Department of Energy: Certain Postretirement Benefits for
Contractor Employees Are Unfunded and Program Oversight Could Be
Improved (15-APR-04, GAO-04-539).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-539
ACCNO: A09806
TITLE: Department of Energy: Certain Postretirement Benefits for
Contractor Employees Are Unfunded and Program Oversight Could Be
Improved
DATE: 04/15/2004
SUBJECT: Budget obligations
Comparative analysis
Contractor personnel
Future budget projections
Program evaluation
Retirement benefits
Retirement pensions
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GAO-04-539
United States General Accounting Office
GAO 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
a
GAO-04-539
Highlights of GAO-04-539, a report to the Chairman, Subcommittee on Energy
and Water Development, Committee on Appropriations, House of
Representatives
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.
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.
www.gao.gov/cgi-bin/getrpt?GAO-04-539.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Robert Martin at (202)
512-6131 or [email protected].
April 2004
DEPARTMENT OF ENERGY
Certain Postretirement Benefits for Contractor Employees Are Unfunded and
Program Oversight Could Be Improved
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
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 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 postclosure benefit costs.
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
1 2 3 11
13 19
25 29 30 30
Appendixes
Appendix I:
Appendix II:
Appendix III: Appendix IV:
DOE Contractor Locations with Pension and Postretirement Health
Liabilities as of September 30, 2003
Comparison of DOE and DOD Contractor Benefit Programs
Comments from the Department of Energy
GAO Contact and Staff Acknowledgments
GAO Contact Acknowledgments 32
34
36
37 37 37
Tables Table 1: Table 2: Table 3: Table 4:
Reported Funded Status for DOE Contractor Pension and
Postretirement Health Benefits at the End of Fiscal Years
1999 through 2003 15
DOE Reimbursements for Contractor Pension
Contributions and Postretirement Health Payments for
Fiscal Years 1999 through 2003 17
Summary Statistics for DOE Order 350.1 Benefit Value and
Cost Comparison Studies (Results Compared to an
Average Comparator Index of 100.0) 20
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) 28
Contents
Table 5: Comparison of DOE and DOD Contractor Benefit Programs 35
Figures Figure 1: Relationship between DOE, Contractors, Third-Party
Administrators, and Contractor Employees 7
Figure 2: DOE Reimbursements for Postretirement Benefits Sorted
by the Applicability of DOE Order 350.1 Comparison
Studies 22
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A
United States General Accounting Office Washington, D.C. 20548
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.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
1U.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).
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.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
2DOE 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).
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
longterm 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 pension3 and
postretirement health4 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
3Employee 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.
4In 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.
other things, reasonable,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.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).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.
5The 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. S:
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. S: 31.205-6(b)(2).
6See 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.
7Section 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. S: 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. S:
412(c)(7).
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-go8 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.
8Under 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.
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.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.
9This 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.
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.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,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.
10Compensation programs and costs discussed in DOE Order 350.1 include
employee salaries, other cash and noncash compensation, and employee
benefits programs.
11Contractor 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.
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 value12 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.
12Replacement 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.
Scope and Methodology
To analyze the agency's estimated financial liability for contractor
employee pension and postretirement health obligations, we
o obtained audited financial reports and disclosures on contractor
employee postretirement benefit obligations for fiscal years 1999 through
2003,
o interviewed DOE officials from the Office of Finance and Accounting
Policy and CHRM regarding the character of obligations at DOE research and
cleanup sites,
o reviewed actuarial computations of DOE contractor benefit obligations
to determine how obligations at cleanup sites were adjusted for expected
site closure dates, and
o 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
o reviewed DOE Order 350.1 and other agency policy and procedure guidance
related to the completion of contractor comparison studies,
o interviewed DOE officials from CHRM to determine procedures used to
assess the quality of the contractor comparison studies,
o 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
o 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 upto-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
o reviewed the FAR and other applicable standards related to allowable
pension and postretirement health costs under contracts with commercial
organizations;
o determined applicable internal control procedures for DOE's contractor
benefits program using our Standards for Internal Control in the
Federal Government13 and Internal Control Management and Evaluation
Tool;14
o 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
o 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
13U.S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
14U.S. General Accounting Office, Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001).
September 30, 2003, totaled $13.4 billion.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.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 actuarial17
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
15The 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.
16DOE 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.
17Actuarial 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.
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 rates18 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
Dollars in billions
Fiscal year-end
Pension funded status
Postretirement health funded status Total funded status
2003 ($3.7) ($9.7) ($13.4)
2002 ($1.0) ($8.3) ($9.3)
2001 $5.1a ($6.8) ($1.6)
2000 $10.2 ($5.4) $4.8
1999 $8.2 ($4.6) $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.
aA positive funded status indicates an excess of the fair value of
dedicated assets over estimated benefit obligations.
18Financial 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.
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
Fiscal year-end
Pension contributions
Postretirement health payments
Total contributions and payments
2003 $167 $264 $431
2002 $75 $243 $318
2001 $43 $226 $269
2000 $58 $205 $263
1999 $61 $181 $242
Source: DOE.
Note: Information from DOE Performance and Accountability Reports for
fiscal years 1999 through 2003.
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.19 In any
case, the reported $13.4 billion unfunded balance will, eventually,
require additional contributions, investment gains, or favorable benefit
experience20 within existing pension and postretirement health plans in
order to satisfy future benefits when they come due.
Post-Closure Benefit While DOE fiscal year 2003 reimbursements of
postretirement benefits to Obligations Will Increase contractors
administering benefits following site closure totaled only with Continuing
approximately $6 million, future amounts will significantly increase with
continuing environmental site closures. DOE has indicated that the
agencyEnvironmental Site is scheduled to close several environmental
cleanup sites within the next Closures few years. Contractor employee
postretirement benefits at these sites had
total unfunded balances in excess of $1.5 billion as of September 30,
2003.
1926 U.S.C. S: 412.
20Favorable 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.
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 costs21 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:
21The 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.
o 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.
o 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.
o The continuation of postretirement benefits through another contractor
or a third party requires DOE to pay for the allowable administrative
expenses of these activities.
o 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)
Total benefits Comparison study measures index
Average
Maximum 148.0
Minimum
Number of sites with an index above 105a
Number of sites with an index from 90 to 110 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.
aDOE'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).
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,22 (2) reimbursed under support contracts,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
22The 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.
23Although 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.
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
Source: GAO analysis.
Note: Based on information provided by DOE and data in its fiscal year
2003 audited financial statements.
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 Manual24 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:
o Contractors did not follow applicable provisions for selecting and
documenting comparators used in the development of a benefit value index
(11 of 1825 sites completing benefit value studies).
24The 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.
25These 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.
o 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).
o Contracting officers did not obtain recommended certifications from
contractors and actuarial consultants to verify data used in the benefit
value studies (16 of 1826 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.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
26See footnote 25.
27The 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.
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,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,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
28DOD 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.
29Federal 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.
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)
Total benefits Defined benefit Postretirement
Comparison study index pension index health index
measures
Average 99.8 129.0 144.8
Maximum 148.0 261.2 737.0
Minimum 71.0 75.0 18.6
Number of sites with an
index
above 105 5 11
Number of sites with an
index
from 90 to 110 16 2
Source: GAO analysis.
Note: Summarizes the most recent contractor benefit value studies
submitted by DOE contractors.
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
longterm 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.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
30These 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.
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.
2.
3.
4.
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.
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.
In cases where the extension of the order is not practical, develop and
perform appropriate alternative procedures to provide similar information.
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 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
Our Evaluation 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
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
[email protected]. Contributors to this report are listed in appendix IV.
Sincerely yours,
Robert E. Martin Acting Director Financial Management and Assurance
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 Reserves1
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 Plant2
Princeton Plasma Physics Laboratory
1DOE 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.
2The obligation for postretirement benefits at this contractor site was
liquidated through a negotiated settlement in February 2004.
Appendix I
DOE Contractor Locations with Pension and
Postretirement Health Liabilities as of
September 30, 2003
Rocky Flats Environmental Technology Site / Rocky Flats Security
Services3
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
3See footnote 1.
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.
Appendix II Comparison of DOE and DOD Contractor Benefit Programs
Table 5: Comparison of DOE and DOD Contractor Benefit Programs
Program area DOE DOD
Ownership of operations Employees receiving Majority of employees
facilities benefits are at government-receiving benefits are at owned
facilities. contractor-owned facilities.
Duration of contractor / site Long-term relationships, for Mostly
short-term
mission example, completion of relationships, for example, environmental
cleanup construction of military tasks and ongoing research equipment.
missions.
Separation of operation Majority of plans are for Employees continue to
employee benefits from other DOE contract benefits only; participate in
existing contractor employee corporate plans require contractor corporate
plans. programs separate benefits
calculations for reporting
purposes.
Involvement in Contracting officers Contractor is usually
contractor are free to
establishment and involved in the structure and make
changes initial changes
to existing contractor approvals of to plans, but resulting
contractor costs
employee benefit benefit programs and are subject to review
programs for
subsequent changes allowability.
to
those programs.
Segregation of operation DOE contractor employees DOD contractor employees
contractor employees from generally do not split time often work on DOD
and other contractor operations between DOE and non-other contracts
concurrently.
DOE work.
Extent of post-closure benefit DOE policies allow for DOD generally
settles obligations and applicability contractor continuance of
obligations according to of Cost Accounting benefit programs for CAS
provisions after the Standards employees who earned contractor ceases to
(CAS)a benefits under former perform under the contract.
contracts.b
Source: GAO analysis of DOE and DOD data.
aSection 26 of the Office of Federal Procurement Policy Act, as amended,
41 U.S.C. S: 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.
bAccording 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.
Appendix III
Comments from the Department of Energy
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.
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