Make early retirement enticing to teachers

Districts work to refresh—and lower the cost of—their teaching staff
By: | March 16, 2016

Howard County Public School System in Maryland considers offering early retirement incentives a pretty effective cost-saving strategy.

Administrators at the district of 76 schools twice contemplated—and decided against—offering an incentive in the last decade, before finally crafting a buyout plan in the 2014-15 school year that would save the district an estimated $11.4 million over eight years.

It was a win-win for the district and roughly 400 of its employees, says Beverly Davis, Howard County’s executive director of budget and finance. But the time it took to put together illustrates the myriad challenges district leaders face in crafting a successful retirement initiative.

For many districts, early retirement incentives are considered a good business practice—a way to cut top-heavy payrolls and replace teachers whose heart may no longer be in the classroom.

If a district can get enough of its highest paid teachers to retire, the rule of thumb is that it can then hire two new teachers for the price of one, according to Dan Domenech, executive director of AASA, the School Superintendents Association.

Without good planning, early retirement incentives can end up costing districts in the long run, both financially and academically. “When you get people to retire early, you will have a diminished number of retirees in subsequent years” says Stan Rheingans, superintendent of Dubuque Community Schools in Iowa.

When fewer teachers retire over a period of time, that can eat up savings that districts may depend on as part of the annual budget cycle. “It could become cyclical” he adds.

No prototypical early retirement incentive exists. That’s because laws, union contracts, demographics, per-pupil spending and the ability to attract young and qualified replacement teachers vary so greatly from state to state.

Early retirement incentives hardly exist in New York because strict laws govern teacher retirement, Domenech says. In Virginia, it’s not unheard of for teachers to retire from one district and then go work in another. Florida allows teachers to return to work in the same district they retired from after a certain amount of time has lapsed.

Four types of incentives are common:

Cash payments or health insurance benefits for teachers willing to retire a few years earlier than they might otherwise

Buyouts or similar cash incentives for those near the top of the pay scale who may not be close to retirement but may want to leave education or move to another district

Early-notification incentives that provide a small bonus for teachers who let districts know early in the year that they plan on retiring or leaving

Penalties or changes to a retirement program that negatively impact employees who don’t retire before changes are effective.

Extend health benefits

Last year, Dubuque Community Schools more than doubled its average number of retirees through what would be considered a classic early retirement incentive. The district offered teachers 55 and older 50 percent of their yearly salary and $250 a month toward health insurance premiums until the age of 65.

Even with health insurance payments that could last up to 10 years if a teacher retires at age 55, Dubuque saved $2.4 million from its general fund and prevented layoffs, Rheingans says.

The health payments were also a fixed dollar contribution—instead of a percentage of a premium that could increase in price.

Dubuque succeeded with the structure of its retiree health payments because such benefits (which few districts offer) represent an uncontrolled cost that becomes another unfunded liability down the road.

Encourage early notices

Several years ago, Upsala Area School District in Minnesota stopped offering early retirement incentives after multiple teachers approached the school board to individually negotiate packages. The board wanted to even the playing field and make sure all teachers received the same deal, Upsala Superintendent Vern Capelle says.

So this year, the district, which has 36 teachers, offered an early-notification incentive. Two teachers claimed the $1,000 bonus by informing the district prior to Feb. 1 of their plans to retire. Knowing that just two are leaving is helpful because it’s a more significant percentage of the workforce than it would be anywhere else. And it helps with planning, Capelle says.

These notifications may not save as much money as early retirements do, but they help administrators hire and plan for the next year, Capelle says. And unions like them because they don’t provide enough incentive to entice teachers to retire early or leave the system.

Penalties don’t please unions

The option most likely to trigger union opposition is what Paul Lemle, president of the teacher’s union in Howard County, calls a “retirement penalty.” In 2011, several years before offering the incentive, Howard County Public Schools changed its retirement package from covering the full cost of health insurance premiums to paying 90 percent of benefits if teachers chose to retire later, Lemle says.

Although 90 percent coverage is still a good benefit, the difference was enough to make some teachers jump ship early so they could still walk away with full coverage. The district announced the change a year before it took effect, and had a number of teachers retire that way, Lemle says.

“I think that’s a classic example of what not to do” Lemle says. “Scare your most senior workforce out by saying if you don’t retire you’re going to be penalized.”

Be strategic about buyouts

More districts now offer cash and benefit “buyouts” to entice their highest paid employees to leave regardless of how close they may be to retirement. Because these buyouts aren’t based on age, they may also prevent discrimination lawsuits.

A typical buyout for a school district right now ranges from $40,000 to $60,000 per employee and is paid out over a number of months, says Katy Rose, senior vice president at Educators Preferred Corporation, a company that specializes in K12 and university early retirement incentives.

Last year, the company worked on Howard County Public School’s incentive package, which was offered to teachers with 15 or more years of service and school employees who qualified for regular or early retirement.

Howard County’s feasibility study suggested that as many as 597 employees might take the package. In the end, 395 employees did, of which 217 were teachers, says Davis, executive director of budget and finance.

Howard County saved about $4.3 million in the first year after the buyout. The district expects to save $11.4 million over eight years—the amount of time it anticipates accruing savings before new employees move up to a pay scale comparable to the salaries of those who took buyouts.

Make careful calculations

Administrators considering an early retirement incentive should consult with comparable-size districts to find successful plans. But ultimately it comes down to some district-specific calculations, says Domenech says, of AASA.

Districts first need to determine the average number of employees who retire each year and then analyze how many of those are at the top of the pay scale or near retirement age. This will provide a clearer picture of how many employees are earning the highest salaries and might be eligible for an early retirement or buyout offer.

“A lot of times, districts don’t look at regular retirement numbers and end up just handing out an extra bonus” says Rose, of the Educators Preferred Corporation. “The worst thing you can do is offer a benefit and just get those who were going to retire anyway.”