The Buyout (ERIP) 2

There is a lot of inaccurate information on this that is being disseminated during this campaign. The following can help people understand the effects of the ERIP.

First, I believe that all six elected city officials (including myself) are on record as stating that they would do it differently, if they could do it over. I was in favor of the ERIP because it was projected to save the City several million dollars over a 30-year period. However, the benefits paid to the retirees was too generous for the liking of most residents. Although the projections continue to show that ERIP will save the City money, the ERIP has become such a distraction that for this reason alone I would have done it differently. I probably would have supported a one-year’s salary buyout, rather than two.

Second, there is an immediate cost for the buyout—that is the payments made to the 67 employees who took the buyout. This is a significant cost—perhaps $11 million. To this cost is added the interest payments to the retirement fund. Mr. Angel suggested that the buyout be funded over 30 years. However, if the fund is repaid in a shorter term, such as 25 years, then the savings to the City will be even greater.

Third, there are two primary sources of savings to the City from the Buyout: (1) The employees hired in place of retirees will come in at the low end of the pay scale for their positions. Thus for the 60 positions that have been filled, there will be an average savings of $X/year, in salaries alone. Assuming that X = $10,000, this would result in a savings of $600,000 per year. (2) For those positions that were left vacant, this would result in a savings to the City of $Y/year in salaries. Assuming that the average salary and benefits of these 7 positions is $50,000, this would result in a savings of $350,000 per year. (These are hypothetical, not actual figures. But they illustrate the benefit side of the buyout.) These two combined factors could amount to $1 million/year in savings.

Fourth, in the short-term, the buyout saved the City over $1 million in FY2010.

Fifth, the independent evaluation of the buyout by McLean, Koehler, Spars & Hammond [MKSH] (Dec. 1, 2008) disagreed with Mr. Angel’s actuarial estimates. (The actuarial factor deals with life expectancy of retirees—how long they would receive benefits.) MKSH concluded that the actuarial factor should be more than Mr. Angel projected, and would result in a greater cost to the City than Mr. Angel projected. The MKSH analysis concluded that the buyout would probably bring little savings, but neither did it conclude that there would be any significant losses.

Sixth, MKSH report declined to consider one very important factor—a factor that supports Mr. Angel’s projection that the buyout will save the City several million dollars—that is the financial impact if the City declines to fill some vacancies created by the buyout. Mr. Angel projected that the City would save $14 million if 4 positions were not filled. In fact, there are currently 7 positions that remain unfilled. MKSH declined to consider this factor because they said that this was not an argument that had been offered as a basis for doing the buyout prior to the Board of Aldermen vote on the buyout. However, in evaluating the actual financial impact of the buyout, this factor must be included. It is perhaps fortuitous that the economy collapsed after the buyout decision because it gives the City an opportunity to reduce the number of employees without laying people off. By including this factor in the City’s financial projections, and including the MKSH adjustments, the buyout is still projected to save a lot of money for the City.

Seventh, while most of the Aldermen expressed the desire that employees who accept the buyout should not return to work for the City, with some exceptions, there is nevertheless an additional benefit to the City when employees return—that is that the City does not have the expense of paying for health insurance benefits for these employees, since the City is already paying them as a part of retirement benefits.

Eighth, several candidates for Mayor and Alderman criticize the buyout as a terrible financial mistake for the City, but none of them dare to suggest how big a loss the buyout will be for the City. They may take the point of view that it is too obvious to require any analysis or in-depth discussion. But, if it is so obviously a mistake, why don’t they state how much money they believe it will cost the City? If it is that obvious, then it should be easy to come up with such an amount. The depth of analysis that critics have demonstrated on this issue is superficial at best, and irresponsible at worst. The financial impacts of the buyout are complicated and extensive. As one who has studied this in some depth, I have found the critics of the buyout to be overly eager to condemn the buyout, even though they cannot justify their basis for condemning it.

Ninth, at this point, according to my financial projections, the Buyout will not cost the City, but rather is still likely to save the City money.

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