Change in Employer-Paid Post-Retirement Health Benefits
For Employees Hired On or After July 1, 2010
Memo from Lou Anna K. Simon - April 13, 2010
Over the years, the university’s compensation policy has been guided by a set of principles that blend market competitiveness, fairness, and financial stewardship. A key component of this approach is to adjust compensation to reflect the market place. The market is defined by the recruitment area - - national/ international for most faculty (particularly tenure system, cyclotron system, and health system faculty), and local/regional for other faculty and staff. For tenure system faculty, the target for overall compensation is the middle of the Big Ten. This peer group is particularly relevant given the similarity of the institutions: all are internationally competitive and recognized for their graduate and research achievements by membership in the AAU.
We are all aware that the global economic crisis has had an effect on the market place. However, our principles have remained at the core of our planning and are embedded in our budget recommendations. Another equally important dimension of our compensation policy is assuring the long-term financial stability and stewardship of the university. One persistent concern over the last two decades has been the growing cost of employer-paid post-retirement health care benefits, a component of the benefit package that is increasingly rare in higher education as well as other employment sectors in the regional market place. Michigan State is currently the only Big Ten University to offer full employer- paid retiree health benefits to new hires.
The challenge this benefit poses to responsible financial stewardship is reflected in both the growth rate of our annual benefit costs and the Governmental Accounting Standards Board’s recent requirement that public employers reflect the actuarial cost of employer-paid post-retirement health benefits in annual financial statements. This accounting requirement reports the projected actuarial cost of MSU retirees over their lifetime as well as the pro rata share of post-retirement health care coverage accumulated to date by currently eligible employees.
The current estimate of this liability for Michigan State University is approximately $1 billion and is expected to double every fifteen years through 2040 if unabated (Attachment A). Similarly, the annual cost of retiree health benefits alone is expected to increase from $31 million today to $140 million by 2040 if unabated. Over time, these expenses will diminish available institutional assets, increasing reliance on annual budget reductions and tuition income. Further, MSU’s access to bond financing for critical projects will diminish. Because of these circumstances, the elimination of post- retirement health benefits for new hires is a necessary economic strategy to maintain stability in MSU’s long-term financial health and to preserve programmatic quality.
In 2002, a first step was taken; eliminating funded post-retirement health benefits for dependents of new support staff. This change was applied to new faculty in 2005. Most recently, the elimination of funded post-retirement benefits for new employees as well as dependents was a topic in negotiations with the Coalition of Labor Organizations (Coalition), and was included in information provided to the University Committee on Faculty Affairs (UCFA). Both the Coalition agreement and the UCFA’s 2010-11 salary recommendations reference the possible elimination of employer-paid post-retirement health benefits (Attachment B).
Accordingly, based upon MSU’s long-standing compensation policy and the need for responsible stewardship of University resources, MSU will discontinue providing contributions towards retiree health care benefits for new employees (including, faculty and academic staff, executive management and Coalition members, unless itemized below) hired on or after July 1, 2010. This action has no impact on current employees or retirees.
Further, it is understood that the value of post-retirement health care has been included in our compensation calculations. Thus, in order to keep salary and compensation within the market parameters that permit us to recruit and retain our high quality work force, some adjustments in the compensation approach may need to be considered for new employees. Any adjustments will be based upon the collective bargaining process with the Coalition and discussions with the UCFA and the Academic Specialist Advisory Committee (ASAC). It is important to note that we have not concluded negotiations with the Union for Non-Tenure Track Faculty, which include the matter of post-retirement health benefits.
These changes are part of a long-term solution that will enable Michigan State University to operate on a sustainable financial basis that is consistent with the practices of our peer institutions and our financial capacity.
Lou Anna K. Simon,
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