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. 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. Reported Unfunded Balances for Contractor Postretirement Benefits Are Significant, and Amounts for Post- Closure Benefits Are Increasing

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. 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. Contractor employee postretirement benefits at these sites had  total unfunded balances in excess of $1.5 billion as of September 30, 2003. Evaluation of Contractor Benefits Could Be Improved

DOE Order 350.1 generally requires that contractors periodically complete  self-assessments of major nonstatutory benefit programs against  professionally recognized measures. A Significant Number of Contractors Do Not Complete DOE Order 350.1 Comparison Studies

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. In addition, the studies were not performed at six contractor  sites that were closed, or nearing completion. 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. 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. 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. 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. 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. 2. 3. 4.
Why GAO Did This Study

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.

What GAO Found

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.