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Improving Financial Management

ADOPT GOOD BUSINESS PRACTICES

FM13: Charge Agencies for the Full Cost of Employee Benefits

Background

Federal agencies should be required to pay for the total costs of employee compensation, including a charge for future pension payments and retiree health benefits. Agencies directly pay for the pension benefits of civilian personnel under the Federal Employees Retirement System (FERS), which covers federal employees first hired after 1983. Agencies with employees covered under the older retirement system, Civil Service Retirement System (CSRS), only pay about one-third of the government's share of the pension cost for their employees. Agencies pay the health benefits for all active civilian employees, but there is no charge for the future health cost of these employees after they retire. Charging full costs to the agency for employees under both FERS and CSRS and charging agencies for future health costs of their employees would improve overall budgetary management for an agency.

Need for Change Agencies should be charged directly for retirement benefits earned by active employees to ensure that total costs are available for decisionmaking and evaluating performance results. This would improve budgetary management and the efficiency of choice between labor and other resources and assist the decision process for performing services internally, through franchising, or contracting out. It would make the government account for retiree benefits on a comparable basis to the private sector.

The CSRS pension cost averages about 25 percent of salary per employee. The agency and the employee each contribute 7 percent of salary into the trust fund. The total of 14 percent is only about half the cost to fund the pension. If agencies were required to pay full normal costs for CSRS employees, with no change in employee contributions, the agencies' contributions would have to be increased from 7 percent to 18 percent adding $5.0 billion to agencies' personnel costs [Endnote 1]. The employees would still pay the remaining 7 percent.

Agencies also pay only a portion of the health insurance premiums for their active civilian employees, with the remainder being paid by the employee. However, agencies do not pay any of the costs for future health benefits earned by active employees. The Office of Personnel Management (OPM) pays the government's portion of health premiums for civilian retirees. The annual cost of future retiree health benefits earned by current civilian employees is estimated to be $4.0 billion [Endnote 2]. The Department of Defense (DOD) does pay the government's portion of current cash expenditures for retired military personnel. However, DOD financial decisionmaking would improve if benefits that are currently earned were counted as part of current compensation. Both civilian agencies and DOD should pre-fund expected future liabilities.

As cost accounting standards are needed to ensure accurate value for the dollar reporting, agencies should be charged directly for these costs to ensure full disclosure of employee costs and to ensure that total costs are available for decision-making and evaluating performance results.

The recommendations propose an accounting change that will better reflect the full cost of employee benefits to the agencies. Their implementation would not affect the unified budget deficit. Agency discretionary funds will show larger outlays, which will be reflected in an increase in the Civil Service Retiree and Disability Trust Fund.

Actions 1. Require all agencies to pay the full accruing cost of Civil Service Retirement System (CSRS) pensions. (3)

Legislation should be enacted to require that agencies contribute the additional amount to the Civil Service Retiree and Disability Trust Fund as a discretionary expense. The decision on implementation should be determined by the Director of OMB. The Director of OMB should be permitted to make one-time adjustments in the Budget Enforcement Act caps for discretionary accounts to reflect the accounting change as a change in a budget concept.

2. Research the possibility of charging agencies the full accruing cost for civilian and military retiree health benefits. (2)

The Director of OMB and the Director of OPM should jointly research the possibility of charging agencies for civilian retiree health benefits as part of salaries and expenses and provide a plan by January 1995.

The Director of OMB and the Secretary of Defense should research and provide a similar plan for military retiree health benefits by January 1995.

Endnotes

1. U.S. Office of Management and Budget, Economic Policy Office. Internal report based on annual estimates made by OPM actuary estimates.

2. U.S. Office of Management and Budget, Economic Policy Office. Internal report based on a 1991 OMB study, which, in turn, was based on OPM actuary estimates.

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