Column: Layered Pay Cuts To Reduce Costs

January 5, 2016

[Opinion column written by Larry Burchall]

The current impasse with the Bermuda Police Association over matters of pay, regurgitates the whole matter of how Government’s personnel costs can actually be reduced.

I first tackled the “how” issue in 2013. This is two years before the well-paid Three Wise Men came to Bermuda and told Government exactly what I’ve been telling and showing Government.

Larry Burchall 160104

In choosing ‘furlough days’, the Government chose the worst possible solution. Furlough days resulted in an unfair across-the-board ‘cut’ of only 4.6%, administrative confusion, bitter wrangling, and was then summarily rejected – and rightly so – by the BTUC.

For Bermuda’s unique circumstances, the only possible way to reduce personnel costs will be layered pay cuts. This means the highest paid people getting the biggest percentage cuts, while the lowest paid people get the smallest percentage cuts.

Here is a simple typical example that achieves an overall 24% pay cut:

  • Civil Servants on $200,000 a year get a 30% pay cut, so their after-cut pay would be $140,000 a year.
  • Civil Servants on $100,000 a year get a 20% pay cut, so their after-cut pay would be $80,000 a year.
  • Civil Servants on $50,000 a year get a 10% pay cut, so their after-cut pay would be $45,000 a year.

Assuming just one person in each category, the difference works out like this:

  • Pre-cut pay total [$200,000 + $100,000+$50,000] = $350,000.
  • After-cut pay total [$140,000+$80,000+$45,000] = $265,000. Total pay ‘saved’ = $85,000. This is an overall percentage savings of [$85,000/$350,000] = 24% overall percentage of pay that is saved.

Study the chart. The chart uses numbers that are much closer to reality. However, since the precise number of Government employees seems a closely guarded national secret, you should not take the employee Numbers as absolute. However, you should still see how the Method will work in real life and achieve a 21% ‘across-the-board’ savings of $92m on Personnel costs.

how layered pay cuts Bermuda Jan 4 2016

The only way that Government can achieve the size of personnel cost reduction that it will ultimately have to achieve is by layered pay cuts. That is, and that will remain, the only method by which the overall size of the cuts can be achieved without materially reducing personnel numbers and in the short and shortening timeframe now necessary.

In 2016 and by 2020, the Government needs to slice out about $90m – $100m from its personnel costs. If not done in 2016, then the size of the cut that’s needed will simply get bigger.

If layered pay cuts are not used, then there will be a forced reduction in all personnel numbers. This is exactly what happened in Barbados just before Christmas 2013. Precipitated by the interest rate decisions of their foreign lenders, the Government of Barbados was suddenly forced to send out ‘pink slips’ to 3,000 [13%] of its 23,000 workers.

I have always written and spoken of the need to reduce personnel costs. I have never advocated dismissing Government employees as the primary cost-cutting method.

Unlike the Three Wise Men, I live in Bermuda. I am a deeply interested Bermudian, not someone just zipping through. I am acutely aware of and understand all of Bermuda’s unique economy and the social dynamics lying just beneath Bermuda’s deceptively smooth national veneer.

Since 2010, I have strongly advocated cuts in Government’s personnel costs. Since 2010, those personnel cost and other cuts have not been made. In 2010, the overall savings required was around 10%. This is less than half the size of the reduction needed now. Procrastination is expensive!

Planned spending in FY 2015/16 [$1,151.3m] is actually higher than Government’s actual spending in FY 2009/10 [$1,126.4m]. Seven years ago in 2010, we needed to start cutting costs, and didn’t cut. Now, seven years later in 2016, the need to cut has increased. That’s arithmetic.

New to and just zipping through Bermuda, the Three Wise Men advocated a “restructuring of Government services”. The TWM have given excellent advice. But their paid for advice is like advice against unprotected sex that is given seven years too late.

Government has a nasty but not un-solvable problem. However, after seven years of side-stepping and back-loading, in 2016, options have fallen away. There are now only two solutions and the personnel cost cuts now need to be as deep as I show.

It’s simple. Chop people! – or – Chop pay!

[This ultimately unavoidable cost-cutting would be made much easier if all Parliamentarians took a 50% pay cut. This would set an excellent example and show true leadership!]

- Larry Burchall

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Comments (36)

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  1. serengeti says:

    There is another approach which is fairer.

    Keep the people you need, and lay off the people you don’t. Keep the people who do a good job, and lay off the people who don’t.

    Why should people who do are needed and who do a great job potentially give up 30% of their salary in order to keep people who don’t work hard or aren’t needed?

    • Rockfish#1 says:

      That is a good idea in theory. But who will decide who stays and who goes? Surely not the PSs, some of them should be among the first to be shown the door.

    • BalthazarGasparMelchior says:

      I feel like Lar’s approach is the better idea out of all the ones put forth. Good one Lar. Person(s) that make the most should take a bigger cut because they can better deal with the financial hit than those on the lower wage tier. Doesn’t that make common sense for the common good?
      Those who would disagree best remember that we’re supposed to be all in this together. Do be unselfish. Unions tend to work together, right and so should the workers. Consider your lower paid unionized brethren.

      • serengeti says:

        Ok, well Larry’s idea has everyone earning the same. The lazy incompetents earn the same as the hardworking. The people who aren’t needed get the same as the people who do a useful job.
        Just so that we don’t have to make hard decisions about who should stay and who should go.
        Obviously we aren’t adult enough to make decisions like that. Easier just to pay everyone the same. Reduce the higher paid people’s salaries by more. Obviously they none of those people deserve those higher salaries. They didn’t work or do anything useful to get there.
        Utter madness.

    • Because, We in the Union stick together. What Larry has said makes good sense. Please tell Bob.

  2. Jolly says:

    You know that Gov would rather raise taxes on the community rather than face the wrath of the civil service.

  3. Public says:

    One thing this guy Larry Burchal talks nonsense. Why does he think that it should be only government workers to be the ones to take the financial burden of the government cuts. The government should increase taxes across the board to be able to fund their debt and affect EVERYBODY NOT JUST THE GOVERNMENT WORKERS. If he is talking cuts then ask him to suggest they give up the regiment because that is a waste of money. See what he has to say to that.

    This man clearly doesn’t understand that a person cannot go to the bank and say I took a 20% pay cut, can you reduce my mortgage by 20%. He needs to be realistic in his thinking and logic because such deep cuts will make people default on their mortgages and loans, not be able to pay their bills, etc. Start writing your articles and preach increased taxes across the board, not put everything on the back of government workers

    P.S. Why doesn’t Dunkley take a furlough from his workers and give that money to the Government.

    • lalalalala says:

      @Public… Maybe because the private sector workers have been taking pay cuts etc for the past 4-5 years. It’s now time to trim the fat from Government… We (all the people of Bermuda) cannot afford to support an oversized (and paid) Government.

      Truthfully they should cut 10-15% of the staff (across all levels)

      • voodoo economics says:

        Lala it was the private sector that caused the recession in the US that led to where we are today. That and the PLP who spent like it was going out of style.

        • serengeti says:

          Who in the private sector has had guaranteed jobs, 70 days sick leave, 33 days vacation, index linked pensions, during the past 7-8 years?

          • Seriously says:

            Nobody employed by Government has a guaranteed job, if anyone employed in Government gets anywhere near 33 days of vacation it would be less than 1% – I am a 30 year employee and get 26 paid days of vacation. 70 days of sick leave would have to be certified by a Doctor and generally only applicable in cases of serious illness and operations where prolonged periods of recovery is needed. Serengeti, you are clearly jealous and perhaps you should have looked into benefits before applying for a job…..

            • serengeti says:

              I’m not jealous. I’m just concerned that the country is paying $20m a year for extended sick leave (see Sage report). I’d like that to stop so my kids have a chance to grow up without being in financial slavery.

              And how many people in government jobs have been made redundant? Let’s see, in round numbers, the total is zero. Nil.

              So who employed by government doesn’t have a guaranteed job?

            • serengeti says:

              And according to the union agreement, grades PS1-40 get 19 days vacation to start with, rising in levels up to 33 days after 25+ years.
              They start with 5 weeks full paid sick leave entitlement, rising to 14 weeks full paid sick leave entitlement after 4 years of employment.

            • impressive. says:

              Dont you know how it goes? Repeat a misconception enough times to it becomes a fact, then use the “fact” to generalize.. smdh

            • filobedo21 says:

              Well 26 paid vacation days is near enough, and most private sector jobs are not giving that.

    • Real Talk (original) says:

      Ummm… Where do you think the thousands of unemployed Bermudians came from?

      I’ll give you a hint: not the public sector!

      Furthermore, widespread redundancies, in the absence of a healthy labour market to absorb workers will plunge the country into deeper recession. The solution offered by Larry Burchall is a good compromise. Not ideal, but makes sense that the higher paid should take the deeper cuts.

      Government needs to address the $800m elephant in the room sooner or later.

      • Triangle Drifter says:

        And that elephant is an increase in size of the civil service since 1998 by 50% serving a population that has DECREASED in size since 1998.

        The Government civil service needs to decrease its size by 50%, & that will reduce it to a time when it was already bloated in 1998. Contrary to the views of many in the civil service, it is not supposed to be some sort of very generous social assistance program for people otherwise not employable. It is not a vote well for political partys. Having to turn up to the office every day is not some sort of baby sitting service where the children get paid to attend.

        The Government needs to do what Barbados did, before it is done for them & done in a much harsher manner by an outside organisation.

    • wondering says:

      maybe it is because govt employees are directly controlled by the (wait for it) – the government!

      it is easier to cut YOUR spending than it is to try to dictate to the private sector cost management to benefit another entity, i.e the govt.

      private sector will either shut down businesses if govt increases tax levels to a point where it is no longer cost effective to be in business – result = economy worsens from less cash flow, more people in need of social assistance of some form, more none performing loans from no rental income because i can’t work in the private sector, et al.

      good idea LB

    • lowe says:

      I’d take a 20% reduction instead of losing my job completely.

    • umok says:

      Raising taxes might cripple the economy more. Government needs to decrease spending. Larry Burchall has some good points with the article.

    • The public sector has been carrying the country for the pass 8 years, that’s why. Also , the 3-4,000 people un employed are all from the private sector. Government, Unions , both enjoyed full employment.

  4. voodoo economics says:

    Force a paycut like that on government workers and see your private sector businesses fail one after the other….

  5. Lois Frederick says:

    I like the concept although maybe with some tweaking. However, I can’t see this happening anytime soon. The same workers marched and refused to take a furlough day a month. How do you think those same workers are going to act if this pay cut is proposed by Govt. and then implemented? Furlough days would then seem like a pretty good alternative. So, this concept could be used to persuade the unions and workers that after all, furlough days are not the worst thing and under the circumstances are the lesser of two evils.

    • frank says:

      Take a pay cut. And keep. A. Job. Or no paycut. And. Have. No. Job
      Mr burchall. Has. The. Right. Idea.
      Also more. Control. On. All those. Gp. Cars we don’t need. All. Those. Toys

      • serengeti says:

        Funny. That’s the opposite of what you were all saying last year when the furlough was being discussed. But whatever.

  6. True Lies says:

    It doesn’t really make sense to cut so much from the individuals making > 100K. Presumably, these are the most qualified individuals who have worked their way up. If you don’t reward talent and hard work, then talented individuals will move to the private sector.

    What should be done is a LEAN initiative, to remove the dead weight and reward the hard workers. Stop paying 2 people to do a job that 1 person can handle.

    • Bob says:

      Move where? To what jobs?

      Remove the 20% on work permits – let’s start there …..

  7. Keepin' it Real!...4Real! says:

    IT’S NOT GOING TO HAPPEN!

    Mr. Burchalls columns are always a pleasure to read…IF…and it’s a BIG if…if we were living in a perfect world but we’re not…Our debt will be the death of your children’s children…poor people are gonna lose more than the land that they may own…Our future is very bleek but you’ll never be told that…more pestilence to come.

  8. Keepin' it Real!...4Real! says:

    Get rid of whoever. ..then they become eligible for assistance…work it out.

    • filobedo21 says:

      Not the higher paid Civil servants who will have their early retirement to live on. What has to happen will have to happen, Bermuda is not the only country going through this.

  9. ALVIN WILLIAMS says:

    Government workers get the blame for this government fiscal short fall; but take away their earning power and watch Bermuda’s domestic economy take an even deeper decline. so-called black Friday will be cancel next year because all those unemployed government workers will no longer be spending their money in Bermuda’s economy; if there remains shops in the retail sector that still remain open?

  10. bluebird says:

    PLEASE PLEASE PLEASE DO WAIT FOR IT.
    Time will tell when as a country we are told to go whistle a tune when we can no longer borrow another $220Million Dollars per year to pay the Civil Service.
    Even our “TAXES” might not be enough to pay just the interest on the money we have borrowed and it does not matter which Government is Governing
    And then HA HA HA HA HA HA! We will all have to SUCK IT UP.
    But don’t come around asking for donations as I won’t be able to help you either.
    Some of you are unable to see it, imagine NO Government Payroll and NO Government Pensions.
    And you think it will not happen…JUST LOOK AT PUERTO RICO.

  11. swing voter says:

    we can’t afford another experiment in 2017. The economy is growing back slowly, OBA cannot afford to piss of the CS so don’t expect any changes to CS employment levels or wages.

    • Triangle Drifter says:

      Very true. Bermuda could not afford the PLP experiment the first time around. In late 2012/2013 the OBA took over a financial dung pile now costing in the region of $500,000.00 per day to service. Wages for the civil service, which take up the vast majority of our costs, are way above that.

  12. Larry, Do you think that I could get Bob to pay you? You are spot on. Government is hoping to get an increase in GDP before they suggest any pay cuts.

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