The yearbook staff could have more carefully chosen their words but the term mentally retarded isn't offensive, it is definitive.
It’s made worse by the non-PC term, but this isn’t completely about being politically correct...
The point is why label the kids at all? Why not just a picture of the kids and their name? This approach was just silly, unless the yearbook staff wanted to be fair and label everyone with their associated problems. I bet half the kids could be labelled in some way: ADHD, learning disability, dyslexic, eating disorder, depression, crippled, stutterer, etc.