ANPRM on CAS Harmonization with PPA

1. ANPRM on CAS Harmonization with PPA November 2008

2. Pension Regulations • ERISA (amended by PPA in 2006) • Measures pensions to determine amounts to contribute to pension trust • Moved to a short term approach • FASB 87 • Measures pensions to determine pension amounts recorded for financial reporting • Moved to a short term approach • CAS • Measures pension to determine amount of cost recoverable in government contracts • Long term approach

3. Current CAS v. PPA Considerations • Contractor cash flow negatively impacted • PPA requires higher contributions to fund pension trust • CAS prepayment growth • CAS cost recovery slower • Lower liability measurement • Long (10-30 year) amortization periods • PPA close ties to the market significantly increased volatility of funding measure • PPA effective for most contractors in 2008, a few large contractors have a deferral to 2010 • PPA mandates harmonization of CAS with the PPA minimum funding requirement by 2010 • Publication must be by 1/1/2010 and rule must be effective by 1/1/2011

4. Concepts in Harmonization ANPRM • CAS pension costs will increase • Liability is now greater of two measures (current AAL or new MAL) • Prepayment credits divided into two categories • Mandatory (funding in excess of CAS cost up to PPA min) • Amortized over 5 years • Voluntary (discretionary funding in excess of PPA min) • Actuarial gains/losses amortized over 10 years from 15 • Assignable cost limit (ACL) changed to reduce the frequency of entering and exiting full funding (volatility) • Transition rules conservatively phase in increased cost

5. Concerns with the ANPRM • Cost recovery tied to contractor funding patterns • ANPRM “Minimum required funding” is PPA reduced by ERISA credits • PPA “minimum required funding” not reduced by ERISA credits • Minimum required funding amount baseline for mandatory prepayment • Discretionary v. Mandatory funding • Assignable Cost Limitation • Revised to be 125% of AAL, but explicitly ignores MAL • Effective Date and Applicability • PPA funding v. Cost recovery

6. Cost recovery tied to funding patterns • Contractors with same PPA funding requirements and funding amounts over the same period have different cost recovery

7. Cost recovery tied to funding patterns • Contractors with same PPA funding requirements and funding amounts over the same period have different cost recovery

8. Cost recovery tied to funding patterns • Recommended two changes to ANPRM to provide for fair and equitable cost recovery: • Minimum Required Funding definition for CAS should not be reduced by ERISA credits 2. When ERISA credits are used as a funding source to satisfy the PPA minimum funding required (i.e. the assets become mandatory contributions and are no longer discretionary), a corresponding reclassification from CAS voluntary prepayments to CAS mandatory prepayments should be made

9. Assignable Cost Limitation • Revised to use 125% of AAL, but explicitly ignores MAL • ACL intended to prevent excessive buildup of assets that have funded CAS costs • ANPRM uses higher of AAL or MAL to calculate CAS pension costs • Ignoring MAL illogical based on intent of ACL • Recommended ACL use greater of 125% AAL or 100% MAL

10. Effective Date and Applicability • PPA mandates CASB issue rule by 1/1/2010, rule effective by 1/1/2011 • Final rule expected to be effective immediately in 2009 when published • If receipt of new CAS covered contract in 2009, rule applicable to contracts as of 1/1/2010 (start of next cost accounting period) • PPA funding requirements become effective for eligible contractors the earlier of: • Beginning of next fiscal year after effective date of the harmonized rule (i.e. if CAS rule out in 2009, eligible contractors must fund in 2010), or • January 1, 2011 • If CAS rule out too late in 2009 to get new contract in 2009 (i.e. new contract receipt in 2010), CAS applicability would be 1/1/2011 but eligible contractors would be subject to PPA funding in 2010 if CAS effective immediately in 2009 • Recommended the CAS Board be aware of the potential problems with publishing a final harmonized rule too close to the end of 2009 and consider an effective date of January 2, 2010 for the final rule if necessary

11. Conclusion • ANPRM positive move toward harmonization • ANPRM reasonable balance between timely cost recovery and acceptable volatility • Conservative transition rules acceptable • Consider the availability of contract funding for increased costs and equitable adjustments in current economic conditions