Department of Energy
Certain Postretirement Benefits for Contractor Employees Are Unfunded and Program Oversight Could Be Improved Gao ID: GAO-04-539 April 15, 2004The Department of Energy (DOE), which carries out its national security, environmental cleanup, and research missions through extensive use of contractors, faces significant costs for postretirement health and pension benefits for contractor employees. Given DOE's long history of using contractors and the rising cost of postretirement benefits, the Chairman, House Committee on Appropriations, Subcommittee on Energy and Water Development, asked GAO to (1) analyze DOE's estimated financial obligation for postretirement health and pension benefits for contractor employees at the end of fiscal year 2003, (2) determine how DOE evaluates its contractor postretirement health and pension benefit programs and assesses the comparative levels of benefits offered by contractors, and (3) assess how DOE's oversight of these benefits could be enhanced.
As of September 30, 2003, DOE reported an estimated $13.4 billion in unfunded contractor postretirement health and pension benefits. This figure is an actuarial estimate of all benefits attributed to employee service before September 30, 2003, minus the fair market value of assets dedicated to the payment of retiree benefits. The unfunded balance has grown over the past 4 fiscal years as a result of the continuing accumulation of benefits, declining interest rates, and negative returns on pension assets. A significant portion of the unfunded balance relates to benefit programs at contractor sites that have already closed or will close once the work is complete. DOE Order 350.1 generally provides that contractors periodically complete selfassessment studies comparing their benefits to professionally recognized measures. DOE uses these studies to make decisions about the level of contractor benefits. While the most recently completed comparison studies suggest that DOE has been successful in offering total contractor benefits that are comparable to those of selected competitors, the DOE Order 350.1 studies are not performed at a significant number of contractor locations, and alternative review procedures performed by DOE personnel are inconsistent from one contractor location to another; thus DOE's ability to evaluate the full range of programs is limited. In addition, GAO found that a number of contractor studies completed under DOE Order 350.1 did not conform to prescribed and recommended methodologies, calling into question the validity and comparability of the results. Moreover, DOE's current focus on total benefits rather than individual benefit components in evaluating benefits does not fully recognize the differences in costs between deferred benefit programs, such as pension and postretirement health benefits, and other benefit components. This distinction is important because changes to pension and postretirement health benefits can have a significant impact on DOE's long-term costs and budgetary needs. For example, a 1 percent increase in a contractor employee's current year vacation benefits has less impact on DOE's long-term costs and budgetary needs than a 1 percent increase in postretirement pension or health benefits, which have a continuous and compounding effect as they are paid out in each year of retirement. While reported total contractor benefits are comparable to selected competitors, as stated above, the postretirement health benefits of DOE contractor employees at these sites averaged more than 44 percent greater than the average of the contractors' competitors, while defined benefit pension benefits averaged 29 percent greater. The approval and monitoring of DOE contractor employee pension and postretirement health benefits is primarily the responsibility of DOE contracting officers, who administer contracts at individual contractor locations. Management does not systematically review information developed at individual contractor locations to identify best practices or areas where benefit comparisons do not adhere to agency requirements or guidance. Developing and disseminating this information agencywide would enhance DOE's oversight of contractor employee benefits and provide information needed to manage postclosure benefit costs.
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Director: Team: Phone:GAO-04-539, Department of Energy: Certain Postretirement Benefits for Contractor Employees Are Unfunded and Program Oversight Could Be Improved
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Report to the Chairman, Subcommittee on Energy and Water Development,
Committee on Appropriations, House of Representatives:
April 2004:
DEPARTMENT OF ENERGY:
Certain Postretirement Benefits for Contractor Employees Are Unfunded
and Program Oversight Could Be Improved:
GAO-04-539:
GAO Highlights:
Highlights of GAO-04-539, a report to the Chairman, Subcommittee on
Energy and Water Development, Committee on Appropriations, House of
Representatives
Why GAO Did This Study:
The Department of Energy (DOE), which carries out its national
security, environmental cleanup, and research missions through
extensive use of contractors, faces significant costs for
postretirement health and pension benefits for contractor employees.
Given DOE‘s long history of using contractors and the rising cost of
postretirement benefits, you asked GAO to (1) analyze DOE‘s estimated
financial obligation for postretirement health and pension benefits for
contractor employees at the end of fiscal year 2003, (2) determine how
DOE evaluates its contractor postretirement health and pension benefit
programs and assesses the comparative levels of benefits offered by
contractors, and (3) assess how DOE‘s oversight of these benefits
could be enhanced.
What GAO Found:
As of September 30, 2003, DOE reported an estimated $13.4 billion in
unfunded contractor postretirement health and pension benefits. This
figure is an estimate of the present value of all benefits attributed
to employee service before September 30, 2003, minus the fair market
value of assets dedicated to the payment of retiree benefits. The
unfunded balance has grown over the past 4 fiscal years as a result of
the continuing accumulation of benefits, declining interest rates, and
negative returns on pension assets. A significant portion of the
unfunded balance relates to benefit programs at contractor sites that
have already closed or will close once the work is complete.
DOE Order 350.1 generally provides that contractors periodically
complete self-assessment studies comparing their benefits to
professionally recognized measures. DOE uses these studies to make
decisions about the level of contractor benefits. While the most
recently completed comparison studies suggest that DOE has been
successful in offering total contractor benefits that are comparable
to those of selected competitors, the DOE Order 350.1 studies are not
performed at a significant number of contractor locations, and
alternative review procedures performed by DOE personnel are
inconsistent from one contractor location to another; thus DOE‘s
ability to evaluate the full range of programs is limited. In addition,
GAO found that a number of the comparison studies did not conform to
prescribed and recommended methodologies, calling into question the
validity and comparability of the results.
Moreover, DOE‘s current focus on total benefits rather than individual
benefit components in evaluating benefits does not fully recognize the
differences in costs between deferred benefit programs, such as pension
and postretirement health benefits, and other benefit components. This
distinction is important because changes to pension and postretirement
health benefits can have a significant impact on DOE‘s long-term costs
and budgetary needs. For example, a 1 percent increase in a contractor
employee‘s current year vacation benefits has less impact on DOE‘s
long-term costs and budgetary needs than a 1 percent increase in
postretirement pension or health benefits, which have a continuous and
compounding effect as they are paid out in each year of retirement.
Although reported total contractor benefits are comparable to selected
competitors, the postretirement health benefits of DOE contractor
employees at these sites averaged more than 44 percent greater than the
average of the contractors‘ competitors, while defined benefit pension
benefits averaged 29 percent greater.
The approval and monitoring of DOE contractor employee pension and
postretirement health benefits is primarily the responsibility of DOE
contracting officers, who administer contracts at individual contractor
locations. Management does not systematically review information
developed at individual contractor locations to identify best practices
or areas where benefit comparisons do not adhere to agency requirements
or guidance. Developing and disseminating this information agencywide
would enhance DOE‘s oversight of contractor employee benefits and
provide information needed to manage post-closure benefit costs.
What GAO Recommends:
GAO recommends four executive actions: (1) institute systematic
management review of pertinent data from each contractor location; (2)
extend, as practical, DOE comparison study requirements to contractors
not currently covered by them; (3) where the extension of the order is
not practical, perform appropriate alternative procedures; and (4)
incorporate into DOE‘s oversight a focus on the long-term costs and
budgetary implications of decisions pertaining to each component of
contractor benefit programs. In written comments on a draft of this
report, DOE agreed with these recommendations.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Scope and Methodology:
Reported Unfunded Balances for Contractor Postretirement Benefits Are
Significant, and Amounts for Post-Closure Benefits Are Increasing:
Evaluation of Contractor Benefits Could Be Improved:
Increased Management Review Would Help DOE Oversee Its Contractor
Employee Benefits Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: DOE Contractor Locations with Pension and Postretirement
Health Liabilities as of September 30, 2003:
Appendix II: Comparison of DOE and DOD Contractor Benefit Programs:
Appendix III: Comments from the Department of Energy:
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Reported Funded Status for DOE Contractor Pension and
Postretirement Health Benefits at the End of Fiscal Years 1999 through
2003:
Table 2: DOE Reimbursements for Contractor Pension Contributions and
Postretirement Health Payments for Fiscal Years 1999 through 2003:
Table 3: Summary Statistics for DOE Order 350.1 Benefit Value and Cost
Comparison Studies (Results Compared to an Average Comparator Index of
100.0):
Table 4: Summary Statistics for Total Benefits, Defined Benefit Pension
Benefits, and Postretirement Health Benefits in DOE Contractor Value
Studies (Results Compared to an Average Comparator Index of 100.0):
Table 5: Comparison of DOE and DOD Contractor Benefit Programs:
Figures:
Figure 1: Relationship between DOE, Contractors, Third-Party
Administrators, and Contractor Employees:
Figure 2: DOE Reimbursements for Postretirement Benefits Sorted by the
Applicability of DOE Order 350.1 Comparison Studies:
Letter April 15, 2004:
The Honorable David L. Hobson:
Chairman, Subcommittee on Energy and Water Development:
Committee on Appropriations
House of Representatives:
Dear Mr. Chairman:
The Department of Energy (DOE) carries out its national security,
environmental cleanup, and scientific and technological innovation
missions through the extensive use of third-party contractors,
including universities and private companies. These contractors, in
many cases, incur costs for pension and postretirement health benefits
that are reimbursed by DOE under the terms of their contracts.
Contractor pension and postretirement health benefits represent
significant costs for both research and environmental cleanup efforts.
The current methodology used to fund these costs may result in the need
for DOE to reimburse contractor benefit payments well after current
operating contracts are terminated or cleanup sites are completed.
We, along with DOE's Office of Inspector General (IG), have issued
several reports during recent years on the challenges DOE faces in the
area of contract management and the extent of environmental cleanup
costs.[Footnote 1] Since 1990, we have included DOE's contract
management, which is broadly defined to include contract administration
and project management, as a high-risk area. Given DOE's long history
of using contractors in its research and cleanup missions and the
rising cost of providing employee postretirement health benefits, it is
important that the management of short-term and long-term contractor
employee benefits obligations ensures both the successful completion of
cleanup and research objectives and the cost-effective use of
government resources.
In this context, you requested that we review DOE's contractor employee
benefits to (1) analyze the department's estimated financial obligation
for pension and postretirement health benefits for contractor employees
at the end of fiscal year 2003, (2) determine how DOE evaluates its
contractor pension and postretirement health benefit programs and
assesses the comparative levels of benefits offered by its contractors,
and (3) assess how DOE's oversight of these benefit programs could be
enhanced.
We conducted our review from July 2003 through February 2004 at the
Department of Energy headquarters in Washington, D.C., and the Defense
Contract Audit Agency in Fort Belvoir, Virginia, in accordance with
generally accepted government auditing standards. We requested written
comments on a draft of this report from the Secretary of Energy. We
also requested oral comments on applicable sections of a draft of this
report from the Secretary of Defense. We incorporated those comments
into our report as appropriate.
Results in Brief:
As of September 30, 2003, DOE reported an estimated $13.4 billion in
contractor pension and postretirement health benefits that remain
unfunded. The unfunded balance, or funded status of these benefits, is
an estimate of the present value of all benefits attributed to employee
service rendered prior to September 30, 2003, less the fair market
value of accumulated assets dedicated to the payment of retiree
benefits.[Footnote 2] The unfunded balance of these contractor
benefits has significantly increased over the past 4 fiscal years due
to the continuing accumulation of accrued benefits and adverse economic
factors, such as declining interest rates and negative returns on
pension assets. A significant portion of the unfunded balance relates
to benefit programs at contractor sites where operations either have
already been completed or will eventually be completed. The future
administration and payment of pension and postretirement health retiree
benefits following site completion creates a number of specific
challenges for DOE.
DOE Order 350.1 provides that DOE's contractors should periodically
compare their benefits to those of selected competitors or other
professionally recognized measures. The most recently completed
comparison studies report that total contractor benefits are, on
average, comparable to selected competitors. However, the self-
assessment provisions of DOE Order 350.1 are not applicable to a
significant number of contractor locations and benefit obligations.
Also, our review of completed contractor studies reveals a number of
cases of nonconformance with key DOE procedures, which raises questions
about the validity of the results of the comparisons.
DOE's oversight of contractor postretirement health and pension
benefits could be strengthened to provide for greater management review
of contractor site information and incorporate a focus on the
anticipated long-term duration of these benefit obligations. The
absence of systematic management reviews of individual contractor site
information hinders the agency's ability to conduct programwide
oversight of contractor benefits and effectively evaluate post-closure
benefit costs. Moreover, the lack of focus on long-term costs in
periodic contractor benefit reviews does not fully recognize the
difference in costs between deferred benefits programs, such as pension
and postretirement health benefits, and other benefit components. This
distinction is important because changes to deferred benefits have a
continuous and compounding effect as they are paid out in each year of
retirement.
In written comments on a draft of this report, DOE noted that our
findings were consistent with those of its own internal assessment and
agreed with the report's four recommendations.
Background:
DOE relies on contractor organizations to manage, operate, maintain,
and provide support to its environmental cleanup and science and energy
research at government-owned facilities. Contractors at environmental
cleanup sites direct remediation efforts for radioactive and hazardous
waste contamination generated during former nuclear weapons research
and production activities. The eventual completion of cleanup
activities at individual contractor locations without the existence of
other ongoing operations, called site completion or site closure,
generally leads to transition into long-term stewardship activities
such as monitoring and surveillance requiring significantly fewer
resources. Contractors at research sites complete a variety of ongoing
research and development activities at national laboratories and
universities.
Contractors at cleanup and research sites may sponsor and pay
pension[Footnote 3] and postretirement health[Footnote 4] benefits,
collectively called postretirement benefits, for employees providing
service under DOE contracts in order to attract, motivate, and retain
qualified individuals to assist the agency in carrying out its mission.
Contractors administer postretirement benefits for these employees
either by establishing separate benefit plans solely for these
individuals or by arranging for their participation in existing
corporate plans, where contractor employees at DOE sites and those
contractor employees assigned to non-DOE work participate in the same
benefit plans.
DOE reimburses contractor payments for employee compensation, including
postretirement benefits as authorized by applicable regulations and
each contractor's operating agreement. For example, the Federal
Acquisition Regulation (FAR) establishes uniform policies and
procedures for the acquisition of goods and services by executive
agencies. The FAR cost principles include factors to be considered by
an agency when determining whether a contractor-claimed cost is to be
allowed and reimbursed by an agency. Generally, consideration of
whether compensation costs incurred under a government contract with a
commercial organization are allowable includes whether they are, among
other things, reasonable,[Footnote 5] allocable, and compliant with
other applicable standards and the terms of the contract. For fiscal
year 2003, DOE reimbursed approximately $431 million in contractor
postretirement benefit contributions at 39 different DOE contractor
sites.[Footnote 6]
Contractor employees qualify for retiree benefits in pension and
postretirement health plans differently, resulting in different
methodologies for the payment of the two types of benefits. Pension
benefits are determined using a formula based on employee salary and
years of service as specified by contractor plan provisions. Employees
accrue, or earn, future pension benefits throughout their period of
service and are generally required to work for a certain period, called
a vesting period, before they have a right to receive any accrued
retirement benefits. DOE contractors that offer defined benefit pension
plans are subject to the minimum funding standards established by the
Employee Retirement and Income Security Act of 1974 (ERISA).[Footnote
7]The ERISA requirements set minimum standards regarding how much
contractors must set aside each year in order to provide for future
defined benefit pension payments when they are due.
In contrast to contributions for pension benefits, there are no legal
requirements to fund postretirement health benefits in advance for
payments to retirees. Therefore, DOE contractors generally pay for
postretirement health plans on a pay-as-you-go[Footnote 8] basis.
Retired contractor employees are usually entitled to participate in
contractor health plans after they complete a period of service
immediately prior to their retirement. However, unlike pension
benefits, the future amount of postretirement health benefits earned by
a contractor employee cannot be expressly defined at the employee's
retirement date. This is due, in part, to the potential for future
contractor changes in benefit provisions, such as retiree
contributions, copayments, and coverage limitations, or cancellation of
postretirement health coverage.
Figure 1 summarizes the previously discussed relationships between DOE,
contractors, third-party administrators, and contractor employees in
the payment, sponsorship, and delivery of postretirement benefits.
Figure 1: Relationship between DOE, Contractors, Third-Party
Administrators, and Contractor Employees:
[See PDF for image]
[End of figure]
Consistent with the long-term nature of DOE research and cleanup
activities, it is DOE's policy to provide for the continuation of
postretirement benefit plans when there are changes in individual
contractors due to contract competitions. Typically, these scenarios
would not result in the need for the cancellation and re-creation of
these benefit plans. Although future contractor employee benefits
earned may change as a result of contract negotiations, DOE attempts to
continue the existing benefit plan with the new contractor as the
sponsor, or offer comparable benefits in a successor contractor benefit
plan during changes in contractors. Under this scenario, prior
contractor retirees continue receiving benefits from the new plan
sponsor and current employees continue to accrue benefits according to
existing plan provisions.
It is also DOE's policy to facilitate the continuation of
postretirement benefits following the completion of activities at
environmental cleanup sites. DOE officials stated that an agency review
of contracts, benefit plan documents, and labor agreements determined
that contractor postretirement plans set forth the terms of an exchange
between the contractor and contractor employees.[Footnote 9] In
exchange for current services, contractors provide benefits after
retirement (i.e., monthly pension payments and payments toward
postretirement health insurance premiums) as defined by the terms of
the postretirement benefit plans. DOE officials also stated that the
continuation of pension and postretirement health benefits is necessary
to reward former contractor employees for prior service at cleanup
sites and to attract and retain future contractors and contractor
employees to work at remaining cleanup sites.
The completion of all contractor activities at environmental cleanup
sites generally results in either the termination of the prime contract
or a significant reduction in the scope of the outstanding contract.
These contract changes at site closure differ from a change in
contractor at an ongoing site because retirees who earned
postretirement benefits under the terms of prior contracts are left
without an active contractor to administer future benefit payments. It
is DOE's policy in these situations that future postretirement benefits
earned by contractor employees may be satisfied by the outgoing
contractor in one of two ways. Under the first option, the contractor
can request reimbursement from DOE for the immediate settlement of
outstanding benefit obligations, such as through the purchase of
insurance contracts. Under the second option, the contractor may
facilitate the continuation of the current benefit program and seek DOE
reimbursement as postretirement benefit payments are made to retirees.
The outgoing contractor can achieve the latter option through
continuing to sponsor current postretirement benefit plans or through
the transfer of plan administration to another party. This report
refers to those benefits due and paid after site closure as post-
closure benefits.
In 1996, DOE issued Order 350.1 to establish responsibilities,
requirements, and further cost allowability criteria for the management
and oversight of contractor compensation programs.[Footnote 10] The
order provides that contracting officers are largely responsible for
the review and approval of allowable contractor compensation costs. It
also details procedures for the management and oversight of
postretirement benefits, such as the approval of new postretirement
benefit plans, the approval of changes made to existing plans, and
required procedures during contract and postretirement benefit plan
terminations. The department's Contractor Human Resources Management
Division (CHRM) is responsible for providing contracting officers with
policies and procedures for managing contractor postretirement benefits
costs under the provisions of DOE Order 350.1. DOE's Office of
Procurement Assistance Management (OPAM) establishes overall
performance objectives for contractor compensation programs and
approves changes to pension and postretirement health benefit plans in
excess of contracting officer authorization limits. The National
Nuclear Security Administration (NNSA) assumes these responsibilities
at current naval reactor sites and assists in the review of contractor
compensation programs at other NNSA-designated locations.
DOE Order 350.1 requires contractors to complete a recurring evaluation
of their employee benefit programs,[Footnote 11] including pension and
postretirement health plans, against the benefit programs of labor
competitors in the private sector or other professionally recognized
measures.
These provisions are completed to aid contracting officers in assessing
contractor benefit costs against the reasonableness standards of the
FAR. Specifically, DOE Order 350.1 states that contractors may use
either the results from (1) a benefit value study or (2) the annual
U.S. Chamber of Commerce Employee Benefit Study, collectively called
comparison studies in this report, to perform an appropriate evaluation
of their benefit programs.
Benefit value studies are intended to measure the relative worth of a
contractor's benefit programs to its employees. This is done through
the calculation of a replacement value[Footnote 12] for the benefits
offered in the contractor's benefit program. Replacement values that
may differ among employees, such as the use and extent of current
employee health benefits, are calculated through the use of a
hypothetical group of employees. This methodology allows comparisons
between the provisions of benefit programs with different demographics,
turnover and retirement rates, and benefit election patterns. As such,
replacement values are also calculated for selected labor market
competitors of the contractor and compared to the contractor
replacement values. DOE contractors engage benefits consulting
companies to assist with the benefit value studies and work with
contracting officers to approve the methodologies used.
Replacement values are found for each benefit component evaluated in
the study and used to develop an overall benefit index program for that
contractor. The final product of the benefit value study, called the
net benefit value index, compares the relative value of the
contractor's employer-paid benefits to the employer-paid value of the
average labor competitor's benefits, represented by an index of 100.
Therefore, a contractor with a net benefit value index of 107.0 offers
benefits to its employees with a replacement value that is 7 percent
above the average of the contractor's labor competitors. As mentioned,
the benefit value studies also create separate indexes for major
individual benefit components, such as pension benefits and vacation
time.
The U.S. Chamber of Commerce Employee Benefit Study, or Chamber of
Commerce cost study, provides a comparison of the annual employee
benefit contributions and payments made by the contractor with the
average contributions and payments of a survey population. The U.S.
Chamber of Commerce Employee Benefit Study is an annual polling of
domestic employers conducted by the U.S. Chamber of Commerce's
Statistics and Research Center and sponsored by American International
Group, Inc. The survey publishes information on average employer
benefit contributions and payments per full-time employee made during
the preceding year and the percentage of total employer payroll spent
on employee benefits.
Scope and Methodology:
To analyze the agency's estimated financial liability for contractor
employee pension and postretirement health obligations, we:
* obtained audited financial reports and disclosures on contractor
employee postretirement benefit obligations for fiscal years 1999
through 2003,
* interviewed DOE officials from the Office of Finance and Accounting
Policy and CHRM regarding the character of obligations at DOE research
and cleanup sites,
* reviewed actuarial computations of DOE contractor benefit obligations
to determine how obligations at cleanup sites were adjusted for
expected site closure dates, and:
* interviewed DOE officials from the Office of Finance and Accounting
Policy and the Office of General Counsel regarding the agency's
liability with respect to contractor post-closure benefits.
The calculation of financial liabilities for postretirement benefits
earned by contractor employees involves the use of significant economic
and demographic assumptions under the guidance of Statement of
Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. It was not our intent to assess, nor did
we independently assess, the reasonableness of the assumptions used in
the financial calculations or the accuracy of contractor data used in
the calculations. For fiscal years 1999 through 2003, DOE's financial
statements, including estimates of contractor postretirement benefits,
were audited by either independent public accountants or its IG. For
each of these years, the auditing entity determined that DOE's
financial statements presented fairly, in all material respects, the
financial position of the agency.
To determine how DOE evaluates its contractor postretirement benefit
programs and compares the benefits offered by DOE contractors with
private industry benchmarks, we:
* reviewed DOE Order 350.1 and other agency policy and procedure
guidance related to the completion of contractor comparison studies,
* interviewed DOE officials from CHRM to determine procedures used to
assess the quality of the contractor comparison studies,
* obtained and analyzed the most recent comparison studies completed by
DOE contractors for all locations subject to the valuation provisions
of DOE Order 350.1, and:
* reviewed the most recent comparison studies for all locations subject
to the DOE Order 350.1 valuation provisions for compliance with DOE
policies and procedures.
We reviewed contractor comparison studies for compliance with key
controls in DOE's policies and procedures, designed to provide
reasonable assurance over the validity of the study results, including
(1) timely completion and inclusion of major benefit components; (2)
presence of recommended certifications to attest to the accuracy,
relevance, and consistency of the data used in the study; (3)
development of benchmark information through the selection of labor
competitors and the use of up-to-date data for the competitors
selected; and (4) calculation of desired (either required or
recommended) performance measures. We summarized the results of these
procedures in this report and communicated the detailed results of our
testing to DOE officials. It was not our intent to verify, nor would we
have been able to independently verify, the accuracy of actuarial
calculations, assumptions, or competitor data used in the comparison
studies due to the proprietary nature of benefits consulting firm
databases used to conduct the studies. However, we confirmed that DOE
requirements regarding the completion of these studies by national
consulting groups with annual consulting revenues in excess of $5
million were met for all benefit value studies reviewed. We also did
not independently assess the validity of the data supplied by DOE
contractors for use in the comparison studies.
To assess DOE's oversight of its contractors' pension and
postretirement health benefit programs, we:
* reviewed the FAR and other applicable standards related to allowable
pension and postretirement health costs under contracts with commercial
organizations;
* determined applicable internal control procedures for DOE's
contractor benefits program using our Standards for Internal Control in
the Federal Government[Footnote 13] and Internal Control Management and
Evaluation Tool;[Footnote 14]
* reviewed related DOE policy and procedure guidance and interviewed
DOE officials regarding procedures for overseeing contractor benefit
programs in existence through the end of fiscal year 2003; and:
* reviewed contractor locations subject to the provisions of DOE Order
350.1 for compliance with DOE policies and procedures related to the
review of changes to contractor postretirement benefit programs.
In addition, we reviewed contractor operations and the oversight of
contractor postretirement benefit programs at several federal agencies
to determine whether contractor benefit programs at these agencies were
comparable to those at DOE. We determined that the oversight of
contractor benefit programs at the Department of Defense (DOD) was
comparable, in some respects, to oversight at DOE and interviewed DOD
officials to gain an understanding of that agency's procedures and the
differences between DOE and DOD contractor operations.
Reported Unfunded Balances for Contractor Postretirement Benefits Are
Significant, and Amounts for Post-Closure Benefits Are Increasing:
In DOE's fiscal year 2003 Performance and Accountability Report, the
agency reported that the present value of estimated contractor
postretirement and pension benefits that were unfunded as of
September 30, 2003, totaled $13.4 billion.[Footnote 15] The unfunded
balance of these deferred benefits has increased significantly over the
past 4 fiscal years due to various operating and economic factors. An
increasing portion of the future unfunded balance will relate to
estimated pension and postretirement health obligations at completed or
near-completed environmental cleanup sites. The expected magnitude of
these benefits at site closure will require DOE to meet significant
future budgetary and administrative challenges to facilitate the future
payment of these benefits.
DOE Estimates That the Present Value of Unfunded Contractor
Postretirement Benefits as of September 30, 2003, Is $13.4 Billion:
DOE reimburses allowable contractor costs for employee postretirement
benefits and records estimates of these future benefit payments in its
financial accounting statements.[Footnote 16] The agency reported an
estimated present value of $13.4 billion for pension and postretirement
health benefits that have been earned by contractor employees under
current postretirement benefit plan provisions but were unfunded as of
September 30, 2003. This figure, also called the funded status, is an
actuarial[Footnote 17] estimate of future postretirement benefits
attributed to contractor employee service rendered prior to the
measurement date less the fair market value of accumulated assets
dedicated to the payment of the obligation.
The calculation of financial accounting estimates involves the use of
significant actuarial, demographic, and economic assumptions,
including, among other things, future interest rates, health care cost
trends, salary increases, and life expectancies of eligible retirees
(and their survivors). Also, the estimation is inherently difficult
because benefits earned by current contractor employees are deferred
until retirement and the actual payment of these benefits may not occur
for decades.
Funded Status of Contractor Postretirement Benefits Has Deteriorated
Significantly since 1999:
The combined funded status for contractor pension and postretirement
health benefits has changed from a $3.6 billion overfunded position in
1999 to a $13.4 billion unfunded position in 2003. There are several
significant reasons for this deterioration in funded status over the
last 4 fiscal years, including negative pension asset returns,
declining discount rates[Footnote 18] over the past 3 fiscal years, and
increasing trends in estimated postretirement health care costs. Table
1 summarizes the funded status for pension and postretirement health
benefits for the last 5 fiscal year-ends as reported by DOE.
Table 1: Reported Funded Status for DOE Contractor Pension and
Postretirement Health Benefits at the End of Fiscal Years 1999 through
2003:
2003;
Pension funded status: ($3.7);
Postretirement health funded status: ($9.7);
Total funded status: ($13.4).
2002;
Pension funded status: ($1.0);
Postretirement health funded status: ($8.3);
Total funded status: ($9.3).
2001;
Pension funded status: $5.1[A];
Postretirement health funded status: ($6.8);
Total funded status: ($1.6).
2000;
Pension funded status: $10.2;
Postretirement health funded status: ($5.4);
Total funded status: $4.8.
1999;
Pension funded status: $8.2;
Postretirement health funded status: ($4.6);
Total funded status: $3.6.
Source: DOE.
Notes: Information from DOE Performance and Accountability Reports for
fiscal years 1999 through 2003. Numbers may not add to total due to
rounding. DOE's financial statements for the covered fiscal years were
audited and received unqualified audit opinions.
[A] A positive funded status indicates an excess of the fair value of
dedicated assets over estimated benefit obligations.
[End of table]
In general, deterioration in the funded status of postretirement health
benefits can be attributed to the excess of future benefits earned by
current contractor employees, known as service costs, plus interest
costs on outstanding obligations over the payments made to retirees to
satisfy previously earned benefits. Postretirement health benefit
service costs plus interest costs have ranged from 2.3 times to 2.5
times the payments to retirees made in each of the past 5 fiscal years.
The significant increases in recent retiree health benefit costs,
decreases in discount rates, and continuing accrual of postretirement
benefits in existing contractor plans all affect the service and
interest costs of contractor postretirement health plans, although we
did not determine to what extent each of these individual factors
affected the total funded status.
Annual changes in the funded status of pension plans, unlike changes in
the funded status of postretirement health plans, can be significantly
affected by returns on dedicated pension assets. Contributions to
pension plans are generally held in trust for the payment of benefits
to participants and their beneficiaries. Plan trustees, usually banks
or trust companies, make investment decisions for the plan with these
assets. Contractor pension assets have, on average, experienced
negative returns from 7 percent to 8 percent in each of the past 5
fiscal years. Negative asset returns decrease the fair market value of
accumulated pension assets and therefore significantly contribute to
changes in the funded status of pension benefits.
However, because of current DOE policies, neither the current unfunded
position nor the significant recent changes in funded status results in
a requirement for contractors, or DOE, to make any additional annual
postretirement benefit contributions. DOE Order 350.1 provides that in
general, annual contractor contributions for pension benefits shall not
exceed the minimum contribution required by ERISA. The order also
provides that postretirement health benefits are paid using a pay-as-
you-go method unless otherwise required by state or federal statute.
See table 2 for pension contributions and postretirement health
payments reimbursed by DOE over the last 5 fiscal years.
Table 2: DOE Reimbursements for Contractor Pension Contributions and
Postretirement Health Payments for Fiscal Years 1999 through 2003:
Dollars in millions:
2003;
Pension contributions: $167;
Postretirement health payments: $264;
Total contributions and payments: $431.
2002;
Pension contributions: $75;
Postretirement health payments: $243;
Total contributions and payments: $318.
2001;
Pension contributions: $43;
Postretirement health payments: $226;
Total contributions and payments: $269.
2000;
Pension contributions: $58;
Postretirement health payments: $205;
Total contributions and payments: $263.
1999;
Pension contributions: $61;
Postretirement health payments: $181;
Total contributions and payments: $242.
Source: DOE.
Note: Information from DOE Performance and Accountability Reports for
fiscal years 1999 through 2003.
[End of table]
However, certain contractors may face higher short-term pension
contributions because minimum contributions calculated under ERISA
rules factor in both current service costs and outstanding
obligations.[Footnote 19] In any case, the reported $13.4 billion
unfunded balance will, eventually, require additional contributions,
investment gains, or favorable benefit experience[Footnote 20] within
existing pension and postretirement health plans in order to satisfy
future benefits when they come due.
Post-Closure Benefit Obligations Will Increase with Continuing
Environmental Site Closures:
While DOE fiscal year 2003 reimbursements of postretirement benefits to
contractors administering benefits following site closure totaled only
approximately $6 million, future amounts will significantly increase
with continuing environmental site closures. DOE has indicated that the
agency is scheduled to close several environmental cleanup sites within
the next few years. Contractor employee postretirement benefits at
these sites had total unfunded balances in excess of $1.5 billion as of
September 30, 2003.
DOE Order 350.1 provides that when operations at a DOE facility are
terminated and no further work is to be completed, pension and
postretirement health benefit continuation will be provided for those
contractor employees who earned retirement benefits in these plans.
Consistent with DOE Order 350.1, contract language at anticipated
closure sites (such as Fernald and Rocky Flats) indicates that the DOE
contracting officer will designate and communicate the method of
benefit continuation within the final 6 months of the contract and may
direct any of a number of potential means of doing so, including, but
not limited to, (1) termination and settlement of the plans in
accordance with relevant laws and regulations, (2) continuation of the
plans on a pay-as-you-go basis under a separate contract with the
contractor, or (3) transfer of plan responsibilities to another
contractor or third party.
In conjunction with a site closure, the contractor may submit a claim,
called a settlement proposal, for the final calculation of estimated
postretirement benefits earned by contractor employees. The
reimbursement of these costs would allow the contractor, generally
through the purchase of insurance contracts, to complete the payment of
future pension and postretirement health benefits without further DOE
reimbursement. The ability of DOE to honor these claims largely depends
on DOE's available financial resources compared to the total settlement
costs[Footnote 21] involved in the satisfaction of outstanding
postretirement benefits.
According to DOE officials, DOE has recently considered several options
to avoid postretirement benefit settlements because the reimbursement
of contractors for the purchase of annuity contracts and future health
benefit payments involves significant costs above the calculated
settlement amount. Because of the budgetary resources required to
settle postretirement benefits at completed cleanup sites, DOE
officials anticipate continuing the annual reimbursement of benefit
payments by extending contracts with cleanup site contractors in some
cases, solely to administer the benefits, thereby preserving the
contractor relationship as the plan sponsor. The continuation of these
benefits creates specific challenges for DOE, including the following:
* DOE currently attempts to pass the administrative responsibilities
for the continuation of post-closure employee benefits to existing
contractors. However, as the number of contractors with existing
cleanup operations diminishes with additional site closures, DOE must
either continue relationships with former contractors, many of which
were created only to facilitate a site closure, or transfer
responsibilities to another party.
* Even though contractor postretirement benefits are earned during
previous employment periods, DOE will require continuing appropriations
in order to reimburse contractors for the payment of postretirement
benefits to former contractor retirees and other beneficiaries. DOE
officials estimate that the post-closure obligations may extend through
2075.
* The continuation of postretirement benefits through another
contractor or a third party requires DOE to pay for the allowable
administrative expenses of these activities.
* The continuation of postretirement benefits requires DOE to monitor
and evaluate the ongoing contractor reimbursement for post-closure
benefit payments and any changes in those benefit programs made by the
contractor.
In response to these challenges, DOE announced plans in 2003 to
establish an Office of Legacy Management to address the long-term
management of former cleanup site contractor obligations. According to
agency officials, a key mission of the Office of Legacy Management is
to ensure the quality of service and continuity of former contractor
employees' pension and medical benefits. The office is planning a
comprehensive approach to fulfill the agency's pension and
postretirement health obligations at current and future closure sites.
Evaluation of Contractor Benefits Could Be Improved:
DOE Order 350.1 generally requires that contractors periodically
complete self-assessments of major nonstatutory benefit programs
against professionally recognized measures. The most recent contractor
comparison studies report average contractor benefits are 0.2 percent
below the value of selected labor competitors. However, a significant
number of contractor locations are not subject to the valuation
provisions of DOE Order 350.1, or otherwise do not complete them. In
cases where DOE Order 350.1 does not apply, alternative procedures are
performed by DOE personnel; however, the procedures are inconsistent
among contractor locations and are limited at completed, or near-
completed, cleanup sites. We also found the comparison studies that
were completed under DOE Order 350.1 often did not conform to existing
DOE policies and recommended procedures.
Evaluation Studies Report Contractor Benefits Are Comparable to Those
Offered by Selected Competitors:
Each DOE contractor subject to the self-assessment provisions of DOE
Order 350.1 is to periodically complete a comparison study evaluating
its benefit programs against external benchmarks. This evaluation of
contractor benefits may take the form of either a benefit value study,
which measures relative replacement cost of employer-paid benefits
against the benefits offered by a group of selected labor competitors,
or a cost study, which measures the annual relative per capita benefit
cost against companies surveyed by U.S Chamber of Commerce. The results
of the comparison studies allow DOE contracting officers to measure the
competitiveness of contractor benefit programs in the labor market and
to assess contractor benefit program costs for reasonableness under
applicable regulations and contract provisions. Table 3 summarizes the
reported results from the most recent contractor comparison studies
completed.
Table 3: Summary Statistics for DOE Order 350.1 Benefit Value and Cost
Comparison Studies (Results Compared to an Average Comparator Index of
100.0):
Comparison study measures: Average;
Total benefits index: 99.8.
Comparison study measures: Maximum;
Total benefits index: 148.0.
Comparison study measures: Minimum;
Total benefits index: 71.0.
Comparison study measures: Number of sites with an index above 105[A];
Total benefits index: 5.
Comparison study measures: Number of sites with an index from 90 to
110;
Total benefits index: 16.
Source: GAO analysis.
Notes: Summarizes most recent contractor benefit value and Chamber of
Commerce cost studies submitted by 21 DOE contractors. Generally, DOE
benefit value study indexes should not be used to compare benefit
program values between contractor sites because each study uses
different comparator firms, each study completes the study as of a
different date, and assumptions and methodologies may vary among
contractor locations. However, the comparison study results are useful
as performance indicators of how contractor benefits compare to a
similarly determined value, the average benefit value of a selected set
of labor competitors.
[A] DOE's goal is for the reported contractor benefit value to be no
higher than 105 (or 5 percent higher than the average value of the
contractor competitors at each location).
[End of table]
The reported results of the contractor comparison studies suggest that
DOE has been fairly successful in achieving its goal of limiting the
total value of contractor benefits to no more 5 percent higher than the
average total value of the contractor's labor competitors at each
location. As shown in table 3, only 5 of 21 studies have a benefits
value of more than 105 and the average contractor benefits value is 0.2
percent below the employer-paid benefits level of selected study
competitors. The reported results range from 29 percent below
competitor averages to 48 percent above those averages; however, at 16
of 21 contractor locations, the reported benefits value falls from 90
to 110, or 10 percent below to 10 percent above labor competitor
averages. As discussed later in this report, contractor nonconformance
with DOE guidance on the completion of these studies raises questions
about the validity of the comparison study results.
A Significant Number of Contractors Do Not Complete DOE Order 350.1
Comparison Studies:
A significant number of DOE contractors, and the postretirement
benefits they offer, are not subject to the comparison study provisions
of DOE Order 350.1. Contractors with postretirement benefits (1)
offered in corporate plans,[Footnote 22] (2) reimbursed under support
contracts,[Footnote 23] and (3) provided for employees at naval reactor
sites are exempted from the requirements. In addition, the studies were
not performed at six contractor sites that were closed, or nearing
completion.
DOE reimbursements of postretirement benefits at sites at which
comparison studies were not completed accounted for $105 million of the
$431 million, or 24 percent, in total contractor contributions made for
contractor postretirement benefit programs in fiscal year 2003. Figure
2 illustrates DOE reimbursements for postretirement benefits made for
fiscal year 2003 according to whether the contractor location is
subject to the comparison study provisions and the reasons DOE
officials provided for their exclusion.
Figure 2: DOE Reimbursements for Postretirement Benefits Sorted by the
Applicability of DOE Order 350.1 Comparison Studies:
[See PDF for image]
Note: Based on information provided by DOE and data in its fiscal year
2003 audited financial statements.
[End of figure]
DOE officials complete alternative monitoring procedures at some
locations where DOE Order 350.1 comparison studies are not required or
otherwise completed. Examples of these procedures include reviews of
benefit payment invoices, comparisons to other DOE contractor programs,
and review of annual actuarial calculations. CHRM also periodically
completes valuation and cost reviews at various contractor sites. CHRM
procedures include reviews of contractors' actual incurred costs for
benefits and wages; actuarial valuation and accounting reports; and
various annual pension plan reviews, such as salary replacement, plan
investment, and cash flow requirement analysis.
However, at completed or near-completed cleanup sites we found that DOE
officials did not complete comparison studies and completed limited
alternative procedures to assess the reasonableness of continuing
pension and postretirement health payments at these locations.
According to DOE officials, significant reasons for the absence of
comparison studies for post-closure benefits include the lack of
resources to perform the studies at former contractor sites that are
nearing completion and the fact that three DOE sites were closed before
the provisions of DOE Order 350.1 became applicable. Reimbursements at
these locations in fiscal year 2003 totaled $31 million and, as
previously mentioned, the postretirement benefits paid at closed
locations are anticipated to increase as additional closure sites are
completed.
Nonconformance with DOE Guidance Raises Questions about the Validity of
Comparison Study Results:
DOE Order 350.1 requires certain processes and procedures for
completing the previously discussed comparison studies. In addition,
DOE's Value Study Desk Manual[Footnote 24] describes recommended
methodologies for the completion of a benefit value study.
Collectively, the procedures and methodology outlined in DOE Order
350.1 and the Value Study Desk Manual are intended to provide
reasonable assurance that the comparison studies result in valid,
reliable, and comparable information regarding the benefits offered by
DOE contractors. To assess the studies completed by DOE contractors, we
selected 12 significant provisions from DOE Order 350.1 and the Value
Study Desk Manual and reviewed the most recently completed contractor
studies for conformance with these provisions. Our review encompassed
all 21 contractor sites subject to the comparison study provisions of
DOE Order 350.1 (18 completed benefit value studies and 3 completed
Chamber of Commerce cost studies).
Based on our review of the studies performed at contractor sites
subject to the valuation provisions of DOE Order 350.1 and the Value
Study Desk Manual, we found one or more instances of nonconformance
with required or recommended comparison study procedures at 18 of the
21 contractor sites. In summary, we found instances of nonconformance
with guidance in the following areas:
* Contractors did not follow applicable provisions for selecting and
documenting comparators used in the development of a benefit value
index (11 of 18[Footnote 25] sites completing benefit value studies).
* Contractors did not use the recommended methodologies to calculate
the results of the comparison study (10 of 21 sites completing benefit
value or cost studies).
* Contracting officers did not obtain recommended certifications from
contractors and actuarial consultants to verify data used in the
benefit value studies (16 of 18[Footnote 26] sites completing benefit
value studies).
Since the results of the benefit value comparison studies are sensitive
to the selection of a comparator group, DOE Order 350.1 and the Value
Study Desk Manual provide that the comparator group include at least 15
participants, only 20 percent of which can be other DOE contractor
sites that compete for professional level staff. Our review determined
that 11 out of 18 contractors did not properly select comparator firms
or maintain documentation on comparators in accordance with recommended
procedures in the Value Study Desk Manual.[Footnote 27] Although DOE
policies also require contracting officers to review and approve the
contractor comparator group prior to the completion of the benefit
value study, several contractors were not in compliance with this
agency procedure because they did not provide the specific
documentation recommended by the Value Study Desk Manual. This
situation may result in inconsistent criteria selection for comparators
among contractor studies.
DOE Order 350.1 requires contractor comparison studies to generate
appropriate comparison statistics. The Value Study Desk Manual
recommends that benefit value studies calculate the contractor's total
employer-paid net benefit value using a comparison to the average total
(e.g., the mean) net benefit value for the comparator group. DOE Order
350.1 requires Chamber of Commerce cost studies to calculate the
contractor's actual per capita benefits cost per employee compared to
the most recently published survey from the same benefit year. Our
review found that 10 out of the 21 contractor sites did not calculate
the desired performance measure as required or recommended by DOE
guidance. In several cases, we found that the contractor total benefit
value index was computed based on the median, not the mean, of
competitor replacement values. We also found that separate performance
measures were presented for employee groups with tiered benefits
without any indication of the total cost distribution between the
groups. The failure to calculate consistent comparison study results
makes it difficult for agency officials to compare results among sites
and correctly determine whether corrective action plans are required.
The Value Study Desk Manual also recommends that the assigned
contracting officers obtain certifications from both the contractor and
the benefits consulting group performing the comparison studies to
verify the accuracy, consistency, and validity of comparisons
completed. The certifications are key controls over the quality of the
studies. For example, they would alert contracting officers if the
contractor was to change comparator firms or valuation methodologies
and assumptions or was unable to obtain up-to-date competitor benefit
data. Our review determined that 16 out of 18 contractors that
completed a benefit value study did not submit the contractor and
actuarial certifications at the completion of the study. The absence of
these certifications can result in the improper interpretation of the
comparison study results by contracting officers.
Increased Management Review Would Help DOE Oversee Its Contractor
Employee Benefits Program:
DOE could enhance its oversight of contractor employee benefits and
address the challenges posed by the future administration of
significant post-closure benefits by providing for greater management
review of information developed at individual contractor sites and
incorporating a focus on the long-term nature of pension and
postretirement health benefits. The limited review of post-closure
benefit payments completed by contracting officers at closed sites may
make the continued decentralization of benefit program monitoring
impractical. Also, the 70-year anticipated duration for some DOE
reimbursements of contractor employee pension and postretirement health
costs earned to date needs additional consideration in DOE's
evaluations of contractor benefit costs.
DOE contracting officers are primarily responsible for determining the
allowability of DOE contractor employee benefit costs and administering
the benefits. Accordingly, DOE's current monitoring and risk assessment
process is largely performed by contracting officers who are
responsible for reviewing benefit programs at one contractor site.
Contracting officers have the ability to seek technical advice and
policy support from various DOE resources, including CHRM, OPAM, and
NNSA. DOE also maintains a Memorandum of Understanding with DOD agency
offices to provide audit services. These management offices offer, as
needed or requested, various issue-or location-specific monitoring
activities; however, they do not routinely review the results of the
monitoring and risk assessment activities of the contracting officers.
Thus, agencywide information regarding nonconformance with guidelines
for contractor employee benefit program assessments is not routinely
analyzed by management so that corrective actions can be taken.
Similarly, best practices are not routinely identified at individual
contractor sites and propagated across the agency.
Also, dissimilarities in benefit programs between contractor locations
can lead to adverse situations for the contractor benefits program as a
whole. DOE recently approved proposals submitted by contractor employee
groups at two DOE sites to enhance each group's pension benefits so
they would be comparable with the pension benefits at another DOE site.
The agency approved these benefit enhancements largely based on the
argument that doing so would retain skilled staff, even though the most
recent contractor benefit value studies indicated that these sites
already had pension and postretirement health benefit replacement
values exceeding average labor competitor programs.
The fact that some sites have closed, and others are nearing
completion, also suggests the need for more management attention to
program reviews. We found that contracting officers at several closed,
or near-completed, environmental sites did not perform comparison
studies under the provisions of DOE Order 350.1 or complete other
substantive monitoring procedures. The failure to do so was attributed
to a lack of resources. We believe that transitioning these monitoring
and risk assessment procedures to a management level that will still
exist after site closure would better position DOE to address future
challenges. Systematic monitoring reviews and risk assessments will be
necessary for post-closure benefits since DOE officials contend that
(1) current contractor pension and postretirement health plan
provisions allow for changes in postretirement benefits subsequent to
the site closure and (2) post-closure benefit payments remain subject
to compliance with DOE's guidance for comparison studies and applicable
regulations, such as the cost reasonableness provisions of the FAR.
Although the agency resources required to monitor DOD's contractor
benefits program are significantly greater than those needed at
DOE,[Footnote 28] the organizational structure at DOD provides an
example of an oversight group used to assist in compliance reviews and
risk assessment at all contractor locations. DOD provides contracting
officers significant operational support from the Defense Contract
Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA).
The two agencies provide a consistent source of routine review and
analysis of detailed benefit and cost information outside of individual
contractor locations. This group is thus able to gain broad knowledge
of contractor issues and decisions to apply a more consistent
definition of reasonableness to the evaluation of contractor benefit
costs. DOD also has formal guidance within the agency's supplement to
the FAR,[Footnote 29] which lists occurrences in postretirement health
or pension programs that indicate heightened risk and should lead a
contracting officer to request a separate in-depth evaluation of the
policies, practices, and costs of a contractor benefit component that
is performed jointly by DCAA and DCMA staff.
DOE's evaluation of total benefits in the benefit value study rather
than a review of the individual benefit components does not fully
address the differences in costs between deferred benefit programs,
such as pension and postretirement health benefits, and other benefit
components. A management focus on the long-term impacts of contractor
benefit program decisions may provide improved information for decision
makers in DOE and Congress. This information is important because
decisions on changes to pension and postretirement health benefits can
have a significant impact on DOE's long-term budgetary needs. For
example, a 1 percent increase in a contractor employee's current year
vacation benefits has less impact on DOE's long-term costs and
budgetary needs than a 1 percent increase in postretirement pension or
health benefits, which have a continuous and compounding effect as they
are paid out in each year of retirement. Nevertheless, DOE contracting
officers decide whether corrective action plans are needed largely
based on the review of the total benefit value index, which does not
take into account the differences between the total cost of pension and
postretirement health benefits and other benefit components. These cost
differences may be significant because pension and postretirement
health benefits can require DOE reimbursement long after an employee
retires.
As shown in table 4, the benefit value indexes for contractors' pension
and postretirement health benefits are significantly different from the
total benefits indexes shown in table 3. Both the pension and
postretirement health benefit indexes have larger programwide averages,
larger index ranges, and more contractors with benefit indexes outside
of DOE's target range of 5 percent above the average of selected
competitors. For example, postretirement health benefits average more
than 44 percent greater than the average of the DOE contractors'
competitors, while defined benefit pensions average 29 percent greater.
Table 4: Summary Statistics for Total Benefits, Defined Benefit Pension
Benefits, and Postretirement Health Benefits in DOE Contractor Value
Studies (Results Compared to an Average Comparator Index of 100.0):
Comparison study measures: Average;
Total benefits index: 99.8;
Defined benefit pension index: 129.0;
Postretirement health index: 144.8.
Comparison study measures: Maximum;
Total benefits index: 148.0;
Defined benefit pension index: 261.2;
Postretirement health index: 737.0.
Comparison study measures: Minimum;
Total benefits index: 71.0;
Defined benefit pension index: 75.0;
Postretirement health index: 18.6.
Comparison study measures: Number of sites with an index above 105;
Total benefits index: 5;
Defined benefit pension index: 11;
Postretirement health index: 9.
Comparison study measures: Number of sites with an index from 90 to
110;
Total benefits index: 16;
Defined benefit pension index: 2;
Postretirement health index: 2.
Source: GAO analysis.
Note: Summarizes the most recent contractor benefit value studies
submitted by DOE contractors.
[End of table]
In addition, DOE's review of current pension contributions and
postretirement health payments through the Chamber of Commerce cost
studies completed by three contractor sites is not consistent with the
long-term nature of pension and postretirement health benefits. This
inconsistency is largely due to the fact that annual employer
contributions for pension and health benefits generally do not equal
the estimated amount of postretirement benefits earned by current
employees that year, also called the annual service cost of benefits.
For example, DOE reimbursed $430 million in costs to its contractors
for pension and health plan contributions in fiscal year 2003; however,
the reported fiscal year 2003 service cost of those plans was $872
million.[Footnote 30]
It is DOE's policy to evaluate contractor requests for changes to
existing pension and postretirement health plans by reviewing total
benefit values and annual contributions, rather than total costs. DOE
Order 350.1 requires contractors to submit proposed changes to
contractor postretirement benefit programs with information on the
impact of the changes on existing comparison studies and anticipated
changes in cost. However, the order does not differentiate the annual
contractor contribution cost from the total future cost of the changes.
For example, the determination to accept proposed changes by one
contractor noted that the increase in pension liabilities caused by the
changes would not result in additional short-term reimbursements by DOE
due to the positive funded status of the plan. Furthermore, our review
of changes made to contractor postretirement benefit plans during
fiscal year 2002 revealed that 3 out of 11 contractors that submitted
changes to DOE for approval did not include either the effect of the
plan changes on comparison study results or an estimate of savings or
costs.
Conclusions:
The satisfaction of postretirement contractor benefits earned under
current and prior contracts with the government will require
significant amounts of budgetary and administrative resources to pay
and monitor the payment of these benefits long after current research
contracts and cleanup sites are terminated. Because DOE has excluded
certain contractor locations from a requirement to complete periodic
benefit valuation studies, it cannot apply a consistent evaluation of
costs for all benefit programs. Within programs required to complete
comparison studies, instances of contractor nonconformance with
policies and guidance make the results difficult to interpret and use
in making management decisions regarding the level of program benefits.
The challenges associated with administering post-closure benefits and
a lack of focus on the long-term nature of postretirement pension and
health benefit obligations exacerbate these problems. Formal management
reviews that attempt to identify and correct areas of nonconformance,
propagate best practices agencywide, and focus on long-term budgetary
needs could improve DOE's oversight of the contractor employee
postretirement benefits program.
Recommendations for Executive Action:
GAO recommends that the Secretary of Energy take the following four
executive actions:
1. Institute systematic management review of pertinent data from each
contractor location to enhance the consistency of benefit program
evaluations and reduce the instances of nonconformance with the
requirements of DOE Order 350.1 and other recommended procedures. The
intent of the management review would be to correct areas of
nonconformance, identify best practices, and disseminate this
information across the agency.
2. Extend the comparison study requirements of DOE Order 350.1, to the
extent practical, to all contractor locations with benefit obligations
to provide better information about programwide contractor employee
benefit costs.
3. In cases where the extension of the order is not practical, develop
and perform appropriate alternative procedures to provide similar
information.
4. Incorporate into DOE's oversight process a focus on the long-term
costs and budgetary implications of decisions pertaining to each
component of contractor benefit programs, especially pension and
postretirement health benefits, that have budgetary requirements beyond
the current year. This would augment the current consideration of total
annual benefit costs.
Agency Comments and Our Evaluation:
We requested and received from DOE written comments on a draft of this
report, which are reprinted in appendix III. In its comment letter, DOE
noted that our findings were consistent with those of its own internal
assessment and agreed with the report's four recommendations. DOE also
provided us with technical comments, which we have incorporated as
appropriate.
Additionally, we requested oral comments from DOD on applicable report
excerpts. DOD did not have any comments on the report.
We are sending copies of this report to appropriate House and Senate
committees; the Secretary of Energy; and the Director of the Office of
Management and Budget. We will also make copies available to others
upon request. The report is also available at no charge on GAO's Web
site at [Hyperlink, http://www.gao.gov]. If you have any questions
about this report, please contact me at (202) 512-6131. You may reach
me by e-mail at [Hyperlink, martinr@gao.gov]. Contributors to this
report are listed in appendix IV.
Sincerely yours,
Signed by:
Robert E. Martin:
Acting Director Financial Management and Assurance:
[End of section]
Appendixes:
[End of section]
Appendix I: DOE Contractor Locations with Pension and Postretirement
Health Liabilities as of September 30, 2003:
Contractor site:
Ames Laboratory;
Argonne National Laboratory;
Bettis Atomic Power Laboratory;
Brookhaven National Laboratory;
Civilian Radioactive Waste Management Program (Yucca Mountain
Project);
Fermi National Accelerator Laboratory;
Fernald Environmental Management Project;
General Electric Vallecitos Nuclear Center;
Grand Junction Sites;
Hanford Site;
Hanford Site - Hanford Environmental Health Foundation;
Idaho National Engineering and Environmental Laboratory;
Kansas City Plant;
Knolls Atomic Power Laboratory;
Lawrence Berkeley National Laboratory;
Lawrence Livermore National Laboratory;
Los Alamos National Laboratory;
Miamisburg Environmental Management Project (Mound Plant);
National Renewable Energy Laboratory;
Nevada Test Site/Naval Petroleum Reserves[Footnote 31];
Nevada Test Site - Security Services;
Oak Ridge/Paducah and Portsmouth Gaseous Diffusion Plants;
Oak Ridge Y-12 Site;
Oak Ridge Associated Universities/Oak Ridge Institute for Science and
Education;
Oak Ridge National Laboratory;
Oak Ridge - Security Services;
Pacific Northwest National Laboratory;
Pantex Plant;
Pinellas Plant;
Portsmouth Gaseous Diffusion Plant[Footnote 32];
Princeton Plasma Physics Laboratory;
Rocky Flats Environmental Technology Site/Rocky Flats Security
Services[Footnote 33];
Sandia National Laboratory;
Savannah River Site;
Savannah River Site - Security Services;
Stanford Linear Accelerator Center;
Thomas Jefferson National Accelerator Facility;
Waste Isolation Pilot Plant;
West Valley Demonstration Project.
[End of section]
Appendix II: Comparison of DOE and DOD Contractor Benefit Programs:
Both DOE and DOD manage a large number of individual contracts and
contractor operations. Both agencies also allow for the reimbursement
of annual pension and postretirement health costs and have agency
contracting officers who are responsible for reviewing these costs for
compliance with applicable regulations. However, as shown in table 5,
there are some underlying program differences that have an impact on
the way the two agencies manage their contractor benefits.
Table 5: Comparison of DOE and DOD Contractor Benefit Programs:
Program area: Ownership of operations facilities;
DOE: Employees receiving benefits are at government-owned facilities;
DOD: Majority of employees receiving benefits are at contractor-owned
facilities.
Program area: Duration of contractor/site mission;
DOE: Long-term relationships, for example, completion of environmental
cleanup tasks and ongoing research missions;
DOD: Mostly short-term relationships, for example, construction of
military equipment.
Program area: Separation of operation employee benefits from other
contractor employee programs;
DOE: Majority of plans are for DOE contract benefits only;
corporate plans require separate benefits calculations for reporting
purposes;
DOD: Employees continue to participate in existing contractor corporate
plans.
Program area: Involvement in contractor establishment and changes to
existing contractor employee benefit programs;
DOE: Contracting officers are involved in the initial approvals of
contractor benefit programs and subsequent changes to those programs;
DOD: Contractor is usually free to structure and make changes to plans,
but resulting costs are subject to review for allowability.
Program area: Segregation of operation contractor employees from other
contractor operations;
DOE: DOE contractor employees generally do not split time between DOE
and non-DOE work;
DOD: DOD contractor employees often work on DOD and other contracts
concurrently.
Program area: Extent of post-closure benefit obligations and
applicability of Cost Accounting Standards;
(CAS)[A];
DOE: DOE policies allow for contractor continuance of benefit programs
for employees who earned benefits under former contracts.[B];
DOD: DOD generally settles obligations according to CAS provisions
after the contractor ceases to perform under the contract.
Source: GAO analysis of DOE and DOD data.
[A] Section 26 of the Office of Federal Procurement Policy Act, as
amended, 41 U.S.C. § 422 (2000), requires certain contractors and
subcontractors to comply with CAS, as issued by the Cost Accounting
Standards Board. These standards are mandatory for use by all executive
agencies and by contractors in estimating, accumulating, and reporting
costs in connection with negotiated prime contract and subcontract
procurements with the government in excess of $500,000, other than
contracts or subcontracts that have been exempted by regulations.
[B] According to a DOE official, compliance with CAS standards related
to accounting for pension costs is not mandatory under DOE management
and operating or support services contracts.
[End of table]
[End of section]
Appendix III: Comments from the Department of Energy:
Department of Energy
Washington, DC 20585
APR 05 2004:
Mr. Jeffrey C. Steinhoff
Managing Director
Financial Management and Assurance
U.S. General Accounting Office
Washington, D.C. 20548:
Dear Mr. Steinhoff:
We appreciate the General Accounting Office (GAO) comprehensive review
of the Department of Energy (DOE) financial obligations for
postretirement health and pension benefits for contractor employees and
the assessment of how Departmental oversight of these benefit programs
could be enhanced. Contractor pension and postretirement health
benefits represent significant costs under DOE major facility
management contracts but, unlike pension benefits, there are no tax
favorable vehicles to prefund retiree medical benefits. In addition,
medical cost inflation has continued to increase, causing enduring cost
escalation in otherwise reasonable contractor medical benefit plans.
While we agree with the four GAO recommendations, we have enclosed
detailed comments on your draft report, Certain Postretirement Benefits
for Contractor Employees are Unfunded and Program Oversight Could Be
Improved (GAO-04-539). Our comments either clarify the Department's
position or note factual errors. We are please to note that the GAO
findings were consistent with the conclusions of a DOE internal
assessment which was completed in September 2003, and that the GAO
recommendations appear to support the corrective actions already
underway as part of the Fiscal Year 2004 Balanced Scorecard Performance
Assessment Program.
The DOE internal assessment identified Department oversight of
Contractor Human Resource costs as a significant area of concern. The
DOE conclusion that "...appropriate oversight of contractor
compensation cost, long term pension, and retiree medical liabilities
is necessary for programmatic financial planning..." mirrors the GAO
concerns for long-term liabilities associated with post closure pension
and health benefits.
We believe that completion of these management initiatives will result
in more consistent implementation of DOE contractor compensation and
benefit acquisition policy. The Department would be pleased to provide
any additional information that is desired in this matter.
Sincerely,
Signed by:
James T. Campbell:
Acting Director, Office of Management, Budget and Evaluation/Acting
Chief Financial Officer:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Robert E. Martin, (202) 512-6131:
Acknowledgments:
In addition to the individual named above, Sharon Byrd, Richard
Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Roger Thomas, and
Scott Wrightson made key contributions to this report.
(190096):
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Energy, GAO-03-100 (Washington, D.C.:
January 2003), and Contract Reform: DOE Has Made Progress, but Actions
Needed to Ensure Initiatives Have Improved Results, GAO-02-798
(Washington, D.C.: Sept. 13, 2002). U.S. Department of Energy, Office
of Inspector General, Management Challenges at the Department of
Energy, DOE/IG-0626 (Washington, D.C.: November 2003).
[2] DOE calculates the funded status of its postretirement health and
pension benefits in accordance with the accounting methodology and
assumptions prescribed in Statement of Financial Accounting Standards
(SFAS) No. 87, Employers' Accounting for Pensions, and SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions,
as issued by the Financial Accounting Standards Board (FASB).
[3] Employee pension benefits can include participation in defined
benefit and defined contribution plans; however, we use the term
pension benefits to refer to defined benefit pension benefits in this
report. For information on the differences between defined benefit and
defined contribution pension plans, please see U.S. General Accounting
Office, Answers to Key Questions About Private Pension Plans, GAO-02-
745SP (Washington, D.C.: Sept. 18, 2002), 8-11.
[4] In general, postretirement health benefits can include medical,
disability, and life insurance coverage. However, the majority of DOE
contractor postretirement costs are for retiree medical benefits;
therefore, we refer to these benefits as postretirement health benefits
in this report.
[5] The FAR provides that if the compensation costs are established
pursuant to an "arms length" labor management agreement negotiated
pursuant to the Federal Labor Relations Act or similar state statute
and are otherwise allowable, they are reasonable unless, as applied to
the work in performing government contracts, they are determined to be
unwarranted based on criteria specified in the regulation. See 48
C.F.R. § 31.205-6(b)(1) (2003). In addition, the FAR provides that if
employee compensation costs are not covered by labor-management
agreements, the compensation for each employee or job class of
employees must be reasonable for the work performed and is reasonable
if the aggregate of each measurable and allowable element sums to a
reasonable total. Factors that may be relevant to this determination
include, but are not limited to, conformity with compensation practices
of other firms: (1) of the same size, (2) in the same industry, (3) in
the same geographic region, and (4) engaged in similar nongovernment
work under comparable circumstances. See 48 C.F.R. § 31.205-6(b)(2).
[6] See app. I for a complete list of DOE contractor locations that had
recorded financial accounting liabilities for contractor employee
benefits as of September 30, 2003.
[7] Section 1013(a) of ERISA, Pub. L. No. 93-406, 88 Stat. 829, 914,
added section 412 to the Internal Revenue Code of 1954, which appears
at 26 U.S.C. § 412. Section 412 establishes minimum funding
requirements for private sector defined benefit pension plans designed
to ensure that these plans will have sufficient assets to pay the
accrued benefits of participants upon retirement. The minimum funding
rules generally require plan sponsors to contribute an annual amount to
cover the following: (1) actuarial present value of benefits attributed
by the pension benefit formula to services rendered during the plan
year, (2) amortization of past service costs, and (3) amortization of
increases in pension liabilities and experience losses. ERISA also
establishes a maximum tax-deductible limit on the required contribution
in 26 U.S.C. § 412(c)(7).
[8] Under a pay-as-you-go method, DOE only reimburses contractors for
the funds needed to meet the premium costs of current retirees'
benefits. This method can be contrasted with an accrual basis funding
method, which funds estimated amounts of future payments needed to
cover benefits earned during the current period. According to DOE
officials, one DOE contractor does fund postretirement health benefits
on an accrual-funding basis, as defined and allowed by applicable
regulations.
[9] This exchange is consistent with the provisions of SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions.
[10] Compensation programs and costs discussed in DOE Order 350.1
include employee salaries, other cash and noncash compensation, and
employee benefits programs.
[11] Contractor benefit programs, or contractor benefits, as used in
this report, includes all major nonstatutory benefit programs offered
by the contractor, such as postretirement health and pension benefits.
Contractor benefits, as used in this report, exclude statutory
benefits, such as Social Security benefits, and contractor employee
compensation, which are evaluated separately by DOE.
[12] Replacement value, in this context, indicates the amount of money
an employee would need to spend or invest in order to duplicate the
benefits provided by the employer.
[13] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[14] U.S. General Accounting Office, Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001).
[15] The unfunded balance of $13.4 billion differs from the financial
liability of $9.8 billion presented in the Consolidated Balance Sheet
of DOE's fiscal year 2003 Performance and Accountability Report. The
unfunded balance of $13.4 billion equals the financial liability of
$9.8 billion plus $3.6 billion in net losses incurred but not required
to be recorded until future periods and other adjustments as prescribed
by SFAS No. 87, Employers' Accounting for Pensions, and SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
[16] DOE calculates liabilities for contractor pension and
postretirement health benefits according to the methodology established
by FASB, which promulgates accounting rules for private sector
enterprises. DOE's costs under its commercial contracts include the
reimbursement of annual contractor employee benefits, and therefore DOE
records these obligations as if it were the plan sponsor.
[17] Actuarial calculations for postretirement benefits involve the
determination of the value, as of a specified date, of a series of
future amounts payable, adjusted to reflect the time value of money
(through discounts for interest) and the probability of payment (for
example, by means of decrements for events such as death, disability,
or withdrawal from a plan) between the specified date and the expected
date of payment.
[18] Financial liabilities for postretirement health and pension
obligations are estimated using the present value of future expected
benefit payments. When assigning postretirement benefit costs to more
than one financial statement period, interest costs are incurred due to
the passage of time. The rate used to calculate the interest costs, and
therefore adjust outstanding obligations for the time value of money,
is called the discount rate. Decreases in the discount rate result in
increases in annual financial statement benefits costs.
[19] 26 U.S.C. § 412.
[20] Favorable benefit experience can be defined as differences between
estimates of benefits earned to date by current and retired employees
and the actual postretirement benefits paid to those employees in the
future. Favorable benefit experience may also include the negotiated
settlement of benefit obligations with contractors for amounts less
than the estimated accounting obligations as measured by FASB
standards.
[21] The total settlement costs for each contractor pension plan
consist of the unfunded benefit obligation at the contract termination
date, the reimbursement of excise taxes paid by the contractor to
terminate the plan, and any additional costs or fees associated with
the purchase of insurance contracts to satisfy future payments to
employees. Contractor benefit plans that are overfunded at the
settlement date could result in the reversion of excess funds to DOE
after all costs are paid to satisfy the estimated benefit obligations.
[22] The term "corporate plan" is used within DOE Order 350.1 to
indicate the participation of DOE contractor employees in a
contractor's companywide benefits program. Contractors providing
corporate plan benefits are subject to the provisions of DOE Order
350.1; however, they are specifically exempted from the comparison
study requirements.
[23] Although the majority of DOE contracts at environmental cleanup
and research sites are for primary cleanup and research missions,
called management and operating contracts, some contracts at these
sites are support services contracts. Support services refer to those
activities that are not fundamental to the environmental cleanup and
research operations, including facilities management, security, and
health services. These contracts are generally smaller in size and
scope and were separated from larger management and operating contracts
in order to provide opportunities for smaller businesses.
[24] The Value Study Desk Manual was prepared for DOE by Buck
Consultants, Inc., and issued in February 1999. The manual is
distributed to all DOE contracting officers and contains recommended
procedures for completing DOE benefit value studies. Policies and
procedures for the completion of both the benefit value studies and the
Chamber of Commerce cost studies are also found in DOE Order 350.1.
[25] These tests were conducted for 18 of the 21 contractor sites
because the Value Study Desk Manual recommended procedure to obtain
contractor and actuarial certifications and maintain documentation for
comparator companies outside of the contractor's industry are not
applicable to the 3 contractor sites that completed Chamber of Commerce
cost studies.
[26] See footnote 25.
[27] The Value Study Desk Manual recommends that all companies selected
as comparators for the benefit value study should compete for
professional staff in the same "industry" or the contractor should
provide documentation that they have gained or lost professional staff
to the comparator firm within recent years.
[28] DOD generally maintains a shorter duration of individual
contractor operations and contractor employees usually participate in
existing corporate plans and are not separated from non-DOD contract
operations. This results in an increased need to review the allocation
of employee costs, including benefit costs, between DOD and non-DOD
contracts. See app. II for further comparisons between DOE and DOD
contractor benefit reimbursement programs.
[29] Federal agencies subject to the FAR provisions may supplement the
regulations through separately issued requirements for agency
contractors. Both DOE and DOD have issued agency supplements to the
FAR.
[30] These differences in annual postretirement benefit payments and
service costs can occur because the number of current employees earning
benefits and the cost of those benefits in any given year may not equal
the number of retirees receiving postretirement benefits and the cost
of those benefits. Differences can also occur because pension
contribution amounts required under ERISA may not equal the estimated
benefits earned by employees.
[31] DOE operations sites that include more than one contractor have
been counted as one location for purposes of this report when the
contractor benefits for multiple contractors are included in the same
DOE Order 350.1 comparison study.
[32] The obligation for postretirement benefits at this contractor site
was liquidated through a negotiated settlement in February 2004.
[33] See footnote 1.
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