SPEAKING OUT


Questioning the Q & A

The March 26 edition of Almanac or The Compass [one is never sure these days where the former leaves off and the latter starts] contains a section titled "Human Resources at Your Service: Retiree Benefits for Faculty and Staff." The answer to one of the questions contains a factual error. The question and answer, as published, are below:

Q. Why are changes in the benefits happening now? Is the cost-sharing of retiree medical benefits part of the University's restructuring and cost containment efforts?

A. No. The changes are the result of the July 1, 1993, changes in an accounting rule known as Financial Accounting Standard (FAS) 106. As a result of these changes, a University task force re-evaluated Penn's retiree benefits program. In preparation for the July 1, 1996, changes, the University provided a three-year window for faculty and staff to retire and receive the current retiree benefits package. The window closes on June 30, 1996.

It is incorrect to blame an accounting standard for benefit reductions. Accounting only reports, it does not create. FAS 106 merely requires employers to record in their financial statements the cost of providing post-retirement benefits to their employees. This requires the University to record a periodic expense on its Statement of Activities and a liability for the accumulated unpaid costs on its annual Statement of Financial Position, something the University failed to do until required by FAS 106.

FAS 106 has nothing to do with determining the level of benefits. That is strictly under the control of the employer. In other words, the University has taken the opportunity to blame an accounting standard for its decision to reduce the economic status of its employees. FAS 106 may have required the University to calculate for the first time the size of the liability it had accumulated by promising postretirement benefits. That new knowledge may surprise an employer which did not understand how much it had promised its employees. The employer then might wish to reduce the benefit formula. But it is important to understand that it is the employer who makes that change and bears the responsibility, not the accounting standard. Therefore, the correct answer to the question in the March 26 Almanac/Compass is Yes, not No.

I have spent thirty-one years teaching students that a journal entry never changed anything real. Now I have the opportunity to pass on that knowledge to those who bring Human Resources to our service.

--Peter H. Knutson, Associate Professor of Accounting


Response(s) to Dr. Knutson

To the chief message in Dr. Knutson's letter, the validity of the answer given to the question about origins of the change in benefits, Vice President for Human Resources Clint Richardson notes that Professor Knutson makes a good point, and that a response will be furnished for next week's issue.

On the issue raised parenthetically in the first sentence of Dr. Knutson's letter, the chair of the Almanac Advisory Board writes:

This response is strictly confined to Professor Knutson's concern about the distinction, or lack thereof, between Almanac and Compass material. He will, I hope, be pleased to note that the Senate Committee on Publication Policy for Almanac shares this concern (Almanac March 19, 1996, p. 6). And that its report appeared in the Almanac section of the publication, as it should. Should he have specific suggestions as to how this problem can be addressed we would be delighted to hear from him.

-- Martin Pring, Physiology (Med)
Chair, Senate Committee on Publication Policy for Almanac


Almanac

April 2, 1996
Volume 42 Number 26


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