You're all quite right that I failed to present a complete solution and that it doesn't work well in many cases. In part I was hoping to get discussion on how to really fix the ability to play monsters. (I did! Woohoo!
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I do think that it works better for fun play than LA as written does.
To fix the large oversight that JaronK and bhu have pointed out, the wording must change to incorporate LA's additions without racial HD: "...Allow retraining at intervals equal to Non-Adjusted Racial HD, trading the HD from LA first.
If no racial hit dice are associated with a source of LA, then the hit dice it adds count towards the minimum interval to trade HD for levels. Once the LA HD go away, reduce the intervals..."
That reduces the problem from being free fast trades for low or no HD creatures. The Mineral Warrior and Half Minotaur templates would have a mid level cost too, but it would scale a bit...I understand the need in balancing to err on the side of weakness; it can be hard to take away toys that folks have been playing with. It's much easier to give more power out to compensate for weaknesses.
This truly is a patch, rather than a fix.
To fix LA, we'd have to make it actually balance out first. What I mean is that a creature's hit dice should definitely equal its CR. That CR, too, should accurately reflect it's utility in a group. For many monsters this would mean removing or reducing abilities, for others it would simply mean adjusting the HD or CR. Any monster that "casts spells as an [X] level [Class]" would actually have those levels, with the HD, saves and BAB, and then a enough HD to cover those special abilities that need paying for.
This still isn't complete by any means; just sort of brain
fartingstorming...
Thanks for the input so far guys!