The Budget Can’t be Right if Staff Costs are Wrong
November 24, 2015
From the Finance Director’s Desk…
Adopting a new budget each year guarantees a blend of high drama and melodrama. 2004 leaned particularly toward the latter. Council spent two budget hearings just debating the merits of two possible Self Contained Breathing Apparatus (SCBA) systems the Fire Department would use to enter burning buildings. We learned SCBA systems are expensive, technical, and not interoperable. Each had esoteric yet critical advantages. Council was determined to scrutinize every facet before making a decision the City would have to live with for several years.
Like all budgetary decisions, this one was important. But I knew in the back of my mind that much of the budget had been shaped months before when the Council approved updates to the Authorized Personnel List and Salary Schedule. Our budget team had built a solid foundation for the year’s budget based on Council’s direction.
Getting personnel costs right is the first step, so that everyone knows what is available to work with for every need other than wages and benefits. I wondered how many people in the Council chamber that night understood how many factors had to come together to get staff costs right.
My Path to Personnel
My first real job was doing payroll for ADP — the largest payroll processor in the country at the time. While studying Business and Accounting at San Jose State University, I worked the night shift turning around payrolls in 24 hours for thousands of employers. After graduating, I worked with many new customers, learning the nuances of their payroll and personnel systems while installing them on ADP’s main-frame software. The complexity and error sensitivity of that work shaped my career; everyone audits their paycheck on payday.
When I moved on from payroll, I entered general accounting after a stint in Benefits Operations for Wells Fargo. Budgeting processes fascinated me because they were intricate and challenging. I learned to build cost forecasts from the bottom up. I attended A-87 training in how to recognize indirect costs and fairly allocate them among departments and programs. After serving as a CFO for a Federally funded non-profit in job training and an entrepreneurial but poorly funded startup, I decided to enter government. By that point I was able to bring a wide range of experience in labor cost calculation and allocation. All of which made it easier to work through the issues in municipal personnel cost budgeting.
Exploring Budgeting for People
Conceptually, personnel budgeting is easy enough; just answer three simple questions:
1. Who works here?
2. How much do they cost?
3. Where do they work?
As anyone who has tried it knows, the devil is in the details. The estimates, educated guesses, and forecasts required for the budget depend on internal factors, labor markets, and a large, often-opaque, benefit vendor market.
In preparing budgets to satisfy Federal program auditors for the non-profit I worked at, I had learned to start by calculating costs in detail, position by position, using the data from the personnel system in Excel worksheets. Once we had those costs we just needed to figure out where they worked. This approach was even more important in government where wage and benefit costs include so many elements.
As you consider your next budget cycle and run down your mental checklist, you may opt to start with revenue forecasts and personnel rosters like I did. Revenue forecasting is another story for a different post, but on the personnel side, one of your first tasks is getting the Authorized Position List reconciled with personnel records, and submitted for legislative approval action if changes are needed.
The Authorized Salary Schedule is another early task on your list. With labor unit negotiations often underway at the same time, it is tough, but critical, to have your best salary estimate for every position. But base salary is just the beginning; many other pay elements are frequently added to base pay. For example, just one small city in California authorizes twenty-three distinct pay types: including bilingual pay, car allowances, educational incentives, six different differentials, various standby pays, uniforms, and even tool allowances.
These additional pay elements are driven by shortages in skilled labor. Legislators often cap published salary structures, so the pressure to find other ways to compensate needed hires and make careers attractive continues to grow. This increases the difficulty of projecting salaries in budgets and long-term forecasts. Multiple retirement plans, benefit matrices, and actuarially calculated costs coming with GASB 67 and 68, all add complex layers to every personnel cost calculation.
It is easy to forget how much personnel practice, benefits administration, and Excel expertise budget teams bring to the table every budget season. Watching that Council debating difficult spending decisions from the dais, I was satisfied that my professional team had built an accurate budget proposal for them, based on a detailed understanding of the personnel costs that made up 75% of the total budget.
Mike McCann moved into government service in Ukiah, then Monterey CA, after beginning his career in corporate (ADP, Wells Fargo Bank, Blue Shield of CA), not-for-profit (Blue Shield of Ca, Mendocino Private Industry Council), and start-up accounting. For the last 20 years, Mike has been hands-on with budget, financial reporting and accounting operations, including City budgets and CAFRs. He holds a B.S. in Accounting from SJSU and M.S. in Instructional Technology from CSUMB.
Category: Government Finance