Employee Contract Costing & Budget Implications

1. Employee Contract Costing&Budget Implications Keith Knauss June 2012 Rev. 2/2/13

2. Guideline Keep employee compensation increases (salary plus benefits) at or below real estate tax increases Said another way- If you’re raising taxes by 3% this year then employee compensation should increase no more than 3%

5. Contract Costing • Here come the numbers

6. Teacher Compensation • Approximately half of the budget • Sets precedence for administrative and support staff compensation

7. Salary and Benefits

8. Funding Sources Local Real Estate Taxes $32.8M State Taxes $2.5M Teacher Compensation $35.3M

9. Local Tax Impact vs. Total Teacher Compensation $2.5M

10. Hypothetical Contract Offer EvaluationStep + 1% Matrix + $1,000 Bonus +5% Supplementals For an explanation of Step, Matrix and Educational increases see Appendix A

11. Example Contract Offer EvaluationStep + 1% Matrix + $1,000 Bonus + 5% Supplementals

12. Example Contract Offer EvaluationStep + 1% Matrix + $1,000 Bonus + 5% Supplementals Salary Increase PSERS Increase Compensation Increase

13. Contract Offer Evaluation Criteria • Economically sustainable under Act 1 limits? • Compensation increases inline with current economic conditions? • Compensation appropriate to attract and retain quality employees?

14. Example Contract Offer EvaluationStep + 1% Matrix + $1,000 Bonus Economically sustainable under Act 1 limits? No, the Index plus PSERS exception is currently in the 3% range Compensation increases inline with current economic conditions? No, local compensation is currently in the 2% range Compensation appropriate to attract and retain quality teachers? No, compensation is in excess of what is needed

15. Typical Contract Offers • Nine additional contract offers will be examined to determine the approximate tax impact

16. Example 1Step + 1% Matrix Increase

17. Example 2Step Only

18. Example 31% Matrix Only

19. Example 41% Matrix, 15% Healthcare Contribution (was 10% in 2012-13)

20. Status Quo • By law, school districts that cannot reach a contract agreement with their teachers enter a “status quo” period where the District and the teachers are bound by the terms of the expired contract. • Teachers continue to teach while receiving the same pay and benefits specified by the expired contract.

21. Example 5Status Quo

22. Furloughs • A reduction in staff by dismissing one or more teachers • Must be for one of 3 reasons and approved by the PDE • Usually requires the elimination of non-core courses (art, language, music) • Least senior staff (lowest paid) go first; bumping rules (seniority) apply

23. Example 6Status Quo, 5 FTE Furloughs 5 furloughs @ $55K

24. Demotions • A reduction in assignment and pay (e.g. 100% to 80%) • Can be for any number of reasons (economic, decline in course enrollment, curtailment of programs) • No approval needed from PDE • Can target senior, highly paid staff for maximum savings while minimizing the negative educational effect to the students

25. Example 7Status Quo, 3 FTE Demotions 3 demotions @ $100K

26. Graphical Format

27. Financial Gimmicks • Use the Reserve Fund • Offer an Early Retirement Incentive Plan (ERIP) Both gimmicks shift the financial burden from the current year to future years – a form of intergenerational wealth transfer

28. Typical multi-year Analysisstep +1% matrix, 4 years

29. Reserve Fund • Heard most often: • “Use the reserve fund to stabilize PSERS increases” • “Use the reserve fund to keep tax increases within the Act 1 cap”

30. Example 8 Reserve Fund, step +1% matrix, 4 years

31. Early Retirement Incentive Program (ERIP) • Offer an incentive of $50K (or $40K or $25K) for each retiring employee • Highly compensated employees (~$100K salary) are replace with new, less compensated (~$60K) employees • “Pulls” retirements forward in time

32. Example 9ERIP, step +1% matrix, 4 years

33. Graphical Format

34. Mid-Year Increases • Is a mid-year 4% salary increase the same as a beginning-of-the-year 2% salary increase? • Yes and no • Yes, the dollars spent in the first year are the same • No, the dollars spent in the second year are 2% higher for the mid-year increase

35. Accounting for mid-year Increases 4% matrix increase given mid-year 2% matrix increase given beginning of year

36. Conclusions • Expect several years of small or no salary increases due to above-inflation health care increases and PSERS increases • Expect a move to high deductible health care plans or increased employee contributions • Because of the unpredictable nature of revenues (state contribution, assessment appeals, transfer taxes) and expenditures (PSERS contribution rates, health care premiums), contracts should be negotiated yearly as part of the budgeting process

37. Appendix ATeacher Salary Matrix • Matrix Movement • Step Movement (vertical) • Educational Movement (horizontal)

38. Teacher Salary Matrix

39. New Salary Matrix

40. Salary Movement

41. Appendix BAverage Salary – Method 1- Attrition Included

42. Appendix BAverage Salary – Method 2 – Attrition not Included

43. Appendix CEffect of aOne Time BonusStep + 1% Matrix + $1,000 Bonus +5% Supplementals

44. Appendix DThe PSERS Problem • Approximate 4% per year compensation increases for several years caused just by PSERS: • Who “pays” for PSERS? • What effect does PSERS have on contracts?