Debunking Eagle Tribune editorial on early retirement- it does save money
Methuen, Massachusetts Mayor Bill Manzi
By: Methuen Mayor Bill Manzi – October, 2010
An editorial in the Eagle~Tribune last month called into question the real savings to taxpayers that would come from Methuen’s adoption of the early retirement law that the legislature passed as part of the municipal relief package. The editorial is interesting in that it makes some assumptions, and then asks a rhetorical question:
“The retired workers, meanwhile, would be collecting pensions for the rest of their lives — at least three years longer than they would have otherwise. Is that being figured into the projected savings?”
While the editorial does not explicitly say so it appears to assume that the extra three years have not been figured in. And they start the editorial this way:
“So local residents should be skeptical of the claim by Methuen Mayor William Manzi that the city could save $1.7 million if 39 employees who have expressed interest in early retirement follow through and leave by Nov.
1. I have attached the same spreadsheet on my website that I provided to the Tribune, so let us now review actual numbers, to see if the editorial skepticism is warranted. Let me first explain what the spreadsheet represents.
The law mandates that I conduct a “survey” of employees to see who might be interested in “early retirement”. The spreadsheet represents the total amount of their current salaries, what their pensions would be if they retired standardly, and what the increase is to their pension by virtue of “early retirement”. The spreadsheet shows the aggregate amount of pension benefit. It is important to note that any employee opting for early retirement must pay over to the retirement system all accruals they would have coming under existing law.(vacation, pension) That number, since it is not yet defined, is not shown on the spreadsheet, but is a major offset to the cost of the increased pension benefit. Another number to consider is the so called “30% rule”, which allows the city to replace 30% of the salaries saved through early retirement in the first year after adoption.
So what are we looking at in terms of making the judgement? Lets look at the numbers.
For the purposes of this exercise let us just look at the city side numbers. These are full year numbers. The City would save, in the year of adoption, $1,705,333.91 in salaries. (Based on those returning the survey). The increase in pension benefit for those opting in would be $124,768.81. And that increased benefit, in year 1, would likely be entirely wiped out by the forced givebacks of accruals. So on that basis the early retirement numbers are a no-brainer. But lets look at the numbers in a more comprehensive way. The new “retirees’ would be collecting aggregate pensions of $1,166,605.26. Under the terms of the Tribune reasoning this three year cost to the retirement system would be $3,499,815. Now that number must be reduced by the overall cost of foregone unemployment (Tribune editorial notes this potential savings) and by the amount of the accruals that the employees would have to give over. Although difficult to quantify here let us assume that the year 1 savings would be $500,000,(conservative estimate) driving the total three year cost down to about $2,999,815. The three year savings to the City budget (based on the $1,705,333 annual salary savings) is $5,116,002. Hmmmm. Where I come from that is a savings of over $2 million dollars (American).
What has been left out? Have my numbers been cooked? Should we be skeptical? Aha you say! Mr. Mayor you have not figured in the 30% allowed under law for the City to “replace” retired salaries!!! Great point. Lets look at that. The law “allows” such replacement, but does not mandate it. I have represented to City Council, per the law, that if replacement did occur, it would only come in the first year after implementation. What that means is that the replacement salaries would only exist for two of the three years in question. Since everyone agrees that one of the benefits to the law is that cities are trying to avoid layoffs and the costs associated with them, it is hard to see how any Mayor would be in a position to utilize the full percentages allowed by the law. I know that I do not intend to do so. But using that 30% number of $511,600 and assuming the very worst you multiply that by two and you get $1,022,000, which would then be deducted from the earlier savings shown of $2 million, and you still get a savings of over $1 million dollars.
The numbers, I realize, can make your head spin. And the Tribune editorial, I believe, relies on the fact that earlier “municipal early retirement” packages were in fact not great deals for the taxpayers. This package is indeed different, and the numbers show exactly that. Methuen taxpayers are substantially better off by adoption of this legislation, and our implementation of it will prove that.
Read the Tribune editorial on-line at: http://www.eagletribune.com/opinion/x535471008/Editorial-Early-retirement-savings-can-be-fleeting.