No Early Out At County

September 17, 2007
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GRAND RAPIDS — Despite a potential deficit for its upcoming general operating fund and despite previously offering its employees a buyout, it doesn't appear that KentCounty will propose an early-out or retirement incentive program to its workers anytime soon.

"I don't think you'll see this on the agenda for quite a while," said Richard Vander Molen, commission vice chairman and chair of the county's Finance Committee.

The county has offered workers such an option three times in recent history, with the last one in 2002. In June, commissioners asked CountyAdministrator and Controller Daryl Delabbio to determine if offering a similar program would be cost efficient and relieve some of the fiscal strain facing the 2008 general fund.

Delabbio met with members of the county's budget review team and concluded that an early-out program wouldn't help and could hurt the county's fiscal status in the future.

"I do not intend to recommend, as part of the Fiscal Year 2008 Budget, any form of 'early-out option' for currently qualified county employees, and this issue will not be revisited during the current FY2007 and Fiscal Year 2008 budget cycles," Delabbio wrote in a memo to the Finance Committee.

Delabbio based his decision on the results from the 2002 program. He said that plan did produce some short-term, cash-flow savings for the county, but it also created some long-term costs. And he doesn't think cash flow will be the biggest problem the county will face next year. "While we do have fiscal constraints, KentCounty is not experiencing a cash-flow problem," he said.

Deputy Director of Fiscal Services Stephen Duarte reported that 132 of the 245 workers that were eligible for the 2002 voluntary-retirement program took the early-out option. He said the plan did improve the county's cash flow, increasing it by about $725,000 over a two-year period. The improvement came from spreading out the employees' past-service costs over the pension board's 15-year amortization plan.

But Duarte also reported that the early-out program cost the county $4.5 million. He said the biggest cost factors were the present value of past service at $6.5 million and nearly $1.1 million for post-retirement health care costs. Those two expenses were offset by the $3.1 million the county saved in wages. "However, overall, the plan cost the county money and it does not appear cost effective to offer a new retirement incentive at this time," wrote Duarte in his report.

He went on to argue that early-out options don't correct a budget's biggest problem: expenditures growing at a higher rate than revenue. If revenue grows by 4 percent a year, it will take roughly 18 years for that income to double. But if expenses rise by 6 percent a year, they will double in only about 12 years.

"Because it does nothing to address the compounding issue, retirement incentives in and of themselves do not 'fix' budgetary problems. What retirement incentives can do, when cash reserves are below acceptable levels, is temporarily improve the organization's cash outflow, thus preserving existing cash reserves."

Besides the 2002 program, the county also offered employees early-out incentives in 1994 and 1996. Delabbio said the 1996 offering came during a time when the county was reorganizing the administrative department and some positions were combined. No such plan is on tap for next year, so a program would only be implemented to improve cash flow. Delabbio and Duarte agreed cash flow isn't the county's major financial problem, which Duarte labeled as "cash burn."

"While the county's 'cash burn' needs to be addressed, it appears the county has sufficient cash reserves to allow management time to undertake the necessary strategic changes without incurring the long-term costs associated with a retirement incentive," he said.

"Consequently, it does not appear cost-effective to offer a new retirement incentive consisting of additional years of credited service and additional years of health care subsidy for the foreseeable future."    

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