Newark failed to charge millions in mandated health benefit costs

By Ted Sherman | NJ Advance Media for NJ.com
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on March 09, 2015

NEWARK — In 2011, the state passed a health benefits reform law requiring all public employees to pay a growing portion of the cost of their health benefits.

But for the past two years, records show that Newark—which is operating under state financial supervision—has not been collecting the full mandated contribution from its more than 3,000 employees, at an estimated cost to taxpayers of more than $7.2 million.

Newark officials blamed software issues they said they thought had been corrected. However, an examination of recent financial audits indicate the city was warned at least two years ago that at some employees were not paying anything at all for their health benefits. At the same time, auditors repeatedly complained they had not been provided with the proper files to determine if the required health benefit deductions were being made across the city's payroll.

"None of this stuff was implemented. I don't know why," said recently elected Mayor Ras Baraka. "I'm not going to speculate about why it wasn't done."

The Department of Community Affairs acknowledged the longstanding problems in Newark, but would not publicly criticize the financially challenged city, which depends heavily on state aid. Under the state's transitional budget aid agreement with Newark, the department has oversight of the city's day-to-day finances.

"We are aware of the city's challenges in adjusting their payroll system," said Tammori Petty, a spokeswoman for the department. "It is our understanding that the city has developed a solution with its software vendor and an adjusted personnel file is being uploaded into their payroll system."

The state did not respond to specific questions about the city's failure to follow the law, or why the department itself did not immediately pick up on the problems spanning through three successive city administrations, despite the audit findings.

"The Division of Local Government Services' fiscal monitors assigned to the city of Newark have been engaged in direct conversations with the business administrator, the chief financial officer and the personnel director to monitor the city's steps to fully and properly implement this law," said Petty.

Newark personnel director Kecia Daniels, though, said the state indicated no small displeasure with the continuing delays in implementing a statewide law that requires all public employees cover a larger part of their health care costs.

"Fix this and fix it now. That was their attitude," she said.

Sharing the cost

Legislation requiring all public employees to contribute toward the cost of their health care and pension benefits was signed into law by Gov. Chris Christie in June 2011, and was to be phased in over four years.

Under the law, the health benefit contributions are based upon a percentage of the cost of coverage, and vary according to salaries and levels of coverage. Lower compensated employees pay a smaller percentage and more highly compensated employees pay a higher percentage. No employee pays less than a minimum 1.5 percent of their employee's base salary, with contributions growing to as much as 35 percent of the premium for the highest paid employees.

The full contribution applied immediately to new employees and those not covered by union contracts, and was gradually implemented for union workers as their contracts expired.

In Newark, Daniels said the city—which manages its own payroll—ran into technical difficulties when it first began implementing the tiered health benefit deductions.

"We had to invest in new technology," she said. "We had to have data imported into the city payroll and the databases did not talk to each other."

By 2014, as the level of contributions began increasing, Daniels said the city was "led to believe" the deductions were being taken. "But when we checked the system they were not happening," she said.

Audits raise red flag

An examination by NJ Advance Media of the most current independent financial reviews in Newark, though, shows that the city's auditors raised questions about the level of contributions in a report last year, and then again in January. Those audits were for 2012 and 2013. The city has yet to be audited for 2014.

In both of the years examined, the auditors—Samuel Klein and Co.—said the health benefits data needed to determine whether employees were having the correct amount deducted from their paychecks was not provided to them, leaving them unable to determine whether the proper contributions were being taken from all paychecks.

In fact, when the auditors examined a sample of employees in each year, they found none were paying anything at all for their health benefits—not even the base contribution every public employee in the state must pay.

"The minimum mandatory health benefits withholding of 1.5 percent was not collected," concluded the audit report.

It also found that pension contributions, which increased as well under the benefits reform legislation, did not match the required levels mandated under the law.

Now officials say the required contributions are finally kicking in. Neither the state nor city officials could provide an estimate of what it cost the city and taxpayers for the failure to collect the benefits costs.

"Without a data-driven analysis, it is too premature to speculate on the total amount of these contributions," said Petty. "Division of Local Government Services fiscal monitors are working with city officials for the purpose of resolving this matter."

According to figures provided by the city, however, $405,790 was collected in health benefit contributions in the most recent pay period, compared with $126,471 the previous pay period. Based on a bi-weekly pay period, and assuming everyone opted for the same benefits as before, those contributions indicate Newark may have failed to collect more than $7 million for health care costs in the past year.

Baraka said the city will not charge employees for the benefit contributions not collected in previous paychecks.

"We refused. They tried to but we refused to do that," he said. "We just stood our ground and said 'we can't do that; it's punitive'. We worked it out."

Mark Pfeiffer, the former deputy director of the state Division of Local Government Services now with the Bloustein Local Government Research Center at Rutgers University, said the lack of compliance by Newark "clearly has had an impact on the city's budget and its property taxpayers."

He said he had been unaware Newark employees were not contributing the full amount mandated for their health care costs when he was with the state, but added that no one ever anticipated that any municipality would not comply with the state law.

"For Newark to have taken this long, there clearly must have been some extraordinary circumstances or decisions taken by Newark officials that got them to the point where they are today," he said. "It could have been it's too complicated. Or they just didn't want to do it and decided to ignore the law as long as they could."

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