Article

Classification and compensation review

July 29, 2019

While municipal government is largely intended to be non-partisan, the political climate at both the state and federal levels can make governing locally more complex.  Decisions regarding the delivery of core services are best made without, but may be influenced by, party affiliation.  It’s unsurprising then that impartial administrators and managers watch with curiosity (and some trepidation) conditions in various statehouses, at Capitol Hill, and even on Pennsylvania Avenue.  Recent activity, ranging from legal cases to intergovernmental relationships, have the potential to fundamentally change “life as we know it” in the public sector. 

Initially, the Supreme Court rendered two decisions that will, without question, transform the public sector workforce.  In South Dakota v. Wayfair Inc., the majority reversed a precedent established in 1967 (and reaffirmed in 1992) where it determined e-commerce sites (or really, any remote retailer) can be forced to charge a sales tax.  While ambiguity still exists about timelines for implementation, systems for collection and remittance, and whether it will prompt much-needed congressional action, one thing is clear: there will be a financial gain, with estimates anywhere from $8-33 billion annually.  A few days later, a slightly different majority ruled in Janus v. AFSCME that mandatory “agency fees,” often charged by unions to cover the cost of collective bargaining, are unconstitutional (on First Amendment grounds).  This verdict has the potential to lessen membership, decrease union budgets, and weaken associations in their representation of employees.  AFSCME’s own research concluded approximately 15% of its members would no longer pay, with as many as half undecided on whether they would continue to provide monetary support.  The full consequences of these two cases are not immediately known, though it is safe to assume that, with increased operational funding and destabilized unions (which cover approximately 34% of public employees), the landscape of governmental personnel management will undoubtedly change. 

Other factors can also complicate public sector leadership.  Retirements are occurring in record numbers, and an interest in public service among younger workers remains scarce.  Transparency is, rightfully so, the default, though that degree of external visibility can be problematic when addressing the missteps that invariably occur.  Technology continues to disrupt (albeit positively) business processes and citizen engagement.  Consequently, public sector human capital management will remain a strategic challenge for the foreseeable future and will continue to evolve in ways not yet understood. 

Although it is important for public agencies to periodically assess their classification and compensation system, these circumstances make such a review even more urgent.  A properly-designed and administered program is comprised of several essential characteristics, the first of which are internal equity, or the quantifiable, consistent relationship among positions, and external competitiveness, or the ability to successfully recruit and retain within an identified market.  Presuming those factors are confirmed, employees should then progress through their pay range based on some combination of defined criteria that, when appropriately managed, produces individual equity for employees throughout an organization. 

With local governments likely to invest a portion of the anticipated sales tax revenue growth in their human capital, new and revised roles are sure to emerge.  Entities should equip their Human Resources staff to objectively and measurably explain how changes to existing jobs, or the creation of new jobs, impact their pay structure(s).  Likewise, with their fees now voluntary, unions will be forced to work even more diligently to illustrate how membership advances employees’ interests.  The most direct way, of course, is through wage and benefit negotiations.  Thus having a credible job evaluation system in place provides both management and union leadership the ability to fairly express the relative internal value of positions to an employer.  Similarly, a trend for local government has been an increasingly greater reliance on performance (rather than tenure) in determining employee compensation, a philosophical change expected to accelerate in light of the Janus outcome.  It is critical, therefore, for employees at all levels to have confidence in the integrity of the performance evaluation process, which may warrant retooling after some inattention during the Great Recession and subsequent recovery.

It is uncommon for the same industry to be so significantly altered by so many different variables in such a short period of time.  It is too early to fully understand what effects they will have on local government, though they do bring to the forefront an emphasis on public sector human capital and, more specifically, job classification, market competitiveness and employee performance evaluation.  Because a comprehensive classification and compensation initiative takes time to complete, organizations who have not done so in the recent past, or who have done so but may not be in a position to effectively scale the system to support anticipated changes, should prioritize a study to ensure a dependable system is in place before the extent of these variables is realized.

For more information on this topic, or to learn how Baker Tilly municipal specialists can help, contact our team.

Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and wholly-owned subsidiary of Baker Tilly US, LLP, an accounting firm. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.