Labor &Management. Teaming Up to Solve Budget Challenges

Transcription

1 Labor &Management Teaming Up to Solve Budget Challenges By Jay M. Goldstone

2 The Great Recession has created a unique set of issues for each of our communities, but we ve all had to balance the negative impact this has had on our budgets with our ability to meet community expectations. The depth of this recession has been unprecedented in recent history, with revenues declining and benefit-related costs escalating so dramatically at the same time. And while we may be seeing a little light at the end of the recession tunnel, no one is predicting the kind of rapid turnaround we have seen during previous economic cycles. If this is the new reality for the foreseeable future, the question we are all asking ourselves is how do we balance our budgets and still meet our core missions? One way is by turning to the jurisdiction s workforce for concessions. approximately 875 fewer positions nearly 8 percent of the total workforce; 12.5 percent, if you look at just the general fund workforce. The city also stopped increasing salaries, eliminated certain benefits for employees hired after July 1, 2005, and established a second tier pension plan for most employees hired after July 1, Fortunately for San Diego, much of this was done while the local economy was still strong. City officials explored every option for controlling costs while preserving critical services. As a result, when the recession did hit, San Diego was probably better positioned than most other large cities, but it also had fewer easy options left to close the looming new deficit. After years of cuts, cost controls, and reorganizations, there were few places to turn without affecting services. BACKGROUND: SAN DIEGO The economic struggles this recession brought to San Diego, California, were nothing new to the city, which was already living beyond its means. Like many public agencies, in the late 1990s and early 2000s, San Diego was increasing wages and pension benefits as it attempted to compete with the private sector for talented employees. But unlike most other public agencies, San Diego s approach was to significantly underfund its pension system so it could provide services and programs the city couldn t afford without asking the community to pay more taxes. A number of articles have been written about how this combination of delivering services without having a means to pay for them finally caught up with the city. Beginning with the fiscal 2007 budget, San Diego began a long process to right-size its budget. Over the next few years, the city made its pension payments in full and rebuilt its reserve balances, and most of the organization went through business process reengineering to determine more cost-efficient ways of delivering services. San Diego reexamined its core versus non-core services, eliminated several programs, reduced others, asked employees to take on more responsibilities with fewer resources, and raised selective fees. By fiscal 2010, the city was a trimmer organization, with When the recession did hit, San Diego was probably better positioned than most other large cities, but there were few places to turn to close the looming new deficit without affecting services. In October 2009, the city released its fiscal five-year financial outlook. The picture was dire. The city projected a general fund budget deficit of about 16 percent in fiscal 2011 $179 million. This was in spite of having cut more than $150 million over the previous three fiscal years. Since total decimation of city services was not an option and raising revenues would have required voter approval, San Diego took a multifaceted approach to its budget problem, employing a combination of one-time solutions and permanent fixes and asking its employees to be a key part of the solution. Like most public agencies, a significant portion of San Diego s budget is driven by salary and wages as much as 70 percent to 80 percent for most departments. Given the severity of the projected deficits, the city turned to its workforce for concessions. Instead of offering no wage or benefit increases, this time, the city asked labor to give back a portion of the compensation it had previously negotiated. In anticipation of tough economic times, the city had negotiated its labor contracts to all expire at the same time, so every labor group would be at the negotiation table concurrently. Often, both labor and management want multiyear labor contracts. This typically creates more certainty for both sides and allows for future salary and benefits adjustments to be structured to meet the particular economic conditions at the December 2010 Government Finance Review 17

3 time. Having multiyear agreements also helps minimize the workload associated with negotiating the contracts, especially when a jurisdiction has multiple labor organizations. But there are times when the need for greater flexibility far outweighs the extra time and costs associated with negotiating four, five, or even ten separate labor agreements. As the City of Vallejo, California, has demonstrated, trying to unwind multiyear agreements can be extremely expensive and time consuming. San Diego took a cautious approach. As we started to see the city s revenues decline and the stock market plummet, we anticipated that the economic cycle was going to be unlike any we had experienced in the past. Therefore, we took the position that one-year labor agreements were in the city s best interest. This gave both sides more flexibility to maneuver through the economic storm. Since the duration and severity of the recession on city revenues and expenses was unknown, San Diego s approach allowed it to better control its costs, change course as necessary, and improve its financial planning. It probably also made it easier for the labor leaders to convince their members to accept labor contracts that did not include salary or benefit increases, since they knew these were only oneyear agreements. In the end, the strat- environment. egy of negotiating one-year agreements proved very beneficial to the city. BALANCING THE BUDGET As previously mentioned, San Diego took a multifaceted approach to developing a balanced budget. First, the city adopted its fiscal 2011 budget in December of 2009 and implemented most of the reductions by February The approximately $24.5 million the city saved in fiscal 2010 by implementing the reductions early was set aside in a separate account so it would be available to offset the fiscal 2011 deficit. The city also turned to a number of one-time solutions that preserved positions and services, accounting for nearly $72 million in additional savings. Approximately $32.5 million dollars came from actual service reductions, including substantial cuts to both the police and fire department budgets. For the first time in recent memory, the city not only How was the city able to obtain critical concessions from its labor organizations? The short answer is It wasn t easy, but it was done in a mostly cooperative reduced park and recreation programs, library hours, and numerous administrative positions, but it actually cut sworn police and fire positions from the budget. In the end, the city had cut another 539 positions, bringing the total number of positions eliminated from the budget to 1,414 since fiscal year The remaining $50 million in savings came from reducing every employee s compensation. LABOR CONCESSIONS So how was the city able to obtain critical concessions from its labor organizations? The short answer is It wasn t easy, but it was done in a mostly cooperative environment. When management sat down at the negotiating table, all of the city s cards were laid out in plain view. The city presented its five-year financial outlook and discussed the details behind the numbers. Of course, the press was reporting about every other city, large or small, going through the same budget crisis, which made it slightly easier for San Diego to convey its message to the unions. Headlines throughout the state and across the country were all the same, and no one thought the recovery from this recession was going to be quick or easy. Beyond the numbers, we talked to labor about the balanced approach the city was willing to take to close its budget gap. It was not all about layoffs. Since service levels had to be cut and some employees were going to lose their jobs, management felt strongly that labor had to be a key part of the solution. Our primary goals were to minimize possible service reductions as much as possible, minimize layoffs in such a tough economy, and, unlike in previous years, spread out any service cuts throughout the organization, including police and fire. Through this process, dollar targets were established regarding how much the city needed from each budget-balancing alternative. In the end, it was determined that a 6 percent concession from every employee was required. San Diego s labor negotiators then sat down individually with each group to lay out the city s strategy. Needless to say, this was not initially well received, but again, there was at least a recognition 18 Government Finance Review December 2010

4 that the city was facing a $179 million general fund deficit. One of the additional challenges the city faced was convincing labor that every employee must participate with the concessions, even if their position was funded with enterprise funds or some other non-general fund source. Once the discussion moved past the 6 percent target, the city decided to offer a menu of options in order to achieve the target. This menu varied from bargaining group to bargaining group, depending on the particular needs of each group. In addition, the city ultimately allowed some flexibility on an individual employee basis within the group. While most groups had to pick up a larger portion of their retirement costs, the balance of the 6 percent could come from other benefit reductions or salary reductions. NOT WITHOUT ITS CHALLENGES Of course, trying to apply something of this magnitude to every employee is never easy, especially when you are negotiating with five labor groups at once, each with unique needs. Reaching full agreement was no different in this case. In the end, the city did reach an agreement with three of its five labor groups and had to declare impasse with the other two. The next view. challenge for management was getting a majority of the city council to accept When management sat down at the negotiating table, all of the city s cards were laid out in plain the mayor s last, best, and final offer and to impose the last, best, and final offer on those two remaining groups. What worked in San Diego s favor was the fact that management s objectives were ultimately aligned with the objectives of the three groups that had already reached an agreement with the city. These groups were not willing to make the necessary concessions unless they applied to everyone. As such, clauses were built into the agreements of the three groups that would allow them out of the agreement if the city council did not impose at least the same terms on the two remaining groups. To convince all the groups that it was in everyone s best interest to reach an agreement with the city, San Diego s last, best, and final offer to the two remaining groups included reductions or concessions that were more severe and less flexible than those agreed to by the other three groups. Even with that, these two groups felt that they had enough influence with the city council to avoid the concessions and get a better offer. In the end, these two groups underestimated the resolve of the city, especially in light of the most favored nation clauses that were put into the three initial agreements and the impact that failing to reach to an agreement with the final two groups would have had the city would have been forced to further cut critical services. December 2010 Government Finance Review 19

5 Government Finance Officers Association Beyond the numbers, we talked to labor about GFOA BUDGETING SERIES VOLUME Putting Recommended Budget Practices into Action Government Finance Officers Association Capital Project Planning and Evaluation Expanding the Role of the Finance Officer JOSEPH P. CASEY AND MICHAEL J. MUCHA, EDITORS VOLUME A Budgeting Series Book the balanced approach the city was willing to take to close its budget gap. It was not all about layoffs. At the end of a very long day, the city council came out of closed session and voted on each agreement, one at a time. They first approved the three agreements with the groups that had settled with the city. Then, one at a time, they agreed to impose the mayor s last, best, and final offer on the remaining two groups. The room got deafeningly silent. A well prepared capital budget is necessary for successfully planning, funding, and implementing capital projects, but the process of recognizing capital needs and the creation of a capital plan occurs long before the development of the annual budget. Finance officers have an opportunity to contribute valuable insight at all stages in the capital planning process and help local governments CONCLUSIONS In the end, these agreements saved the city s general fund approximately $50 million a year. Even with this savings, police and fire services were reduced, along with library hours and recreation programs. It is hard to imagine what the city s service levels would have looked like with $50 million in additional cuts. Fortunately, we did not need to find out. y make capital project investments that align with long-term service goals, objectives, and strategies. With Capital Project Planning and Evaluation: Expanding the Role of the Finance Officer, the GFOA takes a practical approach to capital project planning. Focusing on common essential projects for small and mid-size local governments, this eighth volume JAY M. GOLDSTONE is the chief operating officer for the City of San Diego, California. He oversees the city s daily operations and implements mayoral and city council initiatives and policies. Before that, he was the chief financial officer, the city s first. Before coming to San Diego, Goldstone was director of finance for the City of Pasadena. of the GFOA Budgeting Series provides finance officers enough information to become educated consumers of capital projects and to become active participants in the capital planning and evaluation process, including needs assessment, project planning, project evaluation, and project implementation. 20 Government Finance Review December 2010