Retire-rehire move costs millions

REDFORD -- James Finn retired two years ago, which may come as a surprise to Thurston High School students.

The 60-year-old assistant principal patrols the school hallways, joking with teens and talking on a walkie-talkie, just as he did before his retirement. But on top of his salary, Finn now collects his pension and retiree health care benefits -- a package worth about $50,000 a year.

Finn is among an estimated 500 Michigan public school administrators skirting state retirement policies by collecting retirement benefits while staying on the job as contract employees. Encouraged by school superintendents and ignored by state officials, the scenario will cost taxpayers an estimated $25 million this year alone -- enough to hire 500 teachers.

An informal survey conducted by the Michigan Education Association found there are about 500 "retired" school administrators who continue to work for public schools. More are joining their ranks each year, as budget-crunched districts search for ways to save money.

Individual schools save money through the practice because they don't pay taxes, health insurance or the state's retirement tax on contract employees. But state schools as a whole lose money, because the contract employee is collecting pension and retirement health care benefits, the cost of which is divided among Michigan's school districts.

"It's a scam," said MEA retirement consultant Charles Agerstrand. "It's a runaway problem (that) is taxing the retirement system."

As the costs of pensions and retiree health care increase, schools search for creative ways to save money. A growing number of schools have latched on to the retire/rehire plan, in which districts take advantage of a loophole in the Michigan Public School Employees Retirement System.

State law prevents public school employees from collecting retirement benefits while they're employed by the schools. Retirees, however, can collect those benefits if they work elsewhere. Schools get around the law by encouraging retirement-eligible administrators to retire, then hiring them back through an employment agency. The administrators technically work for the employment agency rather than the schools.

"Some people call it a double-dip," Finn said. "But I call it a win-win."

From Finn's perspective, South Redford benefits by lowering its expenses and by keeping an experienced administrator on staff; Finn benefits by collecting his salary and his pension at the same time.

Bill Weber, the longtime superintendent of South Redford Schools who retired April 30, said the district saves about $20,000 per year by having Finn work as a contract employee.

But to get that $20,000 in savings for South Redford, state public schools in general pay $50,000 in retiree benefits. Because those retirement benefits are spread across Michigan's 553 school districts (pro-rated based on payroll), South Redford in effect pays only about $40 per year toward Finn's retirement.

"It's an attractive thing for us," Weber said. "Not only do you save the money, but you have people who are skilled in the positions and know the students."

The problem is that every other district is paying for Finn's retirement, too. Birmingham is paying $150; Dearborn ponies up about $285, and Detroit, the state's biggest school district, is saddled with an $1,800 tab for the pension and retiree health care of the South Redford contract employee.

John Chamberlin, director of the political watchdog group Common Cause of Michigan, calls it a "suspect practice" and "a liberal form of double-dipping."

"The incentives are all wrong," Chamberlin said. "It only works because people can bill their neighbors for their actions. This is the same as asking, 'do I throw my garbage in the lake rather than pay someone to pick it up?' You save money, but if everyone does it, pretty soon, the lake is ruined."

"Someone in Lansing ought to (study) the impact of this," Chamberlin said. "The education system doesn't need money drained out of it for schemes like this."

Any qualms Weber feels about the loophole are outweighed by the value of the programs the savings have helped him keep. South Redford has managed to hold on to programs other districts have cut in recent years. The district has a full-day kindergarten. The high school has 12 Advanced Placement classes.

Weber approached three senior administrators several years ago and explained the retire/rehire strategy. "He asked us to retire (and come back to work through an agency)," Finn said. "The saved money could be used to save instructional programs."

Retirement costs statewide, now pegged at 17.74 percent of payroll, are projected to increase to 30 percent of payroll by 2020. If that happens, "everything we've worked for will be in jeopardy," Weber said.

If using a loophole in the law helps save a kindergarten teacher or a high school counselor, then it's worth it. "As (budgets) get tighter and tighter, it's something more districts look at," Weber said. "I'd venture to say there are a couple hundred districts that either are currently doing this or have done it."

Several Michigan companies advertise that they can arrange retire/rehire contracts. One of them is Temporary School Staff Inc., a Dearborn company run by former Dearborn Public Schools Superintendent Tom McLennan. He argues that criticism over rehiring retired administrators misses the point:

"It's about kids," he said. "If a district has five people (hired back after retiring) who were making $80,000, and the district is saving 20 percent of their (former) cost, that's enough (savings) to hire two teachers. That means class sizes are kept at a more reasonable level. It's about offering a world-class education, not begrudging people the benefits they've earned."

McLennan argues that school districts that encourage the retire/rehire scenario "should be praised, because they're helping kids."

As the state-mandated retirement bill grows, more schools consider contracting out their retirement-age administrators to save money, which in turn makes the problem worse across the state.

"It's promoted as a strategy to save some dollars," said the MEA's Agerstrand. "But it's a false sense of savings, because you're just shifting the burden to the retirement system."

Though the practice costs taxpayers an estimated $25 million each year and is heightening the retirement fund crisis, state government has not considered closing the loophole.

No one from the Office of Retirement Services has ever suggested to South Redford's Weber that the retire/rehire loophole is a problem. In fact, Phil Stoddard, executive director of the Office of Retirement Services, said he hadn't heard of the practice. "I am unaware of the specific situation you describe," he said.

South Redford's Weber knows some people criticize the practice. But his district is looking at another $2 million in cuts next year.

"It was never our intent to privatize our staff," he said. "(But) retirement costs have hurt us dramatically. If we can save money (through contract administrators), we can save programs."