ADVISORIES: The Use of Early Retirement Incentives Flashcards
State and local governments should not use ERIs for a variety of reasons.
What is GFOA’s position on the use of Early Retirement Incentives (ERIs) by state and local governments?
GFOA recommends against the use of ERIs for various reasons including underestimated costs, lower than projected savings, and the complexity of analysis and implementation required.
Why might governments underestimate the full costs of ERIs?
Because a cost-benefit analysis may not account for all direct and indirect impacts such as hiring and training new workers, costs of independent contractors, additional retiree health care, leave cash outs, and unanticipated effects on public services.
How can the projected savings of ERIs be lower than expected?
ERIs assume savings from replacing higher-paid staff with lower-paid new hires, but this often results in only short-term savings as new staff may experience faster salary increases and market factors may require higher salaries or benefits to recruit qualified replacements.
What are the challenges in analyzing and implementing ERIs?
They require detailed cost-benefit, budgetary, legal, and actuarial analysis, extensive communication and administration efforts, and careful monitoring of their actual impacts on the organization, including service delivery and loss of institutional knowledge.
What can impact actual participation in ERI offerings?
Participation may be lower or higher than expected, affecting cost savings and service impact. Subsequent ERI offerings to boost participation can distort normal retirement patterns.
Why does GFOA advise against the use of ERIs despite their potential for short-term payroll cost reduction?
Due to the risk of increased long-term costs to the retirement system, disruption to services, loss of institutional knowledge, and the complexity and effort required to accurately analyze and implement ERIs.
