NANCY B. FIRESTONE, Judge.
Pending before the court are the parties' cross-motions for partial summary judgment regarding the treatment of Pay-As-You-Go ("PAYG")
STATEMENT OF FACTS
As stated above, this case involves the closing of two GE segments, the GEA and MAO segments. The basic facts regarding the closing of these segments are discussed in detail in the court's prior decisions and will not be repeated here. The following additional facts are not disputed.
As was the case with its pension plans, GE's PRB plans were offered to eligible GEA and MAO employees. In contrast to most of GE's pension plans, however, GE reserved the right to modify or terminate its PRB plans at its own option. GE employees cannot compel the payment of PRBs should GE elect to modify or terminate the benefits. Also in contrast to most of its pension plans, GE did not account for PRB costs using accrual accounting. Rather, GE accounted for PRB costs on a PAYG basis. Under PAYG accounting, costs are recognized on the company's books for purposes of billing the government when the company pay the benefit to the employee. Under "accrual accounting," however, the costs are recognized in the same accounting period in which an employee performs the work for which he or she earns the benefits, not at the time the company pays out the benefits to that employee or his or her beneficiary after retirement. Theoretically, PAYG and accrual accounting are designed to yield the same total amount of PRB costs over the lifetime of a PRB plan.
Although GE used PAYG accounting for its PRB costs for cost accounting purposes, it was nonetheless obligated to use accrual accounting for financial accounting purposes after the Financial Accounting Standards Board ("FASB") issued Statement No. 106 ("FAS 106") in 1990.
FAS 106 also provided guidance for companies dealing with a "plan curtailment."
Following promulgation of FAS 106, the government amended the Federal Acquisition Regulations ("FAR") to address the allowability and payment of PRBs under government contracts.
GE's PRB costs prior to the segment sales were paid by the government in proportion to the ratio of government contracts to private contracts. GE's PRB costs after the segment sales continue to be paid by the government in proportion to the ratio of government contracting and private contracting.
When GE sold the GEA and MAO segments to Martin Marietta Corporation and Westinghouse Electric Corporation, respectively, GE retained the PRB obligations owed to GEA and MAO employees who had retired before the sale. GE refers to these individuals as the "inactives." GE continues to pay the PRB costs for the GEA and MAO inactives. GE is also reimbursed for a portion of those PRB costs by the government in proportion to the ratio of government contracts to private contracts. Because these costs are folded into GE's general overhead costs and distributed proportionally across all of GE's contracts, however, the government now pays less of these costs. This is because the ratio of government to private contract work has changed.
The fact that the government is not paying as great of a percentage of the "inactives" PRBs costs following the sale of the GEA and MAO segments was recognized in an October 1995 memorandum written by the Defense Contract Management Command ("DCMC") which stated, "Because GE kept the [PRB] liability, the government saves money." DCMC Prenegotiation Memorandum on MMC-GEA "Pension Issue" at 6 (Oct. 19, 1995). Similarly, in 1995, the DCMC Contract Management Board of Review found that the PRB cost reductions at GEA were a "substantial benefit to the Government due to the purchase." DCMC Bd. of Review Meeting Summary at 1.
Following the sale of the GEA and MAO segments, the government, over GE's objections, determined that a segment closing adjustment under CAS 413 was required. In
In its present motion, GE claims that its PAYG PRB costs must also be included in the CAS 413 segment closing adjustment. Because GE has not pre-funded its PRBs and pays for them on a PAYG basis as these costs come due, GE argues that the present value of the future PRBs GE will be required to pay to GEA and MAO inactives in the future must be included in the CAS 413 segment closing calculation.
In the alternative, GE claims it is entitled to an offset or credit to account for the "benefit" the government has obtained because it is now paying a smaller percentage of inactive PRB costs than it would have paid had GE not sold the segments at issue because GE now has fewer government contracts against which it can charge PRBs. GE argues it may offset this "savings" from the pension surplus GE owes to the government as part of the CAS 413 segment closing adjustments for pension costs.
HEARING OF EXPERTS
In support of their summary judgment motions, GE and the government offered the affidavits and testimony of William Keevan
Although Mr. Keevan does not believe that the plain language of CAS 413 explicitly requires that PAYG PRB costs be included in a segment closing adjustment, he explained that there are several other CAS provisions that require GE to treat its PRB costs in the same manner as pension costs when conducting a segment closing adjustment pursuant to CAS 413. In particular, Mr. Keevan testified that CAS 402.40, 4 C.F.R. § 402.40 (1992), CAS 403.40 ("CAS 403"),
Ms. Homburg, on behalf of the government, disputed Mr. Keevan's conclusions with regard to the interpretation of each of these CAS provisions. She testified that PAYG pension costs that cannot be compelled are not treated the same under CAS 412 and CAS 413 as actuarial accrued pension costs because they were accounted for using different accounting methods. Ms. Homburg testified that the CAS 413 segment closing adjustment applies only to pension costs accounted for and allocated to government contracts based on accrual accounting. According to Ms. Homburg, because GE's non-compellable PAYG pension costs are allocated to government contracts differently from GE's other pension costs under CAS 412,
The court will discuss the testimony regarding each CAS provision in turn.
4 C.F.R. § 402.40 (1992).
1. Mr. Keevan's Testimony
According to Mr. Keevan, CAS 402 requires consistency in the allocation of all direct and indirect costs under all covered contracts. Mr. Keevan testified that under CAS 402, if GE's PRB costs are incurred for the same purpose and in like circumstances as GE's pension costs, GE's PRB costs must be treated in the same fashion as those pension costs for purposes of the CAS, including for purposes of CAS 413 (meaning that all these costs would be included in the CAS 413 segment closing adjustment). In this connection, Mr. Keevan explained that under CAS 412, all pension costs must be accounted for using accrual accounting for government contracting purposes regardless of whether they are ultimately allocated to government contracts using accrual or PAYG accounting.
Mr. Keevan stated that in his view, GE's PRB costs were incurred for the same purpose and in like circumstances as GE's PAYG pension costs and therefore GE's PRB costs must be treated the same as PAYG pension costs under CAS 413. Mr. Keevan acknowledged that GE's PAYG pension benefits cannot be compelled and therefore cannot be allocated to government contracts based on accrual accounting under C AS 412.
2. Ms. Homburg's Testimony
Ms. Homburg took issue with virtually all of Mr. Keevan's opinions regarding the meaning and application of CAS 402 to the facts of this case. She explained that CAS 402 is concerned with the allocation of costs to individual government contracts and that it is designed to protect against double billing on government contracts, which is not at issue in this case.
To begin, Ms. Homburg explained that government accounting for pension costs is governed by CAS 412. Contrary to Mr. Keevan's contentions, Ms. Homburg testified that CAS 412 distinguishes between pensions that are accounted for using "accrual" accounting and pensions using PAYG accounting. Ms. Homburg explained that under CAS 412, pension costs that are accounted for using accrual accounting may be allocated to the government when the cost is "incurred" (i.e., when the working employee earns the benefit). However, in Ms. Homburg's view, for pension plans using PAYG accounting, the contractor may not necessarily allocate the cost at the time that he working employee earns the benefit. Rather, under CAS 412.40, the contractor may only allocate pension costs to government contracts when the benefits are earned by the employee if the pension benefit is "compellable" by the employee. Homburg Tr. 236:1 to 240:21 (discussing CAS 412.40; see fn. 14 supra). In other words, explained Ms. Homburg, PAYG pension plans with benefits that employees cannot compel cannot be allocated to government contracts on an accrual basis (i.e., when they are "incurred" or earned by the employee). Rather, the contractor can only allocate the cost to the government contract when the benefit is actually paid as a benefit to the employee. Thus, the non-compellable, PAYG pension cost is not "incurred" in the same manner as the compellable pension cost. In other words, Ms. Homburg testified that CAS 412 specifically provides that the entire cost assignable to a period is allocable to cost objectives of that period
Ms Homburg further explained that to the extent GE's pension costs are compellable by employees, the costs were allocated to government contracts based on the use of accrual accounting, not PAYG accounting (the method by which GE's PAYG PRB costs were allocated). The pension costs compellable by employees also gave rise to actuarial gains and losses associated with accrual accounting and these gains and losses were allocated to its government contracts. In Ms. Homburg's view, how costs are accounted for and allocated to government contracts is the critical factor in deciding whether costs are incurred for the same purpose or in like circumstances. Because GE's non-compellable pension or PRB costs were not allocated to government contracts based on the use of accrual accounting, but were allocated to government contracts based on the amounts actually paid to beneficiaries (i.e., on a PAYG basis), Ms. Homburg testified that GE's compellable pension costs and non-compellable PAYG PRB costs were not incurred "for the same purpose" or "in like circumstances" and therefore non-compellable PAYG PRB costs do not have to be treated the same as compellable pension costs for purposes of CAS 402 or CAS 413.
B. CAS 403
CAS 403.40 states, in pertinent part,
1. Mr. Keevan's Testimony
Mr. Keevan testified that because GE "incurred" PAYG PRB costs for "the same purpose" as pension costs (i.e., to benefit retirees), GE is required under CAS 403.40(a)(2) to allocate pension costs for the GEA and MAO inactives to the GEA and MAO segments for purposes of the CAS 413 segment closing. According to Mr. Keevan, CAS 403 requires GE to match up all of its PRB costs to the segments that generated the costs. Mr. Keevan testified that because this court has ruled that GE must combine the pension assets it retained for its inactives from the GEA and MAO segments with the pension assets it later transferred for the GEA and MAO actives to perform a segment closing adjustment, GE must also include the unfunded PRB costs necessary to pay the GEA and MAO inactives in order to comply with CAS 403. Mr. Keevan explained that under CAS 403, costs incurred for the same purpose must be treated the same for CAS purposes. Therefore, explained Mr. Keevan, GE's pension costs and PRB costs must be treated the same for purposes of CAS 413, and because the pension costs are to be included in the segment closing adjustment, the PRB costs must also be included.
2. Ms. Homburg's Testimony
Ms. Homburg testified that Mr. Keevan's reading of CAS 403 is incorrect. In Ms. Homburg's view, CAS 403(a)(2) does not compel the same treatment of GE's PRB costs and pension costs because, as with CAS 402, the difference in accounting treatment mandates different treatment. That is, the costs are not alike and thus CAS 403(a)(2) is inapplicable. Ms. Homburg explained that while pension costs accounted for using accrual accounting give rise to actuarial gains and losses that are subject to a "settling up" under CAS 413, non-compellable PAYG PRB costs could not, by their nature, give rise to actuarial gains and losses that need to be settled up under CAS 413. Therefore, Ms. Homburg continued, GE's PAYG PRB costs have to be treated differently from the accrued pension costs when a segment closes. In particular, because the GEA and MAO segments no longer exist, GE is allowed to allocate the non-compellable PRB costs attributable to the GEA and MAO inactives to GE's other segments (including those performing federal government contract segments) as "residual costs" under CAS 403.40(c), which it cannot do with accrued pension costs.
C. CAS 406
CAS 406.40(b) states, "A contractor shall follow consistent practices in his selection of the cost accounting period or periods in which any types of expense and any types of adjustments to expense (including prior-period adjustments) are accumulated and allocated." 4 C.F.R. § 406.40(b) (1992).
1. Mr. Keevan's Testimony
Mr. Keevan testified that because PRB costs and pension costs are the same "types of expense" within the meaning of CAS 406, they must be treated the same under CAS 406. Therefore, according to Mr. Keevan, PRB costs must be included in the same CAS 413 segment closing adjustment as the GEA and MAO pension costs. Mr. Keevan testified that pension costs and PRB costs involve the same types of expense, and just as there is a need to settle up with the government with regard to basic pension costs where there are no future periods for payment, the same is true for PRB costs.
2. Ms. Homburg's Testimony
Ms. Homburg challenged Mr. Keevan's assertion that PRB costs and pension costs are the same "types of expenses" under CAS 406.40(b). Ms. Homburg again focused her testimony on the fact that GE's pension costs and PRB costs did not involve the same types of expense because these two categories of expenses were accounted for differently and allocated differently to government contracts under the CAS. Ms. Homburg agreed with Mr. Keevan that expenses of the same type are accounted for in the same way, but she disagreed with Mr. Keevan that GE's pension and PRB costs at issue were, indeed, the same type of expense. She testified that because GE used accrual accounting for its compellable pension plans, the costs associated with those plans should be subject to a segment closing adjustment under CAS 413. However, in Ms. Homburg's view, the PRB costs are a different type of expense because those costs were allocated to the government contracts based on PAYG accounting. Ms. Homburg concluded that costs given different accounting treatment are not of the "same" and do not have to be treated "consistently" for purposes of CAS 406.
D. CAS 413
42 Fed. Reg. 37,191, 37,198 (Jul. 20, 1977).
1. Ms. Homburg's Testimony
Ms. Homburg testified at length regarding her view that a segment closing adjustment for non-compellable PAYG pensions or PRB costs is precluded by the terms of CAS 413 because CAS 413 applies only to pension plans that are accounted and allocated to government contracts based on accrual accounting. Ms. Homburg explained that the purpose of CAS 413 is to provide for measuring and assigning actuarial gains and losses. Such gains and losses, Ms. Homburg explained, arise only when contractors allocate costs to government contracts based on accrual accounting, not when they utilize PAYG accounting methods. This is because the actuarial assumptions used for accrual accounting may differ from actual experience. Under the terms of CAS 413.50(a)(2), contractors are required to amortize or spread those actuarial gains and losses over a fifteen-year period.
As stated above, GE's PAYG PRB plans, in contrast were not allocated to government contracts based on accrual accounting. Accordingly, explained Ms. Homburg, there were no actuarial gains or losses allocated to the GEA and MAO segments' contracts to be adjusted. Put another way, because GE's PRB costs were allocated to government contracts based on the contractor's actual payments to the beneficiaries and did not include actuarial gains or losses, there is nothing to "correct or adjust" for purposes of CAS 413.50(c)(12).
2. Mr. Keevan's Testimony
In response to Ms. Homburg's testimony regarding the application of CAS 413, Mr. Keevan testified that the CAS 413 segment closing adjustment is not limited to situations involving actuarial gains or losses. Mr. Keevan testified that CAS 413.50(c)(12), by its plain terms, is focused on "actuarial liabilities." According to Mr. Keevan, GE has an "actuarial liability" in connection with its non-compellable PAYG PRB costs for the GEA and MAO segments and therefore there is nothing in CAS 413.50(c)(12) that precludes GE from including PRBs in a segment closing adjustment.
I. Standard of Review
A. Summary Judgment
Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." RCFC 56(c)(1);
B. Interpretation of the CAS
The standard of review for a motion for summary judgment premised on the proper interpretation of a statute or regulation is well-settled. Here, the primary dispute concerns the proper interpretation of the original CAS 413.50(c)(12) and it relationship to other CAS provisions, which involve questions of law.
In evaluating the meaning of the original CAS 413.50(c)(12), the Federal Circuit has held that the court must be guided by the CASB's intent in promulgating the standard.
316 F.3d at 1373 (quoting
II. The Cost Accounting Standards Do Not Authorize or Permit a Segment Closing Adjustment of Non-Compellable PRB Costs Accounted for and Allocated to Government Contracts on a PAYG Basis.
A. The Positions of the Parties
At the core of GE's argument is its contention that pension plans accounted for using PAYG accounting must be treated the same as pension plans accounted for using accrual accounting and therefore PRB plans using PAYG accounting must be treated the same as pension plans using accrual accounting for purposes of CAS 413, meaning that the costs associated with PAYG PRB plans must be included in the segment closing adjustment. GE supports this claim by relying on the language of CAS 412 with regard to PAYG pension plans and then applies the conclusions it draws from that provision to other CAS provisions. GE argues that although PAYG PRB plans are not directly covered by a CAS 413 segment closing adjustment, they must nevertheless be included because of the operation of other CAS provisions must be included in the segment closing adjustment. In particular, GE claims that provisions found in CAS 402, CAS 403, CAS 406, and CAS 412, when read together, mandate that costs incurred for the same purpose or involving the same types of expenses must be treated the same for purposes of CAS 413.
GE's argument begins with CAS 412.50(b)(4), which provides that PAYG pension plans are to be "measured in the same manner as are the costs of defined-benefit plans whose benefits are provided through a funding agency." 4 C.F.R. 412.50(b)(4). Defined benefit plans are measured under CAS 412 using "accrual accounting." CAS 412.40(b)(1). Therefore, PAYG pension plans must be measured using accrual accounting as well, regardless of the fact that the costs are ultimately billed on a PAYG basis. For this reason, GE argues, because its PAYG pension plans are measured using accrual accounting, its PAYG PRB plans must also be accounted for using accrual accounting for CAS purposes. Continuing this reasoning, GE next argues that because PAYG pension plans are accounted for using "accrual accounting," they must be included within a segment closing adjustment under CAS 413. Thus, argues GE, PAYG PRB plans must also be included.
GE rejects the government's contention that only pension plan costs that are measured and allocated to government contracts using accrual accounting are to be included in a CAS 413 segment closing adjustment. GE recognizes that under CAS 412, PAYG pension plans that do not have compellable benefits cannot be allocated to government contracts based on accrual accounting, but GE argues that how costs are allocated to government contracts is irrelevant. According to GE, it does not matter whether the contractor has allocated actuarial gains and losses to the government for purposes of the segment closing provision. GE argues that the segment closing provision, CAS 413.50(c)(12) applies regardless of whether the pension costs were allocated to government contracts based on accrual accounting with actuarial gains and losses. GE argues that CAS 413.50(c)(12) refers only to "actuarial liability," not "actuarial gains and losses," and that because it has an "actuarial liability" with regard to its non-compellable PAYG PRB plans, it must include its unfunded, non-compellable PRB liabilities in the segment closing adjustment. GE concludes that CAS 402, 403 and 406 require it to include the actuarial liability associated with the PRBs it has retained for the GEA and MAO inactives in the CAS 413 segment closing adjustment for pension costs.
The government argues in response that GE's argument is based on a fundamentally flawed premise — namely, that a CAS 413 segment closing adjustment can include pension costs that were not allocated to government contracts on the basis of accrual accounting. The government argues that CAS 413, when read in its entirety, makes plain that its focus is on the assignment, measurement and allocation of pension costs that are accounted for using accrual accounting. The government contends that GE's analysis of CAS 412 and 413 impermissibly ignores the distinction drawn by the CAS Board between PAYG pension plans with benefits that can be compelled and PAYG plans with benefits that cannot be compelled. The government contends that only those PAYG pension plans that have
The government disagrees with GE that the segment closing adjustment was intended to provide a one-time settling up for all pension costs in cases where payment was "deferred" either through accrual or PAYG accounting. The government argues that GE's reliance on the phrase "actuarial liabilities" in CAS 413.50(c)(12) is misplaced. The government contends that "actuarial liabilities" cannot be read out of context and that in the context of CAS 413, including the illustrations provided for in the regulation and the regulation's preamble, the CAS Board clearly intended to include only those previously determined pension costs that included actuarial gains and losses in a CAS 413 segment closing adjustment.
Finally, the government argues that there is nothing in CAS 402, CAS 403 or CAS 406 that compels a different result. According to the government, the differences between the accounting requirements for compellable pension costs and non-compellable pension costs established in CAS 412 compel a different treatment for non-compellable pension and PRB costs under CAS 402, CAS 403, CAS 406 and CAS 413. For the reasons that follow, the court agrees with the government.
1. The CAS 413 segment closing provision applies only to accrued pension plans that were required to account for actuarial gains and losses.
The court agrees with the government that GE's argument is based on a fundamental misunderstanding of CAS 413 and the purpose of the segment closing adjustment. CAS 413 was first promulgated in 1977 to "provide guidance for adjusting pension cost by
The purpose of the CAS 413 segment closing adjustment was explained by the Federal Circuit in
Thus, the reason that CAS 413.50(c)(12) does not extend to GE's PAYG PRB costs is that CAS 413 provides a means to sort out actuarial gains and losses and does not extend to situations where no such actuarial gains and losses were ever allocated to government contracts. Actuarial gains and losses only arise in the context of accrual accounting.
Pension plans funded using PAYG accounting that do not have compellable benefits have not been allocated to contracts based on actuarial determinations. Accordingly, these non-compellable PAYG costs have not been allocated to government contracts based on actuarial assumptions, assumptions that, while meant to be as accurate as possible, inevitably result in over or under payments. Because non-compellable PAYG costs have been allocated to government contracts based only on the actual payments made to retirees, no assumptions were used and no costs based on actuarial gains or losses were allocated to government contracts. In such circumstances, there are no "previously determined costs" that need to be adjusted in a CAS 413 segment closing adjustment.
GE's contention that CAS 413.50(c)(12) includes non-compellable PAYG pension costs because it speaks only of "actuarial liabilities" regardless of how costs have been allocated to government contracts is not supported. GE argues that it can calculate an actuarial liability for its segments. However, GE's ability to calculate an "actuarial liability" is not enough to include its non-compellable costs in a segment closing adjustment. The segment closing provision in CAS 413 was promulgated to address the treatment of actuarial gains and losses allocated to government contracts when future periods for sorting out those actuarial gains and losses are terminated by a segment closing. GE's suggestion that the segment closing provision was intended to provide for a settling-up in any situation where pension costs have been simply "deferred" either through accrual accounting or PAYG accounting renders the distinctions the CAS Board drew between the allocation of costs under accrual and PAYG accounting in CAS 412 and 413 meaningless.
The court cannot construe a regulation to render the provision meaningless.
2. Nothing in CAS 402, 403 or 406 Requires or Permits a Segment Closing Adjustment for GE's Non-Compellable PRB costs.
a. CAS 402
CAS 402(c), as noted above, requires that "all costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives." GE argues that under CAS 402, PRB costs must be included in the segment closing adjustment of basic pension costs on the grounds that pension costs and PRB costs are "incurred for the same purpose and in like circumstances" and therefore must be allocated to cost objectives in the same manner.
GE relies on the GAAP definition of "incurred" to support its contention that regardless of when its PRBs are paid to beneficiaries, the costs were "incurred" before the obligation to pay arose. Quoting from FAS 106, GE states that for PRBs, "Employers have generally recognized the obligation and related costs from the exchange as the obligation was satisfied rather than when it was incurred." FAS 106 para. 142. Relying on this provision, GE argues that the obligation to pay PRBs is separate from satisfying that obligation. GE also relies on the FAR provision on PRBs, which also draws a distinction between when PRBs are "incurred" and when they are "paid."
GE argues that PRBs and pension costs are incurred for the same purpose in that both are designed to provide retirement benefits.
The government argues that GE's reliance on CAS 402 is misplaced because it does not address the allocation of costs to segments and thus it is not relevant to determining whether GE must include its PRB costs in the segment closing adjustment. In the alternative, the government argues that CAS 402 does not mandate the inclusion of PRB costs in a segment closing adjustment because GE's PRB costs were not "incurred for the same purpose" or "in like circumstances" as GE's basic pension costs. The government argues that for CAS purposes, costs are only considered to be "incurred" when they can be compelled by the plan participant or when the benefit is actually paid. Thus, GE's non-compellable PRB costs were not "incurred" at the same time that its compellable pension costs were incurred. According to the government, GE's non-compellable PRB costs were only "incurred" for CAS purposes when GE paid the benefit. To be "incurred" for the same purpose and in like circumstances for government accounting purposes under the CAS, the government argues, means that the costs were accounted for in the same way.
The court agrees with the government that CAS 402 is wholly irrelevant to the issue at hand. This case concerns the allocation of costs to segments, not to individual cost objectives
b. CAS 403
GE argues that CAS 403 requires that PRB costs for the GEA and MAO inactives must be allocated to the GEA and MAO segments along with the pension costs at the time of the segment closing because CAS 403 does not allow a contractor to allocate an expense as a "residual expense" if the cost was incurred for the same purpose as another cost that had to be allocated to a specific segment.
The government disputes GE's contention that GE's pension and PRB costs were "incurred for the same purpose" and argues that for this reason, pension costs and PRB costs are properly treated differently without violating CAS 403. The government further argues that GE can properly allocate the PRB costs to all segments as a "residual" expense under CAS 403.
The court agrees with the government's reading of CAS 403. First, the court finds that GE's reading of the phrase "incurred for the same purpose" in CAS 403 is incorrect. In explaining the reasons behind the promulgation of CAS 412, the CAS Board made clear in CAS 412 that "certain of these criteria [referring to financial accounting criteria in place at the time] are not appropriate for Government contract costing purposes." 40 Fed. Reg. 43,873, 43,874 Pt. 412, pmbl. A. This language serves to highlight that the C AS Board did not intend for these costs to be treated the same in every situation as they were under financial accounting principles. Moreover, regardless of how the term "incurred" is used for financial accounting purposes, it is clear that the CAS Board does not consider non-compellable PAYG pension costs to be "incurred" for government accounting purposes until they are paid to the beneficiaries and thus it will not allow a contractor to allocate a PAYG pension cost allocable to a government contract unless the contractor can establish that it is "liable" for that cost. The CAS Board stated that the "underlying concept of [CAS 412]" was to allow for the accrual of pension costs only "when a valid liability exists." 40 Fed. Reg. 43,873, 43,876 Pt. 412, pmbl. A. Where payment is non-compellable, no such liability can be said to exist. It is for these reasons that the court finds that for government accounting purposes, the word "incurred" means the incurrence of a "valid liability." Therefore, GE's reliance on FAS 106 or the FAR to define "incurrence" for CAS purposes is misplaced.
Moreover, given the lengths the CAS Board went to in CAS 412 to require that only costs that could be legally compelled could be allocated to government contracts, the plaintiff cannot credibly contend that the CAS Board intended for the requirement to be undone through CAS 403. It is well-established that express provisions take precedence over general provisions.
Therefore, even though GE must allocate pension assets and liabilities for inactives to the GEA and MAO segments as part of the segment closing adjustment,
c. CAS 406
CAS 406 requires a contractor to follow a consistent practice in selecting the accounting period in which "any types of expense and any types of adjustment to expense (including prior-period adjustments) are accumulated and allocated." 4 C.F.R. § 406(b). GE argues that PRB costs and pension costs involve the "same types of expense" and therefore, in accordance with CAS 406, pension costs and PRB costs must be treated the same for purposes of CAS 413.50(c)(12).
The government argues that CAS 406 is not applicable to the issue before the court because it deals with the problem of contractors assigning the same expense to different accounting periods and not with the assignment of costs to a segment. The government also argues that CAS 406 is irrelevant to the issue of whether non-compellable PRB costs must be treated the same as pension costs accounted for using accrual accounting because, for the reasons discussed above, the two types of costs are not the "same types of expense."
The court agrees with the government that CAS 406 has no application to the issue before the court. The stated purpose of CAS 406 is to "promote uniformity and comparability in contract cost measurements." 4 C.F.R. § 406.10 (1992);
B. The Government Is Not Required to Give GE a Credit for Any Cost Savings Associated with GE's Not Transferring the Inactives in the Segment Sale.
GE argues that if it is not entitled to a CAS 413 segment closing adjustment for its PAYG PRB costs, it is nonetheless entitled to some credit or offset based on the government's alleged cost savings attributable to GE's decision not to transfer its PRB cost obligations to the new owners as part of its segment sales.
The government argues that GE is not entitled to any offset or credit for any "savings" allegedly created by GE's decision not to transfer the PRB liability of inactives to the new owners as part of the segment sales. It asserts that it has not "saved" any PRB costs following the segment closing because the government never agreed to reimburse PAYG PRB costs on anything other than the ratio of government contracts available for allocation at the time the PRB costs are paid to beneficiaries. The government contends that it will continue to reimburse GE for its PAYG PRB costs on the same terms as it always has reimbursed GE (i.e., on a PAYG basis). By electing to use PAYG accounting, the government argues, GE assumed the risk that the ratio of GE's government contracts to private contracts might be lower when it came time to pay benefits. The government concludes that the alleged "cost savings" GE claims the government has obtained is nothing more than the logical outcome of GE's accounting decision.
The court agrees with the government. As noted above, the court has previously determined that under the Credits clause, 48 C.F.R. § 31.201-5, to the extent the government has received a cost reduction attributable to the excess pension costs over and above the amount necessary to pay for the "actives" GE transferred to the new companies in the segment sales, the government must give GE credit for that actual cost savings in contracts with the new segment owners.
GE's contention that the government has similarly "saved" PRB costs is mistaken. The government has not received a cost savings because under the CAS GE could only allocate PRBs once they were paid. Thus, GE can only allocate its PAYG PRB costs to contracts based on the ratio of government to private contracts that are in effect at the time the costs are paid. Now that the GEA and MAO segments are closed, CAS 403(c) allows GE to continue to allocate PRB costs as residual expenses to all segments. If GE decides to take on more government contracts, it will be able to allocate a greater percentage of PRB costs to those contracts. Thus, the government has not received a "cost reduction," attributable to the segment closing.
GE's reliance on the CAS windfall provision, 41 U.S.C. § 422(h)(3), is equally misplaced. The government has not obtained a "windfall" by virtue of GE's decision to sell the GEA and MAO segments. The CAS does not contemplate that every business change which triggers a cost change be corrected to avoid a windfall. Rather, the government is not entitled to a windfall in connection with the correction of a CAS violation. Here, the alleged "windfall" occurs because GE is complying with the CAS. GE's continued and proper use of PAYG accounting for PRBs does not trigger the "windfall" provision.
For all of the above-stated reasons, the government's motion for partial summary judgment is
FAR 31.205-6(o)(1), 48 C.F.R. § 31.205-6(o)(1) (2010).
That decision does not dispose of the issues in this case because GE does not contend that its PRB plans are "pension plans" within the meaning of CAS 412 or 413. Rather, GE argues that its PRB costs are subject to a segment closing adjustment because of the separate requirements established in CAS 402, 403 and 406.
40 Fed. Reg. 43,873, 43,878.
The court rejects GE's invitation to read out of CAS 413 the allocation rules in CAS 412. In
Here, however, there is no conflict between CAS 412 and CAS 413. To the contrary, CAS 412 defines what costs will be covered by CAS 413. 42 Fed. Reg. 37,191, 37,195 Pt. 412, pmbl. A. Accordingly, the court has no reason to ignore the CAS 412 allocation rules for non-compellable pension costs.
GE's reliance on Department of Energy (DOE) Order 3890.1A is also misplaced. In the DOE Order, DOE agreed to pay future PRBs earned by employees of DOE contractors under DOE's Management and Operating contracts at certain nuclear facilities.