Paul on the Buyout (ERIP)

The BUYOUT is on schedule to save the City money!

(See below (and in the blog) Paul’s Response to Katherine Heebrandt’s Column of 10/30/09.)

A common accusation of current city candidates and of some people from the media is that the City’s Early Retirement Incentive Program (ERIP or the “Buyout”) was a financial disaster for the City. I dispute this. No candidate has analyzed the Buyout issues and reached a conclusion as to how much the Buyout will cost the City. Except for mayoral candidate Jason Judd, I have not heard any candidate express an oninion as to an amount of money the Buyout would save or cost the City. Mr. Judd opinined that it would cost the City $10 million. For the reasons expressed below (and in the attached evalauation writings), Mr. Judd’s opinion is erroneous, and is not based upon either facts or reason. Mr. Judd has not explained the basis for his opinion, and therefore his reasoning cannot be examined–his conclusions are unsupported by facts or reason.

Analyzing the Buyout is complex, so I understand why neither Jason Judd nor any other candidate who is critical of the Buyout has undertaken to do his/her own analysis of the Buyout. But I have studied the analysis done by Jon Angel, by the MKSH auditors, and the current City projections–and they show that the Buyout could save the City over $5 million in 30 years. I have seen no support for Mr. Judd’s opinion that the Buyout “will” or “may” cost the City $10 million.

The Buyout is easy to criticize because the generosity of the 2-year-salary payments was more generous than City residents can stand. For that reason, I would have voted differently if I were to revisit the issue. But in 2008 the projections were that it would save the city $8 million over 30 years, and the current projections continue to show that it could save the city over $5 million in 30 years. So, if we are going to make a responsible analysis of the costs and benefits of the Buyout, we need to analyze the many factors that are involved. It is of no help to merely give a gut reaction and then to ridicule the importance of making a thorough financial analysis. After a thorough review of this matter for a year-and-a-half, I have concluded that it may save the City $5+ million over 30 years, or that it could bring some losses, or something in between—but the City still has the opportunity to obtain the maximum savings. It is not accurate to say that the Buyout WILL cost the City $10 million. The Buyout is on schedule to save the City money, despite the fact that 26 employees who took the buyout were rehired by the City. Consider the following facts and analysis, which support the conclusion that the Buyout is on schedule to SAVE the City monty.

Former City Budget Director Jon Angel concluded that the Buyout would save the City approximately $8 million over 30 years. The MKSH audit report found two flaws in Jon Angel’s analysis of the savings that the Buyout would bring to the City. Based upon their corrections, MKSH reported that the Buyout was not likely to save the City anything. However, MKSH specifically declined to consider that Mr. Angel’s savings were based upon his projection that the City would leave unfilled FOUR city positions. This factor is worth at least $7.5 million in savings over 30 years (assuming the average salary/benefit cost to be $60,000 per employee). The City currently has 7 unfilled positions. Therefore it is currently on a faster track to generate savings than what Mr. Angel projected. Until we know how long the city will go forward with a smaller work force, we cannot determine what the total savings will be, orwhether there will be a net loss. However, the City still has the opportunity to achieve savings of more than $10 million over 30 years. If the City is able to pay-off the retirement payment loans in 25 years, instead of 30 years, then this will increase the savings even more. The tight economy is giving the City to keep its work force at a reduced number. Thus, the timing of the Buyout was actually very good because it led us to reduce our work force without having to layoff workers. Nevertheless, I believe that over time the City would have had the opportunity to make some reductions in work force every time someone left the City employ for reasons other than for retirement. It is difficult to estimate what this would be and when it would occur, but it should be considered as an offset to the figure of the 7 current unfilled positions.

Another factor to consider is that the cost to the City for the 26 rehirees is less than what the cost would be for new hires BECAUSE the City does not have to provide duplicate health insurance benefits for the rehirees. The annual savings from this would be $156,000 (@ $6,000/yr x 24 rehirees). Thus, while the return of those who took the buyout was not wanted by the Board of Aldermen, nevertheless, their return does generate some savings to the City.

For the first 4 years, the Buyout will save the City a lot of money every year. It saved the City $1.6 million in FY2009. For the middle years (5-17, I think), the Buyout is projected to generate annual losses. Then, for the remaining years, the Buyout will again bring annual savings. For the short run, the Buyout has been a big help to the City–it will save the city $2 million in the first three years ($1.6+ million in 09, $0.235million in ’10, and $0.06 in ’11). The current financial problems have nothing to do with the Buyout; it would have been worse without the buyout. But making projections for whether the Buyout will ultimately save or cost the City money 30 years from now is an extremely complex exercise. And contrary to what Mr. Judd asserts, the City is currently on track to save millions of dollars. The primary savings comes because actual salaries paid is substantially less than the salaries that would be paid. Over 30 years, the City projects that the net savings are projected to be over $5 million. Thus, the Buyout is not projected to cost the City money, but rather the Buyout gives the City the opportunity to save, if it continues with the reduced work force.

Nevertheless, if I were to do it again, I would have voted for a 1-year salary payment. The 2-year payment was too generous for the citizens–that is the principal problem, not that it will cost the City too much. I think it is clear that 67 people would not have taken the buyout if it was only for one year’s salary. But perhaps that still would have been beneficial.

The next time someone asserts that the Buyout was a terrible financial mistake for the City, that person should be challenged to state how much he/she has determined that it will cost the City and to explain the basis for this conclusion. Except for mayoral candidate, Jason Judd, to my knowledge, no one has dared to offer any such figure. Unless someone can give his opinion about the amount of savings or loss–and with analysis to support it–their opinions are baseless rhetoric. With regard to Mr. Judd’s projections, at the October 27th debate he stated that the Buyout would cost the City $10 -11 million in 20 years. His website states that the Buyout “may end up costing us $10 million.” His use of “may” is much more accurate. As I stated above, the City’s current projections are that it may save us over $5 in 30 years. Mr. Judd’s use of the 20-year analysis period is either a mistake or misleading. Because the City is financing the Buyout over 30 years, that is the time period that must be considered–not 20 years. And even if the loan is paid off over a shorter period of time, the 30-year evaluation period should be used, because of the intial loan period and because of the actuarial projections (e.g., how long retirement payments will be paid to retirees [until they die]).

In the year and half since the BUYOUT was approved by the Boad of Aldermen, I have published the following writings on the Buyout, which the reader can access by linking to them. Some of my analysis has changed during the last year-and-a-half, but for the most part it still applies today.

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