases, the costs for which are significant. However, CAO s cost management controls do not align with best practices for monitoring and evaluating vendors. Internally, litigation attorneys are not required to track their time and case budgets do not include time projected to be spent by CAO litigators. For a complete copy of this report, visit www.denvergov.org/auditor Or Contact the Auditor s Office at 720.913.5000

TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION & BACKGROUND 5 SCOPE 10 OBJECTIVES 10 METHODOLOGY 11 FINDING 1 12 Assigning Oversight of the Liability Claims Fund to the City Attorney s Office Does Not Promote Citywide Risk Management 12 RECOMMENDATIONS 19 FINDING 2 20 City Attorney s Office s Litigation Management System Requires Additional Support and Evaluation 20 RECOMMENDATIONS 24 FINDING 3 25 City Attorney s Office Can Strengthen its Cost Management Controls 25 RECOMMENDATIONS 30 AGENCY RESPONSE 31

EXECUTIVE SUMMARY Assigning Oversight of the Liability Claims Fund to the City Attorney s Office Does Not Promote Citywide Risk Management Fragmented governance and inconsistent collaboration between agencies responsible for reducing the City s liability the City Attorney s Office (CAO) and Risk Management (RM) inhibits formal assessment, monitoring, and mitigation of liability risks facing the City. Because it is the steward of the Liability Claims Fund, CAO has exclusive control over liability claims and litigation data and does not regularly share such information with RM. Without this information, RM cannot use its expertise to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Further, CAO s administration of the City s Liability Claims self-insurance fund lacks transparency and accountability. The City should follow the lead of peer jurisdictions and move oversight of the Liability Claims Fund to the Cash, Risk, and Capital Funding Division in the Department of Finance, which would institutionalize RM s access to data necessary for implementing its mission, and also enhance oversight of taxpayer dollars used to pay claims and litigation brought against the City. Fragmented Governance Inhibits Formal Monitoring and Management of Liability Risks across the City CAO does not formally assess or monitor trends in civil liability risk for several reasons, including a lack of risk management expertise and a heavy workload. Further, the CAO Claims Division has full control over data that would be used to engage in such risk management and prevention activities and does not regularly share such information with RM. According to CAO management, sharing these data with RM would violate attorney-client privilege because CAO does not consider RM a client. 1 As such, CAO only shares limited civil liability risk information and data with RM on an adhoc basis. Due to its lack of access to information about liability claims and lawsuits, RM does not regularly assess or monitor the City s civil liability risks. In contrast, the CAO Employment Division and RM share information on a regular basis regarding workers compensation claims and litigation, and even collaborate to develop City policies for preventing claims through increased worker safety. RM oversees all aspects of the workers compensation program, including the Workers Compensation Fund, and handles all workers compensation claims for the City. Further, as the administrator of the Workers Compensation Fund, RM is a client of CAO when workers 1 The attorney-client privilege protects communications between a client and lawyer and extends to information given for the purpose of obtaining legal representation. A similar but qualified protection exists under the work product doctrine, through which thoughts and research of both lawyers and non-lawyers developed because of litigation are protected from the discovery processes. Sharing work product with a person other than the client may result in a waiver of either protection and potentially lead to disclosure of information to another party. Because attorney work product includes legal advice, there is great value to the City, when involved in litigation, to ensure that attorney-client privilege and work product protections are maintained. Further, attorneys have an ethical duty of confidentiality, and failure to adhere to this duty may result in sanctions for the attorney. See e.g., Bell, Craig D.; Spahn, Thomas E.; and Rizek, Christopher S., "A Guide to the Attorney-Client Privilege and Work Product Doctrine for Tax Practitioners" (2007). William & Mary Annual Tax Conference. Paper 60. http://scholarship.law.wm.edu/tax/60. P a g e 1 Office of the Auditor

compensation issues are involved, and, therefore, data and information can be shared freely between the two departments and is protected by attorney-client privilege. Assigning Responsibility for the Liability Claims Fund to Risk Management Would Improve the City s Liability Risk Management and Fund Accountability Both the City Charter and common practice in other organizations indicate that self-insurance funds, such as the Liability Claims Fund, should be overseen by professional financial risk managers. City Charter indicates that, as a rule, the Manager of Finance should administer self-insurance funds, and that any deviation from this practice should be an exception. 2 Although the City Charter indicates a policy preference that self-insurance funds be administered by the Department of Finance, the Liability Claims self-insurance fund remains under CAO s purview. In addition to the guidance provided by City Charter, we identified numerous public sector organizations that assigned oversight of liability self-insurance funds to a risk management function located outside the law department. Our analysis of a benchmark study of peer jurisdictions conducted by CAO in 2012 revealed that seven of eleven peer jurisdictions allocate this responsibility to risk management departments; one city shows a shared responsibility between the risk management department and the law department; and one city does not have a risk management department. In addition, auditors found that the City of Arvada, the City of Aurora, and the State of Colorado, all of which operate under the same legal framework as the City and County of Denver, also assign responsibility for their liability self-insurance funds to their respective risk management departments. Because CAO is the primary steward of the Liability Claims Fund, there is little accountability and transparency for the claims and litigation management processes. CAO does not permit any entity or person except the client to access case information or provide input regarding litigation strategy. In fact, the only other entity evaluating settlements or payments from the Liability Claims self-insurance fund is the City Council, and this oversight occurs only when payments exceed a threshold of $25,000 for property damage claims and lawsuits or $5,000 for other liability claims and lawsuits. 3 However, from 2009 through 2012, CAO paid a total of $637,000 for claims and lawsuits from the Liability Claims Fund without any third-party oversight from City Council. Further, as much as 69 percent of all non-litigation claims in 2012 fell below the City Council-approval thresholds and were paid by CAO out of the Fund. In addition, City Council can only assess the claim presented for their oversight and without aggregate information cannot identify trends or propose preventative actions. To enhance the transparency and accountability of the Liability Claims self-insurance fund and to ensure greater oversight of liability risks to the City, the Mayor should assign the oversight of the Liability Claims selfinsurance fund to the Department of Finance and should direct the Manager of Finance to place the Liability Claims self-insurance fund under the administration and management of the Cash, Risk, and Capital Funding (CRCF) Division. This move would not require final approval of settlements but would allow CRCF to provide input from a citywide risk perspective on claims and litigation that impact the Liability Claims Fund 2 City Charter Title I, Part 5 2.5.3. 3 Denver Revised Municipal Code 20-1 requires City Council to approve any payments above these thresholds. City and County of Denver P a g e 2

proposed settlements. Further, reassigning administration of the Liability Claims Fund would allow the City Attorney s Office to designate CRCF as a client in cases that impact the Liability Claims Fund. Further, CAO could share important risk information freely with CRCF, allowing CRCF to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Because this reassignment may take several months to implement, CAO should work with RM in the interim to conduct an assessment of liability trends over the past five years to-date, and use that information to determine if selfinsurance remains the best policy for protecting the City against liability risks. In addition, CAO should develop and implement a plan to assess liability trends at least quarterly until the Liability Claims self-insurance fund is reassigned to the Department of Finance. City Attorney s Office s Litigation Management System Requires Additional Support and Evaluation Without proper administrative and technological support, CAO management cannot effectively assess whether their current litigation management system, Practice Manager, needs to be upgraded or replaced. A 2011 agreement between CAO and the City s Technology Services department (Technology Services) expressly stating that CAO is solely responsible for addressing software needs related to Practice Manager coupled with the loss of an in-house IT staff position in late 2012 have created a situation whereby CAO does not have adequate technical administrative support for its litigation management system. CAO should work with Technology Services and the Budget and Management Office to determine the IT staff support and funding needed to adequately address CAO s technological needs. Practice Manager Currently Limits Access to Reliable and Timely Management Information Practice Manager limits CAO management s ability to monitor individual and organizational performance, as well as impairs the efficiency of attorneys and paralegals, which reduces overall organizational effectiveness. In most instances, Practice Manager is only used as a repository for documentation rather than a comprehensive litigation management tool. In fact, CAO management determined that many reports generated by Practice Manager, including the Pipeline Report a report designed to provide an overview of all open cases contain unreliable data. Consequently, CAO personnel must use several subsequent processes to facilitate monitoring efforts, including manually re-creating and verifying data generated by Practice Manager. Several additional system limitations noted by CAO personnel contribute to office-wide inefficiencies including but not limited to the inability to provide timely response to external parties, limited search functionality, and the inability to synchronize with many other basic software systems used by CAO, such as Microsoft Office s Outlook calendar. At present, Practice Manager is not a reliable or useful management tool. CAO Hopes to Address Technology and Personnel Limitations with Monies from the City s Innovation Fund CAO management has focused limited resources on an office-wide assessment of software needs, which it hopes to fund with the City s Innovation Fund (ifund) 2013 monies. However, successful implementation of Practice Manager by the City of Minneapolis suggests that if CAO dedicates the proper resources, process P a g e 3 Office of the Auditor

changes, and technical support, the current litigation management system could meet its needs. The CAO should upgrade Practice Manager to maximize its capabilities, using the City of Minneapolis as a model. To mirror the successful implementation of Practice Manager demonstrated by the City of Minneapolis, CAO should work with Technology Services to establish one or more dedicated IT staff positions with ifund monies or revisit their IT shared services agreement. In addition, CAO should improve internal processes to assist in the successful implementation of any software litigation management system not limited to Practice Manager. This may include but should not be limited to specifying and restricting the Types and Categories fields and developing an internal process for establishing and enforcing a file naming convention for all documents stored in Practice Manager. Failing to prioritize and address these processes will limit any improvements gained through updating or replacing the ligation management system. Further, CAO should conduct updated office-wide training on the litigation management system to improve utilization and understanding by internal office personnel. Once Practice Manager is optimally executed, CAO should perform a follow-up assessment to determine whether Practice Manager meets its needs or if a replacement litigation management system is needed. If Practice Manager is still insufficient, CAO should allow the current contract to expire and use the savings to replace Practice Manager or petition for 2014 ifund monies, among other viable budget sources. City Attorney s Office Can Strengthen its Cost Management Controls CAO cost management controls can be strengthened to provide more formal evaluations of outside vendors and additional management information. CAO utilizes outside vendors, such as outside counsel or expert witnesses, to help defend their cases. CAO spent $3.3 million on outside vendors in the period 2009 through 2012. Of this total, CAO spent approximately $1.5 million, or 46 percent, just in 2012. Further, outside counsel costs spiked from 2011 to 2012 by 272 percent. CAO cost management controls do not align with best practices for monitoring and evaluating of external parties, such as outside counsel. A formal performance-based evaluation of the outside counsel firms at the end of each project would hold them accountable for their performance in a standardized, impartial, and transparent way. Therefore, CAO should develop and implement a formal performance-based evaluation of the outside vendors at the end of each project. CAO s internal cost management controls also should be enhanced. Implementing more extensive case budgets and requiring litigation attorneys to track their time for each case would provide CAO management with additional information to be used in assessing Citywide risk areas, evaluating staff workload, and evaluating possible organizational inefficiencies. Therefore, CAO should implement a formal and consistent time tracking policy for CAO staff. Further, CAO should develop written policies and procedures regarding time tracking to ensure greater consistency and more useful time tracking data. To provide additional information, CAO should require case budgets to account for all costs internal and external. In addition, CAO should provide written guidance for attorneys to develop these comprehensive case budgets for each case. City and County of Denver P a g e 4

INTRODUCTION & BACKGROUND City Attorney s Office Manages Litigation for the City and County of Denver The City Attorney s Office (CAO) is responsible for performing a wide variety of legal and risk-related services for the City and County of Denver and its constituent agencies. This audit focuses on one portion of these services: litigation and claims management. CAO also oversees the Liability Claims Fund, a self-insurance fund from which litigation and claims payments are made. Civil Litigation Section Responsibilities CAO s Civil Litigation Section provides litigation and claims services for CAO and the City. These services include defending the City against lawsuits in state and federal court, including alleged violations of civil rights, employment law, and even liability for damages to personal property. In addition to defending the City against lawsuits, the Claims Division of the Civil Litigation Section also processes and manages non-litigation claims against the City rising from incidents such as a personal injury in a public building or damage to a private vehicle during an accident with a City-owned vehicle, among other issues. The Civil Litigation Section also includes the Employment Division, which represents the City in personnel actions, including appearing before the Career Service hearing officers when personnel disciplinary actions are appealed by employees. The Employment Division also includes attorneys who focus on workers compensation issues. Workers compensation matters are paid out of the Workers Compensation Fund, a self-insurance fund. Although workers compensation is not the focus of this report, oversight of the Workers Compensation Fund provides an important benchmark against which to compare oversight and processes related to the Liability Claims Fund. Other CAO Responsibilities Other CAO divisions include Municipal Operations, which provides services in myriad areas, including land use, financial matters, compliance, and general municipal law. Municipal Operations also negotiates and drafts contracts, leases, and other key written documents. Prosecution and Code Enforcement responsibilities include handling municipal and traffic citations, and representing the Department of Excise and Licenses. Human Services Legal Services and Airport Legal Services are responsible for providing a suite of legal services related to Denver Human Services and Denver International Airport, respectively. Administration, including the City Attorney, is responsible for the overall management of CAO. Budget CAO has a 2013 budget of approximately $25 million. The budget is primarily dedicated to personnel services CAO management, attorneys, and staff support. CAO has 187 budgeted positions, of which about half are attorneys and half are support personnel, such as paralegals and legal secretaries. Personnel services and other General Fund functions account for approximately $20 million of the overall budget. P a g e 5 Office of the Auditor

CAO also has approximately $5 million in special revenue funds for prosecution, code enforcement, and litigation claims. Of this $5 million, the Liability Claims Fund was allocated $2 million from the General Fund for 2013. According to the Budget and Management Office (BMO), the Liability Claims Fund is not swept at the end of the year; rather, any unused monies remain in the fund and BMO works with the CAO Administration Division to project the amount of money needed for the following fiscal year based on cases that are likely to be resolved during that time period. Table 4 in Finding 1 provides information about total expenditures from the Liability Claims Fund in the period 2009 through 2012. Claims Process The claims process, overseen by the Civil Litigation Section, comprises two distinct but connected processes, which can be understood as simply non-litigation claims and litigation claims. The claims process generally begins with non-litigation claims and involves multiple steps, as illustrated by Figure 1. The claims process begins when a person seeking damages files a notice of claim with the Mayor s Office, the agency allegedly involved in the incident, or directly with CAO. Once CAO receives the claim, an adjuster then determines whether the City is liable for the claim. The City is immune from some types of claims under the Colorado Governmental Immunity Act (CGIA, discussed further below). If CAO determines that the City has immunity from the claim under CGIA, the claims adjuster will send a letter of denial and close the claim. If the claims adjuster determines that the City is not immune from liability for a claim, the claims adjusting process begins. This process includes fact collection and damage documentation, determining of the cost of the damage, and potentially offering settlement to the claimant, when appropriate. If the claimant does not accept the settlement offer, he or she may decide to file a lawsuit and proceed to litigation. All settlements over $25,000 for property damage claims and $5,000 for all other liability claims are submitted to City Council for approval. Persons alleging wrong-doing by the City or one of its employees must follow this claims process before proceeding to litigation if the claim alleges violation of state law. However, in cases of federal law, a potential litigant may serve notice to the Mayor s Office with intent to file a lawsuit without first filing a notice of claim with the City and going through the claims process. Once such notice is received by the Mayor s Office, one or more litigators within the Civil Litigation Section are assigned to the case and begin to develop a strategy for defending the City against the lawsuit. This strategy may include, but is not limited to, determining if the potential lawsuit can be dismissed for reasons including a lack of jurisdiction or, if an opportunity exists to file a motion for summary judgment, seeking a speedy decision in the City s favor when the facts appear to overwhelmingly exonerate the City from liability. Generally, lawsuits work their way through the judicial system at varying speeds depending on the parties involved, the complexity of the facts and theories involved in the case, and the courts rules and dockets. Most civil liability lawsuits defended by CAO are resolved prior to trial, whether through motions to dismiss, summary judgment, settlement, or other outcomes. City and County of Denver P a g e 6

In the period 2009 through 2012 only six cases were resolved through trial in state or federal court. In all six of these cases, the City prevailed. The City also won some cases on appeal during this time period, but the data the City provided to us did not distinguish these cases from other case outcomes. Figure 2 provides an illustration of the litigation claims process. Figure 1: CAO Pre-Litigation Claims Process Source: Auditor analysis of information provided by CAO. P a g e 7 Office of the Auditor

Figure 2: CAO Claims Process with Focus on Litigation Process Source: Flowchart provided by CAO. Note: *Only settlements over $25,000 for property damage claims and $5,000 for all other liability claims are submitted to City Council for approval. City and County of Denver P a g e 8

Key Legal Context There are two key areas that significantly impact the work of CAO s Civil Litigation Section. The first is the Colorado Governmental Immunity Act (CGIA) and the second is Section 1983 of the Civil Rights Act of 1871. CGIA CGIA was passed by the Colorado General Assembly in 1971 and provides for areas in which municipalities are liable for claims as well as providing protection for public employees. CGIA sets timeframes for claims processes under the Act, identifies claims for which entities are or are not liable, and sets financial limits for liability. Under CGIA, a claimant must file a claim within 182 days after an action that caused harm. CGIA also limits liability to $350,000 per individual or $990,000 per occurrence. 4 CGIA applies to public entities in the state, including state government, counties, city and county governments, municipalities, school districts, and special improvement districts. CGIA applies to home rule municipalities as well as statutory municipalities. Home rule municipalities, like the City and County of Denver, may apply more stringent standards than are required by CGIA but may not impose less stringency. In general, CGIA requires that municipalities provide for the defense of public employees and must pay claims associated with the action of public employees. The key restrictions to these requirements are that the employee s action in question must be performed within the scope of employment and that the action was not willful or wanton. CGIA also covers omissions, or failures to act, that may give rise to a claim. Section 1983 cases Section 1983 cases are civil rights cases that take their name from the section of United States Code that governs this area of law. 5 Section 1983 was originally passed into law in 1871 as part of the Civil Rights Law of 1871, also known as the Ku Klux Klan Act. Section 1983 cases allow claimants to seek relief for an alleged deprivation of a litigant s federal constitutional and federal statutory rights by persons acting under color [authority] of state law. CGIA does not exempt public entities from liability under Section 1983. Section 1983 is an important law helping claimants secure rights under the 14 th Amendment to the U.S. Constitution. The section s importance was elevated by the U.S. Supreme Court decision in Monroe v. Pape (1961). In this decision, the Court noted that in some cases states are inadequately securing federal rights, and allowed injured parties to seek a remedy in federal court even if the harm occurred as the result of actions by state officials. Later, cities and counties began to be sued under Section 1983 as parties acting under the color of state law. Section 1983 cases apply to all injuries by persons acting under color of state law, but in the City and County of Denver most Section 1983 4 The Colorado General Assembly passed legislation in 2013 to update the damage limits allowed under CGIA. These new limits take effect July 1, 2013. Prior to July 1, 2013, these limits were $150,000 per individual and $600,000 per occurrence. 5 42 U.S.C. 1983. P a g e 9 Office of the Auditor

cases relate to action by public safety personnel in the Denver Police Department or Denver Sheriff Department. Technology CAO uses various technologies to accomplish its many roles. Such technologies include JustWare, an application used by the Prosecution and Code Enforcement Division, and Alfresco, which houses contracts and contract amendments. Alfresco is used by numerous City employees including the Municipal Operations Division. The focus of this audit is on Practice Manager, which is primarily used by the Civil Litigation Section to track litigation. Practice Manager in its current deployment provides limited functionality and creates inefficiency for the litigators. The tool is not widely used in the municipal legal profession; based on our research, we only identified Minneapolis, Minnesota, as a fellow user of Practice Manager. Finding 2 discusses the issues CAO faces as a result of using Practice Manager and offers recommendations for improving the technology and the governance of technology. SCOPE The audit assessed the efficiency and effectiveness of CAO s litigation management practices, including management of costs and performance. Audit findings reflect practices that were current as of April 12, 2013, except as may be otherwise noted in the audit report. During the audit, we discussed with CAO the ability of the audit team to access settlement memos that are created by litigation attorneys to better understand how CAO evaluates and addresses litigation risk. CAO declined to provide these documents, citing attorney-client privilege and the harm that could come to the City if that privilege was breached. After discussion with CAO management, we did not further pursue access to the settlement memos and instead worked to identify other ways to evaluate CAO s risk management efforts. Consequently, we cannot opine on the content of these settlement memos or on their impact on CAO s efforts to manage legal risk. OBJECTIVES We had two objectives for the audit. First, we worked to understand how CAO manages litigation costs. This objective included assessments of internal controls to ensure efficient and cost effective litigation, as well as an assessment of the Liability Claims Fund, and an assessment of the City s self-insurance practices. Finding 1 and portions of Finding 3 primarily relate to the first objective. Second, we evaluated CAO s performance management. This included assessing the impact of Practice Manager and evaluating the performance management of outside legal services providers. Finding 2 and portions of Finding 3 relate to the second objective. City and County of Denver P a g e 10

METHODOLOGY We used myriad audit methodologies to develop information found in this report, as delineated below. We interviewed CAO management, attorneys, paralegals, and others with respect to policies, procedures, processes, and risks related to claims and litigation. We conducted numerous update meetings with the Deputy City Attorney, during which we discussed audit developments and received additional context and information. We interviewed individuals within the Cash, Risk, and Capital Funding Division of the Department of Finance to better understand the role of City risk management with respect to liability claims and workers compensation. We reviewed Practice Manager, the litigation management application used by members of the Civil Litigation Section, to understand how it is used and its impact on efficiency and effectiveness within CAO. Our review included interviews with CAO personnel, observation on how Practice Manager is used, and reviews of reports generated by Practice Manager. We also interviewed representatives from the City Attorney s Office in Minneapolis, Minnesota, to understand how they have addressed issues related to Practice Manager. Finally, we reviewed an IT shared services assessment between CAO and the City s Technology Services department regarding the support of various technologies including Practice Manager. To understand the legal environment related to the audit objectives, we reviewed City Charter and Denver Revised Municipal Code provisions related to risk management, City Council oversight, and the Liability Claims Fund. We also reviewed the Colorado Governmental Immunity Act and municipal guidance developed by the Colorado Municipal League. Further, we reviewed the Civil Rights Act of 1871, which included Section 1983 related to federal civil rights claims. Cases involving such claims are a significant portion of CAO s litigation workload. We relied on information from the City s PeopleSoft system and from the Budget and Management Office regarding payments made from the Liability Claims Fund during the years 2009 through 2012. We evaluated publicly available documents from various states and municipalities to understand their structure for overseeing liability self-insurance funds. To better understand CAO s external cost management, we reviewed contracts between CAO and outside counsel and examples of invoices submitted to CAO by outside counsel. We also evaluated best practices related to performance evaluation of outside vendors that provide services to law departments to understand how CAO s performance evaluation system compares. P a g e 11 Office of the Auditor

FINDING 1 Assigning Oversight of the Liability Claims Fund to the City Attorney s Office Does Not Promote Citywide Risk Management The City s ability to implement effective Citywide risk management is hindered by assigning oversight of the Liability Claims Fund, a self-insurance fund, to the City Attorney s Office (CAO). First, fragmented governance and inconsistent collaboration between agencies responsible for reducing the City s liability CAO and Risk Management (RM) inhibits formal monitoring and mitigation of liability risks facing the City. Because it is the steward of the Liability Claims Fund, CAO has exclusive control over liability claims and litigation data and does not regularly share such information with RM. Without this liability claims and litigation information, RM cannot use its expertise to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Further, CAO s administration of the City s Liability Claims self-insurance fund lacks transparency and accountability. RM is better suited to administer and oversee the Liability Claims self-insurance fund due to its in-house expertise in managing risk and insurance programs. The City should follow City Charter as well as the existing Workers Compensation Fund process by moving oversight of the Liability Claims Fund to the Cash, Risk, and Capital Funding Division in the Department of Finance. This move would ensure that RM has ready access to data necessary for implementing its mission, and also enhance oversight of taxpayer dollars used to pay claims and litigation brought against the City. Fragmented Governance Inhibits Formal Monitoring and Management of Liability Risks across the City Two City agencies have primary responsibility for handling liability risk management activities, and this fragmented governance inhibits formal monitoring and mitigation of liability risks. The CAO Claims Division manages civil liability claims, litigation, and the Liability Claims self-insurance fund. RM manages safety and loss prevention activities, excess liability insurance policies, and the City s workers compensation program, which includes claims against the City for workers compensation and the Workers Compensation self-insurance fund. Although both of these agencies have responsibilities to oversee liability in the City, CAO does not regularly share critical liability information with RM. Further, CAO does not regularly assess or monitor trends in the City s civil liability risks, nor has CAO re-evaluated the City s policy to self-insure against such risks. 6 As a 6 CAO s mission states that it has the responsibility to protect the City and advance its interests through efficient and effective municipal legal operations by serving as legal counsel to the Mayor, City Council, and all City agencies. Risk Management applies risk management processes and principles to the City business model; identifies, analyzes, and measures the City s risks; and applies risk management solutions including selection and purchases of insurance necessary to sustain the City s ability to provide services. It also develops and implements insurance requirements for use with outside contractors, vendors, and consultants. City and County of Denver P a g e 12

result, City policymakers cannot accurately determine how to reduce the number and cost of future liability claims and lawsuits brought against the City. The CAO Claims Division Has Exclusive Access to Civil Liability Claims Information but Does Not Have the Expertise or Time to Assess the Associated Risks CAO does not formally assess or monitor trends in civil liability risk for several reasons, including a lack of risk management expertise and a heavy workload. The CAO Civil Litigation Section comprises the Claims Division and the Employment Division, and Civil Litigation Section litigators are not trained as risk managers or to monitor liability at the Citywide level. The responsibility of the Civil Litigation Section is to defend the City against claims and lawsuits alleging liability for property damage, personal injury, unfair employment practices, and other issues under state and federal law. Consequently, traditional risk management activities, such as evaluating self-insurance, identifying risk trends, and developing strategies for reducing risks to the City s liability, fall outside the scope of CAO s mission. In some instances, the Civil Litigation Section does work with agencies to conduct employee training on issues that present a legal risk to the City, such as obtaining proper consent for police searches or identifying discrimination in employment practices. However, these activities occur on an ad hoc basis and are not part of a comprehensive approach to citywide risk management. Further, CAO has full control over data that other City agencies would use to engage in such risk management and prevention activities; it handles all liability claims and lawsuits against the City and is the de facto steward of the Liability Claims Fund. As such, no other entity in the City has complete and regular access to data describing the frequency and magnitude of civil liability risks facing the City. According to CAO management, sharing these data with RM or other agencies would violate attorney-client privilege. 7 In addition to a lack of expertise in Citywide risk management, CAO does not appear to have adequate time and resources for assessing and monitoring civil liability risk information. CAO litigators currently face heavy workloads that impede their ability to carry out activities beyond claim and litigation management, such as analyzing civil liability risks or providing liability prevention training to City agencies. Based on interviews with CAO Claims Division attorneys and paralegals, the attorneys commonly work sixty to seventy hours per week on case-related activities, such as discovery, depositions, briefwriting, negotiations, and court appearances. Further, the attorneys reported that, due to the size of the Civil Litigation Section, the City s attorneys often must work on cases as the sole responsible attorney, while plaintiffs may have multiple attorneys to dedicate to the case workload. Moreover, CAO attorneys and management report that they face a large number of Monell claims, which are claims that seek to hold the government 7 The attorney-client privilege protects communications between a client and lawyer and extends to information given for the purpose of obtaining legal representation. A similar but qualified protection exists under the work product doctrine, through which thoughts and research of both lawyers and non-lawyers developed because of litigation are protected from the discovery processes. Sharing work product with a person other than the client may result in a waiver of either protection and potentially lead to disclosure of information to another party. Because attorney work product includes legal advice there is great value to the City, when involved in litigation, to ensure that attorney-client privilege and work product protection are maintained. Further, attorneys have an ethical duty of confidentiality, and failure to adhere to this duty may result in sanctions for the attorney, which, in the case of city attorneys, would be harmful to the City. See e.g., Bell, Craig D.; Spahn, Thomas E.; and Rizek, Christopher S., A Guide to the Attorney-Client Privilege and Work Product Doctrine for Tax Practitioners (2007). William & Mary Annual Tax Conference. Paper 60. http://scholarship.law.wm.edu/tax/60. P a g e 13 Office of the Auditor

responsible for the unconstitutional acts of its employees, typically involving public safety officials, and require the City to produce and receive thousands of pages of documents that must be reviewed. According to CAO management and attorneys, Monell claims can be difficult and time-consuming to defend and resolve. Finally, CAO attorneys face additional time constraints due to inefficiencies of CAO s litigation management system, Practice Manager (see Finding 2 for additional discussion of this system). Risk Management Cannot Use its Risk Management Expertise without Access to Liability Claims and Litigation Data Due to its lack of access to information about liability claims and lawsuits, RM does not regularly assess or monitor the City s civil liability risks. Because CAO is concerned about possible violations of attorney-client privilege, CAO only shares limited information and data with RM on an ad-hoc basis, generally for specific projects. For example, in 2012, the CAO Claims Division shared data and information with RM for an analysis of the potential effects of changes to the municipal liability caps outlined in the Colorado Governmental Immunity Act (CGIA). 8 However, the two agencies do not collaborate on a regular basis because RM is not a client of the CAO Claims Division, according to CAO management. In contrast, the CAO Employment Division and RM share information on a regular basis regarding workers compensation claims and litigation, and they even collaborate to develop City policies for preventing claims through increased worker safety. RM oversees all aspects of the workers compensation program, including the Workers Compensation Fund, and handles all workers compensation claims for the City. As a result, RM has direct and open access to claim data and conducts trend analysis of workers compensation risks on a regular basis. Further, as the administrator of the Workers Compensation Fund, RM is a client of CAO when workers compensation issues are involved; therefore, data and information can be shared freely between the two departments and are protected by attorney-client privilege. RM and CAO Employment Division litigators hold joint meetings with agencies on a quarterly basis to discuss ongoing workers compensation claims and litigation, as well as current trends in workers compensation liability. Through this collaborative relationship, centered on information sharing, the CAO Employment Division and RM are able to better serve City agencies and to reduce the City s potential workers compensation liability. In addition, the City has benefitted from this collaborative relationship through the development of policies and programs that enhance worker safety. Although CAO does not conduct formal assessments of liability risks and trends based on claim and lawsuit data, it does collaborate with the Budget and Management Office (BMO) each year to determine the appropriate allocation for the Liability Claims Fund. According to both CAO and BMO, the two agencies work together to analyze prior years payments, as well as the City s potential legal exposure in current and ongoing legal liability matters, to determine if the allocation will be sufficient to cover the City s anticipated payments for the coming year. In general, BMO recommends a transfer of $2 million annually to the Liability Claims Fund, and this amount is intended to cover all 8 The Colorado Governmental Immunity Act (CGIA) establishes limitations on claims against government entities in Colorado, mandates processes for filing claims against government entities in Colorado, and limits the amount of damages that can be recovered if a claim against a governmental entity is successful. City and County of Denver P a g e 14

payments for liability claims and litigation in a given year. According to an analysis provided by BMO, the City typically spent less than $2 million on claims and litigation payments each year from 2009 through 2012, including lawsuit settlements and judgments. Table 1 shows the total payments made from the Liability Claims Fund by year. Table 1: Liability Claims Fund Payments by Year 2009 2010 2011 2012 Total Claims Payments $265,064 $393,113 $229,465 $178,064 $1,065,707 Litigation Payments $801,143 $1,152,665 $1,598,024 $1,698,883 $5,250,714 Total Payments $1,066,207 $ 1,545,778 $1,827,489 $1,876,947 $6,316,421 Source: Auditor analysis of data provided by BMO. Assigning Responsibility for the Liability Claims Fund to Risk Management Would Improve the City s Liability Risk Management and Fund Accountability RM is better suited to administer and oversee the Liability Claims self-insurance fund due to its in-house expertise in managing risk and insurance programs, which is inherently a financial exercise. The City Charter and the practices of other benchmark organizations support this conclusion. Further, moving the administration of the Liability Claims Fund from CAO to RM would improve the accountability and transparency of fund oversight. The City Charter and Practices in Other Public Sector Organizations Indicate Self- Insurance Funds Should Be Overseen by Risk Management Both the City Charter and common practice by other public entities indicate that self-insurance funds, such as the Liability Claims Fund, should be overseen by professional financial risk managers. City Charter indicates that, as a rule, the Manager of Finance should administer self-insurance funds and that any deviation from this practice should be an exception. 9 The Manager of Finance shall administer any risk management and insurance program of the City and County, including any self-insurance fund; provided, however, the Mayor may assign a specific segment of risk management and insurance programs to another department whenever such assignment is in the interest of economy, organization, administration and efficiency of the City and County as a whole. Although the City Charter states the City s policy preference that the Department of Finance should administer self-insurance funds, the Liability Claims self-insurance fund remains under CAO s purview. Based on historical information provided in City budget books, the Liability Claims Fund has been located within the City Attorney s Office since at least 1999, possibly even earlier. The Charter language referenced above was added more recently as part of Amendment 1B to the City Charter, which was approved by 9 City Charter Title I, Part 5 2.5.3. P a g e 15 Office of the Auditor

Denver voters in 2006. While the language of the charter amendment clearly authorizes the Mayor to assign oversight of a self-insurance fund outside the Department of Finance, we found no evidence of an analysis that justifies the continued oversight of the Liability Claims Fund by CAO. In fact, we concluded that legacy is the mostly likely reason the Liability Claims Fund remains under the oversight of CAO. The City Charter indicates that stewardship of any self-insurance fund, including the Liability Claims Fund, comes with the responsibility to engage in risk management programs and activities. In addition to the guidance provided by City Charter and the collaborative model provided by the CAO Employment Division and RM Management regarding workers compensation, we identified numerous public sector organizations that assign oversight of liability self-insurance funds to a risk management function located outside the law department. As seen in Table 2, our analysis of benchmark cities identified by CAO revealed that seven of eleven peer jurisdictions allocate self-insurance fund oversight to their risk management departments, while two cities show either shared responsibility between the risk management department and the law department or that no risk management department exists. 10 In addition, auditors found that the City of Arvada, the City of Aurora, and the State of Colorado, all of which operate under the same legal framework as the City and County of Denver, also assign responsibility for the liability selfinsurance fund to their risk management departments. Table 2: Self-Insurance Fund Oversight Responsibilities in Denver s Peer Jurisdictions Jurisdiction Risk Management Law Department Shared Minneapolis, MN Portland, OR Fort Worth, TX San Diego, CA Albuquerque, NM Oklahoma City, OK Boston, MA X X X X X X X Seattle, WA X Nashville, TN X Aurora, CO X 10 CAO identified these benchmark cities in 2012 for a survey conducted for CAO management purposes. This survey was unrelated to the audit. City and County of Denver P a g e 16

Arvada, CO State of Colorado X X Source: Auditor analysis of CAO internal benchmark survey and publicly available documents. Note: The selfinsurance oversight structure could not be identified for two benchmark cities: Las Vegas, NV and Charlotte, NC. Current Liability Claims Fund Structure Lacks Accountability and Transparency Because CAO is the primary steward of the Liability Claims Fund, there is little accountability and transparency for the claims and litigation management processes within the City. For example, CAO currently has exclusive authority over how liability claims and litigation are managed and resolved, how much is paid out of the Liability Claims Fund, and determining the reserves necessary to protect the City against legal liability each year. Due to attorney-client privilege concerns, no other agency except the client (agency named in the case) is permitted to access case information or provide input regarding litigation strategy. Further, the only other entity evaluating settlements or payments from the Liability Claims self-insurance fund is the City Council. According to Denver Revised Municipal Code, any settlement payments above $25,000 for property damage claims and lawsuits or $5,000 for other liability claims and lawsuits must be authorized by City Council. 11 In contrast, officials from the State of Colorado Office of Risk Management told us that, as the administrator of the self-insurance fund, they are heavily involved in litigation management and offer a valuable service by providing input on how a particular strategy in a given lawsuit may affect the operations of various departments and the State s overall liability. In addition, the State s Office of Risk Management, not the Attorney General s Office, handles all pre-litigation liability claims against the State. The City s own workers compensation program offers a similar model of third-party oversight and extensive collaboration, in which RM, as administrator of the Workers Compensation Fund, must provide input regarding and approve settlements or other resolutions of litigation on workers compensation issues. However, the City s liability claims and litigation management processes do not currently benefit from this type of objective, third-party input because CAO is the owner of both the fund and the processes. Unlike payments from the Workers Compensation Fund, CAO is not required to seek approval for any payments from the Liability Claims Fund that fall below the thresholds requiring City Council approval. However, a significant portion of payments from the Liability Claims Fund for non-litigation claims fall below these thresholds of $25,000 for property damage claims and lawsuits or $5,000 for other liability claims and lawsuits. As shown in Table 3, analysis of payments from 2009 through 2012 showed that between 35 and 69 percent of all payments for liability claims (non-litigation) fell below the City Council-approval threshold. Over a four-year period, these payments represent a total of approximately $512,000 that was authorized and executed by CAO without any 11 DRMC, Chapter 20, Article I, 20-1. P a g e 17 Office of the Auditor

oversight or evaluation regarding how the payments impacted the larger Citywide risk environment. Total claims paid Total claims payments below City Council approval threshold Table 3: Non-Litigation Claim Payouts below City Council Threshold $ paid 2009 2010 2011 2012 % of total paid $ paid % of total paid $ paid % of total paid $ paid $265,064 $393,113 $229,465 $178,064 % of total paid $128,028 48% $136,847 35% $124,865 54% $122,336 69% Total Non-Litigation Claim Payouts Below City Council Threshold for 2009 2012: $512,076 Source: Auditor analysis of data provided by CAO. We also analyzed payments made for litigation from the Liability Claims Fund for the period 2009 through 2012. Because litigation payments tend to be higher than nonlitigation claims payments, we anticipated fewer litigation payments would have been made without any City Council oversight. As expected, between 0.3 percent and 6 percent of payments for litigation fell below the City Council-approval threshold during this period, as illustrated in Table 4. However, these payments totaled approximately $125,000 over the four-year period, bringing the total amount of payments authorized without oversight of a third party to approximately $637,000. Further, when litigation payments trigger City Council review, Councilmembers can only assess the one claim in front of them; without aggregate information, City Council cannot identify trends or propose preventative actions. Table 4: Litigation Payouts below City Council Threshold 2009 2010 2011 2012 $ claims paid % of total paid $ claims paid % of total paid $ claims paid % of total paid $ claims paid % of total paid Total litigation payments $801,143 $1,152,665 $1,598,024 $1,698,883 Total payments below City Council $50,548 6% $57,907 5% $5,100 0.3% $11,282 0.66% approval threshold Total Litigation Claims Payout Below City Council Threshold for 2009 2012: $124,837 Total Litigation & Non-Litigation Claims Payout Below City Council Threshold for 2009 2012: $636,913 Source: Auditor analysis of data provided by CAO. City and County of Denver P a g e 18

To enhance the transparency and accountability of the Liability Claims self-insurance fund and to ensure greater oversight of liability risks to the City, the Mayor should assign the oversight of the Liability Claims self-insurance fund to the Department of Finance and should direct the Manager of Finance to place the Liability Claims self-insurance fund under the administration and management of the Cash, Risk, and Capital Funding (CRCF) Division. This move would not require final approval of settlements but would allow CRCF to provide input from a citywide risk perspective on claims and litigation that impact the Liability Claims Fund. Further, CAO could share important risk information freely with CRCF, allowing CRCF to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Because this reassignment may take several months to implement, CAO should work with RM in the interim to conduct an assessment of liability trends over the past five years to-date and use that information to identify activities to prevent problems, where applicable, to reduce the impact of problems when they occur, and to determine if self-insurance remains the best policy for protecting the City against liability risks. In addition, CAO should develop and implement a plan to assess liability trends at least quarterly until the Liability Claims Fund is reassigned to the Department of Finance. RECOMMENDATIONS 1.1. To enhance the transparency and accountability of the Liability Claims selfinsurance fund and to ensure greater oversight of liability risks to the City, the Mayor should assign the oversight of the Liability Claims self-insurance fund to the Department of Finance and should direct the Manager of Finance to place the Liability Claims self-insurance fund under the administration and management of the Cash, Risk, and Capital Funding (CRCF) Division. This move would not require final approval of settlements but would allow CRCF to provide input from a citywide risk perspective on claims and litigation that impact the Liability Claims Fund. Further, CAO could share important risk information freely with CRCF, allowing CRCF to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. 1.2. Until the Liability Claims Fund is moved to the Department of Finance, the City Attorney s Office should work with Risk Management in the interim to conduct an assessment of liability trends over the past five years to-date, and use that information to identify activities to prevent problems, where applicable, to reduce the impact of problems when they occur, and to determine if selfinsurance remains the best policy for protecting the City against liability risks. 1.3. The City Attorney s Office should develop and implement a plan to assess liability trends at least quarterly until the Liability Claims Fund is moved to the Department of Finance. P a g e 19 Office of the Auditor

FINDING 2 City Attorney s Office s Litigation Management System Requires Additional Support and Evaluation Without proper administrative and technological support, the City Attorney s Office (CAO) cannot effectively assess whether its current litigation management system, Practice Manager, needs to be upgraded or replaced. Since Practice Manager is a specialized system and is only used by CAO, a 2011 agreement between CAO and the City s Technology Services department (Technology Services) expressly stated that CAO is solely responsible for addressing the software administration needs related to Practice Manager. The subsequent loss of a dedicated technology position within CAO in 2012 and a number of inefficient processes have contributed to CAO s inability to effectively utilize Practice Manager. However, the successful implementation of Practice Manager by a peer city attorney s office suggests that, if CAO dedicates the proper resources, process changes, and technical support, the current litigation management system could meet CAO s needs. Once Practice Manager is optimally executed, the City Attorney s Office should perform a follow-up assessment to determine whether Practice Manager meets the needs of the City Attorney s Office or if a replacement litigation management system is still needed. CAO Needs Adequate Technical Administrative Support to Address Numerous Litigation Management System Limitations CAO does not have the necessary level of technical administrative support to address numerous current limitations of Practice Manager, which threaten the efficiency and effectiveness of CAO management s oversight and attorney performance. These limitations include impairment to the reliability and timeliness of management data contained in Practice Manager as well as system deficiencies that create inefficiencies for CAO attorneys and staff paralegals. CAO Lacks Adequate Technical Support for Practice Manager In late 2012, CAO s only IT staff position was vacated, which removed the one internal staff member who provided technical administrative support for Practice Manager. Contributing to CAO s insufficient technical support is a 2011 IT Shared Services Assessment Findings and Solution Design Summary Report agreement between CAO and Technology Services, which states that Technology Services will not provide a dedicated position for specialized systems used within CAO. 12 Because Practice Manager is considered a specialized system, there is no one in the City dedicated to administering Practice Manager. Since CAO s one IT staff position was vacated, CAO staff have been contacting the Practice Manager vendor (Automon) directly for all technological issues that cannot be resolved 12 Denver Technology Services. IT Shared Services Assessment Findings & Solution Design Summary Report: Version 4.10. February 24, 2011. City and County of Denver P a g e 20

in-house, such as creating new database queries or reports in SQL. 13 Consequently, CAO should work with Technology Services and the Budget and Management Office (BMO) to determine the IT staff support and funding needed to adequately address its Practice Manager technological needs. Practice Manager Currently Limits Access to Reliable and Timely Management Information The version of Practice Manager used by CAO limits management s access to reliable and timely information needed to monitor individual and organizational performance. In most instances, Practice Manager is only used as a repository for documentation rather than a comprehensive litigation management tool. In fact, CAO management determined that many reports generated by Practice Manager, including the Pipeline Report a report designed to provide an overview of all open cases contain unreliable data. In some cases, CAO must use subsequent processes to facilitate monitoring efforts, including manually re-creating and verifying data created by Practice Manager. Such issues were exemplified in the methodology used and timeliness of responses to answer audit requests. In one instance, our request for a breakdown of open cases required CAO personnel to perform a manual review of 390 case files, and CAO s response took twenty-four calendar days. A separate audit request for the number of cases handled by each attorney, number of new claims filed and paid out, and number of new state and federal lawsuits defended annually revealed that Practice Manager s limitations required personnel to use varying methodologies to verify information generated by the system. For instance, in order to verify attorney caseload data, CAO personnel had to manually review and reconcile the totals generated by Practice Manager for accuracy. Despite these duplicative process controls, CAO personnel could not confirm whether the initial Practice Manager reports were completely reliable due to how cases were originally named and stored in the system. Although CAO s methodology determined that such variations would be immaterial to the final calculations, these findings demonstrate the unreliability of Practice Manager as a dependable case management and monitoring tool for CAO management. Other Practice Manager Limitations Impact Attorneys Efficiency CAO management and attorneys noted other Practice Manager limitations, including limited search functionality. This limitation impairs the efficiency of litigation attorneys and paralegals and likely expands the attorneys already extensive work week (see Finding 3 for additional information about attorney workload). The limited search functionality reduces the ease and efficiency with which attorneys and paralegals can locate documents within Practice Manager. This system deficiency is exacerbated when the system is burdened with a high number of files, which are often associated with complicated cases, such as the federal civil rights cases the Civil Litigation Section is tasked with handling. Not only does deficient searching impair efficiency, it also increases the risk that important case information may be lost or duplicated in the large volume of documents managed by CAO. 13 SQL or Structured Query Language is a computer programming language designed to manage data held in a relational database management system. P a g e 21 Office of the Auditor

Practice Manager, as it currently operates, also heightens the risk to efficiency and effectiveness by not synchronizing with many other basic software systems used by CAO, such as the Microsoft Outlook email application and electronic filing systems provided by external entities. Because Practice Manager's calendar function does not sync with the Outlook email system used by CAO attorneys and paralegals, they must choose to maintain one calendar in Practice Manager or one calendar completely external to the system, usually within Microsoft Office s Excel or Outlook. These secondary calendars are manually updated by staff to calculate dates mandated by the courts. However, according to experienced attorneys and paralegals in the legal field, there are a number of litigation management systems that automatically sync with Outlook. Additionally, many of these alternative systems update calendars automatically to reflect case timeframes set in court rules mandated by rule changes at the state or federal level. Although cumbersome to track externally to the primary litigation management system, CAO attorneys and paralegals did not indicate significant exceptions in complying with court dates. Therefore, as part of their office-wide assessment of technological needs, CAO should determine whether a separate system that automatically calculates case-specific court dates is needed. CAO Hopes to Address Technology and Personnel Limitations with Monies from the City s Innovation Fund Although Practice Manager has not sufficiently addressed CAO s litigation management needs, replacing Practice Manager has not been CAO management s primary technological objective. Management stated that CAO lacked the technological expertise needed to determine if Practice Manager is insufficiently administered or if a completely new system is needed when the current contract expires on July 31, 2014. Instead, CAO Management has focused limited resources on an officewide assessment of software needs. As part of a joint effort between CAO and Technology Services to address system limitations and support, CAO pursued Innovation Fund (ifund) monies for dedicated information technology personnel and a complete assessment of software needs. The 2013 Budget Book describes the purpose of ifund monies as, the implementation of projects designed to improve City operations and efficiencies through automation and business process improvement for agencies within the General Fund." Proposals from City agencies are reviewed, scored, and evaluated against the Mayor s vision for the City by representatives from various departments including but not limited to the City Attorney s Office, Technology Services, and BMO. For 2013, ifund project monies of approximately $10 million were planned for distribution to select agencies by the fourth quarter. 14 A Peer City Successfully Implemented Practice Manager As CAO works to develop adequate support for Practice Manager, to allow for appropriate identification of Practice Manager s capacity to support CAO litigation needs, the experience of the City of Minneapolis will be instructive. The Minneapolis City Attorney s Office uses Practice Manager for litigation management and overcame many of the system limitations reported by CAO by focusing on establishing dedicated 14 The City s 2013 Budget Book recommends innovation funds totaling $16 million with $10.1 million specifically allocated towards Innovation Projects. City and County of Denver P a g e 22

technical support and improved internal processes. In Minneapolis, both the Civil and Criminal Divisions successfully implemented a heavily modified version of Practice Manager. Minneapolis used a twofold strategy to maximize its return on software systems investments. First, the Office implemented process changes to improve implementation, such as establishing a set file naming convention, which greatly improved the search capabilities of Practice Manager. Additionally, the Minneapolis Technology Services Department has a dedicated technology position to assist the City Attorney s Office with Practice Manager. The City Attorney s Office should upgrade Practice Manager to maximize its capabilities, using the City of Minneapolis as a model. To mirror the successful implementation of Practice Manager demonstrated in Minneapolis, CAO should work with Technology Services to establish one or more dedicated IT staff positions with ifund monies or revisit the IT shared services agreement. The Minneapolis City Attorney s Office also employs an in-house Administrator. The Administrator is tasked with making minor adjustments to the built-in modules already available in Practice Manager. Any database-related issues are handled by personnel in the Minneapolis Technology Services Department. For example, personnel in the Minneapolis City Attorney s Office found that they could improve the effectiveness of the system by establishing specialized Types and Categories fields in Practice Manager. These fields, developed in conjunction with technology services staff, assign specific information to the documents that are used most frequently. This database change expedited and improved the sorting and searching functionality of Practice Manager, especially in larger cases that might contain thousands of supporting documents. Furthermore, the City of Minneapolis purchased a component system called IBM Cognos to improve Practice Manager s database querying capabilities. 15 According to personnel in the Minneapolis City Attorney s Office, once properly administered, Practice Manager has proven more than sufficient to meet their needs. In addition to any ifund monies obtained, CAO should improve internal processes to assist in the successful implementation of any software litigation management system not limited to Practice Manager. This may include but should not be limited to specifying and restricting the Types and Categories fields and developing an internal process for establishing and enforcing a file naming convention for all documents stored in Practice Manager. Doing so will improve Practice Manager s search capability and allow CAO personnel to find documents located in the litigation management system more easily, which in turn will allow for better overall case management and efficiency. Presently, CAO attorneys reported that as the file load increases it is increasingly difficult to locate essential files in Practice Manager during on-going cases. Improving Practice Manager s search capabilities will help mitigate this issue. Further, CAO should conduct updated office-wide training on the litigation management system to improve utilization and understanding by internal office personnel. Failing to prioritize and address internal process within CAO s control will limit any improvements gained through updating or replacing the ligation management system. Once Practice Manager is optimally executed, CAO should perform a follow-up assessment to determine whether Practice 15 Auditors did not assess the viability of IBM Cognos for use by CAO. This system is referenced only for consideration as a part of any formal, office-wide technology assessment performed by the Office. P a g e 23 Office of the Auditor

Manager meets its needs or if a replacement litigation management system is still needed. If Practice Manager is still insufficient, CAO should allow the current contract to expire and use the savings to replace Practice Manager or petition for 2014 ifund monies, among other viable budget sources. Lastly, as part of an office-wide assessment of technological needs, CAO should also determine whether it needs an independent system that will automatically calculate case-specific court dates. RECOMMENDATIONS 2.1. The City Attorney s Office should work with Technology Services and the Budget and Management Office to determine the IT staff support and funding needed to adequately address the technological needs of the City Attorney s Office. 2.2. As part of their office-wide assessment of technological needs in recommendation 2.1, the City Attorney s Office should determine whether it needs an independent system that will automatically calculate case-specific court dates. 2.3. The City Attorney s Office should upgrade Practice Manager to maximize its capabilities, using the City of Minneapolis as a model. 2.4. In order to mirror the successful implementation of Practice Manager demonstrated by the City of Minneapolis, the City Attorney s Office should work with Technology Services to establish one or more dedicated IT staff positions with Innovation Fund monies or revisit their IT shared services agreement. 2.5. The City Attorney s Office should improve internal processes to assist in the successful implementation of any software litigation management system not limited to Practice Manager. This may include but should not be limited to specifying and restricting the Types and Categories fields and developing an internal process for establishing and enforcing a file naming convention for all documents stored in Practice Manager. 2.6. The City Attorney s Office should conduct updated office-wide training on the litigation management system to improve utilization and understanding by office personnel. 2.7. Once Practice Manager is optimally executed, the City Attorney s Office should perform a follow-up assessment to determine whether Practice Manager meets the needs of the City Attorney s Office or if a replacement litigation management system is still needed. If Practice Manager is still insufficient, the City Attorney s Office should allow the current contract to expire and use the savings to replace Practice Manager or petition for 2014 Innovation Fund monies, among other viable budget sources. City and County of Denver P a g e 24

FINDING 3 City Attorney s Office Can Strengthen its Cost Management Controls The City Attorney s Office s (CAO s) cost management controls can be strengthened to provide more formal evaluations of contractors and additional management information. CAO s cost management controls do not align with best practices for monitoring and evaluating external vendors, such as outside counsel. A formal performance-based evaluation of the vendors on at least an annual basis would hold them accountable for their performance in a standardized, impartial, and transparent way. Further, CAO s internal cost management controls need enhancement by implementing more extensive case budgets and requiring litigation attorneys to track their time for each case. These changes would provide CAO management with additional information for use in assessing Citywide risk areas, evaluating staff workload, and evaluating possible organizational inefficiencies. CAO s Management Controls over External Costs Can Be Enhanced CAO utilizes outside vendors, such as outside counsel and expert witnesses, to help defend their cases. CAO spent $3.3 million on outside vendors during the period 2009 through 2012. Of that $3.3 million, CAO spent approximately $1.5 million or 46 percent in 2012. Further, outside counsel costs spiked from 2011 to 2012 by 272 percent. CAO should strengthen cost management controls over outside vendors to align with industry best practices. This would allow for better metrics to evaluate and hold vendors accountable for their performance, as well as help to keep costs contained. CAO Uses Outside Vendors to Defend Cases and Provide Other Case-related Support Based on a list of contracts with outside vendors from 2009 through 2012, auditors learned that CAO primarily contracts out for legal services, professional services, services performed by court reporters and public stenographers, and computer services and maintenance. Of those categories, the largest cost area is legal services, or outside counsel, which are non-city attorneys used to handle specific cases. According to the City Attorney, the use of outside counsel has been restricted, in part to address the costliness of external legal services. However, there are some situations in which outside counsel is required, primarily conflict of interest cases. These are cases in which CAO s Civil Litigation Section is defending action by a City employee who is also the subject of a personnel-related disciplinary action. Since CAO s Employment Division also represents the City against an employee who appeals a disciplinary action, CAO could have two attorneys simultaneously working for and against a specific employee. Under such circumstances where the City would be representing both an employee and the City litigation matters are referred to outside counsel for representation of the City. CAO s Outside Vendor Costs Are Significant As summarized in Table 5, costs for outside vendors in 2012 constituted 46 percent of the $3.3 million that CAO expended for outside P a g e 25 Office of the Auditor

vendors over the last four years. Further, outside counsel costs spiked from 2011 to 2012 by 272 percent. Table 5: Costs for Outside Vendors: 2009 2012 Computer Court Computer Computer Total Outside Professional Services- Year Reporters & Software Services- Amount Counsel Services Thompson Public Stenos Maintenance Lexis Nexis By Year West 2009 $321,338 $210,186 $33,360 $35,950 $72,960 $14 $673,808 2010 $366,795 $48,163 $35,570 $34,274 $72,949 - $557,751 2011 $278,920 $126,362 $38,923 $34,283 $76,854 - $555,342 2012 $1,037,085 $312,837 $69,079 $35,311 $76,378 - $1,530,690 Total $2,004,138 $697,548 $176,932 $139,818 $299,141 $14 $3,317,591 Source: Auditor analysis of data provided by CAO. CAO explained that the cost increase was a result of certain cases reaching the stage of final resolution, which resulted in an increased need for additional services from outside counsel. To regulate increasing costs from outside legal firms, CAO reported implementing two internal policies. The first internal policy is strictly limiting the use of outside counsel; the second policy consists of requesting itemized billing from outside legal firms. Itemized billing requires outside legal firms to provide a task-based breakdown of costs and services to CAO. CAO Management of Outside Vendor Costs Is Limited Performance-based monitoring of outside vendors within CAO takes two forms: payment tracking and invoice review. CAO s contract administrator tracks all payments related to specific vendors, ensures that payments are recorded in the City s records management system, PeopleSoft, and monitors whether the expenditures are approaching the contract cap amount. If a contractor s expenses are approaching the cap, the administrator alerts CAO management to either close or amend the contract. To contain increasing outside-counsel costs, CAO requires legal firms to submit itemized invoices and to follow scope-of-service guidelines outlined in the contract language. Invoice reviews involve scrutinizing the bills submitted by outside vendors to determine if the charges are reasonable and appropriate. CAO limits its invoice reviews primarily to those submitted by outside counsel, as opposed to reviewing invoices for all types of outside vendors. Itemized billing requires that outside counsel provide a task-based breakdown of all services for which they are billing. CAO provided auditors with a sample of invoices from law firms and drew our attention to the contract language, demonstrating CAO s expectations as outlined within the scope-of-service section of each contract. These itemized invoices had been reviewed by the CAO attorney managing the legal firm s work on each case, noting where any line items deviated from the scope-of-service guidelines. For example, one CAO attorney denied an item on a bill because it duplicated another task previously performed and for which the legal firm had already been compensated. In another instance, the CAO attorney denied a charge from the legal firm for leaving a voice message. The invoices contained approval for payment by an attorney assigned to monitor cases as well as the City Attorney. City and County of Denver P a g e 26

External Risk Managers Utilize Performance Yardsticks to Monitor and Evaluate Outside Counsel While CAO is implementing some cost containment measures through payment monitoring and invoice reviews, best practices suggest a more comprehensive approach. Despite the internal restriction on the use of outside counsel, CAO amended three of its existing contracts with outside counsel by extending the contract amount and time through December 2014; in addition, CAO entered into one new contract with outside counsel in December 2012 for the duration of two years. These changes result in a total of over $1 million in new expected costs. CAO attributed these higher costs to increased activity in cases assigned to outside counsel prior to the current policy limiting the use of outside firms. The increase in authorized outside counsel costs makes implementation of a more comprehensive evaluation approach take on new urgency. We identified two specific best practice approaches that provide guidance for CAO in developing a comprehensive performance evaluation of its outside vendors. Association of Corporate Counsel Guidelines The Association of Corporate Counsel (ACC) provides a framework for effective project management, which includes creating a scorecard to measure the outside counsel performance against mutually understood criteria. Performance-based scorecards and annual reviews are used to align inside and outside counsel in an open, constructive, and mutually satisfactory partnership that is about more than dollars. ACC even provides a sample law firm scorecard. The scorecard contains four categories on which outside counsel will be evaluated and a score is associated with each of the categories. The four categories listed in the template include budget, effectiveness, communication, and strategic advocacy. The budget criterion relates to performance in managing the cost of matters through timely submission of budgets, overall productivity, cost consciousness, and appropriate staffing. Effectiveness relates to the results of services rendered and should consider results in light of the goals and expectations of the representation. Communication evaluates information exchange between inside and outside counsel and considers responsiveness to requests, understanding of expectations, clarity of written and oral communications, and timeliness. Strategic advocacy assesses overall partnership in advancing the interest of the client. This area can include seeking creative solutions to complex problems, contribution to tort reform efforts and strategic appellate practice, collaboration with the client s non-legal resources, understanding the client s business objectives, and efforts to prevent future issues or reoccurrence of past problems. Further, the ACC guidance provides a framework for an assessment scale in which performance that simply meets reasonable expectations should be evaluated as meets expectations; the highest and lowest scores should be reserved for exceptional circumstances. Further, there is a comment section for each of the four areas, in which the client can address both positive and negative performance. International Risk Management Institute Guidance Similar to the guidance provided by ACC, the International Risk Management Institute (IRMI) provides written guidelines to address litigation management s challenges of monitoring P a g e 27 Office of the Auditor

outside counsel s costs and measuring outside counsel s performance from a risk management perspective. These guidelines include six performance yardsticks that risk managers can utilize to evaluate outside counsel, of which communication, competency, and compliance carry the most weight. Among these measures, the competency yardstick prescribes for the risk manager to evaluate and assess outside counsel s performance through a formal process. This process includes giving outside law firms an overall score, putting it in a chart, tracking performance for all outside counsel firms, and even sharing the report card s scores among the law firms. Implementing this practice would provide a standardized, transparent way to evaluate all outside counsel on their performance; hold firms accountable for their services; and set a standardized and transparent way to assess the retention of outside counsel and other vendors for future cases. Therefore, to better conform to best practices for vendor oversight and accountability, CAO should implement a formal performance-based evaluation of outside vendors on at least an annual basis. CAO Management Can Enhance Controls over Internal Costs CAO management can enhance internal cost management controls by requiring litigation attorneys to track their time for each case and implementing more extensive case budgets. These changes would provide CAO management with additional information to be used in assessing Citywide risk areas, evaluating staff workload, and evaluating possible organizational inefficiencies. CAO Litigators Do Not Track Their Time on a Consistent Basis According to CAO management and individual attorneys, CAO does not bill other City agencies for services, and therefore does not need to track litigators time. It is generally not common practice for in-house counsel, whether in the public or the private sector, to track attorney time. For example, in a benchmarking survey conducted by CAO in June 2012, only one municipal city attorney s office tracked attorney time. CAO personnel stated that tracking their time would not matter since attorneys set wages are covered by the City s General Fund and therefore can be viewed as sunk costs. CAO attorneys do track time dedicated to cases where a favorable judgment to the City could result in the judge awarding the City attorneys fees. Although this occurrence is rather rare, CAO litigation representatives noted that, when CAO anticipates that this could happen, the litigators and paralegals working the case track their hours. A second exception can occur in federal cases when CAO attorneys fees may be compensable if the City prevails on a motion to compel, and CAO will be required to produce documentation of time spent on the case. However, both CAO and the City would benefit in several ways if management required litigation attorneys to track their time spent on various activities for all types of cases. First, the information developed through time-tracking could enhance evaluations at both the organizational and individual levels. For example, CAO management has sought to persuade the Budget and Management Office (BMO) that the CAO Claims Division City and County of Denver P a g e 28

needs additional staff by developing a detailed memo comparing hours worked per week to other benchmark organizations. However, because CAO does not require detailed time tracking, the memo was crafted primarily using anecdotal evidence. Accordingly, the case for additional budget resources was not as well-supported as it could have been otherwise. In addition, tracking time spent on individual projects would provide CAO management with supplemental information to identify inefficiencies in individual performance and enable earlier intervention for employees who need support or discipline. Other issues discussed in this report further support the need for additional data regarding case-specific time allocation. As discussed in Finding 1, the City would benefit from Risk Management (RM) performing an assessment of trends, such as costs to the City from particular types of cases. Identifying the types of cases that are most time consuming for attorneys would help RM prioritize areas for training or other risk mitigation activities. Further, as highlighted in Finding 2, Practice Manager s limitations inhibit CAO s efficiency. In one case, CAO management reported that a senior attorney spent one week validating data from Practice Manager. Tracking the time spent on activities that are needed to overcome technological deficiencies would help CAO clarify its technology needs and make a stronger case for additional resources. CAO should implement a formal and consistent time tracking policy for litigation attorneys as well as develop written procedures regarding time tracking to ensure greater consistency and more useful time tracking data. This time tracking policy could allow for higher level tracking of hours at the project level, rather than separately tracking time spent on specific activities within each project, such as time spent drafting a pleading. CAO Provides Limited Written Guidance within Case Budget Forms Litigation cost management best practices call for the use of tools such as case evaluations or case budgets. CAO management and staff stated that CAO litigators develop case budgets when they are going to defend a case or when they are going to utilize outside counsel, expert witnesses, or other professional services related to a specific legal matter. 16 The litigator formally submits the case budget to management for review. The case budget form contains a brief explanation for preparing a case budget, such as a list of external services that the litigator may require to defend a case, an estimate of these costs, and a to-date tracking of the expenditures. However, the form does not track internal costs, such as time required from the attorney, paralegals, or other internal staff. Similar to tracking internal time, projecting internal time using case budgets would help CAO attorneys and management develop strategy and make resource allocations. In addition, case budgets can be flexible documents that account for unanticipated changes in a case and help attorneys change their strategy accordingly. To provide additional information, CAO should require litigation attorneys to develop case budgets to account for all costs internal and external. In addition, CAO should provide written guidance for attorneys to develop these comprehensive case budgets for each case. 16 Litigators develop case budgets for cases expected to accrue costs above $2,000, which is the majority of cases handled by the City Attorney s Office. P a g e 29 Office of the Auditor

RECOMMENDATIONS 3.1. The City Attorney s Office should implement a formal performance-based evaluation of outside vendors on at least an annual basis. 3.2. The City Attorney s Office should implement a formal and consistent time tracking policy for litigation attorneys. 3.3. The City Attorney s Office should develop written procedures regarding time tracking to ensure greater consistency and more useful time tracking data. 3.4. The City Attorney s Office CAO should require litigation attorneys to develop case budgets to account for all costs internal and external. 3.5. The City Attorney s Office should provide written guidance for attorneys to develop comprehensive case budgets mentioned in recommendation 3.4. City and County of Denver P a g e 30

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