August 10, 2009

Do buyouts pay off?

After enticing 425 prison workers to retire, Connecticut now is hiring 135 replacement workers, slashing anticipated budget savings. It has also signed temporary employment contracts with 100 recent retirees.

As New York puts final touches on a $20,000 buyout incentive for 4,500 "nonessential" employees, the experiences of Connecticut and other states, as described by, are instructive....incentive packages to shrink state payrolls have a history of not always delivering their projected cost savings. If states too quickly refill the jobs opened up by the buyouts, they have to absorb the costs of the incentives while still paying salaries to new workers.

A separate concern is that buyouts can lead to a brain drain if too many experienced employees accept. For example, Connecticut lost 10 of its 23 prison wardens, 200 state college professors and 10 percent of its teachers at technical high schools in its recent round of buyouts. In Connecticut, more than 3,800 state workers signed up for a retirement incentive that sweetens employee pensions with an additional three years of service credits.

New York, which offered similar programs in the past, is taking a different tact this year. It is offering employees $20,000 in cash if they retire or quit their jobs. State agencies must deem the jobs "nonessential" and promise not to refill them for an unspecified period of time. Employees who participate cannot be rehired by the state for five years.

State agencies that decide to participate in the plan must identify which jobs are nonessential. Employee participation is voluntary.

Besides Connecticut and New York, four other states--Maine, Louisiana, Oklahoma and Vermont--are offering employee buyouts, according to All, but Connecticut, are offering one-time cash buyouts rather than additional pension credits.

But even as states eye millions in savings, the payoffs aren't always as projected. Instead, these buyouts, which require states to put millions on the table, hinge on the gamble that governments can restrain themselves from rehiring and can adequately predict the amount of interest the programs will generate.

In New Jersey, a 2002 round of buyouts lured more than twice the anticipated number of workers into retirement with the promise of beefed-up pension checks. The unexpected interest drove up pension costs from the $278.1 million anticipated to $616.8 million in 2007 inflation-adjusted dollars, according to a 2007 article in The New York Times. Still, New Jersey again offered buyouts last year.

Another lesson stems from Connecticut's experiment with buyouts in 2003, when it ended up rehiring 983 workers under temporary contracts and paying them around $14 million in salary--in addition to their pensions--in 2004.

Posted by Lise Bang-Jensen

« Previous | Main | Next »