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GG 10
Reduce Management Costs in State Government

Summary

The ratio of managers to staff varies widely among Texas state agencies. While some differences can be expected, many agencies are “top heavy,” with managerial staffing well beyond the national norm. Reducing these ratios would save state revenue, place more focus on front-line employees and improve customer service. State agencies also face problems with other aspects of human resources, including high turnover and an aging work force. Enhancements to the state’s human resource management system would improve work force planning and employee recruitment and performance.

Background

Most state agencies can reduce costs by decreasing their number of managers. By requiring agencies to achieve a minimum “span of control”—a measure of the ratio of managers to employees—the state could achieve significant savings while maintaining or improving its customer service.

Many public and private organizations are pursuing these goals by “flattening”—reducing their number of management layers (the “chain of command”) and decreasing their ratios of managers to employees. A flattened management structure allows front-line workers to exercise greater control over their work, and a greater sense of pride and ownership in its outcome.

Middle management—the managers situated between the executive head of an organization and the front-line supervisors—typically has been the target of flattening efforts. However devised, flattening efforts eliminate excessive managerial positions and increase average spans of control, so that more employees report directly to a single supervisor.

Traditionally, most organizations have stressed supervisory duties as the ultimate goal of professional advancement. Employees seeking to advance in their careers generally needed to assume managerial responsibilities.[1] In recent years, however, this pattern has become the subject of reexamination. By building a system that uniformly ties the greatest economic rewards to the highest-ranking individuals, an organization unwittingly says that it favors hierarchy over productivity.

Often, an agency’s convoluted organizational hierarchy is the result of past realignments to adapt to a changing mission, new responsibilities or the advent of advanced technologies. In the face of such changes, bureaucracies tend to preserve the status of existing managers; instead of creating entirely new organizational structures, they simply add to the existing structure. This patchwork approach often adds new management layers in areas that could be consolidated or eliminated entirely.

Layers of management

A layer of management consists of one or more supervisory employees on the same horizontal level in a vertical organization.[2] Generally, larger agencies have more management layers than smaller ones. Layers of management typically are counted from the first level of staff members with supervisory responsibilities up to and including the chief executive officer(s).

Agencies attempting to flatten their organizations should give considerable forethought to their objectives. Simply relieving employees of supervisory responsibilities or hastily redrafting the organizational chart can be shortsighted and self-defeating. If an agency does not focus on developing innovative and efficient ways to carry out its mission, flattening efforts will surely fail. The “delayering” exercise should be viewed as an opportunity for agency heads to answer the simple but important question, “How would I organize this agency if I were starting from scratch?”

In 1996, the Comptroller’s office offered a series of proposals to streamline staffing in state agencies.[3] One proposal adopted by the Legislature required agencies to report their number of managers, supervisors and staff in quarterly reports of full-time state employees. The State Auditor’s Office (SAO) collects this information in a database, and now has about four years of data showing trends in manager/staff ratios in state government. These data provide an excellent source of verified management/staff information.

A ratio recommended nationwide for the private and public sector is one manager for every eleven employees (1:11).[4] In Texas state government, the average manager-to-staff ratio in agencies with more than 100 employees is 1:13. This average, however, is greatly influenced by the Texas Department of Criminal Justice, which has a ratio of 1:73 for its 35,000 employees.[5]

At least 36 agencies with more than 100 employees have a manager-to-staff ratio of less than one manager for every 11 employees; these range from about 1:9 to 1:2 (Exhibit 1).

Exhibit 1
Management/staff ratios at Selected Texas State Agencies, Fiscal Year 2002

Agency Name Management/Staff Ratio
Office of Court Administration 1:2.403
Department of Housing and Community Affairs 1:4.366
Department of Health 1:4.871
State Lottery Commission 1:4.937
Department of Economic Development 1:4.963
Texas Commission on Alcohol and Drug Abuse 1:5.000
Library and Archives Commission 1:5.167
Alcoholic Beverage Commission 1:5.489
Building and Procurement Commission 1:5.563
Water Development Board 1:5.623
Parks and Wildlife Department 1:5.693
State Department of Banking 1:5.958
Historical Commission 1:5.993
Texas Education Agency 1:5.993
Department of Information Resources 1:6.063
Public Utility Commission 1:6.158
Animal Health Commission 1:6.438
Department of Transportation 1:6.834
Workers' Compensation Commission 1:6.928
Office of Risk Management 1:6.938
Department of Protective and Regulatory Services 1:7.011
Department of Agriculture 1:7.935
Department of Licensing and Regulation 1:7.944
Railroad Commission 1:8.052
Commission on Environmental Quality 1:8.053
Comptroller of Public Accounts 1:8.218
Department of Insurance 1:8.242
Office of the Attorney General 1:8.569
General Land Office 1:8.652
Source: Texas State Auditor’s Office.

Human resources management in Texas

Bloated management is not the only problem that Texas agencies face. As state agencies flatten their organizational structures, other issues should be addressed at the same time to help agencies manage more efficiently. Both federal and state agencies face considerable recruitment challenges, including high turnover rates in certain positions, lengthy position vacancies and the loss of institutional knowledge due to the departure of seasoned employees. These challenges can affect agencies’ ability to perform their core functions and handle workload increases.

In fiscal 2001, the turnover rate in Texas state government was 17.6 percent, significantly above the national average of 12 percent for state governments. Turnover was particularly high among employees with fewer than two years of service and employees under the age of 40. The most common reasons for leaving state service cited during exit interviews includes:

  • lack of recognition and feedback about work;
  • lack of orientation to the job;
  • lack of information about goals and performance;
  • inadequate compensation; and
  • lack of training.[6]

Turnover costs the state about $254 million annually in recruitment, hiring, training costs and lost productivity. A reduction of 10 percent in the 17.6 percent turnover rate (in other words, a reduction from 17.6 percent to 15.8 percent) would save the state about $25 million annually. Reducing the turnover rate to the national average for state governments would save about $81 million annually.[7] Although turnover is likely to have been lower in fiscal 2002, it grew steadily from 13.3 percent in 1994 to 18.9 percent in 2000, and dipped only slightly in 2001, to 17.6 percent. While the current economic downturn may lessen state government’s work force problems, the long-term trend still suggests continuing staffing and skill shortages.

Texas also faces the challenge of effectively planning for the retirement of an aging work force. Almost 14 percent of state employees will become eligible for retirement between 2002 and 2005.[8] Significant amounts of institutional knowledge may be lost unless agencies plan now for the transfer of this knowledge to other staff members.

The state has made some strides in recent years to address work force challenges and adopt and adapt best practices. The Legislature has provided all state agencies with greater flexibility in the use of compensation and work arrangements such as merit raises, one-time pay for performance bonuses, retention bonuses and telecommuting. The state’s classification and exempt salary system has been streamlined, with a reduction in the number of classification titles and greater authority for the governor to set salaries for certain appointees. Other efforts have attempted to make it easier to seek and apply for state jobs; for instance, the Governor’s Job Bank, operated by the Texas Workforce Commission through its HireTexas Web site, has improved its job search and matching process.

Work force planning assistance

Most state governments conduct some form of work force planning. Texas state agencies submitted their first work force plans in June 2002, as a part of the state’s strategic planning process.[9] While SAO will not complete its review of these plans until December 2002, they are likely to vary greatly in quality, focus and usefulness across agencies, given the differences in their resources and experience with planning.

Many agencies need help to improve their work force planning and implementation efforts, and would benefit from training and technical assistance tailored to their needs. SAO has provided state agencies with Internet-based assistance in developing work force plans. The SAO Web site contains a considerable amount of planning information.[10]

While SAO is planning a summary report on agencies’ work force plans, it is not required to offer feedback on individual plans.

Management training

Work force training offers an opportunity to address critical organizational and human resource management needs. Other states have seen investments in training pay major dividends; for example, Washington state has made managerial training a high priority and credits its effort with producing a 37 percent decline in new employment-related grievance claims.[11]

The State Employees Training Act requires agencies to adopt rules on training eligibility and employee training obligations. Agencies must submit these rules to the governor for written approval.[12] Nevertheless, agencies are not required to develop specific plans for or provide a specific level of management training for the estimated 8,864 managers, directors and program administrators working in state agencies. Yet problems with management continue to be one of the most frequently cited reasons for employee dissatisfaction and departures.

Private and public studies alike have strongly and consistently demonstrated that investments in workplace education and training produce real-world benefits. The American Society for Training and Development and Knowledge Asset Management Inc. have developed a performance model showing that firms investing in training at or above average levels consistently outperform the stock market, with a cumulative return on investment nearly twice that of the S&P 500 Index.[13] Organizations ranging from the U.S. Mint to the State Department’s Foreign Service have used training not only to increase the skill base of present workers but also to attract new workers and retain existing ones.

The Governor’s Center for Management Development provides some training and educational services to agency managers at all levels. The center also has provided some training in succession planning. Other resources available to state agencies include the Public Managers Program at Southwest Texas State University and Texas Tech’s Southwest School for Governmental Finance, as well as numerous private and nonprofit providers.

Recruitment and retention bonuses

Flexibility in compensation for key positions can help government acquire, develop and retain talent. The 2001 Legislature recognized this fact by providing increased authority to state agencies to adequately compensate certain positions, such as IT workers, through retention bonuses.[14]

The 2001 Legislature extended this authority to include lump-sum bonuses of up to $3,000 to “enhance the retention of classified employees necessary for the operations of a state agency or institution.”[15] These strategies can have a positive impact on IT worker retention, but thus far agencies are making only modest use of this provision. Early data indicate that only $63,337 spread among 34 retention bonus contracts are slated for payment after September 1, 2002.[16] Agencies have indicated that a lack of funds has hampered their ability to take full advantage of the new legislative authority.

Performance contracts

Many state and local governments around the nation are using performance contracts for senior managers. Performance contracts are written agreements among the organization’s governing body, its chief executive and its senior management team that align upper managerial tasks with the organization’s strategic aims and major performance objectives. Performance contracts serve as an evaluation tool and benchmark during annual performance reviews. While these contracts vary widely in their particulars, they can provide a straightforward means to improve managerial performance.

For example, in the District of Columbia, the mayor develops a two-part contract for members of the district cabinet. The first part, which accounts for 40 percent of a manager’s rating, details the mayor’s priorities for government as a whole. Besides references to overall priorities (such as strong schools, safe streets, affordable housing and reliable transportation), the contract includes performance requirements involving detailed standards for such things as customer service, risk management, neighborhood action, local business contracting, access to agency services and financial management.

In addition to these standards, the second part of the contract (which accounts for 60 percent of a manager’s rating) includes specific performance measures and targets applicable to the unique programs for which each manager is responsible. Cabinet officers are assessed on how well they meet these expectations; anything less than 70 percent of targets met is considered sub-par performance. These contracts have been credited with furthering an overall improvement in the public’s perception of D.C. government.[17]

The federal Veteran’s Health Administration (VHA) also has used performance contracts. VHA has established performance agreements between executives and the undersecretary of Health since 1996, with similar agreements used at lower staff levels in varying degrees. These agreements have helped to identify, emphasize and measure the basic competencies and skills needed for these positions and to gauge progress in areas of high priority to the agency.[18]

Recommendations

A. State law should be amended to require executive state agencies with more than 100 employees to reduce their management ratio to 1:11 by fiscal 2008.

State agencies should be required to reach the goal by reducing the ratio each year beginning in fiscal 2004. The implementation schedule should be as follows:

YearRatio
Fiscal 2004 1:8
Fiscal 2005 1:9
Fiscal 2006 1:10
Fiscal 2007 1:11
Fiscal 2008 1:11

State agencies should be allowed to comply with these ratios through attrition as well as staffing reductions.

B. The State Auditor’s Classification Office should provide state agencies with customized feedback and other technical assistance concerning work force and succession planning.

The State Auditor’s Office (SAO) should provide Texas state agencies with detailed, specific feedback on their existing work force plans and on the efforts needed to improve them. Using its analysis of agency plans, SAO should develop a risk assessment of those agencies that most need this assistance. It should provide specific help in using the work force planning process to identify ways to recruit, train and reward capable employees. SAO should help agencies:
• identify their core competencies and match staff knowledge, skills and abilities with those competencies;
• decide whether to build internal capacity or contract for services from the private sector;
• use information technologies to capture some of the knowledge and skills of current and retiring employees; and
• use training to improve agency management and employee productivity.
While SAO already provides general guidelines and training in some of these areas, agencies need one-on-one feedback and assistance. SAO may choose to work with multi-agency organizations to provide this assistance, such as the Small Agency Task Force, Mid-sized Agency Coordinating Committee and the State Agency Coordinating Committee.

C. State law should be amended to increase and intensify training for state agency managers.

State law should be amended to require agencies to include a managerial training component with specific annual or biennial training-hour minimums in their work force plans. The plans should include the eligibility and obligation rules required by the State Employees Training Act; the separate submission of rules to the governor should be eliminated because the governor already receives the required work force plan.

D. State law should be amended to extend the authority of agency heads to pay one-time recruitment and retention bonuses.

The current retention bonus authority should be extended to include its use for recruitment purposes and strengthened with criteria for bonuses. As an extension of the current process, agencies should include in their written certification to the Comptroller’s office the conditions determining the need for the bonus, such as a key/mission-critical role; high vacancy/turnover rates; difficulties in recruiting due to labor shortages; a lack of qualified applicants; and other factors. The maximum bonus should be raised to $5,000 to give agency heads a more powerful and flexible tool to improve the retention and productivity of critical positions.

E. State law should be amended to require state agencies to develop performance contracts with their senior management teams.

Performance contracts such as those used by the District of Columbia allow governing boards and agency heads to ensure a close link between managerial performance and the organization’s philosophy, goals and objectives. Performance contracts should provide specific objectives for assessing performance through annual reviews.

Fiscal Impact

The fiscal impact for Recommendation A assumes that state agency staffing would be reduced by the difference between current staffing and staffing under the proposed manager/staff ratio.

The following table shows the current manager to staff ratio and the staff reductions that would be needed to achieve a level of 1:8 in fiscal 2004 and 1:9 in fiscal 2005.

Agency Name Current Ratio FY 2004 FTE Reduction To Reach 1:8 FY 2005 FTE Reduction To Reach 1:9
Office of Court Administration 1:2.403 49.5 51.0
Department of Housing and Community Affairs 1:4.366 37.0 41.0
Department of Health 1:4.871 427.0 493.0
State Lottery Commission 1:4.937 27.5 32.0
Department of Economic Development 1:4.963 11.5 13.5
Texas Commission on Alcohol and Drug Abuse 1:5.000 15.5 18.0
Library and Archives Commission 1:5.167 17.0 20.0
Alcoholic Beverage Commission 1:5.489 34.0 41.5
Building and Procurement Commission 1:5.563 36.0 44.5
Water Development Board 1:5.623 18.0 22.5
Parks and Wildlife Department 1:5.693 165.0 205.0
State Department of Banking 1:5.958 7.0 9.0
Historical Commission 1:5.993 4.5 6.0
Texas Education Agency 1:5.993 41.0 54.0
Department of Information Resources 1:6.063 9.0 12.0
Public Utility Commission 1:6.158 10.0 13.5
Animal Health Commission 1:6.438 7.0 10.5
Department of Transportation 1:6.834 361.0 587.0
Workers' Compensation Commission 1:6.928 23.5 39.5
Office of Risk Management 1:6.938 2.5 4.0
Department of Protective and Regulatory Services 1:7.011 137.0 242.0
Department of Agriculture 1:7.935 0.5 8.5
Department of Licensing and Regulation 1:7.944 --* 2.5
Railroad Commission 1:8.052   11.0
Commission on Environmental Quality 1:8.053   44.5
Comptroller of Public Accounts 1:8.218   33.0
Department of Insurance 1:8.242   11.5
Office of the Attorney General 1:8.569   24.0
General Land Office 1:8.652   3.0

*In the case of the Department of Licensing and Regulation, meeting the 1: 8 standard would call for the reduction of less than one-half FTE.

The fiscal impact is based upon the median salaries of the FTEs of each agency that would be affected by the proposed manager/staff ratios.

To realize these savings, the Legislature would have to reduce General Fund appropriations of affected agencies by an amount equal to the savings estimated for each agency, as follows:

Agency FY 2004 Appropriations Reduction General Revenue FY 2005 Appropriations Reduction General Revenue
Office of Court Administration $2,173,000 $2,239,000
Department of Housing and Community Affairs $434,000 $481,000
Department of Health $11,573,000 $13,362,000
State Lottery Commission $1,037,000 $1,206,000
Department of Economic Development $445,000 $522,000
Commission on Alcohol and Drug Abuse $129,000 $150,000
Library and Archives Commission $461,000 $543,000
Alcoholic Beverage Commission $1,238,000 $1,511,000
Building and Procurement Commission $905,000 $1,118,000
Water Development Board $782,000 $977,000
Parks and Wildlife Department $703,000 $873,000
State Department of Banking $339,000 $436,000
Historical Commission $122,000 $162,000
Texas Education Agency $1,003,000 $1,321,000
Department of Information Resources $372,000 $496,000
Public Utility Commission $458,000 $618,000
Animal Health Commission $219,000 $329,000
Department of Transportation $10,616,000 $17,262,000
Workers' Compensation Commission $759,000 $1,277,000
Office of Risk Management $78,000 $125,000
Department of Protective and Regulatory Services $1,325,000 $2,340,000
Department of Agriculture $18,000 $311,000
Department of Licensing and Regulation   $91,000
Railroad Commission   $301,000
Commission on Environmental Quality   $209,000
Comptroller of Public Accounts   $1,513,000
Department of Insurance   $0*
Office of the Attorney General   $717,000
General Land Office   $45,000
Subtotal $35,189,000 $50,535,000
ERS (20.63%) $7,259,000 $10,425,000
FICA (7.65%) $2,692,000 $3,866,000
Total Savings $45,140,000 $64,826,000

*The appropriations for this agency would come from General Revenue Dedicated funds.

Some of these agencies also would experience reductions in general fund dedicated revenue, federal funds and other funds.

Recommendation B would have no significant fiscal impact to the state. SAO would be able to provide the recommended technical assistance by conducting a risk assessment to narrow the number of agencies selected; working with state agency associations that also provide assistance in workforce planning; and redirecting some resources already providing work force planning assistance.

The fiscal impact of Recommendation C cannot be estimated. Agencies already develop work force plans and should be able to modify them with minimal effort. State agencies that have been under-investing in management training may experience an increase in the costs of developing training plans. Agency-specific costs could be addressed through a focused reallocation of training and other administrative resources.

Recommendation D would have no fiscal impact. This recommendation does not advocate additional funds for bonuses, but instead raises the ceiling on the amount of money an agency may provide as a bonus. Agencies already report bonuses to the Comptroller’s office, so no additional resources would be needed to process the notifications.

Recommendation E would have no fiscal impact. Performance contracts would be part of the performance evaluations already in place.

Fiscal Year Savings to General Revenue Savings to General Revenue Dedicated Savings to Federal Funds Savings to Other Funds Change in FTEs
2004 $45,140,000 $ 7,916,000 $ 9,218,000 $1,210,000 -1,441
2005 $64,826,000 $13,101,000 $13,128,000 $1,525,000 -2,098
2006 $82,110,000 $18,109,000 $17,396,000 $4,739,000 -2,770
2007 $96,352,000 $22,154,000 $21,452,000 $7,554,000 -3,337
2008 $96,352,000 $22,154,000 $21,452,000 $7,554,000 -3,337


Endnotes

[1]Robert Tomasko, Downsizing: Reshaping the Corporation for the Future (New York: American Management Association, 1987), p. 19.

[2]Iowa Legislative Fiscal Bureau, Layers of Management Report (Des Moines, Iowa, 1993), Attachment A.

[3]Texas Comptroller of Public Accounts, Disturbing the Peace: The Challenge of Change in Texas Government, (Austin, Texas, December 1996), p. 588.

[4]Alex Markels, “Critical Slot: Restructuring Alters Middle-Manager Role But Leaves It Robust,” Wall Street Journal (September 25, 1995), p. A1.

[5]State Auditor’s Office, A Quarterly Report on Full-time Equivalent State Employees for the Quarter Ending August 31, 2001 (Austin, Texas, February 2002), p. 14.

[6]State Auditor’s Office, An Annual Report on Full-Time Classified State Employee Turnover for Fiscal Year 2001 (Austin, Texas, December 2001), p. 5.

[7]State Auditor’s Office, An Annual Report on Full-Time Classified State Employee Turnover for Fiscal Year 2001, p. 3.

[8]Employees Retirement System of Texas, “Retirement Eligibility—FY 2002 thru FY 2010,” Austin, Texas, November 20, 2001. (Computer printout.)

[9]S.B. 587, 77th Leg., R.S. (2001).

[10]State Auditor’s Office. Work Force Planning Guide (Austin, Texas), www.hr.state.tx.us/workforce/guide.html. (Last visited October 15, 2002.)

[11]Katherine Barrett and Richard Greene, “Grading the States 1999: A Management Report Card,” www.governing.com/gpp/gp9intro.htm (Last visited October 18, 2002).

[12]Tex. Loc. Gov’t Code Ann. §656.048 (Vernon 1993).

[13]Human Capital Dynamics, Human Capital Investments and Firm Performance (Atlanta, Georgia, June 2001).

[14]S.B. 1, 77th Leg., Reg. Sess. (2001).

[15]S.B. 1, 77th Leg., Reg. Sess. (2001).

[16]Data supplied by the Payroll Division, Texas Comptroller of Public Accounts.

[17]District of Columbia Department of Employment Services, FY 2002 Director's Performance Contract, October 1, 2001 - September 20, 2002 (Washington, D.C.), pp 1-4.

[18]U.S. General Accounting Office, A Model of Strategic Human Capital Management (Washington, D.C., March 2002), p. 35.