Cost Savings Applied to Segment Closing Adjustment

Cross-motions for summary judgment on a contractor’s segment closing adjustment obligation under Cost Accounting Standard 413 were resolved in the contractor’s favor by the Court of Federal Claims because the government received a financial benefit from the transfer of pension assets that exceeded the amount of the segment closing adjustment the contractor would otherwise owe the government. CAS 413.50(c)(12) provides for adjustments to pension costs to account for a closed segment’s pension surplus or deficit, determined by calculating the difference between the market value of the pension plan assets allocated to the closed segment and the actuarial liability for the segment. If there is a surplus, the government may be entitled to the “Teledyne share” (see 47 CCF ¶78,020, CA-FC 2003, affirming 45 CCF ¶77,803, FedCl 2001), calculated as a fraction whose numerator equals the government’s contributions to flexibly-priced contracts that provide for CAS 413, and whose denominator equals total pension contributions from all sources since the date of the pension plan’s inception.

Teledyne Share

Here, the contractor’s pension plans had a surplus when the contractor sold four business segments. The government argued the contractor’s Teledyne calculations were incorrect and the contractor owed it more than $12 million, while the contractor contended it owed nothing because its segment closing adjustment obligation was exceeded by the measurable benefit to the government that resulted from the transfer of surplus pension assets to the purchaser. The parties disagreed on whether the contractor should have included pre-1968 deferred annuity contributions made from the inception of a predecessor pension plan in the denominator of the Teledyne share. The contractor argued the contributions should be included because the assets contributed to the pension surplus. The court agreed, finding inclusion of the contributions was supported by Joint Guidance issued by the Defense Contract Management and Audit agencies, which the contractor was bound to follow. The contractor presented undisputed evidence that the annuities attributable to the pre-1968 contributions were retroactively cancelled and the assets were then co-mingled with the assets in the pension administration fund, continued to accumulate, and were eventually co-mingled with the pension assets.

Participation Rate

The parties also disputed how to determine the government’s participation rate in the contractor’s fixed-price incentive contracts, which affected the Teledyne share numerator. Although costs allocated to firm-fixed-price contracts are not included in the Teledyne share because the contractor bears all cost risks, the government was entitled to share in the pension costs allocated to FPI contracts because it shared the risk of cost over- or under-runs before the price ceiling is reached. The contractor argued a 30% government cost participation rate was a reasonable proxy for government participation in its FPI contracts because it was derived from a settlement agreement between the government and a successor in interest to the contractor. The court again agreed with the contractor, finding the government negotiated and approved the 30% share rate for FPI contracts concerning one of the largest segments at issue, and the government did not support its proposed 100% rate with factual evidence. Even if issues regarding the benefit to the government based on the surplus transfer were resolved in the government’s favor, including the pre-1968 contributions in the Teledyne denominator and using a 30% government FPI participation rate in calculating the numerator reduced the amount the contractor owed the government to zero. ( Unisys Corp. v. U.S., FedCl, 57 CCF ¶80,084)