Government Claim Denied When It Couldn't Prove that Money Had Been Paid

Alaska Aerospace Corporation (AAC) is a corporation fully owned by the State of Alaska. It operates a missile test facility on Kodiak Island (Alaska) that has been used by the Missile Defense Agency (MDA) and the Air Force.

Employees of Alaska Aerospace are, in all respects, employees of the State of Alaska, and as such, receive all of the fringe benefits accruing to State employees including a defined benefit pension plan.

In it's Fiscal Year 2008 incurred cost proposal, AAC included contributions to the State's defined contribution pension plan including $302,637 in pension plan contributions that were paid by the State of Alaska on AAC's behalf. DCAA questioned the amount which the contract office then demanded payment in his COFD (Contracting Officer Final Decision). The contracting officer also demanded penalty even though DCAA audit report that questioned the amount concluded that the amount was not subject to penalty.

AAC appealed to the ASBCA (Armed Services Board of Contract Appeals).

The Government quickly retracted on its penalties argument and instead argued that it was entitled to recover that amount because the government paid that amount to AAC as reimbursement of employee pension plan contributions and AAC did not incur those charges since the State of Alaska made the contributions, not AAC.

AAC countered that it did incur those charges since AAC is a corporation run by the State of Alaska. Furthermore, AAC argued that the government is not entitled to recovery as it never paid any of the claimed amount to AAC. AAC states that the employee pension plan contributions were included at the end of FY08 in AAC's Incurred Cost Proposal and were not a part of any invoices that were paid by the government.

The Board sustained AAC's appeal on the basis that the Government could not show that it had reimbursed AAC for any of the costs. However, the Board expressed no opinion as to whether the pension plan contributions at issue in the appeal are allowable costs.

You can read the full ASBCA decision here.

New Retirement Plans for Government Contractors

Okay, so this post is not strictly about Government contracting but it is something that Government contractors should be aware of and should encourage their employees to participate in. It's the President's new retirement savings program he announced at last month's State of the Union address. It's called 'myRA'.

The concept is pretty simple. Employees can have as little as $5 taken out of each paycheck and deposited into a Government bond fund. By deducting money from paychecks before workers receive them, the investments will steadily grow without any decision making required. After that, it works much like a Roth IRA - keep the money in for a minimum amount of time and the earnings can be withdrawn tax-free. Like Roths, there are wage thresholds above which employees will not be eligible to participate.

There's good and bad to this program. The good is that it requires very little up-front investment - $25 to open the account and as little as $5 after that. Also, since the Government controls the investment, there are no fees to be paid to brokerage firms and investment advisers. Secondly, investors will never lose their principle, unlike stocks and mutual fund values.

The bad part is that the returns on Government bonds have always been anemic. Right now, the returns are under two percent. Most investment advisers believe that even with their fees, they can achieve greater returns. 

About 40 percent of workers don't have any kind of retirement plan and more than 50 percent of American's are not saving enough money to maintain the standard of living they enjoy during their working life. Social Security is not going to be enough - workers need to save for retirement. In the scheme of things, this new 'myRA' isn't going to solve the problem of insufficient retirement by itself, but is a step in the right direction.

Looming Crisis in Pension Plan Funding

According to a recent GAO study of the defined benefit pension plans at the 10 largest DoD contractors, pension costs have grown from $500 million to more than $5 billion over the course of the last decade. The GAO also warned that this explosive growth will continue for two reasons. First, since the 2008 market downturn, pension funds investments have not performed as well as initial projections which will require contractors to make additional contributions to make up the shortfall. Secondly, the Pension Plan Protection Act of 2006 (PPA) changed the funding requirements. Prior to PPA companies were required to fund current year liabilities as well as an additional amount required to amortize, over a 30 year period, past service liabilities. After PPA, the 30 year amortization period was lowered to seven years.

The PPA was incompatible with CAS (Cost Accounting Standards) and required the CAS Board to harmonize the CAS requirements with PPA. It took about four years to finalize the harmonization rules. The impact of the PPA on Government contracts will be felt beginning 2014. The DoD Comptroller was quoted last year saying that the impact to the Department "could be billions of dollars, conceivably".

DoD (and other Executive agencies) is understandably concerned about the impact of future pension plan costs on their programs. DoD will be stepping up its oversight on pension costs. It needs auditors and contracting officers that are better trained and equipped to deal with the intricacies of pension plan rules and regulations. As a starting point, DoD will focus on the following:

• How contractors determine pension costs
• Who within DoD ensures the contractor pension costs it pays are appropriate
• How DoD contractor plans compare with the private sector
• Understanding and assessing factors that contribute to increased costs
• How the harmonization of CAS with PPA will affect the amounts DoD will pay in coming years.

Pension Liabilities

A recent article in the Federal Times is sounding the alarm over the impact that the Pension Protection Act (PPA) of 2006 will have on federal budgets beginning in fiscal year 2013. The lead line states that the rule "...requires the U.S. government to reimburse its contractors to a far greater degree for their employee pension costs". In reality, this statement isn't exactly correct. The PPA (and the subsequent amendment to CAS) allows contractors to close the shortfall between pension liabilities and the amount of funds in pension trusts more quickly than was allowed under the old rules. The  Government has always been on the hook for these pension liabilities.

The article is accurate in stating that the impact of the rule changes to future budgets is unknown and could potentially be in the billions of dollars. The Lockheed's, Boeing's, and Northrop-Grumman's probably have not "crunched" their numbers yet and most certainly have not impacted forward pricing rates for the change in methodology. In fact, if these companies have a significant backlog of fixed priced effort, it is to their advantage to defer the impact as long as possible.

The article also focuses on the DoD and its contractors but the Department of Energy is the real elephant in the room with their huge operation and maintenance contracts at their various sites (Savannah River, Los Alamos, Richland, etc). For the past five decades or so, site support contractors have come and gone but the employees with their lucrative defined benefit pension plans have stayed, donning the hat of whatever contractor is brought in to manage them.

Expect to hear a lot about unfunded pension liabilities and their impact on Government budgets in the future.

Proposed Regulation on Pension Costs

The CAS Board yesterday published a proposed rule for harmonizing Cost Accounting Standards 412 and 413 with the Pension Protection Act of 2006 (PPA). Its a long and detailed read. If your company has a defined benefit pension plan, you should study it and provide comments by the July 9, 2010 deadline for public comments. Even if your company is not subject to CAS, the revised Standards may impact the way in which you allocate pension costs to Government contracts since FAR 31.205-6 pretty much sends you back to CAS for determining allowable pension plan contributions.

There are about eleven features in this proposed rule - some merely affirming requirements that were already part of CAS. One significant change is the period used to amoritize actuarial gains and losses. Currently, CAS requires those losses be amoritized over a 15 year period. Under the proposed rule, the amortization period drops to 10 years (the PPA, by the way, specifies a 7 year amortization period). There are also some specific provisions that apply when contractors fund more than the minimum contribution and less than the minimum contribution. Both events should be "neutral" with regard to determining actuarial gains and losses.

To read the entire proposal, go here.