Social Security Coverage
of State and Local Government Employees - A-04-95-06013 - 12/13/96
This report presents the results of our review of the
administration of the Social Security coverage program for State
and local government (public) employees. The objectives of this review
were to determine whether there is a significant risk of noncompliance
with the coverage provisions of the Social Security Act (the Act)
and related criteria, determine operational and oversight responsibilities,
evaluate the discharge of those responsibilities, and make appropriate
recommendations. Our determinations were based on discussions with
officials involved in the administration of the program and data
provided by them. We considered the data sufficient for our objectives
and did not test them. The purpose of this report was to provide
managers of the State and local coverage program with an overview
of their authorities and responsibilities and an insight into measures
that need to be taken to ensure effective program administration.
The review was prompted by officials of the Social
Security Administration (SSA) who requested that the Office of the
Inspector General (OIG) perform compliance reviews of State and local
government employers. The SSA was concerned that a sizeable number
of public employers may not be accurately reporting the coverage
status of their employees for Social Security purposes. This concern
is shared by officials of the Internal Revenue Service (IRS) and
the State Social Security Administrator (SSSA) for Colorado. It is
based on their observation that the coverage provisions of the program
are not well understood by public employers. The basis for the observation
is the fact that SSA continues to address coverage issue problems
which are the result of poor understanding by public employers of
the program coverage provisions. Corroborating the observation are
the results of a recent survey of public employers conducted by the
National Conference of State Social Security Administrators (NCSSSA)
which indicate that public employers are not sufficiently knowledgeable
of the coverage provisions to preclude compliance problems.
Based on discussions with SSA, IRS, the SSSA of Colorado,
and review of the NCSSSA survey results, we agree with their observations
that the coverage provisions are not well understood by public employers.
We concluded that this lack of understanding, combined with relaxed
administration of the program, presents a significant risk of noncompliance
with the applicable coverage provisions.
The knowledge gap of public employers can be attributed
to the complexity of the coverage provisions, complicated changes
in the coverage provisions of the law, and the diminished role of
the SSSA as a technical advisor for public employers. Relaxation
of the administration of the program resulted from events in 1981
and 1986. Because of budget constraints at SSA, the onsite review
program of public employers was discontinued in 1981. In 1986 there
was a statutory change which shifted tax collection responsibility
at the Federal level from SSA to IRS without adequate recognition
of the complexities of the program. Specifically, these factors resulted
in: (1) no systematic reviews of public employers being done
by either SSA or IRS to assess compliance; (2) data collection
and information exchanges between SSA and IRS being insufficient
to detect compliance problems; and (3) widespread confusion
as to the responsibilities, authorities, and roles of SSA, IRS, and
the States.
The potential magnitude of the noncompliance is significant
because of the size of the population. There are about 86,000 public
employers and 23 million public employees. Public employers
are reporting to SSA that about 7 million public employment
jobs need not have full Federal Insurance Contributions Act (FICA)
taxes withheld because they are not covered. The estimated 1996 annual
payroll for the reportedly uncovered public employment jobs amounts
to about $129 billion, or an estimated potential maximum FICA
tax liability of $17 billion annually which is exposed to the
risk of nonpayment because of noncompliance.
The SSA has statutory responsibility to maintain accurate
records of Social Security covered wages and authority to verify
information it posts to those records. Failure to ensure accurate
earnings records presents a risk with potential negative fiscal and
public relations consequences. In individual cases where public employees
are not reported as covered and should have been, SSA is obligated
to provide retroactive coverage and pay Social Security benefits
even if FICA taxes have not been paid into the trust funds. These
employees also could have their right to or amount of Social Security
benefits affected because of a coverage error by a public employer.
Further, State and local employers could be unwittingly incurring
retroactive liability for taxes which should have been due in past
periods. Also, SSA`s goals of improving public confidence in
the Social Security programs and providing world-class service could
be undermined by a disclosure of significant compliance problems.
The SSA, IRS, and the State of Colorado are pursuing
a number of initiatives to reduce the risk of noncompliance. These
include new and revised instructional material for use by SSSAs and
public employers, increased dialogue to resolve operational and oversight
responsibility questions, and exploration of educational projects
and compliance reviews as means to reducing the risk of noncompliance.
There are, however, no specific plans to conduct compliance reviews,
even though such reviews are the only way to assess the extent of
any compliance problems. We have analyzed the responsibilities, authorities,
and functions of SSA, IRS, and the States and presented recommendations
for SSA to address. Recognizing that SSA and IRS share responsibility
for program administration, we believe the SSA should take the lead
in implementing corrective actions because of its obligation to ensure
the integrity of the trust funds. Specifically, SSA should:
(1) fund
an ongoing compliance review program which assures periodic evaluation
of the public employers` compliance with the program coverage
provisions; (2) continue to pursue a formal agreement with
IRS specifying respective responsibilities with regard to performing
compliance reviews, meeting the educational needs of public employers,
and improving the operational and informational exchanges between
the agencies to better detect and deal with compliance problems;
and (3) continue to study the feasibility of universal coverage
for public employees.
The SSA agreed that some type of compliance reviews
are needed to ensure public employers` compliance with coverage
provisions, and will determine the best means of conducting such
reviews in consultation with IRS and OIG. The SSA also agreed to
pursue a memorandum of understanding with IRS which clarifies the
responsibilities of the respective agencies and improves data exchanges
focused on compliance issues. In addition, SSA stated that universal
coverage could be an area for future study, although it is not currently
studying the issue. The text of SSA`s response is included in
Appendix A.
We were requested by SSA to perform reviews of public
employers` compliance with the coverage provisions of the Social
Security program for State and local government employees. The SSA
believed that noncompliance could be a problem because of the absence
of compliance reviews by either SSA or IRS. Many public employees
could have inaccurate earnings records for coverage purposes, and
there could be significant losses of trust fund dollars.
We obtained an Office of General Counsel (OGC) opinion
regarding OIG`s authority to conduct compliance reviews of public
employers. The OGC opinion interpreted case law and the Inspector
General Act of 1978 (IG Act) as prohibiting OIG from performing routine
reviews of public employer compliance. The opinion further concluded
that such routine reviews are properly the responsibility of SSA
or IRS. As such, OIG may only conduct limited audits of public employers
for the purpose of reviewing and assessing the adequacy of SSA`s
management of the State and local coverage program.
This report is intended to provide Government managers
at SSA and IRS with an overview of their authorities and responsibilities
with respect to public employer compliance and insight into measures
that need to be taken to ensure effective program administration.
The SSA, IRS, and State officials agreed that this approach would
provide useful information to program managers.
PROGRAM OVERVIEW
The Old-Age, Survivors, and Disability Insurance programs, authorized
by Title II of the Act, are commonly referred to as "Social
Security." These programs provide financial protection for most
workers and their families against the loss of earnings due to retirement,
death, or disability. Monthly benefits paid to beneficiaries are
funded by Social Security taxes paid by employees and their employers,
and the self-employed. In Calendar Year (CY) 1995, about 43 million
beneficiaries collected Social Security benefit payments of about
$333 billion. To be insured and eligible for benefits, certain
criteria must be met, one of which is that the individual must have
worked in covered employment for a certain period.
Most types of employment in the United States are required by law
to be covered by Social Security. In CY 1995, approximately
141 million people worked in covered employment or self-employment
and paid about $359 billion in FICA taxes. Some work, however,
is specifically excluded from coverage by law, and other types of
work are covered only under certain conditions. About 95 percent
of all jobs in the United States are covered. However, employees
of State and local governments who are members of their employer`s
retirement system and who are not covered by a voluntary Federal/State
agreement are one of the major groups not mandatorily covered.
COVERAGE OF PUBLIC EMPLOYEES
Prior to 1951, Social Security coverage was not available to public
employees, and many public employers did not have their own retirement
system. At that time, legal concerns existed regarding the power
of the Federal Government to tax State and local governments. It
was believed that State sovereignty afforded by the Constitution
prohibited such taxation and the Federal Government was, therefore,
prohibited from mandatorily covering public employees. Amendments
to the Act in 1950 addressed these concerns. These amendments allowed
the States on a voluntary basis to obtain coverage for public employees
who were not in a position covered by a public retirement system.
Coverage could be obtained by means of an agreement between the Federal
and State governments. These agreements are often referred to as "Section 218
Agreements" since they are authorized by Section 218 of
the Act. In subsequent years, a number of significant revisions to
the coverage provisions were enacted.
Beginning in 1955, amendments to the Act gave States the right to
extend Social Security coverage (via a Section 218 Agreement)
to employees in positions already covered under a public retirement
system, if the eligible incumbents of those positions elected coverage
via the referendum process.
Beginning in 1983, amendments to the Act required that public employers
for whom the State entered into a Section 218 Agreement must
continue Social Security coverage unless the entity legally dissolved.
Previously, public employers could opt out of such coverage.
In 1986, a provision of the Consolidated Omnibus Budget Reconciliation
Act (COBRA) of 1985 extended Medicare coverage, on a compulsory basis,
to public employees hired after March 31, 1986 who were not
already covered by a Section 218 Agreement and paying voluntary
contributions. This action departed from the long prevailing view
that the Federal government could not tax State and local governments.
Another change soon followed. In 1991, a provision of OBRA 1990
extended full Social Security coverage, on a compulsory basis, to
most public employees who were not covered as members of a qualified
retirement system offered by their employer or under a Section 218
Agreement. However, there were exceptions. Certain classes of employees
were mandatorily or optionally excluded.
Prior to 1987, payments for Social Security coverage
of public employees were referred to as Social Security "contributions" and
were not considered FICA taxes. They were paid pursuant to agreements
voluntarily entered into by States on behalf of public employers.
The OBRA of 1986 amended the Act and the Internal Revenue Code so
that payments for coverage under Section 218 Agreements became
categorized as FICA taxes instead of voluntary contributions. Concomitant
with the change in how payments for coverage were conceptualized,
OBRA 1986 relocated various responsibilities with respect to
the administration of these payments.
Prior to 1987, the States were responsible for collecting
Social Security contributions from all public employers in their
respective State, and were liable for the sums due. The States paid
their Social Security contributions, as well as those collected from
their local subdivisions, to the Social Security trust funds by depositing
them at the appropriate Federal Reserve Banks. Each State had an
SSSA who was a State employee responsible for the collection and
payment of Social Security contributions and the oversight of coverage
issues. The SSSA was the focal point in each State for obtaining
technical advice on coverage and reporting issues. The SSSAs maintained
close liaison with SSA and were the communications link with the
public employers on all matters germane to the State and local coverage
program. A provision of OBRA 1986 changed this scheme. After
1986, the States no longer had to collect contributions nor were
they liable for any taxes due from their local subdivisions. Instead,
each public employer was required to deposit FICA taxes directly
to IRS, the same as a private employer. Responsibility for collecting
payments was transferred from the States and the SSA to IRS. With
the diminished role of the States in the collection process, the
role played by the SSSAs also diminished.
OVERSIGHT OF PUBLIC EMPLOYER COMPLIANCE
Federal oversight of public employer compliance with
the coverage provisions of the State and local program has been erratic
over the years. Prior to 1971, compliance reviews by SSA were sporadic
and superficial. Between 1971 and 1981, systematic reviews of compliance
were quite comprehensive. And, subsequent to 1981, systematic compliance
reviews have been nonexistent. The IRS has not implemented a routine
review program with the objective of measuring public employer compliance
with State and local program coverage provisions.
During 1967-1968, the Department of Health, Education,
and Welfare (HEW) Audit Agency conducted a review of the quality
of States` compliance with the terms of their Section 218
Agreements. It concluded that SSA did not have adequate State compliance
documentation in its records and indicated its intention to conduct
audits of and in the States. Prior to 1967, two means were utilized
in an attempt to determine the State`s compliance: (1) cooperative
reviews were conducted at the invitation of the States, and (2) coverage
and reporting questionnaires were periodically forwarded to States
for distribution to the local entities for completion and return
to SSA. However, these measures, in the opinion of the HEW Audit
Agency, did not afford SSA concrete documentation as to the State`s
compliance. The SSA requested HEW to delay its proposed action until
such time as SSA could meet with the States and develop a program
satisfactory to the HEW Audit Agency, the States, and SSA. An onsite
review program was developed in SSA and was implemented in Fiscal
Year 1971.
The review program was a sensitive subject. From the
beginning, a few of the States were strongly opposed to the program.
In August 1975, at the NCSSSA in Mobile, Alabama, the States passed
a resolution in favor of discontinuing the review program. However,
SSA continued the review program.
The SSA conducted onsite reviews through 1981 with
a full-time staff usually numbering four persons. Initially
the reviews took about 2 weeks by a two-person team from headquarters,
and later evolved into about 1 week by a team of one person
each from SSA headquarters, the regional office, and the State. The
SSA goal was to review each State (and a different cluster sample
of local government entities) at least once every 3 years. This
cycle was accomplished two full times, and a third was in progress
when the reviews ceased.
The objective of the reviews was to provide a system
for measuring the quality of performance of public employers regarding
their contractual obligations under their Section 218 Agreements.
The SSA drafted criteria, and standard operating instructions and "methodology" for
the reviews. Reviews focused on the effectiveness of:
the system of State controls and recordkeeping;
the system of providing instruction, education,
and guidance for local reporting officials; and
the system of determining compliance by reporting
officials.
Besides SSA personnel, cyclical compliance reviews
were also conducted by the HEW Audit Agency. For some years, the
State could choose to have local entities reviewed by the State,
the SSSA, or independent auditors. The SSA had the operational responsibility
to see that compliance reviews were conducted. With the passage of
the IG Act in 1978, the HEW Audit Agency became the Department of
Health and Human Services` OIG. Its role then became limited
to oversight responsibility.
The SSA personnel involved in the onsite reviews indicated
that the reviews were discontinued in 1981 due to budget constraints.
Similar reviews were not implemented at IRS after the enactment of
OBRA 1986 which required all public employer entities to report
and pay FICA taxes directly to IRS.
CURRENT FUNCTIONS RELATED TO STATE AND LOCAL
COVERAGE PROGRAM
SOCIAL SECURITY ADMINISTRATION
By statute, SSA has the responsibility to maintain
accurate earnings records for all individuals receiving wages or
deriving self-employment income so that it can determine the right
to and the amount of Social Security benefits. To accomplish this,
SSA has statutory authority to verify the information provided to
it to the extent deemed necessary by the Commissioner of Social Security.
Attendant to its statutory responsibility and authority,
SSA promulgated regulations (20 CFR 404.1230-1234) indicating that
it will conduct onsite reviews of public employer records. These
reviews are to be conducted periodically to verify that public employees
are covered according to the terms of the State`s Section 218
Agreement. Oddly, these regulations did not become effective until
1988, approximately 7 years after SSA ceased conducting onsite
reviews. They remain in effect.
To meet its responsibility for maintaining accurate
earnings records of public employees, the main functions SSA now
performs are: maintaining and interpreting Section 218 Agreements
and executing modifications; providing advice and making determinations
regarding coverage; and posting Social Security-covered earnings
to individual earnings records and making corrections as required.
It no longer conducts reviews to determine whether public employers
are correctly providing coverage for their employees pursuant to
the terms of their Section 218 Agreements.
In SSA`s maintenance of earnings records, corrections
to individuals` earnings records are common. When SSA makes a
correction, it routinely notifies IRS if taxes may be involved. For
any resulting FICA liability, the determination, assessment, and
collection are the responsibility of IRS. The SSA will correct the
individual`s earnings record regardless of FICA tax liability
or collection.
INTERNAL REVENUE SERVICE
By statute, IRS has the responsibility and authority
to administer the tax laws of the United States, including the collection
of FICA taxes. Attendant to these responsibilities is the authority
to conduct examinations to verify that the correct amount of taxes
have been reported and collected.
To meet its responsibility for the proper reporting
and collection of FICA taxes, IRS provides instructions on recordkeeping,
withholding, and deposits. It also determines tax liability. The
IRS depends upon public employers and SSA to make accurate coverage
determinations of public employees. The IRS receives notification
of coverage determinations from SSA on an ad hoc basis. The IRS also
receives, on a regular basis, copies of determinations by SSA changing
an individual`s earnings record when FICA taxes may be involved.
It is then up to IRS to follow up with the public employer regarding
any potential FICA liability. The only functional process to verify
the accurate reporting and collection of FICA taxes is the examination
process whereby suspected problem returns are reviewed. The IRS does
not engage in any ongoing systematic reviews of public employers.
The decisions to perform examinations are generally made at the regional
and local level on an individual return basis.
STATES
Under Federal and State law, the States are responsible
for executing and administering their Section 218 Agreement
on behalf of the public employers in the State. On behalf of State
employees, the States are also responsible for the accurate reporting
of wages to SSA and IRS, as well as the payment of FICA taxes to
IRS. Since 1987, the States are no longer responsible for the reporting
of wages and the collection of FICA taxes for local government employees
in their jurisdiction.
Each State is also required by regulation (20 CFR 404.1204)
to designate a State official to act on the State`s behalf in
administering the Section 218 Agreement. That official is generally
referred to as the SSSA. There is no comparable provision with respect
to administering the mandatory coverage provisions.
The main functions of SSSA in maintaining and administering
the Section 218 Agreement are:
negotiating modifications to the original
agreement for such reasons as defining additional coverage groups,
correcting errors, or identifying government units which join a
qualified retirement system;
providing SSA with notice and evidence of
the legal dissolution of covered State or local government entities;
resolving coverage and payroll tax questions
with SSA and IRS related to the Section 218 Agreement;
negotiating with SSA to resolve Social Security
contribution payment and wage reporting questions for public employers
in the State for wages paid before 1987; and
providing information and advice to State
and local employers to help resolve coverage, reporting, and taxation
issues.
Our review was conducted in accordance with generally
accepted government auditing standards. Objectives were to determine
whether there was a significant risk of noncompliance with the coverage
provisions of the Act and related criteria, determine operational
and oversight responsibilities, evaluate the discharge of those responsibilities,
and make appropriate recommendations.
To make our determinations, we consulted a number of
sources. We reviewed relevant statutory and regulatory criteria,
as well as operating policies and procedures. We interviewed SSA,
IRS, and State officials. We reviewed decisions made by SSA on Social
Security coverage, studies conducted by NCSSSA, and attended meetings
between SSA, IRS, and State representatives which concerned operational
and policy issues and initiatives relevant to public employee coverage.
We did not review internal controls or otherwise verify data and
information supplied by SSSA, IRS, the States, or NCSSSA.
Our review was conducted from September 1994 through
August 1996 at SSSA headquarters in Baltimore, Maryland; at
IRS headquarters in Washington, D.C.; and at the SSA regional office
in Atlanta, Georgia.
RESULTS OF REVIEW
We concluded there is a significant risk of noncompliance
by public employers with the State and local coverage provisions.
Our review indicates that the risk exists because of a lack of understanding
by public employers of the coverage provisions and relaxed administration
of the program. The latter accounted for the absence of oversight
reviews of employer compliance, ineffective data collection and information
exchanges between SSA and IRS, and confusion as to the respective
duties of the States, SSA, and IRS. The SSA, IRS, and the State of
Colorado are pursuing a number of initiatives to reduce the risk
of noncompliance. While the initiatives are steps in the right direction,
more needs to be done to detect and measure the extent of noncompliance
and implement controls to identify and prevent compliance problems.
The potential size of the noncompliance is significant
because of the size of the population. There are about 86,000 public
employers and 23 million public employees. Public employers
are reporting to SSA that about 7 million public employment
jobs need not have full FICA taxes withheld because they are not
covered. The estimated 1996 annual payroll for the reportedly uncovered
public employment jobs amounts to about $129 billion, or an
estimated potential maximum FICA tax liability exceeding $17 billion
annually, which is exposed to the risk of nonpayment because of noncompliance.
It should be noted that the $17 billion of risk represents the
total exposure to noncompliance and is not an estimate of actual
noncompliance. Actual lost taxes due to noncompliance will be a smaller
amount because some public employees are not covered by a Section
218 Agreement and are members of their employer`s retirement
system. These employees are not covered for Social Security nor liable
for FICA taxes.
Any sizeable noncompliance would have a significant
negative fiscal effect on the Social Security trust funds. In individual
cases where public employees are not reported as covered and should
have been, SSA may provide retroactive coverage and pay Social Security
benefits even if FICA taxes have not been paid and credited to the
trust funds. Noncompliance could also cause entitlement problems
for potential beneficiaries if not detected. It could also subject
public employers to retroactive tax liabilities. The public`s
confidence in the management of SSA, IRS, and the States would likely
be diminished.
PROGRAM KNOWLEDGE OF PUBLIC EMPLOYERS
Public employer knowledge of the coverage provisions
for the State and local program is not generally sufficient to preclude
compliance problems. This observation which is shared by SSA, IRS,
and the SSSA of Colorado is based on the fact that SSA continues
to address coverage issue problems which are the result of poor understanding
by public employers of the program coverage provisions. Corroborating
the observation are the results of a 1994 NCSSSA survey of public
employers which indicate the coverage criteria for public employers
are not well understood.
Personnel in SSA`s Division of Coverage conservatively
estimate that they handle at least 100 coverage questions a
year from public employers, SSSA`s, and public employees. From
their experience, the questions arise often from poor understanding
of coverage provisions by public employers. The coverage questions
may involve only a few employees or many employees. For example,
a recent coverage issue in the process of resolution involves 40 public
employers in one State whose employees became mandatorily covered
by OBRA 1990 provisions, but have not been reported for FICA
tax purposes. Personnel in the Division of Coverage believe similar
situations exist.
The NCSSSA survey consisted of a questionnaire responded
to by 1,005 public employers in 27 States. The questionnaire
was designed to gauge the knowledge of public employers regarding
the administration of Social Security and Medicare taxes. The results
showed that public employers often lacked knowledge of or misunderstood
the coverage criteria which applied to their employees. The paragraphs
in quotations which follow were excerpted from the NCSSSA survey
report. They provide a summary of the survey findings.
"One of the many concerns faced by State
administrators, and feared by both the Internal Revenue Service
(IRS) and the
Social Security Administration (SSA), is that many governmental
entities do not fully understand the contractual arrangements
which occur through the voluntary coverage agreement process.
Once the agreement has been executed, the papers are typically
put away, and many times, never to be seen again.
"With the eventual turnover or retirement
of key payroll personnel, it ordinarily follows that the next
payroll officer will not be as familiar with the original application
and approval process, nor the details as regards to the included
or excluded positions. This was borne out by the results of the
survey. Although the vast majority of the entities surveyed had
obtained Social Security coverage under a Section 218 Agreement,
only one-third (32.8 percent) responded that their coverage
was the result of this process. Just under 30 percent (29.8 percent)
indicated that they were covered by the OBRA 1990 requirements.
Nearly 37 1/2 percent (37.4 percent) did not know
the correct reason for their Social Security coverage. This
is clearly
an indication that either the process is too complicated or
the employers require a substantial amount of additional education."
Based on our observations, the knowledge gap of public
employers is attributable to several factors. These factors are:
the complexity of the coverage provisions, complicated changes in
the coverage provisions of the law, and the diminished role of the
SSSA as the technical advisor for public employers.
COVERAGE COMPLEXITY
Public employee coverage differs from those in private
employment due to its unique legislative history which evolved amid
concerns over the Federal Government`s authority to tax State
and local governments. It is especially unique in that most public
employees are covered as a result of a voluntary agreement.
The criteria are complex because public employees may
be mandatorily excluded or covered, or optionally excluded or covered.
There may be questions as to whether the individual is in an employment
relationship, whether the remuneration constitutes wages, or whether
the public employee is a member of a qualified retirement system
offered by the public employer. Adding to the complexity is the fact
that the criteria are often phrased in technical terms and widely
dispersed throughout various provisions of the Act, Internal Revenue
Code, Code of Federal Regulations, and the State`s Section 218
Agreement with SSA, some of which contain thousands of modifications.
RECENT CHANGES IN COVERAGE
Since 1950 when the basic Section 218 coverage
was statutorily enacted, there have been several legislative changes
in recent years which complicated the coverage provisions. In 1986,
COBRA 1985 extended Medicare coverage, on a compulsory basis,
to public employees hired after March 31, 1986 who were not
already covered by a Section 218 Agreement and paying voluntary
contributions. In 1991, OBRA 1990 extended full FICA coverage,
on a compulsory basis, to most public employees, with certain highly
technical exceptions, who were not members of the employer`s
qualified retirement system or covered by a Section 218 Agreement.
These changes further complicated an already complex
environment of coverage criteria which are contained in various provisions
of the Act, Internal Revenue Code, Code of Federal Regulations, and
Section 218 Agreements. To be effectively implemented, the changed
provisions would have to have been accompanied by an extraordinary
education campaign aimed at the public employers. From all indications
that did not occur. The changes were disseminated in routine fashion
via SSA and IRS publications.
ROLE OF STATE SOCIAL SECURITY ADMINISTRATOR
With the passage of OBRA 1986, the role of the
SSSA began to diminish because it changed the responsibility for
collection of Social Security contributions. Until then, the SSSAs
representing the States would report covered wages to SSA, collect
the Social Security contributions from the State and local employers,
and deposit them with the Federal Reserve to the account of the Social
Security trust funds. After OBRA 1986, public employers were
required to pay FICA taxes directly to the IRS in the same manner
as a private employer.
The States then were no longer liable for local public
employers` Social Security contributions previously collected
through the SSSAs since FICA taxes were now paid directly by the
public employers to IRS. In the eyes of many States, the relief from
the liability for the Social Security contributions of local public
employers lessened the necessity of retaining the SSSAs. As a result,
the position of SSSA was downgraded or abolished in some States.
The SSA and NCSSSA are concerned about the diminishing
role of SSSAs and the potential crisis emerging in States where SSSAs
are not active or where States are moving toward inactivating them.
In March 1995, NCSSSA notified SSA that 12 States had already
inactivated the position or were moving towards inactivation. The
NCSSSA encouraged SSA to contact the 12 States directly. The
SSA responded by writing to the Governors of these States to remind
them of the important functions provided by this position and that
the States are legally obligated to maintain this function.
The SSSAs carry out a variety of functions which are
important for ensuring Social Security coverage for State and local
public employees. The SSSA is the focal point in each State for obtaining
technical advice on coverage and reporting issues. They are the communications
link between SSA and the public employers on all matters germane
to the State and local coverage program. When the SSSA positions
are deactivated or the activity is reduced, the States no longer
have a focal point for providing advice to public employers or maintaining
their Section 218 Agreements. The result is a lowering of the
knowledge level of public employers on coverage matters.
Because of budget constraints and a law change which shifted FICA
tax collection responsibility from SSA to IRS, program administration
has been relaxed and is not sufficient to preclude noncompliance
by public employers with the State and local coverage provisions.
Although SSA has continued to discharge the duties related to the
maintenance and interpretation of the Section 218 Agreements,
there have been no systematic reviews to determine whether public
employers are correctly providing coverage for their employees.
In 1981, having to choose between competing priorities because of
budget constraints, SSA discontinued its onsite administrative review
program. The onsite reviews were cyclical and performed at SSSA and
public employer office sites. The SSA staff scheduled their visits
with the goal of reviewing each State at least once every 3 years.
Two cycles of reviews were complete and a third was in progress when
the reviews were discontinued.
With the provisions of the State and local coverage program being
so very complex, it is necessary that periodic scrutiny be performed
of public employer compliance with the coverage provisions. The complexity
of the Section 218 Agreements and their modifications, as well
as the statutory coverage criteria, begs continuity of expert public
employer personnel responsible for reporting covered employees in
order for there to be an assurance of compliance. Without onsite
reviews of public employers, it is not possible to evaluate how competently
the employers may be executing the provisions of the coverage criteria.
With the implementation of OBRA 1986 and IRS being assigned
FICA collection responsibility, the need for reviews of public employer
compliance with the coverage provisions did not change. The IRS assumed
collection responsibilities but the IRS did not implement any systematic
reviews of public employers. Public employers were considered the
same as private employers. There was no recognition of the special
complexities of the coverage provisions and the increased probability
of noncompliance. Public employers` FICA returns received examination
only in connection with review of employers` compliance with
payment and reporting requirements for income taxes.
In connection with the collection responsibilities of IRS, SSA routinely
notifies IRS when it corrects an individual`s earnings record
which likely involves FICA taxes. It also notifies IRS on an ad hoc
basis when it provides coverage advice to employers or makes a coverage
decision regarding an employee position or group. There is no feedback
on what action, if any, the IRS takes to ensure that the FICA taxes
of the affected employee or employees are properly reported by the
public employers. Further, the IRS does not routinely pursue the
individual coverage decisions as possible leads to other potential
coverage problems that may exist with given public employers.
With the enactment of OBRA 1986, widespread confusion occurred
among public employers as to the responsibilities, authorities, and
roles of SSA, IRS, and the States. The diminished role of the SSSA
further compounded the problem. This is illustrated by the following
paragraphs excerpted from the NCSSSA survey report:
"The next several questions on the survey
were regarding who (or which agency) the governmental entity
contacts if they have questions about Social Security and/or
Medicare taxes. Over forty-one percent (41.1 percent)
indicated that they would contact SSA. Nearly twenty-two percent
(21.9 percent) said they would contact their State Administrator.
Slightly under fifteen percent (14.7 percent) stated they
would contact IRS. The remainder of the respondents indicated
that they would contact either their accountant, attorney, agency
payroll office, or other sources such as State Auditor, Statewide
associations, or other State agencies.
"Only sixty percent (60 percent) of the
respondents could correctly identify their State Social Security
office. Forty percent (40 percent) incorrectly identified
the State office, and of this group, twenty-three percent
(23 percent) indicated that they did not know who was their
State Social Security Administrator. In many States, this should
not be a surprise. Once the Social Security tax collection and
remittance functions were transferred from the State Administrator
to IRS, many States saw this as an opportunity to phase-out their
State Administrator function. Information releases from the State
Administrators were reduced substantially, if not entirely, and
funding was drastically cut back. Many States also discovered
that they no longer had the support of key upper management within
the State."
Given this environment, we concluded that there is
a need to educate the public employers on the program structure and
the functions of the primary participants.
ADMINISTRATIVE INITIATIVES
The SSA, IRS, and the SSSA of Colorado, in the last few years, have
initiated a number of measures directed at perceived compliance problems.
Some efforts were undertaken collaboratively and others independently.
The efforts were largely directed at the root of the problem, education
of the public employers, but were conceived in an atmosphere of severe
budget constraints. As a result, they are limited.
These initiatives involved: joint publication by SSA, IRS, and the
State of Colorado of a reference guide for public employers; a survey
conducted by SSSA of Colorado to assess compliance of the State`s
public employers and identify approaches to meeting the education
needs of public employers; participation in the annual NCSSSA conferences;
agreement between SSA and IRS to pursue a memorandum of understanding
to specify responsibilities for educating employers and improving
data exchanges to identify noncompliance; issuance by SSA of an updated
State and Local Coverage Handbook; and data gathering by IRS on FICA
tax receipts before and after the mandatory coverage provisions of
OBRA 1990.
Universal coverage of State and local government employees would
provide the program simplification which would be conducive to compliance
with the coverage provisions. Legislation to mandatorily cover State
and local government employees has been previously introduced in
Congress. The Congress, however, has not enacted it. The issue involves
serious legal, fiscal, and political considerations which may prevent
it from ever being enacted.
The State and local coverage program is very complex
to administer. The coverage provisions of Section 218 Agreements
and numerous modifications, as well as other statutory criteria,
provide a highly technical and difficult environment in which SSA,
IRS, and the States have to operate. Effective administration requires
a high level of technical knowledge on the parts of all parties involved
and a program for monitoring the compliance of reporting entities.
Our review observations indicate that the public employers
are not sufficiently knowledgeable of the coverage provisions of
the program to preclude compliance problems. Further, relaxed administration
of the program has resulted in the absence of systematic reviews
to assess compliance with the coverage provisions.
The knowledge gap of public employers is attributable
to the complexity of the coverage provisions, complicated changes
in the coverage provisions of the law, and the diminished role of
the SSSA as a technical advisor for the public employers. The relaxed
administration is attributable to budget constraints at SSA which
resulted in the elimination in 1981 of its onsite review program
of public employers, as well as a 1986 change in Federal law which
shifted tax collection responsibility from SSA to IRS. Because of
the complexity of the coverage provisions, there should have been
more emphasis given to ensuring that public employees were properly
covered. Instead, the law simply shifted collection responsibility
to IRS without providing for review of public employer compliance
with the coverage provisions.
Further, with the shift, effective data collection
and information exchanges between SSA and IRS for detecting compliance
problems were not developed. Also, the change caused widespread confusion
as to the responsibilities, authorities, and roles of SSA, IRS, and
the States.
The above conditions have led us to conclude that there
is significant risk of sizeable noncompliance with the State and
local coverage provisions. We completely agree with the concerns
of SSA, IRS, and the SSSA of Colorado that there could be significant
compliance problems.
The administrative initiatives undertaken by SSA, IRS,
and the SSSA of Colorado over the last few years have been commendable
and should have a positive effect on compliance by public employers.
However, we don`t believe they alone are enough to ensure future
compliance without universal coverage of public employees, which
is probably the only long-term solution to the problem of program
complexity.
The coverage provisions of the State and local program,
are, in our opinion, so complex, technical in terminology, and dispersed
throughout such a variety of laws and agreements that no action short
of a compliance review program would be sufficient to provide reasonable
assurances of compliance with existing criteria by public employers.
We are, therefore, recommending that SSA take the following
actions (two administrative and one legislative in nature).
1. The SSA should fund an ongoing compliance review
program which ensures periodic evaluation of the public employers` compliance
with the program coverage provisions. Periodic reviews are called
for in SSA`s regulations. The SSA should explore the option
of conducting these reviews with SSA staff or by contracting out.
The first reviews should be made of the employers in the States
which represent the bulk of public employee wages reported as not
covered for FICA purposes. Thereafter, cyclical reviews of the
States should be conducted similar to the onsite reviews done prior
to 1981, i.e., a sample of employers be reviewed in each State
every few years.
The SSA agreed that some type of compliance reviews
are needed to ensure public employers` compliance with coverage
provisions, and will determine the best means of conducting such
reviews in consultation with IRS and OIG.
2. The SSA should continue to pursue a memorandum
of understanding with IRS which specifies the respective responsibilities
of both agencies with regard to performing and/or funding compliance
reviews, meeting the educational needs of public employers, and
improving the operational and informational exchanges between them
to better detect and deal with compliance problems. The understanding
should provide for an initiative to educate State officials and
public employers about the responsibilities, authorities, and roles
of SSA, IRS, and the States as they relate to Section 218
coverage and mandatory coverage. The importance of the SSSA should
be given special emphasis.
The SSA agreed to pursue a memorandum of understanding
with IRS which clarifies the responsibilities of the respective
agencies and improves data exchanges focused on compliance issues.
3. As a possible long-term solution to the coverage
problems through program simplification, SSA should continue to
study the feasibility of universal coverage for public employees.
Although there are no present plans to study the
issue, SSA stated that universal coverage could be an area for
future study in light of the need to examine alternatives for long-term
Social Security financing. Mandatory coverage for public employees
would have a significant impact on the Social Security trust funds,
on affected employees, and on existing State and local government
retirement systems.
The computation is based upon an estimate provided
by the Social Security Administration`s Office of the Actuary
of Calendar Year (CY) 1996 wages reported by public employers
as not covered for full Federal Insurance Contributions Act (FICA)
tax purposes. The estimate was derived using CY 1992 actual
data. The FICA tax rate is a combined rate (15.3 percent)
which is apportioned among the Old-Age, Survivors and Disability
(OASDI) trust funds (12.4 percent) and the Health Insurance
(HI) trust fund (2.9 percent).
Wages Reported as Not Covered
Tax Rate
Funds at Risk
$ 62.4 billion (OASDI & HI)
15.3 percent
$ 9.5 billion
$ 66.7 billion (OASDI)
12.4 percent*
8.3 billion
Total $129.1 billion
$17.8 billion
Used for Report Purposes
$17 billion
* Reduced rate used because the wages were reported
as being covered for HI purposes, but not for OASDI.
APPENDIX C
MAJOR CONTRIBUTORS TO THIS REPORT
Office of the Inspector General
Gary Kramer, Director, Program Audits (East)
Emil Mallek, Team Leader
Kathy Woodcock, Team Leader
Rick Edris, Senior Auditor
Jerry Hockstein, Program Analyst
Robert Hudson, Auditor
www.socialsecurity.gov
