opm oig study of usps oig proposals feb 28 2011

8/6/2019 OPM OIG Study of USPS OIG Proposals Feb 28 2011

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u.s.OFFI C E OF PERSONNEl MANAGEMENT

OFFICE OF THE INSPECTOR GENERAL

A Study of the Risks and Consequencesof the USPS OIG's Proposals to ChangeUSPS's Funding of Retiree Benefits

Shifting Costs from USPS Ratepayers to Taxpayers


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OPM OFFICE OF THE INSPECTOR GENERAL FEBRUARY 20 11I EXECUTIVE SUMMARYL

A STUDY OF THE RISKS AND CONSEQ!JENCES OF THE USPS OLG s PROPOSALS TO CHANGE

USPS S FUNDING OF RETIREE BENEFITS SHIFTING COSTS FROM USPS RATEPAYERS TO TAXPAYERS

One of the pri ncipal respons ib ili ties of the U.S. Office of Personnel Management (OPM ) is theadministra tion of the benefits programs for Federal c ivilian employees and ret irees. As part ofthat duty. it manages and oversees the C ivi l Service Retireme nt and Di sability (CSRD) Fund,the Postal Service Retiree Hea lth Benefits (PSRHB) Fund, and the Em ployees Health Benefits(EHB) Fund.The United States Postal Service (USPS) was established in 1971 , rep lac ing th e former U.S. PostOffice Department (POD). Unlike its predecessor, the US PS is an independent establishmentof the Execut ive Branch rather than a Federal agency. This decis ion to transfo rm the POD wasinfluenced by the fact that it offered what were essentially commercial se rvices and thus couldbe expected to produce the revenues to cover its own costs rather th an re lyi ng upon annualGovernment appropriations.In 2009 and 2010, the US PS Office of In spector General (US PS 0 10) issued a series of reportsconta in ing proposals that would reduce, modify, or elimina te th e lega lly-mandated paymentsthat the US PS currentl y makes into the OPM-administered tru st funds. These reports make thegeneral argum ent that the basic goa l of each of these proposa ls is two-fold: (I) to remedy ana lleged inequity in the curre nt method by whi ch the US PS funds its retiree obligat ions (bothannuity and reti ree health benefits) and (2) to obtain ope rat ing capi tal for th e USPS, at least on atemporary basis.

The US PS OIG's ProposalProposal 1; Treatment of FERS Surplus . This proposal would change the law regarding anagency's ( ill thi s case, the USPS's) contributions to the CSRD Fund made under the FederalEmployees Retirement System (FERS) so that w hen the agency has paid an amount in excess ofits current liabi li ties, it may e ither receive a rebate 0 1' be excused from making co ntributions unti lthe excess is ex hausted.


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OPM OFFICE OF THE INSPECTOR GENERAL FEBRUARY 20 11

EXECUTIVE SUMMARY Proposal 2: Allocation of CS RS Liabilities for PO D/US PS Emp loyees. Thi s proposal wouldchange the current allocation of responsibility between the Federal Government and the USPSfo r funding retirement annuities paid to emp loyees who (1) se rved in both the POD and theUSPS, and (2) participate in the Civil Service Retirement System (CSRS). Und er this proposal,the USPS contribution would decrease, thus increasing th e Federal Govcmmen t's share of theliability.Proposal 3: Reduction in Contribution Levels for Retiree Benefits. This proposal wo uldchange the current law requiring the USPS to full y fund both its liabi li ties under FERS and itsob ligations for future ret iree health benefi ts, pennitting the US PS 10 meet lower fund in g leve ls of80 percen t fo r FE RS liabili ties and 30 percent for reti ree hea lth benefit ob ligations.

The OPM OIG 's PositionWe ge nerally ag ree wi th Proposal 1 regarding the d ispositi on of excess FERS contributions. Westrongly object 10 the remaining proposals on several grounds:

They seek 10 a lter the fundamental policy regarding the relations hip between the USPS and the Federa l Governm en t. These proposals wo uld cau se the Government to ass ume respon sibility for US PS ret iree benefit expenses wi thout a co rrespond in g in crease in Governm ent oversight of the US PS.

They do not ac nla lly remedy any a lleged inequities in the Federal ret iremen t prog ram. Instead, they serve onl y 10 prov id e the USPS w ith operat in g capital, whi ch wo uld poten tially shift costs from USPS ratepayers to the taxpayers.

The proposals would create a dangerous precedent whereby the trust funds' as sets areused for purposes other than the pay ment of benefi ts. If this became common pract ice, thefi nancial so undness and integrity of the tru st funds would be severely compromised.

Of great concern to us is the fact that during the course of our research , we did not fi nd anyviab le projections indicating that the USPS wi ll be ab le to restore its operations to profitability.Thi s is prob lematic because:

If the US PS were unable to make the e mployer 's contribution under CSRS and FERS, theFederal Governmen t would be liable fo r any shortfa ll in the CS RD Fund .

The integrity of the Federal Employees Hea lth Benefits (FEHB) Program would beseriously compromised, absent emergency appropriations from Co ngress, if the USPS wereto cease contributing the e mployer 's share of premiums.

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EXECUTIVE SUMMARY Recommendations

Based upon the facts and our ana lysis, we offer the fo llowi ng recommendations:I. The OPM should consider supporting the proposal to amend the FERS funding mechanism

either by pC111itt ing amortization of surplu ses in the same manner as supplemental liabilitiesor utilizing the surplus in lieu of an nu al FERS payments until it is exhausted. In thisin stanc e, the proposal mai ntains the financial integrity of the CS RD Fu nd . However, theOPM should strongly advocate that the proposal app ly to all agencies participating in FERSand not solely to the USPS.

2. The OPM should examine the e ffects that would result from the creation ofa demographicsub-account, whi ch would be util ized in determining the US PS's FERS liability. Sucha study s hould cons ider the effects upon both the USPS's FER S liab ili ties and the en tireFederal ret irement program.

3. As the administrator of the FEHB Program, the aPM should support reta ining therequi rement that the USPS prefund its retiree health benefits as it does under cu rrent law.Thi s requirement protects the FEHB Program against the ri sk of USPS default.

4. Absent additional Congressional act ion on the matter, the O PM should refrain fromimplementing the proposal rega rding the modi ficat ion of its ca lculation of the USPS's CSRSliab ility for POD/USPS employees. We believe that it is beyond the OPM 's legal authorityto adopt thi s proposal without further leg islat ion. We note that the proposa l would shi ftsubstan tial costs from the USPS to the Federa l Government.

5. The OPM should strongly oppose any legislative action that would pennit the USPS tofund its FERS responsib ili ties at 80 percent. This proposa l would cause the CSRO Fund toincur substantial unfunded liabi li ties as well as create a dangerous precedent whereby otheragencies would see k to reduce their FERS fundi ng obligations.

6. In its capac ity as administrator of the trust funds, the aPM ought to share its techni calexpertise with Co ngress and approp riate Executive Branch officials to ensure that they arefu lly informed of the resul ting monetary and programmatic effects of such proposals uponthe retirement programs and trust funds.

7. The O PM should protect the retirement programs agai nst being used as a way to addressa situation that is entirely unrelated to retirement issues. Using the Federal ret irem entprograms as a vehicle through which to imp lement other policy objectives would be unwise,inefficient, and harmful to the programs. The debate surrounding the USPS's financialcondition should not be focused so lely on the funding of retiree benefits.

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EXECUTIVE SUMMARY Concl usion

While we understand that the USPS is having financial difficult ies, the OPM's adm ini strationof the law has not caused this situation. The aPM has complied with the law as wri tten on allaccounts. To say otherw ise is both inaccurate and obscures the true causes of USPS's currentcnSls.We believe tha t these proposals would have a last ing negative impact upon the re tirementprograms and trust funds but have littl e, if any, positive impact upon the USPS 's ultimate long teml pro fi tabili ty. Instead, the result of lhese proposals wo uld be 10 shift cos ts from USPSratepayers to the American ta xpayers.

f3P-/::./ -.Eo/;hz4'Patrick E. McFarl andIn spector Genera l

IV


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TABLE OF CONTENTS EXECUT IVE SUMMARY ......................... ............................................................................. i INTRODUCTION ................................ ....... ...... ...................................................................... 1 SCOPE AN D M ETHODOLOGY ......... ...... ................................ ................................ .......2 ECONOM IC AND LEGAL BACKGROUND ........... .... ......... ................... .... ......... ......3 USPS's Relationship with the Federal Government ..... ........ ............ .... .... ............ .......3 USPS Employee and Retiree Rights ............ .................... ............ .................... ............ .......6

Pensions .... ......................... ... .... .................... ................................. ................................ ..........6 Health Benefits .... ...................................................................................................................7

Economic Considerations ............ ........ ........ ........ ................................ ................................ ...8 D ~ r e r r a l ofLiabilities ............ .................................... ................................ ...........................9 USPS, Financial Outlook ........... .... ...................................................................................9 The Protection Afforded By Prefilllding and Full Funding ......................... ......... .... 11

Structure and Operation of CSRD and PSRHB Trust Funds ....... .... .... ............ .....14 CSRD Fund...................... .................. .............. .................... ............ .................... ............ .....14 PSRHB FUlld ........................................................................................................................14 Financial Ejlects of the Proposals .............. ................................ ................................ ....20

ANALYSIS OF TH E PROPOSALS ............................................. ................................ .....22 Proposal 1: Treatment of FERS Surplus .................... ................................ ....................23

Current La lv..... .... ............................ .... ........ ..... ....................................................................23 US PS DIG; Proposed Action ......... ......................................... ................................ ........23 USPS DIG; Justificationfor the Proposal .......... .................................... .....................24 Discussion ........ .... ............................ .... ............. ....................... ......... ....................... ......... ....24 Conclusion ............................... ......................... ........... ............ .................... ............ .............25

Proposal 2: Allocation of CSRS Liabilities for POD/U SPS Retirees ....................27 Current Lal-v............... .......................................................... ................................ .................27 USPS DIG, Proposed Action ..... ........... ...................... ................................ ....................29 USPS DIG, Justification/or the Proposal...................................................................29 Discussion ............ ........................ ........ ......................................... ................................ ........30 Conclusion ........................... ........... ..... .................................................................................34

Proposal 3: Reduction in Contribution Levels for Retiree Benefits .....................35 Current Lal-v............................................... .................. .......... ........... ........... .......... ........... ....35 USPS DIG; Proposed Action ..................... ............ .... .... ........................ .... .... .................35 USPS DIG; Justification for the Proposal .................................................. .................36 Discussiol1 ................................................... ................ ..... ................................ .....................36 Co nc/usiol1 ....... ................................ ........... ...................................... ................................ ....41

RECOMMEN DATIONS......... ........................................................ ................................ .....43 CONCLUS ION .............. ........ ........ ..................... ........... .......... ................................ .............. .45


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INDEX OF CHARTS Chart I. Structure and Operation of the C iv il Service Retirement and

Disabil ity Fund ... ...... ... ... .. .. .. .. .. .. .. .. .. .. ... .. .... ... ... ... .. .. .. .. .. .. .. ... .. .... .. ... .. .. .. .. .. 15Chart 2A. Structure and Operation of the Posta l Service Retiree Health Benefits

Fund Pre-201 7 .. ... ... .. .. .. .. .. ... ... .. .. .. ....... ... .. .. .. .. .. ...... .. ........... ... .. ...... .. ...... .. ........... . 17Chart 2B . Structure and Operation of the Posta l Service Retiree Health Benefits

Fund Beginning in 20 17 . ... .. .......... .. .. .... ............ .. .......... .. .. .... ............ .. .............. .. 19

1974 Act Posta l Service Payment s to Civi l Service Reti reme nt Fund Law2003 Act Posta l Civil Service Retirement System Funding Refonn Act 0[ 2003CBO Congressional Budge t OfficeCRS Congress ional Research ServiceCSRD Civ il Serv ice Ret irement and DisabilityCSRS Civil Service Retirement SystemEHB Employees Health BenefitsFASB Financ ia l Accounting Standards BoardFEHB Fede ra l Employees Health BenefitsFERS Federa l Employees Ret irement SystemGAO United States Government Accountability OfficeOPM United States Office of Personnel ManagementPAEA Posta l Accountab ili ty and Enhancement Act of 2006POD United States Post Office DepartmentPPA Pension Protect ion Act of 2006PRC Postal Regu latory CommissionPSRHB Posta l Service Retiree Health BenefitsS&P500 Standard and Poor s 500 IndexUSPS Un ited States Postal ServiceUSPS OIG Un ited States Postal Service Office of Inspector General

ACRONYMS


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OI'M OFF ICE OF THE IN SI'ECTORGENERAL

INTRODUCTIONDuring 2009 and 20 I 0, the United State s Postal Se rvice's (US PS) Office of Inspector General(USPS OIG) released a series ofrcpons and studies containi ng proposals meant to allev iate theUSPS's current financial difficu lties.Three of these proposa ls suggest reduc ing, modifying, o r eliminating the OPM's nlissions to oversee and

protect theFederal

retiJ'ementandhealth benefit

progranls

statutori ly. mandated payments that the US PS currently must make into ithe C ivil Service Ret irement and Disab ili ty (CS RD) Fund and the Po sta lService Retiree Health Benefits (PSRHB) Fund. These two trust fu ndsare admi ni stered by the U.S. O ffice of Personnel Ma nagement (OPM)as part of its miss ion to oversee and protect the Federal retirement andhealth benefit programs.The proposa ls are sum marized as follows:Proposa l I: Treatment of FE RS S urp lus. Thi s proposal would change the law regardi ng anagency 's ( in thi s case, the USPS 's) contribut ion s 10 the CSRD Fund made under the FederalEmployees Retirement System (FERS) so that w hen the agency has paid an amount in excess ofits current liabi lities, it may either receive a rebate o r be excused from making co ntribut ions untilthe excess is exhausted.Proposal 2: Alloeatioo of CSRS Liabilities for POD/US PS Employees. This proposal wou ldchange the current a llocation of responsibility between the Federal Government and the USPSfo r fund ing retirement annu ities paid to employees who (I ) served in both the U.S. Post OfficeDepartment (POD) an d the USPS, and (2) part icipate in the C ivil Service Retirement System(CSRS). Under this proposal, the USPS contribut ion would decrease, thus increasing the FederalGove rn ment 's share of the liab ili ty. 2Proposal 3 : Reduction in Co nt r ibu t ion Leve ls fo r Reti ree Benefits. This proposal wouldchange the current law requi ring the USPS 10 fu lly fu nd3 both its liabi li ties un der FERS and itsobligations for future retiree health benefi ts, pennitting the US PS 10 meet lower fund ing leve ls of80 percent fo r FERS liabili ties and 30 percent for reti ree hea lth be nefi t ob ligations.4

I. USPS OIG. Federal Employees Retiremelll System Ol'erfimding, Report Number FT-MA-I 0-001 (A ug. 16,2010) (here inafier "US PS OIG's FERS Report").2. USPS OIG, The Postal S e r v e Share ofCSRS Pension Responsibility, Report Number RARC-WP-IO-OO I(Jan. 20, 2010) (hereinafter "US PS DIG's CSRS Report").3. In this study, the tenns "prefund" and "fully fund" are interchangeable. " Prefulld " is usually used in the healthbenefit context while " fu lly fu nd" is usua lly used in the an nuity context.4. USPS OIG, Subs tan tial Savings Available by Prejunding Pensions alld Retirees ' Health Care at BellcllllwrkedL e v e / ~ Report Number FT-MA-ll-OOI (Nov. 23, 2010) (hereinafter "US PS DIG's Fun ding Levels Report").


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OPM OFF ICE OF TH E INSPECTOR GEN ERAL

At the req uest of th e Director of the O PM, this office ini tiated a review of the e ffects thall heseproposals would have upon the CSRD and PSRHB Funds, as we ll as the associated retireme ntand hea lth prog rams. sSCOPE AND METHODOLOGYGiven aPM 's jurisdiction, we limited o ur study to onl y th e th ree proposals d iscussed above illthe Introduction. We did not eva luate proposals developed by other part ies, such as the US PS,the Postal Regul atory Comm ission (PRe), or Members ofCongress.6Th is study was prepared between November 20 I0 a nd February 20 I I, and is not, nor is it meantto be, a fo nnal audit conducted in accordance wi th the Governmellt A IIdilillg Standards publ is hedby the Government Accoull tab ili ty O ffi ce (GAO). It is a researched analysis of th e fi nancialeffects and policy im plica tions of the three ident ified proposa ls.We di d not engage an independent ac tu arial or consulting fiml duri ng th e development ofthi s s tudy. 7 In stead, we reviewed studies produced by the US PS O IG d iscussing its proposa lsas we ll as reports prepared by the GAO, the Congress ional Research Service (CRS), theCongress ional Bud get Office (CBO), and the PRe. We also exa mined re levant laws , leg islativehi stories, Congressional testimony, and other pu b lic infornlation on this topic. In addi tion to o urindependent research, we consulted wi th the OPM Actuary and staff from oth er OPM programoffices, and met with Congress ional committee staff.

5. Although it involves the PSRHB Fu nd, we do not discuss the proposa l contained in the report issued by theUS PS OIG entitled Estimates o/Postal Service Liabilityfor Retiree Health Care Benefits, Repo rt Nu mb erO-O OI(R) (Ju ly 22, 2009). The OPM Actuary informed us th at prior to th e release of the USPS OI G and th e PostalRegulatory Comm ission (PRC) reports on the issue, the OPM had already decided to use actuarial assumptionsconsistent with those recomm ended by the PR e.6. The PRe commiss ioned a report by the Segal Comp any that addressed Ihe CSRS liab il ity for employees whowork ed for bo th the POD and the US PS. We did not evaluate the Segal Comp any's methodology or reason ing.We note that lhe Segal Company found , and the PRC agreed, that the US PS made surplus contributions undcr theCS RS system for those employees in the amoun t of$50-$55 billion ra ther than the $75 billion that the US PS O IGcontends. See, The Scgal Company, Report to (he Postal Regula(my Commission on: Civil Service RetirementSy.wem Cost (1n(/ Benefit Allocation Principles (June 29, 2010).7. A Janua ry IS, 20 II , article published by the Washington Post asserted th at we had estimated that the USPS hasoverpaid $50-$75 bi ll ion into the ret irement trust fu nd. After receiving correc ted infonnat ion, the Washington Postth cn publishcd a correction stat ing: " Earlier versions Of lhis article incorrec tly said that the inspectors gencral forthe U.S . Postal Service and th e Office of Personnel Managcmcnt estim ated that th e Postal Scrvice has overpa id theCivi l Service Ret iremcnt System by $50 bi llion to S75 bi ll ion. The Postal Regula tory CO lllm ission est im ated anoverpayment of ap proximately $50 billion, and the Postal Service inspector general estimated $75 bi ll io n. The OPMinspcctor general has not yet made an estima te." As staled in th e above text, we ha ve not retained an independ entac tuary and this rcport wi ll not offcr such an estimate, See , Ed O'Keefe, " Freshman Leader of Key House PanelSays He' ll Focus on Federal Payro ll Cuts," IYashillgfoll POSf, Jan, IS , 20 II ; both the article and th e correction arcavailable at: http://www.washi llgtonposl.com/ wp-dynJcontentJarticie/2011 /01 / IS /AR2011011805665.htm l.

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OI'M OFF ICE OF THE INSI'ECTORGENERAL

ECONOM IC AND LEGAL BACKGROUNDIn order to properly eva luate th e proposals, one must understand the US PS's relationship with th eFederal Government ; USPS employee and retiree rights; cCI1ain economic considerations; andthe operat ion of Government-admini stered trust funds. We have provided here a brief overviewof each of these topics.USPS's Relationship with the Federal GovernmentIn 197 1, the POD ceased to be an Executi ve Branch agency and became "an independentestabli shment of the executive branch."8 Congress was influenced by the fact that the POD wasoffe ring what were essenti ally commercial services, and thus could be ex pected to produce therevenues to cover its own costs.9 A Congress ional report issued during the development of thePo sta l Reorganiza tion Act iO state s:

Th e mandate that the Po stal Service must be selfsupporting is essential ifpostalaffa irs are to be conducted with reasonable economy and efficiency. So longas postal managemen t operates with a general awareness that congressionalappropriations are always available, wi thin some uncertain limit , to make goodany shortfall s of revenu e or overruns of costs, there is little real incenti ve to makethe best possible use of resources and efficiency is sure 10 be more honored inth e speech than the observance. Moreover, the "break-even" requirement of[thePo stal Reorganization Act] represents a commitmen t that the Postal Service nolonge r rely on ma ss ive annual infusions of general re venues of the Treasury at thetaxpayers' expense. II

Bud getary control is a ke y fea ture of Congressional and Executive administrat ion ofGovemmentaloperations. Therefore, the Government 's relinqui shing of fi nancial oversight ofthe US PS, affordi ng it greater managemen t flexibility, was a significan t concession.12 As theCRS points out:

Th e budget process is a use fu l management tool for pl an ning as we ll as formaintaining accountabi lity. Presidents and central management agencies findthe di scipline of th e budget an essential element in their manage ment arsenal. ..Govemment corpora tions [s uch as th e US PS], on the other hand, are exempt

8. 39 U.S.c. 201.9. 39 U.S .c. I Ol(d) (Postal rates set to cover costs).10. Postal Reorganization Act or 1970, Pub. L. No. 91-375, 84 Stat. 7 19.

II. H.Rep. No. 91-988 (1970), al page 13; see also, H.Rep. No. 91-1104 (1970), at page 17.12 . 39 V.S.c. 410(a) ("no Fcderallaw dealing wit h pu b lic or Federal contracts, property, works, officers,employees, budgets, or runds ... shal l apply 10 the exerc ise o rlhe powers of the Postal Service."); 10 I(c) (USPScompensation must be comparable to pri va te scctor); 40 1 (Postal Service granted powcr to entcr into contractsand "dctenni nc the charac tcr of, and necessity fo r, its expenditurcs"); 409(h) (court judgment against thc FederalGovernmcnt due 10 USPS activities must be paid by USPS funds); 1003(a) (compensation must bc comparableto the pri vatc sector, although capped at the same salary level as the Vice President of the Uni ted States); 1004(a)(a bility 10 offcr higher levels of compensation to management).

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delennines th aI it is in the public in teres t to do 50.20 By providing an exception, the lawreaffi rmed the rule that the US PS is 10 be solely respon si ble for its liabi li ties unless it receivesexpress agreement from the Government.The USPS, however, has a somewhat different view orthe maller, as explained in its 20 10An nu al Report :

The Postal Service's status as a se lf-support ing ent ity within the federalgovel11ll1 ellt presents unique requi rements and restrictions, but also mitigatessome orthe financ ial risk that would otherwise be associated wi th a cashshortfa ll. Desp ite falling mail volume, the Postal Service is st ill wi delyrecognized to provide an essential government service and th ere are a widevariety of potential leg islati ve remedies that could reso lve the sh0l1 -term liquidityconcern. Therefore, it is unlike ly that, in the event ofa cash shortfa ll , the federalgovernment would cause or allow the Posta l Service to cease operations.21

This statemen t is clearly at odds wi th the expressed Congress iona l intent th at taxpayer dollarsshou ld not be used to pay USPS expenses. The requirement to be se lf-s ustaining was mean t toencourage th e USPS to be more effi cient than its predecessor, the POD, which was a Federalagency, un like th e US PS. The POD's Postmaster Genera l answered directly to the President as amember of the Cabinet and the POD rece ived annual appropriations for expenses that exceededits commercial revenue.In stark contrast, the USPS is not under th e direct ion of the President and it receives on ly a verysma ll appropriation from Congress to pay for pub lic se rvices such as mail for th e blind - anappropriation that the USPS O IG has recommended foregoing as a means of "cementing thefin ancial independence of the Posta l Service in the minds of the public and po licy makers."22A key difference between a "Federa l agency" and an " independent establishment" isaccountabi li ty. Federal agencies are permitted to assume fi nancial liabilities on behalf of theFedera l Government because the agencies are managed and overseen by elected represen tatives.The USPS, however, is not subject to the same contro ls or degree of oversight precisely becauseit is not supposed to use taxpayer do llars.

20. 39 U.S.c. 2006(c).21. US PS, 2010 Allllllal Report: FOlllulutiollforthe FlIIlIfT!, at pages 55 and 70, available at: hllp: llwww.lIsps.com/financia lsly d f/annuaIJ eport_2010.pdf; see a/so, US PS, Quarterl y Annual Report, Form 10-Q (Feb. 9, 2011), atpage 10 (idemical statement).22 . US PS OIG, FelJeral Budget Treatlllent ofthe Postal Service, Report Number ESS-WP-09-001 (Aug. 27 , 2009),at page 12.

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OPM OF F ICE OF T HE INSPECTOR GE N ERAL

USPS Employee and Retiree RightsPensionsUSPS employees arc req uired by law 10 participate in th e Federal retiremen t USPS employeesare requiredby law toparticipate in

the Federalretirementprogrant

program as part of their overall compensation package, 23 This programis a s ingle plan wi th two benefit systems, CSRS and FERS, each havingits own funding method.24 Under each system, the employer - whetherit be a Federal agency or an independent establi shment such as th e US PS- depos its a statutorily-determined amount based upon each eligib leemployee's pay into th e CSRD Fund for each emp loyee's future annui ty. 25Th e employee al so contributes a t u o r i l y ~ d e t e r percentage of hi s orher pay into th e CSRD Fund. 26Two te chnical points must be noted. Firs t, an employee does not have an individual "account" in the CS RD Fund. Second , both CSRS and FERS contributions are made into the CS RD Fund. All amounts depos ited into th e fu nd are comming led even though the an nuity due to each employee is individually calcul ated and th e transactions of each system are accounted fo r separately. Thai is, the assets are used to pay any retirement annuity that is due, regardless of whether the rec ipient is enrolled in CSRS or FERS.

A Federal or US PS employee has a legal ri ght to an annuity if he or sheEven i f the USPSwere to stop

making payments,th e USPS retireeswould still beentitled to their

annuities

meets certain statutory criteria. 27 Ne ither the right to an annuity nor its amount is conditioned upon the employer's continued contributions tothe CS RD Fund. It is the CSRD Fund - 1101 the employing entity - thatis lega lly obligated to make th e pension paymen ts to annuitants. Thu s,even if the USPS were to stop making payments into the CSRD Fund, allUSPS retirees would still be legally entitled to their earned annuities andthe Gove rnment is ob ligated by statute to pay th em. Fu nds from the U.S.Treasury, di rect approp ri at ions to the CSRD Fund from Congress, and the

contribut ions of other Federal employers and employeeswould have to be redirected or increased to fu lfil1 what "The ultimate guaranloJsofGovernmenlpensions

are the taxpayers."- Congressional Research

Service

is an obligation of the United States Governmen t.As ex pressed in a recent CRS report, "[t]he ultimateguara ntors ofGovemmenl pensions are th e taxpayers."28

23. 39 U.S.C I005(d)(I ).24. For purposes of th is report, we do not discuss the Thrift Savings Plan, whic h is administered by the Federal Retirement Thrift I.nvestment Board. 25. 5 U.S.C 8334 (CSRS), 8423 (FERS).26. 5 U.S.C 8334 (CSRS), 8422 (FERS).27. 5. U.S.C 8333 (CSRS), 84 10 (FERS).28. CRS, Federal Employees' Retirement System: Benefits Gild Fillancing, Report 98-810 (Sept. 15 , 20 I 0) (here in after "C RS Report 98-810"), at page 9.

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Health Benefitsin add ition to th e ri ght to an annuity, USPS ret irees , like Federa l retirees, may choose to continuepa l1 icipating in th e FEHB Program, th e Federal Government's employee health insuranceprogram, which is admini stered by the OPM. 29 The OPM negotiates contracts wi th insurancecompani es annually to determine premium s, benefits, and other terms. II is th ese insurancecompanies, ra ther than the Federal Government, that actually deli ver th e health benefits 10 theempl oyee or retiree.Under the FEHB Program, a p0l1ion ofa retiree 's health care in surance premium is paid forby the Federal Government (or, in th e case of US PS ret irees , the USPS) through contributionsto the Employees Hea lth Benefits (E HB) Fund.30 The Federal or USPS retiree contributes th eremaining amount of th e premium to th e fund.As the USPS O IG 's repo l1 s have repeatedly pointed out , the Federal Gove l11ment does notprefund its ret iree health ob ligations.3l Instead, the emp loyer and empl oyee cont ri butions payonly for the costs of the program fo r that particular year. Consequen tly, th e EHB Fund maintainsoilly a sma ll amount of reserves and thus does not have significant assets that remai n in the fundfrom yea r to yea r.Eligible employees or ret irees choose whether or not they wil l par ticipate. If they continue tomeet the e ligibility requirements throughout th e year - and continue to pay their share of th epremium - they may maintain their in surance coverage.It is un clear, however, what the effect would be upon USPS empl oyees' orretirees' rights if the USPS ceased making its req ui red payments into th e TheEHBfunddoes not contain

sufficientreserves thatcould be used

to "replace" theUSPS 's

contributions

EHB Fund because the fund does not contain sufficie nt reserves that couldbe used to " replace" the USPS's con tributions. Consequentl y, th e fund 'sassets would be exhausted very quickly.In such a scenario, the in surance companies wou ld still be lega lly entitledto the fu ll amount of tile premium negotiated under the contract.32 TheOPM would have to take some sorl of act ion because wi thout the USPS'scontributions, the fund simply would not have enough money to pay everyFEHB Program participant's premium.

29. The retiree mllst have participaled in the FEHB Program prior to retirement in addition to meeti ng any othereligibility req uirements listed in 5 U.S.c. 8905(b).30. 5 U.S.C. 8906(b), 8909. Note that this fu nd is a separate fund from the PSRHB Fund. which is discussed inmore dcta il below, in the sectio n enti tled "Struct ure and Operation ofGovemment Trust Fun ds."31. See. e.g., US PS DIG, Cillil Sell1ce Retiremelll System Ore/payment by the Pm'tal Serllice, Repo rt Number CIMA-10-00 I (June 18,20 (0) (hereinafter "US PS OIG CSRS Overpayment Report"), al pages 10-11 ; USPS DIG,SUllllllmy ofSl lbslalll ial Ol'e/jlll1dillg ill Postal Sel1'ice Pensioll alld Retiree fleallh Care Flillds, Report Num ber FTMA-10-002 (Sept. 30, 20 (0) (hereinafter "US PS DIG Summary''), at page 10 .32 . fl eallh III:slI/"{/lIce Plan 0fCreater New York. Illc. 1'. Ulliled SWles, 62 Fed. Cl. 33 (2004) .

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Absent an emergency approp ri ation fro m Congress, it is possible thallhe O PM would have toexercise its regu latory authority to di se nroll USPS emp loyees and retirees as a class in ord er tocontinue provid ing health care coverage to all other FEHB Program participan lsYIf the OPM did not take such drast ic measures, the EHB Fund would very quickly run oul ofassets and pl ans would stop rece iving premium paymen ts be cause OPM simply would not havethe money to pay them. In that sce nario, some insurance companies may unilatera ll y decide that

the Government is in default of th e plan contract and withdraw from theprogram.Ifenoughinsurance If enough in surance companies w ithdrew, it would threaten the existence ofcompanies the FEHB Program. Even if some insurance companies continued to offerwithdrew , it coverage for the remainder of th e year, th ey may decide not to participatewould threaten in the FEHB Program the following year. If th ey did decide to sta y in thethe existence o f program, they may be forced to in crease premiums dramatically in order totheFEHB make up the premium shortfall, which would affect other non-USPSProgram participants.

Economic ConsiderationsIn the public debate surrounding USPS contributions to th e trust funds, there has been mu chconfusion between the crea tion of a deb t and th e payment of a debtY Pension and retiree healthbenefit liabili ties are current liabil ities - not future ones, even if th ey are not payabl e until afuture date. As th e Financial Accounting Standards Board (FASB)35 expl a in s:

In exchange for the CUiTent services provided by the employee, th e employe rpromises to provide, in addition to current wage s and other benefits, [pension]and health and other welfare bene fits after th e employee retires....The empl oyer's ob ligation fo r that compensation is incurred Anorganizationmust budgetandplanfor

futurepayments

as the employees rende r the services necessary to earn theirpostretirement benefi ts. 36

Therefore, ju st as an organi za tion must budget to ensure that it can meetits current payroll obligations, so too mllst it plan for these fu turepayments.

33 . 5 U.S.c. 8913.34 . See. e.g., StalCment ofinspccto r General David C. Wi ll iams, US PS, u.s. Postal Service in Crisis, Subcommittee on Federal Financial Ma nagement, Informa tion, Federal Services, and International Securi ty, Commiuee on Homeland Securi ty and Governmental Affairs, U.S. Senate (April 6.2009), at page 2. 35 . FAS B is the des ignated organ ization in the private sec tor that estab lishes the standards of financ ial accountingthat govern the preparation of fi nanc ial reports by nongovernmental entities. See, www.fasb.org.36. FAS B Statement No. 106; see aIm, FA SB Statement No. 87.

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O I'M OFFICE O F TH E INSI'ECTORGENERAL

Deferral ofLiabilitiesThe USPS has ama ssed a significant amount of general deb Ito the U.S. Treasury)7 in additionto accumulating considerable unfunded liab ili ties with rega rd to pensions and ret iree heallhbellefits.38 While unfunded liabilities are a type o f debt, fo r purposes of this s tudy, we dis tinguishthem from the USPS's general debt held by the U.S. Treasury. As used here, unfunded liabili tiesspecifica lly refer 10 the "promises" that the USPS has made to its employees and retirees forwhich it has not set as ide money to pay.39Two of the proposals suggest amending the law to postpone or dec rease payments tha llhe USPSis cUiTenlly s tatutori ly-mandated to make 10 the CSRD and the PSRHB Fund s.It is likely that deferral of these payments would provide temporary financial relief to th eUSPS. The proposals advocat ing for defe tTal assume tha t eve ntually th e USPS w ill resume suchpayments; in th e mean time, th e USPS would continue to incur new future fi nancial ob liga tions.Thi s is fi nancially risky fo r three reasons . Fi rst, future USPS customers (ratepayers) willhave to pay for expenses tha t the USPS is incurring today. Thi s wi ll likely hurt th e USPS'sability to compete in the future and affect its ability to impro ve its financia l situation. Second,the USPS will lose the benefit of the interest tha t its deposits into th e tnl st funds would haveotherwi se eam ed. This interes t would have reduced its future retiree liabili ties . Consequent ly,im plementation of these proposals would require the USPS to make larger contributions in thefuture. Third, if the USPS becomes in solvent , the Federal Government , th rough the trust funds,w ill still have to pay these pension liabi liti es a nd poss ibly assume responsibility for USPS retireehealth benefit obligat ions as well.

USPS's Financial OutlookWhile various parties have worked di ligent ly to develop business and operational initiativesgeared towards improving the USPS 's business model and financial condition, we have yet tosee a report that cont ain s v iable projections that it w ill improve its fin ancial situation. 40 The37. As of the end of fiscal year 2009. th is amount was $12 bi tlion. US PS. Foml IO-Q (Feb. 9. 20 II ), at page 10.38. Accord ing to the OPM AC lUary, as of the end of fiscal year 2009, the US PS had un funded pension liabi lities of$16.7 bill ion and unfunded retiree health be nefi t liabilit ies of$85.9 bill ion.39. For example, if the US PS ptedges 10 pay an employee $20,000 annually upon ret irement, current law requiresthallhe USPS deposit into the CSRD Fund duri ng the employee's wo rking lifetime the entire amounllhat it wouldtake to fu lfi ll that pledge when the employee retires. Thus, the rund wo uld be able to make the full $20,000 paymenteach year without additional contributions rrom the US PS. An unfund ed liability would exist if the US PS depositedonly enough 10 pay the retiree $15,000 a year, wi th the expectation that when the time comes to make the $20,000payment. the USPS wi ll pa y the remaining $5,000 ou t of its current revenues.40. See. e.g., Statement of Ph illip Herr, Director, Ph ys ica l lnrrastructure tssues, GAO, u.s. Posllll Set"ice:Financial Challenges COlllilllle. wilh Relatively Limited ReslIllsjivm Recent Revenue-Generation Efforts ,Subcomm ittee on Federal Workforce, Postal Service, and the District of Columbia, Commi ttee on Oversight andGovemment Refoml, U.S. House of Rep resentatives , GAO-10-19IT (Nov. 5, 2009), at Int roduction; CRS, The u.s.Postal Sen'ice sFinancial Condition: Oven /jew lind hSllesfor Congress, Report R41024 (Oct. 5, 2010) (hereinafter"CRS Report R41024'"); USPS, 2010 Annual Reporl: Foundmionfor Ihe Future, at page 70 , available at: http ://www.usps.com/financials!j ld flan nual _report_20 IO.pd r.

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CBO's "projections indicate that US PS' s cos ts are on a trend to rise somewhat fas ter than generalinfl ation - i f onl y because health care cos ts are expected to grow in rea l terms." 41 Fu rthermore,both the GAO and the PRe have noted:

Current pressures from declining reven ue and volume do not appear to be abating,but rath er seem to be increasi ng. During th e economi c downturn, there has beenan acce lera ted diversion of busincss and i_ndividualmai l, and some mailers haveleft the market entirely. An economi c recovery may not bring a cO ITcspond illgrecovery in mail volume due to continuin g social and techn ological trends th athave changed the way th at peop le communicate and use the rnail Y

"The ologanizationwill continue toface decliningvolume, stagnantrevenue , largefixed costs, andrising worliforce

costs."-USPS

The USPS itself has si milarl y bleak projections:Industry experts confinn that th e marketplace trends challeng ingthe Po stal Serv ice in recent years are expec ted to accelera te. Theorgani zation will conti nu e to face declining vo lume, stagnantreven ue, large fi xed costs, and ris ing work fo rce costs. Withoutaddit iona l act ion to address th ese trends, the Po stal Service wouldface annual losses as great as $33 billion by 2020.43

The USPS continuall y cites th e annual payments required by the PostalAccountab ili ty and Enhancement Act of2006 (PAEA)44 as a "s ignifi can t"contributor to its inability to meet its expenses ,45 However, th e CRS noted th at "even beforePAEA's enactment in ea rl y FY2007, the rate of growth of the USPS's operat ing expensesexceeded that of its operat ing revenue."4 6

41. Letter from Douglas Holtz-Eakin, Director, CBO. to the Honorable Judd Gregg, Chaimtan, Committee on th eBu dget, U.S. Senale (Sept. 1,2005), at page 8.42 . Statement of Ph ill ip Herr, Director, Physical lnfrastrueture Iss lles, GAO, u.s. Postal Service: DeterioratingPmtal Finances Require Aggressire Actions 10 Reduce Cmw', Subcommiltee on Federal Financial Management,Government Infonnation, Federal Services, an d International Security, Committee on Homeland Security andGovernmental Affairs, U.S. Senate, GAO-09-332T (Jan. 28, 2009), at 5 (referring to PRC, Report 011 UnivermlService alld the Postal MOllopoly (Dec. 19,2008 .43. US PS, Ensuring a Viable Postal Service fo r America: An Action Plan for the Future, at page 6, tlI,ailable at:http: //www. usps.comlstrategic plann ingly d f/A clionPI anfortheF uture_March20 IO. pd f#search=' .44. Postal Account abi li ty and Enhancement Act of2006, Pu b. L. No. 109-435, 120 Stat. 3 I98.45. See, e.g., Statement of Patrick R. Donahoe, Postmaster General/CEO-Designate, Findillg Solutiolls /0 theChallenges F(/cing the u.s. P O ~ ' / ( / I Service, Subcomm ittee on Federal Financial Management, GovernmentInforntation. Federal Services, and Internationa l Security, Commiucc on Homeland Security and GovernmentalAffairs, U.S. Senate (Dec. 2, 2010) at pages 4-5 ("In 2007 and 2008. the Postal Service made the required prefunding payments and consequently sustained losses ofS5.1 billion and S2.8 bill ion, respecti ve ly. Had it not beenfor these payment s, in 2007 the Postal Service would have seen profits ofS3.3 bi ll ion and in 2008 profits wou ldhave been S2.8 billion.''); US PS. 2010 Amlllal Report: Foundarion fOl'lhe Flllure, at 9, available at: http://www.usps.com/financialslyd f/annual_repo"_20 10.pdf ("The prefunding requirement, as it currentl y stands, contributessigni ficant ly to postal losses.").46. CRS, The u.s. Po stal Sen-ice sFinallces and Fillancia! Condition, Repon R4 0768 (Sept. 17,2009), at page 5.

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The increase in costs due to heallh care and the problems generating revenue in a changingmarketplace are obviously not a resu lt of the way the USPS is required to fund its re tireeobliga l'ions. To aller the funding sl'ructure of the Federal retirement program would not only fa ilto address these pressing problems, but cause new ones by requ iring the tlUst funds to take onunnecessary risk through an increase in their unfunded liabi li ties.The Protection Afforded By Prefill1ding and Full FundingThe CBO and GAO have repeatedly raised the point that the Federal Govcl11ment will beliable fo r USPS retiree benefits i f the USPS is unab le to pay those costs ilse lf. 47 Thi s concc l11has underlined the GAO's continu ing emphasis regardi ng the importance of ensuring that theUSPS prefulld its substantial unfunded retiree heallh benefits to the maximum exten t poss ible.48Specifically, the GAO has noted:

The Posta l Service is requ ired to pa y the ret iree health premiums regardless ofwhe ther it pre fu nds some or all of these costs , and the annual cos ts are expected toinc rease over the next 20 years. lf prefund ing health benefit s fo r new employeesproves to be more costly than est imated, or if the prem iums for curren t retireescontinue to grow rapidly, the Service cou ld find itse lf fac ing a signi.fic antobligation at a time when revenues are shrinking. It seems pruden t to set asidefunds now, whil e they are ava ilable to address escalat ing future cos t's rather thanwaiting unti l costs are higher and adequate revenue may not be f o t n g

Whil e it recognizes that the USPS does need financial re lief, the GAO points out the tTadeoffsin providing the relie f th rough modification of how the USPS funds its reti ree health benefitsobligations:

Defe tTing some pre funding of these bene fi ts wou ld serve as short-term fi sca lrelief. However, defe tTals also increase the ri sk that USPS will not be ab le to

47. See, e.g., Lcller from Barry B. Anderson, Acting Direc tor, CBO, 10 the Honorable Jim Nuss le, Chainnan,Comm ittee on the Budget, U.S. House of Representatives (Jan. 27, 2003), at pages It-12 (" If that uncertain[competiti ve} environment substantially hindered the Postal Service's ability to produce income, the federa lgovernment cou ld be left with the long-tenn burden of paying fo r the retiree health benefits of po stal workers.");GAO, u.s. Postal Service: Strategies alld Operation 10 Facililate Process loward Financial Viability, GAO-10-455(April 12,20 I 0), at pages 26 ("Because its retirees arc eligible to recei ve the same health benefits as other federalretirees, if USPS cannot make its required payments, the U.S. Treasury, and hence the taxpayer, would st ill have tomeet the federal government's ob ligations.") and 58 ("Ifno action is taken, the ri sk of USPS's insolvency and theneed for a bai lout by taxpayers and the U.S. Treasu ry increase s.").48. See, e.g., Statement of Ph ill ip Herr, Di rector, Ph ys ical Inrrastructure, GAO, u.s. Posltll Service: Legislalionneeded /0 Address Key Challenges, Subcommittee on Federal Financial Management, Government tnfomlation,Federal Services, and In ternat ional Security, Committee on Homeland Security and Governmental Affairs, U.S.Senate. GAO-II-244T (Dec. 2, 2010) at page 9; GAO, u.s. Po stal Sen1ice: Slrategies and Operalion 10 FacilitateP r o c e s ~ ' o l I ' a r d Financial Viabilily, GAO-J 0-455 (April 12 ,2010), at pages 22 and 53; GAO. Pmtal PewionFllllding ReJorm: Issues Related 10 the Postal Service"!, Proposed U ~ e ofPension Savings, GAO-04-238 (Nov. 26,2003)a l 5 and II .49. GAO, POSTal Pension Fllnding Reform: Issues Related 10 th e Posllli Service sProposed Use ofPensionSavings, GAO-04-238 (Nov. 26, 2003), at pages 20-21.

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OPM OFF ICE OF T HE INSPECTOR GEN ERAL

make future payment's as its core business declines. Therefore, it is importantthat USPS fund its ret iree health benefit ob ligations - including prefunding theseobligations - to the maximum extent that its finances peml it. 1.11 addition toconsideri ng what is affordable and a fa ir ba lance of paymen ts between currentand futu re ratepayers, Congress would also have to address the impact of theseproposa ls on the federal budget. Fu rthe r, the Congressional Budget Office hasraised concerns about how aggress ive USPS's cos t cU ll ing measures wou ld be ifprefulldillg payments fo r retiree health care were reduced.50

Despite the GAO 's wamings, th e series of USPS O IG reports analyzed in ou r study foster acontrary perception that deferring the payment of ob ligations for retirees, pa rt icu larly for retireehealth benefits, is a so lution that can a ll ev iate the USPS 's current financial difficulties withoutany adverse effects.However, modification of the USPS's payments to the retirement tru st funds in the past has notresolved the USPS's continuing financial d iffic ulties. For example, a si milar stopgap measure in2009 failed to produce any lasting resul ts. In tha t year, Congress permitted the USPS to defer $4bi lli on of its $5.4 billion payment to the PSRHB Fund, as requi red by the PAEA. 51As ClllTent Postmaster General Patrick R. Donahoe recent ly tes tified, "While the Posta l Serviceappreciated that [2009] effort, it was a short- term fix. Further, even with the deferral , PostalService 's losses fo r 2009 tota led $3.8 bi lli on."52 Moreover, the USPS stated in its 20 I 0 Annua lReport that "[e]ven if such legislation is enacted to address shorler-lerm liquidity mallers suchas the (PSRHB Fund] pre-funding payme nt schedul e, the Posta l Service st ill faces longe r-te rmfinancia l stability concerns."53 These statements strengthen our bel ief that de fe lT ing the USPS 'spayment of its reti ree benefits is not the appropriate remedy fo r this situalion.

50. Statement of Ph ill ip Herr, ~ ' u p r a note 48 , at page 9 (citing CBO, HR. 22: Unilel/ Stales Postal ServiceFinancial RelieJAct oJ2009 (July 20, 2009); CBO, S.1507: Pm-tal Service Reliree Health Benefits Fllllding ReJormAct of2009 (Sept. 14,2009.51. Legislative Branch Appropriatio ns Act of2010, Pub. L. No. 111-68, 123 Stat. 2023.52. Statement of Pal rick R. Donahoe, Postmaster GenerallCEO-Designate, US PS, Findillg SOlllliolls 10 theChallenges Pacing the Us. P O ~ ' / a l Sel1'ice, Subcomm il1ee on Federal Fin ancial Management, GovernmentInformation, Federal Services, and International Security, Committee on Homeland Security and GovernmentalAffairs, U.S. Senate (Dec. 2, 2010), at page 5.53. US PS, 2010 A IIlIIwl Report: FOlllldatiollJor the FIIII/re , at page 70, amilable at: http://www.llsps.com!financials/yd f!annual_report_20 IO.pdf.

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OPM OFF ICE OF THE INSPECTOR GENERAL

Structure and Operation of CSRD and PSRHB Trust FundsCSRD FundContrib ut ions into the CSRD Fu nd are requ ired by law to be invested in "interest-bearingsecuri ties of the Uni ted States" or other investments that meet statutory spec ificat ions. 54 TheTreasury Department takes the cash payments and converts them to a type of bond, which isdeposited in the applicable trust fund. When an annuity paymen t mu st be made, the TreasuryDepartme nt redeems the needed va lue of bonds held by the trust fund, and then the Departmentmakes the payme nt out of its general cash account.55When Congress created the CS RD Fund, it mandated that the employer and emp loyeeretirement contribut ions made to the fu nd be used to pay pension ob ligations and any associatedadm ini stra tive cos ts. 6C ha rt I illustrates the flow of funds into and out of the CSRD Fund. The Federal employee,US PS employee, and USPS contributions to the CSRD Fund, in green f oboxes at the0 0top of the chart, are considered to be incoming reve nue to the U.S. Treasury.57 In contrast,the con tri butions by Federal agencies into the CSRD Fund arc not new revenu e but ratherin te rgovernmental transfers of funds previously appropriated to agencies. Likewise, themandatory appropriation that Congress provides to pay for the unfunded CSRS liabi li ties andFERS suppleme nta l liab il ities is also an intergovernmental transfer. 8 These assets are investedin Treas ury holdi ngs, as described above, and are represented in Chart I by the blue [ ]boxes.59 Collective ly, these contributions are used to pay annui ties, whic h are debts of theFedera l Government and represented in the red [- "i box on the right side of the chart.

PSRHB FundThe PSRHB Fund is qui te differe nt from the CSRD Fund . It is a separate US PS-spec ific trustfund. Congress estab lished it in 2006 in the PAEA to ensure "that the Postal Service reduces itsgrow ing unfunded liability for retiree health benefi ts.'>60 These assets are in vested in Treasuryholdings in a similar manner as the CSRD Fund.The PSRHB Fund is not used to pay for current benefi ts to current retirees . In stead, the US PSmakes an annual contribut ion to the EHB Fund to pay premiums fo r current reti rees.54. 5 U.S.c. 8348(c)-(e). See also, The SecretaI)' of the Treasury's Authori ty with Respect to the Civil ServiceRetirement and Disability Fund, 19 Op. OfT. Legal Coun sel 286 ( \995).55 . See, The SecretaI)' of the Treasury's Authority with Respect 10 the Civi l Service Retirement and Disabi lityFund, 19 Op. OfT. Legal Counsel 286 ( 1995).56. 5 U.S.c. 8348(a). See also, GAO, Fel/el'lll Trust alld Olher Eamwrkel/ Fllnds: Answers 10 Freqllently AskedQuestions, GAO-O 1-199S P (Jan. 2001), at page 15.57. 39 U.S.c. 2009a.58 . 5 U.S.G. 8348(,).59. The boxes are blue because the investm ent of trust fund assets are intergovemmental transfers because theTreas ury is investing tnlst fund assets in Gove rnment securities.60. H.Rep. No. 109-66 Part I (2005), at page 69.

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CHART 1. STRUCTURE AND OPERATION O F TH E CI VIL SERVICE RETIREMENT AND DISAB I LITY FUND

Ratepayers

USPS USPS TaxpayersEmployees

............. ............. . . . Federa l : .Emp loyeesCongress -+ -f- I

TREASURYDEPARTMENT

Direct appropriation formilitary service, CSRS Iunfunded [ i a b i l i t i e s J . . . . I -

Civil ServiceRetirement andDisability Fundnd FERS

supplemental liabilities Budgets for Federal IAgencies

Federa lAgencies Investmen t inVa rious Bonds

Re demption ofVarious Bond s

Public Deb t

r--------Statulor ily mandated

paymen ts to Federa l and USPS

Retirees .. _------

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OPM OFF ICE OF T HE INSPECTOR GEN ERAL

In add ition to this annual contribution to the EHB Fund, the USPS also makes an annual paymentin to the PSRHB Fund accord ing to a spec ific statutory schedule. No other en ti ty pays into thefund. The USPS and O PM may not utilize the assets unl i12 017, at w hich poi nt th e OPM wi lluse those assets to pay the CUiTen t re tiree health benefi t costs fo r Postal retirees. Therefore, thePS RHB Fund is cUiTen lly co llect ing contribut ions (and eami ng interest), but not maki ng anypayments.C ha rt 2A descri bes how health bene fits fo r retirees are currently funded through the operation ofboth th e EHB Fund and th e PSRHB Fund. (Nei ther Chart 2A nor Chart 2B add ress the fundi ngof belle fi ts fo r current employees.) Once aga in, the green [ . .. . boxes represe nting th e Federalemployees and retirees, US PS employees and retirees, and USPS con tri but ions to the EHBFund are considered to be incoming revenue to the U.S. Treasury. The contributions by Federalagencies and direct appropriation by Congress to the EHB Fund are in tergovernmental transfe rsand aga in are represented by blue [ Jboxes. These commingled amounts are used to makepremium payments to the insurance compani es, which in tu rn provide hea lth insurance coverageto retirees and their e ligible family members.

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CHART 2A. STRUCTURE AN D OPERATION OF TH E POSTAL SERVICE RETIREE HEALTH BENEFITS FUND PRE -20l7

(NOTE: This chart describes the funding of hea lth benefits for USPS retirees only.It does not address the funding of hea lth benefits for current USPS emp loyees.)

TREASURY DEPARTMENT

Ratepayers

............... .......... . . .USPS ................ .................. ................. .: USPS :Employees and :

: Re tirees :Federal

: Employees and :: Retirees : .. ........ ..... ...... ....

Congress +-i'--+-Direct

Investmen t in various bond s;redemption of matu re bond s; &re investment of those proceeds

Postal ServiceRetiree HealthBenefits Fund

appropriation +- +---.,.for Federal

EmployeeHealth Benefits

FundRetireesBudgets forFede ral Agencies

FederalAgencies

Investment inVarious Bond s

Redemption ofVarious Bonds

.. .. .. .. .. .. .. ..... ... .... . . Taxpayers

...................... .. .. . .. .Public Debl

r------------"1Con tractually.

manda ted payments toInsurance com panIesparticipat ing in theFederal Emp loyees

Health Benefi ts Program

--- --- l -----Health insurance

coverage for Federaland USPS retirees and

other beneficiaries

17


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As prev iollsly s laled, the PSRHB Fund's assets a re 110t yet be ing used to pay for any USPSretiree health benefi ts. Only in 2017 can the fund 's assets begin to be used to pay th e premiumsfo r af l USPS ret irees. Starling in that yea r, as Chart 28 illustra tes , the US PS will makepayments fo r reti ree health benefits only into the PSRHB Fund. The PSRH B Fund , in turn, willmake the payments to the EHB Fund necessary to cover the total cost of USPS ret iree hea lthbene fi ts.

18


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Investment inVario lls Bonds

Redemption ofVario lls Bonds


CHART 2B . STRUCTURE AND OP ERATION OF TH E POSTAL SERVICE RETIREE HEALTH BENEF ITS FUND

BEGINNING IN 2017 (NOTE: This chart describes the funding of health benefits for USPS retirees only.

It does not address the funding of health benefits for current USPS employees.)

TREASURY DEPARTMENT

Ratepayers

............... .......... .USPS

---.,......

........ ................. .: USPS :Employees and :

: Re tirees :Federal

: Employees and :: Retirees : .. ........ ..... ...... ....

Congress +-i'--+- Direct

Postal ServiceRetiree HealthBenefits Fund

- - l r - - - ..1appropriation -+ -+ Health Benefits

Fundfor FederalRetirees

Budgets forFederal Agencies

FederalAgenc ies

Investment in Various Bonds

Employee

Redemption of Various Bonds

.. .. .. .. .. .. .. ............ . . Taxpayers

...................... . .. ..Public Debl

r------------"1I I Contrac tually-mandatedII paymen ts to

Insurance companIesparticipat ing in theFederal Emp loyees

Health Benefi tsProgram

------ -. ----_Health insurancecoverage for Fe deral

and USPS retirees andother be neficiaries

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OPM OFFICE OF THE IN SPECTOR GENERAL

Financial Ejjixts of the ProposalsAs the preced ing c hart s illustrate , the trust funds are not a "store ofwealth.'>(il They areGovernment assets th at are expressly pledged to pay specific liabilities. Ir those pl edged assetsare not sufficient to cover the liabilities, the Government must use general revenues to pay thedi fference.The red [- -3 boxes represeming pension liabiliti es and payments to hea lth insurers in Charts 1and 2A-B, respect ively, do not change size, regardless orany changes in the other transactionsiIlustrated in the charts. In Chart 1, the lega lly-required out lays to annuitants w ill be decreasedonly if Congress amends the law to cha nge either the annuity benefits or the qua lificat ionsrequired to obta in them. Lik ewise, the payment s to insurers, seen in Charts 2A and 2B, wouldremain the same absent contract termination or amendment.In Chart 1, if the green [ . . . .} box representing the USPS payments into the CSRD Fund iseliminated (or ifassets are transferred out of the CSRD Fund to the USPS), there is less moneyspec ifica lly identified to be used to pay the un changed annu ity obligations. Consequently, theCSRD Fund w ill need to redeem more bond s in order to generate enough revenue to make th epension payments.62As of September 30, 2009, the CSRD Fund had approx im ately $759 billion in assets ava ilableto pay CSRS a nd FERS annu ity payments.63 The current unfunded liabiliti es of the fund tota l$673. 1 bi ll ion , as of lhe end of fisca l yea r 2009." The CS RD Fund is on schedule 10 be fullyfunded by 2085.65 This is because CSRS annuity ob liga tions will continue to decrease as thepopu lation ofCSRS participants diminishes , eve ntu ally leaving only FERS participants, whoseannuities are essenti ally fully funded. If the unfunded liability of the CSRD Fund were increasedby $75 bi llion to about $750 billion, that figure - $750 billion - would still have to be paid infull by about 2085, according to the OPM Actuary. Under current law, the immediate effectwould be to increase the annual mandatory approp riation made by Congress to pay interest onthe unfunded liability, thereby ultimate ly shi ft ing the cost fo r these liabilities to the Americantaxpayer.The PSRHB Fund opera tes in a slightly di ffe rent manner. The crea tion of the PSRHB Fund wasspurred by the fact that the USPS was incurring substan tial unfunded liabi lities related to futureretiree health benefits. There fore, Congress decided to ensure tha t the USPS fund those fu tureliabi li ties in add ition to pay ing the current year 's ret iree health premiums. Thi s would a llow th eUSPS to spread its future retiree heal th benefi t costs evenl y over a period of time. A halt topayments to th e PSRHB Fund would de fea t the very purpose fo r whi ch the fund was created.61. CRS Report 98-810, at page 13.62. If the CSRD Fund does not eontai n any more bonds, then the mandatory Congress ional appropriation to thetru st fund must increase because, as discussed in the section entitled " Po stal Employee and Retiree Rights," the tru stfund , and therefore the Federal Government, is the enti ty that is lega lly responsible for the payments.63. Allllllal Report oflhe Board ofActual'ies. Civil Service Reliremelll alld Disability Flllld. Fiscal Year ElidedSeptember 30. 2009, at page I.64. Id. , at page 15.65. Id., at page 28.

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Thi s pre fund ing arra ngement requires the USPS to efficient ly and effective ly manage ilsresources so tha l laxpayer do llars do not end up paying fo r USPSexpenses.

As ofSeplember 30, 2009, the PSRHB Fund had approximately$42.5 billion in assets ava ilable 10 pay approx ima tely $85.9 bi llionof USPS re ti ree health benefit liab ili ties.66 Thu s, i f the USPSslopped making contributions, the remainder of the ret iree healthbene fi ts liabi li ties, approximately $43.4 billion, would continue tobe unfunded by Ihe US PS.Therefore, as the chal1Sdemonstrate , the effect of the proposalsif the USPS fails to make th e required re ti ree hea lth benefi tcontributions is tha llhe Federal Govern ment may have to pay theUSPS share.

I f the USPS fails to make the required Joenreebenefitcontributions

the FedemlGovernmentwillhave to paythe USPS shm'e

66. These figures were provided by the aPM Actuary.

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ANALYSIS OF THE PROPOSALSAs mentioned earlier, the USPS OIG presen ted three proposa ls related to the US PS's fundingof its ret iree benefits. A ll of the proposals, although different , have some things in common.Fi rst, the basic goal of each of these proposa ls is two-fold: (I) 10 remedy alleged in equities inthe current method by which the US PS funds its retiree ob liga tions (both annuity and retireehealth benefits)67 and (2) to ob tain operating capital fo r the USPS, at least on a temporaryb Add itionally, the practical effect of each would be a shifting of costs from ratepayers totaxpayers.It should be noted that there have been statements made on the USPS DIG webs ite as well as ina report summarizing its proposa ls that foster the perception that as much as $ 142.4 billion maybe saved by fo llowi ng it s proposals.69 This number is alTi ved at by add ing the purported sav in gsresulting from implementation of these proposals.70 Even if we agreed with the amount of thepurported savings from each proposal, these numbers cannot simply be aggregated because someof these proposals overl ap.in the following pages, we describe the funding mechani sms under current law. We thendesc ribe the proposal and di scuss the supportin g arguments offered in the respective report s.Fi na lly, we offer our own analysis and conclusions as to the valid ity of the proposa ls.

67 . US PS OIG's CSRS Report, at pages 3-4; US PS OIG's FER S Report, al page I; USPS OIG Summary, at pages2-3 ; US PS OIG 's Fun ding Levels Report, at page 2.68. US PS OIG's CSRS Report, at page 4; USPS OIG's FERS Report, at page 6; US PS OIG Summary, at pages4-5; US PS OIG's Funding Levels Report, at page 3.69. "Overfund ed Programs May Offer Postal Service Opportunities to Rebound", available at: hIlP: //www. lIspsoig.gov/ovcrfund ed.pdf ; USPS OIG Summary, at page 4.70. The sav ings come from the three proposals exami ned in our st udy as we ll as a fo urt h fo und in the reportentitled Estimates ofPostal Service Liabilityfor Retiree Health Care Benqfils (Report Number ESS-MA-OOO I(R)(' " Iy 22 , 20(9)).

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Proposal I: Treatment of FERS SurplusCurrent LawFERS is de signed to be fu ll y funded by emp loyee and agency contributi ons. Each year, asrequired by law, th e OrM ca lculates the Federal Govern ment 's and the US PS' s liabili ties underFERS to sec if the re is a surplus or a supplementalliability. 71 (f there is a supplemen tal liabi li ty,the OrM establishes an amortization schedul e so that the liabili ty is paid off completely in 30ycars. 72 The statute does not contemplate what would happen should a surplus ex ist.USPS DIG sProposed ActionAccording 10 the arM Actuary, the USPS currently has a surplus under the FERS program. Areport issued by the USPS O IG est imated that the amo unt of the surplus is approximately $5.5bi lli on as of the end of fi scal year 2009, based upon projections prov ided to it by the OPM andadd itiona l analys is pe rformed by the Hay Group, an independent consu lti ng fi rm engaged by theUS PS OIG ."The repo l1 makes several recommendations w ith respect to the disposition of the funding surplus:( I) Congress should amend the law to address th e treatment of surpluses so they are amort izedin the sa me manner as shortfalls, or the surpluses may be used to make futu re payments untilthey are exhausted; (2) the law should be amended to permit use of funding conidors in thecalculation of FERS liabi li ties; (3) the USPS should work with the OPM "to identify causes ofactual payout differences between th e Postal Service and the rest of th e Federal Government anduse that infonn ation to reduce the risk of future s urpluses;" and, (4) the O PM or Congress shouldcreate a "sub-account" for the USPS in the CS RD Fund.74The Hay Gro up made two suggest ions regarding how the law mi ght be changed so that surplusesare distributed over a period of time. The first (Hay Group Option A) would be to amend thelaw so th at surpluses are treated the sa me way as supplemental liabi li ties (i.e., they would beamortized over 30 years) .75The second sugges tion (Hay Gro up Option 8) would ame nd the law to essentially expand thedefinition of " fu ll y funded."76 This invo lves th e creation ofa funding "coITidor." The examplegiven by the Ha y Group proposes that instead of using 100 percent of projected liabilities as th ebenchmark for full funding of th e pens ion pl an, the range of90 percen t to 110 percent wouldbe considered fu ll y funded. As long as the assets arc wi thin 90 percent to 110 percent of theestimated liabil ities, th en th e USPS would not have to amorti ze a suppleme nt al liability orsurplus.71. 5 U.S.c. 8423(b)(I).72. 5 U.s.c. 8423(b)(2).73. USPS OIG 's FERS Report, al page 6.74. !d.75. Id. , al page 2l .76. Id. , al pages 21-22.

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OPM OFF ICE OF THE IN SPECTOR GENERAL

However, i f the plan is funded at lower th an 90 percent, then the US PS would have asupplemental liab il ity. Conversely. if lh e funding of the plan were over 110 percen t, then theUSPS would rece ive a "negative alllOitiza tion payment" (i.e. , the CSRD Fund would pay theUS PS the excess amount so that the fund ing leve l was brought down to 110 percent ).

The final parI of til e proposal suggests crea ting a sub-account that would allow the USPS'sFERS liabi li ty to be ba sed upon the US PS' s actua l demographics rather than Government-w idedemographi cs.USPS DIG sJustification for the ProposalThe USPS OJG's report po ints oul that because the re is a surplus, there needs to be a way to it.According to the report, the creation of a "sub-account" would provide the US PS wi th moreaccurate information to include on its financial reports and would permit OPM to moreaccurate ly assess the USPS 's FERS liab ili ties. When calculating the USPS 's - or any Federalagency's - annual FE RS payments, OPM rel ies upon demographi c assumptions that are basedupon the FERS population as a whole. Because the demographi c characteristics of the US PSworkforce may be di ffe rent from the overall FERS population, thi s actuari al approach may havethe effect of generating a higher con tri bution rate fo r the USPS than would be obta ined if onlyUS PS employees were considered. 77FUfthennore, the report asse rts that a USPS sub-account wou ld preve nt the USPS's FERS surplusfrom "effect ively subsidiz[ing] appropri ated tax dollars."78Discussion

The USPS's FERSsurplus is not((subsidizingappropriatedtax dollars"

Fi rst, we mu st emphasize that the US PS's FERS surplus is not"subsid iz ing appropriated tax dollars."79 The surplus is held in theCSRD Fund and any interes t ea rned on that surplus reduces the USPS 'sFERS liabi li ty. The US PS, rather than the Federa l Government, earnsthe benefi t from the surplus.The Ha y Group Option A would amend the law to allow fo r surpluses to be treated in the sa memanner as supplemental liab ili ties. Whil e it is unclear whether the Hay Group in tended OptionA to apply to a ll Federal agencies, it is a logical and fai r solution so long as it is not limited to theUSPS.

77. Id. , at page 3.78. Id. , at page 5.79. Id.

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However, we are cOllcc l11ed with the Hay Group Option B, whereby funding corridors wouldbe created. so Congress express ly in tended that FE RS be fully funded, meaning funded at 100percent. Indeed, tha t is why the re is a statutory d irecti ve as to how shortfalls must be addressed.In the sec tion entitled "Reduction in Contribution Levels for Ret iree Benefit s," we discuss thedrastic nature of such a cha nge to FERS in more detail.Wi th regard to the USPS OIG's fi rst recommendation, there is precedent in the priva te sec tor tosupport the proposal to permit the US PS to use the surplus to make future payments until thesurplus is exhausted. The CRS reports Ihal in the pri vate sector "[u]nder current law, pl ans thatare [overfunded]' .. may apply previous years' cred it balances to offset the current yea r 's requiredfunding."81 The drawback of this proposal is that it ass umes that the USPS w ill be able togenerate enough reve nu es in the future to make its usual annual FERS payments, whi ch, as wehave noted in ea rlier sections of this s tudy, is quest ionable.We support the USPS O IG's recommendat ion that the OPM and the US PS co llaborate to co llectin formation regard ing causes of the US PS's FERS surplu s. Thei r work would like ly be veryuse ful to po licymake rs given the c ritica l nature of this issue. However, it should be em phasizedthat such co llaboration could prod uce only recommendat ions, as O PM does not have theauthority to alter the statutory formula used to calculate FER S payments.If that co llaborati ve effort determines that the USPS popul at ion 's demogra phics is li nked to thecreation of its FERS surplus, the OPM sho uld examine the feasib il ity of establis hing the creationof a "sub-account" fo r the US PS. In do ing so, it should consider the effects that such a subaccount would have upon both the USPS's FERS liabilit ies and the Federal retirement programas a who le. We note tha t such fragmentat ion of demog raphics wo uld create a potentia ll ydangerous precedent. All agenc ies - or perhaps even ind ividual offices wi thin agencies ordepartmen ts - may also request sub-accounts. Such a situation would create an admin istrativeburden as well as introduce an element of uncertainty in Federal agenc ies ' budge ting.ConclusionWe ag ree with the Hay Group Option A in sofar as it is not limited to the USPS. It aims to matc hcontributions with oUllays, as is appropriate. Trus t fund assets would not be used for a purposeother than the payment of benefi ts nor wo ul d they be transferred out of the CS RD Fund whilesi multaneously increas in g Federal liab ili ties.

80. We assume th at , given th e language of th e Hay Group's report, the corridor would be used by all agencies todctennine supplernentall iabi li ties or surp luses and nOI only to the USPS. As di sc ussed in the nexl section entitled" Reducin g Contribution Levels for Retire e Benefits," we strongly believe th[ll [lny propos[li treating the USPSdifferently from other agencies under FERS would be unwise and contrary to Congressional intent.81. CRS, Pensioll Guar(mly Corporalioll (PBGC) : A FocI Sheel, Report 98-118 (June 28, 201 0) (hereinafter "CRSReport 98-118"), at pages 4-5.

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OPM OFFICE OF THE IN SPECTOR GENERAL

For th e reasons di scussed previously, the Hay Group Option B, suggest ing the implementation offunding cOITidors, should not be adopted.We ag ree that the OPM and the USPS should analyze the causes of the USPS 's FERS surplus.However, before the aPM establishes a sub-account for th e USPS, th e OPM should carefu llyexamine th e effects that such a suh-account wouLd have upon both th e USPS's FERS liab ili tiesand the en tire Federal retirement progra m.

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Proposal 2: Allocation of CSRS Liabilities for POD/USPS RetireesCurrent LawAn nui ty CalculationsTh ere are two main compone nt s in the computation of an an nuity, wheth er under CSRS orFERS: (I ) years of service and (2) salary. The "years of service" piece includ es qualifyingmilitary serv ice.82 The sa lary fi gure is calcu lated usin g an employee's " hi gh-3 salary," whi chis an average of the three hi ghest sa laries rece ived in a continuous three-year period. Thi s isfrequent ly the last three yea rs of the employee's career.S]The calculation of the present va lue of annuities (i.e., the future liability to pay benefits) isperformed using actua rial assumptions regarding interest rates, inflation, mortality rates,etc. Naturally, these assumptions must be revisite d and modified regularl y to reflect actualexperience. The OPM recalculates a ll liabi lities incurred (by both the Federal Governm ent andthe US PS) under CS RS and FERS on an annual bas is (A nnual Review).84The Annual Reviewdetennines if the prior yea r 's as sumptions diffe red from actua l experi ence to the extent thatthe re was either an overpayment to the CSRD Fund (surp lu s) or an unde rp ayment (supplemen talliabilily).Title 5 of the United States Code contains specia I instructions with regard to the Annual Reviewof the US PS's liabi lities. The PAEA relieved the USPS of all " reg ul ar" future CSRS payments(i.e., the payments it would otherwise make on an an nual basis using the statutory fonnu la inTi tle 5) because when the PAEA was passed in 2006, the USPS had theoretically paid a sufficientamount into the CS RD Fund to meet its entire CS RS liability.Under curren t law, as enacted by the PAEA, any USPS CS RS surplus ca lculated in an AnnualRev iew pr ior to 20 15 remains in th e CSRD Fund.H5 In 2015, if there is a surplu s, lhat amountwill be transferred from the CSRD Fund to the PSRHB Fund .so If, however, an An nual Reviewindicates that the US PS has a supplemen tal liability, as it had at the e nd of fiscal year 2009,87 theUSPS does not pay anything towards that supplemental liability unti l 20 17. At that point, theaPM will establish a sched ul e (an "amort iza tion schedule") by whi ch the USPS will pay off thatamount through annual payments so that the debt is completely paid of f by September 30, 2043. 88

82 . 5 U.S.C. 8332(0) (CSRS), 8411 (FERS).83. For example, perhaps an employee earned $48,000 in year I, $49,000 in year 2, and $50,000 in year 3, makingthai the most he or she has ever earned. The "hi gh- 3" is the average of lhose figures ($49,000) and that is what isused in the form ul a to detenn in e his or her an nuity. [Note that $49,000 is NO T the amount of the annuity.]84. 5 U.S.C. 8348(g)-(h) (CSRS), 8423 (FERS).85. 5. U.S.C. 8348(h)(2)(B).86. 5 U.S.C. 8348(h)(2)(C).87 . According to th e OPM Actuary, th e US PS's CSRS unfunded liabi lity as of tile end offiscai year 2009 was $7.3billion.88. 5 U.S.c . 8348(h)(2)(B).

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Afier 20 17, the aPM will con tinu e to conduct an Annua l Review and rev ise any amortizat ionschedul es accord ingly. 89Actuarial Me th odology at Iss ue

There a re some USPS employees who participate in CS RS and who worked for both th e PODand the USPS (POD/USPS employee

opm oig study of usps oig proposals feb 28 2011

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