WASHINGTON — The single biggest check NASA expects to write next year will go to United Space Alliance (USA) to cover a half-billion-dollar shortfall in the space shuttle contractor’s pension fund.
It is not NASA’s fault USA’s pension fund — held in stocks, bonds and other assets company officials said are worth between $600 million and $700 million — has just a little over half of the money it needs to guarantee retirement pay promised to 11,000 past and current employees.
But the U.S. space agency is legally obligated to make up the shortfall, which totaled more than $500 million as of January, because USA operates the shuttle fleet under a cost-reimbursable contract that entitles the company to charge the government for personnel costs, including pay and benefits.
The bill is coming due now because the rapidly downsizing USA is closing out its pension plan as it prepares for an uncertain post-shuttle future.
Houston-based USA announced in December that it had begun taking steps to terminate its pension plan, a benefit the Boeing-Lockheed Martin joint venture offered its employees until several years ago, when it switched to a less costly 401(k) retirement savings plan for new hires. USA and NASA have been working on a termination plan with the Pension Benefit Guaranty Corp., a federal agency that regulates pensions and steps in to pay benefits when companies fail.
NASA has asked Congress for $548 million in 2012 to ensure USA’s pension plan is fully funded before the plan’s assets are transferred to new trustees that will offer USA retirees a lump sum distribution or annuity. The actual amount of the shortfall — and thus NASA’s liability — will continue to fluctuate as the stock market and interest rates rise and fall.
NASA Chief Financial Officer Elizabeth Robinson told Space News that even though the agency is legally obligated to “make the USA pension fund whole” upon the termination of the company’s longstanding shuttle operations contract, the agency “is happy to do so.”
For many years, Robinson said, “USA workers have provided critical services for NASA’s shuttle program, and they deserve a solid financial footing in retirement.”
A Bill a Long Time Coming
USA, created in 1995 to streamline space shuttle operations, is the only NASA contractor agency officials know of that still has on its books a defined-benefit pension plan, which promises specified monthly retirement income based on an employee’s earning history, length of service and age. Most aerospace contractors abandoned pensions years ago in favor of less costly plans, such as the 401(k), where payout is determined by the performance of investments the employee selects.
Norm Gookins, USA’s vice president of human resources, said NASA’s liability for USA’s pension dates back to 1996 when the agency consolidated some three dozen space shuttle contracts into one. A large percentage of the 10,000-plus shuttle workers USA absorbed under its cornerstone Space Flight Operations Contract, he said, were already enrolled in pension plans.
“One of the requirements that came clearly from NASA — and of course we agreed with it entirely — was to continue our performance in a seamless way and to not disrupt the work force,” Gookins said in an interview.
As the newly created USA rebadged thousands of shuttle workers from Lockheed Martin, Rockwell International and other contractors, “we just brought those [pension] plans into USA with them.”
A decade later, when USA and NASA were negotiating the Space Program Operations Contract — a four-year, $6.4 billion agreement since extended through the last shuttle flight — the company realized it could not keep offering a pension and be competitive as it sought new business. Gookins said USA froze new enrollments in the plan, which by 2006 was running $200 million to $300 million short, and began discussing with NASA the need to terminate the pension at the conclusion of the shuttle program.
Bill Capel, USA’s vice president of finance, said the shortfall was caused by a combination of market conditions and a patchwork of laws and regulations that prevent contractors like USA from passing on the full amount of its annual pension expenses.
“You’ve got the Cost Accounting Standards, which limit how much we can bill the government, and therefore how much cash we have to put into the plans,” he said. “You’ve got the underperformance of the market and then you’ve got the historically low interest rates. It’s almost like the perfect storm at this point.”
Bill Hill, NASA assistant associate administrator for the space shuttle program, agreed. “It’s really difficult for a company like USA … to keep these things fully funded,” Hill said. “If the stock market is doing really well you might have a fighting chance of keeping it so it doesn’t go underwater.”
Even though both USA and NASA recognized the plan was running a shortfall, NASA did not have the option of paying it down gradually.
“The sad part of that is NASA is subject to the [Cost Accounting Standards] and they can’t pay more until you’re in termination,” Capel said. “And then the [Cost Accounting Standards] say NASA is obligated to contribute whatever is necessary to irrevocably settle all plan liabilities.”
Capel said it “would not be prudent for USA, acting in the interests of our employees and pensioners, to count on substantial financial market recoveries as the uncertain solution” for erasing the shortfall. While USA remains profitable, has a half-dozen or so contracts outside of the space shuttle program and continues to pursue new business opportunities, it is a much smaller company than it once was. Some 6,300 people currently work for USA, down from a peak of 10,500 following the shuttle’s 2005 return to flight.
On April 8, 650 more USA employees will be laid off. By the time the shuttle program ends, USA expects to be down to 3,500 employees — only about 500 more than the current number of USA retirees already drawing on their pensions.
“If we look to the future, we’re still going to be in business. We’re still going to be active. But the number of employees that we have … would not be able to support these plans with all the overhang of history,” Capel said. “That’s the reason we have to do this.”
Hill, meanwhile, said NASA is not the only federal agency writing big checks to cover pension liabilities.
“We have found through this process that other government agencies are facing similar circumstances — some better, some worse,” Hill said in an interview. “But we’re seeing the sunset of these defined-benefit pensions. As they come up, the government will incrementally dispose of them and end up having to pay any kind of underfunding or shortfall.”
For example, the U.S. Department of Energy, a $30 billion agency responsible for overseeing the nation’s nuclear weapons and stewarding domestic energy production, is budgeting about $1 billion a year through at least 2016 for contractor pension liabilities.
While the $548 million NASA owes USA is much less, it is among the biggest line items in NASA’s $18.7 billion budget blueprint for 2012, eclipsing what the agency requested for the James Webb Space Telescope and rivaling what it expects to spend on aeronautics research. Only the budget lines for NASA field center operations, the international space station, Multi-Purpose Crew Vehicle and heavy-lift rocket development, and commercial crew and cargo initiatives are bigger. But those budget lines — ranging from $850 million to $1.8 billion for 2012 — will fund multiple contracts and contractors.
For now, NASA is hoping that the stock market rise that began in 2010 will keep going long enough to erase some of USA’s pension shortfall by the time the plan closes early next year.
“But it could go the other way, too, and increase it,” Hill said. “If for instance we get the requested level of $548 million and it turns out to be $560 [million], we’re going to have to go find that extra $12 million someplace else.”
And if Congress does not approve NASA’s $548 million request? “If we had to pay for the whole thing, it would be a serious impact and we’d probably have to go outside [the Space Operations Mission Directorate budget] to get it,” Hill said.