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GG 13
Provide Retirement Incentives for State Employees to Reduce Costs

Summary

Texas faces a significant budget shortfall. Many states and private companies use retirement incentives to trim their payrolls and cut costs. Texas should offer cash bonuses of 25 percent of current annual salaries to persuade employees eligible to retire in the 2004-05 biennium to do so.

Background

Governments across the U.S. face tight budgets. Declining revenues forced 40 states to consider or enact budget cuts in fiscal 2002.[1] Many states are using retirement incentives to cut payroll costs. Such incentives, usually offered for a limited period of time only, include increasing benefit rates or years of service for benefit calculations; changing the calculation of final average salary; reducing age or years of service requirements; cutting or eliminating penalties for early retirement; and paying lump-sum or retirement bonuses.

To cut 5,000 jobs in 2002, for instance, New York passed retirement incentives for state and local government employees that would add one month of service credit for every year in state or local employment, up to a maximum of three additional years of credit. In addition, retirement eligibility would be expanded to include all workers aged 50 or older who have 10 years or more of service, with reduced benefits. Employees aged 55 and older with 25 years of service can also retire without benefit reductions.[2]

Also in 2002, Michigan passed a retirement plan to help combat a $1 billion shortfall. About 7,800 employees took the retirement incentives, which included an increased benefit multiplier. Only 25 percent of retiring employees are being replaced, resulting in a savings estimated at about $50 million per year.[3]

In 2001 and 2002, Massachusetts passed early retirement incentives for state and local government employees who had 20 years of service or were at least 55 years old with 10 years of service. Employees were offered an additional five years of service or age for retirement benefit calculations. To earn the incentive, state employees were required to retire by March 15, 2002; university employees by June 15, 2002; and local government employees no later than December 31, 2002. Participants also are required to accept staggered payment of vacation, sick leave and other benefits over three years. Positions at the state level are being refilled only on a limited basis.[4]

In January 2002, the Houston Independent School District (HISD) offered retirement incentives to senior administrators as a way to restructure the administration and help make up a projected $40 million shortfall in the next fiscal year’s budget. Employees who retired by March 31, 2002 received a lump-sum payment equal to 35 percent of their salaries; employees who retired by August 31 received 17.5 percent. Of 480 eligible employees, 121 took advantage of the plan, about 50 percent more than HISD had anticipated. HISD expects that most of the positions will not be refilled.[5]

Private retirement incentives

Many private companies also have offered retirement incentives to reduce their work forces without layoffs.

In August 2001, Ford Motor Company approved an early retirement program for up to 10 percent of its U.S. work force. About 4,600 employees were eligible for incentives that included adding three years to the employee’s age and three years of service credit for pension calculations. Ford had already used retirement incentives to reduce its work force on two previous occasions in recent years.[6]

DaimlerChrysler offered retirement incentives in an effort to cut one-fifth of its workforce in 2001. Eligible employees were offered $35,000, half in cash and the other half in the form of credit toward the purchase of a Chrysler, Dodge or Jeep vehicle.[7]

Caterpillar Inc. announced early retirement incentives for the first half of 2002 to cut 420 jobs from its domestic work force.[8] Delta Airlines announced early retirement incentives as part of its effort to reduce its work force after the September 11th attacks.[9]

Options for Texas

Retirement incentives, if structured correctly, offer a way to reduce the state’s work force and save money without resorting to layoffs or salary reductions.

Texas has offered retirement incentives before, in the form of increased benefit rates. In fiscal 1987, 43 percent, or 2,189 of those eligible retired, but savings from the initiative were not tracked, and no budgets were cut to realize the savings. In fiscal 1994 and fiscal 1995, 5,938 employees, or 65 percent, of eligible employees retired, accounting for annual salaries worth $194 million. The General Appropriations Act required cuts of $40.7 million over the biennium to realize savings from the incentive.[10]

In fiscal year 2003, 11,407 state employees are eligible or will become eligible to retire. In 2004-2005, 6,359 more will become eligible (Exhibit 1).[11]

Exhibit 1
State Employees Retirement Eligibility
Fiscal 2002-2008

Employees Eligible in 2003 11,407*
Fiscal Years Additional Eligible Employees
2004 3,012
2005 3,347
2006 3,117
2007 3,736
2008 3,911
Total 28,530
Source: Employees Retirement System.
*2003 figure includes employees who become eligible in 2003, as well as employees who became eligible in previous years but have not retired

Previous retirement incentives were paid from surpluses in the Employees Retirement System (ERS) fund. This reduced costs to general revenue and other funds from which retiring employees were paid and created new costs for the ERS fund.

Due to an increased benefit multiplier passed in the last legislative session, however, the ERS fund surplus has been reduced significantly. This means that Texas cannot offer an increased benefit multiplier as an early retirement incentive, as it has in years past, or reduce years of service or age requirements, if the ERS fund is to remain fully funded.

But Texas still can offer a retirement incentive by funding its cost from reduced payrolls. One-time cash bonuses could be offered to eligible employees on the condition that they retire in their first month of eligibility. The 1993 Legislature reduced appropriations for the salaries of employees that retired; this strategy could be used again to fund the bonuses.

Recommendations

A. State law should be amended to offer employees a lump-sum bonus for retiring in the first month they become eligible.

Employees who are or become eligible to retire in the 2004-2005 biennium should be offered a lump-sum bonus equal to 25 percent of their current salary (excluding longevity and benefit replacement pay). Employees who become eligible prior to the start of fiscal year 2004 would be required to retire on the last day of fiscal year 2003; the rest would be required to retire in the first month of eligibility in the 2004-2005 biennium.

B. Agency appropriations should be reduced by 35 percent of each retiree’s final annual salary.

The Employees Retirement System should report to the Comptroller’s office the final annual salary for each employee who retires under the incentive. The Comptroller’s office should be directed to reduce agency appropriations by 35 percent of each employee’s final salary for each year of the biennium. The reduction should be prorated according to how many months the employee works in the fiscal year before retiring. Lump-sum bonuses should be paid from the money generated from reduced agency appropriations. The Legislature may want to consider exempting small agencies, such as those with fewer than 25 employees, from the reductions. This recommendation would not prevent agencies from refilling a position.

Fiscal Impact

Agency appropriations would be reduced by 35 percent of the salaries of those retiring. Bonuses would be paid from the appropriations as reduced. Salary money paid from federal funds, appropriated receipts, interagency receipts and other dedicated funds could not be mixed and used to pay bonuses for employees not paid from these sources; therefore, a general revenue appropriation may be needed to offer bonuses to people paid from these funds.

The estimate assumes that 43 percent of those eligible to retire on September 1, 2003 would do so, and that 25 percent of those eligible after September 1, 2003 would take advantage of the incentive.

Fiscal Year Savings to General Revenue Savings to General Revenue Dedicated Savings to Federal Funds Savings to Other Funds
2004 $ 6,919,000 $ 876,000 $ 2,742,000 $ 2,618,000
2005 $ 25,912,000 $ 3,032,000 $ 9,358,000 $ 8,119,000
2006 $ 28,391,000 $ 3,107,000 $ 9,806,000 $ 8,214,000
2007 $ 28,391,000 $ 3,107,000 $ 9,806,000 $ 8,214,000
2008 $ 28,391,000 $ 3,107,000 $ 9,806,000 $ 8,214,000


Endnotes

[1]National Conference of State Legislatures, “State Budget Shortfalls at $27 Billion; 40 States Project Budget Cuts This Year,” Denver, Colorado, April 16, 2002. (Press release.)

[2]Tom Precious, “Pataki Unveils State Retirement Incentive Plan,” Buffalo News (January 31, 2002), p. B-5; and Office of the New York State Comptroller, “Early Retirement Incentive Information for Members,” http://www.osc.state.ny.us/retire/incentvs/incentivesummary-mbrs.htm. (Last visited September 24, 2002.)

[3]Chris Christoff, “State Offers Buyout to 8,000 workers,” Detroit Free Press (February 6, 2002); and telephone interview with Jan Winters, director, Michigan Office of the State Employer, September 23, 2002.

[4]Massachusetts Public Employee Retirement Administration Commission, “New Laws,” http://www.state.ma.us/perac/newlaw/newlaw.htm. (Last visited September 24, 2002.)

[5]Melanie Markley, “HISD Retirement Incentive OK’d,” Houston Chronicle (January 11, 2002); and Salatheia Bryant, “120 Taking Retirement Incentives,” Houston Chronicle (March 2, 2002).

[6]Keith Bradsher, “Ford Weighs Plans to Cut White-Collar Work Force,” New York Times (August 17, 2001), p. C-1.

[7]“Chrysler and UAW agree to $35,000 retirement deal,” Baltimore Sun (February 14, 2001), p. C-1.

[8]“Company News: Caterpillar Plans to Eliminate More Than 900 Jobs,” New York Times (December 22, 2001), p. C-4.

[9]“Miami-Dade Task Force Established,” Sun-Sentinel (September 26, 2001), p. D-1.

[10]Texas Comptroller of Public Accounts, Disturbing the Peace (Austin, Texas, December 1996), pp. 605-606.

[11]Employees Retirement System of Texas, “Retirement Eligibility—FY2002 thru FY2010,” Austin, Texas, November 20, 2001. (Computer printout.)