Tracking the Recession: Buyouts Lure 9,000 State Workers Into Retirement

Looking to shield their work forces from tumultuous cutbacks, at least six cash-strapped states have decided this year to spend millions on incentives to encourage government employees to retire.

As the job security traditionally associated with state employment becomes increasingly uncertain in the face of large-scale layoffs and furloughs, these buyouts give states the chance to tighten their belts without fracturing morale.

They also allow state governments and unions to find rare common ground amidst deep cuts to employee benefits.

Still, while frequently used during recessions, 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.

All told, 3,856 employees in Connecticut accepted the offer, which adds three years to the length of their careers for the purpose of calculating pensions. For most workers, that will mean a few extra thousand dollars a year in their pension checks.

“What ends up happening is the incentives are very, very attractive, so many people who have institutional history with state agencies opt to take the early retirement,” said Connecticut state Rep. Christopher Caruso (D). “So we frankly drain those agencies of institutional histories, of experience.”

Apart from Connecticut, other states offering buyouts this year include Louisiana, Maine, Oklahoma and Vermont. Meanwhile, in New York, officials are formalizing a plan to buy out a projected 4,500 workers for $20,000 each.

These states are following in the footsteps of New Jersey and Tennessee, where lawmakers last year employed the same strategy.

In all instances, the buyouts are a piece of larger cost-cutting efforts as states work to balance their budgets. According to the National Conference of State Legislatures , all but a handful of states had to close a combined total of $139.4 billion in budget gaps for fiscal 2010.

As part of this, at least 16 states are forcing upwards of 593,000 employees to take unpaid furloughs in 2010. Meanwhile, at least 54,000 state workers, including teachers, have been laid off so far this recession, based on tallies from NCSL and the American Federation of State, County and Municipal Employees (AFSCME).

By comparison, current and upcoming buyouts will affect only around 9,000 employees.

Kerri Korpi, an AFSCME spokesperson, attributes the dominance of furloughs over layoffs and buyouts to a reluctance on the part of state governments to trim their work forces any more than they have already.

Still, even in small doses, buyouts carry the promise of reducing the need for more scarring cuts. In Maine, for example, legislators first tried buyouts before midyear deficits later forced them also to impose a combined 20 government shutdown days – which are similar to furloughs – in 2010 and 2011.

While unable to avoid the shutdowns, Maine has been able to limit its layoffs to around 40 with the help of the incentive packages. Around 800 workers are eligible to take a buyout, and each employee who retires will receive a severance package of $10,000. Workers have until Aug.15 to apply, and state officials are expecting at least 200 of them to take the deal.

Ellen Schneiter, Maine’s budget officer, called the buyouts a gentler alternative to layoffs.

“We don’t have to be cruel to anybody,” she said. “It’s horrible to have to lay anybody off, especially in this job market.”

In New York, the buyouts are part of a deal between Gov. David Paterson (D) and unions to allow the state to escape the current round of cuts without a single layoff. Previously, Paterson had planned to use layoffs to trim the work force by 8,700.

Darcy Wells, a spokesperson for New York’s Public Employees Federation , a union representing state workers, expressed satisfaction with the buyouts, which aim to save $173 million by the close of fiscal 2011.

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.

“(It) ultimately did not result in any long-term savings, but instead led to higher costs of providing salary, pension and health benefits to the combined populations of active and retired employees,” Connecticut Comptroller Nancy Wyman (D) said in a statement.

This year, the rehiring in Connecticut already has begun, as Gov. M. Jodi Rell (R) has announced the state will bring in 135 new workers to the corrections system to make up for the 425 who accepted the buyouts.

The state also has signed temporary contracts with more than 100 of the recent retirees, agreeing to pay them reduced salaries in addition to the pension checks they will be receiving.

To salvage its savings from buyouts, Maine’s Legislature has required that all except critical positions be kept empty, most for two years.

Tennessee went a step further last year, when 1,521 workers accepted buyouts. According to Lola Potter, a spokesperson for the state’s Department of Finance and Administration , only employees holding expendable posts were eligible to step down so that those jobs could be left permanently vacant. Potter said the buyouts netted $46 million in savings in calendar year 2009.

New York is employing the same strategy, and officials are currently vetting positions to see which could be left open after retirements. Only workers in those jobs deemed dispensable will be able to accept the incentives.

Overall, even when retirees’ jobs are filled by new workers who earn less money, state agencies could lose thousands of dollars per rehire in training and lost productivity, said management consultant Nancy Dering Martin , a senior adviser for the Pew Center on the States’ Government Performance Project. ( Stateline.org also is part of the Pew Center on the States.)

“(Rehiring) is not without its costs; it’s not without its implications for performance,” Dering Martin said.