on Government Reform Requests More USPS Info Before Acting on CSRS Escrow Fund
Postal Service Requests Board of Actuaries of the Civil Service Retirement System to Review, Reconsider and Adjust Actuarial Method and Computations, Pursuant to P.L. 108-18
RETIREMENT SYSTEM TO REVIEW, RECONSIDER AND ADJUST ACTUARIAL METHOD AND COMPUTATIONS, PURSUANT TO P.L. 108-18
As provided by P. L. 108-18, The Postal Civil Service Retirement Funding Reform Act (Act), on January 26, 2004, the United States Postal Service formally requested the Board of Actuaries of the Civil Service Retirement System (CSRS) to review, reconsider and make adjustments to the method and computations used by the United States Office of Personnel Management (OPM) in making determinations of Postal Service obligations to CSRS. The request was filed prior to the deadline for such a request.
The Act directs OPM, in consultation with the Postal Service, to develop an actuarial methodology for computing the determination of Postal Service CSRS obligations from the establishment of the Postal Service in July, 1971, and those of its predecessor, the Old Post Office Department, for which the Federal Government is responsible. As specified by the Act, the Postal Service has the right to appeal that method and those determinations by requesting review and reconsideration by the Board of Actuaries.
Previously, the Postal Service had asked OPM to reconsider its actuarial method and computations that place an undue burden of CSRS costs upon the Postal Service and had proposed an alternative years-of-service method for the calculation of Postal Service obligations to CSRS. OPM rejected that request on July 31, 2003. The difference between the determinations yielded by the two methods is $86 billion. The method proposed by OPM results in a Postal Service CSRS liability of $4.8 billion as of September 30, 2002. In contrast, the proposed Postal Service method, formerly also used by OPM, computes Postal Service CSRS obligations according to employees’ years-of-service and results in the Postal Service over funding its CSRS obligations by $81.2 billion as of the same date
December 19, 2003
The Honorable John E. Potter Postmaster General and CEO
United States Postal Service
475 L'Enfant Plaza, SW
Washington, DC 20260
Dear Mr. Postmaster General:
We are writing to you about the disposition of the Postal Service escrow fund. We have received and closely reviewed the Postal Service's September 30 proposal, GAO's November 26 evaluation of the proposal, and your December 8 letter responding to GAO's evaluation. As GAO recommended, we believe the Postal Service should provide Congress with "a comprehensive, integrated infrastructure and workforce rationalization plan" before Congress acts on the escrow fund.'
The concept of the escrow fund originated in our Committee as part of the Postal Civil Service Retirement System Pension Reform Act of 2003. This law relieved the Postal Service of its obligation to pay $39 billion over 10 years, and $154 billion over 25 years, into the Civil Service Retirement System (CSRS). The escrow account was added to the legislation as a mechanism for ensuring that the savings created by the Pension Reform Act would be used wisely to meet major challenges confronting the Postal Service. As GAO recognized in its report, the reduction in pension costs "has provided an opportunity for the Service to address some of its long-standing challenges" and the escrow requirement "provides Congress an opportunity to review how the Service will address a number of long-term challenges."2
The two proposals submitted by the Postal Service on September 30 contain valuable ideas. In particular, we commend you for addressing unfunded retiree health benefits. This is one of the major issues facing the Postal Service. We agree that there is merit in using savings generated by the Pension Reform Act - as well as possible new savings related to military service obligations - to address this issue.
Under both of the Postal Service's proposals, however, a large portion of the savings generated by the Pension Reform Act will go to pay current operating expenses. Indeed, for the second proposal, almost all of the savings would be used for current operating expenses. Two reasons are provided for this allocation: (1) using the savings to pay operating expenses will help keep rates low and (2) the Postal Service will be able to fund needed cost-saving and productivity initiatives without drawing on the savings under the legislation. We agree that it is important that the Postal Service keep rates low, but we do not believe the Postal Service has explained what cost-saving and productivity investments it needs to make.
In your December 8 letter, you state: "it should be emphasized that current and future postal operations are being driven by a comprehensive Transformation Plan which addresses these network and workforce issues."3 The problem as identified by GAO is that the Postal Service has not provided enough information regarding its progress on the transformation plan or its ability to finance these changes. For example, in response to the Postal Service's belief that it can finance necessary capital investments through inflation-based rate increases alone, GAO expressed concern that the Postal 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."4 Furthermore, GAO pointed out that the Postal Service provided little detail on its capital investments for productivity gains and cost-saving initiatives in its proposals, the Five-Year Strategic Plan, or the Five-Year Strategic Capital Investment Plan.5 Even where the Postal Service provided some detail, it failed to give GAO sufficient backup data or description.6
Our goal is to repeal the escrow account. However, it would not be prudent for Congress to take this step until the Postal Service has demonstrated that it has a workable plan to fund the key capital investments needed to ensure the long-tern viability of the Postal Service. That is why GAO recommended that Congress consider repealing the escrow requirement only after it receives "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."7
We will be considering postal reform legislation early next year and would like to address the escrow requirement as part of that legislation. But we will not be in a position to do this without additional information from the Postal Service. For that reason, we ask that you submit to Congress by January 31, 2004, the further planning recommended by GAO.
Why GAO Did This Study
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.
The military service of many Postal Service retirees was already creditable to a civilian pension when the Postal Service began operations in 1971. OPM’s current approach, however, allocated the years of creditable military service of these employees over their entire civilian careers. If Congress decides that the Postal Service should be responsible for military service costs applicable to its employees, then consideration of an allocation alternative reflecting the extent to which the military service of current and former employees was already creditable towards a civilian pension when the Postal Service began operating would enhance the decision-making process.
What GAO Recommends
POSTAL PENSION FUNDING REFORM
Review of Military Service Funding Proposals
Why GAO Did This Study
What GAO Found
The positions taken by OPM and Treasury and the Postal Service were driven in part by differing views on the nature and extent of the relationship between military service and an entity’s operations. The Postal Service favors returning the responsibility for funding benefits attributable to military service to the Treasury, making arguments that include Treasury’s historic responsibility for these benefits, the legislative history surrounding the Postal Service’s funding of retirement benefits, the fact that the majority of military service by CSRS employees was rendered before the current Postal Service was created, and that military service has no connection to the Postal Service’s functions or operations. OPM and Treasury favor the recently enacted law, arguing that the Postal Service was intended to be selfsupporting, military service is a benefit like other CSRS benefits that should be allocated proportionally over an employee’s career, and the current law is one in a series that developed today’s approach to funding the Postal Service’s CSRS costs.
GAO observed that there is no direct relationship between an employee’s military service and an entity’s operations, but an indirect relationship is established once an employee is hired into a position whose retirement plan provisions credit military service when computing a civilian benefit. GAO has long held the position that federal entities should be charged the full costs of retirement benefits not covered by employee contributions in the belief that it enhances recognition of costs and budgetary discipline at the same time it promotes sounder fiscal and legislative decisions. However, our previous recommendations and matters for congressional consideration did not specifically address whether the cost of military service benefits should be included in CSRS employee benefit costs. Currently there is inconsistency in how various self-supporting government entities treat these costs.