Managing Through Fiscal Stress is designed to help our public sector clients find immediate solutions, meet short-term challenges and improve long-term performance during an economic downturn.
Personnel costs run between 60 and 75 percent of a public sector entity's budget and often are the first expenditure subject to cuts in a fiscal crisis brought about by a downturned economy. Balancing the costs of government services with the needs of constituents is a constant challenge for public sector entities. As tax revenues fall and demands for services rise, human resources managers need to increase efforts to sharpen their workforce planning skills.
Most organizations will first implement a hiring freeze and/or a wage freeze. Next steps are usually more severe, such as a reduction in force (RIF). Because most jurisdictions take such actions in a crisis, they often move without the benefit of careful planning. Even when the situation is dire, there are approaches that can yield results that support the jurisdiction’s service mission and its long-term viability.
Key steps to success:
In this financial climate, with state and local governments looking for ways to reduce expenses, marrying a workforce management plan to service delivery needs is key to meeting fiscal and constituent demands. A smart and nimble process can position jurisdictions to maintain key services and improve their long-term financial viability. Identifying the goals of the program, creating proper incentives, and determining what programs and services are critical to the government will provide the foundation for success. Communicating the goals of the program to agency directors, human resource staff, employees, and the public will build goodwill.
Times of fiscal stress require governments to examine the cost and effectiveness of all elements of total rewards, including direct compensation and benefits, to balance recruitment and retention with affordability. Governments spend as much as 75 percent of their general fund budgets on people, and benefit costs alone can comprise one-third of that. Data has shown that benefits are the fastest growing cost relative to pay.
While the initial response to a fiscal crisis is to reduce the workforce, re-balancing the total rewards package is an important strategic component to retain the talent needed to ensure continuity, prepare for better fiscal conditions and still accomplish cost savings in difficult times. Below are Total Rewards Steps to Success:
In this fiscal crisis, it is important not only to contain costs, but to use available resources wisely to maintain a total rewards package that supports recruitment, retention and the ability to meet service standards.
What Happens When Times Get Tough?
Falling budget revenue usually means staff reduction through attrition and possibly even layoffs, which reduces health plan costs by reducing the population. But tough economic times can also trigger higher program costs through:
Leveraging Health Benefit Plans During Turbulent Times
You can be proactive in analyzing the impact of workforce changes and take steps early to manage your health programs through the crisis.
When employer funding is limited, many employers have shifted overall costs to employees—often generating negative employee reaction. One positive strategy is to institute a "voluntary benefit" plan that gives employees access to benefits that they need and can select instead of those that are less important to them. Although they are made available through the workplace, voluntary benefits are funded by employees. Participation is strictly optional and ideally is coordinated with traditional benefit offerings.
The most efficient way to offer voluntary benefits is through a cafeteria-style program under which employees can elect both employer-provided benefits and voluntary benefits. If performed during the typical open enrollment process, this creates a seamless, integrated approach that encourages people to think about their needs and make optimal selections.
Voluntary benefit programs need to be strategically deployed to fill gaps in the employer's offerings. The benefits should be carefully chosen to help employees address their personal, legal, financial and security needs. A properly packaged and delivered voluntary benefit program will significantly enhance the perceived (and actual) value of the employer-provided benefits and will help employees more fully engage in their work.
One reason voluntary benefit programs perform so well in difficult times is that they work in concert with employer-provided benefits to improve employee security. Take the case of one organization that was faced with increasing dental program costs. Employees were, to say the least, upset when the organization reduced its dental benefits to meet its budget. However, the introduction of a voluntary dental plan buy-up with limited underwriting and access to a superior network of providers that charged more modest fee levels allowed employees to fill the gap and save money when they obtained care at participating dentists.
For voluntary benefits to succeed, employees first need to understand the relationship between their core benefits and their individual needs. This can be accomplished as part of an effective marketing and enrollment campaign that also focuses on the advantages that a voluntary program offers employees. These include favorable underwriting, dedicated service centers and plan designs that complement current employer offerings.
Public sector employers that devote resources to the design, underwriting, administration and pricing of voluntary benefits will benefit by offering their employees a valuable service that can help them survive these difficult times.
Because of the current economic downturn, governments across the country are looking for ways to finance competing needs and implement spending cuts to balance their budgets. One of those competing needs is funding their retirement plans. Shrinking investment returns have thrust the funding of public pension plans into the spotlight. Not a day goes by without the national media reporting on how states and localities are rethinking how they approach their benefits, especially their retirement programs.
For more than two decades, nearly 65 percent of the funds available to pay pension benefits accrued from investment returns, but market devaluation has caused defined benefit plan assets to decline 25 to 40 percent over the past year. Knowing that pension obligations and the investment horizon for financing them are both long-term, public-sector finance professionals and benefits plan sponsors should consider any number or combination of the following actions to ensure they can meet their pension promises:
Simply waiting for the markets to recover is not enough to position defined benefits plans to maintain sound funding. Being open to new approaches as well as staying agile and flexible will increase the likelihood of a positive outcome. Understanding the interplay of all aspects of the system and alternative plan designs is the best way to build a platform of knowledge from which to manage through fiscal stress.
Segal collected responses from state and local governments about recent workforce management practices through our Managing Through Fiscal Stress online survey.