Managing Through Fiscal Stress

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:

  1. Identify the fiscal and workforce goals. Know the amount of desired saving and if it is one-time or recurring. Factoring in collective bargaining agreements and personnel policies, work with the heads of departments or agencies to determine if the reduction will be across-the-board or targeted to specific job classifications.
  2. Determine what approach to use. Recurring savings require a rethinking of workforce focus and a revised approach to service delivery. Programmatic savings that result in a loss of inter-governmental revenue are counter-productive. Spending time on both immediate and projected future service demands and mandates can shape the approach to workforce reductions — either voluntary or involuntary — as best determined by an immediate but targeted review.
  3. Offer incentives. Whatever the approach, be it a reduction in work-hours or a voluntary or involuntary reduction in force, the design of the program can enhance its results. For example, a transition package that includes a limited extension of paid health care, education benefits and/or other bridge benefits can be the deciding factor for many employees and good public policy. Controlled expenditures to incent the desired behavior can improve the immediate and long-term outcome of the program and its financial impact.
  4. Create communication and outreach programs. Tell your workforce the why and how of the program. Outreach maximizes the transparency of the process. Communications can include face-to-face meetings and information sessions, websites, call centers, newsletters, workshops, e-mailboxes, frequently asked questions, and resource sheets. Government leaders should deliver the message, consistently reinforcing the greater goal of the program.
  5. Determine benchmarks and measure success. Establish financial, human resources, and employee relations benchmarks up front and evaluate the process once it is completed.

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:

  • Control Recurring Personnel Cost Increases. If you have a step pay plan, consider freezing step movement until the fiscal crisis has abated. If you have a performance-based rewards approach, consider giving bonuses in lieu of recurring base pay increases.
  • Evaluate Optional Work Schedules. From a direct compensation perspective, review how work scheduling impacts costs. Are you incurring overtime and shift differential costs for work that can occur during the regular workday? Can you alter work schedules to avoid overtime? Are there process improvements that could increase productivity with current or reduced staffing levels?
  • Assess Skill Requirements. From a job classification perspective, evaluate the skills required to deliver services. Conduct a skills inventory to make sure your workforce maintains the skills for which you are paying. Are you compensating employees properly for the work performed? Has there been "creep" in the classification system that has increased personnel costs?
  • Balance Staff Reductions with Benefit Changes. Consider the cost savings and service implications of reducing staff versus the savings associated with shifting some benefit costs to the workforce.
  • Know What Benefits Employees Value. Ask employees what matters most to them, and design compensation and benefit packages around those preferences.
  • Communicate Change. Explain any changes and program goals to all stakeholders, including policymakers, employees and citizens.

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:

  • Increased enrollment of dependents as spouses lose jobs and benefit coverage
  • Attempted enrollment of "dependents" who do not meet the definition of a dependent (to avoid coverage loss or expensive COBRA premiums)
  • COBRA coverage increases as laid-off workers fail to find other work with health benefits
  • Delayed retirement as those eligible for retirement reconsider their ability to pay for health coverage after they leave
  • Increased likelihood of stress-related diseases and mental health claims
  • Acceleration of claims for covered voluntary procedures that might have been delayed in normal times (elective surgery or major dental work)
  • Postponement of preventive services that help to keep down long-term costs

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.

  • Review your cost-sharing strategy. Does the design promote and encourage preventive care and discourage unneeded care?
  • Conduct an eligibility audit. Hold costs down by ensuring that the plan is covering only eligible participants and dependents.
  • Improve case management and health coaching services. Help participants stay on appropriate therapies now that will help them avoid future health complications with greater plan costs.
  • Redesign and enhance wellness programs. Even if they cost a bit more now, they will help hold plan costs down in the long-term.
  • Project the benefit cost effect of workforce reductions. If layoffs or staff reductions are being planned, assess the likelihood of both reductions and increases in short-term costs.
  • Redesign your health benefits. Identify benefit features that can be reduced or restructured without eliminating key coverage areas.
  • Manage your contractors and providers. Review your contracted insurers and health plan networks to assess their financial and operational stability.
  • Capture the new temporary COBRA subsidy. Take the federal subsidy into account when dealing with involuntary terminations and layoffs.

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:

  • Review all elements of the current benefit plan. Does the design encourage a retirement strategy that supports the delivery of services? Should changes be made to eligibility, contributions or service requirements that will improve the funding status? Forecasting how design changes will impact funding requirements can help position a plan for recovery.
  • Assess the comprehensive cost of a plan redesign. Is an alternative plan design being considered? Have both the cost of the plan and the value of the benefits it would provide been adequately measured? A shift to a new design for the primary retirement plan, such as to a defined contribution plan, should measure all costs necessary to operate the new and legacy plans, as well as its ability to provide meaningful benefits.
  • Model assets and liabilities. Does the current investment strategy match the future liabilities and cash flow necessary to pay benefits? What are the possible outcomes and probabilities that different investment scenarios will have on future funding levels and ratios? Asset liability modeling can help answer these questions and determine a course of action.
  • Determine the impact of a reduced workforce. Has the plan assessed how workforce reductions, reduced work hour programs or early retirement incentives will affect contributions and overall funding? Estimating the full cost of these programs upfront will provide transparency when approximating their longer-term costs. 
  • Track asset value relationships. Has the plan reviewed its asset valuation method? What is the relationship between the current and projected actuarial value of assets and the market value of assets? Determining the spread between these measures will indicate how contributions may be affected, irrespective of the asset-smoothing period. 
  • Review actuarial assumptions. Are there actual results that are so significant that they should be recognized before the next scheduled experience study? Are there differences between expected experience in the near versus the longer-term? Making adjustments to a set of actuarial assumptions may be prudent in this rapidly shifting economy. 
  • Communicate with stakeholders. Has the plan communicated what actions it is taking to best manage through this downturn? Keep stakeholders – participants, beneficiaries, policymakers and taxpayers – informed about activities and why the plan is undertaking forecasting, modeling and reassessments. This will build a greater understanding of the recovery efforts.

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.

Managing Through Fiscal Stress Survey

Segal collected responses from state and local governments about recent workforce management practices through our Managing Through Fiscal Stress online survey.

Contact an Expert

Cathie Eitelberg

Cathie Eitelberg

SVP, National Public Sector Market Director