Gain Sharing Strategy

"The smartest strategy in combat is the one that allows you to achieve objectives without having to fight."
--Sun Tzu, 500 BC^[1]

Introduction

As economic and political change happens, sharing the challenge of dividing up a smaller pie in good faith, while adhering to carefully weighed guiding principles, leads to more mutually beneficial outcomes, going forward. This column will address in more detail four subtopics raised in the September 2011 Column: (A) challenging issues for public employers; (B) challenging issues for public sector unions; (C) emerging opportunities for partnerships and "if-then" bargains, (D) unique issues for different employee groups (E) review of mutual gains guiding principles and (F) a blend of win-win solutions being driven by the new reality.

When Mutual Gains describe the collective bargain result or outcome, the parties make no deal unless it is a win-win deal. For example, assuming current expense fund revenues are growing at a modest rate (e.g. 3.0% per year) and the rate of inflation is about 3.0%, the cost of compensation (wages and benefits) can usually grow by 3.0% without reducing the number of FTEs. Employees gain by having compensation increase to keep up with inflation and the public gains by retention of quality service levels. However, if the cost of compensation increases by 4.0% (unrelated to inflation), the public may see the quality of services decline to balance the budget and thereby gains nothing. If this becomes a pattern over several years, the outcome is a win-lose proposition and deeper reductions in public services will result.^[2]

A. Challenging Issues for Public Sector Employers

While tax revenues are now increasing at 1.0% to 2.0% rate (if that), annual inflation (as measured by the CPI) is now in the 2.0% to 3.0% range. When labor contracts were negotiated for 2010-11, the annual inflation rate was in the -1.0% to 0.0% range.

Source: www.bls.gov/cpi/tables.htm

Cost of Compensation. The cost of employee compensation continues to increase at a rate of 2.5%-3.0%, even with little or no base wage increases. This is largely due to the double digit increases in the cost of health insurance, increases in pension contributions (due to mandatory state funding requirements), and in-range step increases or longevity pay increases. For PERS employees, a 10% increase in medical costs coupled with a 2.0% increase in pension contributions alone increases costs of employee compensation by approximately 4.0% (with no increase to base wages).

Cost of Services. At the same time, the cost of service contracts (e.g. contracting for police or fire/ems service) is rising at a higher rate than anticipated. The cost of petroleum products is rising higher than anticipated, affecting the employer's maintenance and operations costs. So, something has to give. Over the last two to three years, this has usually resulted in reduction in the level of public service to free up money to pay for increases in the cost of employee compensation.

Union Agenda: At the top of the union's agenda this year is job security, maintenance of existing contract language concessions negotiated to date, locking in past practices that are not spelled out in the labor contract and returning to CPI formulas to capture inflation. This is often seen in the form of proposals to maintain historical premium sharing formulas, limit reduction in medical plan benefits, protect tuition reimbursement benefits, protect layoff language based on seniority, regardless of its effects on public services, and more specific description of work schedules for different employee groups. Unions seek to address wage compression issues for mid-management union groups, even if it means reductions in the number of supervisors. Unions seek to protect employee use of take-home vehicles at no cost to the commuting employee and work schedules that guarantee large blocks of time off, affecting workforce continuity.

Required Sacrifices. Employers consider whether or not to bargain contract extensions, in exchange for unpaid days off now. These agreements may include modified CPI formulas in outlying years, conditional openers or adjustments. Unions propose to place conditions on budget mitigation agreements, e.g. that equal sacrifices be made by different employee groups across-the-board and public office closures to cut costs and make the public feel the pinch as well.

Employee Expectations. Employers cope with union member expectations that there are concessions to be achieved, even if it means reductions in levels of service or hiring freezes to pay for compensation adjustments that may be negotiated. Employers are being asked to begin sharing some of the funding of post-retirement benefits, to make modest progress in the employees' ordinal ranking among comparators, and to provide more access for employees to paid time off accumulations. The Union may propose on duty workout schedules for police officers, including voluntary fitness program participation with a reward of premium pay for successful participation, if little or no wage adjustment is forthcoming.

Inflation. Employers are weighing costs that go with tying base wage adjustments to inflation, when inflation may continue to increase this year and it is uncertain what will happen during upcoming years. Employers are addressing union offers to give up CPI driven wage increases now in exchange for deferred sick leave cash-out concessions. In addition, consideration may be given to moving wage adjustments from the first of the year to the end of the year rather than accept more wage freezes when the CPI is increasing by 2.0% to 3.0%.

And, the list grows, with many issues in play that afford opportunity for mutual gains bargaining.

B. Challenging Issues for Public Sector Unions

Economy: Unions are coping with the reality of slow rebounding revenues, due to declining property values, declining sales tax base, and declining development fee income. Unions are facing the impact of built-in cost of compensation increases (e.g. pension and health insurance driven by an aging working population) and the effects upon the union's ability to achieve base wage adjustments.^[3]

Source of PERS and LEOFF Rates: DRS and Office of the State Actuary.
http://osa.leg.wa.gov/index/index.htm
http://www.drs.wa.gov/employer/EmployerHandbook/pdf/currentcontributionrates.pdf
http://www.drs.wa.gov/employer/EmployerHandbook/pdf/combinedList.pdf

Source of Medical Rate Changes: Association of Washington Cities
http://www.awcnet.org/insurance/employeebenefittrust

Protecting Gains. Unions tend to strive to protect gains already made in bargaining, even if it means leaving money on the table.

Use of Comps. Unions are realizing they have less ability to effectively use comps to support wage and benefit demands than in the past.

Public Opinion. Unions see eroding public support of historical compensation policies (e.g. amount of paid time off and medical benefit levels) that are "richer" than counterparts in the community.

Membership Support. Unions face eroding membership support as employees ask why pay $1500- $2,000 in dues over the term of a three-year contract to get 0.0%-1.0% adjustment to wages, mandatory unpaid days off, pay more for medical insurance, face employee layoffs, have deferred compensation contributions suspended, and have more senior employees benefit from concessions (e.g. job security, increases in paid time off, promotional opportunity) at the expense of less senior employees.

Leverage. Unions see declining leverage in impasse proceedings (e.g. mediation and/or interest arbitration) as seen in recent interest arbitrations.^[4] Focus on comparables is taking a back seat to internal equity and the economy. Even if the arbitrator awards a wage higher than offered by the employer or rejects employer proposals to increase employee medical premium sharing the "win" can quickly become a "loss" in the form of layoffs, hiring freezes or cutbacks in capital items that otherwise might be included in the current expense budget. Unions realize less ability to use the CPI to support "cost-of-living" demands because an increase in the CPI no longer parallels an increase in operating revenues. The escalation in cost to the employer of health benefits no longer supports employee payment of zero percent of employee health insurance premiums. This becomes a difficult issue for the Union to defend in light of private sector practices. Unions are necessarily accepting modifications in health plan designs that significantly increase the maximum employees will pay for medical services.

Revenues Lag. Unions are coping with employer proposals to link increases in compensation to increases in current expense revenues.

Gains Redefined. Unions are redefining what constitutes a gain. The primary reason is illustrated in Table 1 below. Between 2005 and 2008, employee compensation was able to grow in excess of inflation and employer revenues were increasing at an even greater rate than employee compensation was increasing. From 2009 to present, employee compensation was often adjusted annually in excess of inflation to pay for wages and medical costs while employer revenues lagged. So, what Unions considered a gain has been, and will continue to be, redefined.

Table 1^[5]

"The Union Gains listed above are a combination of average base wage increases among Washington cities for general employees (non-LEOFF) and for police and fire employees (LEOFF) and medical rate increases absorbed by the employer for these groups. See Table 2 below. Union gains column does not include cost increases due to increases in add-to-pays (e.g. longevity, education, out of class, assignment, shift differential, allowances, pension or deferred compensation contributions). The source of the wage and medical rate increases is the annual AWC Salary and Benefit Survey published by the Association of Washington Cities in cooperation with the Washington State Association of Counties (2006-2011).

Table 2

**Projected for Illustrative purposes

*Table 2 - Explanatory Note: If wages increase 2.0% in 2012 on a $60,000 salary, the increase is $1,200. If medical premiums increase 10% for 2012 on an $18,000 annual premium, the increase is $1,800. Added together, the total increase of the $1,200 and $1,800 combined is $3,000. The total salary plus medical in the base year is $78,000. The total salary plus medical in the following year is $81,000. This is an increase in compensation of $3,000, or 3.85% (rounded to 4.0% in the example above for 2012). If employer revenues increase only 1.0%, then the 3.0% shortfall will need to be addressed through budget cuts.

C. Opportunities for Partnerships and If-Then Bargains

Opportunities for partnerships between employers and employee representatives are many. Rather than reduce the number of FTEs through attrition to reach a "new balance", parties are becoming more willing to negotiate "if-then" or "variable" bargains.

• Some examples of "if-then" bargains follow. If the CPI of choice exceeds x%, then an adjustment in the bargain is made. If the current expense revenues of the employer from certain sources exceed x% or drop by y%, then an adjustment in the bargain is made in the following year. If the employer agrees to reduce the number of layoffs, then the Union agrees to accept a lower cost of compensation package. If the cost of medical insurance increases more than x%, then an agreed upon adjustment in the premium sharing formula is made for the following medical plan year. If the cost of the employer's pension contributions rise more than x%, then the negotiated wage increase is adjusted downward by an agreed upon factor. Unions can make gains by negotiation one-time wage payments or adopting less costly bargains now in exchange for employer providing post-retirement benefits and even possibly sharing in costs later on.
• Conditional solutions are available for dealing with fear of inflation (caps, floors and triggers). Sometimes, one-time payments (or signing bonuses) are negotiated in lieu of base wage adjustments. For example, the following table illustrates a combination of triggers (such that fixed wage adjustments may change if CPI changes hit certain thresholds) and one-time payments:

*CPI = Seattle Area CPI-U - first half average in 2012 might be used to determine general wage increase for 2013 and first half average in 2013 might be used to determine general wage increase for 2014.

• Both labor and management realize that more paid time off and work schedules offering maximum number of days off is counterintuitive to the reason why employers hire employees in the first place. Thus, alternative solutions are emerging for different employers and their respective groups.
• Both labor and management may begin to agree to CPI-1% as reasonable (due to the cost of medical insurance and the priority employees put on this component of the compensation package).
• Both labor and management often agree to bargain mid-contract changes if economic conditions change or both parties mutually agree to open an issue in the contract. "Sacred cows" (protected under different economic environments) have been replaced with other mutually acceptable benefits. On occasion, employee groups in cities, counties and special purpose districts agree to reopen their contracts to make way for less wage adjustments.
• Equal sacrifice or mutual gains among all employee groups doesn't necessarily mean the same gains are made for all groups. Different groups are aware that the cost of the status quo varies from group to group - union and non-union employee groups alike.

D. Unique Issues for Different Employee Groups

1. LEOFF Personnel Issues (Uniformed Sector):

• LEOFF/Uniformed Personnel: Recent interest arbitrations reflect the lagging economy.^[6] One of the statutory criteria arbitrators are required to " take into consideration" is "changes in the cost of living" as well as "...factors normally and traditionally taken into consideration in establishing wages, hours and working conditions." RCW 41.56.465(1)(d, e) This necessarily includes the economic environment, particularly if the employer has laid off employees to balance budgets and has experienced declining revenues in sources such as property taxes, sales taxes and development fees.
• Overtime Costs: Public employers face the consequences of contract language that does not allow for variable staffing, i.e. resulting in smaller wage adjustments than would otherwise be acceptable.
• Physical and Lifestyle/Fitness issues: Under what conditions are workouts for law enforcement officers allowed while the employee is on duty? What is the benefit to the employer and employee? What can we learn from employers with physical fitness programs that reward successful employee participation with premium pay incentives? Is there a "sweet spot" for rewarding police and fire employees for improving personal fitness that results in lower medical costs, fewer on-the-job injuries, and improved ability to meet the physical demands of the job for a longer period of time?

2. PERS Personnel Issues (Non-Uniformed Sector):

• Pension costs. Rising pension costs for PERS 2 employees in recent years are now having a dampening effect on wages and benefits.
• Automatic One-Year Extension of Labor Contracts (as required by RCW 41.56.123 ) may delay completion of negotiation on successor labor agreements because the union may favor the status quo or face unilateral implementation.
• Disproportionate concessions for non-uniformed personnel vis-à-vis uniformed personnel may be better than the alternatives, such as wage freezes and layoffs.

E. Legitimate Review of Mutual Gains and Guiding Principles

A set of guiding principles is often adopted by management and labor groups. The economic environment raises some new questions about use of guiding principles for bargaining. When does a guiding principle become so important as to remain the same now as in the past?

• Fairness (internal equity)
• Reciprocity (two-way street)
• Wage equity (higher pay for higher standard of performance)

When does a guiding principle call for modification or qualification?

1. Past concessions may not be sustainable
2. Ordinal ranking when compared to historical set of comparators may have to be revisited
3. Internal equity among employees (when budgets are reduced) may not be achievable
4. Historical CPI formulas may have to be modified if out of synch with revenues or operating expenditures.

What questions are important for the parties to raise in seeking mutual gains?

• "Why would we agree to that proposal?"
• "What is the package going to cost over the next three years?"
• "What is of the most long-term benefit to the majority of the employees?"
• "Are we living within the tax authority adopted by elected officials?"
• "Is it time to share equally in medical cost increases if we can come to agreement on a CPI formula or a fixed wage adjustment each year?"

Asking the public to pay more taxes to pay for above market compensation is usually a short term solution.

Tying economic concessions to revenues may work, if agreed upon for a trial period to see what happens. Different principles may work for different employers for a variety of reasons. Slowing down the cost of compensation and letting other comps catch up may fit within a guiding principle, particularly when wages, time off and medical benefits are higher than comparables.

Employers continue to adjust to the transition from "what do we want to do" to "what can we reasonably afford to do". Unions are adjusting to the transition from "what our members would like to have" to "what must we strive to keep that we already have"?

F. HR Leadership Re-Emphasizes the Importance of the Win-Win Model:

Mutual gains are more achievable when the following conditions are present:

• More communications with labor as to what the employer's challenges are
• More information-sharing and documentation of communications with labor representatives, given the legal framework in place
• More clarification as to how a direction taken squares with guiding principles
• Thinking why either side might not make a deal unless it is a win-win deal
• Both sides putting the Public interest first
• Meeting more often with party representative to understand the other's perspective
• Taking time to explore more ideas and benchmarks before landing on results
• Working together, in good faith, to seek out the right solution
• Learning from mistakes made and taking the risk of a change in direction
• Define success by reaching win-win agreements in the face of uncertain outcomes, rather than impasse or unilateral implementation of a contract.

[1] Inspired By: http://government.cce.cornell.edu/doc/pdf/vaughn.pdf

[2] See samples of "if-then" deals later in this Column.

[3] Public pension contribution rates are subject to change by the State Legislature.

[4] Reference: Supplemental Resources Appendix attached to this Article from www.perc.wa.gov.

[5] Sources: Bureau of Labor Statistics, the CPI-U is the First Half to First Half Index published for each Year and wage adjustments reported in Association of Washington Cities annual Salary and Benefit Surveys. (*) Estimated for 2013.

[6] Reference: What have interest arbitrators been saying? See Appendix to this Article.

Appendix

What Have Interest Arbitrators Been Saying Is a Fair Outcome (2010-12)?