Cost Accounting in Local Government

Mitigating the Impact of Accrued Benefit Payouts

You’re going into the fiscal year with a balanced budget and no clouds on the fiscal sky. Suddenly, in July, your police chief announces his retirement. The chief has been at the city his entire career. Beginning as a patrol officer, he rose through the ranks and is beloved by the community.

You do a quick check on the financial impact of his retirement and you discover that he has maxed out his accrual of sick leave, vacation and comp time. Some of these benefits are grandfathered in as you were smart enough to negotiate limits on accruals. However, the impact of his retirement is going to throw a big hole into your balanced budget.

What do you do?

The simplest solution is that you tell the city manager that the position must remain unfilled until you’ve paid off the retiree. This is a great solution if your community can “afford” it. Obviously, it won’t work for all.

All the other solutions require that your management team plan ahead for such contingencies. The financial damage is caused by several factors:

  • The employee is being compensated at their current pay for a benefit that they earned at a lower pay rate; and,
  • The employee was allowed to accumulate hours to the point where the payout is significant.

Each of these issues are simple to solve in concept but will require significant effort during labor negotiations.

The first factor, the increase in the value of the accrual over time, can be resolved by negotiating that all accrued benefits are paid out at the salary at which they were accrued. This might also have the side benefit of discouraging long-term accruals. In fairness, when an accrued benefit is used it should be on a “first-in, first-out” basis.

The second factor, the significant numbers of accrued hours, can be mitigated by establishing limits on the hours that can be accrued. Yes, you will probably have to buy back the hours when you establish the policy. Nevertheless, your buyback now will be much less expensive than your buyback later.

Even if you resolve these two issues, you will still need to reserve monies for the accumulated liabilities that you are accruing. That means actually having a fully-funded reserve for the liability that the auditors are putting in your CAFR. The percentage by which you increase this reserve annually is an additional employee benefit that should be included in your cost of services.

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