Penn's FAS 106 liability was approximately $96 million as of the beginning of FY 1992.(1)
How this number was calculated is not made clear. The Vice President for Human Resources volunteered at a meeting of the Medical Faculty Senate that it had been obtained by outside accountants on the basis of various employee profile data supplied to them by the University, but would say little more about it. (Could we not calculate it ourselves, or were we re-quired to obtain it from an independent source?) Maybe the following sheds some light on its genesis:
Its characterization as a "liability" that "recognize(s) the potential" of an admittedly unlikely event suggests to me that it has something of the nature of a worst-case scenario. Does it assume that all employees will retire as soon as they become eligible for retiree medical benefits, in most cases at age 55? If yes, in what other respects is it unrealistic? What figure represents a best estimate of the actual costs of post-retire-ment medical benefits that would have been accrued by employees at that time?
If, as I conjecture above, actual costs are likely to be substantially less than the calculated liability, why does the FAS 106 Work Group recommend that the University fund the latter in full:
Is this an all-or-nothing choice? The impact of funding only a reasonable estimate of actual costs, or even a conservatively high one, would surely be considerably less severe. Does the answer lie in:
Clearly an incentive to the University for this approach is that it could transfer a significant fraction of the burden from unrestricted funds to restricted income, mainly Federal grants and contracts.
Many employers use early retirement programs as a cost saving tool, since the net reduction in compensation expenses more than offsets the additional benefits. Thus the calculated FAS 106 liability only presents one side of the picture: even if the University should for some reason experience mass early retirements the overall cost to it would be considerably less. The purely fiscal arguments for tinkering with the retirement benefits, even those that affect "very few" individuals, seem less than compelling.
The solution of increasing the employee benefits rate in order to recover part of the inflated liability from restricted funds is presented on the grounds of expedience, without any discussion of its appropriateness or otherwise. Even in this light however, it has negative consequences that ought to be considered--I will confine myself to two such. The bulk of the unrestricted budgets of those departments whose faculty research is largely grant-supported tends to be devoted to compensation. In those cases an increase in the benefits rate of only a few percentage points can represent a substantial portion of the discretionary budget. Faculty whose grants have recently been renewed for multi-year periods will also face a problem, since their budgets are fixed in broad outline for that time. Likewise in their case too only some small fraction of the total may represent funds that can be reallocated without significant disruption.
-- Martin Pring, Associate Professor of Physiology/Med
January 12, 1993
Volume 39 Number 17
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