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BY GEOFF GRANT You have likely heard the term "fringe benefits," which can be defined as any benefit, such as health care, dental coverage or retirement contributions, that an employee receives in addition to salary. What you may not be aware of is how Stanford pays for such benefits. The costs of Stanford's benefits programs are charged to schools and departments as a percentage of all applicable salaries. For faculty and staff whose salaries are paid from grants and contracts, the sponsors pay for their fringe benefits as well, through the application of what is called the fringe rate. In fact, grants and contracts pay for about one-third of Stanford's salaries and benefits. Because government sponsors pay a substantial share of the university's salaries, we negotiate fringe benefit rates with the Office of Naval Research (ONR) each year that are then applied to all university employee salaries. The term "fringe" has become a bit of a misnomer today. When the term was first coined, the portion of the labor cost needed for benefits was a small fraction of salaries. These days this ratio is fast approaching one-third of the salary cost. The fringe benefits rate for regular employees -- those with appointments that are 50 percent time or more and at least six months in duration -- is 24.8 percent in the current fiscal year ending Aug. 31. In recent years, fringe benefit rates remained fairly consistent. However, in the past few years, circumstances arose that will require Stanford to raise the fringe rate significantly in fiscal year 2004, which begins on Sept. 1. Fiscal 2004's increase can be attributed largely to the rapidly increasing cost of health care and the decline in investment values over the past few years. As everyone who follows the news is aware, the cost of health care insurance is rising rapidly. Stanford's cost of providing health care insurance to its employees and retirees grew by 20 percent in 2003 and is projected to increase by another 18 percent in 2004. Investment market declines since fiscal 2000 have had an indirect but very substantial impact on the cost of benefits as well. Many of our benefit programs are self-insured, and the university keeps reserves to pay claims for those programs. During the 1990s, investment returns on the reserves paid for much of the cost of the programs. However, the poor performance of the stock market during the past three years means that investment earnings will no longer cover expenses for these benefit plans. The university will have to make extra contributions in order to meet plan expenses. The combination of rising costs and market losses meant that Stanford's 24 percent fringe rate in fiscal year 2002 was not enough to cover the full cost of benefits for that year. In accounting terms, the benefits were "under-recovered." When that happens, the amount of that under-recovery becomes a cost applied to a future year. Therefore, for the upcoming fiscal year 2004, not only will the benefits rate have to accommodate much higher insurance (and other) costs, but there will also be a charge against the rate to make up for the shortfall from fiscal year 2002. If you are a manager or researcher planning for personnel costs in 2004, please be aware that a larger portion of your labor costs will be allocated to the "fringe." To help reduce the impact of the significant rate increases at the beginning of the next fiscal year, proposals submitted between now and then should use higher provisional rates already agreed upon by ONR. These rates have already been communicated to all department, research and human resource administrators, and can be found on the Office of Research Administration website (www.stanford.edu/dept/ORA/gcrs/rate2.html). The provisional rate for fiscal year 2004 is 29.0 percent for regular benefits-eligible employees. The final fringe rate (as well as rates for postdocs, contingent employees, and graduate research and teaching assistants) will be negotiated between the university and ONR in the near future. We're hoping that future increases in the fringe rate won't have to be so significant, but economic conditions will affect future years just as they have past years. In the meantime, the university will do all it can to minimize the cost increases of "fringe benefits" while still offering the generous benefits our employees deserve. We will keep you informed as the final rates for fiscal year 2004 are resolved. Geoff Grant is associate vice president for research administration.
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Geoff Grant
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Stanford Report, August 6, 2003
