Shuttle’s End Leaves NASA a Pension Bill

The nation’s space agency plans to spend about half a billion dollars next year to replenish the pension fund of the contractor that has supplied thousands of workers to the space shuttle program.

Darren Robb | Stone | Getty Images

The shuttle program accounts for a vast majority of the business of United Space Alliance, originally a joint venture of Boeing and Lockheed Martin. With the demise of the shuttle program, United Space Alliance will be left without a source of revenue to keep its pension plan afloat. So the company wants to terminate its family of pension plans, covering 11,000 workers and retirees, and continue as a smaller, nimbler concern to compete for other contracts.

Normally, a company that lost a lifeblood contract would have little choice but to declare bankruptcy and ask the federal insurer, the Pension Benefit Guaranty Corporation, to take over its pensions. But that insurer limits benefits, meaning not everyone gets as much as they had been promised. United Space Alliance’s plan also allows participants to take their pensions as a single check and includes retiree health benefits, neither of which would be permitted by the pension insurer.

United Space Alliance, however, has a rare pledge from a different government agency to pay the bill. The National Aeronautics and Space Administration says in its contract with the company that it will cover its pension costs “to the extent they are otherwise allowable, allocable and reasonable.” NASA interprets this to include the cost of terminating its pension plans outside of bankruptcy.

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The pension fund now has about half the amount needed. The president’s budget proposal for the 2012 fiscal year requests $547.9 million for NASA to provide the rest. That is nearly 3 percent of the agency’s total budget and just about what the Science Mission Directorate at NASA spent last year on all grants and subsidies to study climate change, planetary systems and the origins of life in the universe.

“We know that it’s NASA’s obligation to fund this, and NASA will do so,” said a spokesman for the space agency, Michael Curie.

Other federal agencies have made promises to pay contractors’ annual pension costs — the Energy Department, for example, for companies that run nuclear sites — and some government auditors have been warning for years that investment oversight was lacking and that the potential costs had been underestimated. This appears to be the first time, though, that a company’s main contract has expired and an agency has had to bear the cost of terminating its plans.

Although NASA was reimbursing the contractor for the annual pension contributions, it had no say over how the money was invested. United Space Alliance put most of the money into stocks.

NASA - The Next Generation - A CNBC Special Report
NASA - The Next Generation - A CNBC Special Report

The backstop will be unusually costly because of market conditions. While United Space Alliance has made its required contributions every year, the fund lost nearly $200 million in the market turmoil of 2008 and 2009. When interest rates are very low, as they have been, the cost of the promises rises rapidly as well, creating a bigger shortfall.

The cash infusion is also being readied at a time when some members of Congress are demanding cuts in spending and threatening to block anything that could be construed as a taxpayer bailout.

“It’s unfortunate that it’s coming in this fiscal environment,” said Bill Hill, NASA assistant associate administrator for the space shuttle.

He said that he hoped Congress would appropriate the money before the fiscal year ended on Sept. 30. If not, he said, NASA will have to divert funds from space-related activities.

Already, United Space Alliance has had five rounds of layoffs and has shrunk to about 5,600 employees from a peak of 10,500. Its workers have performed a wide range of jobs for the space shuttle program, mostly in Florida.

Beth Robinson, chief financial officer of NASA, said that even if United Space Alliance declared bankruptcy at this point, the pension agency would go after NASA for some of the cost. She said the contract was issued during a stock market boom, with a clause saying that if the plans should terminate with a surplus, the extra money would go to NASA. At the time, no one expected them to terminate with a deficit.

The cost of the termination may fluctuate along with market conditions as Congress considers what to do.

Tracy E. Yates, a spokeswoman for United Space Alliance, said the company could not predict the outcome. “However, we have not seen or heard anything to date that indicates that NASA will not receive funding for this obligation,” she said.

To terminate the plans, the company will ask an insurance company to specify the full amount needed, in today’s dollars, to pay all future benefits. Workers will be asked whether they want to receive a monthly check for the rest of their lives or a single big check. Financial planners generally recommend the lifelong income stream, which is the only option from the pension agency. But United Space Alliance’s participants are expected to favor a single check, because so many have been laid off and need money now.

Federal agencies have been warned for more than a decade against promising to reimburse contractors’ pension and retiree health costs without adequately monitoring plans or how the money is invested.

NASA’s inspector general called contractor health and pension plans a high-risk area in 2000, and told the agency not to “blindly accept the risk.” NASA said it agreed, but was required to use Defense Department staff members to vet contractors’ retirement plans, and the Pentagon did not have enough specialists.

The federal agency with the most at risk in retirement plans of its contractors is the Department of Energy, which might have to come up with $37 billion by one estimate. It has made pension promises to the companies that operate government-owned nuclear sites, like the Y-12 National Security Complex near Oak Ridge, Tenn. Contractors not only run the sites, but also decommission them, clean them up and secure nuclear materials. (The Defense Department also hires many contractors, but for shorter terms, so the risk is less.)

In 2005, a Government Accountability Office audit found that government-backed contractors were offering benefit packages far richer than those of their competitors, and warned that this could add “billions of dollars in long-term costs.”

NASA - The Next Generation - A CNBC Special Report
NASA - The Next Generation - A CNBC Special Report

Not long afterward, the Energy Department arrived at a plan to stop paying for contractors’ traditional pensions in the future — but to grandfather current workers at nuclear sites and retirees in existing plans. That initiative was dropped after drawing fire from workers, unions, contractors and benefit consultants.

This year, federal auditors found the Energy Department was still at the mercy of contractors’ investment decisions.