Taxpayers on the Hook for Retiree Costs for Federal Contractors

Fox Business ^ | June 10, 2011 | Elizabeth MacDonald

[Tolerance Sucks Rocks]

A surprising new government report shows that taxpayers have been footing the bill for retiree benefits not just for federal workers, but for independent freelance contractors who do work for the government as well.

And no one is watching the store to see if your tax dollars are being wasted.

Taxpayers for years have been covering private contractors' retiree costs for things like pensions and health care, even though these workers are not on the federal payroll.

Taxpayers also cover these retiree costs for contractors' spouses, too, and in some cases if contractors want to retire early (at age 50), just like regular federal workers, many can then get taxpayer-funded coverage, says an official at the Government Accountability office.

For the Department of Energy alone, overall this coverage cost taxpayers $6.8 billion over the last 10 years, according to the new GAO report recently sent to Congress. Nine out of ten dollars spent on the DOE's annual budget goes towards contracts, including contractor retiree benefits.

The problem is, the GAO tells FOX Business it only knows about this problem at the DOE -- no one in government knows, or is tracking with regular, transparent reports to Congress, the tax money going out the door for these costs at other agencies, like the Pentagon, Homeland Security, the National Institutes of Health, or NASA.

The lion's share of the DOE’s workforce is private contractors, most of whom work in the nuclear energy sector. DOE has the largest private contractor workforce in the federal government.

“We can't speak for other contractors, but what we found at DOE is that these numbers were not transparent to Congress and recommended they be more transparent,” the GAO tells FOX Business.

[MontaniSemperLiberi]

DOE bears the responsibility, according to its contracts, for reimbursing contractors for retiree benefits for an estimated 200,000 people, including 100,000 current and former contractor employees, and 100,000 beneficiaries of those employees, such as spouses.... In fiscal 2008 to 2009, such costs more than doubled, the GAO adds, because of a drop in the interest rate used to calculate contractors’ pension plan liabilities, and because the pension assets plunged in value as the overall market dropped due to the financial crisis.... As is the case across the board, volatile investment returns can drastically impact pension contributions for government contractors, and in turn taxpayer costs to cover them. "As a result, DOE ultimately bears the investment risk incurred by the contractor sponsoring the plan," the GAO said in its report. So the DOE, in order to reduce immediate contract costs, decided to take on the risk of interest rate fluctuations in pension plans. Not for 401k's, the employee keeps that risk, but in pensions. Most contractors would never notice this provision in their company's contract even if they ever got to read it.

[MontaniSemperLiberi]

The choice is simple. Do we believe in defined benefit plans (employer pensions) or in defined contribution plans (401k’s)?

No one is complaining about paying contractors for their work. People are complaining about the DOE signing a dumb contract and now having to make up for a stock market crash.

[pepsionice]

Whoever signed off in DOE for this type of expense...ought to appear before congress...even if they did this twenty years ago. Neither Homeland Security or DOD would have signed off on a deal like this.

[CharlesWayneCT]

People are hired to do a job, and they are given a contract, and the contract pays them for the job, in various ways.

I work for a company. They hired me to do a job. In return, they pay me. They pay me a salary, they give me holidays, they give me vacation. They pay for most of my health benefits. They have a defined benefit retirement plan. They put money into my 401K. All of these are ways I am compensated for the work I do on their behalf.

When I am retired, the company will still be paying me my retirement benefits. I guess at that time someone can complain that the company took on the market risk of the cost of the benefits they provided me. Which they did — but if they didn’t, I’d have wanted more money to pay for those risks.

Or if no companies did that, there would be businesses that would spring up that would offer a defined benefit payout for premiums, kind of like whole life insurance. And then THAT company would assume the risk, and they would charge me what they thought that risk was.

So, apparently the government hires some long-term contractors, probably through contracting companies. It sounds like those companies get a contract, and the government as part of that contract assumed pension liability for the workers. Now that looks stupid because of the increased costs recently of the benefits; at other times it looks like a good deal.

If the government didn’t take that risk, the contracting company would have charged whatever they thought it would cost to assume that risk, just as I assume every defense contractor builds medical and pension overhead costs into the rates they charge government, and just as every car the government buys includes a cost the car companies think is necessary to pay their employee benefits, and every ream of paper, and every computer. I’m sure every building company that the government hires does the same.

It bothers me when people start talking about earned pension benefits as if they are government handouts. It happened a lot in the Wisconsin discussion. I’m all for getting the government to set more reasonable obligation limits in their contracting, but the contracts that already exist were agreed to with people for work those people performed, and they are not “handouts”, any more than any of your companies are giving you handouts when they let you take a vacation day, or pay your pension.

[9YearLurker]

Nope, sorry, bad practice. With government-enforced collective bargaining it is too easy for CEO’s to game their profitability today by promising unaffordable pensions in the future. That leaves the companies uncompetitive long after the CEO has taken his compensation, including performance bonuses.

And in the public sector the situation is even worse. It’s in the interest of the government officials to give away the store today, with their constituents left holding the bag for decades and decades.

Defined benefit programs are rife for fatal organizational mismanagement.

[R W Reactionairy]

"The private sector is being gang raped by government."

Not really and not so much any more as defined benefit plans are being phased out. It's more complicated than this, but in a brief, when the Government enters into a cost type contract they sign up to pay the benefits in place at the company.

These benefits at larger companies used to almost always include defined benefits for pensions. You work so many years at such a salary and by formula you get $X dollars per month when you retire. The cost the Government pays is based on what additional benefit the employee earns that year plus a factor to account for the difference between the assumption made [asset returns on the pension trusts, life expectancy, turnover and others.]

Until recently, because the asset returns were higher than expected costs were lower and the Government paid little in the current year and the surplus was expected by the model to pay future cost.

Then the asset returns headed south, and retirees continued to live a little longer than expected.

Usually these continuing costs get paid by the next contract, but payments are mostly from the trust where the amounts were funded in the past.

However, there are also contract terms that specify that if a contractor stops contracting with the Government, that there be a final settlement. The Government was very big on this when pension surpluses common and changed the terms of contracts in 1995 to have this settlement apply to fixed price as well as cost type contract history.

There goes your tax dollars, but there is nothing nefarious about it. Just contracts and the attempt to have a final settlement of costs.

[dragnet2]

The private sector is being gang raped by government.

Not really and not so much any more

Bull shit..

[R W Reactionairy]

Thanks for your thoughtful and well considered response.

The fact is that for a lot of years, major contractors’ 401(k) matching programs cost the taxpayer money while in most cases their defined benefit pension plans did not due to higher than expected trust returns. I described how defined benefit cost accounting works. I was not commenting on whether in general the taxpayer obtained good value from contractors.

[dragnet2]

I was not commenting on whether in general the taxpayer obtained good value from contractors

lol...And I'm talking about the federal government and government at all levels. The American people, other than those who may be government contractors, are being taken for a ride, due to ever expanding, over spending, controlling and corrupt government.

When I mentioned the private sector is being gang raped by government, this is *exactly* what is occurring, at every level, in nearly every city, every county, in every state including the fed. Most of this went unnoticed during good times, but now, the epic government waste, spending, corruption due to destructive, bad leadership within government, is finally coming into focus, as it's exactly what is causing the American decline.

[dragnet2]

It's more complicated than this

BTW, I have no doubt about that, as everything government does is made intentionally complex and convoluted. Look no further than the U.S. tax codes.