While the city is making cuts and getting the bonds it needs to successfully walk the financial tightrope into the next year, litigation is the one unknown variable that has been lingering below the surface.

Major active lawsuits, speculation on insurance coverage and high legal expenses have many worried about the impact litigation will have on the city’s financial stability.

“As an elected official there are a number of areas of risk, I am not running away from it or denying it,” Mayor Darlene Kordonowy said last week. “I too am concerned about what the long-term financial risk is for a few of the cases we are dealing with at this point in time.”

The definition of that risk is hard to ascertain. At any given time the city is juggling between 25 to 30 active litigation cases, most of which involve land-use issues brought forward by Bainbridge citizens. Two major active cases in which plaintiffs are seeking damages have been in the courts for years: the Blakely Harbor shoreline moratorium and challenges to the city’s building permit fees by the Home Builders Association. The Blakely case has a hearing next month and Kitsap County Superior Court will hear a second motion for summary judgment in the HBA case on Sept. 26.

The potential settlement figures relating to these cases are in the seven figure range, sources say.

“Those have huge price tags,” Kordonowy said “But the wastewater treatment plant, Winslow Way, those are big price tags, too. They are a lot larger than the financial risk with any of the litigation we are under.”

Losing or settling a case could open the city to further litigation and there is always the potential of having to make a large pay out. Funding such an outcome during a time of limited cash flow would most likely involve bonding revenue.

“There is certainly some short-term means,” Kordonowy said. “Debt is a way to do that, cutting cost, operating costs. We don’t have an accurate understanding of the financial risks. At some point we need to make a determination of what we will do financially as we prepare for that risk.”

The city’s potential risk also hinges on what the Washington Cities Insurance Authority, the insurance pool that gives liability coverage to more than 125 cities in the state, will or won’t pay for. The city’s WCIA coverage includes general, automobile, police and employee-benefits liability. There is some question as to what the WCIA would cover in regards to land-use issues.

“It really depends,” said Eric Larson, deputy director of the WCIA. “Some land-use issues are covered, and our coverage document provides defense and indemnity for most things that Bainbridge Island does.”

According to Larson, WCIA would cover some settlements and legal fees. In the past, the WCIA has paid $377,505 in 2004, $74,441 in 2005 and $250,679 in 2006 in covering the city. More accurate numbers for recent years are difficult to gather since payments and decisions are still ongoing, said WCIA Executive Director Lew Leigh.

But WCIA has not fully covered some recent settlements relating to land-use issues. In 2005, the city had to pay $41,000 for legal defense costs not fully covered by the WCIA. Two land-use cases that same year were settled for a total of $80,000, and in 2007 another land-use case was settled for $75,000 above the amount the WCIA paid out.

These unforeseen legal expenses usually come out of the city’s contingency fund. However, due to the city’s current financial situation, that fund has roughly $212,000 left. Another $500,000 in the fund was frozen because the money was unavailable to back it up.

Dipping into the contingency reserve before the end of the year is likely, said City Attorney Paul McMurray.

“I think there is a significant chance we will have to make a request near the end of the year,” McMurray said. “We did it in 2007 and in 2006.”

McMurray was not specific about the amount of money that would be requested, but said it was tied to the fact that funding for legal expenses was winnowed from original budget requests for the 2008 year. Requests for $200,000 in attorney and other fees, and $450,000 for litigation were both cut by $50,000. Outside legal expenses were cut by another $25,000 earlier this year due to the revised revenue forecast.

The legal costs the city accrues are fairly high, McMurray said. Last year, the city spent $820,000 on outside attorney fees and another $219,603 on other costs that included prosecutor, public defender and hearing examiner fees.

“Of course, I would like to see that money spent on other projects and other initiatives,” Kordonowy said. “But I believe that this city must choose the right places to defend those policies and laws we stand behind. We will always have some legal expenses and we will always be deciding which one of these we want to defend and which ones we want to settle on.”

Since most of the litigation the city is involved in regards land-use issues, the administration is targeting what it considers to be largest source of potential problems – the city’s municipal code, especially its sections on subdivision and zoning.

“There are so many contradictions in it,” Kordonowy said. “(Revising the code) is a major step to removing a major source of litigation and inefficiencies.”

Many of the contradictions developed when the island became a city and Winslow and Kitsap codes were meshed together. Modifying those sections of the Bainbridge Municipal Code is being headed by Clarion Associates, which will spend two years cleaning up conflicting language. The project began in February 2008 and is costing the city $240,000.

But that is only part of the problem, Council Member Debbie Vancil said. Another major concern for her is the number of decisions that are made without considering the legal ramifications.

“We expected to reduce our legal costs when we hired an attorney,” Vancil said. “We expected to get more of a risk-evaluation process. In general the city does next to nothing in considering alternatives.”

Vancil said she will take aim at the “cavalier attitude toward matching risks and rewards” within the council and the city before the end of the year.

“We would like to have the staff propose potetial legal costs and risks before bringing a proposition forward,” Vancil said. “I would like to see us managing legal risk costs and the costs of alternatives, we don’t put enough thought into it.”

But before the code is updated and policies are set to evaluate legal risks in decision making, active litigation will be closely monitored by the city administration, said Finance Director Elray Konkel.

“I think we have provided for the liabilities we expect to incur. I’m not saying it isn’t prudent to watch these things closely,” he said. “But I think if we had a substantial loss, (it) would be drawn out for some time.”