The members of the Nutmeg Board are very concerned about whether and how they will make ends meet this year. The Town slashed their budget request during the appropriation process, and as things stand at the beginning of the new fiscal year, they are looking at a deficit approaching $1,000,000.

Veteran Board member Bob Bombast warned his fellow Board members that they better do something and fast, and he promised to put on his thinking cap and to be back to his fellow Board members with some bright ideas.

Realizing that he had to think outside the box, Bob reached out to Bruno, President of the Nutmeg Union of Teachers (NUTS), and they met for coffee. Bruno was sympathetic to Bob’s concerns about the projected deficit in the Board’s budget, explaining that he did not want the Board to have to lay off teachers to save money.

“I have talked with our Executive Committee, and NUTS has two great suggestions for the Board of Education to save money,” Bruno announced grandly. “The first is an early retirement incentive program. If we can work together to adopt such a plan, the Board can save a bundle.”

Bob was intrigued. “Some of these teachers should have retired long ago. Maybe we can get rid of some old deadwood and save money! What do you propose?”

“We will keep it simple. Teachers with twenty or more years of service will be able to participate in the plan, and upon retirement, they will receive a payment of $40,000. After making those payments the Board will be even for the first year, and it will save for years to come on the cost difference between the teachers on the maximum step who retire and their replacements who are hired at the bottom of the scale!”

Bob liked the sound of that, though he was hoping for more immediate savings, and he asked Bruno if he had any other bright ideas.

“Of course!” Bruno responded. “The Board can save money right now if it offers teachers money to waive health insurance, say $3,000 for a teacher on a single plan and $6,000 for a family plan. Given that the cost of insurance is approaching $15,000 for an individual plan and $30,000 for a family plan, the Board will save a bundle whenever teachers take the waiver payment and get off the Board’s plan!”

Bob thanked Bruno for his creative suggestions, and Bruno then suggested that they lock in these savings by putting both the early retirement plan and the insurance waiver in the contract so that they would not have to revisit these issues every year.

“Done,” Bob responded. Bob then emailed his fellow Board members, informing them that he will be asking Mr. Board Attorney to put together a little contract amendment to present to the Board for action.

What’s wrong with this picture?

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Bob and the Board should read up on early retirement incentive plans. While carefully-structured plans can reduce costs, the plan that Bob and Bruno came up with will certainly be costly to the Board. The insurance waiver will be a loser as well.

In considering any early retirement incentive plan, the board must take into account the fact that teachers retire every year. Therefore, the cost analysis must start by projecting how many teachers will retire in the normal course. That number should be excluded from any calculation of savings, because these teachers would have retired anyway. By contrast, the cost of any incentive paid to these teachers must be considered a cost of the plan. In sum, the projected cost “savings” of an early retirement incentive plan must be computed based on the salary savings from the teachers retiring in excess of the average number, because only these teachers may be considered to have been incentivized to retire. Moreover, those “savings” must then offset the costs of the incentives that are paid to all the teachers, including those who would have retired anyway. Only when the “savings” from the retirement of the incentivized teachers have covered the costs of the incentive payment for all retiring teachers will there be savings from the plan.

In assessing the cost impact of a proposed early retirement incentive plan, boards of education must make accurate assumptions. The board should not assume that it will be able to hire all replacement teachers at the first step, given the possibility that some teachers will retire from shortage areas; a more realistic estimate for the cost of the replacement teachers would be MA track, step 5. The board must also decide how many teachers must retire under the plan in order to generate sufficient salary cost savings to justify the plan. Perhaps most important, that number of teachers should be a “trigger” for the plan to go forward. The board won’t know what the participation will be until the plan is offered. Therefore, the plan should be expressly conditioned on the retirement of a specified number of teachers, and the board should reserve the right to withdraw the plan if that trigger number of retirements is not reached.

In any event, such plans should never be included in the collective bargaining agreement. The premise of such plans is to incentivize teachers to retire earlier than they would without the plan. If such plans are available through the contract year after year, the incentive is lost, and teachers will simply retire when they wish, albeit then with a going-away present.

While a carefully-designed retirement incentive plan can save money, such is not the case with an insurance waiver plan. Here, we must start with the premise that teachers (and other employees) will waive their insurance coverage only if they don’t need it. When employee premium cost sharing was minimal, a waiver might have worked to induce an employer to move over to a spouse’s plan. However, with employee cost-sharing approaching (and sometime exceeding) 20%, avoidance of the significant cost of insurance to the employee is incentive enough, and it is unlikely that paying the additional waiver amounts that Bruno suggested would induce any other employees to waive insurance. Rather, such payments will simply be a new cost to the board.

Two points about the Nutmeg Board of Education may be helpful in closing. As board members know, it is important not to do board business on email for fear of conducting an illegal meeting over email. However, the definition of “meeting” under the FOIA excludes “strategy and negotiations with respect to collective bargaining.” Therefore, email discussion of negotiation strategy will not be considered a meeting.

Finally, Bob should watch what he says. Referring to some teachers as “old deadwood” may come back to haunt him if he is ever the subject of an age discrimination complaint.