CHICAGO - The outside administrator of the $230 million Cook County deferred compensation plan might be ousted following an audit report chiding it for overstating the value of the plan.
Copeland Cos., East Brunswick, N.J., faces the loss of a contract it has held for more than a decade as third-party administrator of the plan, which covers approximately 11,000 active and retired county employees.
In a report submitted to the Cook County Board of Commissioners at the end of August, plan auditor Grant Thornton L.L.P., Chicago, criticized Copeland for accounting deficiencies that inflated plan earnings and assets by more than $10 million in 1993.
While no employee money was lost, the Grant Thornton report documented "material weaknesses" that violated basic accounting rules. Inflated asset values made the plan appear more robust than it really was, exaggerated Copeland's performance and might have caused overpayments to the administrator.
A hearing is being scheduled at which county commissioners will grill Copeland officials about the issues raised in the report. But in the meantime, the county will ask other benefit plan administrators to submit bids on the work.
Copeland's most recent five-year contract would have expired at the end of October, but was extended for six months to provide time to solicit bids from other firms.
Copeland likely will get an opportunity to bid on the new contract, but it's considered to have a slim chance of success.
The accounting imbroglio is the latest dust-up in a stormy relationship that began in the mid-1980s, when Copeland acquired the previous plan administrator. In the early 1990s, long-simmering dissatisfaction with Copeland boiled over.
Employees complained the firm offered a meager investment menu limited to annuities, which carried hefty surrender charges. County officials, meanwhile, grew weary of cavalier treatment by the administrator, which denied them access to plan records.
After concluding Copeland's contract could not be revoked, county officials met with Copeland executives in 1992 to air grievances. Copeland agreed to expand investment choices and permit the first full-blown audit of the plan.
The first audit, covering the 1993 fiscal year and completed this summer, unearthed numerous errors in record keeping and accounting, the most serious of which related to the valuation of more than $30 million in annuity contracts purchased for county employees.
Instead of booking the annuities at the present value of the promised payments - as required by accounting rules - Copeland simply added up the payments. The result was an overstatement of plan annuity values by $6.6 million, according to Grant Thornton.
A second serious error cited in the report was Copeland's practice of "grossing up" plan earnings by the total amount payable to employees who have elected to begin receiving annuity payments. Grant Thornton said this practice overstated 1993 earnings by $4.2 million.
Copeland declined to comment on the auditor's report. Grant Thornton, citing a policy against discussing audits publicly, turned down requests for amplification of its findings.
County Comptroller John Chambers, chairman of the plan oversight committee, acknowledged the deficiencies but emphasized employees have not lost any money.
"There's some sloppiness there, but it's not like there's money going out the back door," he said.
But Woods Bowman, former Cook County chief financial officer, points out the overstatement of assets could benefit Copeland.
"It makes the plan look more robust than it might really be and makes (Copeland) look like they're doing a better job than they might really be doing," he explained.
And payments to Copeland, which are based on plan asset value, might have been inflated. At 0.37% of assets, the annual fee payable to Copeland for 1993 would have been roughly $850,000. A $10 million overstatement of assets would have been worth $37,000 in extra fees. Mr. Chambers is investigating whether Copeland received excess payments.
At least one Cook County commissioner believes Copeland should not have been given even the six-month reprieve on the contract.
"I will encourage the board to reconsider their extension so safeguards can be implemented to protect the investment during the transition period," said Commissioner Maria Pappas.