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Category 1 – Internal, Political

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Governance
Poor Morale and Commitment
Excessive Personnel Costs
Overexpansion
Past Awards of Unsustainable Retirement Benefits  
 

 

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Governance

Governance encompasses the board, management, and approved policies and procedures. Strong governance is needed to confront difficult facts, encourage innovative solutions and adaptive behavior, and hold the organization accountable for the changes needed.

The treatments for improving governance vary widely and can be complex to use. Therefore, if you sense that governance is an important cause of distress, you should consider a detailed diagnostic of your governance situation as your first “treatment” so that you can pick the best follow-up treatments.

Treatments:
  • Strategic planning. A strategic plan can be used to develop priorities for the organization. Priorities provide a focal point for board discussions and give staff clear direction. Even a detailed discussion of mission and vision statements can focus discussion on the primary purposes of the agency and allow other issues to be determined consistently thereafter. If developed collaboratively with a wide range of stakeholders, the plan also helps the organization resist special interests that may push for decisions that are not in the community’s best interest. Best Resources:
  • Financial policies. Financial policies define the standards of stewardship over financial resources and clarify the board’s strategic intent for financial management. Get your governing board involved in designing, approving, and confirming compliance with the policies. Also, make policies a part of your long-term planning processes by using the policies as a framework to guide strategy development. Best Resources:
  • Teambuilding. Teambuilding can take place with elected boards, executive staff, or both. Team building may be appropriate if: 1) there is a lack of agreed-upon goals or priorities; 2) roles, responsibilities, or the allocation of work is not clear; 3) group processes such as norms, decision making, and communications are ill-defined or not working; and/or 4) relationships between group members are dysfunctional. Best Resources:
  • Team-based management. A team approach to management is often more productive than a strict bureaucratic approach. Good management teams have open and frequent communications; operate with a clear sense of purpose and goals, trust, and respect among members; do not function based on hierarchical authority; and operate in an environment where members feel free to disagree with other team members. Best Resources:
  • Leadership training. Organizations with good leaders throughout the organization are able to solve problems quickly and recover from mistakes fast. Internal communications are smoother and external communications are more frequent and meaningful. Fortunately, leadership is a skill that can be learned. Formal training and mentorship programs can be used to develop leadership skills. Best Resources:
  • Scorecards and dashboards. Scorecards and dashboards summarize the key indicators of greatest interest to decision makers. They can be used to center board attention on strategic issues. They can also demonstrate that routine services are operating within established parameters and focus attention on routine operations only when they are outside of parameters. Scorecards and dashboards are especially effective when combined with benchmarks that compare performance against external standards Best Resources:
  • Reorganizing. Reorganizing is often looked to as a response to financial challenges. However, moving boxes around on an organizational chart will often not fix underlying problems with lack of goal clarify, ill-defined group processes, or dysfunctional personal relations. A reorganization should be guided by a strategic plan – what is the best organization to achieve our goals? Best Resource:

Excessive Personnel Costs

Labor costs comprise a high proportion of most local governments’ budgets. Excessive compensation costs can severely damage a government’s financial position. Union agreements are often blamed for reducing flexibility or creating compensation plans that are unsustainable. However, excessive personnel costs can have many causes. For example, perhaps the compensation structure is not attracting enough high quality workers, resulting in more people or overtime needed to complete the work. Inefficient processes or communications might require more human resources than would otherwise be necessary.

Treatments for excessive personnel costs might involve better planning and control for human resources to make sure that only needed positions are hired and at appropriate level of compensation. It could also involve reducing the government’s total cost structure by reducing or streamlining the services provided. Finally, it may be important to control compensation through management of health-care costs or more effective collective bargaining.


Treatments:

  • Develop a workforce and compensation plan. A workforce plan describes the positions and employee skills needed to meet the organization’s objectives. A plan helps focus limited training dollars and better define the personnel skills the government is willing to pay for and why. For example, which certifications do employees really need and is the government willing to pay more for them? Are alternatives to traditional training available, such as online courses, partnership with other agencies, or correspondence work? A compensation 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 and establish maximum compensation for each position.
  • Benchmarking. Benchmarks can be used to measure employee headcount against reasonable standards such as population for cities or numbers of students for schools. The results can then be compared to other jurisdictions as well as historical trends. Benchmarks can also be created for specific departments or functions. For example, some school districts set up support staffing sheets to specify the personnel that can be hired. Hiring levels might be based on such factors as number of schools in a district, the size of an individual school in square feet, or a school’s enrollment.
  • Reduce/contain health-care costs. For most of the past twenty years, health-care inflation has been extremely high, growing much faster than general inflation and government general revenues. As a result, health-care costs currently occupy a significant part of a government’s operating budget and strategies to contain them are a vital part of almost any effort to recover from financial distress. Best Resources:

Past Awards of Unsustainable Retirement Benefits

Contributed by Girard Miller


The most common problem underlying post-employment benefit funding challenges today is the legacy of past benefits promises that were never sustainable in the first place.


Treatment:

The first step is to fully understand the plan’s long-term costs. Many pension plans use actuarial smoothing and other techniques to avoid erratic changes in employer contribution rates. However, that practice tends to disguise the actual long-term costs. Only when the employer knows what the long-term costs will be can management begin to plan for proper funding.

The second step is to develop a labor relations strategy. Not only should the management team outline the desired plan design changes, but the labor strategy should address how those will be achieved in the context of collective bargaining and dispute resolution that may include binding arbitration in some states. Knowing that some management proposals may be rejected outright or bargained away for other labor concessions, the retirement benefits strategy should have an end-game focus.

To achieve long-term sustainability, there are three fundamental paths, and usually all three should be pursued:

  • Employees should bear a greater share of costs including mandatory payroll contributions to pre-fund their pension and OPEB benefits
  • Employees should share more retirement medical costs
  • Overall plan design, eligibility, and vesting should be reformed.


Many public employers pay 200 to 500 percent of the share of funding borne by employees. In a crisis situation, this must change. In fact, an increase in employee pension contribution rates, or first-time imposition of OPEB contributions, is the most immediate action a public employer can take to relieve its budgetary costs. Usually, however, this will have to be phased in incrementally in light of salary freezes and other hard-dollar concessions by employees and their unions.

To achieve both immediate and long-term cost reductions, employers can increase co-pays, deductibles, and other non-reimbursable expenses in their benefits plans for both active and retired employees. Such moves are morale-busters, but in situations of financial triage, they may be the only choice. In some states, the only way to reduce retiree benefits is to reduce benefits for active employees first or simultaneously. When such actions are taken unilaterally, it is especially important to first verify that local labor market conditions are such that the result will not be the loss of key talent to competing employers. Most public employees place high value on their benefits, especially medical insurance.

Finally, plan design should be addressed. In most states, constitutional or statutory protections make it virtually impossible to reduce vested benefits, so most plan design changes are prospective only. It should be determined whether benefits changes will apply only to new employees, or may also apply prospectively to some or all incumbent employees (perhaps depending on whether they are already vested).

Options to consider include:

  • Raising the retirement age to the Social Security normal age of 67 for employees born after 1960, and to 66 for older workers
  • Require an actuarial reduction for early retirement
  • Increase vesting requirements, especially for full retiree medical benefits
  • Reduce the pension multiplier for new employees if it now exceeds 2.5 percent
  • Eliminate or reduce dependent benefits for retiree medical plans, or require actuarial reductions for dependent coverage similar to pensions
  • Freeze the dollar benefit level on OPEB plans
  • Require a full 30-year career for civilians and 25 years for safety workers, with pro-rated benefits for earlier service.


Finally, it should be noted that unfunded OPEB plans must eventually be funded fully at their ARC level. See Failure to Fund & Manage Retirement Benefits Prudently for that discussion.

How such changes should affect current retirees, incumbent employees, and new hires inherently differs from one jurisdiction to another. Some state laws prohibit certain employers from reducing benefits for retirees, and many employers perceive a moral obligation to avoid cutbacks for retirees. Most employers are reluctant to reduce benefits for existing employees, especially older workers, even for retiree medical benefits that may not be legally protected. Although legal restrictions on prospective benefits changes are far less common, there could be political reluctance to impose changes on existing employees at all. Policymakers should be educated to understand the inherent cost of failure to address contributions by, or future earning accruals, of incumbent employees. Further, policymakers should be warned against the dangers of temporary reductions in employer contributions as means to relieve financial pressure.

You can read more about retirement plan design in the first article below and about trends in how local governments are acting to contain post-retirement health costs in the second.

Poor Morale and Commitment 

Contributed by James Garnett

 

During threatened or actual retrenchment, strong employee morale and commitment are most needed but are typically at their lowest.

  • Being left out of the loop by management creates employee anxiety and loss of morale.
  • In the absence of effective communication, rumor mills fill the gap and excessive attention gets devoted to conveying or rebutting these rumors.

Treatments:

  • Level with employees about the nature and extent of fiscal stress.  Withholding or soft-peddling bad news is typically counterproductive. Research and experience show that uncertainty is usually harder to take than certain knowledge of a bad future event. Employees who are not informed tend to spend too much time and effort imagining worst case scenarios and spreading rumors about them.  
  • Help employees understand the implications of acting or not acting.  Employees who understand the full picture and the stakes involved are more likely to support managerial actions—and are in a better position to contribute ideas and solutions.
  • Open communication among departments, central administration (including the finance officer), and staff is critical for making sure cost control is taken seriously and for cost-saving innovations to be openly discussed and take hold once initiated.
  • Supply supervisors and others with enough information so they can be credible sources. This helps supervisor and staff morale and diminishes the likelihood of destructive rumors.
  • Avoid even the appearance of inequitable communications and treatment amongst staff and departments. Recognizing that most employees can accept the uglier side of retrenchment if treated with dignity and respect will make the process more palatable. If a specific service area is to be reduced more than another, be clear about the reason, especially as it reflects the organization’s priorities and legal mandates.

Overexpansion

Growth of public services is often inherently attractive, but when undertaken without a compelling purpose it can create financial distress later. Expanding programs is particularly dangerous when not supported by an ongoing revenue stream or strong public demand. Overexpansion can also stretch staff resources and distract managerial attention.

Treatment involves putting policies and systems in place to make sure overexpansion does not occur in the future, and developing a means to understand and evaluate the current portfolio of services.


Treatments:

  • One-time revenue policy. Develop a financial policy to direct non-recurring revenues (including unusual spikes in recurring sources) to non-recurring uses, not to fund ongoing programs. Develop the systems and capacities to recognize those factors influencing recurring revenues to exhibit unusual increases (i.e., spikes in property values, or sudden transfers of significant populations such as occurs when leadership at a major employer changes). Funds from the American Recovery and Reinvestment Act are a good example of one-time revenues that could ultimately harm the financial position of local governments if used to acquire assets that are beyond the ability of government to operate and maintain. Best Resources:
  • Long-term forecasting. Good long-term forecasting, including scenario analysis, shows the long-term impact of budget decisions made today. Long-term forecasting can therefore highlight where new programs may be financially unsustainable. Clearly articulate the underlying assumptions supporting revenue and expenditure forecasts so that as the information influencing these assumptions changes, the forecasts can be evaluated promptly.
  • Develop a program inventory and program review. A program inventory lists all the programs provided, their direct and indirect costs, and, ideally, provides measures of demand for the service provided as well as measures of results provided. The program inventory makes clear the breadth of services provided and enables better discussion about the services government should be providing. 
    • A program inventory could be expanded to a full program review where the programs are subject to a “test” to see if they should be reformed, transferred to another organization, over even discontinued. Tests might address areas like strategic relevance, options for off-setting revenues, or alternative service delivery options. 
    • A program budget shares some features with a program inventory, but may not include the level of discussion formally outlined in a program inventory or review. It defines the budget allocations by program but does not imply that reductions or additions can be made solely along programmatic lines, rather how the existing resources are allocated amongst activities and services provided. Best Resources:
  • Design a “release valve” for political pressure. In some environments, political pressure for spending on favored political projects or constituencies can be very powerful. As a first step, consider involving citizens in the budgeting and capital planning process – perhaps through a blue-ribbon panel to examine spending priorities. Clearly stated and well publicized goal setting will allow the board to defer to the adopted goals when faced with unrealistic political pressure to fund items not in line with the goals. Next, consider a mechanism to accommodate that pressure without creating structural imbalances. For example, providing the board the ability to make one-year micro-grants to community groups for innovative projects that align with the government’s strategic priorities allows the board to engage these groups in government without creating new, institutionalized programs.

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