Buyouts: Short-term fix, long-term problems

ROMEO -- In a normal June, Joseph Beck says goodbye to four or five teachers retiring from Romeo Community Schools.

This year, 19 are leaving.

Faced with a looming budget deficit partly caused by growing retirement costs, the superintendent offered veteran teachers $50,000 to leave.

Teachers get a bonus to retire earlier than they'd planned and the school district saves money by replacing the veteran staffers with teachers straight out of school.

"It's a win-win for everybody," Beck said.

Well, not everybody.

While the buyouts help Romeo balance its budget, each retiring teacher adds as much as $50,000 in costs per year to the same state retirement fund that caused Beck to offer the buyouts in the first place.

Michigan districts like Romeo are caught in a vicious financial circle, pushing veteran employees out the door to save money, which in turn increases retirement costs at districts across the state.

"From an individual school point of view, it's a rational decision," said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. "But in the long run, it costs taxpayers and schools collectively more."

There is no statewide data on the number of schools offering early buyouts or the number of employees taking those buyouts. Katy Rose, senior vice president of Education Preferred Corp., a Southfield firm that administers buyout packages for schools in 14 states, said buyouts increase during tough economic times, such as the one Michigan is undergoing today.

"Generally they're offered to reduce the percentage of staff at the top of the pay scale," said Rose, whose company is administering Romeo's buyout program. "They're becoming more common as districts look for creative ways to save dollars to save programs."

A teacher with a master's degree at the top of a school pay scale can cost a district $30,000 to $40,000 more than a teacher with a bachelor's degree straight out of school.

After replacing the 19 teachers who took the buyout, Romeo officials estimate the district will save $600,000 per year over the next five years.

"More and more districts are following the lead of the Big Three and offering buyouts," Beck said. "With the financial crisis we've been facing in the past few years, we did it to save money."

But the Big Three has learned a lesson about buyouts that the schools haven't. In recent buyout packages, Ford Motor Co. and DaimlerChrysler AG offered packages to some workers that paid more cash up-front but did not include retiree health care -- a move that will save the companies millions in coming years.

Buyouts fuel the retirement crisis in several ways. The vast majority of Romeo teachers taking the buyouts this June are already eligible for retirement, but most had planned to continue working, Beck said. By taking the buyouts, the teachers will receive pensions and retirement health care several years earlier than they had planned.

If the 19 Romeo teachers who took the buyout are retiring an average of two years earlier than planned, taxpayers will be on the hook for $1.5 million in extra benefits.

Meanwhile, the new teachers hired as replacements will eventually feed into the retirement system too, adding to the burgeoning number of retirees.

"Generally, I think superintendents know this costs money in the long run," said Sandra Feeley Myrand, superintendent at Lakeview Public Schools in St. Clair Shores. "You're still not addressing the root cause of the problem."

Beck said retirement costs played a critical role in the decision to offer buyouts.

"These are people who would be in the (retirement) system in a few years anyway," Beck said. "We need to look at our own financial stability."