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entitled 'Social Security Administration: Management Oversight Needed 
to Ensure Accurate Treatment of State and Local Government Employees' 
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Report to Congressional Requesters: 

United States Government Accountability Office:
GAO: 

September 2010: 

Social Security Administration: 

Management Oversight Needed to Ensure Accurate Treatment of State and 
Local Government Employees: 

GAO-10-938: 

GAO Highlights: 

Highlights of GAO-10-938, a report to congressional requesters. 

Why GAO Did This Study: 

In 2007, 73 percent of state and local government employees were 
covered by Social Security. Unlike the private sector where most 
employees are covered by Social Security, federal law generally 
permits each public employer to decide which employees to cover. The 
Social Security Administration (SSA) is responsible for facilitating 
Social Security coverage for these employers through agreements with 
states. SSA is also responsible for maintaining accurate earnings 
records, while IRS is responsible for ensuring Social Security taxes 
are paid. Because of the need to ensure Social Security coverage is 
administered accurately, GAO was asked to review (1) how SSA works 
with states to approve Social Security coverage and ensure accurate 
coverage of public employees, and (2) how IRS identifies incorrect 
Social Security taxes for public employees. GAO reviewed procedures of 
federal agencies and selected states; surveyed all state 
administrators; and reviewed IRS case files. 

What GAO Found: 

Although SSA approves Social Security coverage on behalf of state and 
local government employers, it faces challenges in ensuring accurate 
reporting of Social Security earnings. SSA works with states to 
establish and amend Social Security coverage agreements, but public 
employers do not always know that SSA’s approval is required. For 
example, a small fire district in one state reported Social Security 
wages for more than a decade without approved coverage to do so, not 
realizing a coverage agreement between SSA and the state was required. 
While state administrators are responsible for managing the approved 
coverage agreements for public employers, SSA’s guidance does not 
specify how states should go about fulfilling this responsibility, 
leading to variation in the extent to which states meet their 
responsibility. SSA lacks basic data on which public employers have 
approved coverage and relies on public employers to comply with 
coverage agreements voluntarily. SSA officials told us that the agency 
does not use existing information, such as lessons learned from prior 
coverage errors, to assess the risks that these errors pose to the 
accuracy of public employer wage reporting. 

Figure: Key Players in the Administration of Coverage Agreements: 

[Refer to PDF for image: illustration] 

Public Employers (e.g., local governments): 
Request employee coverage; comply with provisions of the coverage 
changes; withhold Social Security taxes. 

State Administrator: 
Act as bridge between state, local, and federal agencies; prepare 
changes to coverage agreement; and maintain files of relevant 
documents. 

Social Security Admin. (SSA): 
Maintain and interpret coverage agreements; record earnings; approve
changes to agreements. 

Internal Revenue Service (IRS): 
Enforce reporting and collection of taxes; publish tax guidance. 

Source: GAO analysis of agency documents. 

[End of figure] 

IRS conducts compliance checks and examinations of public employers; 
however, examining Social Security coverage for employees is 
challenging due to limited data and the difficulties of determining 
whether employees are covered. To obtain needed data, one IRS field 
office sent its examiners to the SSA regional office to make copies of 
Social Security coverage agreements. Some other IRS field offices do 
not have copies of all their respective agreements. IRS tracks the 
results of its examinations to identify the number of public employers 
that need tax adjustments; however, IRS does not track whether the tax 
adjustments relate to Social Security coverage agreement errors even 
though this information is available during examinations. SSA could 
benefit from such information so that it could help public employers 
identify and correct errors. As a result, IRS’s and SSA’s ability to 
fully understand problems related to Social Security coverage is 
limited. 

What GAO Recommends: 

GAO recommends that SSA work with IRS, state administrators, and 
public employers to improve management oversight and monitoring of 
public employer reporting of Social Security wages and that SSA 
clarify its guidance on state administrator responsibilities. GAO also 
recommends that IRS track errors found through compliance efforts and 
share results with SSA to the extent permitted by law. SSA and IRS 
reviewed the report and agreed with the recommendations. 

View GAO-10-938 or key components. For more information, contact 
Daniel Bertoni at (202) 512-7215 or bertonid@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

SSA Has a Process to Approve Coverage, but Faces Challenges in 
Ensuring Accurate Coverage: 

IRS's Compliance Efforts Are Limited by a Lack of Social Security 
Coverage Information: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Social Security-Covered and Estimated Noncovered Earnings 
from State and Local Government Employment in 2007: 

Appendix III: Number and Year of Last Modification Approved by SSA, as 
of January 1, 2010: 

Appendix IV: SSA's Guidance Related to the Responsibilities of State 
Social Security Administrators: 

Appendix V: List of Committees Formed by SSA at Its April 2010 
Conference: 

Appendix VI: Comments from the Social Security Administration: 

Appendix VII: Comments from the Internal Revenue Service: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Selected Legislative Changes Impacting Social Security 
Benefits for Public Employees: 

Table 2: Number of State Databases That Include Certain Types of 
Information: 

Table 3: Fiscal Year 2007 to 2009 Compliance Checks Completed and 
Discrepancy Letters Issued for Employment Tax Issues: 

Table 4: Fiscal Year 2007 to 2009 Examinations Completed and Number 
with Tax Adjustments for Employment Tax Issues: 

Figures: 

Figure 1: Percentage of State and Local Government Employees Covered 
in 2007 for Social Security by State: 

Figure 2: Shared Responsibilities for Administering Section 218 
Agreements: 

Figure 3: Modification Approval Process: 

Figure 4: SSA Guidance Undertaken by State Administrators to a Very 
Great or Great Extent to Manage Coverage Agreements: 

Figure 5: Types of Outreach Activities Conducted by State 
Administrators at Least Annually to Assist Public Employers: 

Figure 6: Wage-Reporting and Tax Payment Process of SSA and IRS: 

Figure 7: Determining Social Security or Medicare Coverage of State 
and Local Government Employees: 

Abbreviations: 

FICA: Federal Insurance Contributions Act: 

FSLG: Federal, State and Local Governments Office: 

IRS: Internal Revenue Service: 

MOU: Memorandum of Understanding: 

NCSSSA: National Conference of State Social Security Administrators: 

SSA: Social Security Administration: 

TIGTA: Treasury Inspector General for Tax Administration: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

September 29, 2010: 

The Honorable John Lewis: 
Chairman: 
The Honorable Charles Boustany, Jr. 
Ranking Member: 
Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Earl Pomeroy: 
Acting Chairman: 
The Honorable Sam Johnson: 
Ranking Member: 
Subcommittee on Social Security: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable John S. Tanner: 
House of Representatives: 

Before certain amendments to the Social Security Act were made in 
1950, public employees were not covered by Social Security. After 
1950, public employers increasingly provided Social Security coverage 
for their employees, and by 2007, about 73 percent of public employees 
were covered. Currently, state and local governments, in conjunction 
with the Social Security Administration (SSA), generally decide 
whether or not to provide Social Security coverage to their employees 
who are members of a public retirement system.[Footnote 1] Every state 
has an agreement, called a section 218 agreement, with SSA that 
details which public employees are covered by Social Security. 
According to SSA and state officials, these agreements ensure that 
granting Social Security coverage complies with state and federal law, 
since certain states have laws that prohibit Social Security coverage 
for certain employees. Great variation exists between states and local 
governments in terms of which positions are covered by Social Security 
and which are not. For example, although in the same state, police in 
one city may be covered, while police in another city may not be 
covered. SSA is responsible for maintaining accurate records of Social 
Security-covered wages, and relies on the state administrators and the 
Internal Revenue Service (IRS) to help in this responsibility. IRS 
audits in 2007 found that potentially hundreds of school districts in 
the state of Missouri had not accurately reported the coverage status 
of certain part-time teachers and other school staff, resulting in 
confusion over the Social Security coverage status of these employees, 
and uncertainty for affected employees. 

Because of the need to ensure that Social Security coverage is 
administered consistent with the requirements of the Social Security 
Act, we reviewed SSA's procedures for overseeing public employer wage 
reporting. Specifically, this report addresses (1) how SSA works with 
states to approve Social Security coverage and ensure accurate 
coverage of public employees, and (2) how IRS identifies incorrect 
Social Security taxes for public employees. 

To answer these questions, we used a variety of methods to review the 
procedures of SSA, states, and IRS. To address how SSA works with 
states to approve Social Security coverage and ensure accurate 
coverage of public employees, we reviewed relevant federal laws and 
regulations and conducted interviews with SSA officials in 
headquarters and all 10 regional offices. We also reviewed the 
Memorandum of Understanding between SSA and IRS, as well as data from 
SSA, such as the percent of covered state and local government 
employees. We administered a Web-based survey and received responses 
from all state Social Security administrators of the 50 states, Puerto 
Rico, and Virgin Islands between January and February 2010; 
interviewed state officials in selected states regarding coverage 
agreements; and reviewed relevant documents, such as policies and 
procedures of state administrators.[Footnote 2] To address how IRS 
identifies incorrect Social Security taxes for public employees, we 
reviewed relevant federal laws and regulations, agency policies, and 
documents on Social Security and Medicare taxes for public employers. 
We also conducted interviews with IRS officials in the Federal, State 
and Local Governments office (FSLG) within the Tax Exempt and 
Government Entities Division. We also obtained IRS data on 
examinations and compliance checks completed between fiscal years 2007 
and 2009. Finally, we reviewed a judgmental sample of FSLG audit files 
for 10 examinations and 20 compliance checks completed in fiscal year 
2009. We did not review state laws or verify information pertaining to 
state laws that were given to us in the course of our work. 

We conducted this performance audit from July 2009 through September 
2010 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. See 
appendix I for additional information about our methodology. 

Background: 

When the Social Security Act was passed in 1935, state and local 
government employees were excluded from Social Security. As a result, 
some state and local government workers who were not covered by a 
retirement system were left without benefits when they retired. To 
help these employees, in 1950, Congress added section 218 to the 
Social Security Act allowing states to enter into voluntary agreements 
to provide Social Security coverage to certain state and local 
government employees.[Footnote 3] Section 218 authorizes the 50 
states, Puerto Rico, and the Virgin Islands to enter into these 
agreements.[Footnote 4] Although under section 218 of the Act, the 
District of Columbia, Guam, the Commonwealth of the Northern Mariana 
Islands, and American Samoa are excluded from the definition of 
"state," employees within these territories can have Social Security 
coverage under other provisions of the Act. Within a year of this 
amendment, about 30 states had executed section 218 agreements with 
the Social Security Administration. 

Subsequently, additional amendments to the Social Security Act changed 
Social Security and Medicare coverage for state and local government 
workers. Starting in 1991, the Social Security Act required all state 
and local government employees to be covered by Social Security if 
they were not covered by a qualifying state or local retirement 
system. Table 1 describes some of these amendments relating to the 
coverage of state and local government workers. 

More recently, Social Security has projected future financial 
shortfalls in its programs. According to Social Security's Board of 
Trustees, the program's annual surpluses of tax income over 
expenditures are expected to turn to cash flow deficits this year 
before turning positive again in 2012.[Footnote 5] In addition, all of 
the accumulated Treasury obligations held by the trust funds are 
expected to be exhausted by 2037. Once exhausted, annual program 
revenue will be sufficient to pay only about 78 percent of scheduled 
benefits in 2037 (and gradually declining to 75 percent by 2084), 
according to the Social Security trustees' 2010 intermediate 
assumptions. 

Many options have been proposed to help assure the financial stability 
of Social Security, among them requiring all newly hired public 
employees to participate in the program. Although this approach could 
improve Social Security's finances at least temporarily and would 
simplify Social Security as it pertains to public employees, we have 
previously reported that such a change could also result in increased 
costs for the affected governments and their employees.[Footnote 6] 

Table 1: Selected Legislative Changes Impacting Social Security 
Benefits for Public Employees: 

Law: Social Security Act Amendments of 1950[A]; 
Description of relevant portion of legislation: Section 218 was added, 
which gave states the option of providing Social Security coverage to 
certain state and local government employees. 

Law: Social Security Amendments of 1954[B]; 
Description of relevant portion of legislation: At state option, state 
and local government employees covered under a retirement system were 
allowed coverage under Social Security, if a vote is held. 

Law: Social Security Amendments of 1983[C]; 
Description of relevant portion of legislation: A provision was 
repealed that had allowed states to terminate the agreement with 
respect to any coverage group. In effect, states could no longer 
terminate coverage for covered employees.[D] 

Law: Consolidated Omnibus Budget Reconciliation Act of 1985[E]; 
Description of relevant portion of legislation: Employees hired after 
March 31, 1986, are mandatorily covered by Medicare Hospital Insurance 
only, unless specifically excluded by law. For state and local 
government employees hired before April 1, 1986, Medicare coverage may 
be elected under an agreement between SSA and states. 

Law: Omnibus Budget Reconciliation Act of 1986[F]; 
Description of relevant portion of legislation: Public employers were 
required to pay their Social Security payments directly to the IRS 
rather than to the State Social Security Administrator. 

Law: Omnibus Budget Reconciliation Act of 1990[G]; 
Description of relevant portion of legislation: Starting on July 2, 
1991, state and local government employees who were not members of a 
qualifying state or local retirement system were generally required to 
have Social Security coverage.[H] 

Source: GAO analysis. 

[A] Pub. L. No. 81-734, § 106 (1950). 

[B] Pub. L. No. 83-761, § 101(h)(2) (1954). 

[C] Pub. L. No. 98-21, § 103 (1983). 

[D] The state of California challenged the law, arguing it had a 
contractual right to terminate its agreement and that Congress had 
violated the takings clause of the Fifth Amendment by denying the 
state its contractual right without just compensation. The Supreme 
Court rejected California's argument that the contract had established 
a property right within the meaning of the Fifth Amendment. Bowen v. 
Pub. Agencies Opposed to Soc. Sec. Entrapments, 477 U.S. 41 (1986). 

[E] Pub. L. No. 99-272, § 13205 (1986). 

[F] Pub. L. No. 99-509, § 9002 (1986). 

[G] Pub. L. No. 101-508, § 11332 (1990). 

[H] IRS rules generally treat an employee as a member of a retirement 
system if he or she participates in a system that provides retirement 
benefits, and has an accrued benefit or receives an allocation under 
the system that is comparable to the benefits he or she would have or 
receive under Social Security. 26 C.F.R. § 31.3121(b)(7)-2(b). 

[End of table] 

Social Security Coverage Agreements with States: 

The extent to which public employees are covered by Social Security 
varies greatly from state to state. For example, according to SSA 
data, in Vermont, 98 percent of public employees are covered, but in 
Ohio, only about 3 percent are covered. Figure 1 shows the variation 
in Social Security coverage of public employees among states, and 
appendix II provides the amount of covered and noncovered earnings by 
employees in each state. Within states, there is also variation in 
Social Security coverage among public employees working for the same 
employer. Some public employers provide a retirement system for some 
of their employees who meet certain criteria. If employees do not meet 
these criteria and are ineligible for the retirement system such as a 
pension system, they are covered by Social Security. In other 
instances, public employers may choose to provide only Medicare 
coverage rather than both Social Security and Medicare. 

Figure 1: Percentage of State and Local Government Employees Covered 
in 2007 for Social Security by State: 

[Refer to PDF for image: illustrated U.S. map] 

Percentage of State and Local Government Employees covered for Social 
Security in 2007: 0-50%: 
California: 
Colorado: 
Louisiana: 
Massachusetts: 
Nevada: 
Ohio: 
Texas: 

Percentage of State and Local Government Employees covered for Social 
Security in 2007: 51-75%: 
Alaska: 
Connecticut:
Georgia: 
Hawaii: 
Illinois: 
Kentucky: 
Maine: 
Missouri: 

Percentage of State and Local Government Employees covered for Social 
Security in 2007: 76-90%: 
Arkansas: 
Florida: 
Michigan: 
Montana: 
New Hampshire: 
New Mexico: 
North Dakota: 
Puerto Rico: 
Rhode Island: 
Washington: 
Wisconsin: 
Wyoming: 

Percentage of State and Local Government Employees covered for Social 
Security in 2007: 91-100%: 
Alabama: 
Arizona: 
Delaware: 
Idaho: 
Indiana: 
Iowa: 
Kansas: 
Maryland: 
Minnesota: 
Mississippi: 
Nebraska: 
New Jersey: 
New York: 
North Carolina: 
Oklahoma: 
Oregon: 
Pennsylvania: 
South Carolina: 
South Dakota: 
Tennessee: 
Utah: 
Vermont: 
Virginia: 
West Virginia: 

Source: GAO analysis of SSA data; National Atlas of the United States 
(map). 

Note: SSA data did not provide the percentage of covered public 
employees specifically in the Virgin Islands. 

[End of figure] 

All states have a section 218 agreement with the SSA that allows them 
to extend Social Security and/or Medicare coverage to designated 
public employees. With an agreement in force, SSA and the state can 
coordinate and ensure that granting coverage to public employees 
complies with applicable state and federal laws, since according to 
SSA and state officials, state laws can restrict certain employees who 
are members of other retirement plans from receiving Social Security 
coverage. SSA requires states to designate a state employee as a state 
Social Security administrator and establishes the basic roles and 
responsibilities for these administrators. For example, the guidance 
outlines that state administrators should serve as a bridge between 
state and local public employers and federal agencies, as well as 
administer and maintain the Social Security coverage agreement. 

If public employers within the states wish to extend Social Security 
coverage to their employees, their state administrator files a draft 
amendment to the coverage agreement--known as a modification--with 
their SSA regional office. After the state process is completed and 
the SSA Regional Office approves the modification, the public employer 
should begin withholding Social Security and Medicare taxes for the 
employee positions that are covered and send information on earnings 
to SSA. SSA is required by law to maintain accurate earnings records 
for all workers. SSA uses an employee's earnings record to calculate 
the amount of Social Security benefits--retirement, disability, or 
survivor benefits--for an individual or their dependents. Covered 
earnings, which are posted to the earning record, are subject to 
Social Security and Medicare taxes paid by employers and employees. 
IRS is responsible for assuring state and local government employers 
are properly paying Social Security and Medicare taxes (also known as 
FICA taxes).[Footnote 7] Figure 2 shows the major responsibilities for 
these government partners. 

Figure 2: Shared Responsibilities for Administering Section 218 
Agreements: 

[Refer to PDF for image: illustration] 

Public Employers (e.g., local governments): 
Request employee coverage; comply with provisions of the coverage 
changes; withhold Social Security taxes. 

State Administrator: 
Act as bridge between state, local, and federal agencies; prepare 
changes to coverage agreement; and maintain files of relevant 
documents. 

Social Security Admin. (SSA): 
Maintain and interpret coverage agreements; record earnings; approve
changes to agreements. 

Internal Revenue Service (IRS): 
Enforce reporting and collection of taxes; publish tax guidance. 

Source: GAO analysis of agency documents. 

[End of figure] 

[Text box: How Errors Can Happen: A Synopsis of the Social Security 
Coverage Errors in Missouri: 

In 2007, IRS conducted audits in the state of Missouri that identified 
vulnerabilities to providing Social Security coverage to public 
employees. In 2003, a retired Missouri teacher, who was not covered 
for Social Security as a teacher, returned to work as a bus driver. 
The employee raised questions at a local SSA field office about why 
she was not covered for Social Security as a bus driver, and this 
inquiry eventually led to a broad review of the coverage in Missouri's 
school districts, including a few IRS audits in 2007 to 2008. 
Missouri's school districts have two separate retirement systems--one 
pension plan that includes full-time teachers and another that 
includes full-time nonteachers. According to federal and state 
officials, each of these pension plans operates under different rules, 
namely the full-time teachers do not generally have Social Security 
coverage while full-time nonteachers do. State and federal officials 
found that, over decades, several changes in state law altered the 
membership rules of these two pensions, especially the eligibility for 
part-time employees. The effects of these changes on Social Security 
coverage were not well understood and contributed to widespread 
coverage errors in hundreds of districts, according to state and 
federal documents. For example, some teachers were incorrectly paying 
Social Security taxes when they were not eligible to receive Social 
Security coverage. Others were not paying Social Security taxes 
although they were covered by Social Security. To resolve the coverage 
errors and determine which positions in school districts had approved 
coverage, a task force of SSA, IRS, and state officials met several 
times from December 2008 to February 2009 and issued a report in March 
2009. From 2009 to 2010, SSA and state officials on the task force 
took steps in Missouri, including educational outreach to school 
districts, to help these public employers understand the correct 
Social Security coverage of their employees and to report covered 
wages accurately starting July 2010. While it is still unknown how 
many employees were affected, the task force estimated that 
potentially hundreds of school districts have employees whose earnings 
records may need to be corrected so that they can receive the benefits 
to which they are entitled. Since IRS did not collect any back taxes 
from audited school districts, SSA and IRS officials told us that the 
U.S. Treasury and Social Security Trust Funds would effectively bear 
the cost of any long-standing coverage errors and FICA taxes that 
school districts and employees did not pay. To date, eight Missouri 
school districts have already gone through the process with SSA and 
the state for correcting their coverage under the state's agreement. 
End of text box] 

SSA Has a Process to Approve Coverage, but Faces Challenges in 
Ensuring Accurate Coverage: 

SSA Works with States to Approve Social Security Coverage, but It Is 
Unclear If Public Employers Always Know When to Seek Approval: 

SSA has an established process for working with states to approve 
coverage. This approval process is intended to ensure that public 
employers follow applicable state and federal laws regarding Social 
Security coverage, as some state laws exclude certain types of 
employees from receiving Social Security coverage, according to SSA 
and state officials. For example, current New Hampshire law prohibits 
Social Security coverage for police and fire fighters, who belong to a 
distinct, more generous pension plan than other public employees in 
New Hampshire, according to state officials. To obtain Social Security 
coverage, public employers first contact their state Social Security 
administrator who files an amendment--known as a modification--to the 
state's coverage agreement with SSA.[Footnote 8] Because all states 
already have an approved agreement with SSA, any changes to include 
additional public employers are modifications to the agreement. If the 
coverage is proposed for employees who are members of a retirement 
system, then a favorable vote of eligible employees is required. The 
SSA regional office reviews the modification to ensure that it 
complies with all relevant laws and procedures. If it is determined 
these public employees are authorized for coverage, the regional 
office approves the modification and transmits it back to the state. 
After coverage has been approved, the public employer begins 
withholding Social Security and Medicare taxes for the employees in 
covered positions. Under certain circumstances, SSA may approve 
retroactive coverage, which is effective prior to the date that SSA 
approves the modification. Figure 3 shows the modification approval 
process. 

Figure 3: Modification Approval Process: 

[Refer to PDF for image: illustration] 

Public Employers (e.g., local government): 

Public employer requests coverage for employees from the state. 

If employers are members of a retirement system, Social Security 
coverage must be approved by a vote of eligible employees. The State 
Administrator conducts the vote. 

State Government: 

State administrator reviews request and determines if public 
employer’s employees are authorized for Social Security coverage and 
if approving the modification to the coverage agreement would meet 
state law. 

If request is approved, state administrator prepares and submits 
modification to SSA[A]. 

Social Security Admin. Regional Offices (SSA): 

SSA reviews modification and determines if public entity’s employees 
are authorized for Social Security coverage in accordance with federal 
and state law. 

State Government: 

If approved, state official signs the modification. 

Social Security Admin. Regional Offices (SSA): 

If approved, the SSA Regional Commissioner signs the modification. 

SSA files original modification and sends a copy to SSA headquarters 
and IRS. 

State Government: 

State files the original modification. 

Internal Revenue Service (IRS): 

IRS maintains a copy of the modification to update its data base of 
public employers. 

Source: GAO analysis of agency documents. 

[A] A state administrator may send a signed modification to SSA for 
review. 

[End of figure] 

States may file modifications to their coverage agreement on behalf of 
public employers under a variety of circumstances. For example, SSA 
guidance specifies that a state is to amend its agreement to (1) 
extend coverage to new groups of employees, (2) identify new public 
employers joining a public retirement system, (3) correct errors in 
coverage, (4) implement changes in federal or state law, and (5) in 
very limited circumstances, make certain exclusions to previously 
covered services or positions. According to our survey of state Social 
Security administrators,[Footnote 9] we found that administrators in 
36 states had approved a modification in the last 5 years. Of these 36 
states, the most commonly cited reasons for approving a modification 
were to include additional coverage groups (23 states), followed by 
correcting coverage errors (20 states), and notifying SSA of new 
public employers joining a retirement system that SSA has already 
approved for coverage on a statewide basis (19 states).[Footnote 10] 

States do not always notify SSA of changes to covered public 
employers, which can lead to errors in the accuracy of SSA records. 
Under SSA guidance, state administrators are to provide notice and 
evidence to SSA when a public employer legally ceases to exist, or 
dissolves.[Footnote 11] Our survey of state administrators showed that 
SSA does not consistently receive information from states about 
dissolutions. Only 9 states reported collecting information on all 
dissolutions among their public employers, while 16 states reported 
collecting little or none of this information. For example, in one 
state we visited, over 100 school employees were granted retroactive 
coverage a decade after their school district had been formed. The new 
school district was formed by consolidating two school districts that 
had dissolved, but an amendment to the state's coverage agreement had 
not been approved at the time of the consolidation to reflect the 
change. Also, when existing employers legally consolidate, another 
modification may be necessary to provide coverage for the new 
consolidated employer. While 11 states responded that they collect 
information on all consolidations that occur among their public 
employers, 14 states responded that they collect little to none of 
this information. Another 7 states reported that they did not know how 
much information they collect on dissolutions or consolidations. If 
states do not collect information on dissolutions or consolidations, 
they do not know about these changes to public employers and are 
unable to work with SSA to approve coverage and prevent errors. 

Depending on the circumstances in a particular state, several SSA and 
state officials told us that states lacking recent modifications may 
signal that the state or its public employers do not understand the 
established process for obtaining Social Security coverage approval, 
or may not be actively overseeing coverage agreements. Our analysis of 
January 2010 SSA data showed that several states had no modifications 
approved since the 1990s, while over 20 states received approval as 
recently as last year. (See appendix III for the number and year of 
the last modification that SSA approved as of January 1, 2010.) In New 
York, where SSA last approved a modification in 1994, SSA records show 
that a prior state administrator mistakenly thought that modifications 
were no longer necessary and did not submit any, despite state actions 
to consolidate public employers. Similarly, in Missouri, whose last 
modification had been approved in 1997, several SSA and state 
officials told us that the state administrator had been inactive until 
becoming involved to address the widespread coverage errors in many 
school districts (see text box on page 9). According to officials who 
resolved the coverage errors in Missouri, the state and school 
districts did not understand or communicate certain aspects of their 
coverage agreement. For example, the terms of existing modifications 
continued to apply to covered positions, even though subsequent state 
laws expanded the membership of retirement systems for the school 
districts. Instead of continuing to provide coverage based on the 
modifications, school districts based their coverage on the subsequent 
laws, and as a result, the state experienced coverage errors that were 
found decades after the laws passed. 

States Vary in Their Efforts to Implement SSA Guidelines: 

All states have a state Social Security administrator who is 
responsible for managing Social Security coverage for both state and 
local public employers, but state administrators vary in their efforts 
to implement SSA guidelines. SSA has established the basic roles and 
responsibilities for these administrators by providing guidance on 
administering the provisions of the state Social Security agreement 
(see appendix IV). However, SSA's guidance is broad and does not 
specify how a state administrator should fulfill these 
responsibilities. As a result, state administrators vary in the extent 
to which they meet their responsibilities. For example, while SSA's 
guidance notes that state administrators are to administer and 
maintain the coverage agreement, the guidance does not provide detail 
on the types of activities that are necessary for meeting this 
responsibility--such as the frequency with which modifications should 
be reviewed to determine whether changes to public employers have 
occurred. For example, as noted above, both New York and Missouri were 
unclear on their administrative responsibility, resulting in both 
states being at risk for coverage errors. Additionally, SSA's guidance 
notes that state administrators should advise public employers on 
Social Security, Medicare, and tax withholding issues; and according 
to our survey, only 14 states reported doing this to a very great or 
great extent. Likewise, only 18 states reported following SSA's 
guidance on providing information to public employers on policies, 
procedures, and standards to a very great or great extent (see figure 
4). 

Figure 4: SSA Guidance Undertaken by State Administrators to a Very 
Great or Great Extent to Manage Coverage Agreements: 

[Refer to PDF for image: horizontal bar graph] 

Selected responsibilities in SSA guidance: Maintain physical custody 
of Social Security coverage agreements[A]; 
Number of state administrators: 50. 

Selected responsibilities in SSA guidance: Serve as a bridge between 
state and local government employers and federal agencies (such as SSA 
regional offices); 
Number of state administrators: 22. 

Selected responsibilities in SSA guidance: Provide information to 
public employers in accordance with the state’s enabling legislation, 
policies, procedures, and standards; 
Number of state administrators: 18. 

Selected responsibilities in SSA guidance: Resolve coverage and 
taxation questions associated with a Social Security coverage 
agreement and changes to the coverage agreement with SSA and IRS; 
Number of state administrators: 17. 

Selected responsibilities in SSA guidance: Advise public employers on 
Social Security, Medicare, and tax withholding issues; 
Number of state administrators: 14. 

Selected responsibilities in SSA guidance: Provide SSA with notice and 
evidence of the legal dissolution of covered state and local public 
employers; 
Number of state administrators: 9. 

Source: GAO analysis of survey results. 

[A] Number of state administrators who responded yes to our survey 
question asking whether they maintain physical custody of the section 
218 agreement. 

[End of figure] 

In the absence of more detailed SSA or other guidance on how states 
should manage Social Security coverage for state and local public 
employers, the National Conference of State Social Security 
Administrators (NCSSSA)[Footnote 12] in 2003 developed a list of 
recommended practices for use by state administrators. These 
recommended practices help state administrators to carry out SSA's 
guidance. For example, one NCSSSA practice recommends that state 
administrators maintain an electronic database so that they can meet 
the SSA guidance on maintaining physical custody of Social Security 
coverage agreements. While 37 states reported maintaining an 
electronic database of state and local public employers with Social 
Security coverage, we found that only 28 of these states' databases 
include more detailed coverage information such as the date of each 
employer's modifications (see table 2). Moreover, 14 states could not 
provide the total number of public employers with approved coverage 
for their employees in their state. We also found differences in the 
extent to which states review these databases to check for accuracy 
and completeness. Of the 37 states with an electronic database, 5 
states reported not updating their information and 1 state did not 
know how often they updated their database information. Further, only 
7 states reported taking all of the following steps to ensure the 
information was reliable: conducting routine monitoring of the data, 
using edit checks to identify out-of-range entries, and verifying the 
data for accuracy. 

Table 2: Number of State Databases That Include Certain Types of 
Information: 

Type of information included in state databases: List of all 
noncovered public employers; 
Number of state databases that contain this information: 6. 

Type of information included in state databases: List of all covered 
public employers[A]; 
Number of state databases that contain this information: 32. 

Type of information included in state databases: More detailed data on 
all covered public employers (e.g., date of modification, groups 
covered, etc.); 
Number of state databases that contain this information: 28. 

Source: GAO analysis of survey results. 

[A] For the purposes of our survey and this report, we defined 
"covered public employer" as a state or local government employer that 
is subject to a coverage agreement for at least some of the employer's 
positions. 

[End of table] 

SSA's guidance also sets forth that state administrators are to 
provide certain information or advice to public employers, but falls 
short in denoting specific ways such outreach activities can be 
carried out, such as the format for distributing information and time 
frames for carrying out such activities. For example, one state 
administrator told us that he regularly attended local public employer 
association conferences so that he could identify new public employers 
and provide advice to them. However, officials in another state told 
us that they did not have any formal outreach practices and updated 
their information on new public employers when they read about them in 
the newspaper. As a result, the state administrator could not ensure 
that its list of public employers was current. While SSA's guidance is 
limited, NCSSSA has developed recommended practices for conducting 
outreach efforts to public employers, such as presenting at local 
association meetings, providing information via a Web site or 
newsletters, or pursuing other means of outreach. Such efforts can 
help states educate and respond to questions about coverage 
agreements. According to our survey, nine states reported regularly 
(i.e., at least annually) distributing a newsletter or providing 
training, while just over one-quarter of states contact public 
employers included in coverage agreements to update their information 
(see figure 5). In contrast, 21 states reported that they do not 
conduct any of these outreach activities. Ten of these states have 
nearly universal Social Security coverage for their public employees 
and four states had less than half of their public employees covered 
by Social Security. 

Figure 5: Types of Outreach Activities Conducted by State 
Administrators at Least Annually to Assist Public Employers: 

[Refer to PDF for image: horizontal bar graph] 

Selected outreach activity: Contact public employers under the Social 
Security coverage agreement to update their contact information; 
Number of state administrators: 14. 

Selected outreach activity: Update an information Web site on the 
state home page that includes contact information for the state 
administrator; 
Number of state administrators: 13. 

Selected outreach activity: Conduct presentations on coverage 
agreement issues at professional society or association meetings; 
Number of state administrators: 9. 

Selected outreach activity: Distribute a newsletter that includes 
information on coverage agreement issues; 
Number of state administrators: 9. 

Selected outreach activity: Provide training on coverage agreement 
issues; 
Number of state administrators: 9. 

Selected outreach activity: Address state legislative or state 
executive bodies; 
Number of state administrators: 3. 

Selected outreach activity: None of the above; 
Number of state administrators: 21. 

Source: GAO analysis of survey results. 

[End of figure] 

The variation in how states implement the activities outlined in SSA 
guidance can also be explained in part by the training, experience, 
and staffing of state administrators. Some state administrators 
reported they were initially unfamiliar with coverage agreements and 
noted there was little or no transfer of knowledge to help them learn 
about coverage issues. Twenty-seven administrators reported receiving 
little or no training from their predecessor. Of those administrators 
who had not received training, 93 percent had never worked on Social 
Security coverage issues at all prior to becoming the administrator. 
Administrators cited several reasons for the lack of training or 
knowledge-sharing by predecessors, including classification of these 
positions (e.g., political appointees), turnover among staff, and lack 
of funding. 

To address this training gap, NCSSSA developed a training module which 
they recently began providing to state administrators. As of July 
2010, 11 state administrators have received this training, according 
to NCSSSA officials we interviewed. Additionally, in our survey, the 
availability of staff with expertise in coverage agreements was 
identified as a great or very great challenge by 19 states. 
Differences in the amount of time dedicated to the position of state 
administrator also varied among states. Most state administrators view 
the role as an ancillary responsibility, and not as their primary 
duty. Over half of those working as state administrators reported 
spending 10 percent or less of their time on state administrator 
responsibilities. 

SSA Has Limited Management Oversight of Public Employee Wage Reporting: 

SSA relies primarily on public employers to correctly interpret their 
coverage and accurately report covered wages of public employees, 
according to SSA officials. However, some public employers do not 
understand that a modification to the state's agreement with SSA is 
required before amending coverage under section 218 and reporting 
Social Security wages. For example, a small fire district in one state 
reported Social Security wages for more than a decade without approved 
coverage to do so, not realizing coverage under an agreement between 
SSA and the state was required. Several SSA officials told us that 
they also rely on IRS to review the compliance of public employers. 

The Social Security Act requires SSA to ensure that all workers have 
accurate earnings records. SSA requires employers--public and private--
to use SSA's process of wage reporting (see figure 6) to report Social 
Security covered wages. In 2007, private and public employers reported 
nearly $5 trillion in covered wages, with public employers 
representing $528 billion of that amount. (See appendix II on covered 
and estimated noncovered wages for state and local government 
employment in 2007.) The Form W-2 is the annual report of a worker's 
wages, including wages covered for Social Security and for Medicare. 
SSA posts the wages to the employee's earnings record on its Master 
Earnings File and provides IRS with the W-2 information so IRS can 
monitor accurate payment of Social Security taxes. SSA and IRS 
annually match the amounts on Form W-2 with wages that employers 
report to IRS on a quarterly basis.[Footnote 13] When the amounts 
match, no further steps are taken. When the amounts do not match, SSA 
and IRS have processes to reconcile the amounts, including letters to 
contact the employer.[Footnote 14] 

Figure 6: Wage-Reporting and Tax Payment Process of SSA and IRS: 

[Refer to PDF for image: illustration] 

Public Employer: 
Form W-2 (Wage reports): to Social Security Admin. (SSA); 
Form 941 (Quarterly tax returns): to Internal Revenue Service (IRS). 

SSA and IRS compare wage amounts: 
Amounts match: No further steps taken; 
Amounts don't match: Notice sent to reconcile amounts. 

SSA: Covered wages posted to employee’s earnings record in SSA Master 
Earnings File. 

IRS: Taxes collected for U.S. Treasury. 

Source: GAO analysis of SSA and IRS documents. 

[End of figure] 

SSA does not have a process to ensure that public employers only 
report wages for covered employees and that such wages are associated 
with valid coverage under the state's coverage agreement. As long as 
the wage amounts on the Forms W-2 and 941 match, SSA does not follow 
up to ensure that reported wages actually reflect public employees who 
are covered by their state's agreement. SSA officials told us the 
agency does not compare the reported wages with coverage modifications 
applicable to the employer. While wage reports identify employees by 
their name and Social Security number, procedures and data do not 
exist to verify that employees are in positions that are covered by 
their state's agreement. SSA regional officials told us they answer 
questions by public employers about whether employees are covered 
based on their interpretation of coverage agreements. However, SSA 
officials are not able to check if the public employers correctly 
report covered earnings. 

While SSA does not currently monitor the accuracy of public employee 
coverage, prior to 1987, SSA conducted regular oversight activities to 
ensure more accurate reporting. Prior to 1987, state administrators 
gathered Social Security payments in lieu of FICA taxes from public 
employers with approved coverage. States were therefore accountable 
for payments from public employers and employees in their state. SSA 
was responsible for ensuring that state and local government employers 
made the correct payments for the Social Security Trust Funds. Given 
its responsibility, SSA conducted compliance reviews and collected 
data on public employers, such as lists of which public employers were 
part of the coverage agreement. In 1987, a legislative change took 
effect requiring the IRS to collect Social Security taxes from public 
employers and employees directly.[Footnote 15] As a result, public 
employers were required to withhold Social Security taxes from their 
employees and pay taxes to the Treasury using the same procedures as 
private sector employers. SSA and the states reduced staffing, 
management attention, and oversight of coverage agreements. SSA also 
reduced its oversight of public employers, including discontinuing 
compliance reviews and ending certain data collection. In 1996, SSA's 
Inspector General found that many public employers were at risk of not 
complying with their states' coverage agreements, partly due to SSA's 
reduced focus on administration after this statutory change.[Footnote 
16] The Inspector General recommended that SSA pursue regular 
compliance reviews; develop a Memorandum of Understanding (MOU) with 
IRS; and study the possibility of universal coverage of public 
employers to eliminate the inherent complexity of their coverage. In 
2002, SSA and IRS signed an MOU regarding the compliance of state and 
local government employers that specified each agency's role, 
including IRS's responsibility to conduct compliance reviews of public 
employers. Among other things, the MOU established a joint SSA-IRS 
committee to share information on policies, procedures, and compliance 
issues. 

SSA continues to lack basic data on the public employers for which it 
has approved coverage, preventing the agency from monitoring potential 
errors. According to Standards for Internal Control in the Federal 
Government, data are important for an agency to manage its operations 
and measure its activities.[Footnote 17] However, SSA does not track 
the number of public employers that are under a state's approved 
coverage agreement or various activities that could expose public 
employers to greater risk of committing coverage errors. From data 
given to us by all 10 SSA regions, we estimated that since 1951 when 
coverage agreements began, SSA has approved as many as 28,798 
modifications extending Social Security coverage for public employers. 
(See appendix III for information on the number and year of the last 
modification approved by SSA for each state as of January 1, 2010.) 
However, 6 of 10 SSA regional offices no longer collect any 
information on which public employers have approved coverage, and SSA 
officials told us they have not required regional offices to update 
their data, partly due to resource constraints. SSA has also not 
provided the regional offices with guidelines for what should be 
collected and how. As a result, six regions currently collect no data 
at all, while the four regions still collecting data varied in the 
data formats and level of detail of the information collected. For 
example, based on data we reviewed from regional officials, one region 
had a database with details on public employers and their coverage, 
while another region had a list with little information other than the 
names of public employers and the date that SSA approved coverage. 

Without comprehensive and uniform data, SSA may miss opportunities to 
prevent or more quickly correct errors related to public employee 
wages. For example, if all regions tracked information such as recent 
approved modifications, SSA could better identify which states had 
less activity, and could follow up to ensure that those states and 
public employers were aware of the circumstances that would warrant 
filing a modification. In addition, SSA is unable to fully support IRS 
in its efforts to ensure compliance. For example, SSA does not 
validate IRS's database of public employers--including covered 
employers--which may not always contain correct data. Moreover, the 
lack of current or consistently tracked data can limit the efficiency 
with which regions research or answer questions about a particular 
employer. For example, one SSA regional office official said that in 
order to identify a modification with information relevant to a 
particular employer, it takes up to an hour to manually search paper 
files for any modification made after 1987. 

Officials in nearly all 10 SSA regions told us their oversight efforts 
to ensure accurate reporting of public employers generally involve 
reacting to errors or questions brought to their attention. When a 
concern is identified, SSA regional officials respond to address the 
coverage of a particular employer based on specific facts and 
circumstances. For example, IRS conducted an audit of a public port 
and worked with SSA to determine whether the employer had covered 
employees, according to SSA officials and documents. SSA determined 
that the employer's predecessor had a modification for coverage, but 
the new employer did not have coverage for its full-time employees. 
SSA assisted the state and the employer to file a modification that 
would retroactively grant coverage to these employees. Had SSA 
actively worked with the state and used data to observe trends with 
modifications, the state and SSA may have prevented this error or 
caught it sooner. 

SSA has also been asked to resolve errors involving public employers 
that are subject to a modification, but these employers and their 
employees have not paid Social Security taxes. If SSA was notified of 
the error and evidence of employees' earnings was produced by 
employers or employees, SSA officials told us that the agency would 
correct their earnings records. IRS is authorized to collect back-
taxes subject to its statute of limitations, which is generally 3 
years.[Footnote 18] Unfortunately, some of the coverage errors in 
Missouri school districts involved public employers and employees who 
stopped paying Social Security taxes in the 1980s. Thus, the U.S. 
Treasury and Social Security Trust Funds effectively bear the cost of 
any taxes employers or employees did not pay beyond the 3-year statute 
of limitations, according to SSA and IRS officials. Similarly, if an 
error goes undetected or uncorrected, then public employees may not 
have Social Security earnings posted to their record. This could 
result in employees who should be covered by Social Security not 
becoming eligible or not receiving the appropriate amount of Social 
Security benefits in the event of retirement, disability, or 
survivorship. 

SSA officials told us that the agency does not use existing 
information to assess the extent to which coverage errors are 
occurring and the risk that these errors pose to the accuracy of 
public employer wage reporting. According to Standards for Internal 
Control in the Federal Government, risk assessment is the 
identification and analysis of relevant risks associated with 
achieving the agency's objectives.[Footnote 19] SSA has many internal 
and external sources of information it could use to assess the risks 
of inaccurate coverage of public employees. However, SSA headquarter 
officials told us that SSA may not be aware of all errors or related 
factors that regional offices address, unless they are elevated to 
headquarters for assistance. SSA officials in headquarters and 
regional offices generally told us that SSA in recent years has not 
routinely shared experiences across regions, including lessons learned 
from coverage errors and factors that contribute to them. For example, 
one SSA regional office helped resolve a coverage problem that 
involved a consolidation of a state's capital city and the county in 
which it was located. Because the public safety officers of the city 
were not covered while the public safety officers of the county were 
covered, the consolidation had the potential to change the Social 
Security coverage of some public safety positions. Under current 
budgetary pressures, some states are considering or pursuing similar 
consolidations to reduce costs; however, SSA headquarters did not 
share lessons learned from this example with other regions so that 
they could be better prepared to address similar issues in the future. 
SSA headquarters also does not routinely review internal legal 
opinions--known as coverage determinations--or modifications that SSA 
regional offices have approved to correct coverage errors. SSA 
officials told us that they have not analyzed such information in a 
systematic approach to identify any patterns or common issues. Also, 
SSA officials in 8 of 10 regions told us that IRS does not typically 
share the results of its enforcement activities, and IRS officials 
agreed. As a result, SSA is not always aware of the coverage errors 
that IRS finds during examinations and compliance checks. 

SSA hosted a conference in April 2010 with IRS and state 
administrators to explore options for improving how coverage 
agreements are administered. Based on this conference, SSA identified 
possible proposals to reduce the complexity of public employees' 
coverage, including the potential for universal coverage. It also 
formed 11 committees consisting of SSA and state or IRS officials. 
Each week, at least one committee is supposed to meet, and quarterly 
conference calls are planned for all participants to discuss their 
progress starting in September 2010. According to SSA, two committees 
are of the highest priority: the committee to improve training of 
federal, state, and local governments, as well as the committee on 
policies and procedures. A list of the 11 committees and their 
objectives is in appendix V. 

IRS's Compliance Efforts Are Limited by a Lack of Social Security 
Coverage Information: 

IRS Is Responsible For Ensuring Public Employers Pay Social Security 
Taxes but Determining Coverage Is Challenging: 

Since 1987, IRS has been the primary agency responsible for ensuring 
that public employers are accurately paying Social Security and 
Medicare taxes, and its level of enforcement has increased over the 
years. According to IRS officials, IRS performed limited enforcement 
work during the first 10 years after they became responsible for 
receiving public employer Social Security taxes. In 1997, IRS started 
a state and local government compliance initiative to provide outreach 
to public employers. In fiscal year 2000, IRS created the Federal, 
State and Local Governments office (FSLG) to facilitate more accurate 
reporting and collection of Social Security and Medicare taxes by 
public employers, among other activities. Initially, FSLG allocated 
most of its time to educational activities, but in fiscal year 2004 
began to focus more on enforcement activities. 

IRS's enforcement program consists of compliance checks and 
examinations. IRS reviews selected employers each year, based partly 
on its workload and staff availability. A compliance check is a method 
of reaching out to public employers, and is intended to be 
educational. Compliance checks review public employer tax returns and 
are typically less detailed than an examination. Generally, compliance 
checks are performed on smaller public employers, partly to allocate 
IRS enforcement resources. By conducting compliance checks on smaller 
employers, IRS can review and educate a greater number of public 
employers, while still allocating staff time and resources to conduct 
more time-consuming examinations on larger, more complex public 
employers. For compliance checks, IRS completes a checklist of 
selected employment tax areas. Our review of the checklist found that 
it includes four questions about Social Security coverage agreements: 
(1) Does the taxpayer have an agreement? (2) Does the taxpayer have a 
copy of the agreement? (3) What are the number, date, and description 
of the modification to the agreement? (4) What categories of workers 
are excluded from Social Security coverage? If issues are found during 
the compliance check, IRS provides the employer with a discrepancy 
letter identifying problems to be resolved. We reviewed a 
nongeneralizable sample of 20 compliance checks completed in fiscal 
year 2009 that IRS identified as having issues related to Social 
Security coverage agreements. In 11 of these cases, the public 
employer was not covered under the state's Social Security coverage 
agreement. In 6 of the other cases in which the state or local 
government employer was actually covered under the state's coverage 
agreement, IRS found that the employer did not have a copy of its 
modification and in one of these cases, the employer did not know one 
was in effect. In another case, a school district that was covered 
under its state agreement dissolved, and then combined with another 
school district that also was subject to a modification. The school 
district being reviewed was not certain if the coverage agreement was 
still in effect and planned to contact the state Social Security 
administrator to determine if a new modification was necessary. 

IRS also has the authority to conduct examinations of public 
employers' records to determine the correct tax liability. Unlike 
compliance checks, examinations are in-depth, formal audits that may 
result in a tax assessment. Examinations review many areas, including 
proper Social Security withholding, fringe benefits, and public 
retirement systems. For each examination, the IRS examiner is supposed 
to obtain information about the applicable Social Security coverage 
agreement and determine the employees that are covered. In making its 
coverage determination, IRS examiners have to review employer records 
and may informally contact the state administrators and SSA. Figure 7 
shows the basic procedures IRS uses to determine if public employees 
are covered by Social Security or Medicare. Generally, examinations 
are performed on larger public employers, and took an average of 
almost 9 months in fiscal year 2009 to complete. If errors are found, 
IRS can either make a tax assessment for the amount owed by the 
employer or, among other things, refund an overpayment.[Footnote 20] 
Generally, IRS does not provide information about its enforcement 
activities to SSA or state administrators. IRS is subject to statutory 
provisions that generally prevent it from disclosing taxpayer 
information unless there is an exception authorizing disclosure in the 
law.[Footnote 21] One such exception is for purposes of administering 
certain portions of the Social Security Act, in which case the 
information can be disclosed to SSA upon a written request.[Footnote 
22] The MOU between IRS and SSA states that it serves as such a 
request, but IRS still does not generally tell SSA about its 
examinations and compliance checks because, according to IRS 
officials, many of its examiners are not aware of the MOU. According 
to IRS officials, state administrators do not have an exception to the 
disclosure requirements so the agency is prevented from providing 
information to them. 

Figure 7: Determining Social Security or Medicare Coverage of State 
and Local Government Employees: 

[Refer to PDF for image: illustration] 

1. Is the position or service covered for Social Security and Medicare 
under a Social Security coverage agreement? 
If yes: Withhold Social Security and Medicare, unless an exclusion 
applies; 
If no: go to step 2. 

2. Is employee a qualified member of a public retirement system? 
If no: Withhold mandatory Social Security and Medicare, unless an 
exclusion applies; 
If yes: go to step 3. 

3. Is employee covered by a Social Security coverage agreement 
providing Medicare-only coverage for employees hired prior to April 1, 
1986? 
If yes: Withhold Medicare for those employees, unless an exclusion 
applies; 
If no: go to step 4. 

4. Does Medicare Continuing Employment Exception apply? 
If yes: Withhold neither Social Security nor Medicare; 
If no: Withhold Medicare only, unless an exclusion applies. 

Source: IRS Publication 963, Federal-State Reference Guide. 

Note: The Medicare Continuing Employment Exception provides that state 
and local government employees hired prior to April 1, 1986, are 
exempt from mandatory Medicare taxes, if they meet certain 
requirements. 

[End of figure] 

IRS Has Limited Information about Public Employers' Social Security 
Coverage but Is Working to Obtain Additional Information: 

IRS receives limited information about public employers' Social 
Security coverage. Employers are generally required to submit 
quarterly tax returns to IRS providing information on wages and Social 
Security and Medicare taxes paid.[Footnote 23] According to an IRS 
official, IRS started to receive copies of coverage modifications from 
SSA around fiscal year 2000, but IRS generally does not distribute 
copies of the modifications to all field offices. To obtain a complete 
set of modifications, IRS officials in one field office told us they 
went to the SSA regional office and duplicated them. Although some IRS 
offices lack a complete set of modifications, the agency maintains a 
database of public employers and over half of these employers are 
designated as being covered under a Social Security coverage agreement. 

To increase its knowledge about state and local government employers' 
Social Security coverage, in 2009, IRS developed an assessment 
document designed to identify states with potential coverage problems. 
The assessment document is filled out by IRS officials and the state 
administrator and is intended to capture general information such as 
the name of the state administrator and staff, and the applicable SSA 
and IRS officials responsible for that state. The assessment also 
requests the number of modifications and if the state maintains a list 
of employers covered under its coverage agreement. Ultimately, IRS 
plans to use the information obtained to identify states needing 
outreach and education. By October 2009, IRS had developed a draft 
document and later obtained and incorporated input from SSA and NCSSSA 
officials. IRS pilot tested it in January 2010 and, according to an 
IRS official, started using the document in all states in July 2010. 
IRS officials noted that they intend to use the document as the basis 
for continued communication, outreach, and enforcement. 

In addition, from 2008 to 2010, an advisory committee to IRS developed 
a detailed self-evaluation document for public employers to assess 
their own compliance. The self-evaluation document expands on the IRS 
checklist used in compliance checks to include understandable 
information on employment tax requirements, including Social Security 
and Medicare taxes. IRS plans to refine and post the document on its 
Web site by the end of 2010 in an attempt to enhance voluntary 
compliance by public employers. 

IRS Is Evaluating Its Case Selection Process and Results of Its 
Compliance Checks and Examinations: 

In 2006, the Treasury Inspector General for Tax Administration (TIGTA) 
issued a report that reviewed IRS's FSLG workload selection process 
and identified issues related to tracking the effectiveness of the 
indicators used to select cases for review and to analyzing the 
results of compliance checks.[Footnote 24] IRS utilizes 14 indicators 
to select cases for review from over 103,000 state and local 
government employers. One indicator is used to identify issues related 
to Social Security coverage by computing the ratio of Social Security 
wages to total wages paid.[Footnote 25] Under this computation, a 
lower ratio of Social Security wages to total wages increases the 
chances that an employer is selected for review. However, a low ratio 
may not always indicate noncompliance with the state's Social Security 
coverage agreement. For example, a Social Security coverage agreement 
may not include some employees and would result in a lower ratio of 
Social Security wages to total wages paid. TIGTA found that IRS was 
not systematically analyzing the effectiveness of its selection 
process. The TIGTA report said that, with this information, IRS could 
identify more productive indicators and provide baseline measures of 
the levels of noncompliance identified. IRS officials told us that 
they are currently conducting a special analysis of the indicators 
used for its examinations and compliance checks conducted in 2006, 
2007, and 2008, and hope to complete this analysis by 2011. 

In 2006, TIGTA also found that IRS was not analyzing the results of 
completed compliance checks to identify common issues found during 
reviews, and our recent work found that IRS still does not routinely 
conduct such analysis. For compliance checks, IRS tracks the number of 
employers that were issued a discrepancy letter, but not the number 
that had issues related to Social Security coverage. In fiscal years 
2007 to 2009, IRS issued discrepancy letters to over 79 percent of the 
public employers that had a compliance check. However, IRS does not 
know what percent of the employers did not comply with their state's 
Social Security coverage agreement. In 2009, IRS performed a special 
analysis of its 2008 compliance checks to determine the issues found 
during the year. IRS found that 4.1 percent of all of its closed 
compliance checks had Social Security coverage issues. In 2006, TIGTA 
concluded that by analyzing the results of its compliance checks, IRS 
could identify common issues and focus its work for future compliance 
checks. IRS is currently conducting a special analysis of the results 
of its compliance checks, as well as its examinations conducted in 
2006, 2007, and 2008. It plans to use this information and information 
from other special projects to identify the most common areas of 
noncompliance. IRS will then provide focused outreach to state and 
local government employers to address these areas. This outreach could 
include publishing articles in the IRS newsletter or other industry 
journals. IRS officials told us that they anticipate completing this 
analysis by 2011. 

Table 3 provides information on the number of compliance checks 
completed and discrepancy letters issued in fiscal years 2007 to 2009. 

Table 3: Fiscal Year 2007 to 2009 Compliance Checks Completed and 
Discrepancy Letters Issued for Employment Tax Issues: 

Fiscal year: 2007 compliance checks; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 563; 
Cases with discrepancy letters for all employment tax issues[B]: 499; 
Percentage: 88.6%. 

Fiscal year: 2008 compliance checks; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 409; 
Cases with discrepancy letters for all employment tax issues[B]: 364; 
Percentage: 89.0%. 

Fiscal year: 2009 compliance checks; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 355; 
Cases with discrepancy letters for all employment tax issues[B]: 281; 
Percentage: 79.2%. 

Source: FSLG data. 

[A] These data do not include the number of examinations on public 
employers who are not covered under a coverage agreement. 

[B] Employment tax issues include many issues, one of which is Social 
Security coverage. 

[End of table] 

For examinations, FSLG tracks the number of cases that resulted in an 
adjustment to the employers' taxes, but does not know if such tax 
adjustments are due to errors with Social Security coverage 
agreements. FSLG officials told us they do not yet know the prevalence 
of coverage problems and have not done enough audits to fully 
understand the extent of the problems. We requested the closed 
examinations for fiscal year 2009 that had issues related to Social 
Security coverage agreements. FSLG officials stated that due to 
constraints in their information system, they could not identify all 
of these cases and, at best, could provide a list of examinations that 
might indicate Social Security coverage agreement issues using the 
amount of wage adjustments. We selected and reviewed a sample of 10 
closed examinations provided by IRS that had large wage changes. In 5 
of these examinations, the public employer did not have an error 
related to its coverage agreement. In 3 of the other 5 cases in which 
errors were found with coverage agreements, the public employer 
misclassified the employees for whom it was not paying Social Security 
taxes. For example, some Social Security coverage agreements exclude 
certain categories of employees, such as student workers. In one of 
these cases, IRS conducted an examination of a public employer with 
student workers and determined that some of the employees classified 
as students were not actually taking classes at the time. As a result, 
IRS found that the employer was responsible for paying Social Security 
and Medicare taxes for these employees. The following table provides 
information on the number of completed examinations and the number of 
cases with errors in fiscal years 2007 through 2009. 

Table 4: Fiscal Year 2007 to 2009 Examinations Completed and Number 
with Tax Adjustments for Employment Tax Issues: 

Fiscal year: 2007 examinations; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 269; 
Number of cases with tax adjustments for all employment tax issues[B]: 
245; 
Percentage: 91.1%. 

Fiscal year: 2008 examinations; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 391; 
Number of cases with tax adjustments for all employment tax issues[B]: 
349; 
Percentage: 89.3%. 

Fiscal year: 2009 examinations; 
Closed cases for employers covered under Social Security coverage 
agreements[A]: 259; 
Number of cases with tax adjustments for all employment tax issues[B]: 
233; 
Percentage: 90.0%. 

Source: FSLG data. 

[A] These data do not include the number of examinations on public 
employers who are not covered under a coverage agreement. 

[B] Employment tax issues include many issues, one of which is Social 
Security coverage. 

[End of table] 

In fiscal years 2007 to 2009, over 89 percent of employers examined 
had tax adjustments, but the reasons for those tax adjustments are not 
tracked. In 2009, IRS issued a report on community colleges that 
provides an indication of how well some state and local government 
employers were following their state's coverage agreements. The 
primary objective of the report was to measure the compliance level of 
community colleges and identify specific issues of noncompliance. IRS 
selected a random sample of 88 community colleges for examination. 
Although the community college special project results cannot be 
applied to all public employers, IRS found that 10 percent of the 88 
employers reviewed incorrectly excluded workers who should have been 
covered by their state's Social Security coverage agreements. 

Conclusions: 

SSA and IRS do not currently have the information needed and 
procedures in place to effectively and efficiently provide oversight 
of Social Security coverage for public employees. When IRS began 
collecting and overseeing the accuracy of the taxes collected in 1987, 
SSA ceased key monitoring activities that could help ensure states and 
public employers are following the states' agreements for Social 
Security coverage. Ensuring the accuracy of the Social Security 
records for public employees is still a requirement for SSA, and 
should be a priority for the managers of SSA and IRS. At present, SSA 
and IRS managers do not know the extent to which wages are reported 
accurately or to which Social Security taxes are paid in accordance 
with program rules. States can also play a vital role in the oversight 
structure of Social Security coverage for public employees, but lack 
clear guidelines with specific responsibilities to ensure state 
participation. Absent additional management attention and a system to 
monitor the accuracy of public employer wage reporting, Social 
Security benefits and tax payments may be inaccurately reported. 
Without a coordinated monitoring process between SSA and IRS to make 
sure that public employers are complying with state coverage 
agreements, opportunities to identify and correct errors will be lost. 
Given the projected fiscal challenges of the Social Security program 
in the coming decades, every attempt should be made to assure coverage 
is correctly applied so that employers and employees are reporting 
earnings and paying taxes when required to do so. 

Recommendations for Executive Action: 

To improve SSA's management oversight of retirement benefits for 
public employees, we recommend that the Commissioner of Social 
Security, in consultation with IRS, state administrators, and public 
employers, develop procedures for monitoring the accuracy of Social 
Security earnings records. This could include (1) improving data 
collected on public employers, (2) identifying risk factors using 
existing SSA information and IRS audit findings, and (3) targeting 
public employers with those risk factors for follow-up reviews on an 
ongoing basis. 

To improve the states' administration of public employer wage 
reporting, we recommend that the Commissioner of Social Security, in 
consultation with the National Conference of State Social Security 
Administrators, modify SSA's policy guidance to clarify state 
responsibilities governing their oversight of public employers and set 
clear expectations for the steps state administrators should take in 
implementing these responsibilities. 

To improve the process for identifying and correcting errors, we 
recommend that the Commissioner of Internal Revenue track errors found 
through its compliance efforts on Social Security and Medicare taxes 
and share results with SSA, to the extent permitted by federal law. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Social Security 
Administration and the Internal Revenue Service. In its written 
response, reproduced in appendix VI, SSA stated that our report fairly 
represented the key players involved in the administration of Social 
Security coverage agreements and provided a balanced representation of 
the issues. SSA generally agreed with all of our recommendations, but 
suggested that we reword our first recommendation to clarify the 
duties of the respective agencies. SSA also stated that IRS should 
collect data on employees covered under Section 218 agreements. We 
changed the language in the recommendation to clarify that SSA should 
monitor the accuracy of Social Security earnings records and 
highlighted that existing Social Security information as well as IRS 
audit findings may be useful in developing risk factors. While we 
believe that any monitoring effort should be coordinated with IRS and 
other stakeholders, our recommendation is intended for SSA to take the 
leadership role in such an effort. As we note in the conclusion above, 
SSA holds the primary responsibility of ensuring accurate Social 
Security records for public employees. SSA also provided technical 
comments that were incorporated into this report as appropriate. 

In its written response, reproduced in appendix VII, IRS stated that 
our report made an important contribution to the concept of ensuring 
compliance with coverage agreements. IRS agreed with our 
recommendation that it should track errors found through its 
compliance efforts on Social Security and Medicare taxes and stated 
that it has begun identifying and tracking such errors. IRS also 
stated that it will ensure that information applicable to these errors 
is shared with SSA to the extent allowable by the Internal Revenue 
Code. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to relevant congressional committees. In addition, this report will be 
available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7215 or bertonid@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff members who made key 
contributions to this report are listed in appendix VIII. 

Signed by: 

Daniel Bertoni: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

SSA Process for Ensuring Accurate Coverage: 

To obtain information on how the Social Security Administration (SSA) 
ensures accurate coverage of public employees, we interviewed SSA 
officials in Headquarters and in all 10 Regional Offices. We asked 
officials about the roles and interactions of SSA, state 
administrators, public employers, and the Internal Revenue Service 
(IRS). We asked about SSA's data, educational outreach, and oversight, 
as well as how coverage errors are detected and corrected. We reviewed 
relevant federal laws and regulations. We also reviewed documentation 
from SSA, such as policies and procedures, training, Inspector General 
reports, the Memorandum of Understanding (MOU) between SSA and IRS, 
and meeting minutes since fiscal year 2004 of the joint SSA-IRS 
committee. To understand the coverage agreement process, we reviewed 
selected original agreements, modifications (i.e., amendments) that 
provide coverage to public employees, internal legal opinions known as 
coverage determinations, and documents on specific coverage errors 
such as the report of the Federal Section 218 Task Force for Missouri 
School Districts. 

To provide background information on the number of covered state and 
local government employees and the amount of covered earnings, we 
requested data from SSA on covered state and local government 
employment from 2007--the most recent year for which data were 
available. Specifically, we requested the number and percent of state 
and local government workers with and without Social Security coverage 
in each state. We also requested the amount of earnings (i.e., wages) 
of state and local government workers that were covered and not 
covered in each state. SSA's Office of Research, Evaluation and 
Statistics used its 1 percent sample of Social Security numbers, which 
is generalizable to the universe of workers. The sample contains 
earnings data that employers report to SSA on Form W-2. The data do 
not specify the source of coverage, such as coverage agreements under 
section 218 or the provisions under section 210 of the Social Security 
Act.[Footnote 26] For the purposes of our tables, the data assume that 
state and local government workers do not have other, nonpublic 
employment. To assess the reliability of the data, we reviewed 
relevant documents and interviewed knowledgeable SSA officials. On the 
basis of this information, we determined that the data for 2007 were 
sufficiently reliable for the purposes of our review. 

To provide information on how many modifications to the coverage 
agreement SSA has approved by state, we requested the number and year 
of the most recently approved modification for each state.[Footnote 
27] From SSA, we requested that the 10 regional offices provide the 
number and date of the amendment (i.e., modification) most recently 
approved by SSA as of January 1, 2010. From states, we requested the 
same information through our Web-based survey. We then compared the 
results and performed follow-up work, where needed. We also reviewed 
relevant documents and interviewed knowledgeable SSA and state 
officials about the process to approve modifications for coverage. 
Based on these steps, we determined that the data we specially 
requested on the number and year of the last approved modification 
were sufficiently reliable for the purposes of our review. 

State Roles in Social Security Coverage Process: 

To understand the role of states in ensuring accurate coverage, we 
visited four states--California, Colorado, New Hampshire, and Rhode 
Island. We selected these states to provide a variety of experiences, 
based on the percent of covered employees, geographic dispersion, and 
indicators or referrals from SSA or the National Conference of State 
Social Security Administrators (NCSSSA) of how active the state 
administrator is. During our site visits, we interviewed the state 
officials who administer the state's coverage agreement with SSA. We 
asked about the role of the state administrator, the practices to 
administer the coverage agreement, as well as staffing and funding to 
do so. We also asked about interactions with SSA and IRS. We reviewed 
documents from states, such as policies and procedures, and select 
parts of the coverage agreement. We did not review state laws or 
verify information pertaining to state laws that were given to us in 
the course of our work. We also conducted interviews and obtained 
documents from officials of the NCSSSA. 

To obtain further information on states administering Social Security 
coverage agreements, we conducted a Web-based survey that was sent to 
state administrators in all 50 states, Puerto Rico, and the Virgin 
Islands.[Footnote 28] The survey was conducted between January and 
February 2010 and had a response rate of 100 percent. The survey 
included questions about the characteristics of states' coverage 
agreements, the extent to which state administrators conduct 
activities to manage these agreements, as well as the challenges state 
administrators face in administering these agreements. 

Because this was not a sample survey, there are no sampling errors. 
However, the practical difficulties of conducting any survey may 
introduce nonsampling errors, such as variations in how respondents 
interpret questions and their willingness to offer accurate responses. 
We took a number of steps to minimize nonsampling errors. For example, 
a social science survey specialist designed the questionnaire in 
collaboration with GAO staff with subject matter expertise. As part of 
survey development, we received feedback from NCSSSA. The 
questionnaire also underwent a peer review by a second GAO survey 
specialist. We also pretested the questionnaire with appropriate 
officials in four states--Colorado, Florida, Indiana, and Nevada--to 
ensure that the questions and information provided to respondents were 
appropriate, concise, and clearly stated. We selected pretest states 
based on variation in the percentage of covered public employees, 
geographic dispersion, and the level of state administrator 
involvement identified by NCSSSA officials. The pretesting took place 
during November and December 2009 by telephone. Since these were Web-
based surveys, respondents entered their answers directly into 
electronic questionnaires. This eliminated the need to have data keyed 
into databases, thus removing an additional source of error. Finally, 
to further minimize errors, computer programs used to analyze the 
survey data were independently verified by a second GAO data analyst 
to ensure the accuracy of this work. 

While we did not validate specific information that administrators 
reported through our survey, we reviewed their responses and took 
steps to determine that they were complete, reasonable, and 
sufficiently reliable for the purposes of this report. For example, 
during pretesting, we took steps to ensure definitions and terms used 
in the survey were clear and familiar to the respondents, categories 
provided in closed-ended questions were complete and exclusive, and 
the ordering of survey sections and the questions within each section 
were appropriate. In our review of the data, we also identified and 
logically fixed skip pattern errors' questions that respondents should 
have skipped but did not. On the basis of our checks, we believe our 
survey data are sufficient for the purposes of this report. 

IRS Identification of Incorrect Social Security Taxes: 

To understand how IRS identifies incorrect Social Security taxes for 
public employees, we held interviews with IRS managers in the Federal, 
State and Local Governments office (FSLG), which is responsible for 
the tax compliance of federal, state, and local government employers, 
including their Social Security coverage. We asked FSLG officials 
about how IRS selects state and local government employers to review, 
performs examinations and compliance checks, corrects any errors in 
coverage and taxes, and interacts with SSA and states. We reviewed 
relevant federal laws and regulations. In addition, we reviewed 
relevant documents, including policies and procedures, training 
materials, criteria to select employers for review, the MOU between 
SSA and IRS, reports from special projects, and publicly available 
forms and publications. 

We obtained IRS data on enforcement activities it conducted between 
fiscal years 2007 and 2009, including examinations and compliance 
checks completed in each state, and the results of these enforcement 
activities. For examinations, IRS provided information about whether 
the examination resulted in a tax adjustment. For compliance checks, 
IRS provided information about number of cases that resulted in a 
discrepancy letter. We reviewed documents and contacted knowledgeable 
IRS officials about the data. For the purposes of our review, we 
determined these data were sufficiently reliable. 

To understand how IRS identifies Social Security errors for public 
employees, we reviewed a judgmental sample of FSLG audit files for 10 
examinations and 20 compliance checks of state and local government 
employers that were completed in fiscal year 2009. Because IRS does 
not track this information, we asked FSLG to provide lists of 
examinations and compliance checks with an indication of noncompliance 
for Social Security coverage. IRS officials told us that the 
indications of noncompliance, particularly for examinations, are 
imperfect. For example, IRS examiners may not consistently use the 
codes to denote noncompliance related to Social Security coverage 
agreements. Because examinations are in-depth reviews that may result 
in changes to reported earnings and taxes, we selected 10 of 34 
examinations with larger increases and decreases of Social Security or 
Medicare earnings. For compliance checks, IRS identified 20 closed 
compliance checks that found issues with approved Social Security 
coverage. We selected all of these cases for our review. We reviewed 
the files to gather information on how IRS detected errors, what the 
errors were, and how they were resolved. The review of these files is 
for illustrative purposes and is not generalizable to all state and 
local government employers. 

We conducted this performance audit from July 2009 to September 2010 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Social Security-Covered and Estimated Noncovered Earnings 
from State and Local Government Employment in 2007: 

(Dollars in millions, rounded to nearest million). 

Total; 
Social Security-covered earnings: $527,552; 
Percent of state and local government earnings covered for social 
security: 71; 
Estimated noncovered earnings: $213,534; 
Percent of state and local government earnings not covered for social 
security: 29; 
Estimated total of covered and noncovered earnings[A]: $741,085. 

Alabama; 
Social Security-covered earnings: $10,489; 
Percent of state and local government earnings covered for social 
security: 97; 
Estimated noncovered earnings: $372; 
Percent of state and local government earnings not covered for social 
security: 3; 
Estimated total of covered and noncovered earnings[A]: $10,860. 

Alaska; 
Social Security-covered earnings: $757; 
Percent of state and local government earnings covered for social 
security: 42; 
Estimated noncovered earnings: $1,038; 
Percent of state and local government earnings not covered for social 
security: 58; 
Estimated total of covered and noncovered earnings[A]: $1,795. 

Arizona; 
Social Security-covered earnings: $12,460; 
Percent of state and local government earnings covered for social 
security: 92; 
Estimated noncovered earnings: $1,042; 
Percent of state and local government earnings not covered for social 
security: 8; 
Estimated total of covered and noncovered earnings[A]: $13,503. 

Arkansas; 
Social Security-covered earnings: $4,533; 
Percent of state and local government earnings covered for social 
security: 94; 
Estimated noncovered earnings: $264; 
Percent of state and local government earnings not covered for social 
security: 6; 
Estimated total of covered and noncovered earnings[A]: $4,797. 

California; 
Social Security-covered earnings: $40,281; 
Percent of state and local government earnings covered for social 
security: 40; 
Estimated noncovered earnings: $60,506; 
Percent of state and local government earnings not covered for social 
security: 60; 
Estimated total of covered and noncovered earnings[A]: $100,787. 

Colorado; 
Social Security-covered earnings: $3,625; 
Percent of state and local government earnings covered for social 
security: 30; 
Estimated noncovered earnings: $8,631; 
Percent of state and local government earnings not covered for social 
security: 70; 
Estimated total of covered and noncovered earnings[A]: $12,256. 

Connecticut; 
Social Security-covered earnings: $5,998; 
Percent of state and local government earnings covered for social 
security: 55; 
Estimated noncovered earnings: $4,948; 
Percent of state and local government earnings not covered for social 
security: 45; 
Estimated total of covered and noncovered earnings[A]: $10,946. 

Delaware; 
Social Security-covered earnings: $2,083; 
Percent of state and local government earnings covered for social 
security: 92; 
Estimated noncovered earnings: $190; 
Percent of state and local government earnings not covered for social 
security: 8; 
Estimated total of covered and noncovered earnings[A]: $2,274. 

District of Columbia; 
Social Security-covered earnings: $1,929; 
Percent of state and local government earnings covered for social 
security: 64; 
Estimated noncovered earnings: $1,075; 
Percent of state and local government earnings not covered for social 
security: 36; 
Estimated total of covered and noncovered earnings[A]: $3,003. 

Florida; 
Social Security-covered earnings: $36,344; 
Percent of state and local government earnings covered for social 
security: 95; 
Estimated noncovered earnings: $2,062; 
Percent of state and local government earnings not covered for social 
security: 5; 
Estimated total of covered and noncovered earnings[A]: $38,407. 

Georgia; 
Social Security-covered earnings: $14,971; 
Percent of state and local government earnings covered for social 
security: 75; 
Estimated noncovered earnings: $4,900; 
Percent of state and local government earnings not covered for social 
security: 25; 
Estimated total of covered and noncovered earnings[A]: $19,870. 

Hawaii; 
Social Security-covered earnings: $3,129; 
Percent of state and local government earnings covered for social 
security: 83; 
Estimated noncovered earnings: $627; 
Percent of state and local government earnings not covered for social 
security: 17; 
Estimated total of covered and noncovered earnings[A]: $3,755. 

Idaho; 
Social Security-covered earnings: $3,266; 
Percent of state and local government earnings covered for social 
security: 98; 
Estimated noncovered earnings: $75; 
Percent of state and local government earnings not covered for social 
security: 2; 
Estimated total of covered and noncovered earnings[A]: $3,341. 

Illinois; 
Social Security-covered earnings: $11,498; 
Percent of state and local government earnings covered for social 
security: 36; 
Estimated noncovered earnings: $20,322; 
Percent of state and local government earnings not covered for social 
security: 64; 
Estimated total of covered and noncovered earnings[A]: $31,819. 

Indiana; 
Social Security-covered earnings: $11,415; 
Percent of state and local government earnings covered for social 
security: 92; 
Estimated noncovered earnings: $972; 
Percent of state and local government earnings not covered for social 
security: 8; 
Estimated total of covered and noncovered earnings[A]: $12,387. 

Iowa; 
Social Security-covered earnings: $6,903; 
Percent of state and local government earnings covered for social 
security: 96; 
Estimated noncovered earnings: $323; 
Percent of state and local government earnings not covered for social 
security: 4; 
Estimated total of covered and noncovered earnings[A]: $7,226. 

Kansas; 
Social Security-covered earnings: $6,826; 
Percent of state and local government earnings covered for social 
security: 96; 
Estimated noncovered earnings: $262; 
Percent of state and local government earnings not covered for social 
security: 4; 
Estimated total of covered and noncovered earnings[A]: $7,088. 

Kentucky; 
Social Security-covered earnings: $6,024; 
Percent of state and local government earnings covered for social 
security: 67; 
Estimated noncovered earnings: $2,936; 
Percent of state and local government earnings not covered for social 
security: 33; 
Estimated total of covered and noncovered earnings[A]: $8,960. 

Louisiana; 
Social Security-covered earnings: $1,358; 
Percent of state and local government earnings covered for social 
security: 17; 
Estimated noncovered earnings: $6,617; 
Percent of state and local government earnings not covered for social 
security: 83; 
Estimated total of covered and noncovered earnings[A]: $7,974. 

Maine; 
Social Security-covered earnings: $971; 
Percent of state and local government earnings covered for social 
security: 36; 
Estimated noncovered earnings: $1,716; 
Percent of state and local government earnings not covered for social 
security: 64; 
Estimated total of covered and noncovered earnings[A]: $2,687. 

Maryland; 
Social Security-covered earnings: $14,596; 
Percent of state and local government earnings covered for social 
security: 93; 
Estimated noncovered earnings: $1,112; 
Percent of state and local government earnings not covered for social 
security: 7; 
Estimated total of covered and noncovered earnings[A]: $15,708. 

Massachusetts; 
Social Security-covered earnings: $553; 
Percent of state and local government earnings covered for social 
security: 3; 
Estimated noncovered earnings: $15,414; 
Percent of state and local government earnings not covered for social 
security: 97; 
Estimated total of covered and noncovered earnings[A]: $15,968. 

Michigan; 
Social Security-covered earnings: $22,157; 
Percent of state and local government earnings covered for social 
security: 95; 
Estimated noncovered earnings: $1,246; 
Percent of state and local government earnings not covered for social 
security: 5; 
Estimated total of covered and noncovered earnings[A]: $23,404. 

Minnesota; 
Social Security-covered earnings: $11,793; 
Percent of state and local government earnings covered for social 
security: 93; 
Estimated noncovered earnings: $892; 
Percent of state and local government earnings not covered for social 
security: 7; 
Estimated total of covered and noncovered earnings[A]: $12,685. 

Mississippi; 
Social Security-covered earnings: $6,042; 
Percent of state and local government earnings covered for social 
security: 97; 
Estimated noncovered earnings: $161; 
Percent of state and local government earnings not covered for social 
security: 3; 
Estimated total of covered and noncovered earnings[A]: $6,203. 

Missouri; 
Social Security-covered earnings: $7,733; 
Percent of state and local government earnings covered for social 
security: 65; 
Estimated noncovered earnings: $4,087; 
Percent of state and local government earnings not covered for social 
security: 35; 
Estimated total of covered and noncovered earnings[A]: $11,820. 

Montana; 
Social Security-covered earnings: $1,813; 
Percent of state and local government earnings covered for social 
security: 95; 
Estimated noncovered earnings: $92; 
Percent of state and local government earnings not covered for social 
security: 5; 
Estimated total of covered and noncovered earnings[A]: $1,904. 

Nebraska; 
Social Security-covered earnings: $3,673; 
Percent of state and local government earnings covered for social 
security: 91; 
Estimated noncovered earnings: $351; 
Percent of state and local government earnings not covered for social 
security: 9; 
Estimated total of covered and noncovered earnings[A]: $4,024. 

Nevada; 
Social Security-covered earnings: $252; 
Percent of state and local government earnings covered for social 
security: 4; 
Estimated noncovered earnings: $5,640; 
Percent of state and local government earnings not covered for social 
security: 96; 
Estimated total of covered and noncovered earnings[A]: $5,891. 

New Hampshire; 
Social Security-covered earnings: $2,317; 
Percent of state and local government earnings covered for social 
security: 84; 
Estimated noncovered earnings: $453; 
Percent of state and local government earnings not covered for social 
security: 16; 
Estimated total of covered and noncovered earnings[A]: $2,769. 

New Jersey; 
Social Security-covered earnings: $25,237; 
Percent of state and local government earnings covered for social 
security: 91; 
Estimated noncovered earnings: $2,483; 
Percent of state and local government earnings not covered for social 
security: 9; 
Estimated total of covered and noncovered earnings[A]: $27,720. 

New Mexico; 
Social Security-covered earnings: $5,322; 
Percent of state and local government earnings covered for social 
security: 93; 
Estimated noncovered earnings: $409; 
Percent of state and local government earnings not covered for social 
security: 7; 
Estimated total of covered and noncovered earnings[A]: $5,731. 

New York; 
Social Security-covered earnings: $65,384; 
Percent of state and local government earnings covered for social 
security: 99; 
Estimated noncovered earnings: $898; 
Percent of state and local government earnings not covered for social 
security: 1; 
Estimated total of covered and noncovered earnings[A]: $66,282. 

North Carolina; 
Social Security-covered earnings: $19,799; 
Percent of state and local government earnings covered for social 
security: 98; 
Estimated noncovered earnings: $449; 
Percent of state and local government earnings not covered for social 
security: 2; 
Estimated total of covered and noncovered earnings[A]: $20,248. 

North Dakota; 
Social Security-covered earnings: $1,393; 
Percent of state and local government earnings covered for social 
security: 95; 
Estimated noncovered earnings: $76; 
Percent of state and local government earnings not covered for social 
security: 5; 
Estimated total of covered and noncovered earnings[A]: $1,469. 

Ohio; 
Social Security-covered earnings: $160; 
Percent of state and local government earnings covered for social 
security: 1; 
Estimated noncovered earnings: $25,332; 
Percent of state and local government earnings not covered for social 
security: 99; 
Estimated total of covered and noncovered earnings[A]: $25,492. 

Oklahoma; 
Social Security-covered earnings: $7,012; 
Percent of state and local government earnings covered for social 
security: 92; 
Estimated noncovered earnings: $651; 
Percent of state and local government earnings not covered for social 
security: 8; 
Estimated total of covered and noncovered earnings[A]: $7,663. 

Oregon; 
Social Security-covered earnings: $8,280; 
Percent of state and local government earnings covered for social 
security: 97; 
Estimated noncovered earnings: $224; 
Percent of state and local government earnings not covered for social 
security: 3; 
Estimated total of covered and noncovered earnings[A]: $8,505. 

Pennsylvania; 
Social Security-covered earnings: $24,040; 
Percent of state and local government earnings covered for social 
security: 93; 
Estimated noncovered earnings: $1,757; 
Percent of state and local government earnings not covered for social 
security: 7; 
Estimated total of covered and noncovered earnings[A]: $25,797. 

Puerto Rico; 
Social Security-covered earnings: $4,676; 
Percent of state and local government earnings covered for social 
security: 83; 
Estimated noncovered earnings: $960; 
Percent of state and local government earnings not covered for social 
security: 17; 
Estimated total of covered and noncovered earnings[A]: $5,636. 

Rhode Island; 
Social Security-covered earnings: $1,938; 
Percent of state and local government earnings covered for social 
security: 77; 
Estimated noncovered earnings: $563; 
Percent of state and local government earnings not covered for social 
security: 23; 
Estimated total of covered and noncovered earnings[A]: $2,501. 

South Carolina; 
Social Security-covered earnings: $9,872; 
Percent of state and local government earnings covered for social 
security: 98; 
Estimated noncovered earnings: $151; 
Percent of state and local government earnings not covered for social 
security: 2; 
Estimated total of covered and noncovered earnings[A]: $10,023. 

South Dakota; 
Social Security-covered earnings: $1,566; 
Percent of state and local government earnings covered for social 
security: 98; 
Estimated noncovered earnings: $35; 
Percent of state and local government earnings not covered for social 
security: 2; 
Estimated total of covered and noncovered earnings[A]: $1,601. 

Tennessee; 
Social Security-covered earnings: $11,984; 
Percent of state and local government earnings covered for social 
security: 91; 
Estimated noncovered earnings: $1,122; 
Percent of state and local government earnings not covered for social 
security: 9; 
Estimated total of covered and noncovered earnings[A]: $13,106. 

Texas; 
Social Security-covered earnings: $23,966; 
Percent of state and local government earnings covered for social 
security: 47; 
Estimated noncovered earnings: $26,755; 
Percent of state and local government earnings not covered for social 
security: 53; 
Estimated total of covered and noncovered earnings[A]: $50,721. 

Utah; 
Social Security-covered earnings: v4,687; 
Percent of state and local government earnings covered for social 
security: 94; 
Estimated noncovered earnings: $316; 
Percent of state and local government earnings not covered for social 
security: 6; 
Estimated total of covered and noncovered earnings[A]: $5,003. 

Vermont; 
Social Security-covered earnings: $1,440; 
Percent of state and local government earnings covered for social 
security: 99; 
Estimated noncovered earnings: $13; 
Percent of state and local government earnings not covered for social 
security: 1; 
Estimated total of covered and noncovered earnings[A]: $1,453. 

Virginia; 
Social Security-covered earnings: $19,742; 
Percent of state and local government earnings covered for social 
security: 98; 
Estimated noncovered earnings: $430; 
Percent of state and local government earnings not covered for social 
security: 2; 
Estimated total of covered and noncovered earnings[A]: $20,173. 

Washington; 
Social Security-covered earnings: $16,734; 
Percent of state and local government earnings covered for social 
security: 91; 
Estimated noncovered earnings: $1,582; 
Percent of state and local government earnings not covered for social 
security: 9; 
Estimated total of covered and noncovered earnings[A]: $18,316. 

West Virginia; 
Social Security-covered earnings: $3,759; 
Percent of state and local government earnings covered for social 
security: 95; 
Estimated noncovered earnings: $205; 
Percent of state and local government earnings not covered for social 
security: 5; 
Estimated total of covered and noncovered earnings[A]: $3,965. 

Wisconsin; 
Social Security-covered earnings: $12,754; 
Percent of state and local government earnings covered for social 
security: 96; 
Estimated noncovered earnings: $549; 
Percent of state and local government earnings not covered for social 
security: 4; 
Estimated total of covered and noncovered earnings[A]: $13,302. 

Wyoming; 
Social Security-covered earnings: $2,003; 
Percent of state and local government earnings covered for social 
security: 97; 
Estimated noncovered earnings: $72; 
Percent of state and local government earnings not covered for social 
security: 3; 
Estimated total of covered and noncovered earnings[A]: $2,075. 

Other[B]; 
Social Security-covered earnings: $15; 
Percent of state and local government earnings covered for social 
security: 8; 
Estimated noncovered earnings: $176; 
Percent of state and local government earnings not covered for social 
security: 92; 
Estimated total of covered and noncovered earnings[A]: $191. 

Source: GAO analysis of data from SSA's Office of Research, 
Evaluation, and Statistics, 1% Continuous Work History Sample-2007 
Employee Employer File. 

Notes: The data presented in the table are from earnings that were 
posted to SSA administrative records as of January 2009. Any earnings 
posted to SSA's Master Earnings File after this January cut-off are 
not included in the counts. In some years, different state and local 
governments may be late in submitting acceptable W-2 forms to SSA, and 
the state and local government employees included in the late 
submittal would not be included in a given state's total counts for 
covered or noncovered employment. 

[A] To develop this estimate, SSA hypothetically assumed a situation 
of universal coverage where all state and local government employment 
was covered in 2007 and taxable up to the annual Social Security 
taxable maximum of $97,500 in 2007 for each employer. From the total 
estimate, we subtracted currently covered earnings to obtain estimated 
noncovered earnings. 

[B] Other includes American Samoa, Guam, Northern Mariana Islands, and 
U.S. Virgin Islands. 

[End of table] 

Although most Social Security coverage of state and local government 
employees is obtained through coverage agreements, additional Social 
Security provisions affect the coverage of other state and local 
government employees. For example, section 210 of the Social Security 
Act extends mandatory coverage for Social Security and Medicare to 
state and local government employees who are not members of a 
qualifying retirement system, subject to certain exceptions. 

[End of section] 

Appendix III: Number and Year of Last Modification Approved by SSA, as 
of January 1, 2010: 

State: Alabama; 
Number of last approved modification: 717; 
Year of last approved modification: 2005. 

State: Alaska; 
Number of last approved modification: 183; 
Year of last approved modification: 2001. 

State: Arizona; 
Number of last approved modification: 442; 
Year of last approved modification: 2009. 

State: Arkansas; 
Number of last approved modification: 845; 
Year of last approved modification: 2009. 

State: California; 
Number of last approved modification: 1,543; 
Year of last approved modification: 2009. 

State: Colorado; 
Number of last approved modification: 395; 
Year of last approved modification: 2007. 

State: Connecticut; 
Number of last approved modification: 447; 
Year of last approved modification: 2008. 

State: Delaware; 
Number of last approved modification: 83; 
Year of last approved modification: 2006. 

State: Florida; 
Number of last approved modification: 609; 
Year of last approved modification: 2009. 

State: Georgia; 
Number of last approved modification: 960; 
Year of last approved modification: 2009. 

State: Hawaii; 
Number of last approved modification: 13; 
Year of last approved modification: 2006. 

State: Idaho; 
Number of last approved modification: 255; 
Year of last approved modification: 2009. 

State: Illinois; 
Number of last approved modification: 934; 
Year of last approved modification: 2009. 

State: Indiana; 
Number of last approved modification: 558; 
Year of last approved modification: 2007. 

State: Iowa; 
Number of last approved modification: 397; 
Year of last approved modification: 2002. 

State: Kansas; 
Number of last approved modification: 765; 
Year of last approved modification: 2005. 

State: Kentucky; 
Number of last approved modification: 884; 
Year of last approved modification: 2009. 

State: Louisiana; 
Number of last approved modification: 745; 
Year of last approved modification: 2009. 

State: Maine; 
Number of last approved modification: 317; 
Year of last approved modification: 2009. 

State: Maryland; 
Number of last approved modification: 255; 
Year of last approved modification: 2000. 

State: Massachusetts; 
Number of last approved modification: 11; 
Year of last approved modification: 2003. 

State: Michigan; 
Number of last approved modification: 988; 
Year of last approved modification: 2008. 

State: Minnesota; 
Number of last approved modification: 424; 
Year of last approved modification: 2009. 

State: Mississippi; 
Number of last approved modification: 790; 
Year of last approved modification: 2009. 

State: Missouri; 
Number of last approved modification: 444; 
Year of last approved modification: 1997. 

State: Montana; 
Number of last approved modification: 393; 
Year of last approved modification: 2008. 

State: Nebraska; 
Number of last approved modification: 408; 
Year of last approved modification: 1995. 

State: Nevada; 
Number of last approved modification: 52; 
Year of last approved modification: 1989. 

State: New Hampshire; 
Number of last approved modification: 325; 
Year of last approved modification: 2008. 

State: New Jersey; 
Number of last approved modification: 735; 
Year of last approved modification: 2009. 

State: New Mexico; 
Number of last approved modification: 267; 
Year of last approved modification: 2009. 

State: New York; 
Number of last approved modification: 362; 
Year of last approved modification: 1994. 

State: North Carolina; 
Number of last approved modification: 1,134; 
Year of last approved modification: 2006. 

State: North Dakota; 
Number of last approved modification: 689; 
Year of last approved modification: 2006. 

State: Ohio; 
Number of last approved modification: 1; 
Year of last approved modification: 1972. 

State: Oklahoma; 
Number of last approved modification: 1,161; 
Year of last approved modification: 2009. 

State: Oregon; 
Number of last approved modification: 647; 
Year of last approved modification: 2009. 

State: Pennsylvania; 
Number of last approved modification: 1,796; 
Year of last approved modification: 2009. 

State: Puerto Rico; 
Number of last approved modification: 73; 
Year of last approved modification: 2003. 

State: Rhode Island; 
Number of last approved modification: 100; 
Year of last approved modification: 2003. 

State: South Carolina; 
Number of last approved modification: 490; 
Year of last approved modification: 2008. 

State: South Dakota; 
Number of last approved modification: 380; 
Year of last approved modification: 2009. 

State: Tennessee; 
Number of last approved modification: 913; 
Year of last approved modification: 2008. 

State: Texas; 
Number of last approved modification: 1,583; 
Year of last approved modification: 2009. 

State: Utah; 
Number of last approved modification: 210; 
Year of last approved modification: 2008. 

State: Vermont; 
Number of last approved modification: 346; 
Year of last approved modification: 1993. 

State: Virgin Islands; 
Number of last approved modification: 11; 
Year of last approved modification: 1996. 

State: Virginia; 
Number of last approved modification: 388; 
Year of last approved modification: 2004. 

State: Washington; 
Number of last approved modification: 839; 
Year of last approved modification: 2009. 

State: West Virginia; 
Number of last approved modification: 430; 
Year of last approved modification: 2009. 

State: Wisconsin; 
Number of last approved modification: 778; 
Year of last approved modification: 2009. 

State: Wyoming; 
Number of last approved modification: 283; 
Year of last approved modification: 2009. 

Source: SSA information and GAO's survey of state administrators. 

Notes: The number of the last modification approved by SSA is not 
necessarily the exact number of modifications currently in effect. We 
could not state the exact number of modifications currently in effect 
for several reasons. First, the numbers should ascend in sequential 
order, but occasionally some modifications may skip a number. For 
example, a state may withdraw a proposed coverage modification before 
SSA approves or denies it, which could create a skip in the sequence. 
Second, not all modifications are presently in effect. A modification 
may provide coverage for a public employer, which later dissolves and 
no longer exists. A modification may apply to an employer which 
terminated its coverage prior to 1983--when terminating coverage 
modifications was permitted. 

Consistent with the numbering sequences of SSA and states, the table 
excludes a state's original agreement. The original agreement is not 
counted as a modification because it is not an amendment to the 
agreement. 

[End of table] 

[End of section] 

Appendix IV: SSA's Guidance Related to the Responsibilities of State 
Social Security Administrators: 

* Serve as a bridge between state and local public employers and 
federal agencies, including SSA and IRS. 

* Administer and maintain the section 218 agreement that governs 
voluntary Social Security and Medicare coverage by public employers. 

* Prepare modifications to the section 218 coverage agreement to 
include additional coverage groups, correct errors in other 
modifications, identify additional public employers that join a 
covered retirement system, and obtain Medicare coverage for public 
employees whose employment relationship with a public employer has 
been continuous since March 31, 1986. 

* Provide SSA with notice and evidence of the legal dissolution of 
covered state and local public employers. 

* Conduct referenda for Social Security and Medicare coverage for 
services performed by employees in positions under a public retirement 
system. 

* Resolve coverage and tax questions associated with Section 218 
agreements and modifications with SSA and IRS. 

* Advise public employers on Social Security, Medicare, and tax 
withholding matters. 

* Provide information to public employers as appropriate in accordance 
with the state's enabling legislation, policies, procedures, and 
standards. 

* Provide advice on Section 218 optional exclusions applicable to the 
state and/or individual modifications, and advice on state and local 
laws, rules, regulations and compliance concerns. 

* Maintain physical custody of the state's Section 218 agreement, 
modifications, dissolutions, and intrastate agreements. 

Source: SSA's Program Operations Manual System SL 10001.130. 

[End of section] 

Appendix V: List of Committees Formed by SSA at Its April 2010 
Conference: 

Committee: Improving Collaboration; 
Objectives: Develop and implement ways to improve interagency 
relationship and collaboration. 

Committee: Uniform Workflow Processes; 
Objectives: Recommend uniform procedures for the regions and state 
administrators. 

Committee: Policy and Procedures[A]; 
Objectives: Research policies and recommend improvements. 

Committee: Database Development; 
Objectives: Develop ideas that will improve a centralized database. 

Committee: State Administrator Position Support; 
Objectives: Suggest and develop training materials that will help new 
state administrators learn the position. 

Committee: Succession Planning; 
Objectives: Improve succession planning procedures. 

Committee: Training and Education[A]; 
Objectives: Improve training in all levels of federal, state, and 
local government by creating joint training sessions. 

Committee: Policy Enhancement; 
Objectives: Research to identify areas of policy or procedures that 
may be improved. 

Committee: Raising Awareness for State Elected Officials; 
Objectives: Develop and explore ways to strengthen agency 
relationships with state-elected officials. 

Committee: Staffing Resources; 
Objectives: Review staffing issues in the regions and states and 
recommend solutions. 

Committee: Disclosure Issues; 
Objectives: Discuss disclosure limitations. 

Source: SSA. 

[A] SSA identified these committees as the highest priorities. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Social Security Administration: 

Social Security: 
Social Security Administration: 
Baltimore, MD 21235-0001: 

September 17, 2010: 

Mr. Daniel Bertoni: 
Director, Education, Workforce, and Income Security Issues: 
441 G. Street, N.W. 
Washington, D. C. 20548: 

Dear Mr. Bertoni: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office (GAO) Draft Report, "Social Security 
Administration: Management Oversight Needed to Ensure Accurate 
Treatment of State and Local Government Employees" (GAO-10-938). Our 
comments on the report are enclosed. 

If you have any questions, please contact me or have your staff 
contact Rebecca Tothero, Acting Director, Audit Management and Liaison 
Staff at (410) 966-6975. 

Sincerely, 

Signed by: 

James A. Winn: 
Executive Counselor to the Commissioner: 

Enclosure: 

[End of letter] 

Comments On The Government Accountability Office (GAO) Draft Report, 
"Social Security Administration: Management Oversight Needed To Ensure 
Accurate Treatment Of State And Local Government Employees" (GA0-10-
938): 

General Comments: 

We believe the report fairly represents the key players involved in 
the administration of Social Security Act, Section 218 coverage 
agreements, and is a balanced representation of the issues. The report 
also accurately describes the present Section 218 process that we and 
the Internal Revenue Service (IRS) use. 

We strive to administer all programs and activities in accordance with 
applicable laws and regulations. To assist state and local government 
employers on Social Security coverage issues, we work with state 
administrators at the local level through our ten regional employer 
services liaison officers. We also have regional office state and 
local coverage specialists who provide support. In addition, we 
sponsor an annual meeting of the National Conference of State Social 
Security Administrators (NCSSSA), and maintain a website solely for 
state and local government employers. 
http://www.ssa.gov/slge/index.htm. 

Comments On Recommendations: 

Recommendation 1: 

To improve SSA's management oversight of retirement benefits for 
public employees, the Commissioner of Social Security, in consultation 
with IRS, state administrators, and public employers, should develop a 
monitoring effort that ensures Social Security earnings are accurately 
reported for public employees. This could include 1) improving data 
collected on public employers, 2) identifying risk factors, and 3) 
targeting public employers with those risk factors for follow-up 
reviews on an ongoing basis. 

Comment: 

We suggest you reword this recommendation as it is unclear regarding 
the duties of the respective agencies. 

We will work to develop monitoring efforts with IRS, state 
administrators, and public employers to ensure Social Security 
earnings are accurately reported for public employers. IRS, however, 
must collect data on employees covered under Section 218 agreements. 
With this information from IRS, we can work together to: 

* develop a monitoring effort that ensure Social Security earnings are 
accurately reported for public employees; 

* identify risk factors, and target public employers with those risk 
factors; and; 

* establish best practices for educating public employers with this 
information. 

Recommendation 2: 

To improve the states' administration of public employer wage 
reporting, the Commissioner of Social Security, in consultation with 
the National Conference of State Social Security Administrators, 
should modify SSA's policy guidance to clarify state responsibilities 
governing their oversight of public employers and set clear 
expectations for the steps state administrators should take in 
implementing their responsibilities. 

Comments: 

We agree. Our "Policy and Procedures" committee, with input for other 
committees, will focus on this task. We will collaborate with the 
NCSSSA, and revise our policy guidance as you suggest. We will improve 
the guidance and post it to our Program Operations Manual System 
(POMS) by March 2011. 

POMS is our official repository of program instructions, and it may be 
accessed by our employees and by state and Federal agencies, including 
IRS. When we issue the new instructions, state administrators will 
have a clearer and more detailed source of information to guide them 
in carrying out their roles and responsibilities under Section 218. 

Recommendation 3: 

To improve the process for identifying and correcting errors, the 
Commissioner of the Internal Revenue Service should track errors 
identified through compliance efforts and share the results with SSA 
to the extent permitted by Federal law. 

Comments: We agree. 

[End of section] 

Appendix VII: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Deputy Commissioner: 
Washington, D.C. 20224: 

September 17, 2010: 

Mr. Daniel Bertoni: 
Director: 
Education, Workplace, and Income Security Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Bertoni: 

I have reviewed your draft Government Accountability Office (GAO) 
report titled, "Social Security Administration: Management Oversight 
Needed to Ensure Accurate Treatment of State and Local Government 
Employees" (GA0-10-938). 

The report makes an important contribution to the concept that 
ensuring compliance with Section 218 agreements — the agreements 
between various state and local governmental entities and the Social 
Security Administration (SSA) under which certain public employees are 
covered by Social Security — is challenging and important. As the 
report demonstrates, the interaction of federal tax, Social Security 
and state statutes and Section 218 agreements needed to arrive at 
correct Social Security and Medicare coverage determinations for 
public employees is complex. It requires the coordination of the SSA, 
State Social Security Administrators, and the Internal Revenue Service 
(IRS). 

The IRS created its Federal, State and Local Governments (FSLG) 
function in 2000 to serve as the focal point within the IRS for 
meeting the IRS's responsibility to ensure that
units of state and local government were correctly determining and 
paying federal employment taxes for their employees. Since it was 
created 10 years ago, FSLG has provided extensive outreach services 
and training to units of state and local governments. The goal has 
been to arm these entities with a robust knowledge of,the special 
withholding and reporting rules that apply to their employees covered 
by Section 218 agreements. Over the past five years, FSLG has also 
focused on conducting examinations to evaluate employment tax and 
information reporting compliance at the state and local levels. 

The report notes that we have also undertaken several initiatives to 
enhance our data gathering and reporting on SSA Section 218 issues. 
For example, FSLG is at work now on an analysis of the results of its 
Section 218 examination and compliance check activity. FSLG plans to 
share its findings from this work with SSA, to the extent permitted by 
law. (As you indicated, section 6103 of the Internal Revenue Code 
imposes certain limits on the ability of the IRS to share tax 
information with other federal agencies.) 

The report also notes that FSLG is conducting reviews of state-level 
Section 218 agreements using an IRS Section 218 assessment tool. These 
reviews are designed to give us a complete picture of the Section 218 
agreements and structures that define Social Security coverage of 
state and local employees in each state. The information FSLG gains 
from this assessment, combined with the information from its analysis 
of examination and compliance check activity, will allow us to improve 
our overall service and compliance efforts at the state and local 
levels. 

We work with the SSA on an ongoing basis on significant issues related 
to Section 218 compliance. While we do not always share final audit 
reports with SSA, we typically contact SSA when an examination will 
result in changing the 218 coverage of an employee or category of 
employees. In cases where the governmental unit we are examining 
agrees with the IRS determination, this contact with SSA is normally 
carried out informally. In cases where the governmental unit disagrees 
with our determination, we obtain a formal written interpretation from 
SSA. This practice honors SSA's statutory authority to interpret 
coverage questions under Section 218 agreements. 

This consultation is carried out, in part, pursuant to a Memorandum of 
Understanding (MOU) between SSA and the IRS. FSLG provided a copy of 
this MOU, and an accompanying explanatory memorandum from the Director 
of FSLG, to all FSLG employees in 2007. Further, FSLG specifically 
addresses Section 218 matters in the Internal Revenue Manual at 
section 4.90.1.4, to which all FSLG employees have access. 

We look forward to continuing our outreach, education and compliance 
activities with government employers at the state and local levels. We 
also look forward to continuing collaboration with SSA and the State 
Social Security Administrators to identify and address Section 218 
concerns, including consulting with them on ways to ensure that Social 
Security earnings are accurately reported for public employees. 

A response to your recommendation for the IRS is enclosed. We 
appreciate your interest in our work with state and local governmental 
entities on matters related to Social Security and Medicare taxes. If 
you have any questions or would like to discuss this response in more 
detail, please contact Sarah H. Ingram, Commissioner, Tax Exempt and 
Government Entitles Division, at (202) 283-2500. 

Sincerely, 

Signed by: 

Steven T. Miller: 

Enclosure: 

[End of letter] 

Enclosure: 

Recommendation: 

To improve the process for identifying and correcting errors, we 
recommend that the Commissioner of Internal Revenue track errors found 
through its compliance efforts on Social Security and Medicare taxes 
and share results with SSA, to the extent permitted by federal law. 

Response: 

We have begun identifying and tracking errors concerning Section 218 
agreements discovered in our compliance processes. We will ensure that 
information applicable to these errors is shared with the Social 
Security Administration to the extent allowable by the disclosure 
provisions of the Internal Revenue Code. 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Daniel Bertoni (202) 512-7215 or bertonid@gao.gov: 

Staff Acknowledgments: 

Blake Ainsworth, Assistant Director; Richard Harada, Matthew 
Saradjian, Anjali Tekchandani, Kris Trueblood, James Bennett, Susannah 
Compton, Alex Galuten, Stuart Kaufman, Wayne Turowski, and Walter 
Vance made significant contributions to this report. 

[End of section] 

Footnotes: 

[1] Section 218 of the Social Security Act authorizes coverage for 
groups of positions of a state or local government employer. The 
groups can include those positions outside or inside the public 
employer's retirement system. Thus, a public employer may have 
coverage for some but not all of its employees. 

[2] For purposes of this report, we use the term "states" to include 
the 50 states, Puerto Rico, and the Virgin Islands. 

[3] Pub. L. No. 81-734, § 106 (1950); codified at 42 U.S.C. § 418. 

[4] Section 218 also allows interstate instrumentalities to enter into 
these agreements. An interstate instrumentality is an independent 
legal entity that is organized by two or more states to carry out one 
or more functions. For purposes of a section 218 agreement, an 
interstate instrumentality is governed (to the extent practicable) by 
the provisions applicable to agreements with states. According to SSA, 
there are approximately 60 interstate instrumentalities, such as the 
Port Authority of New York and New Jersey, with a section 218 
agreement. 

[5] The Board of Trustees, Federal Old-Age and Survivors Insurance and 
Federal Disability Insurance Trust Funds, The 2010 Annual Report of 
the Board of Trustees of the Federal Old-Age and Survivors Insurance 
and Federal Disability Insurance Trust Funds (Aug. 2010). 

[6] GAO, Social Security: Issues Regarding the Coverage of Public 
Employees, [hyperlink, http://www.gao.gov/products/GAO-08-248T] 
(Washington, D.C.: Nov. 6, 2007) and Social Security: Implications of 
Extending Mandatory Coverage to State and Local Employees, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-98-196] (Washington, D.C., Aug. 
18, 1998). 

[7] Federal Insurance Contributions Act (FICA) is a tax on both 
employers and employees to fund the Social Security and Medicare trust 
funds. The Social Security tax is 6.2 percent each for employers and 
employees on earnings up to a maximum amount, which typically 
increases each year. In 2010, the maximum amount was $106,800. The 
Medicare tax is 1.45 percent each for employers and employees on all 
earnings. 26 U.S.C. §§ 3101, 3111. 

[8] According to SSA officials, in some regions, the modification may 
undergo an initial review at an SSA field office, known as the 
Parallel Social Security Office, which is usually located in the 
state's capital. SSA regional offices should send copies of approved 
modifications to the Parallel Social Security Office. 

[9] We sent the survey to the 52 states and territories authorized to 
enter into coverage agreements with SSA: the 50 states, Puerto Rico, 
and the Virgin Islands. 

[10] This survey question asked state administrators to rank the top 
three reasons for modifications in the last 5 years. Since respondents 
could provide more than one reason, the sum of the reasons may exceed 
the number of respondents (52 states and territories). 

[11] A state or local government employer that legally dissolves ends 
its coverage. This is the only situation that can end coverage 
approved by SSA. Otherwise, consistent with a 1983 statutory change to 
section 218, a public employer's coverage cannot terminate. 

[12] The National Conference of State Social Security Administrators 
(NCSSSA), an association of state administrators, was formed in 1952 
to provide leadership to state and local public employers on Social 
Security, Medicare, and employment tax issues. 

[13] The quarterly tax return for employers is generally the Form 941. 

[14] For more information on the annual reconciliation process, see 
SSA, Office of the Inspector General, The Social Security 
Administration's Wage Reconciliation Process With the Internal Revenue 
Service, A-03-08-18069 (June 16, 2009). 

[15] Pub. L. No. 99-509, §9002 (1986). 

[16] SSA, Office of the Inspector General, Social Security Coverage of 
State and Local Government Employees, A-04-95-06013 (Dec. 13, 1996). 

[17] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[18] IRS generally has a 3-year statute of limitations for assessing 
additional taxes. 

[19] According to Standards for Internal Control in the Federal 
Government, risk assessment may include qualitative and quantitative 
approaches, such as ranking risks, conducting planning sessions, or 
other methods. 

[20] IRS generally has a 3-year statute of limitations for assessing 
taxes. In addition, when a taxpayer files for a tax refund, generally 
only the taxes paid in the preceding 3 years can be refunded. 

[21] 26 U.S.C. § 6103. 

[22] 26 U.S.C. § 6103(l)(1)(A). 

[23] According to IRS officials, some public employers are not 
required to submit quarterly tax returns. Some employers do not pay 
wages either due to staff volunteering their time or the use of 
contracted workers. Others may file a consolidated quarterly return 
rather than separately for each quarter. 

[24] Treasury Inspector General for Tax Administration, The Federal, 
State, and Local Governments Office Can Improve the Workload Selection 
Process to Increase Effectiveness, 2006-10-073 (Apr. 28, 2006). 

[25] Another indicator involves Medicare wages. 

[26] Although most Social Security coverage of state and local 
government employees is obtained through coverage agreements under 
section 218, additional Social Security provisions affect the coverage 
of other state and local government employees. For example, section 
210 of the Social Security Act extends mandatory coverage for Social 
Security and Medicare to state and local government employees who are 
not members of a qualifying retirement system, subject to certain 
exceptions. 

[27] Each state has only one agreement with SSA, comprised of an 
original agreement along with any amendments (known as modifications). 
For the purpose of this report, we generally refer to a state's 
original agreement along with the modifications as a "coverage 
agreement." However, for the table in appendix III on the number of 
the last approved modification, we explicitly noted that we excluded 
the original agreement from the data in accordance with SSA and 
states' numbering sequence. 

[28] We did not send a state administrator survey to the District of 
Columbia, Guam, the Commonwealth of the Northern Mariana Islands, or 
American Samoa because they are not authorized to enter into Social 
Security coverage agreements. 

[End of section] 

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