Don’t Overlook this Fiscal Tool in Challenging Times: Voluntary Separation Incentives

Categories: Early Retirement Incentives,National Developments,PARS News
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As published on CAPSS’ News on July 21, 2020…

by Kathryn Cannie, PARS Senior Consultant, New England

As a result of the COVID-19 pandemic, school districts throughout Connecticut face the paradox of decreasing budgets, due to state and local revenues losses, and increasing costs, due to safety mitigation in transportation, sanitization, temperature checks, personal protective equipment, and technology. With mounting pressure, many school districts are being asked to evaluate layoffs, furloughs, or other austerity measures to create savings.

Another option that Superintendents should consider are district-controlled voluntary separation incentives. If properly analyzed and designed, incentives can mutually benefit labor and administration, while creating budgetary and cash flow savings needed to help keep resources in the classroom. They can help with the retention of more recently hired and trained, lower paid staff, and Superintendents sometimes like to use them for restructuring or reorganizing the workforce. Incentives can also reduce or eliminate layoffs or other austerity measures that are less popular with Boards, employees, and the public.

A district-controlled voluntary separation incentive is separate and supplemental to TRS, MERS and local systems, and is typically a one-time, rare offer. The concept is to accelerate the natural attrition by encouraging top of the salary, senior employees to retire earlier than they would ordinarily.

When evaluating whether an incentive is right for your district, here are some key points a Superintendent consider:

  1. Comprehensive Analysis Is Key – An incentive should be empirically evaluated based on your district’s actual demographics. The analysis should compare savings created over the next 5 or more years when offering an incentive and should take into account the cost of the benefit, retiree health care premiums, natural attrition, loss of future natural attrition, and projected replacement scenarios.
  2. Natural Attrition Is a Cost – In any given year, a number of your employees (typically 6-10%) will leave or retire. These individuals must be considered a cost in the analysis, as they would have left even if an incentive was not offered. It is important to only count savings derived from those employees leaving above and beyond natural attrition.
  3. Avoid Lump Sum Cash Incentives – IRS rules state that cash incentives have to be paid within first two years of separation, so they can create cash flow issues. A better approach is to use a post-employment, employer contributed 403(b) vehicle, which can be funded over 5 years and allows for different kinds of tax deferred payout options (including IRA rollovers) that help to increase participation.
  4. Teachers Salary Differentials Drive Savings – Most savings from an incentive are created when nearer to retirement age teachers at higher salary levels are replaced by teachers at lower levels on the salary scale. Other groups often don’t have that same salary differential and therefore may not create savings without some temporary or permanent non-replacement of positions.
  5. Have an Opt-Out for Board – An incentive can be structured so that your Board of Education has final approval to move forward or not after the enrollment window has closed and an analysis has been completed. This ensures that the plan is only implemented if it meets the district’s fiscal and operational objectives.
  6. Seek Out Professionals – To maximize savings and success, we recommend that you use firms that specialize in plan analysis, design, communication, compliance and implementation of school district incentives to manage your incentive. Experienced professionals can help get the analyses right and will reduce the administrative burden on your staff.

Public Agency Retirement Services (PARS) is the nation’s leader in the analysis, design, administration and communication of locally controlled, customized voluntary separation incentives. We have administered over 1,000 incentives for 450+ school districts and colleges since 1984, and have completed over 5,000 analyses. For more information on our services, or to receive a complimentary analysis based on your districts demographics, please contact PARS Senior Consultant, Kathryn Cannie, at (617) 549-6555 or kcannie@pars.org.