Is There Really a Way to Control Contract Cost?

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Is There Really a Way to Control Contract Cost?

• Mark Fitzgerald
• And
• Tim Shrom

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http//www.ifo.state.pa.us/Independent Fiscal
Office January 2012
National
State
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IFO - Economic Trends

• Real growth remains modest for the US (2.0
  percent) and the Commonwealth (1.6 percent) for
  2012.
• Unemployment remains elevated for the US (8.8
  percent) and the Commonwealth (7.9 percent) for
  2012.

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IFO - Demographic Trends
From 2010 to 2020, the Penn State Data Center
projects that Total population will increase
2.3 percent (0.2 percent per annum) Elderly
residents over age 65 will increase 25.0 percent
(2.3 percent per annum) Working age residents
will decline by -1.8 percent (-0.2 percent per
annum).
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IFO - General Fund Revenue Trends
Based on demographic and economic forecasts
For FY 2010-11 to FY 2013-14, revenues will
increase by 1.6 percent per annum. For FY
2014-15 to FY 2016-17, revenues will increase by
4.0 percent per annum. The Pennsylvania tax
base will continue its long-term contraction due
to demographic factors.
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IFO - General Fund Expenditure Trends
Based on demographic and economic forecasts
General Fund expenditures will outpace revenues,
assuming no further policy actions to bring the
two series into balance. Demographic trends
will cause significant growth in the number of
residents eligible for Medical Assistance,
creating budgetary pressures. Pension
contributions will comprise a rapidly increasing
share of General Fund expenditures 4.2 percent
for FY 2011-12 growing to 11.6 percent for FY
2016-17.
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Locally - Know Your Data

• Trending
• Where have you been?
• Projecting
• Where are you going?
• Steering
• Where do you need to go?
• Correcting
• Where are you not on course?

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8.76 - 1997-98
4.78 - 2009-10
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Combined 4.88 share increase of the Budget over
8 years
63.43
68.31
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Downward pressure on all shares of other objects
Equipment and Supplies 5.1
3.24 reduction in share for Debt service
liability
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So, where to start??The big Stuff....

• RX
• Salary
• Multi-yr promise
• Matrix
• Step differentials
• Column differentials
• ERIs
• Difference from Average ..life time
  earnings...compaction...range reduction..

• Movement on scale / across columns
• Tuition reimbursement
• Productivity and Leave data
• Health Care
• PPACA
• Cadillac Tax
• Cost and medical trend
• Total compensation

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...the 80 / 20 rule...
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Average Benefit Expense Per Script Average Benefit Expense Per Script Single E 2 Fam Total
Brand 170.00 622 1,222 1,250 3,094
Generic 11.29 971 2,181 2,883 6,035
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Number of claims Percent of Total Claims Benefits Expense Percent of Total Benefits
Prescription Options
Brand 3,094 33.89 525,979 88.53
Generic 6,035 66.11 68,164 11.47
Total 9,129 100.00 594,143 100.00

Formulary Utilization
Formulary 7,820 85.66 388,816 65.44
Non-Formulary 1,309 14.34 205,327 34.56
Total 9,129 100.00 594,143 100.00

Delivery System
Retail 8,598 94.18 513,586 86.44
Mail Order 531 5.82 80,557 13.56
Total 9,129 100.00 594,143 100.00
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School District H
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Matrix structure will impact staffing levels...
Correlation to of staff?
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3 Rs Realistic Range Reduction
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761,175 .............06-07 to 09-10 ---Note
Front load CBA expiring year
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2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract 2006-07 - 2009-10 Contract
FY Dollars to Bach 12 Dollars to Bach 24 Dollars to Masters Dollars to Mast 15 Dollars to Mast 30 Dollars to Mast 45 Total Dollar Inc. FY Total Cumulative Gross Salary Inc.
Fall 2006 8 6,335.00 12 9,289.00 7 6,865.00 8 8,151.00 5 4,804.00 9 9,000.00 44,444.00    
Spring 2007 2 1,510.00 3 2,337.00 1 978.00 1 1,077.00 1 948.00     6,850.00 51,294.00 51,294.00
Fall 2007 9 6,480.00 8 6,537.00 3 3,021.00 3 3,250.00 3 2,893.00 3 3,028.00 25,209.00    
Spring 2008 2 1,527.00     2 1,998.00 1 1,008.00         4,533.00 29,742.00 81,036.00
Fall 2008 2 1,534.00 11 9,187.00 6 7,058.00 1 1,294.00 4 3,974.00 3 3,054.00 26,101.00    
Spring 2009 1 772.00     2 2,073.00             2,845.00 28,946.00 109,982.00
Fall 2009 9 6,957.00 4 3,468.00 4 4,208.00 2 2,144.00 2 2,012.00 1 1,027.00 19,816.00    
Spring 2010 1 773.00 1 773.00 4 4,212.00 0 - 0 - 0 - 5,758.00 25,574.00 135,556.00
Totals 34 25,888 39 31,591 29 30,413 16 16,924 15 14,631 16 16,109 135,556 909.77 Avg per move
                Total of "moves" across columns Total of "moves" across columns Total of "moves" across columns Total of "moves" across columns Total of "moves" across columns 149.00 2,536.03 Avg 's per move cumulative over K
Fall of 2008 one teacher moved from B12 to Masters Fall of 2008 one teacher moved from B12 to Masters Fall of 2008 one teacher moved from B12 to Masters Fall of 2008 one teacher moved from B12 to Masters Fall of 2008 one teacher moved from B12 to Masters Fall of 2008 one teacher moved from B12 to Masters
Bach M Total Salary Advancements Cumulative over 4 yr k --- Salary Advancements Cumulative over 4 yr k --- Salary Advancements Cumulative over 4 yr k --- Salary Advancements Cumulative over 4 yr k --- Salary Advancements Cumulative over 4 yr k --- Salary Advancements Cumulative over 4 yr k --- 377,868.00
102 47 149 Tuition Payments over 4 year Contract Tuition Payments over 4 year Contract Tuition Payments over 4 year Contract Tuition Payments over 4 year Contract Tuition Payments over 4 year Contract Tuition Payments over 4 year Contract 761,174.75
            1,139,042.75
             

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Leave Equivalencies -Days-imputed value-sub
costs
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Benefit Option Comparison Benefit Option Comparison Benefit Option Comparison Benefit Option Comparison Benefit Option Comparison
Benefit Current POS Program Implementation of Proposal Estimate of Savings on Premium Estimate First Year Premium Savings
Calendar Year Deductibles 0 deductible in-network A)     200 individual/600 family in-network400 individual/1200 family out-of-network -3.86 178,136.67
(Annual deductible applies to all services except those with an office visit copay and preventive care   B)      100 Ind/300 Family In-Network 1000 Ind/3000 Family out of network -3.44 158,965.01
  1000 individual/2000 family out-of-network C)      200 Ind/600 Family 2000 Ind/6,000 Family out-of-network -5.31 245,237.48
    D)      300 Ind/900 Family 3000 Ind/9,000 Family -8.04 371,450.91
In-Network Specialist Office Visit Copayment 25 copayment per visit A)     15 copayment per visit 0.90 (41,538.60)
In-Network Specialist Office Visit Copayment 25 copayment per visit B)      30 copayment per visit -0.38 17,574.02
In-Network Specialist Office Visit Copayment 25 copayment per visit C)      35 copayment per visit -0.71 32,751.59
In-Network Specialist Office Visit Copayment 25 copayment per visit D)      40 copayment per visit -0.98 45,133.28
In-network Physician Office Visit Copayments (Non-specialist care) 15 copayment per visit A)     20 copayment per visit -0.38 17,574.02
In-network Physician Office Visit Copayments (Non-specialist care) 15 copayment per visit B)      25 copayment per visit -0.71 32,751.59
In-network Physician Office Visit Copayments (Non-specialist care) 15 copayment per visit C)      30 copayment per visit -0.98 45,133.28
In-network Diagnostic Services Copayment 0 copayment A)     25 copayment per date of service -0.15 6,989.67
In-network Diagnostic Services Copayment 0 copayment B)      35 copayment per date of service -0.21 9,785.53
In-network Diagnostic Services Copayment 0 copayment C)      50 copayment per date of service -0.30 13,979.34
Emergency Room Copayment 25 copayment A)     50 copayment per visit -0.77 35,547.45
Emergency Room Copayment 25 copayment B)      75 copayment per visit -1.27 58,713.21
Emergency Room Copayment 25 copayment C)      100 copayment per visit -1.65 76,287.23
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Benefit Implementation of Proposal Estimate of Savings on Premium Indicate Options (Up To 1 Per Segment)
DEDUCTIBLE A)      100 Ind/300 Family In-Network 200 Ind/600 Family out of network -4.64 NO
(Annual deductible applies to all services except those with an office visit copay and preventive care B)      200 Ind/600 Family In-Network 400 Ind/1,200 Family out of network -6.71 ELECTED
OUT OF POCKET MAXIMUM 0/0 (500/1,500) -0.07 ELECTED
(Excludes deductibles,copays and 0/0 (500/1,500) -0.07 ELECTED
amounts over RC) 0/0 (500/1,500) -0.07 ELECTED
Individual (Family) 0/0 (500/1,500) -0.07 ELECTED
PHYSICIAN OFFICE SERVICES - PCP (OV Only) COPAY A)     20 (80) copayment per visit -0.37 NO
PHYSICIAN OFFICE SERVICES - PCP (OV Only) COPAY B)      25 (80) copayment per visit -0.70 NO
PHYSICIAN OFFICE SERVICES - PCP (OV Only) COPAY C)      30 (80) copayment per visit -0.96 ELECTED
PHYSICIAN OFFICE SERVICES - PCP (OV Only) COPAY D)      35 (80) copayment per visit -1.23 NO
PHYSICIAN OFFICE SERVICES - SCP (OV Only) COPAY A)     30 (80) copayment per visit -0.22 No
PHYSICIAN OFFICE SERVICES - SCP (OV Only) COPAY B)      35 (80) copayment per visit -0.45 NO
PHYSICIAN OFFICE SERVICES - SCP (OV Only) COPAY C)      40 (80) copayment per visit -0.67 ELECTED
PHYSICIAN OFFICE SERVICES - SCP (OV Only) COPAY D)      45 (80) copayment per visit -0.89 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY A)     5 (80) copayment per visit -0.03 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY B)     10 (80) copayment per visit -0.04 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY C)     15 (80) copayment per visit -0.05 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY D)     20 (80) copayment per visit -0.06 ELECTED
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY E)     25 (80) copayment per visit -0.07 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY F)     30 (80) copayment per visit -0.08 NO
PHYSICIAN OFFICE SERVICES - CHIROPRACTIC COPAY G)      35 (80) copayment per visit -0.09 NO
EMERGENCY ROOM COPAYMENT A)     50 copayment per visit -0.75 ELECTED
EMERGENCY ROOM COPAYMENT B)      75 copayment per visit -1.24 NO
EMERGENCY ROOM COPAYMENT C)      100 copayment per visit -1.61 NO
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Multi-Year CBA....A Required discussion...book
the Liability???
Excise Tax Total by year EE E1 Fam Total
2013-14 6,189.75 - 6,189.75
2014-15 46,505.72 - 46,505.72
2015-16 90,046.98 31,516.54 121,563.52
2016-17 137,071.54 148,437.86 285,509.40
2017-18 187,858.06 274,712.89 462,570.95
2018-19 242,707.51 411,089.92 653,797.43
   
Total Federal Excise Tax 2018 only Total Federal Excise Tax 2018 only At 8 Trend 1,116,368
Model above uses 2011-12 rates and trends them annually at the selected rate noted. Tax for EE1 is not yet clarified In the regulations. Model above uses 2011-12 rates and trends them annually at the selected rate noted. Tax for EE1 is not yet clarified In the regulations. Model above uses 2011-12 rates and trends them annually at the selected rate noted. Tax for EE1 is not yet clarified In the regulations. Model above uses 2011-12 rates and trends them annually at the selected rate noted. Tax for EE1 is not yet clarified In the regulations. Model above uses 2011-12 rates and trends them annually at the selected rate noted. Tax for EE1 is not yet clarified In the regulations.
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ERIs according to TJS

• Generalization Cost avoidance too often only
  exists if there is no replacement, and sometimes
  not even then
• Math must include all dollars to be expended, all
  revenues to be lost, from all funds used, for all
  school years impacted
• Math cannot include avoidance or savings in
  out years for when normal attrition would have
  occurred anyhow.
• Free or significantly reduced Health Care
  Guarantees Enrollment...added legacy cost...
• Legal and IRS regulatory issues dot all is and
  cross all ts
• In the past....pace of revenues...covered bad
  assumptions...

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Legal Implications of attempting to control costs
outside of a CBA

• Not so fast my friend

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Challenging Economic Times

• School Districts and Intermediate Units will look
  to contract out services in order to reduce costs
  in the areas of pension obligations, healthcare,
  and overtime.
• Such contracted services may come in the area of
  custodial support, transportation, related
  services under the Individuals with Disabilities
  Education Act, and food services.
• What to know as you go forward..

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Contracting Out Services Getting Started

• Is Contracting out a simple process that only
  includes approval of the school board?
• Are there legal implications in using contracted
  workers versus regular employees?
• What Labor Law limitations exist to subcontract?
• And, to the extent you are contracting out
  services, are these contractors really school
  district employees hiding as contractors?

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Contracts 101

• As with any contract think of how to shift the
  risk.
• A good contract will help you confront problems
  and concerns before they rise to an adversarial
  situation or even litigation.
• Unfortunately, too many schools neglect this
  significant risk management tool.
• Often, many school entities do not properly
  police their contracts and let bad practices
  develop

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Outsourcing unionized work

• Sure enough as professional and support contract
  are set to expire, and School Boards are looking
  for cost certainty (at least in the short term)
  and to alleviate the burdens of healthcare
  premiums, PSERs contributions, workers
  compensation, etc., the push to contract out work
  is in full force.

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Outsourcing-Bargaining

• In determining whether the employer fulfilled
  that obligation, the Board will look at a
  totality of the circumstances.
• The key factor is whether the employer made
  counterproposals. Lower Dauphin School District,
  19 PPER 19195 (Final Order, 1989).

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Outsourcing and Bargaining

• The Board will find that an employer has engaged
  in an unfair labor practice if it refuses to
  bargain with the union over the subcontracting of
  bargaining unit work. Elizabeth Forward Sch.
  Dist. v PLRB, 624 A.2d 215 (1992).

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PLRB/Subcontracting Bargaining Unit Work

• If an employer is contemplating subcontracting
  bargaining unit work, it has an affirmative duty
  to seek out the representatives of its employees,
  announce its intentions to subcontract and
  provide all relevant information for them to
  fulfill their bargaining obligation. Lancaster
  County, 24 PPER 24054 (Final Order, 1993), affd
  sub. nom. County of Lancaster v. PLRB, 25 PPER
  25098 (Court of Common Pleas, Lancaster Co.,
  1994).

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Online/Cyber Schooling and Bargaining Unit Work

• In the Tredyffrin/Easttown School District
  decision, the Pennsylvania Labor Relations Board
  has held that the offering of online courses
  without teacher involvement is a subcontracting
  of Bargaining Unit services that needs to be
  bargained to impasse. 
• The Labor Board would have authority to issue a
  cease and desist order on the online courses and
  under certain circumstances, award lost pay to
  the Bargaining Unit Members who were allegedly
  deprived of the opportunity to participate in
  teaching those courses.

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Online/Cyber Schooling and Bargaining Unit Work

• The only exception that has evolved under the law
  is under the Rochester Area School District
  decision.  The Pennsylvania Labor Relations Board
  did not find unlawful subcontracting when the
  District offered online courses having teachers
  involved in the monitoring of the course, grading
  of the course, or presentation of the online
  programming, even if it meant that the teachers'
  duties were either reduced or substantially
  modified as the result of the programming. In
  other words, technology that utilizes equipment
  to eliminate most or all of the duties of a
  position does not constitute the removal of work.

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Make sure your independent contracts are truly
independent

• In determining whether a worker is an independent
  contractor or employee, we look to a series of
  tests on the issue
• The IRS Test
• The US Department of Labor Test
• Pennsylvania Labor and Industry
• Pennsylvania Case Law

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Staying Independent

• The status of the employee could have profound
  implications in the areas of overtime
  requirements, unemployment compensation, tax
  issues, pension qualifications, workers
  compensation, and various other benefits
  typically provided to employees and not
  independent contractors.

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Independent Contractor versus Employee
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Contractor for Unemployment Compensation Purposes

• The Unemployment Compensation Law "presumes that
  an individual is an employee, as opposed to an
  independent contractor." Beacon Flag Car Co. v.
  Unemployment Compensation Board of Review, 910
  A.2d 103, 107 (Pa. Cmwlth. 2006). However, this
  presumption may be overcome if the putative
  employer shows that the claimant (1) "was free
  from control and direction in the performance of
  his service" and (2) "as to such service, was
  customarily engaged in an independent trade,
  occupation, profession or business." Id. "Unless
  both of these showings are made, the presumption
  stands that one who performs services for wages
  is an employee." Id.

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Contractors Unemployement

• As to the second prong of the independent
  contractor test--whether the claimant was engaged
  in an independently established trade,
  occupation, profession or business--the courts
  have generally considered (1) whether the
  individual was "'capable of performing his
  services to anyone who wished to avail
  themselves of the services' and was not
  'compelled . . . to look to only a single
  employer for the continuation of such services'"
  (2) whether the individual was "dependent on the
  presumed employer for employment" and (3)
  whether the individual was "hired on a job-to-job
  basis and could refuse any assignment." Viktor
  LTD v. Department of Labor and Industry, Bureau
  of Employer Tax Operations, 586 Pa. 196, 214-15,
  892 A.2d 781, 792-93 (2006)

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Workers Compensation

• An independent contractor is not entitled to
  Workers Compensation benefits because of the
  absence of a master/servant relationship. 77 P.S.
  21 77 P.S. 22 Cox v. Caeti, 444 Pa. 143,
  279 A.2d 756, 757 (Pa. 1971). Thus, employee or
  independent contractor status is a crucial
  threshold determination that must be made before
  granting workers' compensation benefits. It is a
  claimant's burden to establish an
  employer/employee relationship in order to
  receive benefits. Johnson v. WCAB (DuBois Courier
  Express), 158 Pa. Commw. 76, 631 A.2d 693, 695
  (Pa. Cmwlth. 1993). Moreover, a determination
  regarding the existence of an employer/employee
  relationship is a question of law that is
  determined on the unique facts of each case. JFC
  Temps, Inc. v. WCAB (Lindsay and GB Packing),
  545 Pa. 149, 680 A.2d 862, 864 (Pa. 1996)

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Workers Compensation

• The Commonwealth Court in Universal Am-Can v.
  Workers' Comp. Appeal Bd. (minteer), 563 Pa. 480
  considered certain common-law factors
  traditionally used in considering employee
  status. Consistent with the Board's analysis, the
  Commonwealth Court noted that while all factors
  are important, the most persuasive indicator of a
  claimant's employee or independent contractor
  status lies in the right to control either the
  work to be done or the manner in which the work
  is to be accomplished, citing Lynch v. WCAB
  (Connellsville Area School District), 123 Pa.
  Commw. 299, 554 A.2d 159 (Pa. Cmwlth. 1989)

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Contractor or Employee for purposes of PSERS?

• PSERS limits its memberships to school
  employees. 24 PS 8301. A school employee is
  defined as follows- Any person engaged in work
  relating to a public school for any governmental
  entity and for which work he is receiving regular
  remuneration as an officer, administrator or
  employee excluding, however, an independent
  contractor or a person compensated of a fee
  basis.

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Contractor-PSERS

• The Supreme Court in Zimmerman set out a ten part
  test to determine who is an employee and who is a
  contractor, thus who is eligible for PSERs
  membership.
• The test consists of the following factors

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Contractor-PSERS

• 1. Control of manner of work being done
• 2. Responsibility for result only
• 3. terms of agreement between the parties
• 4. the nature of work or occupation
• 5. skill required for performance
• 6. whether one is engage in a distinct occupation
  or business
• 7. which party supplied the tools
• 8. payment is by the time or job
• 9. whether the work is part of the regular
  business of employer
• 10. right to terminate employment at any time

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Independent Provider contracts for the delivery
of Special Education

• All intermediate units and many school district
  are increasing the number of independent
  providers of special education services.
• This can and will be very tricky as the
  performance of the independent provider reflects
  directly on whether the School Entity could be
  exposed to possible legal liability under the law.

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Special Education 101

• The LEA cannot not provide services.
• The special education laws set up a cooperative
  process.
• As between the LEA and parents, all risk and
  liability is on the LEA.
• But the courts permit contracts with
  third-parties that shift the risk.
• In this day and age of subcontracting, proper
  contracts that shift risk to the provider and
  protect the entity is advisable

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Great by Choice

• Victory awaits him who has everything in
  order-----luck people call it. Defeat is certain
  for him who has neglected to take the necessary
  precautions in time-----this is called bad luck.
• ---Roald Amundsen, the South Pole
• ( Book The Last place on Earth)
• Robert Scott...

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• Not all time in life is equal...life serves
  up moments that count much more than other
  moments....
• .........these next few years, Count Heavily

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So.......Is there really a way to control
contract costs?Questions?