FINANCIAL MANAGEMENT/Retirement incentives help offset deficit
Determined to avoid the myriad problems that accompany declining tax revenues, the Oakland County, Mich., Board of Commissioners this year implemented stopgap measures to buy time for studying the county’s looming deficit. By imposing a hiring freeze, cutting back on capital improvements and borrowing money from the general reserves, the county was able to balance the 2003 fiscal year budget and begin focusing on fiscal year 2004.
“We’re anticipating a $13.9 million shortfall for 2004, but state revenues are down, and we are concerned we may get some additional [revenue] cuts in 2003,” says Judy Eaton, the county’s director of personnel.
To tackle those challenges, the county drew on one of its most valuable resources: its history. Looking at savings models that had been successful in the past, the county decided to offer a retirement incentive program.
“We went through a budget shortfall in 1993, where we implemented a successful retirement incentive program,” Eaton explains. Because of the program’s success, the county was able to keep all employees who wanted to stay, she continues.
Today, Oakland’s retirement program is more complicated than it was in 1993. Employees now have a choice between the traditional “defined benefit program” (which provides a monthly pension check in an amount based on the employee’s years of service and final salary) and a “defined contribution program” (which allows employees to contribute pre-tax funds to a 401(a) account, and provides for the county to match those funds). “We wanted to make [the retirement incentive package] equivalent for both type of programs,” Eaton says.
To that end, the county decided to offer an incentive of 26 weeks’ salary to eligible employees who are willing to retire early. In the past, employees who are at least 60 years old and have served the county for at least eight years qualified for the retirement incentive package. Those qualifications have been expanded to include any employee whose age and “service credits” add up to 75, as long as the employee is at least 50 years old and has served the county for at least 20 years.
Out of a total of 4,500 county employees, 500 employees now are eligible to retire. If at least 50 percent of those decide to retire — and if the county fills only half of the resulting vacant positions — the county will save approximately $7.4 million per year, Eaton explains.
“One thing that might make more people decide to retire is that we are facing this shortfall, with even more cuts possible in 2003,” she says. “There will be program and position cuts. If I were thinking about retiring, now might be the time to do so.”
On the other hand, employees participating in the defined contribution program may be less inclined to retire during the current economic downturn, Eaton admits. “Defined contribution is based on investments, and some [employees] are not doing as well as they had originally anticipated,” she says.
The county plans to pay for the expanded retirement program — which will cost approximately $7.2 million — out of a surplus in the employee retirement system. If history repeats itself, the resulting $7.4 million in annual savings will continue to last for years to come, Eaton explains.
Eaton sees the expanded retirement program as the first step toward regaining control of her community’s fiscal solvency. “The [$13.9 billion anticipated] shortfall has given us an opportunity to look at how we do business,” she says. “Our hope is that we will be able, through restructuring, to [continue to] provide services at a level that would not show a negative impact to our citizens.”
The author is a contributing editor to American City & County.