B-227353, May 23, 1990, 69 Comp.Gen. 483

B-227353: May 23, 1990

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Either full costing or incremental costing may be used since administrative cost determinations are left to the discretion of Railroad Retirement Board and Secretary of Health and Human Services. "would place each such trust fund in the same position in which it would have been" if railroad employees had been covered by the social security program and the railroad retirement program had never been enacted into law. We believe that it is within the discretion vested in the Railroad Retirement Board and the Secretary of Health and Human Services by section 7(c)(2) of the 1974 Act to use full costing to determine administrative costs for the purpose of the financial interchange between the Social Security trust funds and the Railroad Retirement Account.

B-227353, May 23, 1990, 69 Comp.Gen. 483

APPROPRIATIONS/FINANCIAL MANAGEMENT - Budget Process - Funds transfer - Cost allocation Section 7(c)(2) of the Railroad Retirement Act of 1974, 45 U.S.C. Sec. 231f(c)(2) (1982), provides for transferring funds between the Social Security trust funds and the Railroad Retirement Account. When computing costs for this purpose, either full costing or incremental costing may be used since administrative cost determinations are left to the discretion of Railroad Retirement Board and Secretary of Health and Human Services.

Determining costs for transfers between the Social Security trust funds and the Railroad Retirement Account:

This responds to a request from Dorcas Hardy, former Commissioner of the Social Security Administration (SSA), Department of Health and Human Services (HHS), for a decision concerning the proper method for computing costs in connection with the transfer of funds (financial interchange) between the Social Security trust funds /1/ and the Railroad Retirement Account authorized by section 7(c)(2) of the Railroad Retirement Act of 1974 (1974 Act), 45 U.S.C. Sec. 231f(c)(2) (1982). Section 7(c)(2) authorizes transfers of those amounts which, when added to or subtracted from the Social Security trust funds, "would place each such trust fund in the same position in which it would have been" if railroad employees had been covered by the social security program and the railroad retirement program had never been enacted into law.

SSA fully allocates all administrative costs, including staff overhead, when determining the Social Security trust funds' administrative expenses for the purposes of computing the financial interchange. However, the Office of the Inspector General, HHS (OIG), maintains that using full cost allocation results in an administrative cost determination greater than permitted by section 7(c)(2), thereby placing the trust funds in a financial position other than that required by section 7(c)(2). Accordingly, the report recommends that SSA use only incremental costs to determine administrative expenses for the purpose of computing the amount of the financial interchange. /2/

For the reasons discussed below, we believe that it is within the discretion vested in the Railroad Retirement Board and the Secretary of Health and Human Services by section 7(c)(2) of the 1974 Act to use full costing to determine administrative costs for the purpose of the financial interchange between the Social Security trust funds and the Railroad Retirement Account.

BACKGROUND

In the 1930s, many private pension plans established by the railroads encountered financial difficulties. This led to legislation which created a federal railroad retirement program and established a Railroad Retirement Board (Board) to administer the program. /3/ The legislation provides benefits to retired and disabled railroad workers and their dependents in a manner similar to the benefits that social security provides to other retired and disabled workers.

Initially, employers and employees financed the railroad retirement program from their contributions. During the 1940s, railroad retirees received benefits much higher than those paid by social security. 1950, the Congress increased social security benefits and liberalized the social security eligibility requirements to enable millions of beneficiaries to receive immediate benefits. These increases in social security benefits substantially narrowed the difference in benefits between the two systems, but not in contributions.

Consequently, Congress in 1951 amended the Railroad Retirement Act of 1937 to increase railroad retirement benefits and the number of eligible beneficiaries without substantially increasing contributions. However, because of potential funding problems, the legislation provided for an annual transfer of funds-- the financial interchange-- between the Social Security trust funds and the Railroad Retirement Account. Act of October 30, 1951, ch. 621, sec. 22(b), 65 Stat. 687, 45 U.S.C. Sec. 228e(k)(2) (1952) (1951 Act). The financial interchange was intended to compensate for the exclusion of railroad employees from social security coverage. was felt that this exclusion benefited the social security program because the railroad retirement program had a high rate of beneficiaries to tax- contributing workers. See S. Rep. No. 890, 82d Cong., 1st Sess. 14-16, 27 (1951). The legislation also placed railroad employees with less than ten years of employment at the time of their retirement or disability under the social security program. Sec. 22(a) of the 1951 Act, 45 U.S.C. Sec. 231q (1982). The financial interchange also compensates for these costs.

/4/ The Railroad Retirement Act of 1937 was amended in its entirety and completely revised by the 1974 Act. The 1974 Act restructured the railroad retirement program but retained the provision for the financial interchange. S. Rep. No. 93-1163, 93d Cong., 2d Sess. 49 (1974).

THE MATTER IN DISPUTE

Section 7(c)(2) of the 1974 Act requires the Board and the Secretary of HHS, at the close of each fiscal year, to determine the amounts which, if added to or subtracted from the Social Security trust funds, "would place each such Trust Fund in the same position in which it would have been" if railroad employees had been covered by the social security program after December 31, 1936 and the railroad retirement program had never been enacted into law. Once the amount of the transfer is determined by the Board and the Secretary of HHS, the Secretary of the Treasury is required to transfer the amount certified by the Board or the Secretary of HHS between the Railroad Retirement Account and the trust funds. 45 U.S.C. Sec. 231f(c)(2) (1982).

The actual computation of the amount is done by the Board. The Board estimates (1) the benefits that would have been paid to railroad employees if they had been covered by the social security program, (2) the social security taxes that would have been collected, and (3) the administrative expenses SSA would have incurred if railroad retirement beneficiaries had been covered under the social security program. GAO/HRD-83-2 at 2. For the third item, the Board bases its estimate on unit cost factors developed by SSA. Id. at 18.

Once these amounts are determined for each of the Social Security trust funds, the benefit payments and administrative costs are added together and compared to the taxes that would have been collected. If the combined costs are greater than the taxes that would have been collected, the difference plus interest is transferred from the particular Social Security trust fund to the Railroad Retirement Account. If the amount of taxes that would have been collected exceeds the costs that would have been incurred, the difference plus interest is transferred from the Railroad Retirement Account to the particular Social Security trust fund. For each year since 1957, net transfers have been out of the social security system and into the railroad retirement system. Id. at 4.

The unit cost factor reflects SSA's estimated cost in administering each of its programs. SSA estimates the cost for initial enrollment, eligibility determinations and benefits computations, maintaining benefit rolls, and handling compensation reports for each of its programs. developing the unit costs, SSA includes staff overhead as part of its full cost calculation. According to the OIG's Report, about 15 percent of the total administrative expense is attributed to staff overhead functions. OIG Report at 6. The OIG concluded that including staff overhead in the unit cost computation of administrative expense results in administrative expenses greater than permitted by section 7(c)(2) of the 1974 Act and does not result in fund transfers that would place each of the Social Security trust funds in the same position it would have been in if railroad employees had been covered by the social security program. The OIG therefore recommended that only incremental costs be included, and the Board concurred. Id. at 6 7. However, the Commissioner of Social Security, who certifies the amount of the transfer on behalf of the Secretary of HHS, disagrees. Therefore, the Commissioner requested our independent views on this matter.

HHS OIG POSITION

The OIG believes that SSA's staff overhead cost would not increase with the addition of the railroad retirement program caseload. Therefore, all of the staff overhead costs should not be included in the administrative expense determination. /5/ The OIG states that:

"To place the trust funds in the same position they would have been in had railroad employment been covered by the Social Security Act, a careful analysis is needed to determine only those additional administrative costs SSA would incur if they were to process the RRB caseload."

The OIG reasons that some of the overhead staff costs are not dependent on the rise and fall of workload production; that these staff overhead functions are already in place within the SSA organization and would exist regardless of the additional workload from Railroad Retirement Board cases.

SSA POSITION

According to the OIG Report, SSA disagrees with the OIG's conclusion that full cost treatment, including staff overhead costs, was inappropriate. SSA also argues that the concept of full cost accounting requires that both direct and indirect costs be included in the determination of administrative costs for purposes of the financial interchange, and to do otherwise would be inconsistent with the methods for determining administrative costs for other purposes. OIG Report at 6-8.

In various submissions provided to this Office, SSA points out that the concept of full costing is a standard principle throughout government accounting that has been recognized by the decisions of this Office. SSA also states that full costing was incorporated in the administrative accounting system formally approved by the General Accounting Office on September 30, 1980. SSA notes that while our 1983 audit report on the financial interchange recommended a number of changes in the methods SSA used to calculate administrative costs, we did not recommend that SSA exclude staff overhead costs that are allocated in accordance with SSA's cost accounting system.

Finally, there are several other cases where the calculation of benefits and associated administrative costs are used to determine transfers into the trust funds. These are payments for military service credits, special age-72 benefits, and pension reform. In each of these cases, the administrative costs used are based on direct and indirect costs. SSA argues that using an incremental cost methodology in computing SSA's administrative unit costs for the financial interchange might require for purposes of consistency changes in other computations affecting benefit transfers from the general fund to the trust funds.

DISCUSSION

We agree with SSA that the concept of full costing is an accepted accounting principle throughout government accounting. /6/ As such, we would not lightly hold that its use is prohibited unless the law expressly, or by necessary implication requires such. /7/ Thus, the question is whether section 7(c)(2) of the 1974 Act expressly or by necessary implication precludes the use of full costing when determining administrative costs for the purpose of computing the amount of the financial interchange.

Section 7(c)(2) of the 1974 Act makes no mention of cost recovery. merely requires the Board and the Secretary to "determine the amounts, if any, which if added to or subtracted from" the Social Security trust funds that "would place each such Trust Fund in the same position in which it would have been" if railroad employees had been covered by the social security program after December 31, 1936, and the railroad retirement program had never been enacted into law.

We are unable to glean from the language of the law a prohibition on the use of an otherwise generally accepted method of administrative cost determination such as full costing. The law does not prescribe the method for placing the funds in the same position they otherwise would have been in had the railroad retirees only been covered by social security system, or for making related administrative cost determinations.

Section 7(c)(2) of the 1974 Act leaves to the discretion of the Board and the Secretary the methodology for determining the amount of the financial interchange and whether the respective funds are in fact being maintained in the same position they would have been if there had been no separate railroad retirement system. The full cost method for determining administrative costs has been in effect since at least 1976 (when the SSA's Cost Analysis System for identifying costs took effect) and SSA indicates that it was probably in effect earlier. A contemporaneous construction put on a statute by an agency charged with its administration is entitled to deference and is generally affirmed by courts if reasonable, Udall v. Tallman, 380 U.S. 1, 16 (1965); Investment Co. Institute v. Camp, 401 U.S. 617, 626-627 (1971). Thus, the prior determination by the Board and the Secretary to use full costing when computing administrative costs for the purpose of determining the amount of the financial interchange is entitled to some deference as a proper interpretation of their authority under section 7(c)(2) of the 1974 Act. Additionally, as noted in the OIG's Report, the amount in dispute represents roughly 15 percent of the administrative expense cost figure applicable to the computation of the total amount transferred for each year. The administrative expense figure itself represents a small proportion of the total amounts involved in computing the financial interchange. It is unclear whether the cost and burden entailed in SSA singling out the financial interchange for a different accounting treatment than that which SSA applies when computing reimbursement involving the Social Security trust funds under other provisions of law warrant the imposition of the incremental costing method in the absence of a clear legislative requirement that it do so. Consequently, in view of the discretion vested in the Board and the Secretary, we cannot conclude that their decision to use full costing to determine administrative costs for the purpose of the financial interchange violates section 7(c)(2) of the 1974 Act.

/1/ "Social Security trust funds" means the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, and the Federal Hospital Insurance Trust Fund.

/2/ U.S. Department of Health and Human Services, Office of Inspector General, Office of Audit: "Review of Selected Aspects of the Financial Interchange Behavior, the Social Security Administration and the Railroad Retirement Board Social Security Administration" (Audit Control No. 113- 62671, August 13, 1985) (hereafter cited as OIG Report).

/3/ Act of August 29, 1935, ch. 812, 49 Stat. 967, 45 U.S.C. Secs. 215- 228 (1940). The 1935 act was amended in its entirety and completely revised by act of June 24, 1937, ch. 382, 50 Stat. 307, 45 U.S.C. Secs. 228a-228z-1 (1940) (known as the Railroad Retirement Act of 1937). Current authority for the railroad retirement program is provided by the Railroad Retirement Act of 1974, 45 U.S.C. Secs. 231 231u (1982).

/4/ For further information concerning the evolution and operation of the financial interchange, see GAO, Railroad Retirement, Federal Financial Involvement at 12-16 (GAO/HRD-86-88, B-22204, May 9, 1986) and GAO, Inaccurate Fund Transfers Between Social Security Administration and Railroad Retirement Board at 1-2 (GAO/HRD-83-2, B-210707, April 4, 1983).

/5/ OIG Report at 6-7. The OIG report identifies charges for the following staff overhead functions as being improper: Central office administration, program policy, research, statistics, actuarial, legislative liaison, planning, program information/public affairs, and management information. The OIG characterizes direct and indirect personnel costs including training, operations management and supervision related to the processing of the workload, as proper charges.

/6/ See, e.g., GAO, Policy and Procedures Manual for Guidance of Federal Agencies, tit. 2, appendix I, pages 10-11 (TS 2-24, October 31, 1984), recognizing that full costs may be appropriate for financial reporting purposes.

/7/ We note that 57 Comp.Gen.675 (1978) concluded that the "actual cost" recovery required by the Economy Act of 1932 should be based upon a full cost methodology to the extent described in the decision. OUr decision was based on our construction of the Economy Act in light of legislative history clearly reflecting Congress's rejection of the incremental cost recovery requirement imposed by earlier decisions of this Office for interagency reimbursable work performed prior to enactment of the Economy Act. See 57 Comp.Gen. at 678-679. Although, the cost recovery methodology required by the Economy Act does not control the determination of costs for purposes of the financial interchange required by section 7(c)(2) of the 1974 Act, it does support the conclusion that the full cost method is, at a minimum, a reasonable method, if not the preferred or required method, to be used when determining costs in other situations, absent a clear legal requirement to the contrary.