Misuse of the MKSH Buyout Analysis

The city has now released the buyout analysis report by McLean, Koehler, Sparks & Hammond (MKSH)(dated December 1, 2008) on the city’s Early Retirement Incentive Program (ERIP or “buyout”). The MKSH report does not conclude that the city will lose money on the buyout. Yet this is a conclusion that some have already embraced.

The study by MKSH did not undertake to determine whether or not the buyout would save the city money; it only analyzed the validity of the assumptions that city staff presented as a basis for projecting savings. The MKSH analysis did not conclude any specific amount of savings or loss—it did conclude that the projected savings of $7.58 million should be reduced to $3.38 million to correct an actuarial assumption that Mr. Angel had used. MKSH further concluded that if the rehires were hired at an average of 10% above the lowest Base pay, then the projected savings would be only $1.48 million; and that if the rehires were hired at an average of 20% above the lowest Base pay, then the projected savings would become a loss to the city of $0.41 million. The MKSH had other qualifications and concerns as well, but their report declined to make their own savings/cost projections. What the MKSH report did was analyze Mr. Angel’s analysis, and MKSH found some flaws in it. Worst scenario for the city appears to be that by correcting Mr. Angel’s projections, the buyout would be a wash, with no substantial savings or extra costs.

However, the MKSH analysis specifically declined to consider at least one factor that can lead to substantial savings for the city—that is the effect of not filling every position that was vacated by the buyout. Mr. Angel estimated that if the city would not replace 4 positions, then this could result in an additional savings of $14.5 million to the city. MKSH declined to analyze or even consider this factor, because it was not a part of the Executive Summaries that Mr. Angel submitted on 3/28/08 and 4/9/08. But the city has the opportunity to obtain these savings through the buyout, whether or not this factor was addressed in Mr. Angel’s executive summaries. In fact, this is the primary reason that buyouts are occasionally offered by large businesses. The city now has this option (or card) to play. And, in light of the economic downturn, there are multiple reasons for the city to play it, which could yet bring millions of dollars of savings to the city through the buyout.

Therefore, it is erroneous and premature for anyone to conclude that the buyout is projected to cost the city money. The city is in a position to save several million dollars from the buyout. The biggest way for the buyout to save the city money is through not filling certain positions. The city must now carefully evaluate its workforce to see if there are positions that need not be refilled at this time. A buyout provides this possibility without having to fire or furlough people.

The city should make this evaluation and should make appropriate restructuring of the city work force. Based upon this, the city should make specific projections of what savings or costs are expected to result from the buyout. Until then, the MKSH report will likely serve as fodder for those who will misuse that report to argue that the buyout will cost the city. The city can help prevent this misuse by quickly completing and publishing projections on what savings/cost it expects will result from the buyout.

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