ANN ARBOR—The University of Michigan has announced that it will accelerate changes to retiree health benefits that will save $9 million a year by 2020. Savings are projected to grow to $165 million a year by 2040.

Starting in 2013, some current retirees and all future retirees will pay more for health care in retirement. By full implementation in 2021, the university-paid percentage of retiree health care will shrink from 93 percent today to a maximum of 68 percent for future retirees who are hired after Jan 1, 2013. The change is another step in the university’s ongoing efforts to cut expenses in areas that do not diminish the quality of the educational experience for students. University leaders emphasized that it is the faculty and staff who are implementing these cost-saving measures by increasing efficiency, adopting new technology and paying a bigger share of benefit costs.

Appointed in 2009, the Committee on Retiree Health Benefits recommended a more gradual implementation by 2028. With the number of U-M retirees projected to double in the next 20 years, the U-M’s executive officers determined the university needed to move ahead more quickly. That kind of recurring cost reduction is vital to the university’s core mission, explains Provost and Executive Vice President for Academic Affairs Phil Hanlon, the university’s chief budget officer.

“The funding that we preserve helps strengthen the university’s ability to succeed in its missions of education, research and patient care,” Hanlon says. “The better job we do at controlling expenses, the more effective we can be at influencing the rate of future tuition increases; that’s very important to us.”

The university has had great success keeping the cost of attendance reasonable. The typical Michigan resident undergraduate with a family income of less than $80,000 pays less today out of pocket to attend the U-M than she did in 2004.

Previous analyses of peer institutions showed that the university’s retiree health benefits were well above the market average. University leaders determined that position could not be sustained. In fiscal year 2010 U-M paid $39 million for retiree health benefits.

“U-M’s retiree health benefits turned out to be among the most generous of the 27 peer institutions studied,” says Laurita Thomas, associate vice president for human resources. “That showed us an important opportunity to spend more wisely and still remain competitive with a very valuable retirement health benefit.”

The university will implement these changes in two ways: By gradually increasing the retirement eligibility requirements and by slowly decreasing the university’s contribution toward health benefits for retirees and dependents.

When faculty and staff hired after Jan. 1, 2013, are eligible to retire with benefits, the university contribution in retirement will be 68 percent of their health care premiums and 26 percent for any covered dependents.

To help employees understand how these changes will affect them individually, the university has developed an online Retirement Health Benefit Estimator (www.benefitsstewardship.umich.edu).

This change in cost sharing for retiree heath care coverage follows a number of other cost-cutting measure, including:

• The full implementation this year of increased health care cost sharing for university employees who now pay, on average, 30 percent of their health care premiums. This change and a one-year retirement savings plan waiting period for new employees saves $40 million in annual operating costs.
• U-M reduced recurring general fund expenditures $135 million in fiscal years 2003 through 2009 from initiatives such as more efficient building maintenance, strategic supplier contracts that drive down costs and more efficient use of energy.
• The university has set a goal to shave another $100 million in recurring costs from the general fund budget through 2012 by such efforts as consolidating IT services, improving space utilization and increasing energy efficiency. A 14 percent reduction of energy consumption in fiscal year 2010 has allowed the university to avoid $5.2 million in annual costs.
• From 2013 through 2017, the university is planning additional efforts to reduce costs by $120 million as the university continues to identify new areas of additional cost savings.
• The U-M general fund budget for fiscal year 2011 is $1.55 billion. The general fund pays for academic services, operations, administration and financial aid.
• Including auxiliary units (Athletics, Housing, Student Publications) and the U-M Health System, the university is a $5.6 billion enterprise.