Postal Pension Funding Reform
Issues Related to the Postal Service's Proposed Use of Pension Savings Gao ID: GAO-04-238 November 26, 2003In April 2003, Congress enacted the Postal Civil Service Retirement System (CSRS) Funding Reform Act of 2003 (P.L. 108-18), which\ lowered the Postal Service's (Service) annual payment for its CSRS obligation by over $2.5 billion beginning in fiscal year 2003. P.L. 108-18 includes requiring (1) the Service to begin making payments into an escrow account in fiscal year 2006, (2) the Service to issue a report on its proposed use of "savings" resulting from the lower CSRS payments, and (3) GAO to evaluate the Service's report and present its findings to Congress. GAO evaluated whether the Service's proposals were consistent with P.L. 108-18; the impact of the escrow account; and whether the proposals were fair to current and future ratepayers, affordable, and helped achieve transformation goals.
The Service's report presented two proposals for how it would use the "savings," and GAO found both to be generally consistent with P.L. 108-18. The first proposal assumes that responsibility for military service pension costs shifts to the Treasury Department and proposes prefunding retiree health benefits for retirees and current employees. The second proposal assumes that the Service retains responsibility for military service pension costs and proposes prefunding retiree health benefits only for new employees. Both proposals assume that the Service would pay down debt and fund capital investment through inflation-based rate increases. Under both proposals, the Service proposes that the escrow requirement be eliminated, so that the Service would not have to include $3 billion as a mandated incremental operating expense beginning in fiscal year 2006. The Service cannot use the escrow funds unless Congress eliminates the escrow requirement or specifies by law how these funds may be used. If no action is taken, the Service believes that it would have to raise rates higher than would otherwise be necessary. The escrow requirement provides Congress an opportunity to review how the Postal Service will address a number of long-term challenges, such as progress toward transformation and funding its retiree health benefits obligation. Once Congress is satisfied, it could repeal the escrow requirement so that an escrow account is not needed. GAO assessed the Service's two proposals according to their fairness, affordability, and the ability to achieve transformation goals. Fairness: Proposal I strikes a more equitable balance of allocating costs between current and future ratepayers, because benefits earned by today's employees will be built into the current rate base. Under Proposal II, much of the retiree health benefits obligation would remain unfunded, thereby placing the burden of the benefits being earned today on future ratepayers. Affordability: The Service's proposals attempt to balance short-term rate mitigation with some level of prefunding to address its long-term obligations. The first proposal would require a larger postal rate increase than the second proposal and would prefund more of the retiree health benefits. The second proposal focuses more on rate mitigation. Given the Service's uncertain financial future, its ability to raise revenues, reduce costs, and improve productivity and efficiency is critical to affordability. Transformation goals: Although the Service believes it can pay down debt and fund the capital investments associated with its transformation initiatives, this is not clear because the Service has not yet presented a comprehensive, integrated infrastructure and workforce rationalization plan. GAO has previously recommended that the Service provide Congress with such a plan and periodic reports on its transformation progress. The Service disagrees with GAO that the escrow repeal should be tied to a plan.
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Director: Team: Phone:GAO-04-238, Postal Pension Funding Reform: Issues Related to the Postal Service's Proposed Use of Pension Savings
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Report to Congressional Committees:
November 2003:
POSTAL PENSION FUNDING REFORM:
Issues Related to the Postal Service's Proposed Use of Pension Savings:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-238] GAO-04-238:
GAO Highlights:
Highlights of GAO-04-238, a report to congressional committees
Why GAO Did This Study:
In April 2003, Congress enacted the Postal Civil Service Retirement
System (CSRS) Funding Reform Act of 2003 (P.L. 108-18), which lowered
the Postal Service‘s (Service) annual payment for its CSRS obligation
by over $2.5 billion beginning in fiscal year 2003. P.L. 108-18
includes requiring (1) the Service to begin making payments into an
escrow account in fiscal year 2006, (2) the Service to issue a report
on its proposed use of ’savings“ resulting from the lower CSRS
payments, and (3) GAO to evaluate the Service‘s report and present its
findings to Congress.
GAO evaluated whether the Service‘s proposals were consistent with
P.L. 108-18; the impact of the escrow account; and whether the
proposals were fair to current and future ratepayers, affordable, and
helped achieve transformation goals.
What GAO Found:
The Service‘s report presented two proposals for how it would use the
’savings,“ and GAO found both to be generally consistent with P.L.
108-18. The first proposal assumes that responsibility for military
service pension costs shifts to the Treasury Department and proposes
prefunding retiree health benefits for retirees and current employees.
The second proposal assumes that the Service retains responsibility
for military service pension costs and proposes prefunding retiree
health benefits only for new employees. Both proposals assume that the
Service would pay down debt and fund capital investment through
inflation-based rate increases.
Under both proposals, the Service proposes that the escrow requirement
be eliminated, so that the Service would not have to include $3
billion as a mandated incremental operating expense beginning in
fiscal year 2006. The Service cannot use the escrow funds unless
Congress eliminates the escrow requirement or specifies by law how
these funds may be used. If no action is taken, the Service believes
that it would have to raise rates higher than would otherwise be
necessary. The escrow requirement provides Congress an opportunity to
review how the Postal Service will address a number of long-term
challenges, such as progress toward transformation and funding its
retiree health benefits obligation. Once Congress is satisfied, it
could repeal the escrow requirement so that an escrow account is not
needed.
GAO assessed the Service‘s two proposals according to their fairness,
affordability, and the ability to achieve transformation goals, as
follows:
Fairness: Proposal I strikes a more equitable balance of allocating
costs between current and future ratepayers, because benefits earned
by today‘s employees will be built into the current rate base. Under
Proposal II, much of the retiree health benefits obligation would
remain unfunded, thereby placing the burden of the benefits being
earned today on future ratepayers.
Affordability: The Service‘s proposals attempt to balance short-term
rate mitigation with some level of prefunding to address its long-term
obligations. The first proposal would require a larger postal rate
increase than the second proposal and would prefund more of the
retiree health benefits. The second proposal focuses more on rate
mitigation. Given the Service‘s uncertain financial future, its
ability to raise revenues, reduce costs, and improve productivity and
efficiency is critical to affordability.
Transformation goals: Although the Service believes it can pay down
debt and fund the capital investments associated with its
transformation initiatives, this is not clear because the Service has
not yet presented a comprehensive, integrated infrastructure and
workforce rationalization plan. GAO has previously recommended that
the Service provide Congress with such a plan and periodic reports on
its transformation progress. The Service disagrees with GAO that the
escrow repeal should be tied to a plan.
What GAO Recommends:
To ensure continuing progress in addressing the Service‘s financial
challenges, Congress should consider repealing the escrow requirement
after it receives an acceptable plan on rationalizing the Service‘s
infrastructure and workforce. Absent an acceptable plan, Congress
could direct the Service to fund specific purposes, such as prefunding
its retiree health benefits obligation or supporting the Service‘s
transformation. GAO makes additional matters for Congress to consider
in the report.
www.gao.gov/cgi-bin/getrpt?GAO-04-238.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Bernard L. Ungar at
(202) 512-2834 or ungarb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Both Proposals Are Generally Consistent with P.L. 108-18:
Escrow Requirement Places Pressure on Rates:
Key Issues Used to Assess the Postal Service's Proposals:
Issues Related to the Implementation of Proposals I and II:
Conclusions:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the U.S. Postal Service:
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Staff Acknowledgments:
Table:
Table 1: Estimated Debt Repayment and Capital Investment under Proposal
II:
Figures:
Figure 1: Additional Expense Generated from Proposal I:
Figure 2: Comparison of Retiree Health Premiums and "Savings" under
Proposal II:
Abbreviations:
CBO: Congressional Budget Office:
CSRS: Civil Service Retirement System:
CSRDF: Civil Service Retirement and Disability Fund:
FASB: Financial Accounting Standards Board:
OPM: Office of Personnel Management:
PRC: Postal Rate Commission:
Letter November 26, 2003:
The Honorable Susan M. Collins:
Chairman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Governmental Affairs:
United States Senate:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Postal Service (Service) faces significant financial challenges,
including declining mail volume, the need to fund productivity
improvement and cost saving initiatives necessary to transform itself
into a more efficient organization, and a growing obligation for
retiree health benefits that the Service estimated will reach $54
billion by the end of fiscal year 2003. In April 2003, Congress enacted
the Postal Civil Service Retirement System (CSRS) Funding Reform Act of
2003 (P.L. 108-18), which afforded the Service the opportunity to
address some of these challenges by lowering the annual payment the
Service is required to make into the Civil Service Retirement &
Disability Fund (CSRDF) by over $2.5 billion annually beginning in
fiscal year 2003. The legislation specified how these savings were to
be used for fiscal years 2003-2005. It also required the Service to
begin making payments into an escrow account beginning in fiscal year
2006 in an amount equal to the difference between the estimated CSRS
payments prior to, and after, enactment of the legislation. The amount
of the payments into the escrow account would have to be included in
the Service's rate base. Under the legislation, the Service cannot use
the funds in the escrow account unless Congress eliminates the escrow
requirement or specifies by law how the escrow funds may be used. In
our view, this escrow requirement provides Congress an opportunity to
review how the Service will address a number of long-term challenges,
including debt repayment, capital projects, and its unfunded retiree
health benefits obligation. The legislation also required the Service
to report by September 30, 2003, on how it proposes to use these
pension savings and required GAO to evaluate the Service's submission
and present our findings to the appropriate oversight
committees.[Footnote 1] The legislation states that not later than 180
days after receiving our report, the Congress shall revisit the issue
of how the savings accruing to the Service as a result of enactment of
the legislation should be used.
P.L. 108-18 also transferred responsibility for CSRS pension benefits
attributable to military service in the amount of $27 billion from the
Department of the Treasury (Treasury) to the Postal Service. The law
required the Service, the Office of Personnel Management (OPM), and the
Treasury to prepare reports by September 30, 2003, articulating who
should be responsible for these costs in the future.[Footnote 2] The
Postal Service's report on this issue recommended that the
responsibility for military service costs be transferred back to the
Treasury. However, the joint report of Treasury and OPM recommended
that the Postal Service should be responsible (1) for all pension costs
related to military service for its employees that were hired after the
Service's reorganization in 1971 and (2) for a portion of the military
service costs for employees hired before 1971. Further, the legislation
required GAO to review these reports and submit our findings to the
appropriate oversight committees, which we are providing in a separate
report ( [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-281]
GAO-04-281) also issued on this date.[Footnote 3]
To guide the Service in its proposed use of pension-related savings
beginning in fiscal year 2006, the legislation included specific
"Matters to Consider" and a "Sense of Congress." The "Matters to
Consider" included the following matters: (i) debt repayment; (ii)
prefunding of postretirement health care benefits for current and
former postal employees; (iii) productivity and cost-saving capital
investments; (iv) delaying or moderating increases in postal rates; and
(v) any other matter. The "Sense of Congress" stated that:
* "the savings accruing to the Postal Service as a result of the
enactment of this act will be sufficient to allow the Postal Service to
fulfill its commitment to hold postage rates unchanged until at least
2006;
* because the Postal Service still faces substantial obligations
related to postretirement health benefits for its current and former
employees, some portion of the savings . . . should be used to address
those unfunded obligations; and:
* none of the savings . . . should be used in the computation of any
bonuses for Postal Service executives.":
In addition, the legislation stated that the Service should also
consider the work of the President's Commission on the United States
Postal Service (the Commission), whose report, issued in July 2003,
identified the need for the Service to operate more
efficiently.[Footnote 4] The Commission's report recommended, among
other things, that:
* "the Service should review its current policy relating to the
accounting treatment of retiree health care benefits, and work with its
independent auditor to determine the most appropriate treatment of such
costs in accordance with applicable accounting standards and in
consideration of the Postal Service's need for complete transparency in
the reporting of future liabilities;
* the Postal Service should consider funding a reserve account for
unfunded retiree health care obligations to the extent that its
financial condition allows; and:
* responsibility for funding Civil Service Retirement System pension
benefits relating to the military service of Postal Service retirees
should be returned to the Department of the Treasury.":
The Service's report on the use of the savings contained two proposals
that are linked to the outcome of the military service issue. The first
proposal (Proposal I) is predicated on the assumption that the Service
is relieved of responsibility for military service costs and proposes
that the Service would prefund retiree health benefits for retirees and
current employees. In its second proposal (Proposal II), the Service
assumes that it retains responsibility for the military costs and
proposes that it would prefund retiree health benefits only for new
employees, pay down debt, and finance selected capital investments. The
Service also stated that this proposal would have what the Service
characterized as an "indirect benefit" of mitigating rate increases. By
using most of the pension savings to fund normal operating expenses,
the only additional rate increase needed would be a 0.3 percent
increase over the rate of inflation to cover the prefunding for its new
employees.
This report addresses four objectives. First, it evaluates whether the
Postal Service's report on the use of the pension savings is consistent
with P.L. 108-18. Second, it evaluates the issues surrounding the
impact of the escrow requirement that the Service identified in its
report. Third, it assesses the Service's two proposals according to the
following questions, which are based upon our previous work:
* Are these proposals fair and balanced between current and future
ratepayers and taxpayers?
* Can the Service afford to do as it proposes in light of its financial
challenges?
* Do these proposals help promote and accelerate the Service's
transformation efforts, including related cost savings and productivity
improvement efforts?
Finally, our report discusses other pertinent issues, such as how the
proposals might be implemented, that we identified in the course of our
review. Our work is based on our review of Postal Service documents,
the report of the President's Commission on the United States Postal
Service, our prior reports, and interviews with officials at the Postal
Service and the Congressional Budget Office (CBO). A more detailed
discussion of our objectives, scope, and methodology is included in
appendix I. We requested comments on a draft of this report from the
Postal Service, and its comments are discussed later in this report and
reproduced in appendix II.
Results in Brief:
Both proposals are generally consistent with the Sense of Congress
expressed in P.L. 108-18 because they address, to varying degrees,
prefunding the retiree health benefits obligation. They also address
some of the Matters to Consider outlined in P.L. 108-18, including rate
mitigation and, to a lesser degree, debt repayment and productivity and
cost-saving capital investments. In addition, the proposals are
generally consistent with the Commission's recommendations and our
previous work. In considering the Service's proposals, we note that
this legislation, by significantly reducing the Service's pension
costs, has provided an opportunity for the Service to address some of
its long-standing challenges, including prefunding its retiree health
obligations and accelerating its transformation to a more efficient and
viable organization. While the Service's proposals addressed the
prefunding obligation, and the Service has indicated that it can
support its transformation initiatives through normal rate increases,
the extent to which it would be able to support or accelerate its
transformation was not clear. Consequently, careful monitoring of the
Service's financial situation and the pace of its progress in
implementing its transformation initiatives will be necessary.
One of the issues we considered in evaluating these proposals was the
impact of the escrow requirement. The Service's report proposes that
the escrow requirement be eliminated, because the Service cannot use
these funds unless Congress eliminates the escrow requirement or
specifies by law how the escrow funds may be used. If no action were
taken, the Service would not realize a reduction in its annual
operating expense of over $3 billion beginning in fiscal year 2006.
Consequently, the Service believes it would have to raise rates higher
than would otherwise be necessary. In our view, the escrow requirement
could be one means to direct funding for specific purposes that
Congress may believe to be especially important. Once Congress is
satisfied, it could repeal the escrow requirement so that an escrow
account is not needed, or it could indicate its preferences through
means other than an escrow requirement.
Moreover, it is critical to the Service's future viability that it
continue to make progress on addressing its financial challenges, such
as prefunding retiree health obligations, repaying debt, and financing
capital needed to implement its transformation initiatives. We believe
that Congress will need to have sufficient information to determine
that the Service is making or accelerating progress in achieving its
transformation goals. In this regard, we have already recommended that
the Service provide periodic reports on the status of its
transformation initiatives and other Commission recommendations, which
the Service recently provided to its congressional oversight
committees. In addition, the Chairman of the Senate Committee on
Governmental Affairs and Senator Carper sent a letter to the Postmaster
General dated November 19, 2003, asking for a comprehensive plan by
early April 2004 that lays out how the Postal Service intends to
optimize its infrastructure and workforce.
We also assessed Proposals I and II according to their fairness,
affordability, and how they address the Service's transformation
efforts, including its cost saving and productivity improvement
initiatives, as follows:
* Fairness: Proposal I strikes a more equitable balance of allocating
costs between current and future ratepayers because benefits being
earned by today's employees would be built into the current postal rate
base. Under Proposal II, a substantial portion of the retiree health
benefits obligation would remain unfunded, thereby placing the burden
of the retiree health benefits being earned today on future ratepayers.
Fairness between ratepayers and taxpayers is also an issue, because
P.L. 108-18 transferred $27 billion in pension costs related to
military service from the Treasury Department to the Postal Service--or
in effect, from taxpayers to ratepayers--but required further study of
who should be responsible for these costs. This issue is discussed in
more detail in GAO's related report.
* Affordability: The Service's proposals attempt to balance both short-
term rate mitigation and some level of prefunding to address its long-
term obligations. Given the Service's uncertain financial future, the
affordability of these proposals is tied to the Service's ability to
raise revenue, cut costs, and improve productivity and efficiency. In
recent years, the Service has made some progress in cutting its costs
and improving productivity but has had trouble raising sufficient
revenue to offset declines in First-Class Mail volume. Under both
proposals, the Service assumes that it can pay down debt and fund
capital investment needs through periodic rate increases within normal
inflationary trends. The Service's proposals for prefunding some level
of its retiree health benefits obligation would require modest
additional rate increases over the amount needed to cover inflationary
cost increases. The Service estimated that Proposal I would require an
additional rate increase in fiscal year 2006 of 2 percent over the rate
of inflation, while Proposal II would require only an additional
increase of 0.3 percent over the rate of inflation since it is funding
a smaller portion of the retiree health benefits obligation. The
Service did not estimate the impact of either proposal on postal rates
beyond fiscal year 2006. Furthermore, the Service did not propose to
fully fund its retiree health benefits obligation in a specified time
period under either proposal. However, even moderate rate increases to
prefund some portion of the retiree health benefits obligation now
could help the Service avoid more dramatic postal rate increases later.
* Transformation: In passing P.L. 108-18, several Members of Congress
expressed the need for the Service to continue its modernization
efforts to transform itself into a more efficient and effective
organization. Further, the Commission and GAO have reported on the need
for the Service to enhance its efficiency through such efforts as
standardization of its mail processing operations, improving retail
access, and rationalizing its infrastructure and workforce. The Service
has begun implementing a number of its transformation initiatives to
improve its efficiency and has made meaningful progress in a number of
areas, including reducing its workforce, cutting costs, and improving
productivity. To achieve additional results, sufficient capital
investment will need to be made. Both proposals assume that the Service
can raise sufficient capital through inflation-based rate increases.
Although the Service has provided some information to us showing what
capital investments it plans to make related to its transformation
goals, it has not yet prepared a comprehensive, integrated plan showing
how it plans to rationalize its infrastructure and workforce and the
funding that would be needed to implement such a plan, as well as the
savings or additional revenue the plan would be expected to generate.
Without such a plan, and periodic updates on the status of
transformation initiatives as we have previously recommended, as well
as their cost and funding, it is not clear whether the Service's
planned funding would be sufficient.[Footnote 5]
Under both proposals, we also identified technical issues related to
implementation of prefunding retiree health benefits obligation,
including whether the Service should explore the implications of fully
funding its retiree health benefits obligation over a specific time
period; the proper demographic and economic assumptions to employ in
estimating the obligation; and what agency should be responsible for
making these decisions.
To ensure continuing progress in addressing the Service's financial
challenges, we suggest that Congress consider the following:
* Repealing the escrow requirement after receiving an acceptable plan
from the Service describing how it intends to rationalize its
infrastructure and workforce and is confident that the Service is
making satisfactory progress on transforming itself into a more
efficient organization and implementing its transformation goals.
* Directing the Service to fund specific purposes that Congress
believes are especially important--such as prefunding the retiree
health benefits obligation or supporting and possibly accelerating the
Service's transformation efforts--if the Service does not provide an
acceptable plan for rationalizing its infrastructure and workforce, or
show satisfactory progress in implementing transformation, or if
Congress wants greater assurance that the Service will spend funds in a
particular manner. In this regard, we have already recommended that the
Service provide periodic reports on the status of its transformation
initiatives and other Commission recommendations.
* Addressing implementation issues related to prefunding the retiree
health benefits obligation. For example, one key issue that would need
to be further explored is what options may be available that would
allow the Service to amortize its unfunded retiree health benefits
obligation over a specified time period (e.g., 20-40 years) and prefund
the retiree health benefits obligation for future retirees.
In commenting on a draft of our report, the Service disagreed with our
Matters for Congressional Consideration that repeal of the escrow
requirement should be tied to an acceptable plan. We agree that
establishing an escrow account without allowing the Service to use the
funds would not be a desirable outcome and that is one of the reasons
why we suggested that Congress consider repealing the escrow
requirement. On the other hand, contrary to the Service's view, we
believe the escrow requirement is an opportunity for Congress to review
how the Service plans to address a number of long-term challenges,
including debt repayment, capital projects, its unfunded retiree health
benefits obligation, and its progress toward transformation. If the
Service provides Congress with an acceptable plan in the next several
months and Congress finds the plan and the Service's transformation
progress satisfactory, we believe Congress should have sufficient time
to repeal the escrow requirement so that an escrow account would not be
needed. Thus, the Service would not have to include the operating
expense associated with the escrow requirement in its rate base for the
next rate case filing.
Background:
In April 2003, Congress enacted P.L. 108-18, which reduced the
Service's annual payment into the CSRS pension fund, in part, to
reflect a reduction in the Service's estimated unfunded obligation for
prior years' service from about $30 billion to about $5 billion. The
difference between the Service's CSRS payment required prior to
enactment of P.L. 108-18 and the payment after enactment is labeled the
"savings" in the legislation. However, P.L. 108-18 requires the Service
to use the savings in fiscal years 2003 and 2004 to pay down
outstanding debt and in fiscal year 2005 to extend the current rate
cycle. Therefore, according to the Service, all of the overfunding
generated by current rates will be completely consumed by the end of
fiscal year 2005. In fiscal year 2006, the Service is required to begin
making payments into an escrow account that it cannot use until
otherwise provided for by law. The amount of the payments into the
escrow account would have to be included in the Service's rate base.
The Service's report recommended that the escrow requirement be
repealed, and provided two proposals for use of the "savings." A brief
description of each proposal is given below.
Proposal I:
Transferring the military costs from the Service to the Treasury, as
detailed in Proposal I, increases the projected overfunding of the
postal CSRS pension fund from $78 billion to $105 billion. This would
result in an overall cost reassignment of $27 billion and a $10 billion
overfunding of the postal CSRS pension fund as of the end of fiscal
year 2002. The Service proposes that the $10 billion in overfunding
would remain in the pension fund, in a separate account designated as
the "Postal Service Retiree Health Benefit Fund (Retiree Health Fund)."
The Service made a payment of about $1.3 billion for its pension
obligation into the CSRS pension fund in fiscal year 2003. Under
current legislation, it would continue to make payments of $2.2 billion
in fiscal year 2004 and $2.1 billion in fiscal year 2005. If
responsibility for all military service costs is transferred back to
the Treasury, the resulting overfunded status would negate the need for
further Postal Service annual CSRS payments.[Footnote 6] The Service
proposes that the CSRS payments it made in fiscal year 2003, and will
make in fiscal years 2004 and 2005, remain in the CSRDF in the newly
designated Retiree Health Fund. Beginning in fiscal year 2006, the
Service proposes to make annual payments into the Retiree Health Fund.
This new fund would be used to pay retiree health insurance premiums in
the future.
This proposal assumes that the escrow requirement would be eliminated.
However, the Service estimates that the expense for prefunding retiree
health obligations would add $1.2 billion to its expenses in fiscal
year 2006. The Service estimates that this expense would require a rate
increase that would be 2 percent higher than would be necessary to
cover inflationary expense growth. Otherwise, the Service believes it
can pay down debt and finance its capital investment needs through its
normal cycle of inflation-based rate increases.
Proposal II:
Proposal II, other than funding a small amount of the retiree health
benefits obligation, results primarily in rate mitigation. This
proposal is based on the assumption that the escrow requirement would
be repealed and that the Service would remain responsible for military
service costs. Under this scenario, the Service proposes to prefund the
retiree health benefits cost for employees hired after fiscal year
2002. It would not fund the retiree health benefits cost already
incurred for current and former employees, which comprises most of the
obligation. The Service estimates that the expense created to prefund
retiree health benefit costs for new employees would require a rate
increase in fiscal year 2006 that would be 0.3 percent higher than
necessary to cover normal inflationary expense growth. Although the
Service's proposal stated that some funds would be used to pay down
debt and fund capital investments, postal officials have told us that
the proposed debt repayment and capital investment costs are equal to
what they had planned to spend regardless of enactment of P.L. 108-18.
Consequently, the Service believes that, absent the escrow requirement,
it would be able to continue to pay the retiree health premium costs
for current and former employees on a pay-as-you-go basis, pay down
debt, and finance its capital investment needs through normal rate
increases that would correspond with general inflation trends.
Both Proposals Are Generally Consistent with P.L. 108-18:
We believe that both proposals are generally consistent with the "Sense
of Congress" expressed in P.L. 108-18, that some portion of the savings
should be used to address the Service's unfunded obligations. However,
Proposal I goes much further in this area because it proposes
prefunding a substantial portion of retiree health benefits for all
current and former employees, while Proposal II would prefund these
costs only for employees hired after fiscal year 2002. Both proposals
also address, to varying degrees, the Matters to Consider, outlined in
P.L. 108-18. Proposal I addresses, almost exclusively, matter (ii)--
prefunding of postretirement health benefits for current and former
employees. Proposal II addresses matter (ii) to a limited extent, and
matter (iv)--delaying or moderating increases in postal rates. Under
both proposals, the Service believes that it can address matter (i)--
debt repayment--and matter (iii)--productivity and cost saving capital
investments--through inflation-based rate increases.
The legislation also directed the Postal Service to consider the work
of the Commission. The Commission recommendations, like our previous
work, stressed the significance of funding the retiree health benefits
cost to the extent that the Service's finances permit. The Commission
pointed out that the pension obligation is funded as benefits are
earned and recovered through rates, but the retiree health benefits
obligation is funded as the benefits are paid and not as they are
earned. The Commission strongly urged the Service to consider funding a
reserve account to begin paying down the retiree health benefits
obligation so future ratepayers are not forced to pay for costs
associated with postal services delivered today. The Commission also
stated that raising rates should be the last recourse, not the first,
to cover rising costs. In our November 2003 testimony before the Senate
Committee on Governmental Affairs, we also raised concerns about rate
increases, stating that raising rates may provide an immediate boost to
the Service's revenues but would likely accelerate the transition of
mailed communications to electronic alternatives.[Footnote 7] In
addition, the Commission expressed concern regarding the Service's
ability to repay its debt and stressed the importance of the Service
improving its operational efficiency. Another important recommendation
of the Commission was that the Service should review its current policy
relating to the accounting treatment of retiree health care benefits,
and work with its independent auditor to determine the most appropriate
treatment of such costs in accordance with applicable accounting
standards and in consideration of the Postal Service's need for
complete transparency in the reporting of future liabilities. We have
also discussed these issues in our previous work.[Footnote 8] Proposal
I addresses the issue of funding retiree health benefits to a greater
extent than Proposal II, while Proposal II addresses the matter of
mitigating rates to a greater extent than Proposal I.[Footnote 9] Both
proposals address the issue of debt repayment and capital investment
through inflation-based rate increases.
Escrow Requirement Places Pressure on Rates:
The Service recommended in its report that Congress eliminate the
escrow requirement, because of its negative impact on postage rates and
the mailing industry, the general public, and the economy as a whole.
The Service estimates that it would need an additional rate increase of
5.4 percent, including 2 cents on the 37-cent First-Class stamp, in
order to generate the $3.2 billion required to be placed in an escrow
account in fiscal year 2006. This is because P.L. 108-18 requires all
"savings" attributable to fiscal years after 2005 to be considered an
"operating expense" and placed into an account that the Service cannot
use until Congress specifies how the funds may be used. All of the
"savings" accruing under current rates would likely be expended or
absorbed by inflationary cost increases by the end of fiscal year 2005.
Thus, in order to pay this "operating expense" the Service would need
to include the $3.2 billion in its rate base in fiscal year 2006 and
collect the money from its ratepayers or lower expenses by a
corresponding amount. The Service has taken steps to reduce its total
expenses over the past 2 fiscal years, and we believe it is important
for the Service to continue its cost-cutting efforts. However, setting
aside unused funds in an escrow account that must be considered an
"operating expense" would serve to lessen the financial benefits of the
Service's cost-cutting efforts.
For fiscal years after 2006, an increasing amount--estimated to
eventually reach a peak of $8.7 billion--would have to be placed
annually in the escrow account. This would be in addition to its
operating expenses, such as compensation and retiree health premiums,
as well as any amounts needed to pay down debt or fund capital
investments. The Service estimates that it would require additional
biannual rate increases between 1 percent and 1.5 percent to cover the
required escrow amount. Frequent rate increases of this magnitude would
likely hasten the decline in First-Class Mail volume and increase the
risk of volume declines in other mail classes.
In our view, the escrow requirement could be viewed as one means to
direct funding for specific purposes that Congress may believe to be
especially important. We also believe it is critical to the Service's
future viability that it continue to make progress on addressing its
financial challenges, such as prefunding retiree health obligations,
repaying debt, and financing capital needed to implement its
transformation initiatives. Several options include (1) tying the
repeal of the escrow requirement to congressional review of the
Service's progress on transformation, which could include the Service
providing Congress with an acceptable plan for realigning its
infrastructure and workforce; (2) repealing the escrow requirement but
specifying the use of funds; or (3) repealing the escrow requirement
and allowing the Service to fund activities as specified in its
proposals. Another option would be to retain the escrow requirement and
direct funding for specific purposes, which would likely require
Congress to periodically revisit the use of funds. We believe this
option could be problematic if an impasse arose, which could make the
funds unavailable to the Service to spend on specific purposes.
If Congress does not want to specify by law the purposes and amounts
that should be funded, but rather permit the Service to decide which
activities to fund, we believe that Congress would need to have
sufficient information to determine that the Service is making or
accelerating progress in achieving its transformation goals. In this
regard, we have already recommended that the Service provide periodic
reports on the status of its transformation initiatives and other
Commission recommendations that fall within the scope of its existing
authority. The Chairman of the Senate Committee on Governmental
Affairs, along with Senator Carper, requested in a letter to the
Postmaster General dated November 19, 2003, that the Service provide
the Committee with a comprehensive plan that lays out how the Service
intends to optimize its infrastructure and workforce. Further, the
letter requested biannual updates on the status of implementing
transformation initiatives and recommendations of the Presidential
Commission. In November 2003, the Service provided the congressional
oversight committees with a progress report on its transformation
initiatives.
Key Issues Used to Assess the Postal Service's Proposals:
We also assessed the Service's two proposals in the context of three
key issues emerging from our previous work and the Commission's
recommendations. The first issue is whether the proposals are fair and
balanced between current and future ratepayers regarding who pays for
employee benefits earned today. Another aspect of this issue is
fairness between ratepayers and taxpayers regarding responsibility for
military service costs and the effect of the proposals on the federal
budget. The second issue is whether the proposals are affordable in
light of the Service's current financial situation. Given declining
First-Class Mail volume, rising compensation costs, and a significant
retiree health benefits obligation, if the Service's proposals greatly
exacerbate these financial challenges, affordable universal service
could be jeopardized. The third issue is how these proposals assist the
Service in achieving or accelerating its transformation initiatives.
The importance of this issue lies in the need for the Service to become
a more efficient and effective organization in order to remain
financially viable.
Fairness Issues:
One factor that should be kept in mind when evaluating these proposals
is the issue of maintaining an equitable balance between the postal
costs paid for by current and future ratepayers and the impact of these
proposals on taxpayers. As we noted in our November 2003 testimony,
under the Service's current accounting and rate-setting methods,
current ratepayers have not fully covered the total costs of the postal
services they have received.[Footnote 10] Further, future ratepayers
are likely to face more significant and frequent rate increases to
cover the cost of benefits being earned by current employees. The
equity of this arrangement should be considered in evaluating these
proposals. Likewise, the effects of these proposals on the federal
budget--which specifies the spending and financing of the federal
government--and whether these effects are equitable to both ratepayers
and taxpayers, should also be considered.
Proposal I strikes a better balance between current and future
ratepayers by prefunding the retiree health benefits obligation for
both retirees and current employees and providing a mechanism for
better aligning current expenses with current revenues. Therefore,
benefits being earned by today's employees would be built into the
current rate base.
While Proposal II does partially address the issue of striking a
balance between current and future ratepayers in regard to the retiree
health benefits obligation, it does not go as far as Proposal I in this
area. By only prefunding the retiree health benefits cost for new
employees, it leaves a sizable portion of this obligation unfunded.
This means that future ratepayers will still be required to pay for
most of the retiree health benefits earned by today's workforce. In
addition, mailers argue that prior to enactment of P.L. 108-18, they
were paying too much for the CSRS obligation; therefore, mitigating
rate increases now is merely recompense. However, while mailers may
have been paying more than necessary to fund the pension obligation,
they were paying less than necessary to fund the retiree health
benefits obligation.
Fairness between Ratepayers and Taxpayers:
Another important consideration is the effect these proposals would
have on the federal budget and, therefore, the taxpayer. An issue
currently before Congress is who should be responsible for paying the
military service pension costs of postal employees covered by CSRS.
Proposal II is predicated on the assumption that current ratepayers pay
for pension costs related to military service, much of which was vested
prior to creation of the Postal Service and had already been paid by
Treasury. If Congress decides that the Service should retain
responsibility for these costs, the postal ratepayers would bear the
costs. If Congress determines that the Treasury should be responsible
for these costs, then the costs would be borne by taxpayers. The
Service has stated that the impact on the federal budget of
transferring these costs under Proposal I would likely be minimal. The
budgetary effects of the Service's proposals have not been scored by
CBO. However, based on its scoring of the Postal Civil Service
Retirement System Funding Reform Act, we believe that Proposal I might
be scored as having little effect on the deficit in the short term. In
the long term, it could have an effect when the Service's cash flow
changes in later years as the prefunded benefits are paid. However,
insufficient detail has been provided on both proposals to determine
their overall budget effects.
The CBO is required to "score," or estimate, the budgetary effects of
legislation reported out of committees, so it has not scored the
Service's proposals. However, the CBO scoring report on the bill that
resulted in the pension legislation provides some insight into how this
proposal might be scored.
CBO scoring considers both on-budget and off-budget effects of
legislative proposals. As an off-budget entity, any payments that the
Service makes to the retirement trust fund (an on-budget entity) are
considered offsetting receipts; reducing those payments would reduce
on-budget receipts. Under P.L. 108-18, after fiscal year 2005, savings
resulting from the act are to be considered operating expenses of the
Service. Therefore, these expenses would be included in rate setting,
even though the Service's actual expenses would decline by the amount
placed in escrow. As a result, net off-budget outlays of the Postal
Service would decline by the same amount as the savings from lower
pension payments, beginning in fiscal year 2006. This is reflected in
the CBO scoring report. These lower off-budget outlays would offset the
on-budget impact of lower payments to CSRS. Thus, any proposal that
uses the escrowed savings could affect the overall federal budget
deficit.
Scoring of the Service's proposals hinges on what the Service would do
with the escrowed savings. Proposal I, in shifting the cost of military
service back to the Treasury, would result in a reduction in on-budget
receipts. But Proposal I, in using most of the savings to prefund
retiree health benefits, would also keep those amounts in a separate
CSRS account.[Footnote 11] The combined impact might be scored as
having little effect on the deficit in the short term. However, in the
long term, it could have an effect because at some point, the prefunded
benefits would be paid out, resulting in changes in cash flows in later
years. In addition, Proposal I would use a small amount of the savings
for debt reduction, which would cause on-budget interest receipts to be
lower.
Under Proposal II, which assumes that the Service would retain
responsibility for the military service costs, the Service said it
would fund its retiree health benefits obligation only for its
employees hired after fiscal year 2002 and then fund, in priority
sequence, debt repayment and capital investments to improve
productivity and cost-savings. This proposal also raises issues related
to the federal budget. The continuation of payments for military
service costs would mean that there would be no reduction in on-budget
receipts. In the short term, prefunding some retiree health benefits
could have a small positive effect on the budget, because the Service
would be collecting revenue that would not be immediately paid out. In
general, any reduction in the Service's debt would reduce on-budget
interest receipts. Any additional capital investments would increase
off-budget outlays. However, if the Service can provide credible
support that the investments would result in cost savings, the scoring
may show increased outlays initially and savings subsequently.
Affordability of Proposals Is Unclear:
The Service believes that its proposals are affordable, meaning they
would not cause rate increases that irreparably harm volume, or hinder
the Service's ability to sustain current operations and implement
transformation initiatives. We are concerned that the Service may not
be able to achieve all of these goals if its financial situation
worsens. Therefore, we believe it is imperative for the Service to
continue addressing its key financial challenges--long-term
obligations and debt, difficulty raising revenue, and aggressive cost-
cutting measures--to the extent that it is able. The Service faces a
difficult challenge in trying to balance all of these issues. The
Service's proposals attempt to balance both short-term rate mitigation
and some level of prefunding of retiree health obligations to address
its long-term obligations, while also providing for debt repayment and
capital investment. However, the Service did not present an analysis of
how its proposals would affect the overall financial condition of the
Postal Service. Consequently, it is difficult to assess which, if
either, of these proposals would improve the long-term financial
situation of the Postal Service or ensure its future financial
viability. Therefore, we believe that the Service's financial situation
will need to be closely monitored to ensure that its proposals are
indeed affordable.
The affordability of these proposals to ratepayers is also a
consideration, as is the effect of rate increases on volume because, as
we have previously reported, the Service faces uncertainty regarding
its future revenue stream.[Footnote 12] Since fiscal year 2000, the
Service's total mail volume has declined by almost 6 billion pieces and
is estimated to continue declining. In a report for the Commission, the
Institute for the Future developed a mail volume estimate that shows a
gradual 10 percent decline from 202.8 billion pieces in fiscal year
2002 to 181.7 billion pieces in 2017. Also, First-Class Mail volume,
which provides the bulk of the Service's revenue, has been declining
and shows no sign of rebounding. Declines in First-Class Mail are
particularly troublesome to the Service, because First-Class Mail pays
almost 70 percent of the Service's institutional costs. These costs,
which are approximately 40 percent of all postal expenses, include some
administrative, facility, postmaster, and supervisor costs, and a large
portion of the expanding delivery network costs. Therefore, if First-
Class Mail volume continues to decline, it would become more difficult
for the Service to fund its institutional costs without raising postal
rates.
Historically, when the Service has raised postal rates, mail volume
growth declined in the fiscal year immediately following the rate
increase but rebounded in the next fiscal year. However, over the last
3 years this has not been the case. The Service raised rates twice in
fiscal year 2001 and once in fiscal year 2002. Total estimated mail
volume at the end of fiscal year 2003 was almost 6 billion pieces lower
than total mail volume was in fiscal year 2000. In this climate, rate
increases may lead to further volume declines, which in turn would
necessitate additional rate increases and begin a cycle often referred
to as the "death spiral.":
The Service's first proposal would require a larger rate increase than
the second proposal. Under Proposal I, the Service estimates that
prefunding retiree health benefits would add $1.2 billion to its
expenses in fiscal year 2006 compared with its expenses in that year
under the current law, assuming the escrow requirement were eliminated.
According to the Service, this additional expense would require a rate
increase in fiscal year 2006 that is 2 percent higher than the increase
that would be necessary due to inflationary expense growth alone. In
fiscal years after 2006, the Service would continue to make these
additional payments and future rate increases would likely be
marginally higher than would be necessary to reflect inflationary
pressures alone.[Footnote 13] Figure 1 shows the annual additional
amount the Service proposes to spend on prefunding under Proposal I.
Figure 1: Additional Expense Generated from Proposal I:
[See PDF for image]
[End of figure]
If the Service's mail volume continues to decline and the Service is
unable to cut costs accordingly, or if the Service is faced with higher
retiree health premium costs than estimated, the Service may not be
able to afford to continue prefunding the retiree health benefits
obligation. Therefore, the Service's financial condition must be
carefully monitored under this proposal.
Proposal II would require a lower rate increase than Proposal I in
fiscal year 2006, and thus would likely have less of an impact on
postal volumes in the short term. However, in the long-term it may
require larger rate increases that could have a negative impact on
future volumes. As seen in figure 2, the estimated retiree health
premium expense will eventually outpace the estimated difference
between the CSRS payment prior to enactment of P.L. 108-18 and the
payment required under the legislation. Consequently, in order to pay
the retiree health premiums in the future, the Service would need to
raise additional revenue through rate increases or lower its operating
expenses.
Figure 2: Comparison of Retiree Health Premiums and "Savings" under
Proposal II:
[See PDF for image]
[End of figure]
The Postal Service is required to pay the retiree health premiums
regardless of whether it prefunds some or all of these costs, and the
annual costs are expected to increase over the next 20 years. If
prefunding retiree health benefits for new employees proves to be more
costly than estimated, or if the premiums for current retirees continue
to grow rapidly, the Service could find itself facing a significant
obligation at a time when revenues are shrinking. It seems prudent to
set aside funds now, while they are available, to address escalating
future costs rather than waiting until costs are higher and adequate
revenue may not be forthcoming. Because Proposal II would result in a
smaller rate increase in fiscal year 2006 than Proposal I, it raises
the question of whether it would be possible for the Service to
increase its proposed level of prefunding retiree health benefits under
Proposal II. By setting aside an additional $1 billion in funding for
this obligation, the Service would need an additional rate increase of
2 percent, the same increase the Service proposes under Proposal I. The
Service has stated that the decision to prefund only retiree health
benefits for new employees arose from the desire to have a logical
basis for its funding proposal. Because the legislation was enacted in
fiscal year 2003, the Service decided to begin prefunding with a
corresponding time period. While this may provide a baseline, we agree
with the Commission that the Service should address its retiree health
benefits obligation to the extent that its financial situation allows.
Again, we believe the Service's financial situation will have to be
carefully monitored to ensure that this option remains affordable.
Another factor associated with the affordability of the proposals
concerns how they address the Service's outstanding debt level, which
in fiscal year 2002 was close to statutory limits and was threatening
the Service's ability to fund capital improvements. The Service made
significant progress in reducing its outstanding debt in fiscal year
2003, from $11.1 billion to an estimated $7.3 billion, and plans to
continue paying down its debt in fiscal years 2004 and 2005. The
Service has estimated that debt outstanding as of the end of fiscal
year 2005 will be $3 billion. Under both proposals, the Service
proposes to repay the same amount of debt in fiscal years 2006-2010. As
seen in table 1, the Service estimates that its outstanding debt will
be paid off by 2010. These estimates assume that the Service would
raise rates when necessary to break even for each of the fiscal years
2006 through 2010. If this break-even assumption is not correct, or if
the Service faces unforeseen financial problems, the Service may not be
able to pay down the amount of debt it proposes, and may, in fact, have
to borrow more.
Table 1: Estimated Debt Repayment and Capital Investment under Proposal
II:
Dollars in millions.
2006; Beginning debt balance: $3,000; Estimated debt payment: $776;
Ending debt balance: $2,224.
2007; Beginning debt balance: 2,224; Estimated debt payment: 540;
Ending debt balance: 1,684.
2008; Beginning debt balance: 1,684; Estimated debt payment: 612;
Ending debt balance: 1,073.
2009; Beginning debt balance: 1,073; Estimated debt payment: 521;
Ending debt balance: 552.
2010; Beginning debt balance: 552; Estimated debt payment: 559;
Ending debt balance: (7).
Source: U.S. Postal Service.
[End of table]
The affordability of these proposals is also tied to a separate matter
currently before Congress--who should bear responsibility for military
service pension costs and how these costs should be determined. If
Congress determines that the Treasury should bear responsibility for
military service costs, then the Service believes that it can afford to
prefund retiree health care costs for all of its current and former
employees. If Congress determines that the Service should retain
responsibility for the military service costs, then the Service
believes that it can only afford to prefund the retiree health benefits
cost for employees hired after fiscal year 2002, which would leave the
obligation for current and former employees unfunded.
As both the Commission and we have noted, the Service has had limited
success in its pursuit of new revenue streams. Therefore, to counter
the loss in revenue due to declining mail volume without resorting to
frequent rate increases, the Service must aggressively cut costs. To
its credit, the Service has decreased work hours, reduced its
workforce, and closed some facilities. However, we do not believe that
these incremental savings will be enough to ensure a financially viable
Postal Service over the longer term, especially if mail volumes
continue to decline. For this reason, we believe the Service must
continue to make progress in implementing its transformation goals.
Transformation Issues:
In assessing these proposals, we also considered how the Service would
be able to fund cost saving and productivity initiatives needed to
successfully transform itself into a viable organization for the 21st
century. In April 2002, in response to a GAO recommendation[Footnote
14] and a request by the Senate Committee on Governmental Affairs, the
Postal Service prepared a Transformation Plan that outlined strategies
for transforming the organization into an efficient and performance-
based entity. Among those initiatives were plans to standardize
operations, increase customer access, and realign the processing and
distribution network. The Commission's report also made suggestions for
improving postal efficiency. We agree with the Commission that the
Service must continue to pursue aggressive cost-cutting strategies and
productivity gains in an effort to become more efficient. We also
believe that the mandate for the Service to report on the potential use
of savings from P.L. 108-18 was an opportunity for the Service to
present its plans in this area, and the Service's proposals must be
evaluated with the need for cost-cutting and productivity gains in
mind.
Under both proposals, the Service believes it can finance capital
investments related to upgrading existing assets and the investment
needed to implement transformation initiatives through inflation-based
rate increases. We are concerned that the Service's financing plan may
not be adequate to provide for its capital investment needs, because
historically, the Service has found it problematic to finance its
capital needs with operating revenues. Thus, it has often resorted to
borrowing to finance its capital needs. In contrast, under both
proposals, the Service would finance its capital needs while continuing
to pay down debt through inflation-based rate increases. Another
possible source of capital funds could be the proceeds from the sale of
excess property. However, the Service did not discuss this issue in its
report.
We are also concerned with the Service's lack of specifics on capital
investments under both proposals. While the Service stated that its
capital investments for productivity gains and cost saving initiatives
were related to its Transformation Plan, it has provided little detail
on any of these initiatives in its pension savings report, its Five-
Year Strategic Plan FY 2004-2008, or its Five-Year Strategic Capital
Investment Plan 2004-2008. The Service did provide a breakdown of some
capital investments related to its Transformation Plan initiatives, but
did not provide sufficient back-up data or description to enable us to
determine to what transformation initiatives these investments were
related or to what extent they would meet transformation goals.
In our November 2003 testimony, we also noted our concern that since
the Service issued its Transformation Plan in April 2002, it has not
provided adequate transparency on its plans to rationalize its
infrastructure and workforce; the status of initiatives included in its
Transformation Plan; and how it plans to integrate the strategies,
timing, and funding necessary to implement its plans.[Footnote 15]
While the Postal Service is moving forward with its Transformation Plan
initiatives, and has made meaningful progress in a number of areas, it
is not clear how it will be able to finance these initiatives within
inflation-based rate increases, especially if mail volume continues to
decline. Therefore, we recommended in our November testimony that the
Postmaster General develop a comprehensive and integrated plan to
optimize the Service's infrastructure and workforce, in collaboration
with its key stakeholders, and make it available to Congress and the
general public. We also recommended that the Postmaster General provide
periodic reports to Congress and the public on the status of
implementing its transformation initiatives and other Commission
recommendations that fall within the scope of its existing authority.
Postal officials have agreed to develop a comprehensive and integrated
plan to optimize its infrastructure and provide periodic reports on the
implementation of its transformation initiatives and make them
available to Congress and the public. As previously mentioned, the
Service provided its congressional oversight committees with a progress
report on its transformation initiatives in November 2003. The
infrastructure and workforce plan and the periodic reports on the
status of transformation initiatives will be critical to oversight in
this area.
Issues Related to the Implementation of Proposals I and II:
During our review, we identified implementation issues that Congress
may want to consider if it determines that the Service should prefund
some or all of its retiree health benefits obligation. Under Proposal
I, implementation issues involve the method that would be used to fund
the retiree health benefits, and the demographic and economic
assumptions that would be used to determine the amount of the total
obligation as well as the annual funding amount. Under Proposal II, the
question arises as to how the annual cost of retiree health benefits
for employees hired after fiscal year 2002 would be calculated. In
addition, neither proposal ensures that the Service would continue to
prefund the retiree health benefits obligation. Additional questions
arise about the Service's accounting treatment for retiree health
benefits under both proposals.
If Congress decides to accept one of the proposals, technical issues
related to implementing the proposal would need to be addressed. Under
Proposal I, the Service would fund the retiree health benefits
obligation by making payments into a fund currently maintained by OPM.
Postal officials raised questions about which agency--the Service or
OPM--should determine the amount of the obligation, and what economic
and demographic assumptions should be used. In addition, we have
questions about the Service's proposed funding mechanism, because it
does not amortize the obligation over a specific time period. In
Proposal II, the Service would maintain control of the retiree health
benefits fund. Under both proposals, the Service would continue to make
payments into the respective funds after 2010; however, under P.L. 108-
18, the Service would be under no obligation to prefund the retiree
health benefits obligation.
Technical Issues Related to Proposal I:
One issue pertains to the assumptions used by the Service to estimate
its retiree health benefits obligation. If these assumptions change,
then the future funded status of the obligation would also change. This
estimated obligation is based on several assumptions, such as premium
costs, retirement rates, termination rates, mortality assumptions,
disability assumptions, plan enrollment, and coverage election that
could change annually and may differ between the Postal Service and
other agencies. These assumptions materially affect the future funded
status of the obligation. An illustration of the practical effect of
using different assumptions can be seen in the estimate of the
Service's total retiree health benefits obligation. A postal estimate
of its retiree health benefits obligation as of the end of fiscal year
2003 differs from an estimate for the same period prepared by OPM by
about 4 percent, or $2.2 billion. According to the Service, the
difference in these two estimates is primarily due to differences in
the measurement date, the discount rate, the health care trend rate,
the cost basis, and the attribution method used. The Service's estimate
was actuarially certified as reasonable. However, a different set of
results could also be considered reasonable actuarial results, because
the actuarial standards describe a "best-estimate range" for each
assumption rather than a single best-estimate value.
In addition, the Service said it would not amortize the retiree health
benefits obligation within a specified time frame. Instead, the
proposed funding that the Service calculates to address its retiree
health benefits obligation is the amount that would be required to fund
the annual retiree premium cost plus the estimated future cost of
retiree health premiums for current employees (service costs), and
interest expense on both the outstanding obligation and the new service
cost. According to the Postal Service, while it is the Service's
intention to eventually fully fund its retiree health benefits
obligation under Proposal I, this proposal does not fully fund all
prior years' service costs--the $54 billion obligation--within a
specified time period. In fact, because the proposed funding under
Proposal I includes a beginning asset balance of $10 billion, but does
not amortize any of the retiree health benefits obligation,
approximately $45 billion of the obligation would not be funded. The
Service's proposed funding for the retiree health benefits obligation
is modeled after the funding method used by some utilities to prefund
their retiree health benefits. However, other options might allow the
Service to amortize its existing obligation and prefund the retiree
health benefits obligation for future retirees. While postal officials
indicated that under these proposals the Service intends to make annual
payments for prefunding, the Service would be under no obligation to do
so. Consequently, if Congress wanted to ensure that the Service
prefunds its retiree health benefits, legislative action would be
required.
In considering Proposal I, we identified the following unresolved
questions:
* Should prefunding Postal Service retiree health benefits be mandated
by Congress, or left to the Service's discretion?
* Should the Postal Service, OPM, or another entity determine the
amount of the Service's total retiree health benefits obligation?
* Who should determine the proper funding mechanism for the retiree
health benefits obligation?
* Should the Postal Service be required to amortize its prior years'
service obligation within a set time frame? If so, what is the
appropriate time frame?
* What economic and demographic assumptions should be used to determine
the current obligation, service costs, and asset balance, and future
estimates of these amounts? Furthermore, how often should these
assumptions be updated, and what process should be used to update
future estimates?
* What recourse, if any, should parties have if they disagree with this
funding mechanism?
* What oversight, if any, is needed in this area?
Technical Issues Related to Proposal II:
According to postal officials, unlike Proposal I, in Proposal II the
Service would maintain control of the funds used to prefund the retiree
health benefits cost for new employees. These officials have also
stated that the Service would be responsible for determining the proper
economic and demographic assumptions to be used in calculating the
annual fund amount. However, questions arise about how the Service
estimated these costs for fiscal years 2006-2010. For example, the
Service provided us with estimates of these costs that ranged from $214
million in fiscal year 2006 to $687 million in fiscal year 2010. The
Service then adjusted these numbers downward to $100 million for fiscal
year 2006 and to $300 million for fiscal year 2010. According to postal
officials, this downward adjustment was made to reflect attrition.
Although we attempted to verify the method used to lower these
estimated costs, we were unable to obtain the necessary data in the
time available to complete our work. As with Proposal I, while the
Service has said that it intends to fund this obligation for employees
hired after fiscal year 2002, it is not currently required to prefund.
Questions similar to those raised in Proposal I would also relate to
consideration of this proposal, including the following:
* Should prefunding retiree health benefits for new employees be
voluntary or legislatively mandated?
* How should the annual funding amount be determined?
* What oversight, if any, is needed in this area?
Questions Remain about the Accounting Treatment of the Retiree Health
Benefits Obligation:
Regardless of which proposal is adopted, questions remain about how the
retiree health benefits obligation should be reflected in the Service's
financial statements. The Service currently uses a pay-as-you go basis
of accounting for its retiree health benefits obligation. We previously
reported that we believe the Service should consider whether the
accrual basis of accounting is both the acceptable and appropriate
method for this obligation, especially considering the importance of
giving full consideration to economic realities as the Service attempts
to transform itself in order to respond to major operational and
financial challenges.[Footnote 16] Postal Service management and the
Board of Governors, the Postal Rate Commission, Congress, and other
stakeholders need to have a clear understanding of the Service's true
financial condition as difficult transformation decisions are being
considered.
It is our understanding that the Service would not adopt the accrual
basis of accounting under either of the proposals presented, but would
disclose the amount of its retiree health benefits obligation in the
footnotes to its financial statements. While enhanced disclosure would
be a positive step, we continue to believe that accrual accounting is
needed in order to provide all stakeholders with the soundest and most
transparent basis for decisionmaking. In our view, the enactment of
P.L. 108-18 could be viewed as a significant event that triggers the
need to reassess the accounting treatment currently used by the Service
with respect to these obligations, and even more strongly reinforces
our view that full accrual accounting should be adopted for financial
statement reporting purposes. Given the unique nature of the Postal
Service retiree health benefits obligation and the impact of P.L. 108-
18, it may be prudent for the Service and its auditors to consult with
the Financial Accounting Standards Board (FASB) on the appropriate
accounting treatment for this obligation for financial statement
reporting purposes.
A postal official has expressed concern that accrual accounting for
this obligation would result in immediate rate increases of significant
magnitude. We recognize that such an approach may initially result in
higher rate increases than would otherwise be the case under a pay-as-
you-go basis; however, rate increases would likely be more moderate in
the longer term. Various options may exist for addressing the effect of
recognizing this obligation, including possible amortization of any
current unfunded obligation over a reasonable time period, such as 20-
40 years. To further explore these options, we believe that the Service
should work with the Postal Rate Commission and other appropriate
stakeholders to determine options for phasing in any potential effect
on postal rates.
We will be assessing the impact of the accounting treatment for the
retiree health benefits obligation for whichever proposal is adopted,
as well as for the Service's pension obligation, as part of our ongoing
work.
Conclusions:
The Service faces an uncertain future. First-Class Mail volume
continues to decline, and new revenue sources are not apparent. The
Service faces significant unfunded obligations, the largest of which is
for retirees, which must be addressed. Further, decisions must be made
as to whether current or future ratepayers, or taxpayers, should be
responsible for paying these obligations. The Service has acknowledged
that it needs to reduce its operating costs to deal with the decline in
First-Class Mail volume and meet its obligations. The most direct way
for the Service to do this is to become more efficient by standardizing
its operations and reducing excess capacity in its network as part of
an integrated strategy to rationalize its infrastructure and workforce.
The Service has stated that it plans to reduce its debt and finance
capital investment necessary to transform itself from rate increases
within the rate of inflation. It also proposes to prefund at least some
of its retiree health benefits obligation. However, it is not clear
based upon available information from the Postal Service whether it can
accomplish these goals. If sufficient funding for transformation
initiatives is not available, or if it does not achieve additional cost
savings, significant additional efficiency gains may not be achieved.
In addition, if larger postal rate increases are needed, further
declines in mail volume could result. These scenarios could thereby
threaten the Service's future financial viability.
It is against this backdrop of fairness to current and future
ratepayers and taxpayers, affordability, and the ability of the Service
to achieve its transformation goals that the Service's proposal to
eliminate the escrow requirement and its two funding proposals must be
weighed. We believe that the continuation of the escrow requirement
after fiscal year 2005 without allowing the Service to use the funds
has the potential for significantly raising postal rates unnecessarily.
Rate increases of the magnitude necessary to fund this escrow
requirement in the future may precipitate further declines in mail
volume and could hinder the Service's ability to achieve other
financial goals. Furthermore, Congress has other means by which it can
direct or guide the Service in its use of funds if it chooses to do so.
Both funding proposals presented by the Service are generally
consistent with the provisions of P.L. 108-18. Proposal I, which is
preferred by the Service, hinges on transferring the responsibility for
military service pension costs from the Service to the Treasury.
Proposal I would result in a greater postal rate increase and would
shift more of the responsibility for the retiree health benefits
obligation to current ratepayers. Proposal II, on the other hand, would
require less of a postal rate increase, focus more on rate mitigation,
and shift less of the responsibility for the retiree health benefits
obligation to current ratepayers than Proposal I. This would leave
future postal ratepayers with more of the burden of paying for costs
unrelated to products and services they receive.
Under both proposals, a portion of the retiree health benefits
obligation would remain unfunded, and the Service currently does not
intend to account for or report on its retiree health benefits
obligation on an accrual basis under either proposal. Thus, the full
extent of the Service's obligation would not be recognized on its
financial statements. Finally, the Service anticipates that it will be
able to pay down debt and fund capital investments through inflation-
based rate increases under both proposals. In our view, the Service
needs to begin addressing its retiree health benefits obligation as
soon as it can afford to do so, and to the extent it can. The most
substantive way it will be able to do this, as well as enhance its
overall financial viability, is by effectively implementing the
transformation goals it and the President's Commission set forth,
particularly by becoming more efficient and rationalizing its
infrastructure and workforce. It is therefore critical for the Service
to have the capital funding needed for transformation. Although the
Service believes it would be able to generate enough funds, this is not
clear because the Service has not yet presented a comprehensive
integrated infrastructure and workforce rationalization plan. However,
the Service has agreed to do so, as well as report periodically on its
progress in implementing its Transformation Plan. Finally, a number of
technical issues need to be considered that are associated with the
Service's two funding proposals, including the implementation of any
prefunding of the Service's retiree health benefits obligation and the
manner in which the Service should amortize and report on its
obligation.
Matters for Congressional Consideration:
To ensure continuing progress in addressing the Service's financial
challenges, we suggest that Congress consider the following:
* Repealing the escrow requirement after receiving an acceptable plan
from the Service describing how it intends to rationalize its
infrastructure and workforce and is confident that the Service is
making satisfactory progress on transforming itself into a more
efficient organization and implementing its transformation goals.
* Directing the Service to fund specific purposes that Congress
believes are especially important--such as prefunding the retiree
health benefits obligation or supporting and possibly accelerating the
Service's transformation efforts--if the Service does not provide an
acceptable plan for rationalizing its infrastructure and workforce, or
show satisfactory progress in implementing transformation, or if
Congress wants greater assurance that the Service will spend funds in a
particular manner. In this regard, we have already recommended that the
Service provide periodic reports on the status of its transformation
initiatives and other Commission recommendations.
* Addressing implementation issues related to the retiree health
benefits obligation. For example, one key issue that would need to be
further explored is what options may be available that will allow the
Service to amortize its unfunded retiree health benefits obligation
over a specified time period (e.g., 20-40 years) and prefund the
retiree health benefits obligation for future retirees.
Agency Comments and Our Evaluation:
The Postal Service provided comments on a draft of this report in a
letter from the Chief Financial Officer dated November 21, 2003. These
comments are summarized below and reproduced in appendix II. The
Service's letter stated the following:
* It was pleased that our report found its proposals to be consistent
with P.L. 108-18, and that its preferred proposal presented a more
equitable balance of costs between current and future ratepayers.
* It would have to raise rates to generate funds for the escrow
requirement.
* The issue of the affordability of the proposals should be viewed as a
question of whether the ratepayers can afford them.
* It was concerned with our recommendation that Congress repeal the
escrow requirement after it receives an acceptable plan from the
Service concerning rationalization of its infrastructure and workforce,
and if Congress believes that the Service is making satisfactory
progress on its transformation goals.
* The Service believes that it already provides adequate information to
Congress for reviewing its plans and progress on transformation. Thus,
the Service believes that using the escrow as an oversight mechanism is
not necessary and will result in forcing the Service to raise rates.
* It believes that its Proposal I is in the best interest of the
taxpayers and postal stakeholders.
In response to the Service's comment regarding the affordability issue,
we agree that affordability to ratepayers is an important consideration
and discuss the impact of these proposals on rate increases and volume.
We have also added language to our report to clarify this point.
Regarding the Service's concern about tying the escrow requirement to
an acceptable infrastructure and workforce rationalization plan, we
understand the Service's concern that if the escrow requirement is not
repealed, it would have to raise rates unnecessarily. We agree that
establishing an escrow account without allowing the Service to use the
funds would not be a desirable outcome, and that is one of the reasons
why we suggested that Congress consider repealing the escrow
requirement. On the other hand, contrary to the Service's view, we
believe the escrow requirement is an opportunity for Congress to review
how the Service plans to address a number of long-term challenges,
including debt repayment, capital projects, an unfunded retiree health
benefits obligation, and its progress toward transformation. If the
Service provides Congress with an acceptable plan in the next several
months and Congress finds the plan and the Service's transformation
progress satisfactory, we believe Congress should have sufficient time
to repeal the escrow requirement so that an escrow account would not be
needed. Thus, the Service would not have to include the operating
expense associated with the escrow requirement in its rate base for the
next rate case filing. Alternatively, if Congress is not satisfied, it
could direct the Service to fund specific activities or purposes
through means other than an escrow requirement.
Finally, the Service believes that using the escrow requirement for
additional oversight is not needed, because it has provided Congress
with adequate information on its plans and progress toward
transformation. While we agree that the Service provides a variety of
reports and plans to Congress, including its November 2003
Transformation Plan Progress Report, the Service has not provided
Congress with a comprehensive and integrated infrastructure and
workforce rationalization plan. We believe such a plan is needed
because the Service's rationalization of its infrastructure and
workforce is among the most important initiatives in the Service's
Transformation Plan since it will significantly affect the Service as
well as so many employees, mailers, and communities. Recognizing the
widespread interest and potential controversy associated with any
changes in this area, it is critical that the Service inform Congress
and the public about its rationalization strategies and plans. We, as
well as the President's Commission, believe that these initiatives are
also key to the Service's efforts to cut costs and become more
efficient. Accordingly, we believe oversight in this area is necessary,
and that information related to the cost of these initiatives and the
Service's ability to fund them will be needed to assure Congress that
the Service is continuing to make progress in implementing its
Transformation Plan.
:
We will send copies of this report to the Chairmen and Ranking Minority
Members of the House and Senate Committees on Appropriations, as well
as Representative John M. McHugh, Chairman of the House Special Panel
on Postal Reform and Oversight; Representative Danny K. Davis, Senator
Daniel K. Akaka, Senator Thomas R. Carper, the Postmaster General, the
Secretary of the Treasury, the Director of the Office of Personnel
Management, the Director of the Office of Management and Budget, the
Chairman of the Postal Rate Commission, and other interested parties.
We will also make copies available to others on request. In addition,
this report will be available at no charge on GAO's Web site at
[Hyperlink, http://www.gao.gov] http://www.gao.gov.
Signed by:
Staff acknowledgments are included in appendix III. If you have any
questions about this report, please contact Bernard L. Ungar, Director,
Physical Infrastructure Issues, at (202) 512-2834 or at [Hyperlink,
ungarb@gao.gov.] ungarb@gao.gov.
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our objectives for this report were to fulfill our legislative mandate
to evaluate the Postal Service's proposal for use of the savings
accruing to the Service from enactment of pension reform legislation.
We evaluated the report based on its consistency with P.L. 108-18. We
also addressed the escrow requirement that the Service identified as an
issue in its report, and identified issues based upon our previous work
that Congress may want to consider in assessing the Service's
proposals, including the fairness and affordability of the proposals,
and the ability of the proposals to help the Service achieve its
transformation goals. Finally, we discussed other pertinent issues that
we identified in the course of our review.
To assess whether the proposals were consistent with the provisions of
P.L. 108-18, we reviewed the legislative history of P.L. 108-18. We
then assessed how well each of these proposals addressed the Sense of
Congress and the Matters to Consider expressed in that legislation. We
also reviewed the Commission recommendations to determine if the
proposals were consistent with this work.
To assess the escrow requirement, we reviewed the Service's report,
interviewed postal officials, and analyzed the Postal Service's
financial data to assess the impact of the escrow requirement on the
Service's financial situation. We also interviewed congressional staff
to discuss the purpose of this account.
To identify issues we had previously reported on, we reviewed our
previous work. To assess how well each proposal addressed fairness
issues, we reviewed Postal Service documents and interviewed Postal
Service officials. We also assessed the affordability of each proposal
by obtaining and analyzing Postal Service documents, including the
Five-Year Strategic Plan FY 2004-2008, the Integrated Financial Plan
for Fiscal Year 2004, the Five-Year Strategic Capital Investment Plan
2004-2008, annual reports, and materials provided by the Service in
support of its proposals. We did not independently verify any of the
financial data provided by the Postal Service. We also reviewed
actuarial reports regarding the retiree health benefits obligation, and
analyzed the Service's proposed funding mechanism. We did not
independently verify any of the actuarial reports. We also reviewed the
Service's April 2002 Transformation Plan to assess progress in this
area. To assess the impact on the federal budget, we reviewed the
federal budget and documents prepared by the Congressional Budget
Office related to the effect of P.L. 108-18 on the federal budget, and
we conducted interviews with officials from the Congressional Budget
Office.
To identify other pertinent issues that Congress may want to consider,
we reviewed Postal Service documents, the Commission's report, and our
previous work. We also conducted interviews with congressional staff,
OPM, and Postal Service officials.
The Service raised another issue in its report that was not within the
scope of our review. The Service has expressed concern with the method
that OPM used to determine the amount of the postal CSRS fund. The
Service believes that OPM's methodology assigns an unreasonably low
portion of the retirement benefit to the federal government, so it
provided OPM with two alternatives to consider. OPM did not agree with
the first alternative and did not respond to the second alternative.
P.L. 108-18 required OPM, in consultation with the Postal Service, to
develop the methodology used to determine the amount of the postal CSRS
fund. The law also afforded the Service the opportunity to appeal OPM's
methodology to the Board of Actuaries of the Civil Service Retirement
System, which the Service is currently considering. Thus, we did not
include this issue in the scope of our review.
We conducted our review at Postal Service headquarters in Washington,
D.C., from October 1, 2003, through November 25, 2003, in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the U.S. Postal Service:
RICHARD J. STRASSER, JR.
CHIEF FINANCIAL OFFICER
EXECUTIVE VICE PRESIDENT:
UNITED STATES POSTAL SERVICE:
November 21, 2003:
Mr. Bernard L. Ungar:
Director, Physical Infrastructure Issues United States General
Accounting Office Washington, D.C. 20548-0001:
Dear Mr. Ungar:
Thank you for providing the Postal Service the opportunity to review
and comment on the General Accounting Office (GAO) draft report, Postal
Pension Funding Reform: Issues Related to the Postal Service's Proposed
Use of Pension Savings (GAO-04-238).
We are cognizant of the tight timeframe you are under and appreciate
the draft you provided on November 19 for our review. We have not had
sufficient time, however, to solicit input on these important issues
from the Postal Service Governors.
We are pleased that the GAO's review of our proposals found that both
proposals were consistent with the Postal Service Civil Service
Retirement System Funding Reform Act of 2003 (P.L. 108-18). In
particular, we note that in terms of fairness, GAO found that our
preferred proposal which recognized OPM's determination that we were
$10 billion overfunded under the old statute, resulted in a more
equitable balance of costs between current and future ratepayers. We
further note that affordability should not be viewed as an issue of
whether the Postal Service can afford the proposals; rather, it is a
question of whether the ratepayers can afford them. The mailing
industry needs to have rates that generate volumes that in turn will
generate revenues for the Postal Service.
We also stress, as GAO indicated on page 7 of its report, "[T]he
Service would not realize a reduction in its annual operating expense
of over $3 billion beginning in fiscal year 2006." The escrow in FY
2006 can only be generated by new rates and, in fact, accelerates the
need for further increases, thus contributing to the "death spiral"
referenced on page 24 of the GAO report.
We are concerned with the recommendation contained in the report that
Congress only repeal the escrow requirement after if it receives an
acceptable plan from the Postal Service concerning rationalization of
its infrastructure and workforce, and if Congress believes that the
Postal Service is making satisfactory progress on its transformation
goals. In fact, we believe that Congress currently has a variety of
adequate avenues for reviewing the Postal Service's plans. The Postal
Service publishes a Five-Year Strategic Plan and fully complies with
the Government Performance and Results Act. Moreover, beyond these
statutorily-mandated reports and consistent with prior GAO
recommendations to Congress, the Postal Service undertook an
unprecedented effort to develop a comprehensive Transformation Plan.
The Transformation Plan reflects a consensus of all interested parties
on the steps necessary for the Postal Service to remain a viable
enterprise well into the future. The Postal Service has aggressively
pursued implementation of Transformation Plan goals. In fact, a
Transformation Plan Progress Report
was just issued. That report emphasizes the progress made on
improvements in customer satisfaction, cost reductions, and elimination
of career positions, among other things, since the plan was released in
April 2002. We believe that using the escrow requirement as an
additional oversight mechanism simply is not necessary and further will
force the Postal Service to raise rates to generate billions of dollars
in revenues over which it will exercise little control.
Finally, the Postal Service believes that its preferred proposal, under
which military pension costs are the responsibility of the Department
of the Treasury and the Postal Service prefunds retiree health
benefits, is in the best interests of the American taxpayers as well as
all postal stakeholders. As the GAO report recognizes, this proposal
achieves a fair balance between current and future ratepayers while
allowing the Postal Service to prefund a greater portion of its long-
term obligations.
If you or your staff would like to discuss any of these comments, we
are available at your convenience.
Sincerely,
Signed by:
Richard J. Strasser, Jr.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Bernard L. Ungar, (202) 512-2834.
Staff Acknowledgments:
Teresa L. Anderson, Alan N. Belkin, Christine Bonham, Margaret Cigno,
Nikki Clowers, Kathy Gilhooly, and Kenneth E. John made key
contributions to this report.
(543081):
FOOTNOTES
[1] U.S. Postal Service, Postal Service Proposal: Use of Savings for
Fiscal Years after 2005, P.L. 108-18, Sept. 30, 2003.
[2] U.S. Postal Service, Postal Service Proposal: Military Service
Payments Requirements, P.L. 108-18, Sept. 30, 2003. Joint report by the
Office of Personnel Management and the Department of the Treasury,
Report to Congress on the Financing of Benefits Attributable to the
Military Service of Current and Former Employees of the Postal Service,
Sept. 30, 2003.
[3] U.S. General Accounting Office, Postal Pension Funding Reform:
Review of Military Service Funding Proposals, GAO-04-281 (Washington,
D.C.: Nov. 26, 2003).
[4] President's Commission on the United States Postal Service,
Embracing the Future: Making the Tough Choices to Preserve Universal
Mail Service, (Washington, D.C.: July 31, 2003).
[5] U.S. General Accounting Office, U.S. Postal Service: Bold Action
Needed to Continue Progress on Postal Transformation, GAO-04-108T
(Washington, D.C.: Nov. 5, 2003).
[6] Postal employees would continue to make their contributions to the
CSRS fund, which are currently 7 percent of pay.
[7] GAO-04-108T.
[8] U.S. General Accounting Office, Major Management Challenges and
Program Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.:
January 2003); and U.S. Postal Service: Deteriorating Financial Outlook
Increases Need for Transformation, GAO-02-355 (Washington, D.C.: Feb.
28, 2002).
[9] It should be noted that Proposal I, by funding retiree health
benefits for current and former employees only if it is relieved of
responsibility for military service costs, also addresses rate
mitigation because funding this obligation for current and former
employees, while retaining responsibility for military service costs,
would result in even higher rate increases.
[10] GAO-04-108T.
[11] Proposal I specifies that any overfunding not be withdrawn from
the separate account. If it were withdrawn, there would also be on-
budget outlays.
[12] GAO-04-108T.
[13] It is important to note, however, that rate increases would not be
higher than they would have been if P.L. 108-18 had not lowered the
Service's annual CSRS pension payments.
[14] GAO-01-598T.
[15] GAO-04-108T.
[16] See U.S. General Accounting Office, U.S. Postal Service:
Accounting for Postretirement Benefits, GAO-02-916R (Washington, D.C.:
Sept. 12, 2002).
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