Department of Energy: Certain Postretirement Benefits for Contractor Employees Are Unfunded and Program Oversight Could Be Improved
Published: 2004-04-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: The Department of Energy (DOE) carries out its national security,  environmental cleanup, and scientific and technological innovation  missions through the extensive use of third-party contractors, including  universities and private companies. These contractors, in many cases,  incur costs for pension and postretirement health benefits that are  reimbursed by DOE under the terms of their contracts.  Contractor pension  and postretirement health benefits represent significant costs for both  research and environmental cleanup efforts. The current methodology  used to fund these costs may result in the need for DOE to reimburse  contractor benefit payments well after current operating contracts are  terminated or cleanup sites are completed.
We, along with DOE’s Office of Inspector General (IG), have issued several  reports during recent years on the challenges DOE faces in the area of  contract management and the extent of environmental cleanup costs.  Since 1990, we have included DOE’s contract management, which is  broadly defined to include contract administration and project  management, as a high-risk area. Given DOE’s long history of using  contractors in its research and cleanup missions and the rising cost of  providing employee postretirement health benefits, it is important that the  management of short-term and long-term contractor employee benefits  obligations ensures both the successful completion of cleanup and  research objectives and the cost-effective use of government resources.
In this context, you requested that we review DOE’s contractor employee  benefits to (1) analyze the department’s estimated financial obligation for  pension and postretirement health benefits for contractor employees at the  end of fiscal year 2003, (2) determine how DOE evaluates its contractor  pension and postretirement health benefit programs and assesses the  comparative levels of benefits offered by its contractors, and (3) assess  how DOE’s oversight of these benefit programs could be enhanced.
We conducted our review from July 2003 through February 2004 at the  Department of Energy headquarters in Washington, D.C., and the Defense  Contract Audit Agency in Fort Belvoir, Virginia, in accordance with  generally accepted government auditing standards. We requested written  comments on a draft of this report from the Secretary of Energy. We also  requested oral comments on applicable sections of a draft of this report  from the Secretary of Defense. We incorporated those comments into our  report as appropriate.
subsections: section_title: Background
paragraphs: DOE relies on contractor organizations to manage, operate, maintain, and  provide support to its environmental cleanup and science and energy  research at government-owned facilities. Contractors at environmental  cleanup sites direct remediation efforts for radioactive and hazardous  waste contamination generated during former nuclear weapons research  and production activities. The eventual completion of cleanup activities at  individual contractor locations without the existence of other ongoing  operations, called site completion or site closure, generally leads to  transition into long-term stewardship activities such as monitoring and  surveillance requiring significantly fewer resources.  Contractors at  research sites complete a variety of ongoing research and development  activities at national laboratories and universities.
Contractors at cleanup and research sites may sponsor and pay pension  and postretirement health benefits, collectively called postretirement  benefits, for employees providing service under DOE contracts in order to  attract, motivate, and retain qualified individuals to assist the agency in  carrying out its mission. Contractors administer postretirement benefits for  these employees either by establishing separate benefit plans solely for  these individuals or by arranging for their participation in existing  corporate plans, where contractor employees at DOE sites and those  contractor employees assigned to non-DOE work participate in the same  benefit plans.
DOE reimburses contractor payments for employee compensation,  including postretirement benefits as authorized by applicable regulations  and each contractor’s operating agreement. For example, the Federal  Acquisition Regulation (FAR) establishes uniform policies and procedures  for the acquisition of goods and services by executive agencies. The FAR  cost principles include factors to be considered by an agency when  determining whether a contractor-claimed cost is to be allowed and  reimbursed by an agency.  Generally, consideration of whether  compensation costs incurred under a government contract with a  commercial organization are allowable includes whether they are, among other things, reasonable, allocable, and compliant with other applicable  standards and the terms of the contract. For fiscal year 2003, DOE  reimbursed approximately $431 million in contractor postretirement  benefit contributions at 39 different DOE contractor sites.
Contractor employees qualify for retiree benefits in pension and  postretirement health plans differently, resulting in different methodologies  for the payment of the two types of benefits. Pension benefits are  determined using a formula based on employee salary and years of service  as specified by contractor plan provisions. Employees accrue, or earn,  future pension benefits throughout their period of service and are generally  required to work for a certain period, called a vesting period, before they  have a right to receive any accrued retirement benefits. DOE contractors  that offer defined benefit pension plans are subject to the minimum funding  standards established by the Employee Retirement and Income Security  Act of 1974 (ERISA).The ERISA requirements set minimum standards  regarding how much contractors must set aside each year in order to  provide for future defined benefit pension payments when they are due.
In contrast to contributions for pension benefits, there are no legal  requirements to fund postretirement health benefits in advance for  payments to retirees. Therefore, DOE contractors generally pay for  postretirement health plans on a pay-as-you-go basis. Retired contractor  employees are usually entitled to participate in contractor health plans  after they complete a period of service immediately prior to their  retirement. However, unlike pension benefits, the future amount of  postretirement health benefits earned by a contractor employee cannot be  expressly defined at the employee’s retirement date. This is due, in part, to  the potential for future contractor changes in benefit provisions, such as  retiree contributions, copayments, and coverage limitations, or  cancellation of postretirement health coverage.
Figure 1 summarizes the previously discussed relationships between DOE,  contractors, third-party administrators, and contractor employees in the  payment, sponsorship, and delivery of postretirement benefits.
Consistent with the long-term nature of DOE research and cleanup  activities, it is DOE’s policy to provide for the continuation of  postretirement benefit plans when there are changes in individual  contractors due to contract competitions. Typically, these scenarios would  not result in the need for the cancellation and re-creation of these benefit  plans. Although future contractor employee benefits earned may change as  a result of contract negotiations, DOE attempts to continue the existing  benefit plan with the new contractor as the sponsor, or offer comparable  benefits in a successor contractor benefit plan during changes in  contractors. Under this scenario, prior contractor retirees continue  receiving benefits from the new plan sponsor and current employees  continue to accrue benefits according to existing plan provisions.
It is also DOE’s policy to facilitate the continuation of postretirement  benefits following the completion of activities at environmental cleanup  sites. DOE officials stated that an agency review of contracts, benefit plan  documents, and labor agreements determined that contractor  postretirement plans set forth the terms of an exchange between the  contractor and contractor employees. In exchange for current services,  contractors provide benefits after retirement (i.e., monthly pension  payments and payments toward postretirement health insurance  premiums) as defined by the terms of the postretirement benefit plans.  DOE officials also stated that the continuation of pension and  postretirement health benefits is necessary to reward former contractor  employees for prior service at cleanup sites and to attract and retain future  contractors and contractor employees to work at remaining cleanup sites.
The completion of all contractor activities at environmental cleanup sites  generally results in either the termination of the prime contract or a  significant reduction in the scope of the outstanding contract. These  contract changes at site closure differ from a change in contractor at an  ongoing site because retirees who earned postretirement benefits under  the terms of prior contracts are left without an active contractor to  administer future benefit payments. It is DOE’s policy in these situations  that future postretirement benefits earned by contractor employees may be  satisfied by the outgoing contractor in one of two ways. Under the first  option, the contractor can request reimbursement from DOE for the  immediate settlement of outstanding benefit obligations, such as through  the purchase of insurance contracts. Under the second option, the  contractor may facilitate the continuation of the current benefit program  and seek DOE reimbursement as postretirement benefit payments are  made to retirees. The outgoing contractor can achieve the latter option  through continuing to sponsor current postretirement benefit plans or  through the transfer of plan administration to another party. This report  refers to those benefits due and paid after site closure as post-closure  benefits.
In 1996, DOE issued Order 350.1 to establish responsibilities, requirements,  and further cost allowability criteria for the management and oversight of  contractor compensation programs. The order provides that contracting  officers are largely responsible for the review and approval of allowable  contractor compensation costs. It also details procedures for the  management and oversight of postretirement benefits, such as the approval  of new postretirement benefit plans, the approval of changes made to  existing plans, and required procedures during contract and postretirement  benefit plan terminations. The department’s Contractor Human Resources  Management Division (CHRM) is responsible for providing contracting  officers with policies and procedures for managing contractor  postretirement benefits costs under the provisions of DOE Order 350.1.  DOE’s Office of Procurement Assistance Management (OPAM) establishes  overall performance objectives for contractor compensation programs and  approves changes to pension and postretirement health benefit plans in  excess of contracting officer authorization limits. The National Nuclear  Security Administration (NNSA) assumes these responsibilities at current  naval reactor sites and assists in the review of contractor compensation  programs at other NNSA-designated locations.
DOE Order 350.1 requires contractors to complete a recurring evaluation of  their employee benefit programs, including pension and postretirement  health plans, against the benefit programs of labor competitors in the  private sector or other professionally recognized measures.
These provisions are completed to aid contracting officers in assessing  contractor benefit costs against the reasonableness standards of the FAR.  Specifically, DOE Order 350.1 states that contractors may use either the  results from (1) a benefit value study or (2) the annual U.S. Chamber of  Commerce Employee Benefit Study, collectively called comparison studies  in this report, to perform an appropriate evaluation of their benefit  programs.
Benefit value studies are intended to measure the relative worth of a  contractor’s benefit programs to its employees. This is done through the  calculation of a replacement value for the benefits offered in the  contractor’s benefit program. Replacement values that may differ among  employees, such as the use and extent of current employee health benefits,  are calculated through the use of a hypothetical group of employees. This  methodology allows comparisons between the provisions of benefit  programs with different demographics, turnover and retirement rates, and  benefit election patterns. As such, replacement values are also calculated  for selected labor market competitors of the contractor and compared to  the contractor replacement values. DOE contractors engage benefits  consulting companies to assist with the benefit value studies and work with  contracting officers to approve the methodologies used.
Replacement values are found for each benefit component evaluated in the  study and used to develop an overall benefit index program for that  contractor. The final product of the benefit value study, called the net  benefit value index, compares the relative value of the contractor’s  employer-paid benefits to the employer-paid value of the average labor  competitor’s benefits, represented by an index of 100. Therefore, a  contractor with a net benefit value index of 107.0 offers benefits to its  employees with a replacement value that is 7 percent above the average of  the contractor’s labor competitors. As mentioned, the benefit value studies  also create separate indexes for major individual benefit components, such  as pension benefits and vacation time.
The U.S. Chamber of Commerce Employee Benefit Study, or Chamber of  Commerce cost study, provides a comparison of the annual employee  benefit contributions and payments made by the contractor with the  average contributions and payments of a survey population. The U.S.  Chamber of Commerce Employee Benefit Study is an annual polling of  domestic employers conducted by the U.S. Chamber of Commerce’s  Statistics and Research Center and sponsored by American International  Group, Inc. The survey publishes information on average employer benefit  contributions and payments per full-time employee made during the  preceding year and the percentage of total employer payroll spent on  employee benefits.
section_title: Scope and Methodology
paragraphs: To analyze the agency’s estimated financial liability for contractor  employee pension and postretirement health obligations, we  obtained audited financial reports and disclosures on contractor  employee postretirement benefit obligations for fiscal years 1999  through 2003,  interviewed DOE officials from the Office of Finance and Accounting  Policy and CHRM regarding the character of obligations at DOE  research and cleanup sites,  reviewed actuarial computations of DOE contractor benefit obligations  to determine how obligations at cleanup sites were adjusted for  expected site closure dates, and  interviewed DOE officials from the Office of Finance and Accounting  Policy and the Office of General Counsel regarding the agency’s liability  with respect to contractor post-closure benefits.
The calculation of financial liabilities for postretirement benefits earned by  contractor employees involves the use of significant economic and  demographic assumptions under the guidance of Statement of Financial  Accounting Standards (SFAS) No. 87, Employers’ Accounting for  Pensions, and SFAS No. 106, Employers’ Accounting for Postretirement  Benefits Other Than Pensions. It was not our intent to assess, nor did we  independently assess, the reasonableness of the assumptions used in the  financial calculations or the accuracy of contractor data used in the  calculations. For fiscal years 1999 through 2003, DOE’s financial  statements, including estimates of contractor postretirement benefits, were  audited by either independent public accountants or its IG. For each of  these years, the auditing entity determined that DOE’s financial statements  presented fairly, in all material respects, the financial position of the  agency.
To determine how DOE evaluates its contractor postretirement benefit  programs and compares the benefits offered by DOE contractors with  private industry benchmarks, we  reviewed DOE Order 350.1 and other agency policy and procedure  guidance related to the completion of contractor comparison studies,  interviewed DOE officials from CHRM to determine procedures used to  assess the quality of the contractor comparison studies,  obtained and analyzed the most recent comparison studies completed  by DOE contractors for all locations subject to the valuation provisions  of DOE Order 350.1, and  reviewed the most recent comparison studies for all locations subject to  the DOE Order 350.1 valuation provisions for compliance with DOE  policies and procedures.
We reviewed contractor comparison studies for compliance with key  controls in DOE’s policies and procedures, designed to provide reasonable  assurance over the validity of the study results, including (1) timely  completion and inclusion of major benefit components; (2) presence of  recommended certifications to attest to the accuracy, relevance, and  consistency of the data used in the study; (3) development of benchmark  information through the selection of labor competitors and the use of up- to-date data for the competitors selected; and (4) calculation of desired  (either required or recommended) performance measures. We summarized  the results of these procedures in this report and communicated the  detailed results of our testing to DOE officials. It was not our intent to  verify, nor would we have been able to independently verify, the accuracy  of actuarial calculations, assumptions, or competitor data used in the  comparison studies due to the proprietary nature of benefits consulting  firm databases used to conduct the studies. However, we confirmed that  DOE requirements regarding the completion of these studies by national  consulting groups with annual consulting revenues in excess of $5 million  were met for all benefit value studies reviewed. We also did not  independently assess the validity of the data supplied by DOE contractors  for use in the comparison studies.
To assess DOE’s oversight of its contractors’ pension and postretirement  health benefit programs, we  reviewed the FAR and other applicable standards related to allowable  pension and postretirement health costs under contracts with  commercial organizations;  determined applicable internal control procedures for DOE’s contractor  benefits program using our Standards for Internal Control in the  Federal Government and Internal Control Management and  Evaluation Tool; reviewed related DOE policy and procedure guidance and interviewed  DOE officials regarding procedures for overseeing contractor benefit  programs in existence through the end of fiscal year 2003; and  reviewed contractor locations subject to the provisions of DOE Order  350.1 for compliance with DOE policies and procedures related to the  review of changes to contractor postretirement benefit programs.
In addition, we reviewed contractor operations and the oversight of  contractor postretirement benefit programs at several federal agencies to  determine whether contractor benefit programs at these agencies were  comparable to those at DOE. We determined that the oversight of  contractor benefit programs at the Department of Defense (DOD) was  comparable, in some respects, to oversight at DOE and interviewed DOD  officials to gain an understanding of that agency’s procedures and the  differences between DOE and DOD contractor operations.
section_title: Reported Unfunded Balances for Contractor Postretirement Benefits Are Significant, and Amounts for Post- Closure Benefits Are Increasing
paragraphs: In DOE’s fiscal year 2003 Performance and Accountability Report, the  agency reported that the present value of estimated contractor  postretirement and pension benefits that were unfunded as of   September 30, 2003, totaled $13.4 billion. The unfunded balance of these  deferred benefits has increased significantly over the past 4 fiscal years due  to various operating and economic factors. An increasing portion of the  future unfunded balance will relate to estimated pension and  postretirement health obligations at completed or near-completed  environmental cleanup sites. The expected magnitude of these benefits at  site closure will require DOE to meet significant future budgetary and  administrative challenges to facilitate the future payment of these benefits.
subsections: section_title: DOE Estimates That the Present Value of Unfunded Contractor Postretirement Benefits as of September 30, 2003, Is $13.4 Billion
paragraphs: DOE reimburses allowable contractor costs for employee postretirement  benefits and records estimates of these future benefit payments in its  financial accounting statements. The agency reported an estimated  present value of $13.4 billion for pension and postretirement health  benefits that have been earned by contractor employees under current  postretirement benefit plan provisions but were unfunded as of   September 30, 2003. This figure, also called the funded status, is an  actuarial estimate of future postretirement benefits attributed to  contractor employee service rendered prior to the measurement date less  the fair market value of accumulated assets dedicated to the payment of  the obligation.
The calculation of financial accounting estimates involves the use of  significant actuarial, demographic, and economic assumptions, including,  among other things, future interest rates, health care cost trends, salary  increases, and life expectancies of eligible retirees (and their survivors).  Also, the estimation is inherently difficult because benefits earned by  current contractor employees are deferred until retirement and the actual  payment of these benefits may not occur for decades.
section_title: Funded Status of Contractor Postretirement Benefits Has Deteriorated Significantly since 1999
paragraphs: The combined funded status for contractor pension and postretirement  health benefits has changed from a $3.6 billion overfunded position in 1999  to a $13.4 billion unfunded position in 2003. There are several significant  reasons for this deterioration in funded status over the last 4 fiscal years,  including negative pension asset returns, declining discount rates over the  past 3 fiscal years, and increasing trends in estimated postretirement health  care costs. Table 1 summarizes the funded status for pension and  postretirement health benefits for the last 5 fiscal year-ends as reported by  DOE.
In general, deterioration in the funded status of postretirement health  benefits can be attributed to the excess of future benefits earned by current  contractor employees, known as service costs, plus interest costs on  outstanding obligations over the payments made to retirees to satisfy  previously earned benefits. Postretirement health benefit service costs plus  interest costs have ranged from 2.3 times to 2.5 times the payments to  retirees made in each of the past 5 fiscal years. The significant increases in  recent retiree health benefit costs, decreases in discount rates, and  continuing accrual of postretirement benefits in existing contractor plans  all affect the service and interest costs of contractor postretirement health  plans, although we did not determine to what extent each of these  individual factors affected the total funded status.
Annual changes in the funded status of pension plans, unlike changes in the  funded status of postretirement health plans, can be significantly affected  by returns on dedicated pension assets. Contributions to pension plans are  generally held in trust for the payment of benefits to participants and their  beneficiaries. Plan trustees, usually banks or trust companies, make  investment decisions for the plan with these assets. Contractor pension  assets have, on average, experienced negative returns from 7 percent to 8  percent in each of the past 5 fiscal years. Negative asset returns decrease  the fair market value of accumulated pension assets and therefore  significantly contribute to changes in the funded status of pension benefits.
However, because of current DOE policies, neither the current unfunded  position nor the significant recent changes in funded status results in a  requirement for contractors, or DOE, to make any additional annual  postretirement benefit contributions. DOE Order 350.1 provides that in  general, annual contractor contributions for pension benefits shall not  exceed the minimum contribution required by ERISA. The order also  provides that postretirement health benefits are paid using a pay-as-you-go  method unless otherwise required by state or federal statute. See table 2 for  pension contributions and postretirement health payments reimbursed by  DOE over the last 5 fiscal years.
However, certain contractors may face higher short-term pension  contributions because minimum contributions calculated under ERISA  rules factor in both current service costs and outstanding obligations. In  any case, the reported $13.4 billion unfunded balance will, eventually,  require additional contributions, investment gains, or favorable benefit  experience within existing pension and postretirement health plans in  order to satisfy future benefits when they come due.
section_title: Post-Closure Benefit Obligations Will Increase with Continuing Environmental Site Closures
paragraphs: While DOE fiscal year 2003 reimbursements of postretirement benefits to  contractors administering benefits following site closure totaled only  approximately $6 million, future amounts will significantly increase with  continuing environmental site closures. DOE has indicated that the agency  is scheduled to close several environmental cleanup sites within the next  few years. Contractor employee postretirement benefits at these sites had  total unfunded balances in excess of $1.5 billion as of September 30, 2003.
DOE Order 350.1 provides that when operations at a DOE facility are  terminated and no further work is to be completed, pension and  postretirement health benefit continuation will be provided for those  contractor employees who earned retirement benefits in these plans.  Consistent with DOE Order 350.1, contract language at anticipated closure  sites (such as Fernald and Rocky Flats) indicates that the DOE contracting  officer will designate and communicate the method of benefit continuation  within the final 6 months of the contract and may direct any of a number of  potential means of doing so, including, but not limited to, (1) termination  and settlement of the plans in accordance with relevant laws and  regulations, (2) continuation of the plans on a pay-as-you-go basis under a  separate contract with the contractor, or (3) transfer of plan  responsibilities to another contractor or third party.
In conjunction with a site closure, the contractor may submit a claim,  called a settlement proposal, for the final calculation of estimated  postretirement benefits earned by contractor employees. The  reimbursement of these costs would allow the contractor, generally  through the purchase of insurance contracts, to complete the payment of  future pension and postretirement health benefits without further DOE  reimbursement. The ability of DOE to honor these claims largely depends  on DOE’s available financial resources compared to the total settlement  costs involved in the satisfaction of outstanding postretirement benefits.
According to DOE officials, DOE has recently considered several options  to avoid postretirement benefit settlements because the reimbursement of  contractors for the purchase of annuity contracts and future health benefit  payments involves significant costs above the calculated settlement  amount. Because of the budgetary resources required to settle  postretirement benefits at completed cleanup sites, DOE officials  anticipate continuing the annual reimbursement of benefit payments by  extending contracts with cleanup site contractors in some cases, solely to  administer the benefits, thereby preserving the contractor relationship as  the plan sponsor. The continuation of these benefits creates specific  challenges for DOE, including the following:  DOE currently attempts to pass the administrative responsibilities for  the continuation of post-closure employee benefits to existing  contractors. However, as the number of contractors with existing  cleanup operations diminishes with additional site closures, DOE must  either continue relationships with former contractors, many of which  were created only to facilitate a site closure, or transfer responsibilities  to another party.
Even though contractor postretirement benefits are earned during  previous employment periods, DOE will require continuing  appropriations in order to reimburse contractors for the payment of  postretirement benefits to former contractor retirees and other  beneficiaries. DOE officials estimate that the post-closure obligations  may extend through 2075.
The continuation of postretirement benefits through another contractor  or a third party requires DOE to pay for the allowable administrative  expenses of these activities.
The continuation of postretirement benefits requires DOE to monitor  and evaluate the ongoing contractor reimbursement for post-closure  benefit payments and any changes in those benefit programs made by  the contractor.
In response to these challenges, DOE announced plans in 2003 to establish  an Office of Legacy Management to address the long-term management of  former cleanup site contractor obligations. According to agency officials, a  key mission of the Office of Legacy Management is to ensure the quality of  service and continuity of former contractor employees’ pension and  medical benefits. The office is planning a comprehensive approach to fulfill  the agency’s pension and postretirement health obligations at current and  future closure sites.
section_title: Evaluation of Contractor Benefits Could Be Improved
paragraphs: DOE Order 350.1 generally requires that contractors periodically complete  self-assessments of major nonstatutory benefit programs against  professionally recognized measures. The most recent contractor  comparison studies report average contractor benefits are 0.2 percent  below the value of selected labor competitors. However, a significant  number of contractor locations are not subject to the valuation provisions  of DOE Order 350.1, or otherwise do not complete them. In cases where  DOE Order 350.1 does not apply, alternative procedures are performed by  DOE personnel; however, the procedures are inconsistent among  contractor locations and are limited at completed, or near-completed,  cleanup sites. We also found the comparison studies that were completed  under DOE Order 350.1 often did not conform to existing DOE policies and  recommended procedures.
subsections: section_title: Evaluation Studies Report Contractor Benefits Are Comparable to Those Offered by Selected Competitors
paragraphs: Each DOE contractor subject to the self-assessment provisions of DOE  Order 350.1 is to periodically complete a comparison study evaluating its  benefit programs against external benchmarks. This evaluation of  contractor benefits may take the form of either a benefit value study, which  measures relative replacement cost of employer-paid benefits against the  benefits offered by a group of selected labor competitors, or a cost study,  which measures the annual relative per capita benefit cost against  companies surveyed by U.S Chamber of Commerce. The results of the  comparison studies allow DOE contracting officers to measure the  competitiveness of contractor benefit programs in the labor market and to  assess contractor benefit program costs for reasonableness under  applicable regulations and contract provisions. Table 3 summarizes the  reported results from the most recent contractor comparison studies  completed.
The reported results of the contractor comparison studies suggest that  DOE has been fairly successful in achieving its goal of limiting the total  value of contractor benefits to no more 5 percent higher than the average  total value of the contractor’s labor competitors at each location.  As  shown in table 3, only 5 of 21 studies have a benefits value of more than 105  and the average contractor benefits value is 0.2 percent below the  employer-paid benefits level of selected study competitors. The reported  results range from 29 percent below competitor averages to 48 percent  above those averages; however, at 16 of 21 contractor locations, the  reported benefits value falls from 90 to 110, or 10 percent below to 10  percent above labor competitor averages. As discussed later in this report,  contractor nonconformance with DOE guidance on the completion of these  studies raises questions about the validity of the comparison study results.
section_title: A Significant Number of Contractors Do Not Complete DOE Order 350.1 Comparison Studies
paragraphs: A significant number of DOE contractors, and the postretirement benefits  they offer, are not subject to the comparison study provisions of DOE  Order 350.1. Contractors with postretirement benefits (1) offered in  corporate plans, (2) reimbursed under support contracts, and   (3) provided for employees at naval reactor sites are exempted from the  requirements. In addition, the studies were not performed at six contractor  sites that were closed, or nearing completion.
DOE reimbursements of postretirement benefits at sites at which  comparison studies were not completed accounted for $105 million of the  $431 million, or 24 percent, in total contractor contributions made for  contractor postretirement benefit programs in fiscal year 2003. Figure 2  illustrates DOE reimbursements for postretirement benefits made for fiscal  year 2003 according to whether the contractor location is subject to the  comparison study provisions and the reasons DOE officials provided for  their exclusion.
DOE officials complete alternative monitoring procedures at some  locations where DOE Order 350.1 comparison studies are not required or  otherwise completed.  Examples of these procedures include reviews of  benefit payment invoices, comparisons to other DOE contractor programs,  and review of annual actuarial calculations. CHRM also periodically  completes valuation and cost reviews at various contractor sites. CHRM  procedures include reviews of contractors’ actual incurred costs for  benefits and wages; actuarial valuation and accounting reports; and various  annual pension plan reviews, such as salary replacement, plan investment,  and cash flow requirement analysis.
However, at completed or near-completed cleanup sites we found that DOE  officials did not complete comparison studies and completed limited  alternative procedures to assess the reasonableness of continuing pension  and postretirement health payments at these locations.  According to DOE  officials, significant reasons for the absence of comparison studies for  post-closure benefits include the lack of resources to perform the studies at  former contractor sites that are nearing completion and the fact that three  DOE sites were closed before the provisions of DOE Order 350.1 became  applicable. Reimbursements at these locations in fiscal year 2003 totaled  $31 million and, as previously mentioned, the postretirement benefits paid  at closed locations are anticipated to increase as additional closure sites  are completed.
section_title: Nonconformance with DOE Guidance Raises Questions about the Validity of Comparison Study Results
paragraphs: DOE Order 350.1 requires certain processes and procedures for completing  the previously discussed comparison studies. In addition, DOE’s Value  Study Desk Manual describes recommended methodologies for the  completion of a benefit value study. Collectively, the procedures and  methodology outlined in DOE Order 350.1 and the Value Study Desk  Manual are intended to provide reasonable assurance that the comparison  studies result in valid, reliable, and comparable information regarding the  benefits offered by DOE contractors. To assess the studies completed by  DOE contractors, we selected 12 significant provisions from DOE Order  350.1 and the Value Study Desk Manual and reviewed the most recently  completed contractor studies for conformance with these provisions. Our  review encompassed all 21 contractor sites subject to the comparison  study provisions of DOE Order 350.1 (18 completed benefit value studies  and 3 completed Chamber of Commerce cost studies).
Based on our review of the studies performed at contractor sites subject to  the valuation provisions of DOE Order 350.1 and the Value Study Desk  Manual, we found one or more instances of nonconformance with required  or recommended comparison study procedures at 18 of the 21 contractor  sites. In summary, we found instances of nonconformance with guidance in  the following areas:  Contractors did not follow applicable provisions for selecting and  documenting comparators used in the development of a benefit value  index (11 of 18 sites completing benefit value studies).
Contractors did not use the recommended methodologies to calculate  the results of the comparison study (10 of 21 sites completing benefit  value or cost studies).
Contracting officers did not obtain recommended certifications from  contractors and actuarial consultants to verify data used in the benefit  value studies (16 of 18 sites completing benefit value studies).
Since the results of the benefit value comparison studies are sensitive to  the selection of a comparator group, DOE Order 350.1 and the Value Study  Desk Manual provide that the comparator group include at least 15  participants, only 20 percent of which can be other DOE contractor sites  that compete for professional level staff. Our review determined that 11 out  of 18 contractors did not properly select comparator firms or maintain  documentation on comparators in accordance with recommended  procedures in the Value Study Desk Manual. Although DOE policies also  require contracting officers to review and approve the contractor  comparator group prior to the completion of the benefit value study,  several contractors were not in compliance with this agency procedure  because they did not provide the specific documentation recommended by  the Value Study Desk Manual. This situation may result in inconsistent  criteria selection for comparators among contractor studies.
DOE Order 350.1 requires contractor comparison studies to generate  appropriate comparison statistics. The Value Study Desk Manual  recommends that benefit value studies calculate the contractor’s total  employer-paid net benefit value using a comparison to the average total  (e.g., the mean) net benefit value for the comparator group. DOE Order  350.1 requires Chamber of Commerce cost studies to calculate the  contractor’s actual per capita benefits cost per employee compared to the  most recently published survey from the same benefit year. Our review  found that 10 out of the 21 contractor sites did not calculate the desired  performance measure as required or recommended by DOE guidance. In  several cases, we found that the contractor total benefit value index was  computed based on the median, not the mean, of competitor replacement  values. We also found that separate performance measures were presented  for employee groups with tiered benefits without any indication of the total  cost distribution between the groups. The failure to calculate consistent  comparison study results makes it difficult for agency officials to compare  results among sites and correctly determine whether corrective action  plans are required.
The Value Study Desk Manual also recommends that the assigned  contracting officers obtain certifications from both the contractor and the  benefits consulting group performing the comparison studies to verify the  accuracy, consistency, and validity of comparisons completed. The  certifications are key controls over the quality of the studies. For example,  they would alert contracting officers if the contractor was to change  comparator firms or valuation methodologies and assumptions or was  unable to obtain up-to-date competitor benefit data. Our review determined  that 16 out of 18 contractors that completed a benefit value study did not  submit the contractor and actuarial certifications at the completion of the  study. The absence of these certifications can result in the improper  interpretation of the comparison study results by contracting officers.
section_title: Increased Management Review Would Help DOE Oversee Its Contractor Employee Benefits Program
paragraphs: DOE could enhance its oversight of contractor employee benefits and  address the challenges posed by the future administration of significant  post-closure benefits by providing for greater management review of  information developed at individual contractor sites and incorporating a  focus on the long-term nature of pension and postretirement health  benefits. The limited review of post-closure benefit payments completed by  contracting officers at closed sites may make the continued  decentralization of benefit program monitoring impractical. Also, the   70-year anticipated duration for some DOE reimbursements of contractor  employee pension and postretirement health costs earned to date needs  additional consideration in DOE’s evaluations of contractor benefit costs.
DOE contracting officers are primarily responsible for determining the  allowability of DOE contractor employee benefit costs and administering  the benefits. Accordingly, DOE’s current monitoring and risk assessment  process is largely performed by contracting officers who are responsible  for reviewing benefit programs at one contractor site. Contracting officers  have the ability to seek technical advice and policy support from various  DOE resources, including CHRM, OPAM, and NNSA. DOE also maintains a  Memorandum of Understanding with DOD agency offices to provide audit  services. These management offices offer, as needed or requested, various  issue- or location-specific monitoring activities; however, they do not  routinely review the results of the monitoring and risk assessment  activities of the contracting officers. Thus, agencywide information  regarding nonconformance with guidelines for contractor employee benefit  program assessments is not routinely analyzed by management so that  corrective actions can be taken.  Similarly, best practices are not routinely  identified at individual contractor sites and propagated across the agency.
Also, dissimilarities in benefit programs between contractor locations can  lead to adverse situations for the contractor benefits program as a whole.  DOE recently approved proposals submitted by contractor employee  groups at two DOE sites to enhance each group’s pension benefits so they  would be comparable with the pension benefits at another DOE site. The  agency approved these benefit enhancements largely based on the  argument that doing so would retain skilled staff, even though the most  recent contractor benefit value studies indicated that these sites already  had pension and postretirement health benefit replacement values  exceeding average labor competitor programs.
The fact that some sites have closed, and others are nearing completion,  also suggests the need for more management attention to program reviews.  We found that contracting officers at several closed, or near-completed,  environmental sites did not perform comparison studies under the  provisions of DOE Order 350.1 or complete other substantive monitoring  procedures.  The failure to do so was attributed to a lack of resources. We  believe that transitioning these monitoring and risk assessment procedures  to a management level that will still exist after site closure would better  position DOE to address future challenges. Systematic monitoring reviews  and risk assessments will be necessary for post-closure benefits since DOE  officials contend that (1) current contractor pension and postretirement  health plan provisions allow for changes in postretirement benefits  subsequent to the site closure and (2) post-closure benefit payments  remain subject to compliance with DOE’s guidance for comparison studies  and applicable regulations, such as the cost reasonableness provisions of  the FAR.
Although the agency resources required to monitor DOD’s contractor  benefits program are significantly greater than those needed at DOE, the  organizational structure at DOD provides an example of an oversight group  used to assist in compliance reviews and risk assessment at all contractor  locations. DOD provides contracting officers significant operational  support from the Defense Contract Audit Agency (DCAA) and the Defense  Contract Management Agency (DCMA). The two agencies provide a  consistent source of routine review and analysis of detailed benefit and  cost information outside of individual contractor locations. This group is  thus able to gain broad knowledge of contractor issues and decisions to  apply a more consistent definition of reasonableness to the evaluation of  contractor benefit costs. DOD also has formal guidance within the agency’s  supplement to the FAR, which lists occurrences in postretirement health  or pension programs that indicate heightened risk and should lead a  contracting officer to request a separate in-depth evaluation of the policies,  practices, and costs of a contractor benefit component that is performed  jointly by DCAA and DCMA staff.
DOE’s evaluation of total benefits in the benefit value study rather than a  review of the individual benefit components does not fully address the  differences in costs between deferred benefit programs, such as pension  and postretirement health benefits, and other benefit components. A  management focus on the long-term impacts of contractor benefit program  decisions may provide improved information for decision makers in DOE  and Congress.  This information is important because decisions on changes  to pension and postretirement health benefits can have a significant impact  on DOE’s long-term 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.  Nevertheless, DOE contracting officers decide whether corrective action  plans are needed largely based on the review of the total benefit value  index, which does not take into account the differences between the total  cost of pension and postretirement health benefits and other benefit  components. These cost differences may be significant because pension  and postretirement health benefits can require DOE reimbursement long  after an employee retires.
As shown in table 4, the benefit value indexes for contractors’ pension and  postretirement health benefits are significantly different from the total  benefits indexes shown in table 3. Both the pension and postretirement  health benefit indexes have larger programwide averages, larger index  ranges, and more contractors with benefit indexes outside of DOE’s target  range of 5 percent above the average of selected competitors.  For  example, postretirement health benefits average more than 44 percent  greater than the average of the DOE contractors’ competitors, while  defined benefit pensions average 29 percent greater.
In addition, DOE’s review of current pension contributions and  postretirement health payments through the Chamber of Commerce cost  studies completed by three contractor sites is not consistent with the long- term nature of pension and postretirement health benefits. This  inconsistency is largely due to the fact that annual employer contributions  for pension and health benefits generally do not equal the estimated  amount of postretirement benefits earned by current employees that year,  also called the annual service cost of benefits. For example, DOE  reimbursed $430 million in costs to its contractors for pension and health  plan contributions in fiscal year 2003; however, the reported fiscal year  2003 service cost of those plans was $872 million.
It is DOE’s policy to evaluate contractor requests for changes to existing  pension and postretirement health plans by reviewing total benefit values  and annual contributions, rather than total costs. DOE Order 350.1 requires  contractors to submit proposed changes to contractor postretirement  benefit programs with information on the impact of the changes on existing  comparison studies and anticipated changes in cost. However, the order  does not differentiate the annual contractor contribution cost from the  total future cost of the changes. For example, the determination to accept  proposed changes by one contractor noted that the increase in pension  liabilities caused by the changes would not result in additional short-term  reimbursements by DOE due to the positive funded status of the plan.  Furthermore, our review of changes made to contractor postretirement  benefit plans during fiscal year 2002 revealed that 3 out of 11 contractors  that submitted changes to DOE for approval did not include either the  effect of the plan changes on comparison study results or an estimate of  savings or costs.
section_title: Conclusions
paragraphs: The satisfaction of postretirement contractor benefits earned under  current and prior contracts with the government will require significant  amounts of budgetary and administrative resources to pay and monitor the  payment of these benefits long after current research contracts and  cleanup sites are terminated. Because DOE has excluded certain  contractor locations from a requirement to complete periodic benefit  valuation studies, it cannot apply a consistent evaluation of costs for all  benefit programs. Within programs required to complete comparison  studies, instances of contractor nonconformance with policies and  guidance make the results difficult to interpret and use in making  management decisions regarding the level of program benefits. The  challenges associated with administering post-closure benefits and a lack  of focus on the long-term nature of postretirement pension and health  benefit obligations exacerbate these problems. Formal management  reviews that attempt to identify and correct areas of nonconformance,  propagate best practices agencywide, and focus on long-term budgetary  needs could improve DOE’s oversight of the contractor employee  postretirement benefits program.
section_title: Recommendations for Executive Action
paragraphs: GAO recommends that the Secretary of Energy take the following four  executive actions: 1.
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. 2. 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.
3.
In cases where the extension of the order is not practical, develop and  perform appropriate alternative procedures to provide similar  information.
4.
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.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested and received from DOE written comments on a draft of this  report, which are reprinted in appendix III. In its comment letter, DOE  noted that our findings were consistent with those of its own internal  assessment and agreed with the report’s four recommendations. DOE also  provided us with technical comments, which we have incorporated as  appropriate.
Additionally, we requested oral comments from DOD on applicable report  excerpts. DOD did not have any comments on the report.
We are sending copies of this report to appropriate House and Senate  committees; the Secretary of Energy; and the Director of the Office of  Management and Budget. We will also make copies available to others  upon request. The report is also available at no charge on GAO’s Web site at  http://www.gao.gov. If you have any questions about this report, please  contact me at (202) 512-6131. You may reach me by e-mail at  martinr@gao.gov. Contributors to this report are listed in appendix IV.
section_title: DOE Contractor Locations with Pension and Postretirement Health Liabilities as of September 30, 2003
section_title: Comparison of DOE and DOD Contractor Benefit Programs
paragraphs: Both DOE and DOD manage a large number of individual contracts and  contractor operations. Both agencies also allow for the reimbursement of  annual pension and postretirement health costs and have agency  contracting officers who are responsible for reviewing these costs for  compliance with applicable regulations. However, as shown in table 5,  there are some underlying program differences that have an impact on the  way the two agencies manage their contractor benefits.
section_title: Comments from the Department of Energy
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Sharon Byrd, Richard  Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Roger Thomas, and  Scott Wrightson made key contributions to this report.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO’s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to   e-mail alerts” under the “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs