Department of Energy:

Certain Postretirement Benefits for Contractor Employees Are Unfunded and Program Oversight Could Be Improved

GAO-04-539: Published: Apr 15, 2004. Publicly Released: Apr 15, 2004.

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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, the Chairman, House Committee on Appropriations, Subcommittee on Energy and Water Development, asked GAO to (1) analyze DOE's estimated financial obligation for postretirement health and pension benefits for contractor employees at the end of fiscal year 2003, (2) determine how DOE evaluates its contractor postretirement health and pension benefit programs and assesses the comparative levels of benefits offered by contractors, and (3) assess how DOE's oversight of these benefits could be enhanced.

As of September 30, 2003, DOE reported an estimated $13.4 billion in unfunded contractor postretirement health and pension benefits. This figure is an actuarial estimate of all benefits attributed to employee service before September 30, 2003, minus the fair market value of assets dedicated to the payment of retiree benefits. The unfunded balance has grown over the past 4 fiscal years as a result of the continuing accumulation of benefits, declining interest rates, and negative returns on pension assets. A significant portion of the unfunded balance relates to benefit programs at contractor sites that have already closed or will close once the work is complete. DOE Order 350.1 generally provides that contractors periodically complete selfassessment studies comparing their benefits to professionally recognized measures. DOE uses these studies to make decisions about the level of contractor benefits. While the most recently completed comparison studies suggest that DOE has been successful in offering total contractor benefits that are comparable to those of selected competitors, the DOE Order 350.1 studies are not performed at a significant number of contractor locations, and alternative review procedures performed by DOE personnel are inconsistent from one contractor location to another; thus DOE's ability to evaluate the full range of programs is limited. In addition, GAO found that a number of contractor studies completed under DOE Order 350.1 did not conform to prescribed and recommended methodologies, calling into question the validity and comparability of the results. Moreover, DOE's current focus on total benefits rather than individual benefit components in evaluating benefits does not fully recognize the differences in costs between deferred benefit programs, such as pension and postretirement health benefits, and other benefit components. This distinction is important because changes to pension and postretirement health benefits can have a significant impact on DOE's long-term costs and budgetary needs. For example, a 1 percent increase in a contractor employee's current year vacation benefits has less impact on DOE's long-term costs and budgetary needs than a 1 percent increase in postretirement pension or health benefits, which have a continuous and compounding effect as they are paid out in each year of retirement. While reported total contractor benefits are comparable to selected competitors, as stated above, the postretirement health benefits of DOE contractor employees at these sites averaged more than 44 percent greater than the average of the contractors' competitors, while defined benefit pension benefits averaged 29 percent greater. The approval and monitoring of DOE contractor employee pension and postretirement health benefits is primarily the responsibility of DOE contracting officers, who administer contracts at individual contractor locations. Management does not systematically review information developed at individual contractor locations to identify best practices or areas where benefit comparisons do not adhere to agency requirements or guidance. Developing and disseminating this information agencywide would enhance DOE's oversight of contractor employee benefits and provide information needed to manage postclosure benefit costs.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The Department reports actions consistent with the intent and objectives of the recommendation by ensuring that contractor benefit program evaluations and corrective action requirements are consistently incorporated into solicitations and contracts when work is completed or at contract extension, and through HQ annual reviews of contractors. However, DOE has not yet provided documentation demonstrating that it has instituted a systematic management review of pertinent data from each contractor location to enhance the consistency of benefit program evaluations and reduce the nonconformance with the requirements of DOE Order 350.1. According to agency officials, DOE is in the process of establishing an office to perform procurement management reviews (PMR) that would review the benefit valuation and cost comparison studies for compliance with applicable agency instructions and guidance. However, DOE does not expect that the office will be operational and a plan for reviews created until fiscal year 2009. In February and April 2010 DOE provided additional documentation to address this recommendation, including a PMR User Manual and a plan for conducting PMRs. In February 2012 DOE provided evidence of PMRs completed in fiscal years 2009, 2010, and 2011. However, summary results and actions taken were not provided for all fiscal years and DOE indicated that a PMR analysis was not conducted for fiscal year 2011 because the PMR process was being revamped and had been suspended pending approval of DOE management. In April 2013 an official from DOE's Office of Contractor Human Resources told us that some PMRs were being conducted. However, the official said that the scope of the current PMRs did not include review of contractor pension and insurance plans.

    Recommendation: The Secretary of Energy should 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.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: As of October 2007, DOE has provided documentation showing that it had added comparison study requirements to 7 of the 8 contracts that were awarded since 2004. While the 1 remaining contract does not include these provisions, the contractor is voluntarily performing comparison studies. Further, DOE transferred sponsorship of the benefit plans for 2 closed sites to contractors that manage other active sites and included comparison study requirements in the modifications to those site contracts. Lastly, as of August 2008 the outstanding solicitation for another site includes the comparison study requirements. Consequently, consistent with the recommendation, DOE has taken action on a majority of the contracts where it is practical to extend the requirements.

    Recommendation: The Secretary of Energy should 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.

    Agency Affected: Department of Energy

  3. Status: Closed - Not Implemented

    Comments: Based on its September 30, 2007, audit status report, the Department stated that it had met the intent and objectives of the recommendation by requiring the incorporation of standard language into new solicitations and contracts. However, DOE actions will not address those situations where a benefit comparison study is not being performed. DOE has not yet provided sufficient evidence of the procedures they are performing over the benefits of contractor's corporate benefit plans, plans offered by contracts with support contracts at DOE sites, and benefit plans of closed sites, that would serve as an adequate substitute for performing a benefit value or cost comparison study. In January 2012 we provided DOE's Office of Contractor Human Resources with a summary of how the contracting officers responsible for each DOE site in question previously responded to our request for a description of any alternative procedures that they performed; the summary we provided was the same as the one we provided DOE in December 2009. At that time, DOE site personnel did not provide any evidence of alternative procedures, and in some cases indicated that the plans in question were not material or high risk, and thus no procedures would be performed. As of April 2013, DOE has not provided any addtional information in response to our January 2012 request.

    Recommendation: The Secretary of Energy should, in cases where the extension of the order is not practical, develop and perform appropriate alternative procedures to provide similar information.

    Agency Affected: Department of Energy

  4. Status: Closed - Implemented

    Comments: We reported in April 2004 that DOE's evaluation of total benefits in benefit value studies rather than a review of the individual components does not address the differences in costs between deferred benefit programs, such as pension and postretirement health benefits. We noted that a management focus on the long-term impacts of contractor benefit program decisions may provide improved information for decision makers in DOE and Congress. During the course of conducting our work that lead to issuance of GAO-08-642R, DOE officials told us that the agency sought to respond to our recommendation in April 2006 by issuing Notice 351.1, Contractor Employee Pension and Medical Benefits Policy, which laid out the agency's revised policy for benefit cost reimbursements for ALL contractors. The Notice provided that DOE would reimburse contractors for "market-based" pension and health benefit plans for NEW employees. A pension plan was deemed "market-based" if the pension plan was a defined contribution plan. Also, for pension and health plan costs to be reimbursed the benefit value and per capita cost of the contractor's INDIVIDUAL plans and the total benefit package could not exceed the comparison group's average by more than 5 percent. However, DOE suspended Notice 351.1 in June 2006 in response to stakeholder and congressional concerns, and subsequently decided in June 2007 not to reissue it. Although DOE Order 350.1, Contractor Human Resource Management Programs, remains in effect, as contracts are recompeted DOE has begun to include a provision that defines "market-based" benefits to mean that ALL new employees' benefits do not exceed the comparison group's average TOTAL benefit value and cost study scores by more than 5 percent. As we reported in GAO-11-378, some contractors have responded to this new provision by shifting from providing employees defined benefit plans to offering new employees defined contribution plans and some contractors have also stopped providing other postretirement benefits to new employees. According to officials from DOE's National Nuclear Security Administration (NNSA), NNSA is now exploring a further shift in contract requirements for sites it oversees to allow successor contractors to alter existing employees' benefit packages. Nonetheless, we reported in GAO-11-378 that DOE had not comprehensively reviewed other postretirement benefits (as it had for pension) or to clearly inform Congress of those costs and their potential impact on mission work. Based in part upon our work, DOE issued a memo on October 31, 2011, announcing an expanded quarterly information request to contractors for DOE's information system, iBenefits, through the 2012 fiscal year. The agency's data call includes information on postretirement benefits and also includes such benefit costs in its new annual discussions with contractors on their postretirement benefit management plans. In addition, DOE requests information from contractors on key actuarial assumptions and potential PRB cost-cutting measures. As a result, DOE has, through changes to the language of recompeted contracts and issuance of more robust data calls on and analysis of pension and postretirement benefit costs, taken actions that help to incorporate into its oversight process a focus on the long-term costs and budgetary implications of decisions related to significant components of contractor benefit programs.

    Recommendation: The Secretary of Energy should 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 Affected: Department of Energy

 

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