Speaking Out

Questioning FAS 106 Proposals

The University's plans for compliance with Statement 106 of the Financial Accounting Standards Board (FAS 106) raise a number of questions and problems that I can best illustrate by quotations from the two recent Almanac articles on the subject (see References below-readers who have not yet read these carefully are strongly urged to do so). The first section that specifically addresses FAS 106 at-tempts, reasonably enough, to assess the magnitude of the problem caused by the requirement to accrue the costs of post-retirement medical benefits over the work- ing career of employees by assigning a number to it:

Penn's FAS 106 liability was approximately $96 million as of the beginning of FY 1992.(1)

How this number was calculated is not made clear. The Vice President for Human Resources volunteered at a meeting of the Medical Faculty Senate that it had been obtained by outside accountants on the basis of various employee profile data supplied to them by the University, but would say little more about it. (Could we not calculate it ourselves, or were we re-quired to obtain it from an independent source?) Maybe the following sheds some light on its genesis:

... very few staff and even fewer faculty retire before the age of 65. For FAS 106 purposes, however, this aspect of the program is very costly because the University must recognize the potential that many individuals will retire before age 65. (2)

Its characterization as a "liability" that "recognize(s) the potential" of an admittedly unlikely event suggests to me that it has something of the nature of a worst-case scenario. Does it assume that all employees will retire as soon as they become eligible for retiree medical benefits, in most cases at age 55? If yes, in what other respects is it unrealistic? What figure represents a best estimate of the actual costs of post-retire-ment medical benefits that would have been accrued by employees at that time?

If, as I conjecture above, actual costs are likely to be substantially less than the calculated liability, why does the FAS 106 Work Group recommend that the University fund the latter in full:

While FAS 106 requires an accounting recognition of post-retirement medical benefits, it does not require an employer to fund the liability. There are advantages in doing so however. (1)

Is this an all-or-nothing choice? The impact of funding only a reasonable estimate of actual costs, or even a conservatively high one, would surely be considerably less severe. Does the answer lie in:

The University could secure the needed monies through an increase in allocated costs to schools and centers, through a reduction in their subvention, or by increasing the employee benefits rate ... . The last option offers the advantage of accelerating collection from third parties, particularly Federal research sponsors... (1)

Clearly an incentive to the University for this approach is that it could transfer a significant fraction of the burden from unrestricted funds to restricted income, mainly Federal grants and contracts.

Many employers use early retirement programs as a cost saving tool, since the net reduction in compensation expenses more than offsets the additional benefits. Thus the calculated FAS 106 liability only presents one side of the picture: even if the University should for some reason experience mass early retirements the overall cost to it would be considerably less. The purely fiscal arguments for tinkering with the retirement benefits, even those that affect "very few" individuals, seem less than compelling.

The solution of increasing the employee benefits rate in order to recover part of the inflated liability from restricted funds is presented on the grounds of expedience, without any discussion of its appropriateness or otherwise. Even in this light however, it has negative consequences that ought to be considered--I will confine myself to two such. The bulk of the unrestricted budgets of those departments whose faculty research is largely grant-supported tends to be devoted to compensation. In those cases an increase in the benefits rate of only a few percentage points can represent a substantial portion of the discretionary budget. Faculty whose grants have recently been renewed for multi-year periods will also face a problem, since their budgets are fixed in broad outline for that time. Likewise in their case too only some small fraction of the total may represent funds that can be reallocated without significant disruption.

-- Martin Pring, Associate Professor of Physiology/Med

1. Almanac Supplement 12/8/92.
2. Almanac, "For Comment", 12/15/92


January 12, 1993
Volume 39 Number 17

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