The Pain of Cutting Payroll
Whacked by budget deficits and with no end to sluggish economies in sight, states, cities and counties have been forced to make the hardest cuts...
Whacked by budget deficits and with no end to sluggish economies in sight, states, cities and counties have been forced to make the hardest cuts of all -- workforce reductions. In most cases, there's no other place left to cut. Personnel expenses are the largest single allocation in most government budgets. Salaries and benefits account for 25 percent or more of state expenditures and often comprise an even greater share of budgets for counties, municipalities, and smaller units of government. More and more, the personnel side becomes an inevitable target.
But at the same time as governments are reducing their forces, they are facing greater demand for services. And that leaves major questions about how to trim staff costs while limiting the negative impact that goes along with those reductions. What makes the most sense? Layoffs? Pay cuts? Furloughs?
For simplicity, it's hard to beat across-the-board pay cuts. Nevada, a state hard-hit by the economic downturn, looked into furloughs and unpaid leave but, says Daniel Burns, communications director for Governor Jim Gibbons, "the simplest method to save millions of dollars was a 6 percent pay cut for everyone." Layoffs or furloughs, he says, require complex schedule coordination and take time to implement. Burns says Nevada's pay cut, which is awaiting legislative approval, could save the state from laying off as many as 10,000 workers.
There are, however, inherent complications with pay cuts, most notably the effect on retirement benefits and other calculations related to base rate of pay. Although Burns insists that those effects are minimal and can be reversed when the economy recovers, many managers and employees in other states are reluctant to risk such long-term difficulties for the sake of short-term savings.
That's one reason furloughs are now seen by many as the preferred alternative. Like pay cuts, they soften the blow by spreading the pain broadly and thinly, but unlike pay cuts, furloughs reduce work rather than base pay. That's not their only advantage. In California, where thousands of state employees have been furloughing a day or two a month, using that tool rather than layoffs allows the state to access savings faster. "The layoff process takes more time," says Lynelle Jolley, spokesperson for California's Department of Personnel Administration. The state has a 125-day period to calculate seniority, map demotional patterns for employees and give them proper notice. "It's a very long and torturous process," Jolley says. "Very demoralizing to the workforce and very destructive to productivity."
There's also "survivor syndrome" -- the combination of guilt and low morale that hits workplaces after colleagues have been laid off. "For the people who still have jobs," says Leslie Scott of the National Association of State Personnel Executives, "there's still the same amount of work, and sometimes they can't handle it."
Of course, morale is not exactly sky high among furloughed workforces either, but "if they know they are pulling together to accomplish short-term cost savings to get through a crisis," says Sam Wilkins, director of South Carolina's Office of Human Resources, "they are willing to pitch in, to do what they need to do to keep their job or see that their co-workers don't lose theirs." During the 2001 downturn, South Carolina achieved one-fifth of its $9.4 million savings from unpaid leave via a voluntary approach. Furloughs, adds Wilkins, also mean the state won't lose those savings to turnover and rehiring down the road, as both are costly in terms of time and money.
Not everyone sees furloughs as the best answer. John Sullivan, a professor of management at San Francisco State University, argues that unpaid leave and other across-the-board maneuvers are detrimental to maintaining a high level of operational performance and don't forestall layoffs in the long run. To get through these difficult times, Sullivan argues, governments should target unnecessary programs and less-productive workers for cuts. "The ultimate answer isn't layoffs," he says. "It is getting rid of bottom performers."
Sullivan urges all employers, especially governments, to restructure their workforces with a greater number of contingency employees. More part-time and contract workers would enable quicker contraction or expansion of workforces as budgets fluctuate with every major bump in the business cycle.
Another argument against furloughs is that employers are still on the hook for the bulk of office expenses and equipment costs, as well as employee benefits, which can total as much as 40 percent of salaries.
Then there's the fact that not every agency can be furloughed. Officials in El Dorado County, California, are considering a broad-based furlough program they hope will save over $450,000. But they almost certainly won't get that much. The county has to exclude people who provide essential services -- such as the sheriff and jail personnel. "Once you take out all of that," says Deborah Kal, the county's senior personnel analyst, "you are down to $68,000." That explains in part why the county has laid off more than 150 staff in recent months -- even as it weighs its program of furloughs.
In Virginia, managers avoid across-the-board approaches with a workforce plan that includes a variety of detailed individual and programmatic performance measures. In times of stress, Virginia doesn't simply reduce positions; it seeks to leverage layoff situations to reorganize state agencies and shift workflows. "You can't deliver the same services with so many fewer people," says Sara Wilson, who heads Virginia's Department of Human Resource Management. "You have to reengineer the job and manage expectations."
But there is one undeniable advantage that furloughs have over other options: They don't add anything to the overall unemployment problem or to the financial burden of unemployment benefits. "In this environment," says C.R. McLeod, communications director of New Castle County, Delaware, "the last thing you want to be doing is adding to your unemployment numbers."