SUMMARY: The price of health insurance in America has consistently risen faster than the rate of inflation and, despite the intentions of the Affordable Care Act (ACA), is projected to continue to do so for the foreseeable future.
A provision of the ACA known as the ‘Cadillac Tax’ is designed to discourage employers from purchasing excessively priced health insurance plans; which is intended to reduce at least one of the factors that contribute to the dramatic increase of price.
This paper draws on a wide array of research that demonstrates government employers are most likely to be affected by the ‘Cadillac Tax’ due to their propensity to purchase the most expensive forms of health insurance available for their employees.
A particularly striking form of excess – a $42,942 plan – for an employee of a small water district in Los Angeles County prompted an inquiry into the health costs for other public agencies in the County.
This analysis reveals that the largest Los Angeles County public employers are paying approximately 71% more for their employees’ health insurance than private employers, at an estimated cost of $676 million a year.
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Despite the warning from the Government Accountability Office (GAO) of the impending burden to state and local governments from rising healthcare costs, many Los Angeles governments are purchasing wildly exorbitant health insurance for their employees, at taxpayers’ expense.
Last year the Water Replenishment District of Southern California (WRD) paid $42,942 for a single employee’s health insurance plan. Nearly half of the District’s full-time employees received a plan that cost at least $30,000 apiece.
In 2011, the WRD had four employees receiving plans that cost at least $30,000. By 2014, that number increased three-fold, demonstrating the $42,942 plan is not a remote outlier, but part of an agency-wide practice of vastly overpaying for health insurance.
Surprisingly, WRD employees are also part of the coveted “3% @ 60” pension plan – which calculates the retirement benefit by multiplying the number of years worked by 3 percent, and then multiplying that number by the employee’s highest salary.
Typically, plans with the generous 3% multiplier are reserved for police and fire employees. In fact, the 3% plan is so expensive that the Pension Reform Act of 2013 eliminated it completely for new hires. New employees at the WRD would be under the reduced, but sustainable, “2% @ 62” formula.
The total compensation package for WRD employees is quite generous as well – full-time WRD employees received an average $180,636 in 2013.
As the data available on TransparentCalifornia.com is making clearer, it is in the often-overlooked smaller, local government agencies where the most dramatic levels of excessive public compensation can occur.
Table 1: Water Replenishment District of Southern California Employee Compensation
The problem is widespread
Unfortunately, California governments overpaying on health insurance goes well beyond the WRD. Transparent California previously reported on the numerous $20k+ health plans in Corte Madera and the Contra Costa Community College District, as well as the $30k+ plans found in the cities of Beverly Hills and Sierra Madre.
Pew Research confirms that the problem is nationwide – over the past 25 years, state and local government spending on health insurance increased 447% in inflation-adjusted dollars, and is projected to rise further.
This dramatic increase can be attributed, in part, to government wastefulness – government employers not only purchase the most expensive plans, they also ask their employees to contribute the least to help fund them.
In California’s public sector, this problem is accelerating at an alarming rate. From 2011-2013 the amount spent on health insurance by the State increased by 8% as compared to the average 1% decrease nationwide, according to Pew Research.
While the WRD’s excess is the highest in absolute terms, its impact is limited due to their small size. As such, it is more meaningful to analyze the larger districts in the state.
This analysis will incorporate data from the State of California and the largest government agencies in Los Angeles County – home to both the largest city and county in the state.
Table 2 compares two of the biggest special districts – the Los Angeles County Sanitation Districts and the Metropolitan Water District of Southern California – as well as the Los Angeles Department of Water and Power, the City of Los Angeles and the Los Angeles County government.
The Bureau of Labor and Statistics (BLS) provides comparable information for private employers. However, the information is only reported by geographical region, not individual state. As such, the Pacific regional data, of which California is the largest component, is used in this comparison.
The BLS data is by coverage type only. Therefore, the average employer cost is estimated assuming a 50/50 split between employees selecting single or family coverage plans, consistent with the trend found by the Medical Expenditure Panel Survey.
Consistent with the nationwide data, Los Angeles governments pay significantly more for health insurance than the average private sector employer.
For just the five Los Angeles governments analyzed, the total amount paid in excess of the average private employer’s cost is approximately $676M, as shown in Table 3 below.
Table 3: Average Public vs Private Cost of Health Insurance and Total Cost of Public Excess, Los Angeles
A bad problem gets worse
The forthcoming ‘Cadillac tax‘ provision of the Affordable Care Act is expected to pose a significant burden to government employers – due to their propensity to purchase Cadillac-style plans for their employees. Beginning in 2018, employers must pay a 40 percent tax on the excess of plans that cost more than $10,200 for single coverage and $27,500 for family coverage.
It must be noted that the threshold for the Cadillac Tax applies to the total cost of the plan. The values reported here are only the employer costs. If employees also contribute towards the cost – meaning the total cost is higher than just the employer’s share – the number of plans affected will rise significantly.
The WRD, for example, will have to pay at least $41,000 a year in penalty taxes for just the twelve employees with health care plans over the $27,500 cap at their current rates. Virtually the entire full-time staff – over 1,400 employees – of the Metropolitan Water District of Southern California received health plans that cost more than $10,200; if any of those plans are for single coverage only, they would be hit by the tax too.
Los Angeles County had 56,366 employees – about 67% of staff – who received health insurance that cost at least $10,200. Outside of the WRD, the County had the greatest individual cost – with 192 plans costing $37,148 each. For just these 192 employees, the County would have to pay a penalty tax of at least $740,966 a year beginning in 2018.
Given the recent, and projected, double digit increases in health insurance premiums, merely holding costs to the present level by 2018 would be a remarkable feat.
Finally, the City of Los Angeles appears best positioned to avoid being affected by the tax. In addition to having the lowest average cost, there was not a single plan with a cost of more than $16,400.
The increasing cost of healthcare is certainly much more complex than merely being the result of government wastefulness. A comprehensive solution would require an entire rethinking of how healthcare should be provided. Still, having a consumer as big as government routinely overpay for a product will contribute to its rising cost.
As taxpayers are struggling to pay their own health insurance premiums, government should be doing all it can to rein in costs. As bad as the healthcare situation is at the moment, there is simply no justification for a government agency to consistently pay over $20,000 a year, or more, for their employees’ health insurance.
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About the Author: Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute.
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Phase I of a comprehensive benchmarking report on the LADWP was just released by the City of Los Angeles.
The report itself confirmed a few things most ratepayers already know – that the LADWP’s payroll costs are dramatically higher than that of their peers and their customer service is quite poor. Previously, in my study, Examining Public Pay in California: The Los Angeles Department of Water and Power, I found that DWP employees are receiving an average compensation premium of 155% as compared to their private sector counterparts:
The City-commissioned report compared the LADWP to utilities of a similar size, both nationally and regionally, and analyzed a host of factors beyond just payroll. It found that spending on customer service was below average for the power agency and above average for the water system; but both “continue to rank last among their peers in customer satisfaction.”
Several immediate action items were recommended, the first being recommendations to improve customer service. The others were focused on two additional areas the LADWP placed last in – high amounts of electricity lost in transit and lost revenue due to an inability to collect unpaid debts.
The report found positives too. While rates are very high on a national scale, they are in line with their regional counterparts. Obviously, the proposed rate increases in the coming years will impact this ranking. Reliability scored well and total costs were in the 2nd quartile compared to their peers, thanks to savings in areas such as in customer service and generation.
Unfortunately, the Mayor’s Office press release announcing the findings of this report appeared more concerned with highlighting the good, while omitting the bad. In fact, the release states that the LADWP ranked in the 1st quartile in operating costs, when in fact they were ranked in the 2nd. Not a word was devoted to their bottom scores in the items mentioned above or the enormous savings that could come from payroll reductions to a level that would match that of their peers.
As seen in the image below (bottom text is my own) if the LADWP were merely to reduce payroll expenditures to be in line with other utilities, let alone the massive savings from reducing pay to the market avg, they would save over $320M a year.
This is troublesome because it would suggest that the Mayor’s Office is more concerned with painting the LADWP in a positive light, as opposed to acting in the best interest of the ratepayers. Particularly given future rate increases are planned as early as this spring, ratepayers are in desperate need of an advocate that acknowledges these rate increases are mostly to support excessive LADWP pay.
The LADWP ranked in the bottom quartile in terms of payroll spent on administrative staff, while ranking favorably (meaning spending less) for customer service.
Naturally, pay reductions should occur for all LADWP employees to a level that is less obscenewhen compared to their LA area counterpart. For example, the average customer service rep’s pay could be reduced to “only” 40% above the market average of $60k a year, as opposed to the current $72k avg.
Given the LADWP is overweight in the administrative sector and underweight in the customer service department, this would allow for both an improvement of operations and savings for the ratepayers at the same time by reducing administrative staff and replacing them with the less expensive, and more needed, customer service reps.
While it is likely an increase in hiring for customer service reps will occur, a reduction in pay or total administrative staff will be much more difficult. Unfortunately, this is exactly what is needed to reduce the growing burden on ratepayers – who need to make sure their interests are being put first by City Hall.
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About the Author: Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute. Fellner recent completed an in-depth analysis of Los Angeles Dept. of Water and Power rates of pay in his study entitled “Examining Public Pay in California: The Los Angeles Department of Water and Power.”
Controversy continues at the Los Angeles City Council about the selection of the University of California Institute for Labor and Employment (part of the University of California Miguel Contreras Labor Program) to produce a second taxpayer-funded study to prove again that adopting a city minimum wage ordinance would be a wonderful exercise in Progressive compassion. That study is expected to be released soon.
Meanwhile, staff reports for the Oakland City Council about the costs and implications of minimum wage increases on the city’s own operations are available for free on the web. These reports don’t pull any punches, even in one of the country’s most leftist cities.
Yes, some city employees and contract employees will make more money, including unionized city employees who are already making more than minimum wage. But others will lose hours or jobs. It is even possible that the City of Oakland will have more trash on its streets and highways because of the minimum wage increase. Here are some conclusions from the staff reports:
1. Increased Public Costs and Job Losses for Youth and Seniors
In June 2014, the Oakland City Council had to enact a relatively mild ordinance to adjust the salary rates for all classifications for which the lowest step was less than $9.00 per hour, the new California minimum wage as of July 1, 2014. Three classifications were changed: part-time Recreation Aide, part-time Senior Aide, and part-time Student Trainee.
A staff report provided a summary of costs and implications to the city:
Two City departments are directly impacted by the change to the base rate for certain classifications. The Human Services Department (HSD), through a federal grant, provides employment opportunities to Oakland seniors. Funding for the Senior Aides program is determined by the federal government and staff have confirmed that additional funding will not be allocated to account for the change in the California minimum wage. The impact of the minimum rate change, then, is that fewer individual seniors can be hired into positions funded by the program.
The Oakland Parks & Recreation Department (OPR) employs many Recreation Aides, particularly during the summer months. If OPR were to continue to employ the same number of people in those roles, the increase to the budgeted cost of those positions is estimated to be approximately $24,500 per year, $18,155 in fund 1820 (OPR Self-Sustaining Programs Fund), and $6,345 in fund 1010 (General Purpose Fund). The proposed legislation does not include a recommendation for increased funding for Recreation Aide positions. Without additional funding, OPR will have to employ fewer Recreation Aides or schedule them for fewer hours.
A more substantial local minimum wage increase would soon do more damage. On November 4, 2014, 82% of Oakland voters approved Measure FF, which raised the minimum wage in Oakland for anyone who works in the city for two hours or more per week to twelve dollars and twenty-five cents ($12.25), effective March 2, 2015. It also imposed paid sick leave.
Here is what staff estimates as the cost and implications of this local minimum wage increase to the city:
Two City departments are directly impacted by the change to the base wage rate for certain classifications. HSD, through a federal grant, provides employment opportunities to Oakland seniors. Funding for the Senior Aides program is determined by the federal government, and staff has confirmed that additional funding will not be allocated to account for the change in Oakland’s increased minimum wage. As a result, the impact of the minimum wage increase rate change is that fewer individual seniors can be hired into positions funded by the program. Currently, the program targets to provide 148 seniors with twenty (20) hours per week of employment. With the new MWL, the program is expected to reduce the number of seniors employed by twenty-five (25) and reduce the hours per week to sixteen (16) for all remaining participants.
OPR employs many people in the classifications of Recreation Aide, PT; Recreation Attendant I, PT; Recreation Attendant II, PPT; Recreation Attendant II, PT; Recreation Leader I, PT; Recreation Leader II, PPT; and Recreation Leader II, PT; particularly during the summer months. Using FY 2013-14 data, if OPR were to continue to employ the same number of employees, in the same classifications and utilizing the same number of annual hours, the increase to the fully-burdened cost is estimated to be $625,000 per year.
Two departments (Public Works Department and Human Services Department) currently employ a combined total of five TPT Student Trainees at hourly rates below the proposed Oakland’s increased minimum wage of $12.25 per hour. Although the impacts will be nominal, each department will either adjust the salaries in accordance with the new minimum wage or cease to employ these five impacted employees.
The City funds several workforce training programs through the Workforce Investment Act (“WIA”) (Fund 2195), the Oakland Fund for Children and Youth (“OFCY”) (Fund 1780), Oakland Unite (Fund 2251 ), Team Oakland (Fund 1720) and OPR (Funds 1010 and 1820). Combined these programs serve over 1,000 youth year-round and during the summer. In addition, Alameda County and the Oakland Housing Authority (Fund 7999) fund programs that serve a total of 650 Oakland youth year-round and during the summer. Currently, these programs pay an average of approximately $10.00 per hour. At $12.25, the 22.5% increase in wages and related withholding taxes could result in a service level reduction of roughly 20%, assuming no increases in funding allocations. For Workforce Development, the WIA funded youth service providers may have to reduce service levels between 10% and 30%, depending on their respective program models…
ASSETS Senior Employment – Senior Services of America Inc. (SSAI) is clear that they must comply with local wage laws and the OCA concurs. SSAI will reduce the required number of participants and the number of hours worked per week…
2. Ripple Effect: Public Employees With Higher Wages Get a Raise, Too
Staff in the Human Resources Management Department had analyzed the earlier state-mandated minimum wage increase to determine whether raising the wage rates for the impacted classifications would result in creating “compaction” with the other related classifications. It did not. But the voter-approved minimum wage increase did:
Measure FF impacts the wages and sick leave accrual of employees represented by SEIU 1021. Employee Relations sent official written notice to SEIU 1021 on December 19, 2014, informing the Union that the wages of certain classifications and sick leave accruals for TPT employees would be increasing once the Oakland Municipal Code Chapter 5.92 goes into effect on March 2, 2015. This notice also offered SEIU 1021 the opportunity to meet and confer with the City regarding the impact of the legislation on wages and sick leave accrual for affected employees. The Union responded to the notice and Employee Relations will meet and confer in good faith with SEIU 1021, as required under state law.
There is validity to the claim that unions support minimum wage increases in part because they increase wage rates for other employees represented in the affected bargaining unit. The Service Employees International Union (SEIU) Local 1021 was a leading supporter of Measure FF.
3. You May End Up Paying for the Minimum Wage Increase Even If You Never Venture Near Oakland
A cryptic paragraph appeared in a December 4, 2014 memorandum from the City of Oakland’s lobbying firm in Sacramento (Townsend & Associates) to the Oakland City Council entitled “City of Oakland Proposed 2015 State and Federal Legislative Agenda.”
Legislative solution for direct care services to pay for higher city minimum wages. The City of Oakland recently passed an increase to the local minimum wage. Additionally, a growing number of cities are enacting minimum wage ordinances, too. Currently there are no procedures to address the required rate increases. The goal of this proposal would be to create legislation that sets rate and distribution policies.
Few ordinary people would understand the meaning of this paragraph, although they would probably feel good about the word “solution.” A December 22, 2014 memorandum to the Los Angeles City Council’s Rules, Elections, & Intergovernmental Relations Committee from its Chief Legislative Analyst was more clear about the plan:
RECOMMENDATION: Adopt revised Resolution to include in the City’s 2015-2016 State and Federal legislative programs support or sponsorship of legislation or administrative action to require an adjustment of reimbursement formulas for social service and healthcare providers to provide adequate funding to meet the requirements of local wage and benefit programs
SUMMARY; Resolution recognizes that many non-profit organizations serve vulnerable populations and that these organizations face certain financial limitations that result from their federal and State funding sources. Resolution recognizes that operational costs in local jurisdictions can be higher as a result of wage and benefit requirements. Resolution, therefore, recommends that the City support legislation or administrative action at both the State and Federal levels to ensure that governmental reimbursement formulas be structured to provide adequate funding to meet the requirements of local wage and benefit programs.
BACKGROUND: Cities across the nation, and particularly in California, have adopted minimum wage requirements that are higher than those required by federal and state laws. Certain non-profit organizations may have difficulty meeting these local wage and benefit requirements due to their originating source of funds. Many social services and health care services are provided through non-profit organizations that receive reimbursements from federal or state governments. These reimbursements may be set according to state and federal wage and benefit requirements, without adjustments to recognize local laws. Without adjustments to meet local requirements, these nonprofit organizations may need to reduce their payroll and services in order to continue to operate. Resolution seeks federal and state action to ensure that reimbursement rates reflect local wage and benefit requirements. Such an adjustment would ensure that services could continue to be provided in these jurisdications (sic).
4. More Litter on the Highways and Roads if Parolees Are Covered by the City’s Minimum Wage Law
There are also ambiguities about whether or not the Oakland minimum wage preempts the state minimum wage for parolees picking up litter from the roads:
Golden State Works/ California Department of Corrections (“CDCR”) – These work crews of individuals on parole conduct beautification projects on CalTrans right-of-ways and receive job placement support. Participants currently receive $10.00 per hour. The OCA initially ruled Measure FF is applicable for work performed within the City of Oakland. CDCR is conferring with their contracts unit, which initially indicated that state minimum wage law would prevail…
Voters of Oakland may have inadvertently given themselves more litter on the roads of Oakland when they approved a city minimum wage increase.
December 22, 2014 Memorandum to the Los Angeles City Council’s Rules, Elections, & Intergovernmental Relations Committee from its Chief Legislative Analyst on More Federal and State Reimbursement for Higher Minimum Wage
Supplemental Informational Report On The Impact Of Implementing The Voter Approved Local Minimum Wage (“Measure FF”), Which Takes Effect March 2, 2015 – City of Oakland Office Of The City Administrator – February 17, 2015
Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and is the author of frequent postings about generally unreported California state and local policy issues at www.laborissuessolutions.com. Follow him on Twitter at @DaytonPubPolicy.