9/25/2009 Fringe Benefits

Fact Checker!!!

A mole in the Brodhead Administration -- concerned about the sluggish and secretive response to the fiscal crisis -- has provided Fact Checker with substantial information, including a confidential memo warning that the cost of Duke's fringe benefits is spiraling out of control.

This raises the specter of large-scale cuts in the spectrum of lavish benefits that faculty and employees enjoy -- most notably medical insurance. The benefits package was recently cited by the Chronicle of Higher Education in naming Duke one of the best colleges to work for.

The memo also discusses layoffs on a scale so significant that the rate Duke is charged by the state of North Carolina for participation in its unemployment insurance program (often called the experience rating) may leap, meaning an unforeseen expense may well hit the annual budget for many years. Up until now, administrators have dodged layoff questions, hoping furloughs would not be necessary and giving no hint of the magnitude that apparently is under discussion.

The memo says the outlook for the cost of fringe benefits continues to deteriorate -- with numbers calculated just a few months old already outdated. Moreover, the projections show continuing year-to-year bumps consuming a bigger percentage of the budget at a time when there is competition for every precious dollar.

Officials have been holding meetings, which will continue in October, to consider the narrowing options.

Among other reasons given in the memo for the developing crunch:

A) the cost of medical care is rising.

B) on top of that, Duke's faculty, employees, their dependents and even students are making greater use of medical care -- more doctors visits, more tests, more procedures, more prescriptions per capita.

In addition to people currently working, Duke gives its retirees and their dependents continuing health insurance, very rare these days.

A prescription plan is included, even rarer. To show the dimensions of this, when Medicare started its first drug benefit two years ago, Duke calculated the federal government would be assuming a portion of Duke's cost valued at $100 million over ten years. $100 million. Just a portion of the cost.

Duke allows all people in its medical plans to get prescription drugs locally. Most plans require long-term medications to be generic, purchased from less costly mail-order pharmacies. Duke estimates this one change would save millions of dollars.

Another indication of the generous medical benefits was evident when employees were briefed ten days ago on a second round of incentives for early retirement. There was criticism, led by Executive Vice President Trask, when someone mentioned a plan circulating in Washington to tax medical benefits as income. Since the tax would only apply to the most generous medical plans, Trask's burst of mumbles established that Duke's plan is top tier.

It's not known if Duke has a separate executive-level medical plan as many corporations do -- granting reimbursement for every aspirin and Band-Aid.

So far in the financial crisis, Duke has only tinkered with its medical plan: minor increases in premiums and co-pays.

In retrospect, the answer to a question at the employee briefing seems ominous. An official said the framework of the medical plan is safe. For this year.

C) Because of massive losses through investment of its pension fund reserves, Duke faces the prospect of having to make bigger annual contributions in order to stay afloat ("funded") as required by federal law. There are not only investment losses to contend with; hundreds of people are tapping the pension fund unexpectedly through incentive programs, getting larger retirement checks, earlier in their lives.

Fact Checker has been warning about the pension crunch for months; one of the highest officials in the administration has denied twice that there is any problem. To see the denials contradicted by a direct and clear memo contemporaneously circulating in Allen Building is disheartening.

This memo establishes a great credibility gulf and yes, Fact Checker has all this in writing.

The list of fringes goes on and on. Faculty as well as all staff enjoy extra grants on top of their regular salary to help pay for their children's college education at any school they choose. The Children's Tuition Grant Program has been trimmed twice in recent decades, but anyone hired prior to 1975 remains in the top tier, eligible for an extra $37,486 per year for four years for every child. Duke's newest employees get this benefit after two years of service -- but unlike the open ended payments for earlier hires, the rate per academic year is lower and there is a cap of $225,216 for the entire family. If both parents work at Duke, the cap can be doubled.

Everyone gets this: from the President to the groundskeeper and food service worker.

There is nothing comparable outside academia.

Faculty and top staff also have access to a subsidized country club (family membership: $790 per year) with complete facilities tucked into Duke Forest near the Washington Duke Inn. There are three swimming pools, including an outdoor lap pool heated in the fall.

There is more Dukies.

The Chronicle did not cover, as one of its four university news and feature stories in its Wednesday edition, Dean George McLendon's annual report to the Arts and Sciences Council. He revealed the core budget for Arts and Sciences is $300 million -- with half of that exempt from any cuts because it is student financial aid. McLendon said out of the remaining $150 million, another $12 million must be cut this year, with more slices taken out in future years. That's a tough assignment.

McLendon also commented on faculty hiring. After a surge and splurge in the past few years, he said routine replacement of professors will not occur. Rather he said Duke will be looking for special opportunities to hire in a market where there is less competition for stars.

While McLendon said the Arts and Sciences faculty has increased by about 50 during his five years, the university-wide number is far greater. There were 2477 regular faculty members five years ago, 2730 at the end of the 2008 fiscal year on June 30, 2008, and probably about 2800 now.

McLendon challenged the faculty: "What old habits and approaches are we willing to give up?" He did not mention teaching loads, where Duke is dramatically under its peers, nor costly sabbaticals, or hint at what he has in mind.

McLendon's asking the question about faculty give-backs was brave. An old-line professor recruited from Princeton five years ago, McLendon had been viewed as an unlikely candidate to carry the torch for ending traditional perks that lard the faculty payroll.

Lastly McLendon said non-regular faculty -- adjuncts, professors of the practice -- will be relied on more and more. He said it is a trade-off to have such people teaching, but he said in many cases it is "unambiguously" a positive development. Translation: cheaper.

The supplementary faculty members typically do not get tenure or sabbaticals -- but there have been moves at Duke before the money meltdown to accord the near-faculty some degree of the Shibboleths of the ivory tower.

The faculty senate, the Academic Council, got an important briefing on finances yesterday (Thursday), not covered in Friday's Chronicle. I would say shame on you, but Fact Checker was also slacking last night, and has no word either.

(correction: the Chronicle buried a short account of this briefing in another story dealing with a proposal for a new PhD program that the Academic Council discussed. This program -- if eventually improved -- will embrace a max of four students a year. Fact Checker thinks the briefing -- no matter how repititious of past information -- should have been the lead.)

Next week will bring a flood of financial news. Translation: bloodbath.

With the trustees meeting October 2-3, all the results for the last fiscal year, ending June 30, 2009, should be publicly available. Fact Checker expects Duke to have lost 37 percent of its endowment in that period, with additional wipe-out since July 1 in this fiscal year. If my estimate holds, this would be the most severe of any college or university I know of.

The percentage loss applies not only to endowment, but to billions in other assets: pension plan, Health System reserves, and apparently money carried on the books as "funds functioning as endowment."

In dollar terms, The Fact Checker's overall estimate is $3.75 billion.

Chronicle -- you have not given one headline ever -- ever -- to the percentage or value of our losses in endowment and other assets. If someone donated $3.75 billion, I trust you would break out the big type. Wake the hell up.

The Trustee meeting will be the first plenary session presided over by the new chair, Daniel Blue. He has pledged "transparency," and it will be interesting to see what steps he takes, if any, to fulfill his pledge.

For example, will he resume briefings for the news media after Trustee meetings -- a vital source of information cut off by Bob "Wachovia" Steel except where he thought there was news that shined upon him.

The careful reader of Fact Checker will recall Steel's comments after the board meeting last December -- the first meeting after he imposed the blackout. Steel contended that Duke is not affected by the financial meltdown like other schools.

Read this and weep: "The good news is that Duke has been very prudently and conservatively managed from a financial perspective for quite awhile."

Fact Check!!!! 37 percent!!!!

Much of the financial trouble at Duke stems from aggressive use of private equity and hedge funds, and other fancy pants financial twists like derivatives. Far more aggressive than other schools, Fact Checker is preparing a report on this, probably for next semester.

And the careful reader will also recall President Brodhead's standing at Steel's side, smiling from his own assurance that our endowment is "secure" and "stable."

Poor Brodhead, he went on to list five alumni Trustees guiding our investments. Let's look at the list and the Fact Checker update since December:

Steel. Last job was chair of Wachovia. Kaboom!!! Now out of work.

Rick Wagoner. Last job was chair of GM. Kaboom!!! Now out of work.

Alan Schwartz, former chair of Bear, Sterns, the first Wall Street firm to collapse. Kaboom!! Out of work though recently he emerged somewhere.

John Mack, chair of Morgan Stanley, still in office but his replacement has just been selected.

Xiqing Gao, a top official of the Chinese government in Beijing, still in power.

Thank you for reading Fact Checker. The fan is whirling. Let's see what hits the blades.