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Projected Fringe Benefit Rate
Memorandum
To: University Community
From: Heather J. Haberaecker, PhD
Assistant Vice President for Business and Finance/ Chief Business Officer
Re: Fringe Benefit Rates-What Happened and How We Are Proposing to Handle Rates Prospectively
The purpose of this memorandum is to explain what happened to cause the FY2006
fringe benefit rate to increase as much as it did, to compare our rates
to other universities' rates, and to review how we are proposing to handle
fringe benefit costs in grant proposals in the future to minimize
the potential impact on principal investigators. As the new Assistant Vice
President, all I can do now is offer an explanation of what happened prior
to my arrival in February, 2005 and commit to new ways of doing business
to prevent these problems from occurring in the future.
The components of the employer's share of the fringe benefit rate charged to grants, the various service plans, and other business entities are shown in Appendix A. The retirement and health, life and dental (HLD) costs represent over 93 percent of the rate charged. The retirement rate charged over the past several years has remained fairly constant. Health insurance costs through the Department of Central Management Services( CMS), on the other hand, have risen dramatically as they have nationally as shown in Appendix A. The methodology for determining fringe benefit rates annually is also detailed in Appendix A.
What Happened in FY2005?
With the exception of the SURS benefit rate, all entities were charged the
same fringe benefit rate in FY05 as they were in FY04 even though health
costs rose substantially. The reasons for this are somewhat complicated. The
University
did not submit its FY05 fringe benefits proposal to the
federal government until the end of January, 2005, due to difficulty in
obtaining the required data from Banner for the first time. For reasons
that remain unclear, the University did not begin charging the new rate
of 29.94%
at that time, but instead continued to charge the outdated fringe benefits
rate of 28.65%. Thus, grants were charged less in FY05 than they should
have been if the fringe benefit proposal had been developed and implemented
on a timely basis.
Cause of Substantial FY06 Fringe Benefit Increase
The FY06 fringe benefit rate of 33.88% really represents a two year rate
increase, primarily in the health, life and dental rate. The HLD rate increased
from the 14.66% charged in FY04 and FY05 to 20.80% in FY06. The FY06 rate
was also affected by a mandated change in the way the University
remits funds to CMS for HLD payments. This unexpected change in methodology
increased the HLD rate by 1.3% in FY06. While the overall increase is significant,
our fringe benefit rates are not out of line compared to the rates charged
by other public universities as shown below. Clearly, the private institution's
rates listed below are less than those of public universities, although
it appears that the benefits provided require higher employee co-pays and
may not be as robust.
University of Illinois at Chicago 33.88%
University of Minnesota 33.00%
University of Illinois at Urbana 37.56%
University of Iowa 31.00%
University of Wisconsin 34.00%
Northwestern University 24.30%
University of Chicago 21.0%
When the FY06 fringe benefits rate was announced, it was stated that the rate would be retroactive to the first payroll of FY06. This was a change in past practice in that the under-recovery from the retroactive portion was previously built into a future year's rate. However, given that the FY06 rate represents a two year rate increase, the under-recovery is sizable at over $1.6 million and would have added 1.3% to the FY08 rate if the costs were deferred.
FY07 and Beyond
In May, 2005, the federal government's representative spoke with me regarding
the University's January, 2005 FY05 rate proposal. Her first response was
to have the University charge the new rate to grants retroactive to the
beginning of FY05. Since this would have had an extremely negative impact
on FY05 grant expenses given how late it was in the fiscal year, it was
agreed to consider the significant under-recovery of costs in FY05 in the
development of the FY07 fringe benefit rate. By keeping rates relatively
constant between FY04 and FY05, the University collected substantially
less revenue than the fringe benefits expenses incurred, resulting in a sizable
under-recovery of
costs. This under-recovery will need to be captured in the FY07 fringe
benefits rate shown below.
We plan to begin to routinely publish projected three year fringe benefit rates for faculty to use in their grant proposals. While the projected rates may not precisely equal the actual rates in a given year, it will certainly result in far less reallocation than if the proposal reflected a constant fringe benefit rate for the entire grant period. This guidance should negate the concern over the retroactive component of the increase noted this year since the higher amounts will already have been included in grant budgets. As such, new fringe benefit rates, when announced, will be effective with the first payroll of the fiscal year. The projected FY07-FY09 fringe benefit rates are as follows:
Projected Fringe Benefit Rate
FY07 37.23%
FY08 37.24%
FY09 38.85%
Summary
FY06 fringe benefits rates increased substantially because they represented a two year rate increase in HLD costs and there was a mandated change in the way the University remits HLD funds to CMS. FY07 rates are projected to again increase substantially due to the FY05 under-recovery of HLD costs that needed to be built into the rate. We are committed to developing and implementing fringe benefits rates on a more timely basis so that we don't experience the problems that were caused by the way things were handled in FY05, which affected both the FY06 and FY07 rates. By developing three year projected fringe benefit rates, PI's should be able to submit more realistic budgets to granting agencies, which, in turn, should result in less reallocation within grant-funded budgets.
http://www.obfs.uillinois.edu/forms/Appendix_A_FB_Memo.doc
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