The Buyout MKSH Report

After my review of the MKSH analysis (dated December 1, 2008), I present this summary and analysis of the MKSH report.

I. Scope of the MKSH Report.
While the MKSH report does not explicitly define the scope of their analysis with the

clarity that I would have liked, nevertheless, after reviewing the report, it became apparent that they were evaluating the accuracy and validity of the ERIP proposal itself that was presented through the staff’s Executive Summary dated April 9, 2008.

It is important to understand the scope of the MKSH review because there will be those who will misinterpret this report to draw conclusions that are not warranted. To appreciate the importance of identifying the scope of the MKSH review, it should be pointed out what the review was not intended to do:

A. The review did not take into consideration the oral comments and reasons given by staff and by the Board of Aldermen at public meetings as to the purpose and application of the ERIP, prior to passage of the ERIP. (This is a significant point because the comments showed that the Board of Aldermen had additional reasons that supported the ERIP which MKSH did not consider.)

B. The review did not take into consideration the actuarial letter dated April 11, 2008 (from Bolton Partners, Inc.)(Appendix E).

C. The review did not make an ultimate conclusion as to whether the ERIP would ultimately save the city money or cost the city money.

D. The MKSH review did not make its own cost savings analysis of whether or not the ERIP would save money; rather they only critiqued the various components that were in the staff’s projections. In fact, MKSH identified other factors that could affect the cost savings analysis, but without making any study or finding as to what specific cost/savings would result because of such factors. (For example, without specific analysis or reasoning, MKSH stated its concern on pages 3 and 8 that “The additional cost to the retiree medical plan (the OPEB plan) under GASB 45 has not been addressed.”)

E. Without analysis, the MKSH review concludes that amortizing the buyout over 25 years would cost more to the city than amortizing it over 30 years (page 8). Similarly, at pages 6 & 9, MKSH concludes that amortizing the buyout over 10, 15 or 20 years would increase the city’s costs. No explanation is given for this conclusion, but some is required because the shorter amortization period would decrease the total interest costs. The shorter amortization periods would increase the costs during the years of amortization, but this would not affect the benefit side, and in the long run this would be a factor that could increase the overall cost savings to the city. Regardless of how short a period is used to amortize the buyout, the benefits to the city must be considered over a longer period. MKSH did not acknowledge this, and it appears that MKSH may not have taken it into consideration.

F. At the bottom of page 7, MKSH specifically excludes from its analysis the impact on the city that would result from not replacing 4 positions. In a May 20, 2008 email from Mr. Angel, it was estimated that over a 30-year period this could result in a $14.5 million savings to the city. I think it is because this email was not generated until a month after the ERIP was passed (April 17, 2008), and therefore was outside of the scope of the MKSH analysis. However, when the ultimate analysis is done to determine whether the ERIP saved or cost the city, this is a legitimate factor to consider. When such analysis is done, it would be unlikely and unrealistic to estimate that an unfilled position would continue for 30 years; it is more likely that an unfilled position would later be reinstated or would reappear in a different department. Nevertheless, even the temporary elimination of city positions can cause a substantial savings to the city. And it is for this very reason that major corporations do sometimes offer the buyout options to employees.

G. The MKSH did not undertake to study the effects of the buyout on employee morale, efficiency and productivity. This is not to imply that the MKSH review should have attempted this. But there can be increases in efficiency and productivity from such a buyout, and I have heard that there have been some such benefits noted.

The MKSH report cannot be properly understood or utilized if one does not first identify the scope of the report. And in this case, where MKSH was only evaluating the legitimacy of the assumptions used by the City in the two Executive Summaries (date 3/28/08 and 4/9/08), then the analysis will have extremely limited value. The MKSH review did not address whether, as implemented, the ERIP is on track to either save the city or cost the city. As such, the report will serve only to fan the flames of debate on this issue, and will do little if anything to answer the question of whether or not the ERIP will result in a savings or a loss to the city.

II. MKSH Conclusions.
Many people, including myself, will be looking to the MKSH report to find a quantified

conclusion about the cost-savings (if any) of the ERIP. The MKSH declined to make such a comprehensive and conclusive finding. However, MKSH did include two specific deductions that it said should be taken from the City’s projections, whatever they might be.

The only savings projections mentioned in the MKSH report are those that were stated by Mr. Angel in his May 20th email (Appendix F). Mr. Angel projected that the net savings to the city over the 30-year period would be $7.584 million. The MKSH report did not take issue with this projection, other than mentioned in its Findings/ Conclusions (page 8). Those conclusions were that two reductions should be made to the $7.584 figure: (1) MKSH concluded that reductions should be made to account for the expectation that all rehires will not be made at the lowest Base pay; and (2) MKSH concluded that the actuarial costs used by Mr. Angel ($775,000/year) should be changed to ($990,000/year), which MKSH stated were the actual costs (after it was determined that 67 employees would take the buyout. Mr. Angel could not

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