Congress ties Postal Service into knots

Original Reporting | By Kevin C. Brown |

But what to do with the savings? Congress did not immediately take either of the paths that Baker identified. Instead, it stipulated that, during fiscal years 2003 through 2005, the Postal Service should use the difference between the former rate of contribution and a new lower rate to pay off its debt to the Treasury’s Federal Financing Bank, which had and does lend the Postal Service money to cover operational expenses and capital improvements (the net increase in indebtedness is limited to $3 billion per year; pursuant to the requirement of the 2003 Act, the Postal Service did, in fact, pay off an over $11 billion debt in the course of those three years). 

reduced but still
excessive pension contributions?

The legislation passed in 2003 and 2006 attempted to resolve, in part, the overfunding of postal pension contributions and suspended Postal Service payments into the Civil Service Retirement System (CSRS) pension system (the one for employees who began work prior to 1984). Postal contributions for the Federal Employees’ Retirement System (FERS), however, continue despite at $11.4 billion dollar surplus above estimated liability. When combined with a $1.7 billion surplus in the CSRS program, the Postal Service holds at least a $13.1 billion surplus in its pension fund beyond its accrued liability, as calculated by the Office of Personnel Management (OPM).

Some say the surplus is actually greater. In 2010, the Postal Service Office of Inspector General (OIG) released a report suggesting that the Postal Service had actually overfunded its obligations to CSRS by $75 billion between the early 1970s and 2009 (the Postal Regulatory Commission suggests the number is lower, but still significant: $50-55 billion). The OPM, designated as the agency that determines the scope of a surplus or deficit, has argued that its lower calculations accurately follow the requirements of the law.

The return of that money, as the OIG and others have pointed out, could be used to fully fund the retiree health benefit fund, pay off all Postal Service debt to the Federal Financing Bank, and give the Service more time to make changes in its operations so that it can continue to be independent.

For subsequent fiscal years, Congress instructed, the pension savings — estimated to grow to about $5 billion per year by 2006 — should be temporarily held in escrow. At the same time, the Postal Service was required to put together a plan for utilizing future savings, as well as those held in escrow.

One area of Congressional concern was properly funding the Postal Service’s obligations for retiree health benefits. While the funding of retiree pensions had been found not to be a problem (but, rather, had been overfunded), there was at that point no dedicated fund at all for the payment of retiree health benefits. Instead, the Postal Service was paying for those benefits on a current basis out of operating funds.

Congress directed that “some portion” of the savings on future pension contributions should go to the creation of a fund that would meet anticipated retiree health benefits over an extended period of time (in other words, moving from year-to-year operating budget payments to a pension-like system). At the time, the amount that was estimated to be sufficient to pay for retiree health benefits over a period of decades was $40 billion to $50 billion.

The Postal Service’s plan was also supposed to consider whether and to what extent the savings should be used for debt repayment, for productivity and cost saving capital investments, for delaying or moderating postal rate increases, and for other alternatives.

The Postal Service reported back to Congress in September 2003 that its preference was to devote over 95 percent of the savings to prefunding retiree health benefits, and to utilize the balance for debt reduction. The preference prefigured, and may have reflected, the Bush Administration’s desire for “budget neutrality” (see bottom box on next page). Three years later, Congress passed the Postal Accountability and Enhancement Act (PAEA), and followed the Postal Service’s preference for using all of the savings for the prefunding of retiree health benefits. The PAEA “seeded” the new fund by having Postal Service overpayments for its CSRS obligations (determined by the OPM to be $17 billion) transferred to the new fund. The PAEA also specified a remarkably rapid period for prefunding the overwhelming portion of what was then estimated to be the remaining liability for retiree health benefits: only 10 years.


Why 10 years?

The idea of prefunding over a reasonable period is entirely uncontroversial; indeed, the failure to prefund many pensions has led to well-publicized problems. Rep. Peter DeFazio (D-Ore.), the sponsor of one of the postal reform bills currently before Congress, said, “There are a lot of pension plans or retirement systems around the country that have promised continuing healthcare benefits and a lot of them are in deep trouble…The idea of putting aside something to cover current employees’ future retirement benefits has merit.” Teresa Ghilarducci, a professor of economics at the New School for Social Research and an expert on pension and retirement issues, concurred: “If you are serious about the promise, of course [you should fund it].”

The operative question was the time schedule on which to do so. 

Prefunding is typically accomplished over a matter of decades. The version of the PAEA that passed in the House in the summer of 2005 was, as DeFazio recalled, “pretty modest, and very bipartisan.” It called for pre-funding retiree health benefits on a schedule where the liability would be decided by the Postal Service and the OPM “in accordance with generally accepted actuarial practices and principles.” The Senate bill, passed in February 2006, stipulated specifically that the fund be amortized by 2046 — that is, 40 years after enactment.

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