Beyond Furloughs

I’ve been meaning to write on the issue of furloughs for a while as our firm has been dealing with the issue throughout the state. As I’ve commented publicly, part of the reason we’ve been successful in negotiating furloughs in a number of jurisdictions is because the unions have largely been cooperative.  From the perspective of unions, furloughs allow them to save jobs.  The unions also believe—correctly in my view—that once the economy recovers, it will be a lot easier to end furloughs than it will be to fill positions where people have been laid off.  However, with next year’s state budget not looking that much better, many public agencies are going to have a make tough choices.  Continue furloughs?  Impose layoffs? Cut services? Or something else?

Layoffs v. Furloughs

A recent article out of the Wharton School of Business helps shed some light on why furloughs have been in vogue during this recession. According to the article, in the past the investment community favored layoffs in response to economic downturns. “If you laid people off, it looked like you were taking action. It looked like you were cutting costs, and the investment community used to reward companies every time they announced that.  As a result, there was strong evidence that employers announced more layoffs than they actually executed.”  Thus, by laying-off employees companies were often rewarded by investors (ie their stock price went up).

However, recently that thinking has begun to change.  Many companies have discovered that layoffs extract a heavy price in terms of severance payments, potential litigation, decreased productivity and morale among those remaining, and general dissatisfaction among employees.  According to the article, “many companies have discovered in this most recent downturn that having an effective layoff -- one that actually helps the organization rather than inflicting strategic damage on the organization -- is fairly difficult to do.”  The investment community has also taken notice of the negative side-effects of layoffs. As a result, the investment community does not seem to be “rewarding” companies for layoffs today in the way it did in the past.

With the realization that layoffs may not be the best option in response to an economic downturn, many companies and public entities turned to furloughs as the next obvious choice.

What Happens Next?

However, the notion of furloughs as a better alternative to layoffs necessarily requires that the furloughs be short-term.  If maintained long-term, furloughs become nothing more than pay-cuts that harm employee morale and may cause the best employees to look for jobs elsewhere.  Thus, furloughs only make a lot of sense if you expect your financial problems to only last a year or two.  The problem for public agencies is that economic conditions in California may not improve significantly anytime soon.

According to a Pew study, the recession has been so deep that many states may not see revenues rebound until late in the next decade.  It’s difficult to imagine furloughs lasting that long.  So instead, according to the Pew study, “some states are moving beyond short-term fixes to rethink the role and structure of government with the goal of delivering high quality, but fewer services, at lower costs. Targeted are functions and agencies that overlap or are no longer relevant.”  Thus, cutting services may have to be part of the discussion in California.  Quite simply, as a state we may not be able to afford the level of services that has been provided in the past.

The Pew study also noted that, “After hiring freezes, furloughs are the preferred short-term option for most states, because they preserve morale and keep talented workers on the job for better days ahead.” However, according to the study, “A better way for states to weather fiscal ups and downs is to increase the number of contract workers.”  Most corporations maintain about 25 percent of their workforce through flexible contracts, while most states have a contingent workforce in the single digits.

Thus, in addition to cutting services, contracting out may have to be considered.  Contracting out certainly makes sense economically.  If you maintain a permanent workforce at a level sufficient to handle the “valleys” and contract out temporary employees to handle the “peaks” you can avoid layoffs and furloughs altogether, at least in theory.  However, any discussion of contracting out in the public sector must take into account the role (and opposition) of unions. Contracting out existing bargaining unit work is generally negotiable.  And because unions consider contracting out a direct attack on their very existence, you can expect that they will fight tooth and nail to oppose any contracting out.  More important, in any discussion about contracting-out you can expect unions to use their political might as well.  So it is doable?  Will public agencies go that route?  We’ll have to wait and see …