DENVER – According to an audit released by Denver Auditor Timothy M. O’Brien, CPA, the city is not reporting up to 10 percent of its workers’ compensation costs (approximately $3 million during the three-year audit period) in the proper fund. Because the actuaries do not have all the cost information, some of the liabilities associated with workers’ compensation are not recorded at all.
“The city should account for all workers’ compensation costs in the designated fund, so we know what the self-insured program is actually costing the people of Denver,” Auditor O’Brien said.
State law requires employers to provide medical care and treatment needed at the time of the injury or occupational disease and during the disability. The city’s workers’ compensation activity is accounted for primarily in a dedicated fund.
However, the audit found revenues, costs and liabilities are not fully accounted for in the dedicated fund. Specifically, salary continuation costs are not paid out of the dedicated fund. Instead, these costs are paid directly by the agency without recording all related liabilities in any fund. Salary continuation is when the city provides paid disability leave to eligible employees if the employee has a disability due to an on-the-job injury or disease and is unable to perform the duties of the position or any other position. Salary continuation begins after an employee misses three days and files a workers’ compensation claim.
The city considers salary continuation to be a benefit and pays for it out of individual agency funds rather than the Workers’ Compensation Fund. This matters because it means the city is underreporting the total cost to the city of workers’ compensation in the city’s Comprehensive Annual Financial Report. The city has agreed to add disclosure of salary continuation costs and related liability to the 2018 financial statements.
The city also lacks a formal strategic plan process for the workers’ compensation program. Without comprehensive and targeted measures tied to well-documented strategy, the city cannot determine if the self-insured program is cost-effective and achieving strategic goals. More evaluation of different workers compensation models could help ensure that the city has identified all available cost savings opportunities.
“While the program’s performance has improved in many aspects, the city is not fully analyzing the total cost of the workers compensation program,” Auditor O’Brien said. “Without reviewing performance, how can the city know it’s getting the best deal? Reducing unwarranted costs is a primary goal.”
Finally, the balance policy for the city’s workers’ comp claim fund does not match the actuary’s recommendation. The city uses a third-party firm to calculate the fund’s liability and to make a recommendation on how much above that liability the city should be able to pay due to the uncertainty of claims. The workers’ comp fund has a target funding range $1 million below the actuary’s recommended level.
Auditor O’Brien questions this decision because the city has more funds on hand than the recommended levels, but the agency disagrees and chooses not to consider a policy to require the funds stay at the recommended level.
“Given that the funding levels have greatly improved, I find it puzzling for the city to have more money on hand than needed but not consider making it policy to keep at least the actuarial recommended amount available,” Auditor O’Brien said.
The audit also found room for improvement in updated polices and in efficiency and effectiveness of the risk management information system.