Options to Reduce Personnel Expenses During Uncertain Budget Times

When budgets and revenue forecasts are decreasing and uncertain, employers—including local governments like towns, cities, counties, and special purpose districts—often face the reality of needing to reduce personnel expenses while also minimizing the impacts on both employee morale and service levels.

This blog summarizes several options for local governments when faced with reduced revenues and the likelihood of significant budget shortfalls. This is an overview of several options and not a comprehensive list of all available methods.

Overview

In general, local government decisions to reduce staff costs involve policy-making by an agency’s governing board and must include the adoption, review, and revision of written personnel policies and budget considerations.

Decisions should be made in consultation with your agency’s legal counsel, especially in those matters that involve union-represented employees. In such cases, you’ll want to ensure that any action taken is negotiated and complies with applicable collective bargaining agreements. 

More familiar and traditional options to significantly reduce staff expenses include permanent layoffs, reductions in force, elimination of nonessential positions, temporary hiring freezes, and limits on salary increases, such as merit raises or cost of living increases. A local government may decide, based on revenue forecasts, lack of available work, or a combination of the two, that permanent layoffs are required. For more information, legal authorities, and samples, review MRSC’s webpage on Furloughs, Layoffs, and Other Staffing Reductions.

Voluntary cost-reducing strategies where employees have input and may volunteer to participate in savings may be less familiar but may better promote transparency, fairness, and consultation. For example, employees may be willing to reduce their work schedules from full-time to part-time, take voluntary leave without pay, accept voluntary salary reductions, or consider voluntary separation and retirement incentives.

For all actions that impact an employee’s duties and compensation, it is critical to act in a nondiscriminatory way and to comply with federal and state laws as well as local policies prohibiting harassment and discrimination.

Temporary Layoffs—Furloughs and Standby

Reducing the overall time employees spend on the payroll without requiring a separation may be an effective short-term cost-saving measure that potentially minimizes employee hardship. Both furloughs and standby are forms of temporary layoffs according to the Employment Security Division (ESD).

Furloughs may consist of a complete stoppage of work or reduced work hours over a period of time, for example, a reduction of one day a week for a year. This option was commonly used during the significant workplace and workforce changes during the recent COVID-19 pandemic. See Furloughs and More: Employer Options During the COVID-19 Pandemic and these sample documents below for more information:

• Auburn Furlough Leave Program FAQ (2020)
• Issaquah Ordinance No. 2905 (2020) – Authorizes certain city officials to implement unpaid furloughs and temporary salary reductions

Since the COVID-19 staffing disruptions, “standby status” remains an option, with ESD approval, for both full- and part-time employees who are not working but have an expected return-to-work date within 12 weeks.

Since a temporary layoff is not considered a permanent separation, employers may continue providing benefits if that is part of their policy.

Voluntary Reduced Work Hours—Part-Time Employment

Agencies may offer employees the option of a voluntary reduction in full-time equivalent (FTE) hours. This would allow employees to willingly reduce their scheduled hours and would likely result in direct payroll savings.

Voluntary reduced work hours may be an attractive option for employees who value the extra flexibility and personal time, such as from 40 to 32 hours per week. Workloads and service levels need to be reviewed and adjusted in these cases. Healthcare benefits and leave accruals could also still be provided. As mentioned earlier, work with your agency’s legal counsel as well as union representatives.

SharedWork is an optional ESD program that allows employers to reduce hours by as much as 50%, while their employees collect partial benefits from ESD to replace a portion of any lost wages. Consult with ESD and your legal counsel regarding voluntary changes from full- to part-time schedules.

Voluntary Leave Without Pay

Another simpler method may be to allow employees to request and take voluntary—and perhaps extended—leave without pay (LWOP). This option may appeal to employees who want to pursue personal interests, travel, or go back to school for a defined period, returning when the budget has hopefully stabilized.

In setting up an LWOP program, agencies should establish the process and requirements, such as setting specific leave and return dates. Questions to consider include:

• Who approves the leave request?
• How will healthcare and other benefits be handled?
• Can employees ask for extensions and how would this be handled?

Again, work with your agency’s legal counsel. Outside counsel with labor and employment expertise could also be consulted.

Compensation and Benefits

Voluntary measures may also focus on changes to compensation and benefits, which are typically the largest portion of personnel expenses in an agency’s budget.

Although a mandated pay cut would be an involuntary measure, public employers may also offer a voluntary reduction in salary. An elected official may voluntarily choose to waive, refuse, or donate a portion (or all) of the salary that has been established for the position. In fact, many special purpose district officials are given the express statutory authority to waive all or part of their salaries. Although there is not a comparable statutory provision for elected officials of cities or counties, they may (and some do) voluntarily choose to waive their salaries.

A less intrusive measure involves temporarily suspending or reducing non-essential employee perks and allowances. Voluntarily relinquishing benefits like mobile phone allowances, non-essential training funds, or certain travel reimbursements can lead to meaningful operational savings without an adverse impact on employee salaries.

Voluntary Separation and Retirement Incentive Program

One of the more direct ways to voluntarily reduce staffing costs is by reducing the number of permanent, higher-cost positions. A Voluntary Separation and Retirement Incentive Program (VSRIP) can offer employees financial payments in exchange for voluntarily leaving public service, either through resignation or retirement (if eligible and part of a public retirement system).

It is crucial to have a written policy in place before offering such a program. Agencies should also work closely with legal counsel and the applicable retirement systems—such as the Washington State Department of Retirement Systems (DRS)—to determine eligibility.

Cities, towns, counties, and special districts have local discretion to consider and adopt policies regarding voluntary separations, but such an effort must be led by the local legislative body (e.g., city council, county council/commission, or district board), and the program may also be subject to their local collective bargaining agreements. Local governments must also perform their own cost-benefit analysis and ensure the incentive payments result in true, long-term savings for their specific circumstances.

Offering a VSRIP demonstrates a commitment to avoiding layoffs, which may significantly boost morale among all staff. In addition, there may be a corresponding reduced or eliminated need for permanent involuntary reductions in force, thereby reassuring remaining staff. Vacancies created by voluntary separations or retirements may be left unfilled temporarily as a budget-relieving measure. Depending on circumstances and changes in budget forecasts, vacant positions could later be filled, perhaps through promotion from within or a hiring process.

Public employers need to ensure once a VSRIP process is undertaken, it is fair and transparent, and that employees are given adequate time to consider re-employment restrictions and to make informed decisions based on this understanding.

Classification of employees

When considering changes to an employee’s hours and/or compensation, also review their classification status under the federal Fair Labor Standards Act (FLSA) and Washington’s Minimum Wage Act (MWA) to determine whether employees previously classified as “exempt” from overtime would retain their status or need to be reclassified.

Conclusion

For a personnel-related cost-reducing strategy to succeed, especially one with voluntary components, transparency and fairness should be priorities. As mentioned, public employers will need to work closely with their legal counsel when implementing any option discussed above. Agencies with represented employees will also need to work with the representatives of their collective bargaining units.

Clear communication from the employer, early and often, with all staff (including non-represented employees) about the agency's financial realities and any cost-saving goals should help gain buy-in for proposed cost-cutting measures and maintain trust. An environment of shared, voluntary sacrifice is likely to be more sustainable than one perceived as secretive or punitive.

I hope this blog encourages you to navigate fiscal challenges with transparency and to consider prioritizing voluntary measures before resorting to involuntary layoffs or across-the-board budget cuts.