Employee Compensation & Benefits - Review of Options - April 2009

A comprehensive review of employee compensation and benefit levels was completed as part of the 2010/11 budget development.  This started with a brainstormed list of options, which was developed by a workgroup dedicated to this process, discussions at Labor Management Team meetings as well as through employee suggestions raised at Town Hall Sessions or through eCentral.  These options were categorized as follows:

1. Number of Positions
2. Salaries & Work Hours
3. Time Off Banks
4. Benefits Medical
5. Benefits Retirement
6. Benefits Retiree Health Care (VEBA)
7. Benefits Other
8. Miscellaneous

A review of potential benefits and things to consider are included for each category below.  This is followed by major data points and cost scenarios for a select group of options.

1.     Number of Positions

Due to personnel being 60% of the General Fund budget, and more with the inclusion of appropriations to NGF departments that support personnel, the majority of the budget balancing options need to either come from a reduced workforce (elimination of FTE) or a less expensive workforce (reduced pay and benefit levels).  The opportunities for position reductions are being developed throughout the entire 2010/11 Planning Process with the organization and were not considered for review in this initiative.

Relevant Data:

• Total County FTE as of January 2009 = 1413.19 FTE with 81 position vacancies (6% snapshot attrition factor)
• General Fund FTE with Current Vacancies = 650.9 FTE with 17 position vacancies (2.6% snapshot attrition factor; almost entirely in elected officials; some positions are in the hiring process)
• General Fund is comprised of 81% Union employees to 19% Non-Union

2.     Salaries & Work Hours 

Salary reductions or permanent changes to standard work hours are more advantageous as they lead to structural budget solutions.   These would also reduce the organizations' long-term liability for retirement, although there would be less funding going into the system and may lead to more retirements in the short-term as employees would want to maximize their pension benefits.  It is recommended that if salary reductions are to occur that the reduction be applied to all employees equally.  This would be seen as the fairest approach and would maintain the wage scale between various levels of the organization (i.e. no compression issues would result).  A wage-freeze is most advantageous as employees have yet to receive these increases and it results in a structural reduction from the budget projections. 

Supplemental wages through longevity and Pay for Performance need to also be considered.  Operating under this dual approach creates a set of challenges for employee morale and puts non union against union employees.  The PFP system is currently questioned as a viable benefit since it is subjectively determined at the end of every fiscal year.  A guaranteed performance benefit system may be feasible and more favorable, if applied consistently.  It is more desirable from a long-term fiscal stability perspective to make these non-structural in nature.

Statutory obligations exist which make changes to the standard work hours difficult to implement.  There would also be an inherent reduction in service resulting, or staff being put in a position of trying to do more with less.   No one size fits all approach will work for the 30+ varying business types the county provides.  Loss of revenue for the reduced work hours would need to be netted against any projected savings.

In either case of salary or work hour reductions, the impact to recruitment and retention should be taken into consideration.  Voluntary reductions or periodic days off should be viewed cautiously as they would not result in long-term structural savings in most cases.  However, many employees would find it easier to accept a pay reduction if it coincided with less required hours to work. 

Relevant Data:

• Total Projected 2009 Total County Costs
  • Salary = $73,077,322 (1% of salaries = $730,773)
  • Longevity = $2,035,530
  • Pay for Performance = $749,616 (based on 5% of salary for non union staff only)
• Total Projected 2009 General Fund
  • Salary = $36,164,729 (1% of salaries = $361,647)
  • Longevity = $1,040,016
  • Pay for Performance = $406,030 (based on 5% of salary for non union staff only)
• Average salary by bargaining unit (see attached)
• Step Increases for employees not at top of grade = analysis pending

Fiscal Scenarios:

• Estimated savings if freeze wages (see attached)
• Estimated savings if reduce pay up to total amount needed to balance budget (see attached)
• Estimated savings if reduce work hours (see attached)
• Estimated savings if holidays as non-paid  (see attached)

3.     Time Off Banks

This is an area that has limited short-term savings except for in departments with required overtime to backfill for time off.  However, it is a major consideration in the long-term liability that accrued time off creates.   Time off banks become direct cash payouts through two avenues:  1) upon termination (either voluntary or involuntary) from county and 2) if an employee accrues more than the maximum amount.  It is important to note that revisions can only impact future accruals for all active and new hires, but not current employee bank levels.   Making revisions in this area may have a lower impact on individual employees as they are less dependent on these banks than bi-weekly payroll for meeting living demands.  As stated above, changes will not result in significant short-term structural savings and modifications to these benefits may be viewed negatively if combined with other significant reductions in other areas.

Relevant Data:

• Current fiscal liability for time-off banks is $14 Million
• 2008 Severance Costs = $947,088
• Current policy with standard accrual for time-off banks, caps for maximum amount and payouts (see attached)
  

Fiscal Scenarios:

• None at this time

4.     Benefits Medical

Many considerations are needed when reviewing the countys medical benefits.  The county is self-insured resulting in a direct payment for all claims up to the stop loss.  There is at least a six month delay from the point of incurred liability to when payment is made by the county to Blue Cross Blue Shield.  Both of these issues are critical when projecting savings from modified benefit levels understanding the potential change in use of coverage and budgeting for the delay in savings.

There is a general agreement that the county offers a very good medical benefit to employees and their families.  Reducing the benefit level may be feasible with existing employees and still result in the county remaining a competitive employer when comparing with medical benefits offered in other organizations.  There is an impression that employees may view an increased co-pay at the time of service more favorably than a significant change in provider or service levels.   However, this does disproportionally impact individuals with a chronic health issue.  A mixed model of premium sharing and increased co-pays may be a conceivable option, however there is a risk with any premium sharing that there is an incentive being created for employees to use their medical coverage more liberally.  There is a general fear in complete elimination of benefits such as with family coverage, family dependant coverage and sponsored dependent coverage.  Cost sharing may be more acceptable, and would provide more equity for employees who do not utilize these benefits. 

Medical coverage is a very sensitive issue as people have grown to expect certain benefit levels and have made plans to cover anticipated costs.  Enough time for implementation is needed to allow individuals time to adjust their personal budgets and alter their Health Care Savings Accounts. 

Relevant Data:

• 5 year history of costs total, employer, employee, per employee (analysis pending)
• History of modifications (analysis pending)
• Overview of Community Blue PPO Options (see attached)
  

Fiscal Scenarios:

• Estimated savings if switch core PPO to CB 3 or 4 with Chiropractic doctor visit co-pay (see attached)
• Estimated savings if eliminate Family Continuation (see attached)
• Estimated savings if eliminate Sponsored Dependent (see attached)

5.     Benefits Retirement

The county Board of Commissioners approved a switch from a Defined Contribution plan to a Defined Benefit plan as part of the 2008 Union Contracts.  This results in all county employees outside of the Sheriffs Office being part of the Washtenaw County Employees Retirement System (WCERS).  The Sheriff employees are almost entirely in the MERS retirement system, although a significant liability remains for Sheriff retirees and a couple of active employees in the WCERS system. 

One significant consideration with adjusting benefit levels in a defined benefit system is that changes can only be implemented moving forward.  Each employee would realize the previous benefit levels for time worked prior to the implementation date of any change.  There is a general perception that the WCERS system offers a very good but comparable government defined benefit retirement benefit.   The county just significantly increased its long-term liability for retiree costs with the conversion into the WCERS system.  Moving back to a defined contribution does not appear to be a feasible option and would greatly impact morale and credibility; however a hybrid model with a reduced DB benefit coinciding with a small DC benefit may be a consideration to further pursue.  Implementing a similar revision to MERS would be deemed equitable, although comparables for Sheriff employees needs to be taken into consideration.

Modifications to the benefit level in WCERS either eligible age for retirement, calculation of Final Average Compensation (FAC) or reduced multiplier would reduce the countys long-term liability.  As the actuary makes long-term assumptions to determine the immediate required contribution levels, these savings would have an impact on the budget in the short-term as well.

A final consideration of incentivizing employees to retiree needs to be further explored.  There is a desire when a reduction in the number of county positions is being implemented to protect as many employees as is possible.  Many times it is thought that if someone retirees and cost savings can occur through the elimination of the position that there is a win-win situation.  This may be the case; however, the long-term cost of moving the employee into the retirement system needs to be evaluated.  Legal considerations must also be taken very sensitively as the county cannot ask anyone to retiree and positions with an employee eligible for retirement cannot be targeted.

Relevant Data:

• Various retirement plans (see attached)
• 713 current WCERS retirees = 713; 50 additional retirements in 2009 are estimated (analysis pending)
• WCERS 2009 actuary % contribution for employer = 8.57% (General) and 7.5% for employee contributions
• WCERS 2009 actuary $ contribution for employer = $6,879,782 (General & Sheriff)
• History of funds and contributions (see attached)

Fiscal Scenarios:

• Estimated contribution rates being developed by John L. Boyle

6.     Benefits Retiree Health Care

The county provides health care benefits for all retirees.  Historically the lifetime benefit is based on the health care plans in place at the time of the retirement for each individual employee.  This has been an industry standard although current economic times are starting to force organizations to evaluate retiree benefit levels as well.  As with retirement, the projected liability for the county is determined annually by an actuary.  Changes in benefit levels for retirees, active employees or new hires would all result in a reduced projected liability and therefore employee and/or employer contribution rate. 

As part of the 2008 union contracts, the county modified retiree health care benefits for new hires offering a reduced benefit level based on years of service.  In addition, the employees agreed to provide a contribution into the VEBA system for the 2010 fiscal year.  Further reductions for new hires or modifications to benefit levels for active employees and retirees should be considered as well.

Modifying long-term benefits may be more desirable for active employees than paying into the system, taking a pay cut or greatly reducing current medical coverage.  However, this is an extremely sensitive area for current retirees.  While any change is not desired by retirees, a small modification to prescription co-pays may save the county significant funding without creating a significant increase for retirees. 

Relevant Data:

• WCERS 2009 actuary % contribution for employer = 8.57% (General) and 7.5% for employee contributions
• WCERS 2009 actuary $ contribution for employer = $6,879,782 (General & Sheriff)
• History of funds and contributions   (see attached)

Fiscal Scenarios:

• Estimated contribution rates being developed by John L. Boyle

7.     Benefits Other  (Dental, Life Insurance, Long-Term Disability)

There are other county benefits provided that should be considered but have smaller potential cost savings.  The cost-benefit of these smaller items needs to be considered.  Life insurance and long-term disability are fundamental safeguard benefits for employees.  In many cases if the county did not provide these services then the individual would choose not to secure them on their own and it could lead to individual hardship.  It is a policy consideration as to if the county wants to put employees at risk in this area without realizing a significant cost savings.

Dental is a little different in that the current benefit level is that the employer pays for up to $750 annually.  This is a known maximum liability for each employee and may therefore be easier for employees to restructure their personal budgets to accommodate.  The county could also assist with this through creating quarterly open enrollment periods for Health Care Reimbursement Accounts.  Employees could then increase their contribution into the HCRA making this $750 (or up to this amount based on individual dental needs) tax free.

Relevant Data:

• 2008 Total Cost for Dental = $1,205,365 (total including employee and employer contributions)
• 2008 Total Cost for Life Insurance = $303,223 (total including employee and employer contributions)
• 2008 Total Cost for Long-term Disability = $269,843 (total including employee and employer contributions)

Fiscal Scenarios:

• None at this time

8.     Miscellaneous

Each of the options identified in this section are unique upon themselves and are rather minor from a cost perspective.  Some modifications would be relatively painless in comparison and may be symbolic changes  given the economic realities.  Having said that, making changes in this area may seem petty to some, although every dollar saved can be allocated towards savings jobs and services.

The potential biggest impact to the organization within this section is around professional development both internal and external.  The county made a very strategic and conscious decision to invest in county employees and provide a world class professional development program.  Reductions in this area are possible and may not have a significant organizational impact in the short-term.  However, the long-term implications including recruitment and retention should be weighed.  In addition, the county operates 30+ unique services which varying degree of need.

A revision of county settlement standards should be made as highlighted by the county auditor and due to the potential financial and legal risk such settlements create. 

There is currently an inequitable parking charge by which downtown Ann Arbor employees have to pay but employees located in other parts of the county do not.

Relevant Data:

• 2008 Total County Direct Cost for Settlement Agreements = $435,054 (with additional severance payments under policy)
• 2008 Net County Cost for Employee Parking = $295,291 (total cost of $377,645 with employee contribution of $82,354)
• 2008 Total County cost for Professional Development ~$300K, with decentralized expenses within department operating budgets

Fiscal Scenarios:

• None at this time