Department of Energy:

Progress Made Overseeing the Costs of Contractor Postretirement Benefits, but Additional Actions Could Help Address Challenges

GAO-11-378: Published: Apr 29, 2011. Publicly Released: May 31, 2011.

Additional Materials:

Contact:

Mark E. Gaffigan
(202) 512-3168
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

The Department of Energy (DOE) relies on contractors to conduct its mission activities. DOE reimburses these contractors for allowable costs, including the costs of providing pension and other postretirement benefits, such as retiree health care plans. Since the economic downturn, DOE has had to devote significantly more funding toward reimbursing these benefit costs, in part because of a decline in interest rates and asset values that has increased contractor pension contributions. In a challenging budgetary environment, further growth in these costs could put pressure on DOE's mission work. GAO was asked to report on (1) the level of control DOE has over contractor pension and other postretirement benefit costs under its current business model and (2) the changes DOE has adopted since the national economic downturn to manage those costs and the extent to which those changes have enhanced its approach. To do so, GAO reviewed relevant laws, regulations, and DOE guidance; analyzed agency financial data; and interviewed officials.

Under its current business model, DOE has limited influence over contractor pension and other postretirement benefit costs. For example, contractors sponsor benefit plans and, as a result, control the types of benefits offered to their employees and the strategies for investing pension plan assets. DOE nevertheless ultimately bears the investment risk incurred by the contractors. Moreover, external factors beyond both DOE's and the contractors' control, such as economic conditions and changes in statutory requirements, can significantly affect benefit costs. For example, the investment performance of plan assets can affect pension contributions, while changes in health care law can affect postretirement benefit payments. Even with these constraints, however, DOE can exercise some influence over contractor pension and other postretirement benefit costs through its oversight efforts, reimbursement policy for contractor benefit costs, and contract requirements. Still, the department will ultimately have to reimburse the cost of contractor pension benefits that have already been accrued. Since the economic downturn deepened in 2008, DOE has taken steps to enhance its management of contractor benefit costs--particularly for contractor pensions--but has not comprehensively reviewed its approach to managing its contractors' other postretirement benefit costs, such as retiree health care coverage. In addition, DOE has not added agencywide information on the costs of its contractors' other postretirement benefits to its annual budget request. As a result, DOE may be delayed in identifying options that might better address the growth of its reimbursement costs and may not provide important information to Congress that could inform annual funding decisions. Moreover, while DOE has, for the most part, continued to use the same reimbursement policy and contract requirements from before the economic downturn, it lacks complete guidance on how program offices should evaluate contractor requests to contribute more than DOE's minimum requirement to their pension plans. DOE is therefore unable to ensure that its offices decide on contractor requests on the basis of consistent criteria reflecting departmentwide goals for managing contractor pension costs. In addition, DOE's existing process for having contractors align their benefit packages with DOE's reimbursement standard is incomplete. Specifically, DOE lacks a comprehensive timetable for when contractors must modify benefit packages whose values exceed DOE's standard. As a result, only 1 of the 16 contractors with benefit packages exceeding DOE's standard for the most recent evaluation period is expected to bring its benefits in line with that standard. Further, DOE guidance allows contracting officers to waive the requirement for contractors to correct benefit packages exceeding DOE's reimbursement standard, but does not detail the criteria contracting officers should follow in making that decision or require a review by DOE headquarters. As a result, some contractors may continue for an undefined period to accrue liabilities and be reimbursed by DOE for benefit packages exceeding the department's reimbursement standard. GAO recommends, among other things, that DOE comprehensively review how it manages contractor postretirement benefit costs and define criteria for evaluating contractor requests to contribute more than the minimum to their pension plans. DOE agreed with three of GAO's recommendations but disagreed with the need to define such criteria.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To further improve DOE's approach to managing contractor pension and other postretirement benefit costs, the Secretary of Energy should issue guidance to program offices overseeing contractors with defined benefit plans that defines criteria to be considered when evaluating contractor requests to contribute more than the minimum to their pension plans.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In April 2011, we reported that the Department of Energy (DOE) lacked complete guidance on how program offices should evaluate contractor requests to contribute more than DOE's minimum requirement to their pension plans. DOE was therefore unable to ensure that its offices decide on contractor requests on the basis of consistent criteria reflecting departmentwide goals for managing contractor pension costs. We recommended that the Secretary of Energy issue guidance to program offices defining criteria to consider when program offices evaluate contractor requests to contribute more than the minimum to their pension plans. Based in part upon our work, DOE issued guidance on October 21, 2011, to its program offices on factors they may consider when evaluating contractor reimbursement requests. For example, DOE guidance states that program offices may consider whether there will be a cessation of benefit accruals if a plan is not adequately funded, or whether funding more in the current year will reduce higher contributions in the near term. As a result, DOE can provide greater assurance that its program offices implement its reimbursement policy consistently.

    Recommendation: To further improve DOE's approach to managing contractor pension and other postretirement benefit costs, the Secretary of Energy should expand the information provided to Congress during its annual budget deliberations to include, for example, nonpension postretirement benefit costs by site, program office, and appropriation account, as well as a discussion of factors that affect these contractor benefit costs and DOE's plans for managing those costs in coming years.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In April 2011, we reported that the Department of Energy (DOE) had not added agencywide information on the costs of its contractors' other postretirement benefits to its annual budget request, as it had for its pension costs. As a result, DOE may have been delayed in identifying options that might better address the growth of its reimbursement costs and may not have provided important information to Congress that could inform annual funding decisions. We recommended that the Secretary of Energy expand the information provided to Congress during its annual budget deliberations to include, for example, postretirement benefit costs by site, program office, and appropriation account, as well as a discussion of factors that affect these contractor benefit costs and DOE's plans for managing those costs in coming years. Based in part upon our work, DOE's fiscal year 2013 budget request described factors that affected postretirement costs and recent changes contractors had made to their plans to reduce postretirement benefit costs. The budget request also included postretirement benefit costs for fiscal years 2011 through 2013 for all DOE program offices, and postretirement benefit costs for fiscal years 2014 through 2017 for the National Nuclear Security Administration. As a result, there is now greater transparency provided to Congress on the full cost of DOE's contractor retirement benefits and their potential impact on the resources DOE has available to accomplish its mission work.

    Recommendation: To further improve DOE's approach to managing contractor pension and other postretirement benefit costs, the Secretary of Energy should conduct a comprehensive review, similar to the review of contractor pensions, of the department's approach to managing other contractor benefit costs, including other postretirement benefits, and evaluate options for improving oversight and better managing the cost of these benefits.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In April 2011, we reported that the Department of Energy (DOE) had taken steps to enhance its management of contractor benefit costs, particularly for contractor pensions, but had not comprehensively reviewed its approach to managing its contractors' other post retirement benefit costs, such as retiree health care coverage. We recommended that the Secretary of Energy conduct a comprehensive review, similar to its review of contractor pensions, of the department's approach to managing other contractor benefit costs and evaluate options for improving oversight and cost management. 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 included information on post retirement benefits and also included such benefit costs in its new annual discussions with contractors on their post retirement benefit management plans. In addition, DOE requested information from contractors on key actuarial assumptions and potential post retirement benefit cost-cutting measures. As a result, DOE has taken actions that help to improve its oversight of other post retirement benefits and identify policy options that might reduce or better address the growth of reimbursement costs.

    Recommendation: To further improve DOE's approach to managing contractor pension and other postretirement benefit costs, the Secretary of Energy should clarify existing guidance on correcting contractor benefit packages that exceed DOE's standard by: (1) establishing a defined timeline by when contractors must submit corrective action plans to their DOE contracting officer if the value of their benefit package is determined to exceed DOE's standard, as well as a timeline for when DOE contracting officers must reach a decision on such plans; (2) developing criteria for contracting officers to use when deciding whether to waive a required corrective action plan; and (3) requiring review of these contracting officer decisions by the responsible headquarters office to help ensure consistent application of the criteria across the department.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: In April 2011, we reported that the Department of Energy's (DOE) existing process for having contractors align their benefit packages with DOE's reimbursement standard was incomplete. Specifically, DOE lacked a comprehensive timetable for when contractors had to modify benefit packages whose values exceeded DOE's standard. Further, DOE guidance allowed contracting officers to waive the requirement for contractors to correct benefit packages, but did not detail the criteria contracting officers should follow in making that decision or require a review by DOE headquarters. As a result, some contractors may have continued for an undefined period to accrue liabilities and be reimbursed by DOE for benefit packages exceeding the department's reimbursement standard. We recommended that the Secretary of Energy clarify existing guidance on correcting contractor benefit packages that exceed DOE's standard by: (1) establishing a defined timeline by when contractors must submit corrective action plans to their contracting officer, as well as a timeline for when contracting officers must reach a decision on such plans; (2) developing criteria for contracting officers to use when deciding whether to waive a required corrective action plan; and (3) requiring review of these contracting officer decisions by the responsible headquarters office. Based in part upon our work, DOE issued guidance on October 21, 2011, defining timelines by when contracting officers must notify contractors of the need for a corrective action plan and when contractors must submit a corrective action plan. The guidance also included criteria for contracting officers to use when deciding whether to waive the corrective action plan requirement, such as whether there is clear and convincing evidence that DOE's interest is protected from the reimbursement of unreasonable costs. The guidance also required contracting officers to obtain approval of their decision from the Head of Contracting Activity, with concurrence from the Senior Procurement Executive. As a result, DOE has greater assurance that contracting officers are consistently and efficiently evaluating contractors' corrective action plans to lower benefit costs to meet the Department's standards.

    Jul 17, 2014

    Jul 11, 2014

    Jun 23, 2014

    Jun 9, 2014

    Jun 5, 2014

    May 30, 2014

    May 16, 2014

    May 15, 2014

    May 7, 2014

    May 1, 2014

    Looking for more? Browse all our products here