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Texas Performance Review 
Capital Metro 
Chapter 4
 
Human Resources


The management of public agency human resources is an increasingly complex task that involves coping with rapid social and political change, limited resources, and the ever-present threat of lawsuits, whether valid or frivolous. Effective human resource practices require significant attention to conflict resolution and risk management, to balance competing interests and allow the organization, its managers, and its employees to pursue their goals while staying out of the headlines and out of trouble.

A public agency's human resources department must carry out certain essential functions such as employee recruiting; the management of employee compensation schedules, benefits, and services; the establishment and maintenance of performance appraisal systems; the coordination of training programs; and compliance with federal equal employment opportunity (EEO) laws.

In the course of its review, TPR studied human resource functions and identified best practices in other transit systems in Texas and elsewhere as well as in other state and local agencies, and used these findings to evaluate Capital Metro's operation.

Union employees

Many of Austin's transit workers already were unionized when the City of Austin acquired its bus system, originally a private company, in 1973. The city contracted with American Transit Corporation, a private for-profit corporation based in St. Louis, Missouri, to manage its unionized employees. In July 1985, when Capital Metro was formed, Austin transferred its contract with American Transit to Capital Metro. When that contract expired, Capital Metro entered into another contract for the same services with Management Labor Services.

In 1991, however, to comply fully with a state law prohibiting public entities from supervising unionized employees with collective bargaining rights, the Capital Metro board determined that its unionized employees and their supervisors should be transferred to a separate nonprofit company. In January 1992, Capital Metro created StarTran, Inc., a private entity that acts as the authority's agent in managing its unionized workforce.

Workforce profile

As of April 1998, Capital Metro employs 150 employees and StarTran another 810.1 According to an analysis done by the Human Resources Department in December 1997, about 45 percent of Capital Metro's employees are managers or professionals; 30 percent are clerical; and the remainder are various service employees. Almost 60 percent of StarTran employees are bus drivers; 11 percent are managers or professionals; 4 percent are clerical workers; and the remainder are technicians, craftsmen, and laborers.

As of December 1997, more than 60 percent of Capital Metro's managers and professionals and more than 50 percent of StarTran's were minority members. About 64 percent of Capital Metro's remaining workforce and 66 percent of StarTran's were minority members.2

Human Resources Department

Capital Metro's Human Resources Department provides all of the traditional human resources functions for both Capital Metro and StarTran employees, except that StarTran's unionized employees can be hired and fired only by StarTran supervisors. Capital Metro's Finance Department administers the payroll for both Capital Metro and StarTran employees.3

At this writing, the Human Resources Department has 10 budgeted positions, including a manager who reports to the authority's chief administrative officer; one senior human resources specialist; three human resources "generalists"; an employee services representative; two benefits administrators; an EEO officer; and an administrative secretary. The EEO officer recently resigned and one human resources generalist position remains unfilled.4 The department's budget for fiscal 1998 is $6.5 million, including more than $5 million for employee benefits including health and dental insurance, long-term disability insurance, life insurance, 401(k) plans, and a retirement plan for unionized employees.5

Workers' Compensation

Capital Metro's Risk Management Department oversees its workers' compensation claims as well as general liability and auto liability insurance claims. The department is budgeted for seven full-time employees (two positions vacant as of April 1998) and a fiscal 1998 budget of nearly $2.7 million.6

Problems and solutions

TPR found that Capital Metro's Human Resources Department is failing to perform some of its most basic human resource functions effectively. The department provides inadequate information to employees on the authority's employment policies and procedures and employee benefits, and fails to process employee paperwork in a timely manner. In addition, the authority's hiring and pay policies have allowed managers to place unqualified employees in some positions, and to pay varying amounts for equivalent work. Moreover, the authority's training programs and performance evaluation processes are largely ineffective.

TPR also found that, while Capital Metro's spending on workers' compensations claims has fallen in recent years, the program's overall costs are rising, as is the average payment per claim. Frequent managerial changes have led to inconsistent and ineffective safety efforts. Capital Metro has done little to address repeated worker injuries, as witnessed by the fact that more than half of its workers' compensation claims in fiscal 1996 were filed by employees who have filed three or more such claims. Moreover, Capital Metro has no clear policy to control fraudulent claims, has set no clear goals for reducing costs, and is not collecting certain basic statistical information that could help control worker's compensation costs.

TPR's recommendations in this chapter call for significant changes in Capital Metro's approach to its basic personnel functions. The first proposal would reorganize the Human Resources Department to make staff members accountable for specific responsibilities. Another would help Capital Metro ensure that it fulfills its fiduciary responsibilities in administering employee benefit plans. Still other recommendations would help guarantee that Capital Metro's employees are compensated appropriately and equitably, and strengthen the authority's performance appraisal process. Finally, TPR proposes steps that would improve the authority's employee training program.

Recommendations addressing workers' compensation call upon Capital Metro to adopt an authoritywide safety policy, improve accident investigations, create an employee wellness program, establish a special program for employees with multiple claims, and adopt a clear policy on preventing fraudulent claims.

In all, these recommendations would save Capital Metro $207,300 in fiscal 1999 and more than $1.8 million over the next five years.

PROPOSAL 16

Hold the Human Resources Department accountable for performing its basic functions accurately and effectively.


Background

Modern human resources departments are expected to deliver far more than the traditional personnel departments of 20 or 30 years ago. A modern human resources department acts as a partner with senior management in executing agency strategies. It does so by helping the agency organize work for maximum efficiency and by shaping work processes and agency culture in ways that improve the organization's capacity for change and growth. Yet these roles must not interfere with the fundamental personnel functions for which the department is responsible: the paperwork involved in hiring and firing; the processing of employee benefits, including retirement plans governed by complex federal rules; and the management of personnel records, job descriptions, job evaluations, employee training, and employment policies and procedures.

Capital Metro's Human Resources Department has repeatedly failed to meet some of the most basic expectations for its mission. The department's consistent failure to perform its basic tasks effectively has resulted in confusion, poor employee morale, and unnecessary work for other departments. The carelessness and inefficiency of Capital Metro's Human Resources personnel exposes the authority to risk from employee lawsuits as well as problems with the Internal Revenue Service (IRS) and other federal regulatory agencies.

Carelessness in basic functions

TPR found repeated instances in which Human Resources appeared to have no inclination to provide the most basic service to Capital Metro and StarTran employees. In February 1996, for instance, when an employee in the Maintenance Department died, Human Resources failed to send any explanatory paperwork to the surviving spouse regarding the deceased employee's 401(k) account. The deceased employee's supervisor, who was a relative by marriage, repeatedly approached the department over the next two years, trying unsuccessfully to set up a meeting between the department and the spouse. Over this entire period, the surviving spouse could not obtain money from the 401(k) account.

Finally, when the supervisor threatened to take the matter to the Capital Metro board, the benefits coordinator set up a meeting in January 1998. The benefits coordinator told TPR that he did not think it was "necessary" to send the paperwork. The coordinator also claims that he attempted to contact the deceased employee's surviving spouse twice before January 1998 to set up a meeting, but he has no documentation for these calls.7

Need for standard administrative procedures

The department lacks standard written administrative procedures and has not documented its personnel-related actions adequately. Both problems put the authority at a severe disadvantage in litigation.

TPR found that in the last year, Capital Metro has been forced to settle out of court in at least four employee-related lawsuits that might have been prevented by effective human resources procedures. In one lawsuit, Capital Metro settled out of court with an employee who alleged sexual harassment in part because no sexual harassment sensitivity training had been provided to employees in prior years, after several previous allegations. (Capital Metro informed TPR that they provided sexual harassment training for supervisors and managers in May 1997 and provided a booklet that was used as part of that training.) In another case, Human Resources could not provide a proper paperwork trail to show that the successful candidate for a position had gone through the standard interview and selection process. Capital Metro settled in a "whistle blower" case because a supervisor did not document sensitive communications with an unhappy employee. The fourth instance was a racial discrimination case turning largely on the authority's lack of adequate job descriptions and proper documentation of employee complaints and resolutions. These four cases alone cost Capital Metro more than $120,000.

401(k) loans

All Capital Metro employees and all StarTran administrative (non-unionized) employees may open a 401(k) retirement account, and any employee with a 401(k) account may apply for a loan of up to half of his or her account balance, repaying the loan through subsequent biweekly payroll deductions. However, until recently these loan payments were not remitted to the employee's account for three months. Instead, each payment was kept in Capital Metro's operating fund, earning interest for the authority. Capital Metro could not explain why its Human Resources Department did not process loan payments every two weeks, as they are deducted and received, rather than quarterly. In October 1997, Capital Metro's Human Resources Department began remitting loan payments biweekly for new loans issued.8 However, the loans issued prior to October 1997 still are being remitted on a quarterly basis.

TPR also found that Human Resources has no process in place to ensure that paperwork connected with 401(k) loans is sent to the Payroll Department promptly. When an employee arranges for such a loan, Frost Bank, Capital Metro's trustee bank for its 401(k) program, calculates the amount that should be paid back through a deduction on each paycheck. However, in several instances, Human Resources delayed the transfer of 401(k) loan paperwork to Payroll for between two and 15 months.9 Without this paperwork, the Payroll Department cannot arrange any loan deductions from employee paychecks, and when these deductions are not made, the loans become delinquent.

When TPR asked the benefits coordinator to explain these frequent delays in sending paperwork to Payroll, he said that the paperwork from Frost Bank to Human Resources Department must have been late or lost in the mail, so he was not aware of the loans and could not notify Payroll.10 However, this seems highly unlikely, because Frost Bank mails the paperwork to the benefits coordinator along with the initial loan check. On rare occasions involving employee emergencies, Frost has issued a loan check directly to the employee-but never without the prior approval of the benefits coordinator. On those occasions, the accompanying paperwork was mailed to the benefits coordinator within a day or two.11

At least once each quarter, Frost Bank sends a letter listing delinquent loans to the Human Resources benefits coordinator and follows up with a telephone call. Frost Bank reports that the benefits coordinator's response generally is a simple "I'll look into it."12 The coordinator then will take some action-eventually. This carelessness puts both Capital Metro and its employees at considerable legal risk. In January 1998, Frost Bank warned Human Resources that many employees of Capital Metro and StarTran are close to defaulting on their loans.13 Late loan repayments cause the employee to lose interest earnings; more importantly, late payments can cause the loan to be classified as a taxable distribution to the employee under the provisions of the federal Internal Revenue Code.

This situation becomes worse when employees renegotiate their loans, as they often do, by paying off the old loan and borrowing a larger amount. Obviously, this type of action changes the required loan payment. On several occasions, however, Human Resources has failed to notify the Payroll Department of the new payment amount. Frost Bank returned checks to the Human Resources Department because they reflected an old loan payment rather than the renegotiated payment. On at least one occasion, Human Resources held the returned check for seven months before sending it to Payroll. Meanwhile, the employees became delinquent on their new loans and lost interest earnings. Capital Metro made no interest adjustments to correct the department's error.14

When TPR asked the benefits coordinator about this situation, he said that Frost Bank has "never" returned any checks to the department. However, TPR reviewed copies of a number of returned checks along with a letter from Frost Bank to the benefits coordinator stating the checks were being returned because the loan payments had changed.15

Finally, TPR found that arranging a 401(k) loan can take from 20 days to three months, a delay that causes considerable employee frustration.16 The benefits coordinator placed part of the blame for these delays on the fact that the Capital Metro 401(k) committee, which oversees the authority's 401(k) plan, until recently had only one member.17 (Other committee members had left Capital Metro, and despite the fact that the interim general manager has the authority to appoint new committee members, he did not do so until he read the draft of this report.) However, subsequent information from the manager of Human Resources indicated that most 401(k) loans are taken out by StarTran employees, and the employee committee overseeing StarTran's 401(k) plan is intact.18

For the most part, delays seem to occur at Capital Metro and their third-party administrator, Alliance Benefit Group of Houston, Inc. It takes the benefits coordinator between one and four weeks to get the approval from the 401(k) committee and mail paperwork to Alliance Benefit, and Alliance generally takes two to three weeks to check employee account balances for available funds and instruct Nationwide Insurance Enterprise, which invests the authority's 401(k) funds, to wire the money to Frost Bank. Frost Bank, in turn, takes one or two days to prepare the checks and mails them and the paperwork to the benefits coordinator.19

Lack of coordination with Payroll

The instances described above seem indicative of generally poor communications between Human Resources and Payroll. Another example arose during the review when TPR asked Human Resources for data on retroactive employee pay (see Proposal 19). The department manager replied that to assemble these data, they would have to pull each employee's file and manually calculate the pay amounts. TPR was able to obtain a computer printout of the same data from the Payroll Department in two days.

Two of Texas' six other major transit systems place human resources and payroll under one manager, and one other transit recently decided to combine the functions.20 Many state agencies also place their human resources and payroll functions under a single manager, to ensure coordination and timely action on pay-related issues.21 Many of Capital Metro's problems with personnel functions appear to stem from a lack of such coordination.

Personnel Change Notices

TPR also found that many of the Personnel Change Notices (PCNs) that Human Resources sends to Payroll for salary actions are incomplete, unclear, and even illegible. Such PCNs often are difficult to read and interpret, posing problems for the Payroll Department.

Inadequate informational services

Human Resources does not routinely circulate a standard package of materials on the authority's personnel policies and procedures to new employees. Sometimes, the department hands out a one-page benefits summary sheet on all employee benefits.22 According to a report commissioned by Capital Metro from the Center for Transportation Research at the University of Texas at Austin in 1997, many of the authority's bus drivers do not understand how their pay system works.23

Capital Metro provides each supervisor with a copy of its Human Resources Policy Manual, but authority executives admit that most employees are not aware of the manual.24 Until 1990, Capital Metro supplied each employee with a small employee manual including most relevant employee policies, but that manual is no longer distributed. Recently, the Human Resources Department produced a draft of a revised employee manual, but the draft provides only the most basic information about some topics, including the 401(k) plan, and has not been distributed.25 Furthermore, the authority has no written procedures manual for unionized employees.26 In July 1997, an authoritywide performance audit of Capital Metro by KPMG Peat Marwick LLP recommended that the authority prepare an employee procedures manual for all StarTran employees.27 StarTran recently completed a draft copy of the manual and expects the final review to be completed by the end of July and distributed to the bargaining employees by August 1998.28 Of eight other transit authorities surveyed by TPR, six provide such material to new employees.29

In June 1997, the Human Resources Department conducted an employee survey on its functions. Many of the comments gathered reflected considerable frustration regarding inadequate information on employee benefits and the difficulty of obtaining meaningful answers on benefits from Human Resources personnel.30 Since then, the department has taken some steps to correct the situation, such as designing a one-day orientation class for new employees; preparing a video on Capital Metro's "cafeteria" benefits plan; and arranging group meetings in which the authority's third-party administrator for 401(k) plans explained plan options to employees. However, the department's own statements indicate that these informational efforts have been less than successful; the department has held about a half-dozen meetings with only six or seven attendees at each.31

Lack of business plan and performance measures

Human Resources has no departmental business plan and consequently has no performance measures by which its staff members can be evaluated.32 Of six transit authorities surveyed by TPR on this topic, four had departmental performance measures.33 Other human resources departments, such as the Comptroller's, routinely write a business plan that includes performance measures that can be tracked to determine whether the staff is meeting its goals. Appropriate performance measures might include the percentage of employees meeting training goals; percentage of performance evaluations received by due date; and percentage of job postings completed on time.34

KPMG Peat Marwick LLP's 1997 review recommended that each department of Capital Metro develop an annual business plan citing specific departmental goals and objectives.35 Human Resources Department just started drafting their business plan which the authority intends to use in its fiscal 1999 budget process.

Recommendations

A. The board should place the Human Resources Department directly under the office of the chief financial officer (CFO) no later than September 1, 1998 and direct the CFO to oversee a complete reorganization of the department.

The Human Resources Department is in serious need of new leadership to ensure that its basic functions are performed competently. This change would make the CFO responsible for these functions. Moreover, the combination of Payroll and Human Resources under the CFO should help guarantee better coordination of their functions.

The CFO should ensure that each Human Resources staff member, including the department manager, is assigned a detailed set of job duties and held accountable for performing those duties through annual evaluations.

The Internal Audit Department should closely monitor the progress of the Human Resources Department in implementing these corrective actions.

The CFO should ensure that these staff members have the expertise and training necessary to conduct all of the department's basic functions and hold them clearly accountable for these responsibilities. Each position in Human Resources, including the manager's, should be well-defined. Human Resources staff members should be cross-trained to respond to information requests, handle inquiries, and process paperwork during peak periods.

The department's position descriptions should be refined to specify the following assignments:
  • a benefits specialist with extensive experience in employee group health insurance benefits, retirement plans, and trustee functions, to educate employees regarding their benefits; maintain proper files; communicate promptly and accurately with other Capital Metro departments; process paperwork in a timely manner; assist employees with group insurance and retirement plan problems; and coordinate the preparation of benefits information for employees.
  • a recruitment specialist to assist Capital Metro's managers in their employee recruiting efforts by preparing job postings according to classification standards and guidelines; screening applicants; reviewing new-hire information packages periodically to ensure that their information is accurate and up to date; and monitoring Capital Metro's hiring practices to ensure that departments follow authority policies and guidelines.
  • a custodian of personnel files to ensure that all personnel records are complete, evaluations are conducted in a timely manner, PCNs are processed properly, and job descriptions are updated periodically.
  • an EEO coordinator to ensure that the authority maintains fair employment practices and to act as an ombudsman to mediate employee problems before they become grievances.
  • a training coordinator to plan, organize, conduct, track, and evaluate employee training, development, and continuing education programs.
  • an employee assistance liaison to refer employees to appropriate services for personal problems that may be affecting their lives and work.
  • B. The Human Resources manager should hold the benefits specialist accountable for the prompt completion of employee benefits paperwork and the timely processing of 401(k) loan paperwork for the third-party administrator, the Payroll Department, and employees.

    The manager should immediately set realistic timeframes for these actions and meeting these timeframes should be a major component of the benefit specialist's performance evaluation.

    C. The Human Resources manager should take the current list of 401(k) delinquent loans forwarded by Frost Bank, investigate why these loans are delinquent, take necessary actions to rectify these situations, and meet with each affected employee and explain the status of his or her account by no later than September 1, 1998. The Human Resources manager should report monthly to the chief financial officer and general manager on actions taken to clear up current accounts and prevent future delinquencies.

    Loan payments are automatically deducted from employee paychecks; if Human Resources does its job appropriately, delinquencies should not occur.

    D. The Human Resources Department should complete and distribute the revised employee manual no later than October 1, 1998.

    Special attention should be paid to detailed information about employee benefits including the 401(k) program. This information should accurately reflect the plan document and applicable federal and state laws. The department should implement a strict policy requiring its staff to document, in writing, all contact with and information given to individual employees, particularly during reorganizations.

    The employee handbook should include general information such as work schedules, employee services, and equal employment opportunity information as well as specific issues such as employee standards of conduct, hiring policies, salary actions, termination, disciplinary actions, performance evaluations, leave benefits, employee benefits, and moving and travel expenses.

    E. The Human Resources manager should develop a business plan with specific performance measures for the department no later than October 1, 1998.

    As this report went to press, the Human Resources Department provided TPR with a draft outline of a business plan. The manager's performance evaluation should include completion of this plan as a factor. Some performance measures that could be used include percentage of authority employees receiving formal job-related training; percentage of pension applications processed within a certain period of receipt; percentage of data requests processed for management reports within 24 hours; number of recruitments completed within a specific period; percentage of employee performance evaluations received by due date; and number of formal employee grievances investigated within established timeframes.

    Fiscal impact

    These recommendations could be accomplished with existing resources; the job assignments outlined in Recommendation A would be given to current employees.

    PROPOSAL 17

    Ensure that the authority fulfills its fiduciary responsibility in administering employee benefit plans.


    Background

    All Capital Metro and StarTran administrative employees are eligible to participate in a 401(k) retirement plan, which allows participants to channel a percentage of their salaries into retirement accounts, along with employer contributions, and pay no taxes on the total amount until they begin drawing upon the account at retirement.

    Separate 401(k) plans are maintained for Capital Metro and StarTran, as required by federal law. The plans' third-party administrator, Alliance Benefit Group of Houston, Inc., maintains the individual account balances. Nationwide Insurance Enterprise invests the funds and Frost Bank, the trustee, acts as custodian of the plan assets. The Human Resources benefits coordinator serves as the single point of contact for all Capital Metro and StarTran employees enrolled in a 401(k) plan.36

    StarTran also administers a separate defined-benefit retirement plan for its unionized employees; its provisions are determined through collective bargaining between the union and StarTran. In a defined benefit retirement plan, the employer promises to fund a certain monthly retirement income for its employees based on years of service, compensation, and age at retirement.

    TPR found that the integrity of Capital Metro's 401(k) plans and the interests of its plan participants are compromised by careless administration on the part of Capital Metro and its third-party administrator. Appropriate safeguards are needed to protect the plans and their participants.

    Violation of plan provisions

    Capital Metro and its third-party administrator, Alliance Benefit Group of Houston, Inc., are administering the Capital Metro and StarTran 401(k) plans in violation of the provisions of the plan documents. This practice causes both Capital Metro and StarTran to make unnecessary expenditures for employee benefits.

    Capital Metro and StarTran provide an employer matching contribution of up to 2.5 percent of salary for each employee who establishes a 401(k) salary deferral account, as well as a 3.5 percent discretionary contribution that is subject to a five-year vesting schedule-that is, a schedule that determines the percentage of the contribution to which an employee is entitled depending on years of service, with full rights at the end of the vesting period.37 The plan documents state that participants are eligible to receive the matching contribution regardless of their hours worked during the year, but that they must work at least 1,000 hours during a year to be eligible for the 3.5 percent contribution.38

    TPR's review of 1996 and 1997 participant account information and an interview with the manager of Human Resources indicate that, in fact, participants receive the 3.5 percent contribution regardless of their hours worked during a plan year.39 Capital Metro and StarTran plan participants who left the authority in 1996 without working the minimum 1,000 hours in a year received a total of at least $9,000 in contributions they should not have received. In addition to the unnecessary expenditure, this practice could place the former employees in violation of federal income tax provisions, since they have received unauthorized nontaxable benefits.

    Alliance should have noticed that contributions made by Capital Metro and StarTran did not comply with the provisions of the plan document and brought this to the authority's attention. By not doing so, Alliance failed to fulfill the scope of services cited in its contracts with Capital Metro and StarTran, which state that the third-party administrator will "provide continuous oversight and review of plan activities to ensure compliance with generally accepted accounting principles and actuarial standards."40

    Capital Metro and StarTran remit their employer contributions to employee 401(k) accounts after the end of each two-week pay period.41 According to the plan documents, however, employer contributions do not have to be made until the end of each year.42 Of particular concern is the fact that the authority pays the 3.5 percent employer discretionary contribution to all participants' accounts from the beginning of the year, before any employee has worked the 1,000 hours necessary to be eligible for this contribution.

    Inaccurate employee plan summary

    Capital Metro distributed summaries of its 401(k) plans to Capital Metro and StarTran participants that do not accurately reflect the plans' provisions or applicable law. Both summaries are dated August 1997.43 The Capital Metro 401(k) plan summary, as prepared by Alliance Benefit Group, incorrectly implies that plan participants have certain rights under the federal Employees Retirement Income Security Act (ERISA), such as the right to sue in federal court if a request for materials concerning the plan is not met within 30 days.44 Governmental plans, such as the Capital Metro 401(k) plan are not subject to ERISA; private employer plans, such as the StarTran 401(k) plan, are. The summary also lists the trustee's address as that of Capital Metro headquarters; its section regarding eligibility for contributions, moreover, incorrectly states that participants must be employed on the last day of the year to receive employer contributions, and that they may receive the 3.5 percent discretionary contribution regardless of the number of hours worked.45

    Although the StarTran summary was not available for review by TPR, the manager of Human Resources and benefits coordinator stated that the summary also has a section regarding eligibility for contributions that incorrectly states that participants must be employed on the last day of the year to receive employer contributions.46

    According to Human Resources personnel, revised summaries will be distributed with 1998 first-quarter account balance reports that correct the contributions section for both the Capital Metro and StarTran 401(k) plans.47 However, both revised summaries still contain mistakes, specifically the incorrect trustee address and the reference to the "hours-worked" requirement for discretionary contributions.48 The Capital Metro summary also still contains the incorrect ERISA participants' rights information.49

    These repeated mistakes in the plan summaries indicate an inattention to detail; accuracy in these summaries is important because they are Capital Metro's primary means of communicating information about its 401(k) plans to its employees.

    Employee committees

    Amendments to the 401(k) plans are reviewed and approved by two committees of Capital Metro and StarTran employees, respectively, and signed by the Human Resources manager, general manager or StarTran president. A 1991 Capital Metro board resolution grants the general manager the authority to make "non-substantive" changes to the plan and other changes to comply with current law.50 The Capital Metro board never sees or approves any changes to the 401(k) plans.51 In effect, then, the 401(k) committees are allowed to make decisions concerning the plan that can directly benefit their own members. Consider, for example, the case of a recent amendment to the plan.

    As noted above, the Capital Metro and StarTran plans offers two forms of employer contribution-a matching contribution equal to up to 2.5 percent of the employee's salary and a discretionary contribution of 3.5 percent. Employees have full and immediate rights to the matching contribution; their right to the discretionary contribution is determined by a vesting schedule. One recent plan amendment accelerated the vesting period for the discretionary contribution from seven to five years.52 This amendment means that short-term employees now are closer to full vesting and thus retain a larger portion of their discretionary contributions.

    Shortening the vesting schedule reduces the non-vested portion of the accounts of former plan participants. This is important because the non-vested funds of former plan participants are retained by the authority after the employees leave and spread among current plan participants. Shortening the vesting schedule, then, benefits employees who choose to leave Capital Metro/StarTran after a few years at the expense of long-term employees.

    Obviously, such amendments benefit employees other than members of the 401(k) committees; but the element of self-interest involved makes it inappropriate for committee members to make these decisions. TPR was unsuccessful in obtaining information about the membership of the 401(k) committees at the time of the vesting-schedule amendment, and therefore could not determine if any committee member personally benefited from this decision.53

    Capital Metro's use of this committee structure to make plan amendments without board approval is highly unusual. Five Texas transit authorities told TPR that their boards make all decisions about amendments to their retirement plans.54 Similarly, the board of Texas' Employees Retirement System can recommend changes in the state employee retirement plan, but the Legislature must change the law to enact them.

    Excessive 401(k) loans

    The volume of 401(k) loans taken out by Capital Metro and StarTran employees has risen since 1994, when both 401(k) employee committees changed their rules to permit participants to borrow up to half of the money in their accounts for any purpose. They can borrow both from their own contributions and, if vested, from the employers' share as well.55 This policy differs from the Fort Worth Transportation Authority's 401(k) plan, for instance, which only permits plan loans from the participant's contribution.56

    At this writing, Capital Metro and StarTran employees have 130 outstanding 401(k) loans; in all, some 58 percent of all participants in the two plans have active loans.57 A recent national study of 401(k) plans, by contrast, put the average percentage of participants with plan loans at 23 percent.58

    A recent U.S. General Accounting Office (GAO) survey of defined contribution plans (of which a 401(k) plan is one type) found that, of those plans permitting loans, nearly nine-tenths invest no more than 5 percent of their assets in participant loans.59 Ten percent of Capital Metro's and 11 percent of StarTran's 401(k) plan assets are invested in participant loans. Another GAO study found that the availability of plan loans increases plan participation rates but also may ultimately limit the amount of retirement income available from the plans.60

    The 401(k) plans are the only retirement plans provided to Capital Metro and non-union StarTran employees. These employees are gambling with their own financial security at retirement by taking loans from their 401(k) plans.

    Employer contributions to union retirement

    StarTran's retirement plan for its unionized employees is available to these employees after a year of service. Employer and employee contributions fund retirement benefits for plan participants. This benefit, payable at retirement, is $38 per month for each year of service before March 1, 1992, plus $48 per month for each year of service after March 1, 1992.61

    Employee contributions, which are calculated as 2.75 percent of the current top operator's hourly wage multiplied by 40, are matched by StarTran.62 Participants may withdraw their contributions to the plan and the interest earned on those contributions whenever they leave StarTran, regardless of their time with the company; they become vested in the employer contributions after five years.63 Retired participants received a 10 percent increase in their monthly annuities in March 1992 and March 1994.64

    The plan's actuary is required by federal law to determine the level of funding needed to pay retirement benefits for the plan participants. Each year, the actuary computes the minimum employer contribution needed to keep the plan funded by applying the plan provisions, actuarial assumptions such as interest rates, and all applicable provisions of ERISA and the Internal Revenue Code. A maximum allowable contribution also is calculated. The actuary's computations for 1997 indicate that the employer's minimum required contribution to keep the plan funded was about $100,000 less than the contribution specified in the labor agreement.65 This occurred because the current contract calls for the employer contribution to evenly match the total amount of employee contributions for the year; this amount has no relation to the actuary's computations.

    TPR also found that StarTran's retirement plan for its unionized employees requires StarTran to make periodic employer contributions throughout the year rather than the latest date allowable by ERISA, which is 8.5 months after the end of the year.66

    Need for legal counsel

    The Capital Metro and StarTran 401(k) plans do not have ongoing legal counsel.67 In 1991, the Jenkens & Gilchrist law firm drafted complete documents for both plans. In 1993, Jenkens & Gilchrist prepared applications to the IRS that requested a determination of the plans' status under the Internal Revenue Code. The application for the StarTran 401(k) plan also asked the IRS to consider StarTran as a nongovernmental entity for the purposes of establishing a 401(k) plan.68 (Unless grandfathered, current law prevents governmental entities from establishing 401(k) plans.) In late 1993, the IRS issued letters stating that both plans are qualified under the Internal Revenue Code.69 The IRS also determined that, based on the information provided by Jenkens & Gilchrist, StarTran qualified as a nongovernmental entity.70 Since the end of 1993, Jenkens & Gilchrist has provided no more legal services for the 401(k) plans, although one of its attorneys does provide services to StarTran's union retirement plan.71

    StarTran's current labor agreement states that StarTran will provide its unionized employees with a 401(k) plan as well as the current retirement plan.72 In 1997, StarTran asked the law firm of Graves, Dougherty, Hearon, & Moody for a second legal analysis on whether StarTran, Inc. is eligible to establish such a 401(k) plan under the provisions of the Internal Revenue Code. This analysis focused on determining StarTran's status as a governmental or nongovernmental entity-an issue seemingly settled in 1993.73

    More legal issues face Capital Metro's 401(k) plans. The IRS recently issued instructions requiring the amendment of qualified 401(k) plans to comply with recent federal legislation. The instructions further require that these amendments be submitted to the IRS for examination in the near future.74

    Need for plan audit

    To ensure their fiduciary responsibilities are performed efficiently and effectively, other governmental entities such as the State of Texas, the City of Austin, and the Lower Colorado River Authority routinely have their 401(k) plans audited each year. Private employer plans with 100 or more participants are required by federal law to have an independent qualified public accountant's opinion on their financial statements.75

    In January 1998, Capital Metro's accounting firm, Martinez, Mendoza, and Colmenero, made an unsolicited offer to audit the StarTran 401(k) plan, citing significant growth in the associated funds and the fact that the funds have never been audited.76 Furthermore, the StarTran 401(k) plan must be audited since the number of participants has exceeded 100. The Human Resources manager informed TPR that Capital Metro is seeking independent accounting services to perform this audit.77

    Recommendations

    A. To ensure that Capital Metro fulfills its fiduciary responsibilities appropriately, the authority should contract with an outside consulting firm that specializes in 401(k) plans for annual financial and operational compliance audits of its plans.

    A thorough annual audit of its 401(k) plans seems entirely justified, and in the case of StarTran, a financial audit is required. This audit should review all aspects of the plans and related processes, based on the plan document and federal and state laws. Specific items to be reviewed should include salary deferral elections and allocations of participant accounts; loan payment schedules; identification of any taxable distributions from the plans; third-party administrator functions; internal administration and communication with employees; remittances of funds from Capital Metro to the trustee; accuracy of financial statements; investment product selections; and return on investments. The audit should be conducted by a certified public accountant with experience in auditing the operations of retirement plans and knowledge of both public and private-sector plans.

    The first audit should be conducted by October 1998 so that Capital Metro can use its findings and recommendations in selecting a new third-party administrator.

    B. Capital Metro should contract with an attorney or law firm with experience in retirement plans to provide legal guidance for the administration of its 401(k) plans.

    The laws and regulations governing retirement plans, and the legal structure of Capital Metro and StarTran themselves, are complex and require specialized legal services. The 401(k) plans should receive ongoing legal review by attorneys specializing in retirement plan law to ensure compliance with ongoing changes in federal law and regulations. Specialized legal services also will be necessary to draft the required amendments to the 401(k) plans and the associated applications to the IRS.

    TPR also recommends that Capital Metro weigh the costs and benefits of acquiring in-house legal expertise in retirement plans.

    C. The board should approve any changes to the 401(k) plans.

    Since board members do not participate in the 401(k) plans, they have no vested interest in changes to them. The employee committees should have an advisory role only, since their members have a personal interest in the outcome of plan amendments.

    D. The board should consider altering its policy on loans from 401(k) retirement accounts to ensure that these accounts remain viable as sources of retiree income.

    The design of a 401(k) plan is especially important when it is the only retirement plan available to employees. The board should weigh the short-term benefits of allowing loans against the long-term benefit ensuring an adequate retirement for its employees. One option for doing so would be to limit plan loans to the participant's contributions. This would keep the employer's contributions invested exclusively for retirement purposes.

    E. When the current contract expires on December 31, 1998, Capital Metro should seek competitive bids for a third-party administrator for its 401(k) plans.

    Capital Metro should seek a third-party administrator with extensive knowledge of public and private sector retirement plans and 401(k) plans. The current administrator has provided faulty information to Capital Metro and StarTran employees concerning the plans and, more seriously, has allocated contributions in violation of the plans' provisions.

    F. Capital Metro and StarTran should change the timing of employer contributions to the 401(k) plans.

    Capital Metro and StarTran should discontinue the practice of remitting the 3.5 percent employer contribution to the 401(k) plans to the trustee at the end of each pay period. This would eliminate contributions made to employee accounts before they have worked the 1,000 hours in a year needed to be eligible for the contribution. The contributions should be recorded as a payable for accounting purposes each pay period, but the actual payment should be made no sooner than six months after the beginning of the year.

    G. During its next union contract negotiation, StarTran's managers should negotiate the contract so that employer contributions to the union retirement plan are determined on an annual basis by the plan's actuary.

    This change, which should be made when the current labor agreement expires in June 2000, would allow StarTran to ensure sufficient and appropriate contributions to adequately fund the plan. This would ensure the plan's ability to pay agreed-upon retirement benefits. This change, moreover, would not prevent StarTran from making contributions above the minimum. Under any contract, the recommendations and advice of the plan actuary should be considered very seriously in making decisions regarding the employer contribution.

    Fiscal impact

    The recommendation to bid for new third-party administrator should have no fiscal impact since it would simply replace the existing administrator; the field of 401(k) plan administration is very competitive and it is unlikely that the new contract would cost significantly more than the current one.

    Interest savings could be realized immediately by changing the timing of the 3.5 percent discretionary employer contribution for the 401(k) plans. Based on Capital Metro's contributions during the 1996 plan year and an annual interest rate of 5.39 percent, this recommendation would result in more than $3,000 in annual savings beginning in 1999.

    Savings from making the minimum employer contribution to StarTran's retirement plan would be the excess, if any, of the contribution required by the collective bargaining agreement versus the minimum needed to fund the plan on an actuarially sound basis. Using the 1997 plan year as an example, StarTran could have saved about $100,000 in retirement plan contributions. These savings would not be realized until 2000. Since the amount of contributions would depend on several factors such as contract negotiations, asset value, and federal regulations, these savings cannot be estimated.

    The contract for specialized legal services would represent an additional expense that cannot be estimated. Services involved in amending the 401(k) plan documents and filing the application with the IRS would be unavoidable. Some offset of current expenses would occur if Capital Metro arranges for its legal representatives to update plan documents and excludes this service from its contract with a new third-party administrator.

    One San Francisco firm that specializes in auditing retirement plans told TPR that the cost of an operational audit as recommended here could range from $5,000 to $15,000; the precise amount cannot be estimated since the scope of an operational compliance audit, unlike a financial audit, is determined by the client.78 Capital Metro's accounting firm recently estimated that a financial audit of the StarTran 401(k) plan would cost in the range of $8,500 to $9,000.79

    Fiscal Year Savings Costs Net Costs
    1999 $3,300 ($9,000) ($5,700)
    2000 3,400 (9,000) (5,600)
    2001 3,600 (9,000) (5,400)
    2002 3,700 (9,000) (5,300)
    2003 3,900 (9,000) (5,100)

    PROPOSAL 18

    Establish a job classification system, develop job descriptions for each position, and ensure that recruitment and selection processes effectively match applicant skills and interests with the authority's goals and objectives.


    Background

    Capital Metro's job classification system was last updated in fiscal 1994. The system has not been maintained properly, however, and many employees have voiced concerns about the fairness of their job classifications and pay.80 Pay ranges have not been properly matched to responsibilities and new employees have been brought in at higher salaries than those received by existing employees in comparable jobs. KPMG Peat Marwick LLP's report recommended that Capital Metro perform a compensation and benefits review at least every five years to ensure that its employees are compensated appropriately and competitively.

    In 1997, Capital Metro issued a request for proposals (RFP) for a compensation study to examine the equity of pay rates within Capital Metro and compare the authority's salaries for 25 selected positions to those for similar positions elsewhere in the transit industry and the Austin area. The authority withdrew the contract in February 1998, however, before the study was complete, because they decided that the authority's need for information went beyond the scope of the initial RFP. Capital Metro now has budgeted additional funding for a larger study that would not only evaluate all its employees' compensation, but also assess Capital Metro's "position evaluation system," which ranks each job on a dozen different weighted skills, and its annual performance appraisal system. The authority planned to issue the new RFP by the end of April 1998. However, due to staff turnover in the Human Resources Department, they delayed issuing this proposal.81

    Poorly planned promotions

    Capital Metro has a formal process for filling vacant positions. To fill a position, a manager must work with the Human Resources staff to update or create a job description and job posting. The announcement must be posted in eight locations in Capital Metro's offices. In addition, if the decision is made to recruit external as well as internal candidates, the posting is placed in local newspapers; Human Resources refers qualified applicants to the manager for interviews.

    The general manager, however, is largely exempt from this process. Human Resources Policy HRC-155 gives the general manager authority to promote or transfer employees, modify job duties, and shift employees among positions without job postings or candidate interviews. This authority is subject to certain restrictions: transferred or promoted employees must meet the job descriptions of their new positions; positions may be reevaluated for upgrading only if they have significant additional responsibilities; and a promoted or transferred employee's salary can be adjusted only in accordance with Capital Metro's pay scale.

    TPR found, however, these restrictions are sometimes ignored during Capital Metro's frequent reorganizations. General managers have promoted and transferred employees into positions for which they lacked the necessary skills and experience.82

    For example, one reorganization created a new statistician position in the Operations Department. The general manager moved an employee into this position without a posting or interviews. According to the position description developed after the position was created and filled, the statistician was to collect, analyze, and report on transportation-related data; investigate incidents; provide technical support; and research industry best practices. The employee in question was a former bus driver who did not have the required experience with statistical analysis or database, spreadsheet, and word-processing software.83

    While the general manager has broad latitude in promoting, demoting, and transferring employees, these actions must conform with the requirements of the existing classification system. Employees who do not meet the minimum requirements for their jobs can only reduce the authority's efficiency and effectiveness, since they must learn on the job and may never develop the appropriate skills. Furthermore, such actions harm morale, since employees see their coworkers promoted for reasons apparently unconnected to their skills and experience.

    Excessive benefits and reimbursement for executive managers

    Capital Metro's executive managers, including the assistant general manager of Development, chief financial officer, chief operating officer, chief of Audit and Security, and chief counsel, all receive 20 days of paid vacation time each year, regardless of their length of tenure with Capital Metro. Non-executive, full-time staff members of Capital Metro must work for the authority for ten years before they receive this much vacation leave. They earn vacation time on the basis of their length of tenure with Capital Metro, starting with five days of vacation after they have been with the organization for six months and increasing up to 30 days after 25 years of service (Exhibit 9).84

    EXHIBIT 9
    Vacation Schedule for Non-Executive, Full-Time Capital Metro Employees

    Length of Service Vacation Days Earned per Year
    Less than six months 0
    Six months up to 12 months 5 days
    Up to two years 10 days
    After two years 12 days
    After five years 15 days
    After 10 years 20 days
    After 15 years 23 days
    After 20 years 25 days
    After 25 years 30 days
       


    Source: Capital Metro.

    By contrast, of 12 other transit authorities surveyed by TPR, seven maintain the same vacation schedule for all administrative employees, including executive employees. One other transit can award additional vacation time to its executive staff but has never done so.85 All employees of the State of Texas accrue vacation leave strictly on the basis of their tenure with the state, starting with seven hours of vacation per month until they have been with the state for at least two years.86

    Capital Metro also offers its managers very generous relocation benefits, including reimbursements for interview expenses and a trip to locate a new residence; 60 days of temporary housing and moving costs; and expenses of up to $15,000 associated with selling a house in a previous location and buying a house in Austin. Other exempt, nonmanagerial personnel can receive a relocation reimbursement of up to $2,000 at the discretion of the manager of Human Resources.87 According to the Human Resources manager, Capital Metro is considering extending this benefit to bus operators in its fiscal 1999 budget In fiscal 1997, Capital Metro spent more than $35,000 on relocation expenses, and its fiscal 1998 budget includes $90,000 for such expenses. Recent expenditures have included more than $27,000 for the new manager of Finance and more than $10,000 for the current grants coordinator.88 Of nine other transit authorities surveyed on this matter, only four provide any relocation benefits, and those appear to be much more modest than those offered by Capital Metro. For example, Louisville's Transit Authority of River City sometimes pays relocation expenses for executive positions, but only spends roughly $3,000 each time.

    Incomplete job descriptions

    Job descriptions-complete, accurate descriptions of the tasks and responsibilities accompanying each employee position-tell employees what is expected of them, serve as the basis for meaningful performance evaluations, and document employer expectations in case of litigation.

    Capital Metro's department managers are responsible for ensuring that job descriptions are complete and for updating the descriptions annually. To create a new job description, managers complete a position description questionnaire. Then either they or Human Resources personnel use the questionnaire to write a job description and assign the position to a pay grade. For the annual updates, Human Resources forwards each manager the job descriptions for his or her area and a new questionnaire, and asks the manager to use it to update the job descriptions if necessary. Generally, the employees fill out the questionnaire and discuss it with the managers. Based on that, job descriptions are updated, if necessary.

    The quality of Capital Metro's job descriptions varies wildly. Some are quite detailed, including a summary, a list of duties and responsibilities, job specifications, and educational and experience requirements. Others consist only of a few brief sentences.89 Finally, managers sometimes fail to complete the annual updates assigned to them, and according to Human Resources staff, some positions in Capital Metro and StarTran lack any job description at all.90 Five of the seven peer transit authorities who responded to this question maintain written policies and procedures to ensure that they have a job description for every position.91

    Recommendations

    A. The board and general manager should commission an independent, comprehensive evaluation of its job descriptions and its salary administration and compensation practices.

    To hire the right people for the right jobs at the right pay, Capital Metro needs to completely rewrite its job descriptions for all non-union positions, at Capital Metro and StarTran alike. The first priority of this evaluation would be to make sure job descriptions for all senior manager, professional, technical, and supervisory positions are clearly and consistently documented to hold these employees responsible for their job performance. If the current holders of these positions do not meet the newly rewritten job requirements, Capital Metro should consider publicly advertising for candidates to apply for those positions. Capital Metro should wait to issue the request for proposals on this study until the permanent general manager is hired.

    B. The board should make benefits given to newly hired executive staff, including relocation reimbursements and vacation days, consistent with those provided to other Capital Metro employees and by other public entities immediately.

    C. The general manager should require all Capital Metro managers to develop or update job descriptions for all their employees and file them with the Human Resources Department by December 1998.

    These descriptions should include information on educational requirements, desired experience, and job duties and responsibilities.

    D. The board should adopt a policy that requires the general manager to consider job descriptions in the promotion and transfer of employees.

    This policy should be adopted by October 1, 1998.

    Fiscal impact

    Capital Metro's fiscal 1998 budget already includes $50,000 for the compensation and salary administration survey; no additional resources should be necessary.

    Changing the policy on annual leave and relocation reimbursement expenses for new executive employees should result in savings. The savings cannot be estimated as they would depend upon future turnover in executive positions.

    All other recommendations in this section could be accomplished with existing resources.

    PROPOSAL 19

    Ensure that the performance appraisal process accurately assesses employee performance.


    Background

    All Capital Metro employees and StarTran administrative (non-union) employees are subject to semiannual performance evaluations. As stipulated by their contract, StarTran's unionized employees are not subject to performance evaluations. This provision, to say the least, limits supervisors' ability to effectively address substandard employee performance. For example, TPR learned that some current bus drivers have received as many as 30 complaints from the public. After receiving written complaints, supervisors can, to some extent, address them through various corrective actions; nevertheless, persistent complaints against some union employees indicate that the present measures are inadequate.92

    Lack of useful performance measures

    Capital Metro supervisors lack the tools they need to evaluate employees effectively. Employees are supposed to meet with their supervisors periodically to set individual job objectives based on their detailed job descriptions. With few exceptions, however, supervisors of Capital Metro employees and StarTran administrative employees use a standard evaluation tool that requires them to rate employee performance in achieving their job objectives as "excelled," "exceeded," "achieved," or "underachieved."93 On the basis of these ratings, employees are eligible for an annual merit raise of between 3 to 6 percent.94

    However, as already noted, some positions lack detailed job descriptions, and in practice no job objectives are identified for many employees. In these instances, supervisors must base their ratings on a subjective judgment of how well the employees are performing. Moreover, even when the system works as planned, Capital Metro's process for setting employee objectives is not tied into departmental goals or the organizational goals as a whole, and its supervisors are not trained in performance evaluation techniques.95

    Retroactive payments

    Although Capital Metro's managers are responsible for conducting semiannual performance evaluations, they frequently put this duty off for lengthy periods of time. As a routine, the Human Resources Department makes phone calls to managers, sends them e-mail messages, and occasionally distributes lists of overdue evaluations during weekly managerial meetings to help keep managers on target. Nevertheless, managers routinely fall behind in completing employee evaluations.

    Since many of its late evaluations result in salary increases, Capital Metro often pays employees retroactively. TPR found that in March 1998, Capital Metro gave one employee retroactive pay of $4,400 for pay increases from June 1997, and another $5,600 for two merit raises and a promotion earned since June 1996. In fiscal 1997, Capital Metro paid almost $86,000 in retroactive pay to Capital Metro and StarTran employees. Along with this retroactive pay, Capital Metro also makes accompanying lump-sum adjustments to employee's 401(k) accounts. Nevertheless, late contributions cost employees interest earnings.

    Of six other Texas transit authorities surveyed by TPR, four never pay employees retroactively due to late evaluations. Two transits occasionally pay retroactively, but never for more than two months.96

    Recommendations

    A. When Capital Metro renegotiates its contract with its unionized StarTran employees in 2000, it should attempt to provide those employees with annual evaluations.

    This recommendation also was made by KPMG Peat Marwick LLP in its audit of Capital Metro; it would give the authority some ability to address rude, reckless, or otherwise substandard behavior on the part of some bus operators and other unionized employees.

    B. The general manager should require all managers to receive training in performance evaluation techniques by October 1, 1999.

    Managers who are trained to recognize effective and ineffective performance will provide more reliable ratings than untrained managers. Training also helps managers develop a common frame of reference for evaluating performance.

    C. Capital Metro should immediately stop paying employees retroactively for merit raises and promotions.

    Human Resources should not process any Personnel Change Notices unless a current job description exists for that employee's position, and an annual performance evaluation has been completed, reviewed and signed by the employee, and filed with the department. Timely completion of employee performance evaluations should be a factor in each manager's performance evaluation. This would provide a strong incentive for managers to complete performance evaluations timely.

    Fiscal impact

    These recommendations can be accomplished within existing resources.

    PROPOSAL 20

    Improve staff training programs and provide career development assistance.


    Background

    Capital Metro lacks an effective staff training program. The manager of the Human Resources Department and one of the department "generalists" (a position that is currently unfilled) are assigned to prioritize the authority's training needs based on periodic needs assessments; the last such assessment was performed in 1996.97 The authority also has a Training Department that provides routine in-house training for new bus operators. In addition, each department has a separate combined training and travel budget that is spent at the discretion of the department manager for purposes such as conferences, symposia, and conventions as well as training sessions. In fiscal 1997, Capital Metro's departments incurred almost $282,000 in travel and training expenses.

    In 1995, Capital Metro entered a three-year interlocal agreement with the University of Texas Quality Center for $450,000 to train employees in Total Quality Management (TQM) and a five-year contract for $255,000 with Productivity Point International for computer software training. In 1996, the Vehicle Maintenance Department contracted with the Universal Technical Institute, a multistate training school based in Arizona, to provide training in vehicle maintenance for $225,000 for three years.98 In 1998, Capital Metro will enter another interlocal agreement with the University of Texas' Industrial Education Division to provide basic skills training on topics such as business writing, communications, and supervision.

    Many managers told TPR they would like more training related to their job functions, and most agreed that they have few opportunities to receive such training.99 Although management development classes such as team building, project management, effective communication, problem-solving, and leadership development are offered through University of Texas Quality Center as part of their contract, the authority's emphasis seems to be on TQM basics, TQM tools, and TQM problem-solving.100 Technical training classes on topics such as procurements, third-party contracting and labor contracts do not seem to be a regular part of Capital Metro's training agenda.101

    Interviews with Capital Metro employees highlighted the need to enhance employee training and particularly management training, and TPR certainly concurs with this assessment, given the current problems with poor management. The authority also needs better planning to recruit, groom, and train transit experts for key positions.102

    Enthusiasm for Capital Metro's current training offerings seems limited. Attendance was not mandatory at the 1997 TQM training at the University of Texas; when it became clear that few employees would attend, some classes were canceled. Others were conducted with fewer than half the expected participants.103

    TPR also found that Capital Metro provides no career development assistance to its employees. According to the manager of Human Resources, "employees are in the dark" when it comes to understanding how they may advance and grow within the organization. Capital Metro provides no career counseling to help employees identify their skills and interests, explore their options, and develop a realistic career plan, nor does it train its managers to provide such counseling.104

    Need for a tracking system

    StarTran's Operations Division tracks employees' training hours well.105 On the other hand, Capital Metro's Human Resources Department has only sketchy docu-mentation of administrative employee training.106 Capital Metro, as a whole, does not have a comprehensive record of its employees' training history and the training hours they have accumulated.107 Any employee can receive training with the approval of his or her manager. Conferences and seminars, which are mostly attended by managers, are considered "training," and the associated registration and travel expenses come out of the authority's training budget.

    However, Capital Metro has no mechanism to record the type of training employees receive, the number of hours attended, and the associated expenditures. This lack of tracking mechanisms makes it difficult for Capital Metro to ensure that all its employees receive the training they need to perform their jobs well and meet professional certification and continuing education requirements. Furthermore, training records would help Capital Metro make certain that its training dollars are spread equitably among employees.

    Recommendations

    A. The general manager immediately should establish a Training Advisory Committee to assess and coordinate training activities across the authority.

    This Training Advisory Committee (TAC) would establish a formal mechanism for assessing Capital Metro's overall training needs and coordinating its training activities. TAC should be directed by Capital Metro's general manager and should comprise five to seven employees including the staff development coordinator and vehicle maintenance training specialist. Other members should represent major departments and sections within the organization, including both managers and front-line employees. TAC should provide direction, set priorities, evaluate, and allocate resources for all training activities.

    B. The Human Resources manager should develop a program to provide career development assistance to its employees by October 1, 1999.

    The program should include workshops on career planning skills to employees and supervisors. Attendance should be voluntary for employees but mandatory for supervisors. The workshops should help employees identify their skills and interests and develop a career plan based on a realistic assessment of their options at Capital Metro or StarTran. Managers should receive instruction on providing employees with constructive feedback and helping them find job satisfaction in ways other than traditional promotions to management, such as lateral moves within the organization and temporary assignment to special projects.

    C. The Human Resources manager should implement a tracking system to document its employees' internal and external training by December 31, 1998.

    This system also should track the training seminars and conferences attended by each employee, as well as Continuing Professional Education credits needed and certification examinations taken by staff professionals.

    Fiscal impact

    These recommendations can be accomplished with existing resources.

    PROPOSAL 21

    Reduce workers' compensation costs through improved safety, prevention, and monitoring.


    Background

    Capital Metro compensates its employees for injuries acquired on the job, as required by the Texas Workers' Compensation Act.108 Benefits include 100 percent of medical expenses, 70 to 75 percent of an employee's average weekly pay for the length of any temporary disability, and permanent disability benefits based on the percentage of disability as determined by the employee's doctor.

    Capital Metro's Risk Management Department oversees the authority's workers' compensation program as well as general liability and auto liability insurance claims. The department's budget for fiscal 1998 is nearly $2.7 million, about 18 percent less than in the previous year.109 The department has seven full-time employees.

    Capital Metro is self-insured for workers' compensation claims of less than $350,000 per occurrence and contracts with the Texas Municipal League (TML) Risk Pool to cover claims in excess of $350,000. TML handles the payment of all of Capital Metro's workers' compensation claims, paying claims above $350,000 itself and those under $350,000 from an escrow account established by the authority. In fiscal 1997, Capital Metro paid TML a premium of $275,000 for this coverage.110 In that year, Capital Metro paid 117 workers' compensation claims at a total cost of just over $1 million (Exhibit 10).

    EXHIBIT 10
    Capital Metro Workers' Compensation Claims Fiscal 1993-1997


    Fiscal Year Number of Injuries Number of Lost Days Incurred Liability Average Cost of Claims
    1993 341 10,719 $1,420,826 $6,342
    1994 349 11,864 1,762,403 5,077
    1995* 274 12,194 1,763,948 8,615
    1996 171 5,014 955,022 5,995
    1997 117 3,629 1,063,935 9,093


    * Unusually high costs due to one large claim involving an employee fatality.

    Source: Capital Metro.

    Still not safe

    In 1995, Capital Metro/StarTran was classified by the Texas Workers' Compensation Commission (TWCC) as an "extra-hazardous" employer. TWCC tracks workers' compensation claims and, when an employer's number of claims exceeds the average for its industry, they inspect the employer's facilities and records for hazardous conditions or unsafe practices. If significant problems are found, as they are in about half of these investigations, the employer is placed on extra-hazardous employer status until corrections are made. Capital Metro was initially inspected and placed on this status on June 21, 1995.111

    Two subsequent TWCC inspections in April and August 1996 found that items identified on the initial hazard survey had not been corrected and noted numerous, continuing safety violations. One of the key problems cited in TWCC's inspection report was a lack of commitment on the part of top managers to the authority's safety program.112 TWCC did not remove Capital Metro/StarTran from extra-hazardous employer status until May 1997, almost two years after the initial inspection.113

    Since then, Capital Metro/StarTran has made a number of changes to address the problems cited by TWCC, and the authority's number of employee claims have fallen considerably from only a few years ago (Exhibit 10). In 1994, StarTran initiated a Return to Work Program, to provide temporary, alternative work assignments, with reduced hours and/or reduced tasks, to assist employees in returning to regular full-time employment. Capital Metro also improved case management of its active claims to ensure that all reasonable steps are taken to get the employee back to work. In July 1995, authority staff developed an Accident Prevention Plan, as required by TWCC, outlining Capital Metro's approach to safety, but this was not actually implemented until October 1996.114

    While Capital Metro's managers and the Risk Management Department are to be commended for their progress in reducing the number of workers' compensation claims, much remains to be done. Figures for fiscal 1997 show that while the number of claims has gone down, overall costs for the program rose by 11.4 percent over 1996, while the average cost per claim increased by more than half (Exhibit 10).

    According to TWCC, Capital Metro's fiscal 1997 injury rate was still high, below the cut-off point for "extra-hazardous" status, but very much in need of continued diligence.115 Both Risk Management and the authority's TML representative have expressed concern that Capital Metro's workers' compensation costs remain high and ideally should be brought down from more than $1 million to around $500,000 per year.116

    Management turnover affects safety

    One significant problem has been the continuing effect of Capital Metro's high managerial turnover. This has produced an inconsistent focus on safety and changing directives to staff about their different roles in promoting safety and reducing risk. Policies begun by one management team are barely developed before management changes and the whole process of setting policy begins all over again. Moreover, many authoritywide and departmental safety policies that are on the books are outdated and are not actively enforced.

    For example, the 1996 Accident Prevention Plan, developed in response to TWCC requirements, outlines specific responsibilities for different teams throughout the agency, but these duties are not being carried out as described in the plan. And this plan, while signed by the general manager, was never brought before the board for approval. The lack of board approval makes it easier to ignore such policies after a particular manager leaves.

    TPR also found that communication with employees about the importance of safety measures has been inconsistent. Capital Metro has no job descriptions for many of its various positions, and when they do exist, they often fail to address safety responsibilities. Similarly, many employees do not receive annual performance evaluations, and those that are performed do not include safety as a component. Supervisors receive minimal orientation and training on safety measures and are not held accountable for safety or accident prevention in their areas.

    A recent audit of Capital Metro by KPMG Peat Marwick LLP reported that "...it is apparent that...Risk Management's efforts to improve policies, practices and procedures are not fully endorsed and supported by the critical operations activities. There is a lack of commitment to training activities in all departments as to the emphasis on safety and reduction of risk in the workplan."117

    Over the last few years, Capital Metro has transferred key safety and training staff back and forth from Risk Management to Operations (where such employees, at least in theory, can be in closer contact with bus drivers and maintenance workers). The authority's focus, in turn, has shifted back and forth from loss prevention and overall cost reduction to individual employee safety. Yet both areas are important and both should be addressed.

    In 1997, the responsibility for completing accident reports was transferred from Risk Management to the immediate supervisor of each employee involved in an accident. These supervisors, however, are not adequately trained in how to conduct accident investigations. The Risk Management Department developed a manual to provide supervisors with such direction in February 1998, but senior management has held up approval of it for distribution until the department works with supervisors to "ensure that the document meets the needs of the organization."118 Making supervisors responsible for accident investigations has undercut the authority's efforts to track authoritywide safety trends. Risk Management prepares such analyses from investigation reports, which formerly were prepared by a certified accident investigator employed by the department. Now that responsibility for these reports has been transferred to inadequately trained supervisors, many accident reports lack the sort of detail needed to track accident trends and identify patterns of recurring safety problems.

    Recognized problems not corrected

    TPR's review of Capital Metro's workers' compensation claims for fiscal 1997 found a number of claims that might have been prevented or at least mitigated with a more aggressive training program and tighter enforcement of safety rules. For example, bus accidents comprised more than 20 percent of the claims. Many of these accidents involved a bus being "rear-ended," and most of the injuries were to the drivers' backs, necks and shoulders.119 Clearly, the mandatory use of seat belts by bus operators is critical.

    Capital Metro has periodically contracted with an outside firm, Infosource International, to audit its bus operators' performance. An initial audit was performed in 1994, with follow-up audits in February 1996, October 1996, and December 1997. Based on direct observations of bus driver behavior by trained transit auditors, Infosource identified several persistent safety problems (Exhibit 11). The following percentages are based on samples of about a quarter of the authority's drivers.

    EXHIBIT 11
    Percentage of Reported Safety Violations Capital Metro, 1994-1997


    Audit Period Moving and Traffic Violations Reckless Driving Driver Not Wearing Seat Belt Failure to Stop at Railroad Crossing
    1994 61% 8% 30% 10%
    February 1996 67 12 42 5
    October 1996 42 9 36 9
    December 1997 60 11 28 30


    Source: Infosource International.

    These audits show a clear pattern of potential safety hazards that do not appear to be improving, with the limited exception of seat belt use. While the figures have varied somewhat over the years, performance in three of the four safety areas has worsened. TPR found that, while Capital Metro has continued to contract for these audits, it has failed to act on many of the corrective actions recommended by the audit firm.

    Each of Infosource's audits outlined a number of specific actions Capital Metro/StarTran could take to address these safety violations it observed. For example, in February 1996, Infosource recommended that Capital Metro/StarTran retrain all its drivers in certain safety precautions, and warn them through formal posted notices and individual notices, requiring an employee signature in response, that continued violations could result in suspension or termination. To ensure compliance, the auditors recommended that the authority advise its operators that another inspection would take place in 90 to 120 days and that violations found at that time would result in disciplinary action.120 While individual driver's reports were reviewed by the employees and their supervisors, and the drivers did receive some safety training in response to this recommendation, Capital Metro/StarTran never issued formal warnings or took any disciplinary action based on the results of these inspections.

    The use of safety belts is of particular concern given that a Capital Metro driver's death in 1994 was in part due to failure to use a seat belt.121 Infosource recommended in February 1996, and again in each subsequent audit, that StarTran inform each operator of his or her responsibility for wearing seat belts and that the authority require each operator to sign a statement acknowledging this responsibility.122 TPR found that no such statements of responsibility were ever issued. And while the percentage of drivers not wearing seat belts has fallen, more than one in four still are not complying with this very basic safety requirement.

    StarTran's response to the October 1996 audit was to reintroduce safety meetings and to stress the use of seat belts in these meetings.123 TPR could not document any StarTran responses to the other audits. Again, none of Infosource's more specific recommendations, such as formal warnings or a requirement that operators sign written statements acknowledging the consequences of continued violations, were ever implemented. Consequently, little tangible progress has been made to improve the authority's performance in these key safety areas.

    Wheelchairs

    Yet another area of concern is the large number of claims tied to the loading and unloading of wheelchairs. While Capital Metro provides training in proper lift and securement procedures for wheelchairs, its focus is on the safety of the passenger, not the driver. However, in fiscal 1997, almost 10 percent of the authority's workers' compensation injuries concerned drivers assisting passengers in wheelchairs. These injuries alone resulted in 117 lost work days and cost the authority $163,000.124

    One option for addressing recurring problems such as this, as suggested to TPR by the State Office of Risk Management, would call for Capital Metro to perform a detailed analysis of the actions involved in properly loading and unloading a wheelchair, and to outline a step-by-step process for safely performing the task.125 Bus operators trained in this process then could be held accountable for proper performance of this task to avoid injury to themselves as well as the passenger.

    Employee wellness program stalled

    StarTran's agreement with the Amalgamated Transit Union, which represents its bus operators and mechanics, provides that for each $500,000 annual reduction in workers' compensation costs, Capital Metro will set aside $100,000 for a safety improvement effort. This effort is defined as including some type of fitness or wellness program or equipment deemed by a committee of both union and Capital Metro representatives to improve the quality of employees' work lives.126

    In fiscal 1996, workers' compensation costs fell by more than $800,000. Capital Metro formally agreed to set aside $100,000 for a wellness program in July 1997. However, almost a year later, the program has yet to be established.

    The wellness committee was not convened until November 1997, but by January 1998 had developed a good approach for the program. The committee surveyed the employees in December 1997 and found a wellness company that offered services very much in line with employees' wishes, and was ready to move forward.

    In February 1998, however, a managerial member of the committee determined, in consultation with the authority's manager of Contracts and Procurement, that the entire process would have to go through the authority's formal contract and procurement process.127 This requires a formal request for proposals (RFP) and bid evaluations and awards, a process that can easily take six months. The committee had not been told of this requirement initially, and assumed that the money simply would be made available for the program of its choice, once they reached an agreement as outlined in the labor contract. This RFP requirement was seen by union members as a deliberate stalling tactic on management's part, even though StarTran had specifically agreed to the wellness program as an incentive in its labor contract.

    As of July 1998, Capital Metro still had not developed a formal RFP for the wellness program. The RFP, according to Capital Metro staff, will not be complete until later in July or August, with the review and evaluation of bids requiring at least 45 to 60 days after that; and the final selection must be approved by the board.128 Union officials have expressed their doubt that this program will ever become reality.129

    Multiple claims need attention

    Another problem cited by the Risk Management staff concerns employees with multiple workers' compensation claims. A department analysis indicated that 53 percent of these claims in fiscal 1996 were filed by employees who had filed three or more claims during their tenure with Capital Metro. Ten percent of the claims were filed by employees with 10 to 18 separate claims. Capital Metro has no special means of dealing with such cases.

    Employees with repeated injuries may need to be retrained for a different position that is less physically taxing than bus driving. These cases, moreover, should be examined for ways to prevent injuries that result in ongoing reinjury. For example, a 1996 analysis by TML revealed a problem with the design of Capital Metro's bus driver seats. Eventually all seats were replaced with a more suitable style. Unfortunately, Capital Metro has not followed up to determine the impact of this change, but assumes it was a factor in the drop in claims.

    No clear policy on fraudulent claims

    Workers' compensation fraud occurs when a person knowingly or intentionally conceals, misrepresents, or makes a false statement to either deny or obtain workers' compensation benefits or insurance coverage, or otherwise profit from the deceit. From 1992 to 1996, TWCC detected almost $20 million in workers' compensation fraud in Texas.130 Suspected fraud should be reported to TWCC for investigation and potential criminal prosecution or civil action. If the amount involved is greater than $1,500, the offender is subject to a state jail felony.131

    Historically, however, Capital Metro has not taken legal action against suspected fraud. In one instance, an employee out on workers' compensation due to an alleged back injury was videotaped moving very heavy furniture. This employee was not fired, but agreed to resign, and no formal action was taken against him.132

    In 1996, the Houston Independent School District stepped up its investigation of fraudulent workers' compensation claims and used hidden surveillance cameras to document the physical activities of workers who had filed injury claims. The cases were well-publicized in local television and newspaper reports. The publicity surrounding the district's actions became a highly visible deterrent against the filing of fraudulent claims.133

    Need for better statistics

    Capital Metro does not have clear, measurable goals for reducing workers' compensation costs. The authority tracks the number of claims and costs for different categories of workers, including fixed-route buses, the special transit system, vehicle maintenance, administration, and other. However, these figures are not reported as a percentage of the total number of employees in each category (in other words, claims and costs per employee), which is a common measure; this makes meaningful comparisons with other jurisdictions impossible.

    Information on the number of claims and costs per employee is necessary to compare Capital Metro's workers' compensation data with national and state figures and those for other transit systems. For example, TWCC reports the number of injuries reported and the average number of injuries per 100 workers statewide each year.134 Capital Metro could not provide TPR with similar information on its claims and costs because they do not collect data in this manner. The Risk Management Department is working to assemble these data, but has had difficulty in obtaining accurate figures from Human Resources on the number of people employed by Capital Metro over the last five years in the categories Risk Management uses for tracking workers' compensation.

    Another critical statistical need is to separately track workers' compensation cases with and without lost workdays. Cases with lost workdays, obviously, are the most costly cases and the ones requiring the most attention. Capital Metro must track these cases, and the number of days out associated with each, to be able to benchmark its workers' compensation claims against national, state, and other transit system figures. The U.S. Bureau of Labor Statistics compiles such figures for industries nationwide.135 TWCC and the Texas Workforce Commission compile similar figures for Texas.136 Once again, Capital Metro was unable to provide such data to TPR.

    Recommendations

    A. The board should adopt an authoritywide safety policy aimed at preventing accidents and injuries no later than October 1, 1998.

    This policy should outline the board's commitment to safety and management's role in ensuring implementation of the policy, along with specifics about analysis and recordkeeping necessary to track costs and trends; education and training; audits and inspections; accident investigations; and periodic review and revision of procedures.

    The direct involvement of management and front-line staff from all departments, including bus drivers and mechanics, should be emphasized throughout the development of this policy to ensure that safety is defined as a clear responsibility of all authority employees. A clear set of safety rules should be provided to each employee, with a required signature sheet attesting that each employee has read and understands his or her responsibilities.

    B. The board should adopt clear, measurable goals for reducing the incidence and costs of workers' compensation claims as part of the new safety policy, no later than October 1, 1998.

    The Risk Management Department should benchmark Capital Metro's workers' compensation claims and costs against national, state, and other transit system standards. The Capital Metro board should adopt clear measurable goals for reducing the incidence of workers' compensation. These goals should include a 20 percent reduction in workers' compensation expenditures in fiscal 1999 and an ultimate goal of a $500,000 reduction by fiscal 2003.

    Performance should be measured within each department and supervisors should be held accountable for maintaining rates that meet or beat the goals established by the board for reducing Capital Metro's workers' compensation claims. Employee job descriptions should include specific responsibilities for maintaining a safe working environment, and safety should be a specific part of every employee's performance evaluation.

    C. The risk manager should ensure that all accidents are immediately investigated by a certified accident investigator, as well as by supervisors who are fully trained in proper accident investigation.

    The involvement of immediate supervisors in investigating accidents may help to ensure that any immediate training, discipline, or safety concerns are addressed to prevent further accidents. However, Capital Metro's certified accident investigator also should be involved to document critical accident information and spot patterns or trends that may require authoritywide action.

    Supervisors should be fully trained in accident investigation and reporting before they are allowed to file accident reports. Any unsafe conditions should be immediately addressed by the supervisor for that area. If problems go beyond a single area, Risk Management should work with the general manager to ensure that authoritywide changes are made across departments.

    Safety training should be clearly tied to problems and trends identified both by supervisors and by Risk Management. This training should include step-by-step directions on regular tasks, such as the handling of wheelchair lifts, to ensure that employees know the safest procedures for high-risk duties.

    D. Internal Audit should continue to contract for objective outside audits of its bus operators' performance at least annually, with a full report to the board on results and actions needed to correct any deficiencies.

    A finding that more than a quarter of Capital Metro's bus operators do not wear their seat belts, for instance, should be cause for significant alarm and immediate corrective action. Simply asking drivers to wear seat belts clearly has not proved adequate. Continued outside audits have proven effective at documenting problems, and mandatory training and clear disciplinary action for continued failures to comply with authority policy would be much more effective at eliminating or reducing such problems. Capital Metro should consider spreading outside observations over the year so that operators are aware that they could be monitored at any time.

    E. The labor coordinator, in conjunction with the Contracts and Procurement Department, should immediately issue a request for proposals for the employee wellness program promised as a reward for worker's compensation cost reductions achieved in fiscal 1996. The actual plan should be in place no later than December 1, 1998.

    The funding for this program was set aside more than a year ago and the only barrier to launching a wellness program is the need to issue an RFP and award a contract. Prompt action would ensure that employees finally enjoy the benefits of this long-promised and long-delayed program. Once in place, this program should help Capital Metro further reduce its workers' compensation claims by encouraging employees to take better care of themselves through exercise and other stress-reduction methods.

    F. The Risk Management Department should develop a specialized training/monitoring program for individuals with three or more accidents in a year. This program should be developed in conjunction with the Operations Division and put in place no later than October 1, 1998.

    Capital Metro should learn from these cases to prevent similar injuries in the future. This program must be carefully structured to ensure that it assists individuals with serious and repeat injuries without seeming to harass or punish them. TWCC regularly deals with this type of problem and can assist Capital Metro in the development of a suitable program.

    G. The board should adopt a policy clearly outlining procedures for investigating and reporting fraudulent workers' compensation claims no later than September 1, 1998.

    This information should be distributed to all Capital Metro employees to make it clear that the authority will not tolerate fraud and will take appropriate action in obvious cases of abuse.

    H. The Risk Management Department should begin benchmarking Capital Metro's workers' compensation figures against national and state figures and those of other transit systems no later than September 1, 1998, and report this information to the board at least annually thereafter.

    These data would help the board set overall goals for Capital Metro. The data should include the number of claims per 100 employees for the total system and for various categories of employee, such as bus drivers, vehicle maintenance, special transit drivers, and general administration. Capital Metro also should track the number of cases involving lost workdays to give management and the board a better indication of the number and status of the most serious workers' compensation cases. TWCC has indicated that it would be happy to assist Capital Metro in developing the appropriate statistics to track the authority's workers' compensation claims.

    Fiscal impact

    More aggressive management of the workers' compensation program should reduce expenditures for medical expenses and paid leave. In fiscal 1997, Capital Metro paid $1,063,935 in workers' compensation claims. TPR assumes that these costs could be reduced by at least 20 percent in the first year, producing a savings of about $213,000. TPR's estimate assumes increasing savings each year as the authority more fully implements these changes and moves towards cutting its annual costs by $500,000 in fiscal 2003. The estimated savings total nearly $1.9 million over five years.

    Fiscal Year Savings
    1999 $213,000
    2000 300,000
    2001 400,000
    2002 450,000
    2003 500,000


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