Some small California cities obtain government services from larger public entities under contracts. These cities are known as Lakewood plan cities or contract cities. It appears that some of these cities are “ripped off” by larger public entities.

For example, in 2002 and 2003, a Los Angeles County Sheriff’s Deputy committed (and was convicted in 2006) of three sexual assaults, including rape, during a period when he was assigned by the Los Angeles County Sheriff’s Department to provide contract law enforcement services pursuant to one or more of the Los Angeles County contract services’ programs to Compton and surrounding communities. Over the objection of the California Contract Cities Association (CCCA), the County withdrew funds from the Liability Trust Fund (which provides the mechanism wherein the County indemnifies its contract cities to the extent these cities fund the County’s indemnification) to reimburse itself for its costs in settling two of the three incidents on or about March 31, 2007, and the third on or about December 2008, and the County advised the CCCA in March 2009 that it had reimbursed itself a total of approximately $5.6 million from the Liability Trust Fund related to these incidents.

I understand that many contract cities have taken the position that they should not be liable for such a claim based on the act of a person over whom it (or a relevant, associated contract city) had no control as an employer. I believe that the situation is worse than this—the County has held cities a party to contracts that are invalid.

Background

The CCCA was formed in 1957 for the purpose of developing and expanding the Lakewood Plan approach toward the contracting of municipal services to the cities of Los Angeles County. Using a “cafeteria plan” approach, contract cities were able to operate more economically with fewer personnel and higher performance levels. By contracting for certain public goods, cities could ostensibly afford to provide more highly skilled specialists and professionals in certain fields, especially public safety. Historically, this outsourcing strategy has proven itself, especially through competition that has kept “prices down” and through the increased ability of cities to “pick and choose” services in a Tiebout model economy.

As part of its contract services programs, the County of Los Angeles has had contract cities sign indemnity agreements wherein the County agreed to indemnify the cities to the extent the cities funded an accessible Liability Trust Fund. Initially, the County established that certain contract cities would deposit an additional 2% of their contract amounts (at the start, $100,000 in aggregate) into this special fund. Cities, however, felt that this fund’s accounting was inadequate and that there was no system in place to handle claims or any authority to do so. During the 1980’s, the Contract Cities asked the County, “What happens to the money in the Liability Trust Fund?”

Los Angeles County responded by undertaking a claims and actuarial study that resulted in the discovery of an $11 million deficit, and the County wanted cities to contribute 13% to the Liability Trust Fund in order to rectify this major funding problem. Ultimately, the contributions from the cities increased from 2% to 6% to cover the deficit, and, in a 1989 County-sponsored actuarial study, the County estimated that, by the year 2005, the debt to cover the underfunding would be paid off, a surplus would be established, and the Contract Cities’ contract services with the County would become even more viable.

Contract cities currently pay the County about $275 million per year for law enforcement services, plus 6% toward the Liability Trust Fund ($16.5 million annually) which has a current balance of about $45 million.

Analysis

Indemnification

A sample agreement, the Law Enforcement Services Agreement between the City of Rolling Hills Estates and the County of Los Angeles for renewal effective July 1, 2004 through June 30, 2009 contains an unusual indemnification provision as follows:

5. Indemnification
5.1 The parties have executed an Assumption of Liability Agreement approved by the Board of Supervisors on December 27, 1977 and/or a Joint Indemnity Agreement approved by the Board of Supervisors on October 8, 1991 and/or a revised Joint Indemnity Agreement approved by the Board of Supervisors on August 9, 1993. Whichever of these documents the City has signed later in time is currently in effect and hereby made a part of and incorporated into this agreement as set out in full therein.
5.2 In the event the Board of Supervisors later approve a revised Joint Indemnity Agreement and the City executes the revised agreement, the subsequent agreement as of its effective date shall supercede the agreement previously in effect between the parties hereto.

With respect to this agreement, the City of Rolling Hills Estates is subject to the Joint Indemnity Agreement approved by the Board of Supervisors on October 8, 1991 (City contract no. 65592). In this agreement, the City agreed to make undetermined payments to a Liability Trust Fund whose purpose was to fund the indemnification of the City by the County for the County’s negligent or wrongful acts or omissions related to any contracts the City had made and will make with the County for services. This Fund was to be solely controlled by the County, and the amount of potential payments by the City was uncapped in time or amount. In this agreement, the City also agreed to indemnify the County for the City’s negligent or wrongful acts or omissions related to any contracts the City had made and will make with the County for services. The combination of an indemnification and a trust fund solely funded by the party being indemnified transforms the contract functionally into an exculpatory agreement since the Sheriff is effectively released from its own negligence.

The fact that the County ever required a functional exculpatory clause for its law enforcement services is baffling. A professional law enforcement agency should stand behind its services. After all, other contractors don’t charge the City of Rolling Hills Estates for their mistakes. Indeed, if the City has to fund the indemnity of the Sheriff’s Department for its general and auto liability and its professional errors and omissions, perhaps it should ask itself, “Should we look more closely at alternatives?”

I believe that the Joint Indemnity Agreement approved by the Board of Supervisors on October 8, 1991 violates Section 1668 of the California Civil Code by shielding the Los Angeles County Sheriff’s Department from liability for intentional torts. As such, the contract should not be enforceable.

In a contractual arrangement wherein one party explicitly waives the right to sue, the agreement can be declared invalid if it meets some or all of the Tunkl factors as follows:
1. The business is of a type for public regulation.
2. The service is of great necessity to the public.
3. There is an open invitation to the public.
4. There is a decisive economic advantage over the party waiving its rights to sue.
5. Part of the superior bargaining power includes a general exculpatory clause.
6. As a result of the transaction, one party placed at the control of the other party, subject to the other party’s carelessness.

Costs

Over the past twenty years, the average annual increase associated with contract law enforcement costs has been 5.31% or approximately 93% higher than consumer inflation (roughly “double inflation” ). The average annual increase in contract law enforcement liability costs has been 11.25% or approximately 309% higher than inflation (or roughly “four-fold inflation”).

I believe that public safety wages and costs should more closely align with consumer inflation, and liability cost inflation should not exceed consumer inflation. The fact that these costs have continued to escalate is a classic example of a principle-agent problem (and the problem of moral hazard further exacerbates the liability cost escalation.)

Options toward a Solution

Indemnification

I believe that the indemnification applicable to service contracts between Contract Cities and the County should have eliminated the provision for a Liability Trust Fund, been constructed more simply, and directly inserted into contracts such as the Law Enforcement Services Agreement between the City of Rolling Hills Estates and the County of Los Angeles as follows:

Indemnification

In contemplation of the provisions of Section 895.2 of the Government Code of the State of California imposing certain tort liability jointly upon public entities solely by reason of such entities being parties to an agreement (as defined in Section 895 of said Code), each of the parties hereto, pursuant to the authorization contained in Sections 895.4 and 895.6 of said Code, will assume the full liability imposed upon it or any of its officers, agents, or employees by law for injury caused by any act or omission occurring in the performance of the Agreement to the same extent that such liability would be imposed in the absence of Section 895.2 of said Code. To achieve the above-stated purpose, each of the parties indemnifies and holds harmless the other party for any liability, cost, or expense that may be imposed upon such other party solely by virtue of said Section 895.2. The provisions of Section 2778 of the California Civil Code are made a part thereof as if incorporated herein.

Costs

Costs, obviously, are harder to control. However, there are at least four law enforcement options: (1) maintain the current provider with appropriate changes to indemnification and costs , (2) continue contract law enforcement with another provider on different terms, (3) organize a special district law enforcement agency, or (4) initiate separate police departments. Option (4) is probably cost prohibitive. The other three options are all probably feasible.