Vermont State Colleges Study

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Vermont State Colleges Study

• Prepared by Legislative Joint Fiscal Office
• October 27, 2005
• Maria Belliveau
• Stephen Klein

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JRH 1 Resolves

• committee shall examine and make recommendations
  including, but not limited to
• historical trends related to the allocation of
  system resources for administrative salaries
  relative to faculty salaries
• use of part-time and full-time faculty, 
• participation by the faculty in curriculum
  development and strategic planning at the
  colleges and across the system
• communications among and between the college
  campuses and between the faculty and the
  administration, and the ongoing working
  relationships
• within the VSC community

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Further Resolved..

• review and calculate the past and future
  financial contributions of those current faculty
  who will not be eligible to participate in the
  early retirement program as a result of the
  recent labor negotiations, and recommend any
  appropriate means, including viable funding
  sources, to mitigate the personal and systemic
  losses to the faculty, and
• review and calculate the annual cost to VSC for
  the current early retirees until such time as the
  cohort all reaches age 65, and estimate an annual
  cost for those eligible for early retirement
  through 2010 2020 until they reach age 65

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Acknowledgements

• We have received excellent cooperation from the
  Faculty Union and the Chancellor and his staff.
• While this power point benefited from all their
  input both parties would likely have made some
  changes in the final product
• We appreciate their willingness to work with us
  in a complex and, at times, contentious area

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This overview is structured as follows

• General context
• VSC Financial Pressures
• Part-time and full-time faculty changes
• Allocation of system resources for administrative
  vs faculty salaries
• GASB Context
• The collective bargaining context and formula
• Early retirement program
• Program characteristics
• Impacts of the contract change Tenured
  grandfathered Tenured not grandfathered
  Nontenured faculty over 65 tenured

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Calculations

• Past and future contributions to early retirement
  plan from those nontenured faculty who will not
  be eligible to participate in the program
• Lost benefit w/offsets for tenured faculty not
  eligible for the early retirement program under
  the contract
• Impact of the negotiated agreement on tenured
  faculty who are eligible for the early retirement
  program

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VSC Financial Pressures

• VSC has 2 key funding sources
• State appropriations 27 and tuition 73
• These two represent 2/3 of total all funds
  budget
• Grants, housing payments, contracts, special
  funds etc make up rest
• State appropriation average annual increase
• Fall 01- Fall 05 2.9
• Average Annual Tuition Growth 2001 - 2005
• 5.1 in-state/out of state (Johnson, Castleton,
  Lyndon)
• 5.5 in-state/out of state (VTC)
• FY 2003-4
• 3rd highest 4-yr tuition in NE NY for out of
  state students (OOS)
• 3 year growth in tuition for OOS 2nd lowest in NE
  NY
• In-state tuition Vermont 5,806 National Average
  4,169
• OOS tuition Vermont 12,360 National Average
  10,526
• Student Mix - Fall 2004 FTEs in state
• Overall 79, CCV 94.7, Other VSC 70

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VSC Budget Projections

• Enrollment increases have been strong over the
  past few years
• 2002-5 VSC increased 7.3, 3.8, 3.5, 4.1
• Increases not likely to continue into foreseeable
  future
• Projected changes in public high school grads
  200102 to 201314 VT -22 Northeast 4
  (U.S. DoE 9/05)
• Population trends in Vermont consistent with
  national data
• 2001 to 2005 Gen. Fund budget growth averaged
  6.5
• Assuming 2006-2010 at 4.6 Gen. Fund growth
• With a 2 annual enrollment increase, 3
  appropriations, 4 tuition increase, 12 health
  care, 4.2 salary increases, and 3 instructional
  costs, projected annual deficits grow to approx.
  1m by FY 2010

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State College Health Care Costs

• Health care increases at VSC have been as
  follows
• FY 2004 6.5
• FY 2005 13.1
• FY 2006 10.8
• FY 2007 proj. 12.0
• FY2006 was 12 but savings adjustments were
  made to bring it down to 10.8
• Changes to Medical Stop loss and Medical
  Aggregate Premium Medical and Rx Administration
  Costs
• VSC does not feel it can replicate these savings
  in future budgets

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Faculty change - comparatives

• Full-time faculty salary increases (wage only)
• 2002-3 2.0
• 2003-4 8.1
• 2004-5 4.1
• 2005-6 9.2 7 w/o one time items
• Rate result of changes to college comparisons
  changing faculty mix
• Overall rate change roughly 4.5
• Faculty/Administration 1999 - 2005 growth
• Full-time faculty growth 1 277 to 279
• Part-time faculty growth 31 267 to 349
• Chancellors Office (48) 25 to 13
• Non-Bargain Supervisory units 9 132 to
  144
• Courses and course participation
• Participation bonus/ and extra courses also used
  to absorb some growth
• Participation Fall 02 19 Spring 03 33 -
  Fall 03 43 Spring 04 21

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GASB Context

• The Government Accounting Standards Board has
  adopted GASB 45 and 47, now known as OPEB Other
  Post Employment Benefits
• This affects the state itself, state colleges,
  and other public sector institutions
• This OPEB change requires a move away from pay
  as you go to actuarial obligation accounting for
  medical, dental, vision, and hearing coverage

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OPEB Implementation

• State governments must begin reporting OPEB
  liability after Dec. 15, 2006
• Smaller governments report two years later
• Why is discussing OPEB now this important?
• SP While the payments of pension and other PEBs
  are just two of a large number of factors that go
  into rating analysis, cases may
  arisewhichadversely affect creditworthiness
  12/04
• Fitch An absence of action taken to fund OPEB
  liabilities or otherwise manage them will be
  viewed as a negative rating factor (6/05)
• Moodys OPEB funding status will become a more
  visible factor in credit rating process, similar
  to pension obligations (7/05)

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Vermont State Employee Obligations

• Liability 392 million if pre-funded 1.104
  billion without pre-funding
• Additional annual accrual required 24.9 million
  assuming prefunding, 83 million without
  prefunding
• The legislature has yet to deal with this
  obligation and will need to address it in the
  upcoming two sessions
• Note
• The discount rate used to measure liabilities
  under the new GASB standards will depend on
  whether there is a practice of pre-funding OPEB
  liabilities in line with the annual accrual of
  costs under the standard. Absent or inadequate
  prefunding will result in the use of a lower
  interest rate, and hence larger accruals

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Example of OPEB Liability Vermont State
Teachers Retirement System
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Vermont State Colleges

• As an under-100 million entity, they are a phase
  two institution which must report beginning FY
  2009 (July 1, 2008 June 30, 2009)
• Maximum liability is estimated at 160 million
  for medical insurance and 1.8 million of life
  insurance
• Beginning in FY 2009, they will book an annual
  increased cost of 8.7 million in health and
  122,000 in life insurance costs to comply

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GASB 47

• A second GASB ruling specific to early retirement
  obligations creates an added liability
• Accrued salary obligations due to early
  retirement similarly need to be accounted for in
  a current obligation actuarial manner
• These are salary payments made before regular
  retirement eligibility

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The VSC Early Retirement Program Obligations

• Early retirement generally under GASB
• Early retirement program obligations under GASB
  would be limited to the actuarial time between
  early retirement and regular retirement
• The obligations would be for OPEB and for any
  wage benefit
• As it is an optional program, the projected rate
  of participation is critical for assessing
  liability

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VSCs Early Retirement Program

• Until the prior agreement, VSC faculty were
  eligible for early retirement at
• 55 years of age and 15 years service or 25 years
  service at any age for 50 of base salary plus
  50 of TIAA CREF contribution or
• 55 years and 10 years of service with 40 of base
  annual salary and 40 of TIAA CREF contribution
• Normal retirement is at 65 years of age

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Impact of early retirement on VSC

• VSC paid in salary and health benefits for early
  retirees
• 1.3 million to 41 people for the year ending
  June 2004
• 1.6 million to 43 people for the year ending
  June 2005
• These payments were pre GASB 45 and GASB 47, and
  costs would increase if the actuarial obligations
  were included

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Impacts of VSC early retirement cont.

• VSC and the faculty have estimated a maximum
  total actuarial liability of the program before
  the contract change
• If no new hires were eligible a maximum liability
  of 95-108 million
• 33 - 38 million if 35 used benefit
• Current contract
• Maximum obligations estimated at 41 million
• 14 million if 35 used program

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• In negotiations VSC proposed elimination and the
  union opposed elimination
• Based on the factfinders report, the contract
  eliminated this program in a phased manner with
  final eligibility limited to those eligible prior
  to October 2009 creating four impacted groups
• Nontenured faculty who not be eligible to
  participate in the program at VSC before 7/30/05
  85
• Tenured faculty not eligible for the early
  retirement program due to the cut off date 44
• Tenured faculty who are eligible for the early
  retirement program 111
• Tenured faculty over 65 still working 18
• The estimates of financial impact to these groups
  will be discussed later

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The Collective Bargaining Context

• VSC and the Union have developed an innovative
  compensation system to frame their collective
  bargaining
• The system was designed to address historical low
  wages and high benefits
• The system is designed to have VSC faculty
  compensation be on parity with other similar
  institutions
• The system has been in place for the last two
  contracts
• The parties use Academe surveys for the analysis

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The Methodology

• The VSC and Union use a weighted average of
  comparative 2-year and 4-year institutions to
  come up with total compensation comparisons
• They increase the amount by 1 to account for the
  time lag in data (less than CPI)
• Since the comparisons include benefits and
  salary, higher VSC benefits result in lower
  salaries as compared to peers, but the total is
  comparable
• In the calculation of benefits, only 25 of the
  cost of the early retirement program was
  included. Full inclusion would have led to lower
  salaries

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Methodologycontinued

• Since only 25 of the early retirement value was
  included in the total compensation
• As it is phased out, annual salary increases will
  be higher as the 25 counted drops each year
  starting in FY 2006 2015105
• The VSC has been picking up the other 75 of the
  cost of early retirement
• This means actual total compensation by the
  formula is likely understated, and VSC had been
  absorbing the difference
• It also means that the VSC will see a larger
  financial benefit and the faculty a larger loss
  than the costs reflected in the contract
• Different faculty are affected differently. This
  larger loss is arguably offset by years of not
  paying the full cost of the benefit in the
  compensation formula benefiting still eligible
  staff

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The impact on the four groups

• 1. Nontenured faculty who will not be eligible to
  participate in the program
• 2. Tenured faculty not eligible for the early
  retirement program due to the cut off date
• 3. Tenured faculty who are eligible for the early
  retirement program
• 4. Tenured faculty who continue working past 65.
• While the college takes the position that these
  impacts were part of a resolved contract which
  always produces mixed beneficiaries, the parties
  have agreed on the size of the impacts

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Non-tenured faculty who will not be eligible to
participate in the program

• This group has had lower salary increases during
  their time of service as they have had 25 of the
  cost of the program built into the total
  compensation formula. This will decline during
  the next four years
• Estimated lost wage impact 350,000 - 400,000
• Will experience ongoing impact of 1.5 points of
  salary pool held for tenured not eligible group
• They have also lost the potential to access the
  program

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Tenured faculty not eligible for the early
retirement program due to the cut off date

• This group lost access to the program due to the
  cut off date. They experience
• Lost salary value of about 1,000 a year and loss
  will decline to zero over the next four years
• An adjustment of their compensation upwards which
  more than offsets this loss. The adjustment
  value is just over 1100 and will grow
  indefinitely in the out years
• The lost value of the potential benefit
• The parties have estimated this lost benefit as a
  max exposure of 26 million and between 7.8
  million and 10.4 million depending on
  assumptions about participation
• This range assumes 30-40 of benefit is actually
  used

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Tenured faculty who are eligible for the early
retirement program or over 65

• The tenured faculty still eligible group
• Will receive the benefit at a decreasing cost as
  the contribution is stepped down over the next
  four years. This decreasing cost is reflected in
  a higher wage salary for all faculty
• The still-working over-65 tenured faculty
• This group will receive higher salary increases
  than otherwise would be the case due to the
  declining formula

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Prepared by the Legislative Joint Fiscal Office

• One Baldwin Street
• Drawer 33
• Montpelier, VT 05633
• 802-828-2295
• http//www.leg.state.vt.us/jfo/