Speaking Out

Information, Please

I am becoming deeply suspicious. When the Associate Provost and Vice President for Human Resources introduced the benefits review to the Senate Executive Committee, September 4, 1996, two of the foremost motivations given were "Penn's 30.1% employee benefits rate may be among the highest at comparable institutions" and "Its retirement programs ... may not meet Internal Revenue Service comparable value guidelines." ( Almanac September 10, 1996, p.3).

The latter incentive has been postponed for a year, but the current proposal (Almanac Supplement February 11) again highlights "... costs ... now exceed $139 million in FY '97.... approximately 12% of the total University budget." Yet nowhere in this proposal does one find a clear statement of what the impact of its recommendations on this would be. Instead one may glean snippets, for example, that it would reduce the average University contribution to health care insurance from 89% to 83% of the total, and that the graduate tuition benefits for spouses and dependents, that it recommends phasing out, currently cost $1.3 million.

I was prepared to attribute this to oversight in preparing an already long and complex document. Then I attended a meeting of the Deputy Provost and Associate Provost with my School's faculty this past Monday, March 3. One questioner asked what the reduction in overall compensation to an average faculty or staff member would be, but the response was "It depends on your health insurance plan--which one is it?". It was quite clear to me that he was asking for aggregate rather than personal information, and I am sure that those questioned are as adept as if not more adept than I in discerning the intent of questions from a lecture room floor.

Later in that meeting I asked for a comparison of the benefits cost to the University in FY '97 under the existing package with what it would have been if all the new proposals had been in effect. The Deputy Provost said he "could get those figures for [me]."

This is his chance. I invite him to fill out the table below. The extensive use of explanatory footnotes is encouraged. For example, it would be reasonable to list the cost of the life insurance benefit as the same under both scenarios, due to the proposed one-time conversion of Flexdollars to direct compensation, but that should be explained.

We should realise that the table only gives an approximate estimate of the effect of the proposals. For example, if the increase in contributions by employees to health care insurance drives them to change to the less expensive plans, as has been recommended to those who have complained, the University will save more. I am sure that the consultants employed in the development of these proposals made detailed projections of these effects, and equally sure that we will not be told what they were. Nonetheless I would be happy to see the addition of a third column to the table giving estimates of these consequent savings.

In another example the proposal states that "the practice of providing summer hours also has contributed to the costly administrative complexity of accounting for employee time off." It would be nice to know what savings of this kind are anticipated, too.

I would be happy to trade an inconsequential reduction in benefits for the elimination of, say, the equivalent of a floor of the Franklin Building, and would watch closely for the shrinkage.

-- Martin Pring, Physiology/Med

Response to Dr. Pring

In this letter, we have filled in your table (see below) and regret that we could not give a ready answer for the question at the meeting. It is difficult to answer certain questions when the material to be explained is complex. Your question on the cost impact of Benefit Redesign asked for a comparison of the "projected '97" column with the "recommendations" column. The approach we have used is to compare the projected FY 1998 benefit costs assuming the "recommendations" were to be accepted, with the FY 1998 costs assuming "no changes" were made to the plan. To your proposed table, we have thus added another column which portrays FY 1998 assuming no change in the benefits plan.

Allow us briefly to explain the elements in the table. For health care, if the current recommendations were accepted, the University's costs would increase from $31.300 million in FY 1997 to $31.370 million in FY 1998. In comparison, the costs would rise to a projected $33.370 million in FY 1998 if no changes were made. Hence, we estimate the savings to the University to be $2 million or $33.370 million minus $31.370 million. Note that the University's health care costs are still projected to increase from FY 1997 to FY 1998, assuming the recommendations are accepted.

The cost of the tuition benefit is projected to increase from FY 1997 to FY 1998, since the recommendation delays the implementation of the change to FY 1999. The estimated cost savings of $1.3 million in reduced graduate tuition would not be fully realized until FY 2003, assuming the recommendations are accepted.

The University's cost of life insurance would decrease from $2.300 million in FY 1997 to $700,000 in FY 1998, assuming the recommendations are accepted, versus an increase to $2.400 million if no changes were made. The reduction reflects the elimination of flex-dollars. Note, however, that this reduction in University benefit costs is entirely offset by an increase in employee benefit-base salary. Indeed, as discussed in the original Almanac article, the after-tax improvement in employee compensation is even greater, given the elimination of the tax inefficiency of the current life insurance plan.

The cost of the retirement benefit would increase from $24.800 million in FY 1997 to $26.020 million assuming that the recommendations are accepted. The difference between the $26.020 million and the $25.900 million figure reflects the increased University contributions due to the increase in benefit-base salary mentioned immediately above. The increase in disability plan costs that would result from the implementation of the recommendations also reflects the salary increase from the elimination of flex dollars.

In summary, the proposed recommendations would reduce employee benefit costs by approximately $3.56 million in FY 1998. This is made up of health cost savings of $2 million and life insurance cost savings of $1.7 million, offset by increases in retirement and disability costs of $140,000. Remember, however, that $1.7 million of the savings in benefit costs represents an increase in salary, and hence is not a compensation cost saving to the University. In terms of the original question in your letter, which compares the projected FY 1997 benefit costs against the recommended costs in FY 1998, the total University benefit cost expenditures will increase above current levels, even if the recommendations are accepted. Hence, the cost savings exist only as a reduction from the FY 1998 cost base, assuming no change in the benefit plan.

You mention correctly that any answer to the savings in health care costs will depend on migration among plans and that the consultants looked into this issue. The specific answer to your question is that the University would not save from the migration of employees to the less expensive health plans. Because employees in the indemnity plan pay a larger portion of the cost of their health insurance, any migration would actually add to University costs.

One last point. Your letter frequently refers to "the University" and our letter does the same. We should clarify, however, that in a very real sense, it is not "the University" paying for benefits or "the University" saving money on benefits; it is the schools and responsibility centers. They pay for the benefits, bear the burden of any increases in benefits, and reap the returns for any savings on benefits.

-- Michael L. Wachter, Deputy Provost
-- Barbara Lowery, Associate Provost

Table Submitted by Dr. Pring (see letter above) 

Cost of Employee Benefits to the University in FY '97 

Current shows the actual projected costs. 
Proposal shows the costs that would have been 
incurred if all the proposed changes had been in place.

          		Current    Proposal
Health Care         	 _______     _______
Tuition Remission        _______     _______
Life Insurance           _______     _______
Paid Time Off         	 _______     _______
Retirement         	 _______     _______
Disability          	 _______     _______

            Total     _______     _______

Table by Drs. Wachter and Lowery in Response to Dr. Pring's Letter (see exchange above)

Projected Cost of Employee Benefits Affected by Benefits Redesign Projected '97 are the costs for the current academic year. Recommendations are the costs if proposal is implemented for FY 1998. No Change are the costs if proposal is not implemented for FY 1998 (figures are in thousands of dollars) Projected '97 Recommendations No Change Health Care $31,300 $31,370 $33,370 Tuition Remission 12,300 13,000 13,000 Life Insurance 2,300 700 2,400 Retirement 24,800 26,020 25,900 Disability 2,200 2,320 2,300 Total $72,900 $73,410 $76,970 Table Notes 1. The difference between the Recommendations and No Change columns is $3.560 million. This reflects the reduction in employee benefit costs assuming the recommendations are accepted. Even if the recommendations are accepted, University benefits costs will still increase, as is made clear by comparing the Projected '97 and Recommendations columns. 2. The cost savings from the reduction in paid-time-off, including summer hours, are difficult to quantify. The savings come as an improvement in productivity rather than as a reduction in costs. Hence, no specific figure is included from these savings. 3. We use projected FY 1997 costs to represent current costs. Since the University's fiscal year does not end until June, actual cost figures will not be available until after then.

Speaking Out welcomes reader contributions. Short timely letters on University issues can be accepted Thursday noon for the following Tuesday's issue, subject to right-of-reply guidelines. Advance notice of intention to submit is appreciated.--Ed.


Volume 43 Number 25
March 11, 1997

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