December 2004 · Volume 86 · Number 11 

Case Study: Downsizing Is Rough
After several years of economic challenges and the closing of a major federal facility in the county, along with a shrinking population base confirmed by the 2000 Census figures, the council of a medium-sized city decided that action was inevitable. Having already sliced and diced budget numbers down to the penny for the past month, councilmembers found that it was time to make cutback decisions and to downsize local government operations, which meant cutting back the number of its employees.
How had it come to this, city officials wanted to know?
What this city was experiencing was the reality of what can be described as unprecedented times for state and local governments. This reality involves less tax revenue, more services wanted by citizens, more cost cutting and operational efficiency called for, and less federal financial support available for local government programs. At the same time, more federal rules and regulations must be met.
The city's councilmembers and the manager, who had been in the management position for only 45 days, had considered other savings options first, of course, including employees' retiring earlier or working at home; mandatory work furloughs; contracting-out jobs; cutting back employee benefits; and not hiring replacements for retired personnel. It was a start, but it wasn't enough, and now staff cuts definitely needed to be made.
The city's governing body and manager knew, of course, that there was a profitability side to downsizing, when salaries and employee costs are held down. And they knew of the negatives, including decreases in productivity and morale. The manager discussed with elected officials the possibility that the backlash of downsizing could outweigh any benefits that they thought would be gained, but the governing body still felt that staff cutbacks were needed.
Other difficult decisions that the manager needed to consider and make entailed: who must be laid off, how much notice to give these individuals, what amount of severance pay to provide, and how much help to give the laid-off employees in finding other jobs.
The manager also had to weigh the impact on service delivery: would public safety (fire and police) be cut in any way; could the city still afford to provide such quality-of-life services as parks and libraries; and what about consolidating its services with those of a nearby community?
Also, what approach to the staff layoffs should be used: last-hired, first-fired basis across all departments; 10 percent of employees across all departments on a seniority-only basis (no discriminatory reasons); and saying no more than was absolutely necessary to employees who were departing? Along with these decisions, the manager pondered how many employees needed to be laid off from each department, and from which ones.
One problem the manager had to contend with was the fact that management staff had not developed a comprehensive downsizing plan, and now cutback decisions had to be made in short order.
What's the best action plan or management strategy to begin downsizing in a locality, and then how does a manager follow through and deal with the aftermath of telling employees and reorganizing operations?
Three local government practitioners offer their experience and advice on how to manage the serious business of staff cutbacks and the consequences that will follow.
During the past two years, Middletown, Ohio's (population 51,605) general-fund budget has been cut by 20 percent. We'll cut another 10 percent in 2005, including public safety. I'm hoping that we'll stabilize for a few years after that. But if not, we'll need to continue cutting and then begin the even more difficult task of raising taxes.
There's one certain thing about the economy: it will always cycle through. One of the best strategies I've used for dealing with the bad times is preparing during good times by building up fund balances, controlling spending, and putting one-time revenues into capital projects, rather than operations. Another vital strategy is to do multiyear financial planning. This keeps me thinking about my city's general financial condition and how today's decisions may affect future years.
During the first year of a downturn, it may be difficult to determine if it's a one-time event or the beginning of a new trend. If the reserves are strong, it won't matter much because you'll be able to manage through it without altering services. Such internal controls as changing the fleet replacement schedule, deferring a project, reducing cost-of-living adjustments for nonunion employees, cutting travel and training, limiting materials and supplies, and adjusting fee structures can be used.
If the downturn is a long-term trend, however, these strategies will not work, and reducing services will need to be considered. Since most of the cost of running local government relates generally to people, reductions in force will eventually be required. Because in many local governments almost half of the employees work for the police or fire departments, reductions in public safety will also eventually need to be considered if the downturn lasts long enough. In my experience, if fund balances are strong to begin with, a hiring freeze is a good place at which to start reductions in force. It puts employees on notice that the problem is serious. It can also show them that management staff members are trying to work with them through difficult times. I've tried to be extremely open with employees about our city's financial status and our strategies for dealing with it by holding quarterly meetings that all employees are invited to attend. My philosophy is that the budget process will eventually be public anyway, so a manager might as well inform and include employees on the front end. During our recent experience, we began with a hiring freeze, but this was not where we ended. Attrition doesn't necessarily occur in the departments or positions that you want it to. Transfers, changes in job duties, and targeted staff and program reductions have all been required to make it work for us.
Our first consideration in program reductions is: where is there an alternative for service delivery from another provider? We give an employee as much notice as possible if his or her job is being looked at for elimination. Our experience is that we can effect a transfer, or a person can find other employment, before the job is actually eliminated.
Having informed and cooperative employees has been helpful. We've had to deal with the politics and reality of "cutting the fat" and making sure our efficiencies are high by using internal audits, performance measurement, and managed competition.
—Ron Olson
City Manager
Rono@ci.middletown.oh.us
Menlo Park, California (population 32,000), has a 2004-2005 operating budget of $29.2 million and 230 full-time-equivalent (FTE) employees. This fiscal year is the fourth in a row in which the city has had to reduce spending to match declining revenues. Sales-tax revenue has dropped 50 percent (from $12 million to $6 million) in a two-year period. The city has also lost funds as the state of California has diverted local government revenue to help balance its budget. At the same time, Menlo Park has seen significant cost increases driven primarily by retiree benefit expenses.
To regain balance, the city has trimmed more than $4 million from its operating budget and reduced its workforce by 30 FTEs since 2001. To identify these reductions, and to minimize their impact on the community and the health of our organization, we followed a careful process, the highlights of which are summarized here.
Involve employees early and often. We started by convening all-employee forums to make sure that everyone understood the magnitude and causes of the city's fiscal problem. Each department formed action teams with employees from all levels. We stated up-front that the goal was to find the best solutions and that we would not impose an equal, across-the-board cut in each department.
We gave the teams guidelines and support and charged them with submitting to the city manager a plan to streamline operations, cut costs, and enhance revenues. Employees at-large were encouraged to propose ideas through suggestion boxes and the intranet. The manager held frequent employee briefings and sent even more frequent e-mails to provide updates and to share proposals before they went to the council.
After cuts were implemented, we held informal debriefing sessions and brought in counselors from our employee assistance program to help employees deal with the impacts of the changes. Executive staff saw it as their responsibility to help manage the mood of the organization. By communicating openly and giving employees a chance for input, we were able to protect workplace morale at least somewhat from the stresses of economic uncertainty.
Work with unions to achieve common goals. The first cost-cutting strategies focused on eliminating vacant positions and scaling back nonpersonnel expenses. When it became clear that filled positions would be affected, we worked with union representatives to find ways to avoid layoffs while still reducing the workforce. Together, we developed a voluntary separation process that offered employees early retirement, enhanced severance, or shorter hours. We accepted applications from the service areas targeted for reduction and pursued several alternatives suggested by the unions. As a result, layoffs have not been necessary, and employees have had several months' notice of changes that would be implemented in the next fiscal year.
Seek community input. With each successive round of cuts, it became harder to minimize the impact on the public. So that we could better understand the community's priorities, we mailed a survey to each household and asked residents to rank a list of city services. More than 1,000 surveys (out of 15,500 households) were returned. Community meetings were held in neighborhoods across town to hear more from residents.
The city's commissions were asked for their input on ways to streamline and save money. The feedback from these outreach efforts was presented to councilmembers and used by staff as important data points to guide the development of budget-balancing strategies.
Keep elected officials in the loop. We held a series of meetings, including a half-day retreat, with the city council to inform them of the dimensions of the problem and to seek direction about high-priority service areas and possible reduction opportunities. We called each councilmember once or twice a month to update them on the process and to answer any questions. This helped members feel better prepared in the event that they were contacted by employees, union leaders, or the press.
A panel of experts was brought in to present projections on the regional economy. We asked council to rate city services and used these data, along with the community survey results, to identify service-area cuts. Council also spent time discussing which criteria were most important to consider when weighing potential budget cuts. Taken together, these steps made the difficult decisions and the ultimate adoption of the city budget a bit easier.
As a result of this process, over the past four years Menlo Park has been able to develop a balanced, data-driven set of solutions, including cost reductions, increased revenues, and, in 2004-2005, a first-time use of the city's reserves. This process gave employees a voice in the future of the organization, supported the council's decision making, and helped the city continue to deliver on core community priorities.
—Audrey Seymour
Assistant City Manager
ASeymour@menlopark.org
Downsizing is always painful. Sometimes, it is long-anticipated and planned. More often, it is done on short notice. In determining a plan for downsizing, several factors must be assessed:
•	Communication. 
•	Duration of the downsizing. 
•	Accurate financial analysis. 
•	Need for services. 
•	Other options.
Communication. Throughout the process, good communication is imperative. Whenever possible, solicit input, and provide choices. Keep in mind that elected officials, employees, and citizens are all affected by an economic downturn in other ways, too. They won't like the changes you must implement, but through inclusion and communication, they may respect the process and understand the need.
Confirm which services will be reduced and which services will not be reduced. When budgets are cut and employees are eliminated, services will decrease. Frequently, elected officials and citizens do not understand this fact. Make sure that you communicate it clearly and frequently. Throughout the planning and implementation stages, seek input. Other entities may offer help monetarily or by providing an asset in kind.
Duration of the downsizing. The estimated duration of any downsizing effort is an important consideration if the economic downturn or problem will improve in a few years or sooner. Some things can be delayed rather than eliminated.
The amount of time available to reach economic balance is also important. A partial reduction of employees through attrition is possible with advance knowledge and planning and when some reserve money is available. Sudden or severe changes don't allow for phases. Sudden and severe economic changes also reduce the ability to seek input, to engage in thorough communication, and to develop options.
Accurate financial analysis. A true financial assessment involves two spheres. First, information and revenues must be evaluated for accuracy. In one scenario, for instance, a federal facility has closed. Information about the closing's impact should be available, including the number of jobs lost and the economic impact in the area. Is the impact presumed or more closely known? Census data from 2000 confirm a shrinking population; schools and realtors may be able to provide more timely information.
Second, all revenues and expenses must be closely examined to determine and adjust the true financial assessment. On the revenue side of the picture, determine if fees and charges are being adequately collected. For example, false alarms may be being recorded but not invoiced, or vehicle stickers may have a poor compliance.
Consider using the state's registered-vehicle list to improve these situations. Assess whether present fees and charges are reasonable and current. Review investments for interest earnings. If refuse collection is being furnished at no additional cost, stop. Instead, bill for this service separately, contract it out with separate billing, or develop a franchise agreement with a local waste hauler. Existing city refuse employees could be negotiated into the contract. Budget lines should be analyzed. If the funding amount is based on possible extraordinary weather (flooding, snowstorms), change it. Similarly, if capital items or maintenance lines have "extra room" in case of sudden infrastructure failures, reduce them. Conduct an audit of phone use for savings. 
Need for services. Next, the need for services should be judged. It takes time to identify each service, as few are specifically listed and costed out. For example, brush pickup biannually and after heavy storms is a nice service to offer, but it isn't a core service. After-hours reference information through the library or special events of musical entertainment can be eliminated.
DARE is a popular program that generates good public relations, but it isn't a vital service. Animal control activities, other than those for rabid animals, can be cut. Saturday-morning hours at city hall can be reduced to one Saturday morning each month or eliminated. Examine the provision of police officers at community events. Is their presence at high school football games essential? Could crowd control be accomplished by school personnel or parents?
Costs to mow public grounds can be reduced by mowing less often and by using native plant materials. Use of these plants also reduces pollution from mowing, improves the look of sites, and encourages environmental activity. Geese and droppings are avoided. Review contracts to determine if they have been competitively bid and if they require more than what the city actually needs. For example, specifications may have been written for a high level of service in landscaping or custodial work or for top-of-the-line vehicles.
Banking services are often continued year to year with a prominent local bank without bidding them out. My community of 23,000 population has demonstrated a three-year savings of more than $80,000 with competitively bid banking services. Make sure that contracts and agreements are monitored. Ask vendors for ways to reduce their costs.
Consider selling city assets if there is no future public use planned for them. There may be a database of information that could be sold. Expertise can be taught, and class fees charged (e.g., hazmat training, CPR, accident investigation). Specialized facilities can be rented out (hose tower, skate park).
Other options. A professional and experienced manager and management team can create efficiencies. It is common for these efficiencies to improve services, too. Many communities have been comfortable financially and therefore have not shared services or cooperated with others until forced to do so economically. But sharing and partnering represent a useful option. For instance, employee health and risk insurance are huge costs. The use of insurance pools reduces costs dramatically and, by the provision of training, reduces incidents as well.
Emergency dispatch can be done jointly with one or many other communities. Arson investigations can be done through a county task force. Newsletters can be published electronically or distributed jointly with a school district or other entity. Certainly, they could be issued less often.
In Roselle, the new-resident packets are distributed by the local chamber, so no postage is paid. A local Boy Scout troop distributes chamber directories for a donation, thus saving thousands in postage. Joint purchasing is imperative. Use state bids when possible. Jointly bid with other communities or other local government entities. 
Our local council of governments bids out more than 50 items, from janitorial supplies up to fire trucks. Auction your surplus items. Our COG recently switched from self-auction to a private firm with an Internet element.
Purchases and training can be judiciously delayed. Training that requires overtime pay in police and fire services can be accomplished through videotapes or Internet classes held while personnel are on duty.
Personnel. After determining the financial picture, reduce personnel costs accordingly. An even reduction across all departments won't match up with identified needs and can be an unfair burden on small, lean departments. Early retirement incentives work best if they are specific to areas targeted for reduction. The commonly held belief that all reductions or incentives must be applied evenly, to be fair, is erroneous. Employee groups are already uneven in terms of assignments, pay, status, and benefits. Fairness to the taxpayer is more relevant and can be accomplished by matching needs with resources. Minimum staffing may have to be reduced to decrease overtime costs.
Staff layoff policies like last-hired, first-fired are usually contained in personnel manuals and union contracts. This works best when each employee category has a multitude in the same position. Better decisions, if allowed, would involve retaining the individuals with the best skill sets for the needs identified. Severance pay in local government is usually for 30 days, and anything longer would both delay recovery and irritate taxpayers in the private sector. Employee assistance-program membership could be extended, and resources identified for job training, job search, and job placement. A weekly or monthly meeting for those who are laid off could be established for networking and support.
When situations change and downsizing must be done, give it your best effort, monitoring the results closely to determine if changes need to be adjusted. There is pride in doing a job well, even when it involves job loss and service reductions.
—Robin Weaver
Village Administrator
Roselle, Illinois
RWeaver@roselle.il.us