Senior-level employees like police and fire chiefs, department heads, and city managers often have hundreds (and sometimes thousands) of hours in accumulated leave time on the city ledger. Such is the nature of these professionals, who are often highly compensated, dedicated employees who are long-tenured and rarely take significant time off. So what happens when these employees decide to retire or leave to accept a position with another public agency? Cities are unexpectedly hit with the liability of paying out large banks of leave hours—and too often, management finds that their budget is not prepared for payouts of this magnitude. This liability not only can crush an organization’s budget, but must also be reported annually as compensated absence, adding to the city’s overall unfunded liabilities. This can be viewed negatively by credit rating agencies when assessing the city’s creditworthiness.

It’s no secret that the public sector is facing a significant crisis in its effort to keep up with escalating pension and retiree health care costs. State and local governments are increasingly finding themselves saddled with huge unfunded liabilities.

  • On average, government employees leave 21 percent of their PTO unused.
  • In 2013, there were 24 million government workers, accounting for 13 percent of total jobs. The public sector accounts for 25 percent of all unused days of PTO, or 106 million days, because government workers tend to earn more PTO and leave more days unused.*
  • Nationwide, payouts for untaken time off have rocketed upward by nearly 80 percent since 2008.**
  • In 2017, California paid out six-figure sums to about 460 employees, up from 280 in 2012.

Despite the seemingly insurmountable challenge at hand, fiscal sustainability can be readily achieved through an accrued leave conversion plan, which is an innovative way to increase budget predictability, reduce or even remove liabilities of accrued leave payouts, and decrease administrative burden.

Here’s how it works

Unused compensated employee absences (vacation, holiday, and sick days for example) are deposited into a tax-deferred 401(a) plan, a tax-free Health Reimbursement Arrangement, or a combination of the two. This transfers the value of leave bank dollars, and therefore management of those funds, to the employee while allowing for potential growth. The plan is funded (typically annually) with the current unused leave balance, avoiding payouts at a potentially higher pay rate down the line and eliminating the risk of large payouts upon separation or retirement. And as an ancillary benefit, the plan ultimately allows a city to have more certainty when reporting their annual liabilities.

Simply put, it’s a win-win for both the employer and employee.

If you’re interested in learning more about accrued leave liability solutions, simply reach out to accountmanagement@myMidAmerica.com.

Sources:

*Oxford Economics, “An Assessment of Paid Time Off in the U.S.: Implications for employees, companies, and the economy,” (February 2014).

**Steven Malanga, “Debts No Honest State Can Pay,” (March 25, 2019)

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