The Art and Science of Costing Labor Contracts. (Forum)
Ashbaugh, Sam, Government Finance Review
Labor is the most costly variable in the provision of public services by state and local governments. In order to make informed policy decisions regarding labor contracts, elected officials and finance officers need an accurate assessment of the financial and operational impact of labor union proposals. Without knowledge of the economic value of salary, fringe benefits, and other provisions of a labor agreement, it is difficult for management to respond rationally to union demands or to develop an acceptable counteroffer that minimizes overall costs and is consistent with government policies and available resources.
Understanding the costs of proposed labor agreements works to the advantage of management during internal strategy sessions, in deliberations with unions, and during dialogue with third parties such as mediators and arbitration panels. In addition, cost analysis provides a baseline for future data analysis, exposes management and business practices that need to be reevaluated, and consolidates labor information from different sources.
Considerations for Negotiating and Costing Compensation-Related Benefits
Although requests for wage or salary increases lie at the heart of most labor negotiations, these requests are likely to be accompanied by proposed increases in other compensation-related benefits such as longevity or holiday pay. Since these benefits are dependent upon salaries and often negotiated at the same time, they too must be carefully evaluated. Unfortunately, they can be difficult to cost without making assumptions. This section identifies the most important considerations for analyzing the costs of five major compensation-related benefits.
Base Compensation Costs. Prior to calculating the economic impact of union labor proposals, it is important to determine the base compensation costs for the bargaining unit(s) in question, since all proposals and potential counteroffers must be analyzed in relation to the current cost of each contract provision. Base compensation figures are essential to the determination of the percentage value of any proposed increase in compensation. Since the union will likely propose increases to multiple forms of compensation, management should identify base compensation costs not only at a macro level, hut also for specific contract provisions such as average salary, average overtime earnings, average longevity pay, average shift differential, and average annual cost for paid holidays.
Wages and Salaries. Calculating the fiscal impact of a union proposal to increase salaries 3 percent each year over the next three years may seem like a pretty straightforward exercise for a financial analyst, and it is. Still, it is important that they emphasize the cumulative impact of the proposed salary increase. In addition, the "ripple effect" of wage and salary increases must be carefully analyzed, since increases in salaries usually result in increased costs for other benefits, including overtime, longevity, shift differentials, holiday pay, vacations, and sick days. Regardless of whether or not a particular union has a contract clause tying its compensation to that of another, it is important to understand that what a government offers to or negotiates with a particular group will have an impact on its discussions with other employee groups, including unionized and exempt employees.
Holiday Pay. When it comes to holiday pay, the first thing to understand is that there is a difference between calculating the cost of holiday pay and calculating the cost of additional paid holidays. For public safety and other critical services that must be provided around the clock, governments often must compensate those employees who work holidays at a significantly higher rate than regular wages. Offering additional paid holidays to employees also affects costs by decreasing the number of hours worked, thus increasing the average cost per hour worked.
Health Insurance. In analyzing the cost of health insurance, governments should consider the following: the extent of dependent coverage, whether an employee co-payment option exists, prescription drug plans, dental coverage, health/wellness initiatives, and the provision of retiree health benefits. Because of recent growth in health care costs, employers should devote significant effort to analyzing their existing health care plans, as well as identifying potential cost containment or reduction strategies. Important data elements include plan enrollments, current and projected rates, employee contributions, and savings from previous cost containment efforts.
Pensions. Because of the complexity of employee pension plans, it is critically important to obtain the advice and analysis of outside pension/actuarial experts when attempting to determine the financial impact of pension-related proposals. Governments must understand the ramifications of enhancing pension benefits. Any change to a defined benefit pension could have a significant financial impact, not only during the life of the labor agreement, but into perpetuity. In addition to the budgetary impact, management must assess the ramifications of pension plan reform (i.e., early retirement) on human capital. An early retirement provision, for example, could lead to the unintended departure of key employees. In contrast to defined benefit plans, defined contribution plans are easier to cost and may not require actuarial analysis.
Besides the benefits referenced above, the cost analysis of labor contract proposals also should include items such as longevity payments, vacation benefits, life insurance, sick leave, statutory benefits (e.g., Social Security), uniform/clothing allowances, and changes to work schedules.
Tips for Presenting Cost Analyses
Since most negotiation sessions are led by lawyers without experience in the disciplines of accounting and public finance, the presentation of cost analysis information should be straightforward. The following are some general guidelines:
* Include a one-paragraph summary of assumptions
* Include all assumptions influencing the final number(s)
* List all variables impacting the proposal
* Report unintended consequences not represented by numbers
* List all information sources
* Identify both incremental and cumulative costs
* Explain uncommon terms
* Use spreadsheets as supporting documents
The audience for the cost analysis should use caution in evaluating cost savings proposals that, while not affecting current employees, could lead to financial or operational challenges in the future. For example, low entry-level salaries for teachers could make it difficult to attract qualified new teachers.
Labor contract negotiations take place in a context shaped by budgetary concerns and processes. Since contract proposals have economic, legal, operational, political, and administrative impacts, the negotiating team must consider the following: the purpose of the proposal, the practical effect of the proposal, what is required to implement the proposal, what the proposal will mean to various stakeholders, whether the proposal is consistent with the governments strategic plan and/or policies, the total cost of the proposal, and how the proposal affects other proposals. Knowing what factors to consider in analyzing the costs of labor contract proposals will better prepare managers to negotiate the best terms at the lowest overall cost for their governments.
SAM ASHBAUGH is a manager in GFOA's Research and Consulting Center in Chicago, Illinois. He is the author of a new GFOA publication entitled An Elected Official's Guide to Negotiating and Costing Labor Contracts. This article is excerpted from this publication. Asbbaugh holds a master's degree in public administration from the University of Pittsburgh Graduate School of Public and International Affairs.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Art and Science of Costing Labor Contracts. (Forum). Contributors: Ashbaugh, Sam - Author. Magazine title: Government Finance Review. Volume: 18. Issue: 6 Publication date: December 2002. Page number: 33+. © 1999 Government Finance Officers Association. COPYRIGHT 2002 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.