White Paper Limited Visibility: The Public Sector Absence Management Challenge Managing downstream unfunded benefits; mitigating revenue and service impacts
Executive Summary Public sector organizations are under increasing pressure to reduce operating costs a pressure that has thrust absence management into the spotlight as a potential area for significant savings. As organizations struggle to preserve critical programs and maintain high levels of citizen service in the face of workforce reductions, both public sector management and the press are noticing when public servants aren t on the job. The impact that employee absenteeism has on productivity, morale, and program performance is alarming. Even more alarming is the way in which using manual processes to track, calculate, and accrue absence- and leave-related information can lead to large, unexpected downstream costs that may threaten the financial viability of a public sector organization. The challenges of absence management in the public sector A recent survey conducted by Governing magazine found that 53% of state and local governments and 52% of education organizations are using manual systems to track time and attendance. 3 Large employee payouts upon employee separation and retirement. Long after the private sector abandoned pensions and the liberal leave policies that allowed employees to carry forward unused sick days and vacation, public sector organizations have largely retained both practices. In many public sector organizations, sick time never expires and vacation time can be rolled over to sick time. As a result, accrued leave balances often follow the employee through to retirement and can favorably impact years of service and retirement eligibility. This can also make exiting or retiring employees eligible for large lump-sum cash payouts and can factor into pension calculations upon retirement. Paired with problems tracking leave accurately, you have a situation in which post-employment benefits may be based on wages that were earned erroneously. Scenarios are playing out across the country in which public sector employees are leaving or retiring with months and years of banked leave that not only lead to large separation payouts, but also qualify employees to retire earlier. As a result, organizations are losing valuable, experienced workers earlier than expected, an unwelcome development at a time when a significant portion of the workforce is already eligible and due to retire in the coming decade. To make matters worse, 42 percent 1 of state and local government organizations and 33 percent 2 of education organizations allow employees to apply unused leave hours to years-of-service calculations for the purpose of pension funding. These calculations are performed at the end of the employee s career and most likely at their highest rate of pay. Although the leave may have been earned years ago when the employee was making a far lower salary, the payouts for leave and pension are calculated at the peak salary level. 1 Governing Research, Absenteeism Study: State and Local Government Respondents (e.republic 2012), 16. 2 Governing Research, Absenteeism Study: Education Respondents (e.republic 2012), 16. 3 Governing Research, Absenteeism Study: State and Local Government Respondents (e.republic 2012), 2; Governing Research, Absenteeism Study: Education Respondents (e.republic 2012), 3.
With a budget crisis that has put public sector spending in the spotlight and a declining pension fund that is only 78 percent funded, you don t have to look far to find examples of the havoc that poorly tracked and managed leave can wreak on government and education organizations: The average sick leave payout for San Jose, California, public safety workers in 2010 was $84,973. The top 10 police and fire workers collected a total of $2,149,652 in 2010. All 10 received payouts over $100,000, with seven over $200,000. 5 In New Jersey, 428 municipalities are facing liabilities of more than $825 million for accumulated sick and vacation days, which would cost an additional $250 for every property taxpayer in the state. New Jersey municipalities have been forced to borrow to make sick-leave payments after cutting jobs to balance their budgets. 6 The Pew Center on the States analyzed 2009 and 2010 data on states funding of pensions and found that state pension plans were only 78% funded, declining from 84% in 2008. 4 Georgia s state government paid workers who retired, quit, transferred, or were laid off $43 million in 2011 in unused vacation time. The state is obligated to pay out hundreds of millions more to current employees in coming years. State employees had banked more than $550 million worth of unused time off as of the end of fiscal 2010. The state must pay them for that time when they leave their jobs, minus any time off they actually take. 7 West Virginia previously allowed employees to apply sick days toward either their pension or retirement health care benefits. The state cut the value of these converted days by half for all hires after June 1988. It then ended this perk completely for anyone hired after June 2001. Now 70 percent of retirees below age 65 are paying their premiums entirely with converted sick days. Another 20 percent can cover half their premiums thanks to the unused leave. 8 While in most cases separation and retirement payouts tied to accrued leave are supported by existing policies and union agreements, reducing these payouts and ensuring their accuracy is still possible. With better leave and absence tracking, organizations can have confidence that when employees leave the public sector, they are receiving only the payments they have actually earned and are contractually due. 4 States Fiscal Health, The Pew Center on the States, http://www.pewcenteronthestates.org/initiatives_detail. aspx?initiativeid=57748. 5 Scott Herhold, San Jose s Generous Policy on Sick Leave Is Crazy, San Jose Mercury News, February 16, 2011. 6 N.J. Towns Face $200,000 Retirement Checks, Bloomberg, June 8, 2011, http://www.bloomberg.com/ news/2011-06-08/new-jersey-workers-receiving-200-000-retirement-checks-impoverish-towns.html. 7 James Salzer, State Pays a Bundle in Unused Leave, The Atlanta Journal-Constitution, January 1, 2012. 8 Unused Sick Days Aiding W.Va. Retiree Premiums, Charleston Daily Mail, January 2, 2012.
Understaffing leads to lost revenue. Although you may not think of public sector entities as having revenue-generating missions, revenue generation is critically important to many government and education organizations. Health clinics operated by departments of Health and Human Services; gift shops run by departments of Resources, fees collected by the DMV; ticket and concessions stores run by the Parks and Recreation department; and school bookstores, food services, and athletics are just a few examples of government and education organizations that have a mission to raise revenue in addition to providing services to citizens and students. Just as in a private sector operation like a retail or manufacturing organization, scheduling employees efficiently and managing employee absenteeism for these public sector undertakings is essential to revenue creation. Poorly managed absenteeism makes it nearly impossible to maintain consistent revenue streams and high levels of citizen and student services. Disrupting continuity of service. Employee absenteeism can have a negative impact on the services and programs administered by government and education employees. At a time when budget cuts are forcing the public sector to implement staff reductions and furloughs, incidental and unplanned absenteeism among remaining employees exacerbates an already waning operational efficiency problem. For example, Public Works supervisors need to closely monitor absenteeism when roads have to be cleared of snow or if a water main leak shuts down major portions of the downtown area during rush hour traffic. Safety officers and facilities personnel need to be available for special events on K-12 and higher education campuses. Under these circumstances, it becomes critical for managers to be able to make informed decisions as time-off requests hit their desks, and to do that they need visibility into individual absences as well as absences across the entire department. And when employees know that absence is being efficiently tracked, they are less likely to misuse or abuse their paid-time-off benefits. Improper payments. The unfortunate reality is that many public sector organizations are at serious risk of paying employees incorrectly. Too often, employees are paid for regular time when the time should have been denoted as leave or vacation, which can lead to incorrect pay in areas like overtime or comp time. Incorrectly coding employee time puts public sector organizations at risk of overpaying or underpaying employees in addition to exposing the organization to union and labor law compliance violations that can turn into an employee and public relations nightmare. WHY ABSENCE HURTS The cost of employee absence whether planned (vacation and holidays), incidental unplanned (sick days and personal emergencies), or extended (short-term disability and FMLA leave) is significant. It s these last two categories that are the main targets of absence management efforts. According to a recent survey, employee absenteeism accounts for approximately 35 percent of base payroll, with 22.5 percent of those costs classified as indirect and 12.2 percent classified as direct. Indirect absence costs are a result of work being put off until the employee returns, cases where the employee s absence hamstrings co-workers and slows down project completion, and situations in which the absent employee s work has to be covered by others. 9 9 Mercer, Survey on the Total Financial Impact of Employee Absences, a study commissioned by Kronos Incorporated (Mercer, June 2010), 10-11.
What s causing the absence problem in the public sector? Cumbersome manual processes. In most public sector organizations, employees are primarily responsible for reporting and initiating the paper-based documentation trail that captures absences and defines the absence type. Sixty-three percent 11 of government organizations and 60 percent 12 of education organizations do not have an automated time-off request and approval system. With manual systems in use in more than half the country s government and education organizations, this means they are relying on paper-based, multipart forms and file folders to track vacation, holiday, sick, and personal time. Even for those public sector organizations that claim to be automated, a significant portion are relying on an ERP payroll system that still requires payroll personnel to physically enter absence times and types into the system from a paper timesheet. Physically managing the forms is a challenge in itself when copies are being maintained by the employees, their managers, and human resources. When you consider that many of the forms have to be transported between physical locations across cities, state capitals, campuses, and districts, the opportunity for errors and lost information that never hits the official system of record is significant. 45% of government respondents and 43% of education respondents say their organization s system of tracking time worked and absenteeism is out of date. 10 Manual and semiautomated systems create several opportunities for failure, from employees and managers simply forgetting to fill out the proper forms, noting the time or coding the absence incorrectly, not storing forms properly, and forms getting lost in the shuffle. These systems have no mechanism for alerting employees, managers, and human resources when a form is missing or contains incorrect information. Paper-based systems force managers and employees to keep their own reports accounting for total vacation, sick, and personal time that is available and has been used to date. Even when spreadsheets or ERP systems are being used, there are still manual data entry steps in the absence management process that create opportunities for errors to occur. And inaccurate tracking doesn t just impact leave requests. In a manual environment, there is little visibility or control around labor law and union compliance enforcement for FMLA and military leave. Poor union and compliance tracking can lead to negative, highly visible lawsuits. The city and county of Denver, which employs nearly 13,000 employees serving approximately 600,000 residents, relied on a manual-based system for tracking employee leave that consisted of a three-part leave slip. It took weeks for the leave slips to reach the timekeeper, who then manually entered the information in the city s ERP. The payroll department had no way to verify information and couldn t be sure that rules were being applied accurately. In addition, this approach prevented supervisors from knowing whether or not employees were entitled to available time off. All told, processing an employee s vacation request required 21 separate actions by city employees. After automating absence management, Denver resolved these issues while addressing compliance requirements and gaining the ability to track employee 10 Governing Research, Absenteeism Study: State Local Government Respondents (e.republic 2012), 6; Governing Research, Absenteeism Study: Education Respondents (e.republic 2012), 6. 11 Governing Research, Absenteeism Study: State Local Government Respondents (e.republic 2012), 13. 12 Governing Research, Absenteeism Study: Education Respondents (e.republic 2012), 12.
furlough days. The number of steps it took to submit a vacation request was reduced by 52 percent. Employees now enjoy immediate access to payroll information and leave balances, and supervisors can view verification of approved leave in real time. The city was able to reduce its payroll personnel count by 84 percent and save $1.5 million by redeploying those personnel to higher-value roles. And it expects to receive another $5.2 million in ROI from the time and attendance project. Exception pay. Exception pay is another unique challenge for the public sector, and it s one that can quickly skew leave and overtime if they are not carefully tracked. Most public sector employees are paid using exception pay, where it s assumed that the employee worked 40 hours for each pay period, whether or not that time included vacation, leave, or sick time, for example. Exceptions to regular pay are not calculated using an automated system, but are self-reported by the employee. On an exception pay scale, any time off the employee takes is either manually logged on a paper timesheet or is keyed into an ERP s time and attendance system. If the leave is not tracked correctly, accruals will be inaccurate, leading to overpayments in the short term and potentially inflated pension rates and retirement payouts in the long term. Decentralized management. Government and education entities are composed of many departments and divisions, and depending on the size of the organization, these departments and divisions can be very large and spread across a wide geographic area. In state governments, management of absenteeism is highly decentralized across major departments, raising questions about who ultimately owns the responsibility for absenteeism policies and enforcement. By contrast, in most local government and education organizations, absence management is separated from central payroll and tracked at individual department/agency levels. In either case, there is a perception at high levels of the organization that absence management risk belongs to individual departments and managers and not to the organization as a whole. Lack of visibility. Without accurate leave tracking, public sector organizations can t see the impact of absence on their daily and long-term operations and are unable to take appropriate steps to minimize and mitigate it. In this scenario, when employees retire or separate, it s nearly impossible to know whether you are overpaying employees for accrued vacation and sick time and calculating their pensions and retirement eligibility accurately. Amid a crippling fiscal crisis, managers throughout California s government have routinely allowed their employees to amass unused vacation time, enabling hundreds of workers to end their public-service careers with payouts topping $100,000. One worker combined vacation and compensatory time to walk away with more than $800,000. In the past four years, nearly 500 government workers earned six-figure paychecks, mostly for unused vacation. In total, the state spent $486 million between 2006 and mid- 2009 to pay more than 52,000 employees for time-off benefits which included a small percentage of unused comp time and holidays that weren t taken. Many of those cash payments appeared to violate rules designed to limit how much vacation time state workers can accumulate during their careers. Most employees are allowed to bank 80 days worth of unused vacation, but records show that supervisors routinely allow them to exceed that amount. 13 13 Chase Davis, State Employees Pile Up Vacation Time, Exceeding Caps and Costing Millions, California Watch, February 27, 2010, http://californiawatch.org/money-and-politics/state-employees-pile-vacation-time-exceeding-caps-and-costing-millions.
How workforce management can make a difference Automating your absence management process with a workforce management solution such as the Kronos Workforce Central suite can help public sector organizations properly track and monitor absenteeism and ensure consistent revenue streams and high levels of service to citizens and students. Automated solutions streamline the application of complex attendance and leave policies, allowing organizations to accurately track labor costs, regulate collective bargaining and labor law compliance, and mitigate unnecessary overtime so that downstream liabilities can be managed and planned for. And these solutions allow public sector organizations to enforce rules consistently and control the costs, risks, and productivity effects associated with employee absenteeism. Automated absence management systems address the compliance challenge by preconfiguring and coding state, local, and union policies into the system. This allows government and education organizations to systematically apply attendance rules accurately and objectively across the organization with respect to both rewards and disciplinary actions. If a potential compliance violation occurs, the system alerts the management team so that organizations do not have to rely on manual monitoring to catch the issue. And critical timely documentation trails and reports are also available in the event of an audit. With absence management automation, managers can generate on-demand reports for visibility into patterns of unplanned absences and absence abuse. Managers can zero in on employees with absence issues and take proactive steps to avoid declines in quality and productivity while reducing the costs associated with replacement workers and excess overtime. The accurate time tracking and reporting of absence that is enabled by automated absence management helps ensure that employees are paid accurately, minimizing over- and underpayments. Accruals are properly tracked, a critically important benefit for a sector that largely allows employees to accrue leave and roll it forward for years. Understanding exactly what employees are entitled to allows an organization to better plan for the financial impact of employee retirement and separation. Kronos Incorporated 297 Billerica Road Chelmsford, MA 01824 +1 800 225 1561 +1 978 250 9800 www.kronos.com More information about Kronos customer success stories may be found at www.kronos.com/resources. 2012, Kronos Incorporated. Kronos, the Kronos logo, and Workforce Central are registered trademarks of Kronos Incorporated or a related company. All other product, company names, or marks mentioned, if any, are used for identification purposes only and may be the trademarks of their respective owners. All specifications are subject to change. All rights reserved. PS0109-USv1