E7-5545. Office of Management; Request for Public Comment on Department of Energy Contractor Employee Pension and Medical Benefits Challenge

ACTION:

Request for public comments.

SUMMARY:

The Department of Energy (DOE) is seeking public comments and/or recommendations on how to address the challenge it faces due to increasing costs and liabilities associated with contractor employee pension and medical benefits. Under the Department's unique Management and Operating (M&O) and other site management contracts, DOE reimburses its contractors for allowable costs incurred in providing employee pension and medical benefits to current employees and retirees who are eligible to participate in the contractors' pension and medical benefit plans. DOE has established a Web site for the public to submit comments and/or recommendations on how it should address the financial challenge it faces on contractor employee pension and medical benefits.

DATES:

Comments are due on or before May 11, 2007.

ADDRESSES:

Interested parties may submit comments electronically, via traditional mail service, or by facsimile to the addresses identified below. The Internet address for the Web site is http://management.energy.gov/​request_​for_​comments.htm. E-mail comments to [e-mail]. Transmit submissions by facsimile to Stephanie Weakley, Director, Office of Resource Management, at 202-287-1305. Public comments and other information received from the public will be posted on this Web site. To the extent your comments contain proprietary or business sensitive information, please so indicate and include a redacted version of your comments.

FOR FURTHER INFORMATION CONTACT:

Stephanie Weakley, Office of Procurement and Assistance Management, U.S. Department of Energy, 1000 Independence Avenue, SW., Washington, DC 20585, telephone [phone].

SUPPLEMENTARY INFORMATION:

I. Introduction

Under the Department's unique Management and Operating (M&O) and other site management contracts, DOE reimburses its contractors for allowable costs incurred in providing employee pension and medical benefits to current employees and retirees who are eligible to participate in the contractors' pension and medical benefit plans. DOE intends to continue its approach to reimbursing costs incurred by its contractors for these benefits consistent with Government-wide rules on cost allowability; however, DOE believes an examination of its policies and practices is appropriate to ensure prudent fiscal management of taxpayer dollars.

In FY 2006, DOE reimbursed 46 contractors a total of $1.077 billion for contractor employee pension and medical benefits—more than a 226 percent increase since FY 2000. In addition, the Department in its FY 2006 financial statement reported $11.9 billion in accrued unfunded liabilities for contractor employee pension and medical benefits—a 68 percent increase since FY 2000. Costs and liabilities associated with these benefits are projected to grow over the next several years at a rate that significantly exceeds likely increases in the Department's budget.

To address these rising costs and liabilities, on April 27, 2006, DOE issued Department of Energy Notice 351.1, Contractor Employee Pension and Medical Benefits Policy. This Notice updated and revised the Department's policy concerning reimbursement of M&O and site management contractor pension and medical benefit costs. On June 19, 2006, the Secretary of Energy suspended implementation of the revised policy to permit consultation with stakeholders.

II. Challenge Presented by Increasing Departmental Obligations to Reimburse Contractor Employee Benefits

The Department of Energy is faced with the growing challenge of determining how to best balance its responsibility for funding important national missions, including energy and nuclear security, scientific discovery and innovation and environmental clean-up—with providing contractors sufficient flexibility to offer benefits that will attract and retain highly qualified workers and to treat incumbent contractor employees, retirees and dependents fairly.

A. Background

The Department of Energy relies on contractors to manage and operate its specialized scientific, engineering, production and clean-up sites and facilities. DOE is the only Federal agency that uses these unique M&O contracts to conduct its missions.

The Department obligates approximately 80 percent of its estimated annual $24 billion budget to 46 major cost-reimbursement contracts for management of DOE sites and facilities in 20 states. Pension and post retirement benefit programs sponsored by contractors include 45 contractor defined benefit pension plans, 37 contractor defined contribution pension plans, 23 contractor life insurance plans, and approximately 260 contractor medical benefit plans. These benefits are provided to approximately 100,000 active employees and 100,000 retirees, dependents and beneficiaries. Although DOE reimburses its contractors for certain costs associated with contractor employee benefits, DOE contractors employ their own workforces and sponsor and serve as fiduciaries for all benefit plans.

Most DOE M&O and site management contractors provide defined benefit plans that are supplemented by defined contribution plans and generously subsidized medical benefit plans. According to Department of Energy market comparisons, on average, the pension benefits received by DOE contractor employees are higher than the benefits earned by Federal or private sector employees. In addition, on average, DOE contractor employees contribute less for their medical benefit costs than Federal employees or private sector workers.

The scope of DOE's obligations for contractor employee benefit costs is significant and growing. In FY 2006, the Department's accrued unfunded liabilities associated with contractor employee pension and medical benefits were $11.9 billion. In FY 2006, DOE reimbursed its contractors $1.077 billion for pension and medical benefit plans.

Costs and liabilities for these benefits are projected to grow at a rate that significantly exceeds projected increases in the Department's budget. Absent actions to control benefit escalation, contractor benefit cost reimbursements will continue to increase. Further, the volatility and unpredictability of contractor benefit cost reimbursements will continue to make it difficult for the Department to plan and execute budgets. The Pension Protection Act of 2006 generally accelerates required contributions to defined benefit pension plans and is expected to increase the amount that DOE reimburses contractors for pension benefits over the next 5 to 7 years.

B. Description of DOE Notice 351.1

In April 2006, the Department of Energy issued Notice 351.1 to address concerns about contractor employee pension and medical benefits. However, due to concerns raised about the policy, in June 2006, it was suspended pending consultation with stakeholders.

The goals of the Notice were to improve the Department's stewardship of taxpayer dollars by mitigating the cost growth associated with benefit liabilities, moderating the volatility and improving the predictability of the Department's cost reimbursement obligations for benefits, ensuring that costs for contractor employee pension and medical benefits are more consistent with market trends, and ensuring fairness to incumbent contractor employees.

The major provisions of the Notice included continuing to reimburse contractors for costs for current and retired contractor employee pension and medical plans under existing contract provisions; requiring market-based defined contribution pension plans and market-based medical plans for new employees, except where to do so would be inconsistent with the terms of a collective bargaining agreement; requiring the Secretary of Energy to approve the costs of contractor proposed benefit augmentations; and separately assessing the value of pension and medical benefits to ensure that both are market-based. The policy also provided for the continuation of pension and medical benefit commitments made by contractors through collective bargaining agreements.

Issued in Washington, DC on March 19, 2007.

Ingrid A.C. Kolb,

Director of Management, U.S. Department of Energy.