Rising cost of benefits mean school ‘cannot simply continue with the status quo’
By Beth Healy and Robert Weisman
Globe Staff / November 1, 2012
Harvard University’s top financial officials are sounding an alarm about the rising cost of medical benefits for its employees, saying costs are growing at a rate “unsupportable” relative to revenues.
In Harvard’s annual report, being released Friday, officials said that while they want to keep offering generous benefits, the school “cannot simply continue with the status quo.” It is the first time the nation’s richest university has addressed employee health care so directly.
Benefit costs at Harvard hit $476 million for the year that ended June 30, double what they were a decade ago, with health care accounting for the largest portion.
The university’s medical care obligation for retired faculty and staff is causing even greater fears. At $901.5 million, it’s nearly equal to the pension obligation for retirees — $910 million.
Rising health care expenses are a critical issue for many schools, said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. “Colleges and universities are taking a good, hard look at everything they can do to manage costs so they can manage tuitions,” Doherty said. “Health care is certainly one of those things that have been driving up the cost of education.”
In the report, Harvard acknowledges it now faces the same daunting challenge that businesses and state governments have grappled with for years. Last year, in its first health plan overhaul in several years, the university passed higher co-pays and deductibles on to employees. It also asked them to absorb more prescription drug costs.
Universities and colleges, particularly elite institutions, have long had a culture of rich benefits, said Jon Kingsdale, a managing partner at the Wakely Consulting Group in Boston, which specializes in health care.
“The combination of having a very entitled workforce and being somewhat insulated from cost pressures means that universities have been slow in general, compared to manufacturing, finance, and even retail employers, in sharing costs with employees,” he said.
Underlying the health care concerns is Harvard’s weakened financial position since the nation’s financial crisis. After many prosperous years, Harvard can no longer rely on banking hefty profits from the school’s $30.7 billion endowment. Like many institutions, its investments tumbled sharply in 2009 — by 27 percent — but even last year, with stock markets showing healthy gains, Harvard’s endowment was essentially flat.
“The financial crisis has acted like a tidal wave that, as it receded, exposed certain vulnerabilities with a new clarity,’’ Harvard financial chief Daniel S. Shore and treasurer James F. Rothenberg said in the report.
Last year, the endowment delivered $1.4 billion to help run the university, which still operated at a $4.5 million deficit. The total budget is $4 billion, about half of which goes to salaries and benefits.
The university has so far set aside about one-third of the amount needed to pay retiree health benefits, but the plan is officially “unfunded,” meaning the funds have not been permanently earmarked.
Harvard has taken steps to clamp down on its large debt load, which expanded during the financial crisis when the school borrowed to raise cash. Outstanding debt fell to $6 billion as of June 30, after peaking at $6.3 billion last year. As a result, interest payments slid by 4 percent to $287 million. At the same time, Harvard isn’t getting much added revenue from tuition because it has expanded financial aid.
The new financial pressures are bringing expenses of every kind under scrutiny at the university. Harvard has been restructuring, hiring more carefully, and keeping raises modest, while still trying to attract top talent.
The school has revived a long-stalled Allston expansion plan, even as it takes other cost-saving measures, such as managing space “for maximum efficiency,” reorganizing libraries, and consolidating computer services.
The report said the university is “committed to offering fair and competitive compensation to all its employees,” but that it must balance that “with our need to pursue the university’s broader objectives.”