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Please evaluate the early retirement incentive program recently announced by Howard County Public Schools, as described at this link: http://www.baltimoresun.com/news/maryland/howard/columbia/ph-ho-cf-hcpss-retirement-program-0101-20141231-story.html Should such a program like this or any other early retirement program be considered for MCPS? What are the advantages and disadvantages of such a program? What budget savings could be realized? How would such a program be implemented to generate savings in the FY 2016 budget?

Question#: 15

ANSWER:

The early retirement program approved by Howard County Board of Education on November 20, 2014, is estimated to save the Howard County Public Schools (HCPS) a total of $9.2 million over an eight year period. The HCPS early retirement program approved by its Board utilizes the services of the Educators Preferred Corporation (EPC) to manage the entire process for the school district including administering benefits for the individual employees. The early retirement program provides a monthly stream of incentive funding to the opting participant or their beneficiaries for a fixed number of years. The employee agrees, during a two month elective window, to terminate service with the school district on June 30, 2015.

The early retirement program is a one-time offer to only full-time employees who have 15 or more years of service with HCPS as of June 30, 2015. HCPS employees who have retired and were subsequently re-hired by HCPS are not eligible for the program.

The HCPS early retirement program is based on the assumption that 594 employees (of their total workforce of 8,111, or 7.3 percent) will elect to participate in the plan. This number was determined by an algorithm that the contractor, EPC, has developed having worked with multiple school districts in the past. The first year savings estimate of $1.6 million for HCPS is contingent on getting 594 employees to agree to the incentive while, at the same time, absorbing a penalty for early retirement.

In comparison, MCPS typically has about 550 employees retire per year, or 2.3 percent of the total workforce of 22,932 employees. Using the same 7.3 percent in HCPS' plan, MCPS' comparative number is 1,674, or 1,124 more employees than would be expected to retire in a normal year.

Savings from the HCPS early retirement program are primarily the result of salary savings as employees with at least 15 years of service and a higher salary being replaced with new hires earning lower salaries. While there are savings of $1.6 million in the first year of the HCPS program, by the second year, the early retirement incentive costs the school district more than it saves, essentially eliminating the savings from the first year. By the third year, the impact of the program is estimated to cost the HCPS a total $2.2 million. Only beginning in year four is there a steady stream of savings projected for HCPS that continues through year eight. All of this is contingent on HCPS getting 594 employees to participate and in particular job series.

The substantial majority of the projected savings for the HCPS program comes from teacher retirees; other categories of employees such as administrators, support professionals, and food service workers actually cost HCPS funding cumulatively over the eight year period of the program. The HCPS study assumes that more than half, or 310 of the 594 projected participants in the program, would be teachers.

An example of the HCPS early retirement program is as follows: a member of the Howard County Education Association who elects to receive the early retirement benefit will receive 100 percent of his/her 2014-2015 base salary, not to exceed $60,000. Other associations' members will receive 100 percent of their salaries not to exceed lesser amounts. For example, AFSCME members will receive 100 percent of their salaries not to exceed $35,000. Those electing to receive the benefit will receive it over five years, divided into 60 equal monthly payments.

MCPS has not implemented an early retirement program in the past. Under the terms of our negotiated agreements as well as the time it takes to develop a program, it is would be nearly impossible to implement a program beginning in FY 2016. The Howard County program began with a study period beginning in September 2014. Teachers are incentivized through our negotiated agreement by a higher sick leave payment rate to give notice by April 1 for a July 1 retirement. The Maryland State Retirement Agency timeline to provide retirement benefits estimates to employees considering retirement is ten to twelve weeks, so it would be challenging for employees to have the information required to make a decision to participate.

To implement an early retirement program for a school district, it must be set up so that program does not cost more money than it saves. There is a trigger point such as with the HCPS program where a certain number of employees by employee association need to retire by a certain date or the school district loses money as a result. An analysis also needs to take into account the number of employees who were already planning to retire and would benefit from the buyout benefits of the early retirement program. As mentioned earlier, MCPS typically has approximately 550 employees retire each year and each of them would receive the benefit in addition to others who elect to retire as a result of the inventive.

In addition, real cost of the retirement incentive program needs to take into account added costs for recruitment, training, and other support for the new employees. The HCPS program spreads the incentive payment over several years. Another approach would be to provide the incentive as a one-time lump sum payment.

Some advantages of the early retirement incentive program are:

  • Provides promotion opportunities for employees into positions that are vacated.
  • Presents an opportunity to recruit a more diverse teacher workforce.

Some disadvantages of the early retirement incentive program are:

  • The HCPS early retirement program reflects relatively no savings by the second year, and will cost the school district $2.2 million by the third year.
  • The number of employees by association participating in the program is critical to achieving the projected savings. The HCPS study indicates the substantial majority of savings will come from teacher retirements but not from administrators and support professionals. If fewer teachers elect to participate in the program, then the projected savings will not materialize.
  • Loss of experienced employees.
  • Added training costs for new employees.
  • Increased recruiting costs for new employees.
  • Offering an early retirement program results in providing incentives to some employees who were going to retire anyway.
  • May present challenges to filling vacancies in critical shortage areas (special education, math, science).

We believe, as was mentioned during the Board of Education's worksession on January 20, 2015, that it would be beneficial to discuss consideration of an early retirement incentive program in greater detail at a future meeting of the Board's Fiscal Management Committee.

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