How Sick Leave Can Be Bad for a Locality's Fiscal Health, and Health Insurance May Be Even Worse

Jul 02, 2012
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Borrowing by local governments to pay for operating expenses is bad financial management; it forces future residents to pay for services consumed by those living in a jurisdiction today, often burdening children with the cost of benefits enjoyed by the current generation. Because such borrowing is viewed with great disfavor, local leaders who have resorted to this approach in the past in New York State have been made subject to outside “control boards” and required to adhere to improved fiscal practices in exchange for legislative authority to undertake the borrowing. This happened in New York City, Buffalo, Nassau County and Yonkers.

In addition to these relatively high visibility and high stakes decisions to authorize local borrowing, the Legislature has considered and sometimes approved borrowing by a locality without imposing mechanisms to enforce improved fiscal management. In the 2012 session legislation sought by Rockland County and the City of Long Beach to enable deficit borrowings without control board oversight was not adopted. But in recent years bills have been approved authorizing specific localities to borrow to cover the cost of a large litigation settlement or of a retirement incentive program, implicitly judging such borrowing to be appropriate and not requiring new mechanisms to enforce tougher fiscal management. This trend toward forms of “excusable” borrowing appears now to be growing, extending to borrowing for separation costs such as accrued sick leave and vacation days that are claimed by departing employees without money having been set aside to pay for them. This fiscal strategy should be curtailed, and state officials should develop alternatives to borrowing to cope with the underlying problem – accrued liabilities for “separation costs.”

In the closing days of the latest legislative session four localities  were authorized to borrow to cover deficits generated by the need to pay departing (predominantly retiring) employees the amounts due them from accrued sick leave, vacation pay and other separation costs. The jurisdictions are the village of Lynbrook, the town of Oyster Bay, the city of Glen Cove and the city of Long Beach (which is experiencing fiscal problems beyond its separation costs but was denied authority to borrow for its full operating deficit). While restricting the purpose of the borrowing, the recent bills did not limit or specify the amounts authorized. Long Beach is required to repay the debt in five years, while the three other localities are given ten years.  

It is easy to understand how such situations arise. Many public employers have incentive programs to encourage workers not use all the sick leave to which they are entitled each year. Workers who do not take sick leave are allowed to accrue the time during their working career, and then “cash out” the days when they depart or retire. Similar arrangements may apply to vacation days. And some localities facing a need to reduce staffing may offer cash payments to workers who opt to depart voluntarily. If such separations are bunched in years when revenues are declining due to hard times, the government may find itself short of cash to cover all the associated costs. In the case of Glen Cove, for example, with a total annual budget of $46.6 million, the retirement of six police officers generated separation costs of $1.8 million—fully 4% of the annual budget. [1]

The best strategy for dealing with these circumstances is to (a) take preventive actions to contain the accrued liabilities, and (b) set aside reserves to cover the accrued expenses. Preventive policies include not allowing the lifetime accrual of vacation days (which are better used for breaks from work on a regular annual basis), and tighter limits on the amount of unused sick leave that can be converted to cash payments.

Even more important is the practice of setting side reserve funds to pay for accrued separation costs. Currently, the Generally Accepted Accounting Principles (GAAP) that apply to municipal finances require localities to identify and report the cost of most separation benefits such as accrued sick days and vacation days as a long-term liability. In that sense, it is like debt; it is money that in a given year the jurisdiction has promised to pay someone at a future time. But GAAP do not require localities to set aside money to cover these future expenses as they are incurred; they can remain as an unfunded (but disclosed) liability. Most localities do not set aside the needed money, but they should do so. In fact, many school districts in New York State have created funds to cover future separation costs; the State Comptroller has even criticized some districts for putting too much money into the funds.[2] Towns, cities and villages should be required to fund at least partially their accrued liabilities for separation costs.

Perhaps the most troubling aspect of the recent borrowing needs of these localities is the ominous implications they portend for other unfunded accrued liabilities, notably those for retirees’ health insurance. States and localities have promised to pay all or most of the premiums for health insurance for their retired workers. Like cash pension benefits, these “other post employment benefits” (OPEB in the terminology of GAAP) are an accrued liability that must be paid in the future. And like the separation costs, this liability must be reported but need not be funded. The required disclosures indicate the OPEB liability is far greater than the separation cost liability. Consider the examples of New York City and New York State. At the end of its 2011 fiscal year the City’s accrued liability for vacation and sick leave was $3.9 billion; its OPEB liability was $83.9 billion.[3] For the State the comparable figures are $1.2 billion for vacation and sick leave versus $10.6 billion in OPEB liability.[4]

The current troubles in places like Lynbrook and Oyster Bay may foreshadow far greater cash shortfalls in the major governments serving New Yorkers when future retiree health insurance costs must be paid. Like their smaller suburban neighbors, the leaders of these entities should be doing more to reduce and meet these large future obligations. Rather than enabling ad hoc borrowing as the preferred solution, the Legislature should allow borrowing for those who need it now only on the condition of future requirements to build adequate reserves and should prevent future borrowing needs by establishing standards for funding more adequately future separation costs and OPEB liabilities among all localities and the State itself.  

 

By Charles Brecher



[1] Matthew A. Piacentini, “Comptroller’s Warning – Glen Cove Budget,” Glen Cove Record Pilot, October 19, 2011.

[2] Office of the New York State Comptroller, Division of Local Government & School Accountability, Employee Benefit Accrued Liability Reserve Funds, 2008-MS-3, October 2008.

[3] City of New York, Comprehensive Annual Financial Report of the Comptroller for the Fiscal Year Ended June 30, 2011, p. 40.

[4] Office of the New York State Comptroller, Comprehensive Annual Financial Report for the Fiscal Year Ended March 31, 2011, pp. 31 and 53. 

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