Employee Benefits: They can no longer be considered "fringe"
(from Maine Townsman, January 1998)
By Jo Josephson

Just how much does Maine local government spend on employee benefits?

Well, it depends on what you count as a benefit. If, like the feds, you count health and retirement benefits as well as workers compensation and unemployment insurance, it's an estimated $65 million a year or 27 percent of payroll. If, like the MMA Fiscal Survey, you only count health and retirement benefits, then it's an estimated $55 million or 23 percent of payroll.

When employee benefits were first introduced in the 1920's, they were of minor monetary value and were referred to as "fringe benefits". Designed to promote and reward employee loyalty and discourage unionization, they were viewed as a "gift" from one's employer. While some still refer to them as "fringe", perhaps out of habit, they now comprise a large percentage of the total compensation package and are considered, by many, as "rights" to which all employees are entitled.

In fact, legally required benefits, such as social security, workers compensation, and unemployment insurance, make up about 20 percent of benefits of state and local government workers as reported by the U.S. Bureau of Labor Statistics (BLS)

This article first looks at what BLS considers "employee benefits" and then roughly attempts to compare local government spending here in Maine with the national figures for state and local government before turning its attention to how MMA's Fiscal Survey views the benefit package. It then focuses on two trends to contain health insurance costs, the movement toward employee contributions to health insurance and managed health care plans.

THE BENEFIT PACKAGE: NATIONAL

According to recent (March 1997) national figures for state and local government workers (see below), employee benefits are as much as 43 percent of payroll!  

Employment Cost Trends

State & Local Government

March 1997, U.S. Bureau of Labor Statistics

Compensation Component

Cost

Per Cent

Total Compensation

$26.58

10.0

Wages & Salaries

$18.61

70.0

Total Benefits

$7.97

30.0

Paid leave

$2.06

7.7

Insurance

$2.09

7.9

Health

$1.99

7.5

Life

$0.05

0.2

Sickness & Accident

$0.02

0.1

Long-term disability

$0.03

0.1

Retirement & Savings

$1.95

7.4

Legally Required

$1.61

6.1

Social security

$1.25

4.7

State unemployment

$0.05

0.2

Worker's Comp

$0.30

1.1

Before you get out your calculator and start figuring how employee benefits in your municipality compare with the national figures, you should know that the national figures include everything but the kitchen sink.

Not only do they include the standard health and retirement benefits and the legally required insurances, such as workers compensation, unemployment insurance and social security, they also include "paid leave", a.k.a., sick days, holidays and vacation days!

While most employers do not factor in the cost of pay for time not worked because it is a so-called "inside payroll expense", the Bureau of Labor Statistics does, presumably in an attempt to tell the "whole benefit story".

And as it does, the BLS notes that "paid leave" constitutes the biggest piece of the benefit pie at 25.8 percent; which is to say it is slightly more than health insurance (25 percent) and retirement excluding social security, (24.5 percent), and considerably more than the so-called legally required insurances including social security (20 percent).

Since most employers do not factor in this "inside payroll expenses", when calculating the cost of employee benefits, in trying to compare apples with apples for the purposes of this article, the TOWNSMAN deleted the cost of "paid leave" from its calculations.

By doing this, employee benefits as a percentage of payroll becomes considerably less: benefits constituted only 32 percent of payroll instead of 43 percent and health benefits comprised a much larger piece of the benefit pie, almost 34 percent instead of 25 percent.

THE BENEFIT PACKAGE: MAINE

So how does Maine compare with the Bureau's average 32 percent of payroll figure? To make more of an apples-to-apples comparison, using figures from MMA's Fiscal Survey and Salary Survey for 1996 and adding in amounts for workers compensation and unemployment insurance, the estimated statewide total benefits for municipal employees averaged 27 percent of payroll. The figure is based on an estimated statewide total of $65 million in benefits and $244 million in full-time salaries.

One reason for the difference with the national figure of 32 percent of payroll could lie in the fact that the national figures cover state as well as local government workers and when compared to local government workers, state workers are highly unionized thus accounting for a bigger benefit package.

National comparisons aside, what follows is a brief look at employee benefit expenditures as defined by the MMA Fiscal Survey for 1996. As described by the survey, "benefits" are limited to health, dental, and life insurance and retirement (Social Security, Medicare, Maine State Retirement System, deferred compensation, long-term disability). They do not include workers compensation or unemployment insurance, or "paid leave".

According to the MMA survey, the estimated statewide total spent on employee benefits is slightly more than $55 million, or 22.5 percent of payroll. Of those benefits:

Health, dental and life insurance constitute $24.9 million or 10 percent of payroll

Retirement constitutes $30.4 million or 12.5 percent of payroll.   

Employee Benefit Expenditures

Town

Population

Benefits

Salary

% of Payroll

Readfield

2,197

$26,429.00

$95,000.00

27.8

Raymond

3,649

$67,636.00

$288,168.00

23.5

Houlton

6,804

$419,159.00

$1,602,525.00

26.0

Presque Isle

10,070

$970,157.00

$2,561,295.00

37.9

Brunswick

20,560

$900,730.00

$4,127,642.00

21.8

Lewiston

37,373

$4,554,747.00

$13,725,614.00

33.0

HEALTH BENEFITS: EMPLOYEE CONTRIBUTIONS

As noted above, Maine municipalities were estimated to have spent some $25 million in providing health insurance benefits to their employees. That's about 38 percent of the benefit package, and slightly higher than the national figure of 34 percent.

If one takes the comparisons at face value, the question becomes what are they doing nationally that we aren't doing here at home in Maine? The answer is employee contributions.

According to the latest figures (1994) available from BLS, about half of the full-time state and local government employees with medical coverage were required to contribute toward individual coverage; while 70 percent of covered workers had to pay part of the cost of family coverage. According to the Bureau, in 1994 the monthly employee contributions (of those required to contribute) averaged $30 for individual coverage and $150 for family coverage.

So how does Maine compare to these national figures? Figures available from the MMA 1997 Salary Survey, reflecting practices in 140 municipalities that responded to the survey and which only refer to employers (municipalities) not individual employees as does the BLS survey, indicate that:

28.6 percent of the municipalities required employees to contribute something toward their individual (single) coverage.

 70.7 percent of the municipalities required employees to contribute something toward their family coverage.

How much is "something"? As to be expected, the employer/employee ratio varies widely, as the following examples below indicate. As the above figures imply, in some municipalities employees contribute to their coverage whether it is single or family. In many municipalities, employees only contribute when it comes to family coverage.

A look at the variations on the theme of contributions follows. But first it should be noted that at least 40 municipalities, including Lewiston, Millinocket, Lincoln, Kennebunk, Yarmouth, Rumford , Ellsworth, Madison, Wiscasset, and Livermore Falls, were still paying 100 percent for both single and family coverage at the time the survey was conducted.

Some Examples

In Dexter, while the survey indicates the town currently provides 100 percent of single and family coverage, municipal officials say they are contemplating eliminating full-family coverage for new hires.

In Mexico, the city pays 98 percent of single as well as 98 percent of family coverage. The two percent employee contribution reflects the fact that two years ago employees began paying 60 percent of the increase in insurance premiums Their share will increase as premiums increase.

In Hope, the town pays 100 percent of single coverage; employees who want family coverage contribute 55 percent of the cost; their contribution reflects the difference between the cost of single and family coverage.

In Skowhegan, the town pays 100 percent of single coverage and 20 percent of the additional cost for those who wish family coverage. What it means is that the town pays 56 percent of the cost of family coverage and the employee pays 44 percent.

In Poland, the town currently pays 100 percent for single and family coverage. As a result of recent labor negotiations, employees with the public works department who want family coverage in the future will be chipping in 5 percent of the difference between single and family coverage.

In Old Town, the city pays 100 percent of single coverage; union employees who wish family coverage contribute 50 percent of the cost; non-union employees only contribute 25 percent of the cost.

In Caribou, the city pays 78 percent of single and family coverage for most employees; it used to pay 80 percent, but the year the premiums increased by 12 percent, it asked the employees to chip in 30 percent of the increase leading to the current 78/22 ratio. Members of the public works department only contribute 19 percent of their coverage, as a result of recent negotiations which traded a raise for increased municipal coverage. The employee's share is paid for with pre-tax dollars.

In Rockland, the city offers employees a so-called "cafeteria plan" providing all employees with $329 a month to purchase health, dental and life insurance. Currently the single coverage costs $213 a month; family coverage costs $532.

In Windsor, the clerk/tax collector/treasurer was recently offered 100 percent single coverage in lieu of a raise after one-year on the job; it was viewed as a non-taxable raise.

In Cape Elizabeth, the town currently pays 95 percent of single and family coverage. In the future, the town plans to only pay 90 percent coverage for families. However, for those choosing single coverage, the town will pay 100 percent of the cost and if the individual is eligible for family coverage, the town will split the savings 50-50 with the employee. Those choosing to stick with the 90 percent family coverage will be able to pay their share with "pre-tax dollars".

Pre-Tax Dollars

One cannot talk about employee contributions, without mentioning "pre-tax dollars", which also go by the name of "reimbursement accounts" or "flexible spending accounts". Simply stated, they enable employees to pay for certain expenses, like their share of health insurance, with wages that are set aside before taxes.

According to the Bureau of Labor Statistics, in 1994 about two-thirds (64 percent) of full-time employees in state and local government nationally were covered by employer-sponsored reimbursement accounts.

According to MMA's 1997 Salary Survey, 15 of the 140 municipalities or approximately 11 percent of those that responded to the Survey, offer flexible spending accounts.

Flexible spending accounts are not to be confused with flexible benefit plans (see article on page 25). The former is funded by employees with pre-tax dollars, the latter by employers.

MANAGED CARE HEALTH PLANS

Employee contributions is one way to contain municipal costs; another way is to switch to a health plan that controls costs by managing access to services. While there are numerous types of health care benefit plans available, the major difference among the plans is said to be the ability of and the degree to which participants are able to freely chose their physician and other health care providers. As a general rule, the greater the freedom of choice, the greater the cost of the plan.

A description of the major types of health care plans available follows:

Fee-for-service or indemnity plans. These are the traditional way of providing medical care benefits. Under such plans, individuals receive medical care from doctors and facilities that they choose; the plan either reimburses the provider or the individual for some or all of the cost. While participants in these plans have the greatest freedom in choosing their doctors compared to the other types, most of these plans have some restrictions in place to manage costs, such as a "second opinion" being required for non-emergency surgery.

Preferred Provider Organizations (PPO). Often associated with fee-for-service plans, these plans offer a higher level of reimbursement for services rendered by designated (network) health care providers than pure fee-for-service plans, although participants are free to choose any provider. Designated providers agree in advance to a given fee schedule for their services.

Point-Of-Service (POS). Unlike PPOs, these managed care plans rely on an individual's "primary care physician" to control a participant's access to medical care (gatekeeper). Like PPO plans, participants retain the option to seek care outside the network, but at reduced coverage levels. Relatively new, this type of plan is said to be one of the fastest growing of the non-traditional plans, particularly in Maine.

Health Maintenance Organization (HMO). HMOs are a prepaid plan in which participants may obtain care only from a specified provider network and all care is managed by a "gatekeeper" physician. Unlike the PPO and PSO, no benefits are provided for care received outside the HMO network of health care providers.

According to figures supplied by a national employee benefits consulting firm (J&H Marsh & McLennan), the average cost to employers per active, as opposed to retired, employee (small employer) for health coverage in 1996 was $3,405 up from $3,058 in 1992. Their figures indicate, not surprisingly, that the traditional fee for service plan is more costly than the non-traditional plans. Traditional plans average $3,455 per employee, compared to health maintenance organizations which average $2,771 per employee.

National Trends

So it comes as no surprise that in 1994, the BLS found that the number of state and local government employees with medical care benefits who chose non-traditional health care plans was continuing to increase. Non-traditional, or managed care, health care plans covered 62 percent of the full-time employees with employer-funded medical care benefits in 1994, compared to 57 percent in 1992.

In a more recent (1996) survey, albeit of both the public and private sector, by J&H Marsh & McLennan, employee enrollment in managed care plans continued to rise, although at a slower pace. In 1996, 77 percent of employees were enrolled in some form of managed care plan, up from 71 percent in 1995. Most of the growth occurred in the Point- of-Service plans, rising from 14 to 19 percent of the employees nationwide in 1996.

Maine Trends

So what are the trends in Maine? As of January 1, 1998, figures provided by the Maine Municipal Employees Health Trust, which represents 389 municipal, quasi-municipal and county governments, indicate that 2,556 employees are currently covered by the traditional fee-for-service or indemnity plan, while almost twice that number, 4,448, are covered by a Point-Of-Service plan.

According to the Trust, in the two years since the POS plan was introduced, there has been a 63.5 percent shift away from the indemnity plan to the Point-Of-Service plan. Currently, more than 200 of the entities that are members of the Trust offer their employees both plans.

PAID LEAVE

At the beginning of this article, the federal practice of counting "paid leave" as a part of the benefit package was discussed and then discarded in an attempt to compare apples with apples. Lest, one think it is not an issue, the article comes full circle now by drawing on the benefit calculations made by the city of Ellsworth (pop. 6,277), which, in reinventing its employee benefits package (see article on page 25) counted "paid leave" as an indirect as separate from a direct benefit cost.

Ellsworth City Manager Tim King has calculated that direct benefits for the city's 60 full-time employees come to more than $555,000. Direct benefits include the cost of retirement, health insurance, and workers compensation. Furthermore, he calculates that indirect benefits holidays, vacation days and sick days cost the city an additional $225,000. Holidays cost the city approximately $70,000 a year; vacations cost the city almost $89,000 a year; and sick leave costs the city almost $67,000 a year.

Current benefits, therefore, total slightly more than $780,00 a year. With a payroll of approximately $1.7 million, total benefits amount to 45.8 percent of payroll, a number that is in the national ballpark of 43 percent, when including paid leave.