State Compensation Insurance Fund, after criticism from many California state agencies, including California’s Waste Watcher program, and a top-to-bottom review ordered by Insurance Commissioner Steve Poizner, is taking long-overdue steps to eliminate some 1,000 automobiles from its fleet. The cars are being pulled principally from State Fund employees who have them as a perk and who do not use them for work. About 25% of State Fund’s workforce, some 1,800 employees including 500 managers, drives assigned vehicles. Each employee with a car also gets a gas card for that car. More cars are available in the pool.
The move, while positive for State Fund’s bottom line and culture, is being met with angst and anger by State Fund employees, who also might face pay cuts and layoffs. In addition, they might face additional taxes for use of the cars. But State Fund is showing concern for its employees by giving them time -- as much as a year -- to make other arrangements.
“They are taking a very severe approach to cutting expenses, and it will cost a lot of people a lot of money,” a former State Fund employee says of the changes State Fund is making to its fleet auto policy.
State Fund says the move will save an estimated $8 million annually. More important, it is one step in the change of its culture to a fairer, more ethical and less corrupt set of internal business practices demanded by Poizner.
The rank and file was notified of the change in an email sent by Chief Operating Officer Harrison Jerome. The email, obtained by Workers’ Comp Executive, outlined the plan and spoke to the need for change.
Jerome explained that State Fund’s current policy “is not in line with the way other state agencies … assign cars especially in regard to personal commutes.” Jerome wrote: “We have decided to implement a vehicle assignment policy that ensures our fleet supports appropriate business needs and reduces the size of our corporate fleet. The primary reason for this decision is that it supports our commitment to strengthen corporate governance, improve risk management across the enterprise and increase operational transparency. Secondarily, this move supports our need to reduce expenses across the organization. Although we ended 2009 on a strong financial note, our combined ratio exceeds 160 percent and we must take measures to reduce our expenses going forward.”
Management analysis has been under way for a long time. But the review came at the request of Insurance Commissioner Steve Poizner, who ordered a top-to-bottom review of State Fund back in 2007 as the result of the breaking scandals, most of them broken by this publication.
RSM McGladrey reported that no audit of the fleet had been done since 2003, and that the internal audit plan for 2008 did not include one. It recommended an analysis of the fleet “to determine whether all of the vehicles owned or leased by SCIF are necessary.” It also recommended a periodic audit of the monthly travel logs for compliance with SCIF policy. In other words, abuses had been detected in the investigation that ensued after the departure of SCIF president James C. Tudor and vice president Renee Koren.
"Last year our fleet expenses were around $9 million or $10 million, which is less than one might expect, but we've really let the vehicles age while we've been doing this analysis to determine how we would proceed," says State Fund spokeswoman Jennifer Vargen. She notes that State Fund's fleet management practices have been under review since 2007. "So we anticipate about $8 million in terms of avoided costs. Expenses will crop up in other ways, such as mileage reimbursement, but we won't have to lay out cash for leasing new vehicles."
Employees will be eligible for cars only if 80% of the miles driven are for State Fund business purposes. This eliminates many managers.
Employees affected will be notified by June 1. But they will have plenty of time to make other arrangements because State Fund will accommodate use of cars for most people for an additional year. Senior people need to turn their cars in by December 31, and all others not until July 1, 2011.
Despite this accommodation, many Service Employees International Union (SEIU) members are up in arms.
“I will tell you this,” wrote one who asked not to be identified, “the old SCIF of Tudor, Webb and Bollier, etc. … is now over!”
And it’s about time, according to many. State Fund legends hold that those who “played ball” or “did favors” for former president Jim C. Tudor were rewarded with free cars. Those favors allegedly included keeping quiet about various improprieties, and running operations in ways that may have conflicted with civil service rules and procedures.
It is said that when Tudor was a manager in charge of the Business Services unit, all cars assigned to districts (as branch offices are known) were pulled in and doled out in accordance with his wishes. SCIF legend has it that he gained huge control of, and ability to manipulate, the system by using free cars as a carrot.
There are also stories about a state car assigned to and driven by the daughter of a senior manager who later became a member of the executive committee.
Employees have been provided with a “New Fleet Policy Anticipated Questions and Answers” document and “IRS Fringe Benefit Reporting Questions and Answers,” both marked “Internal Distribution Only,” and a memo to State Compensation Insurance Fund from outside tax counsel Manatt, Phelps & Phillips, LLP. All three are provided in links at the end of this article.
The Tax Man Cometh
Of all things that impact employees the most, changes State Fund is required to make in reporting the car benefit to IRS and therefore how much tax an employee will be liable for is perhaps the most important to employees. It is obviously creating a lot of upset.
Previously, workers assigned a state car routinely had $3 per workday, or $63 per month, added to their reported earnings to cover the benefit of using the car for their commute, regardless of miles driven under the IRS Commuting Valuation Rule (CVR).
But SCIF says outside tax counsel informed it of significant restrictions with this methodology and that most State Fund workers assigned a car do not qualify.
"So what does this mean for you? State Fund drivers whose business mileage is at least 50% of their total mileage and who have a legitimate business reason to commute in a State Fund provided vehicle are eligible to continue using the CVR rule. State Fund drivers whose personal commuting is greater than 50% of total miles driven must use the IRS method known as the Safe Harbor Fair Market Rule to report income for the 2010 tax year," Jerome said in the email, noting that for tax purposes the reporting change will go back to January 1, 2010.
As the name suggests, employees will be taxed for the full fair market value of personal miles put on the cars, including a prorated share of lease, gas, insurance and maintenance costs. These values will vary by employee and type of car assigned, but workers with a 25-mile commute could see their taxable income inflated from $4,000 to $9,000 this year. Remember, this is a noncash benefit, so taxes have to be paid out of present salary.
By retroactively changing the tax reporting back to the first of the year, many workers already face a significant tax burden when April 15 rolls around next year, and that's causing anxiety among workers and managers.
Noting that some 47% of American households pay no taxes, says one industry pundit, “perhaps some of these fine SEIU union members will understand that taxes are high because the government is giving their money to others.”
"There are people who are turning in their vehicles and will now drive their own cars," says Kathleen Collins, a State Fund claims adjuster and SEIU representative. "We've heard from some of our members that they don't want a field job anymore, that they don’t want to use the car anymore. People may be jumping the gun, but I understand because it's affecting their bottom line."
She notes that many of the positions affected include auditors, return-to-work coordinators, loss control reps, and workers in the special investigation unit. Some of these workers may opt to use their own vehicles for company business and be reimbursed at a rate of $0.50 per mile rather than face the tax burden of a state car, but others may not have a vehicle that can withstand the extra travel.
"There are going to be some people who are going to have to purchase cars as their second car might be a junker and won't be able to handle the miles," says Collins, noting that State Fund in the past has given employees the opportunity to buy retired cars at wholesale prices.
Vargen says that same courtesy will be extended here. Workers will also have access to a larger pool of fleet vehicles for employee use on company business.
Another group of workers that will be impacted by the policy change is attorneys who work at State Fund. Pat Whalen, an attorney with California Attorneys, Administrative Law Judges, and Hearing Officers in State Employment (CASE), says nearly all of its members at State Fund will be affected. "All or mostly all of the attorneys are assigned a state vehicle. It's part of the job description," he says. CASE represents approximately 475 workers at State Fund and thus would account for a large share of the cars assigned to workers. He says they are still reviewing documents provided by SCIF and have no further comment at this time.
Workers will be notified by June 1 if they are affected by the change in policy. Executive committee members and program managers who no longer qualify for state vehicles will be allowed to keep them until the end of the year while they make other arrangements for transportation. All other affected employees will be able to keep the cars until July 1, 2011.
Article Resources:
Harrison Jerome email
New Fleet Policy Anticipated Questions and Answers
IRS Fringe Benefit Reporting Questions and Answers
Memo From Tax Counsel Manatt, Phelps & Phillips, LLP
State Fund Associate Purchase Program
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