Future cuts proposed to retiree medical and retirement benefits

In a Faculty Senate report presented last Thursday, Provost John Etchemendy outlined money-saving proposals that would limit growth of university contributions to retiree medical plans, link the value of future retiree medical benefits to years of employment and trim university retirement plan contributions.

For future retired employees, the changes would mean that the university no longer would cover the cost of the lowest-priced health plan, but would instead calculate retiree medical benefits based on the number of years of service at the time of retirement.

The proposed reductions are aimed at reining in the "uncontrolled" cost of providing benefits, which are hampering the university's ability to offer a competitive salary program, Etchemendy said.

Since FY 98, retiree medical benefits have risen 185 percent, while the cost of university contributions to employee retirement plans has increased by 26 percent. Those increases, along with a concurrent 70 percent rise in the cost of providing health care benefits to active employees, helped push the total cost of benefits, in inflation-adjusted dollars, from $182 million in FY 98 to $263 million in FY 03, a 45 percent increase. The cost of providing medical insurance to retirees under the current plan is projected to almost triple by 2014.

The exorbitant rise in benefits cost is "eating up" the ability to have a salary program, Etchemendy said. Despite the lack of a salary program and a hiring freeze, the cost of salaries and benefits rose in the current fiscal year by 6 percent, said Randy Livingston, chief financial officer and vice president for business affairs.

The future health of the university requires that administrators figure out a way to control the costs of benefits, "so that we can control our destiny and our use of funds, " Etchemendy said. " We can't lock in a plan that makes it the case that we can never pay raises again."

The proposals were created by a benefits task force at the joint request of the university budget group and the Board of Trustees and in consultation with the Committee on Faculty and Staff Benefits and other groups, Etchemendy said.

The presentation to the Faculty Senate was designed to solicit community input on decisions that "affect us all, " he said. Final recommendations for changes to benefits are expected by September 2004 and would go into effect January 2006.

Retiree medical benefits

Under the plan proposed Thursday, the university would apportion future medical benefit payments according to years of service.

In order to be eligible for retiree medical benefits, an employee's age and years of service must equal 75 and an employee must have a minimum 10 years of service, which would not change under the proposed plan. (Employees hired prior to 1992 will continue to be eligible when they are 55 and have 10 years of service.) Under the current plan, the university pays 100 percent of the lowest cost health care plan offered. For retirees who are older than 65, that amount this year is $2, 472 for retiree coverage and $1, 483 for spouse coverage. (For retirees younger than 65, who participate in the plan for active employees, the university now pays $3, 176 for retirees and $1, 905 for spouses.)

In the plan that Etchemendy proposed on Thursday, eligible retired employees would annually receive $100 for each year of service for their own medical plan costs and $60 per year of service to cover a spouse's medical plan costs. That benefit rate is based on a plan that would give future employees with 25 years of service the same approximate dollar value that an employee who is over 65 now receives for medical plan costs (in 2004, $2, 472). Eligible employees with fewer years of service would receive a benefit with a lower dollar value and employees with more years of service would receive greater benefits. The basic rate would be adjusted annually to match the percentage growth in salaries.

Grandfathering existing retirees into the plan using current benefits levels, regardless of years of service, is "probably a no-brainer, " Etchemendy said. Less clear is how benefits for employees who now are nearing retirement eligibility should be calculated, he said.

Under the proposed plan, the projected cost to provide retiree medical benefits to existing employees and retirees, given expected years of service, would be reduced from $621 million to between $410 million to $500 million, compared with the plan now in effect. The proposed plan would very likely result over the long term in a reduction of benefits for employees, Etchemendy said. "That's the unfortunate reality."

The university also would start a tax-advantaged savings plan that would allow individual employees to save for retiree medical benefits, Etchemendy said.

Retirement contributions could change

Etchemendy also outlined possible changes to the Stanford Contributory Retirement Plan (SCRP), some also linked to years of service. Under the current plan, the university makes a basic contribution of 5 percent of an employee's salary and then makes additional contributions as employees contribute to the fund, up to an additional 5 percent of an employee's salary. University contributions begin after an employee has a year of service.

Among the changes under consideration, and the annual cost savings for the university compared to the current plan, are:

  • Requiring two years service before the university begins making contributions – $3.4 million
  • Phasing in the basic 5 percent contribution over a five-year period, adding a percentage point each year - $5.7 million
  • Reducing the matching contributions to a dollar-to-dollar ratio and capping the match at 4 percent of an employee's salary – $6.3 million

    The provost also proposed eliminating a little-known program, the Retirement Assistance Program (RAP). The program gives faculty and senior staff a supplemental 10 percent of their salary during their first year of service, in lieu of employer contributions to a retirement account. Eliminating the RAP program would save about $1 million a year.

    Benefits still 'generous'

    Stanford's current benefits package is among the most generous of all universities and "far more generous than what is common on the corporate side" in the Bay Area and California, Etchemendy said, adding that other universities with benefits packages similar to Stanford's are also looking to make cuts.

    During time for discussion -- limited due to other agenda items -- senate members expressed concern that reducing benefits would have a negative effect on retaining staff. Stanford has been able to recruit staff in Silicon Valley partly on the strength of its benefits, said Harvey J. Cohen, pediatrics. Salaries are less than in other industries, but people" are sticking with us because they think about their future, " including retirement, he said.

    Based on data collected from salary surveys covering local and regional areas, Stanford pay ranges "continue to be in line with the current marketplace," Diane Peck, executive director of Human Resources wrote in a recent "Vantage Point," published in the Stanford Report.

    Many staff who left Stanford for higher pay and stock options elsewhere have returned, Etchemendy said. In addition to good working conditions and benefits, Stanford is a competitive employer due to its employment security, he said. "The scale of our layoffs is dwarfed by the scale of layoffs at companies in the Valley."

    Since last fall, administrators have met with numerous groups on campus to discuss proposed benefits changes and will continue to solicit input, Livingston said. "We've gone to great lengths to collect a lot of different input. We want to make sure we haven't overlooked any serious issues."