Joint Appropriations Minutes 02/08/2005 9:00 AM

Sandy Zinter, Commissioner of the Bureau of Personnel (BOP) and Sandy Jorgensen, Director of Compensation presented the FY 06 Total Compensation Proposal. Document 1 was distributed.

Commissioner Zinter told the Committee the Governor's recommended compensation package was $22,145,695 which includes a 3% across-the-board increase ($18.7 million), a 2.5% movement to job worth ($3.4 million) and health insurance. The $22,145,695 includes $9,186,709 from General Funds, $4,743,972 from federal funds, and $8,215,014 from other funds.

Commissioner Zinter gave a brief history of the PACE system. PACE has three components:
    0.1 *      Annual adjustment of 3%
    0.2 *      2.5% movement to job worth
    0.3 *      Longevity pay

Commissioner Zinter told the Committee the annual 3% adjustment is given to eligible employees who are not over the maximum of the pay range. This adjustment is an attempt to keep the state salary structure competitive and is the highest priority for available dollars.

Ms. Jorgensen said the movement to job worth was designed to address the compaction of salaries, especially at the bottom of the range. Ms. Jorgensen said almost 75% of state employees were below job worth before PACE. Commissioner Zinter said job worth makes sure new employees are not paid the same as existing staff. Ms. Jorgensen described job worth as the amount the organization can afford to pay a fully trained competent employee and it takes 7 years to get to job worth.

Ms. Jorgensen directed the Committee to page 5 of the handout and explained the 2.5% movement to job worth example. Senator Earley asked how the 3% annual adjustment figures into the 2.5% movement to job worth. Ms. Jorgensen said the 3% adjustment moves the entire salary range while the 2.5% is merely movement within the salary range. Ms. Jorgensen said the 3% was not included in the example; however, the BOP will add that information to the example and provide that information to the Committee.

Commissioner Zinter told the Committee Longevity Pay is a method of rewarding employees after 7 years of employment. This dollar amount comes out of the agency budget and is not part of the salary package.

Representative Hunhoff asked what the Bureau used to compare the jobs to in order to come up with the minimum salary. Ms. Jorgensen said the Bureau estimated what the state could pay, what positions were in the market place and tried to pick a number that would make the state the most competitive. Commissioner Zinter told the Committee that of the 12,380 total state employees, 83% live in 10 cities.

In-State Salary Comparison Commissioner Zinter said the comparison was done by surveying 453 jobs and 107,000 individual salaries. Senator Apa asked whether the salaries surveyed were only from the private sector or if they included city, county and school employees. Ms. Jorgensen said the figures were from the Department of Labor and because state government competes with all sectors, the survey included everyone. Representative Hunhoff asked what year the data was from. Ms. Jorgensen said the instate data is current through the 3^rd quarter of 2004.

Complete Market Salary Comparison Commissioner Zinter told the Committee the comparison was from surveying the 2003 salaries of 53,000 state employees in the 6 six surrounding states.

In-State Total Compensation Comparison and Complete Total Compensation Comparison - Representative Hunhoff asked how the BOP compared benefits. Ms. Jorgensen said the survey was based on what percent of the payroll is figured on benefits. The data is as close as possible working with the different benefit packages. Ms. Jorgensen said health benefits were the hardest to compare. Representative Peters asked if the state income tax in some of the neighboring states was considered when the surveys were done. Ms. Jorgensen said no.

Representative Haverly asked how the process works, taking 6 states and coming up with a comparison. Ms. Jorgensen said that the compensation directors for 25 states get together, review job descriptions for each state and write definitions for exactly what they want to survey.
Commissioner Zinter said information was available to compare South Dakota to an individual state, as opposed to a group comparison. Senator Smidt commented on the fixed salary and cost of living in South Dakota as compared to other states.

Distance Behind Market - Survey data shows South Dakota 10.1% behind the market in salaries and 9.4% behind in total compensation. Commissioner Zinter said:
    1 *      the state workforce needs a 3+% increase every year to not fall further behind.
    2 *      with a 3% increase per year, state workers would at best only continue to lag the market by 9%, and
    3 *      including a 1% increase per year over the recommended 3% it would take a decade to become competitive with the labor market.

Senator Apa asked what was the total turnover rate in state government and in the private sector. Commissioner Zinter said 12.12% for state government. Ms. Jorgensen did not have the exact figure for the private sector; however, Ms. Jorgensen said it is generally about the same. Commissioner Zinter agreed to provide the information broken down by occupational categories.

Senator Earley commented that he sees two major differences between the private sector and state compensation process:
3.1 * in the private sector performance evaluations are done for salary increases and this is not always the case for state employees; and
3.2 * in the private sector a part of the benefit expense is borne by the employee.

Representative Peters asked how a “substandard” employee is handled and if they receive the same salary increases as other employees. Ms. Jorgensen said no one is give a 2.5% movement to job worth or 3% annual adjustment if they are on a work improvement plan. Once the employee has completed the plan and is satisfactorily performing the job the increase is awarded.
Representative Peters asked how many employees are on such a plan. Ms. Jorgensen said there were 94 last year; most of which went on to complete the plan and receive their salary increase. Ms. Jorgensen said the work improvement plan can last anywhere from 30 days to 6 months, depending upon the performance issue. Representative Hunhoff asked if when the employee is awarded the salary increase, is it retroactive. Ms. Jorgensen said yes. Representative Hunhoff asked if an employee on probation would receive the 3% annual adjustment. Ms. Jorgensen said yes, because the 3% moves the whole range, the employee would receive the 3% adjustment. At the end of the 6-month probation the employee would receive a 5% increase; however, the employee would not receive the 2.5% movement to job worth. The 2.5% movement might be delayed a year, until the next annual adjustment.

Representative Hunhoff asked how many employees are lost in a probationary period, and is the PACE program working. Ms. Jorgensen said BOP feels the PACE program is working. The Bureau will provide information to the Committee regarding employees, by classification, that are lost during the probationary period.

Senator Apa asked the bureau to provide a report listing terminations for cause for FY 04, by department and the total number of turnovers in the each department. Senator Apa also asked for a list of all employees for calendar year 2004.

Representative Tidemann asked if employees are given an option to resign prior to termination.
Ms. Jorgensen said depending upon the reason for termination, they are usually allowed to resign. Ms. Jorgensen said there have been very few instances where an employee is not allowed to resign and is terminated.

Meeting recessed at 10:20 a.m.
Meeting reconvened at 10:35 a.m.

Larry Kucker, Director of the Benefits Program, spoke to the Committee regarding the health insurance program.

Health Claim Trend Rates The comparative numbers were received from a national survey. On the national basis, health insurance with prescriptions went up 14.4%, the border states 10.3% and South Dakota 9.0%. These numbers reflect all employers, large and small.

Benefitted Employees and Dependents by Location - 28,546 total benefitted individuals, involving all benefits, health, life, flexible benefits, etc. Representative Hunhoff asked how long someone can stay on COBRA. Mr. Kucker said COBRA participants, if they are former employees, they can stay on for 18 months, in some cases their dependents can stay on for as long as 36 months; however, most do not.

Senator Earley asked if there were any health benefits for retired employees. Mr. Kucker said employees who are drawing a retirement benefit from the state are allowed to stay on the plan until the age of 65, at which time they move to Medicare and the state offers a Medicare supplement policy. The cost to the retired employees is approximately $260/month/individual. The supplemental plan is age graded. Senator Earley asked if these premiums are subsidized. Mr. Kucker said for employees over 65 there is no subsidy, under the age of 65 there is some subsidy for active employees.

Senator Earley asked if the $260 was subsidized. Mr. Kucker said yes.

Representative Hunhoff asked if the state pays the COBRA. Mr. Kucker said no.

Senator Apa asked if the COBRA payment was subsidized. Mr. Kucker said yes.

Health Plan Members Only - Mr. Kucker said total members in the state health plan is 24,162 which includes 11,143 dependents and 13,109 employees, retirees, and former employees. Senator Earley asked for a breakout in each category (employees, retirees, former employees). Senator Apa asked if all dependents were subsidized at the same amount. Mr. Kucker said yes.

Successful in managing health insurance costs Mr. Kucker told the Committee no increase is requested in FY 06 for health insurance. The state has worked hard at managing health care costs.
4 *      Plan Management - implemented programs and design changes will save an estimated $67 million between FY 00 and FY 06.
5 *      Provider and Employee Participation - members participating in Disease Management programs have avoided $16 million in health care costs
6 *      Cost Sharing - members currently contribute a significant portion of plan costs. Employee premiums and out of pocket expenses amount to over 37% of total plan costs which include claims and administrative charges.

Senator Apa asked if the disease management program was voluntary. Mr. Kucker said yes. Only one program, the “Our Healthy Baby” is mandatory. Senator Apa asked if an employee has serious health problems and drops out of the management program, does that employee pay a higher fee. Mr. Kucker said small incentives, such as paying for an office call, are provided for employees who participate in the disease management program. If an employee drops out of the program, they are dis-enrolled and the incentives are removed. Smokers pay an additional fee for tobacco use. Senator Apa commented on the disease management program and smoker penalty. Senator Apa said these employees need to pay if they don't participate. The state needs to do everything possible to minimize the amount of money coming from the taxpayer to pay for state health insurance.

Discussion followed on the Effect of Plan Management and History of Health Claim Savings.

Representative Putnam asked if the actuarial study was done through a contract or by an employee. Mr. Kucker said the contract was with Watson Wyatt Worldwide.

Senator Gant asked why the Mayo Clinic was listed as a preferred out-of-state provider. Mr. Kucker said approximately $3-4 million is spent on out-of-state providers when the same service can be provided in South Dakota. However, on occasion people need to leave South Dakota to receive specialized care and Mayo Clinic is more efficient and cost effective than other facility. Mr. Kucker said Mayo Clinic is under contract with the state network provider, Dakotacare

Preauthorization was discussed. Mr. Kucker told the Committee over the years the Bureau has addressed the items that cost the most money. Cox-2, PPI and Non-sedating antihistamines will be reviewed in FY 06.

Representative Peters asked what percent of the claims are reviewed. Mr. Kucker said all DRG related claims are reviewed. TPA's are audited every other year. Mr. Kucker said large claims are audited more than small claims.

Mr. Kucker told the Committee no increase was being requested for three reasons:
    7 *      Plan design changes - $3.5 million in changes and cost shifting to members
    8 *      Lower projected FY 05 claims -
    9 *      Actuarial reduction in amount needed to fund “run out claims” - the number of “run out claims” is reduced because the doctors and facilities are faster, more claims are being filed electronically.

Comparison of Annual Health Plan - This survey was done by Central States Compensation Association and shows South Dakota with the lowest cost per employee for the neighboring states. The cost $4,622 is only for claims and does not include administration costs.

Employer/Employee Cost Share - Mercer National surveyed 3,500 employees nationwide on what employees are paying in out-of-pocket expenses and what percent of the total cost is provided in premium payments. Mr. Kucker said employees pay 40.4% of the cost of their health plan. South Dakota designed and built a plan that requires users to pay more out of pocket expenses than members who don't use the plan. Commissioner Zinter said approximately 2000 people didn't use the plan last year. South Dakota's plan is 75/25 and has been for the past 11 years. Mr. Kucker said the plan works and as efficiently as possible.

Senator Apa asked if the BOP had paid Mercer $257,000 to do the study. Mr. Kucker said no, Mercer was paid nothing to do the study.

Senator Apa asked other than general funds and employee dependent fees, what other funds go into the health benefit fund. Mr. Kucker said employees paid with federal dollars, those premiums come to the fund as well as other funds, recoveries on lawsuits, interest on money in account. Commissioner Zinter said of the $4,888 employee premium, 41.6% is State General Fund.

MOTION:     ADJOURN

Moved by:    Glenski
Second by:    Greenfield
Action:    Prevailed by voice vote.

Barb Bjorneberg

____________________________

Committee Secretary

J.E. “Jim” Putnam, Chair

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