oversight

Review of the Office of Personnel Management's Analysis of the United States Postal Service's Funding of Civil Service Retirement System Costs

Published by the Government Accountability Office on 2003-01-31.

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

                                                                                      Comptroller General
                                                                                      of the United States
United States General Accounting Office
Washington, DC 20548



          January 31, 2003

          Congressional Requesters

          Subject: Review of the Office of Personnel Management’s Analysis of the United
                   States Postal Service’s Funding of Civil Service Retirement System Costs

          In our December 2001 report, United States Postal Service: Information on
          Retirement Plans (GAO-02-170), we raised the question of whether the United States
          Postal Service (USPS) was paying more or less than appropriate to cover benefit
          payments for the Civil Service Retirement System (CSRS) for which it is responsible.
          In May 2002, we asked the Office of Personnel Management (OPM) to calculate a
          hypothetical “Postal Fund” balance and projected funding status by estimating the

              •   present value (PV) of the future benefits USPS is required to fund for CSRS
                  retirees and survivors under current law and
              •   extent to which prior and projected future contributions required by current
                  law would fund these benefits.

          OPM released its analysis in November 2002, indicating that, based on current
          contributions, USPS’s CSRS obligations would be significantly overfunded in the
          future. 1 The Administration has proposed legislation that addresses this overfunding.
          Given the significance of this issue, you asked us to (1) review OPM’s analysis for
          reasonableness and (2) analyze the legislative proposal to identify any issues needing
          further consideration. This report provides a summary of our briefing on January 30,
          2003, and the attached slides highlight the results of our work and the information we
          provided.

          Results in Brief

          Review of OPM’s Analysis. To perform its analysis, OPM determined the net assets
          (USPS agency and employee contributions plus earnings benefits and administrative
          expenses) available in the hypothetical “Postal Fund” as of September 30, 2002. OPM
          then calculated the PV of future benefits payable and future contributions to
          determine the extent to which “Postal Fund” net assets and required future
          contributions would fund the projected remaining benefits to be paid. Its analysis
          concluded that as of September 30, 2002



          1
           OPM’s projections are made through 2071, the estimated date at which the last remaining USPS CSRS
          annuitant would receive a benefit payment.


                                       GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
   •     $20.5 billion in CSRS benefits for USPS employees and annuitants remained to
         be funded and
   •     contribution rates set in current law would ultimately result in an overfunding
         of the amount needed to cover CSRS benefit obligations attributable to USPS
         annuitants by $71.0 billion.

OPM included the cost of military service for USPS employees first hired into civilian
service after June 30, 1971, and a portion of the costs for employees hired before July
1, 1971—the effective date of the Postal Reorganization Act—in its reconstruction of
the “Postal Fund” and calculations of the PV of future benefits—even though under
current law the Department of the Treasury is responsible for funding these costs.
Applying current law regarding military service funding to OPM’s analysis, and
making other adjustments discussed below, results in

   •     a current overfunding of $4.1 billion versus the $20.5 billion yet to be funded
         according to OPM’s initial analysis and
   •     a projected overfunding of $103.1 billion versus the $71.0 billion amount OPM
         initially projected.

We found a similar issue regarding OPM’s treatment of certain spousal benefit
payments and payments for CSRS offset benefits. OPM assumed in its analysis that
USPS was responsible for these costs even though under current law Treasury funds
them. OPM has not analyzed the feasibility of determining the effect of these issues
on its calculations, but believes the amounts would be insignificant.

We also found that in its analysis OPM gave credit to the “Postal Fund” for a
$285 million special payment USPS made with appropriations provided to it in fiscal
year 1975 to fund increases in pension liabilities that resulted from pay increases in
1972 and 1973. The effect of this was to increase the “Postal Fund” balance by about
$2.9 billion, as of September 30, 2002, including compound interest.

In reviewing OPM’s calculation, we also identified several adjustments that would
improve its accuracy and collectively resulted in an increase of about $5 billion to the
“Postal Fund” net assets. These include

   •     changing the basis of accounting for employee withholdings and USPS
         contributions from cash to accrual,
   •     reflecting certain employee voluntary and civilian service deposits and
         redeposits in the analysis that were not in OPM’s initial analysis,
   •     using actual data on 30-year and 15-year payments by USPS rather than the
         estimated payments used in OPM’s initial analysis, and
   •     making other miscellaneous adjustments.

Analysis of Proposed Legislation. As a result of OPM’s analysis, the
Administration has proposed legislation that reduces the payments USPS would be
required to make for CSRS benefits from approximately $4.7 billion annually to an
estimated $1.8 billion in fiscal year 2003, a savings of $2.9 billion. Several issues,
some of which were discussed above, could affect the amount of annual payments



Page 2                      GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
USPS would be required to make under the proposed legislation. These issues are as
follows:

   •     Treatment of military service costs—The legislative proposal would make
         USPS responsible for military service costs, which decreases the projected
         overfunding by almost $28 billion. The Congress needs to decide whether
         USPS should be responsible for any or all of these costs. In this regard, one
         possible alternative approach would be to require USPS to fund only the
         military service of employees hired after June 30, 1971. This would result in
         $16.6 billion yet to be funded by USPS and its employees (versus $23.7 billion
         under the legislative proposal, as adjusted) and a projected overfunding of $0.8
         billion (versus an underfunding of $6.3 billion under the legislative proposal, as
         adjusted).

   •     Treatment of payments made with appropriated funds—OPM’s analysis
         credited the “Postal Fund” with a $285 million special payment USPS made in
         fiscal year 1975 with appropriated funds. The effect of this credit was to
         increase the “Postal Fund” balance by $2.9 billion, as of September 30, 2002,
         including compound interest. The legislative proposal does not address the
         treatment of these appropriated funds.

   •     Treatment of underfunded or overfunded amounts and future
         refinements—The legislative proposal generally calls for a 40-year
         amortization period for any unfunded liability. This approach is consistent
         with the Administration’s proposal for CSRS liabilities for non-USPS
         employees. However, a shorter amortization period that more reasonably
         reflects the average remaining working lives of CSRS employees may be more
         appropriate. Additionally, the proposed legislation does not specify how to
         treat an overfunded situation, or how future refinements in the calculation and
         variances from projected versus actual experience that affect the over- or
         underfunded position would be addressed.

   •     Choice of demographic assumptions—Using CSRS-wide versus USPS-
         specific demographics affects the funding status. For example, using CSRS
         demographics instead of USPS-specific demographic assumptions under the
         legislative proposal would decrease the overfunded amount by approximately
         $1.5 billion.

OPM’s projections will need to be adjusted based on the decisions made regarding
these issues. In addition, USPS still faces substantial obligations related to
postretirement health benefits (estimated at $40 billion to $50 billion) as well as
significant outstanding debt to the federal government ($11.1 billion as of September
30, 2002) that should be considered in determining the treatment of the projected
overfunding of CSRS obligations. The Congress needs to decide (1) whether some or
all of the difference in current versus proposed future contributions should be used
to reduce outstanding debt to the federal government or address USPS’s unfunded
postretirement health obligations, and (2) what, if any, other restrictions should be
placed on the use of these funds.




Page 3                      GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Scope and Methodology

To achieve our objectives, we performed various procedures to assess OPM’s
analysis and the legislative proposal. These procedures are described in detail in
appendix III of the attached slides. The procedures we performed do not constitute a
financial audit or actuarial review of OPM’s projections, and we are not expressing an
opinion on the material accuracy of the calculations contained herein. Rather, our
procedures focused on determining the reasonableness of OPM’s methods,
assumptions, and data. Thus, while we found significant issues pertaining to OPM’s
projections, there may be other issues that did not come to our attention. We
performed our work from November 2002 through January 2003, in accordance with
generally accepted government auditing standards.

Agency Comments

We discussed the findings of these briefing slides with OPM officials, including the
Director, Office of Actuaries, who generally agreed with the facts presented. Based
on their consideration of these slides during our meeting, they provided the following
observations:

   •     The primary difference between the $103.1 billion potential overfunding and
         the 71.0 billion originally reported by OPM is due to the treatment of military
         service.
   •     Although under current law governing funding of CSRS the USPS does not pay
         for the cost of benefits attributable to military service, the Administration’s
         proposed legislation is intended to replace the current funding methodology
         with a new approach modeled after the funding of FERS.
   •     Under the Administration’s proposal, the USPS would be responsible for the
         cost of military service. The Administration believes that charging the USPS is
         appropriate because under its proposal the “Postal Fund” would be created
         with a proportional share of the excess investment returns earned by the
         CSRDF over the past 30 years.

                           ____________________________________

We are sending copies of this report to the Director of OPM, the Postmaster General,
the Director of OMB, the Secretary of the Treasury, and other interested parties. The
report is also available at no charge on GAO’s home page at http://www.gao.gov. If
you have questions about this report, please contact Linda Calbom, Director,
Financial Management and Assurance, at (202) 512-8341, or Robert Martin, Assistant
Director, at (202) 512-6131. You may also reach them by E-mail at calboml@gao.gov




Page 4                     GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
or martinr@gao.gov. Other key contributors to this assignment were Kent Bowden,
Margaret Cigno, Fred Evans, Darren Goode, and Scott McNulty.




David M. Walker
Comptroller General
of the United States

Enclosure




Page 5                  GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
List of Requesters

The Honorable Susan M. Collins
Chairman
Senate Committee on Governmental Affairs

The Honorable Thomas R. Carper
United States Senate

The Honorable Tom Davis
Chairman
House Committee on Government Reform

The Honorable Ernest J. Istook
Chairman
Subcommittee on Treasury, Postal Service and General Government
House Committee on Appropriations

The Honorable Dan Burton
The Honorable Steny Hoyer
The Honorable John M. McHugh
The Honorable Dave Weldon
House of Representatives




Page 6                 GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                United States Postal Service

        Review of the Office of Personnel Management’s
      Analysis of the United States Postal Service’s Funding
            of Civil Service Retirement System Costs


               Briefing for Congressional Requesters
                          January 30, 2003



                                                                          1




      Page 7            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                  Contents



   • Introduction
   • Objectives
   • Results in Brief
   • Scope and Methodology
   • Background
   • Assessment of OPM’s Analysis
   • Analysis of the Legislative Proposal
   • Conclusions
   • Agency Comments
   • Appendix I - Key Legislation Affecting USPS’s Funding of
     CSRS Costs
   • Appendix II - Data Limitations and Use of Estimation Methods
   • Appendix III - Detailed Scope and Methodology

                                                                          2




       Page 8           GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Introduction


   Introduction
   • In our December 2001 report, United States Postal Service:
     Information on Retirement Plans (GAO-02-170), we raised
     the question of whether the United States Postal Service
     (USPS) is paying more or less than needed to cover future
     Civil Service Retirement System (CSRS) benefit payments.
   • In May 2002, we asked the Office of Personnel Management
     (OPM) to, in effect, calculate a hypothetical “Postal Fund”
     balance and projected funding status by estimating the
       • present value (PV) of the future benefits to CSRS retirees
         and survivors that USPS is required to fund, and
       • extent to which prior and projected future contributions
         required by current law are estimated to fund these
         benefits.
                                                                            3




      Page 9              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                     Objectives



   Objectives

   Our objectives were to

   • review OPM’s analysis released in November 2002 for
     reasonableness, and

   • analyze the legislative proposal and identify any issues
     needing further consideration.




                                                                              4




      Page 10               GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                              Results in Brief


   Results in Brief
   • In November 2002, OPM reported that, based on the current
     level of contributions, USPS would significantly overfund the
     amount needed in the future to cover CSRS benefit
     obligations attributable to its annuitants. We found that the
     amount of overfunding is considerably greater than OPM
     initially calculated and reported, due primarily to OPM’s
     treatment of military service costs in its analysis that differs
     from how military service is funded under current law.
   • While the Administration’s legislative proposal submitted by
     OPM addresses the projected overfunding by reducing the
     annual payments USPS makes to fund CSRS benefits, a
     number of issues, including treatment of military service
     costs and USPS past payments made with appropriated
     funds, could affect the projected and current CSRS funding
     status.
                                                                            5




      Page 11             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                             Results in Brief



   • OPM’s published projections will need to be adjusted based
     on decisions regarding these issues, as well as refinements
     resulting from improved data and methodologies. In
     addition, USPS still faces substantial obligations related to
     postretirement health benefits for its present and past
     employees, as well as significant outstanding debt, that
     should be considered in determining the treatment of the
     projected overfunding of CSRS obligations.




                                                                           6




      Page 12            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                    Scope and Methodology



   Scope and Methodology

   • To achieve our objectives, we performed various
     procedures to assess OPM’s analysis and the legislative
     proposal. These procedures are described in detail in
     appendix III.

   • These procedures do not constitute a financial audit or
     actuarial review of OPM’s projections, and we are not
     expressing an opinion on the material accuracy of the
     calculations contained herein. Instead, we focused on the
     reasonableness of OPM’s methods, assumptions, and data.




                                                                          7




      Page 13           GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                     Scope and Methodology



   • Thus, while we found several significant issues pertaining to
     OPM’s reconstruction of the “Postal Fund” and projections
     and proposed various adjustments, there may be other
     issues that would significantly impact OPM’s projections that
     did not come to our attention in the course of this review.
     See appendix II for a description of known data limitations
     and OPM’s estimation methods.

   • We performed our work from November 2002 through
     January 2003, in accordance with generally accepted
     government auditing standards.




                                                                           8




      Page 14            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                  Background


   Background
   • USPS commenced operations on July 1, 1971 in
     accordance with the provisions of the Postal Reorganization
     Act of 1970 (P.L. 91-375).
   • USPS is an independent establishment of the executive
     branch with a goal to operate on a break-even basis over
     time and cover its expenses almost entirely through postal
     revenues.
   • At inception, USPS did not have any unpaid liabilities to
     OPM for retirement benefits. The federal government
     remained responsible for all the liabilities attributable to the
     operations of the former Post Office Department, including
     any unfunded retirement benefits.

                                                                             9




      Page 15              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Background



   • USPS currently makes the following contributions to the
     Civil Service Retirement and Disability Fund (CSRDF):
       • agency matching contributions, which for most
         employees is 7.0 percent of basic pay,
       • payments to fund the increase in the present value of
         future retirement benefits resulting from general pay
         increases (in 30 equal annual installments with interest
         at 5 percent), and
       • payments to fund the increase in the present value of
         future retirement benefits resulting from the granting of
         annuitant cost-of-living adjustments - COLAs (in 15
         equal annual installments with interest at 5 percent).

                                                                           10




      Page 16             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Background


   • The laws enacted over time creating the current approach to
      funding USPS’s CSRS costs do not require the calculation
      of a USPS-specific liability and do not create a “Postal
      Fund” within the CSRDF.
       • Therefore, current law does not require a calculation of
         the funding status of USPS’s benefit obligations. OPM
         performed these calculations for the purpose of
         analyzing the extent to which USPS has funded the
         CSRS benefits of its employees and annuitants.
       • Thus, investment and actuarial risk – and any resulting
         gains or losses that could reduce or increase actual
         retirement costs – are currently borne by the the federal
         government.
       • See appendix I for a list of the key laws and a short
         description of each.
                                                                           11




      Page 17             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                Assessment of OPM’s Analysis


   Assessment of OPM’s Analysis
   • In performing its analysis, OPM
       • determined the “net assets” (USPS agency and
         employee contributions plus net earnings on the fund
         balance less benefits and administrative expenses)
         available in the “Postal Fund” as of September 30, 2002,
       • calculated the present value (PV) as of September 30,
         2002 of
            • future benefits payable to current employees and
              annuitants, and
            • all required future contributions, and
       • determined the extent to which “Postal Fund” net assets
         and required projected future contributions would fund
         projected future benefits to be paid.
                                                                            12




      Page 18              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                                                        Assessment of OPM’s Analysis


   • OPM’s analysis concluded that
           • $20.5 billion in future CSRS benefits for USPS
             employees and annuitants remained to be funded as of
             September 30, 2002, and
           • USPS contribution rates set in current law would
             ultimately result in an overfunding of the amount needed
             to cover CSRS benefit obligations attributable to USPS
             annuitants by $71.0 billion as of September 30, 2002.*




    *   OPM’s analysis was projected through 2071, the estimated date at which the last remaining USPS CSRS annuitant would receive a benefit payment.


                                                                                                                                                         13




        Page 19                                             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                Assessment of OPM’s Analysis


    • OPM included the cost of military service for USPS
      employees first hired into civilian service after June 30, 1971
      and a portion of the costs for those employees hired before
      July 1, 1971 in its reconstruction of the “Postal Fund” and
      calculations of the actuarial present value of future benefits -
      - even though under current law Treasury is responsible for
      funding these costs.
    • Applying current law regarding military service funding, and
      making other adjustments (discussed in subsequent slides),
      to OPM’s analysis of future benefits to be funded results in
        • a current overfunding of $4.1 billion (versus $20.5 billion
          yet to be paid per OPM’s initial analysis), and
        • a projected ultimate overfunding of $103.1 billion (versus
          $71.0 billion per OPM’s initial analysis).

                                                                            14




      Page 20              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                               Assessment of OPM’s Analysis



   • We also found that, similar to the military service issue,
     OPM’s initial analysis assumed that USPS had been
     responsible for the cost of certain spousal benefit payments
     and CSRS offset benefits that, under current law, Treasury
     is responsible for funding.

   • OPM has not analyzed the feasibility of determining the
     impact of these issues on its calculations, but believes the
     amounts would be insignificant.




                                                                           15




      Page 21             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                               Assessment of OPM’s Analysis



   • In addition, we found that in its analysis OPM credited the
     “Postal Fund” for a special payment USPS made with $285
     million in appropriations it received in fiscal year 1975.

       • Congress provided these appropriations to fund
         increases in pension liabilities resulting from general pay
         increases that USPS negotiated for in 1972 and 1973.
       • This special contribution, including compound interest,
         increases OPM’s calculation of the “Postal Fund”
         balance by $2.9 billion as of September 30, 2002.




                                                                           16




      Page 22             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                               Assessment of OPM’s Analysis


   • In reviewing OPM’s calculation, we also identified several
     adjustments that would improve its accuracy and would
     collectively result in an increase to the “Postal Fund” net
     assets of about $5.0 billion. Those adjustments, including
     interest, relate to
       • changing the basis of accounting for employee
         withholdings and USPS contributions from cash to
         accrual and other corrections ($2.2 billion),
       • certain employee voluntary and civilian service deposits
         and redeposits that were not reflected in OPM’s initial
         analysis ($1.8 billion),
       • using actual data on 30-year and 15-year payments by
         USPS rather than estimated payments in OPM’s initial
         analysis ($0.5 billion), and
       • other miscellaneous adjustments, net ($0.5 billion).
                                                                           17




      Page 23             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                Assessment of OPM’s Analysis


   • A comparison of OPM’s calculation and a recalculation
     applying current law regarding military service funding,
     eliminating the credit for the special appropriation, and
     making other adjustments is shown in table 1.
   • The special appropriation impact is shown separately in the
     table, whereas the following are factored into the existing line
     items:
       • adjustments for the military service issue,
       • addition of future employee military service deposits that
         were not included in OPM’s initial analysis ($0.7 billion),
       • the adjustments described above, and
       • changes in certain economic assumptions and benefit
         estimation and allocation methods that were made to
         improve accuracy and consistency of the calculations.

                                                                            18




      Page 24              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                        Assessment of OPM’s Analysis



    Table 1: USPS’s Funding of CSRS Benefits as of September 30, 2002 as initially reported by OPM and
             recalculated to reflect current law regarding military service funding,* the impact of payments
             made with appropriated funds, and various other adjustments.*

                                                                        (Dollars in Billions)

                                                            OPM
                                                            initial
                                                          calculation      Recalculation        Difference
    “Postal Fund” net assets                              $ 152.1           $ 185.0             $ 32.9

    PV of future benefits                                  ( 172.6)          ( 178.0)           (     5.4)
     Benefits (yet to be funded)/overfunded                ( 20.5)               7.0                 27.5

    Impact of payments made with appropriated funds          0.0              (    2.9)          (    2.9)
     Revised benefits (yet to be funded) / overfunded     ( 20.5)                  4.1               24.6

    PV of all future contributions                           91.5                 99.0                7.5

    Projected overfunding                                 $ 71.0             $ 103.1            $ 32.1
                                                          ======             ======             ======

    Source: Developed by GAO based on OPM’s data and actuarial calculations.

    *Changes related to these items are factored in throughout the calculation.                                19




      Page 25                             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal



   Assessment of the Legislative Proposal

   • The legislative proposal would reduce the amount of CSRS
     payments by USPS from approximately $4.7 billion annually
     under current law to an estimated $1.8 billion annually (in
     fiscal year 2003) -- an annual savings of $2.9 billion in 2003
     based on OPM’s initial calculation. The amount of savings
     in future years will change
       • once the adjustments we identified are factored into the
         over/underfunding to be amortized, and
       • depending on decisions that are made regarding issues
         discussed in the following slides.


                                                                           20




      Page 26             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                        Assessment of the Legislative Proposal



   • Several issues could affect the amount of annual payments
     required to be made by USPS under the legislative
     proposal, as follows
       • treatment of military service costs,
       • treatment of payments made with appropriated funds,
       • amortization period for any overfunded or underfunded
         amounts, including those arising from data refinements
         and variances between projected and actual experience,
       • use of the most appropriate investment rate of return,
         and
       • choice of demographic and economic assumptions.
                                                                            21




      Page 27              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal



      Treatment of Military Service

   • The legislative proposal would make USPS responsible for
     military service costs as assumed in OPM’s initial calculation,
     which decreases the “Postal Fund” net assets by $27.9
     billion.

   • One possible alternative approach, among others, would be
     to require USPS to fund the military service of employees
     hired after June 30, 1971.




                                                                           22




      Page 28             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal


   • Table 2 shows the financial effect of treating military costs
     under the following three possible alternatives (as adjusted
     for the items previously discussed):
       • USPS funds a portion of the military service costs for
         employees hired before 1972 and all military costs for
         employers hired after 1971 as per the legislative
         proposal (Pro-rata funding by USPS),
       • the alternative described on the previous slide (Partial
         funding by USPS), and
       • the approach embodied in current law, whereby
         Treasury funds the military costs (No funding by USPS).
   • For purposes of these alternatives, we assume that regular
     contributions would equal the full dynamic normal cost,
     which is currently 24.4% of employee pay. Dynamic normal
     cost reflects CSRS economic and demographic
     assumptions, and the full cost of all military service.
                                                                           23




      Page 29             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                                             Assessment of the Legislative Proposal


   Table 2: The effect of possible approaches to allocating the cost of military service on USPS’s Funding of CSRS
            benefits as of September 30, 2002, using USPS-specific demographic assumptions.

                                                                                                         (Dollars in Billions)

                                                                            Pro-rata funding                Partial funding                   No funding
                                                                               by USPS                       by USPS                           by USPS
   “Postal Fund” net assets                                                    $ 168.4                        $ 174.2                          $ 185.0
   PV of future benefits                                                       ( 189.2)                       ( 187.9)                         ( 178.0)
    Benefits (yet to be funded) / overfunded                                    ( 20.8)                        ( 13.7)                             7.0

   Impact of payments made with appropriated funds                                ( 2.9)                         ( 2.9)                         (    2.9)
    Revised benefits (yet to be funded) / overfunded                              ( 23.7)                        ( 16.6)                             4.1

   PV of normal cost contributions (24.4%) a                                        16.7 b                         16.7 b                           16.7 b
   PV of future employee military service deposits                                   0.7                            0.7                              0.0
   PV of 30-year payments                                                            0.0                            0.0                              0.0
   PV of 15-year payments                                                            0.0                            0.0                              0.0
    PV of all future income                                                         17.4                           17.4                             16.7

   Projected (underfunding) / overfunding                                        $( 6.3)                        $ 0.8                          $ 20.8 c
                                                                                 ======                         ======                         ======
   a
     OPM did not calculate a USPS-specific dynamic normal cost percentage that reflects the differing methods of allocating military service and USPS-specific
     demographic assumptions.
   b These  figures were calculated by applying the CSRS dynamic normal cost percentage to projections of future USPS payroll derived using USPS-specific
     demographic assumptions.
   c The legislative proposal does not specify the treatment of projected overfunding when future benefits are currently overfunded. One alternative would be to permit

     USPS to reduce its portion of normal cost contributions.

                                                                                                                                                                          24
   Source:       Developed by GAO based on OPM data and actuarial calculations.




        Page 30                                                GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal



      Treatment of Payment Made with Appropriated Funds

   • As discussed previously, OPM’s analysis credited the
     “Postal Fund” with a $285 million special payment made
     with funds appropriated in fiscal year 1975 for that specific
     purpose.
       • The impact was to increase the “Postal Fund” balance as
         of September 30, 2002 by $2.9 billion (including
         compound interest).
       • The legislative proposal does not address the treatment
         of these appropriated funds.



                                                                           25




      Page 31             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal


      Treatment of Underfunded or Overfunded Amounts and
      Refinements
   • The legislative proposal generally specifies a 40-year
     amortization period for any unfunded liability.
       • This is consistent with the Administration’s proposal for
         CSRS liabilities related to nonpostal employees.
       • A shorter amortization period that more reasonably
         reflects the likely remaining working lives of CSRS
         employees may be more appropriate.
   • The legislative proposal does not specify how an
     overfunded situation would be treated or how future
     refinements in the calculation that impact the
     over/underfunded position would be addressed.

                                                                           26




      Page 32             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                        Assessment of the Legislative Proposal


   •   In addition to the spousal benefit and CSRS offset issues
       previously noted, OPM’s future calculations for USPS CSRS
       costs are subject to change resulting from such items as
       data refinements, changes in estimation methods, and
       actuarial gains and losses. For example
        • OPM used estimated benefit payment data when some
          actual data are available. Using actual data could result
          in more accurate projections. OPM has not analyzed the
          feasibility of extracting the actual data.
        • OPM and/or others may ultimately determine that better
          data or estimation methods exist to project the status of
          the “Postal Fund.”
        • OPM needs to determine and address future variances
          between projected and actual experience in connection
          with key assumptions (e.g., retirement rates, rates of
          return on investment, etc.).
                                                                            27




       Page 33             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Assessment of the Legislative Proposal


      Use of the Most Appropriate Investment Rate of Return
   • OPM allocated total CSRS investment returns to the “Postal
     Fund” based on the ratio of average yearly “Postal Fund”
     net assets to all CSRS plan net assets.
       • This approach would be consistent with the view that,
         although USPS was a new legal entity, USPS
         employees who previously worked for the Post Office
         Department were not new participants in the CSRS plan.
   • An alternative approach would be to use the average rate of
     return for new plan investments each year beginning with
     the creation of USPS.
       • This approach would be consistent with the view that
         USPS was a new employer joining a multiple employer
         pension plan.
                                                                          28




      Page 34            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Assessment of the Legislative Proposal



   • We were unable to determine the monetary impact this
     alternative approach would have on the “Postal Fund’s” net
     assets as of September 30, 2002 because we were unable
     to obtain the necessary data regarding annual investment
     returns on new CSRDF investments for the past 30 years.




                                                                          29




      Page 35            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Assessment of the Legislative Proposal


      Choice of Demographic and Economic Assumptions
   • Using CSRS-wide versus USPS-specific demographics
     impacts the funding status. For example, using CSRS
     demographics instead of the USPS-specific demographic
     assumptions OPM used in its initial analysis and reflected in
     the legislative proposal would decrease the overfunded
     amount by approximately $1.5 billion.
   • The funding status is also impacted by the choice of
     economic assumptions. For example, OPM utilized CSRS’s
     long-term economic assumptions (e.g., 3.75% rate of
     inflation) in its revised projections. On the other hand, the
     Office of Management and Budget’s (OMB) economic
     assumptions reflect short-term expectations (e.g., 1.8% rate
     of inflation). The use of CSRS’s long-term assumptions
     increases both the present value of future benefits and the
     present value of future contributions in OPM’s analyses.
                                                                          30




      Page 36            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Assessment of the Legislative Proposal



   • Currently, the law gives OPM’s Board of Actuaries the
     authority to establish the demographic and economic
     assumptions to be used in all valuations of the CSRS.




                                                                          31




      Page 37            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                       Assessment of the Legislative Proposal



      Other USPS Financial Obligations

   • Another significant issue that should be considered in
     conjunction with the treatment of the CSRS overfunding is
     that USPS faces substantial obligations related to
       • postretirement health care benefits estimated to be
         between $40 - $50 billion that are yet to be funded, and
       • outstanding debt to the federal government of $11.1
         billion as of September 30, 2002.




                                                                           32




      Page 38             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Conclusions



   Conclusions

   • While we agree with OPM’s initial conclusion that current
     law would result in a significant overfunding of USPS’s
     CSRS benefit costs, the amount of the overfunding is
     considerably greater than initially calculated and reported by
     OPM.

   • The legislative proposal would address this overfunding
     issue by reducing the amount of annual payments required
     to be made by USPS to fund CSRS benefits.




                                                                           33




      Page 39             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Conclusions



   • However, there are a number of issues that need to be
     considered that could significantly impact both the projected
     and current CSRS funding status of USPS under the
     legislative proposal.

       • OPM’s projections will need to be adjusted based on the
         decisions made regarding these issues.

   • In addition, USPS still faces substantial obligations related
     to postretirement health benefits for its present and past
     employees, as well as significant outstanding debt, that
     should be considered in determining the treatment of the
     projected overfunding of CSRS obligations.



                                                                           34




      Page 40             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                                 Conclusions



   • The Congress needs to decide

       • whether some or all of the difference in current versus
         proposed future contributions should be used to reduce
         outstanding debt to the federal government or address
         USPS’s unfunded postretirement health obligations, and
       • what, if any, other restrictions should be placed on the
         use of these funds.




                                                                           35




      Page 41             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                            Agency Comments



   • We discussed a draft of these briefing slides with OPM
     officials on January 29, 2003, who generally agreed with the
     facts presented. OPM provided the following observations
     based on their brief consideration of these slides:

       • The primary difference between the $103.1 billion
         potential over-funding and the $71.0 billion originally
         reported by OPM is due to the treatment of military
         service.
       • Although under the current law governing funding of
         CSRS the USPS does not pay for the cost of benefits
         attributable to military service, the Administration’s
         proposed legislation is intended to replace the current
         funding methodology with a new approach modeled after
         the funding of FERS.
                                                                            36




      Page 42              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                                          Agency Comments


       • Under the Administration’s proposal, the USPS would be
         responsible for the cost of military service. The
         Administration believes that charging the USPS is
         appropriate because under its proposal the “Postal
         Fund” would be credited with a proportional share of the
         excess investment returns earned by the CSRDF over
         the past 30 years.




                                                                          37




      Page 43            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                        Appendix I – Key Legislation Affecting
                                            USPS’s Funding of CSRS Costs


   • P.L. 91-93, Civil Service Retirement Amendments of 1969
     Increased the statutory contributions made by employees
     and agency employers and required Treasury to fund the
     future increases in pension liabilities due to changes in
     benefits and increases in pay, the annual interest on
     existing unfunded liabilities, and the portion of benefit
     payments attributable to creditable military service.

   • P.L. 93-349, Postal Service Payments to Retirement Fund
     Required USPS to fund increases in pension liabilities
     resulting from USPS employee general pay increases in 30
     equal payments with interest beginning at the end of the
     fiscal year in which the pay increase becomes effective.


                                                                            38




      Page 44            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                        Appendix I – Key Legislation Affecting
                                            USPS’s Funding of CSRS Costs


   • P.L. 93-554, Supplemental Appropriations Act
     Provided USPS with a $281 million appropriation to pay for
     the first three installments due on increases in its pension
     liabilities that resulted from the 1972 pay increase and the
     first two installments for the 1973 pay increases, plus
     interest. According to House Report No. 93-1378, another
     $4 million was made available to USPS for this purpose as
     part of the Postal Service Appropriations Act of 1975 (P.L.
     93-381).
   • P.L. 100-203, Omnibus Budget Reconciliation Act of 1987
     Required that USPS deposit $350 million into the CSRDF.
     According to House Report No. 101-964, this payment was
     used to fund a portion of the cost of USPS annuitant
     COLAs.

                                                                            39




      Page 45            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                         Appendix I – Key Legislation Affecting
                                             USPS’s Funding of CSRS Costs


   • P.L. 101-239, Omnibus Budget Reconciliation Act of 1989
     Required USPS to fund increases in pension liabilities
     resulting from COLAs granted to USPS employees who first
     became annuitants on or after October 1, 1986 or to the
     survivors of employees or employee annuitants who die on
     or after October 1, 1986. The law provided payment
     schedules for COLAs granted in 1987–1989. Increases in
     pension liabilities resulting from COLAs granted in 1990 and
     thereafter were to be paid in 15 equal payments with
     interest beginning at the end of the fiscal year in which the
     pay increase becomes effective. This law further stipulated
     that USPS would be liable only for the portion of the
     increase that is attributable to civilian service rendered after
     June 30, 1971. In fiscal year 1990, USPS paid
     approximately $74 million under the provisions of this law
     before it was amended by P.L. 101-508.
                                                                             40




      Page 46             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                         Appendix I – Key Legislation Affecting
                                             USPS’s Funding of CSRS Costs

   • P.L. 101-508, Omnibus Budget Reconciliation Act of 1990
     Changed the date from which USPS was responsible for
     funding the cost of annuitant COLAs from October 1, 1986
     to July 1, 1971. Furthermore, P.L. 101-508 amended the
     1987–1989 annual payments for COLAs set forth in P.L.
     101-239 and established annual payments for pre-1987
     and 1990 COLAs. However, the law did not require any
     payments for COLAs that were outside the 15-fiscal-year-
     period that began with the first fiscal year that the COLA
     took effect. This law required USPS to pay a total of
     $1,685 million during fiscal years 1991- 1995 for pre-fiscal
     year 1987 COLAs.
   • P.L. 103-66, Omnibus Budget Reconciliation Act of 1993
     Required that USPS deposit $693 million into the CSRDF
     no later than September 30, 1998, to pay more towards the
     cost of previous annuitant COLAs.
                                                                             41




      Page 47             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Appendix II – Data Limitations and Use of
                                                           Estimation Methods

   • OPM experienced obvious challenges in reconstructing 30
     years of income and expense to create a “Postal Fund”
     within the CSRS plan. In some cases data were no longer
     available, such as regular employee and agency
     contribution data from 1972 through 1982. In other cases,
     such as employee salaries on July 1, 1971, it would have
     been too costly and time-consuming to obtain data from the
     individual hardcopy personnel and benefit files for hundreds
     of thousands of USPS employees and annuitants.

   • One key overarching limitation of these data is OPM’s
     reliance on unaudited financial data for 25 of the 30 year
     span of its analysis. OPM received an unqualified opinion
     for the first time on its fiscal year 1997 financial statements
     of the CSRDF.

                                                                             42




      Page 48              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Appendix II – Data Limitations and Use of
                                                           Estimation Methods

   • Following is a list of some of the most significant estimation
     methods used to overcome the lack of readily available data

       • Regular employee and agency contributions for 1972–
         1982 were not available and, thus, OPM initially
         estimated these to be equal to the average amount of
         regular contributions made by USPS and its employees
         from 1983 – 2001 as a percent of total CSRS regular
         contributions.
            • After successfully reconciling USPS’s accrual-based
              agency contributions to OPM’s cash-based figures
              for 1983 - 2001, OPM accepted our suggestion to
              revise its estimates for 1972 – 1982 using USPS’s
              accrual-based figures for those years.

                                                                             43




      Page 49              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                     Appendix II – Data Limitations and Use of
                                                          Estimation Methods


       • Employee voluntary and civilian service deposits and
         redeposits were estimated to be equal to the ratio of total
         CSRS voluntary and service deposits to total CSRS
         employee withholdings multiplied by USPS employee
         withholdings.
       • Annual CSRS investment returns were allocated to the
         “Postal Fund” based on the ratio of average yearly
         “Postal Fund” net assets to all CSRS plan net assets.
       • Asset transfers to the Federal Employees’ Retirement
         System (FERS) from CSRS for USPS employees who
         were automatically transferred to FERS on January 1,
         1987 were estimated based on fiscal year-end
         investment balances of the FERS “Postal Fund” for fiscal
         years 1983 – 1987. These transfers are reflected as
         reductions in the regular employee and agency employer
         contributions for these four fiscal years.
                                                                            44




      Page 50             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                     Appendix II – Data Limitations and Use of
                                                          Estimation Methods


       • There was insufficient documentation to support how the
         $170 million transferred to FERS for USPS employees
         who elected coverage during the open season that
         ended on December 31, 1987 was calculated.
         Furthermore, although this transfer is reflected in OPM’s
         revised analysis as occurring on September 30, 1988,
         OPM could not provide evidence that this transfer or a
         similar transfer of $1,124 million for non-USPS CSRS
         employees ever occurred.
       • There remains a question as to whether OPM should
         have reflected a transfer of assets in its analysis of the
         “Postal Fund” for those USPS employees who elected to
         transfer from CSRS to FERS during the 1998 open
         season.

                                                                            45




      Page 51             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                    Appendix II – Data Limitations and Use of
                                                         Estimation Methods


       • Benefit payments for each fiscal year were estimated by
         indexing each annuitant’s most recent monthly benefit
         payment amount by the amount of each annual COLA
         back to the annuity start date. OPM’s approach to
         estimating benefit payments does not take into account
         any postretirement elections or adjustments that may
         have changed an annuitant’s monthly payment.
       • Estimated benefit payments were adjusted to reflect a
         factor for dropped records (e.g., child survivor
         annuitants), refunds of contributions to separated
         employees, death claim payments, administrative
         expenses, and an amount for the imprecision of benefit
         payment estimation methods. OPM calculated a
         separate adjustment factor for each fiscal year that was
         equal to the ratio of total CSRS benefits using the
         methods noted above to total actual CSRS expenses per
         published financial and actuarial reports.
                                                                           46




      Page 52            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Appendix II – Data Limitations and Use of
                                                           Estimation Methods


       • Estimated benefit payments to USPS nondisability
         annuitants were allocated between “postal” and “federal”
         shares to reflect
            • all civilian service rendered after June 30, 1971 and
              before July 1, 1971, respectively,
            • estimated salary on July 1, 1971, and
            • benefit accrual rates on service rendered after June
              30, 1971 and before July 1, 1971, respectively.




                                                                             47




      Page 53              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                      Appendix II – Data Limitations and Use of
                                                           Estimation Methods


       • Disability retirement benefit payments were allocated
         based only on service adjusted for applicable benefit
         accrual rates. Survivor benefits are allocated using
         similar factors based on employee annuitant data.
       • OPM’s annuity system maintains total years and months
         of creditable military and civilian service, but not actual
         dates when military service was performed and dates of
         hire into a civilian position. Consequently, OPM
         estimated employee date of hire by subtracting total
         civilian service from the annuity commencing date. This
         approach assumes that there were no significant breaks
         in federal civilian service. Also, military service is
         assumed to have occurred immediately prior to the
         assumed civilian date of hire.

                                                                             48




      Page 54              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                     Appendix II – Data Limitations and Use of
                                                          Estimation Methods


       • OPM’s annuity system maintains data on average high-
         three years salary and final salary at retirement, but not
         an employee’s salary at every point in time. To estimate
         salaries on July 1, 1971, OPM developed assumptions
         regarding general and merit pay increases based on
         historical data on USPS’s active population.

   • Despite the use of estimation methods, there still remain
     limitations for which OPM has not separately adjusted and
     for which it may not be cost beneficial to develop estimation
     methods. These include the two following matters.




                                                                            49




      Page 55             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                    Appendix II – Data Limitations and Use of
                                                         Estimation Methods

       • OPM maintains data within its annuity system on the last
         agency an employee worked at before retirement, but
         not the amount of creditable service an employee
         accumulated while employed at each agency during
         his/her entire federal career. Consequently, benefit
         payments and regular contributions are not prorated
         based on service rendered at USPS and other federal
         agencies.
       • The “Postal Fund” was credited with all contributions
         processed and deposited into the CSRDF by USPS,
         such as military service deposits, made only by
         employees during the time when they were employed by
         USPS and salary offsets for annuitants who were
         reemployed by USPS, regardless of the agency the
         employee retired from.
                                                                           50




      Page 56            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                              Appendix III – Detailed Scope and
                                                                    Methodology

   • To achieve our objectives, we
       •    discussed with OPM’s actuarial staff their process for
            developing the annual income and expense
            components of the “Postal Fund,” projections of future
            benefits and contributions, and the underlying
            assumptions, estimation methods, and data,
       •    reviewed the legislative history of laws that have
            affected USPS’s funding of CSRS costs,
       •    compared OPM data on the amount and timing of
            employee and agency contributions to USPS data and
            evaluated OPM’s methods for estimating contributions
            when data were unavailable,

                                                                             51




      Page 57               GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                           Appendix III – Detailed Scope and
                                                                 Methodology

       • compared OPM’s method for allocating investment
         returns to the methods OPM employs when allocating
         total investment returns between the CSRS and FERS
         plans and the “federal” and “USPS” FERS funds,
       • obtained documentation from OPM on the amount of
         funds transferred from CSRS to FERS for USPS
         employees who were automatically transferred to FERS
         on January 1, 1987, as well as those USPS employees
         who elected FERS coverage during the 1987 open
         season,
       • evaluated the reasonableness of OPM’s methods for
         estimating annual benefit payments and allocating a pro-
         rata share of refunds and administrative expenses,

                                                                          52




      Page 58            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                            Appendix III – Detailed Scope and
                                                                  Methodology

       • evaluated the reasonableness of OPM’s methodologies
         for allocating estimated benefit payments and other
         expenses between service rendered before and after
         July 1, 1971 – the effective date of the Postal
         Reorganization Act,
       • reconciled the financial data used to develop the various
         income and expense components of the “Postal Fund”
         with data from OPM’s published financial and actuarial
         reports,
       • tested the arithmetic accuracy of various computations
         and summarizations, including reperforming OPM’s
         estimate of annual benefit payments and related
         allocations for a nonrepresentative selection of nine
         annuitants,
                                                                           53




      Page 59             GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                             Appendix III – Detailed Scope and
                                                                   Methodology

       • discussed with OPM’s actuaries
            • their choice of economic and demographic
              assumptions and actuarial models used to project
              future USPS-specific benefits and contributions,
            • the extent to which these actuarial assumptions and
              models are similar to those used to prepare
              projections of the entire CSRS for financial statement
              purposes,
            • the effect of using USPS-specific demographics
              versus CSRS-wide demographics on the funded
              position as of September 30, 2002, and
       • reviewed the legislative proposal and identified matters
         that may need adjustment, clarification, or further
         consideration.
                                                                            54




      Page 60              GAO-03-448R Review of OPM Analysis of USPS CSRS Costs
Enclosure




                                           Appendix III – Detailed Scope and
                                                                 Methodology

   • We did not perform a financial audit of the “Postal Fund” as
     of September 30, 2002 or any of the annual income and
     expense components. Further, we did not perform an
     actuarial review of OPM’s projections of future benefits and
     contributions, and are not expressing an opinion on the
     material accuracy of these projections. Instead, we focused
     on the reasonableness of OPM’s methods, assumptions,
     and data.
   • While we found several significant issues pertaining to
     OPM’s reconstruction of the “Postal Fund” and projections
     and proposed various adjustments, there may be other
     issues that would significantly impact OPM’s projections that
     did not come to our attention in the course of this review.
   • We performed our work in Washington, DC from November
     2002 through January 2003, in accordance with generally
     accepted government auditing standards.
                                                                          55




      Page 61            GAO-03-448R Review of OPM Analysis of USPS CSRS Costs