One of the most important lessons that can be learned from marriage is to never say, “I told you so.” Being right is rarely a goal worth reaching; most times the long-term cost to the relationship isn’t worth the momentary warm glow that accompanies the phrase “Neener, neener. I was right and you were wrong.”

But this is a blog, baby. Different situation; different rules. So here it is:

We told you so.

We told you that the recent revisions to CAS 412 and 413 necessitated by the Pension Protection Act were going to be an unpleasant surprise to many.  But not to you—right?  As a reader of the Apogee Consulting, Inc. blog, you not only knew that this issue was going to surface like a bubble of smelly methane gas in the swamp of arcane government contract cost accounting rules, but you also knew that DOD was well aware of the coming scheiß sturm for a least the past six years—and did nothing.

And now the scheiße has hit the fan, so to speak, as recently published polemics demonstrate.  To wit—

The Citizens Against Government Waste (CAGW) is (according to Wikipedia) “functions as a think tank, ‘government watchdog’ and advocacy group for conservative fiscally causes.” (Here’s a link to their website.) If you want a hint as to their approach to campaigning against government waste, note that the organization’s phone number is 1-800-BE-ANGRY.

CAGW recently issued a report on contractor pensions and post-retirement benefits (PRBs) that seemed intended to incite Congress to DO SOMETHING about the price being paid by taxpayers for those particular items of cost. Here’s a link to the CAGW report in question.

The Federal Times ran a story about the CAGW report. Here’s a link to the Federal Times article. The article reported that—

Taxpayers contributed more than $3.3 billion to the pension programs of 18 of the biggest federal contractors in 2010, according to estimates by the Citizens Against Government Waste (CAGW) watchdog group. …

The CAGW estimates the government reimbursed Lockheed Martin Corp., the largest federal contractor, $988 million in 2010 for its pension payments. The figure for Raytheon was $667 million, and for Northrop Grumman Corp., $529 million.

CAGW’s methodology consists of extrapolating from two GAO reports concerning estimates of pension and PRB liabilities associated with Department of Energy (DOE) contractors. Note that the operative word in the Federal Times quote is “estimate”. One might also reasonably wonder whether DOE’s pension/PRB liabilities—which include personnel costs associated with several National Laboratories such as Los Alamos, Sandia, and Lawrence Livermore (whose Operation & Management contracts have only recently been subject to competition)—would be a good representation of the liabilities of other Departments such as Defense. But that’s not the issue that we think readers should take with the CAGW report. No, the disputable issue is that CAGW has taken a position against reimbursement of defense contractor pension and PRB costs.

The Federal Times article quoted the CAGW report as follows—

This [reimbursement of contractor pension/PRB costs] can lead to moral hazard and higher federal spending, making it a challenge for all government agencies to meet their core mission and responsibilities, while at the same time using taxpayer money to subsidize investment decisions made by some of the most profitable corporations in the United States.

The Federal Times article reported that the CAGW report recommended several changes to the current government contract accounting policies affecting how contractors measure, propose, and bill for such costs. The article reported that CAGW “urged” the Federal government to—

• Require that its reimbursements to contractors' pension plans be based on actuarial assumptions required under federal law, not the contractors' own assumptions.

• Require that market losses in invested pension funds be recouped from the contracting companies that make the investment decisions, instead of taxpayers.

• Stop reimbursing contractors for defined-benefit pension plans for new employees and instead reimburse them only for defined contribution plans, such as a 401(k) plan.

This article in Washington Technology took a different approach to the CAGW report.  It told its readers—

The federal government is on the hook for billions of dollars in federal contractor private pension costs that possibly could have been avoided … Citizens Against Government Waste (CAGW) said … it has begun investigating situations in which the federal government has assumed ongoing responsibility for the cost of contractor pension plans. These situations have occurred primarily because of terms approved under cost-plus federal contracts, in which the government contributes to ongoing costs of contractor retirement benefits. …

‘Many of these companies sponsor defined benefit pension plans for their employees (in which) company officials control not only the level of benefits offered, but also the strategies used for investing plan assets,’ CAGW said …. ‘Since many cost-plus federal contracts include clauses that ensure these pension plans are fully funded even if the plans' investment benchmarks are not met, taxpayers ultimately bear the investment risks associated with pension fund investment decisions made by some of the most profitable corporations in the United States.’

The article reported that CAGW stated that, “the structure of those contracts has encouraged several major federal contractors to maintain more expensive defined-benefits plans, even as most of government and private industry have moved away from those types of plans.”

We did, in fact, review the CAGW report. Here are some salient portions of that report—

Many of these [government contractors] sponsor defined benefit plans for their employees and they control not only the level of benefits offered, but also the strategies used for investing plan assets. Since cost-plus contracts include clauses that ensure these pension plans are fully funded even if their investment assumptions are not met, taxpayers ultimately bear the investment risk. …

Federal agencies have increased pension reimbursements to contractors in order to meet the PPA requirement that private company defined benefit pensions be funded to 100 percent of liabilities. … As a result, contractors often decide to contribute more than the minimum to prevent losing favorable tax treatment or to build credit balances that can be used in the out years to try to level the amount it budgets for pension contributions. Combine the PPA standards and internal agency policies with external factors, and the result is record contractor reimbursement costs. …

While the vast majority of corporations and private businesses have transitioned to defined contribution pension plans, defined benefit plans continue to be a mainstay for many of the largest federal government contractors. They are reaping billions of dollars in reimbursements because of contractual obligations, PPA funding, actuarial requirements, and economic and financial factors. …

On December 7, 2011, Senate Armed Services Committee Chairman Carl Levin (D-Mich.) and Ranking Member John McCain (R-Ariz.) sent a letter to the GAO asking the agency to examine the cost of post-retirement benefit reimbursement at the Department of Defense (DOD). Their letter requested ‘an estimate of how much DOD has paid its contractors to backfill their pension plan shortfalls over the past 10 or so years,’ a ‘projection of future liabilities,’ an evaluation of ‘options for limiting DOD’s liability for contractor pensions, including but not limited to the options of eliminating reimbursement for all or some defined plans,’ and the savings that could be achieved from implementing the various options. It is anticipated that GAO will merge the senators’ concerns with an earlier request on the same subject matter from two other members of the Senate Armed Services Committee, and release the final report later this year.

So the CAGW report is getting play and Congress is concerned.  We want to share one more article on this topic with you.  It’s a Federal Times story from February 27, 2012.

The Federal Times story includes quotes from DOD Comptroller Robert Hale.  It reported—

The Defense Department has not yet budgeted for the additional pension costs, but estimates they ‘could be billions of dollars, conceivably,’ Defense Department Comptroller Robert Hale told ‘This Week In Defense News’ on Feb. 23.

‘I'm hoping that our vendors realize in tight fiscal times that they need to work with us to hold down weapons costs,’ Hale said. ‘We think there may be modest added cost, we'll just have to see, but we are going to have to start budgeting for them, and it is a question I'm asking internally as we look into our next budget plan.’

The cost to the Pentagon will depend on how the companies' pension funds fare in the stock market, Hale said. If investments do well and earn money, a greater part of the plans will be funded, he said.

However, if investments do poorly and pension funds become further underfunded, affected contractors would be forced to make greater payments to cover those liabilities, pension experts said. And that will mean more cost to the Pentagon.

The Federal Times story also reported—

With its roots in a 2006 law, the rule's impact should have been anticipated, giving Defense Department officials plenty of time to budget for the expected costs, said David Berteau, director of the Center for Strategic and International Studies Defense-Industrial Initiatives Group.

‘How can this have snuck up on us and caught us unaware?’ he said. ‘I didn't hear any alarm bells.’ …

The impact of the new rule on government contracting costs could be dramatic given the tight budget environment most Defense Department agencies are operating under, Berteau said.

‘This is way more than a bookkeeping question,’ he said.

Because you read this blog, you know that we’ve been ringing the alarm bells for years.  More importantly, you also know that DOD Leadership has known about this issue since the passage of the PPA in 2006.  They knew, and they did nothing.  In fact, DOD Leadership issued direction that prohibited anything from being done.  They hid their heads in the sand.  They kicked the can down the street and made it somebody else’s problem to deal with. Pick your metaphor.

You knew it, because we told you so.

First, thanks to the Federal Times for bringing this issue to our attention. Its story on the topic can be found here. But we are not going to recap the FedTimes story, because we obtained the official NASA IG report in question, reviewed it and, thus, have our own opinion to share with you.

NASA’s nearly 16,000 travelers spend roughly $80 Million on travel-related expenses each year. To use the hook from a popular 90’s song: isn’t it ironic that NASA seems to suffer from many of the same internal control issues that its contractors suffer from? The recommendations in the NASA IG report were reminiscent of many DCAA and other audit reports we’ve read throughout the years. For example—

• Failure to review credit card usage reports to identify inactive cards

• Failure to cancel employee credit cards upon separation/termination

• Employees approving supervisor’s expense reports

• Use of company credit cards for personal expenses

See? We’re all in the same boat!

This is why you need to review the NASA IG report in some detail, to see if any of its recommendations can be applied to your own situation. If you think you have more important issues to deal with, we’re going to have to disagree with your assessment of the situation.

Improving controls over employee travel expense reimbursement is one of the more important initiatives that a growing government contractor (or, as it turns out, an established government agency) can tackle. At the same time, it’s also one of the hardest, since it involves “cultural” issues and, often, issues of perceived employee entitlement. Because business travel often involves long hours and other aspects of personal sacrifice, there is (often) a sense on the employee’s part that s/he is “owed” some type of offsetting compensation. Thus, there is a built-in rationale for violating company travel policy—especially in “gray areas” where the policy is ambiguous.

To combat the temptation to violate company travel policy, it is important to have a very clear employee travel policy that minimizes the “gray areas” and explicitly sets forth expectations regarding what expenses will (and will not) be reimbursed. It is important to establish what expenses will (and will not) be claimed as allowable with respect to government billings. And it is important to establish rigorous internal controls that detect employee violations of company policy and which, by their very nature, act to deter potential wrongdoing.

The foregoing advice is essentially what the IG told NASA management.

The NASA IG reported that NASA’s controls over its employee travel card program were “generally effective.” The IG reported—

We found that NASA was effectively monitoring travel card use, that NASA’s travel card policies and procedures are generally consistent with OMB guidelines, and that the Agency was providing employees with appropriate training. We also found that most NASA employees used their travel cards appropriately and paid their bills on time, and that NASA was effectively monitoring employee payments and reminding employees when their accounts were past due.

Regardless of the foregoing, the IG offered recommendations for improvement that would tend to strengthen existing controls.  (When do they not?)  Here’s what the NASA IG recommended—

• More than 900, or 6 percent of travel cards, had never been used. NASA should cancel them.  In addition, NASA should periodically monitor credit card usage and, based on usage, establish appropriate credit limits or cancel accounts.

• 28 cardholders had separated from NASA, but still had active credit card accounts. NASA should cancel accounts at the time the employees leave the agency.

• The IG tested a sample of 176 credit card transactions and found 9 instances of “improper or questionable use that had not been detected by NASA.” Nonetheless, it found that NASA’s controls were “generally effective.” (Remember that error ratio the next time DCAA reviews your controls.)

• 4 of the 9 “gotchas” were for personal or non-travel related expenses (e.g., $773 for personal travel expenses); the employees had never sought reimbursement but use of the NASA credit card for such expenses violated policy.

• In 5 of the 9 transactions, the NASA IG was less certain: it reported that “it was not clear whether charges were allowable because the Federal Travel Regulation (FTR) does not clearly prohibit certain types of expenses and NASA has not issued supplemental policy to clarify the FTR.” Examples of these “questionable” expenses included purchases of in-room movies and expenses for additional days that preceded or followed an official trip.  The IG recommended that the existing NASA travel policy be revised to address these ambiguous areas. In addition, the IG found that the existing NASA travel policy was generally out-of-date and needed to be brought current.

In addition to the points listed above, the NASA IG also had some findings that were buried in the report.  These additional findings included—

• 45 NASA employees had the authority to self-approve both travel authorizations and claims for travel reimbursement, so there was no additional level of review being applied to their decision-making. The IG found that 22 of the 45 should have been submitting their travel reimbursement claims for additional review/approval, but were not doing so.  The IG noted, “During our audit period, NASA self-approvers incurred $552,000 in travel expenses charged to their individual credit cards.”

• Subordinate employees approved the travel reimbursement claims of their superiors in violation of existing NASA policy.

• NASA could not adequately demonstrate that applying the rebates it received from the credit card issuer (about $5 million) as a credit to its general working capital fund met the OMB requirements that the rebates be applied to the “appropriation or account from which the funds for purchases were expended.” (Readers may recall that other contractors have had problems in this area.)

• “NASA’s charge card issuer reported that from June 2010 through July 2011, 36.5 percent of purchase cards and 3 percent of travel cards had been compromised in the sense that card information (e.g., card number, cardholder’s name) may have been obtained by an unauthorized source.” This is possibly a finding more related to the security of the credit card provider than it is a NASA-related finding—but it does point out the need to discuss credit card security within applicable policies, and to educate employees about what to do if they learn that their information has been compromised in some fashion. A strong policy has a defined process flow and provides employees with appropriate points of contact from whom to obtain any required assistance.

To conclude, we very much appreciate the findings and recommendations within the NASA Inspector General report, because we think it offers our clientele (and readership) an opportunity to evaluate their own policies and controls, and identify opportunities to enhance and improve them. In our view, it would be a shame to ignore these valuable lessons just because they related to a government agency, or because you are too busy fighting fires elsewhere.