AGENDA #4b

 

BUDGET WORKING PAPER

 

TO:                  W. Calvin Horton, Town Manager

 

FROM:            Patricia W. Thomas, Human Resources Director

 

SUBJECT:            Cost Calculations on Pay System Alternatives

 

DATE:            May 30, 2001

 

Council Members requested cost information under two alternative plans for granting Town employee pay increases; these are shown in Options 1 and 2.  In addition, we have provided costs for two additional options, called Options 3 and 4 (see pages 4 and 5).  If the Council believes it to be necessary to cut amounts from the budget in the area of employee pay, we believe these two options should be considered instead of Options 1 and 2.

 

Pay Increases in Manager’s Recommended Budget

 

The Manager’s recommended budget includes funds for employee pay increases implemented October 5, 2001, with components as follows:

 

·          2.75% range pay range adjustments to maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·          4.5% average merit increases for employees with salaries at or above the Job Rate.

 

 

The average employee increase Town wide would be 5.57%, with the distribution as follows:

 

Employees below the Job Rate:	Employees at or above the Job Rate:
2.75% range adjustment
+	4.5% average merit increase
3.78% career advancement step
TOTAL:  6.53%	TOTAL:  4.5%

 

 

Costs for this recommended increase, by fund, would be:

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total (10/ 5/2001)	Annualized Costs
Total	816,600	198,200	39,350	19,800	1,074,000	$1,395,000

 

Option 1:        3.78% merit and 2% market:

 

A requested option for calculation was for a 3.78% average merit increase for employees above the Job Rate (instead of the recommended 4.5% average merit) and a range adjustment of 2% instead of 2.75% as recommended by the Manager.

 

Under this option the average employee increase would be approximately 5%:

 

Employees below the Job Rate:	Employees at or above the Job Rate:
2 % range adjustment
+	3.78%% average merit increase
3.78% career advancement step
TOTAL:  5.78%	Total:  3.78%

 

 

 

Costs:	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total (10/5/2001)	Annualized Costs
Total	706,000	172,000	34,100	18,000	929,900	$ 1,210,000
Savings over Manager’s Recommended	110,600	26,200	5,250	1,800	144,000	$185,000

 

 

Advantages of this option would be:

 

·          It would reduce costs in 2001-2002

 

·            Employees below the Job Rate would receive pay increases sufficient to reflect growth in the labor market and to reflect career development with the Town.             

 

Disadvantages of this option would be:

 

·           Long term employees  above the Job Rate would receive an average merit increase that is 1 - 2% less than the average salary increase projected in the labor market as well as being 2% less than the increase granted to employees below Job Rate.

 

·          An average merit increase of 3.78% provides little flexibility for distributing merit increases among 5 performance levels.

 

We recommend that the Council not adopt this option because of the negative effect on long-term Town employees.

Option 2: Compete at the Middle of the Market?

 

A Council Member requested cost information if the Town Council were to decide to compete at the middle of the local labor market instead of at the 75^th percentile.

 

There is approximately a 5-7% difference between the middle of the market and the 75^th percentile of the market.  So, if the Town decided to no longer compete with the 75^th percentile, no adjustment to the salary ranges would be granted this year, and existing hiring rates and ranges would continue to be used.  In order to balance the increases for employees above and below the Job Rate, the average merit increase for employees above the Job Rate would be limited to 3.78%, the same amount as the step increase for employees below the Job Rate:

 

 

Employees below the Job Rate:	Employees at or above the Job Rate:
3.78% career advancement step	3.78% % average merit increase

 

Costs:	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total    (10/5/2001)	Annualized Costs
Total costs	538,200	122,900	25,450	11,600	697,750	$907,400
Savings over Manager’s Recommended	278,400	75,300	13,900	8,200	376,250	$487,600

 

Advantages of this approach are:

 

·          It would reduce costs in 2001-2002

 

·            Employees would receive pay increases sufficient to offset inflation

 

Two major disadvantages of this option are:

 

·          Town employees would receive only a 3.78% increase.  Although this amount would be enough to offset inflation, it is 1-2% less than the average compensation increases projected for employees in the general labor market, and is less than the current change in the federal Employment Cost Index (4.1% annual change in the last year).

 

·          The Town’s salary ranges would be less competitive with the local market and the recruitment and retention advantages gained through the policy of the 75^th percentile would no longer be present.  In future years, it may be more difficult to attract and retain employees in a competitive labor market setting.  In addition, if it becomes necessary to hire employees above the hiring rate  in this or future years, compression may be reintroduced into the  Town’s wage structure. 

 

We recommend that the Council retain the policy of competing at the 75^th percentile of the market.

Additional Options:

 

We continue to believe that the pay increases in the Manager’s Recommended Budget are justified by the market and would help maintain competitive salaries.  However, if the Council believes it to be necessary to cut amounts from the budget in the area of employee pay, we recommend balancing the cuts among the 3 areas (step increases, range adjustments and merit increases). 

 

Below we have calculated costs for two options that provide different levels of cost savings while balancing the cuts.   Other options could be calculated upon request.

 

Option 3:  We believe that the following option would be preferable to Option 2 explained above.  This option saves a very similar amount of money to Option 2 but would maintain a balance between step increases, the interests of market competitiveness and salary increases for long term employees. Under this option salary ranges would increase by 1.5%, instead of 2.75%, while the step increases and merit increases would remain at the same levels as recommended in the Manager’s Recommended Budget. 

 

Average increases Town wide would be approximately 4.9%, with distributions as follows:

 

 

Employees below the Job Rate:	Employees at or above the Job Rate:
1.5% range adjustment
+	4.5% average merit increase
3.78% career advancement step
TOTAL:  5.28%	TOTAL:  4.5%

 

 

Costs:	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total          10/5/2001	Annualized Costs
Total	712,000	167,000	34,000	16,600	929,000	$1,209,000
Savings over Manager’s Recommended	105,000	31,200	5,350	5,200	145,000	$186,000

 

 

Advantages of this option:

 

·           Retains the structure of the Manager’s Recommendation, with a balance between funding of range increases for market competitiveness, step increases, and merit increases for long-term employees.

 

·          Saves a similar amount of money over the Manager’s Recommended Budget proposal to Option 2 above -- $145,000 versus $144,000 in all funds.

 

·          A salary range increase of 1.5% instead of 2.75% would keep the Town’s ranges close to the 75^th percentile of the market.

 

Disadvantages of this option:

 

·          Town salary ranges would likely be less competitive than last year, because other employers are projecting hiring rate or range increases of 2.5% to 3% this year. The Manager’s Recommended Budget range increase of 2.75% would provide the more competitive level of increase.

 

 

 

Option 4:  This option would cut more costs from the salary recommendations by providing a less competitive amount of salary increase and range adjustment.  However, it does balance various interests by providing a small increase in salary ranges and granting the same level of increase to all employees below and above the Job Rate. 

 

Under this option salary ranges would increase by 0.72%, instead of 2.75%, while the step increases and merit increases would remain at the same levels as recommended in the Manager’s Recommended Budget.  Average increases Town wide would be approximately 4.3% *

 

 

Employees below the Job Rate:	Employees at or above the Job Rate:
.72 % range adjustment
+	4.5% average merit increase
3.78% career advancement step
TOTAL:  4.5%  *	TOTAL:  4.5% *

 

 

Costs:	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total          10/5/2001	Annualized Costs
Total	646,000	148,000	30,500	14,000	839,000	1,090,300
Savings over Manager’s Recommended	171,000	50,400	8,800	5,700	235,600	305,000

 

 

Advantages of this option:

 

·            Reduces costs in 2001-2002.

 

·           Retains the structure of the Manager’s Recommendation, with a balance between funding of range increases for market competitiveness, step increases, and merit increases for long-term employees, with each  group receiving an average 4.5% increase. 

 

·          A salary range increase of 0.72% (compared to Option 1 above) would provide a small increase in hiring rates and other rates in the salary range

 

·           This option maintains a balance between merit increases for long term employees above the Job Rate and career advancement increases for employees below the Job Rate.

 

Disadvantages of this option:

 

·          The Town’s salary ranges would be less competitive with the local market and the recruitment and retention advantages gained through the policy of the 75^th percentile would be lessened.

           

·           Hiring rates and ranges would be less competitive and, where it becomes necessary to hire employees above the hiring rate in this or future years, compression may be reintroduced into the employee wage structure.

 

SUMMARY

 

Of the options presented in this paper, we recommend consideration of these options in the priority order below.  Other options could be calculated at Council’s request.

 

1^st priority:  Manager’s Recommendation:  We continue to believe that the pay increases in the Manager’s Recommended Budget are justified by the market and would help maintain competitive salaries.  Cost: $816,000 General Fund, $198,000 Transportation Fund.

 

·          2.75% range pay range adjustments to maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·          4.5% average merit increases for employees with salaries at or above the Job Rate

 

 

2^nd priority:  Option 3   (savings of $136,200 in the General and Transportation Funds) :

 

·          1.5% range pay range adjustments to maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·          4.5% average merit increases for employees with salaries at or above the Job Rate.

 

3^rd priority:  Option 4 above (savings of $221,400 in the General and Transportation Funds):

 

·          0.72% range pay range adjustments to  maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·          4.5% average merit increases for employees with salaries at or above the Job Rate.

 

4^th priority:  Option 1 above  (savings of $136,800 in the General and Transportation Funds):

 

·          2% range pay range adjustments to maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·          3.78% average merit increases for employees with salaries at or above the Job Rate.

 

5th priority: Option 2 above (savings of $353,700 in the General and Transportation Funds):

 

·          no  range pay range adjustments to  maintain competitive salaries in the area market

·          3.78% step increases for employees with salaries below the Job Rate

·           3.78% average merit increases for employees with salaries at or above the Job Rate.

ATTACHMENT A

 

DETAILS OF COSTS FOR VARIOUS OPTIONS,  BY FUND

 

Manager’s Recommended Budget:

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total  all funds – FY 2001-2002 (October 5, 2001)	Annualized Costs
2.75% range adjustment	230,800	67,900	11,900	8,700	319,300
Step increase	287,200	82,900	14,750	10,600	395,450
4.5% merit	298,700	47,300	12,700	1,200	359,900
Total	816,600	198,200	39,350	19,800	1,074,000	$1,395,000

 

COSTS FOR COUNCIL-REQUESTED OPTIONS:

OPTION  1:                3.78 average merit for employees above the Job Rate  steps, 2% range adjustment

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total  all funds – FY 2001-2002 (October 5, 2001)	Annualized Costs
2% range adjustment	167,900	49,400	8,650	6,300	232,200
Step increase	287,200	82,900	14,750	10,600	395,450
3.78% merit	250,900	39,700	10,700	1,000	302,300
Total	706,000	172,000	34,100	18,000	929,950	1,210,000

 

 

OPTION 2:                  50^th percentile option:  3.78% merit and step, no range adjustment 

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total  all funds – FY 2001-2002 (October 5, 2001)	Annualized Costs
Step increase	287,200	82,900	14,750	10,600	395,450
3.78% merit	251,000	40,000	10,700	1,000	302,300
Total	538,200	122,900	25,450	11,600	697,750	$907,400

 

OTHER COST SAVING  ALTERNATIVES :

 

OPTION  3.  4.5% merit,  step increases, 1.5% range adjustment

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total  all funds – FY 2001-2002 (October 5, 2001)	Annualized Costs
1.55% range adjustment	126,000	37,000	6,500	4,800	174,000
Step increase	287,200	82,900	14,750	10,600	395,450
4.5% merit	298,700	47,300	12,700	1,200	359,900
Total	712,000	167,000	34,000	16,600	929,000	$1,209,000

 

 

OPTION  4.   4.5% merit,  step increases,  .72 % range adjustment

 

	General Fund	Transportation Fund	Housing Fund	Parking Fund	Total  all funds – FY 2001-2002 (October 5, 2001)	Annualized Costs
.72% range adjustment	60,000	17,600	3,000	2,200	83,000
Step increase	287,200	82,900	14,750	10,600	395,450
4.5% merit	298,700	47,300	12,700	1,200	359,900
Total	646,000	148,000	30,5000	14,000	899,000	$1,090,000