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Bringing numbers to the table: what finance officers need to know about collective bargaining.

"[The city] is like a person with cancer who's been shot in the chest. After you've stopped the bleeding and closed the wound, you still have to treat the cancer."

--Former Philadelphia Mayor Edward G. Rendell, discussing his city's immediate fiscal crisis and longer-term economic challenges in the early 1990s

For many local governments, workforce costs represent two-thirds or more of the operating budget. While states and some public enterprises are not quite so labor-intensive, employee wages and benefits are still a significant budget driver across all of the public sector--typically growing at rates that far outpace growth in revenues. Further, the Great Recession has made retiree benefit underfunding an increasingly widespread concern. In many regions of the country, most of these compensation costs are negotiated, at least in part, with public employee unions. Yet despite the tremendous fiscal implications of such bargaining, finance officers are not always at the table--and, even when they are, do not always play the optimal role.

For finance officers to best manage their organizations' fiscal condition, they need to weigh in effectively as labor contracts are negotiated--addressing the impact of negotiations on both the "gunshot wound" of immediate budget shortfalls and the "cancer" of longer-term liabilities and structural imbalances. From this perspective, whether at the table, or in a "consulting physician" role for a jurisdiction's chief negotiators, finance officers can play a vital role in successful diagnosis, treatment, and maintenance of good financial health.

UNDERSTANDING THE BARGAINING CONTEXT

Unlike private-sector labor relations rules, which are set by federal law and administered by federal agencies, public-sector labor relations rules are set by state and/or local laws and generally administered by state agencies. Consequently, public-sector labor relations laws vary widely as to how impasse disputes are resolved and what terms and conditions can be bargained. It is extremely important to understand the laws that apply to your particular unions.

In many regions of the country, when labor negotiations cannot be resolved at the table (when an impasse is reached), non-public safety unions have the ability to strike if they have met the statutory prerequisites such as notice, waiting period, and mediation. In other regions, final terms at impasse may be subject to implementation by the government's legislative body.

In almost every region, however, public safety unions cannot strike. Instead, public safety contracts (and, in some communities, those for civilians) are often settled through a process known as interest arbitration, under which an individual arbitrator or panel determines the final contract. Depending on the applicable statute, interest arbitration can take several forms--conventional arbitration, where an interest arbitrator has wide latitude to craft the award based on the issues raised; last, best, and final arbitration, where an interest arbitrator must choose either the government's or the union's last offer in its entirety (also called "baseball arbitration" because of its similarity to the process used for settling salary disputes in major league baseball); and last, best, and final by provision arbitration, where an arbitrator must again choose either the government's or the union's last position, but with the decision made on an issue by issue basis, not on the contract as a whole.

State and local labor laws also determine which terms and conditions can be bargained. In many cases, certain benefits such as pensions or health-care benefit plan design are set legislatively by statute. In some jurisdictions, a statute may set a minimum level of benefits and leave parties free to negotiate enhancements. A current issue winding its way through courts in several states is whether a government may modify retiree benefits, and if so, when.

These localized differences in the rules of the game can significantly affect the role of the finance officer and the opportunities to help shape the outcome of the bargaining process in a positive way. At the same time, there are many common themes across bargaining formats in terms of both the players at the table and the key approaches for contributing to a good result.

AROUND THE BARGAINING TABLE

To truly understand public-sector labor relations, one must understand the parties involved in a negotiation or interest arbitration, their interests, and their motivations. Of course, the set of players in any particular negotiation may vary, and the worldviews and personalities of the individuals who fill these roles can shape dynamics as much or more than the formal seat they occupy.

Unions. Unions may handle the negotiations either in-house, through an experienced business agent/representative, or through outside counsel. A union generally needs to have its members vote to ratify any agreement, meaning that union leadership will need to "sell" a tentative agreement to its membership, and varying constituencies can hold significant sway (such as "local" units representing particular trades or departments, and/or generational cohorts). In some communities, state and/or national union chapters may also take particular interest, since settlements in one government may have far-reaching impacts in other governments and throughout the nation.

Public Employers. Public employers may also handle the negotiations in-house through their HR/labor relations departments or through an external negotiator, usually a labor attorney. In general, these professionals are expert in relevant employment laws and regulations, and strong at handling key labor management relationships, but they are not always numbers-oriented and may not comprehensively understand the government's fiscal concerns at the outset of negotiations. Although elected officials and executive leadership are rarely at the bargaining table themselves (and it is generally best that they not do the primary negotiating), they typically follow progress closely and expect to be briefed regularly. The government may also engage outside economic consultants, actuaries, and health benefits experts to assist with determining costs, developing proposals, and preparation.

Mediators, Fact Finders, and Arbitrators. These neutral professionals may also play key roles, depending on the statutory context for impasse resolution. In general, mediators, fact finders, and arbitrators bring with them a healthy respect for the bargaining process--and an orientation toward encouraging settlements the parties can live with, rather than rendering judgment as to who is "right" and "wrong." They are prepared to make the decisions required to move past impasse, but they will typically encourage the parties to narrow these issues, seeking to craft arbitration awards that balance the parties' interests (to the extent possible under relevant statutes), rather than giving one side or the other an absolute "win."

Public Constituencies. Finally, while they are not physically at the bargaining table, public constituencies are now taking a keen interest in negotiations. This has long been the case when there is the possibility of a strike that could impact citizens' daily lives, such as a transit work stoppage, and it has become even more prevalent as governmental budget pressures have gained importance and visibility.

In many communities, the divergence between typical private-sector and public-sector compensation approaches--with governments often providing more generous healthcare and retiree benefits--has also contributed to public concerns fueled by "pension envy." The underlying question of who actually earns greater total compensation--public or private employees--is much more complex than is typically addressed in public forums, and relative compensation can vary by type of position. In the current political climate, however, the debate itself often affects the bargaining environment --generating pressures on management negotiators to make major changes and fueling defensiveness among union negotiators and their membership, who may feel under attack and misunderstood.

Finance Officers. Within this broader group of players, what role then should the finance officer play to help bring about a more positive result? Returning to the medical metaphor, this process should be approached from the following three "healing" perspectives: diagnosis, treatment, and follow-up examinations.

In the "diagnostic" phase, professional input is critical to establishing the financial goals and parameters for bargaining. At the outset, finance officers should take the lead in determining "the number"--that is, the total cost the government can afford to spend on the new collective bargaining agreement during its term, while still meeting other community needs and priorities. At the same time, the finance officer should also be an advocate for longer-term fiscal stewardship issues (e.g., restructuring retiree benefits, which might not save money immediately but can nonetheless be crucial to sustainable financial health). Because labor negotiators often focus on trying to reach an amicable settlement, and because structural issues are very difficult to address, long-term concerns are often pushed aside in favor of "getting a deal"--or worse, traded off in agreements that add to recurring costs just to generate immediate relief. Finance officers need to follow the same motto as physicians: first, do no harm. More generally, finance officers can also articulate the importance of financial goals for collective bargaining relative to other competing objectives, such as non-economic operational changes or speed of settlement.

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During the bargaining process, as "treatments" are developed, finance officers should also be involved in calculating (or, at a bare minimum, validating) costs for different scenarios to ensure that the government's financial goals are reliably achieved. Finance officers should also work to educate all parties at and around the table through effective financial communications to audiences who may not have an in-depth understanding of the government's fiscal condition. Clear and compelling financial communications can help build needed trust and manage expectations.

In the "follow up" phase, after a settlement is reached or an arbitration award is issued, the labor-management relationship continues, and the government's finances will further evolve as the parties progress toward the next round of bargaining. Rather than one-time, "winner-take-all" encounters, public-sector labor negotiations are crossroads along an ongoing journey. Accordingly, within the first weeks following a settlement or award, finance officers can play an important role in making the transition to the stages yet ahead. Recommended actions include: documenting the fiscal terms negotiated; ensuring effective implementation of enabling regulations and administrative changes; and establishing ongoing monitoring systems. Such tracking mechanisms can be invaluable both in evaluating the need for any mid-course corrections (particularly if the contract includes a re-opener) and helping develop future bargaining goals (for example, did an overtime reduction provision work, or are further adjustments needed in the next round?).

KEY ROLES FOR THE FINANCE OFFICER

There are six key prescriptions for success in almost every labor negotiation. Although the responsibilities for addressing these issues might differ, depending on the government or the negotiation, finance officers need to understand their impact on the collective bargaining process.

1. Establish and Communicate the Economic and Fiscal Context for Bargaining. The broader economic environment affects every round of collective bargaining. During prolonged and severe downturns, governments often have no choice but to seek wage and benefit concessions. To support its bargaining positions, a government must place the negotiations in the proper economic context by telling an accurate and compelling story about the economic and fiscal challenges it faces. Governments typically turn to their finance officers to make this case.

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The more information a government provides to its unions on its economic condition, the more likely unions are to consider proposals the government advances. Such information includes demonstrating a downturn's direct impact on the government by highlighting:

* Specific tax revenue declines, reduced interest on investments, and grant or transfer reductions.

* The downturn's impact on taxpayers, including any tax increases, local layoffs, and service cuts.

* Shared sacrifices their other employees have made.

Employers should also educate unions about continued structural pressures from factors largely beyond the government's control (e.g., health-care inflation, pension and other postemployment employee benefit funding requirements, and capital and infrastructure needs).

For example, during 2011 bargaining with its largest state employee unions, the Commonwealth of Pennsylvania Budget Office provided its unions with a detailed presentation on the commonwealth's fiscal condition, including information about the economic challenges faced across the public sector generally. The educational effort provided the unions with relevant information about the economic constraints of the government in the context of the larger forces driving those challenges. This has helped place difficult concessionary proposals into the proper economic context, contributing to constructive negotiations, reasonable settlements, and smooth ratification.

2. Ensure Reliable Cost Analysis for Alternative Settlement Scenarios. To know whether the total cost of alternative packages will fit within the financial parameters established for bargaining, the government must not only calculate the individual cost of both sides' proposals, but also determine how the proposals interrelate. For example, an across-the-board base wage increase will not only affect an employee's salary, but also other cash compensation such as longevity payments and shift differentials (if calculated as a percentage of base salary) as well as certain benefits such as payroll taxes and pension obligations. In another example of interrelated proposals, changing the pension retirement age can also affect use of retiree medical coverage.

Governments need to start early on determining the costs of proposals and building models that will allow for rapid turnaround during negotiations. Once the negotiations have started, both sides will be exchanging proposals quickly, at which point finance officers might not have the time they would like to spend on analysis.

3. Review Comparability Analysis for Relevance and Perspective. In interest arbitration, neutral arbitrators typically put great weight on compensation levels of similar or comparable employers. Additionally, as part of good human resource practice, a government should know how its compensation package compares within relevant markets. Consequently, comparability analysis should be part of labor negotiation preparations--whether or not this information is presented at the bargaining table.

Unless a statute identifies a set of specific employers or provides criteria that effectively define a group, parties can generally argue freely for and against what they believe to be the most appropriate reference points. There are no "identical twins" among public employers. Some pay more and some pay less, based on a variety of factors--including differences in duties, responsibilities and organizational structure, relative ability to pay, localized labor market considerations, and differences in cash and non-cash compensation. Even within a relevant comparison grouping, it is entirely appropriate that some employers will pay at the lower end of the range. In fact, unless everyone is paid the same, it is mathematically unavoidable.

Comparability data is often time-consuming to compile, and specialized experience is required to analyze the compensation differences that will be identified. As a result, unions and governments often engage experts to handle these issues.

4. Promote a Pragmatic View of Bargaining "Competitiveness" Goals. The ultimate test of compensation competitiveness is how effectively a compensation package actually works to recruit and retain qualified personnel. Because many negotiations and arbitrations focus so intently on government-to-government comparability, however, this real-world perspective is frequently overlooked. When recruitment and retention data is evaluated and presented, it often supports the position that moderating compensation increases will not disrupt the organization. Further, in those instances when analysis does identify specific recruitment or retention concerns, such information can indicate priority areas for targeting limited resources.

Today's workplace includes employees of different generations who may have very different career expectations and compensation goals. In general, Millennials (born 1977-1990) are much more likely to change jobs frequently than are Baby Boomers (born 1946-1964) or Generation X (born 1965-1976). Accordingly, most government compensation systems, which have defined benefit plans that reward longer tenure, could be spending too much of their total compensation dollar in areas that are not as appealing to newer hires. Governments should use the collective bargaining process to review their compensation structures, determining whether they provide for varying generational compensation expectations and whether limited resources are being effectively directed in ways that will generate the greatest return.

5. Anticipate and Develop Workable Opportunities for Compromise Before the End Game. Labor negotiators often say that negotiations are the art of the possible. Almost invariably, both parties will need to compromise to achieve a settlement. In conventional arbitration, most arbitrators will not give one side or the other everything it wants. Therefore, a government must prioritize its bargaining issues and understand the costs or savings associated with each. In addition, finance officers should consider the goals and interests on both sides of the table, anticipate the "end game," and help develop fiscally sound alternatives before the final hours of a contract.

For example, a public employer could start bargaining with a goal of increasing employee cost sharing for all the plans it offers from 15 percent of premium costs to a higher level, such as 25 percent, which is more consistent with private-sector norms. For union leadership, however, this might be a charged and emotional issue, and a threat to ratification. At the same time, the employer might also be seeking union cooperation on improving health management and wellness programs, to steer employees to lower-cost health plan options, and to rebid its plans to identify more affordable providers.

Given this multipart set of interests, a potential compromise might involve retaining a 15 percent premium cost share for a rebid, redesigned base plan for those employees participating in active health management programs. If employees want to choose a more costly plan option, they would be required to pay the difference. And, with no health management participation, the employee base plan premium contribution would rise to 25 percent. Under this compromise structure, the union provides its members with the opportunity to retain a 15 percent cost share, while the government employer establishes new incentives toward controlling other key drivers of overall premium costs.

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For this type of compromise to be available at the right juncture in bargaining, however, a government would have to have already anticipated the options and estimated all the cost impacts. Often, settlements happen after marathon sessions of bargaining during which both sides have quickly exchanged packages of proposals. At that point, you want to already have a clear understanding of the moves to be made, where you can and cannot compromise, and what the cost impacts will be.

6. Prepare Contingencies in Case Your Eventual Settlement Runs into Unforeseen Difficulties. As the past several years have proven, the only certainty about economic projections is that they will be wrong. Although we hope that any such variances will be manageable, governments should not give away the flexibility to modify the budget when they really need to. Therefore, avoid agreeing to "no layoff," "no furlough," or similar provisions that limit a government's ability to take mid-contract budgetary action unless sufficient alternative contingencies are available. Unions, understandably, may strongly push for such protections in exchange for economic concessions at the bargaining table. The finance officer, however, needs to retain sufficient safety valves in case budget pressures mount to an untenable degree.

As another alternative approach, periods of economic volatility may call for shorter contract terms or mid-contract reopeners for key economic provisions. While longer-term (three-to five-year) labor agreements provide stability and minimize the cost and disruption of the negotiating process during good times, the "option value" of flexibility increases when reserves are tighter and under pressure. Also helpful for managing external budget risks, some potential contractual exposure can be contained through the use of "collars" and caps. For example, recent bargaining agreements negotiated by the City of Pittsburgh, Pennsylvania, have limited growth in the employer's annual health-care premium costs to 9 percent a year. If costs grow faster, this would trigger additional employee cost-sharing and/or plan redesign.

CONCLUSIONS

Given the economic pressures bearing down on most governments, and the unprecedented public attention being paid to public employee compensation, public-sector collective bargaining will only increase in importance. To reach affordable agreements that are fair to employees and the public, finance officers must play a significant role in the process.

The pioneering neurosurgeon Harvey Cushing once wrote that a "physician is obligated to consider more than a diseased organ, more even than the whole man--he must view the man in his world." In labor negotiations, such a broader perspective is no less critical. Finance officers must be prepared to frame alternative settlement scenarios within the larger context of what is needed to maintain stable government finances, a healthy public-sector organization, and a sustainable community to be served.

Determining Costs

Determining the cost of labor proposals is a complicated, time-intensive process involving a set of linked assumptions about employee headcount, benefits, and cash compensation. Even looking at only employee cash compensation, governments should consider all forms of pay, not just base salary. For many employees, pay premiums over and above base salary comprise 15 percent to 20 percent of their total annual cash compensation.

Such compensation can include overtime, longevity, holiday payments, uniform allowances, special assignment pay, shift differentials, language premiums, educational incentive payments, leave payouts, and call-in/standby payments.

Determining Comparable Groups

Selecting and defending the "right" groups of comparable employees, and then placing such reference points into a meaningful context, is difficult. Key issues include:

* Ensuring valid "apples to apples" comparisons across employers, since positions with similar titles can perform different functions.

* Considering both benefits and wages, since each is only part of an employee's full compensation package.

* Looking to future direction, not just status quo "snapshots." In addition to settlement trends, this can also include referencing recommended best practices--such as the Government Finance Officers Association's new guidelines for designing and implementing sustainable pension benefit tiers (available at http://www.gfoa.org/index. php?option=com_content&task=view&id=1887).

* Anticipating and researching the group of comparable employees the union will most likely select--even if management sees this group as less relevant.

* Developing contextual information regarding factors such as relative fiscal condition, community wealth, tax bases, employment levels, and housing costs to help put the inevitable distribution of compensation levels that will be identified into appropriate perspective. Arbitrators are not always familiar with the economic demographics of other governments and will base their decisions on the testimony presented.

Assessing the full labor market, including "opportunity compensation" associated with the next best positions available to your organization's employees. For some positions, private-sector employers are a government's primary "real world" competitors, and comparison to local private employers is a recognized criterion under many arbitration statutes.

MICHAEL NADOL is a managing director at Public Financial Management (PFM) and a former director of finance and labor negotiator for the City of Philadelphia, Pennsylvania. VIJAY KAPOOR is PFM's director of workforce consulting and the former executive director of Pennsylvania's Governor's Office of Management and Productivity.
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Author:Nadol, Michael; Kapoor, Vijay
Publication:Government Finance Review
Date:Aug 1, 2011
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