DENVER – The city is not checking to determine if the process to set compensation for more than 13,000 employees is reasonable, according to a May report commissioned by Auditor Timothy M. O’Brien, CPA. Denver uses a private company to review some of the compensation levels, but this does not provide a fully independent review as required by the city’s code.
“Employee compensation and benefits are one of the city’s largest expenditures and it’s our duty to both employees and the tax payers to make sure those salaries are independently reviewed,” Auditor O’Brien said.
Denver should also follow-up on a study indicating the city could save money on health insurance premiums and should considers the advantages and disadvantages of a self-insurance plan. Finally, the Auditor’s report stated that the way the city reviews the pay of elected officials needs to be clarified, with clear methodology on how comparisons are made and who is responsible for compiling such information.
Auditor O’Brien commissioned Denver auditing firm BKD to review a report from Segal Consulting, which found employees are paid at market rates when compared to their peers. The Segal report started in 2015 and was published in 2017. It said the city’s pay and benefits package is at market when compared with other similar public-sector organizations and above market when compared to the private sector due to health and retirement benefits.
The new BKD evaluation found the Segal report was not entirely independent. The city’s Office of Human Resources guided or assisted with key aspects of the study. The office suggested which cities to compare Denver to and which positions to compare. Segal used some of the city’s suggested positions but also picked some of its own for the comparison.
The Segal evaluation also had a limited scope and not all employee classifications were included. The job titles selected were chosen to cover the largest percentage of city employees, but only represented 11 percent of the city’s overall job titles. The city has 903 titles and 467 different pay grades. See the chart below for a breakdown of the titles included and not included in the study:
The evaluation also found an independent audit of the methodologies for pay plan adjustments, classifications and benefits has not been completed every four years as required in the city’s municipal code. The Office of Human Resources last commissioned an audit using Segal in 2016, as has been the case in previous years. However, the evaluation found this audit did not meet the requirements of independence.
In addition to the compensation and benefits study done every four years, the office conducts a market pay survey every year. BKD’s evaluation noted the Segal study does not include inquiries related to employee benefits. City ordinance does not specify how often benefits need review. The mayor or city council requests this analysis, not the Office of Human Resources.
Based on a 2016 study by Lockton Company, the City and County of Denver would also be a good candidate for self-insurance for certain medical plans for its employees. The new BKD evaluation encourages the city to do more research to decide if this is a realistic option.
The city now uses Lockton Company, an insurance brokerage, for help buying and managing insurance plans, options and plan structure. The city currently contracts with three different insurance companies to provide healthcare services for about 13,600 employees. The three plans cover about 11,000 employees within the city. Sixty percent are enrolled in Kaiser, 34 percent in United Health Care and 6 percent in Denver Health Medical Plan.
These are fully insured health plans, as opposed to self-insured plans, where an employer pays benefits using its own funds. In a fully insured plan, the insurance company contracts with the employer and takes on the risk, which can frequently be passed on to employers and employees in the form of ever-increasing premiums. Conversely, the insurer also reaps any financial benefits if premiums exceed claim costs. Under a self-insured plan, an organization directly takes on insurance risk but typically backs it up with “stop-loss insurance,” which pays catastrophic costs that exceed prescribed limits.
According to the Lockton study, United Health Care is the only provider the city now contracts with that offers a self-insurance option. In 2016, the city paid $42.6 million to United Health Care for the fully-insured option, out of a total estimated $94 million for all three.
The State of Colorado, as well as many large cities, use self-insurance plans. However, the city has not made any decision on using a self-insurance plan for health insurance benefits. The city charter and code do not specify who is directly responsible for making such a decision.
Finally, the BKD evaluation also found elected official compensation calculation, roles and responsibilities should be better defined and clarified. The evaluation found there needs to be more clarity on what data is collected and used to decide how much elected officials get paid. The city also needs to decide what data is considered and who does the calculation.
“Denver’s employees should receive reasonable compensation and the most cost-effective health benefits,” Auditor O’Brien said. “City officials need to work harder to make sure analysis is complete and up to date to ensure this happens.”