The Lure of the Layoff

There are plenty of costly mistakes to make when you try to balance a budget through personnel freezes, cuts or early retirements.
by | January 1, 2009
 

A few weeks back, we came across an article in the Buffalo News that pointed out that there had been 31,000 hires in New York State since July. This was a bit startling, since July was the month when the governor announced a hiring freeze. True, a fair number of the new employees were in the university system, which wasn't included in the freeze. But it was a reminder that, when it comes to cutting personnel to help balance budgets, things may not work out as planned.

Prospects of hiring freezes, early retirements and other personnel machinations are on the radar screen for many cities and states. Albuquerque, Chicago and Louisville just begin the list of cities that are engaged in laying off workers. And unless there's some miraculous cure to their fiscal woes, it's likely that these means of balancing budgets will be on the front page for months to come. No doubt, cutting workforces often can be the only alternative for governments that are drowning in red ink. But the landmines that stand in the way of their effective use are many.

Without careful planning of hiring freezes, positions can be vacated even though they are vital to basic services. And that leads right back to hiring. "There are positions you simply have to refill, regardless of the state of your budget," says Randall Bauer, former chief budget officer for Iowa. By way of example he notes that one of Iowa's two resource centers for long-term care for the disabled is seriously understaffed and under constant scrutiny by the feds. When positions in those centers open, hiring freeze or not, they must be filled.

Another issue with hiring freezes is that they often result in departments laying off current employees and replacing them with contractors. The city or state may wind up paying more for the contractor than for the original employee. That's not only costly but also may be shortsighted. In the current economy, there are squadrons of highly skilled workers who are only too happy to take a job with government at bargain rates. "It's a buyer's market at the moment," Bauer says, "and a hiring freeze prevents you from buying."

The complications don't end there. Some employees, such as tax collectors, more than pay for themselves. Others may be fully or substantially funded by somebody else - for example, county public health positions that draw down state or federal funding.

When governments need to go even further than hiring freezes, they may use outright layoffs. Unfortunately, in many governments, layoffs are based on seniority, with last in/first out being the rule. But, "oftentimes, new, young employees bring more energy, better skills and less allegiance to the status quo than their older, longer-term colleagues and receive lower pay," says John Cape, former budget director of New York State. "Eliminating these employees comes at a very high long-term cost to many organizations."

What about early retirements? Certainly, they can be a useful tool, and can make sense if higher-paid, long-term employees are ultimately replaced with younger, cheaper workers. But that's not necessarily the case. According to the American Federation of State, County and Municipal Employees, early retirement programs do not save money if all vacant positions are filled right away. The way the math works, public employers generally save money only when the vacated positions stay open for a year or two or more. Moreover, some of the employees who take early retirement incentives were likely to retire soon anyway.

There has been a series of fiscal disasters related to badly planned early retirements. One of the most notorious was the effort in Illinois about six years ago. More than twice the anticipated number of workers took advantage of the offer - about 11,000 in all. The program wound up costing the state some $2.2 billion and left holes in the workforce that needed to be refilled immediately.

How to avoid this litany of potential problems? Sadly, the answer, while accurate, is almost a cliché: Start with a plan. This doesn't mean assembling a blue-ribbon commission that takes months to appoint. There's often no time for that. It simply means that government managers take a long-term view and consider the ramifications of whatever decisions they make. As Cape says, "If we make short-sighted mistakes now, we'll be forced by the result to make more later. And that leads to damage to government that we simply can't afford."

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