jefferson by chrstphr

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									                                              STATE OF NEW YORK
THOMAS P. DiNAPOLI                                                                              STEVEN J. HANCOX
                                  OFFICE OF THE STATE COMPTROLLER                             DEPUTY COMPTROLLER
   COMPTROLLER                                  110 STATE STREET                      DIVISION OF LOCAL GOVERNMENT
                                             ALBANY, NEW YORK 12236                    AND SCHOOL ACCOUNTABILITY
                                                                                       Tel: (518) 474-4037 Fax: (518) 486-6479



                                                 May 22, 2009

   Robert F. Hagemann III, County Administrator
   Members of the Board of Legislators of the
   County of Jefferson
   Jefferson County Office Building
   175 Arsenal St.
   Watertown, NY 13601

   Report Number: P3-9-32

   Dear Mr. Hagemann and Members of the Board of Legislators:

   A top priority of the Office of the State Comptroller is to help local government officials
   manage government resources efficiently and effectively and, by so doing, provide
   accountability for tax dollars spent to support government operations. The Comptroller is
   mandated to oversee the fiscal affairs of local governments statewide, as well as
   compliance with relevant statutes and observance of good business practices. This fiscal
   oversight is accomplished, in part, through our audits, which identify opportunities for
   improving operations and officials’ governance. Audits also can identify strategies to
   reduce costs and to strengthen controls intended to safeguard local government assets.

   We conducted an audit of health insurance costs in five counties1 in central and northern
   New York to determine whether these counties have explored options to reduce employee
   health insurance costs through implementation of a health insurance buy out program and
   cafeteria plan. This audit was conducted pursuant to Article V, Section 1 of the State
   Constitution, and the State Comptroller’s authority as set forth in Article 3 of the General
   Municipal Law.

   This report of examination letter contains our findings and recommendations specific to
   Jefferson County (County) for the period January 1, 2006, through June 30, 2007. We
   discussed the findings and recommendations with County officials and considered their
   comments in preparing this report. The County’s response is attached to this report in
   Appendix A. County officials generally disagreed with our findings. Appendix B
   includes our comments on the issues raised in the County’s response letter. At the
   completion of our audit of the five counties, we prepared a global report that summarized
   the significant issues we identified at all of the counties audited.

   1
       Herkimer, Jefferson, Oneida, Onondaga, and Oswego Counties were included in this audit.
Summary of Findings

The County does not currently offer its employees a cash payment to opt out of the
County’s health insurance plan. Based on our analysis, we estimate the County has an
opportunity to reduce its health insurance costs by $71,000 to about $199,000 by offering
a health insurance buy out from $750 to $1,500 if 30 percent of family plan eligible
employees take advantage of the buy out. However, there are also risks associated with a
buy out program. If employee participation were only 10 percent, then the County could
stand to lose as much as $245,000 if it were to offer a family plan buy out of $2,500.
Because the success of the program hinges on the level of employee participation, County
officials should consider surveying employees to gauge employee interest in a health
insurance buy out program and then decide if such a program would be cost effective for
the County.

The County has established a cafeteria plan that allows employees to make pre-tax
contributions toward health insurance, commonly known as a premium only plan (POP).
Approximately 93 percent of employee health insurance contributions were pre-tax in
2006, which saved the County over $57,000 in Social Security and Medicare (FICA)
taxes. Employees not only saved the same amount of FICA taxes, but they were also able
to reduce their Federal and State income taxes because the pre-tax benefit reduced their
taxable income.

Although the County’s cafeteria plan allowed employees to make pre-tax contributions
toward health insurance, it does not give them the option to make pre-tax contributions
towards medical and dependent care flexible spending accounts. Medical and dependent
care FSAs allow employees to pay for specific out-of-pocket medical and dependent care
expenses with those pre-tax earnings. Three of the other four counties we audited offered
medical and dependent care flexible spending accounts to their employees. If employee
participation had been similar to these other three counties, we estimate the County could
have saved about $5,450 annually in FICA taxes by offering this benefit to employees.2

Background and Methodology

The County is located in the northern region of New York State and has a population of
111,738 according to the 2000 Federal Census. Like many other local governments
throughout the State, the County faces significant fiscal constraints, which compel local
officials to seek to achieve cost savings by improving operations. Health insurance
benefits are an integral part of an employee’s compensation and represent a significant
portion of a local government’s personal service costs. The increasing cost of providing
health insurance coverage to employees contributes substantially to the financial
challenges confronting local officials.

The County’s health plan is self-insured and its claims are administered through a third
party administrator (TPA). The TPA processes and pays claims on the County’s behalf
and bills the County for claims paid plus a fixed administrative fee per enrollee. In
2
    We subtracted estimated administrative costs to determine this net savings.




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accordance with County practices and labor agreements, the County provided health
insurance coverage to approximately 1,100 employees and retirees during 2006. The
County paid nearly $10.2 million for health benefits during 2006, nearly $800,000 of
which was contributed by active employees. Retired employees hired prior to 1999 do
not contribute toward the cost of their health coverage.

Many employers have experienced significant savings from the implementation of health
insurance buy outs and an IRS Section 125 cafeteria plan. While not all municipalities’
health plans are alike, there are specific trends that can be analyzed to determine whether
a buy out or cafeteria plan may be advantageous.

We examined payroll registers, health insurance billings, claim costs and administrative
fee invoices for the 2006 fiscal year. We also reviewed collective bargaining agreements
and interviewed appropriate County officials to gain an understanding of the County’s
health benefits and cafeteria plan. The specific assumptions we used to quantify the
potential cost savings or losses the County could realize by offering a health insurance
buy out program and medical and dependent care flexible spending accounts are
addressed in the Audit Results section of this letter.

We conducted this performance audit in accordance with generally accepted government
auditing standards (GAGAS). 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.

Audit Results

Health Insurance Buy Out Plan

Employee health insurance buy outs are payments to employees in exchange for the
employees not participating in health care coverage within the organization’s health
plans. Because coverage can be obtained through alternate sources (usually under a
spouse’s plan), offering a cash payment in lieu of health insurance can be mutually
beneficial to both the local government and the employee. Currently, the County does not
offer a buy out incentive to its employees for declining participation in the County’s
health insurance program.

When a municipality is fully insured, it can realize savings by paying employees a buy
out amount less than the annual cost of their health insurance premiums. However, when
a municipality is self-insured, it assumes financial responsibility for the enrollees’
medical claims and all administrative costs rather than paying a fixed premium for each
enrollee. Therefore, determining whether a health insurance buy out will save the local
government money is more complex for self-insured municipalities than those that are
fully insured.




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Discussions about the costs of health care often focus on the average amount spent per
person; however, spending on health services varies greatly among different individuals.
We obtained the County’s claim costs for all employees covered under a family plan3 in
2006 and found that 20 percent of the employees accounted for about 60 percent of the
claim costs. Because this top tier of enrollees requires such a high level of coverage, they
most likely would not opt out of coverage, even for a cash buy out payment. These
individuals with high claims costs significantly skew the average claim cost and the
premium equivalents4 for the pool of all enrollees covered under a family plan; therefore,
we excluded them from our cost benefit analysis for the purpose of determining whether
it would be beneficial to the County to offer a buy out program. We calculated the
average 2006 claim cost for the remaining 80 percent of the family plan enrollees to be
$6,081.5 The average contribution family plan enrollees paid the County toward the cost
of their health coverage in 2006 was $1,202, resulting in a net average cost of claims to
the County of $4,879. This is the estimated amount the County would save annually for
each employee with family coverage who opts to take the buy out in lieu of health
coverage if the County had a buy out program in place.

If an employee has an alternative source of health insurance, it is sometimes
advantageous for them, even without a buy out program in place, to waive coverage at
the municipality in order to avoid paying the employee’s portion of the health insurance
costs (employee contribution). When analyzing the costs and benefits of a health
insurance buy out, it is important for the municipality to consider the number of
employees who have voluntarily waived health coverage without a buy out incentive.
Although the number of employees who voluntarily waive health coverage may vary
from year to year, based on our review of payroll and health insurance records, we
determined that 91 employees eligible for health insurance opted not to receive health
coverage through the County as of December 2006. This rate was high when compared
to other counties audited. County officials indicated that it is likely that many of these
employees have a spouse who works for the US military at Fort Drum, so they are
covered under their spouses’ health plan and have declined coverage with the County. If
the County were to offer a buy out, it would likely have to pay these employees the buy
out amount even though they have already waived coverage.

When a municipality considers offering a buy out, it must also determine an appropriate
buy out amount that employees would be willing to receive in exchange for waiving
health care coverage. Most importantly, in order to realize cost savings, the municipality
must offer a buy out payment that is less than the expected premium or claims cost and
administrative fees it would have to pay to cover the employee. However, the buy out
amount must be large enough to benefit the employee as well. If the municipality
requires employees to provide only a minimal contribution toward their health care
3
  Married employees whose spouse has access to health coverage through their employer would be in the
best position to take advantage of a health insurance buy out. As a result, we primarily focused our
analysis of buy out costs and savings on those employees with family coverage.
4
  The County Auditor develops a premium equivalent each year for budgeting and cost allocation purposes.
The premium equivalent is based on the County’s assessment of expected costs per covered employee. It is
similar to what would be charged by an insurance carrier for insuring the plan.
5
  The average claims cost includes annual fixed administrative fees of $375 per enrollee.




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coverage, employees would most likely have to receive an opt-out amount close to or
more than the health insurance costs incurred by their spouse in order for them to forgo
this benefit. Employees who have high contribution rates are more likely to take
advantage of a smaller buy out because they not only receive the amount of the buy out,
but they save on their employee contributions.

Two of the five counties included in our regional audit had a health insurance buy out
program in place in 2006. Oneida County saved about $1.83 million by offering a $750
buy out to its family plan eligible employees.6 About 30 percent of eligible employees
took advantage of the family plan buy out. Although Oneida County has since begun self-
insuring several of its health plans, its health plans were primarily fully insured in 2006,
so the County was able to save the difference between the monthly insurance premium
and the buy out amount for the employees who participated in the program. Herkimer
County is self-insured and it lost about $288,000 while offering buy outs that generally
ranged between $2,800 and $4,680 to its family plan eligible employees covered by
certain collective bargaining units. About 37 percent of eligible employees took
advantage of the family plan buy out in Herkimer County. Herkimer lost money despite
this high participation rate, because the buy out amounts were greater than the average
claims costs ($787) for those employees most likely to take advantage of the buy out
option. Herkimer began phasing out its buy out program in 2003 and most employees
hired since that time are no longer eligible to participate in the program. Additionally, we
surveyed eight other counties and cities in central and northern New York that have a
health insurance buy out program in place to determine the amount of the buy out they
offer to employees eligible for family plan coverage and the percentage of employees
who took advantage of the family plan buy out. Although the coverage at these
municipalities varied from fully insured to self insured, we found that the annual family
plan buy outs offered in these other municipalities ranged from $300 to about $6,000 and
their participation rates ranged from five to 24 percent.

The actual savings Jefferson County might realize from a health insurance buy out
program is contingent on the level of participation, the annual cost of the health coverage
and the buy out incentive amount ultimately offered. Below are some examples of the
estimated cost savings (or losses) that would result based on different buy out amounts
and participation rates.




6
 Total cost savings from family, two-person and single plan buy outs was about $1.86 million in Oneida
County.




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                         Number of    Estimated                            Annual    Estimated Net
Amount of Participation Employees Annual Savings                           Cost of      Annual
 Buy Out      Rate      Participating on Claims7                          Buy Outs8 Savings (Loss)
     $750     10%                  53            $0                          $73,471      ($73,471)
     $750     20%                105       $68,306                           $84,774      ($16,468)
     $750     30%                158      $326,893                          $127,565       $199,328
   $1,500     10%                  53            $0                         $146,942     ($146,942)
   $1,500     20%                105       $68,306                          $169,549     ($101,243)
   $1,500     30%                158      $326,893                          $255,131        $71,762
   $2,500     10%                  53            $0                         $244,904     ($244,904)
   $2,500     20%                105       $68,306                          $282,581     ($214,275)
   $2,500     30%                158      $326,893                          $425,218      ($98,325)

  Although health insurance buy out plans often benefit municipalities, the County must
  perform its own research and cost projections to determine whether it should offer a buy
  out plan and, if so, how much of a buy out it should offer. A simple employee survey or
  discussion with labor union representatives can help the County gauge employee interest
  in this type of benefit. As demonstrated in the table above, there are risks associated with
  offering a buy out program and in many cases, the County could actually lose money if
  there is low participation by County employees or if the County offers a buy out amount
  that is too high. Based on our analysis, the County would only benefit from offering a
  health insurance buy out if nearly 30 percent of employees eligible for family plan
  coverage took advantage of the buy out and the amount of the buy out was around $1,500
  or less. This is primarily because the large number of employees (91 as of December
  2006) who have already voluntarily waived coverage would likely take advantage of the
  buy out. The County would incur the buy out cost for these employees but it would not
  reduce its claim costs for them. Nevertheless, there is an opportunity for the County to
  save up to $199,000 by offering a buy out of $750 if 30 percent of family plan eligible
  employees participate in the buy out program. Although our audit focused primarily on
  buy outs for family coverage, the County may want to consider offering buy outs for its
  single coverage plans as well.

  Health insurance plans differ greatly, so if the County chooses to start a buy out program,
  employees should be encouraged to study the potential effects of changing plans before
  they elect to receive a cash payment in lieu of coverage. Additionally, employees should
  realize that payments in lieu of health insurance coverage would represent taxable
  income, but such payments would not be reportable to the New York State and Local
  Retirement System. The County should contact the Internal Revenue Service or its tax
  advisor to determine the tax implications of this opportunity. It also is important to note
  that this incentive is subject to negotiation and approval by the various collective
  bargaining groups.
  7
    Ninety-one employees voluntarily waived coverage as of December 2006. We did not include these
  employees in the estimated annual savings on claims since the County does not currently incur any claim
  costs for these employees.
  8
    The annual cost includes cash buy outs for the 91 employees who have already voluntarily waived
  coverage. It also includes the County’s share of FICA tax (7.65 percent) for the buy out payments.




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Section 125 Cafeteria Plan

Section 125 of the Internal Revenue Code authorizes cafeteria plans that are a way of
providing employees with valuable benefits while both the employer and the employee
save on taxes. Generally, employees may redirect a portion of their salaries to the plan
and use the redirected money to “purchase” non-taxable benefits. Importantly, moneys
redirected by the employees to the plan are not subject to FICA or income taxes.
Employers may include many employee benefits in a cafeteria benefit plan, including
employee medical expense reimbursements and employee contributions for health, life
and disability insurance as well as payments for dependent care assistance programs.

Premium Only Plan – Under a Premium Only Plan, employers typically deduct the
employees’ share of health insurance premiums (and other qualifying insurance
premiums) from the employees’ gross wages before calculating FICA and payroll
withholding taxes. The County automatically enrolls employees in this plan unless they
opt not to receive this benefit during an annual open enrollment period. We found that a
large number of employees have participated in this plan. Approximately 93 percent of
employee health insurance contributions were pre-tax in 2006, which saved the County
over $57,000 in FICA taxes. Employees not only saved the same amount of FICA taxes,
but they were also able to reduce their Federal and State income taxes because the pre-tax
benefit reduced their taxable income.

Flexible Spending Accounts (FSA) – Medical and dependent care FSAs allow an
employee to fund certain eligible medical and dependent care expenses on a pre-taxed
basis through salary reduction to pay for out-of-pocket expenses that are not covered by
insurance. For example, a medical FSA can be used for annual deductibles, co-payments,
prescriptions, orthodontia, and a dependent care FSA can be used to pay daycare
expenses and nursery school fees.

The County does not offer medical or dependent care FSAs to employees through its
cafeteria plan. When reviewing plans in the other counties we audited, we found that
three of the five counties offered medical and dependent care FSAs and those counties
were able to realize some cost savings. If the County offered these plans and its
employees participated according to the average of the other three counties, we estimate
that 112 employees would annually contribute about $928 into a medical FSA and nine
employees would annually contribute about $3,120 into a dependent care FSA. This
would result in the County saving about $7,930 and $2,220 annually in FICA taxes on
medical FSAs and dependent care FSAs, respectively. In addition, employees would not
only save an equal amount on their payroll taxes, they also would reduce their personal
Federal and State income taxes. We estimate total savings from FSAs, less likely
administrative costs to the County ($4,700), would be approximately $5,450.

As with health insurance buy outs, employees should be encouraged to study the potential
effects of FSAs before they elect to use these accounts. If employees do not use the full
balance in their FSA for expenses incurred during the allotted claim period, they lose the
unused portion.




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Recommendations

   1. County officials should study the cost effectiveness of offering a health insurance
      buy out payment as an incentive for employees to decline participation in the
      County’s health insurance program when they are able to obtain coverage from
      other sources.

   2. County officials should consider offering a medical and dependent care FSA
      option to employees.

The Board of Legislators has the responsibility to initiate corrective action. A written
corrective action plan (CAP) that addresses the findings and recommendations in this
report should be prepared and forwarded to our office within 90 days, pursuant to Section
35 of the General Municipal Law. For more information on preparing and filing your
CAP, please refer to our brochure, Responding to an OSC Audit Report, which you
received with the draft report letter. We encourage the Board to make this plan available
for public review in the Clerk of the Board of Legislator’s office. If you have any further
questions, please contact the Syracuse Regional Office at (315) 428-4192.


                                             Sincerely,



                                             Steven J. Hancox
                                             Deputy Comptroller
                                             Division of Local
                                             Government and School Accountability




                                            8
                                     APPENDIX A

                     RESPONSE FROM COUNTY OFFICIALS


The County’s response to this audit can be found in the following pages.




                                            9
         See
         Note 1
         Page 12




         See
         Note 2
         Page 12




         See
         Note 3
         Page 12




     1
10
     See
     Note 4
     Page 12




     See
     Note 5
     Page 12




     See
     Note 3
     Page 12


     See
     Note 6
     Page 13




     See
     Note 7
     Page 13




11
                                      APPENDIX B

                      RESPONSE FROM COUNTY OFFICIALS

Note 1

As indicated in our report, we agree that a buy out program would likely not result in
savings in the majority of the scenarios we presented. However, we also concluded that at
higher participation rates there exists the potential for savings at certain buy out amounts.

Note 2

We have not recommended that the County “open formal negotiations of this matter” nor
intended to suggest that the County circumvent the collective bargaining process. We
have only recommended that the County consider taking steps to gauge employee interest
in a buy out program as a way to estimate the rate of participation. While this might raise
the expectations of employees in a position to benefit from a buy out, we do not see how
those expectations would in any way compromise County officials’ ability to reject the
buy out plan should their further analysis find that such a program would not be cost-
effective.

Note 3

While a buy out program would not always be a fiscally wise course, we concluded that
in certain circumstances the County could achieve savings by offering a buy out. As
stated in the report, those savings are contingent on the level of participation in the
program and the amount of the buy out incentive offered. Consequently, in the context of
our findings, we would consider appropriate corrective action to be the County’s actions
to study and assess the cost effectiveness of a buy out program by first ascertaining
whether employee interest in a buy out program is sufficient for savings to result.
Similarly, the County does not offer a medical and dependent care FSA option and
because our audit found that modest savings might be realized if an FSA was offered, we
would expect the County to initiate corrective action by taking steps to explore the
economic feasibility of the FSA option.

Note 4

As previously stated, our report does not suggest that County officials should circumvent
the collective bargaining process. We understand that both a buy out program and an
FSA would ultimately be the subject of negotiation.

Note 5

When the audit team first met with the County, we indicated that the scope of the multi-
county audit would include a review of best practices, primarily as they relate to health




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insurance buy outs, and IRS Section 125 Cafeteria Plans. We never changed our scope;
we believe we did accurately convey our scope.

Note 6

The examiner who conducted the exit discussion stated to County officials that he would
discuss their objections to the audit report with his manager, the Chief Examiner of the
Syracuse office, and then advise the County of any changes to be made to the findings or
recommendations of the report in response to those objections. We acknowledge that our
decision to make no changes to the report was communicated to the County on January 5,
2008. We apologize if we did not make it clear to the County Administrator that he could
request an extension in the response time if he needed it.

Note 7

As explained, the assertion that our recommendations are at odds with the collective
bargaining process is unfounded. Moreover, our report has not asked the County to
correct “non-existent problems.” Rather, it recommends that County officials consider
investigating two ways we have identified that could help them reduce the County’s
health insurance costs.




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