Audit finds errors in Palo Alto's health care expenditures | December 7, 2012 | Palo Alto Weekly | Palo Alto Online |

Palo Alto Weekly

News - December 7, 2012

Audit finds errors in Palo Alto's health care expenditures

Critical report urges stronger oversight, better record-keeping

by Gennady Sheyner

Palo Alto's process for administering health benefits to city workers and retirees is riddled with errors and suffers from insufficient monitoring, according to a critical report from the Office of the City Auditor.

City Auditor Jim Pelletier found, among other things, that the city's retiree reimbursements were not accurately calculated; that the billing from the California Public Employees' Retirement System (CalPERS) was not adequately monitored; and that the city has not effectively administered its contract with a consultant charged with verifying the city's health expenditures. The report concluded that the city's Human Resources Department needs to improve its internal controls over health benefits to ensure that health premiums, administrative fees and retiree reimbursements are calculated and paid accurately.

The audit focused on health payments made by the city between September 2011 and October 2012 and found that the city has been overpaying for retiree reimbursement. In reviewing CalPERS bills in October 2012, the audit found that the city made overpayments totaling $12,585 and underpayments totaling $3,434, resulting in a net overpayment to retirees of $8,151. The report also notes that 64 retirees were either overpaid or underpaid by $10 or more. The report notes that the Human Resources Department "did not have a clear, documented methodology to determine the reimbursement amount."

The sheer complexity of tallying the reimbursement amounts appears to be a major factor in many the errors uncovered by the audit. The city's program covers 855 active employees and their 1,526 dependents in addition to 871 retirees and their 627 dependents. Each of the city's labor groups is governed by its own health care contract, with varying tiers based on seniority. The fact that the system is administered by a colossal entity based in Sacramento and that CalPERS routinely makes errors and revisions to its billing further muddies the process, the report states.

The report cites the Human Resources Department's (HRD) view 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 for 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," the audit states. "These discrepancies were neither documented nor tracked."

It didn't help that the city's eligibility criteria for retiree health benefits was "not clearly defined and documented," according to the audit. The city has a document called Tier Matrix, which defines retiree health tiers for each employee group and each tier within the group. The audit's review of the Tier Matrix found that the document "was inaccurate and incomplete." While there was no evidence to conclude that the inaccuracy resulted in a "material difference," the audit states: "Adequate documentation and clear communication of eligibility criteria would help to prevent any inaccuracies in future actuarial valuations." The audit recommends making the Tier Matrix available to all stakeholders and enhancing current procedures to ensure that the document is "maintained accurately, completely and in an organized manner."

The audit also found that CalPERS used "inconsistent and inaccurate" methodology to calculate the employer share of health care costs for retirees. Auditors reviewed 832 records and found that the employer share was different from expected amount in 55 of these records, resulting in $5,513 in overbilling. Much of this was related to retirees from two employee groups — the Palo Alto Police Officers Association and Fire Chiefs Association. When reached by the auditor's office, CalPERS "confirmed that most of their formulas set up to calculate the employer share were incorrect" and stated that they will correct these errors as soon as clear written instruction is provided by the city.

The auditor's office reviewed CalPERS billing for December 2012 and found numerous errors. Of the 91 retirees from PAPOA and FCA, 42 were still being billed incorrectly — an error rate of 46 percent.

The audit calls for better monitoring of CalPERS billing for accuracy. Currently, such a review only occurs for retroactive transactions associated with retirees. The audit recommends that the city conduct monthly reviews of CalPERS billing and reconcile these bills with city records.

The audit also criticizes the city's contract with the firm Employee Benefit Specialists, which the city hired in August 2011 and charged with reviewing, calculating and processing health care reimbursements. The review found that the firm "was not providing all services required in the contract." Specifically, the firm did not perform calculations of reimbursements using formulas provided by the city and did not reconcile monthly disbursements. Employee Benefit Specialists claimed that it could not perform the latter function because "CalPERS would not provide them with the necessary data to perform these services."

The audit concluded that the city did not adequately monitor the contract and recommended a review of the contract and monitoring procedures to ensure terms remain adequate.

The city's health care expenditures have emerged as a hot topic over the last four years, as the City Council embarked on a series of reforms, including greater cost-sharing by employees, aimed at containing the swelling costs. The city's health premiums for active employees have been rising steadily over the past decade, going from $9.1 million in 2005 to $13.2 million in 2012, according to the audit.

The council's health care reforms, which began in 2008, have been extremely contentious, prompting a wave of retirements by city employees. Last year, the city reached new agreements with its police and firefighter unions that require employees in both labor groups to foot some of the costs for health care. The city remains at an impasse, however, with its largest police union, the Palo Alto Police Officers Association, over a proposal to extend the cost-sharing provision for health care to retirees.

The council is scheduled to hold a hearing on employee health care costs in January.

In her response to the audit, Chief People Officer Kathryn Shen wrote that the Human Resources Department staff is "committed to addressing the deficiencies and improving the reconciliation methodology for this complex process." She noted that CalPERS has recently implemented a new billing system and is "still struggling to find corrections to the various errors."

"This has complicated the reimbursement process requiring substantial adjustments," Shen wrote. "Fortunately, most overpayments can be recovered by withholding or reducing future reimbursements. Careful reviewing the reimbursement reports will be key to addressing the issues found in the audit. Staff will also continue to find solutions to streamline this reimbursement process."

Staff Writer Gennady Sheyner can be emailed at


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Posted by Wayne Martin
a resident of Fairmeadow
on Dec 7, 2012 at 10:35 am

Here’s a link to the most recent Audit on Healthcare costs:
Web Link

What’s really bothersome about these findings is that many of the items identified by the Auditor’s Office could well have been dealt with by the HR Director. What’s also difficult to gather from this Audit is how many other problems of this sort exist in the HR Department’s handling of Healthcare administration?

The complexity of Healthcare administration is identified by the Audit. Clearly, the cost of Administration seems to have been ignored by previous Councils when they agreed to these contracts. It may not necessarily be in the charter of the Auditor to review the contracts of the various labor bargaining units with the goal of finding ways to reduce complexity/administrative costs/oversight/compliance—but it would be worthwhile if the Auditor were to make such a study.

Much of the management of “complexity” is supposed to be solved with the SAP software. Previous Auditors have shown no understanding of how to analyze the use of software by the various City departments in the Audits of the past. Without looking at how SAP is helping/hurting/not being used, these Audits are not as complete as they could be.

Hopefully a follow-up Audit will be scheduled within a year, so that there can be some sense of closure to these problems demonstrated by the HR people.

Lastly, the quality of Audits from this new Auditor seems to be heads-and-shoulders above those of previous Auditors. Let’s hope that this quality of work continues.

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Posted by David Pepperdine
a resident of Another Palo Alto neighborhood
on Dec 7, 2012 at 11:03 am

[Post removed by Palo Alto Online staff.]

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Posted by Kudos
a resident of Barron Park
on Dec 7, 2012 at 1:00 pm

Let's present these numbers in a different way.

The City of Palo Alto pays $13.2 in mecical cost per year. In 2011 the City overpaid $8151 in medical premiums. The City has over-paid a minute .07% in medical premiums.

The City Auditor has a himself and 5 employees. It probably cost $150k in staff time to find the $8k. Great work!

Like this comment
Posted by SuperD
a resident of Community Center
on Dec 7, 2012 at 2:44 pm

Hey, City of Palo Alto no worries!!! Just tax your way out of this mess, time to increase gas, electric, garbage, and water rates again. And, maybe throw another bond measure into the mix too. Your subjects - I mean citizens - won't mind one bit.

Like this comment
Posted by Read It
a resident of Another Palo Alto neighborhood
on Dec 7, 2012 at 2:49 pm

Kudos, if I understand the report those overpayments are being made monthly not just one time. Seems like its been happening for a while and would have continued without the auditors finding it. Looks like the report found a lot of other problems too.

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Posted by Dan
a resident of Southgate
on Dec 7, 2012 at 4:21 pm

Read it: "The audit focused on health payments made by the city between September 2011 and October 2012..."
Kudos is right. $8k is irrelevant. It's like when a class action lawsuit awards you $0.26 because you lost $20k on a stock due to misrepresentation. CongratulFingAtions

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Posted by Read It
a resident of Another Palo Alto neighborhood
on Dec 7, 2012 at 5:40 pm

Dan, you're reading a 2 page article trying to summarize a 30 page detailed report. I finally finished reading the whole thing. It's dry, and pretty boring, but focusing on the $8k is totally missing the point.

Like this comment
Posted by Terry
a resident of Midtown
on Dec 7, 2012 at 9:10 pm

Agree with Wayne, the only bright spot is that the new auditor is uncovering the mess of inefficiency and incompetence in City government.

Like this comment
Posted by bill g
a resident of Barron Park
on Dec 7, 2012 at 11:27 pm

The City staff does not seem to know how to use computer programs - or at least the SAP one we paid hundreds of thousands of dollars for.

Private companies seem to be able to hire competent people to use software. What is the problem with Palo Alto's training and oversight? High salaries and inefficiency. Ugh!!

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Posted by pat
a resident of Midtown
on Dec 8, 2012 at 8:23 pm

bill g: I agree! Remember the Children’s Theatre scandal when the director was fired because of some checks, but was later exonerated? See Audit 'exonerates' Children's Theatre staff Web Link

The report cited “a long-standing pattern of loose accounting procedures.” Here we go again.

“The sheer complexity of tallying the reimbursement amounts” for health care should make it obvious that the process should be computerized – if only someone can be trusted to write the program.

BTW, the city has paid SAP millions, not hundreds of thousands. In May, 2009, the Utilities Department tested an $8.8 million online system, which allows customers to access their billing information and keep track of electricity use. It had so many bugs that the UD got another $224K to fix "post-implementation issues." Probably not the right consultant to hire for the health care application.

Like this comment
Posted by Inside Out
a resident of another community
on Dec 10, 2012 at 12:14 pm

"Lastly, the quality of Audits from this new Auditor seems to be heads-and-shoulders above those of previous Auditors. Let’s hope that this quality of work continues."

AGREED! These budget problems began back when Jay Rounds was at the end of his HRD career. Then along came Russ "Biggest Joke of Them All" Carlsen. Then you have to factor in the City Manager's current and past (Benest to Keene), as well as the Finance Directors, current and past. There has been a connected 'good ole boy' network between the three positions over the past 20 years AND it has trickled down to management level where the attitude and practices run rampant - "I'm tight with so-and-so. We golf, bbq, share holidays, our wives are friends with him/them so I can do what I want. I'm in! I can hire my unqualified friends, their kids, etc, and promote them too because I can", hence, the current most dysfunctional city organization EVER.

For example, how the current PWD got his job I'll never figure out. He got the job, fixed something (reorganized the department) that was not broken to hide the fact that his engineering staff (even under his assistant director position) is/was incompetent and insufficient to perform duties. He reorganized the public works department and hired back his retired Palo Alto buddy's as contract managers ‘because we are so overworked’ and ouila! Also, in doing so, it created MORE FTE management positions (along with the contracted ones), that this department alone is now dysfunctional with a capital D. Simply disgusting!

SERIOUSLY, the Auditor needs to do performance audits on ALL management staff and get CONFIDENTIAL input from workers they supervise. I’m not sure how ‘tight’ the Auditor is with Keene (another BIG JOKE) or FD or the new HRD (is she really a lawyer and NOT HR experienced?), and I just hope this audit is not being done maliciously to cover how inadequate leaders really are. Let’s not blame employees or retirees for mismanaged budgets! Run City of Palo Alto the way it should as a government entity and not based on politics and lining your $100K+ a year pocketbooks!

Keeping my fingers crossed that “this quality of (Auditor) work continues.”

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Posted by SAP - ugh
a resident of Downtown North
on Dec 10, 2012 at 12:22 pm

Wasn't it city staff who didn't change the SAP access password when the consultant services ended? Remember that allowed ALL city finances and personnel information to be stolen?

How does the Finance Department continue to receive awards for being so great with all these "loose accounting practices"?

There was an employee who worked in HR that went to another department. She should have LOST all of her HR access yet she continued (and probably still does) to 'look' at the infomation. What she does/did with it, who knows. She was hurting financially then and I am sure she still is.

SAP sucks - unless you know how to use what you pay for.

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Posted by Training
a resident of College Terrace
on Dec 10, 2012 at 12:48 pm

"What is the problem with Palo Alto's training and oversight?"

There is no budget for training unless you are a manager.
There is no oversight.

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Posted by Jon
a resident of Palo Verde
on Dec 10, 2012 at 3:48 pm

Let's be honest- $8k is a pretty small error when dealing with a large organization (and healthcare bills, no less!). There has been a mass exodus of line staff and management in the past few years, leaving big knowledge gaps. Expect this trend to continue. I hope and expect that Palo Alro residents will apply for these positions, given their excessive pay/benefit package.

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Posted by Good auditor
a resident of Crescent Park
on Dec 10, 2012 at 6:11 pm

Three cheers for the current auditor. He seems to be doing his job. Previous auditors seemed to be in the PR business, always telling us how wonderful we are.
I hope honesty isn't a problem for the City Manager he may not be accustomed to it.

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Posted by Lazlo
a resident of Old Palo Alto
on Dec 10, 2012 at 8:52 pm

No doubt Keene and Klein's answer will be to appoint a "blue ribbon" committee to perform a lengthy review of the situation and then hire another $150,000 a year manager who will then strategically monitor the process and report back on the recovery of the .0001% overpayment to retirees. No word yet on when the city will repay those retirees whose compensation was underpaid. One should really ask how many hours, how many city employees, and at what cost did it take the auditor's office to file this report so that we can clearly understand the inefficiency and incompetence of city government.

Posted by Name hidden
a resident of Greendell/Walnut Grove

on Jun 5, 2017 at 9:15 pm

Due to repeated violations of our Terms of Use, comments from this poster are automatically removed. Why?