Joint Labor Management Benefits Committee COMMITTEE REPORT Date: November 23, Employee Benefits Trust Fund Refunds and Audit Update

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1 Joint Labor-Management Benefits Committee COMMITTEE REPORT Date: November 23, 2015 To: From: Subject: Joint Labor Management Benefits Committee Staff Employee Benefits Trust Fund Refunds and Audit Update JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE MEMBERS: Management Wendy G. Macy, Vice-Chairperson June Gibson Tony Royster Matthew Rudnick Miguel Santana Employee Organizations Cheryl Parisi, Chairperson Paul Bechely Chris Hannan David Sanders Gregory West RECOMMENDATION: That the Joint Labor-Management Benefits Committee (JLMBC) (a) receive and file this report providing an update regarding the Employee Benefits Trust Fund audit and (b) approve staff s proposed employee refund implementation plan as outlined in this report. DISCUSSION: At its August 6, 2015 meeting, the JLMBC reviewed a report regarding the Employee Benefits Trust Fund and approved certain recommendations from staff relative to Trust Fund status reports for Fiscal Years 12/13 and 13/14; the status of outstanding employee refunds; and staff s analysis of Trust Fund activity and proposals for securing an external auditor to review and validate Trust Fund activity. At its October 8, 2015 meeting, the JLMBC reviewed a report from staff providing an update on each of these items. This report provides further updates and recommendations relative to the external audit review and a proposed employee refund implementation plan. A. BACKGROUND On January 7, 1997, the City established an Employee Benefits Trust Fund. The purpose of the Trust Fund is for the receipt and retention of City and participant contributions for the Civilian Modified Flex Plan (Flex Plan). Amounts deposited into the Trust Fund may be used to pay for Flex Plan premiums, cash-in-lieu benefits, and administrative costs as approved by the JLMBC. The Trust Fund operates as a temporary pass-through account for the funding of premium payments to Flex Plan insurance coverage providers (medical, dental, life, disability and accidental and dismemberment insurance coverage). General Fund amounts approved through the City s budget process, proprietary department payments, as well as employee contributions for their share of premium costs and supplemental coverage, are deposited into the Trust Fund. These amounts are then used to pay the Flex Plan premiums. The total Flex Plan premiums for plan year 2016 will be approximately $323 million dollars. JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE

2 In addition to General Fund transfers, proprietary department reimbursements and employee contributions, other potential Trust Fund revenue sources (which may have occurred in the past, are ongoing, and/or may recur in the future) include excess premium amounts returned from medical carriers with participating contracts, legal settlements, insurance company demutualizations, employee direct payments for benefits when ineligible for subsidies, and interest earnings. In addition to premium transfers from the Trust Fund to service providers, other potential expenditures and liabilities (which may have occurred in the past, are ongoing, and/or may recur in the future) include staffing reimbursements, contractual services payments, participant reimbursements, education/travel, administrative expenses, etc. B. EXTERNAL AUDITOR FOR REVIEW OF EMPLOYEE BENEFITS TRUST FUND ACTIVITY At its August 6, 2015 meeting, the JLMBC approved a recommendation from staff to review options for identifying an external auditor to review and validate Trust Fund activity. At its October 8, 2015 meeting, staff informed the JLMBC that the City Controller s Internal Audit Section maintains a list of external audit firms that have been contracted with by the City to conduct audits for a variety of purposes. Subsequently, on November 10, 2015, the Personnel Department submitted its formal request to the Controller (Attachment A). On November 16, 2015, the Controller responded by providing a Task Order Solicitation Template, which staff is presently drafting and will submit to outline the requested services. C. REFUNDS OF MEMBER CONTRIBUTIONS (i) Background and Review of Prior Actions As previously discussed with the JLMBC, within the Trust Fund is a total balance of approximately $6.6 million in pending refunds to employees from various sources. This balance is composed of the following: Employee Refund Category Explanation for Refund Amount Prudential Life Insurance Supplemental Life Surplus for final contract period ending in 2011 $ 5,459,847 Anthem HMO and PPO participant contributions $ 419,348 Delta Dental Insurance DeltaCare USA PPO and Delta Preventive Only Refunds $ 723,977 Total--> $ 6,603,172 Staff previously indicated that these refunds had not been implemented due to the administrative complexities involved, but that it would now be moving forward. At its October 8, 2015 meeting, staff indicated that it would provide the JLMBC with greater detail as to what 2

3 was originally recommended and approved in 2011, as well as recommendations with how to proceed with the refund. At its February 3, 2011, meeting, staff reported to the JLMBC that the Employee Benefits Trust Fund was holding money representing refunds of employee contributions for Prudential supplemental life insurance and Delta Dental insurance (Attachment B). Staff proposed a refund methodology of dividing the total refund amount by all eligible employees that paid for supplemental life insurance in 2010; the estimated refund amount per employee for Prudential and Delta was estimated at approximately $ and $42.45, respectively. At its June 2, 2011, meeting, staff submitted a revised recommendation in which the refund amount would be broken up into categories of coverage levels (Attachment C). The report contemplated a range of five flat refund amounts based on the coverage level options that an employee may select (1x through 5x salary amount). The recommendation included a proposal that the list of employees eligible for the refund would be limited to those who were active employee members as of April 6, This proposal was apparently based on a finding that the City Controller could not process payments to employees who had separated from service and that it was administratively too burdensome to process refunds to individuals who had contributed to insurance coverage over a range of years. At its August 4, 2011, JLMBC meeting, staff recommended the approval of a proposed refund letter and Frequently Asked Questions to eligible City employees concerning these refunds. Subsequent to these reports, an employee refund amount of $419,348 from Anthem/Blue Cross was received and is included as one of the refund pools. The reason that the original Prudential refund amount was identified as $4,258,923 and is now identified as $5,459,857 is because an additional deposit of $1,200,924 was returned to the City on November 15, 2012 representing year end accounting for calendar year (ii) Proposed Refund Methodology Staff conducted a fresh review of the refund issue in its entirety to ensure that whatever action is now taken is fully supported by the best and most current information and options. Based on that review, staff is recommending proceeding with an approach which differs from that adopted by the JLMBC in First, it should be noted that Mercer Consulting has advised that refunds of employee contributions should be returned to and for the benefit of those employees who made the contributions and may not be retained by the City. Options for returning the funds to the benefit of participants include reductions in premiums and/or direct refunds. In staff s view, the more equitable approach involves direct refunds to only those individuals who made contributions for these benefits, rather than reductions in premium increases which would benefit certain individuals who did not make those contributions originally. This is even more true now that a significant period of time has elapsed since the refund amount was received by the City. 3

4 Second, staff finds that the most equitable refund methodology would provide refunds to all individuals who made contributions to the policies during the relevant contract term of the service provider, 1 rather than be limited to those who were contributing as of a certain point in time. Third, staff finds that the most equitable refund methodology would include refunds to individuals who have separated from service, and not just be limited to active members, since those individuals also made contributions to the coverage. Fourth, staff finds that the refund amounts should be credited with the appropriate amount of interest based on the credited rate to the Employee Benefits Trust Fund during the applicable period of time that the refund amounts were held by the Trust Fund. Based on these principles, staff conducted research with the Flex Benefits Program Third- Party-Administrator (TPA) and determined that they have the capability of generating consolidated reports that would identify all individuals who made employee contributions to each of these programs over the period of time attributable to the gross refund amount. The TPA further indicated that it could include within that listing information which would provide staff with the ability to calculate the approximate amount of the total contributions made on a per-employee basis. With this information, it would be possible to, using a simple spreadsheet formula: Calculate the percent of each individual s estimated contributions as a percent of the total of all employee contributions amount paid during the relevant period of time Apply that percent against the total employee refund amount to derive a proportional share of the refund owed to that employee; and Apply an interest factor to the refund amount. Below is a sample of how the calculation would function for the life insurance refunds (note this sample is illustrative only and does not represent an estimate or calculation of an actual refund amount): Name SSN Address MOU J. Smith Avg bi-weekly contr. over contract Avg Annual Contr. Approx. 5-year Contr. % of Total Premiums Paid Over Contract Term Pre- Interest $ Amt of Refund Applied Interest Factor Total $ Amount of Refund (Including Interest) xxx-xxxxxx xxx xx $20.00 $480 $2, % $ TBD $ Once the calculations are completed, a spreadsheet file would be provided to the City Controller with the list of individuals owed refunds and the refund amounts. Per information provided by the Controller at a meeting held with staff on November 18, 2015, the City s 1 The contract term for Prudential was calendar years 2006 through The contract term for Delta Dental covered by the premium refund was 2005 through The contract term for Anthem covered by the contract term was calendar year

5 payroll system has a functionality in place used for corrections/refunds which would provide for the refund amounts to be issued to employees via separate check or regular City paycheck, and to be issued to the addresses of those employees no longer on payroll. Prior to the refunds being issued, a communication can be sent to the affected employees advising them of and explaining the source of the pending refunds. Since the TPA reports can include employee MOU information, staff can batch the correspondence by MOU and, for any employee organization so interested, co-sign the communication. Staff has developed the following tentative timetable for processing the refunds: Employee Refund Implementation Plan Step Task Deadline Status 1 TPA generates data tables for the refund amounts 01/31/16 3 Notification issued to employees advising them of pending refunds 02/29/16 4 Personnel Department transfers refund amounts from Employee Benefits Trust Fund to departmental salary accounts 03/31/16 5 Refunds issued to eligible recipients 03/31/16 Upon adoption by the JLMBC of the recommended refund methodology and implementation plan, staff will proceed to execute the plan; and to provide status updates regarding the implementation plan at subsequent meetings until the process is complete. Submitted by: Steven Montagna 5

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9 Attachment B CITY OF LOS ANGELES JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE Date: January 27, 2011 To: From: Members of the Joint Labor-Management Benefits Committee Staff Subject: Employee Benefits Trust Fund (Agenda Item 5) RECOMMENDATION: That the Joint Labor-Management Benefits Committee: (a) Approve salary reimbursements from the Employee Benefits Trust Fund to the Personnel Department for $214,781.58; (b) Approve refunds of Prudential Life Insurance and Delta Dental Insurance amounts to eligible employees as soon as administratively feasible; and (c) Approve the necessary funding for costs of administering a second Open Enrollment period for benefit changes effective July 1, BACKGROUND: On January 2, 1997, the City established an Employee Benefits Trust Fund under Internal Revenue Code Section 501(c)9. The purpose of the Fund was the receipt and retention of City and participant contributions for the Civilian Modified Flex Plan. Funds may be used to pay for premiums, cash-in-lieu coverage, and administrative and operating costs of the Plan as approved by the Committee. This report concerns three recommended Trust Fund expenditures. DISCUSSION: SALARY REIMBURSEMENTS On September 7, 2006, the JLMBC approved funding a Management Analyst II position in the Personnel Department s Employee Benefits Division. The Division had one Management Analyst II position at the time; the second was added under the proviso that it would be entirely funded from the Employee Benefits Trust Fund. Reimbursements for these costs have not previously been executed. Staff conducted a review of payroll records from pay period ending 10/14/06 (when the second position was first filled) through the present to determine the periods of time during which JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE

10 reimbursable salary expenses were incurred. Salary reimbursement liabilities exist for the 06/07, 07/08 and 09/10 fiscal years, detailed as follows: Personnel Analyst II Direct/Indirect Salary Costs - FY 07 $ (50,164) Personnel Analyst II Direct/Indirect Salary Costs - FY 08 $ (82,534) Personnel Analyst II Direct/Indirect Salary Costs - FY 10 $ (82,085) Total--> $ (214,782) The total of the actual and related salary costs for these three fiscal years is $214, No such liabilities were created for Fiscal Year 08/09 because the second position was not filled during this period. Staff will not seek reimbursement for Fiscal Year 10/11 until it has concluded. Staff therefore recommends that the JLMBC approve the transfer of $214, from the Employee Benefits Trust Fund to the Personnel Department for reimbursement of salary expenses for the 06/07, 07/08 and 09/10 fiscal years. DISCUSSION: EMPLOYEE REIMBURSEMENTS The Trust Fund is currently holding three pools of money representing refunds of employee contributions. These include: Prudential Life Insurance: $4,258,923 Delta Dental Premium Refund: $723,977 Wageworks: $46,566 Staff recommends that the Prudential and Delta amounts be refunded to eligible employees within those programs as soon as administratively feasible. Staff is presently working with the program s third-party-administrator to develop the most appropriate refunding methodology. Staff is proposing that the refund be processed as a single payment to each subject employee. The refund amount per employee for the Prudential and Delta refunds would be approximately $ and $42.45, respectively. With respect to the Wageworks amount, staff recommends that the JLMBC take no action at this time. This pool represents waived deposits from Flexible Spending Account (FSA) and Dependent Care Reimbursement Account (DCRA) participants. Given that the Flexible Spending Account program is only in its third year, and given the potential for unforeseen liabilities for this program given uncertainties related to employee participation, staff recommends that action on this amount be deferred. DISCUSSION: OPEN ENROLLMENT COSTS The JLMBC s recent approval of benefit design changes requires a second special Open Enrollment period within calendar year The costs for this additional Open Enrollment were not budgeted and represent a cost of administering the City s Civilian Modified Flex Plan. As a result, staff is recommending that the JLMBC approve the 2

11 necessary funding for costs of administering a second Open Enrollment period for benefit changes effective July 1, These costs are expected to be in the range of $ ,000. 3

12 Attachment C CITY OF LOS ANGELES JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE Date: June 2, 2011 To: From: Members of the Joint Labor-Management Benefits Committee Staff Subject: Employee Refund of Life and Dental Insurance Contributions (Agenda Item #5) RECOMMENDATION: That the Joint Labor-Management Benefits Committee approve the proposed refund methodology for refunds of Prudential Life Insurance and Delta Dental Insurance amounts to eligible employees. DISCUSSION At the JLMBC meeting held on February 3, 2011, the JLMBC members adopted staff s recommendation to refund Prudential Life Insurance and Delta Dental Insurance surpluses to eligible employees as soon as administratively feasible. Staff recommended reporting back to the JLMBC with the methodology of providing the refunds and identifying the eligible employees. The pending refunds of employee contributions include: Prudential Life Insurance: $4,258,923 Delta Dental Premium Refund: $ 723,977 The refunds are based on the supplemental life insurance and dependent dental coverage employees elected and paid for. These coverage levels are not paid for by the City, therefore the refunds would go back to eligible employees. Initially staff proposed that the refund be processed as a single payment to each subject employee. The refund amount per employee for the Prudential and Delta refunds would be approximately $ and $42.45, respectively. However, after further review staff recommends that the refunds be based on the coverage level the employee elected. For example if an employee elected life insurance at 3 times their salary their premium costs would be higher than an employee that elected the same insurance at 1 times their salary level. JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE

13 Attachment A contains two options for providing the refunds to employees. Option 1 is a flat amount based on the total refund amount divided by the number of eligible employees (both full and half time employees). Option 2 is a flat amount that varies based on the coverage level the employee was enrolled in In addition, staff recommends providing the refunds to employees that had the supplemental life insurance or dependent dental coverage on April 6, 2010 and that are currently active on payroll in Staff recommends taking a snap shot of the coverage level an employee was enrolled in on specific date (April 6, 2010) because employees could have made changes to their coverage level during the year. The refunds would only be provided to employees currently on payroll, this means that employees that have separated from City services or are not active on payroll (for example leave without pay or suspension) would not receive a refund. Employees that do no meet this criterion will not be eligible for a refund. Staff recommends that the Committee approve Option 2 for the Life and Dental refunds based on the criteria described above. The Personnel Department will coordinate providing the refunds with the Controller s Office. The intent is to have the refunds processed through the payroll system and directly to employees in their checks. The Personnel Department will work with departments to ensure that the funds are transferred to their salary accounts to cover the refund amounts. Therefore, the refunds will be provided to employee in their paychecks during fiscal year to ensure departments have sufficient cash flow to cover the refunds while the transfer of funds is in transit. The Personnel Department will send employees a letter advising them of the refund. Submitted by: Alex Basquez 2