February 13, 2013 By Heather Kerrigan
Early retirement incentives have come and gone. In the 1990s, there was a drive to reinvent government by streamlining operations and decreasing staff counts. Today, the motivation behind such incentives is mainly financial. Reducing personnel -- and therefore salary and benefits costs -- can have a significant impact on budget deficits.
In 2012, several municipalities -- including Kalamazoo, Mich.; Southampton County, Va.; and Broome County, N.Y. -- offered early retirement incentives to eligible employees in an effort to save money. Whether these and similar incentives offered elsewhere achieve their desired results, however, is up for debate.
For instance, around 4,000 New York state employees took advantage of early retirement in 2010. But by 2011, the state concluded that the program had diminishing returns, and that the savings were very small. According to the Citizens Budget Commission, an independent fiscal watchdog in New York, the savings could have been greater if layoffs of a similar magnitude had been instituted instead.
One explanation for the minimal cost impact is because a number of those taking advantage of the program were going to retire soon anyways -- that’s part of the reason Alabama Gov. Robert Bentley dropped his proposed early retirement incentive late last year. The incentive would have been available to approximately 4,500 of the state’s 33,000 employees, and the savings from salaries and benefits were estimated between $18 million and $26 million for every 500 employees who took part. However, only around 300 expressed interest in the program, according to the state's Personnel Department. The ultimate goal was to avoid refilling the positions of retirees.
According to Bentley, prior to coming to office in early 2011, a hiring freeze was in place, but if an employee retired or left, that position was refilled. Now, the state no longer refills those positions. According to State Comptroller Tom White, this has led to a significant decrease in the number of state employees. From December 2010 to December 2012, the state cut about 10.5 percent of its payroll through expected attrition.
“If attrition continues at recent levels, we can achieve significant savings without the need for the legislation," Bentley said, though he didn’t rule out the potential for a future incentives program.
Of course, if a government decides to offer early retirement incentives, not only is cost a consideration, so is the impact on overall operations and institutional knowledge.
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Despite those concerns, Calvert County, Md., approved a plan last month to offer voluntary early retirement incentives to 44 eligible employees -- all of whom have defined-benefit (DB) pension plans that cost the county over $1 million more than those with defined-contribution plans. Full-time employees who choose to take part will receive $1,000 per year of service, while part-time employees will receive $500 per year of service -- all paid in one lump sum. If all of those eligible for the program participate, the county would have a one-time payout of $1.24 million. The county has a projected deficit of $9.3 million for fiscal 2014, but hopes that reducing its number of employees (especially those with costly DB plans) will produce significant savings.
I spoke with Tim Hayden, the county’s director of finance and budget, to find out more about why the county is offering the plan and what impact is expected. His condensed, edited responses appear below.
Why did Calvert County decide to offer early retirement incentives?
Since the fall of 2008, our budget has been difficult. Back then, it was income taxes [taking a hit] and since then, income taxes have come back but our property tax revenues are down. During that time, employees received very limited salary enhancements. We’ve worked hard on operating expenses. We’ve asked departments to decrease operating costs by 2 percent to 5 percent, and we’re asking them to make things work with a smaller budget.
So we really believe we’ve done all that kind of stuff we can and it leaves us with salary and benefits -- and where the big savings are for us would be the reduction in staff. Everyone you talk to says, ‘if this person leaves, there’s no way I can continue my operations.’ So we had to figure out how we were going to make it an employee’s decision to leave rather than management’s decision. The program is voluntary, and we wanted to keep it that way.
How would cutting staff impact the budget?
We might be the only county in the state of Maryland whose current retirement plan is a 401(a) where people hired after July 1, 1998, aren’t in a defined-benefit plan. The people who the retirement incentive is offered to are still in the defined-benefit plan.
It’s been difficult to pin down a number because everyone is different, so trying to use averages immediately becomes a problem since one younger person might be earning more than someone eligible for retirement. But we know exactly what the employer contribution is to the retirement plan. In fiscal year 2012, the total expense for the 401(a) plan was $925,000 for 425 employees. For the defined-benefit plan, the employer contribution was $2.7 million for 146 active employees.
Where we really hope to get the savings is not in replacing people but encouraging them to retire and then doing everything we can to not replace them.
Does not replacing the retirees have an impact on services?
The concern is that some services would be impacted in a way that we believe would create a real issue for the county. For example, in one department we have about half of those who are eligible for the incentive. If everyone decided to go, then we might have to try to discourage them from going all at once.
Would it lead to a brain drain?
There’s real concern regarding the loss of institutional knowledge. We encourage succession planning, but if enough employees decide to leave at one time, it could be a real issue.
Have managers expressed a concern about this?
Yes, I was sitting next to one today who told me she doesn’t know what she’ll do.
Are there a number of managers eligible for retirement?
It’s mixed. Our organizational structure includes elected officials then county administrators then department heads; at least a couple department heads are represented in the eligible population.
How are you handling the retirements?
We’ve asked for an application by the end of February. Then we’ll review, make a decision and ask the employees for a more formal intent to retire by the end of March.
Will you reject any applications?
Everybody who was offered the incentive is eligible for normal retirement as of June 30, 2013, so we can’t tell them they can’t retire, but we could tell them we’ve decided not to go forward with the incentive. But I can’t imagine that would happen. [The application] is just an escape clause for a situation in which everyone eligible from one department decides to leave.
How have employees responded?
I think people see that we’ve arrived at [making cuts to] salary and benefits. We’ve been through operations; all the easy fruits have been picked; and we’re getting to the harder decisions. I think that might stress people out a little bit. This initial foray into retirement incentives shouldn’t stress people out -- it’s voluntary. Even for the people involved, it’s their decision. They shouldn’t think that their job is in jeopardy.
What are the potential savings?
We have a projection where if we can eliminate 10 positions on average from this group, and if you include benefit costs, I believe it would save the county $1 million per year.
Right now, only those eligible for retirement between April 1 and June 30 are eligible for the program. Are there plans to expand it?
There’s no current plan, but the budget deficit is still significant enough that we have to continue to chip away at it.
This article reprinted courtesy of Governing Magazine.