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Pension costs understated

A-76 rules should be revised

May. 19, 2013 - 01:19PM   |  
By TOM McKINNEY   |   Comments

The costs agencies ascribe to federal pensions, when they are comparing whether it is more efficient to perform commercial-like work in-house or to outsource it to a contractor, have been understated significantly for decades.

The rulebook that guides agencies as they decide whether to outsource federal work — the Office of Management and Budget’s Circular A-76 — requires that 21 percent of federal salaries be used as the cost estimate for retirement pension expenses for in-house Civil Service Retirement System (CSRS) personnel.

However, substantial pension subsidies were provided by the U.S. Treasury directly to the Civil Service Retirement and Disability Fund (CSRDF). These subsidies are not counted in the 21 percent retirement pension cost computations.

Between 2000 and 2012, pension subsidies amounting to $333 billion were appropriated by the U.S. Treasury to the CSRDF. These subsidies were needed because agency employers and agency employees did not contribute enough to pay for pensions. For example, in fiscal 2012, $33 billion was provided to help pay for the $74 billion paid out in pensions. (These subsidies, also known as “transfers-in,” were audited and certified by KPMG LLP.)

In addition, the Congressional Research Service (CRS) reported that these subsidies come from the general revenues of the U.S. Treasury, rather than from the budgets of federal agencies. As a result, the amount of employee compensation for which agencies must account in their budgets each year understates the full cost of employees. The transfer of funds to the CSRDF from the U.S. Treasury is included in the federal budget in Office of Personnel Management accounts.

CRS further reported in 2009 and 2010 that these pension subsidies were recognized every year in OPM’s “current administrative accounts.”

In 1995, the Government Accountability Office told Congress in a report that it had a “major concern” with the fact that agencies are charged less than the full accruing cost of CSRS, thus understating the cost of government programs.

Here is an illustration to show that OMB’s A-76 retirement pension cost of 21 percent of salaries is not sufficient — and should actually be closer to 60 percent:

Take the example of a 60-year-old CSRS civilian federal employee who has 35 years of federal service, earned $2 million over his working career and has a high-three salary average of $100,000. This employee would qualify for an immediate CSRS annuity of $66,000 ($100,000 times 66 percent).

If one uses the A-76 figure of 21 percent to calculate the government’s cost of that pension, the result would be 21 percent times $2 million, or $420,000. Using the Thrift Savings Plan annuity calculator, that $420,000 would buy an annuity of only $22,860.

When you take 60 percent of $2 million, the amount becomes $1.2 million. Using the TSP’s annuity calculator, that $1.2 million would buy an annuity of $65,316. Therefore, to get closer to an annuity of $66,000, the government would have to use a multiple closer to 60 percent — instead of 21 percent.

A reasonable attorney, certified public accountant or certified internal auditor would ask: Is interest earned on the $420,000 during the 35 years? The answer is: Yes! However, the interest that would have been earned would have been paid by the U.S. Treasury — therefore, the interest would be an added government cost.

As a result, contractors that bid on government contract proposals do not get a fair shot at winning and being awarded a contract because of the understated full federal cost. Therefore, OMB should update Circular A-76 rules so the retirement pension cost percentage for CSRS is closer to 60 percent.

Likewise, the pension costs as they apply to Federal Employees Retirement System employees should also be reviewed and updated, as needed.

Tom McKinney, a retired Army Audit Agency certified internal auditor, lives in Atlanta.

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