HomeMy WebLinkAboutStaff Report 3464
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
January 22, 2013
The Honorable City Council
Palo Alto, California
Policy and Services Committee Recommendation to Accept the Audit
of Employee Health Benefits Administration
The Office of the City Auditor recommends acceptance of the Audit of Employee Health
Benefits Administration. At its meeting on December 11, 2012, the Policy and Services
Committee approved and unanimously recommended the City Council accept the report. The
Policy and Services Committee minutes are included in this packet.
Recommended Action: Accept the Audit of Employee Health Benefits Administration.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
: Attachment A: Audit of Employee Health Benefits Administration (PDF)
: Attachment B: Policy and Services Committee Meeting Minutes Excerpt (December 11,
2012) (PDF)
Department Head: Jim Pelletier, City Auditor
Page 2
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
December 11, 2012
The Honorable City Council
Attention: Policy & Services Committee
Palo Alto, California
Audit of Employee Health Benefits Administration
In accordance with the Fiscal Year (FY) 2012 Annual Audit Work Plan, the Office of the City
Auditor has completed the Audit of Employee Health Benefits Administration. The audit
contains five findings with a total of twelve recommendations. The Office of the City Auditor
recommends the Policy and Services Committee review and recommend to the City Council
acceptance of the Audit of Employee Health Benefits Administration.
We thank the staff of the Human Resources Department and Administrative Services
Department for their time, information, and cooperation during the audit process.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
Attachment A: Audit of Employee Health Benefits Administration (PDF)
Department Head: Jim Pelletier, City Auditor
Attachment A
Page 2
Attachment A
0
Jim Pelletier, City Auditor
Yuki Matsuura, Senior Performance Auditor
Houman Boussina, Senior Performance Auditor
December 2012
Office of the City Auditor
AUDIT OF EMPLOYEE HEALTH BENEFITS
ADMINISTRATION
Attachment A
0
Attachment A
December 2012
1 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
SUMMARY OF RESULTS
Internal controls over health benefits administration within HRD require improvement to ensure that health premiums,
administrative fees, and retiree reimbursements are calculated and paid accurately for eligible active and retired
employees in accordance with applicable labor agreements, laws, and regulations.
REPORT HIGHLIGHTS
Finding 1: Retiree reimbursements were not accurately
calculated (Page 14)
Retroactive transactions are not consistently
documented and processed.
Eligibility criteria for retiree health benefits were not
clearly defined, documented, and communicated.
Eligibility criteria have not always been accurately
applied in the calculation of retiree reimbursements.
Finding 1 Recommendations:
Establish clear, documented procedures to ensure the
accuracy of the Reimbursement Report.
Enhance current procedures to ensure that the eligibility
criteria are maintained accurately, completely, and in an
organized manner.
Establish procedures for determining the health tier for
each retiree and maintaining a complete and accurate
record of retiree health tiers.
Finding 2: CalPERS billing was not adequately monitored
(Page 19)
Duplicate active employee records in the CalPERS
system went undetected.
HRD did not always update the CalPERS system when
a change in employee group was recorded in SAP.
CalPERS did not have the correct formula to calculate
the employer share.
Finding 2 Recommendations:
Enhance the current procedures to ensure that any changes
in employment affecting employees’ health eligibility status
are accurately and consistently recorded in both SAP and
CalPERS system.
Establish procedures for providing CalPERS with clear,
written instructions for the employer share calculation and
monitoring to ensure that the City instructions are followed.
Finding 3: HRD has not effectively administered the EBS
contract (Page 23)
HRD is paying for services it is not receiving.
Payment instructions to EBS are provided without
adequate supporting documentation.
HRD was not aware that 20 checks issued in 2011
remained uncashed.
HRD process for ensuring required 1099 tax forms are
received by retirees was not always complete or
accurate.
Inadequate review left invoicing errors undetected.
Finding 3 Recommendations:
Review the contract to ensure the adequacy of the contract
terms and accuracy and clarity of the scope of services.
Establish recordkeeping and review procedures to ensure
accuracy and completeness of retiree reimbursements.
Establish procedures for handling uncashed EBS checks.
Establish procedures to verify the accuracy and
completeness of the EBS services provided.
Establish procedures to review EBS invoices to ensure the
accuracy of the EBS billing.
Finding 4: Required documentation to verify the
eligibility of dependents was not always available
(Page 27)
Finding 4 Recommendation:
Improve verification procedures to ensure that required
documentation is obtained, reviewed, and maintained.
Finding 5: Personally Identifiable Information (PII) has
not been adequately protected and controlled (Page 28)
Finding 5 Recommendation:
Take applicable steps recommended by the NIST Guide to
appropriately maintain the confidentiality of PII.
This Executive Summary represents a limited summary of the audit report and does not include all of the information available in the full
report.
Office of the City Auditor
EXECUTIVE SUMMARY – AUDIT OF EMPLOYEE HEALTH BENEFITS ADMINISTRATION
Audit Objective: To determine whether the Human Resources Department (HRD) has adequate
controls over health benefits administration to ensure that health premiums, administrative fees, and
retiree reimbursements are calculated and paid accurately for eligible active and retired employees in
accordance with applicable labor agreements, laws, and regulations.
Attachment A
December 2012
2 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
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Attachment A
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3 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
TABLE OF CONTENTS
EXECUTIVE SUMMARY ......................................................................................................................................................... 1
GLOSSARY OF ACRONYMS AND TERMS USED IN THIS REPORT ............................................................................................ 5
INTRODUCTION ................................................................................................................................................................... 7
AUDIT OBJECTIVE ......................................................................................................................................................................... 7
BACKGROUND.............................................................................................................................................................................. 7
AUDIT SCOPE AND LIMITATIONS .................................................................................................................................................... 12
AUDIT METHODOLOGY ................................................................................................................................................................ 14
CITY AUDITOR’S CONCLUSION ....................................................................................................................................................... 14
FINDINGS
FINDING 1: RETIREE REIMBURSEMENTS WERE NOT ACCURATELY CALCULATED ......................................................................................... 14
FINDING 2: CALPERS BILLING WAS NOT ADEQUATELY MONITORED BY THE CITY .................................................................................... 19
FINDING 3: HRD HAS NOT EFFECTIVELY ADMINISTERED ITS CONTRACT WITH EBS .................................................................................... 23
FINDING 4: REQUIRED DOCUMENTATION TO VERIFY THE ELIGIBILITY OF DEPENDENTS FOR ENROLLMENT WAS NOT ALWAYS AVAILABLE. ............. 27
FINDING 5: PERSONALLY IDENTIFIABLE INFORMATION (PII) HAS NOT BEEN ADEQUATELY PROTECTED AND CONTROLLED ................................. 28
ATTACHMENT 1: CALPERS BILLING SUMMARY FOR JUNE 2012 ......................................................................................... 31
ATTACHMENT 2: CITY MANAGER’S ACTION SUMMARY ..................................................................................................... 33
ATTACHMENT 3: CITY MANAGER’S RESPONSE................................................................................................................... 37
In accordance with the Fiscal Year 2012 Annual Audit Work Plan, the Office of the City Auditor
has completed this Audit of Employee Health Benefits Administration. We conducted this
performance audit 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.
We would like to thank the staff of the Human Resources Department and Administrative
Services Department for their time, information, and cooperation during the audit process.
Attachment A
December 2012
4 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
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Attachment A
December 2012
5 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Glossary of Acronyms and Terms Used in This Report
Acronyms/Terms Description
Accrued Liability* The total dollars needed as of the valuation date to fund all benefits earned in the past for current
members.
Active Employees Current employees of the City who are eligible for and enrolled in the CalPERS Health Program.
Actuarial
Valuations
Valuations performed to estimate the cost of benefits and determine the employer contribution.
ASD Administrative Services Department.
Annual Required
Contribution
(ARC)
The employer’s required annual contributions determined by the value of benefits allocated to the
current fiscal year for service during that year, plus an amortization payment toward the Unfunded
Actuarial Accrued Liability (unfunded portion of the Accrued Liability as determined by Actuarial
Valuations).
Blue Shield Bay
Area Basic
Blue Shield is one of the health plans offered by CalPERS. Bay Area Basic refers to the Basic Monthly
Rate in the Bay Area region. This plan was considered by the City “the second most expensive plan” at
the time of the audit.
Blue Shield Bay
Area SM
Blue Shield is one of the health plans offered by CalPERS. Bay Area SM refers to the
Supplement/Managed Medicare Monthly Rate in the Bay Area region.
CalPERS California Public Employees’ Retirement System. CalPERS provides a variety of retirement and health
benefit programs and services.
CalPERS Billing CalPERS Monthly Employer Billing Roster containing information for each member enrolled in the
CalPERS Health Program including the health plan, premium amount, employer share, and member
share.
CalPERS Health
Program
Program administered by CalPERS as directed by the Public Employees’ Medical and Hospital Care Act
(PEMHCA). Health plans offered, covered benefits, monthly rates, and co-payments are determined by
the CalPERS Board, which reviews health plan contracts annually.
CalPERS ID* A unique CalPERS identification number that is automatically assigned to all participants and business
partners within the CalPERS system.
Contracting
Agency*
A public agency, school district, special district, or county that contracts with CalPERS for retirement or
health benefits.
Dependent* Those family members who meet the specific eligibility criteria for coverage in the CalPERS Health
Program.
Domestic
Partner*
Current and former domestic partners registered in California who have the same rights, protections,
and benefits - as well as the same responsibilities, obligations, and duties - provided to current and
former spouses.
EBS Employee Benefit Specialists, an outside vendor contracted by the City for overall administration of the
retiree reimbursement program including reviewing, calculating, and processing reimbursements.
Employee Group Labor Union or Association’s representation unit.
Encryption* Cryptographic transformation of data into a form that conceals the data’s original meaning to prevent it
from being known or used.
FCA Palo Alto Fire Chiefs’ Association.
GASB 45 Governmental Accounting Standards Board Statement No. 45 (Accounting and Financial Reporting by
Employers for Postemployment Benefits Other Than Pensions) provides standards for the financial
reporting of the City’s Retiree Healthcare Plan.
Health Premium Monthly cost of a health plan offered by CalPERS.
Attachment A
December 2012
6 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
HRD Human Resources Department.
IAFF Local 1319, International Association of Fire Fighters.
Labor Agreement Negotiated Memorandum of Agreement, which is subject to change, containing information about
wages, hours and fringe benefits as well as the terms and conditions of employment for classification
within a Union or Association’s representation unit.
Management Management and Professional Personnel and Council Appointees.
Member An employee who qualifies for membership in CalPERS and whose employer pays contributions into the
Retirement Fund.
Minimum
Contribution
The amount billed by CalPERS as the City share of the health premium for the employee groups for
which Tier 4a/4 was implemented. The minimum contribution is prescribed in Government Code
Section 22892(b)(1).
NIST Guide Guide to Protecting the Confidentiality of Personally Identifiable Information (PII) developed by the
National Institute of Standards and Technology (NIST). This guideline has been prepared for use by
Federal agencies and may be used by nongovernmental organizations on a voluntary basis.
OCA Office of the City Auditor.
PAPOA Palo Alto Peace Officers’ Association.
PEMHCA*
The Public Employees’ Medical and Hospital Care Act (PEMHCA) is part of the California Government
Code Section 22751 et seq. and directs the administration of the CalPERS Health Program.
PERSCare Basic PERSCare is one of the health plans offered by CalPERS. Basic refers to the Basic Monthly Rate. This
plan was considered by the City “the most expensive plan” at the time of the audit.
PII Personally Identifiable Information, defined under California State law to include an individual’s first
name or first initial and last name in combination with other identifying information (e.g., social security
number, health insurance information, etc.) when either the name or the data elements are not
encrypted.
Retiree Employees who retired directly from the City and are eligible for and enrolled in the CalPERS Health
Program.
Retiree Health
Tier
Retiree health benefit levels negotiated in labor agreements. Currently, labor agreements provide for
benefits according to the hire date, retirement date, and employee group at the time of retirement. The
use of the term "tier" is based on the HRD interpretation of applicable labor agreements, resolutions,
and CalPERS letters at the time of the audit. The tier descriptions in this report are generalized and may
not represent specific, exact terms found in each labor agreement. Moreover, tier definition and benefit
terms are subject to change. See Exhibit 4 on page 8 for the City share of health premium for each tier
according to the HRD interpretation of the labor agreements in effect at the time of the audit.
Retroactive
Transaction
Occurs when the eligibility status for a member or dependent changes and the change is not reported in
a timely manner. Typical changes include death and changes in marital status or in employment. These
transactions often result in a difference between the premiums paid and the premiums that should have
been paid if the transaction had been properly reported.
SAP The City’s Enterprise Resource Planning system, which supports the City’s core business functions,
including human resources.
SEIU Local 521, Service Employees International Union.
Survivor* A dependent eligible to receive a benefit upon a member's death.
* As defined by CalPERS
Attachment A
December 2012
7 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Exhibit 1: PEMHCA Health Benefit Enrollment as of June 2012
Active
Employee Retiree
# of Member 855 871
# of Dependents 1,526 627
Spouse/Domestic Partner 540 431
Child 986 196
Source: CalPERS billing June 2012
INTRODUCTION
Audit Objective
The objective of this audit was to determine whether the Human Resources Department (HRD) has adequate
controls over health benefits to ensure that health premiums and administrative fees are calculated and paid
accurately for eligible active and retired employees in accordance with applicable labor agreements, laws, and
regulations. Additionally, the HRD requested our assistance to focus on a complex set of processes related to
reimbursement of health premiums to retirees. We amended our scope to accommodate this request.
Background
The City participates in the Health Program
administered by California Public Employees’
Retirement System (CalPERS) as directed by
the California Public Employees’ Medical and
Health Care Act (PEMHCA). The CalPERS
Board reviews health plan contracts annually
and determines health plans offered, covered
benefits, monthly rates, and co-payments.
According to the CalPERS Monthly Employer Billing Roster (CalPERS billing) for June 2012, the City had 855 active
members and 871 retired members enrolled in the health benefit plan under PEMHCA as shown in Exhibit 1 (see
Attachment 1 for additional information). The number of dependents enrolled was 1,526 and 627, respectively.
City Share of Healthcare Premium and CalPERS Billing – Active Employees
The entire premium cost for all active employees who are enrolled in the CalPERS Health Program is billed to the
City by CalPERS. Exhibit 2 illustrates the annual total health premiums paid by the City for active employees
since Fiscal Year (FY) 2005. For FY 2012,
the City paid a total of $13.2 million.
Over the last ten years, the City reached
agreements with employee groups to
reduce its maximum payment for health
premiums from the most expensive plan
(PERSCare Basic) to the second most
expensive plan (Blue Shield Bay Area
Basic) for all active employees. As
illustrated in Exhibit 3, the City
subsequently implemented employee
contributions beginning with Local 521,
Service Employees International Union (SEIU) and Management and Professional Personnel and Council
Appointees (Management) on April 1, 2011. The initial contribution by SEIU and Management employees was
limited to 50% of the first 10% of each premium increase that occurred for the health plan after January 31,
Source: City of Palo Alto financial records
Exhibit 2: Health Premiums Paid by the City for Active Employees
$9.1 $9.9 $10.5 $11.3 $11.6 $11.8 $12.5 $13.2
$0
$5
$10
$15
2005 2006 2007 2008 2009 2010 2011 2012
Millions
Fiscal Year
Attachment A
December 2012
8 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
2010 up to 10% of the total premium at the retiree’s level of enrollment (see Contribution A in Exhibit 3).
Subsequent labor negotiations resulted in a contribution of 10% of the premium cost up to the second most
expensive plan (see Contribution B in Exhibit 3) for all employee groups including the International Association
of Fire Fighters (IAFF), the Palo Alto Fire Chiefs' Association (FCA), and the Palo Alto Peace Officers' Association
(PAPOA). Employee contributions are collected through payroll deductions and transferred to California
Employers’ Retiree Benefit Trust (CERBT) (see page 11 for additional information on CERBT).
Exhibit 3: Health Premium Contribution by Active Employees
Source: HRD
City Share of Healthcare Premium and CalPERS Billing – Retirees
For retirees, the City share of the health premium cost varies depending on their “tier”. Each retiree falls under
one of the tiers described in Exhibit 4 depending on their hire date, retirement date, and employee group at the
time of retirement.
Exhibit 4: Retiree Health Tiers1
Tier City Share of Health Premium Cost for Retiree
City Share for Dependents2
(Calendar Year)
2011 2012 2013
1 100% 90% 95% 100%
2 100% up to the 2nd most expensive plan offered to active employees 90% 95% 100%
3 Follows CalPERS 20 Year Benefit Schedule (California Government Code Section 22893) 90%3
44 90% up to the 2nd most expensive plan5
4a4
100% up to the 2nd most expensive plan offered to active employees, except that
retirees pay 50% of the first 10% of each premium increase that occurred for the
health plan after 1/31/10 up to 10% of the total premium
90% 95% 100%
Source: HRD
1 Retiree health benefit levels negotiated in labor agreements. Currently, labor agreements provide for benefits according to the hire
date, retirement date, and employee group at the time of retirement. The use of the term "tier" is based on the HRD interpretation of
applicable labor agreements, resolutions, and CalPERS letters at the time of the audit. The tier descriptions in this exhibit are
generalized and may not represent specific, exact terms found in each labor agreement. Moreover, tier definition and benefit terms
are subject to change.
2 The percentage is applied to the dependent portion which is the difference between the maximum employer contribution for the
applicable “Employee and One Dependent” or “Family” plan and the employee only coverage of the same plan.
3 Maximum of 90% once employee completes 20 years of service.
4 The City contribution is “the same contribution amount it makes from time to time for active City employees.”
5 According to HRD, Tier 4 retirees pay 5% of the dependent portion for 2012 (10% for 2011) in addition to 10% of the total premium.
4/1/2011
SEIU & Mgmt
10/22/2011 5/19/2012
IAFF
FCA
PAPOA
3/10/2012 10/6/2012
Contribution B
Contribution B
Contribution BContribution A
Contribution B
Contribution A:
50% of the first 10% of each premium
increase that occurred for the health
plan after 1/31/10 up to 10% of the
total premium. If the premium
exceeds the 2nd Most Expensive Plan
(Blue Shield Bay Area Basic), the
employee also pays the difference.
Contribution B:
10% of the premium. If the premium
exceeds the 2nd Most Expensive Plan
(Blue Shield Bay Area Basic), the
employee also pays the difference.
Attachment A
December 2012
9 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Exhibit 5 illustrates when Tier 3 was implemented for each employee group for those employees who were
hired on or after the date indicated. Tier 3 retirees are tracked by CalPERS and the City share of the premium
cost is calculated and billed by CalPERS in accordance with the benefit schedule set forth by California
Government Code Section 22893. An employee subject to the benefit schedule is eligible for 50% of the
specified employer health premium contribution after 10 years of service credit, provided at least 5 of those
years were performed with the City of Palo Alto. After 10 years, each additional year of service credit will
increase the employer contribution percentage by 5% until, at 20 years of service credit, the employee will be
eligible upon retirement for 100% of the specified employer contribution.
Exhibit 5: Applicable Retiree Health Tiers Based on Hire Date
Source: HRD
Exhibit 6 illustrates how employees hired before the Tier 3 implementation date are categorized into Tier 1, 2, or
4 based on their retirement date and how implementation of Tier 2 and Tier 4 changed the way CalPERS billed
the City. On January 1, 2007, the City implemented Tier 2 for retiree health, capping the healthcare coverage at
the second most expensive plan for employees retiring on or after January 1, 2007 for all employee groups
except for PAPOA. Tier 2 for PAPOA was not implemented until March 1, 2009. Since CalPERS does not
distinguish Tier 1 retirees from Tier 2 retirees, Tier 2 implementation caused CalPERS to apply the cap on all
retirees within the affected employee group on their billing to the City (See Billing Plan 1 in Exhibit 6). As a
result, Tier 1 retirees who were enrolled in the most expensive health plan started seeing excess deductions
from their retirement check from CalPERS for the difference between their plan cost and the second most
expensive plan cost. To prevent those Tier 1 retirees from being impacted by the excess deductions, the City
started issuing reimbursement checks to cover the excess deductions made by CalPERS. According to the HRD
Reimbursement Report for June 2012, a total of $551,950 was reimbursed to 801 retirees for amounts ranging
from $5.60 to $2,496.46.
Effective May 1, 2011, the City implemented Tier 4a for SEIU and Management. The addition of another Tier,
which requires tracking of premium increases and complicated calculations, prompted CalPERS to limit their
billing for retirees to the minimum employer contribution as prescribed in Section 22892 (b)(1) of the
Government Code (See Billing Plan 2 in Exhibit 6). Upon Tier 4a/4 implementation, all retirees within the
applicable employee group except for Tier 3 retirees started seeing significantly larger excess deductions from
their retirement checks. This change required the City to reimburse more retirees for larger amounts. Tier 4
was implemented for IAFF on December 1, 2011.
1/1/2005
Mgmt, IAFF, FCA
1/1/20061/1/2004
Tier 1, 2, or 4 Tier 3
SEIU Tier 1, 2, or 4 Tier 3
Tier 1, 2, or 4PAPOA
Tier 3 Implementation
(Mgmt, IAFF, FCA)
Tier 3 Implementation
(SEIU)
Tier 3 Implementation
(PAPOA)
Tier 3
Attachment A
December 2012
10 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
The health premium reimbursements for May 2011 through August 2011 were processed directly by the City.
On August 1, 2011, the City entered into a contract with an outside vendor, Employee Benefit Specialists (EBS),
for overall administration of the retiree reimbursement program including reviewing, calculating, and processing
reimbursements.
Exhibit 6: Non-Tier 3 Retirees Based on Retirement Date and CalPERS Billing Plans
Source: HRD
* The dependent coverage is based on the requirement for CY 2012 (See Exhibit 4 on page 8)
California Employers’ Retiree Benefit Trust (CERBT)
The CERBT Fund is administered by CalPERS and managed by a separately appointed board for the purpose of
receiving employer contributions that will prefund health and other post-employment benefit costs for retirees
and their dependents. The City elected to participate in this irrevocable trust by prefunding $29 million of the
5/1/2011
SEIU & Mgmt
12/1/20113/1/20091/1/2007
Plan 1 Plan 2
IAFF Plan 1 Plan 2
Plan 1FCA
PAPOA Plan 1
Tier 2 Implementation
(Except for PAPOA)
Tier 2 Implementation
(PAPOA)
Tier 4a Implementation
(SEIU & Mgmt)
Tier 4 Implementation
(IAFF)
Plan 0
Plan 0
Plan 0
Plan 0
Tier 2
Retirees
Tier 1
Retirees
City Share –City share (per Exhibit 4 on
page 8) less Minimum Contribution
Retiree Share -Retiree share (per
Exhibit 4 on page 8)
Tier 4a/4
Retirees
City Share
Minimum
Contribution
City Share -100% plan cost for retiree &95%* of
dependent portion up to 2ndMost Expensive Plan
less Minimum Contribution
Retiree Share -Excess cost
for Most Expensive Plan,
5%* of dependent portion
City Share
Minimum
Contribution
City Share
100% plan cost for retiree &95%* of dependent portion less
Minimum Contribution
Retiree Share
5%* of dependent
portion
City Share
Minimum
Contribution
CalPERS Billing Plan 2 (Currently applicable to SEIU, Management, and IAFF retirees)
CalPERS Billing Plan 1 (Currently applicable to FCA and PAPOA retirees)
City Share
100% plan cost for retiree & 95%* of dependent portion
up to 2nd Most Expensive Plan
Retiree Share -Excess cost
for Most Expensive Plan,
5%* of dependent portion
City Share
100% plan cost for retiree & 95%* of dependent portion
up to 2nd Most Expensive Plan
Retiree Share
5%* of dependent
portion
City Share -Excess cost for
Most Expensive Plan
Tier 2
Retirees
Tier 1
Retirees
CalPERS Billing Plan 0
City Share
100% plan cost for retiree & 95%* of dependent portion
Retiree Share
5%* of dependent
portion
Tier 1
Retirees
City Share -Billed by and
paid to CalPERS
City Share -Excess CalPERS
deduction from retirement
check requiring
reimbursement to retiree
Retiree Share -Paid by
retiree as deduction from
retirement check
Attachment A
December 2012
11 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
City’s future retiree health costs during FY 2008. As a result of prefunding, higher investment return
assumptions, known as discount rate assumptions, have been used for actuarial valuations performed for the
City, making the annual required contribution (ARC) and unfunded liability lower. The ARC is determined by the
value of benefits allocated to the current fiscal year for service worked during that year, plus an amortization
payment toward the Unfunded Actuarial Accrued Liability. The City also receives interest earnings from its
investment in the CERBT fund.
Overview of Health Benefit Costs Paid by the City for Retirees
Exhibit 7 provides an overview of the retiree health benefit costs paid by the City since FY 2005. The City’s
participation in CERBT and prefunding of $29 million in FY 2008 resulted in a lower ARC in FY 2009; however, the
ARC again increased in FY 2011 due to different actuarial assumptions including more retirees and higher
healthcare costs, among others. A portion of the prefunded trust asset was used in FYs 2009 and 2010 to offset
the ARC. When Tier 2 and CalPERS Billing Plan 1 (see Exhibit 6 on page 10) were implemented in FY 2008, the
City began reimbursing retirees for the additional deductions CalPERS was taking from their retirement checks.
In FY 2011, Tier 4a and CalPERS Billing Plan 2 were introduced. This resulted in CalPERS taking larger deductions
from retirees’ checks which led to a significant increase in the amount of reimbursements the City was required
to make. By FY 2012, the amount being reimbursed by the City increased to $5.7 million. It should be noted
that the increase in reimbursements represents redirection of payments that otherwise would have been paid
to CalPERS, not additional costs to the City.
Exhibit 7: Health Benefit Costs Paid by the City for Retirees
$2.0
$5.7
$3.2 $3.6 $4.2 $4.6 $5.2 $5.5
$6.2
$2.5$4.7 $1.7
$1.8 $2.4
$0.7
$29.2
-$1.8 -$0.7
$0.9
-$5
$0
$5
$10
$15
$20
$25
$30
$35
$40
2005 2006 2007 2008 2009 2010 2011 2012
Millions
Fiscal Year
Source: City of Palo Alto financial records
Contribution to CERBT in excess of ARC
or Use of CERBT asset to cover ARC
The following items constitute ARC:
Contribution to CERBT from employee
contribution
Contribution to CERBT from other
sources
Current year premiums paid to CalPERS
Reimbursement made to Retirees
Attachment A
December 2012
12 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Audit Scope and Limitations
Our review covered the City’s health benefits costs for active and retired employees from September 2011
through October 2012, which included retiree imbursements processed by EBS since the beginning of the
contract. The health premium reimbursements processed directly by the City from May 2011 through August
2011 were not reviewed as part of this audit. We also reviewed additional data and documents dating back to
FY 2004 as necessary to understand and evaluate HRD internal controls over health benefits. However, the
scope was limited due to difficulties in obtaining the required data as described below:
Scope Limitation 1 — Incomplete Retiree Records in SAP
According to HRD, when the City implemented SAP in June 2003, management decided not to migrate all of the
retiree data from the Lawson HR/Payroll system. We used the SAP Termination Report to obtain retiree data
from SAP. As of October 2012, the Termination Report included 437 retirees of which we were able to match
only 387 retirees to the October 2012 CalPERS billing. We assumed that the 50 retirees representing the
difference were not receiving health benefits under CalPERS Health Program. There were 874 retirees in the
CalPERS billing, leaving 487 retirees not recorded in SAP. Therefore, the comparison of the retiree data in SAP to
the CalPERS billing was limited to the 387 retirees we were able to match.
Scope Limitation 2 — Lack of Reliable HRD Records of Payment Instructions to EBS
HRD could not provide a complete set of monthly Reimbursement Reports and other payment instructions
provided to EBS due to inadequate record maintenance. We initially requested payment and other service
instruction records from both HRD and EBS and, where feasible, compared them to determine their reliability.
There were instances where a file provided by HRD was not the actual file provided to EBS (the file provided by
EBS was deemed more reliable as it was a copy of the original email within which the file was embedded).
Based on a review of the HRD records related to EBS saved under their shared drive and inquiry with HRD staff,
we determined that we would not be able to obtain reliable records from HRD. Therefore, we relied on the
Reimbursement Reports obtained from EBS for the months of September 2011 through August 2012 and used
them as the original files provided to EBS by HRD for our analysis. For September 2012 and October 2012, we
used the Reimbursement Reports provided directly by HRD. There were other ad-hoc payment instructions
made throughout the year, but they were not documented and/or maintained completely or in an organized
manner. We obtained evidence of such ad-hoc instructions directly from EBS on an as needed basis and
followed up with an interview of HRD staff to determine the reliability of the EBS records or statements.
Scope Limitation 3 — Limited CalPERS Billing Data
According to HRD and Administrative Services Department (ASD) staff, CalPERS billing becomes unavailable for
review in the CalPERS system once the City pays the bill for the month. CalPERS billing contains information for
each active employee and retiree including the health plan, premium amount, employer share, and
employee/retiree share. While HRD downloads the billing every month and saves a copy of the retiree portion,
neither department maintains a copy of the complete billing including active employees. ASD maintains a copy
of the premium statement which shows the total amount billed but none of the details contained in the billing.
Our request for a complete set of billing data was rejected by CalPERS. As such, the billing data for active
Attachment A
December 2012
13 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
employees was limited to the June 2012 billing obtained during our preliminary survey and the October 2012
billing obtained during our fieldwork.
Scope Limitation 4 — CalPERS System Upgrade and Billing Corrections (Retroactive Transactions)
CalPERS billing includes retroactive transactions that occur when the eligibility status for a member or
dependent changes and the change is not reported in a timely manner. Typical changes include death and
changes in marital status or in employment. These transactions often result in a difference between the
premiums paid and the premiums that should have been paid if the transaction had been properly reported.
We found that there have been many retroactive transactions resulting from CalPERS billing errors that are likely
to have been caused by their system conversion. In September 2011, CalPERS implemented a new Web-based
computer system “my|CalPERS”, converting 49 stand-alone systems that previously existed. According to HRD,
there are no explanations provided by CalPERS for these errors, and HRD staff is required to research each
transaction in the CalPERS system to identify the cause. Affected retirees receive a letter from CalPERS notifying
them of any changes in individual billing, but the City does not receive any communication from CalPERS.
We requested the retroactive transactions data dating back to the system conversion, but CalPERS stated that
they would not be able to provide any data other than what is currently made available to the contracting
agencies. They stated that they cannot provide the City with a copy of the letter sent to retirees and that each
contracting agency needs to manually review retiree accounts in the CalPERS system to obtain additional
information. These retroactive transactions were removed from our analysis.
Scope Limitation 5 — Lack of Common Data Fields between CalPERS Billing, SAP, and EBS Reimbursement
Report
Our analysis required a comparison of data recorded in the CalPERS billing, SAP, and the EBS Reimbursement
Report. As illustrated in Exhibit 8, these data sources do not have a common unique data field that would allow
us to perform the comparison accurately, completely, and efficiently. As a workaround, we performed
additional steps to create a common field using the employee name. Although each of these data sources
contained data field(s) for employee name, there were employees with the same or similar names, as well as
differences in formatting (e.g., one field for full name vs. separate fields for last, first, and middle name), spelling
(e.g., Tim vs. Timothy), spacing (Dela Cruz vs. DelaCruz), etc. This resulted in a number of false positive and/or
false negative matches. Although we manually compared the questionable matches to improve the accuracy of
our analysis, we could not completely eliminate errors due to this limitation.
Exhibit 8: Available Data Field as of October 2012
Source: OCA analysis of the data sources
Data Source Employee ID CalPERS ID
CalPERS Billing N/A Available for all
SAP Available for all active employees
but only for 437 retirees
Available for all active employees
but only for 74 retirees
EBS Report N/A N/A
Attachment A
December 2012
14 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Audit Methodology
We used the following methodology:
Interviewed selected HRD and ASD staff to obtain an understanding of the employee health benefit
administration processes.
Reviewed applicable City Council resolutions, labor agreements and compensation plans, City Manager
Reports, and City policies and procedures.
Reviewed relevant Government Code sections and interviewed a Senior Deputy City Attorney to identify
criteria for compliance.
Obtained and reviewed the CalPERS Health Benefits Procedures Manual, applicable Circular Letters, and
CalPERS billing records, and held conference calls with CalPERS staff.
Obtained and analyzed employee benefits data recorded in SAP and compared to the City’s
Comprehensive Annual Financial Reports (CAFR) and the Operating Budgets.
Performed risk assessment independently and in coordination with HRD staff to identify key risks to the
effective administration of health benefits.
Identified and mapped key processes and reviewed the process maps with HRD staff to identify existing
and expected key controls to mitigate the key risks.
Tested controls and performed detailed testing by using data analysis software (ACL) as needed and
maintained frequent communication with EBS to obtain additional information.
City Auditor’s Conclusion
Government auditing standards require us to report our conclusion based on the sufficiency and
appropriateness of the evidence supporting the findings in this report. These findings indicate that internal
controls over health benefits administration within HRD require improvement to ensure that health premiums,
administrative fees, and retiree reimbursements are calculated and paid accurately for eligible active and retired
employees in accordance with applicable labor agreements, laws, and regulations.
In this report, the Office of the City Auditor provides 12 recommendations to improve health benefits
administration processes within the City.
Finding 1: Retiree reimbursements were not accurately calculated
We compared the excess deduction made by CalPERS for the month of October 2012 to the actual amount
reimbursed by the City for each retiree and found that the City made overpayments totaling $12,584.87 and
underpayments totaling $4,433.65, resulting in a net overpayment to retirees of $8,151.22. There were 64
retirees who were either overpaid or underpaid by $10 or more. Our analysis was based on a review of 818 out
of 874 retirees on the October 2012 CalPERS billing. Tier 3 retirees, Tier 4a/4 retirees, retirees with the same
names, and retirees with employee group discrepancy (see page 20 for more information) were excluded from
our analysis.
According to HRD, the CalPERS bill is reviewed only for the retroactive transactions involving retirees. The rest
of the billing is neither reviewed nor reconciled to the Reimbursement Report to ensure that the retiree is
Attachment A
December 2012
15 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
reimbursed for the actual excess deduction made. We also found that HRD did not have a clear, documented
methodology to determine the reimbursement amount.
HRD stated that there are so many billing errors and subsequent corrections made by CalPERS that they would
not be able to review the entire billing
and keep track of all deductions made
from each retiree. For this reason, there
were cases where HRD was aware that
the retiree was receiving overpayment
but no actions were taken because they
assumed the overpayment was due to a
CalPERS error and the error would be
corrected by CalPERS in the future.
These discrepancies were neither
documented nor tracked.
Our analysis demonstrated that a clear
methodology can be established to
perform a review of the billing and its
reconciliation to the Reimbursement
Report in a systematic manner. As
described under Scope Limitation 5, our
analysis was significantly limited by the lack of common data fields between CalPERS billing, SAP, and the EBS
Reimbursement Report. Had a common field existed, we could have performed our analysis more accurately,
completely, and efficiently.
Retroactive transactions are not consistently documented and processed to ensure the accuracy and
completeness of the adjustments to the reimbursements. We found that not all retroactive transactions
impacting retiree reimbursements are recorded in the Reimbursement Report as adjustments in a consistent
manner. HRD does not have a standardized methodology for determining which retroactive transactions are
recorded in the Reimbursement Report or for ensuring consistent treatment of each transaction. There is no
supervisory review performed to ensure the
accuracy or appropriateness of the adjustments
recorded.
According to HRD, the nature of each retroactive
transaction significantly varies and CalPERS does
not provide adequate explanation. Each month,
HRD staff researches each retroactive
transaction by reviewing the affected retiree’s
account in the CalPERS system and records
necessary adjustments under the Adjustment
column in the Reimbursement Report. Exhibit 9
shows the number of retroactive transactions
Finding 1/Recommendation A to City Management (1-A):
Establish clear, documented procedures to ensure the accuracy
of the Reimbursement Report. This should include:
Establishing a methodology for reconciling the CalPERS
billing to the Reimbursement Report and performing a
monthly reconciliation to identify, track, and follow up on
any discrepancies. Create and maintain common data fields
among key data sources to facilitate such reconciliation in
an accurate, complete, and efficient manner.
Establish criteria and a methodology for addressing,
recording, and reviewing retroactive transactions in the
Reimbursement Report.
Exhibit 9: Number of Retroactive Transactions for Retirees
FY 2012 CalPERS Billing
Coverage Month
# Retroactive
Transaction
January 23
February 146
March 665
April 131
May 10
June 36
July 24
August 25
Total 1,060
Source: CalPERS billing
Attachment A
December 2012
16 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
entered by CalPERS for the coverage months from January 2012 through August 2012. Not all retroactive
transactions result in an adjustment to the reimbursements. Currently, the treatment of each retroactive
transaction is left up to the judgment of one HRD staff member. The adjustments recorded in the
Reimbursement Reports do not have any explanation for the origin or reason for the adjustment. There is no
tracking mechanism established for these adjustments and therefore, it is difficult for HRD staff to go back and
determine which retroactive transactions have already been accounted for and recorded in Reimbursement
Reports.
Without adequate procedures for recording and reviewing the adjustments to the reimbursements, inaccurate
or inappropriate payments could go undetected. We did not perform further testing to determine whether all
retroactive transactions are treated and recorded consistently in the Reimbursement Report.
Eligibility criteria for retiree health benefits were not clearly defined and documented. HRD maintains a
document defining retiree health tiers for each employee group (Tier Matrix). We reviewed the Tier Matrix and
found that it was inaccurate and incomplete. As described under the background section of this report, retiree
eligibility for health benefits depends on their tier, which is determined by their hire date, retirement date, and
their employee group at the time of retirement. Tier implementation for each employee group must be
included in the respective labor agreement, passed by a City Council resolution, and filed with the CalPERS board
before it becomes effective in accordance with Government Code 22892(a). The effective date is confirmed by
CalPERS in a letter provided to the City acknowledging receipt of the resolution.
We compared the Tier Matrix to applicable labor agreements, City Council resolutions, and CalPERS letters, and
found that some of the tier implementation dates were incorrect, the definition of Tier 4 was inaccurate, and
the hire date was not always specified for each tier. HRD did not maintain complete, organized records of key
supporting documents. Out of eight CalPERS letters issued covering eleven resolutions passed since FY 2007,
HRD did not have a copy of two letters, one for Resolution No. 8896 for PAPOA and the other for Resolution No.
9146 for SEIU and Management. HRD subsequently obtained a copy of the letters from CalPERS and provided
them for our review.
Eligibility criteria for retiree health tiers was not clearly defined and documented, and HRD staff was not able to
provide an accurate and complete explanation. Significant additional research was required in order to establish
a clear picture of the actual eligibility criteria. The results of this research are summarized in Exhibit 10 which
includes the actual eligibility criteria for each of the retiree health tiers depending upon the employee group.
Attachment A
December 2012
17 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Exhibit 10: Eligibility Criteria for Retiree Health Tiers
Tier
SEIU Management Fire (IAFF) Fire Chiefs (FCA) Police (PAPOA)
Hired Retired Hired Retired Hired Retired Hired Retired Hired Retired
1 < 1/1/05 < 1/1/07 < 1/1/04 < 1/1/07 < 1/1/04 < 1/1/07 < 1/1/04 < 1/1/07 < 1/1/06 < 3/1/09
2 < 1/1/05 < 5/1/11 < 1/1/04 < 5/1/11 < 1/1/04 < 12/1/11 < 1/1/04 < 1/1/13 < 1/1/06 ≥ 3/1/09
3 ≥ 1/1/05 ≥ 1/1/04 ≥ 1/1/04 ≥ 1/1/04 ≥ 1/1/06
4 < 1/1/05 ≥ 5/1/11 < 1/1/04 ≥ 5/1/11 < 1/1/04 ≥ 12/1/11 < 1/1/04 ≥ 1/1/13
4a* < 1/1/05 ≥ 5/1/11 < 1/1/04 ≥ 5/1/11
Source: HRD
* Effective October 6, 2012, Employee Contribution B (see Exhibit 3 on page 8) was implemented for active employees in SEIU and
Management. The retirees in Tier 4a were subsequently transitioned into Tier 4 as the labor agreements required the City contribution
for these retirees to be “the same contribution amount it makes from time to time for active City employees.”
FY 2011 CAFR note disclosure was inaccurate and incomplete. A review of the FY 2011 CAFR found that the
note disclosure regarding the retiree eligibility for health benefits (Note 12 to the Basic Financial Statements)
contained inaccurate information and was incomplete. Some of the tier implementation dates were incorrect
and the note did not include the eligibility information for PAPOA retirees. Upon our notification of the issue,
HRD worked with ASD to revise the notes in FY 2012 CAFR; however, the revised notes still contained inaccurate
information and were published before we were able to review the revision and provide feedback.
The retiree health eligibility information provided to the City’s actuarial firm was inaccurate. Based on a
comparison of the actual retiree health eligibility to the City's Actuarial Valuations issued in May 2012, certain
dates included in the actuarial report were inaccurate (See Exhibit 11). According to Government Code 22892
(a), the effective date of retiree health eligibility is set by the acknowledgment letter sent by CalPERS. In this
case, the dates used by the actuarial firm reflected the dates in the labor agreements instead of the CalPERS
letters.
Exhibit 11: Discrepancies in Effective Date of Retiree Health Tier Implementation
Retiree Health Tier Implementation
Effective Date
CalPERS Letter
(Actual Effective Date) Resolution Actuarial Valuation
(Agrees to Labor Agreement)
Tier 4a SEIU 5/1/11 4/1/11 2/1/10*
Tier 4a for Management 5/1/11 4/1/11 4/1/11
Tier 2 for PAPOA 3/1/09 3/1/09 1/1/08
* It was stated in the labor agreement that “employees retiring after January 31, 2010 but on or before December 31, 2010 shall not be
required to pay any premium increase that first takes effect after January 31, 2010.”
HRD stated that applicable City Council resolutions were provided to the actuarial firm and that it was the firm’s
oversight that the effective dates documented in the labor agreements were included in their final actuarial
report. Since any changes in the labor agreement for the employer contribution will not become effective until
the corresponding resolution is accepted by CalPERS, a complete set of the CalPERS letters should have been
provided to the actuarial firm. We reviewed the communication between ASD and HRD staff and the actuarial
firm and concluded that the retiree health eligibility information was not clearly communicated to the firm.
Attachment A
December 2012
18 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
We found no evidence to conclude that the
inaccuracy resulted in a material difference in
the actuarial valuations performed; however,
adequate documentation and clear
communication of eligibility criteria would help
to prevent any inaccuracies in future actuarial
valuations that could cause more significant
differences in the calculation of ARC.
The effective implementation date of retiree
health tiers is not clearly communicated to
stakeholders. While all labor agreements are
posted on the HRD website, the effective date
included in the labor agreement is not always the
same as the actual effective date specified in the
CalPERS letter. Currently, no clear communication is provided to inform the retirees or other stakeholders that
the effective date in the labor agreement may not be the actual implementation date.
Eligibility criteria for retiree health benefits have not always been accurately applied in the calculation of
retiree reimbursements. We found that the health tier for each retiree was not accurately and completely
maintained by HRD. The tier and employee group at the time of retirement determine how each retiree’s health
premium is billed by CalPERS which impacts the calculation of the reimbursement paid by the City. In our review
of the methodology used by HRD to calculate the reimbursement amount, we found that the tier for each
retiree was not documented and it was not clear how the tier information was factored in the calculation.
The only place where retiree tier was documented was in the monthly Reimbursement Reports provided to EBS.
HRD staff explained that this tier information was developed and documented during the initial setup of the
contract so that EBS could use this information in calculating the reimbursement amount. The calculation is
currently performed by HRD. HRD staff
confirmed that neither HRD nor EBS currently
uses the tier information included in the
Reimbursement Report.
We determined the tier for each retiree by
obtaining a copy of the SAP Termination
Report with the hire date and retirement
date and comparing the dates to the actual
eligibility criteria for each retiree tier (Exhibit
10 above). We then compared the retiree
tier we determined to the tier recorded in the monthly Reimbursement Report. Based on the comparison, 151
of 822 (18%) retirees included in the Reimbursement Report were coded in the incorrect tier as shown in Exhibit
12. As explained under Scope Limitation 5, there were only 437 retiree records available in SAP. Since the
retirees whose records were not in SAP retired prior to any tier implementation, we assumed that these 455
retirees were in Tier 1.
Finding 1/Recommendation B to City Management (1-B):
Enhance current procedures to ensure that the Retiree
Medical Tier Matrix is maintained accurately,
completely, and in an organized manner along with a
complete set of the labor agreements, resolutions, and
CalPERS letters.
Consider making the Tier Matrix available to all
business partners and stakeholders to ensure that the
eligibility criteria are clearly communicated to all
parties.
Finding 1/Recommendation C to City Management (1-C):
Establish procedures for determining the health tier for
each retiree and maintaining a complete and accurate
record of retiree health tiers. Ensure that the tier
determination is based on the hire date, retirement date,
and employee group at the time of retirement as recorded
in SAP and based on the Retiree Medical Tier Matrix.
Attachment A
December 2012
19 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Exhibit 12: Inaccurate tier information recorded in Reimbursement Report
Tier Determined Based on
SAP Termination Report # Retiree
Reimbursement
Report # Retiree
#
Incorrect
%
Incorrect
No Retiree Records
(Assumed to be Tier 1)
455 Tier 1 422 33 7%
Tier 2 33
Tier 1 92 Tier 1 48 44 48%
Tier 2 44
Tier 2 267 Tier 1 71 71 27%
Tier 2 196
Tier 4a/4 8 Tier 1 2 3 38%
Tier 2 1
Tier 4a/4 5
Grand Total 822 822 151 18%
Source: OCA analysis of City of Palo Alto records
Additionally, we found that the retiree tier definition included in the EBS contract was inaccurate. Had EBS
performed the calculation of reimbursement amount as originally required in the contract, they would have
used inaccurate tier information which would have resulted in significant errors.
Finding 2: CalPERS billing was not adequately monitored by the City
We found that neither HRD nor ASD currently reviews the CalPERS billing to verify its accuracy. The only review
conducted by HRD is for retroactive transactions associated with retirees to identify the reason and to make
corresponding changes in the monthly Reimbursement Report. According to HRD, a review of the active
employee portion used to be conducted by ASD staff; however, no review has been performed since the original
staff assigned for this task left the City.
CalPERS strongly encourages contracting agencies to reconcile their invoices monthly to ensure only eligible
members are covered. The CalPERS billing should be reviewed and reconciled to City records monthly to ensure
it is accurate. As described under Scope Limitation 1, however, retiree records are not completely maintained in
SAP, and the Reimbursement Report contains only the retirees requiring reimbursement. Without accurate and
complete City records for both active employees and retirees, it is not feasible to efficiently monitor the
accuracy of the CalPERS billing. Additionally, as described under Scope Limitation 5, CalPERS billing, SAP, and
the Reimbursement Report do not have a common unique data field to facilitate an accurate, complete, and
efficient comparison.
Billing inaccuracies are often not discovered unless the affected retiree contacts HRD for an explanation and
manual research is conducted only for those specific cases. This requires a significant investment of staff time to
investigate these inquiries. We described these inaccuracies in the following three subsections. Each could
have been detected sooner had the HRD performed a periodic review of the CalPERS billing.
Duplicate active employee records in the CalPERS system went undetected resulting in the City making
overpayments to CalPERS. Based on limited billing information we were able to obtain from CalPERS during the
audit, it appears the City overpaid approximately $36,811 for duplicate employees. We identified records with
duplicate names and duplicate CalPERS IDs in the CalPERS billing and reviewed their employee files and
corresponding records in SAP and the CalPERS system for verification. While some of the records with duplicate
names were found to be separate records (e.g., a parent and a child sharing the same name), we confirmed that
Attachment A
December 2012
20 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
there were two duplicate active employees with three duplicate dependents each. The monthly premium was
$1,849 for one employee and $1,832 for the other. The City was billed twice for each of these employees
resulting in a total overbilling of approximately $36,811 assuming duplicate billing started in January 2012.
There were three additional duplicate dependents recorded in the CalPERS system. These duplicate records did
not affect the premium cost and therefore did not result in billing errors.
According to HRD, duplicate health enrollment is normally prevented because the CalPERS system requires a
social security number (SSN) for enrollment. Prior to health enrollment, HR staff must first process retirement
enrollment for the eligible employee and obtain a CalPERS ID. Retirement enrollment requires a SSN and an
enrollment attempt without a SSN or with a duplicate SSN will be rejected by the system. HRD explained that
the CalPERS ID was created for the first time when the CalPERS system went through an upgrade and applied to
all existing CalPERS members. Upon our notification of the duplicate records, HRD staff contacted CalPERS to
consolidate the two records but could not obtain a clear explanation of why and how the duplicate records were
created. HRD requested a formal explanation from CalPERS, but their response had not been obtained at the
time of our reporting. We subsequently reviewed the CalPERS billing for December 2012, and confirmed that
the City received a credit of $18,489 for one employee representing the premium cost for 10 months. For the
other employee, the City received no credit and continued to be billed in duplicate.
HRD did not always update the CalPERS system when a change in employee group was recorded in SAP.
Based on a comparison of the October 2012 CalPERS billing and the City's active employee and retiree records in
SAP, there were 85 active employee records and 36 retiree records in the CalPERS system that did not have the
same employee group recorded in SAP (See
details in Exhibits 13 and 14). According to
HRD, in most cases, employees were promoted
into a different employee group during
employment but the corresponding field in the
CalPERS system was not updated by HRD staff.
Employee group at the time of retirement
affects the tier determination and how the
premium is billed by CalPERS. Since we could
not obtain verification of the correct employee
group for each of these discrepancies, we
excluded the 36 retiree records from our
analysis of the reimbursement processed.
Finding 2/Recommendation A to City Management (2-A):
Enhance the current procedures to ensure that any
changes in employment affecting the employee’s
health eligibility status are accurately and consistently
recorded in both SAP and CalPERS system in a timely
manner.
Verify the accuracy of the CalPERS system record by
comparing to the SAP record for each employee at the
time of retirement to ensure accurate billing by
CalPERS.
Attachment A
December 2012
21 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Exhibit 13: Employee Group Discrepancies for Active Employees
Employee
Group per
SAP
# Employees in
SAP and
CalPERS Billing
Total #
Coded to
Same
Group
# Coded to Different Group in CalPERS Billing As: Total #
Coded to
Different
Group Variance SEIU Management IAFF FCA PAPOA
SEIU 470 446 - 19 - 3 2 24 5%
Management 179 125 53 - - 1 - 54 30%
IAFF 89 88 1 - - - 1 1%
FCA 3 1 - - 2 - - 2 67%
PAPOA 71 67 1 2 1 - - 4 6%
Total 812 727 54 22 3 4 2 85 10%
Source: OCA analysis of CalPERS billing and City of Palo Alto records
Exhibit 14: Employee Group Discrepancies for Retirees
Employee
Group per
SAP
# Retirees in
SAP and
CalPERS Billing
Total #
Coded to
Same
Group
# Coded to Different Group in CalPERS Billing As: Total #
Coded to
Different
Group Variance SEIU Management IAFF FCA PAPOA
SEIU 177 174 - 3 - - - 3 2%
Management 145 116 26 - 1 2 - 29 20%
IAFF 36 35 1 - - - - 1 3%
FCA 2 2 - - - - - - -
PAPOA 25 22 1 2 - - - 3 12%
Total 385 349 28 5 1 2 - 36 9%
Source: OCA analysis of CalPERS billing and City of Palo Alto records
CalPERS did not have the correct formula to calculate the employer share. We reviewed the October 2012
CalPERS billing to determine the methodology used by CalPERS to calculate the employer share billed to the City.
Based on the review, we found that the CalPERS methodology used was inconsistent and inaccurate as
illustrated in Exhibit 15. We recalculated the employer share for 832 out of 874 retirees on the billing (36
records with employee group discrepancy and 6 Tier 3 retirees records were excluded from this analysis), and
determined the following billing errors made by CalPERS:
Exhibit 15: Expected vs. Actual CalPERS Billing
Source: OCA analysis of CalPERS billing and City of Palo Alto records
* For explanation of the CalPERS Billing Plans, please refer to the “City Share of Healthcare Premium and CalPERS Billing – Retirees”
section of the Background from page 8 through page 10. At the time of our reporting, CalPERS billing for SEIU, Management, and IAFF
was limited to the minimum contribution ($106.40 for 2012) and to the second most expensive plan less the retiree share for the
dependent portion (5% for 2012) for PAPOA and FCA.
Employer
Group
Expected Employer Share
Billed
Actual Employer Share Billed CalPERS Overbilling/Underbilling
Gross Net
SEIU,
Management,
IAFF
Billing Plan 2* - Minimum
contribution of $106.40
The employer share for 4 of 743
records was not $106.40 (1 record with
$766.88 and 3 with $888.25 each)
$3,006.03 $3,006.03
PAPOA, FCA Billing Plan 1* - 2nd most
expensive plan (Blue Shield
Bay Area Basic) less 5% of
the dependent portion
51 of 89 records had a total of
$2,506.51 in error ranging from
($337.56) to $32.46.
$2,506.51 ($1,897.82)
Total The employer share for 55 of 832 records reviewed was different from
the expected amount
$5,512.54 $1,108.21
Attachment A
December 2012
22 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
We followed up with CalPERS and HRD to identify the cause for billing errors for PAPOA and FCA retirees, but
received conflicting information in some areas. We subsequently facilitated a conference call between CalPERS
and HRD to clarify the cause and determine how the billing errors can be corrected. Based on the conference
call, the following causes were identified:
CalPERS did not have their calculation formulas set up correctly due to errors. CalPERS confirmed that
most of their formulas set up to calculate the employer share were incorrect. They stated that their
system conversion caused various issues, and they will correct these errors as soon as clear written
instruction is provided by HRD. The errors included the City share for the dependent portion of the
premium not being calculated consistently using the 2012 coverage of 95%, and the cap not being
applied consistently as explained below. CalPERS stated that although their new system went live in
September 2011, the billing was conducted based on the old system throughout 2011; therefore, the
formulas for 2011 were not affected by the conversion. Subsequent to the conference call, HRD
provided CalPERS with written instruction. We reviewed the CalPERS billing for December 2012 and
found that the billing still contained numerous errors. Of 91 PAPOA and FCA retirees included in the
billing, 42 (46%) were still being billed incorrectly. For 16 retirees, the City share was calculated using
the dependent coverage of 100%. The calculation for 26 additional retirees contained errors, and we
could not determine the formula used by CalPERS.
“The second most expensive plan” was not clearly defined in the resolution or understood by CalPERS.
CalPERS stated that their interpretation of the second highest plan has been the Blue Shield Bay Area
Basic rate for retirees in Basic and the Blue Shield Bay Area Supplement/Managed Medicare (SM) rate
for retirees in SM. HRD stated that the City’s intention is to apply Blue Shield Bay Area Basic to all rates.
See Exhibit 16 for an explanation of these differences between the City’s intention and CalPERS
understanding of the second most expensive plan. According to CalPERS, Blue Shield Bay Area had
always been the second highest plan within Basic and within SM until 2012 when Peace Officers
Research Association of California (PORAC) became the second highest plan within SM. CalPERS further
stated that this resulted in PORAC to be used as a cap for some of the rates. The City Council resolutions
for PAPOA and FCA state that the
City share should pay “100% of the
single party premium up to a
maximum of the monthly medical
premium for the second most
expensive medical plan among the
existing array of PEMHCA plans
available within the Bay
Area/Sacramento region.” HRD
provided us with documentation
notifying CalPERS in 2008 that the
City’s intention was to use the Blue
Shield Bay Area Basic, which was the
second most expensive plan at the time, as the cap for all rates. CalPERS stated that they were not
aware of the communication due to staff turnover and suggested that HRD staff draft a new resolution
Finding 2/Recommendation B to City Management (2-B):
Establish procedures for providing CalPERS with clear,
written instructions for the employer share calculation
on a regular basis.
Establish monitoring procedures to ensure that the City
instructions are followed by systematically reviewing
the methodology applied to calculate the employer
share.
Attachment A
December 2012
23 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
which clearly states that Blue Shield Bay Area Basic be used as a cap for all rates. Until such resolution is
received, CalPERS stated that they would be unable to apply the Blue Shield Bay Area Basic as a cap for
employees in SM.
Exhibit 16: Determination of the Second Most Expensive Plan
Source: CalPERS Circular Letter
Finding 3: HRD has not effectively administered its contract with EBS
The City contracts with an outside vendor, Employee Benefit Specialists (EBS), for overall administration of the
retiree reimbursement program including reviewing, calculating, and processing reimbursements. We found
that:
EBS was not providing all services required in the contract;
Payment instructions are provided without adequate supporting documentation; and
The contract was not adequately monitored by HRD.
Because the contract was not amended to reflect the actual services being provided, the City may have overpaid
for the limited services it was receiving. Also, without a clearly defined scope of services that accurately reflects
the actual services to be provided under the contract, the City cannot effectively monitor the performance of
the vendor.
HRD is paying for services it is not receiving. We found that EBS was not providing the following services
required in the contract:
City’s intention was to apply
Bay Area Blue Shield Basic
as a cap to all rates
CalPERSunderstanding was
to apply the second most
expensive plan within each
category (Basic or SM) to
which the employee belongs.
Blue Shield has always been
the second most expensive
plan until PORAC became the
second most expensive plan
in FY 2012.
Retirees in Tier 1, 2, 4, and 4a have to pay 5%
of the dependent portion in FY 2012
=(Premium–Employee Only Premium)x5%
Example
For PERSCareplan with 2+ dependents:
The City share for Tier 1 retiree is $2,593.66
= $1,029.23+(($2,676.00-$1,029.23)x95%)
The City share for Tier 2 retiree is $1,791.97
=$711.10+(($1,848.86-$711.10)x95%)
Attachment A
December 2012
24 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Calculation of reimbursements using formulas provided by the City based on retirement tier and
monthly CalPERS billing; and
Reconciliation of monthly disbursements.
According to EBS, it is unable to calculate reimbursements as required in the contract as CalPERS would not
provide them with the necessary billing data to perform these services. Despite this limitation, the City did not
take steps to amend the contract with EBS.
We found that HRD staff is one of the CalPERS system access administrators. According to the CalPERS manual
for system access administration, each business partner has the ability to submit, correct and/or view
information based on appropriate access privileges and the system relies on each business partner to manage
the assignment and maintenance of these privileges for their staff. Based on a review of the user access list
provided by HRD, one of the EBS staff
currently has access to the CalPERS system.
As a system administrator, HRD staff has the
ability to assign additional system access roles
to this EBS staff. HRD stated that the current
read-only access granted to EBS should be
sufficient for them to perform all of the
services required in the contract.
Additionally, at the City’s request, EBS agreed
to provide additional services related to Form
1099 issuance for 2012; however, this
agreement was also not documented or included in the contract.
Payment instructions to EBS are provided without adequate supporting documentation resulting in an
overpayment of at least $2,148. We identified an overpayment of $2,148 to one retiree resulting from an
inaccurate payment instruction. Currently, the HR staff responsible for calculating and preparing the monthly
retiree Reimbursement Report is also responsible for sending the Report to EBS. There is no other backup staff
who can perform these functions and EBS pays the retirees as instructed by the City without additional review.
Ad-hoc payment instructions are provided without adequate supporting documentation and there are no review
procedures in place to prevent erroneous or inappropriate payment instructions from being provided to EBS.
Such payment instructions are usually provided to EBS via email but HRD does not maintain copies of these
emails in an organized manner. This prevented us from obtaining and reviewing the instructions in an efficient
manner. We reviewed a few selected instructions and did not find any evidence of inappropriate payments;
however, due to lack of adequate support and review, opportunities for inappropriate payments still exist.
To ensure the accuracy and completeness of the retiree reimbursements, adequate supporting documentation
should be maintained and reviewed prior to payment instructions being provided to EBS. Payment instructions
should be reconciled monthly to the EBS check register and any discrepancies including returned, voided, and
reissued checks should be identified and tracked until they are resolved. We found that HRD did not have a
complete set of Reimbursement Reports and ad-hoc payment instructions sent to EBS. This meant that they did
Finding 3/Recommendation A to City Management (3-A):
Review the EBS contract to ensure the adequacy of the
contract terms and accuracy and clarity of the scope of
services including the retiree tier definition. Establish
monitoring procedures to ensure the contract terms
remain adequate and any changes in the scope of services
are documented and properly authorized in accordance
with the terms and conditions under the contract.
Attachment A
December 2012
25 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
not know exactly how much EBS was instructed to pay and how much was actually paid by EBS for each retiree
without inquiring with EBS. HRD was not aware which checks were returned, voided, or reissued.
We also identified a few instances where EBS collected or attempted to collect the overpayments that had been
made directly by the City before the contract was entered into. According to EBS, during the conference calls
held in August and September 2011, the City
requested EBS to collect the overpayments
made to two retirees. No written instructions
were provide by the City. EBS subsequently
collected $287 from one retiree, but was not
able to collect $279 from another retiree as
this retiree had passed away in July 2011. HRD
did not follow up on the collection activities
performed by EBS; therefore, the recovered
amount was never reflected in SAP. EBS stated
that there were a few more overpayments
collected by them throughout the year.
We obtained a complete check register from
EBS and compared it to the HRD
Reimbursement Report for June 2012 (this
report was obtained from EBS as explained
under Scope Limitation 2). We initially
identified significant discrepancies and
requested an explanation from EBS. EBS
discovered recording errors in their system
involving voided/reissued checks, which
resulted in duplicate disbursement records in
some cases. EBS subsequently fixed the system errors and provided us with the corrected check register. EBS
confirmed that these were recording errors and that the actual payments to retirees were not duplicated. We
also requested EBS to prepare and provide us with monthly reconciliations of the check register to the HRD
Reimbursement Report from the beginning of the contract through September 2012. While this request took
over a month for them to complete, EBS stated that they would be able to provide this reconciliation on a
monthly basis upon request by HRD. Our analysis of the corrected check register and the EBS reconciliations
indicates that EBS appropriately reimbursed the City retirees as directed by HRD.
HRD was not aware that 20 checks issued in
2011 remained uncashed. We obtained a list
of uncleared checks as of June 2012 from EBS
and found that 20 checks issued in 2011 and
68 checks issued in 2012 had not cleared. HRD
was not aware of these outstanding checks.
According to EBS, they consider a check “stale-
Finding 3/Recommendation B to City Management (3-B):
Establish recordkeeping procedures for maintaining
monthly Reimbursement Reports and additional
payment instructions provided to EBS along with
adequate supporting documentation.
Establish review procedures to ensure accuracy and
completeness of retiree reimbursements prior to
instructions being provided to EBS for payment.
Request EBS to provide monthly and annual
reconciliations of their check register to the
Reimbursement Reports and to notify the City of any
exceptions noted during the month.
Establish procedures for reviewing the monthly
reconciliations and tracking and following up on any
discrepancies including returned, voided, reissued
checks in a timely manner. If the exceptions require
corrective actions, they should be documented and
related written communication to EBS be maintained.
Finding 3/Recommendation C to City Management (3-C):
Work with ASD to establish procedures for handling
uncashed EBS checks. Based on the procedures, formalize
the EBS procedures for notifying the City of the returned or
uncashed checks and how to handle them.
Attachment A
December 2012
26 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
dated” once it becomes older than one year. After a year, they ask the client if they wish to put a stop-pay on
those checks, reissue, and/or send a communication to the retiree. For checks returned due to incorrect
address, EBS has been alerting the City and reissuing the check if a new address is provided by the City.
According to the City’s Payroll Procedures for Stale Dated Checks, the original checks become stale dated after
six months and the City is required to publish a list of stale-dated checks in a local newspaper on an annual basis.
HRD process for ensuring required 1099 tax forms are received by applicable retirees was not always
complete or accurate. Retirees are requested to substantiate the retiree health reimbursement received during
the tax year to avoid tax consequences on such income by signing and submitting the Retiree Health Premium
Substantiation Form to the HRD. The City is required to provide a Form 1099 statement for any reimbursement
amounts not listed on this Substantiation Form. Submission of the Substantiation Form is recorded by HRD in a
tracking sheet and a list of retirees who did not submit the form is provided to EBS for issuance of 1099
statements.
According to the HRD tracking sheet for the
2011 tax year, 80 out of 688 retirees did not
submit a Substantiation Form. The HRD list sent
to EBS on 1/13/12 contained 77 retirees. We
compared the HRD list to the list of actual Form
1099 recipients provided by EBS and also
reviewed the actual Substantiation Forms on a
sample basis. As a result of this review, we
identified the following errors:
One retiree submitted a Substantiation Form before 1/13/12 but was not included in the HRD list. EBS
issued a 1099 statement to this retiree as a result; and
For two retirees, there was no record that they submitted a Substantiation Form, but they were
included in the HRD list and did not receive a 1099 statement from EBS. HRD confirmed that a 1099
statement should have been issued to these retirees.
HRD did not obtain the list of actual Form 1099 recipients from EBS to verify a statement was issued to all
applicable retirees for the actual amounts reimbursed. According to HRD, beginning in 2012, EBS will provide a
pre-filled substantiation form to each retiree, track submission, and issue 1099 statements based on the actual
payment made. This is expected to reduce the burden on the retirees to list their monthly receipt and fill out
the form while improving accuracy and completeness.
Inadequate review of EBS invoices left invoicing errors undetected. Based on a review of EBS invoices and
contract terms, we identified the following invoicing errors by EBS:
Overcharge of $2,388 for administrative fees for the billing periods from September 2011 through
August 2012. EBS had been charging $4 per retiree per month for direct deposit payment even though
the contract term was $3.50.
Finding 3/Recommendation D to City Management (3-D):
Establish a methodology for EBS to follow and require
specific supporting documentation to be provided to HRD
for review. Identify review criteria and establish
procedures to verify the accuracy and completeness of the
EBS services provided for Form 1099 issuance.
Attachment A
December 2012
27 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
Undercharge of $370 for the 2011 Form 1099 processing fees. EBS did not issue any invoice for this
service due to an accounting error. According to the contract, EBS should have charged $5 per
statement and 74 statements were processed.
HRD currently does not have effective
monitoring procedures for vendor invoices. All
invoices should be reviewed prior to payment
and reconciled to the actual services provided
and contract terms to ensure the accuracy of
the billing.
In response to our inquiry, EBS confirmed these
errors. In September 2012, the City received a
net refund from EBS in the amount of $2,018.
Finding 4: Required documentation to verify the eligibility of dependents for enrollment was
not always available
Based on a review of selected employee files, we found that supporting documentation required by CalPERS for
enrollment of dependents in health benefit plans is not completely maintained by HRD. Out of 31 employee
files judgmentally selected for review, 20 files had at least one required document missing from the file as
shown in Exhibit 17. See Exhibit 18 for the supporting documentation required by CalPERS.
Exhibit 17: Sampled Employee Files with Required Dependent Document Missing
Employee
Status
# Employee
Files
Reviewed
# Employee Files
with Required
Document Missing Dependent Status
# of
Dependents
Required
Documents
Not Filed
Active 17 9 Subtotal 45 14
Spouse/Domestic Partner 13 3
Children under age 26 32 11
Retired 14 11 Subtotal 32 23
Spouse/Domestic Partner 14 10
Children under age 26 13 8
Certified "Parent-Child
Relationship" Children
5 5
Total 31 20 Total 77 37
Source: OCA analysis of City of Palo Alto records
Exhibit 18: CalPERS Required Supporting Documentation for Enrollment of Eligible Dependent
Dependent Type Documentation Required by CalPERS for Enrollment
Spouse Copy of the marriage certificate
Domestic Partner Copy of the Declaration of Domestic Partnership registered with
the Secretary of State
Children under age 26 Copy of birth certificate or adoption papers
Certified "Parent-Child Relationship" Children Affidavit of Parent-Child Relationship (Form HBD-40)
Source: CalPERS Health Benefits Procedure Manual
Finding 3/Recommendation E to City Management (3-E):
Establish procedures to review EBS invoices to ensure the
accuracy of the EBS billing. Review should include
reconciliation of the invoice to the actual services
provided.
Attachment A
December 2012
28 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
The forms and supporting documentation required for the various types of enrollments or changes to
enrollment are also specified in the CalPERS Circular Letter No. 600-045-12. This letter clarifies the employer’s
fiduciary responsibility to manage the CalPERS Health Program by ensuring that only eligible employees and
their dependents are covered. CalPERS requires that records of all supporting documentation that determines
the eligibility of enrolled dependents be requested and maintained by the employer for active employees.
CalPERS is responsible for maintenance of dependent supporting documentation for retirees; however, a
majority of the retirees’ dependents were enrolled while they were active employees. Therefore, missing
dependent eligibility documentation in the
retiree files indicates that eligibility
verification for dependents was not properly
performed for these retirees while they were
still active.
According to HRD, required supporting
documentation was not consistently obtained
at the time of enrollment and filed by HRD;
however, they have since strengthened their review procedures. HRD stated that they recently performed a
partial review of employee files and obtained missing documentation, but did not review all employee files.
Currently, HRD does not perform periodic verification of dependent eligibility including at the time of
retirement, and therefore, any changes in the dependent status are not made until it is reported by the
employee. Without adequate and consistent verification procedures and complete record maintenance,
enrollment of ineligible dependents may go undetected.
Finding 5: Personally Identifiable Information (PII) has not been adequately protected and
controlled
We found that HRD did not have policies and procedures addressing Personally Identifiable Information (PII).
During the audit, we obtained and reviewed documents and records containing PII and observed how they are
stored and handled by HRD staff. As defined under California State law, PII includes an individual's first name or
first initial and last name in combination with other identifying information (e.g., social security number, health
insurance information, etc.) when either the name or the data elements are not encrypted. While we found no
evidence of a security breach as defined under State law, we did find that not all HRD documents and records
containing PII are adequately protected to ensure the confidentiality of such information collected and
maintained by HRD. Files containing PII are saved in a shared drive to which all HRD staff have access and
emailed without password protection.
In August 2012, we came across three unencrypted, unprotected files on the City’s shared network “U” drive
containing PII for City employees and individuals in the business community. Two of these files belonged to HRD
and the other one to ASD. We immediately contacted both departments and these files were removed from the
shared network. HRD stated that the files were placed on the public drive by a former HRD staff, and would
reiterate with all HRD staff the importance of protecting PII. We also notified the City’s Information Security
Manager to take appropriate actions to prevent such incidents from occurring in the future. We also identified
Finding 4/Recommendation to City Management (4):
Improve dependent eligibility verification procedures to
ensure that required supporting documentation is
obtained, reviewed, and maintained in accordance with
the CalPERS Circular Letter No. 600-045-12.
Attachment A
December 2012
29 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
two documents containing the social security number field and questioned whether the SSN field was necessary.
HRD subsequently removed the SSN field from these documents
According to the Guide to Protecting the Confidentiality of Personally Identifiable Information (PII)
recommended by the National Institute of Standards and Technology (NIST Guide), organizations should take
the following steps to appropriately protect the confidentiality of PII:
Identify all PII residing in their environment.
Minimize the use, collection, and retention of PII to what is strictly necessary to accomplish their
business purpose and mission.
Develop and apply appropriate safeguards for PII based on the assessment of the potential harm that
could result to the subject individuals and/or the organization if PII were inappropriately accessed, used,
or disclosed. These include:
o Creating policies and procedures;
o Conducting training;
o De-identifying PII;
o Using access enforcement;
o Implementing access control for mobile devices;
o Providing transmission confidentiality; and
o Auditing events.
Finding 5/Recommendation to City Management (5):
Take applicable steps recommended by the NIST Guide
to appropriately maintain the confidentiality of PII.
Attachment A
December 2012
30 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
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Attachment A
December 2012
31 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
ATTACHMENT 1: CalPERS Billing Summary for June 2012
Status # Participants
Premium
Amount
Participant
Share
Employer
Share
Active 855 $1,124,539 - $1,124,539
Blue Shield Advantage Bay Area 14 22,755 - 22,755
Blue Shield NetValue Bay Area 7 7,217 - 7,217
Blue Shield of California Bay Area 357 516,827 - 516,827
Blue Shield of California Other Northern 8 13,530 - 13,530
Blue Shield of California Sacramento Area 1 1,656 - 1,656
Kaiser Permanente California Bay Area 290 355,764 - 355,764
Kaiser Permanente California Other Northern 6 9,242 - 9,242
Kaiser Permanente California Sacramento Area 1 1,463 - 1,463
Peace Officers Research Association of California 65 73,768 - 73,768
PERS Choice Bay Area 96 108,055 - 108,055
PERS Choice Other Northern California 3 4,027 - 4,027
PERS Choice Other Southern California 1 1,368 - 1,368
PERS Choice Out of State 1 1,688 - 1,688
PERS Choice Sacramento Area 3 4,015 - 4,015
PERS Select Bay Area 1 487 - 487
PERSCare Bay Area 1 2,676 - 2,676
Retired 871 $727,700 $561,600 $166,100
Blue Shield Advantage Bay Area 8 7,486 6,403 1,083
Blue Shield Advantage Los Angeles 1 338 232 106
Blue Shield Advantage Other Southern 4 3,103 1,616 1,486
Blue Shield NetValue Other Southern 1 502 - 502
Blue Shield of California Bay Area 207 192,096 153,457 38,639
Blue Shield of California Other Northern 5 4,537 3,104 1,433
Blue Shield of California Other Southern 2 2,193 705 1,488
Blue Shield of California Sacramento Area 10 9,000 7,936 1,064
Kaiser Permanente California Bay Area 166 121,284 97,422 23,862
Kaiser Permanente California Other Northern 11 9,892 8,721 1,170
Kaiser Permanente California Other Southern 5 3,427 1,735 1,692
Kaiser Permanente California Sacramento Area 18 10,402 6,550 3,852
Kaiser Permanente Colorado 1 816 710 106
Kaiser Permanente Georgia 1 816 710 106
Kaiser Permanente Hawaii 2 3,266 3,053 213
Kaiser Permanente Northwest 8 7,424 6,004 1,421
Peace Officers Research Association of California 51 52,298 31,336 20,962
PERS Choice Bay Area 80 64,252 52,808 11,444
PERS Choice Los Angeles Area 1 383 277 106
PERS Choice Other Northern California 13 10,306 7,590 2,716
PERS Choice Other Southern California 7 2,827 1,850 976
PERS Choice Out of State 52 46,787 38,252 8,535
PERS Choice Sacramento Area 6 3,752 3,114 638
PERSCare Bay Area 95 80,767 58,314 22,453
PERSCare Other Northern California 18 12,521 8,492 4,029
PERSCare Other Southern California 9 6,211 5,253 958
PERSCare Out of State 78 63,382 49,727 13,655
PERSCare Sacramento Area 11 7,629 6,227 1,402
Grand Total 1,726 $1,852,238 $561,600 $1,290,638
Attachment A
December 2012
32 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
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Attachment A
33 City of Palo Alto | Office of the City Auditor | Employee Health Benefits Audit
December 2012
ATTACHMENT 2: City Manager’s Action Summary
In response to the Audit Recommendations in this report, the City Manager has agreed to take the following actions. Additional comments from the City
Manager can be found in Attachment 3 to this report.
Finding
# Summary of Finding
Rec
# Recommendation City Manager’s Action Plan
Target
Date
1. 1 Retiree reimbursements were not
accurately calculated. Retroactive
transactions are not consistently
documented and processed to
ensure the accuracy and
completeness of the adjustments to
the reimbursements.
1-A Establish clear, documented procedures to ensure
the accuracy of the Reimbursement Report. This
should include:
Establishing a methodology for reconciling the
CalPERS billing to the Reimbursement Report and
performing a monthly reconciliation to identify,
track, and follow up on any discrepancies. Create
and maintain common data fields among key
data sources to facilitate such reconciliation in an
accurate, complete, and efficient manner.
Establish criteria and a methodology for
addressing, recording, and reviewing retroactive
transactions in the Reimbursement Report.
Written procedures on the Retiree Medical
Reimbursement Report process will be created.
Mar.
2013
HR staff will request additional resources to
establish an automated methodology for
reconciling the CalPERS billing to the HR
Reimbursement Report.
Jan.
2013
A methodology for recording and reviewing the
monthly retroactive transactions will be
developed.
Jan.
2013
1 Eligibility criteria for retiree health
benefits were not clearly defined
and documented. FY 2011 CAFR
note disclosure and the retiree
health eligibility information
provided to the City’s actuarial firm
were inaccurate. The effective
implementation date of retiree
health tiers is not clearly
communicated to stakeholders.
1-B Enhance current procedures to ensure that the
Retiree Medical Tier Matrix is maintained
accurately, completely, and in an organized
manner along with a complete set of the labor
agreements, resolutions, and CalPERS letters.
Consider making the Tier Matrix available to all
business partners and stakeholders to ensure
that the eligibility criteria are clearly
communicated to all parties.
Current process for maintaining Retiree Medical
Tier Matrix will be improved and organized so it
is available on HR intranet site for business
partners.
Jan.
2013
Labor Agreements are currently available on HR
internet site.
1 Eligibility criteria for retiree health
benefits have not always been
accurately applied in the calculation
of retiree reimbursements.
1-C Establish procedures for determining the health tier
for each retiree and maintaining a complete and
accurate record of retiree health tiers. Ensure that
the tier determination is based on the hire date,
retirement date, and employee group at the time of
retirement as recorded in SAP and based on the
Retiree Medical Tier Matrix.
Review retirees who separated prior to SAP
implementation in 2003 to ensure they are
accurately recorded on Retiree Medical Tier
Matrix.
Mar.
2013
A written procedure for documenting health tier
as soon as a new retiree appears on CalPERS
billing will be documented.
Feb.
2013
Attachment A
34 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
December 2012
Finding
# Summary of Finding
Rec
# Recommendation City Manager’s Action Plan
Target
Date
2 HRD did not always update the
CalPERS system when a change in
employee group was recorded in
SAP.
2-A Enhance the current procedures to ensure that
any changes in employment affecting the
employee’s health eligibility status are accurately
and consistently recorded in both SAP and
CalPERS system in a timely manner.
Verify the accuracy of the CalPERS system record
by comparing to the SAP record for each
employee at the time of retirement to ensure
accurate billing by CalPERS.
HR process for promotions will be updated to
include recording changes in SAP as well as
CalPERS system until such time that two systems
are integrated.
Mar.
2013
Quarterly process for reviewing CalPERS billing to
ensure accurate billing will be established as well
as determining appropriate internal or external
resources to accomplish this review.
Mar.
2013
2 Duplicate active employee records
in the CalPERS system went
undetected resulting in the City
making overpayments to CalPERS.
CalPERS did not have the correct
formula to calculate the employer
share.
2-B Establish procedures for providing CalPERS with
clear, written instructions for the employer share
calculation on a regular basis.
Establish monitoring procedures to ensure that
the City instructions are followed by
systematically reviewing the methodology
applied to calculate the employer share.
Although written instructions were provided in
past, to ensure accuracy, HR staff will provide
annual instructions to CalPERS to ensure
calculations are clearly understood.
Dec.
2012
An automated methodology for reviewing the
CalPERS billing calculations will be established.
Jan.
2013
3 HRD is paying for services it is not
receiving.
3-A Review the EBS contract to ensure the adequacy of
the contract terms and accuracy and clarity of the
scope of services including the retiree tier definition.
Establish monitoring procedures to ensure the
contract terms remain adequate and any changes in
the scope of services are documented and properly
authorized in accordance with the terms and
conditions under the contract.
HR staff will review the EBS contract with vendor
to ensure contract accurately reflects retiree tier
definitions and services that can be provided
given limitations in access to CalPERS records.
Periodic review of contract to ensure scope of
services remains accurate will be conducted.
Dec.
2012
3 Payment instructions to EBS are
provided without adequate
supporting documentation resulting
in an overpayment of at least
$2,148.
3-B
Establish recordkeeping procedures for
maintaining monthly Reimbursement Reports
and additional payment instructions provided to
EBS along with adequate supporting
documentation.
Establish review procedures to ensure accuracy
and completeness of retiree reimbursements
prior to instructions being provided to EBS for
payment.
Recordkeeping procedures for any payment
instructions and adjustments provided to EBS will
be established.
Jan.
2013
Review process will be established to ensure
retiree reimbursement instructions are complete
prior to submitting to EBS for payment.
Dec.
2012
Attachment A
35 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
December 2012
Finding
# Summary of Finding
Rec
# Recommendation City Manager’s Action Plan
Target
Date
3 Payment instructions to EBS are
provided without adequate
supporting documentation resulting
in an overpayment of at least
$2,148. (Continued)
3-B
Request EBS to provide monthly and annual
reconciliations of their check register to the
Reimbursement Reports and to notify the City of
any exceptions noted during the month.
Establish procedures for reviewing the monthly
reconciliations and tracking and following up on
any discrepancies including returned, voided,
reissued checks in a timely manner. If the
exceptions require corrective actions, they should
be documented and related written
communication to EBS be maintained.
HR staff will request monthly reconciliation of
check register and notification to City of any
exceptions noted.
Nov.
2012
Procedures will be established for reviewing
monthly reconciliation reports, including follow
up on any discrepancies and documenting
corrective action.
Feb.
2012
3 HRD was not aware that 20 checks
issued in 2011 remained uncashed.
3-C
Work with ASD to establish procedures for handling
uncashed EBS checks. Based on the procedures,
formalize the EBS procedures for notifying the City
of the returned or uncashed checks and how to
handle them.
HR will work with ASD to establish a procedure
for EBS notification of uncashed checks and steps
to follow in such circumstances.
Feb.
2013
3 HRD process for ensuring required
1099 tax forms are received by
applicable retirees was not always
complete or accurate.
3-D Establish a methodology for EBS to follow and
require specific supporting documentation to be
provided to HRD for review. Identify review criteria
and establish procedures to verify the accuracy and
completeness of the EBS services provided for Form
1099 issuance.
Establish recordkeeping procedures to ensure
EBS accurately issues 1099 forms to retirees who
have not submitted Substantiation forms and at
the same time, accurately documents forms
received.
Dec.
2012
3 Inadequate review of EBS invoices
left invoicing errors undetected.
3-E Establish procedures to review EBS invoices to
ensure the accuracy of the EBS billing. Review
should include reconciliation of the invoice to the
actual services provided.
Procedure for reviewing EBS invoices will be
created to ensure accuracy of EBS billing and
completion of services.
Feb.
2013
4 Required documentation to verify
the eligibility of dependents for
enrollment was not always
available.
4 Improve dependent eligibility verification
procedures to ensure that required supporting
documentation is obtained, reviewed, and
maintained in accordance with the CalPERS Circular
Letter No. 600-045-12.
Verification procedures will be reviewed and
improved to ensure that required supporting
documentation is obtained and if not, medical
insurance will be cancelled promptly.
Apr.
2013
5 Personally Identifiable Information
(PII) has not been adequately
protected and controlled.
5 Take applicable steps recommended by the NIST
Guide to appropriately maintain the confidentiality
of PII.
The NIST guidelines have been reviewed with HR
staff. An internal policy will be created.
Jun.
2013
Attachment A
36 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration
December 2012
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Attachment A
37 City of Palo Alto | Office of the City Auditor | Audit of Employee Health Benefits Administration 37
November 2012
December 2012
ATTACHMENT 3: City Manager’s Response
Date: November 30, 2012
To: James Pelletier, City Auditor
From: James Keene, City Manager
Prepared by: Kathryn Shen, Chief People Officer
The Human Resources Department (HR) requested assistance from the City Auditor to focus
on a complex Retiree Reimbursement process related to the retiree medical benefits
provided to City retirees. HR recognizes the diligent work of the City Auditor Office and
appreciates the recommendations which will greatly improve this recently expanded
process in support of the City’s effort to collect employee health plan contributions that
have decreased the City’s employee benefit costs.
In the past 17 months since this Retiree Reimbursement process was expanded, on average
800 checks have been distributed on a monthly basis, in timely fashion, averaging $700,000
in total per month. In September 2011, CalPERS implemented a new billing system,
"my/CalPERS" which has documented glitches since the implementation date. CalPERS is
still struggling in finding corrections to the various errors. This has complicated the
reimbursement process requiring substantial adjustments. Fortunately, most
overpayments can be recovered by withholding or reducing future
reimbursements. Carefully reviewing the reimbursement reports will be key to addressing
the issues found in this audit. Staff will also continue to find solutions to streamline this
reimbursement process.
Human Resources staff is committed to addressing the deficiencies and improving the
reconciliation methodology for this complex process. Attachment 2 includes the steps that
will be taken to improve procedures as recommended.
Attachment A
TO: HONORABLE POLICY AND SERVICES COMMITTEE
FROM: OFFICE OF THE CITY AUDITOR
DATE: DECEMBER 6, 2012 STAFF REPORT: 3373
SUBJECT: LATE PACKET MEMO
We are providing the revised City Manager’s Response (Attachment 3) to the Audit of Employee
Health Benefits Administration from the City Manager. This is item #2 on the Policy and Services
Committee Agenda.
Respectfully submitted,
________________________________
JIM PELLETIER
City Auditor
2
Date: Dec. 6, 2012
TO: City Auditor Jim Pelletier
FROM: James Keene, City Manager
RE: City Manager’s Response to Audit
The City has made structural changes to its retiree benefits over the years, producing significant cost
savings with each new retiree health tier. CalPERS systems are not as flexible as the City, as it employs a
one-size-fits-all policy. CalPERS deducts health premium costs from retirees, but the majority of City
retirees receive 100% City-paid health care. Yet CalPERS deducts a greater amount every month than
some retirees expect, which the City in turn reimburses to the retiree. This over-deducting has
necessitated City staff to institute a reimbursement process as the burden has shifted from CalPERS to
the City to administer. Moreover, the different IT systems on both the City and CalPERS side make it
difficult to reconcile reimbursement amounts. After learning about the complexities associated with
the existing reimbursement process for retiree medical benefits, the Chief People Officer requested that
the City Auditor focus the employee benefit audit to document the existing process and make
recommendations to improve it. The City Auditor’s recommendations will assist the Human Resource
Department in developing a process that balances the expense and effort of administering these tiers
against cost savings.
On average, 800 checks have been distributed monthly to retirees since 2011, on time, totaling over
$700,000 per month. At the same time, CalPERS began implementing a new billing system which has
documented glitches since the implementation date. CalPERS is still struggling in finding corrections to
the various errors. This has complicated the reimbursement process requiring substantial adjustments.
Fortunately, most overpayments can be recovered by withholding or reducing future reimbursements.
Carefully reviewing the reimbursement reports will be key to addressing the issues found in this audit.
Staff will also continue to find solutions to streamline this reimbursement process. Human Resources
staff is committed to addressing the deficiencies and improving the reconciliation methodology for this
complex process. Attachment 2 contains the steps that will be taken to improve procedures as
recommended.
POLICY AND SERVICES COMMITTEE
DRAFT EXCERPT
Page 1 of 10
Special Meeting
December 11, 2012
Audit of Employee Health Benefits Administration
Jim Pelletier, City Auditor, provided a presentation on the Audit of Employee
Health Benefits Administration. The objective of the audit was to determine
whether the Human Resources Department had adequate controls over
health benefits to ensure the health premiums and administrative fees were
calculated and paid accurately for eligible, active, and retired employees.
The Human Resources department had requested the assistance of the City
Auditor to focus on the reimbursement process related to the health
premiums.
Yuki Matsuura, Senior Performance Auditor, explained the City share of
premiums for active SEIU and management employees. From April 2011
through to October 6, 2012 the employee paid ten percent of the premium.
From October 6, 2012 to the present all active employee groups are paying
the ten percent of the premium. Retiree health share costs were dependent
upon their health plan and the tier they were in.
Council Member Klein asked if the City could request their Legislatures to
carry out legislation to simplify the CalPERS billing/payment system.
James Keene, City Manager, clarified the audit defined the analysis of what
the drivers were to issue and how the City could preventatively manage the
impacts of the problem. The goal of the audit was to define future
assessments on whether adequate systems were in place to grant such a
variety of healthcare benefits. He acknowledged the fundamental issue was
a CalPERS problem the City was trapped in as a client and there were
adaptations necessary. He felt CalPERS had pulled back from previous
commitments and were essentially requesting the cities to pay the bill.
Council Member Klein believed the State Legislatures needed to be involved.
He asked how much the process was costing the City if they were in fact
following the correct process compared to the cost if CalPERS was
completing it correctly.
Attachment B
DRAFT EXCERPT
Page 2 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Kathy Shen, Chief People Officer, noted in 2011 CalPERS initiated a new
Information Technology system which had a number of issues. Because of
those issues CalPERS was only able to administer one type of
reimbursement. Since Palo Alto was so aggressive with a number of tiers the
thought was CalPERS would be able to administer the process and the City
paid them an administration fee. CalPERS passed the administration task
back to the City which became a struggle.
Council Member Klein recommended reducing the administrative fee paid to
CalPERS until they were able to actually complete the administration. He
asked the amount paid to CalPERS.
Sandra Blanch, Human Resources Assistant Director, stated the fee was a
fixed percentage that she did not have at the moment. She would research
and provide and answer at a later time.
Council Member Klein said he was interested to see if other states had
similar issues.
Ms. Matsuura reviewed the billing plans for retirees. CalPERS removed large
sums of money from the retiree checks so the City increased the
reimbursement amounts to the retirees to cover their losses.
Mr. Pelletier clarified CalPERS was taking healthcare premiums from retirees
checks and then billing the City for their share while the City was providing
reimbursement instructions to the outside vendor EBS who was sending the
reimbursement checks to the retirees.
Ms. Matsuura noted more than half of the retirees were not recorded in the
SAP system and those who were in the system were not actively maintained.
There was a lack of reliable Human Resources records of payment. The
billing data for active employees were not retained by the department and
the analysis was limited to the June 2012 and the October 2012 billings for
active employees. CalPERS was unable to provide retroactive transaction
data so that portion was removed from the analysis. CalPERS billing, the
SAP system, and the outside vendor EBS did not have a common data field
to compare reimbursement reports. The first finding was the City had made
overpayments of $12,000 and underpayments of $4,000 for retiree
reimbursements. Retroactive reimbursements were not consistently
documented or processed for accuracy or completeness. Based on research
of the eligibility criteria for retirees, the information was not clearly defined
or documented.
Mr. Keene noted there were 64 errors out of 822 retirees reviewed.
Attachment B
DRAFT EXCERPT
Page 3 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Mr. Pelletier noted the Comprehensive Annual Financial Report (CAFR) note
was incorrect in 2011 and was not corrected for 2012.
Ms. Matsuura stated the health tier for each retiree was not accurately
maintained by the department and were not applied to the reimbursement
calculation. The tier for each retiree was determined based on their hire and
retirement dates, the employee group recorded in SAP, and the comparison
to the tier document in the SAP report. 150 records out of 822 were coded
to an incorrect tier. Two were CalPERS billing and was not adequately
monitored. There were two duplicate active employees where the City was
being billed twice by CalPERS; as of October 2012 the overbilling was
$37,000.
Mr. Pelletier mentioned Human Resources had communicated two duplicate
employees to CalPERS. One employee had been repaired but the other
remained a duplicate.
Ms. Matsuura stated the CalPERS systems were not always updated when a
change in an employee group was recorded in SAP. 85 active employees out
of 812 were recorded to a different group. 36 retired employees out of 385
were recorded incorrectly. It was found that CalPERS did not have the
correct formula to calculate the employer share; the total error was $5,500
in a single month. The third finding was the Human Resources Department
had not effectively implemented the outside vendor EBS contract and was
paying for services the City was not receiving. Payment instructions to EBS
were provided without adequate supporting documentation resulting in
overpayment of $2,148.
Mr. Pelletier mentioned the amount was not the concern as much of the risk
of potential exposure. There was access to a great deal of City funds without
sufficient oversight.
Ms. Matsuura stated the departments were not tracking the cashed checks
nor following the proper procedures for stale dated checks.
Council Member Klein asked if the amount of 20 un-cashed checks in 2011
was an unusual amount.
Mr. Pelletier felt it was possibly a usual amount for un-cashed checks.
Retirees move around without updating their addresses. The main issue was
the City had a policy in place where stale checks were dealt with within a 6-
month period and that had not been followed.
Council Member Klein asked the total amount of the 20 un-cashed checks.
Attachment B
DRAFT EXCERPT
Page 4 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Ms. Matsuura said she did not have the exact amount at the present time.
This finding also reflected the 1099 tax forms received were not accurate or
complete. Inadequate review of the EBS invoices revealed errors previously
undetected; the City received a refund of $2,000. The fourth finding showed
20 employees’ files reviewed out of 31 had missing required documentation.
Council Member Klein asked if there were people with dependents listed that
were actually not eligible.
Ms. Matsuura said there were duplicate dependents located but they were
not affecting the premium being paid by the City. Finding five showed
personally identified information was not adequately protected or controlled.
Ms. Shen requested the audit after becoming aware CalPERS was deducting
funds from retirees’ and the City needing to reimburse the retirees. In 2012,
if a retiree had Blue Shield medical coverage without any dependents, their
health premium was $711.10 monthly. CalPERS had stated they could not
do more than credit the City with the minimum contribution which was
$106.40. Therefore, $604.70 was deducted from the retiree’s pension.
Depending on the tier the retiree was in, the City would reimburse the
retiree for the appropriate amount. The audit showed there were
improvements needed and where checks and balances could be put into
place. She assured the Policy & Services Committee (Committee) the Human
Resources Department was committed to correcting the Auditor’s findings.
Mr. Keene felt the audit recommendations did not have an adverse effect on
the CalPERS billing and reimbursement systems. The recommendations
would have been the same if the CalPERS issues did not exist. He
acknowledged the problem for error was exacerbated by the fact the City
had to pay. The general assumption was the City had a contract and
relationship CalPERS to manage the retiree medical system and the audit
proved the City could not rely solely on that assumption. There needed to be
a parallel system to manage and be sure CalPERS was managing the items
correctly.
Mr. Pelletier said with any contract the City had there was a responsibility to
provide oversight.
Mr. Keene said there were 871 employees in the medical plan and each one
received a reimbursement check from the City so they could ensure their
retirement dollars were made whole because CalPERS deducted funds from
their retirement check. That effort required Staff time checking and verifying
each one of the 871 reimbursement checks was accurate.
Attachment B
DRAFT EXCERPT
Page 5 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Council Member Espinosa understood the action for the current item was to
accept the report; although, he recommended agendizing an action item for
the Council to consider what should occur on a broader basis. He asked if
there were any liability concerns that the City Attorney may foresee a retiree
confronting the City with mismanaging their funds.
Molly Stump, City Attorney, was presently in discussions with Ms. Shen
regarding the possibility of liability. The question the City needed to explore
was whether there were incidents of over or under payments where the City
could proactively reach out and make the adjustments.
Mr. Keene stated the correction was one of accuracy not in large sums of
financial burden. The accuracy needed to be verified further than July 2011.
Moving forward there needed to be a system in place to manage the risk
given the gap between CalPERS and the City.
Ms. Shen said moving forward the City needed to work with CalPERS to get
advanced information because the City had not been provided accurate data
on why certain adjustments had been made on a month to month basis.
Staff would have no knowledge of the difference in payment amount until or
unless the retiree notified the Staff. Her goal was to locate a CalPERS staff
member to coordinate with to verify inaccuracies as they occur rather than
after the fact.
Council Member Espinosa asked if there had been discussions with CalPERS
in a legal environment regarding addressing some of the issues that had
been raised.
Ms. Stump noted the initial phase necessary to move forward with
discussions was the completion of the detailed work by the Auditor’s office.
With the completion of the audit the focus had turned to what could be
accomplished on a systemic basis. She mentioned CalPERS was a very large
bureaucratic organization that was not a client service platform.
Council Member Espinosa questioned the differences between the City
Auditor recommendations and the City Manager response to them. There did
not seem to be a definitive agreement or disagreement between the City
Manager and the Staff recommendations. He asked if the intent was to
implement all of the recommendations.
Mr. Pelletier stated yes, the intent was to implement all of the
recommendations.
Ms. Shen noted her department was planning to implement the
recommended action plans; the written procedures, additional resources,
Attachment B
DRAFT EXCERPT
Page 6 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
process mapping, and the double checking. Some actions had already been
put into place.
Council Member Espinosa asked if there were other significant changes to
the City’s broader Human Resources practices that Ms. Shen felt were
necessary to review or other areas of concern she believed should be
reviewed.
Ms. Shen mentioned there was currently a reorganization occurring in the
Human Resources Department to ensure Staff was better educated and had
enhanced tools at their disposal to serve their customers. She did not feel an
additional audit or review was necessary.
Mr. Keene stated the City did not currently have an integrated complete
Human Resources information systems module and certainly not one that
was compatible with the SAP system. The City needed to realize their
relationship with CalPERS was a lifelong process and they needed to protect
themselves with the parallel checking procedures.
Mr. Pelletier felt putting in specific solid monitoring controls was a step-up
from monitoring a standard large contract. Once the up-front investment
was implemented and the procedures were in place to complete the
recommendations the process would be more efficient and smoother moving
forward. He noted there would be a large investment on the side of Staff to
complete the implementation.
Council Member Klein asked if January 20, 2011 was the date CalPERS
began not paying the full amount of the medical insurance.
Mr. Keene stated it appeared to be a key date as it related to a large group
of the retirees.
Ms. Shen clarified May of 2011 was when the 90/10 applications began
which was when CalPERS informed the City they were not going to
administer the multiple tier process.
Council Member Klein asked if there were other cities within the State of
California with similar concerns.
Mr. Pelletier said Staff was uncertain of issues with other cities.
Ms. Matsuura stated CalPERS had mentioned there were other jurisdictions
providing reimbursements.
Attachment B
DRAFT EXCERPT
Page 7 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Council Member Klein said if Palo Alto was to pursue legislative action it
would be beneficial to partner with other cities that were experiencing
similar concerns.
Ms. Stump noted when the CalPERS system was rolled out there were
tremendous issues. She believed there were a small number of other
jurisdictions who experienced similar contribution issues.
Council Member Klein believed there were a number of cities who adopted
the 90/10 system once Palo Alto had implemented it.
Ms. Blanch stated many agencies structure their health benefits differently
than Palo Alto. While there were others’ in similar situations they set-up a
cafeteria plan and started out with the minimum contribution but paid above
the minimum.
Council Member Klein asked if EBS would have been hired if not for the
CalPERS issues.
Ms. Shen stated no, EBS was hired specifically to reconcile the
reimbursement situation.
Ms. Blanch noted when the initial process began to distribute the checks it
was too costly for the Administrative Services Department (ASD) to assist
with the check writing process. A Request for Proposal (RFP) was conducted
to hire a vendor, originally strictly to distribute checks. As the scope was
being developed the intent was to establish a contract between CalPERS and
the vendor to have the CalPERS invoices be sent directly to the vendor. In
the research performed Staff was informed CalPERS could not connect with a
third party vendor.
Council Member Klein asked the amount the City paid to EBS.
Ms. Blanch said it was an annual contract in the amount of $36,000.
Council Member Klein said it seemed the City could perform all of the tasks
correctly but there would remain issues because of the uncertainty of what
CalPERS was doing.
Mr. Pelletier said if the City had an effective reconciliation process in place
they could mitigate a significant portion of the at-risk errors. The data of
what CalPERS was actually doing was sent to the City; Staff could see what
they were doing and the errors being made.
Council Member Schmid stated the City was making Annual Required
Contribution (ARC) payments to achieve a goal so the payments could be
Attachment B
DRAFT EXCERPT
Page 8 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
invested at the high rates of return. Eventually there would be a fund of
monies that could pay for retiree benefits. If that was the model for the ARC
he was concerned there were reimbursements ranging from $2 million to $5
million; implying the City was on a pay as you go basis for retiree health.
Mr. Pelletier stated the $2 million in 2011 and the $5.78 million in 2012 was
representative of the City’s share portion of the minimum contribution and
the amount the City was responsible for reimbursing to the retirees.
Council Member Schmid was under the impression the City was making the
City share ARC payments and some pre-payment for future retirees. The
reason was to achieve investment return therefore making the final payment
easier.
Mr. Keene clarified the current premium paid to CalPERS was $6.2 million.
That amount was not going to CalPERS in the same way as the billing was
being presented from them. The City needed to backfill by directly
reimbursing the retirees because of the current situation. The amount used
to be a direct payment to CalPERS but now the amount shown was the
amount to CalPERS inclusive of the amounts paid to the reimbursement of
the retirees.
Council Member Klein said a combined cost from 2011 and 2012 was $8.2
million.
Mr. Pelletier said the Staff redirected the same funds from 2011 to 2012 so
rather than paying CalPERS directly; the City was now using the funds to
reimburse the retirees directly.
Council Member Schmid understood the concept; however, in reviewing
2008 there was a pre-payment process with the CalPERS system to begin
drawing interest for future retirees. As the Staff Report moved from 2008 to
2012 the pre-payment information disappeared. The City should be
continuing to make the pre-payments annually to ease the burden on future
retirees but instead the system chosen was to directly pay retirees.
Mr. Keene confirmed the previous pre-payments were held in the Trust and
were factored into the actuarial numbers that comprised the ARC. He was
uncertain as to why there were no pre-payments in the 2012 year.
Council Member Klein suggested when the Council chose to make changes to
the actuarial one of the changes was to not pay it down but to roll it over.
Council Member Schmid said part of the monies CalPERS was paying the
retirees should reflect the earnings of the ARC down payment made. By
Attachment B
DRAFT EXCERPT
Page 9 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
CalPERS forcing the City to reimburse the share of funds they were paying
out of the City’s investment was being reduced annually.
Ms. Stump stated those were solid questions for the Actuarial John Bartel
when he returned. She believed his response would be the City was paying
the current bill for the retirees and were beginning in a small way to pre-
fund the retirement funds of the current employees. The City had not pre-
funded for the current retirees and therefore were on a pay as you go basis.
Council Member Schmid said on page 17 of the Staff Report there was a
note on the CAFR. He asked if Staff was implying the Consultant who
approved the CAFR numbers had problems.
Mr. Pelletier clarified the issues in the note disclosure to the CAFR was an
explanation of the retirement tiers.
Council Member Schmid asked if the note was disclosing there were
miscalculated numbers.
Mr. Pelletier stated no, the note did not impact the financial numbers in the
report. It was information that supported the CAFR numbers.
Council Member Schmid asked if the table should be considered during the
conversation regarding benefits.
Mr. Pelletier stated yes because there were errors located within the table
itself.
Council Member Schmid said Staff Report page 23 referred to the second
most expensive health care plan. The cost for each plan changed annually so
noting the second most expensive plan for 2012 could be a different plan in
2013. He asked if that was a complicated factor where CalPERS needed to
re-calculate each year.
Ms. Shen said in theory it could be difficult but for many years Blue Shield
had been the second most expensive plan.
Council Member Schmid asked what the highest plan was.
Ms. Shen stated PERS Care was the highest.
Council Member Schmid said Staff Report page 31 showed a table of the
CalPERS billing summary for 2012. He questioned the retiree participant
share and employer share. He believed the City had reached the 90/10 cost
split but was uncertain how the numbers were reflective of that.
Attachment B
DRAFT EXCERPT
Page 10 of 10
Policy and Services Committee Special Meeting
Draft Excerpt 12/11/12
Mr. Keene clarified the 90/10 cost share was only effective for the retirees
who retired after the 90/10 plan was implemented. The bulk of the retirees
were not in the 90/10 plan.
Council Member Schmid said the participant share was around 35 percent,
was that because they were receiving Medicare.
Ms. Matsuura stated the table on page 31 was based on the billing and the
participant share was reflective of the amount CalPERS was deducting from
the retirees’ checks. It did not represent what the City intended for each
retiree to pay.
Mr. Pelletier said the amounts may not accurately reflect the tiers the
employees were in or the amount they should pay. The numbers were solely
reflective of what CalPERS should pay including the errors.
Council Member Schmid clarified the participant share included the City’s
reimbursement.
Mr. Pelletier concurred.
MOTION: Council Member Espinosa moved, seconded by Council Member
Schmid to recommend the City Council approve the Employee Health
Benefits Administration Audit.
MOTION PASSED: 4-0
Council Member Schmid said if there was anything the City Council could do
to assist with CalPERS or the state in terms of a Resolution or a letter that
could be helpful to let them know.
Ms. Shen said thank you, she would keep that in mind.
Sheila Tucker, Assistant to the City Manager, stated to her knowledge
everything on the work plan had been accomplished for the 2012 year.
Council Member Espinosa felt the discussions during the meeting on the
process highlighted how issues, ideas, and next steps were raised that would
result in a much better process and state for the City.
ADJOURNMENT: The meeting was adjourned at 9:44 P.M.
Attachment B