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Smart disaster preparedness includes purchasing cards: purchasing cards are valued for their flexibility and oversight in times of disaster.




by Parslow, Darren
Government Finance Review • Dec, 2007 • Best Practices

Hurricanes, tornadoes, earthquakes, and floods are the sorts of natural disasters most of us would rather not contemplate. But for state and local governments--in most cases the first responders-worst-case scenario planning is a vital part of their business. Government agencies understand how important it is to be prepared for all aspects of emergency response, including the procurement of necessary supplies and services.

When disaster strikes and agencies are working frantically around to clock to provide water, food, generators, emergency services, and vaccines, 60- to 90day, paper-based purchase orders are not a viable option.

Every effective disaster plan should include strategies for flexible payments, such as purchasing cards, alongside plans for emergency communications and personnel. Purchasing cards help enable city, county, and state agencies to procure emergency supplies and services not only quickly, but under conditions when even basic infrastructure such as power grids, telecommunications networks, and banking systems are disrupted and suppliers are without power or have been destroyed.

Take the example of agency employees in Florida who needed to purchase gasoline to power trucks and equipment so they could cut down fallen trees and clear roadways during the 2004 hurricane season. In the pitch dark, with no electricity, gas station owners were comfortable accepting agency workers' purchasing card for payment.

"Vendors were confident processing cards offline using paper slips because they knew they would be paid prompt1y," said Lisa Wilkerson, purchasing card program administrator for the Florida Department of Transportation (FDOT).

In the not-too-distant past, before the advent of purchasing cards, some agencies resorted to using cash during these kinds of crises. The obvious downside of cash was that it was difficult to manage and vulnerable to abuse.

THE PURCHASING CARD ERA

The state of Florida began implementing its first purchasing card programs in 1994. At that time, the focus was not on disasters but on everyday efficiency and cost savings, such as procuring office supplies, computers, or field equipment without the costly purchase order procedure. Purchase orders are time-intensive and expensive to process, often taking 60-90 days and costing an estimated $35-$150 per transaction.

By implementing purchasing card programs, states not only save millions of taxpayer dollars, but procurement times are quicker, and administrators now have a greater level of transparency, accountability, and security for all transactions.

The hurricanes that struck Florida and the Gulf Coast in 2004 and 2005 became an unplanned testing-ground for using existing purchasing card technology during disasters.

The cards proved so indispensable they rapidly became the new standard for effective disaster response; critical supplies were secured faster under the worst conditions with maximum oversight and minimal abuse.

A GREAT TOOL GETS BETTER

Florida is a region that has grown accustomed to the often devastating effects of nature, but even Floridians were not prepared for the series of hurricanes that swept through the state in 2004. Four major storms hit within less than a two-month period. Ninety-five people lost their lives, and $42 billion worth of structural damage was inflicted as winds of up to 165 miles per hour destroyed roads, buildings, and other public infrastructure.

Agencies were under pressure 24 hours a day to repair roads, remove debris, protect buildings from water damage, restore gas and electricity, and provide emergency shelter to people whose homes had been destroyed.

The everyday efficiency and cost-effectiveness of the FDOT's purchasing card program suddenly became a critical tool for relief during the storms. The agency was able to quickly increase card limits from $2,500 to $25,000 so crews could buy traffic cones, barricades, sand bags, generators, and satellite phones. The cards also covered travel expenses for emergency responders who traveled to affected areas on short notice.

Suppliers who balked at purchase orders accepted the card willingly The cards worked even when the power was out at merchant locations.

In total, the FDOT made 7,000 transactions amounting to $7.6 million on purchasing cards for response activities--a testament to the cards' flexibility and effectiveness. The agency maintained full oversight via electronic reporting tools throughout.

SPENDING OVERSIGHT

The Florida Department of Agriculture (FDA) had similar positive results. Under normal circumstances, purchasing cards were used to procure office supplies and equipment and for approved travel expenses. But when the hurricanes hit, the agency had the flexibility to raise approved spending limits for critical response efforts.

"Hurricane Charley caught us completely by surprise, because we'd expected it to hit north,' said Kristen Mullikin, purchasing card program administrator for the FDA. "We had to raise limits and activate teams immediately'.'

One of the first teams to get approval for higher spending limits was the forestry division, which was mobilized quickly to buy chain saws, satellite phones, fuel, and generators.

In areas badly hit by flooding, including Punta Gorda in the southwest, animal rescue teams worked with local farmers to move farm animals to safer areas in the state. The teams were able to pay the transportation fees using purchasing cards. They also paid for truckloads of water and ice, as well as meals for people who had lost power in their homes.

Mullikin and a team of procurement employees in each division of the department monitored spending online during the hurricane using the State Accounting Management System. Credit limits were raised as needed by faxing requests directly to the bank, so emergency efforts could continue uninterrupted.

The FDA experienced no unauthorized spending during the hurricanes, an accomplishment Mullikin attributes partly to the purchasing cards' centralized reporting capability.

DISCOUNTS, FEDERAL GRANTS, INSURANCE CLAIMS

Port St. Lucie, on the east coast of Florida, was hit by two hurricanes in 2004. Spending limits on 25 emergency cards were raised from $1 to $500,000 to enable emergency teams to repair roads, sewage systems, and traffic signals. Using cards also helped restore power to buildings with emergency generators. One city agency used its cards to buy the entire fuel supply at a gas station to power emergency vehicles and equipment.

"The cards were great because they allowed us to be flexible about where and when critical purchases were made; said Cheryl Shanaberger, the deputy director of Port St. Lucie's Office of Management and Budget. The single highest purchase on the cards was $96,960, for tree removal.

Shanaberger also said that purchasing cards were particularly useful when negotiating discounts with suppliers of large-value construction materials. "We successfully negotiated a 2 percent discount with one contractor because he knew he would be paid sooner," she said. "The combined savings amounted to $400,000. On top of the price discounts, funds previously tied up in standing purchase orders were invested before they were spent, resulting in significant interest revenue for the city'.'

Shanaberger also pointed out that the detailed transaction information available with purchasing cards made it easier to process state and federal grant applications and insurance claims. "We were able to give FEMA (Federal Emergency Management Agency) and state grant authorities line-item details on all our emergency spending during the hurricanes:

Port St. Lucie also used its purchasing cards as a way to track fixed assets, since the cards provide the city with details such as serial and model numbers.

NO UNAUTHORIZED SPENDING

It is not often that we hear positive stories surrounding Hurricane Katrina, the largest natural disaster in history of the United States, leaving 1,600 dead and forcing the mass exodus of more than half of New Orleans' population. But the disaster response for certain Louisiana state agencies turned out to be a positive proving ground for purchasing cards--both in rapid response times and documented non-misuse of funds.

Louisiana's Department of Environmental Quality (DEQ) had an existing purchasing card program that was quickly mobilized for disaster relief when the storm hit full force. In addition to quickly raising spending limits on the cards, the DEQ was able to rapidly lift merchant category code blocks (MCC) to accommodate the range of items and services that needed to be purchased, ranging from vaccines, first-aid kits, and respirators to supplies for house rescuers, such as coveralls, water, meals and bedding. The purchases were made locally at businesses in Baton Rouge and over the Internet at national merchants, such as Wal-Mart and Corporate Express.

Using purchasing cards gave state emergency responders the option to use vendors outside of the established network of merchants available to state employees under normal circumstances. That flexibility allowed responders to react with more agility than ever before possible. Without the purchasing card, the DEQ would have had to resort to purchasing only from vendors that would be willing to be invoiced and then wait another 60-90 days for payment, an unlikely scenario with normal channels of business disrupted.


The purchasing cards also enabled the DEQ team to make out-of-state purchases easily over the Internet. This was critically important when vital supplies such as respirator cartridges and protective clothing could only be supplied quickly by companies outside of Louisiana.

When the rescue and recovery effort was completed and work entered the cleanup phase, the DEQ returned its purchase and spending limits to pre-emergency levels and restored normal procurement requirements such as bid solicitation for non-emergency items and services. Best of all, there was not a single instance of purchasing card abuse during the crisis period.

A NEW STANDARD

Purchasing cards are here to stay as the financial tool of choice for first responders. The value of flexibility and oversight cannot be underestimated.

States and agencies that incorporate purchasing card best practices into their disaster-preparedness plans will be best positioned to save lives, as well as control and document spending.

Disasters affect lives and livelihoods. Documenting and replicating best practices that emerge from previous relief efforts isn't just a smart thing to do, it's a serious responsibility that can help communities recover from the worst of disasters.

Disaster Planning Tips

If your organization already has purchasing cards or is planning to implement purchasing cards, here are some basic guidelines for incorporating card payments into your disaster recovery planning, based on the experience of government agencies in Louisiana and Florida.

Credit limits and MCC blocks

Establish guidelines and procedures for increasing single purchase and monthly spending limits for primary users and procurement staff in emergency situations. Also set up guidelines for removing merchant category code (MCC) blocks during disasters. Work with your customer service representative to make sure that credit limits can be raised and MCC blocks can be removed in real time.

Emergency cards

Consider setting up emergency cards with $1 credit limits that can be raised as needed during a disaster. Remember that in an emergency, it may not be possible to get new cards issued quickly.

Backup site

Designate a backup recovery site equipped with PCs and the necessary connectivity so you can run your card program management and other systems if your primary site is damaged and inoperable. At minimum, be sure that complete records of your cardholder information are stored at a secure secondary location.

Bid solicitation requirements

Establish rules for suspending your normal competitive bid solicitation requirements for purchases of critical emergency goods and services.

Early payment discounts

Set up guidelines for negotiating early payment discounts for large-dollar purchases from vendors and contractors in return for payment by card. If discounted payments will eliminate standing purchase orders, determine how the freed-up funds can be invested.

Emergency purchase transaction reporting

Establish procedures for using your card reporting system to collect transaction information on emergency purchases to monitor spending during disaster recovery and to facilitate post-emergency audits and analysis. Continue to maintain requirements for turning in paper receipts for card purchases.

Grant applications and insurance claims

Determine how to use your card reporting system to generate the data required for the preparation of federal and state disaster recovery grant applications and insurance claims.

The Emerging Impact of Prepaid Cards

Just as purchasing cards have become the gold standard for government first-responder disaster relief needs, prepaid cards have begun to emerge as a way for consumers to handle their personal finances during the chaos following a disaster.

With so many homes destroyed in the wake of Hurricane Katrina, many victims could not receive unemployment checks, not only because they no longer had an address, but also because the mail service was erratic. During this time, prepaid cards became a more efficient way to transfer funds. The cards could be loaded electronically, bypassing the logistical challenge of distributing benefits through the mail.

Hurricane Katrina caused several companies to re-evaluate their traditional compensation program after the sudden relocation of employees meant paper paychecks had to be reissued and new addresses tracked down. A Federal Reserve study on the nation's response to Hurricane Katrina found that evacuees could not easily cash checks they already had or pick up paychecks held by their employers. (1) According to a 2006 consumer study by the American Payroll Association, more than a quarter (26 percent) of respondents said they were not confident that they would continue to be paid in the wake of a natural disaster. (2)

Electronic payroll programs can help businesses improve operating efficiencies that can better prepare them for a natural disaster. Prepaid cards also make it much easier for the cardholder. In a post-disaster landscape, where banks and cash machines are non-functioning or destroyed, prepaid cards associated with a major payment brand remain readily accepted currency, Also, prepaid cards are often covered by a zero liability policy, which prevents against unauthorized purchases on lost or stolen cards, making them safer and more secure than using cash or checks.

By providing uninterrupted access to needed funds and security features inherent in electronic payments, prepaid cards have proved invaluable to communities, businesses, and consumers recovering from a disaster.

Notes

(1.) Federal Reserve Bank of Philadelphia, How Effective Were the Financial Safety Nets in the Aftermath of Katrina?, January 2006.

(2.) American Payroll Association, National Payroll Week 2006 Survey Results.

DARREN PARSLOW is senior vice president of Visa Commercial Solutions at Visa USA. He holds undergraduate degrees in multinational management from The Wharton School and in international relations from the University of Pennsylvania. He can be reached at publicsector@visa.com.

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