U.S. Postal Service
Allocation of Responsibility for Pension Benefits between the Postal Service and the Federal Government Gao ID: GAO-12-146 October 13, 2011In Process
The current methodology used by OPM for allocating responsibility for CSRS benefits between USPS and the federal government is consistent with applicable law. Congress created USPS in 1971 as an independent, self-sustaining entity, with a package of assets and obligations, as well as competitive advantages and disadvantages. In 1974, Congress explicitly allocated responsibility to USPS for CSRS benefits attributable to post-1971 USPS pay increases and, although it revised aspects of the CSRS funding process in 2003 and 2006, it did not alter the fundamental allocation of responsibility for CSRS benefits. Although the USPS OIG and PRC reports present alternative methodologies for determining the allocation of pension costs, this determination is ultimately a policy choice rather than a question of accounting or actuarial standards. Some have referred to "overpayments" that USPS has made to the CSRS fund, which can imply an error of some type--mathematical, actuarial, or accounting. We have not found evidence of error of these types. While the USPS OIG and PRC reports make judgments about fairness, the 1974 law also implicitly reflected fairness. Congress considered that USPS was to be self-sustaining and that the federal government, which had no control over USPS pay increases, should not be liable for pension benefits attributable to those increases. Also, the USPS OIG and PRC reports assess the fairness of the allocation in isolation, looking only at pension costs. In the private sector, the fairness of the allocation of pension obligations between two businesses depends on the total package of assets and obligations--both pension and nonpension. Finally, the cost of USPS's CSRS pension allocation based on the 1974 law has already been reflected in postal rates for most of the past four decades. The key impacts of transferring assets out of the CSRS fund to USPS based on the current proposals would be to increase the federal government's current and future unfunded pension liability by an estimated $56 billion to $85 billion. This liability would then be funded by the federal government using tax revenue, borrowing, or both. Also, CSRS beneficiaries would continue to receive their benefits under current law, even if the federal government's unfunded CSRS liability increases, but this could indirectly create pressure to reduce pension benefits. Furthermore, legislation would be required for the CSRS funds transferred under the recommendations in the PRC and USPS OIG reports to be used by USPS for purposes other than funding the Postal Service Retiree Health Benefits Fund. Any change in the USPS's share of responsibility for CSRS benefits would provide some temporary relief from the pressures USPS faces because of declining volume, revenue, and inflexible costs, but would not by itself address USPS's long-term financial outlook. Such a transfer of CSRS funds would not be sufficient to repay all of USPS's debt and address current and future operating deficits related to USPS's inability to cut costs quickly enough to match declining mail volume and revenue. Last year, GAO issued a report (GAO-10-455) that outlined a number of options to address USPS's financial viability that Congress could consider--such as realigning its operations, networks, and workforce--so that USPS could modernize to meet changing customer needs.
GAO-12-146, U.S. Postal Service: Allocation of Responsibility for Pension Benefits between the Postal Service and the Federal Government
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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
October 2011:
U.S. Postal Service:
Allocation of Responsibility for Pension Benefits between the Postal
Service and the Federal Government:
GAO-12-146:
GAO Highlights:
Highlights of GAO-12-146, a report to congressional committees.
Why GAO Did This Study:
The Office of Personnel Management (OPM) is responsible for
administering the Civil Service Retirement System (CSRS), including
the United States Postal Service (USPS) CSRS benefits. Two independent
agencies-”USPS Office of Inspector General (OIG) and Postal Regulatory
Commission (PRC)”-have issued reports stating that OPM‘s current
method of allocating responsibility for CSRS benefits allocates a
disproportionately large share to USPS. The USPS OIG and the PRC
proposed alternate methodologies that they estimate would shift
responsibility for from $56 billion to $85 billion in CSRS benefits
from USPS to the federal government.
GAO‘s objectives were to comment on (1) whether OPM‘s current
methodology for allocating responsibility for CSRS benefits between
USPS and the federal government is consistent with the law, (2) the
analysis used by the USPS OIG and PRC to conclude that OPM should
refund the CSRS contributions in question, (3) the potential impacts
such a refund would have on the CSRS fund and CSRS stakeholders, and
(4) the potential impacts that such a refund would have on USPS‘s
financial outlook. GAO reviewed legislation regarding the allocation
of responsibility for CSRS benefits and methodologies used in all
three reports. OPM and the OPM OIG agreed with GAO‘s draft report, but
USPS and the USPS OIG stated that OPM‘s methodology was not consistent
with current law and they, in addition to the PRC, reiterated their
views that the cost allocation is unfair. GAO continues to believe
that its analysis is accurate.
What GAO Found:
The current methodology used by OPM for allocating responsibility for
CSRS benefits between USPS and the federal government is consistent
with applicable law. Congress created USPS in 1971 as an independent,
self-sustaining entity, with a package of assets and obligations, as
well as competitive advantages and disadvantages. In 1974, Congress
explicitly allocated responsibility to USPS for CSRS benefits
attributable to post-1971 USPS pay increases and, although it revised
aspects of the CSRS funding process in 2003 and 2006, it did not alter
the fundamental allocation of responsibility for CSRS benefits.
Although the USPS OIG and PRC reports present alternative
methodologies for determining the allocation of pension costs, this
determination is ultimately a policy choice rather than a question of
accounting or actuarial standards. Some have referred to ’overpayments“
that USPS has made to the CSRS fund, which can imply an error of some
type-”mathematical, actuarial, or accounting. We have not found
evidence of error of these types. While the USPS OIG and PRC reports
make judgments about fairness, the 1974 law also implicitly reflected
fairness. Congress considered that USPS was to be self-sustaining and
that the federal government, which had no control over USPS pay
increases, should not be liable for pension benefits attributable to
those increases. Also, the USPS OIG and PRC reports assess the
fairness of the allocation in isolation, looking only at pension
costs. In the private sector, the fairness of the allocation of
pension obligations between two businesses depends on the total
package of assets and obligations”both pension and nonpension.
Finally, the cost of USPS‘s CSRS pension allocation based on the 1974
law has already been reflected in postal rates for most of the past
four decades.
The key impacts of transferring assets out of the CSRS fund to USPS
based on the current proposals would be to increase the federal
government's current and future unfunded pension liability by an
estimated $56 billion to $85 billion. This liability would then be
funded by the federal government using tax revenue, borrowing, or
both. Also, CSRS beneficiaries would continue to receive their
benefits under current law, even if the federal government‘s unfunded
CSRS liability increases, but this could indirectly create pressure to
reduce pension benefits. Furthermore, legislation would be required
for the CSRS funds transferred under the recommendations in the PRC
and USPS OIG reports to be used by USPS for purposes other than
funding the Postal Service Retiree Health Benefits Fund.
Any change in the USPS‘s share of responsibility for CSRS benefits
would provide some temporary relief from the pressures USPS faces
because of declining volume, revenue, and inflexible costs, but would
not by itself address USPS‘s long-term financial outlook. Such a
transfer of CSRS funds would not be sufficient to repay all of USPS‘s
debt and address current and future operating deficits related to USPS‘
s inability to cut costs quickly enough to match declining mail volume
and revenue. Last year, GAO issued a report (GAO-10-455) that outlined
a number of options to address USPS‘s financial viability that
Congress could consider”-such as realigning its operations, networks,
and workforce”-so that USPS could modernize to meet changing customer
needs.
What GAO Recommends:
View [hyperlink, http://www.gao.gov/products/GAO-12-146]. For more
information, contact Lorelei St. James at (202) 512-2834 or
stjamesl@gao.gov.
Contents:
Letter:
Background:
The Methodology Used by OPM to Allocate Responsibility for CSRS
Benefits Is Consistent with Law:
Studies Suggest Alternate Methodologies for Allocating Pension Costs,
but Decisions about Allocation Are Matters for Congress:
Potential Impacts of a Transfer of CSRS Pension Costs to the Federal
Government:
Potential Impacts on USPS Financial Condition:
Agency Comments and Our Evaluation:
Appendix I: Legal Analysis of OPM's Allocation Methodology for CSRS
Benefit Contributions:
Appendix II: Issues and Options Related to the Postal FERS Surplus:
Appendix III: Objectives, Scope, and Methodology:
Appendix IV: Comments from the Office of Personnel Management:
Appendix V: Comments from the Office of Personnel Management, Office
of the Inspector General:
Appendix VI: Comments from the U.S. Postal Service:
Appendix VII: Comments from the U.S. Postal Service, Office of
Inspector General:
Appendix VIII: Comments from the Postal Regulatory Commission:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Legislation and Events Affecting USPS's CSRS Obligations:
Table 2: Comparison of CSRS Allocation Methodologies:
Table 3: Allocation of CSRS Benefits Responsibility for a Hypothetical
Postal Employee under Proposed Methodologies:
Abbreviations:
CBO: Congressional Budget Office:
CSRDF: Civil Service Retirement and Disability Fund:
CSRS: Civil Service Retirement System:
FASB: Financial Accounting Standards Board:
FERS: Federal Employees Retirement System:
OPM: Office of Personnel Management:
OPM OIG: Office of Personnel Management Office of the Inspector
General:
POD: Post Office Department:
PRC: Postal Regulatory Commission:
USPS: U.S. Postal Service:
USPS OIG: U.S. Postal Service Office of Inspector General:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 13, 2011:
Congressional Committees:
The U.S. Postal Service (USPS) is in a serious financial crisis and,
as mail volume continues to decline, has not generated sufficient
revenue to cover its expenses and financial obligations. For example,
the Postmaster General has testified that USPS would not be able to
pay its statutorily mandated retiree health benefits payment that was
due on September 30, 2011, and Congress delayed the payment due date
until November 18, 2011.[Footnote 1] Several legislative proposals are
pending to address USPS's financial crisis and some of these include
different approaches for restructuring USPS's pension benefit
obligations.[Footnote 2]
Disagreements have emerged about options for restructuring USPS's
benefit obligations. Reports issued in January and June 2010[Footnote
3] by the USPS Office of Inspector General (USPS OIG) and the Postal
Regulatory Commission (PRC)--independent agencies that have oversight
responsibilities over USPS--have proposed that the federal government
[Footnote 4] return to USPS from $50 billion to $75 billion because,
in their view, the current allocation of responsibility for Civil
Service Retirement System (CSRS) benefits for the post-1971 service of
its employees is unfair.[Footnote 5] The most recent estimates of the
amounts involved if responsibility for CSRS benefits were transferred
were approximately $56 billion to $85 billion. The USPS OIG and PRC
reports stated that the current method of allocating responsibility to
USPS for the CSRS benefits that stem from post-1971 pay increases is
inequitable and both reports proposed alternative allocation
methodologies. USPS OIG also told us that in its view, amendments
Congress made in 2003 legislation required the Office of Personnel
Management (OPM) to change the allocation assigned to USPS and that
OPM's current allocation, based on 1974 legislation, is inconsistent
with current law. OPM, which is responsible for administering CSRS
benefits, disagreed with the USPS OIG, stating that OPM does not have
authority to reallocate the CSRS obligations in the manner suggested
by these reports. Furthermore, OPM's Office of the Inspector General
(OPM OIG) reported on this issue and stated that changing the
allocation methodology would shift substantial pension funding costs
from USPS to the federal government. According to the OPM OIG, using
the federal retirement program as a vehicle for implementing other
policy objectives, such as providing USPS with operating capital,
would also be unwise, inefficient, and harmful to the program itself.
[Footnote 6]
Given the amount of funds at issue, the potential impact on the Civil
Service Retirement and Disability Fund (CSRDF),[Footnote 7] and the
need to resolve conflicting information and positions about this
issue, you asked GAO to (1) determine if the current methodology used
by OPM for allocating responsibility for CSRS benefits between USPS
and the federal government is consistent with the law, (2) comment on
the analysis in the USPS OIG and PRC reports used to conclude that OPM
should refund the CSRS contributions in question, (3) comment on the
potential impact that such a refund would have on CSRDF and CSRS
stakeholders, and (4) comment on the potential effects that such a
refund would have on USPS's financial outlook. Appendix I provides a
detailed discussion of the legal analysis we undertook to answer the
first objective above. We were also asked to provide information on a
USPS request to transfer surplus Federal Employee Retirement System
(FERS) funds to USPS. Information on this proposal is presented in
appendix II.
To determine if the current methodology employed by OPM for allocating
responsibility for CSRS benefits between USPS and the federal
government is consistent with law, we reviewed relevant laws,
statutes, and legislative history. To provide commentary on the
analysis used in the USPS OIG and PRC reports, we reviewed and
analyzed reports on this issue by relevant agencies, government
entities, actuarial firms, and industry groups including the report by
the USPS OIG and the actuarial analysis it commissioned from the Hay
Group, the PRC report and the actuarial analysis it commissioned from
the Segal Company, and the OPM OIG report. We also reviewed testimony
and correspondence by USPS, OPM, and the U.S. Civil Service Retirement
System Board of Actuaries. We interviewed officials at OPM, the PRC,
the USPS OIG, and the OPM OIG to obtain information on the method by
which responsibility for CSRS benefits is currently allocated and the
potential impacts of a CSRS payment "refund" on the CSRS fund and
stakeholders. To comment on USPS's request for a FERS refund, we
analyzed OPM's most recent annual report on the CSRDF, interviewed OPM
actuaries, reviewed commentary by USPS OIG and OPM on this issue, and
reviewed approaches to surplus pension assets applicable to private
sector pension plans. To provide commentary on the potential effects
of a "refund" for CSRS payments on USPS's financial condition, we
reviewed and summarized prior GAO work on this subject, including
reports and testimonies related to the financial condition of USPS and
the actions necessary to avoid financial insolvency, and spoke with
officials at USPS.
We conducted this performance audit from September 2011 to October
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Appendix
III contains a detailed discussion of our scope and methodology.
Background:
The Postal Reorganization Act of 1970 (1970 Act) created USPS as an
"independent establishment" of the executive branch on July 1,
1971,[Footnote 8] in place of the old Post Office Department (POD), a
federal agency. Congress conceived of USPS as a financially self-
sufficient entity, which was expected to cover its expenses almost
entirely through postal revenues.[Footnote 9] The equity the U.S.
government held in the former POD became the initial capital of USPS,
and the U.S. government remained responsible for all the liabilities
attributable to operations of the former POD.[Footnote 10] See table 1
for a summary of legislation and events affecting USPS's CSRS
obligations.
Table 1: Legislation and Events Affecting USPS's CSRS Obligations:
Year: 1970;
Event: The Postal Reorganization Act of 1970 (P.L. 91-375) initiated
the transition from POD to the independent USPS.
Year: 1971;
Event: USPS began operations on July 1, 1971.
Year: 1974;
Event: P.L. 93-349 required that for those employees employed by the
POD before 1971 and USPS after 1971, responsibility for paying for the
increase in retirement benefits resulting from increases in postal
salaries after July 1, 1971 be transferred from the federal government
to USPS.
Year: 2003;
Event: The Postal Civil Service Retirement System Funding Act of 2003
(P.L. 108-18) changed the method of estimating USPS's funding
obligations to the CSRDF. The prior method did not project future pay
or cost of living increases and used a fixed interest rate assumption.
The new method uses "dynamic assumptions" which anticipate the effects
of long-term future investment yields, pay increases, and price
inflation and are reassessed annually.
Year: 2004;
Event: At the request of USPS, OPM and the CSRS Board of Actuaries
reconsidered OPM's methodology and determined that it was consistent
with congressional intent.
Year: 2006;
Event: The Postal Accountability and Enhancement Act of 2006 (P.L. 109-
435) required that surpluses in the postal CSRDF be transferred to the
Postal Service Retiree Health Benefits Fund in certain designated
years (beginning in 2007) and that the annual determination made by
OPM of the postal liability or surplus be subject to review by the PRC
at the request of USPS.[A]
Source: GAO analysis.
Note: Other statutes, not relevant to the present questions, also have
been passed amending USPS's CSRS responsibilities.
[A] In 2006, Congress established a 10-year schedule of USPS payments
into a fund (the Postal Service Retiree Health Benefits Fund) that
averaged $5.6 billion per year through fiscal year 2016. Starting in
fiscal year 2017, USPS's share of the health benefits premiums for
current and future retirees will be paid from this fund and USPS will
also fund the actuarially determined normal cost plus an amortization
of any unfunded liability. Pub. L. No. 109-435, § 803(a), 120 Stat.
3198, 3251.
[End of table]
Under the 1970 Act, all officers and employees of USPS (with the
exception of those on the Board of Governors) remained covered by
CSRS.[Footnote 11] CSRS features a defined-benefit pension based on an
employee's term of federal service (years of service) and the highest
3 consecutive year average of his or her rate of basic pay (pay is
also referred to as salary in this report).[Footnote 12] Employees
participating in CSRS have a defined percentage of their salary
withheld and contributed to the CSRDF. The USPS OIG and PRC reports
address the allocation of CSRS benefits attributable to USPS employees
who participate in CSRS and were employed at both the POD (prior to
July 1, 1971) and USPS (after July 1, 1971).
The methods and rates at which USPS funds pension benefit costs were
determined by Congress in 1974. Congress passed legislation (the 1974
Act) requiring that for those employees who have been employed by both
the POD and USPS, responsibility for paying for increases in
retirement benefits resulting from increases in postal salaries after
July 1, 1971 be transferred from the federal government to
USPS.[Footnote 13] Because CSRS benefits are determined by applying
the highest 3 consecutive years of salary to all years of service, pay
increases can have a large effect on the amount of pension benefits.
As such, the liability in the CSRDF for those USPS employees who began
their careers in the POD and continued their careers in USPS grew as a
result of USPS pay increases since the 1970 Act.[Footnote 14]
When USPS was established as an independent federal entity in 1971, it
was given a package of assets and liabilities, which included the
preexisting postal infrastructure and business advantages and
disadvantages. POD's last annual report covering the fiscal year ended
June 30, 1971 stated that the net property, plant, and equipment of
the POD transferred to USPS on July 1, 1971 was valued at about $1.4
billion (about $6.2 billion in today's dollars). Business advantages
and disadvantages included a business monopoly in certain areas and
exemptions from certain laws applicable to private entities, offset by
various mandates and restrictions such as universal service
requirements.[Footnote 15] Having created USPS in 1971 as an
independent, self-sustaining entity, with a package of assets and
obligations, as well as competitive advantages and disadvantages, in
the 1974 Act, Congress explicitly allocated responsibility for CSRS
benefits between USPS and the federal government.
Stakeholders have asserted that two pieces of legislation subsequent
to the 1974 Act are relevant to the allocation of USPS's CSRS
liabilities: the Postal Civil Service Retirement System Funding Reform
Act of 2003 (2003 Act) and the Postal Accountability and Enhancement
Act of 2006 (2006 Act). We discuss the effects of these statutes
below.[Footnote 16]
The Methodology Used by OPM to Allocate Responsibility for CSRS
Benefits Is Consistent with Law:
We examined the legal requirements pertaining to the methodology used
by OPM for allocating responsibility for CSRS benefits between USPS
and the federal government, and found that OPM's methodology is
consistent with applicable law.[Footnote 17] The 1974 Act required
USPS to pay for the increase in retirement costs for service at the
POD attributable to pay increases granted by USPS (that is, increases
since July 1, 1971). OPM has carried out this requirement by
calculating the retirement costs for pre-1971 service (those that the
federal government is responsible for) based on the employee's
credited service and rate of basic pay on June 30, 1971, the last day
the POD was in existence. In our view, the 2003 and 2006 Acts did not
change the fundamental allocation made by the 1974 Act and thus OPM's
current methodology continues to be consistent with law.
As noted above, the 1970 Act established USPS as an independent, self-
sustaining entity within the executive branch. The 1970 Act did not,
however, explicitly assign responsibility for CSRS benefits
attributable to salary increases granted by USPS after July 1, 1971.
Consistent with the core principle of the 1970 Act that USPS should be
self-sustaining, Congress addressed this issue in 1974 by amending the
statute to allocate responsibility for these costs to USPS. As
revised, the law provided that USPS "shall be liable" for such costs
and that the mechanism for collection of these costs is a schedule of
payments by USPS into the CSRDF of amounts determined by OPM following
each USPS pay increase.
Congress revised aspects of this funding process in 2003, but it did
not alter the underlying allocation of liability to USPS. In response
to GAO inquiries in 2001,[Footnote 18] OPM reviewed USPS's payments to
the CSRDF to determine whether USPS was paying either more or less
than was needed to cover its employees' retirement liabilities.
[Footnote 19] OPM (and later, GAO[Footnote 20]) concluded that if USPS
payments continued unchanged, by the time the last CSRS-related
benefit would be paid, USPS would overfund projected costs by a
significant margin.[Footnote 21] OPM therefore proposed amendments to
the statutory funding mechanism, and with some revisions, these
amendments were enacted in the 2003 Act.[Footnote 22]
In place of the 1974 Act's required payments into the CSRDF by USPS
following each USPS pay increase, the 2003 Act instituted a funding
methodology modeled on FERS, the successor to CSRS. In particular, the
2003 Act required USPS to contribute the employer's share of the
"dynamic normal cost" (which is a normal cost computed using dynamic
assumptions),[Footnote 23] plus a schedule of payments to liquidate
any underfunding, called the Postal supplemental liability. The act
provided that both of these amounts due from USPS would be determined
by OPM.[Footnote 24] Although "dynamic assumptions" included
projections of future pay increases, the consequence of the 2003 Act
was to leave the 1974 allocation unchanged, notwithstanding the
removal of the explicit allocation provision. In other words, the 2003
Act required OPM to change the funding methodology for USPS, but in
our view, the act did not change the underlying allocation of benefit
responsibility between USPS and the federal government.[Footnote 25]
Congress amended the USPS pension benefit provisions again in 2006, as
part of the 2006 Act.[Footnote 26] As with the 2003 Act, however, the
2006 Act did not change the fundamental allocation of benefit
responsibility between USPS and the federal government with regard to
the USPS employees and annuitants who had accrued CSRS benefits as POD
employees prior to 1971. Among other things, the 2006 Act altered the
Postal supplemental liability established by the 2003 Act to change
the responsibility for pension costs arising out of prior military
service by USPS employees (the 2003 Act had allocated the
responsibility to USPS,[Footnote 27] whereas the 2006 Act returned the
responsibility to the federal government[Footnote 28]). The 2006 Act
also contemplated the possibility of a postal supplemental surplus as
well as a supplemental liability. It required that any postal
supplemental surplus in certain designated years be transferred to a
new fund for USPS retiree health benefits, and established a procedure
by which USPS could request a review of OPM's determination of a
liability or surplus by the PRC.
Studies Suggest Alternate Methodologies for Allocating Pension Costs,
but Decisions about Allocation Are Matters for Congress:
Although the methodologies suggested in the USPS OIG and PRC reports
present alternatives for determining the allocation of pension costs,
determining the appropriate allocation of responsibility for CSRS
benefits is ultimately a policy choice rather than a question of
accounting or actuarial standards. Application of the approaches
proposed by the USPS OIG and PRC reports would result in a significant
transfer of pension costs from USPS to the federal government and
thereby to taxpayers. Some have referred to overpayments that USPS has
made to the CSRS fund. The term "overpayment" can imply an error of
some type--mathematical, actuarial, or accounting. We have not found
evidence of error of these types. Hence, any reallocation of CSRS
benefit responsibility would be a significant change from a policy
that has been in place since 1974 and not a correction of any
actuarial or accounting methodological error. Congress may determine
that the allocation of responsibility for CSRS benefits should be
revisited within the context of a package of reforms for USPS.
Approaches for Allocating Benefit Responsibility:
CSRS benefits are calculated in part by applying an accrual percentage
to an employee's high 3-year average salary to determine the
percentage of that average that will be paid in a yearly pension
benefit.[Footnote 29] The accrual rates are 1.5 percent per year for
each of the first 5 years of service, 1.75 percent per year for each
of the next 5 years of service, and 2.0 percent per year for the 11th
and subsequent years of service. Because the accrual rates are higher
in the later years of an employee's career, the formula is said to be
"backloaded."
The methodologies proposed by the USPS OIG and PRC reports would make
changes to the formula for allocating responsibility for CSRS
benefits, but differ in their approach, as shown in tables 2 and 3.
The transfer of costs under both of these recommendations would have
both a retrospective and a prospective component. The retrospective
component would be a reallocation of responsibility for benefit
payments already made in the four decades since 1971; this is
estimated to be roughly in the range of $50 billion to $75 billion. In
addition, a prospective component would reallocate responsibility for
another approximately $6 billion to $10 billion in benefit payments to
be made in the future (for a total cost transfer of approximately $56
billion to $85 billion).[Footnote 30] Table 2 summarizes the CSRS
benefit allocation methodologies discussed in the reports issued by
the USPS OIG, the PRC, and the OPM OIG.
Table 2: Comparison of CSRS Allocation Methodologies:
U.S. Postal Service Office of Inspector General:
Methodology: Both the federal government and USPS are assigned
responsibility for a portion of the benefit at the time of retirement
in proportion to years of service under each entity;
Positions presented in USPS OIG, PRC, and OPM OIG reports: The USPS
OIG report stated the following:
* The 2003 law (see table 1) completely redefined the USPS
responsibility for CSRS benefits: the "dynamic actuarial model" put
into place at that time anticipates the effect of inflation, which
includes both increases in salary and cost of living adjustments on
pensions;
* Since the highest salaries earned over a career are the only
salaries used to calculate the amount of an annual CSRS pension, 1971
salary levels should not be considered in the allocation of
liabilities;
* Unlike private sector situations, USPS does not have the ability to
modify the pension benefit levels earned by its employees after 1971;
* Because of the backloaded nature of the CSRS formula, a
disproportionate share of the accrual percentage is allocated to USPS;
Recommendation/conclusion: Recommends a return of assets estimated at
$75 billion to the postal CSRS account.
Postal Regulatory Commission;
Methodology: Uses Financial Accounting Standards Board (FASB)
standards[A] to alter the current CSRS formula by using the final
average (high 3) salary, rather than the 1971 salary;
Positions presented in USPS OIG, PRC, and OPM OIG reports: The PRC
report stated the following:
* The private sector pension accounting standard, although it applies
to financial reporting and not the allocation of benefits, nonetheless
offers a methodology that would be fair and appropriate for allocating
CSRS costs between USPS and the federal government;
* This methodology matches the USPS OIG recommendation in using
projected salary increases, and matches the current methodology used
by OPM in allocating accrual percentages;
Recommendation/conclusion: Recommends a return of assets estimated to
range from $50 billion to $55 billion to the postal CSRS account.
U.S. Office of Personnel Management Office of the Inspector General;
Methodology: The benefit responsibility of the federal government is
calculated based on the employee's service and pay as of June 30, 1971;
Positions presented in USPS OIG, PRC, and OPM OIG reports: The OPM OIG
report stated the following:
* It is beyond the OPM's legal authority to adopt a change in the
allocation of CSRS responsibility without congressional action;
* The changes proposed by the USPS OIG and PRC would shift the costs
of USPS CSRS benefits from USPS ratepayers to the federal government
and, ultimately, to taxpayers, without any corresponding increase in
government oversight of USPS;
* Congress granted USPS fiscal independence in exchange for a promise
of fiscal responsibility;
Recommendation/conclusion: Recommends no change without further action
from Congress.
Source: GAO analysis.
[A] The PRC report states that the FASB standards provide the most
"well reasoned, widely respected, and historically stable guidepost
for allocating pension costs to time periods." The FASB standards
apply to financial reporting. The particular standards applicable to
pension benefits were developed in the 1980s, with subsequent
modifications that did not alter the overall approach for assigning
pension costs to time periods.
[End of table]
The USPS OIG has stated that the allocation of responsibility for CSRS
benefits required by the 1974 law (see table 1) is not appropriate and
that the effects of post-1971 salary increases on pension benefits
attributable to pre-1971 service should be the responsibility of the
federal government. Furthermore, as noted earlier, the USPS OIG has
stated that the allocation of responsibility based on CSRS's
backloaded benefit formula is similarly inappropriate. The CSRS
benefit formula applies an accrual percentage to the high 3-year
average salary. Because benefits are accrued at a lower rate early in
an employee's career, employees who worked at both the POD and USPS
would have earned smaller accrual percentages at the POD than at USPS.
Thus, the costs for USPS under the current formula are greater than
those for the federal government. The USPS OIG recommendation would
change the allocation by prorating the total accrual percentage based
on years of service with the POD and USPS, thus shifting
responsibility for some of the higher accruals earned at USPS to the
POD (i.e., to the federal government). The USPS OIG report states that
under the current methodology, USPS could, for example, "be
responsible for 70 percent of the pension of an employee who worked
only 50 percent of his or her career for the Postal Service." The USPS
OIG report also states that "had new pension plans been created for
postal employees on July 1, 1971, and the Postal Service made
responsible for all liabilities, it would have paid less than under
the current methodology."
The PRC report agrees with the USPS OIG report's statement that the
effects of post-1971 salary increases on pension benefits attributable
to pre-1971 service should be the responsibility of the federal
government. However, the recommendation in the PRC report would
maintain the current CSRS formula of backloading benefit accrual. This
recommendation is guided by the current private sector (FASB) pension
accounting standards.[Footnote 31] Although the purpose of these
accounting standards is financial reporting, the PRC report views
their application as a fair approach for allocating responsibility for
benefits between USPS and the federal government. Table 3 provides an
example of how responsibility for benefits could shift between USPS
and the federal government using the alternative approaches to post-
1971 salary increases and to the backloaded accrual formula for a
hypothetical postal employee.
Table 3: Allocation of CSRS Benefits Responsibility for a Hypothetical
Postal Employee under Proposed Methodologies:
Hypothetical employee characteristics:
* 10 years of POD service, 1961-1971. Final 1971 annual salary:
$10,000;
* 15 years of USPS service, 1971-1986. Final 1986 high 3-year average
salary: $20,000.
Benefit calculations:
* Accrual percentage for POD service = 5 years x 1.5% + 5 years x
1.75% = 16.25%;
* Accrual percentage for USPS service = 15 years x 2% = 30%;
* Total accrual percentage = 16.25% + 30% = 46.25%;
* Total annual benefit = 46.25% of $20,000 = $9,250.
Allocation of benefit responsibility: Methodology for federal
government CSRS benefit;
Current methodology: Based on POD accruals and POD final pay: 16.25%
of $10,000 = $1,625;
Recommendation in the PRC report: Based on POD accruals and career
final average pay: 16.25% of $20,000 = $3,250;
Recommendation in USPS OIG report: Based on proportion of years of
service at POD: (10/25) x $9,250 = $3,700.
Allocation of benefit responsibility: Total annual CSRS benefit;
Current methodology: $9,250;
Recommendation in the PRC report: $9,250;
Recommendation in USPS OIG report: $9,250.
Allocation of benefit responsibility: USPS CSRS responsibility;
Current methodology: $7,625;
Recommendation in the PRC report: $6,000;
Recommendation in USPS OIG report: $5,500.
Allocation of benefit responsibility: USPS percentage;
Current methodology: 82%;
Recommendation in the PRC report: 65%;
Recommendation in USPS OIG report: 60%.
Allocation of benefit responsibility: Federal government CSRS
responsibility;
Current methodology: $1,625;
Recommendation in the PRC report: $3,250;
Recommendation in USPS OIG report: $3,700.
Allocation of benefit responsibility: Federal government percentage;
Current methodology: 18%;
Recommendation in the PRC report: 35%;
Recommendation in USPS OIG report: 40%.
Source: GAO variation on example in the PRC report.
[End of table]
The hypothetical employee profiled in table 3 spent 40 percent of her
career at the POD. Accordingly, the USPS OIG report would assign the
federal government responsibility for 40 percent of her pension
benefits. The PRC report would assign the federal government
responsibility for a smaller portion, 35 percent of the pension
benefits, to reflect the lower accrual percentages earned during
service with the POD while incorporating the higher average salary
earned at USPS. The current methodology in use by OPM assigns the
federal government responsibility for the smallest portion--18 percent
of the pension benefits--to reflect both the lower accrual percentages
earned during service with the POD and the lower final salary at the
POD.
Analysis of Proposed Allocations for CSRS Benefits:
As discussed in further detail below, our analysis of these proposals
determined the following:
* All three methodologies (current, PRC, and USPS OIG) fall within the
range of reasonable actuarial methods for allocating cost to time
periods. However, the allocation of costs between two entities is
ultimately a business or policy decision.
* In the private sector, responsibility for benefits is generally
determined by negotiation and the markets, while in the public sector
such responsibility is determined by negotiation, public policy, and
legal requirements.
* While the USPS OIG and PRC reports make arguments based on fairness,
the 1974 law also implicitly reflected fairness. Congress considered
that USPS was a self-sustaining entity and that the federal
government, which had no control over USPS pay increases, should not
be liable for pension benefits attributable to those increases.
* The USPS OIG and PRC reports assess fairness in isolation, looking
only at the allocation of pension costs. In the formation of a new
business entity, the fairness of a particular allocation of pension
obligations depends also on the total package of assets and
obligations--both pension and nonpension--being allocated to the new
entity.
* The cost of USPS's CSRS pension allocation, based on the 1974 law,
has already been reflected in postal rates for most of the past four
decades, so these costs have already been included in rates paid by
postal customers.
While accounting and actuarial standards may inform a decision about
assignment of costs to time periods, they do not determine the policy
choice of who is responsible for benefits. In its report, the USPS OIG
describes its recommendation as "more equitable," but acknowledges
that there is no actuarial standard for allocating retirement
liabilities between two employers. Similarly, in reviewing both the
current methodology and the USPS OIG's recommendation, the PRC report
states that both of these methodologies are within the range of
acceptable methodologies for allocation of costs and benefits. Within
a single organization, relevant accounting standards must be followed
to assign costs to time periods for financial reporting purposes, but
they do not govern the allocation of responsibility between two
separate entities. Similarly, there are actuarial standards of
practice that apply to such tasks as estimating the amount and timing
of future benefit payments, estimating the value of the overall
obligation, and setting up a funding schedule to cover the obligation
but not for determining who is responsible for the obligation.
While the allocation of benefit responsibility between two different
entities is not the purview of financial reporting standards, the PRC
report views them as a useful guidepost to fairness. The PRC report
stated that the FASB pension accounting standards' "general
application to the current situation is logical and, within the
objective of fairness and equity, represents our preferred set of
principles as well as a reasonable compromise." However, while the
report characterizes this private sector FASB pension accounting
methodology as "an unchallenged part of generally accepted accounting
principles today," which "establishes a compelling definition of cost
allocation equity for 2010," there is a significant school of thought
among pension experts that has challenged this private sector
methodology and deems it inappropriate. For example, the American
Academy of Actuaries has commented to FASB that it believes the
inclusion of the effects of future salary increases is inappropriate.
[Footnote 32] Under this alternative view, the effects of projected
future salary increases are not recognized until the salary increases
actually occur. This alternative approach is consistent with the one
currently used by OPM.
Both the USPS OIG and PRC reports assess fairness in isolation,
looking only at pension costs. However, when USPS was formed in 1971,
it was given a package of assets, and liabilities, which included the
preexisting postal infrastructure and business advantages and
disadvantages. Congress has made adjustments to this package since
then, in 1974 and subsequently. With regard to allocation of
responsibility for pension benefits, in enacting the 1974 Act,
Congress focused on the fact that USPS was to function as a self-
supporting entity with control over, and responsibility for, the
impacts of its employees' future salaries.[Footnote 33] As it reviews
the current prospects of USPS, Congress can, if it chooses, make
another determination about the allocation of the current assets and
obligations of USPS, of which pension obligations are but one
component.
One additional consideration in assessing the fairness of the current
allocation of pension responsibility is whether USPS has already been
compensated for these costs. The cost of USPS's CSRS pension
obligation has already been reflected in postal rates for most of the
past four decades, so that USPS has already received payment for these
costs by postal rate payers.
Potential Impacts of a Transfer of CSRS Pension Costs to the Federal
Government:
The key impact on CSRDF and stakeholders of transferring costs from
USPS to the federal government would be to increase the federal
government's unfunded liability for nonpostal CSRS by approximately
$56 billion to $85 billion, according to the recommendations made in
the USPS OIG and PRC reports.[Footnote 34] If responsibility for CSRS
pension benefits were reallocated in accordance with either the USPS
OIG or PRC recommendations, there would be a transfer of assets from
the nonpostal CSRS subaccount to the postal CSRS subaccount.[Footnote
35] Our analysis of potential impacts on the CSRDF and its
stakeholders determined the following:
* Any assets that are transferred from the nonpostal to the postal
subaccount of CSRS would increase the federal government's nonpostal
CSRS unfunded liability, which must then be paid by the federal
government through tax revenue, borrowing, or both.[Footnote 36] For
example, adoption of the recommendation in the PRC report would result
in an asset transfer of about $50 billion to $55 billion, which would
then need to be repaid by the federal government and taxpayers.
[Footnote 37]
* Beyond the substantial impacts on the federal government's unfunded
liability, a reallocation of benefit responsibility from USPS to the
federal government would not directly threaten the benefit security of
CSRS and FERS participants under current law. Benefits are projected
to continue to be paid to nonpostal CSRS participants via transfers
from the nonpostal subaccount of FERS. The U.S. Treasury funds any
supplemental increases in liabilities through tax revenue and
borrowing.
* There is an indirect risk if the increased unfunded liability were
to create pressure to reduce CSRS and FERS benefits. Any reductions in
program benefits could apply to all participants, including postal
participants.
* Legislation would be required to transfer CSRS funds as proposed
under the PRC or USPS OIG recommendations and to allow these funds to
be used by USPS for purposes other than funding the Postal Service
Retiree Health Benefits Fund. The use of any CSRS funds transferred to
USPS is currently restricted. Under current law, any transfer of
assets from the nonpostal CSRS subaccount to the postal CSRS
subaccount would remain in the CSRS subaccount until 2015 and could
not be used to address other postal financial shortages. In 2015, any
surplus assets, as determined by an actuarial analysis, would be
transferred to the Postal Service Retiree Health Benefits Fund. Thus,
the amount that would be transferred under either the PRC or USPS OIG
proposal could be used to fund benefit obligations under the Retiree
Health Benefits Program.[Footnote 38]
Potential Impacts on USPS Financial Condition:
Any change in the USPS's share of responsibility for CSRS benefits
would provide some temporary relief from the pressures USPS faces
because of declining volume, revenue, and inflexible costs, but would
not by itself wholly address USPS's long-term financial outlook. If,
for example, $50 billion were transferred to USPS, this could be used
to fund its retiree health benefits liability. However, such a
transfer of CSRS funds would not be sufficient to repay all of USPS's
debt and address current and future operating deficits related to
USPS's inability to cut costs quickly enough to match declining mail
volume and revenue. As we have testified, resolving large funding
requirements for USPS's pension and retiree health benefits is
important. It is equally important to address constraints and legal
restrictions, such as those related to closing facilities, so that
USPS can take more aggressive action to reduce costs.[Footnote 39] We
have also testified that in fiscal year 2010, USPS had $67 billion in
revenue and $75.5 billion in expenses, resulting in a loss of $8.5
billion, which it expects to grow to a $20 billion annual loss by
2015.[Footnote 40]
These financial problems are related to customers' changing mail use
combined with the fixed nature and inflexibility associated with
USPS's costs. The decline of First-Class Mail--USPS's most profitable
product--has accelerated as Americans shift to using electronic
communications and other payment alternatives. This trend exposes
weaknesses in USPS's business model, which has relied on volume growth
to help cover costs. To meet these changing customer needs, become
more efficient, control costs, and keep rates affordable, USPS must
modernize and restructure. To do so, it will need to become much
leaner and more flexible.[Footnote 41] USPS has provided Congress with
a set of comprehensive legislative proposals that would reduce costs
and improve operational efficiency include reducing costs by moving to
5-day delivery, reducing excess capacity in USPS's mail processing
network, adjusting its workforce mix to more part-time staff, and
closing unneeded retail facilities, among others.
Last year, we issued a report that outlined a number of options to
address USPS's financial viability that Congress could consider.
[Footnote 42] Further, we have reported that Congress needs to approve
a comprehensive package of actions to improve USPS's financial
viability by (1) modifying its retiree health benefits cost structure
in a fiscally responsible manner; (2) facilitating USPS cost
reduction, for example, by modernizing and optimizing postal networks
and workforce; and (3) requiring any binding arbitration in the
negotiation process for USPS labor contracts to take USPS's financial
condition into account.[Footnote 43]
Agency Comments and Our Evaluation:
We provided a draft of this report to OPM, the OPM OIG, USPS, the USPS
OIG, and the PRC for review and comment. OPM and the OPM OIG agreed
with our report, but USPS, the USPS OIG, and the PRC disagreed with
our analysis. Their written comments are reprinted in appendixes IV
through VIII. The comments of USPS, the USPS OIG, and the PRC are
summarized below, along with our responses to their comments. OPM and
the PRC also provided technical comments, which we incorporated as
appropriate.
USPS's main comments follow:
* USPS believed that our report did not acknowledge actuarial
principles that would govern in the private sector, as well as
fundamental principles of fairness, and that our use of a criticism of
current accounting standards by the American Academy of Actuaries is
taken out of context.
* USPS stated that our report fails to describe the allegedly false
assumptions underlying the 1974 law or the legal environment under
which USPS operates with respect to compensation policy.
* It is USPS's view that our report fails to recognize that the effect
of the 2003 and 2006 laws, when considered together, reflects
congressional intent that OPM determine USPS's CSRS liabilities based
on modern actuarial principles. USPS agreed with our conclusion that
the 1974 Act allocated responsibility to USPS for benefits
attributable to USPS pay increases after July 1, 1971, but disagreed
with our conclusion that the 2003 and 2006 Acts did not change this
fundamental allocation. USPS pointed to the 2003 Act's repeal of the
1974 Act's provision explicitly allocating responsibility to USPS and
specifying the funding mechanism for that allocation, and its
replacement with a different funding mechanism using dynamic rather
than static assumptions. It also pointed to the 2006 Act's creation of
a process allowing PRC review of certain OPM determinations.
* USPS also made the point that our position was flawed when we stated
that a transfer of USPS pension obligations would mean that USPS would
receive payment for these costs twice, once by ratepayers and once by
taxpayers.
Our response follows:
1. Regarding USPS's comment that it believed our report ignored
actuarial principles that would govern in the private sector, we note
that both actuarial and accounting standards provide methods for
allocating costs to time periods for an organization, but they do not
govern the allocation of benefit responsibility between two separate
entities. Ultimately, determining responsibility for benefits is a
business choice (private sector) or policy choice for Congress
(federal government). Similarly, as our report noted, the USPS OIG
acknowledged that there is no actuarial standard for allocating
retirement liabilities between two employers, and the PRC acknowledged
that both the current methodology and the USPS OIG's recommendation
(the PRC's recommendation is in the middle) are within the range of
acceptable methodologies for allocation of costs and benefits. While
acknowledging that the FASB private sector accounting standards do not
govern the allocation of CSRS benefit responsibility, the PRC report
stated that these standards are a logical guidepost for determining a
fair allocation of benefit responsibility; the PRC report also
characterized these standards as "an unchallenged part of generally
accepted accounting principles today." This characterization is the
context for our citation of criticism of these standards.
2. As noted above, USPS commented that our report failed to describe
the allegedly false assumptions underlying the 1974 law and commented
that it did not believe the package of assets and liabilities
resulting from the 1970 and 1974 laws was fair. However, our analysis
shows that in enacting the 1974 Act, Congress focused on the fact that
USPS was to function as a self-supporting entity with control over,
and responsibility for, the impacts of its employees' future salaries.
As the Senate report accompanying the 1974 Act explained, "the bill
will permit the Postal Service to include the cost of financing
unfunded retirement liability in its rate base for purposes of future
postal rate adjustments." Further, the House report accompanying the
1974 legislation stated that "[t]he Congress now has no control--no
oversight whatsoever--with respect to the pay machinery in the Postal
Service. Since each future pay raise . . . will result in specific
unfunded liability and a new financial drain on [CSRDF], the cost of
this liability should properly and equitably be borne by the Postal
Service."
3. Regarding the 2003 Act, USPS commented that the law eliminated the
statutory language requiring OPM to follow the 1974 funding
methodology, and required OPM to determine the benefits "attributable
to the service of current or former employees of the United States
Postal Service." In our view, USPS's interpretation misread the 2003
Act and overstated the role that Congress intended for actuarial and
accounting methods. Although the statute as amended by the 2003 Act no
longer included an explicit allocation to USPS, it did not direct any
change in allocation. Further, the original allocation was still
reflected in the 2003 Act's requirement for an annual OPM calculation
of "Postal supplemental liability." Because this calculation was to be
made using dynamic assumptions, including projected future USPS pay
increases, it was unnecessary to require USPS payments after each pay
increase as the 1974 Act required, so this provision was removed
without changing the allocation. There was no indication in 2003 that
Congress intended to alter its prior decision, reflected in the 1970
and 1974 Acts, that USPS was to be a self-supporting entity. Regarding
the 2006 Act, USPS disagreed with our conclusion that the law did not
fundamentally change the 1974 law's allocation of responsibility,
relying on the act's creation of a process allowing PRC review of
certain OPM determinations. The provision cited by USPS does not
pertain to review of allocations of responsibility for pension
benefits, however, but to OPM's annual determination of the postal
supplemental liability or surplus, that is, whether USPS has overpaid
or underpaid its allocation in a particular fiscal year.
4. USPS did not disagree that ratepayers have already been charged,
and USPS already reimbursed, for the costs of the current allocation
of CSRS benefits. USPS pointed out that ratepayers in turn would
deserve to benefit from any reallocation of these costs. Noting this
point, we believe that who would benefit from any reimbursements is a
question that would require additional analysis (for example, if a
reimbursement to USPS were used to stabilize postage rates, a
generation of ratepayers would benefit from such reimbursement later
than the generation of ratepayers who paid for the current allocation
of benefits). Accordingly, we deleted the sentence that addresses
receiving payments for these costs twice, but retained the main point
that the costs for the current allocation of pension benefits have
already been received by USPS from postal ratepayers.
In its comments, the USPS OIG disagreed with our report regarding how
the 2003 law changed the 1974 law. It stated that the 2003 law changed
the allocation directive to OPM and required it to adopt current
dynamic methods. Additionally, it commented that the current OPM
methodology is "neither fair nor modern nor does it comply with the
2003 law."
1. The USPS OIG's comments regarding the effects of the 2003 law were
similar to USPS's comments. As discussed above, although the statute
as amended by the 2003 Act no longer included an explicit allocation
to USPS, it did not direct any change in allocation, and the original
allocation was still reflected in the 2003 Act's requirement for an
annual OPM calculation of "Postal supplemental liability." As noted
above, because this calculation was to be made using dynamic
assumptions, including projected future USPS pay increases, it was
unnecessary to require USPS payments after each pay increase as the
1974 Act required, so this provision was removed without changing the
allocation. Further, contrary to the USPS OIG's comment that it is
"not ... reasonable" to interpret repeal of the 1974 Act's explicit
allocation provision as other than a change in the allocation, the
Senate report accompanying the 2003 Act indicated the opposite, that
Congress intended to "continue the Postal Service's liability for the
retirement costs attributable to its employees by the CSRS which was
imposed when the Post Office Department became the self-supporting
[USPS] in July 1971." Finally, the USPS OIG's suggestion that the 2003
Act should be read as directing OPM to allocate responsibility by
applying actuarial and accounting standards is not well founded
because allocation is a policy choice, not a mathematical calculation.
2. The USPS OIG also stated that OPM's continued use of the 1974
allocation of responsibility for CSRS benefits despite changes by the
2003 law is either unfair or not consistent with modern pension
standards that use dynamic assumptions. We concluded that OPM's
methodology is consistent with applicable law and that the 2003 law
did not direct OPM to make any changes in the current allocation of
CSRS benefits. Further, as mentioned above, accounting and actuarial
standards pertain to assignment of costs to time periods; they do not
determine the policy choice of who is responsible for benefits.
The PRC agreed with our framing of this issue as a matter of policy.
However, it disagreed with our characterization of the Segal Company's
report. For example, it stated that the Segal report did not
characterize the overfunding of CSRS liabilities as an "overpayment."
It also stated that criticism we cite of private sector pension
accounting standards excludes government plans. Additionally, it noted
disagreement between the USPS OIG and OPM about whether the 2003 and
2006 Acts changed the 1974 Act's allocation to USPS. The PRC also
disagreed with our implication that any change in the allocation would
provide USPS with only limited relief from its financial pressures.
1. Regarding the PRC's comment that the Segal report did not
characterize the overfunding of CSRS liabilities as an "overpayment,"
we reviewed the report and agree that it did not use the term
overpayment. We have changed the language in our report to better
reflect the Segal Company's position.
2. Regarding the PRC's comment that the cited criticism of private
sector pension accounting standards excludes government plans, we
modified our description and commentary about this criticism and
reemphasized our main point that accounting standards ultimately do
not govern the allocation of benefit responsibility between two
entities.
3. The PRC noted a "difference of opinion" between the USPS OIG and
OPM about whether the 2003 and 2006 Acts changed the allocation made
by the 1974 Act. Without explanation, the PRC stated its view that
"the current legislative framework can accommodate a change" in the
allocation by OPM if it chooses to do this. As we have stated above,
the 2003 and 2006 Acts did not change the fundamental allocation made
by the 1974 Act and thus OPM's current methodology continues to be
consistent with law.
4. The PRC disagreed with our statement that any change in the
allocation would provide USPS with only limited relief from its
financial pressures. The commission noted that if the excess funds
from CSRS were transferred into the Postal Service Retiree Health
Benefits Fund, the fund would be almost fully funded. However, in our
view, this action alone would not make USPS financially viable for the
long term. USPS still needs to adjust to declining mail volume by
removing excess capacity from its operations, networks, and workforce.
We are sending copies of this report to the Director of the Office of
Personnel Management, the Office of Personnel Management Inspector
General, the Postmaster General, the U.S. Postal Service Inspector
General, the Chairman of the Postal Regulatory Commission, and other
congressional committees and interested parties. In addition, the
report is available at no charge on the GAO website at [hyperlink,
http://www.gao.gov].
If you or your staff members have any questions about this report,
please contact me at (202) 512-2834 or stjamesl@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made key
contributions to this report are listed in appendix IX.
Signed by:
Lorelei St. James:
Director, Physical Infrastructure Issues:
List of Committees:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Thomas R. Carper:
Chairman:
The Honorable Scott P. Brown:
Ranking Member:
Subcommittee on Federal Financial Management, Government Information,
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Darrell E. Issa:
Chairman:
The Honorable Elijah E. Cummings:
Ranking Member:
Committee on Oversight and Governmental Reform:
House of Representatives:
The Honorable Dennis A. Ross:
Chairman:
The Honorable Stephen F. Lynch:
Ranking Member:
Subcommittee on Federal Workforce, U.S. Postal Service, and Labor
Policy:
Committee on Oversight and Governmental Reform:
House of Representatives:
[End of section]
Appendix I: Legal Analysis of OPM's Allocation Methodology for CSRS
Benefit Contributions:
As part of GAO's review of the United States Postal Service's (USPS)
pension benefit obligations, we examined whether the methodology
employed by the Office of Personnel Management (OPM) for allocating
the responsibility for Civil Service Retirement System (CSRS) costs
between USPS and the federal government is consistent with applicable
law. For the reasons discussed below, we conclude that OPM acted
within the authority it was given by Public Law 93-349 (July 12, 1974)
Public Law 108-18 (April 23, 2003), and Public Law 109-435 (December
20, 2006).
Background:
The Postal Reorganization Act of 1970 (1970 Act) created USPS as an
"independent establishment" of the executive branch on July 1, 1971,
[Footnote 44] in place of the Post Office Department (POD), a federal
agency. As discussed in greater detail in this report, under the 1970
Act, all officers and employees of USPS (with the exception of those
on the Board of Governors) remained covered by CSRS.[Footnote 45]
However, under CSRS, the payroll-withholding and employer-matching
contributions[Footnote 46] are insufficient to adequately fund the
accrued liability to pay the benefits to which the employee is
entitled. Thus, the Civil Service Retirement and Disability Fund
(CSRDF) carries a partly unfunded liability to pay for future benefits
for which the federal government is ultimately liable. Disagreements
have emerged about the allocation of responsibility between USPS and
the federal government for the unfunded liability (CSRS pension costs)
attributable to USPS employees who began their careers with the POD.
The 1970 Act required USPS to withhold a defined percentage of USPS
employee salaries for contribution to the CSRDF.[Footnote 47] The 1970
Act was silent, however, on the question of who--USPS or the federal
government--was responsible for the pension costs of USPS employees
who had worked for the POD.
Congress explicitly addressed the unfunded liability allocation issue
in 1974. Consistent with its previous determination that USPS should
generally be self-supporting, Congress passed Public Law 93-349, 88
Stat. 354 (July 12, 1974) (1974 Act). Section 1 of the 1974 Act,
codified at section 8348(h) of title 5, U.S. Code, explicitly provided
that (1) USPS "shall be liable" for that portion of any estimated
increase in the unfunded liability of the CSRDF attributable to USPS
pay increases,[Footnote 48] and (2) when USPS approved a pay increase
for its employees, the Civil Service Commission (now OPM)[Footnote 49]
would estimate how much this pay increase changed the unfunded
liability in the CSRDF, and USPS would be responsible for contributing
this sum to the CSRDF, amortized over 30 annual payments.[Footnote 50]
Because the 1974 Act was made retroactive to the 1971 establishment of
USPS,[Footnote 51] USPS was required to pay for the increase in
retirement costs for service at the POD (that is, pre-July 1, 1971,
service) attributable to pay increases granted by USPS (that is,
increases since July 1, 1971).
As the OPM Inspector General has explained, OPM calculates the
retirement costs for pre-1971 service based on the employee's credited
service and rate of basic pay on June 30, 1971, the last day the POD
was in existence. That is, OPM calculates the annuity costs using the
years of service at the POD and the salary paid during those years,
meaning the cost remains the same no matter how long the employee
works at USPS. Because this cost will never increase, it is sometimes
referred to as a "frozen benefit." This amount, plus the cost of the
annuity based on military service, is the federal government's share
(federal share) and is funded by the U.S. Treasury. USPS funds the
remainder of the cost of the annuity, the portion that is in excess of
the federal share.[Footnote 52]
As relevant here, after the 1974 Act, Congress next considered the
funding of CSRS costs for postal employees in 2003.[Footnote 53] In
response to inquiries GAO made in 2001,[Footnote 54] OPM reviewed the
USPS payments to the CSRDF to determine whether USPS was paying either
more or less than was needed to cover the retirement liabilities of
its employees.[Footnote 55] OPM's analysis, along with a subsequent
GAO review,[Footnote 56] concluded that if USPS payments continued
unchanged, by the time the last CSRS-related benefit would be paid,
USPS would overfund projected CSRDF costs by a significant margin.
[Footnote 57] This projected overfunding resulted in part because the
amortized contributions that USPS was making pursuant to the 1974 Act
were calculated by OPM assuming a flat 5 percent interest rate, while
the return on pension investments had generally been--and, according
to OPM projections at the time, would continue to be--higher than
that.[Footnote 58] Because changes needed to address this projected
overfunding could not be made under the existing law,[Footnote 59] OPM
sent a legislative proposal to Congress, which, with amendments, was
enacted as the Postal Civil Service Retirement System Funding Reform
Act of 2003 (2003 Act).[Footnote 60]
The 2003 Act replaced the 1974 Act's explicit provision pertaining to
allocation and funding with a funding methodology for USPS's CSRS
obligations that was modeled on the way in which employing agency
costs are calculated under the Federal Employees Retirement System
(FERS), the retirement plan for federal employees that replaced CSRS.
[Footnote 61] In place of the matching of employee withholding
required of most employing agencies and the 1974 Act's required
payments following any pay increase, the 2003 Act required USPS to
contribute to the CSRDF the "normal cost percentage" of each
employee's pay, as calculated by OPM using generally accepted
actuarial practice and standards and using dynamic assumptions.
[Footnote 62] The term "dynamic assumptions" was defined in subsection
2(a) of the 2003 Act as economic assumptions that are used in
determining actuarial costs and liabilities in a retirement system and
in anticipating the effects of long-term future investment yields,
future increases in rates of basic pay, and future rates of price
inflation. This method is comparable to the way employing agency
funding for FERS is determined.
Because these dynamic assumptions include projections of future pay
increases, the consequence of the 2003 Act was to leave the underlying
1974 allocation unchanged, notwithstanding the removal of the explicit
allocation provision. In place of the express allocation provision,
Congress enacted a new concept called the Postal supplemental
liability.[Footnote 63] As of September 30, 2003, OPM was required to
calculate the present value of benefits payable to present or future
CSRS annuitants that are "attributable to the service of current or
former employees of [USPS]," as determined by OPM, and as offset by
assets such as the present value of future employee contributions, the
portion of the CSRDF balance that is attributable to past payments by
USPS and its employees, and the earnings on those payments.[Footnote
64] If OPM found a liability, USPS was required to pay that sum to the
CSRDF, based on a 40-year amortization schedule. If OPM found a
surplus, the Postmaster General was required to report to Congress
with a proposal on how USPS would utilize this surplus.[Footnote 65]
OPM was to recalculate the Postal supplemental liability each fiscal
year. Thus, although the 2003 Act required OPM to change the funding
methodology, in our view, it did not change the method of allocating
the funding responsibility between USPS and the federal government
with regard to the USPS employees and annuitants who had accrued CSRS
benefits as Post Office Department employees prior to 1971.[Footnote
66] The federal government's share with regard to those employees and
annuitants remained frozen at a level based on credited service and
the rate of basic pay of POD employees at the time when USPS was
established.
A few months after enactment of the 2003 Act, in July 2003, OPM
submitted to Congress its plan identifying the actuarial methods and
assumptions directed by the 2003 Act by which OPM would make its
determinations. In 2004, OPM and the U.S. Civil Service Retirement
System Board of Actuaries reconsidered OPM's methodology at the
request of USPS and concluded that OPM's methodology was in accordance
with congressional intent.[Footnote 67] OPM also rejected an
alternative methodology offered by USPS.
Congress amended the USPS pension benefit provisions again in 2006, as
part of the Postal Accountability and Enhancement Act of 2006 (2006
Act).[Footnote 68] Among other things, the 2006 Act altered the
"Postal supplemental liability" established by the 2003 Act to change
the responsibility for pension costs based on prior military service
by USPS employees (the 2003 Act had allocated the responsibility to
USPS,[Footnote 69] whereas the 2006 Act returned the responsibility to
the federal government).[Footnote 70] The 2006 Act also required that
any postal supplemental surplus in certain designated years be
transferred to a new fund for USPS retiree health benefits and
established a procedure by which USPS could request a review of OPM's
determination of a liability or surplus by the Postal Regulatory
Commission (PRC). As with the 2003 Act, however, the 2006 Act did not
change the fundamental allocation of benefit responsibility between
USPS and the federal government with regard to the USPS employees and
annuitants who had accrued CSRS benefits as Post Office Department
employees prior to 1971.
In January 2010, the USPS Office of Inspector General (USPS OIG)
issued a report stating that OPM's allocation of responsibility for
CSRS benefits with respect to postal employees and retirees who had
worked for the POD prior to July 1, 1971 is inequitable and has
resulted in USPS overpaying into the CSRDF by $75 billion.[Footnote
71] In testimony a few months later, the USPS OIG stated that the 2003
Act's repeal of the 1974 Act's express allocation provision
constituted a rejection of that allocation by Congress and that the
2003 Act's addition of the requirement that OPM use dynamic
assumptions necessitated, as a matter of fairness, the adoption of a
more equitable actuarial allocation methodology.[Footnote 72] The USPS
OIG suggested an alternate methodology, the same one that OPM rejected
in 2004.[Footnote 73] USPS then asked the PRC to review OPM's
allocation determination. According to the PRC contractor responding
to this request, both OPM's and the USPS OIG's methodologies are
within the range of acceptable allocations of costs and benefits to
service periods based on current actuarial standards and practices,
but in the contractor's view, OPM's methodology is not "'fair and
equitable' except within the context of P.L. 93-349, the 1974
legislation that underlies the OPM methodology."[Footnote 74]
Analysis:
At issue here is whether OPM's methodology for allocating
responsibility for CSRS pension costs for USPS employees who worked
for both USPS and the POD is consistent with applicable law.
We begin with the 1974 Act, which established the allocation of
responsibility for CSRS pension costs between USPS and the federal
government. As discussed above, the 1974 law explicitly directed USPS
to pay for CSRS costs attributable to pay increases granted by USPS
after July 1, 1971. The 1974 Act created a new subsection 8348(h) of
Title 5, U.S. Code, stating the following:
"(h)(1) Notwithstanding any other statute, [USPS] shall be liable for
that portion of any estimated increase in the unfunded liability of
[CSRDF] which is attributable to any benefits payable from [CSRDF] to
active and retired Postal Service officers and employees, and to their
survivors, when the increase results from an employee-management
agreement under title 39, or any administrative action by the Postal
Service taken pursuant to law, which authorizes increases in pay on
which benefits are computed.
"(2) The estimated increase in the unfunded liability, referred to in
paragraph (1) of this subsection, shall be determined by the Civil
Service Commission. The [USPS] shall pay the amount so determined to
the Commission in thirty equal annual installments with interest
computed at the rate used in the most recent valuation of the civil
service retirement system, with the first payment thereof due at the
end of the fiscal year in which an increase in pay becomes effective."
[Footnote 75]
The express language of subsection (h)(1) made clear that regardless
of any prior federal service by USPS employees, Congress determined
that USPS was to bear responsibility for the entire change in the
liabilities of the CSRDF arising from a USPS pay increase (that is, a
pay increase after July 1, 1971). The legislative history of this
provision explains the logic behind this language. The House report
accompanying the legislation stated that "[t]he Congress now has no
control--no oversight whatsoever--with respect to the pay machinery in
the Postal Service. Since each future pay raise . . . will result in
specific unfunded liability and a new financial drain on [CSRDF], the
cost of this liability should properly and equitably be borne by the
Postal Service."[Footnote 76] The Senate report explained further that
"the bill will permit the Postal Service to include the cost of
financing unfunded retirement liability in its rate base for purposes
of future postal rate adjustments."[Footnote 77] Thus at the time of
the 1974 Act, Congress clearly allocated the full cost of any future
pay increases to USPS, both for employees who had worked for the POD
and USPS as well as for USPS-only employees.[Footnote 78]
The 2003 Act did not direct any change in this allocation. As
discussed above, the 2003 Act required OPM to use more realistic
"dynamic assumptions" rather than static assumptions in its annual
calculation of USPS's CSRS funding obligation. Because these dynamic
assumptions included projections of future pay increases, the
consequence of the 2003 Act was to leave the underlying 1974
allocation unchanged, notwithstanding the removal of the explicit
allocation provision. The 2003 Act amended 5 U.S.C. § 8348(h) by
replacing both the explicit assignment of liability to USPS in
subsection (h)(1) and the responsibility for calculation of this
liability by OPM after each USPS pay increase in subsection (h)(2)
with the "Postal supplemental liability" concept. This new method of
calculation is based upon the present value of benefits payable to
present or future CSRS annuitants that are "attributable to the
service of current or former employees of [USPS]," as determined by
OPM, as offset by assets such as the present value of future employee
contributions and the portion of the CSRDF balance that is
attributable to past payments by USPS and its employees.[Footnote 79]
Because of CSRS's then-static assumption methodology, which did not
project future inflation or pay increases, in order to change USPS'
CSRDF contributions to account for pay increases, USPS would be
required to make a schedule of additional contributions each time it
increased employee pay, as the 1974 Act had done. When the 2003 Act
shifted to dynamic assumptions, it became unnecessary to require a
schedule of additional USPS payments after each pay increase. The
Senate report accompanying the 2003 Act provided the following
explanation:
"Because the dynamic normal cost of CSRS includes the effects of
future employees' pay raises and retiree COLAs, the separate payments
that USPS is required to make under current law to fund the future
increases in CSRS annuities that result from pay raises and COLAs
would no longer be necessary. Consequently, S. 380 would repeal the
provisions of law that require the Postal Service to amortize over 15
years the increases in future CSRS annuities that result from annual
employee pay raises and retiree COLAs."[Footnote 80]
While the statute no longer included the prior explicit statement
regarding allocation to USPS, there was no indication in 2003 that
Congress intended to alter the overriding principle, reflected in the
1970 and 1974 Acts, that USPS was to be self-supporting and that the
full cost of funding its pension liabilities was intended to be
included in the operational costs to be supported by postal revenues.
[Footnote 81] Further, because USPS is an "independent establishment,"
the 1970 Act requires that USPS obligations shall "not be obligations
of, nor shall payment of the principal thereof or interest thereon be
guaranteed by, the Government of the United States," absent a
determination by the Secretary of the Treasury (which has not been
made) that it would be in the public interest to do so.[Footnote 82]
Finally, the 2006 Act, like the 2003 Act, directed no change in the
fundamental allocation of benefit responsibility related to post-1971
pay increases. As noted above, the only allocation change made by the
2006 Act pertained to responsibility for pension costs arising out of
prior military service by USPS employees; responsibility for all other
retirement costs remained unchanged. The fact that Congress changed
the allocation from USPS to the federal government for this one
circumstance but not others, and that Congress did not use the
occasion of legislating about postal pension benefits to direct OPM to
change the direction it had taken in carrying out the 2003 Act,
support the conclusion that the 2006 Act did not direct a change in
the 1974 allocation.
[End of section]
Appendix II: Issues and Options Related to the Postal FERS Surplus:
According to the most recent actuarial analysis, as of September 30,
2009, the FERS postal subaccount had a surplus of $6.9 billion. USPS
has requested a refund of this surplus. In considering this request,
several issues are significant.
* While USPS has a FERS surplus of $6.9 billion, it also has a CSRS
deficit of $7.3 billion (under the current allocation of CSRS benefit
responsibility). However, OPM expects the fiscal year 2011 year-end
[Footnote 83] fund report to show improvement (i.e., a lower CSRS
deficit and a higher FERS surplus) because of the lack of a cost of
living increase and relatively low salary increases since the prior
calculation.
* Each year, USPS incurs additional FERS liabilities from an
additional year of service of FERS participants. This component of
annual growth in liability is known as the normal cost. USPS had been
contributing its share[Footnote 84] of the normal cost to the fund
each year, thereby offsetting the growth in liabilities with
compensating assets; the amount is currently about $3 billion per
year.[Footnote 85] However, USPS ceased making such contributions this
past summer.[Footnote 86] Absent such contributions, the surplus would
be depleted over time as participants earn additional years of service.
Another factor to consider is that actuarial estimates of surplus or
deficit contain a degree of uncertainty and could change over time (as
exemplified by OPM's expectation of a significant change in the
surplus and deficit amounts when the results of the most recent
actuarial valuation are complete). Further, the ability of USPS to
make any future contributions necessitated by "adverse experience"
(for example, higher-than-estimated cost of living increases that
create losses for the fund) is a consideration in any disposition of
the surplus in the fund. We have identified four approaches to
addressing the FERS surplus proposal and their corresponding
implications:
1. Current law. Under current law, USPS cannot access a FERS surplus
and must continue to contribute approximately $3 billion, which is
USPS's share of the normal cost. Conversely, when there is a FERS
deficit, USPS must contribute both its share of the normal cost and a
30-year amortization payment to work toward funding the deficit. The
treatment of surpluses and deficits is asymmetric and arguably unfair.
2. Amortization of the surplus. Earlier this year, the
administration's budget proposal would have allowed USPS to reduce its
FERS contribution by a 30-year amortization of the surplus. That would
have reduced the required contribution by about $0.5 billion, from
about $3 billion to $2.5 billion. The proposal would have made the
treatment of surpluses symmetric with the treatment of deficits.
3. Funding holiday. In the private sector, when surpluses exceed the
normal cost, a "funding holiday" (the cessation of contributions) is
permitted until the surplus is used up.[Footnote 87] This is
essentially the approach USPS unilaterally adopted this summer when it
stopped contributing to FERS. With a $6.9 billion surplus and an
unfunded normal cost of $3 billion, this funding holiday, if it
continued, would use up the surplus in a little over 2 years. With
OPM's expectation that the surplus has increased, the funding holiday
would last somewhat longer than that. Of course, the amount of surplus
(or deficit) could change yet again next year, lengthening or
shortening any funding holiday.
4. Reversion. A reversion refers to the actual return of money from
the pension plan to the plan sponsor (as opposed to a cessation of
contributions). In the private sector, a reversion is only allowed
upon plan termination, when the surplus measure is final. It is
important to note that a reversion of the entire $6.9 billion surplus
(or of an updated surplus amount) to USPS should mean that USPS would
then need to resume contributing its share of the normal cost of $3
billion per year; otherwise, the fund would go into deficit. Given
that the FERS surplus has accumulated over a number of years with no
reductions in USPS's contributions, OPM supports a reversion of the
surplus to USPS over a 2-year period.
[End of section]
Appendix III: Objectives, Scope, and Methodology:
To determine if the current methodology employed by OPM for allocating
responsibility for CSRS benefits between USPS and the federal
government is consistent with law, we reviewed relevant laws,
statutes, and legislative history.
To provide commentary on the actuarial analysis that the USPS Office
of Inspector General (USPS OIG) and Postal Regulatory Commission (PRC)
used in stating that OPM should refund the CSRS contributions in
question, we reviewed and analyzed opinions and studies on this issue
by relevant agencies and government entities including USPS, the USPS
OIG, OPM, and the OPM OIG. We also reviewed and analyzed studies and
opinions by actuarial firms and industry groups, including the Hay
Group, the Institute for Research on the Economics of Taxation, and
the Segal Company, Inc. To gain information on the method by which
responsibility for CSRS benefits is currently allocated and the
potential impacts of a CSRS payment refund on the CSRS fund and
stakeholders, we interviewed officials at OPM. To gain information on
the extent to which CSRS benefit costs have been recovered by USPS
through postal rates to date, we interviewed officials at the PRC. To
comment on USPS's request for a FERS refund, we analyzed OPM's most
recent CSRDF annual report, interviewed OPM actuaries, reviewed
commentary by USPS OIG and OPM on this issue, and reviewed approaches
to surplus pension assets applicable to private sector pension plans.
To provide commentary on the potential impacts of a refund of CSRS
payments to USPS, we reviewed and summarized prior GAO work on this
subject, including reports and testimonies related to the financial
condition of USPS and the actions necessary to avoid financial
insolvency. We also spoke with officials at USPS to gain information
on USPS's current financial condition, and we interviewed officials at
OPM to gain information on the legal requirements applying to any
transfer of CSRS assets and the potential impacts on plan participants.
We conducted this performance audit from September 2011 through
October 2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix IV: Comments from the Office of Personnel Management:
United States Office of Personnel Management:
Office of the Director:
Washington, DC 20415
October 11, 2011:
Lorelei St. James:
Director, Physical Infrastructure Issues:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. St. James,
Thank you for sending us GAO's draft report entitled, U.S. Postal
Service: Allocation of Responsibility for Pension Benefits Between the
Postal Service and the Federal Government, (GAO-12-146). Staff from
the Office of Personnel Management have reviewed the report and concur
with your findings and recommendations.
OPM has consistently maintained that it has followed the law with
respect to the allocation of responsibility for pension benefit
payments between the Postal Service and the Federal Government. Your
report supports this longstanding position.
In Appendix II of the report, the authors outline four approaches to
addressing the surplus in the FERS fund attributable to Postal Service
employees. In describing the fourth approach, a one-time reversion of
the surplus, the authors note: "Given that the FERS surplus has
accumulated over a number of years with no reductions in USPS's
contributions, OPM supports a one-time reversion to USPS as a "re-set"
of the fund back to 100% funded." (p. 37)
The President's Deficit Reduction proposal, "Living Within Our Means and
Investing in the Future," would "provide USPS with a refund over two
years of the $6.9 billion surplus in Postal contributions to the FERS
program." (p. 23)
We suggest that the OPM position be stated as supporting a "reversion
of the surplus to USPS over a two year period."
Thank you for providing OPM with the opportunity to comment.
Sincerely,
Signed by:
Jonathan R. Foley:
Director:
Planning and Policy Analysis:
[End of section]
Appendix V: Comments from the Office of Personnel Management, Office
of the Inspector General:
United States Office of Personnel Management:
Office of the Inspector General:
Washington, DC 25415:
October 11, 2011:
Memorandum for Lorelei St. James:
Director, Physical Infrastructure Issues:
Government Accountability Office:
From: [Signed by] Patrick E. McFarland:
Inspector General:
Subject: Response to GAO Draft Report No. GAO-12-146:
Thank you for the opportunity to comment upon the draft report
produced by your office entitled "U.S. Postal Service: Allocation of
Responsibility for Pension Benefits Between the Postal Service and the
Federal Government," GAO-12-146.
We agree with the legal conclusions contained in the draft report and
find the policy questions raised to be very insightful. Specifically,
we appreciate the analysis of the financial impact that various policy
options would have upon the trust funds administered by the U.S.
Office of Personnel Management. Protection of the financial integrity
of these trust funds is our office's paramount concern.
We expect that Congress will find this report useful as it works to
develop a comprehensive plan to address the U.S. Postal Service's
current financial situation.
[End of section]
Appendix VI: Comments from the U.S. Postal Service:
Joseph Corbett:
Chief Financial Officer:
Executive Vice President:
United States Postal Service:
475 L'Enfant Plaza, SW:
Washington, DC 20260-5050:
202-268-5272:
Fax: 202-265-4364:
[hyperlink, http://www.usps.com]
October 12, 2011:
Ms. Lorelei St. James:
Director, Physical Infrastructure Issues:
U.S. Government Accountability Office: ;
441 G Street, NW:
Washington, DC 20548-0001:
Dear Ms. St. James:
Thank you for the opportunity to provide comments on the Government
Accountability Office (GAO) report, Allocation of Responsibility for
Pension Benefits between the Postal Service and the Federal Government
(Report).
The Postal Service is disappointed that the GAO has rejected the
arguments of the Postal Service Office of Inspector General (01G) and
the Postal Regulatory Commission (PRC) and their independent actuaries
to reach a conclusion that, in our view, ignores actuarial principles
that would govern in the private sector, as well as fundamental
principles of fairness, by perpetuating the inequitable allocation of
pension obligations under the Civil Service Retirement System (CSRS)
for Postal Service employees who also worked for the Post Office
Department (POD). In doing so, the Report fails to describe the false
assumptions underlying the 1974 law, or the legal environment under
which the Postal Service operates with respect to compensation policy.
The Report also mistakenly endorses the Office of Personnel
Management's (OPM's) position that the repealed 1974 law, rather than
generally accepted actuarial practices and principles, should govern
the determination of the Postal Service's CSRS liabilities under
current law.
The Report does not attempt to refute that the actuarial methodologies
employed by the OIG and the PRC are standard actuarial methodologies
typically employed in the private sector for the allocation of pension
liabilities.[Footnote 1] This point is further underscored by the
credibility and stature of the two actuarial firms employed by the OIG
and the PRC. No independent actuary has endorsed OPM's approach, which
is predicated on fundamentally unrealistic assumptions. Rather, the
only basis cited by the GAO for the "fairness" of the pension cost
allocation methodology used by OPM is its consistency with the 1974 law.
GAO's discussion of why the 1974 law is lair" fails to account for the
specifics of postal law, and is only understandable if GAO believes
that the Postal Service and Congress negotiated at arms-length over
the terms of the law. GAO's discussion of the "fairness" of the
current methodology is flawed and incomplete for the following reasons:
* GAO does not provide an example in which the methodology set forth
in the 1974 law would have been accepted by a party in the Postal
Service's position as part of an arms-length transaction. This is not
surprising, because no rational party would accept an transaction in
allocation as part of an arms-length which”-using GAO's example-”an
employee would spend only 60 percent of his career with that party,
but the party would shoulder 82% of the pension costs, while
completely lacking any authority to address the size of those costs.
In a similar calculation, based on an employee with 15 years of
service, including ten with the POD and five with the Postal Service
(i.e., 2/3 POD and 1/3 Postal Service), the Postal Service would
already be responsible for 53 percent of the individual's pension.
Outcomes such as these would only have made sense if significant
benefits were received for accepting that allocation methodology. The
Postal Service, on the other hand, did not receive any such benefits
as part of the 1974 law.
* While GAO claims that one must consider the allocation of the
pension costs in light of the "total package of assets and
obligations" that were involved in the creation of the Postal Service,
much greater context must be provided to achieve fair and balanced
coverage. Full consideration of all assets, liabilities, and
obligations argues against GAO's conclusion. In 1971, the Postal
Service received assets in need of substantial upgrading, a workforce
that it inherited from the POD along with its associated legacy costs,
costly mandates (e.g., those regarding universal service, pay, and
benefits), and a longstanding gap between revenues and costs.
* Most relevant here, the Postal Service was formed, in large part,
because employee wage demands led to wildcat strikes and associated
service disruptions. Congress and the President agreed to an eight
percent pay raise as part of the Postal Reorganization Act, in order
to ensure employee support for the Act, on top of a six percent
increase that had earlier been enacted to end the work stoppage. In
addition, the Act required the Postal Service to provide its employees
with pay and benefits comparable to those paid in the private sector
for comparable work, and imposed a mandatory interest arbitration
process for labor negotiations when management and labor failed to
reach agreement. As such, the pension cost methodology currently used
by OPM penalizes the Postal Service for doing what was made inevitable
by the Act: an increase in wages. In addition, because the 1974
methodology was made retroactive, the Postal Service bears full
responsibility for the eight percent pay raise for Postal Service
employees negotiated prior to passage of the Act and put in effect by
that law.
* For these reasons, the articulated basis for the 1974 law”that the
Postal Service was entirely responsible for its post-1971 wage
increases, and thus should have to finance the effect of those
increases on its pension costs”is also fundamentally in error.
Congress did not give the Postal Service such control, either over its
wages or over its pension costs. First, Congress required in the
Postal Reorganization Act that Postal Service employees remain covered
in CSRS. Thus, the Postal Service had no ability to address the design
of its pension benefits or the size of its pension costs. Second,
Congress required that Postal Service pay wages and benefits
comparable to those in the private sector, and required that any
failure to achieve a negotiated agreement on wages result in binding
interest arbitration. The consequences of this decision were
made abundantly clear four years after passage of the 1974 law, when
an interest arbitrator in 1978 required that Postal Service wage COLAs
be uncapped, just as the country began experiencing double-digit
inflation.
* GAO's statement that addressing the allocation methodology would
allow the Postal Service "to receive payment for these costs twice" is
also flawed. Most fundamentally, it is mailers who have been
overcharged for these costs, and who therefore deserve to benefit from
correction to the overpayment. In addition, to the extent that the
overpayments are used to finance retirement health benefits”as current
legislative proposals endorse”they would be used to pay costs that
were not part of the Postal Service's rate base for most of the time
period after 1971, even though the benefits were being earned by its
employees.
Current law does not in any way preclude OPM from effectuating a fair
and reasonable allocation of these liabilities, such as the approach
set forth in the Segal Report. In concluding to the contrary, GAO
ignores the effects of Public Law No. 108-18 of 2003 and the Postal
Accountability and Enhancement Act of 2006 (PAEA), Public Law No. 109-
435. The 2003 law eliminated the statutory language requiring OPM to
follow the 1974 allocation methodology, and required OPM to determine
the benefits "attributable to the service of current or former
employees of the United States Postal Service."[Footnote 2] GAO does
not dispute this, but claims that because Congress did not expressly
mandate a change to that methodology, OPM has no authority to adopt a
contrary methodology. However, the 2003 and 2006 laws, when considered
together, reflect intent on the part of Congress that OPM determine
the Postal Service's CSRS liabilities based on modern actuarial
principles, rather than the statutorily-imposed principles underlying
the prior funding mechanism, in order to ensure that the Postal
Service fully funds, but does not overfund, those liabilities.
Congress assigned to OPM the authority to determine which actuarial
practices are proper when determining the Postal Service's CSRS
liability: Section 802(c) of the PAEA stated that any determination by
OPM of the Postal Service's CSRS liabilities could be subject to
review by the PRC, employing an independent actuary, who is required
to review that determination "in accordance with generally accepted
actuarial practices and principles." OPM is then required to
reconsider its determination "in light of such report," and to "make
any appropriate adjustments." Clearly, then, Congress intended that
OPM determine the Postal Service's CSRS liabilities based on
"generally accepted actuarial practices and principles," and gave OPM
the authority to do so. As such, OPM's methodology must be defended on
whether it meets that requirement, not whether it is consistent with a
repealed, and fundamentally unfair, law.
Finally, the Postal Service appreciates GAO's recognition that
reallocation of a CSRS pension surplus would not by itself solve
Postal Service financial problems or eliminate its debt, as such a
conclusion would be far from correct. The Postal Service's
comprehensive legislative proposals, were articulated most recently in
Postmaster General Donahoe's testimony on September 6, 2011:
* Resolve the pre-funding of Retiree Health Benefits;
* Return the $6.9 billion overfunding of the Postal Service's
obligations to the Federal Employees Retirement System;
* Grant the Postal Service the authority to determine delivery
frequency;
* Allow the Postal Service the flexibility to restructure its
healthcare and pension systems;
* Permit the streamlining of pricing and product development.
As stated in that testimony, the Postal Service believes that its non-
legislative initiatives and requested legislation must reduce annual
expenses by $20 billion by 2015. These aggressive cost reductions are
designed to address prospective future declines in mail volume and
revenue, and place the Postal Service on a path to long-term financial
sustainability. It is only through a combination of efforts, designed
to ensure that the Postal Service's cost structure is sustainable,
that the Postal Service's financial problems can be resolved.
In conclusion, the Report offers no room for compromise, relying
almost entirely as it does on the mistaken assumption that the 1974
law represented Congress' final determination on the fairness of the
allocation of pension costs between the Postal Service and the U.S.
Treasury. In fact, Congress' direction, as expressed in the 2003 and
2006 laws, indicates otherwise. Furthermore, the Report fails to
support the reasonableness of the 1974 law under current actuarial
standards, which govern OPM's determination of the Postal Service's
CSRS liabilities. The fact that two independent actuaries have
determined that a fair, rational, and actuarially-sound allocation of
the CSRS liability would return between $50 billion and $75 billion to
the Postal Service suggests that a sound and fair result would achieve
a more rational balance between those costs allocated to the Postal
Service and those costs that are properly the responsibility of the
U.S. Treasury. We believe a more balanced report by GAO would include
a more objective analysis and provide compromise options for the
Congress to consider.
Sincerely,
Signed by:
Joseph Corbett:
cc: Mr. Donahoe:
Mr. Stroman:
Ms. Gibbons:
Mr. Vegliante:
CARM Manager:
Footnotes:
[1] The Report's criticism of the Segal Report at the bottom of page
16 and continuing on to page 17 is fundamentally misguided. The
statement in the letter from the American Academy of Actuaries has
been taken out of its original context. The American Academy of
Actuaries' comment letter to FASB dealt with the measurement of the
liability for balance sheet purposes. The comment has nothing to do
with the allocation of pensions earned by two related employers.
[2] This "attributable" language was similar to that in another
section of the U.S. Code (5 U.S.C. § 8406(g), as well as to the
repealed CSRS COLA provisions, under which OPM used a different
allocation methodology.
[End of section]
Appendix VII: Comments from the U.S. Postal Service, Office of
Inspector General:
Office of Inspector General:
United States Postal Service:
October 11, 2011:
Ms. Lorelei St. James:
Director, Physical Infrastructure:
U S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. St. James:
Thank you for the opportunity to comment on the Government
Accountability Office's report titled "Allocation of Responsibility
for Pension Benefits Between the Postal Service and the Federal
Government."
We disagree with the major conclusions of the report. Your review
focuses on the 1974 law (P L. 93-349), which is not in dispute. All
parties agree that the 1974 law made the Postal Service responsible
for funding the additional CSRS liabilities resulting from pay
increases after 1971.
The issue in question surrounds the CSRS Funding Reform Act of 2003
(P L 108-18) as it pertains to the Office of Personnel Management's
(OPM) share of CSRS liability. Your report fails to recognize how the
2003 law changed the 1974 law. We do not understand your assertion
that the "consequence of the 2003 Act was to leave the 1974 allocation
unchanged, notwithstanding the removal of the explicit allocation
provision." If, as you state, the allocation provision was removed, it
does not seem reasonable to assume the intent of Congress was that the
allocation remain unchanged.
In fact, the 2003 law changed the directive to OPM. As the legislative
history shows. it was intended to "repeal" the 1974 law (Senate Report
No 108-35, page 6). OPM was required to adopt modern dynamic methods.
Dynamic methods dictate that OPM take into account the effect of
future salary increases on the total liability. Using these methods,
OPM was to capture the size of the postal liability and the respective
responsibilities of the Postal Service and OPM to satisfy the
liability. Instead, OPM applied dynamic assumptions solely to the
Postal Service's share of the liability ” not to its own share. It
appears that OPM failed to follow the 2003 law and now must agree to
do so or be compelled by law for a second time.
Two separate and independent reviews have found that OPM's continued
use of the 1974 methodology for its own share is either unfair or not
consistent with modern pension standards that use dynamic assumptions
and that are required in the 2003 law:
* Our review, conducted with the assistance of the actuarial firm, the
Hay Group, argued that the CSRS liability for employees with service
prior to 1971 should be split between the Postal Service and the
federal government on a years-of-service basis. A years-of-service
basis was used to split the liability of retirees' cost-of-living
adjustments (COLA) between OPM and the Postal Service prior to the
2003 law. Additionally, we found that the Postal Service's retiree
health benefits are also allocated between the Postal Service and OPM
on a years-of-service basis, which is instructive regarding the proper
structuring of the CSRS benefits. We estimated that the Postal Service
had been overcharged $75 billion from fiscal years 1972 to 2009 for
its share of CSRS pension benefits.
* The Postal Regulatory Commission's independent actuary, The Segal
Company, advocated a methodology based on private sector accounting
standards. Like our methodology, it takes into account the effect of
future salary increases on the liability, but it does not split the
costs evenly by years of service. Instead, it follows the CSRS pension
formula, which provides a higher benefit for later years of service.
Under this methodology, Segal estimated the Postal Service overpayment
to be $50 to $55 billion. The Office of Inspector General believes
that this method, though more moderate, represents a second rational
approach to implement the 2003 law.
We believe OPM can now, if it chooses, apply dynamic assumptions to
the federal share since it has been directed to do so since 2003 Under
5 U S C § 8348, the Postal Service is responsible for the full amount
of retirement benefits that are "attributable to civilian employment
with the Postal Service." However, it is responsible only for that
portion that is attributable to Postal Service employment. The Postal
Service is not responsible for the amount attributable to service
prior to 1971.
Post Office Department (POD) service prior to 1971 is properly the
responsibility of the federal government. The 2003 law established
that these amounts should be calculated dynamically as the liability
increases with inflation and other factors. As a result, both the
Postal Service and federal shares should include the expected salary
increases that are part of the final pension benefit. Non-postal
federal salaries have also risen since 1971, and OPM accounts for and
is responsible for meeting those increased liabilities. OPM's failure
to pay the full CSRS cost of postal service prior to 1971 leaves a
hole in the fund. The Postal Service and its employees have been
forced to fill the gap. OPM's position, however, is that it needs to
be directed more clearly to apply dynamic assumptions to the federal
share by a new piece of legislation.
Applying dynamic standards to only part of the liability is not only
inconsistent with the law and with modern actuarial standards, but it
also results in the extraordinarily unfair assignment of the largest
share of the liability to the Postal Service. Under this methodology,
the Postal Service could be responsible for 70 percent of the CSRS
pension costs for an employee whose service was split evenly (50-50)
between the Postal Service and the POD. By using the 1974 static
method for the federal share, OPM is leaving a deficit in the CSRS
funding by not paying for inflation or pay increases attributable to
POD service. To make up the deficit. OPM has overcharged postal
ratepayers. Your report argues that no change is necessary since
postal ratepayers have already paid these costs. but we believe that
these ratepayers have been overcharged long enough. A correction is
long overdue.
The current OPM methodology is neither fair nor modern nor does it
comply with the 2003 law, We agree with you that action from Congress
is necessary to settle this issue once and for all. We believe
Congress did just that in 2003. If OPM cannot be convinced of the need
to change its methodology, the only alternative is for Congress to
compel OPM to act by adding even more explicit reform language to the
legislation currently being prepared.
Sincerely,
Signed by:
[Illegible] for,
David C. Williams:
Inspector General:
[End of section]
Appendix VIII Comments from the Postal Regulatory Commission:
United States Of America:
Postal Regulatory Commission:
Ruth Y. Goldway, Chairman:
Washington, DC 20268-0001:
October 11, 2011:
Lorelei St. James:
Director, Physical Infrastructure:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. St. James:
Thank you for the opportunity to comment on the Government
Accountability Office's review of the U.S. Postal Service
contributions to the Civil Service Retirement System (CSRS).
Your report correctly frames the CSRS issue as a matter of policy.
However, it stops short of offering any guidance to inform that policy
decision. The Commission has previously provided advice on this issue
and believes that its advice remains relevant.
The Commission's involvement in this matter arose from a Postal
Service request, filed under section 802(c)[Footnote 1] of the Postal
Accountability and Enhancement Act (PAEA), to review the fairness and
equity of the method used by the Office of Personnel Management (OPM)
to apportion the CSRS obligation between the Postal Service and the
Post Office Department (POD).[Footnote 2] The Commission contracted
with The Segal Company (Segal), a member in good standing of the
American Academy of Actuaries, to study this issue. Segal issued its
report on June 29, 2010.
Contrary to your assertion, the Segal report did not characterize the
overfunding of CSRS liabilities as an "overpayment" and did not imply
that errors were made in the calculation of the liability. Segal
considered the OPM allocation a reasonable methodology for
implementing legislation enacted in 1974 (P.L. 93-349). However,
viewed in the context of modern actuarial and accounting standards,
the methodology provides an inequitable allocation of responsibilities
for the Postal Service's share of the CSRS assets.
Segal notes that there was very little guidance during the 1970s
regarding the allocation of pension costs to time periods. Since that
time, significant attention has been given to that issue, primarily in
the current set of corporate pension accounting standards”FASB ASC2
715, Compensation – Retirement Benefits. Additional sources reviewed
by Segal include GASB 27, the pension accounting standard for state
and local governments, and SFFAS, the pension accounting standard for
the Federal government. Segal's report was, in essence, a fresh look
at how the allocation would be made using modern generally accepted
principles.
According to Segal, the use of actuarial or accounting methods
provides meaningful guidance in the proper allocation of CSRS benefits
between the POD and the Postal Service. The accounting standard, FASB
ASC 715, provides a logical and reasonable compromise that is fair and
equitable in the current situation. An employer is required to reflect
the actual benefit accrual formula embodied in a pension plan, as OPM
does. Additionally, an employer is also required to reflect the impact
of future salary increases on current accruals in a "high" or "final"
average salary plan, as the United States Postal Service Office of
Inspector General (LISPS OIG) does. This is consistent with current
actuarial standards, generally accepted accounting principles, and
public sector accounting standards.
Your report claims that a significant body of pension experts deems
the inclusion of the effects of salary increases on pension
liabilities inappropriate. As an example, you cite comments submitted
by the American Academy of Actuaries (the Academy), in early 2006, in
response to FASB's Exposure Draft to Improve Accounting for
Postretirement Benefit Plans.[Footnote 3]
Review of the Academy's comments, in their entirety, reveals that they
explicitly exclude government plans.[Footnote 4]
Your report also claims that the allocation of pension liabilities
made in 1974 implicitly reflects fairness because upon establishment
in 1971, the Postal Service was given a "package of assets and
liabilities, which included the preexisting postal infrastructure and
business advantages and disadvantages."[Footnote 5] Your report
implies that this package is akin to the formation of a new business
where pension liabilities would be part of negotiations. The Segal
report highlighted important differences between the formation of the
Postal Service and the formation of a private business. At page 6 of
its Report to the Postal Regulatory Commission on: Civil Service
Retirement System Cost and Benefit Allocation Principles, Segal states:
1. It is almost unprecedented to have a transfer of ownership of a
private enterprise where the buyer becomes a participating employer in
the seller's pension plan.
2. In a typical transaction involving the sale of a business unit that
has a defined benefit pension plan, there is an exchange of cash
and/or securities from the buyer to the seller. This represents the
market value of the entire enterprise. While each party may have in
mind an adjustment to the purchase price to reflect the pension plan,
they may not be the same, or their individual pricing models may serve
some tax or non-pension accounting purpose, or it may reflect the
relative importance to one of the parties of closing the deal. In the
absence of an actual market for parties buying and selling pension
plans based on final average pay to others independent of anything
else, we do not believe one can say with authority that the private
sector has a definitive model that clearly suggests what is
appropriate in the USPS situation.
3. Another typical private sector transaction is a spin-off of part
of an enterprise into its own separate company. Most often, this does
not result in the new company continuing to participate in the
original enterprise's pension plan, because the whole objective is
separation. In any event, however, this is not normally an arms-length
transaction, because immediately after the separation the shares of
the new company are allocated to the original enterprise's
shareholders in exactly the same proportion as they held in the
original enterprise. While this may be the closest analogy to the spin-
off of the POD as a stand-alone entity, each allocation reflects the
unique goals of the original parent (subject, of course, to the
intervention of laws such as ERISA and those governing the sale of
securities to the public that constrain private-sector transactions).
The Postal Service was not established as a totally separate self-
sustaining entity, but rather as a self-sustaining entity within the
executive branch of the government. This implies that the Federal
government, not the Postal Service, sets the policies and basic
management structure of the Postal Service, in addition to providing
oversight over the organization in return for some monopoly power in
the marketplace and exemption from some local laws and regulations.
The Postal Service was given basic management control of government
assets and liabilities related to the provision of those mail services.
Your report also asserts that the Postal Service has already received
payment for current and future pension obligations from ratepayers and
that transfer of CSRS assets would constitute a double payment, The
Commission respectfully disagrees with that assertion. The purpose of
a break-even requirement, as it stood before the passage of the PAEA,
was to charge users of mail services the full cost of providing those
services. The attribution methodologies established by the Commission
allocated these costs to mail products. Prices were set to recover all
costs of the Postal Service. If Congress were to change the current
allocation of CSRS pension costs in the manner recommended by the
Segal report, the Postal Service would receive a refund of past
payments to the Federal government. It was the ratepayers, not the
taxpayers, who paid for those past costs and it will be ratepayers who
will benefit from the recommended allocation, going forward, through
more stable rates and more reliable, accessible services.
This is similar to what occurred after it was discovered that the CSRS
funding mechanism established in 1974 under Public Law 93-349 would
cause a significant overfunding of the Postal Service's share of the
CSRS liability for pension benefits. That finding resulted in
enactment of Public Law 108-18, which significantly changed the Postal
Service's CSRS funding requirements and resulted in substantial cost
savings to the Postal Service. The Postal Service was required to use
a portion of the savings to hold postage rates down, a benefit for
ratepayers.
The Commission also disagrees with the implication that any change in
the allocation would provide the Postal Service with only limited
relief from its financial pressures. In its Section 701 Report:
Analysis of the Postal Accountability and Enhancement Act of 2006,
[Footnote 6] released on September 22, 2011, the Commission identified
the CSRS as one of the areas where key adjustments to postal laws
could help address the liquidity crisis facing the Postal Service.
Adjustments would improve the Postal Service's current financial
situation in the near term and provide an opportunity to more fully
assess long-term solutions. The Commission noted that if the excess
funds from the CSRS were transferred into the Postal Service Retiree
Health Benefit Fund, the fund would be almost fully funded.
Finally, there is a difference of opinion as to whether the existing
legislation compels the omission of post-1971 pay increases in a 2010
analysis. Both USPS OIG and OPM appear to agree that Public Law 93-349
was intended to prohibit allocating the impact of post-1971 final
average salary increases to the POD. The question is primarily whether
or not Public Law 108-18, enacted in 2003, and the PAEA, enacted in
2006, continued that prohibition. Should there be a determination by
OPM to choose something other than continuation of the present
methodology, we believe the current legislative framework can
accommodate a change.
In conclusion, the Commission agrees that the ultimate decision on
allocation of pension costs between the Postal Service and the POD is
a matter of policy. As requested by the Postal Service, the Commission
sponsored the Segal report to provide guidance on this matter. The
Commission believes that Segal's guidance remains both sound and
relevant. The present allocations, deemed reasonable before the
development of modern practices, do not reflect application of current
generally accepted practices and principles.
Sincerely,
Signed by:
Ruth Y. Goldway:
Footnotes:
[1] Section 802(c) requires the Commission, upon receiving a request
for review, to procure the services of an actuary who is a member of
the Academy of American Actuaries and is qualified in the evaluation
of pension obligations, to conduct a review in accordance with
generally accepted actuarial practices and principles. Upon approving
the report, the Commission is required to provide it to the Postal
Service, OPM and Congress. Section 802 (c) further states that, upon
receiving the report from the Commission, OPM shall reconsider its
determination of the pension liability and make any appropriate
adjustments in light of the report.
[2] Docket No. PI2010-2, Request of the United States Postal Service
for the Commission to Conduct a Review Pursuant to PAEA Section 802(c)
of OPM Determinations Regarding CSRS, February 23, 2010.
[3] In September 2006, the Board issued a final standard, SFAS 158,
Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, completing the first phase of its ongoing two
phase pension accounting project. SFAS 158 amends the prior accounting
standards SFASs 87 and 106 by requiring recognition of the projected
benefit obligation by a pension plan.
[4] The letter states, "We assume that salary and total compensation
are under the control of employer and employee, and that salaries are
set to keep total compensation competitive. So long as both parties
stick to ABO pricing, both parties emerge each year with a fair
exchange. Increases in pension value can be easily coupled to
increases in compensation. Consider what happens with PBO pricing. The
employer will have 'paid' more than the employee will have 'received'
for a year of service. The employer may freeze or terminate the plan
and take a curtailment gain. This moral hazard, from the employee's
point of the view, is only avoidable if there is an enforceable multi-
period contract between the employer and the employee. Except in the
government sector and in some negotiated plans (which are usually not
salary-based), recent experience confirms that such multi-period
contracts don't exist or are not enforceable, Thus, there is no basis
for the employee to assume that he will be entitled to anything more
than his accrued benefit and, if he does so, he will have accepted
lower current pay in return for a renegable promise of his employer."
See American Academy of Actuaries letter to Robert H. Herz,
Chairman, Financial Accounting Standards Board, February 6, 2006, at 2
(footnote omitted).
[5] See General Account Office, Allocation of Responsibility for
Pension Benefits Between the Postal Service and the Federal
Government, [hyperlink, http://www.gao.gov/products/GAO-12-146]
(October 2011) at 6.
[6] Under the PAEA, P. L. 109-435, 120 Stat, 3198 (2006), section 701,
"The Postal Regulatory Commission is required to (a) Submit a report
to the President and Congress concerning”Ill the operation of the
amendments made by this Act [PAEA]; and (2) recommendations for any
legislation or other measures necessary to improve the effectiveness
or efficiency of the postal laws of the United States. (b) Postal
Service views.-–A report under this section shall be submitted only
after reasonable opportunity has been afforded to the Postal
Service to review the report and to submit written comments on the
report. Any comments timely received from the Postal Service under the
preceding sentence shall be attached to the report...."
[End of section]
Appendix IX: GAO Contact and Staff Acknowledgments:
GAO Contact:
Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Teresa Anderson, Barbara
Bovbjerg, Fred Evans, Jeanette Franzel, Kimberly Granger, Katie Hamer,
Susan Irving, Jason Kirwan, Hannah Laufe, Kate Lenane, Kimberly
McGatlin, Diane Morris, Susan Poling, Susan Ragland, Susan Sawtelle,
Kate Siggerud, Ken Stockbridge, Frank Todisco, and Crystal Wesco made
key contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 112-36, § 124 (Oct. 5, 2011).
[2] The U.S. Postal Service Improvements Act of 2011, S. 353, 112th
Cong. (2011); the Postal Operations Sustainment and Transformation Act
of 2011, S. 1010, 112th Cong. (2011); the Postal Reform Act of 2011,
H.R. 2309, 112th Cong. (2011); the United States Postal Service
Pension Obligation Recalculation and Restoration Act of 2011, H.R.
1351, 112th Cong. (2011); and the Innovate to Deliver Act of 2011,
H.R. 2967, 112th Cong. (2011).
[3] United States Postal Service, Office of Inspector General, The
Postal Service's Share of CSRS Pension Responsibility, RARC-WP-10-001
(Arlington, Va.: Jan. 20, 2010). The USPS OIG commissioned the
actuarial firm Hay Group to review the allocation of CSRS liabilities
between USPS and the federal government. Postal Regulatory Commission,
Report to the Postal Regulatory Commission on: Civil Service
Retirement System Cost and Benefit Allocation Principles, by the Segal
Group, Inc. (Washington, D.C.: June 29, 2010). The PRC commissioned an
actuarial report by the Segal Company on the allocation of CSRS
liabilities between USPS and the federal government.
[4] While USPS is part of the federal government, for purposes of this
report, we differentiate between USPS, a self-sustaining, independent
establishment within the executive branch, and the federal government
as a whole.
[5] Responsibility for paying for the increase in retirement benefits
for pre-1971 service of postal employees caused by increases in postal
salaries since July 1, 1971 was transferred from the U.S. Treasury to
USPS by statute in 1974. Pub. L. No. 93-349 (July 12, 1974). See table
1.
[6] U.S. Office 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 (Washington,
D.C.: Feb. 28, 2011).
[7] The CSRDF is a fund of the U.S. Treasury that provides defined
benefits to retired and disabled federal employees covered by CSRS.
[8] Pub. L. No. 91-375, 84 Stat. 719, 720.
[9] Id. at 760. See also, Payments on Unfunded Liability by the U.S.
Postal Service to Civil Service Retirement Fund: Hearing Before the
Committee on Post Office and Civil Service, United States Senate, on
H.R. 29, 93rd Cong. 73-74 (statement by Post Office and Civil Service
Committee Chairman Gale McGee).
[10] GAO, United States Postal Service: Information on Retirement
Plans, [hyperlink, http://www.gao.gov/products/GAO-02-170]
(Washington, D.C.: Dec. 31, 2001).
[11] Pub. L. No. 91-375, 84 Stat. 719, 732.
[12] See 5 U.S.C. §§ 8331, 8339. This calculation is often referred to
as the "high-3" calculation.
[13] USPS was not to be liable for that portion of any increase in the
unfunded liability attributable to its employees that resulted from
new or liberalized retirement benefits provided directly by amendment
of chapter 83 of title 5, and applicable generally to all persons
covered by CSRS. Rather, such increases were to be financed under 5
U.S.C. § 8348(f). See Pub. L. No. 93-349, § 1, 88 Stat. 354 (July 12,
1974); see also H.R. Rep. No. 93-120, at 43 (1973).
[14] Payments on Unfunded Liability by the U.S. Postal Service to
Civil Service Retirement Fund: Hearing Before the Committee on Post
Office and Civil Service, United States Senate, on H.R. 29, 93rd Cong.
73-74 (statement by Post Office and Civil Service Committee Chairman
Gale McGee).
[15] USPS is required by law to provide prompt, reliable, and
efficient services to patrons in all areas and postal services to all
communities. These and related requirements are commonly referred to
as the universal service obligation. 39 U.S.C. § 101 (a).
[16] Other statutes, not relevant to the present questions, also have
been enacted amending USPS's CSRS responsibilities.
[17] A detailed legal analysis of this issue is contained in app. I.
[18] [hyperlink, http://www.gao.gov/products/GAO-02-170].
[19] S. Rep. No. 108-35, at 2 (2003).
[20] GAO, Review of the Office of Personnel Management's Analysis of
the United States Postal Service's Funding of Civil Service Retirement
System Costs, [hyperlink, http://www.gao.gov/products/GAO-03-448R]
(Washington, D.C.: Jan. 31, 2003).
[21] Letter from John Berry, Director, Office of Personnel Management,
to the Honorable Ruth Y. Goldway, Chairman, Postal Regulatory
Commission, regarding the allocation of the costs of CSRS benefits
paid to former POD employees, September 24, 2010.
[22] Pub. L. No. 108-18, 117 Stat. 624 (Apr. 23, 2003).
[23] The normal cost is the annual growth in pension liabilities
resulting from an additional year of service by plan participants.
"Dynamic assumptions" is defined in subsection 2(a) of the 2003 Act as
economic assumptions that are used in determining actuarial costs and
liabilities in a retirement system and in anticipating the effects of
long-term future investment yields, future increases in rates of basic
pay, and future rates of price inflation. The prior funding
methodology had used "static assumptions," which did not project
future pay or cost of living increases and used a fixed interest rate
assumption.
[24] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625 (amending 5 U.S.C.
§ 8348(h)).
[25] The legislative history of the 2003 Act supports this conclusion.
The Senate Report accompanying the 2003 Act states that the Act
"continues the Postal Service's liability for the retirement costs
attributable to its employees covered by the CSRS which was imposed
when the Post Office Department became the self-supporting [USPS] in
July 1971" S. Rep. No. 108-35, at 3 (Apr. 8, 2003).
[26] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249 (Dec. 20, 2006).
[27] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 626.
[28] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249.
[29] There are other details of the formula that are not relevant for
purposes of this analysis.
[30] The proportion of prospective and retrospective costs transfers
may have changed since these estimates were made with more of the cost
transfer now likely to be retrospective.
[31] The FASB standards apply to financial reporting. The particular
standards applicable to pension benefits were developed in the 1980s,
with subsequent modifications that did not alter the overall approach
for assigning pension costs to time periods.
[32] See American Academy of Actuaries letter to Technical Director,
Financial Accounting Standards Board, May 31, 2006; letter to Robert
H. Herz, Chairman, Financial Accounting Standards Board, February 10,
2006; and News Release, "Actuaries Raise Concern with FASB Draft
Guidance," June 7, 2006. The Academy argues that "Inclusion of the
effect of future salary increases in a liability appears to be in
conflict with [Accounting] Concept Statement 6," "Including future
salary levels misrepresents the value of the contract," "Including
future salary levels in pension liabilities does not provide
shareholders with the most relevant information about the current
value of their obligations," and "Including an allowance for future
salary growth is inappropriate in a balance sheet liability." The
Academy does note that an accounting case can be made for recognizing
future pay increases where there is "an enforceable multi-period
contract between the employer and the employee," which it says only
exist in the government sector and for some negotiated (i.e.,
collectively bargained) plans, but also notes that recognition of
future salary increases in pension accounting "would force recognition
of future salary increases for sponsors of defined benefit plans but
not otherwise, a distinction for which we see no justification." The
Academy points to the incongruity of recognizing future salaries for
pension plans when the cost of basic compensation itself is not
recognized until earned. Our overall point here is that there is
debate about the appropriateness of current private sector pension
accounting standards. Our more fundamental point remains that
accounting standards do not govern the allocation of benefit
responsibility between two entities, which is ultimately a business or
public policy matter.
[33] See S. Rep. No. 93-947 at 3 (June 19, 1974); H.R. Rep. No. 93-
120, at 4 (Apr. 11, 1973).
[34] In addition to the transfer of assets from nonpostal to postal
CSRS (about $50 billion to $75 billion), there would be a transfer of
liabilities for future benefits from postal to nonpostal CSRS (about
$6 billion to $10 billion).
[35] The CSRDF is divided into two accounts for CSRS and FERS, which
are further divided by postal and nonpostal subaccounts.
[36] The precise effect of the USPS OIG and PRC recommendations would
be calculated by the Congressional Budget Office (CBO), which is the
legislative branch agency charged with providing cost estimates and
estimates of the impact of legislation on the federal budget.
[37] Using the estimated effects of the PRC proposal as an example,
the mechanism for the transfer of costs would be the following: The
reallocation of responsibility for benefits already paid over the past
four decades would be done via a transfer of assets from the nonpostal
subaccount to the postal subaccount; the estimated amount is $50
billion to $55 billion. The reallocation of responsibility for
benefits still to be paid in the future would be done via a reduction
of actuarial liability for the postal subaccount and a corresponding
increase for the nonpostal subaccount; the estimated amount is $6
billion to $8 billion. The overall cost to the federal government,
over time, would be the sum of these two effects. Thus, the nonpostal
subaccount would bear a total reduction in assets and increase in
actuarial liability ranging from about $56 billion to $63 billion.
[38] Under existing law, USPS would still have to make the current
schedule of retiree health benefit prefunding payments for 2011
through 2016, even if the benefits are fully funded after an asset
transfer. Legislation would be required to alter or eliminate these
required payments.
[39] GAO, U.S. Postal Service: Legislation Needed to Address Key
Challenges, [hyperlink, http://www.gao.gov/products/GAO-11-244T]
(Washington, D.C.: Dec. 2, 2011).
[40] GAO, U.S. Postal Service: Actions Needed to Stave off Financial
Insolvency, [hyperlink, http://www.gao.gov/products/GAO-11-926T]
(Washington, D.C.: Sept. 6, 2011).
[41] [hyperlink, http://www.gao.gov/products/GAO-11-244T].
[42] GAO, U.S. Postal Service: Strategies and Options to Facilitate
Progress toward Financial Viability, [hyperlink,
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: April 12,
2010).
[43] See GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February
2011).
[44] Pub. L. No. 91-375, 84 Stat. 719, 720 (Aug. 12, 1970).
[45] Pub. L. No. 91-375, 84 Stat. 719, 732.
[46] 5 U.S.C. § 8334(a).
[47] Pub. L. No. 91-375, 84 Stat. 719, 732, codified, as amended, at
39 U.S.C. § 1005(d). USPS was also required to contribute annually to
the costs of administering CSRS, but this requirement was later
repealed (see Pub. L. No. 93-349, § 2(a), 88 Stat. 354 (July 12,
1974)), and has no impact on the issues addressed here.
[48] USPS was not to be liable for that portion of any increase in the
unfunded liability attributable to its employees that resulted from
new or liberalized retirement benefits provided directly by amendment
of chapter 83 of title 5, and applicable generally to all persons
covered by CSRS. Rather, such increases were to be financed under 5
U.S.C. § 8348(f). See Pub. L. No. 93-349 §1, 88 Stat. 354 (July 12,
1974); see also H.R. Rep. No. 93-120, at 43 (1973).
[49] The Civil Service Commission ceased operations in accordance with
the Civil Service Reform Act of 1978, Pub. L. No. 95-454, 92 Stat.
1111 (Oct. 13, 1978), and its responsibility to oversee civil service
retirement passed to OPM.
[50] Pub. L. No. 93-349, § 1, 88 Stat. 354. See also S. Rep. No. 93-
947, at 5 (1974).
[51] Id., § 3, 88 Stat. 354.
[52] U.S. Office of Personnel Management, Office of the Inspector
General, A Study of the Risks and Consequences of USPS OIG's Proposals
to Change USPS's Funding of Retiree Benefits: Shifting Costs from USPS
Ratepayers to Taxpayers (Feb. 28, 2011), 28-29.
[53] Congress passed other statutes amending USPS's CSRS
responsibilities. See GAO, Review of the Office of Personnel
Management's Analysis of the United States Postal Service's Funding of
Civil Service Retirement System Costs, GAO-03-448R (Washington, D.C.:
Jan. 31, 2003), 44-47.
[54] GAO, United States Postal Service: Information on Retirement
Plans, [hyperlink, http://www.gao.gov/products/GAO-02-170]
(Washington, D.C.: Dec. 31, 2001).
[55] OPM's analysis is discussed in the Senate report accompanying the
Postal Civil Service Retirement System Funding Report Act of 2003, S.
Rep. No. 108-35, at 2 (2003).
[56] [hyperlink, http://www.gao.gov/products/GAO-03-448R].
[57] Letter from John Berry, Director, Office of Personnel Management,
to the Honorable Ruth Y. Goldway, Chairman, Postal Regulatory
Commission regarding the allocation of the costs of CSRS benefits paid
to former Post Office Department employees, September 24, 2010; see
also S. Rep. No. 108-35, at 2-3.
[58] S. Rep. No. 108-35 at 3.
[59] Id.
[60] Pub. L. No. 108-18, 117 Stat. 624 (Apr. 23, 2003).
[61] FERS covers most federal employees who started their careers on
or after January 1, 1984.
[62] Pub. L. No. 108-18, § 2(b), 117 Stat. 624, 625.
[63] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625 (amending 5 U.S.C.
§ 8348(h)).
[64] Although the 2003 Act was passed based partly on a finding that
USPS had overfunded CSRS, that law gave specific direction to USPS on
the use of savings resulting from the act--specifically, savings in
fiscal years 2003 and 2004 were to be used to repay USPS debt held by
the U.S. Treasury, and savings for fiscal year 2005 were to be used
both to reduce postal debt and to delay a planned postal rate
increase. Pub. L. No. 108-18, § 3(a), 117 Stat.624, 627.
[65] Id.§ 3(f), 117 Stat. 624,629.
[66] GAO, U.S. Postal Service: Strategies and Options to Facilitate
Progress toward Financial Viability, [hyperlink,
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12,
2010), 27-28.
[67] Letter from Douglas C. Borton, Chairman, Board of Actuaries for
United States Civil Service Retirement System, Office of Personnel
Management, to Dr. Ronald P. Sanders, Associate Director for Strategic
Human Resources Policy, Office of Personnel Management, August 18,
2004.
[68] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249 (Dec. 20, 2006).
[69] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 626.
[70] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3250.
[71] United States Postal Service Office of Inspector General, The
Postal Service's Share of CSRS Pension Responsibility, RARC-WP-10-001
(Arlington, Va.: Jan. 20, 2010).
[72] An Examination of the Postal Service's Current Financial Crisis
and Future Viability, Hearing before the House of Representatives
Committee on Oversight and Government Reform and the Subcommittee on
the Federal Workforce, Postal Service, and District of Columbia, 111TH
Cong., (Apr. 15, 2010) (Statement of David C. Williams, Inspector
General, USPS).
[73] Id.
[74] Postal Regulatory Commission, Report of the Postal Regulatory
Commission on: Civil Service Retirement System Cost and Benefit
Allocation Principles, by the Segal Group, Inc. (Washington, D.C.:
June 29, 2010), 2.
[75] Pub. L. No. 93-349, § 1, 88 Stat. 354, formerly codified at 5
U.S.C. § 8348(h)(1) (emphasis added).
[76] H.R. Rep. No. 93-120, at 4 (Apr. 17, 1973).
[77] S. Rep. No. 93-947, at 4 (June 19, 1974).
[78] GAO, in commenting on the proposed 1974 Act, also noted that
requiring USPS to pay for such unfunded liability "vindicates the
policies of the Postal Reorganization Act, while preserving the
integrity of the fund." Letter from the Deputy Comptroller General of
the United States, to the Chairman of the Committee on Post Office and
Civil Service, U.S. Senate, B-130441 (May 30, 1974).
[79] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625.
[80] S. Rep. No. 108-35, at 2.
[81] The conclusion that the 2003 Act did not change the allocation
made by the 1974 Act is supported by the 2003 Act's legislative
history. The Senate report accompanying the 2003 Act states that the
act "continues the Postal Service's liability for the retirement costs
attributable to its employees covered by the CSRS which was imposed
when the Post Office Department became the self-supporting [USPS] in
July 1971." S. Rep. No. 108-35, at 3 (Apr. 8, 2003). See also Payments
on Unfunded Liability by the U.S. Postal Service to Civil Service
Retirement Fund: Hearing Before the Committee on Post Office and Civil
Service, United States Senate, on H.R. 29, 93rd Cong. 73-74 (statement
by Post Office and Civil Service Committee Chairman Gale McGee).
[82] Pub. L. No. 91-375, 84 Stat.719, 741 (Aug. 12, 1970), codified as
amended at 39 U.S.C. §§ 2005(d)(5), 2006(c).
[83] The fiscal year 2011 yearend report will update the actuarial
valuation to September 30, 2010.
[84] Part of the normal cost is funded by the employee contributions
of 0.8 percent of payroll.
[85] USPS's contribution in fiscal year 2010 was $2.9 billion.
[86] USPS and OPM have told us that they are seeking the views of the
Department of Justice's Office of Legal Counsel concerning the USPS
decision to cease making these contributions.
[87] The private sector approach has sometimes been driven by multiple
considerations, not just pension policy--for example, not allowing an
excessive amount of funds to be tax-sheltered, and revenue
considerations.
[End of section]
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