AGENDA #3f

BUDGET WORKING PAPER

TO:                  W. Calvin Horton, Town Manager

FROM:            Kay Johnson, Finance Director

SUBJECT:       Budgeting for Salary Savings

DATE:             April 27, 2005

The purpose of this working paper is to discuss alternative proposals for budgeting for salary savings.

BACKGROUND

On April 11, the Council received a report from the Citizens Budget Subcommittee regarding budget recommendations for the 2005-06 fiscal year.  The Subcommittee recommended that the Town consider budgeting for salary savings by department.  The Committee estimated that we could save $700,000 by budgeting for salary savings by department and by delaying the hiring process.

DISCUSSION

Current Practice

Salary savings are funds which are no longer a budgetary obligation because of a change in an employee’s employment status.  Positions are vacant for varying periods of time for recruitment and selection.  The Manager also may hold positions vacant to accumulate salary savings as necessary to meet budget projections.

Currently, the Council budgets for salary savings as a part of the $800,000 roll-over funds each year that we plan to be able to use in the next year.  If we were to budget salary savings as a reduction of departmental budgets, we would need to reduce the amount of the budget roll-over in the following year by the same amount. 

Alternative 1 – Budget for Salary Savings by Department

In contrast to Chapel Hill’s approach, the City of Durham budgets salary savings for its largest departments using historical rates for salary savings.  They do not budget for salary savings in smaller departments because of the unpredictability of the patterns of staff turnover.

The departments where Durham budgets for salary savings are all larger than the equivalent Town departments.  For example, the City of Durham’s Police Department has 587 full-time equivalent positions in comparison with the Town’s 137 full-time equivalent positions.  The City of Durham’s Fire Department has 286 full-time equivalent positions in comparison with the Town’s 75 full-time positions.  The Town’s largest department, the Transportation Department, has 162 full-time equivalent positions, 43% fewer than the smallest of the City of Durham’s departments with budgeted salary savings.  Because of the City of Durham’s larger size, it has a more predictable base line in salary savings than the Town has.  Budgeting for salary savings by department would be more likely to produce budget or service shortfall in our departments because of the unpredictable patterns of resignations and retirements on a smaller employee base.  In reviewing the needs of our four largest departments, Police, Public Works, Transportation and Fire we believe that there are difficulties in altering our budgeting procedures. 

Currently, the Town’s Police Department has experienced more turnover than other departments.  We believe that changes in police compensation will significantly reduce the availability of salary savings in the Police Department in 2005-06.  With current vacancies, a portion of salary savings must go to paying overtime in order to maintain current police services.

Personnel costs for the Transportation Fund are within one percent of our projections through the end of March.  Because bus service needs to be available regardless of turnovers, we need to use overtime or temporary employees to cover any absences, so it is difficult to achieve salary savings in Transportation.  Salary savings for full-time permanent employees are routinely transferred to cover overtime and temporary employees so the buses “run on time”.  We believe that removing this flexibility would impair service.

The Fire Department must also use overtime or temporary employees to cover for vacancies within the department.  The Fire Department has had no salary savings in the last two years because of having to pay overtime to meet staffing requirements.

The Public Works Department has a different make up from Police, Fire, and Transportation, each of which has a large number of employees doing similar tasks.  Public Works has a diversified work force.  Some positions could be left open after an employee resigns or retires for a short period of time without serious service level issues.  For other positions such as in sanitation, it is important to fill the positions as soon as possible in order to maintain service levels.  Because of the mix of services, we don’t believe that it is a good business practice to set a savings target for the Department without taking service levels into consideration.  As with other Town departments, salary savings are currently used for overtime and temporary employees in areas of critical need.  The savings from salary savings are budgeted as a part of the appropriated fund balance carry forward.

Alternative 2 – Budget by Position

An alternative approach to budgeting for salary savings requires that budget entries are recorded each time an employee leaves or begins employment, receives a raise, has a leave of absence, or receives a promotion or rank progression with the Town.  While this method is effective, it demands significant time to make all the entries.  We believe that the cost of administering this method would exceed the benefits.

CONCLUSION

If the Council wishes, we could reserve a fixed amount within our major departments for salary savings or specifically track within the budget system all employee resignations, retirements, leaves of absence and hirings, but we cannot recommend either approach.  Given the Town’s size, we believe that our current method of budgeting for an appropriation carry-forward, which includes a component for salary savings is an efficient and effective method when combined with the required authorization from the Town Manager before beginning the hiring process.  Either of the alternatives would reduce the projected appropriated fund balance available for carry-forward by the same amount for the following year. 

We cannot envision any system that would substantially increase the savings from salary savings except holding positions open longer.  The Manger already has the authority to set the amount of time a position is held open.  The longer we hold positions open, the less service we are able to provide in the affected area, so we need to balance the need to provide service and the desire to produce budget savings.  The represent system is flexible and takes advantage of opportunities to save money for us in the next budget year while continuing services in a reasonable manner.

RECOMMENDATION

That we continue to account for salary savings as a part of the $800,000 appropriated fund balance carry forward.