oversight

A Study of the Risks and Consequences of the USPS OIG's Proposals to Change USPS's Funding of Retiree Benefits: Shifting Costs from USPS Ratepayers to Taxpayers

Published by the Office of Personnel Management, Office of Inspector General on 2011-02-28.

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

        u.s. OFFI C E OF 

  PERSONNEl MANAGEMENT 


   OFFICE OF THE 

INSPECTOR GENERAL 





A Study of the Risks and Consequences
of the USPS OIG's Proposals to Change
  USPS's Funding of Retiree Benefits
       Shifting Costs from USPS 

       Ratepayers to Taxpayers 

Page Intentionally Left Blank
OPM OFFICE OF THE INSPECTOR GENERAL                                                                  FEBRUARY 20 11 



I
                             EXECUTIVE SUMMARY
L
                     A STUDY OF THE RISKS AND CONSEQ!JENCES 

                     OF THE USPS OLG 's PROPOSALS TO CHANGE 

                        USPS 'S FUNDING OF RETIREE BENEFITS 

                  SHIFTING COSTS FROM USPS RATEPAYERS TO TAXPAYERS

    One of the pri ncipal respons ibili ti es of the U.S. Office of Personnel Management (O PM ) is the
    administra tion of the benefits programs for Federal c ivili an em pl oyees and ret irees. As part of
    that duty. it manages and oversees the Civi l Service Retireme nt and Disabi lity (CSRD) Fund,
    the Postal Serv ice Retiree Hea lth Benefits (PSRHB) Fund, and the Em pl oyees Health Benefits
    (EHB) Fund.

    The United States Postal Service (USPS) was establi shed in 1971 , rep lac ing th e former U.S. Post
    Office Departmen t (POD). Unli ke its predecessor, the US PS is an independent establi sh ment
    of the Execut ive Branch rath er than a Federal agency. Thi s decis ion to transform the POD was
    influenced by the fact that it offered what were essentially commercial se rvices and thu s could
    be expected to produce the revenues to cover its own costs rather than re lyi ng upon annua l
    Government appropriations.

    In 2009 and 2010, the USPS Office of In spector General (US PS 0 10) issued a series of reports
    conta in ing proposals that woul d reduce, modify, or eli minate th e lega ll y-mandated payments
    that the US PS currentl y makes into the OPM-administered trust funds. These reports make the
    general argum ent that the basic goa l of each of these proposa ls is two-fold: (I) to remedy an
    all eged inequity in the curre nt method by whi ch the US PS funds its retiree obligat ions (both
    annuity and reti ree hea lth benefits) and (2) to obtain operating capi tal for th e USPS, at least on a
    temporary basis.

                                           The US PS OIG's Proposal

    Proposal 1; Treatment of FERS Surplus. This proposal would change the law regarding an
    agency's (ill thi s case, the USPS's) contributions to the CSRD Fund made under the Federal
    Emp loyees Retirement System (FERS) so that w hen the agency has paid an amount in excess of
    its curren t liabi li ties, it may e ither receive a rebate 0 1' be excused from maki ng contributi ons unti l
    the excess is ex hausted.
OPM OFFICE OF THE INSPECTOR GENERAL 	                                                             FEBRUARY 20 11 



                                EXECUTIVE SUMMARY 

    Proposal 2: Allocation of CS RS Liabilities for POD/US PS Emp loyees. Thi s proposal would
    change the current allocation of responsibility between the Federal Government and the USPS
    fo r funding retirement annuities paid to emp loyees who (1) served in both the POD and the
    US PS, and (2) participate in the Civil Service Retirement System (CS RS). Under this proposal,
    the US PS contributi on would decrease, thu s increa sing the Federal Govcmmen t's share of the
    liability.

    Proposal 3: Reduction in Contribution Levels for Retiree Benefits. This proposal would
    change the current law requiring the US PS to full y fund both its liabi li ties under FERS and its
    ob ligations for future retiree health benefi ts, pennitting the US PS 10 meet lower fund ing leve ls of
    80 percent fo r FE RS li abili ties and 30 percent for reti ree hea lth benefit ob li gations.

                                          The OPM OIG 's Position

    We generally agree wi th Proposal 1 regarding the d ispositi on of excess FERS contributions. We
    strongly object 10 the remaining proposals on several grounds:

      • 	 They seek 10 alter the fundamental policy regarding the relations hip between the USPS 

          and the Federa l Government. These proposals wo uld cause the Government to assume 

          respon sibility for US PS ret iree benefit expenses wi thout a correspond ing increase in 

          Governme nt oversight of the US PS. 


      • 	 They do not ac nla lly remedy any all eged inequities in the Federal retiremen t program. 

          Instead, they serve onl y 10 provide the USPS w ith operating capital, whi ch would 

          poten tially shift costs from USPS ratepayers to the taxpayers. 


      • 	 The proposa ls would create a dangerou s precedent w hereby the trust fund s' assets are
          used for purposes other than the payment of benefi ts. If thi s became common practice, the
          fi nancial soundness and integrity of the tru st fund s would be severely compromi sed.

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

      • 	 If the US PS were unab le to make the employer 's contribution under CSRS and FERS, the
          Federal Governmen t would be li able fo r any shortfa ll in the CS RD Fund .

      • 	 The integrity of the Federal Employees Hea lth Benefits (FEHB) Program would be
          serious ly com promised, absent emerge ncy appropriations from Congress, if the USPS were
          to cease contributing the employer 's share of premiums.




                                                        11
OPM OFFICE OF THE INSPECTOR GENERAL 	                                                           FEBRUARY 201 1 



                               EXECUTIVE SUMMARY 

                                             Recommendations

    Based upon the facts and our ana lysis, we offer the fo ll owi ng recommendation s:

    I. 	 The O PM shou ld consider supporting the proposa l to amend the FERS funding mechan ism
         either by pCI111itting amortization of surplu ses in the same manner as s upplemental li abilities
         or utilizing the surplus in li eu of an nual FERS payments until it is ex hausted. In thi s
         in stance, the proposal mai ntains the fi nancial integrity of the CS RD Fu nd . Howeve r, the
         OPM shou ld strongly advocate that the proposal app ly to all agencies partic ipating in FERS
         and not so lely to the USPS.

    2. 	 The OPM should examine the e ffects that would result from the creation ofa demographic
         sub-account, whi ch wou ld be util ized in determining the US PS 's FERS li ability. Such
         a study should consider the effects upon both the USPS's FERS liab ili ties and the en tire
         Federal ret irement program.

    3. 	 As the admini strator of the FEHB Progra m, the aPM should support reta ini ng the
         requi rement that the USPS prefund its retiree health benefits as it does under current law.
         Thi s requi reme nt protects the FE HB Program against the ri sk of US PS default.

    4. 	 Absent additional Congressional act ion on th e matter, the O PM should refrain from
         imp lementing the proposal regarding the modi fi cat ion of its ca lculation of the USPS's CSRS
         liab ility for POD/ US PS employees. We believe that it is beyond the OPM 's legal authority
         to adopt thi s proposal without furth er leg islat ion . We note that the proposa l would shi ft
         substanti al costs from the USPS to the Federa l Government.

    5. 	 The O PM should strongl y oppose any legi slative action that would pennit the US PS to
         fund its FE RS responsib ili ties at 80 percent. Thi s proposa l would cause the CSRO Fund to
         incur substanti al unfunded liabi liti es as well as create a dangerous precedent w hereby other
         agencies would seek to reduce their FERS fundi ng obligations.

    6. 	 In its capacity as admini strator of the trust fund s, the aPM ought to share its tech ni cal
         expertise w ith Congress and appropri ate Executi ve Branch officials to ensure that they are
         fu ll y informed of the resul ting monetary and programmatic effects of such proposals upon
         the retirement progra ms and trust fu nds.

    7. 	 The O PM should protect the retirement programs agai nst being used as a way to address
         a situation that is entirely unrelated to retirement issues. Using the Federal retirement
         programs as a vehicle thro ugh which to imp le ment other policy objectives would be unwise,
         ineffic ient, and harmful to the programs. T he debate surrounding the US PS's fi nancial
         condition should not be foc used so lely on the funding of retiree benefits.


                                                      111
OPM OFFICE OF THE INSPECTOR GENERAL                                                            FEBRUARY 201 1 



                               EXECUTIVE SUMMARY 

                                                 Concl usion

    Whil e we understand that the USPS is having financial d iffic ult ies, the OPM's adm inistration
    of the law has not caused this situation. The aPM has complied with the law as wri tten on all
    accounts. To say otherw ise is both inaccurate and obscures the true causes of USPS 's current
    cnS ls.

    We believe that these proposal s would have a last ing negative impact upon the retirement
    programs and trust funds bu t have littl e, if any, positi ve impact upon the USPS 's ultimate long­
    teml pro fi tabili ty. Instead, the result of lhese proposa ls would be 10 shift cos ts from USPS
    ratepayers to the American taxpayers.


                                                           f3P-/::./ -.Eo/;hz4'
                                                            Patrick E. McFarl and
                                                            Ins pector Genera l




                                                      IV
                                    TABLE OF CONTENTS 

EXECUT IVE SUMMARY ...................................................................................................... i 

INTRODUCTION................................................................................................................... 1 

SCOPE AN D M ETHODOLOGY ......................................................................................2 

ECONOM IC AND LEGAL BACKGROUND ..............................................................3 

USPS's Relationship with the Federal Government ....................................................3 

USPS Employee and Retiree Rights ...................................................................................6 

   Pensions ................................................................................................................................... 6 

   Health Benefits ....................................................................................................................... 7 

Economic Considerations .......................................................................................................8 

   D~rerral ofLiabilities...........................................................................................................9 

   USPS, Financial Outlook .................................................................................................. 9 

   The Protection Afforded By Prefilllding and Full Funding ...................................... 11 

Structure and Operation of CSRD and PSRHB Trust Funds ................................14 

   CSRD Fund ........................................................................................................................... 14 

   PSRHB FUlld ........................................................................................................................ 14 

   Financial Ejlects ofthe Proposals ..................................................................................20 

ANALYSIS OF TH E PROPOSALS ..................................................................................22 

Proposal 1: Treatment of FERS Surplus ........................................................................23 

   Current Lalv ..........................................................................................................................23 

   USPS DIG;· Proposed Action .......................................................................................... 23 

   USPS DIG;· Justificationfor the Proposal ...................................................................24 

   Discussion ............................................................................................................................. 24 

   Conclusion ............................................................................................................................ 25 

Proposal 2: Allocation of CSRS Liabilities for POD/USPS Retirees ....................27 

   Current Lal-v..........................................................................................................................27 

   USPS DIG, Proposed Action ..........................................................................................29 

   USPS DIG, Justification/or the Proposal ...................................................................29 

   Discussion .............................................................................................................................30 

   Conclusion ............................................................................................................................34 

Proposal 3: Reduction in Contribution Levels for Retiree Benefits .....................35 

   Current Lal-v..........................................................................................................................35 

   USPS DIG;· Proposed Action ..........................................................................................35 

   USPS DIG;· Justification for the Proposal ...................................................................36 

   Discussiol1 .............................................................................................................................36 

   Conc/usiol1 ............................................................................................................................41 

RECOMMEN DATIONS..................................................................................................... .43 

CONCLUS ION .......................................................................................................................45 

                                                    INDEX OF CHARTS 


Chart I.      Structure and Operat ion of the C ivil Service Retirement and
              Disabil ity Fund ... ...... ... ... .. .. .. .. .. .. .. .. .. .. ..... .... ... ...... .. .. .. .. .. .. .. ..... .... ...      ... .. .. .. .. .. 15

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

Chart 2B.     Structure and Operation of the Posta l Service Retiree Health Benefits
              Fund Beginning in 20 17.. ... .. .......... .. .. .... ............ .. .......... .. .. .... ............ .. .............. .. 19




                                                             ACRONYMS

1974 Act      Posta l Serv ice Payments to C ivi l Service Reti rement Fund Law
2003 Act      Posta l C ivil Service Retirement System Funding Refonn Act 0[ 2003
CBO           Congress ional Budget Office
CRS           Congress ional Research Service
CSRD          Civil Service Ret iremen t and Disability
CSRS          Civil Serv ice Retiremen t System
EHB           Em ployees Health Benefits
FASB          Financ ia l Accounting Standards Board
FEHB          Fede ra l Empl oyees Health Benefits
FERS          Federa l Employees Ret irement System
GAO           United States Government Accountability Office
OPM           United States Office of Personnel Management
PAEA          Posta l Accountab ili ty and Enhancement Act of 2006
POD           United States Post Office Department
PPA           Pension Protection Act of 2006
PRC           Posta l Regu latory Commi ss ion
PSRHB         Posta l Serv ice Retiree Health Benefits
S&P500        Standard and Poor 's 500 Index
USPS          Un ited States Posta l Serv ice
USPS OIG      Un ited States Posta l Service Office of Inspector General
                                                         OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




INTRODUCTION

During 2009 and 20 I 0, the United States Postal Service's (US PS) Offi ce of Inspector General
(USPS OIG) released a series ofrcpon s and studies contai ni ng proposal s meant to allev iate the
USPS's current fi nancial difficu lti es.

Three of these proposa ls suggest reduc ing, mod ifyi ng, or eli mi nat ing the                 OPM's nlission
statutori ly. mandated payments that the US PS currently must make into                       i s to oversee and
the Civil Service Retirement and Disab ili ty (CS RD) Fund and the Posta l                         protect the
Service Retiree Health Benefits (PSRHB) Fund. These two trust fu nds                                 Federal
are admi ni stered by the U.S . O ffi ce of Personnel Management (OPM)                          retiJ'ement and
as part of its mi ss ion to oversee and protect the Federal retirement and                       health benefit
health benefit programs.                                                                           progranls

The proposa ls are sum marized as follows :

Pro posa l I: Treat me nt of FE RS Surplus. Thi s proposal would change the law regardi ng an
agency 's (in thi s case, the USPS 's) contribut ions 10 the CS RD Fund made under the Federal
Employees Ret irement System (FERS) so that w hen the agency has paid an amount in excess of
its current liabi lities, it may e ither receive a rebate or be excused from maki ng contributions until
the excess is ex hausted. I

Proposal 2: Alloeatioo of CS RS Liabilities for PO D/US PS Employees. This proposal wou ld
change the current a llocation of responsibility between the Federa l Govern ment and the USPS
fo r fund ing retirement annu ities paid to emp loyees who (I) served in both the U.S . Post Office
Departme nt (POD) and the USPS, and (2) part icipate in the Civil Service Retirement System
(CSRS). Under thi s proposal , the USPS contribut ion would decrease, thu s increasing the Federa l
Govern ment's share of the liab ili ty. 2

Proposal 3 : Red uction in Co ntr ibu tion Leve ls fo r Reti ree Benefits. This proposal would
change the current law requi ring the USPS 10 fu ll y fu nd3 both its liabi li ties under FERS and its
ob ligati ons for future retiree hea lth benefi ts, pennitting the US PS 10 meet lower fund ing leve ls of
80 percent fo r FERS li abili ties and 30 percent for reti ree hea lth benefi t ob li gations.4




 I. USPS OIG. Federal Employees Retiremelll System Ol'e rfimding, Report Number FT-MA-I 0-001 (Aug. 16,
2010) (hereinafier "US PS OIG's FERS Report").
2. USPS OIG, Th e Postal Service~' Share ofCSRS Pension Responsibility, Report Number RARC-WP-IO-OO I
(Jan. 20, 2010) (hereinafter " US PS DIG 's CS RS Report").
3. In this study, the tenns "prefund" and "fully fund" are interchangeable. " Prefulld" is usually used in the health
benefit context while " fu lly fu nd" is usua lly used in the annuity context.
4. USPS OIG, Substantial Savings Available by Prejunding Pensions alld Retirees ' Health Care at Bellcllllwrked
Leve/~', Report Number FT-MA-ll-OOI (Nov. 23, 2010) (hereinafter "US PS DIG's Funding Levels Report").
  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




At the req uest of the Director of the O PM, this office ini tiated a review of the e ffects thallhese
proposa ls would have upon the CSRD and PSRHB Funds, as well as the associated retirement
and hea lth programs. s

SCOPE AND METHODOLOGY

Given aPM 's jurisd ict ion, we lim ited our study to onl y the three proposals d iscussed above ill
the Introduction. We did not evaluate proposal s developed by other part ies, such as the US PS,
the Postal Regulatory Comm ission (PRe), or Members ofCongress.6

Th is study was prepared between November 20 I 0 and February 20 I I, and is not, nor is it meant
to be, a fo nnal aud it conducted in accordance with the Governmellt A IIdilillg Standards publ is hed
by the Governme nt Accoull tab ili ty O ffi ce (GAO). It is a researc hed analysis of the fi nancial
effects and policy impli ca ti ons of the three ident ifi ed proposa ls.

We di d not engage an independent actuarial or consulting fi ml duri ng the developmen t of
thi s study. 7 In stead, we reviewed stud ies produced by the US PS O IG d iscussing its proposa ls
as well as reports prepared by the GAO, the Cong ress ional Research Serv ice (CRS), the
Congress ional Budget Office (CBO) , and the PRe. We also examined re levant laws, legislative
histories, Congress ional testimony, and other pu bli c infornlation on this topic. In addi tion to our
independent research, we consulted with the OPM Actuary and staff from oth er OPM program
offices, and met with Congress iona l comm ittee staff.




5. Although it involves the PSRHB Fund, we do not discuss the proposa l contained in the report issued by the
USPS OIG entitled Estimates o/Postal Service Liabilityfor Retiree Health Care Benefits, Repo rt Number ESS ·M A~
O-OOI(R) (Ju ly 22, 2009). The OPM Actuary informed us that prior to the release of the USPS OI G and the Postal
Regulatory Comm issio n (PRC) reports on the issue, the OPM had already decided to use actuarial assumptions
consistent with those recommended by the PRe.
6. The PRe commiss ioned a report by the Segal Company that addressed Ihe CSRS liabil ity for employees who
worked for both the POD and the US PS. We did not eva luate the Segal Company's methodology or reason ing.
We note tha tlhe Segal Company found , and the PRC agreed, that the USPS made surplus contributions undcr the
CS RS system fo r those employees in the amount of$50-$55 billion rather than the $75 bil lion that the US PS O IG
contends. See, The Scgal Company, Report to (he Postal Regula(my Commission on: Civil Service Retirement
Sy.wem Cost (1n(/ Benefit Allocation Principles (June 29, 2010).
7. A Janua ry IS, 20 II , article published by the Washington Post asserted that we had estimated that the USPS has
overpaid $50-$75 bi ll ion into the ret irement trust fu nd. After receiving corrected infonnat ion, the Washington Post
thcn publishcd a correction stating: " Earlier versions Of lhi s article incorrectly said that the inspectors gencral for
the U.S . Postal Service and the Office of Personnel Managcmcnt estimated that the Posta l Scrvice has overpa id the
Civi l Service Ret iremcnt System by $50 bi llion to S75 bi ll ion. The Postal Regulatory COlllm ission est imated an
overpayment of approximately $50 billion, and the Postal Service inspector general estimated $75 bi ll ion. The OPM
inspcctor general has not yet made an estimate." As staled in the above text, we have not retained an independent
actuary and this rcport wi ll not offcr suc h an estimate, See , Ed O'Keefe, " Freshman Leader of Key House Pane l
Says He' ll Focus on Federal Payroll Cuts," IYashillgfoll POSf, Jan, IS , 20 II ; both the artic le and the correction arc
available at: http ://www.washi llgtonposl.com/ wp-dynJcontentJarticie/2011 /01 / IS/AR2011011805665.html.



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                                                          OI'M OFF ICE OF THE INSI'ECTORGENERAL 




ECONOM IC AND LEGAL BACKGROUND

In order to properly eva luate the proposals, one must understand the US PS's relation ship with the
Federal Government ; USPS employee and retiree rights; cCI1ain economic consideration s; and
the operat ion of Government-admi ni stered trust funds. We have provided here a brie f overv iew
of each of these topics.

USPS' s Relationship with the Federal Government

In 197 1, the POD ceased to be an Executi ve Branch agency and became "an independent
establi shment of the executi ve branch."8 Congress was influenced by the fact that the POD was
offeri ng what were essenti all y commercial services, and thus could be expected to produce the
revenues to cover its own costs. 9 A Congress iona l report issued during the development of the
Posta l Reorganization ActiO states:

         The mandate that the Postal Service must be sel f·supporting is essential ifpostal
         affa irs are to be conducted w ith reasonable economy and effi ciency. So long
         as postal management operates with a general awareness that congressional
         appropriations are always availab le, within some uncertain limit, to make good
         any shortfall s of revenue or overruns of costs, there is littl e rea l incenti ve to make
         the best possibl e use of resources and efficiency is sure 10 be more honored in
         the speech than the observance. Moreover, the "break-even" requi rement of[the
         Postal Reorganization Act] represents a commitment that the Postal Service no
         longe r rely on mass ive annual infusions of general revenues of the Treasury at the
         tax payers' expense. II

Budgetary control is a key fea ture of Congressional and Executi ve admini strat ion of
Govemmentaloperations. Therefore, the Government 's relinqui shing of fi nancial overs ight of
the US PS, affordi ng it greater management flexibility, was a significan t concession. 12 As the
CRS points out:

         The budget process is a use fu l management tool for pl an ning as well as for
         maintaining accountabi lity. Presidents and central management agencies find
         the di sc ipline of the budget an essential element in their manage ment arsenal. ..
         Govem ment corporations [s uch as the US PS], on the other hand, are exempt

  8. 39 U.S.c. § 201.
  9. 39 U.S .c. § I Ol(d) (Postal rates set to cover costs).
10. Postal Reorganization Act or 1970, Pub. L. No. 91-375, 84 Stat. 7 19.
 II. H.Rep. No. 91-988 (1970), al page 13; see also, H.Rep. No. 91-1104 (1970), at page 17.
 12. 39 V.S.c. § 410(a) ("no Fcderallaw dealing with pub lic or Federal contracts, property, works, officers,
employees, budgets, or runds ... shal l apply 10 the exerc ise o rlhe powers of the Postal Service."); § 10 I(c) (USPS
compensation must be comparable to pri vate scctor); § 40 1 (Postal Service granted powcr to entcr into contracts
and "dctenni nc the charactcr of, and necessity fo r, its expenditurcs"); § 409(h) (court judgment against thc Federal
Governmcnt d ue 10 USPS activities must be paid by USPS funds); § 1003(a) (compensation must bc comparable
to the pri vatc sector, although capped at the same salary level as the Vice President of the United States); § 1004(a)
(ability 10 offcr higher levels of compensation to management).



                                                           3

  OPM OFF ICE OF T HE INSPECTOR GEN ERAL 




        either indi vidually or collect ive ly from many execlit ive branch budgetary
        regulations. These exempti ons are predicated, for the most part, on the idea
        that with the corporate structu re, users, rather than the genera l taxpayers, are the
        principal source of revenue ... lJ

In oth er words, Congress gra nted the USPS fisca l independence in
exchange for a prom ise of fi sca l responsib ility. Thi s fiscal independence is                  Congress
pal1icu larly important because it also en tails a release from accou ntability to               granted the
the taxpayers because there are no taxpayer dollars being used. \4                               USPSfiscal
                                                                                                independence
Whil e the USPS does have some statu tory constraints regarding li se of its                   in exchangefor
funds ,ls it still has fa r more flexibility than Federa l agenc ies. II has used its            a promise of
unique manageria l independence to ass ume substantial ob ligations related                         fiscal
to employee compensat ion, including retirement and health care liabi li ties                   responsibility
that are in excess of what Government agenc ies are pel111itted to assume. 16

For example, under the Federal Employees Health Benefits (FEHB) Program, as designed
by Congress, the Federal Governmen t pays 72 percent of a weighted average of all FEH B
Program plan premium s. 17 In contrast, the USPS 's contribut ion rates fo r the FEHB Program are
"determined through a collecti ve bargaining process wi th its unions," whic h has resulted in the
USPS paying 79 percent of premiums for most emp loyees fo r 20 I 0 and 100 percent of premiums
fo r Postal Ca reer Execllt ive Service emp loyees, USPS O IG directors, and Senior Executi ve
Service emp loyees. IS

In the Posta l Reorgani zation Ac t, Congress codified the principle that " [o]b li gations issued by the
Posta l Serv ice under thi s section shall ... not be obl igations of, nor shall payment of the pri ncipa l
thereof or interest thereon be guaranteed by, the Government of the Uni ted Stales."19 The only
way that such obligat ions would be backed by the full faith and cred it of the Uni ted States is if
the USPS requests that the Sec retary of the Treasury make such a pledge and the Secretary

 13. CRS, Federal Gorerll/llelll CO/pom/ions: An Overview, Report RL30365 (Mar. 23, 2006), at pages 8-9.
 [4. Congrcss docs provide a smal[ annual appropriation to the US PS to pay for the provision of frec mail fo r the
bli nd and overseas voters. 39 U.S.c. § 240 [.
 IS. For exampl e, the US PS's compensation and benefits package must be comparable to that offered in the private
sector. 39 U.S.c. §§ lO[(c), 1003. USPS employees must participate in CSRS o r FERS. 39 U.S.c. § [005(d). If
the US PS wants to change o ne of its fringe benefit programs, such as hea lth care insurance, the new program may
not be "less favorable " ~ than the c urrcnt program (i.e., the FEHB Program). 39 U.S.c. § 1005(f).
 [6. 39 U.S.c. § 4 tOea) ("no Federal law dcaling with public or Fcderal contracts, property, works, officers,
cmployces, budgets, or funds ... shal l apply to the exereise of thc powers of\h e Postal Service.").
 [7. 5 U.S.c. § 8906 (note that the Governmcnt contribution may not exceed 75 pcrccnt of the premium for any
individual plan).
 18. US PS OIG , Follow-Up Review oflhe Poslal Service s Employee Bellejils Programs, Report Number HR-MA­
0[-001 (SCI'\. 3, 20[0), (hereinafter "USPS Follow Up") at page 3. Anothcr example is the USPS's contractual
agreement wit h the fo rmcr Postmaster Gcneral, Joh n E. Potlcr, a partic ipant in CS RS, whereby he is entit[cd to
a separate pension bcnefit, call ed the "US PS Pcnsion Bcncfit. '· This benefit was payable for "his attainment of
required perfomlance objectives over thc six-year period from Junc 2001 -Junc 2007." Fiscal Year 2010 ExecU/il'e
Officer CompeJlsa lioJl, avai!able al; http://www.poslulrepo rter.com/pces-salnry.htm.
 19. 39 U.S.C. § 200S(d)(S).



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                                                          OI'M OFF ICE OF THE IN SI'ECTORGENERAL 



delennines thaI it is in the public inte rest to do 50. 20 By providing an exception, the law
reaffi rmed the ru le that the US PS is 10 be solely respon si ble for its liabi li ties unless it receives
ex pre ss agreement from the Government.

The USPS , however, ha s a somewhat different view orthe maller, as explained in its 20 10
Annual Report:

         The Posta l Se rvice's status as a se lf-support ing ent ity within the fede ral
         govel11ll1ellt presents unique requi rements and restrictions, but also mitigates
         some orthe financ ial risk that would otherwise be associated with a cash
         shortfa ll. Desp ite falling mail volume, the Posta l Service is still widely
         recogn ized to provide an essent ial government service and there are a wide
         variety of potenti al legislati ve remedies that could reso lve the sh0l1-term li quidity
         concern. Therefore, it is unlike ly that, in the event ofa cash shortfall , the federal
         government would cause or all ow the Posta l Service to cease operations. 21

Thi s statemen t is clearl y at odds wi th the ex pressed Congress iona l intent that taxpayer dollars
shou ld not be used to pay USPS expenses. The requiremen t to be se lf-s ustaining was mean t to
encourage the USPS to be more effi cien t than its predecessor, the POD , which was a Federal
agency, un li ke the US PS. The POD 's Postmaster Genera l answered directly to the President as a
member of the Cabinet and the POD rece ived annua l appropriations for ex penses that exceeded
its commercial revenue.

In stark contrast, the USPS is not under the direct ion of the President and it receives on ly a very
small appropri ation from Congress to pay for pub li c se rvices such as mail for the blind - an
appropriation that the USPS O IG has recommended foregoing as a means of "cementi ng the
fin ancial independence of the Posta l Serv ice in the minds of the public and po li cy makers."22

A key difference between a "Federal agency" and an " independent establis hment" is
accountabi li ty. Federal agencies are permi tted to assume fi nancial liabiliti es on behalf of the
Federa l Government because the agencies are managed and overseen by e lected represen tat ives.
The USPS , however, is not subj ec t to the same contro ls or degree of overs ight prec isely because
it is not supposed to use taxpayer do ll ars .




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



                                                           5

    OPM OFF ICE OF T HE INSPECTOR GEN ERAL



  USPS Employee and Retiree Rights

  Pensions

  USPS emp loyees arc req uired by law 10 participate in the Federal retirement                   USPS employees
  program as part of their overall compensation package, 23 Thi s program                          are required
  is a single plan wi th two benefit systems, CS RS and FERS, each having                            by law to
  its own funding method.24 Under eac h system, the emp loyer - whether                            participate in
  it be a Federal agency or an independent establi shment such as the US PS                         the Federal
  - depos its a statutoril y-determined amount based upon each eligib le                            retirement
  employee's pay into the CS RD Fund for each emp loyee's future annuity.25                          progrant
  The em ployee al so contributes a s ta tutorily~determin ed percentage of hi s or
  her pay into the CS RD Fund. 26

  Two techni cal points must be noted. First, an emp loyee does not have an individual "account" 

  in the CS RD Fund. Second , both CS RS and FERS contributions are made into the CS RD 

  Fund. All amounts deposited into the fu nd are comming led even though the an nuity due to 

  each employee is individually calcul ated and the transaction s of each system are accounted fo r 

  separately. Thai is, the assets are used to pay any retirement annuity that is due, regard less of 

  whether the rec ipient is enrolled in CS RS or FERS. 


                           A Federal or US PS employee has a legal ri ght to an annu ity if he or she
 Even if the USPS          meets certain statutory criteria.27 Ne ither the right to an annuity nor its 

    were to stop 
         amount is cond itioned upon the employer's continued contributions to
making payments, the CS RD Fund. It is the CS RD Fund - 1101 the emp loy ing entity - that
the USPS retirees
                           is legally obligated to make the pension payments to annuitants. Thu s,
   would still be
                           even if the USPS were to stop maki ng payments into the CSRD Fund, all
 entitled to their
      annuities            USPS retirees wou ld still be legall y entitl ed to their earned annu iti es and
                           the Government is ob li gated by statute to pay them. Fu nds from the U.S.
                           Treasury, di rect appropri ations to the CS RD Fund fro m Congress, and the
  contri butions of other Federal employers and employees
  wou ld have to be redirected or increased to fu lfil1 what         "The ultimate guaranloJ·s
  is an obligation of the United States Govern ment.                  ofGovernmenl pensions
  As ex pressed in a rece nt CRS report, "[t] he ultimate                  are the taxpayers."
  guara ntors ofGovemmenl pension s are the taxpayers."28
                                                                              - Congressional Research
                                                                                      Service


  23. 39 U.S.C § I005(d)(I ).
  24. For purposes of th is report, we do not discuss the Thrift Savings Plan, which is administered by the Federal 

  Retirement Thrift I.nvestment Board. 

  25. 5 U.S.C §§ 8334 (CSRS), 8423 (FERS).
  26. 5 U.S.C §§ 8334 (CSRS), 8422 (FERS).
  27. 5. U.S.C §§ 8333 (CSRS), 84 10 (FERS).
  28 . CRS, Federal Employees' Retirement System: Benefits Gild Fillancing, Report 98-810 (Sept. 15 , 20 I 0) 

  (hereinafter "CRS Report 98-810"), at page 9. 




                                                            6

                                                            OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




Health Benefits

in add iti on to the ri ght to an annuity, US PS ret irees, like Federa l retirees, may choose to con tinue
pal1icipating in the FEHB Program, th e Federal Governmen t's employee health ins urance
program, which is admini stered by the OPM. 29 The OPM negotiates contracts wi th insurance
compani es annually to determine premium s, benefits, and other terms. II is th ese insurance
compani es, rather than the Federal Government, that actuall y deli ver the health benefi ts 10 the
em pl oyee or retiree.

Under the FEHB Program , a p0l1ion ofa retiree's health care in surance premium is paid for
by the Federal Government (or, in the case of US PS ret irees , the US PS) through contributions
to the Employees Hea lth Benefits (E HB) Fund. 30 The Federal or USPS retiree contributes the
remai ning amount of the premium to the fund.

As the US PS O IG's repol1 s have repeated ly pointed out , the Federal Gove l11ment does not
pre fund it s ret iree health ob li gations. 3l Instead , the emp loyer and em pl oyee contri bution s pay
only for the costs of the program fo r that particular year. Consequen tly, the EHB Fund maintains
oilly a small amount of reserves and thus does not have significant assets that remai n in the fund
fro m yea r to yea r.

Eli gib le empl oyees or ret irees choose whether or not they wil l parti cipate. If they continue to
meet the elig ibility requirements throughout th e year - and continue to pay their share of th e
premium - they may maintain their in surance coverage.

It is unclear, however, what the effect would be upon US PS em pl oyees' or
retirees' rights if the USPS ceased maki ng its req ui red payments into th e                         TheEHBfund
EHB Fund because the fund does not contai n sufficie nt reserves that could                          does not contain
be used to " replace" the USPS's con tributions. C onsequentl y, th e fund 's                            sufficient
asset s would be ex hausted very quickly.                                                             reserves that
                                                                                                      could be used
In such a scenario, the in surance compani es wou ld still be lega ll y entitl ed                    to "replace" the
to the fu ll amount of til e premium negotiated under the contract. 32 The                                USPS's
OPM would have to take some sorl of act ion because wi thout the USPS's                               contributions
contributions, the fund simply would not have enough money to pay every
FEHB Program participant's premium.



29. The retiree mllst have participaled in the FEHB Program prior to ret irement in addition to meeti ng any other
eligibility req uirements listed in 5 U.S.c. ~ 8905(b).
30. 5 U.S.C. §§ 8906(b), 8909. Note that this fu nd is a separate fund from the PSRHB Fund. which is discussed in
more dctail below, in the section enti tled "Struct ure and Operation of Govemment Trust Funds."
31. See. e.g., US PS DIG, Cillil Sell1ice Retiremelll System Ore/payment by the Pm'tal Serllice, Report Number CI­
MA-10-00 I (June 18,20 (0) (hereinafter "US PS OIG CS RS Overpayment Report"), al pages 10-11 ; USPS D IG,
SUllllllmy ofSllbslalllial Ol'e/jlll1dillg ill Postal Sel1'ice Pensioll alld Retiree fleallh Care Flillds, Report Number FT­
MA-10-002 (Sept. 30, 20 (0) (hereinafter "US PS DIG Summary''), at page 10.
32 . fleallh III:slI/"{/lIce Plan 0fCreater New York. Illc. 1'. Ulliled SWles, 62 Fed. Cl. 33 (2004) .



                                                             7

   OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




 Absent an emergency appropri at ion fro m Congress, it is possible thallhe O PM would have to
 exercise its regu latory authority to di se nroll USPS emp loyees and retirees as a class in order to
 continue providing health care coverage to all other FEHB Program participan lsY

 If the OPM did not take such drast ic measures, the EHB Fund would very quickly run oul of
 assets and pl ans would stop rece iving premium paymen ts because OPM simply would not have
 the money to pay them. In that scenario, some insurance companies may unilatera ll y decide that
                       the Government is in default of the plan contract and withdraw fro m the
                       program.
   Ifenough
   insurance
                            If enough insurance compani es withdrew, it would threaten the exi stence of
  companies
                            the FEHB Program. Even i f some insurance compani es continued to offer
  withdrew, it
                            coverage for the remai nder of the year, they may decide not to participate
would threaten
                            in the FEHB Program the follo wing year. If they did decide to stay in the
the existence of
                            program, they may be forced to increase premiums dramatically in order to
   theFEHB
                            make up the premium shortfall, which would affect other non-USPS
   Program
                            participants.

  Economic Considerations

 In the publi c debate surrounding USPS contributi ons to the tru st fund s, there has been much
 confusion between the creation of a debt and the payment of a debt Y Pension and ret iree hea lth
 benefit li abili ties are current li abil ities - not future ones, even if they are not payabl e until a
 future date. As the Financial Accounting Sta ndards Board (FASB)35 expla in s:

          In exchange for the CUiTent services provided by the employee, the empl oye r
          promi ses to provide, in addition to current wage s and other benefits, [pension]
          and health and other welfare bene fit s after the employee retires ....
          The em pl oyer's ob li gation fo r that compe nsation is incurred                 An
          as the employees rende r the services necessary to earn their               organization
          postretirement benefi ts. 36                                                must budget
                                                                                                        andplanfor
 Therefore, just as an organi zation must budget to ensure that it ca n meet
                                                                                                          future
 it s curren t payroll ob ligations, so too mllst it plan for these fu ture                              payments
 payments.




 33. 5 U.S.c. § 8913.
 34 . See. e.g., StalCment ofinspcctor General David C. Wi ll iams, US PS,     u.s. Postal Service in Crisis, 

 Subcomm ittee on Federal Financial Management, Informa tion, Federal Services, and International Securi ty, 

 Commiuee on Homeland Securi ty and Governmental Affairs, U.S. Senate (April 6.2009), at page 2. 

 35 . FAS B is the designated organ izat io n in the private sector that establishes the standards of financ ial accounting
 that govern the preparation of fi nancial reports by nongovernmental entities. See, www.fasb .org.
 36. FAS B Statement No. 106; see aIm, FASB Statement No. 87.



                                                              8

                                                         O I'M O FFICE O F T H E IN SI'ECTORGENERAL 




Deferral ofLiabilities

The USPS has amassed a significant amount of general debIto the U.S. Treasury)7 in additi on
to accumul ating considerable un funded liab ili ties with regard to pensions and ret iree heallh
bellefits.38 While unfunded liabilities are a type o f debt, fo r purpose s of thi s study, we dis tingui sh
them from the US PS's general debt held by the U.S. Treasury. As used here, unfunded li abili ties
spec ifica ll y refer 10 the "promises" that the US PS has made to it s employees and retirees for
which it has not set as ide money to pay.39

Two of the proposa ls suggest amend ing the law to postpone or dec rease payments thallhe US PS
is cUiTenlly statutori ly-mandated to make 10 the CSRD and the PSRHB Fund s.

It is li kely that deferral of these payments would provide temporary financial relief to the
USPS . The proposa ls advocat ing for defetTal assume that eventually th e USPS will res ume such
payments; in the mean time, the USPS would continue to incur new future fi nancial ob liga tions.

Thi s is fi nancially risky fo r three reasons. Fi rst, future USPS customers (ratepayers) will
have to pay for expenses that the USPS is incurring today. Thi s wi ll likely hurt the USPS's
ability to compete in the future and affect its ability to improve its finan cia l situation . Second,
the US PS will lose the benefit of the interest that its deposits into the tnl st fund s would have
otherwi se eamed. Thi s interes t wo uld have red uced its future retiree li abili ties. Consequent ly,
implementation of these proposa ls would req uire the USPS to make larger contributions in the
future. Third , if the USPS becomes in solvent , the Federal Government, through the trust funds,
will still have to pay these pension liabi liti es and poss ibly assume respon sibility for USPS retiree
healt h benefit obligat ions as we ll.

USPS's Financial Outlook

Whil e various parties have worked di li gent ly to develop bu siness and operational initi at ives
geared towards improving the USPS 's business model and finan cial cond ition, we have yet to
see a report that contain s viable proj ection s that it will improve its fin ancial situation. 40 The

37. As of the end of fiscal year 2009. th is amount was $12 bi tlion. US PS. Foml I O-Q (Feb. 9. 20 II ), at page 10.
38. According to the OPM AClUary, as of the end of fisca l year 2009, the US PS had un funded pension liabi lities of
$16.7 bill ion and unfunded retiree health benefi t liabilit ies of$85.9 bill ion.
39. For example, if the US PS ptedges 10 pay an employee $20,000 annually upon ret irement, current law requires
thallhe USPS deposit into the CS RD Fund duri ng the employee's working lifetime the entire amounllhat it wou ld
take to fu lfi ll that pledge when the employee retires. Thus, the rund would be able to make the full $20,000 payment
each year without additional contributions rrom the US PS. An unfunded liability would exist if the US PS deposi ted
only enough 10 pay the retiree $15,000 a year, wi th the expectation that when the time comes to make the $20,000
payment. the USPS wi ll pay the remaining $5,000 out of its current revenues.
40. See. e.g., Statement of Ph illip Herr, Director, Phys icallnrrastructure tssues, GAO, u.s. Posllll Set"ice:
Financial Challenges COlllilllle. wilh Relatively Limited ReslIllsjivm Recent Revenue-Generation Efforts ,
Subcomm ittee on Federal Workforce, Postal Service, and the District of Columbia, Commi ttee on Oversight and
Govemment Refoml, U.S. House of Representatives, GAO-10-19IT (Nov. 5, 2009), at Int roduction; CRS, The u.s.
Postal Sen'ice s Financial Condition: Oven/jew lind hSllesfor Congress, Report R41024 (Oct. 5, 2010) (hereinafter
"CRS Report R41024'"); USPS, 2010 Annual Reporl: Foundmionfor Ihe Future, at page 70, available at: http ://
www.usps.com/fi nancials!jld flannual_report_ 20 IO. pd r.



                                                          9

  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




CBO's "projections indicate that US PS's costs are on a trend to rise somewhat fas ter than general
infl at ion - if only because health ca re cos ts are expected to grow in rea l terms." 41 Fu rthermore,
both the GAO and the PRe have noted:

         Current pressures from declining reven ue and volume do not appear to be abating,
         but rath er seem to be increasi ng. During the economi c downturn , there has been
         an acce lerated diversion of busincss and i_nd ividualmai l, and some mailers have
         left the market entirely. An economi c recovery may not bring a cOITcspond illg
         recovery in mail vo lume due to continuin g social and techno logica l trends that
         have changed the way that peop le commun icate and use the rnail Y

                                                                                               "The ologanization
The USPS itself has si milarl y bleak projection s:
                                                                                                 will continue to
                                                                                                 face declining
         Industry experts confinn that the marketplace trends challeng ing
                                                                                               volume, stagnant
         the Postal Serv ice in recent years are expec ted to accelerate. The
                                                                                                 revenue, large
         organi zation will conti nue to face declining vo lume, stagnant
                                                                                                fixed costs, and
         reven ue, large fi xed costs, and rising workfo rce costs. Without
                                                                                                rising worliforce
         addit iona l act ion to address these trends, the Postal Service would
         face annual losses as great as $33 billi on by 2020.43
                                                                                                      costs. "
                                                                                                         -USPS
The USPS continuall y ci tes the annual paymen ts req uired by the Posta l
Accountab ili ty and Enhancement Act of2006 (PAEA)44 as a "s ignifi can t"
contributor to its inability to meet its expenses ,45 However, the CRS noted that "even before
PAEA's enactment in earl y FY2007, the rate of g rowth of the USPS's operat ing expenses
exceeded that of its operat ing revenue. "46




41. Letter from Douglas Holtz-Eak in, Director, CBO. to the Honorable Judd Gregg, Chaimtan, Committee on the
Budget, U.S. Senale (Sept. 1,2005), at page 8.
42 . Statement of Ph ill ip Herr, Director, Physical lnfrastrue ture Isslles, GAO, u.s. Postal Service: Deteriorating
Pm·tal Finances Require Aggressire Actions 10 Reduce Cmw', Subcommiltee on Federal Financial Management,
Government Infonnation, Federal Services, and International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate, GAO-09-332T (Jan. 28, 2009), at 5 (referring to PRC, Report 011 Univerml
Service alld the Postal MOllopoly (Dec. 19,2008» .
43. US PS, Ensuring a Viable Postal Service fo r America: An Action Plan for the Future, at page 6, tlI,ailable at:
http://www. usps.comlstrategicplann inglyd f/ A clion PI an fort heFuture_ March20 IO. pd f#searc h=' .
44. Postal Accountabi lity and Enhancement Act of2006, Pub. L. No. 109-435, 120 Stat. 3 I 98.
45. See, e.g., Statement of Patrick R. Donahoe, Postmaster General/CEO-Designate, Findillg Solutiolls /0 the
Challenges F(/cing the u.s. PO~'/(/I Service, Subcomm ittee on Federal Financial Management, Government
Inforntation. Federal Services, and International Security, Commiucc on Homeland Security and Governmental
Affairs, U.S. Senate (Dec. 2, 2010) at pages 4-5 ("In 2007 and 2008. the Postal Service made the required pre­
funding payments and consequently sustained losses ofS5.1 billion and S2.8 bill ion, respecti vely. Had it not been
for these payments, in 2007 the Postal Service would have seen profits ofS3.3 bi ll ion and in 2008 profits wou ld
have been S2.8 billion.''); US PS. 2010 Amlllal Report: Foundarion fOl'lhe Flllure, at 9, available at: http://www.
usps.com/fi nancialsl ydf/annual_repo"_20 10.pdf ("The prefunding requirement, as it currentl y stands, contributes
significant ly to postal losses.").
46. CRS, The u.s. Postal Sen-ice s Finallces and Fillancia! Condition, Repon R40768 (Sept. 17,2009), at page 5.



                                                          10 

                                                          OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




The increase in costs due to heallh care and the prob lems generating revenue in a changing
ma rketplace are obvious ly not a resu lt of the way the USPS is required to fund its retiree
ob liga l'i ons. To al ler the funding sl'ructure of the Federal retiremen t program would not only fa il
to address these pressi ng problems, but cause new ones by requ iring the tlUst funds to take on
unnecessary risk through an increase in their unfunded liabi li ties.

The Protection Afforded By Prefill1ding and Full Funding

The CBO and GAO have repeatedly raised the po int that the Federal Govcl11ment will be
liable fo r USPS retiree benefits if the USPS is unab le to pay those costs ilse lf. 47 Thi s conccl11
has underlined the GAO's continu ing emphas is regardi ng the importance of ensuring that the
USPS prefulld its substantial unfunded retiree heallh benefits to the maximum ex ten t poss ible. 48
Specifically, the GAO has noted:

         The Posta l Se rvice is requ ired to pay the ret iree health premiums regardless of
         whether it pre fu nds some or all of these costs, and the annua l cos ts are expected to
         inc rease over the next 20 years. lf prefund ing hea lth benefit s fo r new emp loyees
         proves to be more costl y than est imated, or if the premiums for curren t ret irees
         continue to grow rapid ly, the Service cou ld find itse lf fac ing a sign i.fic ant
         ob liga tion at a time when revenues are shrinking. It seems pruden t to set aside
         funds now, whil e they are ava il able to address esca lat ing future cos t's rather than
         wa iting unti l cos ts are higher and adequate revenue may not be forth co mi ng. ~9

Whil e it recognizes that the USPS does need financial re li ef, the GAO points out the tTadeoffs
in providing the relief through modification of how the USPS funds its reti ree health benefits
ob ligations:

         Defe tTi ng some pre funding of these bene fi ts wou ld serve as short-term fi sca l
         reli ef. However, defetTals also increase the ri sk that USPS will not be ab le to

47. See, e.g., Lcller from Barry B. Anderson, Acting Director, CBO, 10 the Honorable Jim Nuss le, Chainnan,
Committee on the Budget, U.S. House of Representatives (Jan. 27, 2003), at pages It-12 (" If that uncertain
[competiti ve} environment substantially hindered the Postal Service's ability to produce income, the federa l
government cou ld be left with the long-tenn burden of paying fo r the retiree health benefits of postal workers.");
GAO,   u.s.   Postal Service: Strategies alld Operation 10 Facililate Process loward Financial Viability, GAO-10-455
(April 12,20 I0), at pages 26 ("Because its retirees arc eligible to recei ve the same heal th benefits as other federal
retirees, if USPS cannot make its required payments, the U.S. Treasury, and hence the taxpayer, would st ill have to
meet the federal government's obligations.") and 58 ("Ifno action is taken, the ri sk of USPS's insolvency and the
need for a bai lout by taxpayers and the U.S. Treasury increases.").
                                                                                   u.s.
48. See, e.g., Statement of Ph ill ip Herr, Director, Phys ical Inrrastructure, GAO,      Posltll Service: Legislalion
needed /0 Address Key Challenges, Subcommittee on Federal Financial Management, Government tnfomlation,
Federal Services, and Internat ional Security, Committee on Homeland Security and Governmental Affairs, U.S.
Senate. GAO-II-244T (Dec. 2, 2010) at page 9; GAO,       u.s.    Postal Sen1ice: Slrategies and Operalion 10 Facilitate
Proces~·'olI'ard Financial Viabilily, GAO-J 0-455 (April 12,2010), at pages 22 and 53; GAO. Pm·tal Pew·ion
Fllllding ReJorm: Issues Related 10 the Postal Service"!,· Proposed U~e ofPension Savings, GAO-04-238 (Nov. 26,
2003)al 5 and II.
49. GAO, POSTal Pension Fllnding Reform: Issues Related 10 the Posllli Service s Proposed Use ofPension
Savings, GAO-04-238 (Nov. 26, 2003), at pages 20-21.



                                                           II 

  OPM OFF ICE OF T HE INSPECTOR GEN ERAL 




        make future payment's as its core bu siness declines. Therefore, it is important
        that USPS fund its ret iree health benefit ob li gations - including prefunding these
        ob ligations - to the maximum extent that its finances pemlit. 1.11 addition to
        consideri ng what is affordable and a fa ir ba lance of paymen ts between cu rren t
        and futu re ratepayers, Congress would also have to address the impact of these
        proposa ls on the federal budget. Fu rther, the Congressional Budget Office has
        raised concerns about how aggress ive USPS's cost cU ll ing measures wou ld be if
        prefulldillg payments fo r retiree health care were reduced. 50

Despite the GAO 's wamings, th e series of USPS O IG reports analyzed in our study foster a
contrary perception that deferring the payment of ob li gations for retirees, part icu larly for ret iree
health benefits, is a so lution that can a ll ev iate the USPS 's current financial difficulties without
any adverse effects.

However, modification of the USPS's payments to the retiremen t tru st funds in the past has not
resolved the USPS's continuing financial d iffic ulties. For examp le, a si mil ar stopgap mea sure in
2009 failed to produce any lasting resul ts. In tha t year, Congress permitted the USPS to defer $4
bi lli on of its $5.4 billion payment to the PSRHB Fund, as requi red by the PAEA. 51

As ClllTen t Postmaster General Patrick R. Donahoe recent ly testified, "While the Posta l Serv ice
appreciated that [2009] effort, it was a short- term fix. Further, even with the deferral , Posta l
Service's losses fo r 2009 tota led $3.8 bi lli on."52 Moreover, the USPS stated in its 20 I 0 Annua l
Report that "[e]ven if such legislat ion is enacted to address shorler-lerm liquidity mallers such
as the (PSRHB Fund] pre-funding payme nt schedule, the Posta l Serv ice st ill faces longe r-term
financia l stabi lity concerns."53 These statements strengthen our bel ief that de fe lTing the USPS 's
payment of its reti ree benefits is not the appropriate remedy fo r this situalion.




50. Statement of Ph ill ip Herr, ~'upra note 48 , at page 9 (citing CBO, HR. 22: Unilel/ Stales Postal Service
Financial RelieJAct oJ2009 (July 20, 2009); CBO, S.1507: Pm-tal Service Reliree Health Benefits Fllllding ReJorm
Act of2009 (Sept. 14,2009».
51. Legislative Branch Appropriations Act of2010, Pub. L. No. 111-68, 123 Stat. 2023.
52. Statement of Palrick R. Donahoe, Postmaster GenerallCEO-Designate, US PS, Findillg SOlllliolls 10 the
Challenges Pacing the Us. PO~'/al Sel1'ice, Subcomm il1ee on Federal Financial Management, Government
Information, Federal Services, and International Security, Committee on Homeland Security and Governmental
Affairs, U.S. Senate (Dec. 2, 2010), at page 5.
53. US PS, 2010 A IIlIIwl Report: FOlllldatioll Jor the FIIII/re, at page 70, amilable at: http://www.llsps.com!
financ ials/ydf!annual_report _ 20 I O.pdf.



                                                       12 

             OI'M OFF ICE OF THE IN SI'ECTORGENERAL 





Page Inten ti onally Left Blank




              13 

  OPM OFF ICE OF THE INSPECTOR GENERAL 




Structure and Operation of CSRD and PSRHB Trust Funds

CSRD Fund

Contribut ions into the CSRD Fu nd are requ ired by law to be invested in " interest-beari ng
securities of the Uni ted States" or other investments that meet statutory spec ificat ions. 54 The
Treasury Department takes the cash paymen ts and converts them to a type of bond, which is
depos ited in the applicab le trust fund. When an annu ity payment mu st be made, the Treasury
Departme nt redeem s the needed va lue of bonds held by the trust fund, and then the Department
makes the payme nt out of its genera l cash account. 55

When Congress created the CS RD Fund, it mandated that the empl oyer and emp loyee
ret irement contribut ions made to the fu nd be used to pay pension ob li gation s and any assoc iated
adm inistrative costs.56

C ha rt I illustrates the fl ow of funds into and out of the CS RD Fund. The Federal employee,
USPS emp loyee, and USPS contributions to the CSRD Fund, in green f oj boxes at the   0   0   0




top of the chart, are considered to be incomi ng re venue to the U.S. Treasury.57 In contrast,
the con tri butions by Federal agencies into the CSRD Fund arc not new revenue but rather
inte rgovernmental transfers of funds previously appropriated to agencies. Likew ise, the
mandatory appropriation that Congress prov ides to pay for the unfunded CS RS liabi li ties and
FERS supp lementa l liab il ities is al so an intergovern menta l transfer.58 These assets are invested
in Treasury ho ldi ngs, as described above, and are represented in Cha rt I by the blue [         ]
boxes.59 Collective ly, these contributions are used to pay annui ties, whic h are debts of the
Federa l Government and represented in the red [- "i box on the ri ght side of the chart.

PSRHB Fund

The PSRHB Fund is qui te differe nt from the CSRD Fund . It is a separate US PS-spec ific trust
fund . Congress estab lished it in 2006 in the PAEA to ensure "that the Postal Service reduces its
grow ing unfunded liability for ret iree health benefi ts.'>60 These assets are in vested in Treasury
ho ldings in a similar manner as the CSRD Fund.

The PSRH B Fund is not used to pay for current benefi ts to current retirees. In stead, the US PS
makes an annual contri bution to the EHB Fund to pay premiums fo r current reti rees.

54. 5 U.S.c. § 8348(c)-(e). See also, The SecretaI)' of the Treasury's Authori ty with Respect to the Ci vil Service
Retirement and Disability Fund, 19 Op. OfT. Legal Counsel 286 ( \995).
55 . See, The SecretaI)' of the Treasury 's Authority with Respect 10 the Civi l Service Retirement and Disabi lity
Fund, 19 Op. OfT. Legal Counsel 286 ( 1995).
56. 5 U.S.c. § 8348(a). See also, GAO, Fel/el'lll Trust alld Olher Eamwrkel/ Fllnds: Answers 10 Freqllently Asked
Questions, GAO-O 1-199S P (Jan. 2001), at page 15.
57. 39 U.S.c. § 2009a.
58 . 5 U.S.G. § 8348(,).
59. The boxes are blue because the investment of trust fund assets are intergovemmental transfers because the
Treas ury is in vesting tnlst fund assets in Government securities.
60. H.Rep. No. 109-66 Part I (2005), at page 69.



                                                         14 

                                                  OI'M OFF ICE OF THE INSI'ECTORGENERAL 




                CHART 1. STRU CTURE AND OPERATION O F TH E 

               CI VIL SERVI CE RETIREMENT AND DISAB I LITY FUND 





                                        Ratepayers




                       USPS
                                           USPS                Taxpayers         Public Debt
                   Employees




 ··:............. .............
             Federal
                              ...:
                                             TREASURY
  ·                           .
 ~       Employees              ~
                                            DEPARTMENT


        Congress       -+-f-­ I­
• Direct appropriation for                    Civil Service                    r--------

                                                                                  Statuloril y­

 military service, CSRS             I
 unfunded [iabilities, _J...._I-~H~
                                             Retirement and                        mandated 

 and FE RS                                   Disability Fund                     payments to 

 supplemental liabilities                                                         Federa l and 

                                                                                     USPS 

• Budgets for Federal               I                                              Retirees 

 Agencies
                                                                               .. _------­

               Federal                  Inves tmen t in   Redemption of
             Agencies                   Va rious Bonds    Various Bond s




                                                   15 

  OPM OFF ICE OF T HE INSPECTOR GEN ERAL 




In add ition to thi s annual contribution to the EHB Fund, the US PS also makes an annual paym ent
into the PSRHB Fund accord ing to a specifi c statutory schedule. No other en ti ty pays into the
fund. The USPS and O PM may not utilize the assets unl i12 0 17, at which poi nt the OPM wi ll
use those assets to pay the CUiTent re ti ree health benefi t costs fo r Postal ret irees. There fore, the
PS RHB Fund is cUiTen lly co ll ect ing contribut ions (and eami ng interest), but not maki ng any
payments.

C ha rt 2A descri bes how hea lth bene fit s fo r retirees are currently funded through the operation of
both the EHB Fund and the PSRHB Fund. (Nei ther C hart 2A nor C hart 2B address the fundi ng
of bellefi ts fo r current employees.) O nce aga in, the green [. . .. .] boxes representing the Federal
empl oyees and retirees, US PS employees and retirees, and USPS con tri but ions to the EHB
Fund are considered to be incoming revenue to the U.S . Treasury. The contributions by Federal
agencies and d irect appropriation by Congress to the EHB Fund are in tergovernmenta l transfe rs
and aga in are represented by blue [ J boxes. These commingled amounts are used to ma ke
premium paymen ts to the insurance compani es, w hich in turn provide hea lth insurance coverage
to ret irees and their e lig ible fa mily members.




                                                   16 

                                                     OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




               CHART 2A. STRUCTURE AN D OPERATION OF TH E 

           POSTAL SERVICE RETIREE HEALTH BENEFITS FUND PRE- 20l7 


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

                                                                              .. .. .. .. .. .. .. ..... ... .....
                                                                              ··                                .

                                                                                        Taxpayers
                                          TREASURY 

                                         DEPARTMENT 
                         .................. .... .. ..
.
                                                                              ····                              .

                                                                                                                .

                                                                                                                .
                                                                                       Publ ic Debl
         Ratepayers                    Investment in various bonds;
                                     redemption of matu re bond s; &
                                     reinvestment of those proceeds
 ............... ...........
···                        ..
           USPS
 ............... ...........
·........ ..................               Postal Service
:           USPS               :
~      Employees and :                     Retiree Health
:          Retirees            :
                                           Benefits Fund
            Federal
: Employees and :
                                                                              r------------"1
·:.. ........Retirees           :
               ..... ...... .....
                                                                                        Contractually.
          Congress      +-i'--+-­                                                    mandated payments to
                                                                                     Insurance com panIes            I
      • Direct
       appropriation   ­+ - + ---.,.        Employee                                  participating in the
                                                                                      Federal Employees 

       for Federal                        Health Benefits
       Retirees                                                                        Health Benefi ts 

                                               Fund                                          Program 

      • Budgets for
       Federal Agencies
                                                                              ------l -----· 
                       I



                                                                              ~                                      ~




                                                                                        Health insurance
            Federal                 Investment in           Redemption of             cove rage for Federal
           Agencies                 Various Bond s          Various Bonds            and US PS retirees and
                                                                                       other beneficiaries
                                                                                                                     ,

                                                     17 

 OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




As prev iollsly slaled, the PSRHB Fund's assets a re 110t yet be ing used to pay for any USPS
retiree health benefi ts. Only in 2017 can the fund 's assets begin to be used to pay th e premium s
fo r afl USPS ret irees. Starling in that year, as Chart 28 illu strates, the US PS will make
payments fo r reti ree hea lth benefits only into the PSRHB Fund . The PSRH B Fund, in turn, will
make the payments to the EHB Fund necessary to cover the total cost of US PS ret iree hea lth
bene fi ts.




                                                 18 

                                                      OI'M OFF ICE OF THE INSI'ECTORGENERAL 




                     CHART 2B . STRUCTURE AND OP ERATION OF TH E 

                     POSTAL SERVI CE RETIREE HEALTH BENEF ITS FUND 

                                   BEGINNING IN 2017 


     (NOTE: This chart describes the funding of health benefits for USPS retirees only.
       It does not address the funding of health benefits for current USPS employees.)
                                                                           .. .. .. .. .. .. .. ............. 

                                                                          ··                                .

                                                                                                   Taxpayers
                                           TREASURY 

                                          DEPARTMENT 
                                   ...................... .. ... 

                                                                                         ····                        ..
                                                                                                   Public Debl
       Ratepayers                    Investment in           Redempt ion of
                                    Variolls Bond s          Variolls Bonds

·............... ........... 

           USPS

·........ ..................                Postal Service
:          USPS                :
~    Employees and :                        Retiree Health
:        Retirees              :
                                            Benefits Fund
          Federal
: Employees and                :
                                                                                         r------------"1
·:.. ........Retirees           :
               ..... ...... .....                                                        I
                                                                                                                           I
                                                                                                                           I
                                                                                         I      Contractually-mandated     I
                                                                                         I                                 I
        Congress        +-i'--+-­                                                        I           paymen ts to          I

    • Direct
                                                                   --lr----t~ 1     ..           Insurance companIes       I
     appropriation     -+-+ ---.,......      Employee 
                                           participating in the
                                                                                                  Federal Employees
     for Federal
     Retirees
                                           Health Benefits                                         Health Benefi ts
                                                Fund                                                   Program
    • Budgets for
     Federal Agencies
                                                                                         -------. ----_.                   I



                                                                                         ~                                 ~




                                                                                                   Health insurance
          Federal                   Investment in 
          Redemption of 
                     cove rage for Federal
        Agenc ies                   Various Bonds 
          Various Bonds 
                    and US PS retirees and
                                                                                                  other beneficiaries
                                                                                                                           ,


                                                      19 

  OPM OFFICE OF THE IN SPECTOR GENERAL 




Financial Ejjixts ofthe Proposals

As the preced ing chart s illustrate, the trust funds are not a "store ofwealth.'>(il They are
Government assets th at are express ly pledged to pay specific liabilities. Ir those pl edged assets
are not sufficie nt to cover the liabili ties, the Governmen t must use general revenues to pay the
di ffe rence.

The red [- -3 boxes represeming pension liabiliti es and paymen ts to hea lth insurers in Charts 1
and 2A-B, res pect ively, do not change size, regardless orany changes in the other transactions
iIlustrated in the charts. In Chart 1, the legally- required out lays to annuitants will be decreased
only if Congress amends the law to change either the annuity benefits or the qualifi cat ions
required to obta in them. Lik ewise, the payment s to insurers, seen in Charts 2A and 2B, would
remain the same absent contract termination or amendment.

In Chart 1, if the green [.....} box representing the USPS payments into the CS RD Fund is
elimi nated (or ifassets are transferred o ut of the CS RD Fund to the USPS), there is less money
spec ifi ca ll y identified to be used to pay the unchanged annu ity obli gations. Consequently, the
CSRD Fund will need to redeem more bond s in order to generate enough revenue to make th e
pension payments. 62

As of September 30, 2009, the CS RD Fund had approx im ately $759 billion in assets ava ilable
to pay CS RS and FERS annu ity payments. 63 The curren t unfunded li abiliti es of the fund tota l
$673. 1 bi lli on, as of lhe end of fi sca l year 2009. " The CSRD Fund is on schedul e 10 be fully
funded by 2085. 65 This is because CSRS annuity ob li gations will continue to decrease as the
popu lation ofCSRS participan ts diminishes, eventuall y leaving only FE RS participants, whose
annuities are essenti all y fully funded. If the unfunded li abi lity of the CS RD Fund were increased
by $75 bi lli on to about $750 billion, that fig ure - $750 billion - would still have to be paid in
full by about 2085, according to the OPM Actuary. Under current law, the immed iate effect
would be to increase the annual mandatory appropri at ion made by Congress to pay interest on
the unfunded li ability, thereby ultimate ly shi ft ing the cost fo r these liabiliti es to the Ameri can
taxpayer.

The PSRHB Fund operates in a slightl y di ffe ren t manner. The crea tion of the PSRHB Fund was
spurred by the fact that the US PS was incurring substan tial unfunded li abi lities related to future
retiree health benefits. There fore, Congress decided to ensure tha t the US PS fund those fu ture
liabi li ties in add ition to paying the current year's ret iree health premiums. Thi s would a llow th e
USPS to spread its future retiree heal th benefi t costs evenl y over a period of time. A halt to
payments to th e PSRHB Fund would de fea t the very purpose fo r whi ch the fund was created.
61. CRS Report 98-810, at page 13.
62. If the CSRD Fund does not eontai n any more bonds, then the mandatory Congressional appropriation to the
trust fund must increase because, as discussed in the section entitled " Postal Employee and Retiree Rights," the trust
fund , and therefore the Federal Government, is the enti ty that is legally responsible for the payments.
63. Allllllal Report oflhe Board ofActual'ies. Civil Service Reliremelll alld Disability Flllld. Fiscal Year Elided
September 30. 2009, at page I.
64. Id. , at page 15.
65. Id., at page 28.



                                                          20 

                                                      OI'M OFF ICE OF THE IN SI'ECTORGENERAL 





Thi s pre fund ing arra ngement req uires the USPS to efficient ly and effecti ve ly manage ils
resources so thallaxpayer do ll ars do not end up paying fo r USPS
ex penses.
                                                                                  If the USPS 

                                                                               fails to make the 

As ofSeplember 30, 2009, the PSRHB Fund had approximate ly
                                                                                required Joenree
$42.5 billion in assets ava ilable 10 pay approx imately $85.9 bi lli on
                                                                                     benefit
of USPS re ti ree health benefit liab ili ties. 66 Thus, if the USPS
                                                                                 contributions
slopped making contributions, the remainder of the ret iree health
                                                                                  the Fedeml
bene fi ts liabi li ties, approximately $43.4 billi on, would continue to
                                                                               Government will
be unfunded by Ihe US PS.
                                                                                  have to pay
Therefore, as the chal1S demons trate, the effect of the proposa ls
                                                                                the USPS shm'e
if the USPS fails to make th e required re ti ree health benefi t
contributions is thallhe Federal Govern ment may have to pay the
USPS share.




66. These figures were provided by the aPM Actuary.



                                                      21 

  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




ANALYSIS OF THE PROPOSALS

As mentioned earli er, the US PS OIG presen ted three proposa ls rel ated to the US PS's funding
of its ret iree benefits. A ll of the proposa ls, although different , have some thi ngs in common.
Fi rst, the basic goal of each of these proposa ls is two-fold: (I) 10 remedy alleged inequities in
the current method by which the US PS fund s its retiree ob li gations (both annu ity and retiree
health benefits)67 and (2) to obtain operating capital fo r the USPS, at least on a temporary
bas i s . ~8 Add itionally, the practical effect of each would be a shifting of costs from ratepayers to
taxpayers.

It should be noted that there have been statement s made on the USPS DIG website as well as in
a report summarizing its proposa ls that foster the perception that as much as $ 142.4 billion may
be saved by fo ll owi ng it s proposals. 69 Thi s number is alTi ved at by add ing the purported sav ings
resulting from implementation of these proposal s.70 Even if we agreed w ith the amount of the
purported savings from each proposal, these numbers cann ot simply be aggregated because some
of these proposals overl ap.

in the following pages, we describe the funding mechani sms under current law. We then
describe the proposa l and di scuss the supporting arguments offered in the respecti ve reports.
Fi nall y, we offer our own anal ys is and conclusions as to the valid ity of the proposa ls.




67. US PS OIG's CSRS Report, at pages 3-4; US PS OIG 's FERS Report, al page I; USPS OIG Summary, at pages
2-3 ; US PS OIG 's Funding Levels Report, at page 2.
68. US PS OIG's CSRS Report, at page 4; USPS OIG's FERS Report, at page 6; US PS OIG Summary, at pages
4-5 ; US PS OIG's Funding Level s Report, at page 3.
69. "Overfunded Programs May Offer Postal Service Opportunities to Rebound", available at: hIlP://www.lIspsoig.
gov/ovcrfunded.pdf ; USPS OIG Summary, at page 4.
70. The savings come from the three proposals exami ned in our st udy as well as a fo urth fo und in the report
entitled Estimates ofPostal Service Liabilityfor Retiree He alth Care Benqfils (Report Number ESS-MA-O-OO I(R)
('"Iy 22, 20(9)).



                                                      22 

                                                    OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




Proposal I: Treatment of FERS Surplus

Current Law

FERS is de signed to be fu ll y funded by emp loyee and agency contributi ons. Each year, as
required by law, the OrM ca lculates the Federal Govern ment 's and the US PS's li abilities under
FERS to sec if there is a surplus or a supplementalli ability. 71 (f there is a suppl emen tal liabi li ty,
the OrM establishes an amortization schedule so that the liabili ty is paid off completely in 30
ycars. 72 The statute does not contemplate what would happen should a surplu s ex ist.

USPS DIG s Proposed Action

According 10 the arM Actuary, the USPS currentl y has a surplus under the FERS program. A
report issued by the US PS O IG estimated that the amount of the surplu s is approximately $5.5
bi lli on as of the end of fi scal year 2009, based upon projections provided to it by the OPM and
add itiona l analys is performed by the Hay Group, an independent consu lti ng fi rm engaged by the
US PS OIG ."

The repol1 makes several recom mendations with respect to the disposition of the funding surplus:
( I) Congress should amend the law to address the treatment of surplu ses so they are amort ized
in the same manner as shortfalls, or the surpluses may be used to make futu re payments until
they are exhausted; (2) the law should be amended to permit use of funding con·idors in the
ca lculation of FERS liabi li ties ; (3) the USPS should work with the OPM "to identify cau ses of
actual payout differences between the Postal Service and the rest of the Federa l Govern ment and
use that infonnat ion to reduce the risk of future s urpluses;" and, (4) the O PM or Congress should
create a "sub-account" for the US PS in the CS RD Fund. 74

The Hay Group made two suggest ions regarding how the law mi ght be changed so that surpl uses
are d istributed over a period of time. The first (Hay Group Option A) would be to amend the
law so that surpluses are treated the sa me way as supplemental liabi li ties (i.e., they would be
amortized over 30 years).75

The second suggestion (Hay Group Option 8) would amend the law to essentially expand the
definition of " fu ll y funded."76 Thi s invo lves the creation ofa funding "coITidor." The examp le
given by the Hay G roup proposes that instead of using 100 percent of projected li abilities as the
benchmark for full funding of the pens ion pl an, the range of90 percen t to 110 percent would
be considered fu ll y funded. As long as the assets arc within 90 percent to 110 percent of the
estimated liabil ities, then the USPS would not have to amorti ze a suppl emental li ability or
surplus.

71. 5 U.S.c. § 8423(b)(I).
72. 5 U.s.c. § 8423(b)(2).
73.   USPS OIG 's FERS Report, al page 6.
74.   !d.
75.   Id. , al page 2l.
76.   Id. , al pages 21-22.



                                                    23 

  OPM OFF ICE OF THE IN SPECTOR GENERAL 




However, if the plan is funded at lower than 90 percen t, then the US PS would have a
suppl emental liab il ity. Conversely. if lh e funding of the plan were over 110 percen t, then the
USPS would rece ive a " negative alllOitization payment" (i.e. , the CSRD Fund wo uld pay the
USPS the excess amount so that the fund ing leve l was brought down to 110 percent).

The final parI of til e proposal suggests crea ting a sub-account that would allow the USPS's
FERS liabi li ty to be based upon the US PS's actua l demographics rather than Government-w ide
demographi cs.

USPS DIG s Justification for the Proposal

The USPS OJG 's report po int s oul that beca use there is a surplus, there needs to be a way to it.

According to the report, the creation of a "sub-acco unt" wo uld provide the US PS wi th more
accurate information to include on its financial reports and would permit OPM to more
accurate ly assess the USPS 's FERS liab ili ties. When ca lculating the USPS 's - or any Federal
agency's - annual FE RS payments, OPM rel ies upon demographi c assumpti ons that are based
upon the FERS popu lat ion as a whole. Beca use the demographi c characteri stics of the US PS
workforce may be di ffe ren t from the overall FERS popu lation, thi s actuari al approac h may have
the effect of generat ing a hi gher con tri but ion rate fo r the USPS than would be obta ined if only
USPS employees were considered. 77

FUfthennore, the report asserts that a USPS sub-account wou ld preve nt the USPS's FERS surplus
from "effect ively subs idiz[ing] appropri ated tax dollars."78

Discussion
                                                                                      The USPS's FERS
Fi rst, we mu st emphas ize that the USPS's FERS surplus is not                        surplus is not
"subsid iz ing appropriated tax dollars."79 The surplus is held in the                  ((subsidizing
CSRD Fund and any interes t earned on that surplus reduces the USPS 's                 appropriated
FERS liabi li ty. The US PS, rather than th e Federa l Government, earns                 tax dollars"
the benefi t from the surplus.

The Hay Group Option A would amend the law to allow fo r surplu ses to be treated in the sa me
ma nner as supplemental liab ili ties. Whil e it is unclear whether the Hay Group intended Option
A to apply to all Federal agencies, it is a logical and fai r so lut ion so long as it is not limited to the
USPS.




77. Id. , at page 3.
78. Id. , at page 5.
79. Id.



                                                    24 

                                                         OI'M OFF ICE OF THE IN SI'ECTORGENERAL 



However, we are cOllccl11ed w ith the Hay G roup Opt ion B, whereby funding corri dors would
be created. so Congres s expressly in tended th at FE RS be fully funded, meaning funded at 100
percent. Indeed , that is w hy there is a s tatutory d irecti ve as to how shortfalls mu st be addressed.
In the section entitl ed "Reduction in Contribution Leve ls fo r Ret iree Benefit s," we d isc uss the
drastic nature of such a change to FERS in more detail.

Wi th regard to the USPS O IG's fi rst recommendation, there is precedent in the pri vate sec tor to
support the proposa l to permit the US PS to use the surplus to make future payments until the
surplu s is exhausted. The CRS reports Ihal in the pri vate sector " [u]nder current law, pl ans that
are [overfunded]' .. may apply previous years' cred it balances to offset the curren t yea r's required
funding."81 The drawback of thi s proposa l is that it assumes that the USPS w ill be able to
generate enough revenues in the future to make its usual annual FERS payments, whi ch, as we
have noted in earli er sections of thi s study, is quest ionable.

We s upport the USPS O IG's recommendat ion that the OPM and the US PS co ll aborate to co ll ect
in formation regard ing ca uses of the US PS's FERS surplu s. Thei r work would like ly be very
useful to po licymakers given the crit ica l nature of this issue. Howeve r, it should be em phasized
that such co ll aboration could prod uce only recommendat ions, as O PM does not have the
authority to alter the statu tory formula used to calcu late FERS paymen ts.

If that co ll aborati ve effort determ ines that the USPS popul at ion 's demogra phics is li nked to the
creation of its FERS surplus, the OPM should examine the feasib il ity of estab lis hing the creation
o f a "sub-account" fo r the US PS. In do ing so, it should consider the effects that such a sub­
account would have upon both the US PS's FERS liab ilit ies and the Federal retirement progra m
as a who le. We note that s uch fragme ntat ion of demograph ics would create a potenti all y
dangerous precedent. All agenc ies - or perhaps even ind ividual offices wi thin agencies or
departmen ts - may also req uest sub-accounts. Such a situation would create an administrative
burden as well as introduce an element of uncertainty in Federal agenc ies' budge ting.

Conclusion

We agree w ith the Hay G roup Option A in sofar a s it is not li mited to the US PS. It aims to matc h
contributi ons w ith oUllays, as is appropriate. Trus t fund assets would not be used for a purpose
other than the paymen t of benefi ts nor wo uld they be transferred out of the CS RD Fund w hile
si multaneously increas ing Federal liab ili ties.




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



                                                          25 

 OPM OFFICE OF THE IN SPECTOR GENERAL 




For the reasons discussed previously, the Hay Group Option B, suggest ing the impl ementat ion of
funding cOITidors, shou ld not be adopted.

We agree that the OPM and the USPS should ana lyze the causes of the USPS 's FERS surplus.
However, before the aPM establishes a sub-acco unt for the USPS, the OPM should carefu ll y
examine the effects that such a suh-account wouLd have upon both the USPS's FERS liab ili ties
and the en tire Federal retirement program.




                                               26 

                                                        OI'M OFF ICE OF THE INSI'ECTORGENERAL 




Proposal 2: Allocation of CSRS Liabilities for POD/USPS Retirees

Current Law

An nui ty Calculations

There are two main components in the computation of an an nuity, whether under CSRS or
FERS : (I) years of service and (2) sa lary. The "years of service" piece incl udes qualifying
mili tary serv ice. 82 The sa lary fi gure is calcu lated using an employee's " hi gh-3 salary," whi ch
is an average of the three hi ghest sa laries rece ived in a con tinuou s three-year period. Thi s is
frequent ly the last three years of the employee's career.S]

The ca lculation of the present va lue of annu ities (i.e., the future li ability to pay benefits) is
performed using actua rial assumptions regarding interest rates, inflation , mortality rates,
etc. Naturally, these assumptions mu st be revisite d and modified regularl y to reflect actual
ex perience. The OPM recalcu lates all liabi lit ies incurred (by both the Federal Government and
the US PS) under CS RS and FERS on an annual bas is (Annual Review).84 The A nnual Review
detennines if the prior year's assumptions d iffe red from actua l experi ence to the extent that
the re was either an overpayment to the CSRD Fund (surp lu s) or an unde rpayment (supplemen tal
liabilily).

Title 5 of the United States Code con tains specia I instructions with regard to the A nnual Review
of the US PS's liabi lities. The PAEA reli eved the USPS of all " regul ar" future CSRS payments
(i.e., the payments it would otherwise make on an an nual basis using the statutory fonnu la in
Ti tle 5) because when the PAEA was passed in 2006, the USPS had theoretically paid a sufficient
amount into the CS RD Fund to meet its enti re CS RS li ability.

Under current law, as enacted by the PAEA , any USPS CS RS surplus ca lculated in an A nnual
Review prior to 20 15 remain s in the CSRD Fund. H5 In 2015, if there is a surplu s, lhat amount
w ill be transferred from the CSRD Fund to the PSRHB Fund .so If, however, an An nual Review
indicates that the US PS has a suppl emen tal liability, as it had at the end of fiscal year 2009,87 the
US PS does not pay anything towards that supplemental li ability unti l 20 17. A t that poi nt, the
aPM w ill establis h a sc hed ul e (an "amort ization schedule") by whi ch the USPS will pay off that
amount through an nual payments so that the debt is completely paid off by September 30, 2043. 88



82 . 5 U.S.C. §§ 8332(0) (CSRS), 8411 (FERS).
83. For example, perhaps an employee earned $48,000 in year I, $49,000 in year 2, and $50,000 in year 3, making
thai the most he or she has ever earned. The "hi gh-3" is the average of lhose figures ($49,000) and that is what is
used in the formul a to detennine his or her annuity. [Note that $49,000 is NOT the amount of the annuity.]
84. 5 U.S.C. §§ 8348(g)-(h) (CSRS), 8423 (FERS).
85. 5. U.S.C. § 8348(h)(2)(B).
86. 5 U.S.C. § 8348(h)(2)(C).
87 . According to the OPM Actuary, the US PS's CSRS unfunded liabi lity as of tile end offiscai year 2009 was $7.3
billion.
88. 5 U.S.c. § 8348(h)(2)(B).



                                                         27 

  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




A fier 20 17, the aPM will con tinue to conduct an A nnua l Review and rev ise any amortizat ion
sc hed ul es accord ingly. 89

Actuaria l Methodology at Issue

There are some USPS emp loyees who participate in CS RS and who worked for both th e POD
and the USPS (POD/ USPS empl oyees). Thei r years of serv ice al both entit ies are included in
thei r an nuity calc ul at ions. Therefore , the Federal Government and the USPS each pay parI of
that annui ty (POD/ USPS annuity). One of the fo rmul ae used to calcul ate these annu ities is the
subject of the proposa l discussed in this sect ion.

Just as it does for other ann uity liabili ties, the OPM must perfonn an A nnual Review in order to
delenni ne whether there is a surpl us or suppl ementa l liab ility related to the POD/ USPS annui ties.
However, because the fin ancial responsibili ty fo r the cos t of these annui ties is spli t between
the Federal Governme nt and the USPS, the OPM mu st perf0 1111 other computations before it
perfo rms the normal Annual Rev iew.

The OPM firs t determines the tota l cost of th e annui ty owed to the employee using the standard
CS RS formu la. For CS RS participan ts other than USPS or POD/USPS employees, thi s is the
total cost of the annui ty and no other calcu lat ions are needed.

For USPS ( incl uding PODIUSPS) empl oyees, the O PM mu st then ca lcu late the base li ne fo r
the alloca tion of the annui ty costs belweenthe Federal Governmen t and the USPS (Baseli ne
Allocation).

The fi rst step in the Baseli ne All ocation is the determi nation of whether any port ion of the
annu ity cos t is attributable to mili tary service. The Federal Government is res ponsib le for thi s
cost for any USPS retiree, regard less of whether he or she worked fo r the PO D.

For US PS employees other than PODIUSPS emp loyees, this com pl etes the Baseli ne All ocation.
For PO DIUS PS employees, however, an additional step is needed.

The last step in the Baseli ne Allocation fo r POD/ USPS em pl oyees is the determinat ion of the
annu ity cos I that the Federal Governmen t would have paid if the PODIUS PS employee had
ret ired on June 3D, 1971 , the last day thai the POD was in ex istence. ThaI is, the O PM calcu lates
the annui ty costs using the years of serv ice at the POD and the salary paid duri ng those
years. Th is cost remains the same no matter how long the PODIUSPS emp loyee works at the
USPS. Nei ther th e years of serv ice alth e US PS nor the salary during those years is taken into
consideration. Therefore, because this cost will never increase, it is sometimes referred to as a
"frozen benefit."




89. 5 U.S.c. § 8348(h).



                                                   28 

                                                        O I'M O FFICE O F T H E IN SI'ECTORGENERAL 



Thi s figure plus the cost of the annuity due to military service compri ses the Federal
Government's share (Federal Share). The USPS pays the cost of the annuity that is in excess of
the Federal Share.

One consequence of thi s Baseline Allocation method is that because one component of the
Federal Share is the frozen benefit, the US PS must pay for the increase in pension benefits
attributable to USPS salary increases whil e employed by the US PS, even on the years of service
attributable to POD service.

USPS DIG's Pmposed Action

Thi s proposal recommends that the OPM ca lculate the Base line Allocat ion d ifferen tl y. It
advocates a "years of serv ice" method, which would di vide the POD/ US PS annu ity contribut ions
proportionately between the US PS and the Federal Government usi ng the number of years that
the employee worked for each entity. For exampl e, ifa n employee worked fo r the POD for 15
years and the USPS fo r 15 yea rs, then the USPS and the Federal Government would each pay
half of that annui ty payment. However, the Fede ral Government would still pay the full cost
attributable to creditabl e military service.

The USPS OIG has detennined that if the OPM had used thi s rev ised Baseline Allocat ion,
then over the years the US PS has paid $75 billion more in CS RS paymen ts than would be
required. These funds could be used to firs t pay off the US PS's general debt to the U.S. Treasury
(unrelaled 10 Ihe CS RD Fund) and th e US PS's CSRS suppl emenlalli ability. The remainder
could then be trans ferred to the PSRHB Fund, full y funding it. Thi s would all ow the USPS to
( I) cease the statu tory PAEA payments since th e PSRHB Fund would be full y funded and (2)
immedi ately start usi ng the PSRHB Fund, ra ther than its current operat ing capital, to pay the
health ca re premium s for current ret irees. 90

USPS DIG's Justification for the Proposal

Thi s proposal was deve loped because the USPS OIG 's report asserts that it is unreasonab le and
inequitab le to use " [a}n all ocation meth od that ass umes (that} employees will rece ive no pay
increases - not eve n to offset inflat ion. "91 The fo rmul a by whi ch CS RS pens ions are ca lculated
uses the high-3 figure and the employee 's years of serv ice. Under CSRS, not all years of
service are equal in va lue. Later years are "worth more" than earlier years because the CSRS
fo rmul a weighs the later years of an employee's service more heavi ly in computing annuities.
Consequentl y, as the report argues, the Federal Governmen t's share not only reflects lower, pre­
1971 sa laries, but it also has the benefit of usi ng t he earli er, less va luab le years of serv ice. The
report notes that one potential consequence is that the USPS "could be responsible fo r 70 percent
of the pension of an employee who worked only 50 percent of lli s or her ca reer for the Postal
Service. '>92


90. US PS DIG 's CSRS Repon, tntroduction, at page 3.
91. Id. , at page 2.
92. Id.



                                                        29 

  OPM OFF ICE OF THE IN SPECTOR GENERAL 




Furthermore, the report contends that the fact that the aPM uses a years of service calcul at ion
fo r allocat ing the costs of health benefits fo r these POD/USPS CSRS retirees suggests that the
cun en l Baseline Allocation is incorrect because the costs for each benefit should be assigned
using the same method. 93

Another argument advanced by the USPS 0 [0 is that the Posta l C ivi l Service Retirement Sys tem
Funding Reform Act of2003 (2003 Act)94 repea led the provis ion in Ti ll e 5 of the Un ited States
Code that explicitly stated that USPS would be responsi ble for a ll CS RS costs associated wi th
USPS pay increases. 95 The 2003 Act requi red tha i US PS's CS RS liabi li ties be calculated usi ng
the FERS funding f0 I111ula, w hich unlike CSRS, accounts fo r in fla tion. The contention is that the
adoption ofa specific fonnula repea led the ge neral requ ire men t that the USPS be responsib le for
the portion of the PODIUS PS annuity attribu tab le to USPS wage increases. 96

Disclission

Before rev iew ing the arguments put forth in s upport of this proposal, we note tilat the USPS O IG
does not preci se ly explai n how it calculated th e $75 billion figure that it uses. The Hay Group
estimated that, if the Base line All ocation was calculated by using a years of service method, the
U.S. Treasury would owe the US PS $58.7 billion as o f September 30,
2006. 97 The USPS OIG 's report states, in a foo tnote, that it obta ined
                                                                                   Congress intended
the $75 bi llion fi gure by "extend[ing] the Hay Group's analysis
to 2009."98 Now here is thi s "extens ion" computat ion explained.
                                                                                      that POD/USPS
                                                                                          annuity
Reports from various other sources lhat we reviewed on lhi s issue
                                                                                    responsibilities be
appear to have accepted the $75 billion as an accurate fi gure when
                                                                                 divided in the manner
examin ing the proposed allocat ion methodology desp ite the fact that
                                                                                    used in the OPM's
an explanation regarding how that number was calcu lated has not
                                                                                     current Baseline
been provided. In this context we caut ion aga in st reli ance upon this
                                                                                        Allocation
unsupported figure.

Allocation of Pay Increases and Equity Issues

There is extens ive legis lative history that Congress intended that PODIUS PS annu ity
respons ibili ties be d ivided in the manner used in the OPM's curren t Baseline All ocation. For
example, a HOLise Report di scuss ing Pub lic Law 93-349, passed in 1974 (1974 Act), 99 states:


93. /d. , at pages 2-3.
94. Postal C ivil Service Retirement System Funding Refonn Act of2003, Pub. L. No. 108-t8, tl7 Stat. 624.
95. US PS OIG CSRS Overpayment Report, at page 2; see also, Letter from Inspector General David C. Wi lliams,
USPS, to John Berry et al .. Director, OPM (Mar. 4, 2010).
96. Letter from tnspector General David C. Williams, USPS, to John Berry et a1.. Director, OPM (Mar. 4, 2010), at
pages 2-3.
97. US PS OIG 's CS RS Report , at page 19.
98. fd. , at foot note 5.
99. An Act to provide for payments by the Postal Service to the Civil Service Retirement Fund for increases in the
unfunded liabi lity of the Fund due to increases in benefits fo r Postal Service employees, and for other purposes, Pub.
L. No. 93-349, 88 Slat. 354.



                                                          30 

                                                       OI'M OFF ICE OF THE IN SI'ECTORGENERAL 



        The Congress now has no con trol - no oversight whatsoever - with respect to
        the pay machinery in the Postal Service. Since each future pay ra ise, negotiated
        or otherwise granted to employees in the Posta l Se rv ice, will result in a specific
        unfunded liability and a new drain on the Retirement Fund, the cost of thi s
        liabi li ty should properly and equ itably be borne by the Postal Service.HlO

Indeed, as the OPM has poin ted ou t, the USPS itself also recognized and exp lic itly accepted this
po licy as an inheren t condition of its independent status. The Postmaster General sent a leite r to
the Senate Commi ttee dated March 27, 1973, slating:

        This legi slation has been proposed on the ground thallhe Postal Service should
        operate on a financiall y se lf-suffic ient bas is, meeting its operating costs out of its
        revenues and not ou t of hidden subsid ies. After careful consideration - and in full
        awareness of the financia l burdens enactment of the bill will impose - the Posta l
        Service has concluded that it is proper, as a matter of principle, for these cos ts to
        be imposed on postal ratepayers rather than taxpayers. IOI

It should also be noted that the OPM has consistent ly utili zed this method for 40 years . Indeed,
at a joint hearing held by the House Oversight and Governmen t Reform Committee and the
Subcommittee on Fede ral Workforce, Postal Service, and the District of Columbia, John
O'Brien , then the OPM Director of Planning and Po li cy Ana lysis, tes tified:

        OPM's melhodology ... was considered by Ihe GAO in Report Number GAO-03­
        448R, dated January 31, 2003, which ... evaluated the reasonableness of OPM 's
        methodolog ies for alloca ting es timated benefit payments and other expenses
        between serv ice rendered before and after July I, 197 1...and suggested no
        changes to the all ocation methodology used for Postal Reti rement funding. 102

Mr. O ' Bri en also test ified that the OPM did not find any record that Congress was concerned
with the OPM's allocation method as it drafted and passed the 2003 Act or the PAEA. 10] We
were likew ise unable to locate any such records.

Retiree Healt h Benefi t Costs Versus Annu ity Costs

Pen sions and reti ree health benefits are two very different entit lemen ts and thu s it is appropriate
to use different methods to allocate the respect ive contribution respons ibi li ties to them. Pension
rights are earned over time and the value of a pens ion is dependent upon both years of service
and sa lary. The USPS and not the Federal Government sets the sa lary leve l for USPS employees.

100. H.Rep. No. 93-120 (1973).
101 . S.Rep. No. 93-947 (1974), cited by statement of John O'Brien, Director of Planning and Policy Analysis,
OPM , Who Owes Who What? An Examination oflhe United Slates Postal Service~' Civil Sen/ice Reliremel1l
Syslem Pem-ion COlllribulions, Joint Hearing before Ihe Commiltee on Oversighl and Government Refonn and
Subcomm ittee on Federal Work foree, Postal Service, and the District of Columbia, U.S. House of Representatives
(2010), at page 3.
102. Statement of John O'Brien, sllpra note 101 , at page 4.
103. /d. , al page 5.



                                                        31 

  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




Therefore, the US PS and not the Federal Gove l1unent con trols the value of the pens ion. T hi s
is w hy it is proper 10 allocate the va lue of salary increases to the USPS ra ther than on a pro rata
basis.

Retiree hea lth care insurance, on the other hand, is a benefit that is not eamed over lime nor
dependen t upon the USPS salary. It is merely conditioned upon the person 's s tatus as a retiree
who is eli gib le for the benefi t. Therefore, beca use the USPS does not contro l the amount of
the benefi t, it is appropri ate to use a years of service method to all ocate these health care costs
between the USPS and the Federal GOVCl11l11en l.

Impact of the 2003 Ac t

The USPS OIG con tends that the 2003 Act repealed the USPS's liabi li ty fo r the increases in
CSRS pens ion costs attributable to USPS pay increases. 104 T he language repea led by the 2003
Act was ori gi nal ly added to Titl e 5 by the 1974 Act. The original provis ion stated:

        Notwi th standing any other statute, the Un ited States Postal Service shall be
        liable for that portion of any estimated increases in the unfunded liab ili ty of the
        Fund w hi ch is attri buted to any benefits payable from the Fund to active and
        ret ired Postal Service officers and employees, and to thei r survivors, when the
        increase resul ts from an emp loyee-managemen t agreement under title 39, or
        any admini strative action by the Posta l Service taken pursuant to law, whic h
        authorizes inc reases in pay on which benefits are computed, I05

Thi s language di rects the O PM how to calcu late the Baseline A ll ocation (i.e. , the div ision of
fin anc ial li abili ty for the POD/USPS annu ities between the USPS and the Federal Governmen t).
It clearl y SUppOt1S the current Base li ne Allocat ion used by the OPM.

The 2003 Act rep laced this sec tion with language that provides the f0 I111ula that the O PM shou ld
use in the USPS's Annua l Review. As di scussed in the section "USPS OJG's Justificat ion for the
Proposal," the 2003 Act rep laced the 1974 language wi th a spec ific f0I111u la requ ir ing that when
calculating the USPS's CSRS liab ili ty in its Annual Review, the OPM use the FERS funding
fo rmul a, w hi ch accoun ts fo r infla tion. This formula is used fo r all USPS employees, not s impl y
PODIUSPS emp loyees. The 2003 statutory language does not address the calculation of the
Baseline A llocation, on ly the Annual Review.

It is highly unlikely that such an amendment, whi ch app lies to the ent ire USPS CSRS popu lat ion,
was meant to repea l a fundamental po licy decis ion made in 1974 related so lely to PODIUS PS
emp loyees. Indeed, the Senate Commi ttee report accompany ing the 2003 Act rejects such an
idea, not ing that the 2003 Act "cont inues the Posta l Serv ice's li ability for the retirement costs


104. USPS OIG CSRS Overpayment Repon, at page 2; see also, Leller from Inspector General David C. Williams,
USPS, 10 John Berry el aI., Director, OPM (Mar. 4, 2010).
105. Pub. L. No. 93-349 (adding a new subsect ion (h) to section 8348 of Title 5, Un ited States Code; the quoted
passage is paragraph (I) of this new subsection (h)).



                                                       32 

                                                         OI'M OFF ICE OF THE IN SI'ECTORGENERAL 



attributable to its employees covered by the CS RS, w hich was imposed when the Post Office
Departme nt became the self-supporting Uni ted States Postal Service in Jul y 197 1." 106

The USPS Inspector Ge neral David C. Willi ams, in a March 4, 2010, letter to aPM Director
John Berry, poin ts oul that current law slales that when performing the Annual Rev iew, the O PM
may include in its calcul ati ons "any other appropri ate amount, as determ ined by [the OPM1 in
accordance with genera lly accepted actuarial practices and prillc iples."107 The letler asserts that
thi s provision would permi t the OPM to mak e an adjustment to the Baseline Alloca ti on without a
need for new legislation.

We disagree with this assertion. The s uggestions offe red by the US PS O IG and the PRC involve
a radica l revis ion to the Base line Allocat ion. The statutory clause cited above is an exa mpl e of
a "catch-ali" provis ion that is often included in laws to provide an agency with some regulatory
flexibili ty. Making the type o f adjustment sugges ted in the Inspector General Wi lli ams's leiter
en tails increas ing Ihe fi nancial liabilities oflhe Federal Governmenl by $50 10 $75 bi lli on. II
would be highly inappropriate for Ihe OPM to uni laterally make such a decision wi thoul clear
statulory direction from Congress.

Impaci Upon Taxpayers
                                                                                          reduction in the
                                                                                         ((A
Adoption of thi s proposa l would en tail a transfer of significanl
                                                                                    amount ofCSRS pension
reliremen t liabi li lies 10 Ihe Federal Governmenl. As Ihe CRS
                                                                                    expenses allocated to the
po ints out:
                                                                                    USPS would result in an
                                                                                     equal increase in CSRS
         Changing Ihe all ocation o f CS RS pension expenses
                                                                                    pension expenses borne
         between the Postal Service and general fund of the U.S.
                                                                                     by the U.S. Treasury."
         Treas ury is a zero-s um game. A reduction in the amount
         ofCS RS pens ion expenses all ocated to the USPS would                                     -CRS
         result in an equal increase in CSRS pension ex penses
         borne by the U.S. Treasury. IOS

Adopting the USPS O IG's revised Baseli ne All ocation (or that of the PRC) I09 would mean that
the Governmen t is agree ing to pay a larger share of the pensions of POD/ USPS emp loyees.
Under the proposal, a certa in amount of assets - $5 0 to $75 billion, depend ing upon whi ch
revised Base line All ocation is adopted - would be transferred from the CS RD Fund to the
PSRHB Fund. The CS RD Fund's ob li gations remain unchanged . FUl1hel1110re, the USPS would
be reli eved of maki ng any future payments into the PSRHB Fund because the assets received



106. S.Rep. No. 108-3 5 (2003), at page 3.
107. 5 U.S.c. § 8348(h)( I )(8)(iii ). See, Letter from Inspector General Da vid C. Wi lliams, supra note 104, at pages
2-3.
108. CRS Report R41 024, at page II.
109. The PRe's consultant, the Segal Company, suggested an allocation fonnu la that would set USPS 's CSRS
surplus at $50 to $55 bi llion. The Sega l Company, Report 10 the Poswl Regllla/Of)1Commission 011: Civil Service
Retirement System em'l and Benefit A lIoell/ion Principles (June 29, 20 I 0).



                                                          33 

  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




frOlll lhe CS RD Fund would sat isfy al l of the USPS's unfunded liabi lities related to ret iree health
bene fi ts (i.e., the PSRHB Fund wou ld be fully funded) . Thi s wou ld allow the USPS to li se the
PSRHB Fund to pay all retiree hea lth benefit premiu ms.

Consequently. if thi s proposa l were enacted, the Federal Government could lose a stream of
in come (the annual PAEA payment s made by the USPS into the PSRHB Fund), whil e acqui ring
new pension liabi li ties and maintain ing its current level of re tiree health
benefit li abilities.

Conclusion                                                                                 TheOPM
                                                                                        is complying
We conclude that the OPM is comply ing wi th current laws relating to the                  with the
all ocation ofCSRS li abili ties for POD/ USPS ret irees. Furthenn ore, the O PM             law
does not have the au thori ty to imp lement the proposed changes to the Baseline
A llocation f0 I111ula w ithout new legi slation.

Under thi s proposa l, the Federal Governm en t wou ld be assuming new li abili ti es without
obta in ing a correspond ing increase in Government oversigh t of the USPS. As d iscussed in
the subsect ion ent itled "USPS's Financial Out look ," there are many causes of th e USPS 's
financ ial difficulties. By focusi ng only on the reti rement liab il ity issue, the overarching policy
considerations regarding the relations hi p between the USPS and Federal Governmen t would not
be addressed.

Clearl y a transparent and more efficient approach to the USPS's fund ing shortfall wou ld be a
direct appropriation to th e PSRHB Fund or the USPS itself. Such an appropri at ion wou ld all ow
Congress to set conditions or requi re other overs ight reporting to ensure that the Federal funds
bei ng used by the USPS are used effic ien tly.




                                                  34 

                                                         OI'M OFF ICE OF THE IN SI'ECTORGENERAL 




Proposal 3: Reduction in Contribution Levels for Retiree Benefits

Current Law

Congress created FERS to be a fu ll y funded pension plan , unlike CS RS. There are several
rea sons why Congress chose to pre fund it s obligations:

        First, by prov iding a continuous source of budget authority, the [CSRD Fund]
        all ows benefits 10 be paid on lime, regardless of any delays lhat Congress may
        ex perie nce in pass ing its an nual appropriation s bi ll s. Second ly, the ba lance in the
        tru st fund acts as a barometer of the Government's future pens ion obligat ions ...
        Fi nall y, prefundin g pens ion obligat ions fo rces Federal agencies 10 recognize
        their full personnel costs when requesting annua l appropri ations from Congress.
        Otherwise, these costs would be recognized only in the central admini strati ve
        accounts of [OPM] , and not by the agencies where the costs are incurred. I 10

The USPS's pension liabiliti es under FE RS are ca lculated in the same way as those of Federal
agencies.

With regard to retiree health benefits, the US PS current ly makes two separate payments to meet
its liabi li ti es. One is an an nual payment for the actual costs assoc iated with the hea lth bencfits
provided to current US PS retirccs. The second payment is the PAEA-mandated paymcnt into the
PSRHB Fund to prefund its obligations to future retirees.

Beg inning in 20 17, the assets of the PSRHB Fund will be used to pay the actual annual hea lth
care costs of current retirees. This means that begi nning in 2017, the US PS will make onl y
a single an nual payment into the PSRHB Fund. T hi s payment will be based upon annual
calculations by the OPM regarding the projection of US PS's future respon sibi lit ies, and the
USPS's paymen t sched ul e will be adju sted accordi ngly each year.

USPS OIG's Proposed Action

Thi s proposal wou ld amend the law so that the US PS would be pcnnitted to (I) cease fully
funding its FERS obligat ions and (2) cease making the PA EA sc hed ul cd payments into the
PSRHB Fund, which would have over time fu ll y funded its retiree health benefits obligations.
Instead, the USPS would prefund onl y 80 percen t of its FERS liabi li ti es and 30 percent of its
retirec health benefit liabi li ti es.

If thi s proposa l were enacted , the USPS wou ld already have a "surpl us" fo r both its FERS and
retiree health benefi ts funding. The proposal env ision s that the "federal gove l11ll1ent could retain
[these surplus amounts1 in the current funds ...eli mi nat[i ng1 the need fo r the Postal Serv ice to
make payments to the pension and retiree hea lth care fund s until the lowered funding threshold is
reached."111

[ 10. CRS Report 98-8 [0, at page [0. 

[I [. US PS OIG 's Funding Levels Report, al page 3. 




                                                         35 

  OPM OFFICE OF THE INSPECTOR GENERAL 




USPS DIG s Justification for the Proposal

The USPS OIG 's report claims Ihal its "[b]enc hmarki ng results indi cate the Postal Service has
prefullded its pension and ret iree heallh benefits plans at substantially higher leve ls than other
en tities."112 The en tities used for the "benchmarki ng" ofpellsiol1 fund ing are the compan ies
in the Standa rd & Poor's 500 index (S& P 500) as we ll as State and Fede ral Governments.
To establish a benc hmark fo r the funding of ret iree heallh benefi ts, the report indi ca ted that
it reviewed the practices of Fortune 1000 compani es, Siale Governmen ts, and the Federal
Government.

Wi th regard to pension funding, the repol1 fo und that the pens ion prefunding levels among
the S&P 500 during the period of200 1 to 2009 ranged from 73 percent to 112 percent, wi th
a med ian of 79 percent. ll3 The report also notes, bu t wi thout further explanat ion, that "[t]he
aggregate prefunding for States ' pensions in 2008 was also 79 percenl." 11 4 In addi tion , the USPS
OIG has po inted out repeated ly in the past that the Federal Government funds its civili an pension
respons ibilities at 4 1 percent and its military pension responsibi li ties at 24 pe rcen l. llS

Futhermore, the reporl found lhat many Fortune 1000 compani es do nol pre fund rel iree health
benefils al all and of lhose lhat do, the average level is 28 percent. The reporl a lso delermined
that State Governmenls prefund these benefi ts at 30 percen l. I 16 It notes that the military pre funds
il S liab ili ties at 29 percent and the Federal Governmen l does not prefund retiree hea lth benefi ts
fo r civi lians at all.

Disclission

The rad ica l nature of the proposed red uced fundi_ng levels cannot be overstated. We strongly
oppose the entire proposa l and beli eve that the financia l soundness and integri ty of the CS RD
Fund would be seriously compromi sed ifi l were enacted.

Benchmarks

Before looki ng at specific argument s and pieces of lhe proposal, we would like to nole thal the
report fa ils to support its "benchmarks." The calcul at ion of these benchmarks is not ex pl ained in
that report or any oth er report that we have reviewed. There fore, we are unab le to eval uate the
propri ety of using these benchmarks in compari ng funding practices across the various sectors.

The use of lhese benchmarks as justi fica lion fo r a radical change to the relirement funding
structure is an examp le of what concern s us about the tenor of the debate on these malters. The



112. Id. , at page 2.
113. Id. , at footnote 3.
114. Ill. , al page 2.
115. See, e.g., USPS O IG CSRS Overpayment Repon, at page 10; USPS OIG Summary, at page 10.
116. USPS O IG Summary, at page 10.



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 report conta ins several decl aratory statements that are presented as fact and yet offer no fac tual
 support. 1l7 Such statements serve onl y to confuse matters and crea te mi sleading impressions.

 Comparison to Pri vate Sector

 There is some support fo r the report's concepts as app li ed to the private sector. Bi ll s were
 introduced in the 111th Congress that wou ld provide fund ing relief similar to what the report
 is proposing.1 18 These proposals would reduce payment obl igations, perm itt ing corporations
 to redi rect the money to more immediate needs. These bill s were introduced in response to the
 fac t th at requi rements imposed by the Pension Protection Act of2006 (PPA)1 19 upon pri vate
 corporations, comb ined with variou s economic fac tors, have increased the funding obligat ions of
 pension plan sponsors. 120 However, that is where the simil arities between the pri vate sector and
 the US PS end.

 Whi le the USPS and pri vate compani es may face the same problems, they are very different
 types of entities. A pri vate company can termina te its pen sion plan at any time. Furthennore,
 bankruptcy proceedi ngs offe r priva te companies the potentia l of fi nancial reli ef w ith regard to
 both pen sion and retiree health benefi ts. The fOllner Ass istant Secretary of the Treasury fo r
 Fi nanc ial Markets, Timothy S. Bi tsberger, test ified at a hearing before the Se nate Committee on
 Home land Security and Governmenta l Affairs that " the pri vate sector has the ab ili ty to eli minate
 [its retirement health liab il ities] and other ob li gations ei ther voluntari ly or through a bankruptcy
 proceeding. These changes generally take the form of reduced or el iminated benefi ts."' 21

                               lfa company does go bankntpt and its pension pl an is not fu lly
                               funded, its employees and retirees have a degree of protection because
   It is not only              the Pension Benefit Guaranty Corporation steps in and, assuming
  reasonable but               certain cri teria are met, ful fills the company's pen sion obligat ions
prudent to require             up to a specified maximum benefi t level. 122 The USPS, on the
 the USPS to fully             other hand, has no suc h backstop except for the U.S. Treasury. As
fund its liabilities           d iscussed in the subsect ion entitl ed " Postal Emp loyee and Retiree
   since the U.S.              Righ ts," the Federal Governmen t is the entity that is lega ll y bound to
 taxpayeJ' acts as             satisfy annui ty obligat ions to US PS ret irees. There fore, it is not only
the USPS's insurer             reasonable but pruden t to requ ire the USPS to fully fund its liab il ities
                               si nce th e U.S. taxpayer acts as the USPS's insurer.


 117. See our discussion in the subsections entitled "Comparison to Private Sector" and "Comparison to States."
 118. H.R. 3936 (Preserve Benefits and Jobs Act o(2009); H.R. 2989 (40 I(k) Fair Disclosure and Pension Security
 Act of 2009); H.R. 4213 (Tax Extenders Act of2009, later the American Jobs and Closing Tax Loops Act of 2010,
 which included provisions from H.R. 2989); Preservation ofAccess to Care for Medicare Beneficiaries and Pension
 Rel ief Act of201O, Pub. L. No. 111-192, 124 Stal. 1280. See, CRS Report 98-118, at pages 3-4.
 119. Pension Protect ion Act of2006. Pub. L. No. 109-280, 120 Stat. 780.
 120. See, CRS Report 98-118, at page 3.
 121. St.1tement of Timothy S. Bitsberger, Assistant Secretary for Financ ial Markets, U.S. Department of the
 Treasury, Reform oflhe United States Postal Sen-ice, Committee on Homeland Security and Governmental Affairs,
 U.S. Senate (April 14,2005), at page 4.
 122. 29 U.S.c. § 1322.



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  OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




The descript ion of the lega l standards governing the fund ing levels of private pension funds
contained in the USPS OIG's report is confusi ng at bes t. It s lales that the PPA "considers
pensions prefullded at less than 70 percent as being 'at risk ' and attempts to protect such plans
by commenc ing restTi ct ions on corporate pension funds only when prefunding is be low 80
percen t." IB The report conc ludes that "80 percen t prefulldillg for pensions ... represen ts a
reasonable level ill addressing ret irees' needs, yet also provides the Posta l Serv ice wi th a mean s
ofhaiting its curren t financial slide." '24

A 2006 CRS report l25 explai ns that the PPA estab li shed new ru les fo r pen sion plans and sel the
funding targe t fo r si ngle-employer plan s at 100 percent, although thi s is phased in ove r fi ve
years, reaching 100 percen t on ly in 20 I I. 126 Pens ion funds that do not meet cel1ain funding tes ts
w ill be detennined to be at risk of defaulting on thei r li abilities (ca ll ed " at-risk plans") and plan
sponsors will be req uired to use actuarial assumptions that result in larger annual payments to the
plan. 127

Therefore , the law does not promote 80 percent as a fund ing leve l, as the USPS O IG's report
implies. That is si mpl y the lowest funding leve l a plan can have to avo id being penalized; it
is the floor set by the law, not the to/gel. Cons idering the USPS 's own unfavorable financial
project ions and its approx imately $12 bi lli on debt to the U.S. Treasury, the PPA offers no support
fo r the proposa l to change from fully funding a plan to using the minimum funding percentage
pel1n itted w ithou t penalty.

The USPS O IG's report offers only a single sen tence regarding the prefunding of ret iree health
benefits in the pri vate sector. 128 It states that "the average level that Fortu ne 1000 companies
prefund ret iree health care (many do not prefund) is 28 percent."129 However, fonner Ass istant
Secre tary Bitsberger stated at a Congressiona l hearing:

            [T] he private sector genera lly has not fu lly pre-funded these li abili ties, but. ..
            in recen t years, many finn s that offer post-ret iremen t health benefits have in fact
            estab li shed ded icated trusts 10 fund these li abili ties as the seriousness of these
            ob ligations became apparent. lJO



123. USPS OIG's Funding Levels Report, at page 2.
124. Id. , at page 3.
125. CRS. SUIIIIIIWY oflhe Pension PlVleclioll Acr of2006, Report RL33703 (Oct. 23, 2006), at pages 4-5.
126. !tI. For 2009, the target was 94 percent and for 2010, it was 96 percent.
127. There arc two tests to detemline if a plan is at-risk. First, iftne plan is funded below 70 percent under
"worst-case scenario'· assumptions that (I) tne employer is not pennitted to usc credit balances to reduce its cash
contribution and (2) employees wi ll rct ire at the earliest possible date and will choose to take the most expensive
fonn ofbenefil, then it is at risk un less it meets the second test. Under the second lest if, under standard actuarial
assumptions, the plan is considered to be funded above 65 percent, then it wou ld not be considered at-risk. The
standard under the second lest changed 10 70 percent in 2009, 75 percent in 20 I0, and 80 percent in 2011 and
thereafter. Id. , at page 4.
128. USPS OIG's Funding Levels Report, at page 2.
129. It/.
130. Statement of Timothy S. Bitsberger, ~·upra note 121 , at page 4.



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Whil e the US PS DIG 's report does not provide the source ofi ls data rega rd ing the treatmen t of
retiree health benefi ts in the pri vate sec tor, the CBO has stated that "[a]ccording to one ana lysis,
just 35 percent of Fortune I 000 companies have set as ide assets to cove r those li abilities.
Moreover, those assets are only large enough to cover about one-thi rd of the expected costs, on
average."1J1 The paper goes on to poi nt oUllhat fewer and fewer compan ies are now offering
these benefi ts and if they do, they are cutting benefits. Agai n, however, the key difference is that
the pri vate sector can avo id these obligat ions through plan tel111ination and/or the app licat ion of
the bankruptcy laws.

Comparison to States

The USPS OIG 's report ind ica tes that "[t]he aggregate prefunding for States' pensions in 2008
was 79 perce nt of li abili ties."1J2 However, agai n, the method used to calculate that fi gure is not
ex plained. While it c ites a 2008 GAO report fo r the proposition that "many expert's consider at
least 80 percen t prefunding to be sound for governmen t pensions," 1J3 it fai ls to mention other key
po ints in the GAO report.

The GAO exp lains that the method it used to determine the funding status of a plan was to look
at three d ifferent measures: (I ) the yea rly contributions made by the Government-employe r;
(2) the funded ratio (i.e., li abili ties covered by assets); and (3) the unfunded li abili ties.1J4 In its
analysis, the GAO fo und that because State and loca l government s use differen t actuarial cost
me thods, assumptions, and amortization peri ods to es timate the second and thi rd factors, "[l] he
funded status measures of differen t plans cannol be compared to one another easil y."135

The USPS O IG 's report states thaI it used the S&P 500 to de ve lop the priva te sector benc hmark
but fails to offer any indication of what data il used for the State Governmen t benchmark s.
It cannot be relying upon the GAO researc h becau se the USPS O IG 's report speak s only of
Slate Governments while the GAO repOt1 uses data fro m both State al1d loca l governments.1J6
Moreover, the USPS D IG ind icates that it is 1101 using "computer-generated data to support the
op ini ons and conclusions presented in Ihi s report ."1J7 Consequently, we are unable to re ly upon
the assertion that Slale Governmen ts are fundin g their pension plans at 79 percen t. 1J8




131 . CBO, Letler from Barry B. Anderson, Acting Director, CBO, to the Honorab le Jim Nussle, Chai nnan,
Commiuee on the Budget , U.S. House or Representat ives (Jan. 27, 2003), at page 15 (citi ng Watson Wyatt, Retiree
Health Beneftts: lime to Resuscitate? Research Report (Washington, D.C. : 2002»).
132. USPS OIG's Funding Levels Report, at page 2.
133 . Ill. (cit ing GAO, Stale and Local Governmelll Retiree Benefits: ClIrrelll FlIndell StatllS a/Pension and Health
Benefits, GAO-08-223 (Jan. 29, 2008) (hereinafter '·GAO-08-223"».
134. GAO-08-223 , at page 2.
135. Id. ,al pages 8 and II.
136. Moreover, GAO's own data sci is by no means exhaust ive: its two sources contai n "sel r-reported data on state
and local govern ment pension plans in years 1994, 1996, and 2000 to 2006. Each year, between 62 and 72 plans
were represented in [the] datasel.'· GAO-08-223 , at foo tnote 15.
137. USPS OIG's Funding Levels Report, at page 5.
138. Ill. , at page 2.



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  OPM OFF ICE OF T HE I NSPECTOR GEN ERAL 




The USPS OIG's report also conta ins only a sing le sen tence regardi ng the pre fu nd ing of
ret iree health benefi ts by State Govemm ents .!39 Therefore, we cannot comment on the report's
comparison of the US PS to State Governmen ts except to note its lack of fac tua l support.

Comparison to the Fede ral Government

in seve ral of its repol1 s d iscussi ng the USPS's fund ing of its reti rement obligat ions, as well
as in tes timony before Congress, the USPS 0 10 has emphatica ll y repealed that (1) Federal
Government civilian annui ties are funded a l 41 percent , (2) mi litary pensions are funded at 24
percen t, (3) Federa l civili an ret iree heallh plans a re not funded at all , and (4) mililalY plans are
funded a l 29 percent. These fac ts are used to argue that the US PS should be treated in a si mil ar
manner.

It is mi slead ing to use the 4 1 percent fig ure in describing the status of the Federal retirement
programs in the ir entirety because thi s figure combines CS RS and FERS.140 It has never been
in dispute that CS RS is not full y funded. FERS, on the other hand, is des igned to be full y
funded . Granted, suppl emental FERS liabi lities exist, but they are a very small fract ion of the
Govern ment's tota l unfunded CS RD Fund li abi lities. For example, at the end of fi scal year 2008,
the CS RD Fund had approx imatel y $674 bill ion in unfu nded li abilities and according to the
Congress ional Research Service, " [a] 1I but $ 1 billi on of thi s un funded liabili ty is attri butable to
CS R S . "I~1



The fo rmer Act ing Director of the O PM, Da n G. Blai r (l ate r the fi rst chai rman of the PRC),
testified at a Senate hearing that "[tJ he Pos tal Service has been treated di fferently than other
Federa l entities fo r more than three decades when it comes to ret irement pay m e n ts." I~l There is
a very good reason fo r this: it is not a Federal agency and its obligat ions are not - absen t express
consent - backed by the full fai th and credit of the Fede ral Government. 143 Lnstead, it is an
independent establishment of the Execut ive Branc h ' 4-! that is empowered to issue debt in its own
name. 145 Former Act ing Director Blai r wen I on to slate:

          The law requires the Posta l Serv ice to manage its fi nances to ensure that its
          revenues cover its costs, unli ke virtuall y a ll other Federal agencies. The
          paralle ls between departments such as Defense, Education, Housing and Urban
          Development, Hea lth and Human Serv ices, Treasury, Homeland Securi ty, Ju st ice,
          et aI. , and the Posta l Serv ice simpl y do not ex ist. 146

139. Id. (" In addit ion, we detenn ined that stale governments that prefund retiree health care averaged 30 percen!.").
140. USPS D IG's Funding Level s Report, at page 2.
141. CRS Repon 98-8 10, at page 12.
142. Statement of Dan G. Blair, Acti ng Director, DPM , Reform ofthe United Sillies Postal Sen'ice, Committee on
Homeland Security and Governmental Affairs. U.S. Senate (A pril 14,2005), at page I.
143. 39 U.S.c. § 2005 (USPS debts shall "not be obligations of, nor payment of the principal thereof or interest
thereon by guaranteed by, the Government of the United Stales except as provided in section 2006(c)"); § 2006(c)
(USPS obligations wil l be backed by the fu ll faith and credit oflhe U.S. Government only if the Secretary of the
Treasury "determines that it wou ld be in the publ ic interest to do so.").
144. 39 U.S.c. § 201.
145. 39 USC. § 2005.
146. Statement of Dan G. Blair, supra note 142, at page 3.



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As discussed above in the subsect ion en titled "US PS's Re lat ionshi p w ith the Federal
Government," neither Congress nor the Preside nt has budgetary authority over the USPS. In
contrast, Federal agenc ies are subject to such authority because they are funded by appropriated
taxpayer do ll ars. If there is an unfunded liab ili ty in a trust fund attributab le to a Federal agency,
then regard less of whether it is "charged 10 the Genera l Fund of the Treasury or charged to
agency budgets," that cos t is st ill borne by the laxpayer,I47

Conclusion
                                                                                 The unintended
The unintended conseq uences of this proposal are particu larly fa r­          consequences ofthis
reaching and would threaten the viab ility of the trust funds.                     proposal are
                                                                                   particularly
Congress intended for FERS to be fu ll y funded because it sought
                                                                                far-reaching and
to create a cost-effic ien t pension program that could compete                 would threaten the
effec ti ve ly with the pri va te sector. A report issued by the Senate           viability ofthe
Committee on Governmen tal A {fai rs discuss ing the design of thi s                trustfunds
new ret iremen t program stated:

           [F10r an enterpri se to survive it mu st keep its cos ts under control. Compen sation
           is a major cost for any organization, such as the Government, and ret irement
           can account fo r 15-25 percent of payroll. Re lated to cost is how a retiremen t
           plan is funded. Retiremen t costs, un like o ther costs, do not necessaril y surface
           until many years after the es tab li shment ora plan. Federal law,
           however, requires pri vate emp loyers to pre fund thei r plans to a
           certain extent to ensure the ava il abili ty of assets to pay fo r benefi ts     Congress
           when they come due. The comm ittee find s that the costs of the                intendedfor
           Federa l Government plan should be on par w ith corporate plans.                FERStobe
           Additiona lly, the comm ittee beli eves tha t the Governmen t shou ld         fully funded
           pre fund it s plan to avoid th e revela tion ofstal1ling costs at a later
           period. 148

Whil e the Federal Gove l11ment does not prefund its CSRS pension or reti ree hea lth benefits
ob ligations at 100 percent, it does prefund its FERS liabi lities at 100 percent. This in no small
part has contri buted to the cont inued viab ili ty of the CSRD Fund:

           One reason that the [CSRD Fund1 wi ll not ex haust its resources is that a ll Federal
           emp loyees hired since 1984 are enrolled in FERS. By law, the benefits that
           emp loyees earn under FERS mu st be fu ll y fu nded by the sum of the emp loyer and
           emp loyee contributions and inte res t earni ngs. 149




147. hi.
148. S.Rep. No. 99-166 (1985), al page 5.
149. CRS Report 98-1 10, at page 12.



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      OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




    Another major flaw with thi s proposa l is that it ca rves out a unique advan tage for a single
    Governm enta l en tity without any justification fo r suc h special treatment. In 2004, fo nner
    Secre tary of the Treasury, John W. Snow, rai sed the same objection that we do today:

            This issue is best cons idered ill lhe wider con text of the Federal Governmen t's
            ret iremen t funding system. Choos ing to treat the Pos tal Service in a manner that
            is incons istent wi th the FERS funding paradigm has impli cat ions to the wider
            Government retirement structure. By so do ing, the door is open to tinker wi th
            FERS across agenc ies, as it wi ll be diffi cul t to conclude that the Postal Service
            is the only exception to an oth erwise consisten t re tirement system. The costs are
            likely to be enormous in thei r en tirety. ISO

    As fo rmer Secretary Snow warned, permitting th e USPS to deviate from the established FERS
    fo rmul a creates the dangerous - and expens ive - ri sk that agency by agency except ions to the
    CSRD Fund 's operat ions will be enacted into law. If this proposal were adopted, it is read il y
    fo reseeable that virtua ll y all other Federal agenc ies, Govemmen t corporations, and any other
    Governmenta l en tities that part icipate in the Federal ret iremen t program w ill argue that they too
    shou ld be ab le to reduce thei r personnel costs by funding thei r FERS ob li gations at 80 percen t.

    As fo rmer aPM Ac ting Director Blai r po inted out, the Federal Government is li able fo r any
    unfunded obligations it creates, regardless of the account from which the money is actually
    taken. lSI Thi s is logica l given that elected officials are charged with acting responsib ly to protect
    public funds and are held accoun tab le by th e voters. The USPS lacks equiva len t accoun tab ili ty.

                                      The requ iremen t fo r the USPS to fully prefund its re tiree li abili ties
      The USPSfully                   provides important protection for taxpayers by guarantee ing that
       prefunding                     the USPS wi ll con tinue to pay its ow n ex penses. We have already
  retirement liabilities              explai ned our concerns regarding potential the USPS inso lvency
   p"'ovides important                and the Federal Government's subsequent assumpt ion of those
protection for taxpayers              debts. Those concerns app ly equa ll y here.

    We question whether permitting anything less than 100 percent pre fund ing of either pen sion or
    ret iree health benefi ts would be a wise use of public funds. The US PS may need the operating
    capital ri ght now, but as discussed throughout our study, it has
    encountered financial cri ses in the past, received some level of
    monetary reli ef, and yet is still in a cri tica l financial situation. If the USPS needs Federal
                                                                                  assistance, it should not
    We suggest that if the USPS needs Federa l assista nce, then that
                                                                                    be debated within the
    assistance shou ld be examined and debated independent ly and
                                                                                     context offunding
    not within the context of funding reti remen t ob li gation s.
                                                                                   retirement obligations


    t50. St.1tement of John W. Snow, Secretary, Department of the Treasury, Reform oIrhe Postal Service, Joint
    Hearing before the Committee on Government Reform, U.S. House ofRepreselllatives, and the Committee on
    Governmental Affairs, U.S. Senate (Mar. 23, 2004) (d iscussing the issue orm ilitary service cred it).
    151. Statement of Dan G. Blair, supra note 142, at page 3.



                                                          42 

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RECOMMENDATIONS

Based upon our resea rch and analysis, we make the fo ll owi ng recom mendat ions:

I. 	 The O PM shoul d consider suppol1ing the proposa l to amend the FE RS fu nding mechani sm
     either by penni tting amortization of surpluses in the same man ner as supplementa l li abilit ies
     or utilizi ng the s urplus in lieu of an nual FERS payments until it is exh austed. In thi s
     instance, the proposal mai nta ins the fi nancial integrity of the CSRD Fund . However, the
     O PM shou ld strongly advocate that the proposal appl y to all age ncies partic ipating in FE RS
     and not so lely to the USPS.

2. 	 The O PM shoul d exami ne the effects that would result from the creation ofa demographic
     sub-acco unt, w hi ch wou ld be utili zed in determi ni ng the USPS's FERS li ability. Such
     a study should conside r the effects upon both the USPS 's FERS liab ili ties and the en tire
     Federal ret irement program.

3. 	 As the admi nistrator and fi duciary of the FEHB Program , the O PM shoul d support retaini ng
     the requ irement that the US PS prefund its ret iree hea lth benefi ts as it does under current law.
     Thi s requ ireme nt protects the FEHB Program agai nst the ri sk of the USPS default.

4. 	 We recommend that the OPM not implemen t the proposa l regard ing the modification of the
     Base li ne A ll ocation used to calculate the US PS's CSRS liab ili ty fo r POD/ USPS empl oyees.
    It is beyond the O PM's lega l aUlhorily 10 ado pt ei lher the US PS O IG's or the PRe's revised
    Basel ine A ll ocation. Absent Congress ional action on the matter, the OPM should refrai n
    from mak ing the USPS OIG 's (or PRC's) suggested amendments to its Base li ne Allocat ion
    formu la. We note that a change in the Basel ine Allocation would shift substantial costs from
    the USPS to the Federal Governme nt.

5. 	 We recommend that the OPM strong ly oppose any legislative action that would permit
     the USPS to fund its FERS responsibilities at 80 percent. This proposal wou ld cause the
     CSRD Fund to incur substa ntia l un funded liab ili ties as we ll as create a da ngerous precedent
     whereby other agencies would seek to reduce their FERS fundi ng obligat ions. Permitt ing the
     USPS to fund its FERS li abili ti es be low 100 percent would stri p the taxpayer of protecti on
     aga inst US PS defau lt . Furthennore, if other agencies were to adopt the same model, (a)
     agencies would avoid bei ng accountable fo r thei r full person nel costs, leavi ng the Federal
     Government to pay ret iree costs out of the U.S. Treasury's general fu nd rather than through
     the agencies' an nual appropriations, (b) the continued use of trust fund assets fo r purposes
     other than the payment of retiree benefit wou ld com promise the integrity of the trust funds by
     increa sing its un funde d liabil ities, and (c) thi s di rect ly contradicts the Congressional in tent
     that FERS be a fu ll y funded program.




                                                    43 

 OPM OFF ICE OF TH E INSPECTOR GEN ERAL 




6. 	 The O PM, as the admin istrator of the trust funds, should ensure that Congress and
     appropri ate Exec utive Branch o ffi cials are info rmed regard ing the monetary and
     programmati c effects of the proposa ls upon ret irement programs and trus t funds. Because the
     Federa l Government w ill be responsible fo r the payment of ret iree benefi ts should the US PS
     defa ult , the aPM should consult with the above poli cymakers so that any new policies are
     adopted with the full knowledge of the impact upon the retirement and hea lth care programs
     as well as the U.S. Treas ury and ul timate ly, the Ameri can tax payers.

7. 	 The O PM should protect the retirement programs agai nst bei ng used as a way to address a
     situation that is entire ly unrelated to re tirement issues. Us ing the Federa l ret irement program
     as a ve hicl e through which 10 impl ement other po li cy objectives would be unwise, ineffic ient,
     and harmful to the program itse lf. The debate sUlTound ing the USPS's fin ancial cond ition
     should not be foc used solely uponlhe fu nd ing of reti ree benefi ts.




                                                   44 

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CONC LUSION

Whil e we understand that the USPS is having fi nancial d iffic ul ties, the OPM 's admi ni stration
of the law has not caused thi s situation. The arM has complied with the law as wri tten on all
accounts. To say otherw ise is both inaccurate and obscures the true causes of USPS's current
c n S IS.


We believe that these proposal s would have a last ing negati ve impact upon the ret irement
programs and tru st funds but have little, if any, po sitive impact upon the US PS's ult imate 10ng­
tenn profi tability. Instead, the result of these pro posa ls would be to shift costs from USPS
ratepayers to the American taxpayers.




                                                  45 

Page Intentionally Left Blank
Page Intentionally Left Blank
     OFFICE OF THE INSPECTOR GENERAL
U.S. OFFICE OF PERSONNEL MANAGEMENT
         Theodore Roosevelt Building 

        1900 E Street, N.W. , Room 6400 

         Washington, DC 204 15- 1100 


          Telephone: (202) 606-1200 

             Fax: (202) 606-2 153 


          Website: www.opm.gov/oig