Contain Personnel Costs
Personnel cost are the largest component of most governments’ budgets. Further, personnel costs are, in economic theory, considered variable costs. However, the reality is that personnel costs in public-sector organizations can be very difficult to reduce. Collective bargaining agreements, political pressure, and local and state laws can all make it difficult to change the personnel system. This section presents methods to address personnel costs from various angles including headcount, wages, and benefits.
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Develop a Workforce Plan & Compensation Plan
A workforce plan defines the positions and skills you need in your employees to meet the organization’s objectives and get the work done. A workforce plan helps you focus limited training dollars and better define the personnel skills you are willing to pay for and why. For example, which certifications does staff really need and is the government willing to pay extra for them? What positions are necessary to deliver a program? A workforce plan could lead to a comprehensive examination of job descriptions to find out if the duties performed are still relevant to the organization’s objectives and if the compensation structure is appropriate. In addition, the HR strategy can be used to determine positions likely to become vacant in the near future and how those positions can be shaped during attrition to better serve the organization. Anticipated leadership and specialized knowledge shortages can be headed off or mitigated through succession planning as a part of the HR strategy.
A workforce plan might also reference specific policy guidelines that serve as a basis for determining hiring levels. For example, some school districts set up support staffing standards to specify what personnel can be hired. Hiring levels might be based on factors such as number of schools in a district, the size of an individual school in square feet, or a school’s enrollment.
A natural complement to a workforce plan is a compensation plan. The plan should include total compensation (wages plus benefits), be updated regularly, and be based on market comparisons. Use the plan to determine the reasonableness and competitiveness of the compensation structure. Also, use the plan to create pay ranges, including the maximum that will be paid for each position. Evaluate the underlying philosophy attached to the compensation plan and determine its appropriateness for the current and foreseeable conditions facing the organization.
Reduce/Contain Health-Care Costs
Employee health-care costs occupy a significant part of a government’s operating budget and are an important part of employee compensation, so they impact recruitment and retention. Health-care costs are growing much faster than general inflation and government general revenues, making strategies to contain the costs a vital part of almost any effort to recover from financial distress. Health-care cost containment measures could include joining up with other governments to reduce costs, establishing individual health management programs (e.g., wellness programs), and cost-sharing with employees. Read GFOA’s Best Practice “Health Care Cost Containment” to learn more about these and other health-care cost containment strategies.
Although it is far from a guaranteed win, outsourcing is often seen as a way to reduce personnel costs by substituting (presumably lower cost) private contractors for public employees. There are a number of conditions that, when present, support a successful outsourcing arrangement.
- The service to be contracted must be carefully specified in advance and performance able to be evaluated after the fact. This will make competition more likely.
- The government should understand how the production process of the service creates public value. The government should know how citizens benefit so it can make sure the contractor delivers similar value or so at least the government can make a conscious choice to forgo that value.
- Government must have a complete understanding of current cost structure in order to know if economic benefits really are available. Critically, the government must understand “avoidable” costs – the costs that will be eliminated with the hiring of a private contractor. Many forms of overhead are not avoidable; for example, it may not be possible to downscale the facilities where public employees used to work or cut the costs of support services like payroll.
- Disappointing contractors are able to be readily replaced (or penalized). This maintains some competitive pressure even after the contract has been signed. While this doesn’t necessarily mean that contracts must always have easy termination clauses for governments, it does mean that the market must maintain a viable pool of competitors and the winning firm must not be able to build up competitive barriers to the point where they become very difficult to replace for practical reasons. If fire service is contracted out and the contractor owns the fire station, for example, it may be very difficult to realistically replace the contractor.
- Government cares more about the ends or results of the service than the means used to provide it. This allows private firms to better use their inherent advantages such as less constrained labor practices, richer array of personnel incentives and penalties, a more precise allocation of responsibility within the firm, and scale.
Replacing labor with technology is often viewed as a way to reduce personnel costs. While the potential for success exists, it is often not realized. Perhaps the biggest culprit behind unrealized returns on technology investments is insufficient IT governance. IT governance is a system for identifying the potential investments with the biggest return, making a strong case for the investment with critical mass of authorities in the organization, and assigning the proper accountabilities to seeing that the return is realized. Under a good IT governance system, it is clear when a technology investment is intended to reduce labor costs, the magnitude of the anticipated reduction, and where and how the reduction will be realized. See the GFOA publication IT Budgeting and Decision Making: Maximizing Your Government's Technology Investments for more information.
Improve Salary and Wage Budgeting
Since salaries make up the greatest portion of the expenditure budget, it is important to both better predict and control personnel costs. Better forecasting techniques can provide a true picture of where payroll dollars are headed. Better mechanisms to manage headcount and hours worked can help control costs. Best Resources:
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