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Legislative Action
Early retirement: savings short,
liability long
By MICHAEL D. KLEMENS An early retirement plan offered to state workers a year ago was heralded as a way to reduce payroll costs and to allow salary increases for remaining workers. This year similar plans are floating around for college and university employees, for public school teachers and for state police officers. As such changes are pondered, lawmakers would do well to weigh the results of last year's effort. The payroll savings turned out to be less than the last spring's estimates. The costs turned out to be much higher. And the state pension systems, already underfunded, ended up even more underfunded. Last year's early retirement was part of Senate Bill 45, the omnibus budget-cutting bill that settled the 19-day overtime session last July. The theory was to let older employees retire and either leave positions unfilled or hire new workers at lower salaries. The incentive to retire early was the employee purchase at half the price of up to five years of additional service credit and five years of age. That purchase in turn would increase retirement benefits. All state workers except for university employees and elected officials were eligible. To participate employees had to be age 50 or have at least 30 years of service by December 31, 1991. Retirement had to be effective by January 1, 1992. Based on projections that 4,200 of 14,000 eligible state workers would retire, the early retirement provision was supposed to save $50 million in salary spending for fiscal year 1992. At the same time the early retirement would boost the liabilities of the pension system by somewhere between $30 million and $100 million. First, look at actual savings. According to the State Employees' Retirement System, 4,602 workers took advantage of the program. Those employees had monthly salaries totaling $13 million, and their total salaries would have been $78 million for six months after they retired (January 1, 1992, to June 30, 1992). Not all of the salaries could be saved, however. Workers were eligible for lump sum payments for unused vacation time and for half of their accumulated sick time. Workers with lots of accrued sick and vacation time could eat up most of that six months' salary supposedly saved. And in some cases positions had to be filled. In the Department of Corrections, for example, 441 individuals retired and all but about 40 were replaced. Similarly all but about 30 of the 948 individuals who retired from the Department of Mental Health and Developmental Disabilities were replaced. In both cases the prison guards, nurses and aides necessary to keep institutions running had to be replaced. The actual savings are difficult to calculate. Agencies were directed to "reserve" funds, meaning they were not to spend a portion of their personnel lines. Initially the Bureau of the Budget said that early retirement reserves would total $50 million. When all was said and done, agencies ended up reserving only $37.5 million: $28.5 million from the general funds and $9.0 million from all other funds. There is no way to tell whether or not the funds that agencies reserved reflected savings from early retirement or money that they would not have spent anyway. Second comes the long-term cost to the pension system of the short-term savings in payroll. In theory the pension systems take each employee's pension contribution and the payment from the state, invest them and put the money aside for the day when the employee will retire. The early retirement shorted the pension system half of the employee's contribution and all of the state's contribution for the additional time purchased to retire early. The retirement system ends up holding the bag for the difference. For the State Employees Retirement System (SERS), it is a $200 million bag. The early retirement plan increased the system's liabilities $200 million more than its assets. In effect this unfunded liability is a bill that will become due for future taxpayers. Its payment will diminish payroll savings. Another way to look at the savings is to consider the effect of the early retirement on SERS benefit payments. Michael L. Mory, executive secretary of SERS, puts his system's increased monthly payments as a result of the early retirement at $3 million. Much of the payroll savings is simply a shift of obligations to the pension system. The final number worth noting is the relatively high per capita cost of the program. With 4,600 participants and an increased pension liability (debt) of $200 million, the per beneficiary cost becomes more than $40,000. Such an allocation of state resources benefits relatively few at high cost. Mory says that the SERS board would like to see a general increase in benefits for all SERS members. The benefit formula has remained unchanged since 1971. The change that they are seeking would cost $600 million, three times the early retirement price tag. However, the change would benefit 65,000 SERS members, more than 10 times those who benefitted from early retirement. The early retirement plan seemed almost too good to be true last spring. It was to save payroll costs without layoffs, all at a modest pension cost. As lawmakers sit down to wrestle with a new set of early retirement proposals, here's hoping the rose-tinted glasses of last spring were retired.
24/June 1992/Illinois Issues |
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