Earlier this week, the Senate Office of Oversight and Outcomes released a report that concluded that the furlough savings was illusory at 24.7 facilities, specifically at state hospitals, prisons, and other 24/7 facilities that are under state operation. This finding by itself carries a considerable consequence, but amazingly it is not the only finding of its kind.
But another study done by UC Berkeley’s Center for Labor Research and Education released on Thursday found that:
“Much of the savings from California state workers’ three-day-a-month mandatory furlough will be offset by reduced revenue and increased costs to the state general fund in future years.”
The Berkeley study analyzes the impact of furloughing state employees for three days a month, the equivalent loss of seven weeks of pay. The study concludes that the furlough will save the general fund only 12 cents for every dollar cut in wages.
Government agencies across the state have imposed furloughs as a means to reduce operating costs during the hardship. They range from cities to counties to the higher educational system. It is unclear just how much these findings are generalizable to other situations, but it seems these impacts ought to be examined.
Twenty Four Facilities
The Senate study found that employees in positions that must be filled day and night are generally not taking off three days per month. Instead, while absorbing the 14% reduction in income, they are working furlough days and banking time to be taken off in the future.
In the prison system, which has 70% of all general fund paid state workers, officials say that the long-term cost of furloughs is greater than the savings. However, these official argue that they were told by the administration that short-term payroll savings are more important than future liabilities.
According to the release from Senator President Pro Tem Darrell Steinberg’s office:
“correctional workers banked 1.5 million furlough hours between February and August 2009. Most are correctional officers. At a pay rate of $34.91 an hour, those hours create a future liability of at least $52 million.
When correctional officers do take time off, they generally use furlough days, not vacation days. As a result, from February through August of 2009, the number of unused vacation days accrued by correctional officers jumped 500 percent. This massive buildup of vacation time will complicate prison staffing in the future. The accrued vacation will increase costs, because many workers will be at a higher pay rate when they finally do use their vacation hours.
Furloughs fail to save the $108 million projected by the administration in the prison healthcare system, according to the court-appointed agency operating inmate medical care. Instead, officials say, paying overtime and hiring private workers to fill in for furloughed employees will more than offset any savings.
Furloughs are projected to increase costs within the prison health care system by $37 million to $47 million this year, according to the court-appointed receiver. They say furloughs also create a “management nightmare” and interfere with the court-mandated effort to improve inmate medical care.
Employees in California’s dozen mental hospitals and developmental centers are also being forced to work furlough days. They are racking up large balances of furlough and vacation time.”
Read the full report here: http://www3.senate.ca.gov/deployedfiles/vcm2007/senoversight/docs/roundtheclockfurloughFINAL2hirez.pdf
Berkeley Study
The Berkeley study analyzes the impact of furloughing state employees for three days a month, the equivalent loss of seven weeks of pay. The study concludes that the furlough will save the general fund only 12 cents for every dollar cut in wages.
The study’s lead author Ken Jacobs, also chair of the Labor Center said in a release on Thursday:
“It is poorly designed, if the goal is to provide savings to the general fund. Key design problems include furloughing state workers in revenue-generating positions, continued accumulation of pension and benefit debt, and inclusion of workers whose salaries are paid by the federal government and other special funds, in addition to the general fund.”
Jacobs said the state should consider reducing furloughs to one day each month and making up the difference in savings in the short term by raising revenues.
According to the study, a one-day-a-month furlough plan for the current fiscal year would result in a net savings to the general fund of $256 million, once future year costs are factored in, the study says.
Since February, the Labor Center report estimates a reduction in wages and benefits of $2.01 billion for the 193,000 affected workers this current fiscal year. Along with lost revenues and increased costs due to the furloughs, the net general fund savings for fiscal year 2009-2010 is calculated at $738 million. But, the study says, this year’s furloughs will result in a loss of $503 million in future years for a net savings to the general fund of $236 million.
By comparison, a one-day-a-month furlough plan for the current fiscal year would result in a net savings to the general fund of $256 million, once future year costs are factored in, the study says.
According to the study, reduced savings is attributable to the following:
* An estimated 42.3 percent of the reduction in pay and benefits comes from federal and self-supporting, special funds.
* The Franchise Tax Board and State Board of Equalization estimates that furloughs and related cuts will result in a loss of $675 million to the state’s general fund, including a loss or delay of $363 million in fiscal year 2009-2010.
* A mandatory three-day-a-month furlough will result in a projected reduction in pension payments of approximately $299 million this fiscal year, but those funds must be paid back – with interest – through an automatic adjustment in the formula for state payments to the fund, pushing the costs to subsequent years.
Moreover the study finds a ripple effect in the economy.
According to Jacobs:
“The furloughs are not only costly to workers, they are also costly to the local economy.”
By way of example, Sacramento County can expect a loss of an estimated 4,100 private sector jobs due to the reduced spending by the county’s many state workers.
The full report is available here: http://laborcenter.berkeley.edu/californiabudget/furloughs09.pdf
In their executive summary, the authors found other very serious impacts of furloughs.
These findings include:
The furloughs create a significant hardship for workers. The salary reduction is equivalent to losing more than seven weeks of pay a year. A pay reduction of this magnitude can be expected to result in lower employee morale and increased stress, both of which are associated with reduced productivity and greater work errors. Wage reductions may also lead to turnover of more highly productive workers.
The total pay reduction without benefits from the furloughs is projected to be $1.63 billion in 2009–2010. Taking into account taxes and employee savings, this is expected to reduce employee spending by $1.24 billion over the course of the year. The reduction in spending will have a multiplier effect in the economies of cities and counties with large numbers of state workers, resulting in a loss of private sector jobs and a potential increase in home foreclosures. The furloughs are projected to result in the loss of an estimated 4,100 private sector jobs in Sacramento County.
Workers included in the furloughs are not all paid through the state General Fund. Of the $2.01 billion reduction in spending for salary and benefits, an estimated 57.7 percent comes from general funds and 42.3 percent from federal and special funds. Furloughs of workers on federal funds represent a straight loss of income to the state.
The furloughs include workers paid through federal funds who perform roles in qualifying California residents for federal support. Any slowdown in processing or qualifying applicants will result in an additional loss of income for California residents.
Furloughs of workers in revenue-generating departments like the Franchise Tax Board and the proportional reduction in funds to the Board of Equalization are projected to result in a loss of $363 million in tax collections in FY 09–10 and $312 million in the subsequent years. In addition, licensing bureaus have reported increased backlogs, which will result in delayed revenue into special funds.
The furloughs will result in a projected reduction in payments to CalPERS of approximately $299 million in FY 09–10, while benefits are maintained whole. In effect, the state is borrowing this money from CalPERS. The funds will be paid back—with interest—through an automatic adjustment in the formula for state payments to the fund, pushing the costs to subsequent years.
Disruptions of state services have an impact on the broader economy. This includes delays in business licensing, longer waiting periods for public services, and traffic disruptions from the furloughs of Caltrans workers. Each of these exacts a cost on business operations in the state.
For every dollar in reduced spending from furloughs, the state saves approximately 37 cents for the General Fund for FY 09–10; this falls to 12 cents when losses in subsequent years are taken into account.
The study concludes that the state should restrict furloughs to general fund paid workers.
“The state should restrict furloughs to non-revenue generating departments that are paid for out of the General Fund. In addition, the state would greatly reduce the adverse impacts of the furloughs by restricting them to a single day and raising revenue to cover the difference. Depending on how the revenue was generated, such an approach would have a significantly smaller impact on jobs and the California economy than the current approach.”
