It's Your Money

Your Taxpayers’ Association is fortunate to have Dr. Ron Pilenzo, PhD, a highly respected consultant, and an experienced hands-on human resource manager, as a member of our Board of Directors. Through our organization he has graciously offered up his expertise to various Martin County government entities as we all look for opportunities to improve efficiencies and do more with the currently shrinking tax revenues. This is particularly true for the Martin County Administration that is struggling with personnel costs that range from 80% to as high as 94% of department operating budgets. With that in mind he has offered the following examples of successful strategies for reducing personnel cost while retaining jobs. We will be discussing his ideas with County officials in the near future.

Strategies for Cutting Pay

In researching various pay cut plans, he discovered that successful companies used an assortment of methods for reducing cost. Some companies simply cut pay, usually by about 10 percent across the board, and reduced staff. However, the majority of companies, including such giants as Hewlett Packard, Intel, and EDS, used a tiered pay cut plan. HP, for example, cut executive pay by 15 %, other executive management by 10%, other exempt by 5% and non-exempt by 2.5%. Some of the very large companies dealt with executive pay in an entirely different manner based on the size of the individual executive’s pay. Others combined pay cuts with reductions in benefits, or at least a “tweaking” of benefits. A few companies, including FedEx, took the position that cutting pay and benefits was a better strategy than cutting any employees. In other words, sharing the pain is a better way of dealing with cost reduction than eliminating positions and losing good employees in the process. Their pay reduction plan reduced salaries from 7.5 % to 20%. However, they reduced non-union, salaried employees pay by only 5%. A number of high-tech companies also used a tiered set of cuts. One example was a 20% cut for the CEO, 15% for all other management and 10% for those ineligible for overtime and 5% for those eligible for overtime.

Clark County in Nevada developed a plan that involved both pay and benefits. In particular they focused on reducing and/or eliminating longevity pay and raised the questions of the value of having programs that include COLA’s, step increases, merit increases and longevity pay. They also looked at outsourcing as another cost reduction strategy. In other words, Clark County looked at every opportunity to reduce costs and questioned the viability of many traditional governmental pay and benefits programs.

Benefit Plans

His research also found that many companies have decided that their current level of company benefits is not sustainable. These companies are making changes that retain the core benefits such as hospital-medical, but are re-examining paying the full costs of programs like dental, drugs and vision. More companies are totally dropping some programs such as vision care and making them available as a voluntary participation program at group rates. Many organizations are establishing Health Savings Accounts and funding the accounts while getting out of the business of directly providing the current level of some group plans. Drug programs are also being re-evaluated in light of the fact that Medicare Plan D and other drug plans are available at relatively low cost.

What to do

In short, he believes that the County can only achieve the cost cutting goals necessary by making significant changes in both pay levels and benefits.

It appears that the most successful way to reduce pay is to use a tiered strategy and the following might be applicable to Martin County:

Tier One: 10-12 percent reductions for all employees earning 100K or above.

Tier Two: 5 - 7.5 percent for all other exempt employees.

Tier Three: 2.5 percent for all non-exempt employees

Even though cutting the pay of the non-exempt employees will be painful, in order to share the pain, he strongly encourages at least a token reduction in the pay of all employees. The goal here is to preserve jobs and most surveys reveal that the majority of employees are willing to give up some pay and benefits in order to keep their jobs.

He recommends elimination of any and all benefit program features that are predicated on length of service or seniority except pension plans. He also recommends that all employees, regardless of their status or position, be required to pay a portion of the premiums for all health care programs. The County should consider dropping all retiree health care benefits when they become eligible for Medicare by replacing them with the subsidized purchase of a supplemental or Medigap plan. When combined with Medicare, these programs provide for more than adequate coverage at significantly less cost.

Obviously many of these actions may have to be timed to currently running union contracts for some departments and some actions may not be necessary or desired. Dr. Pilenzo’s advice for the County is to begin with the things that can be done without opening contracts as quickly as possible, and incorporate equitable features during future negotiations. We will not comment further until discussing these issues with County officials. However, like Clark County NV, every option including outsourcing, pay cuts, furloughs, staggered work weeks, tele-commuting, reducing hours, flexible scheduling, unpaid vacations, hiring freezes and pension reductions should be selectively considered. The current salary structure in some areas such as Fire Rescue are unsustainable and will only get worse until significant actions are taken.