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

Statement of Barbara D. Bovbjerg, Associate Director

Education, Workforce, and Income Security Issues

Health, Education, and Human Services Division

Testimony

Before the Special Committee on Aging and the

Committee on Small Business, United States Senate

United States General Accounting Office

GAO
Page 1 GAO/T-HEHS-00-199

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.1

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.2

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

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

travel.

2 Pension Benefit Guaranty Corporation: Contracting Management Needs Improvement (GAO/HEHS00-130, Sept. 18, 2000).

Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 2 GAO/T-HEHS-00-199

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.3

The Employee Retirement Income Security Act of 1974 created PBGC as a

self-financing, nonprofit, wholly owned government corporation.4 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

3 Pension Benefit Guaranty Corporation: Certain Contract Awards Suggest Improper Influence

(GAO/T-OSI-00-17, Sept. 21, 2000).

4 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.

Background
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 3 GAO/T-HEHS-00-199

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

employees5 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.6 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 budget—which is primarily subject to

review and approval by the Office of Management and Budget (OMB)

rather than the Congress—from $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).

5 Full time equivalent federal staff ceiling for fiscal year 1999.

6 Trust assets include assets acquired from terminated plans, investment returns on the assets, and

recoveries from employers responsible for underfunded terminated plans.
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 4 GAO/T-HEHS-00-199

Figure 1: PBGC Limitation/Nonlimitation Budget, Fiscal Years 1975-1999

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

Airlines—contributed 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

PBGC Contracting

Decisions Reflect Past

Short-Term Needs

Fiscal Year

Limitation Nonlimitation

0

20

40

60

80

100

120

140

160

180

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Dollars in Millions

Total

$69 Million

$40 Million

$29 Million

$6 Million

$160 Million

$149 Million

$11 Million
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 5 GAO/T-HEHS-00-199

office’s physical proximity to plan records and participants.7Over 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 participants—those 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.

7 A sole-source contract is entered into or proposed to be entered into after soliciting and negotiating

with only one source.
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 6 GAO/T-HEHS-00-199

Figure 2: Pending Benefit Determinations, Fiscal Years 1990-1999

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

190,641

207,292

228,244

242,904

259,699

300,685

289,527 297,788

248,269

212,828

Fiscal Year
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 7 GAO/T-HEHS-00-199

Figure 3: New Pension Plans Trusteed by PBGC, Fiscal Years 1990-1999

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.8

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

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

0

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

130

184

197

234

136

106

77 77

83

62

Fiscal Year
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 8 GAO/T-HEHS-00-199

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.9 Prior to this change, ongoing

administration—which generally involves routine maintenance for plans in

which all final benefit determinations have been issued—for 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.

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.

9 Prior to the revision, ongoing administration was allowed only for plans with 10,000 or more

participants or plans requiring special expertise.

PBGC’s Procurement

Practices Have

Weaknesses
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 9 GAO/T-HEHS-00-199

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 offices—Miami, Atlanta, Wheeling, and Wilmington. Together,

these contracts totaled about $71 million. At that time, a single large

contractor—Office Specialists, Inc.—was incumbent at the Miami, Atlanta,

and Wheeling offices. A second contractor—Benefit Services Unlimited—

was 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.10

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.

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

Procurements for Benefit

Administration Services

Were Not Consistently

Structured
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 10 GAO/T-HEHS-00-199

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 company—a current field office contractor—told 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.

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.11

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

11 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.

Competition for SoleSource Benefit

Administration Services

Contracts Could Be

Improved
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 11 GAO/T-HEHS-00-199

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 conducted—or why one was not

conducted—and 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.12 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.

12 Contract Management: Few Competing Proposals for Large DOD Information Technology Orders

(GAO/NSIAD-00-56, Mar. 20, 2000).
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 12 GAO/T-HEHS-00-199

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

Additional Observations on

PBGC Contractor

Selection Practices
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 13 GAO/T-HEHS-00-199

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 audits—about $70,000 per

audit—which 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.13 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 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

sequential processing, in which cases were handed off between various

components as discrete tasks were completed. PBGC has also made

13 Based on proposal of about $4,000 per plan audit.

Contract Oversight

Practices Need

Improvement
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 14 GAO/T-HEHS-00-199

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.

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 office—such as final benefit determinations—

on 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 that—if uniformly compiled and

monitored—additional 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

PBGC Does Not Centrally

Compile and Monitor

Automated Data on FBA

Office Performance
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 15 GAO/T-HEHS-00-199

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.

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

Performance Review

Process for Field Offices

May Not Adequately

Ensure Work Quality
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 16 GAO/T-HEHS-00-199

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.

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 dayto-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

Individuals Responsible for

Contractor Oversight Lack

Sufficient Guidance
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 17 GAO/T-HEHS-00-199

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.

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.

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.

Organizational Placement

of Review Function Could

Have Contract

Management Implications

Conclusions
Pension Benefit Guaranty Corporation:

Contract Management Needs Improvement

Page 18 GAO/T-HEHS-00-199

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.

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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