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The Dos and Don’ts of Separation Incentives as a Fiscal Tool for Connecticut School Districts

A well-crafted separation incentive can be a win-win approach for management and educational employees to achieve fiscal savings, avoid layoffs, and restructure departments or positions. The key to constructing a successful incentive is considering when and how it should be implemented. Below are crucial points to examine:

1.    DO Properly Analyze Whether an Incentive Will Work
One of the biggest mistakes districts often make is failing to properly analyze the costs of an incentive over multiple years, then implementing a program that does not truly save dollars over the long-term.  A key focus of any incentive, therefore, is to ensure that a comprehensive analysis is conducted that accounts for costs such as retiree health care, natural attrition, and the incentive itself. The likelihood of plan success should also be analyzed based on different benefit offerings, current workforce demographics, and the re-staffing needs for projected retirements.

2.    DON’T Offer A Cash Incentive
Separation or retirement incentives in school districts are often offered as a one-time, lump sum “cash” payout option. This has distinct and significant drawbacks: Uncle Sam takes a large portion of the benefit upfront, employers are subject to paying payroll taxes on the benefit, and the incentive itself must be paid in one lump sum, which puts a great strain on the budget. There are more valuable alternatives that should be considered prior to implementing a cash incentive.

3.    DO Use a Tax Deferred Vehicle
Instead of a cash offering, consider a locally-controlled tax qualified retirement vehicle, such as a 403(b) plan which allows employer-to-employee contributions for 5 years post-employment, making it an ideal tax deferral vehicle for a separation incentive. The employer can also fund the incentive over 5 years for cash flow purposes, and employees gain more flexible distribution options such as IRA rollovers, which typically end up increasing participation.

4.    DON’T Do if Salary Differentials are Small
Retirement incentives generally focus on near-retirement-age employees that are clustered at higher salary levels and protected by seniority. Cost savings are achieved by replacing these employees with those that are lower on the salary scale (such as entry-level employees) or by eliminating certain positions altogether. Larger salary differentials, commonly seen with teachers, make the savings happen, whereas narrow salary differentials can often cause an incentive to cost money, rather than create savings.

5.    DO Only if You Can Beat Natural Retirement Attrition
A separation incentive only works, and creates savings, if a district offers enough of an incentive to significantly exceed natural retirement attrition in any given year. This means that if you typically have 10 retirements in a year, you need to incentivize at least 20 or 25 employees to leave to achieve savings. This is because the first 10 employees would have retired regardless which means they must be considered a cost in the analysis, not a savings.

6.    DON’T Try to Do It All Yourself
Whenever possible, have seasoned firms with separation incentive experience help your district properly analyze, design, and communicate the incentive. Find an expert in the consulting and design of school district or higher education retirement incentives (not to be confused with 403(b) vendors) that will not only assist your district in the development of the program but can also handle all of the communication with employees and retirees.

By Kathryn Cannie, Senior Manager at Public Agency Retirement Services (PARS)

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 district’s demographics, please contact PARS Senior Manager, Kathryn Cannie, at (617) 549-6555 or kcannie@pars.org.

Website: www.pars.org