Assessing early retirement | Arkansas Blog

Tuesday, March 3, 2009

Assessing early retirement

Posted By on Tue, Mar 3, 2009 at 9:42 AM

Little Rock School Superintendent Linda Watson has proposed an early retirement incentive as a means of reducing the district workforce on account of a drop in students and revenue.

The idea has prompted some questions from Board member Jody Carreiro, with Watson's answers, on the jump. It's inside baseball, but it's the kind of discussion that might be helpful to those interested in the LRSD's ultimate decision.



I have lots of questions and my first reading of the information provided didn't answer very many.

1.    Have the attorneys sent an opinion as of yet?  Let me reiterate, I have done nothing but retirement plans for 20 years.  I will not recommend a early retirement incentive to my clients until I have something from an ERISA attorney.  I would not only be in violation of public trust, but professional responsibility if I treat this any differently.  I have collected several items out of what I have available, but I am not supposed to be doing this research, I am supposed to be reading what is supplied to me as a board member.  Early retirement is tricky at best, dangerous at worst.

Governments, such as school districts, are not subject to ERISA, however, an attorney from the Friday firm with specialized knowledge has reviewed the language and we have incorporated recommended changes.  Bear in mind that this is not a option that impacts the teachers' retirement plan, merely a little incentve to encourage an employee to take an otherwise available alternative.  And, there is no longer any requirment to actually retire, so the employee could continue to work for another entity, just not LRSD. 

2.    What is the rationale to tripling the size of the pool from the first proposal?  If there is an ADEA problem why did we use 20 years instead of 25?

The original spreadsheet was a "what if" scenario to try to estimate the cost savings.  It did not reflect the proposed pool.  The pool has increased to include employees over the age of 65 and decreased to exclude classified employees under the grade of 61.  Overall, I would estimate that the pool has decreased, not increased.
We used 20 years as this was the top of the pay scale and a point where we were, essentially, assured that we could replace an employee (if necessary) with an employee at a sufficiently lower pay rate to be able to fully recover the cost of the incentive in the same fiscal year.  The applicable requirement, I believe, in section 623 of the ADEA is that the employer may not:
"(2) to limit, segregate, or classify his employees in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s age; or"
So, to exclude an employee based on age from the right to participate in this option would not be permitted.  This is why we've included the 65+.  The exclusion decision is based on grade level, not age, and that is for budgetary reasons (cost/benefit threshhold).

3.    How many of the targeted group of people are we not paying benefits (that is ATRS) for?  All of those would not have as great of a savings.

All employees of the District, including part-time and temporary, are required to participate in ATRS.  They are not required to contribute, but the District must pay the 14% employer contribution, so the cost of benefits (reflecting social security, Medicare, and ATRS contributions) should be quite accurate.

4.    The savings estimates are not adjusted for the fact that we "expect" a certain number of these people to retire anyway. Normal retirement is about 30 employees each year (according to HR records), we expect that to be less given the current economic conditions.

This is the reason the minimum participation rate is set at 40 participants.  With an additional 20 participants, the savings (at $20K each) should more than break even (more than pay for the cost of the 20 expected to retire).  Also, currently, an employee can retire and stay employed at the District with a 30 day break in service (if retiring by July 1).  This plan would cause the surrender of right to re-employment thereby increasing attrition.

5.    I am concerned that we have opened the pool to people who can leave, get another job outside the district and get 15000 without losing anything.

The objective of this effort is to increase attrition to allow the District to meet an unprecedented reduction in force without involuntary terminations.  What an employee does after they leave the District does not impact this objective.

6.    I am also afraid that in offering this to people not eligible for retirement under ATRS we are encouraging people to may very poor financial decisions and if they ask us the ramifications we are supposed to supply them.  A 60,000 employee who retires a year earlier than they could have loses a present value of 30,000 to 40,000.

We do not advise employees regarding their personal financial decisions.  The ATRS can serve as an independent source of information for employees making these decisions.  Bear in mind that the alternative to this "voluntary attrition" plan is an involuntary one.  We must reduce the employment force to meet budget requirements.  The involuntary plan would impact our newest hires, presumbably with no retirement or other income entitlements whatsoever.

I will probably have more questions when I have time to actually study the proposal.

Please bear in mind that the example provided is not the "plan", but an extremely rough guesstimate.   It is expected that the actual retiree pool will be quite different from the "guesstimate".  Since we have no control over who accepts the offer, we have no way to predict what the actual cost saving will be.  However, at a savings of approximately $20K for every retiree requiring a replacement, and the possibility to "soften the blow" of the signifcant reduction in positions we are facing this next year to balance the budget, we feel it is prudent to undertake at this time.

Thanks for your help.

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