Pension Benefit Guaranty Corporation: Statutory Limitation on Administrative Expenses Does Not Provide Meaningful Control
Published: 2003-02-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Concerned about the increasing proportion of the Pension Benefit Guaranty Corporation's (PBGC) operational and administrative budget that is outside the annual administrative expense limitation, the Ranking Minority Member of the Senate Special Committee on Aging asked GAO to review PBGC's (1) application of the limitations set forth in its appropriations in developing its budget estimates and (2) methodology for allocating and reporting its operational and administrative expenses falling under the statutory limitation.
section_title: What GAO Found
paragraphs: As part of PBGC's fiscal year 1985 appropriation, Congress limited the amount of PBGC's appropriated revolving funds available for "administrative expenses." In later years, PBGC requested and Congress approved certain types of expenses to be excluded from the administrative expense limitation. PBGC requested the exclusions in order to gain flexibility in dealing with several major pension plan terminations. The exclusions, combined with PBGC's application of the limitation, have resulted in only 5 percent of PBGC's administrative and operational expenses being included in the limitation for fiscal year 2002. GAO found significant problems with the way PBGC develops its proposed budget estimates for activities covered by its administrative expense limitation. PBGC does not have a reliable basis for estimating its administrative expenses subject to the legislative limitation. As a result, PBGC's estimates for its activities covered by the limitation are not meaningful and thus are ineffective in controlling administrative costs. In addition, PBGC does not have a meaningful basis for reporting adherence to the limitation, since it does not accumulate and allocate actual expenses for activities subject to the limitation. PBGC uses its budgeted amount for the administrative expenses limitation as a basis for allocating and reporting actual costs for those activities. This amounts to force fitting reported expenses so that they equal or come close to the budgeted amount for the limitation, and accordingly, does not provide reliable cost data related to actual activities or a meaningful basis for reporting and tracking compliance with the limitation.

section_title: Letter
paragraphs: The Pension Benefit Guaranty Corporation (PBGC) insures the benefits of  44 million participants on default of their employer-sponsored defined  benefit pension plans. Established by Title IV of the Employee Retirement  Income Security Act of 1974 (ERISA) as a wholly owned government  corporation, PBGC’s primary activities involve collecting insurance  premiums from pension plan sponsors, overseeing plan terminations, and  ensuring the proper disbursement of payments. During fiscal year 2002,  PBGC received $812 million in premium income and paid over $1.5 billion  in retirement benefits. ERISA requires that PBGC’s activities be self- financing. PBGC finances its activities primarily through premiums  collected from covered plans, assets received from terminated plans,  collection of employer liabilities due under ERISA, and investment  earnings.
Amid congressional concerns that PBGC had not informed Congress of  prior-year commitments for a large office automation project, PBGC’s fiscal  year 1985 appropriation limited its use of its appropriated revolving funds  for annual administrative expenses to $33.1 million, which included all of  PBGC’s operational and administrative expenses at that time. Since fiscal  year 1985, PBGC’s operational and administrative budget has grown  significantly, to $227.2 million for fiscal year 2002, while the administrative  expenses limited by annual appropriations acts have fallen to $11.7 million,  or 5.2 percent of the total operational and administrative budget.
In your December 18, 2001, letter, you expressed concern about the  increasing proportion of PBGC’s operational and administrative budget  that is outside of the annual administrative expense limitation. In that  regard, you asked us to (1) describe the evolution of PBGC’s current  statutory limitation on administrative expenses, (2) review PBGC’s  application of the limitations set forth in its appropriations in developing its  budget estimates, and (3) review PBGC’s methodology for allocating and  reporting its operational and administrative expenses falling under the  statutory limitation.
subsections: section_title: Scope and Methodology
paragraphs: To describe the evolution of PBGC’s current statutory limitation on  administrative expenses, we reviewed PBGC’s enabling and appropriations  legislation from 1974 to 2002. We reviewed Titles I and IV of ERISA (29  U.S.C. Chapter 18); Chapter 91 of Title 31, United States Code (commonly  referred to as the Government Corporation Control Act); the Treasury- General Government Appropriations acts for various fiscal years; and  pertinent legislative histories of those acts.
In order to review PBGC’s application of the statutory limitations in  developing its budget estimates for amounts falling under the limitation, we  reviewed the 1985-2003 Budget of the United States Government; PBGC’s  2002 annual report and financial statements; related audit reports, budget  submissions, and proposals; and other publications and official  correspondence dealing specifically with PBGC’s budget limitations.
To review PBGC’s methodology for allocating and reporting its operational  and administrative expenses for activities falling within the administrative  expense limitation, we reviewed key documents from PBGC’s budget  formulation and execution process and interviewed PBGC officials  knowledgeable about the process. We analyzed PBGC’s budget policy  manual, mission and function descriptions for each PBGC department, and  PBGC’s budget justification documents. We obtained and reviewed the  2001 budget execution reports submitted by PBGC to the Office of  Management and Budget (OMB), including the Apportionment and  Reapportionment Schedules (SF 132) and Reports on Budget Execution  and Budgetary Resources (SF 133). We reviewed PBGC’s budgetary  accounting code structure and obtained copies of budgeting and  accounting documents applying those codes. We also interviewed PBGC’s  Budget Director, Controller, Chief Management Officer, and other  appropriate PBGC officials.
As agreed with your staff, we did not review the relationship of PBGC’s  revolving funds to the trust funds it administers as trustee of defined  benefit pension plans because this matter is subject to ongoing litigation.
Accordingly, we did not review individual expense transactions for the  purpose of determining whether they should be properly charged to the  revolving or trust funds.
We conducted our review from March 2002 through December 2002 in  accordance with generally accepted government auditing standards. We  obtained written comments on a draft of this report from PBGC’s Chief  Management Officer.  These are included in appendix IV.
section_title: Background
paragraphs: Congress enacted ERISA in 1974 to protect the anticipated retirement  benefits of employees when defined benefit pension plans they participate  in are terminated and do not have sufficient assets to pay the estimated  future benefits promised to employees (underfunded plans). Defined  benefit pension plans are established or maintained by employers or  employee organizations, or both, and provide for a specific amount of  retirement income with the payment amounts typically based on years of  service and earnings.
PBGC insures participants for single-employer and multiemployer defined  benefit pension plans. Single-employer plans generally consist of plans that  provide benefits to employees of one employer. Multiemployer plans are  those established through collective bargaining agreements that require  contributions by and provide benefits to workers from more than one  employer. PBGC charges a flat-rate premium or a variable-rate premium to  finance its coverage of amounts needed to guarantee benefit payments of  plans that terminate with insufficient assets to pay promised benefits.  PBGC initiates involuntary terminations for underfunded plans. Once those  plans are terminated, PBGC routinely is appointed as the permanent  trustee. (App. I summarizes the plan termination processes in more detail.)
As shown in figure 1, PBGC’s major expenditures include benefit payments,  financial assistance payments, and “operational and administrative”  expenses. Under the single-employer program, PBGC makes guaranteed  benefit payments to retirees or their dependents for underfunded  terminated plans. Under the multiemployer program, PBGC provides  financial assistance payments to pension plans that become insolvent. This  allows the plans to continue paying participants their guaranteed benefits.
PBGC’s operational and administrative expenses include expenses  incurred in carrying out its responsibilities as trustee of plans and its  administrative expenses. PBGC’s expenses as a trustee include the costs of  collecting plan assets; processing, accounting, valuing, and managing  assets; determining eligibility and benefit levels; and paying benefits. PBGC  divides its operational and administrative expenses into two subcategories:  “services related to terminations” and “administrative.” PBGC treats all  expenses of “services related to terminations,” including an allocation of  indirect expenses, as expenses related to its role as trustee of plans. PBGC  charges those expenses to its trust funds. (App. II discusses PBGC’s  revolving and trust funds.) Over the years, PBGC operations have grown  significantly as pension plan terminations have increased. PBGC’s reported  net position increased from a negative $1.3 billion in fiscal year 1985 (total  assets of $1.2 billion against $2.5 billion in recorded liabilities) to   $7.8 billion in fiscal year 2001 (total assets of $22.5 billion against $14.7  billion in recorded liabilities). In fiscal year 2002, PBGC’s net position  decreased to a deficit of $3.5 billion (total assets of $26.4 billion against  $29.9 billion in recorded liabilities). The large decrease in PBGC’s net  position in fiscal year 2002 was due largely to losses associated with  completed and probable pension plan terminations. The number of pension  plan participants that PBGC is responsible for increased from 170,000 in  fiscal year 1985 to 783,000 in fiscal year 2002, an increase of 361 percent.  PBGC’s net position from fiscal year 1985 through 2002 is reflected in figure  2.
section_title: Evolution of PBGC’s Current Statutory Limitation on Administrative Expenses
paragraphs: In annual appropriations acts since fiscal year 1985, Congress has limited  the amount of PBGC’s permanent indefinite revolving fund appropriations  that may be used for administrative expenses. The annual appropriations  acts have not defined the types of costs to be included as “administrative  expenses.” In fiscal years 1989 and 1991, however, the appropriations acts  identified certain PBGC contractual and other expenses to be excluded  from the administrative expense limitation, thus narrowing the activities  and expenses subject to the administrative expense limitation. Over time,  the percentage of PBGC’s administrative expense limitation compared to  the total operational and administrative budget has decreased dramatically,  from 100 percent in fiscal year 1985 to 5.2 percent in fiscal year 2002. (See  fig. 3 and app. III for more details.) This decrease resulted in part from the  1989 and 1991 statutory provisions that narrowed the activities under the  administrative expense limitation. The decrease is also a result of PBGC’s  application of the statutory limitation in its budget process, which is  described in a later section of this report.
The first limitation on PBGC’s administrative expenses appeared in the  Department of Labor Appropriations Act for fiscal year 1985. Expressing  concern that PBGC had not informed Congress of prior-year commitments  for computer acquisitions, the Senate Committee on Appropriations  recommended to Congress that it cap PBGC’s budget authority for its fiscal  year 1985 “administrative expenses” at $33.1 million. This limitation applied  to all of PBGC’s operational and administrative expenses for fiscal year  1985, which covered PBGC’s entire operational and administrative budget.  Congress has included a limitation on administrative expenses in each  annual appropriations act since fiscal year 1985.
However, in subsequent years, Congress excluded expenses from the  “administrative expenses” that had been included under the original  limitation in fiscal year 1985. For fiscal year 1989, PBGC requested that  Congress exclude certain contractual expenses from the administrative  expense limitation.  PBGC’s Budget Director stated that the request was in  response to several major plan terminations. He stated that PBGC needed  flexibility to react quickly to the sizable cost and the unpredictable nature  of pension plan terminations. The statutory administrative expense  limitation in fiscal year 1989 limited PBGC’s appropriations for  “administrative expenses” to $44.2 million and allowed PBGC to exclude  from the limitation its “contractual expenses” for   legal and financial service contracts in connection with the termination   benefits administration services.
In late fiscal year 1991, PBGC requested that Congress further expand its  operational and administrative budget flexibility because of its rising  workloads. PBGC requested that, for the last 2 months of fiscal year 1991  and thereafter, the exclusions from the expense limitation be expanded to  include all expenses related to termination of pension plans, asset  management, and benefits administration. Congress modified the  administrative expense limitation as requested and has excluded these  expenses from the limitation in subsequent appropriations acts.  Subsequent to fiscal year 1991, PBGC made changes in its approach to  applying the statutory limitations, which resulted in a further reduction in  the proportion of expenses falling under the limitation.
After we provided a draft of our report to PBGC, the President’s proposed  Budget of the United States Government, Fiscal Year 2004 was released on  February 3, 2003.  The fiscal year 2004 budget includes a proposal to  eliminate the limit on PBGC’s administrative expenditures.
section_title: PBGC’s Application of the Statutory Limitation Is Not Reliable
paragraphs: During our review, we found significant problems with the way PBGC  developed its budget estimates for its administrative expense limitation.   As a result, PBGC’s estimate for activities covered by the budget limitation  is not meaningful or reliable.  PBGC’s Budget Director could not  demonstrate that PBGC had conducted any analysis of expense  classifications for PBGC’s operational and administrative budget since  PBGC last reviewed its activities in 1993. We identified flaws in the  concepts supporting PBGC’s budget estimates for expenses subject to the  limitation.  For example, PBGC did not identify any direct costs of activities  falling under the expense limitation, and based its estimated budget only on  the amount of indirect expenses not allocated to activities PBGC attributes  to plan terminations. Based on this flawed concept, PBGC determined that  its estimated budget for administrative expense limitation was   $11.5 million for fiscal year 1995. PBGC has used that amount, with some  minor adjustments, as a basis for all subsequent annual budget proposals,  without subsequent validation.
To calculate the estimated cost of activities subject to the statutory  limitation based on the new exclusions that PBGC received beginning with  the last 2 months of fiscal year 1991, PBGC’s Budget Director told us that  PBGC conducted reviews in 1991 and 1993 of activities at different  organizational levels. The official told us that based on a 1993 review,  PBGC identified and estimated direct and indirect expenses associated  with PBGC’s different activities, including premium collections and  revolving fund investment services—the major expense activities deemed  by PBGC to remain subject to the administrative expenses limitation. The  PBGC Budget Director was unable to provide us with documentation  supporting the review or the resulting expense allocations among PBGC’s  activities. The PBGC official also did not provide supporting  documentation for the reasons why certain other regulatory and overhead  activities were excluded from the budget estimates for the administrative  expense limitation. Identifying and documenting its activities, along with a  basis for including or excluding those activities from the administrative  expense limitation, would have been PBGC’s logical first step in developing  a cost allocation methodology for identifying total expenses under the  administrative expense limitation.
However, in its budget proposals for fiscal year 1995, PBGC used a flawed  methodology for estimating costs that was inconsistent with the concept of  assigning direct and indirect costs based on activities performed. Under its  proposed operational and administrative budget, PBGC identified  estimated direct expenses for “services related to terminations” that it  considered trustee activities. PBGC then placed all other expenses in a  pool it characterized as “indirect,” even though these “indirect” expenses  included direct expenses for premium collection and revolving fund  investment services, the two major activities it deemed to be subject to the  administrative expenses limitation. Further, PBGC estimated its budgeted  amount for the expense limitation based on an allocation of the expenses in  its pool of “indirect” expenses only. PBGC first allocated estimated  “indirect” expenses to its “services related to terminations” based on the  ratio of estimated direct expenses for trustee activities to PBGC’s total  estimated operational and administrative expenses. PBGC then assigned  the remaining “indirect” expenses to the estimated budget for the limited  administrative expenses, even though no direct expenses had been  assigned to those activities, and even though, by definition, indirect  expenses are generally not allocated to functions that do not have direct  expenses. (See fig. 4.)
The effect of not considering the direct expenses associated with the  activities falling under the limitation when budgeting for these activities is  to arrive at a total budget estimate for limitation activities that may not be  reasonable. The budget estimate could be overstated or understated  depending on the actual level of direct expenses associated with limitation  activities.
Based on this flawed approach, PBGC determined its proposed budget for  the expense limitation to be $11.5 million in fiscal year 1995 and has used  this amount as a basis for all subsequent years’ budget proposals.  According to PBGC’s Budget Director, all of PBGC’s subsequent budget  proposals for the statutory limitation on administrative expenses have been  based on the fiscal year 1995 budgeted amount of $11.5 million, with minor  cost adjustments and inflation adjustments.  Therefore, from fiscal year  1995 through 2002, the amount of budgeted expenses falling under the  limited administrative expense category has generally remained constant,  while PBGC’s total budget for operational and administrative expenses has  grown substantially. (See fig. 5.)  PBGC has attributed all growth in  expenses to trust fund activities and pays the increased expenses from the  trust funds, without any verification of the validity of this approach.
section_title: PBGC’s Reporting of Expenses Falling under the Administrative Expense Limitation Is Not Meaningful
paragraphs: We found that PBGC does not account for the actual expenses within its  administrative expense limitation. Instead, PBGC uses its budgeted amount  as a basis for allocating and reporting actual costs for those activities.  PBGC accounts for operational and administrative expenses for activities  other than “services related to plan terminations” under the category,  “administrative expenses.” This amount includes indirect expenses for the  statutory limitation category and indirect expenses for “services related to  terminations.” However, the amount prorated to the limitation is based on  the initial amount of administrative expenses budgeted for activities PBGC  subjects to the limitation and is designed to allocate to the limitation an  amount equal or close to the originally estimated amount. This amounts to  force fitting reported actual expenses so that they equal or come close to  the statutory limitation amount. This method does not provide meaningful  funds control over these activities. As a result, PBGC does not have a  meaningful basis for reporting and tracking its compliance with the  limitation. The reporting of actual expenses should be from detailed,  transaction-based support for the direct and indirect expenses related to  the activities subject to the limitation.
According to PBGC’s Budget Director, PBGC developed its current method  for reporting the costs associated with premium collection and revolving  fund investment services to simplify the process and to avoid unduly  complex and excessive accounting practices. He explained that the  methodology was created to eliminate judgment calls and any “gray”  distinctions between assigning costs for administrative activities subject to  budget limitations and those not subject to budget limitations. This  methodology, however, does not provide any reliable or meaningful cost  data related to actual activities. Proper budgetary accounting provides a  means to track the status of budget authority to help avoid overexpending  or overobligating appropriations. A methodology for budgeting, allocating,  and reporting costs should be clearly defined, well reasoned, consistently  applied, and properly documented. However, PBGC’s process for  determining annual proposed and reported actual costs of activities subject  to the statutory limitation on administrative expenses is neither reasonable  nor reliable.
As discussed in our executive guide on best practices in financial  management, to effectively evaluate and improve the value derived from  government programs and spending, Congress and other decision makers  need accurate and reliable financial information on program cost and  performance. We also note that financial information is meaningful when it  is useful, relevant, timely, and reliable. Cost accounting principles call for  direct costs to be assigned to an activity wherever feasible and  economically practical, and indirect costs to be allocated on a reasonable  and consistent basis. Such practices would require that PBGC periodically  evaluate its methodology for assigning the direct costs of activities and the  allocation of related indirect costs. Further, agencies administering  appropriation and fund accounts are responsible for ensuring that the  amounts obligated and expended do not exceed the legally imposed  limitations. Thus, when obligating or expending amounts for its expenses  under the administrative limitations, PBGC is required to separately track  those amounts, including whether they were actually disbursed, so that it  can determine by expense category whether its obligations and  expenditures are proper in amount and purpose.
section_title: Conclusions
paragraphs: PBGC’s budget proposals for its administrative expense limitation, along  with its reporting of the amounts spent under the expense limitation, are  not based on actual data and thus are not meaningful or effective in  controlling administrative costs. PBGC does not have a reliable basis for  estimating its budget for activities subject to the legislative limitation. Even  if PBGC had such a basis, it still would have no basis for reporting on  adherence to the limitation, since it does not accumulate and allocate  actual expenses for activities subject to the limitation. Its practice of  reporting on limitation expenses so that the reported amounts are designed  to equal or come close to the budgeted numbers further undermines the  credibility of this process. Furthermore, the percentage of PBGC’s  operational and administrative budget subject to the limitation has fallen  significantly while its total operations budget has increased significantly.
Accordingly, the limitation as now structured and implemented does not  represent a meaningful control over administrative expenses.
section_title: Matter for Congressional Consideration
paragraphs: With only about 5 percent of total operating and administrative costs falling  under the limitation in fiscal year 2002, the statutory limitation on  administrative expenses offers little opportunity for controlling operational  and administrative expenses. Because the limitation no longer serves as a  meaningful control over PBGC’s administrative activities and expenses,  Congress may wish to consider whether or to what extent to continue to  use the administrative expense limitation as a tool for overseeing PBGC’s  activities. Congress could choose to more clearly define PBGC’s  administrative expense limitation, which would improve the limitation’s  use as an oversight tool during the normal congressional appropriations  process. A more clearly defined expense limitation could result in a larger  share of PBGC’s expenses falling under the limitation. On the other hand,  Congress may decide to eliminate the administrative expense limitation for  PBGC altogether.
section_title: Recommendations for Executive Action
paragraphs: In order to provide cost information to assist Congress in its oversight of  PBGC’s expenses and for congressional decision making about whether or  to what extent it should continue to use an expense limitation in its  oversight of PBGC, we recommend that PBGC’s Executive Director  employ a systematic review, including both quantitative and qualitative  measures, to develop a methodology for assigning the direct expenses  related to its major categories of activities;   develop a method of allocating indirect costs to each activity using a  logical, reasonable, and consistent basis; and  develop a method for accounting for actual direct and indirect expenses  for its major activities.
section_title: Agency Comments
paragraphs: In commenting on a draft of this report, the Chief Management Officer  (CMO) of PBGC noted that the Corporation had reached a conclusion  similar to ours about the clarity of PBGC’s current budget structure and  stated that the budget structure must change.  In this regard, PBGC’s CMO  stated that PBGC proposed a new budget structure for its fiscal year 2004  congressional budget submission that would restructure PBGC’s budget  program and financing activity line items so that they match up with  PBGC’s lines of business.  PBGC’s CMO further stated that PBGC will  consider establishing an internal review process in which budget, finance,  auditing, and legal staff will examine all budget lines midyear to ensure  their correct classification to the new activities.
PBGC’s CMO expressed concern that our report appears to be stating that  PBGC’s budget structure does not provide Congress with meaningful  control.  However, our report addresses the administrative expense  limitation and not PBGC’s overall budget.  As we stated in our report, we  found significant problems with the way PBGC developed its budget  estimates for activities covered by the administrative expense limitation as  well as with PBGC’s reporting of actual expenses covered by the limitation.   The percentage of PBGC’s administrative expenses subject to the limitation  has fallen significantly while its total operational and administrative  expenses have increased significantly, resulting in only 5 percent falling  under the administrative expense limitation.  Accordingly, if Congress  wishes to maintain some sort of limitation for some or all of PBGC’s  administrative expenses, the limitation as now structured and implemented  does not represent a meaningful control.
PBGC’s CMO disagreed with our conclusion that PBGC’s reporting  processes are not based on actual data. As we stated in our report, for  reporting on administrative expenses that fall under the administrative  expense limitation, PBGC uses its budgeted amount for the administrative  expense limitation as a basis for allocating and reporting actual costs for  those activities. As discussed in the body of our report, this PBGC process  merely results in force fitting reported expenses so that they equal or come  close to the budgeted amount for the statutory limitation, and accordingly,  does not provide reliable cost data related to actual activities or a  meaningful basis for reporting and tracking compliance with the limitation.
PBGC’s CMO stated that the current budget proposal addresses the three  recommendations in our report.  However, as described in the CMO’s  response, PBGC’s proposed budget restructuring does not specifically  address our recommendations.  As described in the CMO’s response,  PBGC’s proposal does not address our recommendations calling for a  systematic review to develop a methodology for assigning direct expenses  to PBGC’s  major categories of activities, developing a method of allocating  indirect costs to those activities, and developing a methodology for  accounting for those expenses for its major lines of activities.
Finally, PBGC notes that it is facing historic challenges to the pension  insurance system given the significant number of large plan terminations  and other potential liabilities.  We agree that this is an opportune time for  Congress to decide whether or to what extent it will use the administrative  expense limitation as an oversight tool.  As we state in our report, Congress  may wish to review whether to continue including such a limitation in  appropriations acts as an oversight tool. If a statutory limitation for  controlling costs continues to be desirable, Congress may wish to  reexamine the scope of the limitation and require PBGC to apply and report  on the limitation in a more meaningful manner.
As agreed with your office, unless you announce its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date.  At that time, we will send copies to the Chairman of the Senate  Special Committee on Aging and to other interested congressional  committees. We are also sending copies to the Executive Director of the  Pension Benefit Guaranty Corporation. Copies of this report will also be  made available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-9406 or by e-mail at franzelj@gao.gov if you  or your staff has any questions concerning this report. Key contributors to  this report were Darryl Chang, F. Abe Dymond, Meg Mills, and Estelle Tsay.
section_title: Pension Plan Termination Procedures
paragraphs: The Employee Retirement Income Security Act of 1974 (ERISA) directs  PBGC to oversee the termination of single-employer defined benefit  pension plans under three different sets of circumstances. Each type of  termination involves different procedures. PBGC may be appointed as  pension plan trustee under two of these procedures.
ERISA authorizes plan sponsors or plan administrators to initiate the  termination of ongoing plans under three general circumstances and  through three corresponding procedures set out in federal regulations.  First, a plan administrator may initiate a “standard termination” of a single- employer plan if the liabilities of the plan are sufficiently funded. “Standard  termination” is the name given by ERISA to the termination procedure that  consists primarily of a series of notices and valuations. Second, a plan  administrator of a single-employer plan may initiate a “distress  termination” when the plan sponsor and each member of the plan sponsor’s  controlled group meet financial distress criteria. “Distress termination” is  the name given by ERISA to the termination procedure that authorizes plan  administrators to notify PBGC that they intend to terminate a plan because  (1) the employer is in liquidation proceedings, (2) the employer is in  reorganization proceedings and the bankruptcy court determines that the  employer is unable to continue in business if it must fund the plan,   (3) PBGC agrees that the employer cannot pay all debts and cannot  continue in business, or (4) PBGC agrees that the costs of continuing plan  coverage are “unreasonably burdensome” solely because of a decline in the  employer’s workforce. If, during a “distress termination,” PBGC determines  that the plan is not sufficiently funded to cover the amounts it would  guarantee, it must petition a federal district court or reach agreement with  a plan administrator to terminate the plan.
A third termination procedure—“PBGC-initiated termination” (sometimes  called “involuntary termination”)—is available only to PBGC. PBGC must  initiate the “involuntary termination” of a single-employer plan when it  determines that there are insufficient plan assets to pay benefit liabilities  currently due, and it may initiate a plan termination when, among similar  reasons, PBGC’s “long-run loss with respect to the plan may reasonably be  expected to increase unreasonably.” “Involuntary termination” remains  available during “standard” and “distress terminations.”
Once the decision to terminate an underfunded plan has been made, either  in a distress termination or in a PBGC-initiated termination, the applicable  procedures vary:  PBGC and the plan administrator may agree to the appointment of an  interim trustee to administer the plan while they or a federal district  court consider whether the plan should be terminated. If they do not  agree to an appointment, either may petition a federal district court to  appoint an interim trustee for that duration.
PBGC and the plan administrator may agree that the plan should be  terminated, and if they also agree to the appointment of a permanent  trustee, that trustee may terminate the plan.
PBGC may apply to a federal district court for a decree adjudicating that  the plan should be terminated, or if an interim trustee has been  appointed, the trustee may also apply for that decree. The court must  stay any proceedings against the plan in any court until it adjudicates  the matter. If the court grants the decree, it authorizes the interim  trustee to terminate the plan or appoints a new permanent trustee to do  so.
If an interim trustee is appointed upon initiation of the “involuntary  termination,” but the court dismisses an application for termination or  PBGC fails to file an application within sufficient time, that trustee’s  duties end.
A plan’s termination date triggers various powers and duties of PBGC,  employers, trustees, plan administrators and sponsors, participants, and  the federal courts. The plan termination date generally is reached when  agreed to by PBGC or when ordered by a federal court pursuant to the  applicable termination procedure. On the plan termination date, benefits  cease to accrue to plan participants, the plan is generally removed from  coverage under Title I of ERISA, and the plan can be processed for  liquidation. The termination date is used by PBGC to make and issue  determinations on the value of (1) vested benefits, (2) unfunded vested  benefits, (3) employer liability for unfunded amounts, and (4) PBGC’s  liability for its insured amounts.
Terminated plans under “PBGC-initiated terminations” are “closed-out”  when PBGC issues final determinations of benefits payable to plan  participants, resolves participants’ appeals from the determinations, and  places the plans in administrative status. Under the administrative status,  PBGC contracts with plan administrators and other service contractors for  subsequent investment of plan assets, payment of benefits due, and  maintenance of participant data. The average age of benefit determinations  issued in fiscal year 2002 was 3.3 years after the date PBGC was appointed  as trustee. The average age of unissued benefit determinations at fiscal  year end was 0.9 years. Under “standard” and “distress terminations,”  plans are liquidated when PBGC receives a certificate of distribution of  plan assets from a plan administrator (certifying that the administrator  purchased annuities or paid participants a lump sum). Plan administrators  do not manage benefit payments, participant data, or plan investments  after they are distributed under “standard” or “distress terminations.”
PBGC estimates that it will approve 1,200 “standard terminations” and  conduct 110 “involuntary terminations” by the end of fiscal year 2003 and  anticipates the same workload in fiscal year 2004. ERISA also authorizes  PBGC to restore any terminating or terminated plan to Title I “active”  status, and it has done so with major plan failures, such as LTV  Corporation’s $1.8 billion underfunded plans in 1986.
section_title: PBGC Finances Its Activities under Two Fund Types—Appropriated Revolving Funds and the Trust Fund
paragraphs: Prior to 1981, PBGC was treated as an off-budget federal entity, and its  transactions were excluded from the budget totals. Beginning in 1981,  Public Law 96-364 required that PBGC’s receipts and disbursements be  included in the budget. These are accounted for in a single U.S. Treasury  account and reported in a single budget account—the PBGC Fund, a public  enterprise fund. PBGC also maintains separate trust fund accounts in a  custodian bank for plan assets it holds as trustee and to account for  terminating or terminated plans. These accounts are not included in the  total of the federal budget. The trust funds, referred to by PBGC  collectively as the “trust fund,” reflect accounting activity associated with  trusteed plans—plans for which PBGC has legal responsibility,  plans pending trusteeship—terminated plans for which PBGC has not  yet become legal trustee, and   probable terminations—plans that PBGC determines are likely to  terminate and be trusteed by PBGC.
To provide financing for PBGC, ERISA established revolving funds for  PBGC that constitute permanent indefinite appropriations. Out of these  revolving funds, PBGC may pay its expenses, such as “operational and  administrative expenses,” guaranteed benefits, and financial assistance.
Accordingly, PBGC categorizes its expenditures into three groups. (See   fig. 6.) First are PBGC’s “operational and administrative” expenses, which  PBGC further divides into two subcategories: “administrative expenses”  and “services related to terminations.” Both of these expense  subcategories are paid from the revolving funds, but the trust fund  periodically reimburses PBGC for the “services related to terminations”  expenses and portions of the “administrative expenses” that are allocated  to “services related to terminations.”
Reimbursement of a percentage of benefit funding)
PBGC’s two other expense categories are benefit payments that PBGC  makes to retirees or their dependents (benefit payments) and financial  assistance loans that provide PBGC assistance to underfunded  multiemployer pension plans (financial assistance). PBGC expends its  revolving funds for both categories, but the trust fund reimburses the  revolving funds for a percentage of the amount of benefit payments. PBGC  calculates the reimbursement percentage using what it calls its  “proportional funding” method. The “proportional funding” percentage  represents aggregate calculations of the amount of benefits that can be  paid by the trust fund without its being depleted. No financial assistance  payments are reimbursed by the trust fund.
subsections: section_title: Appropriated Revolving Funds
paragraphs: Title IV of ERISA establishes seven revolving funds on the books of the U.S.  Treasury and provided PBGC with permanent indefinite spending authority  to carry out its duties. ERISA lists the programs, activities, and costs that  each of the seven revolving funds may be used to support. Of the seven  revolving funds, however, PBGC currently uses only three because it does  not conduct the programs or activities supported by the other four. Of the  three revolving funds that PBGC currently uses, funds 1 and 7 support the  basic benefit guarantee program for single-employer pension plans and  fund 2 supports the basic benefit guarantee program for multiemployer  pension plans. All of these are combined into the PBGC fund for budget  reporting purposes.
Title IV of ERISA lists the specific types of resources to be credited to each  fund. For example, PBGC’s revolving funds 1 and 2 may receive premiums  charged to employers, attorney’s fees awarded to PBGC, earnings on  investments of amounts in the funds, and amounts that PBGC may borrow  from the U.S. Treasury (up to $100 million). Revolving fund 1 may also  receive amounts transferred to it from revolving fund 7. Revolving fund 7,  however, may only receive certain premiums for single-employer plans, and  also the related penalties, interest charges, and earnings on investment of  those amounts.
Title IV of ERISA also specifies the types of expenses that each fund may  pay and certain types of expenses each may not pay. For example, PBGC  may use the two benefit guarantee revolving funds to pay such costs as  PBGC’s guaranteed pension plan benefits, to purchase assets of terminated  plans, and to pay for certain of PBGC’s “operational and administrative  expenses” not included in the statutory “administrative expense”  limitation. However, PBGC may use amounts in each of its revolving funds  only for the purposes specified by ERISA for each, and they may not be  used to finance any other activity.
Congress reviews PBGC’s budget each year, as required by the Government  Corporation Control Act. However, with the exception of amounts limited  under the statutory limitation on administrative expenses, the revolving  funds are available to PBGC without annual appropriations, so long as  expenditures do not exceed available resources.
section_title: Trust Fund
paragraphs: Title IV of ERISA also authorizes PBGC to be appointed as interim trustee  of pension plans to control them after it has initiated an involuntary  termination (in its corporate capacity) or to serve as permanent trustee  after the plan terminates. According to the PBGC General Counsel, “PBGC  routinely requests that it be appointed trustee of terminated, under-funded  pension plans, and courts routinely grant such requests.” PBGC  administers such plans in the trust fund by depositing their assets into  accounts held at a custodian bank. The trust fund identifies trusteed plan  assets according to plan type (e.g., single employer) and year of  termination. Once plan assets are deposited into the trust fund, PBGC  combines them with the assets of similar plan types, so that the assets lose  their individual plan accounting identity. Within the trust fund, however,  PBGC currently accounts for more than trusteed plan assets, including   (1) plans pending trusteeship—terminated plans for which PBGC has not  become legal trustee by fiscal year-end—and (2) probable terminations— plans that PBGC determines are likely to terminate and be trusteed by  PBGC. PBGC expends amounts from these combined accounts for plan  benefit payments and expenses arising from all the plans.
PBGC distinguishes the legal status of its revolving funds from its trust  fund, concluding that the “private” trust fund assets are not subject to  government restrictions on their use, except to the extent that PBGC  voluntarily abides by any restrictions. In 1985 and 1986, we concluded that  the funds held by PBGC as permanent trustee of terminated plans under  ERISA were not subject to the laws applicable to expenditures of  appropriated funds by wholly owned government corporations.  Specifically, we concluded that they were not subject to laws related to  procurement of investment manager services, laws requiring the deposit of  collections into the General Fund of the U.S. Treasury, and laws requiring  the use of government printing plants.
We found that when PBGC assumed the fiduciary duties of permanent  trustee as prescribed by ERISA, the specific activities considered in those  cases were “fundamentally different” than those arising from its  governmental duties because the outcome would inure to “the benefit of  the trust funds and not to the direct benefit of the United States.” Because  these fiduciary duties were the same as those of a “private fiduciary”  appointed to the same position, we concluded that the funds should be  treated as “non-public” in nature for the purposes of the specific activities  then under review.  Since then, a 1987 amendment to ERISA expanded  PBGC’s authority to pool the assets of any terminated plan for  administration, investment, payment of the liabilities of those pooled plans,  and for other purposes that PBGC deems appropriate.
PBGC now administers the trust fund together with the revolving funds  under a “proportional funding” method whereby it pays benefits from each  of these funds using financial calculations designed to maximize the  longevity of their combined assets. PBGC uses the trust fund for all of its  corporate expenses except those subject to the statutory limitation on  administrative expenses, the benefit payment amounts “proportionately”  attributed to the revolving funds, and the amounts for multiemployer plan  financial assistance.
According to PBGC budget and accounting officials, the assets and  liabilities of trusteed terminated plans, terminated plans pending  trusteeship, and “probable terminations” are accounted for by program and  year within the trust fund. PBGC uses the value of its accounts in its  allocation of investment gains and losses and in its expenses. It allocates  earnings and expenses to individual trust funds in proportion to their value  relative to the total amount of the trust funds, unless such activities are  directly attributable to a specific fund. PBGC’s trust funds are not included  in the federal budget.
section_title: Reimbursement of Appropriated Revolving Funds from the Trust Fund
paragraphs: In the fiscal years from 1985 through 1988, expenses for the administration  of terminated plans entrusted to PBGC were accounted for under the  separate trust fund, which is not subject to the appropriations act  limitation on administrative expenses. Consequently, amounts budgeted for  these trust fund expenditures were not included in PBGC’s revolving fund  budget submitted to Congress. For example, in fiscal years 1987 and 1988,  the trust fund directly paid $7.3 million for administrative expenses for  trust fund operations that were not included in the revolving fund operating  budgets. During fiscal year 1989, as PBGC needed additional amounts in  the revolving funds for additional unbudgeted contractual expenses, it used  additional funds from its trust fund without a need for further  congressional approval.
For its fiscal year 1989 budget, PBGC included in its budget submission to  Congress a request for authority to initially use the revolving funds for all  revolving fund and trust fund expenses, with the trust fund later  reimbursing the revolving funds for trustee-related expenses associated  with plan terminations. In the committee reports accompanying their  respective appropriations bills, the House and Senate Appropriations  committees approved the PBGC proposal to pay expenses from the  revolving funds, without limitation, that were previously paid from the trust  fund.
PBGC now routinely makes payments from the revolving funds first, with  reimbursements from the trust fund. For example, in fiscal year 2001,  PBGC’s total reported operational and administrative expenses of $187.9  million included amounts chargeable to both the revolving funds and the  trust fund. Of this, PBGC charged $176.3 million to the trust fund. Because  not all of these were actually paid out during fiscal year 2001, PBGC carried  forward to fiscal year 2002 those amounts due to the revolving funds,  totaling about $173.3 million. The remaining amount of about $11.6  million was not reimbursed, and was therefore paid by the revolving funds,  and it reflects slightly less than the estimated $11.7 million for  administrative expenses limited by Congress for fiscal year 2001. PBGC has  stated that only the amounts submitted to Congress in its administrative  expense budget are subject to the annual appropriations review process  because the remaining amounts are reimbursed from the trust fund and  constitute “non-public” funds.
section_title: Limitation on Administrative Expenses Compared to Total Operational and Administrative Expenses, FY 1985-2003
section_title: Comments from the Pension Benefit Guaranty Corporation
paragraphs: The following are GAO’s comments on the Pension Benefit Guaranty  Corporation’s (PBGC) letter dated February 6, 2003.
subsections: section_title: GAO Comments
paragraphs: 1. The term “administrative expenses” in appropriations acts, legislative  history, and PBGC’s practices differ from how the term is typically used.   Therefore, we used terminology in our report that we believe is  understandable to third parties not involved in PBGC’s annual  appropriations process.  Throughout the report, we are specific when we  discuss the expenses that fall under PBGC’s limitation, and use the term  “administrative expenses that fall under the limitation” or the  “administrative expense limitation.”  2.  As we state in our report, the reviews conducted by PBGC in 1991 and  1993 to identify and document its activities would have been PBGC’s logical  first step in developing a cost allocation methodology for identifying total  expenses under the administrative expense limitation. However, in its  budget proposal for fiscal year 1995, PBGC used a flawed methodology for  estimating costs that was inconsistent with the concept of assigning direct  and indirect costs based on activities performed.  Furthermore, PBGC has  not reviewed this methodology since then. 3. We do not disagree with PBGC’s overall assumptions about  the  relationship of its costs to its overall workload trends.  However, PBGC has  not reviewed its activities—looking at approach and amounts—to  determine whether the large changes in the scope of its workload call for  changes in the way it budgets and reports the amounts subject to the  administrative expense limitation.
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