oversight

Federal Retirement Systems: Unrecognized Costs, Inadequate Funding, Inconsistent Benefits

Published by the Government Accountability Office on 1977-08-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            DOCUMENT RESUMF
03168 - [A21732861

Federal Retirement Systems: Unrecognized Costs, Inadequate
Funding, Inconsistent Benefits, FPCD-77-48; B-179810. August 3,
1977. 33 pp.   16 appendices (41 pp.).
Report to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: Personnel Management and Compensation (300);
    Personnel Management and Compensation: Compensation (305).
Contact: Federal Personnel and Compensation Div.
Budget Function: Income Security: Federal Employee Retirement
    and Disability (602).
Organization Concerned: Administrative office of the United
    States Courts; Civil Service Commission; Department of
    Defense; Department of State; Federal Reserve System;
    Tennessee Valley Authority; United States Tax Court.
Congressional Relevance: ouse Committee on Armed Services;
    Senate Committee on Armed Services: Congress.
Authority: Employee Retirement Income Security Act of 1974 (88
    Stat. 829)}    (P.1. 94-350;   90 Stat.. 823)..    tP.L. 94-554; 90
    Stat. 2611).     (P.L. 91-93; 83 Stat. 136).      OMB Circular A-"6.
         The cost and liabilities of Federal retirement programs
are much greater than recognized by current costing and funding
procedures. Findings/Conclusions: In 1976, seven of the
Government's retirement systems paid over $15..6 billion to
retirees and the survivors of decease3 employees and
ret'rees--an increase of 10 billion since 1970. The systems
also reported liabilit' s exceeding $320 billion for which less
than 44 billion had been set aside i Federal trust funds.
Federal retirement systems' funding requirements vary, but in
most cases are less stringent than those imposed by law on
private pension plans. sually, little or no consideration is
given to the effect of future general pay increases and annuity
adjustments on ultimate benefit payments, resulting in
considerable understatement of benefit costs accruing each year.
Recommendations: The Congress should enact legislation equiring
that the full cost of Federal retirement systems be recognized
and funded and that the difference between currently accruing
cost and employee contributions be charged to agency operations.
In addition, Congress should establish an overall Federal
retirement policy to guide retirement system development.
Centralization of committee jurisdiction over all Federal
employee retirement systems would facilitate the establishment
and implementation of such a policy. (Author/SC)
co       REPORT TO THE CONGRESS
           Y     THE       CMPTROLLER

         BY THE COMPTROLLER GENERAL
X,4s s   OF THE UNITED STATES



         Federal Retirement Systems:
         Unrecogni7ed Costs,
         Inadequate Funding,
         Inconsistent Benefits
         Costs and liabilities of the seven Federal re-
         tirement systems discussed in this report are
         not fully recognized and funded. Conse-
         quently, the costs of agency operations and
         programs are understated. This also results in
         unrecognized subsidies to agencies whose
         operations are intended to be self-supporting.
         The Congress has not provided an overall
         policy to guide the development of Federal
         retirement systems and should do so. The
         systems have developed on an independent,
         piecemeal basis, causing inequities and il,con-
         sistencies, as well as common problems. Many
         of the differences are without apparent ex-
         planation.




         FPCD-77-8                                         AUGUST 3, 1977
                COMPTROLLER GENERAL OF THE UNITED STATES
                           WASHINGTON. D.C. 248




 B-179810




To the President of the Senate and the
Speaker of the House of Representatives
      This report reiterates our
retirement systems and discusses concern over Federal employee
                                  the many inequities, incon-
sistencies, and common problems that exist.
                                              We are particu-
larly concerned that the full costs of benefits
                                                 accruing
under the systems are not being recognized, thereby
the ability of the Congress to make sound decisions inhibiting
lishing, amending, or ut.ding retirement and         on estab-
                                              agency
An overall policy is needed to guide the development programs.
eral retirement systems.                              of Fed-

     We made our review pursuant to the Budget and
                                                   Accounting
Act, 1921 (31 U.S.C. 53), and the Accounting
                                             and Auditing Act
of 1950 (31 U.S.C. 67).

     We are sending copies of this report to
Civil Service Commission; the irector, Officethe Chairman,
                                                of Management
and Budget; the Secretary of Defense; the Secretary
the Director. Administrative Office of the United    of State;
Courts; the Court Executive, United States Tax     States
                                                Court; the
Secretary of the Board, Board of Governors of
                                               the Federal
Reserve System; and the General Manager, Tennessee
Authority.                                          Valley




                                  Comptroller General
                                  of the United States
     COMPTROLLER GENERAL'S                FEDERAL RETIREMENT SYSTEMS:
     REPORT TO THE CONGRESS               UNRECOGNIZED COSTS,
                                          INADEQUATE FUNDING,
                                          INCONSISTENT BENEFITS
                    DIGEST

                This report states once again GAO's concern
                over Federal employee retirement systems.
                In 1976, seven of the Government's retire-
                ment systems paid over $15.6 billion to
                retirees and the survivors of deceased
                employees and retirees--an increase of
                billion since 1970. The systems also $10
                                                       reported
                liabilities exceeding $320 billion for
                which less than $44 billion had been set
                aside in Federal trust funds.
                The Congress should enact legislation requiring
                that the full cost of Federal retirement
                systems be recognized and funded and that
                difference between currently acc ruing cost the
                and employee contributions be charged to
                agency operations.
                Federal retirement systems' funding require-
                ments vary, and in most cases are less
                                                       strin-
                gent than those imposed by law on private
               pension plans. The cost and liabilities
                                                          of
               Federal retirement programs are much greater
                than recognized by current costing and
                ing procedures. Usually, little or no fund-
                                                       con-
               sideration is given to the effect of future
               general pay increases and annuity adjust-
               ments on ultimate benefit payments, resulting
               in a considerable understatement of benefit
               costs accruing each year. For the civil
               service retirement system alone. unrecognized
               retirement costs in 1976 amounted to an
                                                        esti-
               mated $7 billion. In some programs. none
               the currently accruing cost is recognized. of
               (See pp. 3 to 5.)

              Because most Federal retirement crust funds
              are requir,)d by law to be invested in Federal
              debt securities, full funding of Govern-
              ment retirement liabilities would not
                                                     elimi-
              nate the need for future taxing and borrowing
              to meet benefit payments as they become
                                                       due.

                                     ia nremowe
                                              te   eroot   FPCD-77-48
MW    MdA .   *Ib    noW,.
                        htwo.
However, full funding would enhance cost
recognition and budgetary discipline as
well as promote sounder fiscal and legis-
lative decisionmaking. Under existing fund-
ing provisions, the unfunded liabilities of
Federal retirement systems will continue
to grow.  (See pp. 5 to 13.)
Costs not covered by employee contributions
must ultimately be paid by the Govern-
ment. When retirement costs are understated,
the costs of Government operations and
agency programs are also understated. One
side effect of the underallocation of retire-
ment costs to agency operations is the unre-
cognized subsidy that accrues to Gove-nment
organizations whose programs are required
by law to be financed by the users of their
services. Understatement of retirement costs
may also rsult in a tendenuy to adopt bene-
fits which could jeopardize the affordability
of the retirement systems.  (See pp. 16 to 21.)
Some of the agencies responsible for adminis-
tering Federal retirement programs tcreed
with GAO that the full cost of retirement
benefits should be recognized. The Depart-
ment of Defense did not comment on the report,
and others had no comments on GO's ecommend-
ations. Self-supporting agencies, whose
retirement contributions would be higher if
costing and funding techniques recognized
general pay increases and annuity adjust-
ments, generally agreed that the costs of
their operations were being understated.
Some believed the Congress hould appropriate
funds to pay the higher costs rather than
increase charges to the users of the agencies'
services.  (See pp. 21 and 22.)
GAO further recommends that the Congress
establish an overall Federal retirement
policy to guide retirement system develop-
ment. Centralization of committee jurisdic-
tion over all Federal employee retirement
systems would facilitate the establishment
and implementation of such a policy.

There is no standard or method of assessing
the adequacy of Federal employee retirement
programs. Different committees of the Congiess


                    ii
            have legislative jurisdiction over the
                                                   various
            systems. There is no overall policy for
                                                     guid-
            ance in establishing, financing, or amending
            these progrLms.
            Federal retirement systems have developed
                                                       on an
            independent, piecemeal basis. Many inequities,
            inconsistencies, and common problems exist
            among the systems. Some of the differences
            be legitimate, but many of the benefit       may
                                                   provi-
            sions differ without apparent explanation.

            -- Employee contribution Ttes vary. Some
               systems require no cost haring by
                                                 he
               covered employees.  (See app. I.)
            -- Each system has its own age and service
               requirements that employees must meet to
               become eligible for a retirement annuity.
               (See pp. 23 and 24.)
            -- Transfers of service credits between
                                                    re-
               tirement systems are treated inconsistently.
               (See pp. 23 and 25-26.)
           -- Benefits payable at retirement vary from
              system to system.  (See pp. 26 to 28.)
           -- There are wide variations in the survivor
              benefit programs of the systems.  (See
              pp. 28 and 29.)
           -- Each system has differing provisions
                                                   re-
              garding the amounts reemployed annuitants
              may receive. (See pp. 29 to 31.)
           -- Disability provisions and practices
                                                   are
              not consistent.  (See pp. 31 and 32.)
           -- Social security coverage is provided
                                                    to
              employees under two of the retirement
              systems. Employees in the other systems
              are prohibited by law from participating
              in social security through their Federal
              employment.  (See p. 32.)
           Most Federal agencies responsible for admin-
           istering the various retirement systems
           no specific comments to GAO on whether made
                                                   the
           many different provisions and practices
           lowed are justified.                     fol-
                                 (See pp. 32 and 33.)

IL   Sht                        iii
                          Con t e n t

                                                        Page
 DIGEST
 CHAPTER
       1     INTRODUCTION                                    1
                 Scope of review
                                                             2
       2;    COST OF RETIREMENT PROGRAMS:
               UNDERSTATED AND UNDERFUNDED
                 Recognizing retirement costs                3
                 Funding retirement costs                    3
                                                             5
                 Financing and funding p ctyies
                   of Federal retirement systems
                 Funding requirements in the             7
                   private sector
                 Conclusions                            13
                 Recommendation to the Congress         14
                 Agency comments                        15
                                                        15
      3     UNDERSTATED CIVIL SERVICE RETIREMENT
              COSTS RESULT IN UNRECOGNIZED SUBSIDIES
                Selected agencies receiving subsidies   16
                Conclusions                             16
                Agency comments and our evaluation      21
                                                        21
      4     INEQUITIES AND INCONSISTENCIES OF FEDERAL
              RETIREMENT PROGRAEMS
                Retirement eligibility                  23
                Service credits and portability         23
                Benefit formulas                        23
                Survivor benefits                       26
                Reemployed annuitants                   28
                Disability retirement                   29
                Social security coverage for            31
                  Federal employees
                Conclusions                             32
                Recommendation to the Congress          32
                Agency comments and our evaluation      32
                                                        32
APPENDIX
   I        Financing provisions
                                                        34
  I         Survivor benefits
                                                        35
                                                         Page
APPENDIX

 III       Disability retirement                          40
  IV       May 16, 1977, letter from the Director,
             Bureau of Retirement, Insurance, and
             Occupational Health, Civil Service
             Commission                                  47
   V       April 28. 1977, letter from the Deputy
             Assistant Secretary for Budget and
             Finance, Department of State                49
  VI       April 27. 1977, letter from the Court
             Executive, United States Tax Court          51
 VII       May 20, 1977, letter from the Secretary
             of the Board of Governors, Federal
             Reserve System                              54
VIII       May 10, 1977, letter from the Director,
             Administrative Office of the United
             States Courts                               56
  IX       May 12, 1977, letter from the General
             Manager, Tennessee Valley Authority         58
   X       April 29. 1977, letter from the Director,
             Accounting and Fiscal Operations, Federal
             Home Loan Bank Board                        59
  XI       May 6, 1977, letter from the Controller,
             Federal Deposit Insurance Corporation       60
 XII       April 25, 1977, letter from the Acting
             Governor of the Canal Zone and Vice
             President. Panama Canal Company             62
XIII       May 4, 1977, letter from the Governor,
             Farm Credit Administration                  63
 XIV       April 29, 1977. letter from the Vice
             President for Administratior, Federal
             National Mortgage Association               66
  XV       June 3, 1977, letter from the Postmaster
             General                                     68
                                                     pag
APPENDIX
 XVI       May 19. 1977. letter frcm the Mayor,
             District of Columbia
                                                     72
                         ABBREVIATIONS
ERISA      Employee Retirement Income Security
                                               Act
GAO        General Accounting Office
OMB        Office of Management and Budget
TVA        Tennes ,e Valley Authority
CPI        Consumer Price Index
                            CHAPTER 1
                          INTRODUCTION
      In a 1974 report to the Congress,
 financial status and oenefit provisions we summarized the
                                          of various Federal
 employee retirement systems and discussed
                                            a number of issues
 related to basic policies, financing, administration,
benefits. 1/                                             and
                We recommended that the Congress assume
role in est-ablishing an overall retirement               a major
objectives and principles to guide future    policy  to provide
                                            development and
improvement of Government retirement systems.
have reviewed in depth and reported on various Since then we
Federal retirement programs and are presently, aspects of
of three House committee and subcommittee        at the request
                                            chairmen, conduct-
ing a comprehensive study of the desirability
                                                of consolidating
all or part of the retirement systems administered
and instrumentalities of the Federal Government       by agencies
                                                  into a cen-
tralized mechanism.
     This report reiterates our concern over
                                             Federal employee
retirement systems and provides additional
mation on the issues involved.             and updated infor-

     A retirement system is basically a program
                                                  for providing
a pension to retired employees. The amount
is generally based on either length of serviceof the  pension
some combination of both. Although a life        or  salary,  or
                                             pension is con-
sidered the primary benefit of any system,
also frequently plrovide benefits for death, retirement systems
involuntary termination.                      disability, and

     Seven retirement systems cover most Federal
                                                  personnel.
The table on the following page shows, for
                                           fiscal
the number of employees and annuitants covered     year 1976,
tem and the amount of benefits paid.           by  each sys-




1/"Federal Retirement Systems: Key Issues,
  and Benefit Provisions" (B-179810), July Financial Data,
                                           30, 1974.
                                      Benef iciar ies
  Retirement                          (retirees and      Outlays
   systems          Employees           survivors)      (millions)
Civil service       2,721,900           1,452,353        $ 8,284.1
Foreign Service           7,983              4.606             66.9
Uniformed
  services          2,924,624           1,109,357          7,295.7
U.S. Tax Court
  judges                     13                 13               .4
Tennessee Valley
  Authority (TVA)        17,799              4,599            22.2
Federal judiciary           503                343           a/7.8
Federal Reserve
  Board                   1,302                289           a/2.4
                    5,674,124           2,571.560        $15,679.5
a/As of Dec. 31, 1975.
SCOPE OF REVIEW

     Our examinatio.. included a review of retirement legis-
lation and related documents and reports, actuarial valua-
tions, agency statistical reports, and previous studies of
Federal employment retirement systems. We also interviewed
system actuaries and other Government officials responsible
for administering these programs.




                                  2
                             CHAPTER 2
                   COST OF RETIREMENT PROGRAMS:
                   UNDERSTATED AND UNDERFUNDED
    The benefits accruing under Federal retirement systems
represent a large and growing long-term financial
of the U.S. Government. Full recognition of these commitment
                                                    growing
liabilities as they accrue is essential not only in
                                                     deter-
mining and allocating the cost of Government operations,
also in determining the present and future financial      but
tion of the United States. However, benefit costs     condi-
                                                    are not
fully recognized and consequently the costs of Governmant
programs are understated and large unfunded liabilities
been created.                                            have

RECOGNIZING RETIREMENT COSTS
    In actuarial terminology, the value of benefit rights
earned (accrued) annually by employees covered under
retirement system is referred to as the "normal cost" a
system. For most Federal retirement systems, the        of the
normal cost is understated, and for some it is not estimated
                                                    cal-
culated at all.
     Because of the uncertainty of such future events as
 death, disability, or retirement, the ultimate cost
 retirement system can be determined only as actual of a
 tures emerge throughout the life of the system. By expendi-
                                                       the
 very nature of a retirement system, there is a timelag
 between the accrual of benefit rights and the actual
                                                        payment
 of benefits. Under most Federal retirement systems,
 rights accrue during an employee's years of service. benefit
 is, each year of service has an associated benefit      That
                                                     value.
     Normal cost is commonly expressed as a percent of
                                                         pay-
roll, and from a financing point of view represents
                                                      an
estimate of the amount of funds which, if accumulated
annually and invested over covered employees' careers,
be enough to meet their future benefit payments.          will
the normal cost is a complex actuarial process whichEstimating
                                                        requires
consideration of a multitude of factors. Basically,
                                                        however,
the process involves mathematically predicting the
                                                     future
experience of the system (for example, salary progression,
rate of return on invested funds, probable rates of
                                                      employees'
death, disability, retirement, and termination of
                                                   employment)
and translating this experience into cost on the basis
systems' benefit provisions. If reasonable assumptions of the
not made on all factors affecting future benefit payments, are
normal cost will be incorrect.


                               3
    Normal cost can be calculated on either a "static" or
"dynamic" basis. Static calculations do not consider future
general pay increases or future annuity cost-of-living
adjustments, dynamic calculations consider such increases.

    The normal cost of most Federal retirement systems is
calculated on a static basis even though annuities are
generally based on an employee's salary and length of
service and most systems provide for increasing these
annuities based on increases in the Consumer Price Index
(CPI). General pay and annuity increases have occurred
frequently and in large amounts. However, because the
probability that such increases will occur in the future is
generally ignored in calculating normal cost, accruing
Government retirement liabilities are greatly understated.

    For example, the costs accruing under the civil service
retirement system are determined on a static basis, even
though since 1969 Federal white-collar pay has increased
65 percent and annuity adjustments have totaled 80 percent.
In its most recent actuarial report, the Board of Actuaries
estimated the system's static normal cost to be 13.64 per-
cent of pay. Thus, agency and employee contributions of 7
percent of pay each, as required by law, appear to cover
the normal colt of the system. However, the report also
included estimates of the system's dynamic normal cost which
ranged from 21,56 to 28.74 percent, depending on the economic
assumptions used. These estimates were not intended as a
prediction of the system's future experience but as an
expression of the Board's concern that the potential long-
range obligations resulting from general pay increases and
annuity cost-of-living adjustments be recognized. Between
November 1969 and March 1976, benefit adjustments increased
the system's liabilities by approximately $28 billion.

    The Office of Management and Budget (OiB) recently gave
official recognition to the dynamic normal cost of the civil
service retirement system.  Using economic assumptions derived
from past pay and cost-of-living increase experience, OMB
estimated the dynamic normal cost to be 31.7 percent of pay.
In October 1976, OMB instructed Federal agencies to use a
retirement cost factor of 24.7 percent of base pay (31.7 per-
cent less 7-percent employee contributions) when preparing
cost analyses under OMB Circular A-76. 1/ In June 1977,



l/This circular provides guidance to Federal agencies in
  making decisions and cost comparisons pertaining to in-house
  vs. contracting out for needed products and services.

                            4
OMB temporarily suspended use of this factor pending a
complete review of the circular and its implementation.
We were advised by OMB officials, however, that they have
no reason to question the accuracy of the 31.7 percent
dynamic normal cost figure.

    In fiscal year 1976, the total payroll for employees
covered by the civil service system was approximately $39.2
billion. Based on this payroll figure, the following table
indicates the difference in the estimated costs accruing
under the system depending on whether such costs are
determined on a static or dynamic basis.

                                        Normal cost
                                     Percent    Amount
        Computation method           of pay   (billions)
          Dynamic                     31.70     $12.4
          Static                      13.64       5.3
              Understated cost        17.06     $ 7.1
FUNDING RETIREMENT COSTS

    The primary purpose of Government funding is to formally
recognize cost. Fundin Federal retirement systems promotes
sound fiscal and legislative responsibility and enhances
'udgetary discipline.

    The conventional approach to financing pension benefits
is for the employer (and the employees in a contributory
plan) to set aside funds in advance of the date on which the
benefits become payable. However, some Federal retirement
systems (for example, the uniformed services system) operate
on a "pay-as-you-go' basis whereby the Government finances
benefit payments through annual appropriations.

    A retirement system is considered fully funded if funds
on hand and to be received are equal to the system's liability
for benefit payments to present retirees and the anticipated
liability for active employees, expressed in terms of present
value. 1/ However, when the fund balance and future
receipts are less than the liability, an unfunded liability



1/Present value is a concept which recognizes the time value
  of money. It is a technique for determining the amount of
  money which, if invested today at a given interest rate,
  would be sufficient-to provide monthly benefits in the
  future.

                             5
   is said to exist.   (Under a pay-as-you-go system, all of the
   liability is unfunded.) As shown in the following table, the
   reported unfunded liabilities for three major Federal retire-
   ment systems have grown, on a static basis, from $157 billion
   in fiscal year 1970 to $280 billion in fiscal year 1976, an
   increase of 79 percent. Under existing funding provisions,
   the unfunded liabilities will continue to increase.
                                                                                  Percent of
                            1970                              1976               increase in
               Liability    Fund     Unfunded    Liability    Fund     Unfunded   unfunded
                note a)    balance   liability   (note a)    balance   liability liability
               ----------------------- (millions)-------
Uniformed
  services     $103,426    $         $103,426    $172,239    $         $172,239     67
Civil
  service        75,236     22,432     52,804     150,470     43,470    107,000    103
Foreign
  Service           528         53        475     b/1,252        185   b/1.067     125

               $179,190    $22,485   $156,705    $323,961    $43,655   $280,306     79


             a/Net liability after deducting future agency and employee
               contributions and future amortization payments covering
               specific liability increases.  (See pp. 8 and 10.)
             b/As of Sept. 30, 1976.


        Although some Federal retirement systems provide for
   advance funding of future benefit payments, Federal and pri-
   vate funding practices differ. Contributions to private
   pension funds are usually made in cash by employers and/or
   employees. These funds are managed by independent trustees
   who invest the contributions in income-producing securities
   and, as needed to make benefit payments, convert the invest-
   ments into cash by selling them in the secirities market.
   The essence of the private trust fund is tat its receipts
   and balance represent cash or assets that can be converted
   to cash.
        Some Federal retirement trust funds have the outward
   characteristics of private pension funds, but with an im-
   portant difference. The receipts of Government retirement
   funds--for example, deductions from employees' salaries.
   agency contributions, direct appropriations, and interest
   earnings--are generally required by law to be invested in




                                                  6
Federal securities. 1/ There is' no cash involved in this
kind of intragovernmental transaction, only bookkeeping
entries. Thus, funding in itself does not cause a finan-
cial hardship for the Government. When funds are needed
to make benefit payments, the Treasury obtains the cash
through its normal channels of tax receipts or borrowing
from the public.

     Billions of dollars in benefits are paid annually
under Federal retirement programs. These annual outlays
are increasing greatly. The following table shows the 1970
to 1976 increases for three Government retirement systems
which cover approximately 98 percent of all Federal em-
ployees.

     Retirement             Outlays          Percent of
       system            197U     17          increase
                           (millions)
Civil service           $2,752    $ 8,284         201
Uniformed services       2.853      7,296         156
Foreign Service             16         67         319
    Total               $5,621     15,647         178

     The increase in outlays during this period was due
primarily to (1) an increase in number of beneficiaries
(50 percent), (2) increases in the pay rates upon which
annuities a:e based (36 percent in white-collar jobs, for
example), and (3) annuity cost-of-living adjustments
(64 percent),

FINANCING AND FUNDING PRACTICES
OF FEDERAL RETIREMENT SYSTEMS

     No uniform practices or principles exist with respect
to financing and funding Federal retirement systems. Dif-
ferent methods are used by each system. Some require em-
ployees to contribute to retirement funds, and some do not.



l/The funds of two Federal retirement systoms--TVA and the
  Federal Reserve Board--are not required by law to be
  invested in Federal securities. These funds are in diversi-
  fied investments including fixed-income securities, common
  stocks, and real property.



                             7
 Some provide for fully funding benefit rights
 some provide for partial funding, and some     as they accrue,
 unfunded. Following is a brief discussion  are  completely
                                            of
 and funding practices of each system covered   the financing
                                               by this report.
 Civil service retirement system

      The last major change in civil service funding
 occurred in October 1969 with the enactment          policies
                                             of Public
 Law 91-93 (83 Stat. 136).  Immediately before
 the only contributions to the fund consisted this change,
 employee contributions of 6.5 percent each. of agency and
 that time indicated the fund would be depletedEstimates at
                                                 by 1987 un-
 less funding changes were made.
     The 1969 legislation increased both agency
                                                and employee
contributions to 7 percent. In fiscal year
                                            1976, the agen-
cies and their employees each contributed about
to the retirement fund.                         $2.7 billion

     The 1969 law also requires
appropriations to liquidate, in the  Government to make direct
                                 30 annual installments, any
increase in the unfunded liability resulting
                                              from pay in-
creases, liberalization of retirement benefits,
                                                 or extension
of retirement coverage to new groups of employees.
tion, the Secretary of the Treasury is required      In addi-
to the civil service retirement fund annual      to tra:nsfer
interest on the unfunded liability and for payments for
                                            the cost of allow-
ing credits for military service. In fiscal
Government appropriations and the Treasury    year 1976, the
                                            transfers totaled
$4.7 billion.

     In addition, the fund earned $2.5 billion in
on assets invested in Federal securities.         interest

     While the intent of the 1969 legislation was
the fund and retard the                            to stabilize
                        growth of the unfunded liability,
was not achieved. The Government's contributions            this
                                                   to the Civil
Service Retirement and Disibility Fund, as
                                           well as the un-
funded liability and outlays, are growing dramatically.
the end of fiscal year 1970 to the end of fiscal          From
                                                  year 1976
     -- Government contributions to the retirement
                                                   fund
        increased by 280 percent to S7.4 billion, 18.9
        cent of payroll;                                per-

    -- cash outlays increased by 201 percent to
                                                $8.3 billion;
       and




                              8
      -- the unfunded liability, computed on a static basis,
         increased by 103 percent to $107 billion.

     The $107 billion unfunded liability was attributable
to various causes, including (1) creditable service for
which neither the Government nor the employees made con-
tributions; (2) not funding liabilities resulting from
general pay increases, cost-of-living adjustments to annui-
ties, and benefit liberalizations; and (3) lost interest in-
come which would have been earned if the accrued liability
had been fully funded. The unfunded liability will continue
to increase, primarily because of cost-of-living adjustments
for which no funding provision has been made.

     Assuming the same yearly average pay and cost-of-living
increases (6 percent) as occurred in fiscal years 1970 to
1975, it is estimated that by 1985

     -- the Government's annual contributions to the fund will
        increase another 192 percent to $21.6 billion, about
        34 percent of pay;

     --expected benefit payments will increase another
       254 percent to $29.4 billion; and
     -- the unfunded liability will increase another 93 percent
        to about $207 billion.
Foreign Service retirement system

     This system is funded in much the same manner as the
civil service system. Participants contribute 7 percent
of their pay, and the employing agency makes a matching con-
tribution. In addition, Public Law 94-350 (90 Stat. 823),
approved July 12, 1976, authorized annual appropriations
to the retirement fund equal to he amount that the system's
normal cost exceeds employee and employer contributions.

     The normal cost of the Foreign Service system as
determined by the latest actuarial valuation was 18.6 percent
of payroll. As in the civil service system, this figure is
a static calculation that does not include the effect of
future general pay increases or annuity adjustments. At the
time of our review, a new valuation was being made which was
to include future annual annuity cost-of-living adjustments.
However, it did not provide for future general pay increases.
Consequently, normal cost will continue to be understated.




                              9
     The Government makes direct appropriations to amortize
any increase in the unfunded liability resulting from (1)
increases, (2) liberalization of retirement benefits, or pay
                                                         (3)
extension of retirement coverage to new groups of employees.
Also, the Secretary of the Treasury annually credits to the
retirement fund an amount equivalent to the interest on the
unfunded liability and the cost associated with allowing
credit for military service. For fiscal year 1976, amorti-
zation payments, interest on the unfunded liability, and
military service credit payments totaled $54.5 million.

      The unfunded liability of t   system as of September 30,
1976, was about $1.1 billion. A In the civil service system,
cost-of-living adjustments granted to annuitants had not been
funded. Another factor which contributed to the unfunded
liability was the requirement that Foreign Service staff
ployees be covered by the civil ervice system until they em-
completed 10 continuous years with the Foreign Service.
(This requirement was rescinded by Public Law
ing the time of the 10-year requirement, these 94-350.)  Dur-
                                                employees and
the Department of State made matching contributions to the
civil service fund. When the 10-year requirement was met,
the employees' service was creJited to the Foreign Service
system and employees' contributions plus interest earnings
were transferred from the civil service fund to the Foreign
Service fund. However, the agency contributions and amortiza-
tion payments, along with the associated interest earnings,
remained in the civil service fund.

Uniformed services retirement system

     This system is noncontributory, meaning that the Govern-
ment pays the entire cost of providing benefits. / The
tem operates on a pay-as-you-go basis, and benefits are sys-
financed through annual congressional appropriations. As
                                                          a
result, the Department of Defense budget reflects some of
the cost of operating the military services in prior years,
but does not include any accrual of retirement costs for
current military personnel.

     The following able shows actual
and accrue liabilities through fiscal and projected outlays
                                       year 1978.


i/Military personnel are also covered under social security
  and provided certain death and disability coverage by the
  Veterans Administration.




                            10
                       Outlays (note a)              Accrued
         Amoun       Percent of basicpy   (oe   )   liabilities
        (millions)                                   (millions)
 1970   $2,743                     22.3             $103,426
 1971    3,260                     26.0
 1972                                                113,389
         3.742                     28.5              121.392
 1973    4,218                     28.7
 1974                                                130,373
         4.962                     33.2              148.016
 1975    6,028                     39.7
 1976                                                169,228
         7,048                     45.5              172.239
 1977    7,822                     48.7
 1978                                                175.085
         8,536                     51.9              177.724
a/Actual costs, fiscal year 1970 to 1976; projected costs,
  cal years 1977 and 1978. Excludes reserve retired pay fis-
                                                           and
  survivor benefits.
b/Based on budgeted basic pay for all years.

U.S. Tax Court judges retirement system

      Retirement benefits under this system are
annual congressional appropriations. Judges whofinanced
                                                  elect to
                                                          by
participate in the system's survivor benefit plan contribute
3 percent of pay before and after retirement. Survivor
fit payments in excess of such contributions are financedbene-
annual appropriations.                                      by
                         Estimates of the expenditures and
appropriations necessary for the maintenance and operation
the survivor annuity fund are submitted annually to OMB.     of
crnise the system is basically a pay-as-you-go operation.   Be-
normal cost is not determined. The unfunded liability
the survivor benefit plan as of September 30, 1976, was of
                                                          less
than $500,000. The unfunded liability of the noncontributory
retirement plan has not been determined.

Retirement Plan for Employees
of the Board of Governors
of-the Federal Reserve System

     This system is funded through employee contributions
7 percent of pay and contributions by the employer equal of
the difference between employee contributions and normal to
                                                          cost.
In calculating normal cost, the actuary has always included
an economic assumption regarding future general pay increases.




                              11
     Employee contributions during calendar year 1976 totaled
about $1.5 million, while the employer contributed about
$2.7 million. In addition, $1.2 million was required to
fully fund the 5.4 percent annuity cost-of-living adjustment
effective March 1, 1976, and this was covered by previously
accumulated excess reserves of the plan.

     According to the plan's most recent annual report,
issued in July 1976, the employer's required contribution
was 11.1 percent of basic pay, based on assumptions of
4-percent future annual salary increases and a return on
investments at the rate of 5.5 percent. This contribution
when combined with the 7-percent employee contributions
covers the current normal cost, but not the costs of annuity
adjustments based on changes in the CPI. Under the system,
any annuity adjustments granted because of changes in the
CPI are to be funded immediately by the employer, thus call-
ing for lump sum payments in the amount determined by the
actuary. Based on the required normal cost contributions
and lump sum payments, the plan's actuary expressed the
opinion that funds on hand and those to be received will be
sufficient to provide benefits to all retired and active
members; in ether words, the system reports no unfunded
liability.

Federal judiciary retirement system
     Federal judiciary retirement benefits are financed from
funds appropriated for Federal judicial salaries. Because
the financing is pay-as-you-go, normal cost is not calculated
and the system is completely unfunded. No determination has
been made of the amount of the system's unfunded liability.
     The system also provides an elective survivor benefit
plan which, under Public Law 94-554 (90 Stat. 2611) of
October 19, 1976, is financed jointly by contributions of
4.5 percent of salary each by participants and the Govern-
ment. These contributions are made both before and after re-
tirement. The law also requires the Government to make a
direct appropriation to fund the plan's unfunded liability
as of January 1, 1977. At the time of our review, the amount
of appropriation needed to fund the liability had not been
determined. As of March 1, 1976, the unfunded liability of
the survivors plan was $8.5 million.
Tennessee Valley Authority retirement system

     The TVA retirement system is financed by employee and
employer contributions. The system provides retirement



                            12
  benefits composed of two amounts--an annuity,
  financed portion of the benefit, and a pension,the employee-
  financed portion. The standard employee            the employer-
                                           contribution
  6 percent of basic pay, but it may be adjusted            is
  the member's date of entry into the system.      depending   on
 are also covered under social security,        TVA   employees
 elect to reduce his contributions        and a memb(rr may
                                    to the TVA retirement sys-
 tem by 3 percent on that part of his salary
                                               not in excess
 of the social security base. In fiscal year
 ployees contributed $13.9 million to the       1976, TVA em-
                                           retirement system.
       TVA contributes the amoIut required to cover
                                                       the admin-
 istrative cost of operating the system and
                                              to provide all
 benefits other than those derived from members'
 The amount TVA contributes, determined by          contributions.
                                            an  annual
 valuation, consists of a normal cost contribution, actuarial
 bution to amortize any unfunded liability,             a contri-
                                             and a cost-of-
 living contribution. In fiscal year 1976
 $24.9 million.                             TVA contr buted

     Based on the most recent actuarial
system, prepared as of June 30, 1975, thevaluation of the
contribution rate is 10.01 percent of pay. current employer
sists of                                     This rate con-

     -- 6.81 percent of pay to cover the normal
                                                 cost,
     --. 25 percent of pay to fund fiscal year
        living increases, and                   1975 cost-of-

     -- 2.95 percent of pay to amortize the remaining
        liability.                                    unfunded

In computing normal cost, factors for prospective
creases were included. The system's unfunded      pay in-
estimated to be $85 million.                  liability was

FUNDING REQUIREMENTS IN
THE PRIVATE SECTOR

     While the Government has not adopted
practices or principles for financing and any uniform
                                          funding its own
retirement programs, it has imposed stringent
on pension plans in the private sector through requirements
the Employee Retirement Income Security Act     enactment of
(88 tat. 829). Although government plans     of 1974 (ERISA)
                                            are
from these requirements, the law does provide   exempted
sional committee studies of retirement plans for congres-
                                              estaolished
by Federal, State, and local governments.



                              13
     Generally, the minimum funding requirements for private
employer plans include:  (1) payment of normal cost and (2)
minimum amortization periods for funding unfunded liabilities
that

     -- arise initially upon establishment of a new plan (30
        years);
     -- exist as of January 1, 1976, for plans in operation
        (40 years);

     -- are created by plan amendments (30 years);

     -- arise from variations between assumed and actual plan
        experience (15 years); or
     --are created by a change in the plan's actuarial
       assumptions (30 years).
     ERISA does not specify the manner in which normal cost
and unfunded liabilities of the private plans are to be de-
termined. It does, however, require that the actuarial as-
sumptions used in making the determinations be reasonable.
Section 1013 of the statute states that

     "* * * all costs, liabilities, rates of interest,
     and other factors under the plan shall be deter-
     mined on the basis of actuarial assumptions and
     methods which, in the aggregate, are reasonable
     (taking into account the experience of the plan
     and reasonable expectations) and which, in com-
     bination, offer the actuary's best estimate of
     anticipated experience under the plan."
     Following the enactment of ERISA, the Committee on
Actuarial Principles and Practices in Connectiolt with Pension
Plans, a body of the American Academy of Actuaries, approved
draft recommendations for exposure to the membership of the
academy regarding compliance with the ERISA requirements. One
of the committee's recommendations would require that the
impact of future inflation on retirement costs be recognized
in each actuarial assumption affected.

CONCLUSIONS
     The Congress s not being provided realistic and consis-
tent informecion on he cost of Federal retirement programs;
this inhibits its ability to make sund fiscal and legislative




                            14
decisions on establishing, amending, or funding retirement
and agency programs.

     Funding of Federal retirement systems remains a serious,
growing problem that needs further attention. We believe
that retirement costs for all systems should be determined and
funded on a dynamic basis. The Congress, employees, and the
taxpayers should not be misled by unrealistic estimates of
retirement costs. When the full costs are not recognized,
there may be a tendency to adopt added benefits which could
jeopardize the eventual affordability of the retirement sys-
tems. Lack of full cost recognition also results in the
understatement of the cost of Government programs, including
subsidies to agencies whose operations are intended to be
self-supporting. (See ch. 3.)   Furthermore, without full
funding, the Government's retirement system liabilities are
not totally reflected in the public debt.
RECOMMENDATION TO THE CONGRESS

     We recommend that the Congress enact legislation requir-
ing all Federal retirement systems to be funded on a dynamic
normal cost basis and that the difference between dynamic
normal cost and employee contributions be charged to agency
operations.
AGENCY COMMENTS

     The Civil Service Commission generally agreed with our
conclusions and acknowledged that current financing measures
do not directly show the long-range cost of the civil service
retirement system or proposed amendments to the system. The
Commission agreed that the full long-term cost of the system
should be recognized and stated tha' it is currently studying
various possible approaches to introducing dynamic cost mea-
sures into the system's financing.
     The Federal Reserve Board indicated full agreement with
the report. The Board and the Tennessee Valley Authority
reiterated that their retirement system costs were already
calculated on a dynamic basis. The Department of Defense
did not comment on the report, and responses from the agen-
cies responsible for administering the other three systems
did not comment on the recommendation that costs for these
systems be calculated on a dynamic basis and charged to
agency operations,




                             15
                          CHAPTER 3
          UNDERSTATED CIVIL SERVICE RETIREMENT COSTS

               RESULT IN UNRECOGNIZED SUBSIDIES
     Because agencies are being charged only a portion of the
costs accruing to the Government for the civil service retire-
ment system, those agencies whose operations are intended to
be self-supporting are annually receiving large unrecognized
subsidies.

     Most agencies whose employees are covered by the civil
service retirement system are required to make a matching
contribution of 7 percent of pay to the retirement fund.
While this combined employer-employee contribution of 14 per-
cent of pay covers the static normal cost (13.64 percent)
of the ystem, it is less than half the cost of the system
when future pay increases and annuity adjustments are con-
sidered. Based on OMB's economic assumptions (see p. 4),
the system's dynamic normal cost is 31.7 percent of pay.
Using this cost factor as a guide, agencies' operating costs
are understated by approximately 17.7 percent of pay (31.7
minus 14).
SELECTED AGENCIES
RECEIVIN  SUBSIDIES
     Many Government agencies have been established to operate
on a self-supporting basis, and others that sell products or
services are expected to recover costs incurred. However,
because most of these agencies are charged only 7 percent
of payroll for civil service retirement contributions, their
oterations are, in effect, subsidized by an amount equal to
their share of unrecognized and unallocated retirement costs.
For example, the agencies listed below received subsidies of
approximately $41 million in 1976. These subsidies were
calculated using OMB's estimate of 24.7 percent as the
dynamic normal cost for the retirement system not covered
by employee contributions.




                             16
                      Estimated       Agency contri-
                    cost of accru-    bution to the    Estimated
   Agency            ing benefits    retirement fund    subsidy

                     --------------- (millions)---------------
Federal Home
  Loan Bank
  Board                $ 6.6              $ 1.9          $ 4.7
Export-Import
  Bank                   2.0                    .6         1.4
Federal Deposit
  Insurance
  Corporation           12.6                3.6            9.0
Panama Canal
  Company and
  Canal Zone
  Government            35.0                9.9           25.1
Farm Credit
  Administration         1.1                    .3          .8
    Total              $57.3              $16.3          $41.0
     Certain other self-supporting agencies--the Federal Na-
tional Mortgage Association and the various Farm credit banks--
are not requiredto match employees' contributions but must,
by law, contribute the difference between their employees'
contributions and the system's total normal cost. The ob-
vious purpose of this requirement was to charge these agen-
cies the total cost, less employee contributions, of providing
retirement benefits to their employees. In actual practice,
however, they are payinq far less than the full cost. In 1976
the agencies were required to pay only 6.77 percent of pay into
the retirement fund (imputed static normal cost estimate for
1976 less 7 percent employee contributions). Based on the
31.7 percent dynamic normal cost figure, we estimate they re-
ceived subsidies totaling approximately $2.2 million in 1976.

                      Estimated       Agency contri-
                    cost of accru-    bution to the    Estimated
   Agency            ing benefits    retirement fund    subsidy

                    --------------- (millions)---------------
Federal National
  Mortgage As-
  sociation              $1.3             $.3           $1.0
Farm credit banks         1.7              .5            1.2
     Total               $3.0             $.8             2.2


                                17
     As a further indication that the Congress intended these
agencies to be charged their share of all costs associated
with the retirement system, laws require that they pay a por-
tion of the cost of administering the system.

     In 1976 the two agencies paid administrative expenses
of $5.41 for each employee covered by the retirement system
at the end of the year. This amount was determined by
dividing the total administrative expense of the civil serv-
ice retirement system by the total number of active employ-
ees covered by the system at the end of 1976. Although a
relatively minor amount, this charge actually represents a
double payment by these agencies, because the Commission
includes a factor for administrative epenses in computing
normal cost. The administrative expenses paid by the Farm
credit banks go into te Treasury as miscellaneous receipts,
while the amount paid by the Federal National Mortgage As-
sociation goes into the civil service retirement fund.

Postal Service

     The United States Postal Service is required by law to
match its employees' contributions to the retirement fund
and to pay additional amounts to cover the retirement
liabilities associated with employee-management bargaining
agreements. The additional payments include, but are not
limited to, retirement liabilities resulting from negotiated
employee pay increases. If retirement costs were calculated
on a dynamic basis, total Postal Service and employee con-
tributions would be insufficient to cover the retirement
costs accruing each year.

     The Postal Reorganization Act (84 Stat. 719) of
August 12, 1970, created the Postal Service to be a self-
sustaining enterprise and authorized it to bargain collec-
tively with its employees. When initially enacted, however,
the act made no provision for funding the retirement liabili-
ties created by employee-management agreements.

     The Civil Service Commission requested appropriations
from the Congress for fiscal years 1972 and 1973 to cover
the annual installments necessary to amortize the Postal
Service's portion of the retirement system liability
caused by past pay raises. However, the Subcommittee on
Treasury--Postal Service--General Government, House Com-
mittee on Appropriations, denied the request because it
was not clear whether the liability was to be funded by
Government appropriations or by the Postal Service. Fol-
lowing this denial, the Comptroller General rendered a



                            18
decis 4 on to the subcommittee chairman expressing the
opinion that it was technically permissible to finance the
Postal Service's portion of the amortization payments out
of the General Fund of the Treasury.

      Reaiz'ing the substantial subsidy that would be going
to the Postal Service each year by not requiring it to fund
the retirement liabilities resulting from employee-management
agreements, the Congress passed Public Law 93-349 (88 Stat.
354) in July 1974, making the Postal Service liable for such
costs. However, the law did not require the Postal Service
to pay for cost-of-living adjustments received by its re-
tirees.

      The retirement liabilities resulting from employee-
management agreements are determined by the Civil Service
Commission and are payable by the Postal Service in 30 equal
annual installments, with interest computed at the rate used
in the most recent valuation of the retirement system. Al-
though the requirements of Public Law 93-349 were made retro-
active to July 1. 1971, the Postal Service was relieved of
payments due June 30, 1972, 1973, and 1974, attributable to
pay increases granted before July 1. 1973. The Congress ap-
propriated money for these payments to the Postal Service,
which in turn transferred the appropriation to the Civil
Service Retirement and Disability Fund. The Postal Service
was made responsible for making all amortization payments
beginning in 1975. The following table shows the annual
payments required to amortize the increases in the unfunded
liability resulting from negotiated pay increases, Postal
Service payments, and the Government appropriations neces-
sary to cover the amortization payments which the Postal
Service was not required to make.

        Annual payments required      Postal
        to amortize the increase     Service         Government
          in unfunded liability      payments      appropriations
                 ------------ (000   omitted)------------
1972            $ 62,991             $      -        $ 62,991
1973             104.985                              104,985
1974             174.185                  69,200      104,985
1975             207.441                 207,441         -
976              385,865                 385,865         -
     Of all the agencies participating in the civil service
retirement system, the Postal Service is the only one re-




                              19
quired to amortize the increases in the unfunded liability
resulting from employee pay raises and benefit improvements.
In 1976, the Postal Service paid about $1 billion to the
civil service retirement fund, including $614.5 million to
match employees' contributions and $385.9 million in amorti-
zation payments. However, if accruing costs were calculated
on a dynamic basis and the Postal Service was required to
pay all costs not covered by employees' contributions, the
Service's 1976 contribution would have been approximately
$2.2 billion--$1.2 billion more than the amount paid. Sub-
sidies will continue each year as long as the Postal Serv-
ice is not required to pay for cost-of-living adjustments
received by its retirees.

Tennessee Valley Authority
     Basically, TVA operates independently of appropriations.
Its power prograins--which accounted for about 96 percent
of its fiscal year 1975 program receipts--are completely
self-supporting. Its nonpower programs, with the exception
of its fertilizer program, depend primarily on appropriated
funds. The fertilizer program is supported 80 percent
through fees charged to users and 20 percent through appro-
priations.
     TVA had about 31,000 employees as of June 30, 1976, of
which 248 wer covered by the civil se.vice retirement sys-
tem.  (Employien entering TVA within 3 days after leaving a
position in which they were covered under the civil service
system are required to continue under civil service cover-
age.) Of the 248 employees, 121 are in the power program,
23 are in the fertilizer program, and the remaining 104 are
in programs primarily financed through Government appropria-
tions. The remainder of TVA's employees are covered by the
TVA retirement system and/or social security.

     TVA employees contributed $384,404 to the civil service
retirement fund in 1976P and TVA matched their contributions.
We estimate, using dynamic calculations, that TVA was under-
charged about $1 million in retirement system costs. Of
this amount, about $574,000 was applicable to programs not
dependent on appropriations.
District of Columbia

     Although the District of Columbia annually receives a
Federal payment, its main source of income is money col-
lected through local taxes. The District has about 58,000




                             20
 employees, of which approximately 31,000
                                          participate in the
 civil service retirement system.
      In 1976, District employees contributed
 lion to the civil service retirement         about $28.8 mil-
                                      system. and the District
 matched employees' contributions. Using
                                          dynamic costing, we
 estimate that in 1976 the District was
                                        subsidized
 $72 million through the retirement system.        more than

      This underallocation of civil service
                                                retirement costs
 to the District is in sharp contrast
                                       to
 the Federal Government finances benefits   the  manner in which
Park Police, Executive Protective Service,for the 1,500 U.S.
                                                and Secret Serv-
 ice Federal employees who participate
                                        in
Columbia's policemen and firemen retirement  the District of
system is financed essentially on a pay-as-you-gosystem. That
                                                       basis.
Employees covered by it are required
of their basic pay, which passes into  to  contribute 7 percent
the District of Columbia. The Federal   the   general revenue of
the District for all Federal annuitant    Government   reimburses
excess of the amounts contributed         benefit payments in
                                   to the District by active
Federal employees.

CONCLUSIONS
      Failure to recognize and allocate
civil service retirement system results the full cost of the
                                         not only in an under-
statement of the cost of Government operations,
                                                 but also in
subsidies to certain agencies and instrumentalities
                                                     whose
operations the Congress intended to be
understatement of operational costs and self-supporting. The
continue until the full dynamic normal the subsidies will
                                        cost of the system
is recognized and allocated to those
                                      agencies and instru-
mentalities whose employees are covered
                                         by the retirement
system.

AGENCY COMMENTS AND OUR EVALUATION

      Eight of the agencies identified in the
being wholly or partially self-supporting      report as
comments. They generally agreed that       provided    written
civil service retirement system was notthe  full  cost  of the
                                         being paid by agency
and employee contributions, and pointed
the users of their services would have out that charges to
higher retirement contributions were    to be increased if
                                      required. Some of the
agencies expressed concern that a retirement
reflecting Government-wide experience          cost factor
reflect their specific experience. Theymight  not  properly
                                          suggested that




                              21
separate actuarial valuations should be performed in de-
terminig their retirement contributions. One agency also
sugges,   :hat the retirement fund could receive a higher
rate of .turn if the law were changed to allow investments
in other than Federal Government securities.

     In our opinion, theze observations and suggestions
regarding cost calculations and investment policies may
be worthy of consideration in future refinements of the
system. However, they should have little bearing on the
need to fully recognize and allocate the accruing cost of
retirement benefits. To calculate costs by individual
agency, it would be necessary to assemble data on the
demographic characteristics of the personnel employed by
each agency in the system. We are unaware that any such
data is available, and even if it were there is no reason
to believe that the results would appreciably differ from
those achieved by using rGovernment-wide data.

     The Postal Service agreed in principle with the concept
of dynamic costing and also agreed that agencies should be
charged with all costs not covered by employee contributions.
It maintained, however, that the Postal Service should not be
required to pay the cost of its retirees' cost-of-living ad-
justments since they were authorized in law by the Congress
and were beyond the Postal Service's control. Similarly,
the District of Columbia questioned whether employee pay
raises and retiree -- ,t-of-living adjustments provided by
law should be ;-        in the contribution formula, because
agencies can d    tt     ~ influence the direction of costs
in these areas.

     We believe the lack of control by individual agencies
over the retirement system's provisions is a separate ssue
from cost recognition and allocation. All of the system's
provisions are established in law, and if agency control
were used as a criterion for determining retirement con-
tributions, most agencies would be required to make no
contribution to the retirement fund regardless of whether
costs were calculated on a static or dynamic basis.   It
is true that most agencies have no voice in determining
the amount of employee pay increases, and no agency has
any involvement in establishing retiree cost-of-living ad-
justments. Nevertheless, these factors have a direct ef-
fect on retirement system costs, and we continue to believe
that these costs should be recognized and allocated to
participating agencies.




                             22
                           CHAPTER 4
                INEQUITIES AND INCONSISTENCIES
                OF FEDERAL RETIREMENT PROGRAMS

      Different committees of the Congress have legislative
jurisdiction over various retirement systems, and
no overall Federal retirement policy to guide the there is
                                                   develop-
ment of Government retirement systems. In the absence
a coherent, coordinated Federal policy, the benefit     of
                                                     struc-
tures of Federal retirement programs have evolved
continue to develop on a piecemeal basis.          and
                                            Federal person-
nel may be treated quite differently depending upon
Government retirement system is applicable to their which
ment.                                                employ-

RETIREMENT ELIGIBILITY
     Age and service requirements that Federal employees
                                                           must
meet to become eligible for a retirement annuity vary.
systems have minimum age and service requirements,        Some
others have only a minimum service requirement.     while
                                                 Requirements
range from no age restriction and 20 years' service
70 and 10 years' service.                            to age

     In addition to optional and disability retirement,
systems provide for involuntary, deferred, and           some
                                               mandatory
tirements. The table on the following page summarizes     re-
                                                        the
general eligibility provisions for various types of
ment under each system.                             retire-

SERVICE CREDITS AND PORTABILITY

     Generally, an employee is permitted to transfer credit
from one Federal retirement system to another.  However,
several inconsistent practices exist.

     -- The military retirement system does not permit any
        credit for Federal civilian service. However, mili-
        tary service is generally creditable under Federal
        civilian retirement systems without ccntributions
        from the employee, with the following exceptions:
        (1) the TVA retirement system grants credit for
       military service only if it is performed between
        two contiguous periods of coverage under the TVA
        retirement system--the employee must make contribu-
        tions to cover such service; and (2) the Federal




                             23
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                                                                                                                                               24~~~~~~~~~~~ld
  judiciary and U.S. Tax Court judges retirement.sys-
  tems do not permit retirement credit for other Fed-
  eral civilian or military service; however. such
  service is creditable in computing survivorship
  benefits.
-- Employees entering the service of the Board of
   Governors of the Federal Reserve System on or after
   January 1, 1944, are covered by the Federal Reserve
   Board retirement system unless they are members of
   the civil service system. However, a member who has
   had prior service with a Federal Reserve bank is
   permitted to withdraw his contributions from the
   civil service retirement system and become a member
   of the Federal Reserve Board retirement system.

-- Employees covered by the civil service retirement
   system at the time of their transfer to TVA are re-
   quired to continue participating in the civil service
   retirement system, provided the break in service is
   3 days or less. If the break is of more than 3 days.
   employees under the civil service retirement system
   transferring into TVA must join the TVA retirement
   system. These employees do not receive TVA retire-
  ment credit for civil service employment. However,
   an employee transferring from TVA to a position
   under the civil service retirement system receives
   credit for his TVA service provided he makes contri-
   butions to cover those years of service.

-- Employees under the Foreign Service retirement
   system who perform duty at certain designated "un-
   healthful posts" may receive 1.5 years of retirement
   credit for each year of service at such posts unless
   the employee elects to receive the differential pay-
   able for that post of assignment. Employees under
   the civil service retirement system working at the
   same posts receive no extra retirement credit. They
   do. however, draw the differential payable for that
   post of assignment.

-- Military service generally may not be used to earn
   retirement credit under both the uniformed service
   retirement system and a civilian retirement system.
   However, military reservists who receive credit for
   any active military service in their annuity calcula-
   tions are given credit for that same service toward
   annuities under civilian systems.




                        25
     -- An employee in the civil service retirement
                                                     system
        who is appointed as a U.S. Tax Court judge has
                                                        the
        option of remaining in the civil service retirement
        system and crediting his service as a judge to
        system, or he may withdraw his contributions    that
        the civil service retirement                  from
                                      system and e covered
        under the U.S. Tax Court judges retirement system.
        This decision, once miade, is irrevocable.
     -- Under the military retirement system, service
        credited on a yearly basis. That is, for any is
                                                       service
        of 6 months or more up to a year, 1 year's service
        credited toward retirement. In contrast, the         is
        service retirement system credits service on   civil
                                                      a monthly
        basis but does not give credit for periods of
        than 1 month.                                  less

BENEFIT FORMULAS

     The general benefit formula used to determine
of a retiring employee's annuity (pension) varies the amount
to system and within the civil service system.     from system
                                                There
ferent formulas for specific groups of employees.       are dif-
formulas for each system are shown below.           The  general

Civil service:
    General formula        1.5 percent for each of the first
                           5 years of service, plus 1.75 per-
                           cent for each of the next 5 years,
                           plus 2 percent for each year there-
                           after, multiplied by the employee's
                           average salary for the 3 consecutive
                           highest pay years ("high-3").  The
                           maximum annuity is 80 percent of
                           high-3 plus any additional percent
                           produced by crediting unused sick
                           leave.
   Members of Congress     2.5 percent of high-3 for each year
     and congressional     of service. The maximum annuity for
     employees             retired Members of Congress is 80
                           percent of final salary. For con-
                           gressional employees, the maximum
                           is 80 percent of high-3.
   Air traffic             General benefit formula and maximum
     controllers           but no less than 50 percent of
                           high-3.



                            26
    Law enforcement        2.5 percent of high-3 for each of
      and firefighter      the first 20 years, and 2 percent
      personnel            for each year thereafter.  The
                           maximum annuity is the same as
                           under the general formula.

    Foreign Service        2 percent of high-3 for each year
                           of service, with a maximum of 70
                           percent of high-3 plus the percent
                           due to unused sick leave.

    Uniformed services     2.5 percent of basic pay 1/ being
                           received at the time of retirement
                           for each year of service. with a
                           maximum of 75 percent.

    Federal judiciary      Members retiring receive the cur-
                           rent slary of their office.   Mem-
                           bers resigning receive the salary
                           earned at the time of resignation.

    U.S. Tax Court         Current salary of former position
      judges               multiplied by the ratio of years
                           of service to 10 years.  The bene-
                           fit may not exceed the current
                           salary of the former position.

    TVA                    1.3 percent of high-3 multiplied by
                           years of service, with credit for
                           unused sick leave; reduced by the
                           social security offset plus annuity
                           based on actuarial equivalent of
                           member's contributions.  There is
                           no maximum on benefit amounts.

    Federal Reserve        Same as civil service general
      Board                formula.

     The differences are illustrated in the following table,
which shows the benef t under each system for an employee who



1/Does not include nontaxable subsistence and quarters allow-
  ances ad the tax advantage thereon, which when added to
  basic pay represents Regular Military Cmpensation, con-
  sidered to be the equivalent of a civilian employee's salary.




                             27
retires with 30 years' service and meets the minimum age re-
quirement. The benefits range from 56.25 percent of high-3
average salary up to the full salary of the position.

          System                         Benefit
Civil service:
    Regular employee           56.25 percent of high-3
    Congressional employee     75          " "     "
    Member of Congress         75       "
    Law enforcement and
      firefighter personnel    70          "
Foreign Service                60          "

Uniformed services (note a)    75   percent of final basic pay
Federal judiciary             100   percent of the salary of
                                      the office
U.S. Tax Court judges         100

Federal Reserve Board          56.25 percent of high-3
TVA (note a)                                   (b)

a/Also covered under social security.
b/Varies depending on the actuarial value of the employee's
  contributions.
SURVIVOR BENEFITS

     While all Federal retirement systems provide for some
form of survivor benefits, there is a wide variation in the
benefits, the time required for vesting, and in the amount
employees must contribute for those benefits. A few of these
differences are as follows:

     -- In the TVA system, survivorship rights for new em-
        ployees begin immediately, while the civil service
        system requires 18 months' service and the military
        system requires 20 years.

     --The minimum annuity for he surviving spouse of a
       participant who dies in service ranges from a lump
       sum payment made up of the employer's and employee's
       contributions with interest, to an annuity amounting
       to 55 percent of the deceased employee's earned
       annuity.

                              28
     -- The U.S. Tax Court judges system and the Federal
        judiciary system require a 3- and 4.5-percent ccntri-
        bution. respectively, from the member both before
        and after retirement in order to provide a survivor
        benefit. Other systems use a formula to reduce
        the annuity of a retired employee who elected survi-
        vorship coverage.
     -- While most systems provide for the adjustment of
        survivor benefits in line with increases in the CPI,
        the Federal judiciary system djusts such benefits
        on the basis of active judges' pay increase percent-
        ages, and the Tax Court judges system has no provi-
        sion for adjusting survivor benefits.
     The survivorship provisions under each system   e out-
lined in appendix II.
REEMPLOYED ANNUITANTS

     Federal retirees reemployed by the Government are treated
quite differently under the various retirement systems. The
differences vary from a reduction in salary or annuity to a
suspension of annuity to no reduction in either salary or
annuity. Examples of some of these differences are discussed
below.

      1. When a civil service retiree whose retirement was
voluntary is reemployed by the Federal Government, his
annuity continues but his salary is reduced by the amount of
his annuity. However, Federal employees who retire under
the District of Columbia's policemen and firemen retirement
system (see p. 21), whether retired optionally or for dis-
ability, may be reemployed in a position covered by the
civil service retirement system without a reduction in either
salary or annuity. For example, recently a former Federal
employee who retired under the policemen and firemen system
was reemployed in a position covered under the civil service
system and is receiving a full salary of $43,923 and full
annuity of about $18,000 a year. In contrast, the salary of
a civil service retiree who is reemployed in a position
covered by the District's system would be reduced by the
amount of his civil service annuity.

     2. An annuitant under the Foreign Service system who
is recalled to duty in the Foreign Service receives the full
salary of the position in which he is serving, but his
annuity is suspended. If a Foreign Service annuitant is
reemployed in another Federal agency, he receives the full



                             29
salary of his new position plus a portion of his annuity
which when combined with his salary does not exceed in any
one year the salary he was receiving on the date of his re-
tirement from the oreign Service.
     3. A retired regular military officer who is reemployed
in a civilian position of the Federal Government receives a
portion of his military retirement plus the full salary of
his position. The retiree receives the first $4,045 of his
military retirement plus one-half of any remainder. The
amount of $4,045 became effective with the March 1, 1977,
adjustment of 4.8 percent and will increase in direct pro-
portion to each cost-of-living adjustment granted to all
retirees. Retired enlisted personnel and retired reserve
officers continue to receive their full military retirement
plus the full salary of their new position when reemployed
in a civilian capacity.

     The Civil Service Commission reported that as of
June 30, 1975, approximately 142,000 uniformed services
retirees were employed in the Federal civilian service,
including 111,793 retired enlisted personnel and 27,662 re-
tired officers of whom 2,641 retired as colonels or above.
Of the former officers. 5,164 retired as regulars and
22,518 as nonregulars. The majority (66 percent) of the
total reemployed uniformed services retirees had Federal
civilian salaries of $10,000 to $18,000, as shown in the
following table.
          Civilian               Reemployed retirees
           salary            Number    Percent of total

    Under $6,000              1,505           1.06
    $ 6,000 to $ 9,999       24,648          17.38
    $10,000 to $17,999       93,309          65.79
    $18,000 to $28,999       19,225          13.56
    $29,000 to $35,999        2.154           1.52
    $36,000 and over            796            .56
    Unspecified                 180            .13
        Total               141,817         100.00

Approximately 8,000 retirees, or about 5 percent. were under
age 40, while slightly more than 9,000, or about 6 percent,
were 60 and over. Forty-six percent were between 40 and 50,
and 41 percent were between the ages of 50 and 60. The
average uniformed services retirement benefit being received
was $9.701 for officers and $5,147 for enlisted personnel.



                              30
     4. Federal judges and justices are entitled to receive
their full salary in addition to any annuity they may have
earned under the civil service retirement system.

     5. Retirees under the civil service retirement system
who become Tax Court judges may remain in the civil service
system and receive no benefits under the Tax Court system.
If they elect to be covered by the Tax Court system, they
must waive their rights to future civil service retirement
benefits. The law makes no provision regarding retirees
from other Government retirement systems who may become
Tax Court judges.

      6. Annuitants under the TVA retirement system can be
reemployed by TVA with no reduction in salary or annuity,
provided their reemployment is for a predetermined period
of not more than 6 months; if more than 6 months, retire-
merit benefits are discontinued. TVA retirees who are hired
by other Federal agencies are not subject to reduction in
pay or annuity. However, the salaries of retirees from
the civil service retirement system who are reemployed by
TVA are reduced by the amount of their annuity. Retired
regular military officers while reemployed by TVA forfeit
a portion of their retired pay, as under the civil service
retirement system, while enlisted personnel and reserve
officers continue to receive their full retired pay and
salary.

DISABILITY RETIREMENT

     Each of the systems discussed in this report provides
some form of benefits to employees who become disabled be-
fore retirement.

    -- Definitions of disability: under the various retire-
       ment systems these definitions range from totally
       disabled or incapacitated for useful and efficient
       service to the inability to perform efficiently in
       the specific position occupied.
    -- Periods of coverage: all systems provide life-long
       benefits to individuals who remain disabled, al-
       though some impose earnings restrictions.
    --Benefit levels: benefits are computed on various
      bases such as salary at time of retirement, pay for
      the 3 highest paid years. or percentage of disability.




                            31
    -- Establishment of disability: some programs require
       documentary evidence and medical examinations by
       designated physicians, and some allow the employee
       to provide his personal physician's report. However,
       some programs require only that the employee certify
       his own disability.

     The disability provisions for each system are contained
in appendix III.

SOCIAL SECURITY COVERAGE
FOR FEDERAL EMPLOYEES

     As a general rule, Federal civilian employees are not
covered by the social security program. As such. they are
the only major group of employees in the United States who
cannot participate in the program. However, active and re-
serve military personnel and most employees of TVA are
covered by social security in addition to their Government
retirement systems. Military retirement benefits are paid
in addition to social security; benefits paid to survivors
of retired military personnel and to TVA retirees are re-
duced by partial social security offsets.
CONCLUSIONS

     Many inconsistences and inequities exist among Federal
retirement systems. While there may be legitimate reasons
for providing particular benefits to certain types of em-
ployees, many of the differing benefit provisions are with-
out apparent explanation. We believe that many of the dif-
ferences are caused by the lack of an overall policy to
guide the development and improvement of Federal retirement
systems. The fact that different committees of the Congress
have legislative jurisdiction over each of the systems has
probably contributed to the situation.
RECOMMENDATION TO THE CONGRESS

     We recommend that the Congress establish an overall
Federal retirement policy to guide retirement system develop-
ment. Centralization of committee jurisdiction over all Fed-
eral employee retirement systems would facilitate the estaD-
lishment and implementation of such a policy.

AGENCY COMMENTS AND OUR EVALUATION
     The Department of Defense did not respond to our re-
quest for comments, and most of the agencies responsible
for administering the six other retirement systems discussed



                                 32
in this report made no specific comments on whether the many
different provisions and practices followed by the various
systems were justified.

     The Civil Service Commission stated that it believed
some of the differences were reasonable and suggested that
any action by the Congress to establish an overall retire-
ment policy and centralize committee jurisdiction should
keep in mind the need for some differences in the systems.

     The Administrative Office of the U.S. Courts questioned
the propriety of considering the Federal judiciary retirement
system in the same context as other retirement systems be-
cause "retired" judges continue to perform substantial judi-
cial duties. Likewise, the U.S. Tax Court believed there
must be a distinct retirement system for Federal judges and
maintained that Tax Court judges should continue to receive
retirement benefits comparable to the Federal judiciary.
The Tax Court stated that its system's provision of paying
full salary after retirement is needed to attract qualified
persons to hold judicial positions and to induce retired
judges to carry a substantial caseload.

     We are not suggesting in this report that there is no
justification for providing differing retirement benefits
to certain groups of employees when necessary. A determina-
tion of whether differences are justified could be made only
after careful and thorough study of the provisions of each
system, identifying and evaluating the reasons for the dif-
ferences, and ascertaining whether they serve legitimate pur-
poses.  In fact, as discussed on page 1. we are currently
performing such a review at the request of three House com-
mittee and subcommittee chairmen.  It remains our opinion
at this time, however, that many of the differing policies
and pra tices of the various systems in areas such as dis-
ability and survivor benefits, service credits and portabil-
ity, reemployment of annuitants, and employee contribution
rates are without apparent explanation and demonstrate the
need for an overall Federal retirement policy.




                             33
  APPENDIX I                                                                                       APPENDIX I




                                                    FINANCING PROVISIONS
      Retirement            Employee            Agency                Other Government            Investment
         ystem            contribution       contribution               contributions               Pollcy
 Civil service        7 percent of base     Matches employee        Direct appropriations      Required to invest in
                      pay (note a)          contribution            for (1) interest on        U.S. Treasury obliga-
                                                                    the unfunded liability.    tions
                                                                     (2) the cost of credit-
                                                                     ing military service.
                                                                    and (3) amortization of
                                                                    certain increases in
                                                                    the unfunded liability
                                                                    over 30 years
 Foreign Service      7 percent of base    Matches employee         Same as civil service.     Same as civil service
                      pay                  contribution             plus an additional
                                                                    amount to fund the
                                                                    difference between
                                                                    normal cost and agency
                                                                    and employee contribu-
                                                                    tions
 Uniformed services          None          Amount needed to                None                        (c)
   (note b)                                pay benefits
 U.S. Tax Court:
     Judges                  None          Amount needed to                None                        (c)
                                           pay benefits
      Survivors       3 percent of pay     Estimate of appro-              None                Required to invest in
                      both before and      priations necessary                                 U.S. Treasury obliga-
                      after retirement     for maintenance and                                 tions and Federal farm
                                           operation of fund                                   loan bonds
                                           submitted annually
                                           to OMB
Federal judiciary:
    Judges                   None          Amount needed to                None                        (c)
                                           pay benefits
      Survivors       4.5 percent of pay   Matches employee                None (note d)       U.S. Treasury obliga-
                      both before and      contribution                                        tions and Federal farm
                      after retirement                                                         loan bonds
Federal Reserve       7 percent of base    Difference between              None                U.S. Treasury obliga-
  Board               pay                  employee contribu-                                  tions and private
                                           tions and normal                                    sector investments
                                           cost (note e)
TVA                   6 percent (note f)   Difference between              None                U.S. Treasury oblige-
                                           employee contribu-                                  tions and private
                                           tions and normal cost                               sector investments
                                            (note e) plus annual
                                           amount necessary to
                                           amortize the unfunded
                                           liability and annuity
                                           cost-of-living adjust-
                                           ments
a/Members of Congress contribute   percent of their pay. Congressional employees and certain law
  enforcement and firefighter personnel contribute 7.5 percent of their pay.
b/Also covered under social security. which currently requires employees and employers to contribute
  5.85 percent of the first $16,500.
c/Not applicable.
d/Public Law 94-554. approved Oct. 19. 1976. authorized a lump sum payment to fund the unfunded
  liability as of Jan. 1, 1977.
e/A factor for future general pay increases is   included in the normal cost calculation.
f/Employees may choose to reduce their contributions by 3 percent on that part of their salary not in
  excess of the social security base (currently $16,500).




                                                       34
 APPENDIX II
                                                   APPENDIX II
                         SURVIVOR BENEFITS
 CIVIL SERVICE RETIREMENT SYSTEM

 Survivors of deceased employe
                                 s

      Eligibility--18 months' service.

      Spouse's benefit--55 percent of the deceased
        earned annuity.                            employee's

         The law guarantees a minimum annuity equal
         cent of the smaller of (a) 40 percent of an to 55 per-
         high-3 or (b) the regular annuity obtained employee's
         creasing the deceased employee's service by after in-
         of time between is date of death and the     the period
                                                    date he
         would have reached age 60.
     Children's benefit, amount per child--

         (i)   If survived by a widow(er), lesser of

               (a) 60 percent of high-3 average salary divided
                   by the number of children,
               (b) $4,860 divided by the number of children,
                                                             or
               (c) $1,620.
         (ii) If no widow(er), lesser of

               (a) 75 percent of hign-3 average salary divided
                   by the number of children,
               (b) $5,832 divided by number of children, or

               (c) $1,944.
Survivors of deceased annuitants

     Eligibility--spouse receives an annuity if
                                                annuitant
         accepts a reduced annuity at retirement. Reduction
         is 2.5 percent of the amount, up to $3,600,
         retiree specifies as a base for the survivor the
                                                       benefit,
         plus 10 percent of any amount over $3,600
         fied. Eligible children receive an annuityso  speci-
                                                      in any
         event after death of annuitant.
    Spouse's benefit--55 percent of all or whatever
        of the retiree's annuity that the retiree   portion
        as a base for the survivor benefit.       specifies



                              35
APPENDIX II                                      APPENDIX II


     Children's benefit--same as for children of a deceased
         employee.

     Other beneficiary--an unmarried annuitant in good
         health mey accept a reduced annuity and designate
         an individual with an insurable interest to re-
         ceive a benefit of 55 percent of the reduced amount.
         The annuity is reduced by 10 percent, and by an
         additional 5 percent for each full 5 years younger
         the beneficiary is than the retiring employee.
         The total reduction cannot exceed 40 percent.

FOREIGN SERVICE RETIREMENT SYSTEM

     With enactment of Public Law 94-350 on October 1, 1976,
survivor benefits under the Foreign Service system are sub-
stantially the same as those of the civil service system.

UNIFORMED SERVICES RETIREMENT SYSTEM

     Eligibility--20 years of service; if a member's death
         results from the performance of active duty or a
         service-connected disability, survivor benefits
         are payable from the Veterans Administration
         regardless f the member's length of service.

     Benefit--the benefits received under the Survivor
         Benefit Plan and the reduction in the retired pay of
         the member to provide these benefits are essentially
         the same as under the civil service retirement system
         except for the following:

        -- The ::u.vivur benefits are reduced by any Veterans
           Administration dependency and indemnity compensa-
           tion payments and social security survivor benefits
           attr ibutabl]e t military service.

        -- The rduction in retired pay to provide a survivor
           annuity that flows to the spouse until he or she
           becomi'p ineligible (death or remarriage before
           age 60) and then to the children is the same as
           for the spouse   plus an actuarial charge.  The
           charge depends on the age of the member, the
           spouse, and the youngest child.

        --The reduction in retired pay to provide an annuity
          for children only is based on an actuarial charge
          that depends on the age of the member and the
          youngest child.



                             36
 APPENDIX II
                                                   APPENDIX II

 FEDERAL JUDICIARY RETIREMENT SYSTEM

      Eligibility--18 months of creditable service
          contributions have been made.             for   which
          elective and those who choose toParticipation
                                            participate
                                                          is
                                                          must
          contribute 4.5 percent of salary both
          after retirement.                      before   and

     Spouse's benefit--1.25 percent of the participant's
         high-3 average salary multiplied by the
         of judicial service, military service, total years
                                                 service as
         a Member of Congress, and other Government
         service not exceeding 15 years, plus .75    employee
                                                   percent of
         high-3 multiplied by any remaining years
         The annuity cannot exceed 40 percent of of service.
                                                  high-3.
     Children's benefit, annual amount per child--

         (i)   If survived by a widow(er), lesser of

               (a) $1,548 or
               (b) $4,644 divided by the number of children.
         (ii) If no widow(er), lesser of

               (a) 100 percent of the annuity to which
                                                       a
                   surviving spouse would have been entitled,
                   ('.vtied by the number of children;

               (b) $1,860; or
              (c) $5,580 divided by the number of children.
U.S. TAX COURT JUDGES RETIREMENT SYSTEM

    Eligibility--5 years of creditable service
                                               for which
        contributions have been made. Participation
        elective, and those who choose to participate is
        must contribute 3 percent of salary both
                                                 before
        and after retirement.
    Surviving widow's benefit with no dependent
                                                 child--upon
        reaching age 50, the widow receives an
                                                annuity equal
        to the sum of (1) 1.25 percent of the participant's
        average annual salary for the 5 consecutive
                                                     highest
        paid years of service ("high-5") multiplied
                                                     by
        sum of his years of judicial service, military the




                                37
APPENDIX II                                        APPENDIX II


         service, service as a Member of Congress, and congres-
         sional employee service not exceeding 15 years. and
         (2) .75 percent of the high-5 multiplied by all other
         creditable service. The annuity cannot exceed 37.5
         percent of high-5.

     Surviving widow's benefit with a dependent child or
         children--an immediate annuity as determined above.

     Children's benefit, annual amount per child--

         (i)   If survived by a widow, lesser of

               (a) 50 percent of the amount of the widow's
                   annuity,

               (b) $900 divided by the number of children, or

               (c) $360.
         (ii) If no widow(er), lesser of

               (a) the amount of the annuity to which a
                   widow(er) would have been entitled or

               (b) $480.
     The survivor benefits under the U.S. Tax Court judges
and Federal judiciary systems were substantially identical
before the enactment of Public Law 94-554 (90 Stat. 2603) in
October 1976 which made major improvements in the Federal
judiciary system. Legislation was introduced in the 94th
Congress to make similar changes to the U.S. Tax C-urt
judges system. The Tax Court plans t have the sam, bill
reintroduced in the 95th Congress.

FEDERAL RESERVE BOARD RETIREMENT SYSTEM
     The survivor benefits and the amount the employee must
pay for these benefits are the same as under the civil serv-
ice retirement system.
TVA RETIREMENT SYSTEM

     Eligibility--surviorship rights begin accruing im-
         mediately.
     Benefit--if death ccur, before retirement, a benefit
         is payable to the dsignated beneficiary. This


                              38
APPENDIX II                                       APPENDIX II

         benefit may be in the form of (1) a lump sum pay-
         ment consisting of the employee's contributions,
         with full credited interest, plus (from TVA) a per-
         cent of final salary which is based on length of
         service including credit for unused sick leave; or
         (2) a life annuity which must be actuarially equiva-
         lent to the lump sum credit.
     There are several options available to the employee upon
retirement to provide a survivor benefit to a designated bene-
ficiary. These options, each of which is the actuarial
equivalent of the maximum benefit, are as follows:

     1. The retiring employee accepts a reduced benefit
with the insurance that at death the designated beneficiary
will receive the balance left from the employee's contribu-
tions with interest at retirement after deducting the benefit
payments the employee has received from his contributions.

     2. The retiring employee accepts a reduced benefit
and the designated beneficiary will continue to receive the
same benefit at the death of the retired employee. The
amount of the reduction depends on the assumed life of the
retiring employee and his designated beneficiary.

     3. The retiring employee accepts a reduced benefit with
one-half of the reduced amount continuing to the surviving
beneficiary. The reduction of course would be smaller than
under option 2.

      4. This option offers the retiring employee more
flexibility than the other options. The retiring employee
may specify the amount of the survivor benefit; however, the
total value of the employee's reduced benefit plus the survi-
vor benefit must be actuarially equivalent to the employee's
earned benefit without reduction. Settlements under this
option are subje:t to approval by the retirement system
board.




                             39
APPENDIX III                                      APPENDIX III


                    DISABILITY RETIREMENT

CIVIL SERVICE RETIREMENT SYSTEM

     Basic eligibility--5 years' creditable service.

     Definition of disability--inability to perform useful
         and efficient service in the specific position
         occupied at the time application for retirement is
         made.

     Establishment of disability--application by the employee
         or employing agency accompanied by a statement from
         the employee's superior officer showing how the em-
         ployee's condition affects job performance and a
         report from the employee's doctor fully describing
         the disability. The Civil Service Commission may
         also require the employee to undergo an additional
         medical examination by an approved physician.  The
         employee's disability is rated either temporary or
         permanent.

     Periodic reexamination--for temporary disabilities, the
Commission reviews the case annually until the retiree reaches
age 60 or is reclassified permanently disabled.

     Payments for partial disability--none.

     Length of coverage--until death, medical recovery, or
         restored earning capacity before reaching age 60.
         If the retiree recovers, payment of the annuity
         countinues for 1 year.  Earning capacity is deemed
         restored if in each of 2 succeeding calendar years
         the annuitant's income equals at least 80 percent
         of the current rate of pay of the postition oc-
         cupied immediately before retirement. However, the
         annuity is restored if the earnings fall below
         80 percent in a later calendar year.

     Computation of annuity--the larger of amounts derived
         from the general formula or the guaranteed minimum.

               (1) General formula--larger of the following two
                   amounts:

                   (a) 1.5 percent of the hig  3 average pay for
                       each of the first 5 years of creditable
                       service, plus 1.75 percent for each of
                       the second 5 years of service, plus 2 per-
                       cent for each year over 10 years; or


                               40
APPENDIX III                                       APPENDIX III

               (b) substitute 1 percent of the high-3 average
                   pay plus 25 for any or all of the percent-
                   ages in (a) where it will yield a larger
                   amount, mutiplied by the years of service
                   as shown in (a).

        (2) Guaranteed minimum--the lesser of the following two
            amounts:
               (a) 40 percent of the high-3 average pay or
               (b) the amount obtained under the general formula
                   after increasing the employee's actual credit-
                   able service by the time remaining between
                   the date of separation and the date he at-
                   tains age 60.
FOREIGN SERVICE RETIREMENT AND DISABILITY SYSTEM

    Basic eligibility--5 years' c.ditable service.

    Definition of disability--totally disabled or incapacitated
        for useful and efficient service by reason of disease.
        illness, or injury not due to vicious habits, intem-
        perance, or willful misconduct on employee's part.
    Establishment of disability--application by employee ac-
        companied by a description of the disability and a
        full explanation of the manner in which it affects
        the performance of duties; must inform immediate
        supervisor of application for disability retirement
        and undergo meccal examination. Disability is
        determined by tile Secretary of State, or his dsig-
        nated representative, on the basis of advice pro-
        iided by one or more duly qualified physicians or
        surgeons designated to conduct examinations. The
        employee's disability is rated either temporary or
        permanent.
    Periodic reexamination--unless the disability is rated
        permanent at the time of retirement or at a later
        date, examinations by duly qualified physicians or
        surgeons designated by the Secretary are made
        annually until annuitants reach the mandatory re-
        tirement age for their class in the service.

    Payments for partial disability--none.
    Length of coverage--remainder of lifetime unless annui-
        tant recovers to the extent that he can return to


                               41
APPENDIX III                                     APPENDIX III


         duty.  If the retiree recovers, payment of the
         annuity continues 6 months after the date of examina-
         tion.

     Computation of annuity--2 percent of average basic salary
         for the high-3 consecutive years, times years of
         service not exceeding 35.  The average high-3 years do
         not have to be consecutive for a Chief of Mission
         whose service in that capacity was interrupted.   For
         retirees with less than 20 years' service, the annuity
         is computed as though the employee has 20 years' serv-
         ice; but the additional service credit may not exceed
         the difference between the employee's age at time of
         retirement and the mandatory retirement age.

UNIFORMED SERVICES RETIREMENT SYSTEM

     Basic eligibility--20 years' service, or at least 30-
         percent disability and (1) 8 years' service, (2) dis-
         ability being the proximate result of performing
         active duty, or (3) disability being incurred in
         line of duty during war or national emergency.

    Definition of disability--unfit to perform the duties
        of office, grade, rank, or rating because of a
        physical disability which did not result from the
        member's intentional misconduct or willful neglect
        and was not incurred during a period of unauthorized
        absence.

    Establishment of disability--report to sick bay and
        request physical evaluation board's ruling on
        physical fitness to maintain duties in the military.
        Physical evaluation board makes decision on dis-
        ability on the basis of medical advice from military
        doctors.  The disability is rated either temporary
        or permanent.

    Periodic reexamination--if the disability is temporary,
        the retiree must undergo a physical examination at
        least every 18 months.  If the disability still
        exists after 5 years, it   is considered permanent.

    Payments for partial disability--yes.  If member has less
        than 20 years' service, disability must be at least
        30 percent.




                            42
APPENDIX III                                      APPLNDIX III

     Length of coverage--remainder of lifetime unless retiree
         recovers from disability or falls to report to an
         examination without just cause.

     Computation of retired pay--monthly basic pay on day
         before retirement multiplied by either (1) 2.5 per-
         cent times years of service or (2) the percentage
         of disability. The retired pay cannot exceed
         75 percent of the monthly basic pay. Those tem-
         porarily disabled receive at least 50 percent of
         the monthly basic pay.
FEDERAL JUDICIARY   ETIREMENT SYSTEM
     Basic eligibility--judges and justices of the United
         States: appointment to position of judge or justice
         of the United States. Judges of the District Court
         of Guam, Canal Zone, and the Virgin Islands:  10
         years' creditable service.
     Definition of disability--unable to discharge all duties
         efficiently because of permanent mental or physical
         disability.
     Establishment of disability--written certification to the
         President signed by the chief official of the court.
         The President may retire any judge or justice whom he
         finds to be mentally or physically incapable of dis-
         charging all the duties of his office.
     Periodic reexaminatlon--none.

     Payments for partial disability--no provisions.

     Length of coverage--remainder of lifetime.

     Computation of annuity--justices and judges of the
         United States:  if 10 years' service, the salary
         of the office; if less than 10 years' service,
         one-half the salary of the office. Judges of the
         District ourt of the Canal Zone, Guam, and the
         Virgin Islands: if 16 years' service, salary of
         the office at the time of relinquishment; if
         10-15 years' service, salary times years of
         service, divided by 16.
U.S. TAX COURT JUDGES RETIREMENT SYSTEM

     Basic eligibility--appointment to a U.S. Tax Court
         judge position.


                              43
APPENDIX III                                    APPENDIX III


     Definition of disability--unable to discharge efficiently
         all the duties of the office by reason of permanent
         mental or physical disability.
     Establishment of disability--written certification to the
         President. The President must concur with the Chief
         Judge's disability retirement. The Chief Judge must
         sign any other judge's disability certification.
         The President shall declare any judge retired if he
         finds the judge to be permanently disabled from per-
         forming duties.
     Periodic reexamination--none.

     Payments for partial disability--none.
     Length of coverage--same as Federal judiciary.

     Computation of annuity--if 10 or more years' judicial
         service, 100 percent of the salary payable to a judge;
         if less than 10 years' judicial service, 50 percent
         of the salary payable to a judge.
TVA RETIREMENT SYSTEM

     Basic eligibility--5 years' creditable service.

     Definition of disability--inability to continue in
         present position because of a physical or mental
         disability that is likely to be permanent and a
         lack of another available TVA position for which
         the employee is qualified. The determination
         must be made by the TVA Retirement System Board
         of Directors on the basis of a report either by
         the medical board (three physicians independent
         of TVA) or by the director of the TVA division of
         medical services and information from the TVA
         employment branch.
     Establishment of disability--application by TVA or
         by employee, who authorizes the retirement system
         to obtain reports from his personal physician(s),
         the TVA physician, his supervisor, and the TVA
         division of personnel. The completed file is
         then reviewed by the Director of the TVA division
         of medical services and, if appropriate, by the
         medical board, and approved by the TVA retirement
         system board of directors.




                             44
APPENDIX III                                      APPENDIX III

     Periodic reexaminations--as may be determined by the
         board of directors.
     Payments for partial disability--none.

     Length of overage--until death, reemployment in a
         position covered by TVA retirement system, or until
         earnings plus regular disability benefit exceed
         his prior position's salary, which initiates a
         reduction. Obligated upon request by the directors
         to file, within 30 days, a proper application for
         social security disability insurance benefits or,
         at age 65, a social security old-age benefit; if he
         does not, the TVA disability pension may be dis-
         continued.
     Computation of disability retired pay--disability benefit
         consists of two parts:

               (1) An annuity--the actuarial equivalent of the
                   employee's accumulated contributions.

               (2) A pension from TVA's contributions to the
                   system. The pension is equal to 1.1 percent
                   of the member's average compensation for each
                   year of creditable service. However, an
                   alternative formula is used if this results
                   in less than a 30-percent pension. Under
                   the alternative formula a 30-percent minimum
                   is provided, except for older employees with
                   short service.
     If the member becomes entitled to social security dis-
         ability insurance or old-age benefits, the TVA pen-
         sion is subject to reduction.
FEDERAL RESERVE BOARD RETIREMENT SYSTEM

    Basic eligibility--5 years' creditable civilian service.

    Definition of disability--inability to perform useful
        and efficient service in specific position occupied
        at the time application for retirement is made.
    Establishment of disability--application accompanied
        by a report from member's personal physician fully
        describing the disability. A medical examination
        is also made by a physician designated by the em-
        ployer. Decision of disability is made by the



                              45
APPENDIX III                                      APPENDIX III


         medical board, based on the examination reports of
         the physicians. The disability is rated temporary
         or permanent.

     Periodic reexamination--if the disability is rated
         temporary or subject to improvement, a reexamination
         is required annually until retiree reaches age 60.
     Payments for partial disability--none.

     Length of coverage--same as civil service.

     Computation of annuity--same as civil service.




                             46
APPENDIX IV                                                          APPENDIX IV




                   UNITED STATES CIVIL SERVICE COMMISSION                ILV P"Wmno
                               WASHINGTON, D.C. 20415


                                 MAY 1 0 1977

       Mr. H. L. Kreiger
       Director
       Federal Personnel and Compensation Division
       U. S. General Accounting Office
       Washington, D.C. 20548




       Dear Mr. Kreiger:

       This i in response to your request for comments on the GAO draft report
       "Federal Retirement Systems: Unrecognized Cost, Inadequate Funding, and
       inconsistent Benefits".

       Cost of Retirement Programs:   Understated and Underfunded

       This section of your report summarizes the financing of the Civil Service
       Retirement (CSR) system, and six other Federal systems. The current
       funding provisions of the CSR system were included in Public Law 91-93
       passed in 1969.

       Funding before 1969 was on a sporadic basis with the government contri-
       bution limited to 6.f5 of payroll in the 1960s. Projections made then
       showed that the fund would be depleted if strong funding measures were
       not enacted. The law went a long way toward providing stable financing.
       Recently, however, there has been concern that the current funding is
       not adequate.

       We have undertaken an extensive study of the financing of the CSR system
       and have found that current law financing is adequate to assure continuation
       of the fund in the foreseeable future under any reasonable economic
       assumptions. As you point out, current financing measures do not directly
       show the long range cost of the CSR system or proposed amendments. Since
       the CSR fund is part of the total Federal budget there may be no real way
       to charge higher costs to current taxpayers and a change in the law to
       reflect dynamic costs may have little real effect. We do believe, however,
       that it is necessary to at least publicize the true long term cost of the
       system and alternatives whether or not the law is changed.




           THE MERIT SYSTEM-A GOOD INVESTMENT IN GOOD GOVERNMENT




                                         47
APPENDIX IV                                                            APPENDIX IV




     Understated Civil Service Retirement costs results in hidden subsidies

     Except for the Postal Service, agency contributions are limited to 7%
     of payroll. The Postal Service is also required to pay the cost of
     retirement liabilities resulting from their union negotiations. All
     of the rest of the government contributions are paid from general
     revenues. This section of your report concludes that the full dynamic
     normal cost in excess of the employee contribution should be charged to
     the agencies.

     As administrators of the CSR system our primary concern is that adequate
     allowance be made for financing the benefits. Allocation of the govern-
     ment cost among various sources is primarily a consideration and decision
     for other agencies and the Congress. We note that the Office of Management
     and Budget has already suggested use of the dynamic normal cost, less the
     employee contribution, in comparing the cost of doing business between
     government sources and outside contracts. OMB has also stated that the
     balance of the dynamic cost should be charged to agencies beginning in
     1979. These positions appear to be consistent with your conclusion.

     Inequities and Inconsistencies of Federal Retirement Programs

     As the report notes, there are many differences among the various
     Federal Retirement systems. Some of these differences are reasonable.
     For instance, a typical military career is much different than a typical
     civil service career and the retirement eligibility provisions need to
     reflect this. Other major differences are attributable to the fact that
     participants in some of the systems are covered by Social Security while
     participants in others are not.

     Your recommendation is that Congress establish overall policy on retire-
     ment systems and centralize committee jurisdiction. If this does happen,
     the committee(s) involved should keep in mind the need for some differences
     in the systems.



     We agree generally with the conclusions of your report. Our staff work
     on financing and advice received from consultants, however, indicate
     that there are other possible approaches to introducing dynamic cost
     measures into the financing of the CSR system. Our study is very near
     completion and should be available in the not too distant future. Your
     report, our study, and other comments should provide a good basis for
     Congressional consideration of CSR financing this year.
                                              Sincerely yours,



                                              Thomas A. Tinsley
                                              Director
                                              Bureau of Retirement, Insurance,
                                                and Occupational Health




                                         48
APPENDIX V                                                               APPENDIX V




                         DEPARTMENT OF STATE
                               W$%hinltto, ,    C   520



                                                    April 28, 1977



      Mr. J. . Fasick
      Director
      International Division
      U.S. General Accounting Office
      Washington, D. C. 20548
      Dear Mr. Fasick:
      I am replying to your letter of April 6, 1977, which
      forwarded copies of the draft report: "Federal Retire-
      ment Systems: Unrecognized Cost, Inadequate Funding, and
      Inconsistent Benefits."
      The enclosed comments were prepared by the Deputy Assistant
      Secretary for Personnel.
      We appreciate having had the opportunity to review and
      comment on the draft repcrt.  If I may be of further
      assistance, I trust you will let me know.

                                         Sincerely,


                                                Db4L±     i11mmon, Jr.
                                         Deputy Assistant Secretary
                                         for Budget and Finance
      Enclosure:   As stated




                                               49
APPENDIX V                                                       APPENDIX V




                                                April 27, 1977


              GAO DRAFT REPORT: "FEDERAL RETIREMENT SYSTEMS:
                Unrecognized Cost, Inadequate Funding, and
                  Inconsistent Benefits"




              Thank you for the opportunity to review your
              draft report on the costs, benefits and funding of
              the Federal retirement systems.
              In the course of our review we discovered a few
              minor technical errors. Corrections and/or clari-
              fications have been made on pages 14, 31 and 32
              and they are attached for your information.




                                    Arthur I. Wortzel
                                    Deputy Assistant Secretary
                                    for Personnel


              Attachments:
              Pages 14, 31 and
              32 of draft report




GAO notes: 1.      Appropriate technical changes were made to the
                   report as suggested.

             2.    Page references in appendixes V through XVI
                   refer to the draft report and may not correspond
                   to pages in this final report.




                                      50
 APPENDIX VI                                                          APPENDIX VI




                                 UNITED STATES TAX COURT
                                        WASHINGTON


      cour zcamUnvm                                  April 27, 1977




                Mr. Victor L. Lowe
                Director, General Government Division
                General Accounting Office Building
                Room 3866
                441 'G' Street, N. W.
                Washington, DC 20548
                Dear Mr. Lowe:
                     Enclosed are the U. S. Tax Court's com-
                ments on your draft report on the costs, bne-
                fits, and funding of Federal retirement systems.

                     Enclosure (1) contains general remarks
                justifying the need for a distinct retirement
                system for Federal judges.
                     Enclosure (2) consists of commnents on
                specific references made in your report con-
                cerning the Tax Court judges' retirement and
                survivor benefit systems.

                                           Sincerely yours,



                                                       CREWE
                                           Court Executive

                Enclosures




GAO note:    Enclosure 2 to this letter contained suggested
             technical changes to the report which have been
             made.
APPENDIX VI
                                                              APPENDIX VI



                                                       Enclosure (1)



                       NEED FOR DISTINCT RETIREMENT
                         SYSTEM FOR FEDERAL JUDGES

              J..ihough there may be reasons for re-evaluating
       inconsistencies among many of                            the
                                        the Federal
       tems, it should be recognized that there retirement sys-
       tinct retirement system maintained for       must be a dis-
                                                 Federal judges.
            The judges who serve on courts created
                                                    under Article
       III of the Constitution have the constitutional
       remain in office for life. The initial            right to
      created for Federal judges applied only retirement system
                                                to the judges
       serving on Article III courts, and it is
      that such retirement system permitted such not surprising
      tinue to receive the pay of the office       judges to con-
                                              after they retired.
      Since such judges could remain in office
      wished, it is clear that if they had been as long as they
                                                  compelled to
      accept any substantial reduction in compensation
      result of retirement, many of them would            as a
                                                 not have elected
      to retire. Although the Tax Court is created
      cle I, not Article III, of the Constitution, under Arti-
      decided in 1969 that the judges                the Congress
                                       of this Court should be
      treated in the same manner as those judges
      Article III courts, and for that reason,     serving on
      provide a retirement plan for Tax Court it decided to
                                               judges which is
      substantially identical to the plan available
      III judges.                                     to Article

            There are two additional reasons for providing
       ferent retirement plans for Federal judges:           dif-
                                                      In designing
      most retirement plans, it is assumed, or
                                                 hoped, that em-
      ployees will commence working for the employer
      age and remain with the employer throughout       at a young
       lifetime. Employees who do remain with       their working
      such a substantial period are provided the employer for
                                              substantial retire-
      ment benefits. However, no similar period
      be expected of a Federal judge. Unlike       of service can
      a person is not suitable to be selected other employees,
                                               as a judge until
      he has acquired extensive experience and
      narily, a person chosen as a judge has    maturity. Ordi-
      the zenith of his professional career. already reached
                                               In the case of
      the Tax Court, most judges are in their
      appointed to the court. A person who has 40's  or 50's when
      such an age cannot be expected to serve     already reached
      15, or 20 years, and if a retirement planfor more than 10,
      service than that to qualify for significantrequires more
      simply will not help judges and will not       benefits, it
      ting the most qualified persons to hold assist in attrac-
                                               judicial positions.




                                 52
APPENDIX VI                                               APPENDIX VI




          The other reason for a different retirement plan for
     judges involves the nature and the extent of the judicial
     work. In all courts, including the Tax Court, the volume
     of judicial work has increased spectacularly in recent
     years. The number of cases commenced each year and the
     total number of cases pending before the court are both
     at all-time highs. The size of the Tax Court has not been
     increased since 1926, and it is hoped thatsuch size will
     not have to be increased. One significant method of coping
     with this increased workload is to call upon the retired
     judges tor continued judicial services.
          Since the judicial work involves mental efforts and
     calls for the exercise of judgment, mature persons can
     often continue to perform the work beyond the ages vwhen
     they might have to discontinue other types of work. Thus,
     retired judges are often capable of continuing to carry
     a substantial caseload, and by doing so, they can assist
     materially in the performance of the court's work. To
     provide a sufficient inducement for the retired judges to
     work, to the extent they are capable of doing so, it is
     appropriate and sound to continue to pay them the salary
     of the office.




                                  53
APPENDIX VII                                                       APPENDIX VII




                                BOARD OF GOVERNORS

         ofts               7 EDERAL RESERVF. SYSTEM
                                  WAAHINGTON, 0. C. 205B I


                                    May 20, 1977




      Mr. H. L. Krieger, Director
       Federal Personnel and Compensation Division
      U.S. General Accounting Office
      Washington, D. C. 20548
       Dear Mr. Krieger:
                 As requested in your letter of April 4, 1977, members of
      the Board's staff have reviewed your proposed report to the Congress
      on the costs, benefits, and funding of Federal retirement systems.
      Messrs. Peter Lynn and Bud Santee met on May 17 with Mr. C. W. Wood,
      Assistant Director of Personnel for the Board, and Mr. Merritt Sherman,
      former Secretary of the Board and presently Consultant on benefits
      matters.

                 I regret that we were not able to send you our comments
      by April 29, but your original letter apparently failed to reach the
      Board's offices, and it was not until May 10 that a duplicate with a
      copy of the draft report came into my hands.
                 The reaction of our staff to your draft report is that its
      main thrust is very good and long overdue. A realistic valuation of
      the true costs and liabilities of a benefits program is a basic
      essential to a sound financing program. In our opinion, it is
      important to consider both present and prospective benefit levels
      and their costs, and out of such study to develop a funding program
      adequate to meet current and future liabilities. We are glad to
      know that serious reviews along these lines regarding all Federal
      retirement programs are currently underway, and we hope they will be
      pursued to a logical conclusion.
                 Insofar as the report refers to the Federal Reserve Board
      Plan, Messrs. Wood and Sherman gave your representatives a few suggestions
      which we understand will be taken into account in preparation of your
      fina'. port. A copy of the suggested changes in the text of page 16
      of your draft is enclosed for your convenient reference. You will note
      that : this revision we have suggested the use of 1976 cost data, which




GAG note:       The suggested technical changes were made to the
                report.




                                        54
APPENDIX VII                                                         APPENDIX VII




     indicate realistically the current normal funding costs of the Board
     Plan on a dynamic basis, including terminal funding of the 5.4 per cent
     cost of living supplement granted rtirees and beneficiaries effective
     March 1, 1976. (As your draft report indicates, the Board Plan benefits
     are essentially the same as those of the Civil Service Retirement System
     except for one or two relatively minor     ferences, and the contribution
     rate of the Board's roloyees isthe same as that for employees who
     are members of the Cv:l Service retirement fund)
                You may also wish to consider adding a footnote to Appendix I
     (pages 41 and 42 inour copy) which now describes Board contributions
     as the "difference between emplyee contributions and normal cost."
     The Board Plan normal cost has always included an economic assumption
     for a career salary progression rate, the level of that allowance for
     future cost increases being about 1-1/2 or 2 percentage points lower
     than the assumed rate of interest on invested reserves.
                We appreciate having had an opportunity to review your draft
     report and will be glad to receive several copies of the completed
     document when it isavailable.
                                      Sincerely yours,



                                    Theodore E.Allison
                                   Secretary of the Board
      Enclosure




                                         55
APPENDIX VIII                                                         APPENDIX VIII




                        ADMINISTRATIVE OFFICE OF THE
                           UNITED STATES COURTS
                                SUPREME   COURT BUILDING
                                   WASHINGTON. D.C. 20544
 ROWLAND F. KIRKS
      o RCTOR

 WILLIAM E. FOLEY
    DEFU, DIfCTOR                      May 10, 1977



    Mr. Victor L. Lowe
    Director, General Government
      Division
    General Accounting Office
    Washington, D.C.   20548

    Dear Mr. Lowe:

         Rcference is made to your letter of April 4, 1977, with which you enclosed
    copies of your proposed draft report to the Congress on the costs,
                                                                       benefits and
    funding of Federal retirement systems.

         I question the propriety of including in such a study :. compensation
    payable to a Federal justice or judge who takes senior status in accordance
    with the provisions of sections 371 and 372 of Title 28 of the United
                                                                           States
    Code. These sections provide that any justice or judge of the United
    appointed to hold office during good behavior, may retain his office States,
                                                                          but "retire"
    from regular active service. Under Article III of the Constitution,
                                                                          such
    justices and judges are appointed for life during good behavior and
    cannot be diminished. A justice or judge who "retires" from regular their salary
    service under subsections 371(b) or 372(a) may continue to perform    active
                                                                        such judicial
   duties as he is willing and able to undertake under the provisions of
                                                                           section
   294 of Title 28 of the United States Code.   Therefore, a justice or judge does
   nnt "retire" as that term would be applied to other civilian officers
                                                                           or
   employees of the Federal Government. Actually, they continue to
                                                                     perform sub-
   stantial judicial services. It has been possible to meet the heavy
                                                                         caseload
   of the courts by the willingness of such senior justices or judges
                                                                        to continue
   to perform judicial duties. At this time, our records show that more
                                                                           than 90
   percent of the judges who have "retired" are performing substantial
                                                                         services
   and accordingly are provided office space and staff. They may not engage
   the practice of law and are subject to the same restrictions as any active in
   Judge. It is therefore apparent that senior ustices or Judges should
                                                                            not be
   compared with other civilian officers and employoes of the Federal Government
   who are completely separated from their position upon retirement.
                                                                       The compen-
   sation paid to senior justices or judges is not a "pension"; it is subject
                                                                                to
   the same payroll deductions chat were made from their salary as an "active
   justice or judge."

        It should be stressed that any proposed legislation could be in conflict
   with Article III of the Constitution. This matter has not been referred
                                                                              to the
   Judicial Conference of the United States but I am certain there will
                                                                         be con-
   side-able opposition to any changes. I would like to transmit your
                                                                        final




                                              56
 APPENDIX VIII                                                          APPENbIX viII



     report to te members of the Judicial Conference for consideration
     event you liclude the senior Justices or judges in your           in the
                                                             study
           I have no problem with your references to the Judicial
     Annuity System but the Judicial Conference of the United      Survivors'
     previousl) pproved the rtention of the administration States has
                                                               of that system
     by this office. On page 17 of the report, you speak of
     liability of ths Judicial Survivors' Annuity System.      the unfunded
     (Public Law 94-554, approved October 19, 1976) providesRecent  legislation
                                                               for direct
     appropriation to the Judicial Survivors' Annuities Fund
     unfunded liability as of January 1, 1977. In connection to cover the
     I am enclosing corrected page 42 (Appendix                 with this system,
     changes in the system hat were made by ioblic1)Lawn view of the recent
                                                         94-554.
          With kind regards, I am

                                                Since;:ly yours,



                                                Rowland F. Klrk
                                                    Dirr,ctor
    Enclosure




GAO note:       Tile suggested technical change was made to the
                report.




                                          57
APPENDIX IX                                                        APPENDIX IX




                          TENNESSEE VALLEY AUTHORITY
                              KNOXVILLE. TENNESSEE 37902

                                       MaY l 2, 1977




              Mr. H. L. Krieger, Director
              Federal Personnel and Compensation Division
              United States General Accounting Office
              441 G Street, NW
              Washington, D.C. 20548

              Dear Mr. Krieger:

              In response to your request of April 29, our comments
              on your draft report on the costs benefits and funding
              of Federal retirement systems are enclosed.

              We appreciate bing given the opportunity to express
              our views. If we may be of further assistance,
              please let us know.

                                               Very truly yours,



                                               Lynn Seeber
                                               General Manager


              Enclosure




GAO note:     The enclosure was a copy of our draft report with
              suggested wording changes.  Appropriate changes
              were made.




                                     58
APPENDIX X                                                                       APPENDIX X




                                                            320 Flit 91iot N.W
                                                            Wll.hltglon. D C. 20582

                                                            FidMial   ome Loin   nk Sytem
                                                                          Loan Moroag CoIIn
    Federal Home Loan Bank Board                                ,.
                                                              WI..i
                                                            FIK41l $1vlnl nd Ln       InsurneL Copoflion


                                       April 29, 1977




           Mr. H.L. rieger, Dlirector
           Federal Personnel nd
             Cowpensation Division
           United States General Accounting Office
           Washington, D.C. 20548

           Dear ir. Krieger:
           Chairman narton asked that I respond to your April 4, 1977 letter
           concerning the dreft of a proposed report on Federal Retirement
           Systems. ·
           We have no problem with the two recoemendations contained on pags
           40.
           Our major concern is that if any changes are made in the required
           funding of the retirement system there must be appropriate changes
           to our Congressional and OM limitations to allow us to fund the
           change.
                                        Very truly yours,


                                                3. Wolpert Director
                                               'rt
                                        Accounting & Fiscal Operations

           cct Chairman Marston




                                         59
APPENDIX XI                                                                   APPENDIX XI




 OFFICE   OF   THE
                  F
                  DI CONTROLLER
                                    FEOERAL DEPOSIT INSURANCE CORPORATION,   Whington.   D.C.
                                                                                            20429




                                                            May 6, 1977



  Mr. H. L. Krieger, Director
  Federal Personnel and Compensation
   Division
  General Accounting Office
  Washington, DC 20548

  Dear Mr.     Krieger:

  This is in response to your letter of April 4, 1977, with which you enclosed copies
  of your proposed report to the Congress on the costs, benefits, and funding of
  Federal retirement systems.

  We found your report interesting and, particularly, examined Chapter 3.       This was
  natural in light of the fact t at the Corporation is and wishes to be ubstantially
  self-supporting.    It contributes to the retirement system, as to any other employee
  benefit program, i the amounts which have been stated to be its obligation.      If it is
  receiving large hidden subsidies, therefore, it is not because o' necessity or desire
  on the part of the Corporation.

  To say this, however, does not mean that the Corporation is searching out ways to
 add to its annual expenditures.   Your draft report suggests OMB has recently
  recognized that the cost of the Civil Service Retirement Syster.l should be determined
 on a "dynamic" rather than "static" basis.     Further, using economic assumptions
 derivrd from past pay and cost-of-living increase experience, OMB estimated the
 "dyramic" normal cost of the system to be 31.7 percent of pay. Thereafter, in
 October 1976, OMB issued a memorandum instructing Federal agencies to use a
 factor of 24. 7 percent of base pay (31.7 percent less 7 percent employee contribu-
 tions) when preparing cost analyses.    The Corporation did not receive this memoran-
 dum and, as a self-supporting agency, would probably not be preparing such analyses.

 From this background, your report concludes that the FDIC may have received an
 estimated subsidy of $9 million in 1976. This presumably represents the difference
 in computing contributions on a "static" versus "dynamic" basis.

 Whether these estimates and arithmetic are valid is perhaps merely something to be
 proved out in due course. From the point of view of the Corporation, our conceptual
 position is that we want to pay our way wherever appropriate. If the Congress accepts
 the recommendation that the cost of Federal retirement systems be computed on a
 "dynamic" basis and the difference between currently accruing costs and employee




                                            60
APPENDIX XI
                                                                          APENDIX XI




  contributions be charged to agency operations,
 the additional everal million dollars annually then we are quite willing to earmark
                                                  which might be required, In fact,
  it may be that the burgeoning costs of Federal
 L pported by recomputations on a "dynamic" retirement systems can only be
 at all anxious to increase our expenditures    basis, On the other hand, we are not
                                              merely because OMB has "estimated"
 the costs on a "dynamic" basslr and GAO
                                           has
 expenditure to be charged to the Corporation "estimated" the consequent increased
                                                e account.
 If w can be shown it is the sense of the
                                          Congress, therefore, to use the "dynamic"
 cost basis and if reasonably provable arithmetic
 contributions flows therefrom, we are              as to the amount of increased FDIC
                                         entirely able and willing to pay our proper
 share.

                                         Sincerely,



                                         Edward F. Phelps,    r.    j\
                                         Controller




                                         61
APPENDIX XII                                                                   APPENDIX XII



                         CANAL ZON3 OOVMRNMZNT


    6'!                      MAUIOA

                           0,PO   5r]c
                                         UOUTS, ONAL S01U

                                      or Ts     GOVURNOR


                                                                 APR z 51977



  Mr. H. L. Krieger
  Director
  Federal Personnel and Compensatils        Division
  U.S. General Accounting Office
  Washington, D.C. 20548

  Dear Mr. Krieger:

       This is in reply to your letter of April 4, 1977, to Mr. Thomas
  Constant, requesting comments on the draft report entitled, "Federal
  Retirement System: Unrecognized Cost, Inadequate Funding, and
  Inconsistent Benefits."

       The Panama Canal Company and the Canal Zone Government, commonly
  referred to as the Panama Canal enterprise, are separate and distinct
  Government entities. As prescribed by law (two Canal Zone Code sections,
  62 and 412), the Panama Canal Company is designed to be self-sustaining.
  The Company finances its operations with revenue from its transit tolls
  and support services.   The Canal Zone Government, on the other hand,
  receives annual appropriations to finance its operations.   These
  appropriations are returned to the U.S. Treasury through recovery of
  charges for services rendered by the government and payments by the
  Company for the net cost of the Canal Zone Government, i.e., operating
  costs in excess of recoveries.

       With the above financing of the entities in mind, the following
  comments are made concerning the draft report. Your recoendation on
  page 21 to require . . . "the cost of Federal retirement systems to be
  computed on a dynamic basis and the difference between currently
  accruing cost and employee contributions be charged to agency operations",
  if adopted, would have a significant impact on the rates for services,
  including tolls for ue of the Panama Canal. The rates of tolls were
  increased an average of 19.7% in 1974, and 19.5% in 1976. In all
  probability, a similar increase in rates would be needed if additional
  retirement costs are rquired to be charged to the operations of the
  Panama Canal Company and the Canal Zone Government.

       We appreciate the opportunity to comment on the draft report.

                                              Sincerely yours,



                                         Richard L. Hunt
                                Acting Governor of the Canal Zone
                              Vice President, Panama Canal Company
   Enclosure




                                                 62
APPENDIX XIII                                                               APPENDIX XIII




                               40 L'ENFANT PLAZA, 8.W. WASHINGTON, D.C. 20576


     May 4, 1977



     Mr. Hnry Eschwege, Director
     Community and Economic Development Division
     General Accounting Office
     Washington, D.C. 20548

     Dear Mr.   Eschwege:

    We have reviewed the draft of your proposed report on Federal retirement
    systems.  We believe that the report is based on fact and that the
    conclusions are essentially sound. We re in full agreement with the
    concept of dynamic funding and believe that Feoe-al retirement systems
    should operate on funding principles similar to those in the private
    sector under the requirements of the Employee Reti-ement Income Security
    Act. We have the following comments regarding those sections of the
    report which relate to coverage of Farm Credit Administration and Farm
    Credit System employees under the Civil Service Retirement System:

                1.   Your report accurately points out that our operations
                     are established on a self-supporting basis with expenses
                     assessed against the banks of the Farm Credit System,
                     rather than from tax revenues. Because of the static
                     basis used to compute the normal costs of the Civil
                     Service Retirement System, the report estimates that
                     the agency received a subsidy of $800,000 in 1976.
                     This figure represents the difference between what is
                     actually paid into the fund and the estimated normal
                     cost calculated on a dynamic basis. However, when the
                     normal costs of the Civil Service Retirement System
                     are computed on a static basis as is currently the
                     case, there is no subsidy at all. We do not think that
                     a handful of agencies should be singled out for
                     special treatment merely because they were intended
                     to be self-supporting. The emplcees of Farm Credit
                     Administration are competitively appointed from Civil
                     Service registers and have the same pay and benefits
                     as other employees el the Federal Government. We




                                             63
APPENDIX XIII                                                          APPENDIX XIII




            believe it would be a gross inequity to calculate normal
            costs on a dynamic basis for Farm Credit Administration
            employees and on a static basis 'or other agencies.

       2.   As the report points out, the Farm Credit Banks are
            required by law to contribute the difference between
            their employees' contributions and the Civil Service
            Retirement System's normal cost as determined by the
            Civil Service Commission. What we stated above also
            applies to the Farm Credit Banks; there is no subsidy
            when normal costs are computed on a static basis and
            a dynamic calculation should be used uniformly or not
            at all. Additionally, we must point out that the number
            of bank employees covered by Civil Service Retirement
            is steadily declining. From approximately 1600 covered
            employees in 1959, the number has shrunk to approximately
            270 emplo)ees today and will probably disappear within
            20 years. This means that the liability for these employees
            and retired annuitants of the banks will continue to
            increase and that receipts for covered bank employees
            will continue to decrease. The significance of this
            "subsidy" will continue to decline as more of the bank
            employees reach retirement age.

      3.    Finally, we believe that the assets of the Civil Service
            Retirement fund should not be limited by law to invest-
            ment in Federal Government securities. During the 1976
            calendar year, long-term Treasury bonds ranged in price
            between 6.38 percent and 7.01 percent, and long-term new
            corporate bonds ranged between 7.90 percent and 9.00 percent.
            During this same period, intermediate securities of the
            Farm Cedit System ranged from 7.10 to 7.45 percent, and
            long-term Farm Credit System securities ranged from 7.85
            to 7.95 percent.  When these rates are compared to the
            5.75 percent rate paid on the Civil Service Retirement
            fund in 1976, we question if the fund is subsidizing the
            Federal Government with a cheap source of funds. We
            believe that if the Tennessee Valley Authority and Federal
            Reserve Board can diversify the investment of their
            retirement funds, the Civil Service Retirement fund should
            be allowed to do likewise. Health and life insurance
            benefits are handled by private carriers; perhaps a




                                        64
APPENDIX XIII                                                        APPENDIX XIII




                  consortium of private insurance companies and banks could
                  act as trustee for a portion of the fund assets. As
                  a minimum, the investment policy should be liberalizsed
                  to permit investment in agency securities such as those
                  issued by the Farm Credit Banks.
     In summary, while we agree with most of the conclusions of your draft
     report, we oppose using a dynamic basis for estimating normal costs for
     Farm Credit Administration and bank employees, while a static basis is
     used for all other agencies. We also believe that consideration should be
     given to diversification of the Civil Service Retirement fund assets.
     We appreciate the opportunity to comment on your draft and hope that
     these comments will be useful.
     Sincerely,




     Governor




                                        65
APPENUIX XIV                                                                                                     APPENDIX XIV




  FEDERAL NATIONAL MORTGAGE ASSOCIATION

  F. C GOSLING
  VICI PMIN4,*l FO A   )IN1ITUTIO#




                                                                April 29, 1977




  Mr. Henry Eschwege
  Director, Community and Economic
   Development Division
  U. S. General Accounting Office
  Washington, DC   20548
  Dear Mr. Eschwege:

  We appreciate the opportunity to comment on your proposed
  report, "Federal Retirement Systems: Unrecognized Cost,
  Inadequate Funding and Inconsistent Benefits." Our partial
  participation in the Civil Service Retirement System is with
  definite restrictions, and our contributions to the Civil
  Service Retirement and Disability Fund are as set forth in
  Section 309(d)(2) of the Federal National Mortgage Association
  Charter Act (12 U.S.C. 1723a(d)(2)). There are now only 215
  of our 1260 employees who are subject to this provision.
  FNMA's own retirement plan supplements the regular social
  security coverage for the majority (1045) of our employees.
  We believe that your review is substantive and timely, but
  do not agree with the conclusions set forth in the proposed
  report. The concept of "dynamic cost" and the OMB estimate
   (emphasis added) is apparently based on federal agency
  experience, which should not include FNMA. The report
  incorrectly assumes that FNMA employees' wages are affected
  by or included in the General Schedule. However, since
  December 1, 1968, administrative adjustments for the GS
  schedules have increased 66% whereas FNMA adjustments have
  totalled 46%. This 43% difference would represent a potentially
  significant reduction in any actuarial computation of retirement
  liability. The OMB directed that the "dynamic" normal cost
  be used for cost accounting purposes under OMB Circular
  A076.1. It does not necessarily follow that the same calculation
  should be used in funding a retirement system. Cost accounting




                         1133 FIFTEINTH   STREET, N W   ·   WASHINOTON.   D   C   20005   ·   (202)   2S3-605O




                                                                66
APPENDIX XIV                                               APPENDIX XIV




     for determlning whether or not agency functions should be
     contracted out is not the same as determining how many
     actual dollars should be contributed to a retirement fund,
     and there is no reason why they should be treated alike.
     The dynamic cost figure of 31.7%, which apparently did not
     come from any independent actuarial study by GAO, should not
     be applied to all agencies and all retirement systems.
    We were pleased to be able to review your draft report and
    thank you for considering our comments. We would appreciate
    your sending us a copy of the final report you will submit
    to Congress.

                                       Sincerely,



                                       67




                                 67
APPENDIX XV                                                APPENDIX XV




                            THE POSTMASTER GENERAL
                                  Wahlngqon, DC 2020


                              June 3, 1977


         The Honorable Elmer B. Staats
         Comptroller General of the
           United States
         Room 7000
         441 G. Street, N.W.
         Washington, D.C. 20548
         Dear Elmer:
         Thank you for the opportunity to comment on the General
         Accounting Office's (GAO) proposed report to the Congress
         on Federal Retirement Systems.
         Perhaps more than any other agency, the Postal Service is
         aware that funding retirement benefits is an expensive under-
         taking. As pointed out in your report, we are presently the
         only agency that is required to amortize the increases in the
         unfunded liability resulting from pay increases. We believe
         our retirement financing procedures are more prudent than the
         financing procedures followed generally. We feel very strongly
         that our financing procedures are indeed proper.
        Since our total payments to the retirement system were just
        over $1 billion in Fiscal Year 1976, and we employ approxi-
        mately 25 percent of all persons covered by the Civil Service
        retirement system, we are necessarily concerned about the
        impact of any changes to the existing retirement ystem.
        Moreover, since Postal Reorganization, we have paid approxi-
        mately $6 billion into the retirement fund. During that same
        period, retired postal employees have received approximately
        $3 billion in benefits.
        Since P.L. 93-349 was enacted in July 1974, the Postal Service
        has been regularly paying into the Civil Service Retirement
        a.d Disability Fund substant:-l amounts over and above the 14
        percent so-called static normal cost of the retirement system
        required to be paid by other agencies and their employees.
        The law makes the Postal Service liable for additional amounts
        sufficient to discharge any unfunded liability attributable to




                                  68
APPENDIX XV                                                 APPENDIX XV




    actions of the Postal Service in increasing, either through
    collective bargaining or by administrative action, the pay
    of postal employees on which benefits are computed.
   It is quite clear from P.L. 93-349 itself, as well as from
   the legislative history, that the Postal Service was not to
   be made liable for any unfunded liability not caused by the
   Postal Service. As the Senate Committee on Post Office -and
   Civil Service stated in its report n the bill that was subse-
   quently enacted into law: "The Postal Service, however, would
   not be held responsible for unfunded liabilities which might
   be created by an Act of Congress". S. Rep. No. 93-947, 93d
   Cong., 2d Sess. 3 (1974).   In the House report there is the
   following unequivocal statement: "The purpose of this legisla-
   tion is to clearly establish the responsibility of th U. S.
   Postal Service to finance the increases in tne unfunded liability
   of the Civil Service Retirement and Disability fund, caused by
   administrative action of the Postal Service, as apart frol,
   increases in unfunded liabilities which are incurred by Act of
   Congress".  H.    Rep. No. 93-120, 93d Cong., 1st Sess. 2 (1973)
   (Emphasis added.)
   Even though the Congress clearly and unmistakably limited the
   Postal Service's unfunded liability to that caused by the
   Service through pay increases, and even though Congress speci-
   fically recognized the fact that there is other unfunded
   liability caused by acts of Congress, which Congress would
   fund, the GAO draft report characterizes this liability as an
   "unrecogrized subsidy" to the Postal Service.
   This characterization is not really apposite. The unfunded
   liability, which GAO recommends we fund, is caused largely by
   cost-of-living increases granted to annuitants pursuant to a
   statutory formula enacted by Congress. It discharges no legal
   obligation of the Postal Service under existing law.
   We fully agree with the principle now embodied in the law tat
   postal ratepayers should be responsible for all unfunded
   liability costs attributable to the actions of the Postal
   Service.
   The Postal Service agrees in principle with the concept of
   using "dynamic" procedures in determining the amount of con-
   tributions it should make to the retirement fund. However, the
   latest draft of a Civil Service interagency task force report
   indicates that, under a dynamic funding approach, substantial




                                 69
APPENDIX XV
                                                                APPENDIX XV




    overfunding could be possible. Also, the
    to compute dynamic costs, particularly       assumptions used
    are subject to significant changes which the   inflation factors,
    tions highly ariable. 1/ Accordingly, could make contribu-
                                              we foresee major pro-
    blems in any funding arrangement that could
    in the postal ratemaking process.               cause instability

   As pointed out on pages five and six of
                                              the draft report,
    there are a number of dynamic funding estimates
   been developed by both the Office of Management that have
   and the Civil Service Commission. It                 and Budget COMB)
   report uses te OMB's estimate of 24.7 appears that the draft
   the impact of dynamic funding. It wouldpercent to illustrate
   final GAO report were to state               be helpful if the
   and assumptions are recommended exactsr- which funding estimates
                                    for adoption and explain
   clearly how the percentage figures were
   obviously important for the Postal Service,derived. This is
   to page 27 of the draft report, the Postal since, according
   dynamic funding "would have had to come up Service under
   $1.2 billion in 1976 to fund its share         with" an additional
                                            of the retirement costs.
  We understand from discussions with GAO
                                             staff members that the
   $1.2 billion figure includes unfunded liabilities
  from cost-of-living annuity i-r !Ses granted            resulting
  5 U.S.C. 8340.                                     by Congress under
                    A discussed     ve, such liabilities should
  under present law be funded by taxpayers
  funds rather than by postal ratepayers. out of appropriated
  the $1.2 billion tat would, under dynamic    As to that part of
  be payable by the Postal Service because        funding procedures,
                                               attributable to pay
  increases, it would help if the exact dimensions
  were calculated and published in the GAO               of this amount
  neither the Congress nor the Postal Service  report. Otherwise,
  informed position on the merits of dynamic can take a fully
                                                  funding as it would
  affect the Postal Service.
  The GAO suggests that the difference between
  accruing cost of Federal retirement systems the currently
  dynamic basis and the employee contributions computed on a
  agency operations. We agree, but we also      be charged to
  would be helpful if GAO would consider and believe  that it
                                              incorporate into
  the report additional options to fund retirement
                                                     liabilities.



  1/   We assume that GAO hs independently verified
       of any actuarial data or assumptionr made     the validity
                                                 by the
       Service Commission and recognizes this potential Ci;il
       funding on a dynamic basis.                      for over-




                                    70
APPENDIX XV                                                APPENdIX XV




      The Postal Service shares the concern of the General Account-
      ing Office about the rising costs and inequities in Federal
      retirement programs. Our concern is that no new inequities
      be created as a result of your report, which would affect
      postal customers. But we strongly agree that more responsible
      practices in regard to adequate financing of retirement plans
      should be developed, agreed upon by the Congress, and placed
      into effect forthwith.

                                      Sincerely,




                                      Benjamin F. Bailar




                                 71
APPENDIX XVI                                                            APPENDIX XVI




                                  THE DISTRICT OF COLUMBIA
    WALTER   . WAGHINGTON
             MAYOR                 WASHINGTON, D. C. 20004

                                                   MAY   9 197




                 Mr. Victor L. Lowe, Director
                 General Government Divisionz
                 U. S. General Accounting Office
                 Washington, D. C. 20548

                 Dear Mr. Lowe:

                Thank you for the opportunity to comment on your draft report
                entitled, "Federal Retirement Systems: Uniecognized Cost,
                Inadequate Funding, and Inconsistent Benefits. "

                The report examines a number of significant policy questions
                concerning the financing and benefit provisions of Federal pension
                plans.   The District of Columbia is included in the study because
                about 60 percent of the District workforce -- employees hired
                unde- 'he General Schedule and Wage System -- are enrolled in
                the    .feral Civil Service Retirement System. Thus, issues aris-
                ing from that retirement program also impact the District Govern-
                ment by virtue of City erployee membership in the Civil Service
                system.

                The report notes that existing statutes require the Federal
               Government to make multi-billion dollar payments to the Civil
               Service fund each year to finance pension liabilities that are not
               being met through the seven percent matching contributions from
               Federal agencies and their employees. Even with the additional
               payments, the Civil Service Retirement System faces massive un-
               funded liabilities, estimated at $107 billion during the last fiscal
               year alone.




                                           72
APPENDIX XVI                                                        APPENDIX XVI




        While the unchecked growth in unfunded liabilities is the primary
        issue confronting the Civil Service program, the -eport questions
        whether current financing policies are fair, especially in the case
        of agencies like the District Government which derive a sub-
        stantial portion of operating revenues from sources outside the
        Federal budget. Since those agencies are generally intended to be
        self-sustaining, the : nort suggests they should contribute the full
        cost of annual liability accruals through employer and employee
        payments. When those payments do not cover all benefits earned,
        as at present, Federal taxpayers must make up the difference, a
        situation that could produce inequities in the incidence of pension
        financing burdens. As a result, Federal funds used to meet a
        porrtion of annual pension costs may constitute a "hidden subsidy"
        to self-supporting agencies. The .eport estimates District co.
        tributions in fiscal 1976 fell $72 million below the level required
        to cover all benefits earned by active employees.

        This issue came to our attention in June of last year in a report to
        the SenAte Committee on the District of Columbia prepared by the
        public accounting firm of Arthur Andersen and Company. That:
        study also estinrated the amount of Civil Service pension liabilities
        that are not being reflected in the normal matching contributions.
        However, the Andersen report cautioned against simply applying to
        the District the same actuarial factors developed for the entire
        Civil Service system. "To properly evaluate the actual normal
        cost for the District, " the report concluded, "a separate actuarial
        study must be performed so that only actual District employee ex-
        perience is considered" (Volume IX, page 45).

        Herein lies one of our concerns with the draft rLnort. Because
        employment and retirement practices are impactei by several
        factors resulting from inherent differences between he D'strict
        Government and Federal agencies, it is questic     'e to assume
        that District employees are earning pension benefits at the same
        average rate as all Federal Civil Service employees. As the
        Arthur Andersen study noted, a complete actuarial analysis would
        be neied to verify that assumption. Thus, I urge you to include
        in th,: eport a recommendation that separate actuarial statistics
        be developed for the District and other agencies in thie Federal
        Civil Service before they are charged the full amount of currently
        accruing pension costs.




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APPENDIX XVI                                                              APPENLTX XVI




    Aside from actuarial considerations, there is a broader
                                                               policy
    question regarding the appropriate division of financing
                                                              responsi-
    bility between the Federal Government and the individu;l
                                                                agencies
    whose employees subscribe to the Civil Service system.
                                                                Whi'.e many
   provisions of the Civil Service retiremerit program should
                                                                 be
   financed entirely front employer and employee contributions,
                                                                     there
   are grounds for continuing to meet certain costs on a
                                                           system-wide
   basis through direct Federal appropriations. One clear-cut
                                                                   ex-
   ample is the benefit giving employe es Civil Se' vice
                                                         credit for prior
   military service. Since that beneit is for service to
                                                           the nation as
   a whole, it is reasonable to pay for military service
                                                          credits directly
   from the U.S. Treasury, rather than allocating those
                                                            costs to
   individual agencies such as the District Government.

    More difficult issues mist be considered in dealing
                                                           with the impact
    of pay raises, benefit liberalizations and cost- of-living
                                                                pension ad-
   justments, none of which is currently included in the
                                                             formula for
    employer and employee contributions. There i merit
                                                               in the argu-
   ment that individual agencies, such as the District,
                                                            can do little to
   influence the directon of costs in these areas. Since
                                                             agencies
   typically do not have the option to accept or reject Congressionally
   approved pay and benefit improvements or the power
                                                             to control in-
   flationary trends, the Federal Government might well
                                                              choose to
   continue treating these liabilities as a system-wide
                                                           expense, not
   charged to employing agencies as part of the contribution
                                                                  formula.
   Extending Civil Service eligibility to ne w groups of employees
                                                                       could
   also Le financed in this manner if it creates a substantial
                                                                  past
   service liability.

   In conclusion, I found the report a comprehensive and
                                                          thoughtful
   treatment of rather complex issues in Feder.l re.,remnent
                                                              policy.
   I appreciate the opportunity to comment on the draft
                                                        report prior
   to its official release.


                                            Sincerely yours,



                                         Walter E. Washington        C
                                                 Mayor




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