Pension Benefit Guaranty Corporation: Contract Management Needs
Improvement (Testimony, 09/21/2000, GAO/T-HEHS-00-199).

Pursuant to a congressional request, GAO discussed the Pension Benefit
Guaranty Corporation's (PBGC) management of its contracting
responsibilities, focusing on: (1) the basis for PBGC's decisions
regarding the use of contractors versus government personnel to address
its workloads; (2) PBGC's processes and procedures for selecting
contractors; and (3) how effective PBGC has been in monitoring the
performance of its contractors.

GAO noted that: (1) PBGC's contracting decisions and its organizational
field structure have been heavily influenced by the need to service
rapidly increasing workloads within existing federal staffing
limitations; (2) because PBGC's focus was on obtaining needed staff
quickly, it has not linked its contracting decisions to workload trends
or strategic planning considerations and could be unprepared for future
work environment changes; (3) GAO also identified weaknesses in PBGC's
procurement planning and execution processes; (4) in particular, PBGC's
consolidation of three formerly separate field office services
procurements was not supported by a sound business rationale and may
have limited competition; (5) for several other field office
procurements, PBGC should have done more to stimulate competition by
conducting market research to identify additional potential offerors;
(6) in reviewing several other contracts, GAO identified additional
weaknesses, including the need for PBGC to better document its basis for
contractor awards and use more fixed-price rather than labor-hour
contracts, which carry more cost and quality assurance risks; and (7)
GAO also identified contractor oversight problems, including a lack of
centralized data essential to monitoring contractor performance and
deficiencies in PBGC's quality assurance review process.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-00-199
     TITLE:  Pension Benefit Guaranty Corporation: Contract Management
	     Needs Improvement
      DATE:  09/21/2000
   SUBJECT:  Pensions
	     Contract oversight
	     Source selection
	     Human resources utilization
	     Procurement planning
	     Contract performance
	     Procurement practices

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GAO/T-HEHS-00-199

   * For Release on Delivery
     Expected at 9:30 a.m.

Thursday, September 21, 2000

GAO/T-HEHS-00-199

PENSION BENEFIT GUARANTY CORPORATION

Contract Management Needs Improvement

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Statement of Barbara D. Bovbjerg, Associate Director

Education, Workforce, and Income Security Issues

Health, Education, and Human Services Division

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Testimony

Before the Special Committee on Aging and the Committee on Small Business,
United States Senate

United States General Accounting Office

GAO

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Pension Benefit Guaranty Corporation: Contract Management Needs Improvement

Mr. Chairman and Members of the Committees:

I am pleased to be here today to discuss the Pension Benefit Guaranty
Corporation's (PBGC) management of its contracting responsibilities. PBGC is
a self-financing government corporation that insures defined benefit pension
plans and assumes administration of those plans that either terminate or
become insolvent. In fiscal year 1999, about 215,000 retirees received over
$902 million in benefit payments from PBGC. To service its workloads, PBGC
relies heavily on the services of contractors whose employees account for
almost half of its workforce. In fiscal year 1999, about $100 million of
PBGC's $160 million budget was used to pay for contracting and related
expenses.

Due to the number of contractors involved in supporting PBGC's mission, you
asked us to (1) determine the basis for PBGC's decisions regarding the use
of contractors versus government personnel to address its workloads, (2)
assess PBGC's processes and procedures for selecting contractors, and (3)
determine how effective PBGC has been in monitoring the performance of its
contractors. Today I will discuss the findings of our report, which was
released today, and the broader management issues that could affect PBGC's
ability to efficiently and cost effectively serve the needs of pension plan
participants. Additional operational issues pertaining to PBGC's day-to-day
management of specific contracts are discussed in more detail in our full
report.

In summary, our work shows that PBGC's contracting decisions and its
organizational field structure have been heavily influenced by the need to
service rapidly increasing workloads within existing federal staffing
limitations. Because PBGC's focus was on obtaining needed staff quickly, it
has not linked its contracting decisions to workload trends or strategic
planning considerations and could be unprepared for future work environment
changes. We also identified weaknesses in PBGC's procurement planning and
execution processes. In particular, PBGC's consolidation of three formerly
separate field office services procurements was not supported by a sound
business rationale and may have limited competition. For several other field
office procurements, PBGC should have done more to stimulate competition by
conducting market research to identify additional potential offerors. In
reviewing several other contracts we identified additional weaknesses,
including the need for PBGC to better document its basis for contractor
awards and use more fixed-price rather than labor-hour contracts, which
carry more cost and quality assurance risks. We also identified contractor
oversight problems, including a lack of centralized data essential to
monitoring contractor performance and deficiencies in PBGC's quality
assurance review process.

In response to our review and report recommendations, PBGC plans to act in
several areas to better manage its contracting activities and ensure that
competition and oversight are strengthened. It is important that PBGC
sustain its efforts and fully implement those actions to address the
problems we identified. I will also note that during our review, we obtained
other information and documents regarding PBGC's procurements that appeared
to involve possible improprieties. Accordingly, we referred this information
to our Office of Special Investigations (OSI); the results of OSI's
investigation are being reported separately.

Background

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The Employee Retirement Income Security Act of 1974 created PBGC as a
self-financing, nonprofit, wholly owned government corporation. PBGC
protects participants in private pension plans from losing promised benefits
due to the termination of underfunded plans. PBGC's work is performed at its
Washington, D.C., headquarters, and at 11 contract office locations
throughout the country. PBGC's primary responsibilities are to collect
premiums from sponsors of defined benefit pension plans to insure against
default and to assume administration of plans that terminate or become
insolvent. In the event of plan default, PBGC assumes control of plan
assets, calculates benefit amounts, and pays pension plan beneficiaries.

Over the years, PBGC's workloads have grown significantly. In fiscal year
1975, PBGC administered three pension plans with a total of 400
participants. By last year, PBGC had assumed responsibility for more than
2,700 pension plans with a total of more than 500,000 participants. To
address its workloads in fiscal year 1999, PBGC relied on 754 federal
employees and 680 staff employed by contractors. A total of 240 contractor
employees are located at PBGC's 11 field benefit administration (FBA)
offices. PBGC's procurement activities pertaining to benefit processing and
administration services are not bound by the Federal Acquisition Regulation
(FAR). However, as a matter of policy, PBGC voluntarily abides by FAR in
procuring all goods and services.

PBGC is self-financing in that it receives no general revenues. Its
operating budget is financed by insurance premiums paid by plan sponsors and
trust assets. Although it does not receive general revenues, the portion of
its budget allocated to administrative expenses has been subject to a
statutory limitation since 1985. The Congress revised this limitation in
1989 and in 1992 to provide PBGC more flexibility to address the rapid and
often unexpected workload increases that followed several large pension plan
failures. The revisions exempted from limitation all expenses incurred by
PBGC in connection with the termination and management of pension plans, and
provided PBGC with the discretion to determine which functions and
activities qualified as nonlimitation expenses. Over time, PBGC has expanded
the range of activities and functions classified as nonlimitation expenses,
and currently uses these resources to fund nearly all contractor positions
and related costs. This has resulted in a steep increase in PBGC's
nonlimitation budgetwhich is primarily subject to review and approval by the
Office of Management and Budget (OMB) rather than the Congressfrom $29
million in fiscal year 1989 to $149 million in fiscal year 1999. During the
same period, PBGC's limitation budget, which receives both OMB and
congressional review and approval, decreased from $40 million to $11
million. By fiscal year 1999, only 75 federal employees were funded out of
the limitation budget while the remaining 1,359 federal and contractor
employees were funded out of the non-limitation budget (see fig.1).

Figure 1: PBGC Limitation/Nonlimitation Budget, Fiscal Years 1975-1999
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PBGC Contracting Decisions Reflect Past Short-Term Needs

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PBGC's contracting decisions and its organizational structure have been
heavily influenced by the need to service dramatic and often unexpected
workload increases while adhering to staffing limitations. Beginning in the
mid-1980s, several large unexpected bankruptcies-including those of LTV
Steel, Wheeling Pittsburgh Steel, Eastern Airlines, and Pan American
Airlinescontributed to more than doubling the number of PBGC pension plan
participants from 170,000 to nearly 400,000. Rather than repeatedly seeking
significant increases in federal staff during a period of government
downsizing, PBGC turned increasingly to contractors to provide services.
More specifically, PBGC often entered into sole-source contracts with
existing pension office administrators from the insolvent companies to take
advantage of their familiarity with plan provisions as well as their
office's physical proximity to plan records and participants. Over the
years, 11 field office contractors have remained with PBGC to perform
benefit administration services for other insolvent plans as they were
terminated and trusteed. Staffing at these offices has also nearly doubled
in the last 5 years. Thus, with no apparent linkage to agency strategic
planning or an assessment of how PBGC should be organized for maximum
efficiency, these offices have become PBGC's field structure.

Because PBGC's focus was on obtaining needed staff quickly, it has not
performed a comprehensive analysis of the costs and benefits of using
contractors versus federal employees to service its workloads. Nor has PBGC
taken actions to reassess its contracting and organizational structure needs
against projected future workload changes. In the absence of such
activities, PBGC has operated for many years without reasonable assurance
that it has a cost beneficial mix of federal and contractor employees.

Potential changes in PBGC's workloads attributable in part to increased
productivity, economic trends, changes in pension laws, and enhanced plan
funding suggest that PBGC should reexamine its approach to the acquisition
of contract services and better link its activities to long-term strategic
planning. For example, PBGC has reduced its inventory of pending benefit
determinations from a high of 300,000 in fiscal year 1994 to about 190,000
in fiscal year 1999. PBGC expects to eliminate this backlog and reach a
working inventory of 120,000 cases in less than 5 years (see fig. 2).

As PBGC moves into an era of more real-time processing of benefits, changes
in staffing levels and its organizational structure may be necessary.
Several other factors may also affect PBGC's future workloads, including the
corporation's improved ability to target underfunded plans and get them to
improve their financial positions, thereby averting plan failures. The
universe of defined pension plans insured by PBGC has also decreased
dramatically in recent years. This has been accompanied by a decrease in the
number of active plan participantsthose currently earning pension accruals,
and considered by PBGC to be a better measure of future workloads. Finally,
the number of new plans taken over by PBGC each year has also steadily
decreased (see fig. 3). If the above trends continue, PBGC's exposure to
future pension plan failures and accompanying workloads should be reduced.

Figure 2: Pending Benefit Determinations, Fiscal Years 1990-1999
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Figure 3: New Pension Plans Trusteed by PBGC, Fiscal Years 1990-1999

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Our prior work on human capital planning suggests that planning strategies
should be linked to current and future human capital needs, including the
size of the workforce and its deployment across the organization. Staff
deployment should also be linked to mission accomplishment and provide for
efficient, effective, and economical operations. In the absence of such
analyses, PBGC lacks a blueprint as to how it should organize its
contractors and federal staff to cost effectively meet the needs of current
and future pension plan participants. PBGC is also giving inadequate
consideration to the longer-term effects of its contracting decisions. For
example, last year, PBGC initiated a policy change to allow all contract
field offices to perform ongoing administration for their closed plans.
Prior to this change, ongoing administrationwhich generally involves routine
maintenance for plans in which all final benefit determinations have been
issuedfor hundreds of closed plans was consolidated primarily at two
designated field offices. An official at one of the largest field offices
told us that, without the new ongoing administration workloads or a
significant influx of new plans, the office would likely have insufficient
work in the future to continue operations.

During our review, PBGC management acknowledged that it had not focused on
the long-term effects of allowing more contractor offices to perform routine
maintenance services. However, they assured us that PBGC would continue to
transfer closed plans to the two designated ongoing administration offices
in all but very limited circumstances. Despite these assurances, we are
concerned that this policy change was made without sufficient analysis of
future workload trends and has the potential to unnecessarily perpetuate the
existence of some field office contracts if the influx of new plans trusteed
by PBGC levels off in the future.

In responding to our recommendation, PBGC also agreed that a strategic
workforce planning study is necessary and said it intends to engage an
independent outside organization to conduct such a review within the next
year. We believe this type of analysis and the contingency planning that
should flow from it is a positive first step toward positioning PBGC to make
systematic and orderly changes to its future workforce and organization
while still meeting the needs of recipients.

PBGC's Procurement Practices Have Weaknesses

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Our review of PBGC's most recent FBA services procurements identified
weaknesses in its procurement planning and execution processes that could
affect competition and result in PBGC's paying too much for procured
services. Specifically, PBGC lacked a sound business rationale to support
its approach for consolidating procurements for services at three field
office locations and may have limited competition. PBGC also should have
done more to stimulate competition for its other field office services
procurements. In reviewing several other contracts, we identified additional
weaknesses, which are discussed below.

Procurements for Benefit Administration Services Were Not Consistently
Structured

As noted previously, PBGC currently has 11 contracts for FBA services
requirements. The first competitive procurement for these services occurred
in 1997, when PBGC competed the requirements for services at four field
officesMiami, Atlanta, Wheeling, and Wilmington. Together, these contracts
totaled about $71 million. At that time, a single large contractorOffice
Specialists, Inc.was incumbent at the Miami, Atlanta, and Wheeling offices.
A second contractorBenefit Services Unlimitedwas incumbent at the Wilmington
office. Rather than compete the services for each of these offices
separately, PBGC consolidated the Miami, Atlanta, and Wheeling service
requirements into a single procurement. The services for the Wilmington
location were excluded from the consolidated procurement and competed
separately. These procurement actions resulted in PBGC awarding the $47
million, three-site contract to Office Specialists, Inc., and the $24
million Wilmington contract to Benefit Services Unlimited, leaving the
incumbent contractors in place for all four locations.

PBGC's Procurement Director indicated that a factor in PBGC's decision to
consolidate the Miami, Atlanta, and Wheeling field office services
requirements was the existence of qualified staff already working at the
three locations. He also stated that requiring the successful offeror to
perform at all three locations would not tend to restrict competition.
However, he acknowledged that the services for the Wilmington site were
excluded from the consolidated procurement so that the incumbent contractor
would not be precluded from competing.

In general, federal procurements are to be conducted using full and open
competition and solicitations are permitted to contain restrictive
conditions only to the extent necessary to satisfy the needs of an agency.
Because consolidated procurements combine separate requirements into one
award, they have the potential to restrict competition by excluding
potential competitors that can furnish only a portion of the requirement.
Therefore, consolidated procurements must be based upon sound business
reasons supporting the conclusion that the government's overall needs can be
most effectively provided through such an approach. In sum, PBGC's reasons
for combining requirements should have been balanced against the possible
restriction of competition.

Based on our work, we believe PBGC's conduct of these procurements showed
weaknesses in its procurement planning and execution practices. In
particular, PBGC did not provide a sound business rationale for why the
consolidation of the Miami, Atlanta, and Wheeling requirements was necessary
to meet its needs. Nor did it establish that the combination supported any
plans or goals of the corporation. In addition, PBGC's explanation for
combining the three requirements and its explanation for excluding the
fourth were inconsistent in contending that the consolidated procurement
would not tend to affect competition, while acknowledging that a four-site
procurement that included the Wilmington location would have affected the
smaller contractor's ability to compete.

Although PBGC did receive several offers for these contracts, our work also
showed that two additional companies were interested in competing to provide
services at one of the three offices for which services were consolidated.
PBGC rejected the first company's proposal because it offered to provide
services for the Atlanta location only. Managers of the second companya
current field office contractortold us that they would have competed for
services at a single location had that option been available. However, this
contractor decided not to submit an offer due to the size of the combined
workload and potential management difficulties associated with a multisite
contract. Thus, PBGC's conduct of these procurements may have limited
competition. Consequently, PBGC risked paying too much for contracted
services and receiving inferior performance.

Competition for Sole-Source Benefit Administration Services Contracts Could
Be Improved

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PBGC also should have done more to stimulate competition for its remaining
sole-source field office procurements. While PBGC competed four of its field
office services requirements in 1997, it continued its practice of making
sole-source awards for its seven other field office contracts. PBGC's
rationale for continuing this practice was that the incumbent contractors,
as former pension plan administrators of companies from which their primary
plans emanated, were uniquely qualified to perform the work because of their
knowledge of the primary plan.

In reviewing the procurement files for the Pueblo, Sarasota, and Cleveland
offices, we confirmed that the principals/owners were former benefit
administrators for the primary plans under administration, and were still
servicing these plans. However, over several years, these contractors had
made considerable progress toward completing work on their primary plans and
had assumed benefit administration responsibility for numerous additional
pension plans beyond their original area of expertise. In fact, one contract
office had a total of 15 additional trusteed plans from various companies
and thousands of new participants under its administration.

When a contracting entity uses noncompetitive procedures, it must execute a
written justification that includes sufficient facts and rationale to
justify its use of those procedures. The justification must also include a
description of any market survey conductedor why one was not conductedand a
statement of actions the agency may take to remove barriers to competition
in the future. For those contract files we reviewed, PBGC's written
justification notes that no statements of interest were received from other
potential offerors in response to its Commerce Business Daily (CBD) notice
of its intent to award the sole-source contracts. It also notes that PBGC
was unaware of any specific barriers to competition that could be overcome
with respect to this requirement.

Although PBGC published a CBD notice of these awards, we found no indication
that PBGC ever acted to enhance competition by conducting outreach or market
research activities to identify other potential offerors capable of
performing the required services. In prior work, we have reported that such
activities have been effective in stimulating competition. Even though,
procedurally, the CBD notice may serve the purpose of a market survey, PBGC
should have done more to monitor the marketplace and foster competition
through outreach efforts. PBGC's actions in continuing to award these
contracts noncompetitively for almost a decade could have affected its
ability to obtain the best value for the services procured.

Consistent with our recommendations, PBGC now plans to separately compete 10
field office services requirements next year. It has also agreed that
additional outreach and market research efforts could enhance its
competitive processes.

Additional Observations on PBGC Contractor Selection Practices

Our review of PBGC's contracting practices also identified other management
and operational weaknesses associated with contracts let by the chief
financial officer (CFO) component, which is the second-largest user of
contractor services at PBGC. For example, PBGC should have more fully
documented its basis for awarding an $18 million information resources
management contract for systems engineering and a $1.5 million investment
management contract. PBGC's internal guidance at the time of the
procurements provided for the establishment of a technical evaluation panel
to assess contractor proposals and make selection recommendations to the
Procurement Director. Each panel member was required to identify and
document the strengths and weaknesses of all proposals reviewed. To assist
in their analysis, members could, but were not required to, prepare
individual scoresheets to document how they rated each proposal.

The procurement files we reviewed included the technical scores for the
offerors under consideration as well as a final selection recommendation
from the panel chairperson. However, they did not include a complete set of
individual panel members' scoresheets documenting their review and rationale
for arriving at a particular score. For the investment management contract,
only two of seven panel members submitted individual scoresheets and some
analysis of the specific strengths and weaknesses of proposals. With only
the final numeric scores, the record lacked information concerning the
panel's basis for determining contractor qualifications and issuing its
final selection recommendations. Thus, we could not determine whether final
award decisions were based on a thorough assessment of each offeror's
proposal by all members.

We also reviewed five contracts for premium compliance audit services. For
these contracts, audit firms perform reviews of companies that pay insurance
premiums to PBGC to ensure that premium amounts paid are correct. In fiscal
year 1999, PBGC received $925 million in premium collection income from
pension plan sponsors.

Our analysis of these contracts showed that PBGC should give stronger
consideration to using fixed-price contracts rather than labor-hour
contracts for these services. Fixed-price contracts generally involve a firm
price for performing a particular service, regardless of how long it takes.
Labor-hour contracts provide for payment of contractors at hourly rates for
performing agreed-upon tasks. Labor-hour contracts also generally require
detailed reviews of the hours charged by contract staff and close monitoring
to ensure that quality and timeliness requirements are met. Otherwise, an
organization risks paying a higher price than it would under a fixed-price
arrangement, as well as receiving poor performance. As of June 2000, about
60 percent of PBGC's active contracts involve labor hour pricing.

When acquiring services that previously have been provided by contract, the
Office of Federal Procurement Policy notes that agencies should rely on the
experience gained to facilitate the use of fixed-price contracts for such
services. Prior to entering into the current contracts in 1997, the
incumbents performed similar work for PBGC under purchase order agreements.
Thus, PBGC had actual experience in pricing these contracts. Based on this
information, PBGC calculated a potential fixed price of between $3,400 and
$8,000 for each audit completed. A fixed-price contract was originally
solicited by PBGC and the five firms submitted offers. However, PBGC later
made a determination that a labor-hour payment arrangement would be more
effective to accommodate the variable level of effort needed to complete the
audits.

Our review showed that, after the contracts were awarded, PBGC experienced
performance problems with several of the contractors. PBGC subsequently
opted, after 15 months, not to continue its relationship with two of the
firms. Documents we obtained showed that PBGC paid one of these contractors
$210,000 to complete three auditsabout $70,000 per auditwhich resulted in
$2,000 in additional collections. In contrast, PBGC's highest-producing
contractor performing similar services completed 27 audits with $1.3 million
in additional collections at an average cost of $6,600 per plan. Thus, PBGC
could have paid much less than $210,000 under the fixed-price arrangement
originally proposed. In addition, a second contractor has been referred to
PBGC's OIG for investigation of potential contract billing irregularities.
In light of the performance issues surrounding these contracts, and the fact
that PBGC had a basis to award them as fixed-price contracts, PBGC should
give stronger consideration to using fixed prices in similar situations.

Contract Oversight Practices Need Improvement

Contract oversight primarily involves monitoring performance. In recent
years, PBGC has taken actions to better support its field office
contractors. For example, in 1993, PBGC reorganized its benefit
administration operations to implement team case processing so that
auditors, actuaries, and benefit administrators in both headquarters and the
field are deployed in teams to process benefits. This replaced
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sequential processing, in which cases were handed off between various
components as discrete tasks were completed. PBGC has also made significant
investments in automation and centralized several functions previously
handled by the field offices to allow staff to focus primarily on processing
benefit determinations. However, we identified several key management
weaknesses that could affect PBGC's ability to monitor and hold contractors
accountable for performance.

PBGC Does Not Centrally Compile and Monitor Automated Data on FBA Office
Performance

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In order to undertake a comparative analysis of field office productivity,
we requested data from PBGC to document the range of activities and volume
of work processed by these offices. However, field office data essential to
overseeing and managing performance are not centrally compiled and monitored
by PBGC. Instead, PBGC generally compiles data on work processed by each
officesuch as final benefit determinationson a plan-specific basis. This
information is then included in the productivity data for PBGC's eight
headquarters processing divisions. Thus, a field office with 30 pension
plans could report to several processing divisions and its workload outputs
would be included within the productivity totals of each of those divisions.
As a result, PBGC lacks centralized field office performance data and
reports necessary for quickly providing top management with a snapshot of
office productivity as pension plans move through the various stages. The
commingling of data, and the fact that field office productivity is reported
on a plan-specific basis, make it difficult for PBGC to ensure that its
contract field offices are performing efficiently and effectively.

Individual offices maintain internal productivity information to assist in
managing their workloads, such as the number of benefit determinations
processed, death notices recorded, address changes completed, plans closed
out, and so forth. However, the extent and detail of data vary among the
offices. We believe thatif uniformly compiled and monitoredadditional
automated data would provide PBGC with information needed to compare office
productivity and performance over time, monitor a specific office's
performance against prior months and years, more quickly determine work
progress, and identify and track workload backlogs. Field-office-specific
data would also allow PBGC to evaluate the effects of special management
initiatives on other workloads, such as a recent PBGC mandate to complete
all pre-1994 pending benefit determinations by the end of fiscal year 1999.
PBGC's Office of Inspector General (OIG) has reported that PBGC's emphasis
on processing benefit determinations may have caused final plan closings to
receive less priority. The OIG also concluded that completing this step was
important because it allowed PBGC to ensure that all final benefit
determinations for a plan were issued. Because no field-office-specific data
on plan closures are centrally compiled or monitored by PBGC, it lacks
information that top management could use to assess the effect of this
directive on other workloads.

PBGC has agreed, as we recommended, to develop additional performance
information for its field office contractors. These steps should provide
PBGC with better management information to establish more meaningful future
field office performance goals and measures.

Performance Review Process for Field Offices May Not Adequately Ensure Work
Quality

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PBGC requires its field office contractors to undergo regular performance
reviews to help ensure that proper internal controls are in place and that
workloads are processed in a complete, accurate, and timely manner. However,
our analysis identified continuing weaknesses in the review process that may
affect PBGC's ability to manage contractor performance.

In 1995, its OIG reported that PBGC's performance reviews were not performed
in accordance with government auditing standards and often resulted in
flawed recommendations. This report also concluded that PBGC seemed to
excuse poor field office performance. Our review identified continuing
problems. PBGC's procedural manual states that the reviews are based on
government auditing standards and that review team members are required to
meet general standards for independence, qualifications, due professional
care, and quality control. Despite these requirements, key headquarters
staff and managers told us that the reviews had limited impact on improving
field office performance because management often did not support efforts to
identify weaknesses and hold the offices accountable for negative findings.
Others noted that team leaders and members often lacked sufficient training
and expertise to perform the reviews.

We also obtained an internal Management Report prepared by PBGC last year
affirming that the reviews continued to show weaknesses in meeting auditing
standards and could facilitate internal control weaknesses and poor product
quality. The report specifically noted that some components rotated
experienced personnel out of the review function each year, and assigned
individuals with insufficient experience and training to lead roles. In
fact, out of 22 field office reviews completed by PBGC, nearly one-third
were led by individuals who had never before participated in a review. The
report also cited frequent instances of poor quality control and of reports
and work papers being returned for significant additional development, even
though they had been reviewed and approved by team supervisors. It also
concluded that resources devoted to reviews may be insufficient to ensure
quality. Citing feedback from various review teams, the report also pointed
out that corners would be cut when PBGC's work priorities dictated.

PBGC should act quickly to address the weaknesses in its performance reviews
of field office contractors. An effective quality control system is
particularly important, considering that PBGC recently completed its
initiative to issue final benefit determinations for plans trusteed prior to
1994. During our field visits, contractor management commonly referred to
this initiative as a major undertaking with tight time frames. Individuals
from several offices also noted that pressure to process this workload may
have negatively affected the accuracy of benefit calculations and quality of
notices sent to participants. Thus, it is important that PBGC have an
adequate review process in place to detect errors resulting from this
effort.

We have recommended that PBGC take action to strengthen its performance
review process to better ensure that its contractors meet quality and
accuracy requirements. PBGC has agreed to strengthen its quality assurance
processes, by ensuring that trained and experienced staff are assigned to
the reviews and taking other actions.

Individuals Responsible for Contractor Oversight Lack Sufficient Guidance

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Primary responsibility for oversight of PBGC's contracts lies with more than
69 contracting officer's technical representatives located throughout PBGC
and five contract specialists within the Procurement Department. Despite the
importance of these individuals to monitoring and ensuring contractor
performance, we found that PBGC has not developed a comprehensive set of
policies and procedures to guide them in their day-to-day activities. The
Procurement Department maintains a limited policy and procedure manual which
serves as the primary guide to contractor selection and oversight. However,
the Director often supplements this document with ad-hoc directives,
e-mails, and standalone memorandums to address contracting issues and
problems as they arise. Because PBGC has never compiled these informal
policy clarifications and directives into its departmental manual, it lacks
a comprehensive set of standard operating procedures to guide staff in
addressing common contract oversight problems.

During our review, staff involved in contract oversight management expressed
a need for additional policy and procedural guidance and training beyond
what is currently provided by PBGC. In the absence of more specific
procedures, some staff have chosen to rely on their own judgment or on
advice from coworkers for policy and procedural interpretations and spend
significant time seeking guidance for issues such as when contracts should
receive legal review or what to do with pension files after plans are
closed. We also found that staff and managers sometimes received conflicting
directions, which could ultimately lead to inconsistent administration
practices and to contractor performance problems.

Organizational Placement of Review Function Could Have Contract Management
Implications

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Our work also shows that the independence and objectivity of PBGC's
Contracts and Controls Review Department (CCRD) could be negatively affected
by its position in PBGC's organizational structure.

The CCRD was established by PBGC's deputy executive director and CFO in 1994
to perform contract cost audits and internal control reviews of PBGC's
departments and programs. Auditing standards require the audit organization
and individual auditors to be organizationally independent. However, because
the director of CCRD reports directly to the CFO, any internal reviews of
departments and programs located under this component cannot be considered
independent. CCRD management told us that any reports or reviews of
departments under the CFO must disclose the fact that CCRD is not considered
independent. While we agree that such a disclosure is necessary, we are
concerned that the objectivity of this department's reviews could still be
in question because of the current reporting relationship. More importantly,
we are concerned that the potential exists for management to influence the
scope of audits or affect CCRD's ability to make independent judgments as to
which CFO departments and programs should be reviewed. As we recommended,
PBGC said it would examine the issue of CCRD organizational placement as
part of its larger workforce planning study to be completed next year.

Conclusions

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Contractors have played a significant role in PBGC's ability to serve plan
participants and reduce the backlog of pending benefit determinations from a
high of about 300,000 in fiscal year 1994 to about 190,000 in fiscal year
1999. However, despite projected changes in future workloads, PBGC still has
not taken steps to reassess its contracting and organizational structure
needs. Current trends show that PBGC should act soon to respond to a
potentially different future work environment. In response to our report,
PBGC plans to undertake a strategic workforce planning study. Such an effort
should include analyses of its staffing needs, skill levels, and
organizational structure relative to current and future workloads. This type
of contingency planning should allow PBGC to make systematic and orderly
changes to its workforce as needed in the future while still meeting the
needs of plan participants.

Our work also confirmed that PBGC should do more to encourage competition in
the procurement of services. Without consistent efforts to monitor the
marketplace and to stimulate competition, it is difficult for PBGC to ensure
that it obtains the best value for services it procures. Moreover, without
more effective contract oversight, PBGC cannot be sure that its contractors
are held accountable for meeting performance requirements.

As noted earlier, PBGC's budget structure provides the corporation with
substantial flexibility to address workload pressures by utilizing funds
that are not directly subject to review and approval by the Congress. The
absence of this means of oversight over PBGC's budget eliminates one of the
Congress' ordinary methods of ensuring that PBGC sufficiently administers
trust fund assets while meeting the needs of pension plan participants.
Under the current budget arrangement, it is particularly important that PBGC
implement the planned corrective actions we have noted in our testimony
today.

Absent meaningful action, PBGC risks paying too much for required services,
contractor performance problems, and ultimately, a deterioration of service
to plan participants. Furthermore, inaction may also call for the Congress
to strengthen its oversight role by reassessing and redefining the range of
activities and functions treated as nonlimitation expenses.

This concludes my prepared statement. I will be happy to respond to any
questions you or other Members of the Committees may have.

GAO Contacts
and Staff Acknowledgments

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For information regarding this testimony, please contact Barbara Bovbjerg at
(202) 512-7215 or Dan Bertoni at (202) 512-5988. Individuals who made key
contributions to this testimony include Jeff Bernstein and Elizabeth
O'Toole.

(207112)

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1-800-424-5454 (automated answering system)

This figure includes about $80 million in personnel costs, $15 million in
office rents, and $5 million in travel.

Pension Benefit Guaranty Corporation: Contracting Management Needs
Improvement (GAO/HEHS-00-130, Sept. 18, 2000).

Pension Benefit Guaranty Corporation: Certain Contract Awards Suggest
Improper Influence (GAO/T-OSI-00-17, Sept. 21, 2000).

A wholly owned government corporation is generally defined as a corporation
pursuing a government mission assigned in its enabling statute, typically
financed in part by appropriations, with assets owned by the government and
controlled by board members or an administrator appointed by the President
or department secretary. The Congress sometimes exempts these corporations
from key management laws to provide greater flexibility than federal
agencies typically have in hiring employees, paying salaries/benefits,
disclosing information publicly, and procuring goods and services.

Full time equivalent federal staff ceiling for fiscal year 1999.

Trust assets include assets acquired from terminated plans, investment
returns on the assets, and recoveries from employers responsible for
underfunded terminated plans.

A sole-source contract is entered into or proposed to be entered into after
soliciting and negotiating with only one source.

Human Capital: A Self-Assessment Checklist for Agency Leaders
(GAO/GGD-99-179, Sept. 1999).

Prior to the revision, ongoing administration was allowed only for plans
with 10,000 or more participants or plans requiring special expertise.

These figures represent the total contract costs over a term of 4 years.

The primary plan is defined by PBGC as the original plan for which the
contract was initiated. For example, the initial contract for the Pueblo,
Colorado, office was let in the early 1990s to service CF&I Steel. The
principal/owner was a former pension benefit administrator at CF&I Steel.

Contract Management: Few Competing Proposals for Large DOD Information
Technology Orders (GAO/NSIAD-00-56, Mar. 20, 2000).

Based on proposal of about $4,000 per plan audit.
*** End of document. ***