How a Teacher Shortage in 2000 Became A Mega-Booster for Superintendent Compensation Packages in 2022

Arizona superintendents dupe school boards to approve "retire/rehire" schemes

Jul 19

In this Stack:

Liberty25 school board outsources the superintendent job to a staffing agency
“Retire/Rehire” Schemes under the Arizona Retirement Plan System
In the teacher shortage of 2000, AG Janet Napolitano says schools can’t “lease” teachers, so AZ legislature changes the law to bring back retirees
But doesn’t it save the district money? They all say it does, so it must be true!
So why hasn’t anyone stopped them?

This story illustrates just one tiny aspect of the Arizona public education swamp - greedy, indifferent edu-elites taking advantage of volunteer school board members who don’t know better, aided by law firms and staffing agencies who make money from managing good relationships with superintendents. All of it reeks of either incompetence, or worse, corruption. A wave of new school board members will be taking office next January, but if the swamp isn’t drained, these swamp creatures will eat them alive. The issues are complex. The context is long - and so is this post. Some email apps have byte limits, so please click-through to read on Substack.

1/ Liberty25 school board outsources the superintendent job to a staffing agency

In this Stack, I expand on Jason Berry’s reporting that Liberty25’s school board recently voted 3-2 to accept Superintendent Lori Shough’s retirement - then rehire her the next day - enabling Shough to collect retirement payments and keep drawing a district salary. Corrine Murdock at AZ Free News also has a piece here. Berry calls it a “double-dipping,” and it’s clear to me it’s not just smoke. There’s fire with these “retire/rehire” plans.

What started as a means to bring back retired teachers during a shortage is now routinely used to boost superintendent’s negotiated executive compensation packages. Barry reports that about 60 superintendents across the state are currently on “retire/rehire” plans that, through employment agreements approved by governing boards, allow superintendents to start collecting retirement payments and continue to draw a district salary for so long as any district keeps them.

The problem, in the public school context, is that these “retire/rehire” plans were designed for teachers, not superintendents. Superintendents are not like any other employee. They are the chief executive of the district, a permanent non-voting member of the governing board, and both the statutes and district policies reflect these unique functions and powers. There’s a problem here, and its exposure is likely to ripple through the education swamp like an Arizona monsoon in July.

I’m not an Arizona lawyer, but I do lawyer for a living; I can read statutes and do the research. And this “retire/rehire” scheme for superintendents smells. It smells real bad.

So, here we go.

Liberty25 Superintendent Contract and the “Retire/Rehire” Provision

First, the Liberty board really didn’t have a choice but to approve the scheme. Shough had already negotiated the “retire/rehire” plan as part of her executive compensation package in 2021. If they didn’t approve, she could sue for breach of employment contract. See the operative provision below.

Here’s how it works. She negotiated a three-year contract where, after year one, she can retire, go to work for a staffing agency, require the district to lease her back from her new employer in year two, and then come back to the district as a full time employee in year three. (Superintendents are restricted by Arizona statute to 3-year contract terms).

See that? In year two, the district no longer has an actual, human superintendent. They just buy “superintendent services” from a third party to manage the district. As you can see in the vendor agreement below, the superintendent job is literally “outsourced” to a staffing agency in year two.

Imagine a corporations’ board of directors deciding they don’t need to hire a CEO, they’ll just rent one. I’ve never seen that happen in the corporate world. Corporate boards have fiduciary duties to the shareholders to manage the affairs of the company on their behalf. The board delegates a large portion of that authority to a chief executive officer whom they direct, supervise and control. And if the board doesn’t do that job well enough, the investors can hold them legally and financially accountable. See Theranos. If only it were that easy in the public school context to hold superintendent’s and boards accountable!

But from July 1, 2022, the Liberty board has done just that. Shough still gets paid - she just doesn’t report to the board from a strictly legal point of view. She reports to a Scottsdale staffing company - Education Services, LLC. And yet she still can control the district’s financial accounts, enter contracts binding on the district, evaluate and supervise teachers, everything a superintendent normally does. See for yourself:

This is not an unusual contract as far as staffing companies go. Basic employment and tax law codifies the common law principle that “you can serve only one master” at a time. Otherwise, a co-employment relationship is created where both employers are jointly liable for things such as payroll taxes, workers compensation, and labor law violations. Companies using staffing agencies don’t always get it right - and may find themselves legally liable for huge sums in employee misclassification, wage and hour law violations. See Microsoft.

So why would a school district do this? Why are school districts giving up “full control over the employment, direction, supervision, evaluation, compensation, discipline and discharge” of their superintendents?

They do it because professional education executives in Arizona, making 4-5x more than teachers on average, are hoodwinking school boards to approve get-rich “retire/rehire” schemes using a 2001 law designed to bring back retired teachers to meet a teacher shortage crisis of the early 2000s.

2/ “Retire/Rehire” Schemes under the Arizona Retirement Plan System

In a nutshell, “retire/rehire” plans are designed to comply with the “return to work” statutes governing the Arizona State Retirement System, as well as IRS and Social Security Administration rules, that prohibit a retiring member from receiving benefits if they work for an ASRS-employer more than 20 hours a week for 20 weeks or more in a single fiscal year.

But there’s a caveat: a retired worker is permitted to go back to work at the very same ASRS-employer via a third party vendor or staffing agency. If you go this route, you’ll work for a staffing agency at about 80% of your prior salary, but you’ll receive your full monthly retirement payments on top of that. And you only have to do it a year.

So, you can retire, go to work for a staffing agency, and return the next day as if it never happened and Bob’s your uncle, as they say.

But wait! There’s more! Because the rules only look at one fiscal year, you can structure your plan in a way that let’s you come back to full-time employment, after your 12-month “time out,” and get 100% of your salary back - plus continue to collect retirement on top of THAT for the rest of your working days! Your third year base salary may have even increased in that time if you plan ahead in the contract.

Nice gig if you can get it. But what employer would do something like this? Can teachers negotiate their individual contracts with school districts to get in on that early retirement + salary pay plan? No, not in advance. Teachers generally get a 1 year contract term - and it is a one-size-fits-all standard contract template for them. The “return to work” rules apply to them; they just can’t negotiate a contract like a superintendent does. They are at the whim of the district who may or may not take them back if they actually retire.

But Arizona superintendents, who negotiate their contracts directly with the board, can - and they do. If you’re a teacher in Arizona making 4-5x less than your superintendent - and you have a take-it-or-leave-it contract, how does that make you feel?

So, how did we get here?

3/ In the teacher shortage of 2000, AG Janet Napolitano says schools can’t “lease” teachers, so AZ legislature changes the law to bring back retirees

Some historical context: In 2000 Arizona schools faced (yet another) teacher shortage, so the Chinle school board asked the AG whether they have authority to hire a staffing agency to bring in teachers and administrators. AG Napolitano reviewed the statutes and answered no. Her summarized opinion:

“School boards have only the authority granted by statute which must be exercised in the mode and within the limits permitted by statute….No where do the statutes grant governing boards express authority to contract with a private company to provide teachers or administrators….If the necessary authority is not expressly provided in the statute, it must be impliedly provided….However, implied authority should not construed beyond the statutory bounds….In sum, the relevant statutes distinguish teachers and administrators from other positions within the district and do not support the interpretations that would permit school district governing boards to delegate responsibility for selecting, supervising, and disciplining these educators to a third party.” AG Opinion I00-021.

Translation: governing board powers are limited by statute, the statutes treat employment of teachers and administrators differently from other positions in a district, and boards need clear statutory authority before delegating their power to a third-party vendor.

The legislature responds

So the very next year the legislature passed S.B. 1483 ( short title: teachers; employees of private entities) to amend A.R.S. §15-502(A) (Employment of school district personnel; payment of wages of discharged employees) with this one sentence:

“The governing board may obtain the services of an any employee, including teachers, substitute teachers and administrators, by contracting with a private entity that employs personnel required by the school district.”

The amendment expressly says “any employee” and includes “administrators,” so it must include superintendents, right? Well, not so fast.

Remember the AG’s reasoning to reject Chinle’s request in the first place - the statutes distinguish teachers and administrators from other positions in the district. School boards do not have statutory authority to employ superintendents under A.R.S. §15-502(A). That statute applies to employees, and personnel more generally.

No where does A.R.S. §15-502 mention district superintendents.

That’s because A.R.S. §15-502 does not authorize the board to hire a superintendent.

The specific, express authority of the board to employ superintendents is under A.R.S. §15-503 and is very simple:

Notice something else unique in A.R.S. §15-503? Something not applicable to teachers and administrators or any other staff?

A.R.S. §15-503(A)(1) requires that, if the governing board employs a superintendent, the board must hold a public meeting to determine the qualifications - in front of the people who elect them. That’s how important and unique this position is - the board must deliberate in public, before the community stakeholders, on what qualifications they will require of their chief executive officer responsible for all teachers, staff and students in their district. No other employee is subject to such statutorily required screening.

Here’s another kicker. In the very recitals of the ESI-Liberty25 staffing agreement it states the district has authority to enter the contract under A.R.S. §15-502 - not A.R.S. §15-503:

You have to see it, to believe it.

The statutes are replete with specific references to general and discretionary powers of governing boards and their superintendents, supporting the obvious proposition that a superintendent, responsible for all district-level functions and reporting to the governing board, is not like any other employee or administrator. Every school district has multiple administrative staff with district-wide responsibilities, but there is only one superintendent. For brevity, I wont’t list the statutes. You can search for superintendents here:

There’s more.

Senate Fact Sheet for S.B. 1483 shows the very purpose of the amendment was to address “teacher shortages” - not superintendent shortages. The legislature could have amended A.R.S. §15-503 to include district superintendents, but it did not. Because superintendents are unique agents of the board, and, accordingly, are treated differently.

4/ But doesn’t it save the district money? They all say it does, so it must be true!

If you’re not already hot about this issue, get ready for this.

Superintendent Shough issued a press release (in suspiciously heavy legalese) to respond to the CBS5 story, saying:

“State statute equitably allows any employee to return to work as a contracted employee. Contracted employees in our district are compensated at a lesser amount to provide budget savings for the district and to cover the cost of the third party contractor fees. Additionally, districts and ultimately, tax payers, save even more money because districts do not have to pay employer-related expenses such as 12.17% to Arizona State Retirement System for contracted employees. The “return to work” system is a cost saving option for districts. The legislators made an important change to the system that requires districts to contribute to the state retirement system for “retired” employees who return to work (ARS 38-766.02). This legislation protected the health of Arizona’s retirement system by making the return to work practice [sic] cost neutral. As long as there are cost savings for districts, no costs to taxpayers, and no negative impact to the pension system, then I think it is a viable system that helps districts retain employees.” (Bold added).

The audacity. The sheer arrogance. THIS, people, is the Arizona education swamp. “Retain employees?” She literally negotiated this contract before she took the job!

And get this:

The author of this press release knows full well that in 2011, in response to the high number of public employees retiring early and straining the state pension system built on actuarial tables that assumed people would actually work until retirement age, the legislature amended the “return to work” statues to require employers to pony up into the system for any “retiree” that came back to work, albeit at (slightly) reduced rates:

That’s right. From 2011, school districts - like all public employers - pay an “Alternate Contribution Rate” amount that varies year to year for these “retirees.” For 2021-22, the rate is 10.22% - versus the ordinary rate of 12.17% cited in press release. What’s the savings amount of less than 2% on a $200,000 superintendent salary?

Remember that staffing agreement? Yeah, the district’s obligation to continue paying at the Alternate Contribute Rate is right there in the contract. The one Shough signed herself before making the public statement:

So here’s the back-of-the-envelop numbers based on the fee exhibits. The school district pays the staffing agency and ASRS:

80% of prior salary, plus
17% administrative fees, plus
10.22% in Alternate Contributions ASRS.

Is that really “cost neutral?”

At least districts save a few bucks on health insurance. But the superintendent makes out nicely.

They know what they are doing. You decide if its incompetence or corruption. I can’t tell anymore.

5/ So why hasn’t anyone stopped them?

Liberty25 board meeting records show the board met with legal counsel in executive session to discuss this contract for almost two hours. So one would think that the plan passed legal review and the plan is all legit, right? Astonishingly, in my view, it did pass legal review. But if counsel informed the board that the superintendent’s “retire/rehire” plan is not potentially problematic - for the board members - the board needs new counsel.

Almost twenty-two years after Napolitano’s opinion, how did we get to a situation where superintendents are negotiating contracts like Shough’s using a “loophole” in the retirement rules and education statutes that were designed to bring retired teachers back into the classroom?

Because there is no “loophole” - its a misapplication of the law.

We also don’t really need to speculate. Companies like Education Services exist because they make money on the margin between the cost of a leased employee and what they can charge a school district. With the average teacher’s salary in Arizona, the dollar value of that margin is maybe not so high. They need a high volume of leased teachers to really make a go of it. But if they snag a superintendent with a six-figure salary in the $200,000 - $300,000 range, now the margins are looking much better. So we can understand the commercial motivation for companies like ESI to push superintendents to take advantage of the rules.

But what about district counsel that approve these schemes and write up the contract? I’ve written about this problem before. There’s really only one or two law firms in the Valley that have the deep bench in education law - besides the Arizona School Board Association. And their former general counsel now works for the largest ed law firm of all:

TheLegalProcess @ALegalProcess

Swampy⬇️ Former general counsel and executive of @AzSBA joins Gust Rosenfeld's education practice group

TheLegalProcess @ALegalProcess

"It's always done this way" - is NOT a legal opinion and doesn't mean it's legit. It may just be a sign of intrinsic problems in the system. AZ school admin is a swamp in AZ. Let's look for patterns. Here's one: "Outside counsel" Gust Rosenfeld 1/6 https://t.co/YlLiuxgEtR https://t.co/pXZ1CjClHG

So if this firm takes a position on an issue, that’s pretty much the only side school board members will hear. And since board members come and go, these firms know it’s the relationship with the superintendent that really matters most. She’s the one with the attorney on speed dial. She’s the one whose calls are promptly returned. She’s the one who signs the checks. Look, it’s natural. It’s how the world works. But change is coming.

Board members need access to a different, independent legal opinion, one with authority. The statutes in Arizona already provide that county attorneys shall act as attorneys for the school districts. So here’s an idea - let’s elect a county attorney who will take up their statutory duty to schools. Let’s elect an AG and governor who will make legal services to school boards (not superintendents) a priority again. They have the statutory authority to do so. They just haven’t.

||Longer Thoughts||