FEDERAL WORKFORCE REVISED FACTORS TO COMPARE GOVERNMENT AND CONTRACTOR COSTS ARE APPROPRIATE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000501200002-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 5
• Document Creation Date: December 22, 2016
• Document Release Date: October 31, 2012
• Sequence Number: 2
• Publication Date: January 1, 1986
• Content Type: REPORT

Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
tv.~y37
United States General Accounting Office
Report to the Honor-able Bud Shuster
House of Representatives
FEDERAL
WO'1'3%,KFO-ID,, k"" ~_~ E
nevised Factors to
Compare Government
and Contractor hosts
e Agr-%rorxiate
Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
 Declassified and Approved For Release 2012/11/01 : CIA-RDP90-0053OR000501200002-7
GAO
Fringe Benefit Costs
United States
General Accounting Office
Washington, D.C. 20548
General Government Division
13221426
The Honorable Bud Shuster
House of Representatives
This is in response to your letter dated October 10, 1985, in which you
expressed concerns about the recent revisions by the Office of Manage-
ment and Budget (OMB) of Circular A-76, Performance of Commercial
Activities. The circular requires government agencies to compare the
cost of performing a function using federal employees to the cost. of per-
forming the work using a contractor in order to determine the most eco-
nomical means of obtaining support services. Specifically, you were
concerned about the appropriateness of (1) increased cost factors for
federal employee fringe benefits, (2) eliminating costs for one-time phys-
ical inventories, and (3) increased tax rates.
We interviewed responsible OMB and Office of Personnel Management
(opal) officials to determine the reasons for changing the A-76 cost fac-
tors and the appropriateness of those changes. We also reviewed laws
and OPM reports relating to the cost factors, the circular, and its related
handbook. Our work was performed in accordance with generally
accepted government auditing standards during November and Decem-
ber 1985.
We concluded that the increases in fringe benefit costs were appropri-
ate, that one-time costs for physical inventories were not eliminated,
and that changes in the tax computation table were appropriately made
to reflect more up-to-date data on taxes being paid by selected private
industries. These matters are discussed in more detail below. We did not
address fringe benefit cost factors that did not change.
In August 1985, oars increased the cost factors for federal employee ben-
efits from 27.30 percent of pay to 35.75 percent of pay as shown in
table 1.
Page I GAO/GGI18637 Revised Cost Factors
Declassified and Approved For Release 2012/11/01 : CIA-RDP90-0053OR000501200002-7
 Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
Insurance Costs
(Percent of pay)
Previous
factor
Revised
factor
Retirement
20.40
27.90
Health and life insurance
_
3.70
4.70
Other benefits'
1.90
1.80
Medicare
1.30
1.35
Total
27.30
35.75
The revised factor represents the most recent estimate of the govern-
ment's share of the cost of the civil service retirement system reported
to the Congress by orat. In accordance with requirements of Public Law
95-595, OPMM reports annually to the Congress on the status and cost of
the civil service retirement system. opat's estimate of retirement costs is
dependent on numerous factors, including the demographic characteris-
tics of the workforce, and assumptions about future pay raises, infla-
tion, and interest rates. The previous A-76 retirement factor was
adopted in 1979 and needed to be updated to reflect changes in factors
affecting the cost estimate. The revised retirement factor included
changes in workforce demographics and updated economic assumptions
used by Oi.%t to determine the system's cost in its May 1985 report to the
Congress. Because the rate can be quite variable (i.e. it was 29.5 percent
in May 1984), we recommended, to 0Mtt3 that the rate be annually
reviewed and updated. OMB specified in the revised circular that the rate
would be adjusted annually based on oat's determinations.
Federal employees hired since December 31, 1983, are covered by social
securit v, and the Congress is considering alternative retirement pro-
grams for them. Until a new program is established, oMB has decided to
use the same factor (27.9 percent) for determining the retirement cost
for these new employees. However, once the new program is adopted
and its costs are determined, opts will have to establish and maintain
separate cost factors for the employees in the two retirement programs.
The new factor for health and life insurance (4.7 percent of pay) reflects
the increased cost of health benefits. According to oral, the government's
r Letter to the Administrator. Office of Federal Procurement Policy. Office of Management and
Budget, dated January 17, 1984.
Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
 e~ Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
6221426 _"-
share of the average annual health benefit premium in 1984 was $1,102
per employee which represented 4.4 percent of the average salary
($25,211) of federal employees. The life insurance factor was
unchanged at 0.3 percent of pay.
Medicare Cost
This factor was increased to 1.35 percent. which is the employer's tax
for medicare for 1985 as prescribed by the Social Security Amendments
of 1977 (Public Law 95-216). The tax is scheduled to be increased to
1.45 percent. in 1986.
Physical Inventories
you were concerned that the revised. circular eliminated from cost com-
parisons the cos' to the government for performing physical inventories
required in connection with a transfer of material to a contractor.
Instructions-on physical inventory costs, which were previously in the
"Other Costs" section of.t lie j o creeding cost comparison handbook. are
now contained in the "Material !,whited Cost" section of the cu, rent
handbook. Page IV-38 of the current handbook states that "For pur-
poses of the cost comparison, only tl ~~. , ~tt ime cost associated with
transferring material to a contractor %vili be i; hided (physical inven-
tt, packing, crating, transportation, etc.)." it ..derscoring supplied.]
The costs of physical inventories, therefore, are to be included in cost
comparisons.
Tax Rates
The changes in the tax computation table in the cost comparison hand-
book were made to update the tax rates (as a percent of sales) for
selected industries. According to oath, the new tax rates were developed
from information provided by the Internal Revenue Service on a sample
of corporation tax returns.
An analysis of the tax rate changes for the 135 industries listed in the
tax computation table showed that 67 industries' tax rates decreased, 58
increased. and 10 were unchanged. The overall average tax rate for the
135 industries increased from 1.976 percent to 2.008 percent of sales.
Page 3 GAO/GGI)-i;G 37 Revised Cost Factors
Declassified and Approved For Release 2012/11/01: CIA-RDP90-0053OR000501200002-7
 Declassified and Approved For Release 2012/11/01: CIA-RDP90-00530R000501200002-7
As requested by your office, we did not obtain agency comments on this
report. As arranged with your office, copies of this report are being sent
to Representative James V. Hansen; the Director, Office of Management
and Budget; and the Director, Office of Personnel Management. Copies
will be made available to other interested parties on request.
Sincerely yours,
William J. Anderson
Director
Declassified and Approved For Release 2012/11/01: CIA-RDP90-00530R000501200002-7