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United States Government Accountability Office: 
GAO: 

Report to the Chairman, Committee on Oversight and Government Reform, 
House of Representatives: 

December 2012: 

U.S. Postal Service: 

Status, Financial Outlook, and Alternative Approaches to Fund Retiree 
Health Benefits: 

GAO-13-112: 

GAO Highlights: 

Highlights of GAO-13-112, a report to the Chairman, Committee on 
Oversight and Government Reform, U.S. House of Representatives. 

Why GAO Did This Study: 

PAEA required USPS to prefund its future retiree health benefits as 
part of comprehensive postal reform by establishing the PSRHBF along 
with an initial target period to fund the unfunded liability in 50 
years. This requirement included annual payments to this fund from 
2007 to 2016 of between $5.4 billion to $5.8 billion. USPS, its 
employee groups, and others have argued that this prefunding 
requirement is a major source of USPS’s financial woes-—reported by 
USPS as contributing $32 billion toward its $41 billion of net losses 
over the past 6 years. USPS defaulted on the last 2 years of PSRHBF 
payments totaling $11.1 billion. 

As requested, this report addresses the (1) status and financial 
outlook of the PSRHBF, (2) impact on future annual USPS payments and 
unfunded liabilities of alternative approaches, and (3) key 
considerations for policymakers. GAO reviewed and summarized PSRHBF 
financial data and analyzed and compared current law requirements with 
five alternative approaches by developing projections based on OPM and 
USPS data. 

What GAO Found: 

The Postal Service Retiree Health Benefits Fund (PSRHBF) covered about 
49 percent of the U.S. Postal Service’s (USPS) $94 billion retiree 
health benefit liability at fiscal year-end 2012. USPS’s deteriorating 
financial outlook, however, will make it difficult to continue the 
current prefunding schedule in the short term, and possibly to fully 
fund the remaining $48 billion unfunded liability over the remaining 
44 years of the schedule on which the 2006 Postal Accountability and 
Enhancement Act (PAEA) was based. The liability covers the projected 
benefits for about 471,000 current postal retirees and a portion of 
the projected benefits for about 528,000 current employees; it does 
not cover employees not yet hired. Under PAEA, USPS is responsible for 
contributing an additional $33.9 billion to the PSRHBF by fiscal year 
2017, including the $11.1 billion USPS has defaulted on over the past 
2 years. PAEA also requires the Office of Personnel Management (OPM) 
to calculate the remaining unfunded liability in 2017 and develop an 
initial 40-year amortization payment schedule. USPS, however, projects 
further declines in mail volume and revenues that may continue to 
limit its ability to prefund the remaining retiree health benefit 
liability. 

GAO’s analysis of maintaining current law requirements compared to 
five alternative approaches showed differing impacts on USPS’s future 
annual payments and unfunded liabilities. For example, three of the 
approaches-—1) the Administration’s Approach, 2) Senate Bill (S. 1789) 
and 3) “Pay-as-You-Go” (no prefunding)-—would reduce USPS’s annual 
payments in the short term, thereby easing its immediate cash flow 
problems and financial losses. However, these approaches would 
increase USPS’s unfunded liability, sometimes substantially, and 
require larger payments later. Deferring funding could increase costs 
for future ratepayers and increase the possibility that USPS may not 
be able to pay for some or all of its liability. Conversely, a fourth 
approach-—the House Bill (H.R. 2309)-—and the current law requirement 
would reduce USPS’s unfunded liabilities more aggressively but may 
result in significantly higher USPS financial losses in the near 
future. If USPS stopped prefunding and let the existing fund grow with 
interest, the unfunded liability is projected to significantly 
increase. Under a fifth approach, if USPS stopped prefunding and used 
the existing fund to pay current and future premiums, the fund is 
projected to be exhausted by 2026. Private sector, state, local, and 
other federal entities are not required to prefund these benefits, 
though some do so to a limited extent, and most are required to 
recognize the future costs in their financial reporting. 

GAO identified several key considerations including: (1) the rationale 
and consequences of prefunding such benefits; (2) trade-offs affecting 
USPS’s financial condition, such as sizes of the annual payments and 
unfunded liability; (3) fixed versus actuarially determined payments; 
(4) targeted funding levels; and (5) assumption criteria. USPS is 
intended to be a self-sustaining entity funded almost entirely by 
postal ratepayers, but its financial losses are challenging its 
sustainability. GAO has testified that USPS should prefund its retiree 
health benefit liabilities to the maximum extent that its finances 
permit, but none of the funding approaches may be viable unless USPS 
has the ability to make the payments. USPS’s default on its last two 
required PSRHBF payments and its inability to borrow further make the 
need for a comprehensive package of actions to achieve sustainable 
financial viability even more urgent. 

What GAO Recommends: 

GAO is not making new recommendations in this report, as it has 
already reported on strategies and options for USPS to achieve 
sustainable financial viability. In commenting on a draft of this 
report, USPS and the USPS Office of Inspector General stated that USPS 
could not afford to prefund. USPS has stated that any discussion of 
PSRHBF’s outlook must consider USPS’s proposed health plan. GAO is 
currently reviewing this proposal. 

View [hyperlink, http://www.gao.gov/products/GAO-13-112]. For more 
information, contact Frank Todisco at todiscof@gao.gov or Lorelei St. 
James at stjamesl@gao.gov or call (202) 512-2834. 

[End of section] 

Contents: 

Letter: 

Background: 

Status and Financial Outlook of the PSRHBF: 

USPS's Future Payments and Unfunded Liabilities Vary Widely Based on 
Approaches to Fund Retiree Health Benefits: 

Short-term Effects: 

Long-term Effects: 

Key Considerations for Assessing Funding Approaches: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Projected Results Using Senate Bill Assumption Basis: 

Appendix III: Comments from the U.S. Postal Service: 

Appendix IV: Comments from the U.S. Postal Service, Office of 
Inspector General: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: PSRHBF Payments and Fund Status as of September 30, 2012: 

Table 2: Key Features of Current Law and Alternative Approaches for 
Prefunding USPS Retiree Health Benefits: 

Table 3: Estimated Annual Payments and Unfunded Liabilities in the 
Short Term (Fiscal Years 2013 to 2020) under Current Law Assumption 
Basis: 

Table 4: Estimated Annual Payment and Unfunded Liability in the Long 
Term (in Fiscal Year 2040, the Last Year of the Projection) under 
Current Law Assumption Basis: 

Table 5: Key Differences between the Two sets of PSRHBF Funding 
Assumptions, as of September 30, 2011: 

Table 6: Sensitivity of Fiscal Year-end 2011 Unfunded Liability to One-
Percentage-Point Change in Medical Inflation Assumption: 

Table 7: Estimated Annual Payments and Unfunded Liabilities in the 
Short Term (Fiscal Years 2013 to 2020) under Senate Bill Assumption 
Basis: 

Table 8: Annual Payment and Unfunded Liability in the Long Term (in 
Fiscal Year 2040, the Last Year of the Projection) under Senate Bill 
Assumption Basis: 

Figures: 

Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to 
2012: 

Figure 2: USPS's First-Class Mail Volume Forecast, Fiscal Years 2013 
to 2020: 

Figure 3: USPS Retiree Health Benefits Fund's Sources as of September 
30, 2012: 

Figure 4: Estimated Annual Payments for Different Approaches from 
Fiscal Year 2013 to Fiscal Year 2020 under Current Law Assumption 
Basis: 

Figure 5: Estimated Annual Payments (as a Percentage of Compensation) 
for Different Approaches from Fiscal Year 2013 to Fiscal Year 2040 
under Current Law Assumption Basis: 

Figure 6: Estimated Unfunded Liability (as a Percentage of USPS's 
Annual Compensation Costs) for Different Approaches from Fiscal Year-
end 2012 to Fiscal Year-end 2040 under Current Law Assumption Basis: 

Figure 7: Estimated Funded Ratios for Different Approaches from Fiscal 
Year-end 2012 to Fiscal Year-end 2040 under Current Law Assumption 
Basis: 

Figure 8: Estimated Annual Payments for Modified Senate Prefunding 
Approach from Fiscal Year 2013 to Fiscal Year 2020 under Current Law 
Assumption Basis and Senate Bill Assumption Basis: 

Figure 9: Estimated Annual Payments (as a Percentage of Compensation) 
for Modified Senate Prefunding Approach from Fiscal Year 2013 through 
Fiscal Year 2040 under Current Law Assumption Basis and Senate Bill 
Assumption Basis: 

Figure 10: Estimated Annual Payments for Different Approaches from 
Fiscal Year 2013 to Fiscal Year 2020 under Senate Bill Assumption 
Basis: 

Figure 11: Estimated Annual Payments (as a Percentage of Compensation) 
for Different Approaches from Fiscal Year 2013 to Fiscal Year 2040 
under Senate Bill Assumption Basis: 

Figure 12: Estimated Unfunded Liability (as a Percentage of USPS's 
Annual Compensation Costs) for Different Approaches from Fiscal Year-
end 2012 to Fiscal Year-end 2040 under Senate Bill Assumption Basis: 

Figure 13: Estimated Funded Ratios for Different Approaches from 
Fiscal Year-end 2012 to Fiscal Year-end 2040 under Senate Bill 
Assumption Basis: 

Abbreviations: 

CSRDF: Civil Service Retirement and Disability Fund: 

CSRS: Civil Service Retirement System: 

DOD: Department of Defense: 

FASAB: Federal Accounting Standards Advisory Board: 

FASB: Financial Accounting Standards Board: 

FEHBP: Federal Employees Health Benefits Program: 

FERS: Federal Employees Retirement System: 

FTE: full-time employees: 

GASB: Governmental Accounting Standards Board: 

IG: Inspector General: 

OIG: Office of Inspector General: 

OPEB: other post-employment benefits: 

OPM: Office of Personnel Management: 

PAEA: Postal Accountability and Enhancement Act (2006): 

PRC: Postal Regulatory Commission: 

PSRHBF: Postal Service Retiree Health Benefits Fund: 

PVB: present value of future benefits: 

SFFAS 33: Statement of Federal Financial Accounting Standards No. 33: 

S&P: Standard & Poor's: 

USPS: U.S. Postal Service: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

December 4, 2012: 

The Honorable Darrell E. Issa:
Chairman:
Committee on Oversight and Government Reform:
House of Representatives: 

Dear Mr. Chairman: 

Because of significant financial difficulties, the U.S. Postal Service 
(USPS) was unable to make its statutorily required payments of $5.5 
billion in fiscal year 2011 and $5.6 billion in fiscal year 2012 to 
prefund retiree health benefits.[Footnote 1] The Postal Accountability 
and Enhancement Act (PAEA) required USPS to make fixed annual payments 
to begin prefunding the cost of future retiree health benefits accrued 
by current employees and retirees.[Footnote 2] The act required annual 
payments (ranging from $5.4 billion to $5.8 billion per year) from 
fiscal years 2007 through 2016 to be deposited into a new fund 
established in the U.S. Treasury and administered by the Office of 
Personnel Management (OPM) called the Postal Service Retiree Health 
Benefits Fund (PSRHBF). During this period, USPS would also make 
annual payments for its share of health benefit premiums for current 
retirees to the Federal Employees Health Benefits Fund (this payment 
amounted to $2.5 billion in fiscal year 2012).[Footnote 3] Beginning 
in fiscal year 2017, USPS's share of health benefit premiums for 
retirees is to be paid from the PSRHBF rather than by USPS. PAEA 
further required that beginning in fiscal year 2017, USPS's 
contributions to the PSRHBF are to be based on actuarial calculations 
performed by OPM. USPS's actuarially determined annual contribution to 
the PSRHBF is to consist of a payment for the cost of future benefits 
attributable to employee service during the fiscal year, plus a 
payment to fund the remaining unfunded retiree health benefit 
liability over a statutorily determined amortization schedule that 
initially extends 40 years to 2056.[Footnote 4] 

USPS, employee organizations, and other stakeholders have argued that 
the prefunding requirement is a major contributor to USPS's financial 
decline--contributing $32 billion towards its $41 billion of net 
losses over the past 6 years[Footnote 5]--and that Congress should 
relieve USPS from these prefunding requirements or substantially 
reduce them. As of the end of fiscal year 2012, OPM estimated that 
USPS's total health benefit liability for future and current 
retirees[Footnote 6] was approximately $94 billion--of which $48 
billion was unfunded and $46 billion was in the PSRHBF. We have 
previously reported that USPS cannot be financially viable until 
Congress and USPS address the cash flow problems that limit its 
immediate prefunding capability while also addressing how to pay for 
the long-term cost of USPS's unfunded retiree health benefit 
liability. Projected declines in mail volumes and revenues will 
continue to exacerbate USPS's difficulties in paying for the cost of 
its retiree health benefits. 

Several approaches proposed by the Administration (Administration) and 
congressional committees offer alternatives that would revise USPS's 
prefunding payments and affect the amount of funds deposited in the 
PSRHBF to make future retiree health premium payments. In addition, 
USPS's Office of Inspector General (OIG) has analyzed a proposal to 
suspend prefunding and let the existing fund grow with interest. Some 
have also suggested that prefunding is unnecessary, inadvisable, or 
unfair. You requested that we review the PSRHBF and study the effects 
of multiple proposals to revise the payment structure for funding 
retiree health benefits, which include reducing or deferring payments 
in the short term, as well as eliminating prefunding altogether. This 
report (1) describes the status and financial outlook of the Postal 
Service Retiree Health Benefits Fund, (2) analyzes how alternative 
approaches for funding retiree health benefits could affect future 
USPS payments and unfunded liabilities, and (3) determines key 
considerations for policymakers assessing the alternative approaches. 

USPS has also proposed withdrawing from the Federal Employees Health 
Benefits Program (FEHBP) and administering its own health care plan 
for its employees and retirees. This report looks at retiree health 
benefits funding options assuming that USPS continues to participate 
in FEHBP under current provisions. We will be issuing a separate 
report on USPS's proposal to administer its own health care plan. 

To describe the status and financial outlook of the PSRHBF, we 
reviewed and summarized USPS financial data regarding payments made to 
the fund, interest earned from such contributions, overall fund 
balance, and retiree health benefit liability. We also reviewed our 
prior work and reviewed and summarized reports and data from USPS and 
others on how USPS's financial condition has changed since 2006. We 
reviewed relevant statutes, proposed legislation, and sections of the 
President's budget request for fiscal year 2012 pertaining to USPS's 
health and pension benefit programs. We also interviewed USPS and OPM 
officials on the status and financial outlook of the PSRHBF. To 
analyze how alternative proposals for funding retiree health benefits 
could affect future USPS payments and unfunded liabilities, we 
analyzed and compared current law requirements and five alternative 
approaches. The alternative approaches included an approach contained 
in a bill passed by the Senate, an approach contained in a bill 
approved by a House committee, an Administration proposal, an approach 
analyzed by the USPS OIG, and a pay-as-you-go method with no 
prefunding. We obtained data from USPS on current and projected full-
time employee (FTE) counts and compensation. In addition, we met with 
OPM officials to discuss actuarial assumptions and the methodology for 
projecting future actuarial costs and premium payment levels under 
different sets of assumptions, using the workforce projections 
provided by USPS. We used the projections provided by OPM and USPS to 
calculate, for each of the alternative approaches to prefunding, 
USPS's required payments and the PSRHBF's unfunded liability through 
fiscal year 2040. To determine key factors for policymakers to 
consider when assessing alternative approaches, we used our own 
actuarial judgment and expertise. In addition, for comparison purposes 
we examined the prefunding requirements and prefunding behavior of 
private-sector entities, state and local governments, and other 
federal entities. We also looked at how these other entities, as well 
as USPS, recognize the cost of these benefits in their financial 
reporting based on relevant accounting standards promulgated by the 
Financial Accounting Standards Board (FASB), Governmental Accounting 
Standards Board (GASB), and Federal Accounting Standards Advisory 
Board (FASAB). For more information on our scope and methodology, see 
appendix I. 

We conducted this performance audit from May 2012 to December 2012 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

USPS, an independent establishment of the executive branch, is 
intended to be a financially self-sufficient entity that covers its 
expenses almost entirely through postal revenues. In April 2001, we 
placed USPS on our high-risk list for two reasons.[Footnote 7] First, 
in the short term, USPS's ability to continue to fulfill its mission 
on a self-supporting basis was threatened because of projected annual 
losses of $2 billion to $3 billion, severe cash flow pressures, and 
debt approaching its statutory borrowing limit without any debt 
reduction plan. Second, in the long term, increasing retirement-
related expenses threatened to reduce USPS's future cash flows and 
place upward pressures on postal rates. 

We have been reporting on USPS's financial challenges, including those 
related to funding its retiree health benefit liability, over the past 
decade. In May 2002, the Comptroller General testified that USPS had 
about $100 billion in liabilities, including an estimated $49 billion 
in unfunded retiree health benefit liability.[Footnote 8] Unlike 
pension liabilities, USPS had been funding its retiree health benefit 
liability on a pay-as-you-go basis--an approach in which USPS paid its 
share of premiums for existing retirees, with no prefunding for any 
future premiums expected to be paid on behalf of current retirees and 
workers. In May 2003, the Comptroller General testified that USPS's 
accounting treatment--which reflected the pay-as-you-go nature of its 
funding--did not reflect the economic reality of its legal liability 
to pay for its retiree health benefits, and that current ratepayers 
were not paying for the full costs of the services they were 
receiving. Consequently, the pension benefits being earned by USPS 
employees--which were being prefunded--were recovered through current 
postal rates, but the retiree health benefits of those same employees 
were not being recognized in rates until after they retired. The 
Comptroller General testified that without a change, a sharp 
escalation in postal rates in future years would be necessary to fund 
the cost of retiree health benefits on a pay-as-you-go basis.[Footnote 
9] 

Two laws, enacted in 2003 and 2006, reformed USPS's pension 
liabilities and required it to prefund retiree health benefits: 

* The Postal Civil Service Retirement System Funding Reform Act of 
2003:[Footnote 10] 

- changed USPS funding of its Civil Service Retirement System 
(CSRS)[Footnote 11] pension liabilities (based on "dynamic 
assumptions"[Footnote 12]) while retroactively transferring 
responsibility for funding the cost of CSRS benefits attributable to 
the military service of postal employees from the U.S. Treasury to 
USPS; 

- required USPS to escrow the reduction in annual CSRS payments 
resulting from the funding changes in the act (about $3 billion); and: 

- required USPS to report to Congress on how it could use the CSRS 
savings realized after fiscal year 2005. USPS proposed to Congress in 
2003 that the responsibility for funding the cost of CSRS benefits 
attributable to the military service of postal employees be 
transferred back to the U.S. Treasury and that it use the resulting 
savings to prefund its retiree health benefit liability. 

* PAEA, enacted in 2006,[Footnote 13] 

- transferred all responsibility for costs related to CSRS military 
service credit from USPS back to the U.S. Treasury, both retroactively 
and prospectively; this included all CSRS military service costs for 
postal employees since the inception of the Postal Service in 1971; 
[Footnote 14] 

- established the PSRHBF to begin prefunding the health benefits of 
current and future postal retirees and transferred about $20 billion 
of "start-up" funds into the PSRHBF ($3 billion from the discontinued 
CSRS escrow--as USPS's annual CSRS payment was suspended--and $17 
billion from the surplus in the CSRS fund); 

- required USPS to make annual payments ranging from $5.4 billion to 
$5.8 billion per year into the PSRHBF from fiscal years 2007 through 
2016 to begin prefunding its retiree health benefit liability; and: 

- required OPM to calculate the remaining unfunded liability in 2017 
and each subsequent year, and to calculate an amortization payment 
based on an amortization period that extends to 2056 or, if later, 15 
years from the then-current fiscal year.[Footnote 15] 

As a result, in 2007 USPS began prefunding its retiree health benefits 
as its CSRS pension liability was significantly reduced and its annual 
CSRS payment was suspended. USPS stated in its 2007 Annual Report that 
such prefunding was a farsighted and responsible action that placed 
USPS in the vanguard of both the public and private sectors in 
providing future security for its employees, and augured well for its 
long-term financial stability, but also acknowledged that the required 
payments would be a considerable financial challenge in the near 
term.[Footnote 16] Contrary to statements made by some employee groups 
and other stakeholders, PAEA did not require USPS to prefund 75 years 
of retiree health benefits over a 10-year period. Rather, pursuant to 
OPM's methodology, such payments would be projected to fund the 
liability over a period in excess of 50 years, from 2007 through 2056 
and beyond (with rolling 15-year amortization periods after 2041). 
However, the payments required by PAEA were significantly 
"frontloaded," with the fixed payment amounts in the first 10 years 
exceeding what actuarially determined amounts would have been using a 
50-year amortization schedule. 

We testified in April 2007 that we had removed USPS from our high-risk 
list due in part to USPS's financial improvements resulting from these 
congressional actions.[Footnote 17] From fiscal years 2003 to 2005, 
USPS's annual pension expense declined by $9 billion. USPS had repaid 
over $11 billion of outstanding debt, reported $5.4 billion in cost 
savings and record high net incomes, and delayed rate increases from 
fiscal year 2003 until January 2006. 

Since fiscal year 2007, however, USPS has experienced significant 
financial challenges. USPS's gap between expenses and revenues has 
grown significantly, as shown in figure 1. In addition, USPS's 
outstanding debt to the U.S. Treasury increased from $2.1 billion at 
fiscal year-end 2006 to its current statutory-borrowing limit of $15 
billion.[Footnote 18] In fiscal year 2009, we returned USPS to our 
high-risk list due, in part, to a projected loss of $7 billion--and an 
actual loss of over $8.5 billion--in fiscal year 2010. For fiscal year 
2012, USPS had a net loss of almost $16 billion, which included $11.1 
billion for required PSRHBF prefunding payments that USPS did not 
make.[Footnote 19] Furthermore, USPS's future financial outlook is 
bleak as it projects further declines in mail volume and revenue by 
fiscal year 2020. 

Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to 
2012: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2006: $900 million; 
Fiscal year: 2007: -$5.142 billion; 
Fiscal year: 2008: -$2,806 billion; 
Fiscal year: 2009: -$3.794 billion; 
Fiscal year: 2010: -$8,505 billion; 
Fiscal year: 2011: -$5.067 billion; 
Fiscal year: 2012: -$15.906 billion. 

Source: USPS. 

[End of figure] 

USPS projects that First-Class Mail--which is highly profitable and 
generated about 44 percent of USPS's revenue in fiscal year 2012--will 
decline in volume by about 42 percent by fiscal year 2020, as shown in 
figure 2. During the economic downturn, there has been an accelerated 
diversion of business and individual mail to electronic alternatives, 
and some businesses have left the mail entirely. USPS further projects 
that an economic recovery will not bring a corresponding recovery in 
mail volume because of continuing social and technological trends that 
have changed the way that people communicate and use the mail. USPS 
has several initiatives to generate new revenue; however, such efforts 
are unlikely to generate enough revenue in time to offset the 
projected decline in mail volume.[Footnote 20] Limited increases in 
revenue require USPS to seek aggressive cost-saving initiatives to 
achieve financial stability. 

Figure 2: USPS's First-Class Mail Volume Forecast, Fiscal Years 2013 
to 2020: 

[Refer to PDF for image: vertical bar graph] 

Pieces: 

Fiscal year: 2013: 64 billion; 
Fiscal year: 2014: 59.9 billion; 
Fiscal year: 2015: 56.1 billion; 
Fiscal year: 2016: 52.7 billion; 
Fiscal year: 2017: 49.1 billion; 
Fiscal year: 2018: 46 billion; 
Fiscal year: 2019: 42.2 billion; 
Fiscal year: 2020: 39 billion. 

Source: USPS. 

[End of figure] 

In February 2012, USPS announced a plan that included a goal of 
achieving $22.5 billion in annual cost savings by the end of fiscal 
year 2016. The plan included changes in USPS's mail processing and 
transportation networks and other cost-saving initiatives, as follows: 

* $9 billion in network operations, of which $4 billion would come 
from consolidating its mail processing and transportation networks; 

* $5 billion in compensation and benefits; and: 

* $8.5 billion through legislative changes, such as moving to a 5-day 
delivery schedule. 

At the same time, USPS's plan would also reduce the overall size of 
the postal workforce by roughly 155,000 career employees, with many of 
those reductions expected to result from attrition. USPS reports in 
the plan that half of its current career employees--283,000 employees--
will be retirement eligible by 2016. In March 2010, USPS presented a 
detailed proposal to the Postal Regulatory Commission (PRC) to move 
from a 6-day to a 5-day delivery schedule to achieve its workforce-
reduction and cost-savings goals.[Footnote 21] USPS projected that its 
proposal to move to 5-day delivery by ending Saturday delivery would 
save about $3 billion annually and would reduce mail volume by less 
than 1 percent. However, on the basis of its review, PRC estimated a 
lower annual net savings--about $1.7 billion after a 3-year phase-in 
period--as it noted that higher revenue losses were possible.[Footnote 
22] In February 2012, USPS updated its projected net savings from 5-
day delivery to $2.7 billion after a 3-year implementation period. 

As noted earlier, USPS has also proposed withdrawing from the Federal 
Employees Health Benefits Program (FEHBP) and administering its own 
health care plan for its employees and retirees. This report looks at 
retiree health benefit funding options assuming that USPS continues to 
participate in FEHBP under current provisions. Adoption of any of the 
funding approaches analyzed in this report would not by itself 
preclude USPS from continuing to pursue its proposal to administer its 
own plan. If USPS's proposal was adopted and if it was expected to 
result in cost savings, these projected savings would be reflected in 
a lower liability, a lower unfunded liability, and lower prefunding 
contributions than otherwise.[Footnote 23] We will be issuing a 
separate report evaluating USPS's proposal to administer its own 
health care plan. 

Related to whether USPS should prefund retiree health benefits, some 
stakeholders have argued that such prefunding is primarily responsible 
for USPS's dismal financial condition and is unfair, arguing that no 
other entity is required to conduct such prefunding. According to a 
2011 OPM Inspector General (OIG) report, however, postponing 
prefunding (deferring payments until later) is financially risky. 
[Footnote 24] OPM's Inspector General reported that future USPS 
customers (ratepayers) will have to pay for expenses that the USPS is 
incurring today and added that deferring payments will likely hurt the 
USPS's ability to compete in the future and affect its ability to 
improve its financial situation. The report added that USPS would lose 
the benefit of the interest that its deposits into the funds would 
have otherwise earned. This interest would have reduced USPS's future 
unfunded liabilities for these benefits. Consequently, postponing 
prefunding would require the USPS to make larger contributions in the 
future. 

Status and Financial Outlook of the PSRHBF: 

At the end of fiscal year 2012, OPM estimated that USPS's total 
retiree health benefit liability was almost $94 billion, whereas the 
PSRHBF balance was about $46 billion (49 percent), leaving USPS with 
an unfunded liability of about $48 billion. Approximately half of the 
$94 billion liability is for retired annuitants and their survivors 
while the other half is for current career employees. At fiscal year-
end 2012, USPS had about 471,000 annuitants and survivors who were 
receiving retiree health benefit coverage and about 528,000 career-
employees who could become eligible for such coverage when they 
retire.[Footnote 25] The liability for current employees is a portion 
of the ultimate liability for their future retiree benefits; the 
liability accrues steadily over their working years, from zero at date 
of entry into FEHBP to the full liability at retirement. Contrary to 
some claims, there is no liability held, nor contributions made, for 
any future employees who have yet to be hired or yet to be born. 

PSHRBF's balance comes from three sources. USPS's annual prefunding 
payments have accounted for $17.9 billion, or 39 percent, of the 
PSRHBF balance as of September 30, 2012.The remaining balance consists 
of about $20 billion transferred from USPS's excess CSRS funds 
(referred to as "start-up funds" in figure 3 below) when the PSRHBF 
was created in 2007 and approximately $7.8 billion in earned interest 
(see figure 3). 

Figure 3: USPS Retiree Health Benefits Fund's Sources as of September 
30, 2012: 

[Refer to PDF for image: pie-chart] 

Start-up funds: $20.0 billion (44%); 
USPS prefunding: $17.9 billion (39%); 
Interest earned: $7.8 billion (17%). 

Source: USPS. 

Note: Start-up funds included about $3 billion from the CSRS escrow 
and about $17 billion from a surplus in the CSRS fund. 

[End of figure] 

Because of USPS's financial difficulties, however, USPS has not made 
all of its required prefunding payments. Under PAEA, USPS is still 
responsible for contributing an additional $33.9 billion to the PSRHBF 
by fiscal year 2017 as shown in table 1, including $11.1 billion that 
USPS has defaulted on over the past 2 years. Originally due at the end 
of fiscal year 2011, USPS's $5.5 billion required retiree health 
prefunding payment was delayed until August 1, 2012.[Footnote 26] USPS 
missed that payment as well as the $5.6 billion that was due by 
September 30, 2012. 

Table 1: PSRHBF Payments and Fund Status as of September 30, 2012: 

CSRS start-up[A]; $20 billion. 

USPS prefunding payments made: 

Fiscal year 2007; $5.4 billion. 

Fiscal year 2008; $5.6 billion. 

Fiscal year 2009[B]; $1.4 billion. 

Fiscal year 2010; $5.5 billion. 

Total USPS prefunding; $17.9 billion. 

PSRHBF earned interest; $7.8 billion. 

PSRHBF balance; $45.7 billion. 

Retiree health benefit liability; $93.6 billion. 

Unfunded liability; $47.8 billion. 

USPS outstanding mandated prefunding payments to PSRHBF: 

Fiscal year 2011[C]; $5.5 billion. 

Fiscal year 2012[D]; $5.6 billion. 

Fiscal year 2013; $5.6 billion. 

Fiscal year 2014; $5.7 billion. 

Fiscal year 2015; $5.7 billion. 

Fiscal year 2016; $5.8 billion. 

Total; $33.9 billion. 

Source: USPS. 

Note: Totals may not add because of rounding. 

[A] The start-up included $3 billion from the CSRS escrow and $17 
billion from a surplus in the CSRS fund. 

[B] USPS's required prefunding payment was reduced from $5.4 billion 
to $1.4 billion in 2009. Pub. L. No. 111-68, § 164(a) 123 Stat. 2023, 
2053 (Oct.1, 2009). 

[C] Originally due at the end of fiscal year 2011, USPS's $5.5 billion 
retiree health benefit payment was delayed until August 1, 2012. Pub. 
L. No. 112-74, § 632. USPS, however, did not make this payment. 

[D] USPS did not make its $5.6 billion required payment in fiscal year 
2012. 

[End of table] 

While the PSRHBF balance covered about 49 percent of USPS's retiree 
health benefit liability at fiscal year-end 2012, USPS's deteriorating 
financial outlook will make it difficult under current requirements 
for USPS to continue prefunding the remaining unfunded liability in 
the short term, and possibly to continue funding the remaining 
unfunded liability over the next several decades, as required under 
PAEA. 

USPS's Future Payments and Unfunded Liabilities Vary Widely Based on 
Approaches to Fund Retiree Health Benefits: 

We considered current law (PAEA) requirements against five alternative 
approaches for funding the costs of retiree health benefits, each of 
which involves tradeoffs that could impact USPS's short-term cash 
flow, its future financial condition, different generations of postal 
ratepayers, and over a million postal employees and retirees. We 
compared the current law prefunding requirements as well as approaches 
that have been proposed in (1) a bill passed by the House of 
Representative's Committee on Oversight and Government Reform, ("House 
Bill"),[Footnote 27] (2) in the President's fiscal year 2012 budget 
request ("Administration Approach"), and (3) in a bill passed by the 
Senate, ("Senate Bill")[Footnote 28]. In addition, some postal 
stakeholders have argued that prefunding is unnecessary or inadvisable 
altogether, so we also examined the effects of implementing two 
variations on a "Pay-as-You-Go Approach." 

Our projections[Footnote 29] showed that some approaches would reduce 
USPS's annual payments in the short term, thereby easing its cash flow 
problems and financial losses in the near future, but would increase 
its unfunded liability, sometimes substantially, and require larger 
annual payments later. Other approaches would have USPS reduce its 
unfunded liabilities more aggressively, which could result in 
significantly higher financial losses in the near future and thereby 
increase USPS's financial challenges. These options must be considered 
within the context of USPS's financial situation and prospects. USPS 
officials told us that given its current financial problems, USPS 
simply does not have the cash to implement any of the prefunding 
options and that larger structural solutions must be found to USPS's 
financial viability as a self-sustaining entity. 

PSRHBF Funding: 

Current law (the 2006 PAEA) consists of distinct prefunding 
requirements that apply first through fiscal year 2016 and then from 
fiscal year 2017 forward. Through fiscal year 2016, USPS is required 
to make fixed annual payments[Footnote 30] ranging from $5.5 billion 
to $5.8 billion to the PSRHBF in addition to making its share of 
premium payments for existing retirees and beneficiaries, which OPM 
has estimated will rise from about $2.5 billion to about $3.8 billion 
per year between fiscal year 2011 and fiscal year 2016.[Footnote 31] 
Beginning in fiscal year 2017, the current law switches to an 
"actuarial approach" for the remaining funding, under which USPS's 
share of premium payments for existing retirees and beneficiaries is 
paid from the PSRHBF rather than by USPS, and USPS makes annual 
payments to the PSRHBF consisting of two components: 

1. the actuarially determined cost of future benefits attributable to 
employee service during the fiscal year (known as the annual "normal 
cost"), and: 

2. the actuarially determined amount that, as calculated by OPM, would 
be projected to fully fund the remaining unfunded liability over an 
amortization period ending in the later of fiscal year 2056 or 15 
years subsequent to the then-current fiscal year. 

Current law requires OPM to base its actuarial calculations of 
prefunding requirements on the actuarial assumptions used by OPM for 
its financial reporting. We will discuss the relevance of this current 
law assumption basis later in this report. 

As discussed earlier, USPS did not make the required 2011 and 2012 
payments to the PSRHBF, totaling $11.1 billion. We modeled a modified 
version of current law assuming that these missed payments are 
eliminated by legislation and that the current law payment schedule 
resumes with the payment of $5.6 billion due at the end of fiscal year 
2013. We refer to this schedule as "Modified Current Law Approach" in 
our presentation of results. 

The three alternative prefunding approaches we examined differ from 
current law in the following respects. 

* The House Bill (H.R. 2309) reduces the fixed payment due at the end 
of fiscal year 2011 from $5.5 billion to $1.0 billion, making up the 
difference in higher fixed payments in fiscal year 2015 and fiscal 
year 2016. Starting in fiscal year 2017, the House Bill's actuarial 
approach for determining prefunding is the same as current law. As 
with our modeling of current law, because the 2011 and 2012 payments 
have already been missed, we modeled a modified version of the House 
Bill in which the House Bill's 2011 and 2012 payments are eliminated 
by legislation and the House Bill's payment schedule commences in 
fiscal year 2013. We refer to this schedule as "Modified House 
Approach" in our presentation of results. 

* The Administration Approach restructures and generally reduces 
[Footnote 32] the required fixed prefunding payments in each fiscal 
year from 2011 through 2016. It also calls for USPS's share of premium 
payments for existing retirees and beneficiaries to begin to be paid 
from the PSRHBF right away, rather than beginning in fiscal year 2017. 
As a result, total USPS payments prior to fiscal year 2017 (prefunding 
plus any required payment of premiums) are significantly lower under 
the Administration Approach than under current law or the House Bill 
(and, consequently, would be somewhat greater after fiscal year 2017 
to make up for this). Starting in fiscal year 2017, the 
Administration's actuarial approach for determining prefunding is the 
same as current law and the House bill. As with current law and the 
House Bill, we modeled a "Modified Administration Approach" that 
eliminates its 2011 and 2012 payments by legislation and commences 
payment in 2013. 

* The Senate Bill (S. 1789) differs from current law, the House Bill, 
and the Administration Approach in three key aspects. First, the 
Senate Bill eliminates the fixed prefunding payments and begins an 
actuarial approach to prefunding right away (which we modeled to begin 
at the start of fiscal year 2013).[Footnote 33] Second, the Senate 
Bill uses a target of funding 80 percent of the liability, instead of 
the 100 percent funding targeted by current law and the other 
approaches. Third, the Senate Bill directs OPM to use actuarial 
assumptions consistent with those used by OPM to determine funding for 
USPS's share of liabilities in the federal civilian pension programs. 
These pension-funding assumptions are selected by OPM, with advice 
from an independent Board of Actuaries. As discussed further in the 
next section and later in this report, this assumption basis specified 
in the Senate Bill differs from the assumption basis specified in 
current law and retained in the House Bill and Administration 
proposal. We refer to the Senate Bill provisions as "Modified Senate 
Approach" in our presentation of results.[Footnote 34] 

Key features of current law and these alternative approaches are 
summarized in table 2. In addition, we also modeled two variations on 
a Pay-as-You-Go Approach, discussed in a subsequent section of this 
report. 

Table 2: Key Features of Current Law and Alternative Approaches for 
Prefunding USPS Retiree Health Benefits: 

Approach (as modified to begin in fiscal year 2013): Modified Current 
Law Approach; 
Funding target (percentage of liability): 100; 
Initial target year for amortization schedule for funding unfunded 
liability[A]: 2056; 
Period when premiums for current retirees begin being paid from PSRHBF 
instead of by USPS: 2017; 
Assumption basis: Consistent with OPM financial reporting; 
Total fixed prefunding payments, 2013-2016 fiscal years: $22.8 billion. 

Approach (as modified to begin in fiscal year 2013): Modified House 
Approach; 
Funding target (percentage of liability): 100; 
Initial target year for amortization schedule for funding unfunded 
liability[A]: 2056; 
Period when premiums for current retirees begin being paid from PSRHBF 
instead of by USPS: 2017; 
Assumption basis: Consistent with OPM financial reporting; 
Total fixed prefunding payments, 2013-2016 fiscal years: $27.3 billion. 

Approach (as modified to begin in fiscal year 2013): Modified 
Administration Approach; 
Funding target (percentage of liability): 100; 
Initial target year for amortization schedule for funding unfunded 
liability[A]: 2056; 
Period when premiums for current retirees begin being paid from PSRHBF 
instead of by USPS: 2013; 
Assumption basis: Consistent with OPM financial reporting; 
Total fixed prefunding payments, 2013-2016 fiscal years: $18.1 billion. 

Approach (as modified to begin in fiscal year 2013): Modified Senate 
Approach; 
Funding target (percentage of liability): 80; 
Initial target year for amortization schedule for funding unfunded 
liability[A]: 2052; 
Period when premiums for current retirees begin being paid from PSRHBF 
instead of by USPS: Upon enactment of Senate Bill[B]; 
Assumption basis: Consistent with USPS's CSRS and FERS funding; 
Total fixed prefunding payments, 2013-2016 fiscal years: NA--
Prefunding payments are actuarially determined, not fixed. 

Source: GAO. 

[A] As calculated by OPM, the amortization schedule extends to the 
later of this target year or 15 years from the then-current fiscal 
year. 

[B] We modeled this approach based on enactment of the bill in the 
beginning of fiscal year 2013. 

[End of table] 

Short-and Long-term Effects of Alternative Approaches: 

Our analysis shows that, over the short-term period ending in fiscal 
year 2020, the Modified Current Law and House Approaches would 
decrease USPS's unfunded liability for retiree health benefits, while 
the Modified Administration and Senate Approaches would increase the 
unfunded liability. This is mainly the result of significantly higher 
contributions under the Modified Current Law and House Approaches in 
fiscal years 2013 through 2016. Over the longer term through 2040, 
there are significant differences in the projected unfunded liability 
among the various approaches. The Modified Current Law, House, and 
Administration Approaches are projected to eliminate most of the 
unfunded liability over that period; the Modified Senate Approach is 
projected to leave a larger portion of the liability still unfunded 
because of its lower funding target, while the two Pay-as-You-Go 
Approaches we examined would lead to very large unfunded liabilities. 

It should be understood that projections of this type, especially 
longer term projections, contain a significant degree of uncertainty. 
Nonetheless, given the magnitude of the retiree health benefit 
liabilities and the importance of being able to pay for these 
benefits, reasonable projections of the associated costs and 
liabilities provide essential information for enabling responsible 
stewardship of USPS resources. 

Our comparison of the four prefunding approaches was complicated by 
the fact that the Senate Bill calls for selecting assumptions based on 
different criteria than current law, the House Bill, and the 
Administration Approach. Assumptions represent estimates of future 
economic and demographic trends, and while initial assumptions may 
differ, only one scenario can actually occur, and assumptions 
generally change over time to reflect emerging experience. 
Accordingly, to compare the four prefunding approaches, we modeled 
them under uniform assumptions--first using the current law assumption 
basis, presented in this section, and then using the Senate bill 
assumption basis, presented in appendix II. We also discuss the 
underlying differences between these two assumption bases, and present 
some comparative results, in the section below on "Sensitivity to 
Assumptions." Our overall findings were not materially affected by the 
choice between these two assumption bases. 

Short-term Effects: 

For a short-term outlook, we projected USPS's required payments 
(prefunding contributions as well as premium payments for current 
retirees, when applicable) and the amount of unfunded liability in 
fiscal years 2013 through 2020.[Footnote 35] Over this 8-year period, 
USPS's payments under the Modified Current Law and House Approaches 
would be significantly greater than under the Modified Administration 
and Senate Approaches. For example, estimated total payments over this 
period under the Modified Current Law Approach would be 48 percent 
greater than under the Modified Senate Approach. In particular, 
payments over the 8 years would total about $58 billion under Modified 
Current Law and $61 billion under the Modified House Approach, versus 
$44 billion under the Modified Administration Approach and $39 billion 
under the Modified Senate Approach. Higher payments mean a lower 
unfunded liability at the end of the period, and vice versa. Thus, at 
the end of fiscal year 2020, the Modified Current Law and House 
Approaches are projected to result in unfunded liabilities of $39 
billion and $35 billion, respectively, whereas the Modified 
Administration and Senate Approaches are projected to result in 
unfunded liabilities of $59 billion and $64 billion respectively. 
Thus, in the short term through fiscal year 2020, the unfunded 
liability is projected to decrease under the Modified Current Law and 
House Approaches and increase under the Modified Administration and 
Senate Approaches (see table 3). 

Table 3: Estimated Annual Payments and Unfunded Liabilities in the 
Short Term (Fiscal Years 2013 to 2020) under Current Law Assumption 
Basis: 

2013; 
Modified Current Law Approach: 
Annual Payments: $8.6 billion; 
Unfunded Liability (at Year-end): $47.6 billion; 
Modified House Approach: 
Annual Payments: $8.6 billion; 
Unfunded Liability (at Year-end): $47.6 billion; 
Modified Administration Approach: 
Annual Payments: $1.3 billion; 
Unfunded Liability (at Year-end): $55.0 billion; 
Modified Senate Approach: 
Annual Payments: $4.4 billion; 
Unfunded Liability (at Year-end): $51.8 billion;. 

2014; 
Modified Current Law Approach: 
Annual Payments: $8.9 billion; 
Unfunded Liability (at Year-end): $44.6 billion; 
Modified House Approach: 
Annual Payments: $8.9 billion; 
Unfunded Liability (at Year-end): $44.6 billion; 
Modified Administration Approach: 
Annual Payments: $5.4 billion; 
Unfunded Liability (at Year-end): $55.9 billion; 
Modified Senate Approach: 
Annual Payments: $4.5 billion; 
Unfunded Liability (at Year-end): $53.6 billion;. 

2015; 
Modified Current Law Approach: 
Annual Payments: $9.2 billion; 
Unfunded Liability (at Year-end): $41.2 billion; 
Modified House Approach: 
Annual Payments: $11.5 billion; 
Unfunded Liability (at Year-end): $39.0 billion; 
Modified Administration Approach: 
Annual Payments: $5.6 billion; 
Unfunded Liability (at Year-end): $56.8 billion; 
Modified Senate Approach: 
Annual Payments: $4.5 billion; 
Unfunded Liability (at Year-end): $55.4 billion;. 

2016; 
Modified Current Law Approach: 
Annual Payments: $9.6 billion; 
Unfunded Liability (at Year-end): $37.3 billion; 
Modified House Approach: 
Annual Payments: $11.9 billion; 
Unfunded Liability (at Year-end): $32.7 billion; 
Modified Administration Approach: 
Annual Payments: $5.8 billion; 
Unfunded Liability (at Year-end): $57.5 billion; 
Modified Senate Approach: 
Annual Payments: $4.7 billion; 
Unfunded Liability (at Year-end): $57.1 billion;. 

2017; 
Modified Current Law Approach: 
Annual Payments: $5.0 billion; 
Unfunded Liability (at Year-end): $37.9 billion; 
Modified House Approach: 
Annual Payments: $4.8 billion; 
Unfunded Liability (at Year-end): $33.3 billion; 
Modified Administration Approach: 
Annual Payments: $6.2 billion; 
Unfunded Liability (at Year-end): $58.0 billion; 
Modified Senate Approach: 
Annual Payments: $4.9 billion; 
Unfunded Liability (at Year-end): $58.9 billion;. 

2018; 
Modified Current Law Approach: 
Annual Payments: $5.2 billion; 
Unfunded Liability (at Year-end): $38.4 billion; 
Modified House Approach: 
Annual Payments: $5.0 billion; 
Unfunded Liability (at Year-end): $33.9 billion; 
Modified Administration Approach: 
Annual Payments: $6.4 billion; 
Unfunded Liability (at Year-end): $58.3 billion; 
Modified Senate Approach: 
Annual Payments: $5.1 billion; 
Unfunded Liability (at Year-end): $60.5 billion;. 

2019; 
Modified Current Law Approach: 
Annual Payments: $5.4 billion; 
Unfunded Liability (at Year-end): $38.8 billion; 
Modified House Approach: 
Annual Payments: $5.2 billion; 
Unfunded Liability (at Year-end): $34.4 billion; 
Modified Administration Approach: 
Annual Payments: $6.6 billion; 
Unfunded Liability (at Year-end): $58.6 billion; 
Modified Senate Approach: 
Annual Payments: $5.3 billion; 
Unfunded Liability (at Year-end): $62.2 billion;. 

2020; 
Modified Current Law Approach: 
Annual Payments: $5.7 billion; 
Unfunded Liability (at Year-end): $39.2 billion; 
Modified House Approach: 
Annual Payments: $5.4 billion; 
Unfunded Liability (at Year-end): $34.7 billion; 
Modified Administration Approach: 
Annual Payments: $6.8 billion; 
Unfunded Liability (at Year-end): $58.7 billion; 
Modified Senate Approach: 
Annual Payments: $5.5 billion; 
Unfunded Liability (at Year-end): $63.8 billion;. 

Total Payments; 
Modified Current Law Approach: 
Annual Payments: $57.7 billion; 
Unfunded Liability (at Year-end): NA; 
Modified House Approach: 
Annual Payments: $61.1 billion; 
Unfunded Liability (at Year-end): NA; 
Modified Administration Approach: 
Annual Payments: $44.1 billion; 
Unfunded Liability (at Year-end): NA; 
Modified Senate Approach: 
Annual Payments: $39.0 billion; 
Unfunded Liability (at Year-end): NA. 

Average Annual Payment; 
Modified Current Law Approach: 
Annual Payments: $7.2 billion; 
Unfunded Liability (at Year-end): NA; 
Modified House Approach: 
Annual Payments: $7.6 billion; 
Unfunded Liability (at Year-end): NA; 
Modified Administration Approach: 
Annual Payments: $5.5 billion; 
Unfunded Liability (at Year-end): NA; 
Modified Senate Approach: 
Annual Payments: $4.9 billion; 
Unfunded Liability (at Year-end): NA. 

Source: GAO. 

Note: Totals may not add because of rounding. Annual payments consist 
of any prefunding payments to the PSRHBF, and, where applicable, 
USPS's share of premium payments for existing retirees and 
beneficiaries (see descriptions of the different approaches). Unfunded 
liabilities are the amounts as of the end of the fiscal year, and 
start at an estimated value of $50.1 billion as of September 30, 2012, 
under all four approaches. Subsequent to the development of these 
projections, USPS reported the actual unfunded liability as of 
September 30, 2012, to be $47.9 billion. 

[End of table] 

The higher payments required under the Modified Current Law and 
Modified House Approaches are concentrated in fiscal years 2013 
through 2016, prior to the switch to an actuarial basis in fiscal year 
2017. These payments in fiscal years 2013 through 2016 are 
significantly higher than those that would be calculated under the 
specified actuarial approach.[Footnote 36] For example, the payments 
that USPS would have to make in fiscal year 2016 under the Modified 
House Approach, $11.9 billion, is more than double the following 
year's payment of $4.8 billion, when the actuarial approach begins. 
Similarly, under Modified Current Law, the estimated 2016 payments 
would be almost double the 2017 payments. In contrast, payments under 
the Modified Administration and Senate Approaches are more affordable 
and consistent over the period. Figure 4 illustrates these patterns 
over the fiscal years 2013 through 2020. 

Figure 4: Estimated Annual Payments for Different Approaches from 
Fiscal Year 2013 to Fiscal Year 2020 under Current Law Assumption 
Basis: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2013; 
Modified Current Law Approach: $8.557 billion; 
Modified House Approach: $8.557 billion; 
Modified Administration Approach: $1.276 billion; 
Modified Senate Approach: $4.432 billion. 

Fiscal year: 2014; 
Modified Current Law Approach: $8.925 billion; 
Modified House Approach: $8.925 billion; 
Modified Administration Approach: $5.423 billion; 
Modified Senate Approach: $4.459 billion. 

Fiscal year: 2015; 
Modified Current Law Approach: $9.213 billion; 
Modified House Approach: $11.463 billion; 
Modified Administration Approach: $5.573 billion; 
Modified Senate Approach: $4.545 billion. 

Fiscal year: 2016; 
Modified Current Law Approach: $9.615 billion; 
Modified House Approach: $11.865 billion; 
Modified Administration Approach: $5.829 billion; 
Modified Senate Approach: $4.711 billion. 

Fiscal year: 2017; 
Modified Current Law Approach: $5.042 billion; 
Modified House Approach: $4.777 billion; 
Modified Administration Approach: $6.205 billion; 
Modified Senate Approach: $4.902 billion. 

Fiscal year: 2018; 
Modified Current Law Approach: $5.230 billion; 
Modified House Approach: $4.965 billion; 
Modified Administration Approach: $6.394 billion; 
Modified Senate Approach: $5.097 billion. 

Fiscal year: 2019; 
Modified Current Law Approach: $5.428 billion; 
Modified House Approach: $5.163 billion; 
Modified Administration Approach: $6.591 billion; 
Modified Senate Approach: $5.305 billion. 

Fiscal year: 2020; 
Modified Current Law Approach: $5.657 billion; 
Modified House Approach: $5.392 billion; 
Modified Administration Approach: $6.821 billion; 
Modified Senate Approach: $5.549 billion. 

Source: GAO. 

[End of figure] 

In summary, these projections illustrate: (1) the inverse trade-off 
between payment requirements and unfunded liability (higher payments 
mean lower unfunded liability; lower payments mean higher unfunded 
liability) and (2) possible patterns for required payments (e.g., 
front-loaded, consistent, or back-loaded). These options must be 
considered within the context of USPS's financial situation and 
prospects. 

Long-term Effects: 

We extended our projection of USPS's required payments and the amount 
of unfunded liability to fiscal year 2040. While the uncertainty of a 
projection increases with the length of the projection period, a 
longer projection period allows potential longer-term implications of 
different approaches to emerge--effects that might not be observable 
under a short-term projection. Since dollar amounts in fiscal year 
2040 are not fully comparable to dollar amounts today, it is helpful 
to "normalize" such long-term projections to make the results more 
comparable across time periods. In table 4 we show projected payments 
and unfunded liability in fiscal year 2040 in three different ways: 
(1) as nominal (unadjusted) dollar amounts; (2) in constant (inflation-
adjusted) 2012 dollars; and (3) as a percentage of USPS's projected 
2040 modified employee compensation costs[Footnote 37] (which for 
convenience we refer to as "compensation"). We also show the projected 
funded percentage--or the ratio of PSRHBF assets to USPS's liability 
for retiree health benefits. 

Table 4: Estimated Annual Payment and Unfunded Liability in the Long 
Term (in Fiscal Year 2040, the Last Year of the Projection) under 
Current Law Assumption Basis: 

Dollars in billions. 

Nominal $; 
Modified Current Law Approach: 
Annual Payment: $11.8 billion; 
Unfunded Liability: $9.4 billion; 
Modified House Approach: 
Annual Payment: $11.5 billion; 
Unfunded Liability: $6.5 billion; 
Modified Administration Approach: 
Annual Payment: $12.9 billion; 
Unfunded Liability: $22.1 billion; 
Modified Senate Approach: 
Annual Payment: $12.5 billion; 
Unfunded Liability: $66.5 billion. 

Constant $; 
Modified Current Law Approach: 
Annual Payment: $6.1 billion; 
Unfunded Liability: $4.8 billion; 
Modified House Approach: 
Annual Payment: $5.9 billion; 
Unfunded Liability: $3.4 billion; 
Modified Administration Approach: 
Annual Payment: $6.7 billion; 
Unfunded Liability: $11.4 billion; 
Modified Senate Approach: 
Annual Payment: $6.4 billion; 
Unfunded Liability: $34.2 billion. 

Percentage of Compensation; 
Modified Current Law Approach: 
Annual Payment: 15%; 
Unfunded Liability: 12%; 
Modified House Approach: 
Annual Payment: 14%; 
Unfunded Liability: 8%; 
Modified Administration Approach: 
Annual Payment: 16%; 
Unfunded Liability: 28%; 
Modified Senate Approach: 
Annual Payment: 16%; 
Unfunded Liability: 83%. 

Funded percentage; 
Modified Current Law Approach: 
Annual Payment: NA; 
Unfunded Liability: 96%; 
Modified House Approach: 
Annual Payment: NA; 
Unfunded Liability: 97%; 
Modified Administration Approach: 
Annual Payment: NA; 
Unfunded Liability: 91%; 
Modified Senate Approach: 
Annual Payment: NA; 
Unfunded Liability: 73%. 

Source: GAO. 

Note: Annual payment is prefunding payment to the PSRHBF. Unfunded 
liability is as of the end of the fiscal year. Constant dollar amounts 
were derived by converting the projected 2040 nominal dollar amounts 
into 2012 dollars, using an inflation assumption based on the current 
law assumption basis. Compensation was projected by GAO based on 
information provided by USPS. Additional information on methodology 
and assumptions is presented in appendix I. 

[End of table] 

Showing payments and unfunded liability amounts as a percentage of 
compensation provides a sense of the size of USPS's retiree health 
care costs relative to the size of USPS's operations. Projecting 
compensation does require an additional assumption regarding 
compensation growth and therefore introduces additional uncertainty 
into the projection.[Footnote 38] Nonetheless, increases over time in 
projected payments and unfunded liabilities as a percentage of 
compensation can be indicative of a likely greater strain on USPS's 
resources. For example, unfunded liability as a percentage of 
compensation will rise to the extent that USPS is operating with a 
reduced workforce. 

As seen in table 4, in comparing the projections under Modified 
Current Law and the three alternative modified approaches, the 
differences in the projected payment required in fiscal year 2040 are 
not large, with the dollar amount of the projected payment ranging 
from $11.5 billion to $12.9 billion across the four approaches ($5.9 
billion to $6.7 billion in constant dollars). The more significant 
differences in the annual payments, across the four approaches, occur 
in the short-term period covering fiscal years 2013 through 2016. 
There are, however, significant differences in the projected unfunded 
liability in fiscal year 2040. The Modified Senate Approach results in 
a projected unfunded liability of about $67 billion; this compares to 
unfunded liabilities of $22 billion under the Modified Administration 
Approach, $9 billion under Modified Current Law, and $7 billion under 
the Modified House Approach. This projected unfunded liability under 
the Modified Senate Approach amounts to $34 billion in constant 
dollars and 83 percent of projected annual compensation. For the 
Modified Administration Approach, the projected unfunded liability is 
$11 billion in constant dollars and 28 percent of projected 
compensation. The corresponding results under the Modified Current Law 
and House Approaches are significantly smaller. For example, as a 
percentage of projected compensation, the projected unfunded liability 
is 12 percent and 8 percent under the Modified Current Law and House 
Approaches, respectively. 

A primary reason for these differences is that the Senate Approach 
uses a target funded percentage of 80 percent, whereas the other three 
approaches use a target of 100 percent. By fiscal year 2040, the 
funded percentage is projected to have reached 73 percent under the 
Modified Senate Approach, versus 91 percent under the Modified 
Administration Approach, 96 percent under Modified Current Law, and 97 
percent under the Modified House Approach. 

It is important to note that reaching a 100 percent funded percentage--
that is, the unfunded liability is fully paid off and PSRHBF assets 
equal the liability--would not mean that USPS would have no further 
prefunding payments to make. USPS would continue to have to pay the 
"normal cost" each year into the fund, reduced by amortization of any 
surplus that might develop if experience is more favorable than 
assumed, or increased if less favorable such that the funded 
percentage falls back under 100 percent. As mentioned earlier, the 
normal cost is the actuarially determined cost of future benefits 
attributable to employee service during the fiscal year, a cost that 
increases the liability each year. Failure to continue to make such 
contributions into the fund each year would mean a failure to pay for 
the cost of then-current employee service; the likely result would be 
PSRHBF assets again falling short of the liability, thereby creating a 
new unfunded liability. Under any of the approaches modeled, by fiscal 
year 2040, roughly 80 to 90 percent of USPS's required payment would 
consist of this normal cost. 

Short-and Long-term Effects Combined: 

Combining the short-term and long-term projection results, figure 5 
illustrates projected annual payments, as a percentage of projected 
compensation, for each fiscal year from 2013 through 2040. The largest 
differences among the four approaches occur from fiscal year 2013 
through fiscal year 2016. Under the Modified House Approach, estimated 
required payments are in excess of 20 percent of compensation in all 4 
of these years, climbing to 28 and 29 percent of compensation in 
fiscal year 2015 and fiscal year 2016. Under Modified Current Law, 
estimated required payments are also in excess of 20 percent of 
compensation in each of these years, peaking at 23 percent of 
compensation in fiscal year 2016. In contrast, under the Modified 
Administration Approach, estimated required payments start at just 3 
percent of compensation in fiscal year 2013 before climbing to 13 to 
14 percent of compensation in the ensuing three years. Under the 
Modified Senate Approach, estimated required payments round to a 
steady 11 percent of compensation in each of these first 4 years. 

From fiscal year 2017 through fiscal year 2040, the estimated required 
contributions are closer together across the four approaches, ranging 
from 11 to 17 percent of compensation. The projected payments are 
somewhat higher under the Modified Administration Approach than under 
the Modified Current Law or House Approaches, in order to make up for 
the differences in payments from fiscal year 2013 through fiscal year 
2016. The projected payments under the Modified Senate Approach follow 
a slightly different trajectory because of the approach's 80 percent 
funding target, but fall within the same range.[Footnote 39] 

Figure 5: Estimated Annual Payments (as a Percentage of Compensation) 
for Different Approaches from Fiscal Year 2013 to Fiscal Year 2040 
under Current Law Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2013; 
Modified Current Law Approach: 20.4%; 
Modified House Approach: 20.4%; 
Modified Administration Approach: 3%; 
Modified Senate Approach: 10.6%. 

Fiscal year: 2014; 
Modified Current Law Approach: 21.6%; 
Modified House Approach: 21.6%; 
Modified Administration Approach: 13%; 
Modified Senate Approach: 10.8%. 

Fiscal year: 2015; 
Modified Current Law Approach: 22.4%; 
Modified House Approach: 27.9%; 
Modified Administration Approach: 13.5%; 
Modified Senate Approach: 11%. 

Fiscal year: 2016; 
Modified Current Law Approach: 23.3%; 
Modified House Approach: 28.7%; 
Modified Administration Approach: 14.1%; 
Modified Senate Approach: 11.4%. 

Fiscal year: 2017; 
Modified Current Law Approach: 12.1%; 
Modified House Approach: 11.5%; 
Modified Administration Approach: 14.9%; 
Modified Senate Approach: 11.8%. 

Fiscal year: 2018; 
Modified Current Law Approach: 12.5%; 
Modified House Approach: 11.8%; 
Modified Administration Approach: 15.3%; 
Modified Senate Approach: 12.2%. 

Fiscal year: 2019; 
Modified Current Law Approach: 12.8%; 
Modified House Approach: 12.2%; 
Modified Administration Approach: 15.6%; 
Modified Senate Approach: 12.6%. 

Fiscal year: 2020; 
Modified Current Law Approach: 13.2%; 
Modified House Approach: 12.6%; 
Modified Administration Approach: 15.9%; 
Modified Senate Approach: 13%. 

Fiscal year: 2021; 
Modified Current Law Approach: 13.7%; 
Modified House Approach: 13%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 13.4%. 

Fiscal year: 2022; 
Modified Current Law Approach: 14%; 
Modified House Approach: 13.4%; 
Modified Administration Approach: 16.6%; 
Modified Senate Approach: 13.8%. 

Fiscal year: 2023; 
Modified Current Law Approach: 14.1%; 
Modified House Approach: 13.6%; 
Modified Administration Approach: 16.7%; 
Modified Senate Approach: 14%. 

Fiscal year: 2024; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.7%; 
Modified Administration Approach: 16.8%; 
Modified Senate Approach: 14.2%. 

Fiscal year: 2025; 
Modified Current Law Approach: 14.4%; 
Modified House Approach: 13.9%; 
Modified Administration Approach: 16.8%; 
Modified Senate Approach: 14.4%. 

Fiscal year: 2026; 
Modified Current Law Approach: 14.6%; 
Modified House Approach: 14%; 
Modified Administration Approach: 16.9%; 
Modified Senate Approach: 14.6%. 

Fiscal year: 2027; 
Modified Current Law Approach: 14.7%; 
Modified House Approach: 14.2%; 
Modified Administration Approach: 16.9%; 
Modified Senate Approach: 14.8%. 

Fiscal year: 2028; 
Modified Current Law Approach: 14.8%; 
Modified House Approach: 14.3%; 
Modified Administration Approach: 16.9%; 
Modified Senate Approach: 15%. 

Fiscal year: 2029; 
Modified Current Law Approach: 14.9%; 
Modified House Approach: 14.4%; 
Modified Administration Approach: 17%; 
Modified Senate Approach: 15.2%. 

Fiscal year: 2030; 
Modified Current Law Approach: 14.9%; 
Modified House Approach: 14.5%; 
Modified Administration Approach: 17%; 
Modified Senate Approach: 15.3%. 

Fiscal year: 2031; 
Modified Current Law Approach: 15%; 
Modified House Approach: 14.6%; 
Modified Administration Approach: 17%; 
Modified Senate Approach: 15.5%. 

Fiscal year: 2032; 
Modified Current Law Approach: 15.1%; 
Modified House Approach: 14.6%; 
Modified Administration Approach: 17%; 
Modified Senate Approach: 15.6%. 

Fiscal year: 2033; 
Modified Current Law Approach: 15.1%; 
Modified House Approach: 14.7%; 
Modified Administration Approach: 16.9%; 
Modified Senate Approach: 15.7%. 

Fiscal year: 2034; 
Modified Current Law Approach: 15.1%; 
Modified House Approach: 14.7%; 
Modified Administration Approach: 16.9%; 
Modified Senate Approach: 15.8%. 

Fiscal year: 2035; 
Modified Current Law Approach: 15.1%; 
Modified House Approach: 14.7%; 
Modified Administration Approach: 16.8%; 
Modified Senate Approach: 15.9%. 

Fiscal year: 2036; 
Modified Current Law Approach: 15.1%; 
Modified House Approach: 14.7%; 
Modified Administration Approach: 16.7%; 
Modified Senate Approach: 15.9%. 

Fiscal year: 2037; 
Modified Current Law Approach: 15%; 
Modified House Approach: 14.7%; 
Modified Administration Approach: 16.6%; 
Modified Senate Approach: 15.9%. 

Fiscal year: 2038; 
Modified Current Law Approach: 14.9%; 
Modified House Approach: 14.6%; 
Modified Administration Approach: 16.5%; 
Modified Senate Approach: 15.9%. 

Fiscal year: 2039; 
Modified Current Law Approach: 14.8%; 
Modified House Approach: 14.5%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 15.7%. 

Fiscal year: 2040; 
Modified Current Law Approach: 14.6%; 
Modified House Approach: 14.3%; 
Modified Administration Approach: 16.1%; 
Modified Senate Approach: 15.5%. 

Source: GAO. 

[End of figure] 

Figure 6 illustrates the projected unfunded liability, as a percentage 
of projected USPS annual compensation costs, as of the end of each 
fiscal year from 2012 through 2040. For each approach modeled, the 
projection starts at the estimated unfunded liability of 108 percent 
of compensation as of the end of fiscal year 2012.[Footnote 40] In the 
short term, the unfunded liability as a percentage of compensation 
trends down under the Modified House Approach and Modified Current Law 
Approach because of their relatively high required early payments, 
while the unfunded liability as a percentage of compensation trends 
upward under the Modified Administration Approach and, for a somewhat 
longer period, under the Modified Senate Approach. In the longer term, 
the unfunded liability as a percentage of compensation trends down 
under all four approaches. 

By the end of the projection period in fiscal year 2040, the vast 
majority of the unfunded liability, measured as a percentage of 
compensation, is projected to be eliminated under the Modified House 
and Modified Current Law Approaches, while a smaller majority of it is 
projected to be eliminated under the Modified Administration Approach. 
A larger unfunded liability as a percentage of compensation is 
projected to be retained under the Modified Senate Approach because of 
its 80 percent funding target. 

Figure 6: Estimated Unfunded Liability (as a Percentage of USPS's 
Annual Compensation Costs) for Different Approaches from Fiscal Year-
end 2012 to Fiscal Year-end 2040 under Current Law Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2012; 
Modified Current Law Approach: 107.9%; 
Modified House Approach: 108%; 
Modified Administration Approach: 107.9%%; 
Modified Senate Approach: 107.9%. 

Fiscal year: 2013; 
Modified Current Law Approach: 113.6; 
Modified House Approach: 113.6%; 
Modified Administration Approach: 131.2%; 
Modified Senate Approach: 123.6%. 

Fiscal year: 2014; 
Modified Current Law Approach: 108%; 
Modified House Approach: 108%; 
Modified Administration Approach: 135.4%; 
Modified Senate Approach: 129.7%. 

Fiscal year: 2015; 
Modified Current Law Approach: 100.2%; 
Modified House Approach: 94.7%; 
Modified Administration Approach: 138.1%; 
Modified Senate Approach: 134.6%. 

Fiscal year: 2016; 
Modified Current Law Approach: 90.3%; 
Modified House Approach: 79.1%; 
Modified Administration Approach: 139.3%; 
Modified Senate Approach: 138.4%. 

Fiscal year: 2017; 
Modified Current Law Approach: 91.1%; 
Modified House Approach: 80.1%; 
Modified Administration Approach: 139.4%; 
Modified Senate Approach: 141.6%. 

Fiscal year: 2018; 
Modified Current Law Approach: 91.6%; 
Modified House Approach: 80.8%; 
Modified Administration Approach: 139.1%; 
Modified Senate Approach: 144.4%. 

Fiscal year: 2019; 
Modified Current Law Approach: 92%; 
Modified House Approach: 81.3%; 
Modified Administration Approach: 138.6%; 
Modified Senate Approach: 147.2%. 

Fiscal year: 2020; 
Modified Current Law Approach: 91.6%; 
Modified House Approach: 81.2%; 
Modified Administration Approach: 137.2%; 
Modified Senate Approach: 149.1%. 

Fiscal year: 2021; 
Modified Current Law Approach: 91.1%; 
Modified House Approach: 80.9%; 
Modified Administration Approach: 135.7%; 
Modified Senate Approach: 150.9%. 

Fiscal year: 2022; 
Modified Current Law Approach: 90.1%; 
Modified House Approach: 80.2%; 
Modified Administration Approach: 133.4%; 
Modified Senate Approach: 151.8%. 

Fiscal year: 2023; 
Modified Current Law Approach: 87.6%; 
Modified House Approach: 78.1%; 
Modified Administration Approach: 128.9%; 
Modified Senate Approach: 150.3%. 

Fiscal year: 2024; 
Modified Current Law Approach: 84.8%; 
Modified House Approach: 75.8%; 
Modified Administration Approach: 124.3%; 
Modified Senate Approach: 148.5%. 

Fiscal year: 2025; 
Modified Current Law Approach: 81.8%; 
Modified House Approach: 73.2%; 
Modified Administration Approach: 119.5%; 
Modified Senate Approach: 146.4%. 

Fiscal year: 2026; 
Modified Current Law Approach: 78.6%; 
Modified House Approach: 70.5%; 
Modified Administration Approach: 114.5%; 
Modified Senate Approach: 144.1%. 

Fiscal year: 2027; 
Modified Current Law Approach: 75.3%; 
Modified House Approach: 67.5%; 
Modified Administration Approach: 109.4%; 
Modified Senate Approach: 141.5%. 

Fiscal year: 2028; 
Modified Current Law Approach: 71.7%; 
Modified House Approach: 64.2%; 
Modified Administration Approach: 104.2%; 
Modified Senate Approach: 138.7%. 

Fiscal year: 2029; 
Modified Current Law Approach: 67.8%; 
Modified House Approach: 60.8%; 
Modified Administration Approach: 98.7%; 
Modified Senate Approach: 135.5%. 

Fiscal year: 2030; 
Modified Current Law Approach: 63.8%; 
Modified House Approach: 57.1%; 
Modified Administration Approach: 93.1%; 
Modified Senate Approach: 132.1%. 

Fiscal year: 2031; 
Modified Current Law Approach: 59.5%; 
Modified House Approach: 53.2%; 
Modified Administration Approach: 87.3%; 
Modified Senate Approach: 128.4%. 

Fiscal year: 2032; 
Modified Current Law Approach: 55%; 
Modified House Approach: 49%; 
Modified Administration Approach: 81.3%; 
Modified Senate Approach: 124.3%. 

Fiscal year: 2033; 
Modified Current Law Approach: 50.3%; 
Modified House Approach: 44.6%; 
Modified Administration Approach: 75.2%; 
Modified Senate Approach: 120%. 

Fiscal year: 2034; 
Modified Current Law Approach: 45.4%; 
Modified House Approach: 40%; 
Modified Administration Approach: 68.8%; 
Modified Senate Approach: 115.4%. 

Fiscal year: 2035; 
Modified Current Law Approach: 40.2%; 
Modified House Approach: 35.2%; 
Modified Administration Approach: 62.3%; 
Modified Senate Approach: 110.5%. 

Fiscal year: 2036; 
Modified Current Law Approach: 34.8%; 
Modified House Approach: 30.1%; 
Modified Administration Approach: 55.6%; 
Modified Senate Approach: 105.3%. 

Fiscal year: 2037; 
Modified Current Law Approach: 29.3%; 
Modified House Approach: 24.9%; 
Modified Administration Approach: 48.8%; 
Modified Senate Approach: 99.9%. 

Fiscal year: 2038; 
Modified Current Law Approach: 23.6%; 
Modified House Approach: 19.4%; 
Modified Administration Approach: 41.8%; 
Modified Senate Approach: 94.2%. 

Fiscal year: 2039; 
Modified Current Law Approach: 17.7%; 
Modified House Approach: 13.8%; 
Modified Administration Approach: 34.7%; 
Modified Senate Approach: 88.5%. 

Fiscal year: 2040; 
Modified Current Law Approach: 11.7%; 
Modified House Approach: 8.1%; 
Modified Administration Approach: 27.5%; 
Modified Senate Approach: 82.6%. 

Source: GAO. 

Note: Under all four modified approaches to prefunding, the unfunded 
liability starts at the same point at September 30, 2012, and begins 
to diverge in fiscal year 2013 with the different approaches to 
prefunding. 

[End of figure] 

Figure 7 illustrates the funding gap by another measure, the funded 
ratio--that is, the percentage of the liability that is covered by 
PSRHBF assets. This figure illustrates how a divergence emerges from 
fiscal year 2013 to fiscal year 2016 between the Modified House and 
Current Law Approaches on the one hand, and the Modified 
Administration and Senate Approaches on the other hand. By the end of 
the projection period, the funded ratio is projected to be just short 
of the 100 percent target under the Modified House and Modified 
Current Law Approaches, slightly further away from 100 percent under 
the modified Administration Approach, and, under the Modified Senate 
Approach, approaching its lower 80 percent funded ratio target. 

Figure 7: Estimated Funded Ratios for Different Approaches from Fiscal 
Year-end 2012 to Fiscal Year-end 2040 under Current Law Assumption 
Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2012; 
Modified Current Law Approach: 48%; 
Modified House Approach: 48%; 
Modified Administration Approach: 48%; 
Modified Senate Approach: 48%. 

Fiscal year: 2013; 
Modified Current Law Approach: 53%; 
Modified House Approach: 53%; 
Modified Administration Approach: 46%; 
Modified Senate Approach: 49%. 

Fiscal year: 2014; 
Modified Current Law Approach: 58%; 
Modified House Approach: 58%; 
Modified Administration Approach: 48%; 
Modified Senate Approach: 50%. 

Fiscal year: 2015; 
Modified Current Law Approach: 63%; 
Modified House Approach: 65%; 
Modified Administration Approach: 49%; 
Modified Senate Approach: 51%. 

Fiscal year: 2016; 
Modified Current Law Approach: 68%; 
Modified House Approach: 72%; 
Modified Administration Approach: 51%; 
Modified Senate Approach: 52%. 

Fiscal year: 2017; 
Modified Current Law Approach: 69%; 
Modified House Approach: 73%; 
Modified Administration Approach: 53%; 
Modified Senate Approach: 52%. 

Fiscal year: 2018; 
Modified Current Law Approach: 70%; 
Modified House Approach: 74%; 
Modified Administration Approach: 55%; 
Modified Senate Approach: 53%. 

Fiscal year: 2019; 
Modified Current Law Approach: 71%; 
Modified House Approach: 74%; 
Modified Administration Approach: 56%; 
Modified Senate Approach: 54%. 

Fiscal year: 2020; 
Modified Current Law Approach: 72%; 
Modified House Approach: 75%; 
Modified Administration Approach: 58%; 
Modified Senate Approach: 54%. 

Fiscal year: 2021; 
Modified Current Law Approach: 73%; 
Modified House Approach: 76%; 
Modified Administration Approach: 59%; 
Modified Senate Approach: 55%. 

Fiscal year: 2022; 
Modified Current Law Approach: 74%; 
Modified House Approach: 76%; 
Modified Administration Approach: 61%; 
Modified Senate Approach: 55%. 

Fiscal year: 2023; 
Modified Current Law Approach: 74%; 
Modified House Approach: 77%; 
Modified Administration Approach: 62%; 
Modified Senate Approach: 56%. 

Fiscal year: 2024; 
Modified Current Law Approach: 75%; 
Modified House Approach: 78%; 
Modified Administration Approach: 64%; 
Modified Senate Approach: 57%. 

Fiscal year: 2025; 
Modified Current Law Approach: 76%; 
Modified House Approach: 79%; 
Modified Administration Approach: 65%; 
Modified Senate Approach: 57%. 

Fiscal year: 2026; 
Modified Current Law Approach: 77%; 
Modified House Approach: 79%; 
Modified Administration Approach: 67%; 
Modified Senate Approach: 58%. 

Fiscal year: 2027; 
Modified Current Law Approach: 78%; 
Modified House Approach: 80%; 
Modified Administration Approach: 68%; 
Modified Senate Approach: 59%. 

Fiscal year: 2028; 
Modified Current Law Approach: 79%; 
Modified House Approach: 81%; 
Modified Administration Approach: 69%; 
Modified Senate Approach: 59%. 

Fiscal year: 2029; 
Modified Current Law Approach: 80%; 
Modified House Approach: 82%; 
Modified Administration Approach: 71%; 
Modified Senate Approach: 60%. 

Fiscal year: 2030; 
Modified Current Law Approach: 81%; 
Modified House Approach: 83%; 
Modified Administration Approach: 72%; 
Modified Senate Approach: 61%. 

Fiscal year: 2031; 
Modified Current Law Approach: 82%; 
Modified House Approach: 84%; 
Modified Administration Approach: 74%; 
Modified Senate Approach: 62%. 

Fiscal year: 2032; 
Modified Current Law Approach: 84%; 
Modified House Approach: 85%; 
Modified Administration Approach: 76%; 
Modified Senate Approach: 63%. 

Fiscal year: 2033; 
Modified Current Law Approach: 85%; 
Modified House Approach: 87%; 
Modified Administration Approach: 77%; 
Modified Senate Approach: 64%. 

Fiscal year: 2034; 
Modified Current Law Approach: 86%; 
Modified House Approach: 88%; 
Modified Administration Approach: 79%; 
Modified Senate Approach: 65%. 

Fiscal year: 2035; 
Modified Current Law Approach: 88%; 
Modified House Approach: 89%; 
Modified Administration Approach: 81%; 
Modified Senate Approach: 66%. 

Fiscal year: 2036; 
Modified Current Law Approach: 89%; 
Modified House Approach: 91%; 
Modified Administration Approach: 83%; 
Modified Senate Approach: 68%. 

Fiscal year: 2037; 
Modified Current Law Approach: 91%; 
Modified House Approach: 92%; 
Modified Administration Approach: 85%; 
Modified Senate Approach: 69%. 

Fiscal year: 2038; 
Modified Current Law Approach: 93%; 
Modified House Approach: 94%; 
Modified Administration Approach: 87%; 
Modified Senate Approach: 70%. 

Fiscal year: 2039; 
Modified Current Law Approach: 94%; 
Modified House Approach: 96%; 
Modified Administration Approach: 89%; 
Modified Senate Approach: 72%. 

Fiscal year: 2040; 
Modified Current Law Approach: 96%; 
Modified House Approach: 97%; 
Modified Administration Approach: 91%; 
Modified Senate Approach: 73%. 

Source: GAO. 

Note: Under all four modified approaches to prefunding, the funded 
ratio starts at the same point at September 30, 2012, and begins to 
diverge in fiscal year 2013 with the different approaches to 
prefunding. 

[End of figure] 

The annual prefunding payments that have been made since prefunding 
commenced in 2007--and that would continue to be made under any of the 
four prefunding approaches examined here--can be broken down into two 
components: a portion to pay for the cost of future benefits 
attributable to the current year of employees' service (the "normal 
cost"), and the remainder, which pays down part of the unfunded 
liability. One of the rationales for prefunding is to pay for benefits 
as they are earned--during the working years--rather than later after 
the workers have retired and are no longer generating revenue for the 
enterprise. Further, this serves the purpose of assigning full costs 
of current employee compensation to current ratepayers, rather than to 
future ratepayers. A complicating factor is what might be called the 
"legacy" unfunded liability, i.e., the existing unfunded liability 
that conceptually should have been paid by ratepayers in prior years 
but was not. There is no obvious answer as to who should be 
responsible for the legacy unfunded liability, which ultimately comes 
down to a policy decision. The approach in PAEA spreads the cost of 
USPS's legacy unfunded liability over 50-plus years of then-future 
postal ratepayers. 

To illustrate the portion of prefunding requirements that are 
attributable to legacy costs, we found that across the four different 
prefunding approaches that we examined, legacy costs would account for 
anywhere from 39 percent to 53 percent of the prefunding requirement 
in fiscal year 2017, tapering down to anywhere from 8 percent to 18 
percent by fiscal year 2040.[Footnote 41] 

Sensitivity to Assumptions: 

Measurements of actuarial costs and liabilities, as well as 
projections of such measures into the future, are subject to inherent 
uncertainty, and depend on a combination of economic and demographic 
assumptions as to future experience. Current law requires OPM to 
determine the value of USPS's retiree health benefit liability based 
on actuarial assumptions that are consistent with those used by OPM 
for its financial reporting of liabilities for federal employee 
benefits. These assumptions are to be used to determine USPS's funding 
requirements beginning in fiscal year 2017, when current law switches 
from a fixed-payment prefunding requirement to actuarially determined 
prefunding requirements. When the current law was enacted, this 
approach to selecting actuarial assumptions was consistent with the 
approach used by OPM for determining funding requirements for USPS's 
participation in the CSRS and FERS pension programs. 

In 2008, the Federal Accounting Standards Advisory Board (FASAB), 
which promulgates financial reporting standards for the federal 
government, issued Statement of Federal Financial Accounting Standards 
No. 33 (SFFAS 33), which, beginning in 2010, specified particular, new 
methodologies for the selection of economic assumptions for valuing 
various post-employment benefits for financial reporting purposes. 
[Footnote 42] As a result, the assumptions used by OPM for financial 
reporting for federal employee benefits--and by extension under the 
current law, for determining USPS's future prefunding requirements for 
retiree health care benefits--became different from the assumptions 
used by OPM to determine USPS's funding requirements for CSRS and 
FERS. The House and Administration Approaches retain the current law 
assumption basis for determining USPS's prefunding requirements; the 
Senate Approach would switch the determination of USPS's prefunding 
requirements to assumptions consistent with those now used for USPS's 
funding requirements for CSRS and FERS. 

The particular assumptions that differ are with respect to the 
interest rate (also known as the discount rate), the general inflation 
assumption, and the medical inflation (also known as the "trend") 
assumption. Table 5 shows the differences in these assumptions for the 
September 30, 2011, actuarial valuations performed by OPM, which 
served as the basis for our projections.[Footnote 43] 

Table 5: Key Differences between the Two sets of PSRHBF Funding 
Assumptions, as of September 30, 2011: 

Basis: 
Current law assumption basis (also used in House and Administration 
Approaches): Consistent with OPM's financial reporting of actuarial 
value of federal employee benefits; 
Senate bill assumption basis: Consistent with USPS's funding 
requirements for CSRS and FERS. 

Interest rate (also known as discount rate): 
Current law assumption basis (also used in House and Administration 
Approaches): 4.90; 
Senate bill assumption basis: 5.75. 

General inflation: 
Current law assumption basis (also used in House and Administration 
Approaches): 2.40; 
Senate bill assumption basis: 3.00. 

Medical inflation (also known as the "trend" assumption)[A]: Initial 
rate; 
Current law assumption basis (also used in House and Administration 
Approaches): 5.50; 
Senate bill assumption basis: 5.50; 

Medical inflation (also known as the "trend" assumption)[A]: Peak rate; 
Current law assumption basis (also used in House and Administration 
Approaches): 6.39; 
Senate bill assumption basis: 4.96. 

Medical inflation (also known as the "trend" assumption)[A]: Ultimate 
rate; 
Current law assumption basis (also used in House and Administration 
Approaches): 4.35; 
Senate bill assumption basis: 7.01; 

Source: GAO. 

[A] The trend assumption rises to a peak rate for 2015 and very 
gradually falls to an ultimate rate for 2084 and later. 

[End of table] 

Under SFFAS 33, the discount rate assumption should reflect average 
historical interest rates, over the prior 5 years or longer, on 
marketable Treasury securities with maturities consistent with the 
cash flows being discounted. The number of historical rates used in 
the calculation of this historical average should be consistent from 
year to year. OPM uses a 10-year historical averaging period.[Footnote 
44] Further, the discount rate, the inflation assumption, and other 
economic assumptions should be consistent with one another.[Footnote 
45] OPM determines the general inflation assumption under SFFAS 33 
using the same 10-year historical averaging period that it uses in 
determining the discount rate. The selection of assumptions is also 
guided by relevant Actuarial Standards of Practice, which are 
promulgated by the Actuarial Standards Board. 

In contrast to the current law assumption basis that is now tied to a 
historical averaging period, the assumptions for determining USPS's 
funding requirements for CSRS and FERS represent OPM's estimate of 
future, long-term experience, informed by advice from an independent 
Board of Actuaries, and similarly guided by relevant Actuarial 
Standards of Practice. These standards too require that economic 
assumptions be consistent with one another. 

The relationship between the two assumption bases illustrated in table 
5 is not static, so that the gap between the two assumption bases, and 
even which assumption base has higher rates, could change over time. 
It is important to note that assumptions that are tied to historical 
averages--as is the case under the current law assumption basis since 
the promulgation of SFFAS 33--can potentially diverge significantly 
from either current economic circumstances or from the current long-
term economic outlook. The assumption criteria in SFFAS 33 were 
designed to accomplish financial reporting objectives rather than 
funding objectives. 

In selecting the medical inflation assumption, OPM relies on a model 
developed by the Society of Actuaries.[Footnote 46] This model ties 
medical inflation to the general inflation assumption (among other 
factors), so that a higher expected general inflation rate implies 
higher expected medical inflation. 

As mentioned earlier, we modeled all four modified prefunding 
approaches in two ways: first, as if they all used the current law 
assumption basis, and second, as if they all used the Senate bill 
assumption basis. Our findings and conclusions are not materially 
different under the two different assumption bases. Figure 8 compares 
the dollar amount of estimated USPS payments, in each fiscal year from 
2013 through 2020, under the Modified Senate Approach to prefunding, 
using both the current law assumption basis and the Senate bill 
assumption basis. These dollar payment amounts differ by just 2 
percent in aggregate over the period, and by not more than 4 percent 
in any particular year. 

Figure 8: Estimated Annual Payments for Modified Senate Prefunding 
Approach from Fiscal Year 2013 to Fiscal Year 2020 under Current Law 
Assumption Basis and Senate Bill Assumption Basis: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2013; 
Current law assumption basis: $4.432 billion; 
Senate bill assumption basis: $4.275 billion. 

Fiscal year: 2014; 
Current law assumption basis: $4.459 billion; 
Senate bill assumption basis: $4.319 billion. 

Fiscal year: 2015; 
Current law assumption basis: $4.545 billion; 
Senate bill assumption basis: $4.430 billion. 

Fiscal year: 2016; 
Current law assumption basis: $4.711 billion; 
Senate bill assumption basis: $4.612 billion. 

Fiscal year: 2017; 
Current law assumption basis: $4.902 billion; 
Senate bill assumption basis: $4.817 billion. 

Fiscal year: 2018; 
Current law assumption basis: $5.097 billion; 
Senate bill assumption basis: $5.024 billion. 

Fiscal year: 2019; 
Current law assumption basis: $5.305 billion; 
Senate bill assumption basis: $5.243 billion. 

Fiscal year: 2020; 
Current law assumption basis: $5.549 billion; 
Senate bill assumption basis: $5.495 billion. 

Source: GAO. 

[End of figure] 

Figure 9 compares estimated USPS payments under the Modified Senate 
Prefunding Approach, over the entire projection period from fiscal 
years 2013 through 2040, as a percentage of projected USPS annual 
compensation costs, again under both the current law assumption basis 
and the Senate bill assumption basis. The difference in the average 
payment percentage is just 0.7 percentage point, with the difference 
never exceeding 1 percentage point in any year. 

Figure 9: Estimated Annual Payments (as a Percentage of Compensation) 
for Modified Senate Prefunding Approach from Fiscal Year 2013 through 
Fiscal Year 2040 under Current Law Assumption Basis and Senate Bill 
Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2013; 
Current law assumption basis: $10.6%; 
Senate bill assumption basis: $10.1%. 

Fiscal year: 2014; 
Current law assumption basis: $10.8%; 
Senate bill assumption basis: $10%. 

Fiscal year: 2015; 
Current law assumption basis: $11%; 
Senate bill assumption basis: $10.6%. 

Fiscal year: 2016; 
Current law assumption basis: $11.4%; 
Senate bill assumption basis: $10.9%. 

Fiscal year: 2017; 
Current law assumption basis: $11.8%; 
Senate bill assumption basis: $11.2%. 

Fiscal year: 2018; 
Current law assumption basis: $12.2%; 
Senate bill assumption basis: $11.6%. 

Fiscal year: 2019; 
Current law assumption basis: $12.6%; 
Senate bill assumption basis: $11.9%. 

Fiscal year: 2020; 
Current law assumption basis: $13%; 
Senate bill assumption basis: $12.2%. 

Fiscal year: 2021; 
Current law assumption basis: $13.4%; 
Senate bill assumption basis: $12.6%. 

Fiscal year: 2022; 
Current law assumption basis: $13.8%; 
Senate bill assumption basis: $12.9%. 

Fiscal year: 2023; 
Current law assumption basis: $14%; 
Senate bill assumption basis: $13.2%. 

Fiscal year: 2024; 
Current law assumption basis: $14.2%; 
Senate bill assumption basis: $13.5%. 

Fiscal year: 2025; 
Current law assumption basis: $14.4%; 
Senate bill assumption basis: $13.8%. 

Fiscal year: 2026; 
Current law assumption basis: $14.6%; 
Senate bill assumption basis: $14%. 

Fiscal year: 2027; 
Current law assumption basis: $14.8%; 
Senate bill assumption basis: $14.2%. 

Fiscal year: 2028; 
Current law assumption basis: $15%; 
Senate bill assumption basis: $14.4%. 

Fiscal year: 2029; 
Current law assumption basis: $15.2%; 
Senate bill assumption basis: $14.6%. 

Fiscal year: 2030; 
Current law assumption basis: $15.3%; 
Senate bill assumption basis: $14.8%. 

Fiscal year: 2031; 
Current law assumption basis: $15.5%; 
Senate bill assumption basis: $14.9%. 

Fiscal year: 2032; 
Current law assumption basis: $15.6%; 
Senate bill assumption basis: $15%. 

Fiscal year: 2033; 
Current law assumption basis: $15.7%; 
Senate bill assumption basis: $15.1%. 

Fiscal year: 2034; 
Current law assumption basis: $15.8%; 
Senate bill assumption basis: $15.1%. 

Fiscal year: 2035; 
Current law assumption basis: $15.9%; 
Senate bill assumption basis: $15.2%. 

Fiscal year: 2036; 
Current law assumption basis: $15.9%; 
Senate bill assumption basis: $15.2%. 

Fiscal year: 2037; 
Current law assumption basis: $15.9%; 
Senate bill assumption basis: $15.2%. 

Fiscal year: 2038; 
Current law assumption basis: $15.9%; 
Senate bill assumption basis: $15.1%. 

Fiscal year: 2039; 
Current law assumption basis: $15.7%; 
Senate bill assumption basis: $14.8%. 

Fiscal year: 2040; 
Current law assumption basis: $15.5%; 
Senate bill assumption basis: $14.5%. 

Source: GAO. 

[End of figure] 

Because of the closeness of the results using the two assumption 
bases, we have chosen to present numerical results across all four 
prefunding approaches using the current law assumption basis in the 
main body of this report. Appendix II contains comparable numerical 
results using the Senate bill assumption basis. The primary reason for 
similar results under the two assumption bases is that the effects of 
differences in particular assumptions are offsetting to a certain 
extent. For example, the discount rate of 5.75 percent under the 
Senate bill assumption basis is more optimistic than the discount rate 
of 4.90 percent under the current law assumption basis. However, a 
higher discount rate suggests higher inflation and medical inflation; 
the higher medical inflation offsets much of the benefit of the higher 
discount rate. 

The two different inflation assumptions were also incorporated into 
our projection of USPS's annual compensation costs, which we extended 
based on a 10-year forecast of workforce and compensation provided to 
us by USPS. More information on these data and projections is provided 
in appendix I. We did not otherwise analyze variations in the 
workforce and compensation assumptions, as a more extensive analysis 
of assumption variations was beyond the scope of our study. 

As USPS notes correctly in its fiscal year 2011 Form 10-K report, 
"Because calculation of this [retiree health benefits] liability 
involves several areas of judgment, estimates of the liability could 
vary significantly depending on the assumptions used."[Footnote 47] In 
comparing the effects of the current law assumption basis versus the 
Senate bill assumption basis, we noted that differences in the 
discount rate and medical inflation assumptions have offsetting 
effects, so that the aggregate difference between the two assumption 
bases is not large. If, however, one of the assumptions were to change 
without an offsetting change in another assumption, the impact would 
be larger. OPM provided information on the sensitivity of the 
liability to variation in the medical trend alone, holding other 
assumptions constant. OPM's most recent measure of USPS's liability 
for retiree health benefits would have been 16 percent higher if the 
medical trend assumption had been one percentage point higher in all 
years (i.e., in table 5 above, 6.5 percent instead of 5.5 percent in 
the first year, etc.), and would have been 13 percent lower if the 
medical trend assumption had been one percentage point lower. 
Moreover, because the unfunded liability is equal to the difference 
between the liability itself and the amount of assets, a given 
percentage change in the liability can produce a larger percentage 
change in the unfunded liability. If the 2011 liability had been 16 
percent higher, the unfunded liability would have been 31 percent 
higher; if the liability had been 13 percent lower, the unfunded 
liability would have been 26 percent lower. Thus, the $46 billion 
unfunded liability as of September 30, 2011, varies from $34 billion 
to $60 billion over this range of alternative assumptions. See table 6 
below. 

Table 6: Sensitivity of Fiscal Year-end 2011 Unfunded Liability to One-
Percentage-Point Change in Medical Inflation Assumption: 

Liability; 
Actual amount: $90.3; 
If medical inflation one percentage point higher: 
New amount: $104.4; 
Percent change: +16%; 
If medical inflation one percentage point lower: 
New amount: $78.5; 
Percent change: -13%. 

Assets; 
Actual amount: $44.1; 
If medical inflation one percentage point higher: 
New amount: $44.1; 
Percent change: 0; 
If medical inflation one percentage point lower:
New amount: $44.1; 
Percent change: 0. 

Unfunded Liability = Liability - Assets; 
Actual amount: $46.2; 
If medical inflation one percentage point higher: 
New amount: $60.3; 
Percent change: +31%; 
If medical inflation one percentage point lower: 
New amount: $34.4; 
Percent change: -26%. 

Source: GAO. 

[End of table] 

Pay-as-You-Go Funding: 

Arguments have been made that requiring USPS to prefund its retiree 
health care benefits is unnecessary, unfair, or inadvisable, so we 
also examined the effects of a Pay-as-You-Go Approach. Under pay-as-
you-go funding, each year USPS would only pay its share of premium 
payments for then-existing retirees and beneficiaries--there would be 
no prefunding. 

Given that money has already been prefunded in the PSRHBF, we first 
modeled a pay-as-you-go funding approach in which the fund would be 
drawn upon to pay USPS's share of premium payments for as long as 
possible. Under this approach, no additional contributions would be 
made to the fund, the fund would grow with interest, and USPS's share 
of premium payments for retirees and beneficiaries would be paid out 
of the fund until the fund was exhausted. Once the fund was exhausted, 
USPS would pay these premiums directly as they became due. 

Our projections show that, under either of the two sets of assumptions 
[Footnote 48]--the current law and Senate bill assumption bases--the 
PSRHBF would become exhausted in 14 years, in 2026. USPS would have 
zero reported costs for retiree health benefits until then. Beginning 
in 2026, USPS would begin paying its share of premium payments. By 
2040, under the current law assumption basis, this annual cost is 
projected to be about $13 billion, not much different than the annual 
prefunding cost in fiscal year 2040 under the four different 
prefunding approaches. The big difference would be in the unfunded 
liability. Under this Pay-as-You-Go Approach, the unfunded liability 
in fiscal year 2040 would be about $250 billion, which would be about 
$130 billion in 2012 dollars, and about 310 percent of USPS's 
projected annual compensation cost. By comparison, under the modified 
Senate prefunding approach, which produces the largest unfunded 
liability of the four prefunding approaches, the unfunded liability in 
fiscal year 2040 would be about 85 percent of projected annual 
compensation cost. 

In summary, once the trust fund became exhausted, annual pay-as-you-go 
payments would not become significantly more onerous than annual 
prefunding payments, at least through the end of our projection period 
in fiscal year 2040. However, the Pay-as-You-Go Approach would produce 
a vastly bigger unfunded liability--which could eventually require an 
escalation of postal rates or reduction in costs. 

We examined a second variation of pay-as-you-go funding, an approach 
that the USPS OIG analyzed and reported on in February 2012.[Footnote 
49] Under this approach, USPS would stop making prefunding payments 
and would pay its share of premium payments for retirees and 
beneficiaries as they become due. The existing fund would be left to 
grow with interest, with no other cash inflow or outflow. The 
intention would be for this to continue only until USPS's liability 
was fully funded.[Footnote 50] The USPS OIG has informally referred to 
this approach as the "Seal and Grow" Approach. 

The USPS OIG estimated that the fund would grow from $44 billion (its 
September 30, 2011, level) to $90 billion in 21 years. The USPS OIG 
did not estimate the liability or unfunded liability in 21 years, but 
noted that while the liability is not a static amount, and has risen 
over time historically, it had not changed significantly over the 
prior 3 years, going from $87 billion at fiscal year-end 2009 to $91 
billion at fiscal year-end 2010 to $90 billion at fiscal year-end 
2011.[Footnote 51] 

Some have concluded from this analysis that USPS's unfunded liability 
of $46 billion would be eliminated in 21 years by adopting this 
approach. However, our projections of the unfunded liability, which 
incorporate OPM's projections of the liability itself, show that the 
liability, in fact, would increase, resulting in a significant 
increase in the unfunded liability rather than its elimination. 
Specifically, we project that the unfunded liability would grow from 
$46 billion at fiscal year-end 2011 to $86 billion at fiscal year-end 
2032 under this approach. The $86 billion estimate is equal to $53 
billion in 2012 dollars and 139 percent of fiscal year 2032 
compensation (up from 96 percent for fiscal year 2011).[Footnote 52] 

The USPS OIG's projection of assets - from $44 billion to $90 billion 
over 21 years - represents a 3.5 percent annual return over this 
period. Under our projection, using the current law assumption basis, 
assets grow from $44 billion to $120 billion over this period, at the 
assumed return of 4.9 percent, but the liability grows from $90 
billion to $206 billion, or at an average rate of 4.0 percent per 
year. This projected liability growth reflects the net effect of 
accretions for interest, accretions for normal cost (with a reduced 
workforce), and reductions as premium payments are made, thereby 
discharging a portion of the liability. The projected liability would 
have to be 42 percent lower than projected for the unfunded liability 
to disappear by 2032. For this to occur (in the absence of cuts to 
benefits), future experience would have to be much more favorable than 
predicted by the assumptions. 

Nonetheless, under this Seal and Grow Approach the funded percentage 
is projected to improve over time. Because premium payments are 
projected to exceed normal cost for most of the projection period, the 
liability is projected to grow at a slower rate than assets (as noted 
in the preceding paragraph). As a result, the liability is projected 
to be 70 percent funded by 2040, close to the 73 percent projected 
funded percentage under the Modified Senate Approach.[Footnote 53] 
Thus, like the Modified Senate Approach, the Seal and Grow Approach is 
projected to result in a significant improvement in the funded 
percentage over the projection period, while still leaving a 
substantially larger unfunded liability relative to the Modified 
Current Law, House, and Administration Approaches. Moreover, USPS's 
payments under the Seal and Grow Approach would be more backloaded 
than under the Modified Senate Approach--with lower payments in the 
short term and higher payments later--making it more affordable in the 
short term but resulting in higher estimated unfunded liabilities in 
the short term as well. 

Key Considerations for Assessing Funding Approaches: 

To assist Congress in considering the various funding approaches, we 
identified some factors to consider in assessing what would constitute 
reasonable short-term and long-term funding requirements. We also 
examined the prefunding requirements of other organizations that offer 
retiree health benefits to their employees. Given that USPS is 
intended to be a self-sustaining entity funded almost entirely by 
postal revenue, we have previously stated that USPS should prefund its 
retiree health benefit liability to the maximum extent that its 
finances permit. 

Funding Approach Considerations: 

The following considerations should be taken into account when 
assessing the various funding approaches for USPS. 

Rationale for Prefunding: 

Consideration of whether to prefund retiree health benefits includes 
the associated consequences of the potential inability to fund the 
remaining unfunded liability or keep up with annual premium payments. 
In general, rationales for prefunding post-retirement benefits for any 
enterprise, whether for pension benefits or retiree medical benefits, 
can include the following: 

* Achieving an equitable allocation of cost over time by paying for 
retirement benefits during the employees' working years, when such 
benefits are earned. For USPS, the relevant cost allocation is between 
current and future postal ratepayers. The rationale is to have current 
ratepayers pay for the full cost of compensation for current 
employees, including the portion of such current compensation that is 
not paid until these current employees are retired. However, as noted 
earlier, an additional consideration is the "legacy" unfunded 
liability that was not paid by ratepayers in prior years. The 
conceptual rationale for prefunding does not answer the question of 
who should be responsible for a legacy unfunded liability. 

* Protecting the future viability of an enterprise by not saddling it 
with bills later after employees have already retired. In the case of 
USPS, this consideration is complicated by the organization's 
financial condition. 

* Providing greater benefit security to employees, retired employees, 
and their beneficiaries. Funded benefits protect against an inability 
to make payments later on, and can also make the promised benefits 
less vulnerable to cuts. In the private sector, failure to prefund 
retiree health benefits may have contributed to private employers 
terminating or reducing such benefits. In the state and local 
government sector, large unfunded liabilities for both retiree health 
and pension benefits have led to pressure and actions to trim the 
levels of these benefits. Others have contended that the mere 
requirement to account for the cost of these benefits in employers' 
financial reporting has led to benefits being cut. While an analysis 
of the cause of retiree health benefit cuts in other sectors is beyond 
the scope of our research, failure to prefund these benefits is a 
potential benefit security concern. 

* Providing security to any other party that might become responsible 
for part of the liability in the event of an enterprise's inability to 
pay for the remainder of the unfunded liability. For example, the 
Pension Benefit Guaranty Corporation is responsible for backing up 
private sector pension benefits when companies are unable to do so. 
According to the OPM OIG, the consequences if USPS could not pay for 
its retiree health benefits are unclear.[Footnote 54] 

Trade-offs: 

The effect of trade-offs among the different approaches on a number of 
issues would need to be considered, including trade-offs affecting: 

* USPS's financial condition. Protecting the future viability of USPS 
by not overwhelming it with bills and unfunded liabilities for the 
cost of employee benefits after these employees have already retired 
is complicated by the organization's immediate cash flow challenges 
including having reached the maximum of its borrowing authority. 
Prefunding payments under current law have contributed about $21 
billion toward USPS's $25 billion of net losses over the past 5 years. 
If USPS continues to experience operational losses even before 
factoring in prefunding requirements, prefunding would add to such 
losses. As such, USPS would need to find larger cuts in operational 
costs now in order to have the cash to make its short-term prefunding 
payments. On the other hand, to the extent short-term prefunding 
payments are postponed, greater payments would be required later, 
supported by a smaller base of mail volume, with price caps further 
limiting revenue. Such a scenario would produce even greater pressure 
for cuts in operational costs later as well as raise concerns about 
USPS's ability to make prefunding payments, when unfunded liabilities 
would be greater because of the deferral of prefunding payments. 

USPS's OIG has stated that as an alternative to additional prefunding, 
USPS's extensive real estate holdings could provide collateral for the 
remaining unfunded liability.[Footnote 55] However, USPS has stated 
that it does not believe that USPS-occupied real estate would be a 
suitable asset within the PSRHBF because employer-occupied real estate 
cannot be readily sold to provide cash when needed to pay 
benefits.[Footnote 56] In addition, we would note that in the event of 
USPS's being unable to fund its liabilities, USPS might have other 
debts and obligations in addition to unfunded retiree health care 
liabilities for which any available real estate would be needed. 

Some comprehensive proposals to address USPS's financial condition 
have included provisions to transfer USPS's FERS pension surplus from 
the Civil Service Retirement and Disability Fund (CSRDF) to USPS; such 
a transfer could be viewed as a short-term source for some of the 
required PSRHBF prefunding payments. However, the most recent estimate 
of this surplus is significantly lower than the two prior estimates. 
We have previously reported on options and considerations with regard 
to this surplus.[Footnote 57] Use of any FERS surplus would not be a 
long-term solution to address USPS's financial outlook and operational 
imbalances. 

* Size of the annual payment and the unfunded liability. More near-
term funding reduces payments and the amount of the unfunded liability 
later, while less near-term funding produces larger unfunded 
liabilities and requires higher funding payments later. 

The unfunded liability can also be viewed in a larger context. From 
fiscal years 2007 through 2010, USPS contributed a total of $17.9 
billion to the PSRHBF. Over this same period, USPS increased its debt 
to the U.S. Treasury from $2.1 billion at fiscal year-end 2006 to 
$12.0 billion at fiscal year-end 2010, an increase of $9.9 
billion.[Footnote 58] Thus, from fiscal year-end 2006 to 2010, USPS 
made payments to the PSRHBF of $17.9 billion while borrowing an 
additional $9.9 billion from U.S. Treasury. 

* Allocation of costs between current and future postal ratepayers. 
More near-term funding assigns more cost to current postal ratepayers 
that is reflected in rates, while less near-term funding assigns more 
cost to future ratepayers. As noted above, a complicating factor is 
the existing unfunded liability, which conceptually should have been 
paid by prior ratepayers but was not. Instead, this legacy cost is 
being spread among current and future ratepayers since fiscal year 
2007. 

* Allocation of risks. Less prefunding now increases the risk that 
later some party(ies) could be called upon to pick up a greater share 
of the costs if USPS could not make its payments or pay off its 
unfunded liability. Another risk is that the level of employee pay and 
benefits may not be sustainable and could be reduced. As stated 
earlier, OPM's OIG reported that the exact consequences of these risks 
are unclear.[Footnote 59] Achieving reasonable postal rates from an 
equitable and consistent allocation of costs for pay and benefits 
earned during employees' work years could provide greater benefit 
security to employees, retirees, and beneficiaries. 

Fixed versus Actuarially Determined Payments: 

Another consideration with regard to the timing of prefunding payments 
is whether Congress wishes to continue requiring fixed prefunding 
contributions that are significantly in excess, through 2016, of 
actuarially-determined amounts. The House Bill largely retains this 
Current Law Approach, while the Senate Bill and the Administration 
Approach would produce a more consistent funding pattern. 

Targeted Funding Level: 

The Senate Bill targets an 80 percent funding level while the other 
approaches target a 100 percent funding level. The Senate committee 
report accompanying the Senate Bill stated that the committee set an 
80 percent target-funding level on the presumption that USPS, if 
necessary, had additional assets it could draw upon to meet its 
liabilities.[Footnote 60] As previously stated, USPS's OIG report 
stated that USPS's extensive real estate holdings could provide 
collateral for the remaining unfunded liability, but we would note 
that in the event of USPS's being unable to fund its liabilities, USPS 
might have other debts and obligations in addition to an unfunded 
retiree health benefit liability for which any available real estate 
would be needed. If an 80 percent funding target level were selected 
because of concerns about USPS's ability to achieve a 100 percent 
target level within a particular time frame, an additional option 
could be to build in a schedule to achieve 100 percent funding in a 
subsequent time period after the 80 percent level is achieved. 
[Footnote 61] 

Basis for Assumptions: 

As discussed earlier, the issuance of SFFAS 33 had the effect of 
creating a divergence between the actuarial assumptions used in 
determining USPS's funding requirements for PSRHBF and those used in 
determining its funding requirements for CSRS and FERS. Another 
consideration is whether Congress desires more uniform funding 
assumptions across these programs. As noted, the funding assumptions 
for PSRHBF under current law, which are retained in the House Bill and 
Administration Approach, are now, post-SFFAS 33, based on 10-year 
historical averages. Assumptions that are based on historical averages 
can potentially diverge significantly from either current economic 
circumstances or from the current long-term economic outlook. The 
assumption criteria in SFFAS 33 were designed to accomplish financial 
reporting objectives rather than funding objectives. 

Comparison with Other Entities: 

We also reviewed the prefunding requirements for other organizations 
that offer retiree health benefits to their employees: private sector 
entities, state and local governments, and other federal entities. 
Although other federal, state and local, and private sector entities 
generally are not required to prefund retiree health care benefits, a 
few do prefund at limited percentages of their total liability. 
However, most are required to recognize the future costs of these 
benefits in their financial reporting if they follow generally 
accepted accounting principles. Although recognizing the cost of 
retiree health benefits for financial reporting purposes is a separate 
issue from the question of whether to prefund these benefits, such 
reporting does enhance the transparency of the cost of these benefits. 
USPS accounts for these benefits using private-sector multiemployer 
accounting rules, under which USPS does not recognize the unfunded 
liability for these benefits on its balance sheet.[Footnote 62] In 
2002, GAO suggested that USPS reconsider its method of accounting for 
these benefits.[Footnote 63] 

In addition, although prefunding is not required, a number of private, 
state, local, and federal entities have elected to prefund some 
percentage of their retiree health benefits. For example, Standard & 
Poor's (S&P) reported that 126 of the 296 companies in the S&P 500 
that offered "other post-employment benefits" (OPEB)[Footnote 64] 
prefunded some percentage of the associated liabilities, while the 
USPS OIG has reported that 38 percent of Fortune 1000 companies that 
offer retiree health care benefits prefund them, at a median funding 
level of 37 percent.[Footnote 65] Further, in November 2009, we found 
that 18 states and 13 of the 39 largest local governments had set 
aside at least a combined $25 billion in assets to cover their OPEB 
liabilities.[Footnote 66] 

Although the majority of federal civilian agencies do not prefund 
these benefits, a few small, civilian, federal agencies do so. In 
addition, the Department of Defense (DOD) prefunds its retiree health 
benefits for Medicare-eligible retirees and beneficiaries, with a 100 
percent target funded percentage. This fund was started in 2002 in 
reaction to rapidly rising health care costs. The fund had assets of 
$166 billion as of September 30, 2010, which represented a funding 
level of 38 percent.[Footnote 67] DOD does not prefund its pre-
Medicare-eligible retiree health benefits, although its independent 
Board of Actuaries has recommended that it consider prefunding these 
costs as well, in order to reflect the full costs of these future 
benefits and promote a better understanding of the program's value. 
[Footnote 68] 

While private sector, state and local government, and other federal 
entities generally are not required to prefund these benefits, most 
are required to recognize the future costs of these benefits on an 
accrual basis as they are earned, rather than when they are paid, in 
their financial reporting. Standards governing financial reporting 
(i.e., accounting) are separate and apart, and under different 
jurisdiction, from any laws, regulations, or rules governing 
prefunding.[Footnote 69] 

In contrast to most other federal entities, USPS reports under private 
sector (FASB) accounting standards, and follows FASB's multiemployer 
accounting rules, rather than FASB's single-employer accounting rules, 
in reporting its participation in FEHBP. These multi-employer 
standards exempt employers from reporting the cost of these retirement 
benefits on an accrual basis. Instead, expense for a year is set equal 
to required cash payments--which currently for USPS means the sum of 
its required prefunding payment and its share of premium payments that 
it pays directly--while no liability is shown on the USPS balance 
sheet except for any required payments that have been missed (such as 
the missed fiscal year 2011 and 2012 prefunding payments). In 
contrast, if USPS were following FASB's single-employer accounting 
standards, USPS would show a liability on its balance sheet for the 
entire unfunded liability, and expense for a year would be an 
actuarially determined accrual cost independent of whether USPS had to 
make a small or large prefunding payment for that year. In 2002, the 
Comptroller General wrote to the Postmaster General and, based on a 
reassessment of the applicability of multiemployer versus single-
employer accounting standards to USPS, suggested that USPS reassess 
its accounting treatment of retiree health benefits, and consider 
accounting for its retiree health benefits on an accrual basis, 
meaning, to consider adopting the single-employer accounting 
procedures. A basic premise behind the exemption from accrual 
accounting for multiemployer plans was that the liability for an 
individual employer would be difficult to determine and would be of 
limited value, a premise that is not the case for USPS.[Footnote 70] 

Recognizing the cost of retiree health benefits on an accrual basis 
for financial reporting enhances the transparency of the cost of these 
benefits even in the absence of prefunding. As a result, in situations 
where prefunding requirements do not exist or are significantly 
relaxed or eliminated, accrual accounting provides an important 
function by recognizing the costs of these future benefits even in the 
absence of prefunding. It can also be the case that a year's accrual 
cost can be lower than the amount funded. For example, the fixed 
payments required under current law may well be higher than the annual 
accrual cost that USPS would recognize under single employer 
accounting, although, again, the full unfunded liability would be 
recognized on the balance sheet. 

Note that there is one other significant program, federal workers' 
compensation under the Federal Employees' Compensation Act, for which 
USPS's financial reporting is based on actuarial projections of future 
benefits rather than on its annual required cash payments. USPS pays 
the Department of Labor each year for the cash benefits to current 
beneficiaries, but USPS records a liability on its balance sheet for 
the entire actuarial present value of future benefits for those who 
have already been injured, and recognizes the growth in this liability 
as an expense each year. This unfunded FECA liability on USPS's 
balance sheet was $17.6 billion as of September 30, 2012. 

Concluding Observations: 

Timely action is essential in addressing the funding of USPS's retiree 
health benefits. We have suggested that Congress must take action to 
address the uncertainty related to: 

1) USPS's inability to meet the current retiree health prefunding 
requirements, 

2) reducing the unfunded retiree health benefit liability over time, 

3) determining the proper allocation of costs between current and 
future ratepayers, and: 

4) enacting comprehensive postal reform legislation that would improve 
prospects for USPS's long-term financial viability. 

USPS's recent defaults on its retiree-health-prefunding payments and 
its inability to borrow now that it has reached its $15 billion 
borrowing limit create an even more urgent need for congressional 
action. The continued uncertainty around resolution of USPS's 
financial problems and the funding of these payments creates 
uncertainty for mailers in developing their business plans, an 
uncertainty that could negatively affect mailers' willingness to use 
USPS's services. As noted earlier, USPS has also proposed withdrawing 
from FEHBP and administering its own health care plan for both workers 
and retirees, a proposal that is the subject of our ongoing work in 
another study. 

Congress should also consider how quickly and to what level prefunding 
of retiree health benefits should occur. As previously cited, 
deferrals and lower payments in the short-term will reduce USPS's 
reported financial losses in the short-term, but would increase its 
unfunded retiree health benefit liability and require larger annual 
payments in the future; yet at the same time, currently required short-
term payments are higher than what would be required under the 
actuarial approach that begins in 2017. Both of these points raise 
issues regarding fairness to future and current ratepayers. 
Furthermore, postal ratepayers provide USPS with funding, but as mail 
volumes decline, there may be fewer ratepayers in the future to pay 
for deferred costs. In addition, the less USPS reduces its retiree 
health unfunded liability, the greater the potential consequences, 
with unclear impact, if USPS is ultimately unable to pay this unfunded 
liability. In considering the options for USPS to address its retiree 
health benefit liability, Congress should keep in mind that stopping 
or deferring prefunding of these benefits would serve as short-term 
relief, but would also increase the risk that USPS may not be able to 
make future payments if its core business continues to decline. 
Therefore, we continue to believe it is important that USPS prefund 
its retiree health benefit liability to the maximum extent that its 
finances permit. 

None of the funding approaches will be viable unless USPS has the 
ability to make the required payments. Without congressional or 
further USPS actions to cut postal costs, USPS will not have the 
finances needed to make annual payments in the short term and reduce 
its retiree health unfunded liability over the long term. USPS has 
stated that it will be unable to make any prefunding payment toward 
reducing its retiree health unfunded liability if it continues to 
experience cash flow difficulties. While USPS may have limited control 
of its revenue stream because of advances in technological 
communication, it is important that USPS reduce its expenses to avoid 
even greater financial losses, repay its outstanding debt, and 
increase capital for investment. Consequently, as we have repeatedly 
stated, Congress and USPS need to reach agreement on a comprehensive 
package of actions to improve USPS's financial viability. In previous 
reports, we have provided strategies and options, to both reduce costs 
and enhance revenues, that Congress could consider to better align 
USPS costs with revenues and address constraints and legal 
restrictions that limit USPS's ability to reduce costs and improve 
efficiency. Implementing strategies and options to better align costs 
with revenues may better enable USPS to be in a financial position to 
prefund its retiree health benefit liability for its over one million 
active and retired postal employees and their beneficiaries. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to USPS, the USPS OIG, and OPM for 
review and comment. USPS and the USPS OIG provided comments, which are 
reprinted in appendixes III and IV, respectively. USPS and the USPS 
OIG did not disagree with the report's conclusions and analysis about 
the trade-offs involved with the alternative funding approaches, but 
both commented that USPS cannot afford to make prefunding payments and 
provided additional context. OPM had no comments but provided 
technical clarifications, which we incorporated into the report as 
appropriate. 

USPS agreed that comprehensive reform is necessary to achieve 
financial sustainability. It also recognized its obligation to provide 
effective, affordable health benefits to its employees and retirees, 
but said that it does not have the financial resources to make 
prefunding payments required by current law. Further, USPS said that 
releasing this report is inappropriate because, in its view, the 
solution to managing its health care costs is to reduce the cost of 
future health care coverage by allowing USPS to sponsor its own 
medical plan. In response to USPS's comment, we noted in the report 
that adopting any of the prefunding approaches analyzed in this report 
would not preclude USPS from continuing to pursue its proposal to 
administer its own plan, and that any resulting expected cost savings 
would be reflected in a lower unfunded liability and lower actuarially 
determined prefunding payments than otherwise. As USPS noted, we are 
currently reviewing USPS's proposal to administer its own plan. 

The USPS OIG concurred with our analysis of the trade-offs among the 
alternative funding approaches that would result in paying more now or 
in the future, but stated its concern that the report needed 
additional context in four areas: 1) historical, 2) financial, 3) use 
of other assets to satisfy the retiree health benefit obligation, and 
(4) the problems with prefunding. 

First, the USPS OIG stated that USPS started prefunding its retiree 
health benefits as a result of the discovery that, because of external 
fund management misjudgments, it was on track to seriously overfund 
its pension obligations by $78 billion. The USPS OIG also said that a 
decision to turn a mistake into a second prefunding obligation created 
its own problems, including a 10-year schedule of prefunding payments 
that was structured toward a 100 percent funding goal, and that the 
aggressive payment schedule appears to have been set based on 
byzantine "budget scoring" considerations rather than actuarial 
assumptions or an evaluation of USPS's ability to make the payments. 

In our report, we noted USPS's reduction in pension contributions to 
the Civil Service Retirement System occurred as a result of the Postal 
Civil Service Retirement System Funding Reform Act of 2003, which 
switched the actuarial basis for future contributions to "dynamic" 
assumptions from the "static" assumptions that OPM projected would 
result in overfunding. Further, we pointed out that the 10-year 
schedule of prefunding payments for fiscal years 2007 through 2016 was 
not based on an actuarial assessment, and that the remaining required 
payments through fiscal year 2016 are significantly in excess of what 
would be calculated under the actuarial approach that begins in fiscal 
year 2017. We also noted that USPS proposed prefunding to Congress in 
2003. 

Second, the USPS OIG discussed several points in a financial context. 
It said that USPS has never been able to afford a single payment--that 
it has either borrowed from the U.S. Treasury to make prefunding 
payments to date or that it has defaulted on them. However, we noted 
in our report that from fiscal year-end 2006 to 2010, USPS made total 
prefunding payments of $17.9 billion while borrowing an additional 
$9.9 billion from the U.S. Treasury. The USPS OIG also stated that now 
that the USPS has reached the limit of the amount it can borrow, it 
can no longer make the payments. We noted in our report that none of 
the funding approaches will be viable unless USPS has the ability to 
make the required payments, and that a comprehensive package of 
actions is needed to improve USPS's financial viability. The USPS OIG 
also said that its "seal and grow" proposal was made in the context of 
USPS's urgent financial situation and was meant as a temporary--not 
permanent--measure, and that we mistakenly represented it as a 
permanent payment plan. Our report actually noted that the Seal and 
Grow Approach was intended to continue until USPS's liability was 
fully funded--meaning, not thereafter; we added additional wording to 
clarify this point. The USPS OIG also pointed out that USPS has 
substantially funded its retiree benefit programs, with its pensions 
fully funded and its retiree health benefits half funded, with enough 
to cover current retirees. We did note in our report that the retiree 
health benefit liability is 49 percent funded and that approximately 
half of the liability is for current retirees. As for pensions, USPS 
reported in its most recent annual financial report (10-K) for fiscal 
year 2012 that it had an unfunded pension liability of almost $16 
billion, which represented a 95 percent funded percentage (i.e., close 
to fully funded), based on a projected year-end fund balance of $285 
billion and a liability of $300 billion; the prior year's estimate had 
indeed been a pension surplus. 

Third, the USPS OIG stated that our report did not adequately explore 
the use of other assets USPS holds as a means of satisfying its 
retiree health benefit obligation. The USPS OIG noted that it has 
reported on two sources of assets worth billions that could be used to 
cover any unfunded obligation, including 1) an estimated $85 billion 
in real estate holdings and 2) surpluses in USPS's pension funds. As 
we noted in our report, USPS has stated that it does not believe that 
USPS-occupied real estate would be a suitable asset within the PSRHBF 
because employer-occupied real estate cannot be readily sold to 
provide cash when needed to pay benefits.[Footnote 71] We noted that 
in the event of USPS's being unable to fund its liabilities, USPS 
might have other debts and obligations in addition to unfunded retiree 
health benefit liabilities for which any available real estate 
proceeds would be needed. We noted that we reported on options and 
considerations with regard to any USPS pension surplus (in particular 
regarding FERS) in a prior report. 

Finally, the USPS OIG commented that our report should examine the 
problems of prefunding and examine why no business or government 
entity has taken advantage of prefunding, and that making prefunding 
payments at the current levels will bankrupt USPS. Our report did 
discuss these issues, beginning with the section entitled, Comparison 
with Other Entities. While our report did not examine comprehensively 
the reasons for other entities' prefunding decisions, we noted that 
although prefunding is not required, a number of private, state, 
local, and federal entities have elected to prefund some percentage of 
their retiree health benefits, as follows: 

* Standard & Poor's (S&P) reported that 126 of the 296 companies in 
the S&P 500 that offered "other post-employment benefits" (OPEB) 
prefunded some percentage of the associated liabilities; 

* the USPS OIG reported that 38 percent of Fortune 1000 companies that 
offer retiree health benefits prefund them, at a median funding level 
of 37 percent; 

* 18 states and 13 of the 39 largest local governments had set aside 
at least a combined $25 billion in assets to cover their OPEB 
liabilities; and: 

* the Department of Defense prefunds its retiree health benefits for 
Medicare-eligible retirees and beneficiaries, with a 100 percent 
target funding percentage, and that this fund, which was started in 
2002 in reaction to rapidly rising health care costs, had assets of 
$166 billion as of fiscal year-end 2010. 

We also recognized USPS's inability to meet the current retiree health 
prefunding requirements along with the need for comprehensive 
legislative action. Specifically, we said, "None of the funding 
approaches will be viable unless USPS has the ability to make the 
required payments. Without congressional or further USPS actions to 
cut postal costs, USPS will not have the finances needed to make 
annual payments in the short term and reduce its retiree health 
benefit liabilities over the long term." 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days after its date. At that time, we will send copies of this 
report to the appropriate congressional committees, the Postmaster 
General, OPM, the USPS Inspector General, and other interested 
parties. In addition, the report will be available at no charge on 
GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions on this report, please 
contact Frank Todisco at todiscof@gao.gov; Lorelei St. James at 
stjamesl@gao.gov: or call (202) 512-2834. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Contact information and key contributors 
to the report are listed in appendix V. 

Sincerely yours, 

Signed by: 

Frank Todisco: 
Chief Actuary: 
Applied Research and Methods: 

Signed by: 

Lorelei St. James:
Director:
Physical Infrastructure Issues: 

The undersigned meets the qualification standards of the American 
Academy of Actuaries to render the actuarial findings contained in 
this report. 

Signed by: 

Frank Todisco, FSA, MAAA, EA: 
Chief Actuary: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report (1) describes the status and financial outlook of the 
Postal Service Retiree Health Benefits Fund (PSRHBF), (2) analyzes how 
alternative proposals for funding retiree health benefits could affect 
future USPS payments and unfunded liabilities, and (3) determines key 
considerations for policymakers assessing the alternative proposals or 
other approaches. 

To describe the status and financial outlook of the PSRHBF, we 
reviewed and summarized USPS financial data regarding payments made to 
the fund, interest earned from such contributions, overall fund 
balance, and retiree health benefit liability. We also reviewed our 
prior work and reviewed and summarized reports and data from USPS and 
others on how USPS's financial condition has changed since 2006. We 
reviewed relevant statutes, proposed legislation, and sections of the 
President's budget request for fiscal year 2012 pertaining to USPS's 
health and pension benefit programs. We also interviewed USPS and OPM 
officials on the status and financial outlook of the PSRHBF. 

To determine the impact on USPS payments and unfunded liabilities 
under alternative approaches to fund retiree health benefits, we 
analyzed and compared current funding requirements and five 
alternatives. We interviewed USPS officials on the USPS's ability to 
meet future mandated payments and to obtain information on current and 
projected employee (FTE) levels, compensation, and revenue. In 
addition, we met with OPM officials to discuss projection methodology, 
and assumption selection, for using the data provided by USPS to 
project future premium payments, normal costs, and liabilities. OPM 
provided us projections of these amounts, which we further analyzed to 
project future prefunding contributions and unfunded liabilities under 
the different approaches to prefunding that we analyzed. Additional 
information on data, assumptions, and methods is provided below. 

To determine key factors for policymakers to consider when assessing 
alternative approaches, we used our own actuarial judgment and 
expertise. We also examined prefunding requirements for retiree health 
benefits, and prefunding behavior, of other entities (federal, state, 
and local governments and private sector). In addition, we examined 
financial reporting requirements applicable to other entities for 
these benefits, reviewing relevant accounting standards promulgated by 
the Financial Accounting Standards Board (FASB), Governmental 
Accounting Standards Board (GASB), and Federal Accounting Standards 
Advisory Board (FASAB); we compared these standards to USPS's 
financial reporting for these benefits. 

Additional Information on Data, Assumptions, and Methods Underlying 
the Actuarial Projections: 

We relied on OPM's actuarial projections of normal cost, accrued 
liability (referred to in the report, and in the remainder of this 
appendix, simply as "liability") and premium payments. We obtained 
data on workforce projections from USPS, as described further below, 
which we projected further and supplied to OPM for use in the 
projections. OPM's valuation of the cost of USPS's retiree health 
benefit obligations entails the collection and analysis of participant 
data and claims cost data, the setting of demographic and economic 
assumptions, and the application of these data and assumptions to the 
provisions of the benefit program. We had extensive discussions with 
OPM regarding its valuation methodology and were satisfied with the 
reasonableness of the approach with regard to the issues discussed. 
However, we did not otherwise audit or evaluate OPM's actuarial 
assumptions, methodology, calculations, or underlying data. Such an 
evaluation would have required a substantial amount of additional work 
beyond the scope of our assignment, and would also have required 
engaging additional actuarial resources with particular expertise in 
the valuation of health care benefits. For projecting the most recent 
valuation results into the future, we selected the methodology and 
projection assumptions in consultation with OPM. Additional detail on 
OPM's methods and assumptions is available from OPM. 

It should be understood that projections of this type contain a 
significant degree of uncertainty, as discussed further in the section 
of the report on Sensitivity to Assumptions. Nonetheless, given the 
magnitude of the liabilities and the importance of being able to pay 
for these benefits, reasonable projections of these costs and 
liabilities provide essential information for enabling responsible 
stewardship of resources. 

OPM provided us with projected normal cost and premium payments for 
each year through 2040. OPM calculated and provided us with projected 
liability as of three points: the end of 2010 (the measurement date of 
the most recent data collection at the time of our request), the end 
of 2021, and the end of 2040. We used a linear interpolation to 
estimate the liability for each of the intervening years. For each 
future year, we calculated the prefunding contribution, based on the 
normal cost and unfunded liability, when an actuarial approach 
applied; rolled the assets forward by adding the prefunding 
contribution and investment income and subtracting premium payments, 
as applicable; calculated the next year's unfunded liability based on 
these projected assets and the projected liability for that year; 
calculated the next year's prefunding contribution based on this new 
unfunded liability; and so on to the end of the projection period. The 
calculation of the prefunding contribution--as well as the 
applicability of fixed versus actuarially determined contributions and 
whether premium payments came out of the fund--was based on the 
provisions of the prefunding approaches we modeled, as described in 
the main body of this report (table 2 and preceding text). Where an 
actuarially determined prefunding contribution was used, it was the 
sum of the normal cost and an amortization payment (mortgage-style 
amortization calculation) calculated to pay off the unfunded liability 
in equal annual installments. Note that under the terms of the Senate 
Bill, which uses an 80 percent funded percentage target instead of 100 
percent, the amortization is based on [(0.80*Liability) - Assets], 
rather than [0.80*(Liability - Assets)], and 100 percent of the normal 
cost is added to the amortization payment, rather than 80 percent of 
the normal cost. 

OPM's projections of liabilities are based on the current level of 
plan health benefits and do not reflect any proposals to reduce the 
actuarial value of benefits. USPS has proposed withdrawing from the 
Federal Employees Health Benefits Program (FEHBP) and administering 
its own health care plan for its employees and retirees. This report 
looks at retiree health benefit funding options assuming that USPS 
continues to participate in FEHBP under current provisions. We will be 
issuing a separate report on USPS's proposal to administer its own 
health care plan. 

OPM's projections also reflect the projected changes over time in the 
U.S. Treasury's share of USPS's retiree health benefit costs. U.S. 
Treasury is responsible for the portion of USPS's share of retiree 
health benefit premiums attributable to service prior to 1971, when 
the Post Office Department was transformed into the USPS. The U.S. 
Treasury's share of costs is diminishing over time as the proportion 
of retirees who had pre-1971 service decreases. 

One of the factors affecting future changes in USPS's liability for 
retiree health benefits is the size of its future workforce. The 
liability grows with future accruals of employee service and is also 
affected by when employees retire. USPS provided us with projected 
counts of career employees from 2011 through 2020. USPS noted that its 
intermediate-term planning horizon was through 2016 and that because 
of the rapidly changing nature of the mailing environment and the 
overall economy, projections beyond that point are likely to have a 
higher margin of error. 

USPS's projection had its career-employee complement dropping, from 
561,000 in 2011 and 534,000 in 2012 (representing approximate averages 
over the fiscal year) to approximately 416,000 by 2016 and to 392,000 
by 2020. USPS told us that it would be reasonable to assume that the 
complement would stabilize at that level thereafter. We assumed a 
constant career workforce of 392,000 for the remainder of the 
projection from 2020 through 2040. 

USPS viewed this workforce projection as its optimal, target workforce 
path, assuming USPS would be able to achieve certain objectives 
regarding its network and other operational issues. It noted that its 
ability to achieve these reductions remains to be determined, and 
would be affected by negotiations with unions and any congressional 
actions. USPS also noted that its workforce projections were based on 
long-term projections of mail volume. There is, of course, uncertainty 
regarding future levels of mail volume. 

OPM found that using its standard valuation assumptions for such 
factors as employee retention and retirement, and adding in an amount 
of new hires necessary to stay on target, its projection model 
reasonably approximated USPS's projected workforce path. Based on this 
workforce path and the number of projected retirements and other 
workforce reductions, OPM projected some new hiring to begin in 2014, 
and to continue as necessary to keep the workforce constant after 
2020. OPM based new hire demographic profiles on the government-wide 
distribution of recent hires, since USPS has not been hiring enough 
recently to have adequate data for that purpose. 

So that we could also calculate USPS payments and unfunded liabilities 
as a percentage of employee compensation, USPS provided us with 
projections of compensation (salary and wages and benefits) to 
accompany the workforce projections, through 2020. The data provided 
by USPS encompassed salary plus a portion of employee benefits; it did 
not include retiree health benefits, worker's compensation, or any 
forecasted contract negotiations savings. For simplicity, we refer to 
these amounts as "compensation." 

We projected these compensation amounts beyond 2020 to 2040. Since we 
assumed the USPS workforce to be constant over that period, we 
projected total compensation to increase by inflation plus one 
percent. USPS had provided us with two sets of compensation 
projections through 2020: one based on USPS's own internal inflation 
assumption ranging from 1.7 to 2.2 percent annually over that period; 
and a second, at our request, assuming 3.0 percent inflation. We 
estimated an additional compensation projection based on 2.4 percent 
inflation from these data. We used the two sets of compensation 
projections--one based on 2.4 percent inflation and one based on 3.0 
percent inflation--for our projections under the current law 
assumption basis and the Senate bill assumption basis, respectively. 

Liabilities and normal costs are based on the "Aggregate Entry Age 
Normal" actuarial cost method. A per-participant normal cost rate is 
determined based on an aggregate ratio of present value of future 
benefits at entry age to present value of future service at entry age, 
with service weighted to increase with medical inflation and with the 
accrual period from entry age to assumed retirement. The normal cost 
rate is computed based on the demographics and claims' costs of the 
entire FEHBP population, not just the USPS population, to reflect how 
the plan actually works. OPM would need additional USPS-specific data 
to determine a USPS-specific normal cost. The accrued liability is 
equal to the present value of future benefits (PVB) minus the present 
value of future normal costs. The PVB is just for the USPS population, 
but based on demographic assumptions for the entire FEHBP population, 
and without USPS-specific utilization, as this is how FEHBP premiums 
are determined. The actuarial cost method is the same one used by OPM 
in its financial reporting of the cost of these benefits (as required 
under FASAB accounting standards) and the same one used by OPM for 
determining funding requirements for the CSRS and FERS federal 
employee pension programs. Other actuarial cost methods could 
reasonably be adopted[Footnote 72] for determining USPS prefunding 
requirements, such as the projected unit credit method (which is also 
the method used for single employer accounting under FASB). The 
actuarial cost method determines the portion of future retiree costs 
that are attributable to each year of employee service, and different 
methods build up the accrued liability more or less quickly over the 
working years. 

As discussed in the body of the report, OPM provided current and 
projected liabilities, normal costs, and premium payments on two 
different assumption bases: (1) the current law basis, which ties 
funding assumptions to those used by OPM for its financial reporting, 
which in turn is guided by the FASAB accounting standards and (2) the 
Senate bill basis, which ties funding assumptions to those assumptions 
used by OPM to determine USPS's funding requirements for CSRS and 
FERS. The assumptions differ with respect to discount rate, general 
inflation, and medical inflation (trend). These assumptions are 
disclosed in table 5 in the report. Demographic assumptions that are 
common to both the current law and Senate bill assumption bases can be 
found in OPM's most recent funding valuation report for CSRS and FERS, 
[Footnote 73] though these are applied on a per-participant basis in 
the retiree health valuation and on a dollar-amount basis in the 
pension valuations. OPM also assumes that present retiree 
participation rates in FEHBP, calculated by age and gender, continue 
into the future. 

The discount rate of 4.90 percent used for the current law assumption 
basis, which is the discount rate used by OPM in its reporting at 
September 30, 2011, represents the single rate equivalent to a 10-year 
average of Treasury yield curves, with yield curve maturities matched 
to the timing of projected payments, a methodology that satisfies 
SFFAS 33. We assumed that the discount rate would remain at 4.90 
percent in future years. In fact, in each future year, a new 10-year 
average discount rate will be developed, and if interest rates were to 
remain unchanged from present levels, this would result in a lower 
future discount rate, as higher interest rates at the beginning of the 
10-year averaging period are replaced by lower interest rates at the 
end of the averaging period. OPM indicated that modeling such changes 
would present significant computational difficulties.[Footnote 74] 
Accordingly, we used a steady 4.90 percent discount rate, which 
implies that interest rates would rise from current low levels. In 
making this assumption, we noted that a steady 4.90 percent discount 
rate is still significantly lower than the 5.75 percent discount rate 
assumed for the Senate bill assumption basis, and so still provides 
useful information regarding potential effects of variations in 
assumptions. We also note that the medical inflation assumption used 
in the projection was developed to be consistent with the discount 
rate and general inflation assumption (the latter is also based on a 
10-year average), and that OPM's model would produce a lower medical 
trend assumption if discount rates and inflation assumptions were to 
decrease, offsetting much of the effect of the lower discount rate. 
Also, in projecting future premium payments, which went into 
projecting future liabilities, OPM did not "restart" the trend 
assumption vector each year. 

A final methodological decision that had to be made was whether the 
projection assumptions should differ from the valuation assumptions. 
In actuarial projections, there is a distinction between "valuation 
assumptions" and "projection (or experience) assumptions." Valuation 
assumptions are those used to compute the liability and normal cost at 
any point in time. Projection assumptions model what actually happens 
as you move the projection forward, which might differ from the 
expectations embedded in the valuation assumptions. The Senate Bill 
specifies a different assumption basis than current law, the House 
Bill, or the Administration's Approach, but these specifications are 
referring to valuation assumptions. While different valuation 
assumptions might be used, only one scenario can actually unfold in 
the real world. One way to reflect this situation in a projection 
would be to retain the different valuation assumptions for the 
different prefunding approaches, but then to project all the 
approaches under a uniform set of projection assumptions. However, 
this approach would create false precision, because at some point the 
valuation assumptions would change to reflect emerging experience, and 
the projection would then need to incorporate additional assumptions 
as to when that would happen. Accordingly, as a reasonable approach to 
compare the four prefunding approaches on an apples-to-apples basis, 
we modeled them under uniform assumptions--first using the current law 
assumption basis, with results presented in the main body of the 
report, and then using the Senate bill assumption basis, with results 
presented in appendix II of this report. As discussed further in the 
section of the report on "Sensitivity to Assumptions," it turns out 
that these two assumption bases do not produce significant differences 
in basic findings because of the offsetting effects of different 
discount rates and medical inflation assumptions. 

We conducted this performance audit from May 2012 through December 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Projected Results Using Senate Bill Assumption Basis: 

As discussed in the report, we projected USPS's annual payments and 
unfunded liability under four prefunding approaches (Modified Current 
Law, Modified House, Modified Administration, and Modified Senate) and 
under two different assumption bases: the assumption basis specified 
in current law, and the assumption basis specified in the Senate bill. 
The differences between these two assumption bases are described in 
the report. The report presents projection results based on the 
current law assumption basis. This appendix presents the corresponding 
results based on the Senate bill assumption basis. As discussed in the 
report, our findings and conclusions are not materially different 
under the two different assumption bases. 

Short-term Effects under Senate Bill Assumption Basis: 

Table 7: Estimated Annual Payments and Unfunded Liabilities in the 
Short Term (Fiscal Years 2013 to 2020) under Senate Bill Assumption 
Basis: 

Fiscal year: 2013; 
Modified Current Law Approach: 
Annual Payments: $8.6 billion; 
Unfunded Liability (at Year-end): $44.9 billion; 
Modified House Approach: 
Annual Payments: $8.6 billion; 
Unfunded Liability(at Year-end): $44.9 billion; 
Modified Administration Approach: 
Annual Payments: $1.3 billion; 
Unfunded liability (at Year-end): $52.3 billion; 
Modified Senate Approach: 
Annual Payments: $4.3 billion; 
Unfunded liability (at Year-end): $49.3 billion. 

Fiscal year: 2014; 
Modified Current Law Approach: 
Annual Payments: $8.9 billion; 
Unfunded Liability (at Year-end): $42.0 billion; 
Modified House Approach: 
Annual Payments: $8.9 billion; 
Unfunded Liability(at Year-end): $42.0 billion; 
Modified Administration Approach: 
Annual Payments: $5.4 billion; 
Unfunded liability (at Year-end): $53.4 billion; 
Modified Senate Approach: 
Annual Payments: $4.3 billion; 
Unfunded liability (at Year-end): $51.4 billion. 

Fiscal year: 2015; 
Modified Current Law Approach: 
Annual Payments: $9.2 billion; 
Unfunded Liability (at Year-end): $38.5 billion; 
Modified House Approach: 
Annual Payments: $11.5 billion; 
Unfunded Liability(at Year-end): $36.3 billion; 
Modified Administration Approach: 
Annual Payments: $5.6 billion; 
Unfunded liability (at Year-end): $54.4 billion; 
Modified Senate Approach: 
Annual Payments: $4.4 billion; 
Unfunded liability (at Year-end): $53.4 billion. 

Fiscal year: 2016; 
Modified Current Law Approach: 
Annual Payments: $9.7 billion; 
Unfunded Liability (at Year-end): $34.5 billion; 
Modified House Approach: 
Annual Payments: $11.9 billion; 
Unfunded Liability(at Year-end): $29.8 billion; 
Modified Administration Approach: 
Annual Payments: $5.8 billion; 
Unfunded liability (at Year-end): $55.2 billion; 
Modified Senate Approach: 
Annual Payments: $4.6 billion; 
Unfunded liability (at Year-end): $55.3 billion. 

Fiscal year: 2017; 
Modified Current Law Approach: 
Annual Payments: $4.9 billion; 
Unfunded Liability (at Year-end): $35.0 billion; 
Modified House Approach: 
Annual Payments: $4.6 billion; 
Unfunded Liability(at Year-end): $30.4 billion; 
Modified Administration Approach: 
Annual Payments: $6.3 billion; 
Unfunded liability (at Year-end): $55.6 billion; 
Modified Senate Approach: 
Annual Payments: $4.8 billion; 
Unfunded liability (at Year-end): $57.2 billion. 

Fiscal year: 2018; 
Modified Current Law Approach: 
Annual Payments: $5.1 billion; 
Unfunded Liability (at Year-end): $35.5 billion; 
Modified House Approach: 
Annual Payments: $4.8 billion; 
Unfunded Liability(at Year-end): $30.9 billion; 
Modified Administration Approach: 
Annual Payments: $6.5 billion; 
Unfunded liability (at Year-end): $55.9 billion; 
Modified Senate Approach: 
Annual Payments: $5.0 billion; 
Unfunded liability (at Year-end): $59.0 billion. 

Fiscal year: 2019; 
Modified Current Law Approach: 
Annual Payments: $5.3 billion; 
Unfunded Liability (at Year-end): $35.8 billion; 
Modified House Approach: 
Annual Payments: $5.0 billion; 
Unfunded Liability(at Year-end): $31.2 billion; 
Modified Administration Approach: 
Annual Payments: $6.7 billion; 
Unfunded liability (at Year-end): $56.1 billion; 
Modified Senate Approach: 
Annual Payments: $5.2 billion; 
Unfunded liability (at Year-end): $60.7 billion. 

Fiscal year: 2020; 
Modified Current Law Approach: 
Annual Payments: $5.6 billion; 
Unfunded Liability (at Year-end): $35.9 billion; 
Modified House Approach: 
Annual Payments: $5.3 billion; 
Unfunded Liability(at Year-end): $31.5 billion; 
Modified Administration Approach: 
Annual Payments: $6.9 billion; 
Unfunded liability (at Year-end): $56.1 billion; 
Modified Senate Approach: 
Annual Payments: $5.5 billion; 
Unfunded liability (at Year-end): $62.4 billion. 

Total Payments; 
Modified Current Law Approach: 
Annual Payments: $$57.3 billion; 
Unfunded Liability (at Year-end): NA; 
Modified House Approach: 
Annual Payments: $$60.7 billion; 
Unfunded Liability(at Year-end): NA; 
Modified Administration Approach: 
Annual Payments: $$44.4 billion; 
Unfunded liability (at Year-end): NA; 
Modified Senate Approach: 
Annual Payments: $$38.2 billion; 
Unfunded liability (at Year-end): NA. 

Average Annual Payment; 
Modified Current Law Approach: 
Annual Payments: $$7.2 billion; 
Unfunded Liability (at Year-end): NA; 
Modified House Approach: 
Annual Payments: $$7.6 billion; 
Unfunded Liability(at Year-end): NA; 
Modified Administration Approach: 
Annual Payments: $$5.5 billion; 
Unfunded liability (at Year-end): NA; 
Modified Senate Approach: 
Annual Payments: $4.8 billion; 
Unfunded liability (at Year-end): NA. 

Source: GAO. 

Notes: Totals may not add because of rounding. 

[End of table] 

Annual payments consist of any prefunding payments to the PSRHBF, and, 
where applicable, USPS's share of premium payments for existing 
retirees and beneficiaries (see descriptions of the different 
approaches). Unfunded liabilities are the amounts as of the end of the 
fiscal year, and start at an estimated value of $47.3 billion as of 
September 30, 2012, under all four approaches. Subsequent to the 
development of these projections, USPS reported the actual unfunded 
liability as of September 30, 2012, to be $47.9 billion. 

Figure 10: Estimated Annual Payments for Different Approaches from 
Fiscal Year 2013 to Fiscal Year 2020 under Senate Bill Assumption 
Basis: 

[Refer to PDF for image: vertical bar graph] 

Annual payments: 

Fiscal year: 2013; 
Modified Current Law Approach: $8.569 billion; 
Modified House Approach: $8.569 billion; 
Modified Administration Approach: $1.276 billion; 
Modified Senate Approach: $4.275 billion. 

Fiscal year: 2014; 
Modified Current Law Approach: $8.938 billion; 
Modified House Approach: $8.938 billion; 
Modified Administration Approach: $5.423 billion; 
Modified Senate Approach: $4.319 billion. 

Fiscal year: 2015; 
Modified Current Law Approach: $9.248 billion; 
Modified House Approach: $11.498 billion; 
Modified Administration Approach: $5.573 billion; 
Modified Senate Approach: $4.430 billion. 

Fiscal year: 2016; 
Modified Current Law Approach: $9.676 billion; 
Modified House Approach: $11.926 billion; 
Modified Administration Approach: $5.829 billion; 
Modified Senate Approach: $4.612 billion. 

Fiscal year: 2017; 
Modified Current Law Approach: $4.925 billion; 
Modified House Approach: $4.627 billion; 
Modified Administration Approach: $6.261 billion; 
Modified Senate Approach: $4.817 billion. 

Fiscal year: 2018; 
Modified Current Law Approach: $5.119 billion; 
Modified House Approach: $4.821 billion; 
Modified Administration Approach: $6.455 billion; 
Modified Senate Approach: $5.024 billion. 

Fiscal year: 2019; 
Modified Current Law Approach: $5.320 billion; 
Modified House Approach: $5.022 billion; 
Modified Administration Approach: $6.656 billion; 
Modified Senate Approach: $5.243 billion. 

Fiscal year: 2020; 
Modified Current Law Approach: $5.550 billion; 
Modified House Approach: $5.252 billion; 
Modified Administration Approach: $6.886 billion; 
Modified Senate Approach: $5.495 billion. 

Source: GAO. 

[End of figure] 

Long-term Effects under Senate Bill Assumption Basis: 

Table 8: Annual Payment and Unfunded Liability in the Long Term (in 
Fiscal Year 2040, the Last Year of the Projection) under Senate Bill 
Assumption Basis: 

Dollars in billions. 

Fiscal year 2040: 

Nominal $: 
Modified Current law Approach: 
Annual Payment: $12.7 billion; 
Unfunded Liability: $10.4 billion; 
Modified House Approach: 
Annual Payment: $12.4 billion; 
Unfunded Liability: $7.3 billion; 
Modified Administration Approach: 
Annual Payment: $14.1 billion; 
Unfunded Liability: $24.1 billion; 
Modified Senate Approach: 
Annual Payment: $13.8 billion; 
Unfunded Liability: $79.4 billion. 

Constant $; 
Modified Current law Approach: 
Annual Payment: $5.6 billion; 
Unfunded Liability: $4.5 billion; 
Modified House Approach: 
Annual Payment: $5.4 billion; 
Unfunded Liability: $3.2 billion; 
Modified Administration Approach: 
Annual Payment: $6.2 billion; 
Unfunded Liability: $10.6 billion; 
Modified Senate Approach: 
Annual Payment: $6.0 billion; 
Unfunded Liability: $34.7 billion. 

Percentage of Compensation; 
Modified Current law Approach: 
Annual Payment: 13%; 
Unfunded Liability: 11%; 
Modified House Approach: 
Annual Payment: 13%; 
Unfunded Liability: 8%; 
Modified Administration Approach: 
Annual Payment: 15%; 
Unfunded Liability: 25%; 
Modified Senate Approach: 
Annual Payment: 15%; 
Unfunded Liability: 84%. 

Funded percentage; 
Modified Current law Approach: 
Annual Payment: NA; 
Unfunded Liability: 96%; 
Modified House Approach: 
Annual Payment: NA; 
Unfunded Liability: 97%; 
Modified Administration Approach: 
Annual Payment: NA; 
Unfunded Liability: 92%; 
Modified Senate Approach: 
Annual Payment: NA; 
Unfunded Liability: 73%. 

Source: GAO. 

Notes: Annual payment is prefunding payment to the PSRHBF. Unfunded 
liability is as of the end of the fiscal year. Constant dollar amounts 
were derived by converting the projected 2040 nominal dollar amounts 
into 2012 dollars, using an inflation assumption based on the Senate 
bill assumption basis. Compensation was projected by GAO based on 
information provided by USPS. Additional information on methodology 
and assumptions is presented in appendix I. 

"Compensation" is used as a shorthand expression to represent employee 
salary and wage costs plus employee benefit costs exclusive of retiree 
health benefits, workers' compensation, or any forecasted contract 
negotiations savings. 

[End of table] 

Figure 11: Estimated Annual Payments (as a Percentage of Compensation) 
for Different Approaches from Fiscal Year 2013 to Fiscal Year 2040 
under Senate Bill Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2013; 
Modified Current Law Approach: 20.3%; 
Modified House Approach: 20.3%; 
Modified Administration Approach: 3%; 
Modified Senate Approach: 10.1%. 

Fiscal year: 2014; 
Modified Current Law Approach: 21.4%; 
Modified House Approach: 21.4%; 
Modified Administration Approach: 13%; 
Modified Senate Approach: 10.3%. 

Fiscal year: 2015; 
Modified Current Law Approach: 22.1%; 
Modified House Approach: 27.4%; 
Modified Administration Approach: 13.3%; 
Modified Senate Approach: 10.6%. 

Fiscal year: 2016; 
Modified Current Law Approach: 22.9%; 
Modified House Approach: 28.2%; 
Modified Administration Approach: 13.8%; 
Modified Senate Approach: 10.9%. 

Fiscal year: 2017; 
Modified Current Law Approach: 11.5%; 
Modified House Approach: 10.8%; 
Modified Administration Approach: 14.6%; 
Modified Senate Approach: 11.2%. 

Fiscal year: 2018; 
Modified Current Law Approach: 11.8%; 
Modified House Approach: 11.1%; 
Modified Administration Approach: 14.8%; 
Modified Senate Approach: 11.6%. 

Fiscal year: 2019; 
Modified Current Law Approach: 12.1%; 
Modified House Approach: 11.4%; 
Modified Administration Approach: 15.1%; 
Modified Senate Approach: 11.9%. 

Fiscal year: 2020; 
Modified Current Law Approach: 12.4%; 
Modified House Approach: 11.7%; 
Modified Administration Approach: 15.3%; 
Modified Senate Approach: 12.2%. 

Fiscal year: 2021; 
Modified Current Law Approach: 12.7%; 
Modified House Approach: 12%; 
Modified Administration Approach: 15.6%; 
Modified Senate Approach: 12.6%. 

Fiscal year: 2022; 
Modified Current Law Approach: 12.9%; 
Modified House Approach: 12.3%; 
Modified Administration Approach: 15.8%; 
Modified Senate Approach: 12.9%. 

Fiscal year: 2023; 
Modified Current Law Approach: 13.2%; 
Modified House Approach: 12.6%; 
Modified Administration Approach: 15.9%; 
Modified Senate Approach: 13.2%. 

Fiscal year: 2024; 
Modified Current Law Approach: 13.4%; 
Modified House Approach: 12.9%; 
Modified Administration Approach: 16.1%; 
Modified Senate Approach: 13.5%. 

Fiscal year: 2025; 
Modified Current Law Approach: 13.6%; 
Modified House Approach: 13.1%; 
Modified Administration Approach: 16.2%; 
Modified Senate Approach: 13.8%. 

Fiscal year: 2026; 
Modified Current Law Approach: 13.8%; 
Modified House Approach: 13.3%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 14%. 

Fiscal year: 2027; 
Modified Current Law Approach: 14%; 
Modified House Approach: 13.4%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 14.2%. 

Fiscal year: 2028; 
Modified Current Law Approach: 14.1%; 
Modified House Approach: 13.6%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 14.4%. 

Fiscal year: 2029; 
Modified Current Law Approach: 14.2%; 
Modified House Approach: 13.7%; 
Modified Administration Approach: 16.4%; 
Modified Senate Approach: 14.6%. 

Fiscal year: 2030; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.8%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 14.8%. 

Fiscal year: 2031; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.8%; 
Modified Administration Approach: 16.3%; 
Modified Senate Approach: 14.9%. 

Fiscal year: 2032; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.9%; 
Modified Administration Approach: 16.2%; 
Modified Senate Approach: 15%. 

Fiscal year: 2033; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.9%; 
Modified Administration Approach: 16.2%; 
Modified Senate Approach: 15.1%. 

Fiscal year: 2034; 
Modified Current Law Approach: 14.3%; 
Modified House Approach: 13.9%; 
Modified Administration Approach: 16.1%; 
Modified Senate Approach: 15.1%. 

Fiscal year: 2035; 
Modified Current Law Approach: 14.2%; 
Modified House Approach: 13.8%; 
Modified Administration Approach: 15.9%; 
Modified Senate Approach: 15.2%. 

Fiscal year: 2036; 
Modified Current Law Approach: 14.1%; 
Modified House Approach: 13.8%; 
Modified Administration Approach: 15.8%; 
Modified Senate Approach: 15.2%. 

Fiscal year: 2037; 
Modified Current Law Approach: 14%; 
Modified House Approach: 13.7%; 
Modified Administration Approach: 15.6%; 
Modified Senate Approach: 15.2%. 

Fiscal year: 2038; 
Modified Current Law Approach: 13.9%; 
Modified House Approach: 13.5%; 
Modified Administration Approach: 15.4%; 
Modified Senate Approach: 15.1%. 

Fiscal year: 2039; 
Modified Current Law Approach: 13.7%; 
Modified House Approach: 13.3%; 
Modified Administration Approach: 15.1%; 
Modified Senate Approach: 14.8%. 

Fiscal year: 2040; 
Modified Current Law Approach: 13.4%; 
Modified House Approach: 13.1%; 
Modified Administration Approach: 14.8%; 
Modified Senate Approach: 14.5%. 

Source: GAO. 

[End of figure] 

Figure 12: Estimated Unfunded Liability (as a Percentage of USPS's 
Annual Compensation Costs) for Different Approaches from Fiscal Year-
end 2012 to Fiscal Year-end 2040 under Senate Bill Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2012; 
Modified Current Law Approach: 101.8%; 
Modified House Approach: 101.8%; 
Modified Administration Approach: 101.8%; 
Modified Senate Approach: 101.8%. 

Fiscal year: 2013; 
Modified Current Law Approach: 106.5%; 
Modified House Approach: 106.5%; 
Modified Administration Approach: 124%; 
Modified Senate Approach: 116.9%. 

Fiscal year: 2014; 
Modified Current Law Approach: 100.4%; 
Modified House Approach: 100.4%; 
Modified Administration Approach: 127.7%; 
Modified Senate Approach: 122.7%. 

Fiscal year: 2015; 
Modified Current Law Approach: 92%; 
Modified House Approach: 86.6%; 
Modified Administration Approach: 129.8%; 
Modified Senate Approach: 127.3%. 

Fiscal year: 2016; 
Modified Current Law Approach: 81.4%; 
Modified House Approach: 70.5%; 
Modified Administration Approach: 130.5%; 
Modified Senate Approach: 130.7%. 

Fiscal year: 2017; 
Modified Current Law Approach: 81.7%; 
Modified House Approach: 71%; 
Modified Administration Approach: 129.8%; 
Modified Senate Approach: 133.4%. 

Fiscal year: 2018; 
Modified Current Law Approach: 81.6%; 
Modified House Approach: 71.1%; 
Modified Administration Approach: 128.6%; 
Modified Senate Approach: 135.7%. 

Fiscal year: 2019; 
Modified Current Law Approach: 81.2%; 
Modified House Approach: 70.9%; 
Modified Administration Approach: 127.2%; 
Modified Senate Approach: 137.8%. 

Fiscal year: 2020; 
Modified Current Law Approach: 80.1%; 
Modified House Approach: 70.1%; 
Modified Administration Approach: 124.9%; 
Modified Senate Approach: 139%. 

Fiscal year: 2021; 
Modified Current Law Approach: 78.8%; 
Modified House Approach: 69%; 
Modified Administration Approach: 122.4%; 
Modified Senate Approach: 140.1%. 

Fiscal year: 2022; 
Modified Current Law Approach: 80.2%; 
Modified House Approach: 70.8%; 
Modified Administration Approach: 122.4%; 
Modified Senate Approach: 143.4%. 

Fiscal year: 2023; 
Modified Current Law Approach: 79.8%; 
Modified House Approach: 70.8%; 
Modified Administration Approach: 119.9%; 
Modified Senate Approach: 144%. 

Fiscal year: 2024; 
Modified Current Law Approach: 78.8%; 
Modified House Approach: 70.3%; 
Modified Administration Approach: 117%; 
Modified Senate Approach: 144.1%. 

Fiscal year: 2025; 
Modified Current Law Approach: 77.3%; 
Modified House Approach: 69.2%; 
Modified Administration Approach: 113.6%; 
Modified Senate Approach: 143.5%. 

Fiscal year: 2026; 
Modified Current Law Approach: 75.3%; 
Modified House Approach: 67.6%; 
Modified Administration Approach: 109.8%; 
Modified Senate Approach: 142.4%. 

Fiscal year: 2027; 
Modified Current Law Approach: 72.8%; 
Modified House Approach: 65.5%; 
Modified Administration Approach: 105.5%; 
Modified Senate Approach: 140.8%. 

Fiscal year: 2028; 
Modified Current Law Approach: 69.9%; 
Modified House Approach: 63%; 
Modified Administration Approach: 100.9%; 
Modified Senate Approach: 138.7%. 

Fiscal year: 2029; 
Modified Current Law Approach: 66.6%; 
Modified House Approach: 60.1%; 
Modified Administration Approach: 96%; 
Modified Senate Approach: 136.1%. 

Fiscal year: 2030; 
Modified Current Law Approach: 63%; 
Modified House Approach: 56.8%; 
Modified Administration Approach: 90.7%; 
Modified Senate Approach: 133.1%. 

Fiscal year: 2031; 
Modified Current Law Approach: 58.9%; 
Modified House Approach: 53.1%; 
Modified Administration Approach: 85.2%; 
Modified Senate Approach: 129.7%. 

Fiscal year: 2032; 
Modified Current Law Approach: 54.6%; 
Modified House Approach: 49.1%; 
Modified Administration Approach: 79.3%; 
Modified Senate Approach: 125.8%. 

Fiscal year: 2033; 
Modified Current Law Approach: 49.9%; 
Modified House Approach: 44.7%; 
Modified Administration Approach: 73.2%; 
Modified Senate Approach: 121.6%. 

Fiscal year: 2034; 
Modified Current Law Approach: 45%; 
Modified House Approach: 40.1%; 
Modified Administration Approach: 66.9%; 
Modified Senate Approach: 117%. 

Fiscal year: 2035; 
Modified Current Law Approach: 39.8%; 
Modified House Approach: 35.2%; 
Modified Administration Approach: 60.4%; 
Modified Senate Approach: 112%. 

Fiscal year: 2036; 
Modified Current Law Approach: 34.4%; 
Modified House Approach: 30.1%; 
Modified Administration Approach: 53.7%; 
Modified Senate Approach: 106.8%. 

Fiscal year: 2037; 
Modified Current Law Approach: 28.8%; 
Modified House Approach: 24.8%; 
Modified Administration Approach: 46.8%; 
Modified Senate Approach: 101.3%. 

Fiscal year: 2038; 
Modified Current Law Approach: 23%; 
Modified House Approach: 19.2%; 
Modified Administration Approach: 39.8%; 
Modified Senate Approach: 95.5%. 

Fiscal year: 2039; 
Modified Current Law Approach: 17%; 
Modified House Approach: 13.5%; 
Modified Administration Approach: 32.6%; 
Modified Senate Approach: 89.6%. 

Fiscal year: 2040; 
Modified Current Law Approach: 11%; 
Modified House Approach: 7.7%; 
Modified Administration Approach: 25.4%; 
Modified Senate Approach: 83.6%. 

Source: GAO. 

Note: Under all four modified approaches to prefunding, the unfunded 
liability starts at the same point at September 30, 2012, and begins 
to diverge in fiscal year 2013 with the different approaches to 
prefunding. 

[End of figure] 

Figure 13: Estimated Funded Ratios for Different Approaches from 
Fiscal Year-end 2012 to Fiscal Year-end 2040 under Senate Bill 
Assumption Basis: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2012; 
Modified Current Law Approach: 49.7%; 
Modified House Approach: 49.7%; 
Modified Administration Approach: 49.7%; 
Modified Senate Approach: 49.7%. 

Fiscal year: 2013; 
Modified Current Law Approach: 55%; 
Modified House Approach: 55%; 
Modified Administration Approach: 47.6%; 
Modified Senate Approach: 50.6%. 

Fiscal year: 2014; 
Modified Current Law Approach: 60.3%; 
Modified House Approach: 60.3%; 
Modified Administration Approach: 49.5%; 
Modified Senate Approach: 51.5%. 

Fiscal year: 2015; 
Modified Current Law Approach: 65.5%; 
Modified House Approach: 67.5%; 
Modified Administration Approach: 51.3%; 
Modified Senate Approach: 52.2%. 

Fiscal year: 2016; 
Modified Current Law Approach: 70.7%; 
Modified House Approach: 74.6%; 
Modified Administration Approach: 53.1%; 
Modified Senate Approach: 53%. 

Fiscal year: 2017; 
Modified Current Law Approach: 71.7%; 
Modified House Approach: 75.4%; 
Modified Administration Approach: 55%; 
Modified Senate Approach: 53.7%. 

Fiscal year: 2018; 
Modified Current Law Approach: 72.6%; 
Modified House Approach: 76.1%; 
Modified Administration Approach: 56.8%; 
Modified Senate Approach: 54.4%. 

Fiscal year: 2019; 
Modified Current Law Approach: 73.6%; 
Modified House Approach: 76.9%; 
Modified Administration Approach: 58.6%; 
Modified Senate Approach: 55.1%. 

Fiscal year: 2020; 
Modified Current Law Approach: 74.6%; 
Modified House Approach: 77.7%; 
Modified Administration Approach: 60.3%; 
Modified Senate Approach: 55.8%. 

Fiscal year: 2021; 
Modified Current Law Approach: 75.6%; 
Modified House Approach: 78.6%; 
Modified Administration Approach: 62%; 
Modified Senate Approach: 56.5%. 

Fiscal year: 2022; 
Modified Current Law Approach: 75.7%; 
Modified House Approach: 78.6%; 
Modified Administration Approach: 63%; 
Modified Senate Approach: 56.6%. 

Fiscal year: 2023; 
Modified Current Law Approach: 76.1%; 
Modified House Approach: 78.8%; 
Modified Administration Approach: 64%; 
Modified Senate Approach: 56.8%. 

Fiscal year: 2024; 
Modified Current Law Approach: 76.5%; 
Modified House Approach: 79.1%; 
Modified Administration Approach: 65.1%; 
Modified Senate Approach: 57.1%. 

Fiscal year: 2025; 
Modified Current Law Approach: 77.1%; 
Modified House Approach: 79.5%; 
Modified Administration Approach: 66.3%; 
Modified Senate Approach: 57.4%. 

Fiscal year: 2026; 
Modified Current Law Approach: 77.7%; 
Modified House Approach: 80%; 
Modified Administration Approach: 67.5%; 
Modified Senate Approach: 57.9%. 

Fiscal year: 2027; 
Modified Current Law Approach: 78.5%; 
Modified House Approach: 80.6%; 
Modified Administration Approach: 68.8%; 
Modified Senate Approach: 58.4%. 

Fiscal year: 2028; 
Modified Current Law Approach: 79.3%; 
Modified House Approach: 81.4%; 
Modified Administration Approach: 70.2%; 
Modified Senate Approach: 59%. 

Fiscal year: 2029; 
Modified Current Law Approach: 80.3%; 
Modified House Approach: 82.2%; 
Modified Administration Approach: 71.6%; 
Modified Senate Approach: 59.7%. 

Fiscal year: 2030; 
Modified Current Law Approach: 81.3%; 
Modified House Approach: 83.1%; 
Modified Administration Approach: 73%; 
Modified Senate Approach: 60.4%. 

Fiscal year: 2031; 
Modified Current Law Approach: 82.4%; 
Modified House Approach: 84.2%; 
Modified Administration Approach: 74.6%; 
Modified Senate Approach: 61.3%. 

Fiscal year: 2032; 
Modified Current Law Approach: 83.6%; 
Modified House Approach: 85.3%; 
Modified Administration Approach: 76.2%; 
Modified Senate Approach: 62.2%. 

Fiscal year: 2033; 
Modified Current Law Approach: 84.9%; 
Modified House Approach: 86.5%; 
Modified Administration Approach: 77.9%; 
Modified Senate Approach: 63.3%. 

Fiscal year: 2034; 
Modified Current Law Approach: 86.3%; 
Modified House Approach: 87.8%; 
Modified Administration Approach: 79.6%; 
Modified Senate Approach: 64.4%. 

Fiscal year: 2035; 
Modified Current Law Approach: 87.8%; 
Modified House Approach: 89.2%; 
Modified Administration Approach: 81.4%; 
Modified Senate Approach: 65.6%. 

Fiscal year: 2036; 
Modified Current Law Approach: 89.3%; 
Modified House Approach: 90.7%; 
Modified Administration Approach: 83.3%; 
Modified Senate Approach: 66.9%. 

Fiscal year: 2037; 
Modified Current Law Approach: 91%; 
Modified House Approach: 92.2%; 
Modified Administration Approach: 85.3%; 
Modified Senate Approach: 68.2%. 

Fiscal year: 2038; 
Modified Current Law Approach: 92.7%; 
Modified House Approach: 93.9%; 
Modified Administration Approach: 87.4%; 
Modified Senate Approach: 69.7%. 

Fiscal year: 2039; 
Modified Current Law Approach: 94.5%; 
Modified House Approach: 95.7%; 
Modified Administration Approach: 89.5%; 
Modified Senate Approach: 71.2%. 

Fiscal year: 2040; 
Modified Current Law Approach: 96.4%; 
Modified House Approach: 97.5%; 
Modified Administration Approach: 91.7%; 
Modified Senate Approach: 72.8%. 

Source: GAO. 

Note: Under all four modified approaches to prefunding, the funded 
ratio starts at the same point at September 30, 2012, and begins to 
diverge in fiscal year 2013 with the different approaches to 
prefunding. 

[End of figure] 

[End of section] 

Appendix III: Comments from the U.S. Postal Service: 

Joseph Corbett: 
Chief Financial Officer: 
Executive Vice President: 
United States Postal Service: 
475 L'Enfant Plaza SW: 
Washington, DC 20200-5000: 
202-268-5272
Fax: 202-268-4364: 
[hyperlink, http://www.usps.com] 

November 19, 2012: 

Ms. Lorelei St. James: 
Director, Physical Infrastructure Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548-0001: 

Dear Ms. St. James: 

Thank you for the opportunity to provide comments to the Government 
Accountability Office (GAO) report titled, Status, Financial Outlook 
and Alternative Approaches to Fund Retiree Health Benefits.
We concur with the overarching conclusion of the report that 
comprehensive reform is necessary to achieve a financially sustainable 
Postal Service. The Postal Service recognizes and accepts its 
obligation to provide effective, affordable health benefits to its 
employees and retirees. 

However, it does not have the financial resources to make prefunding 
payments required by current law. We believe that releasing this 
report is inappropriate given the solution to this situation is to 
allow the Postal Service to sponsor its own medical plan. The GAO is 
scheduled to report on our plans to sponsor our own medical programs 
soon. 

The report makes clear that the outlook for the Postal Service Retiree 
Health Benefits Fund (PSRHBF) is primarily determined by the costs of 
future health care coverage. These costs must be reduced and this can 
best be clone by adopting our proposal for a Postal Service-sponsored 
health plan for both current employees and retirees, separate from the 
Federal Employees Health Benefits Program. Allowing the Postal Service 
to gain control of its own health care program would save money, 
reduce or eliminate the current unfunded liability, and allow for better
management of health care costs going forward. Any discussion of the 
PSRHBF's outlook is compromised without discussion of the benefits 
provided by the postal health plan. 

Providing a stable and dependable health care plan for all employees 
is a crucial part of our strategic plan. Having an affordable 
arrangement, utilizing best practices found in the private sector, 
will serve Postal Service employees and retirees well. Congressional 
decision-makers would be better served by issuance of a report that 
fully considers all alternatives to providing health benefits to 
postal employees and retirees, including the proposed postal health 
plan. 

Sincerely, 

Signed by: 

Joseph Corbett: 

[End of section] 

Appendix IV: Comments from the U.S. Postal Service, Office of 
Inspector General: 

Office of Inspector General: 
United States Postal Service: 

November 21, 2012: 

Ms. Lorelei St. James: 
Director, Physical Infrastructure: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. St. James: 

Thank you for the opportunity to comment on the Government 
Accountability Office's report titled "Status, Financial Outlook, and 
Alternative Approaches to Fund Retiree Health Benefits." 

The report compares several approaches for funding the Postal 
Service's retiree health benefits and finds that there is a tradeoff 
between paying now and paying later. Paying more now reduces the 
amount that must be paid in the future, but it has created a severe 
fiscal challenge. Postponing payments will result in large payments in 
the future or longer amortization. We do not disagree with this basic 
premise of the report. 

We are concerned, however, that the report ought to provide needed 
context regarding the Postal Service's historic prefunding efforts. 
The context is important for the proper evaluation of the different 
proposals examined in the report. First, there is the historical 
context. The Postal Service started prefunding its retiree health 
benefits as a result of the discovery that, due to external fund 
management misjudgments, it was on track to seriously overfund its 
pension obligations by $78 billion. This discovery was one of several 
fund management issues identified about the same time. The decision to 
turn a mistake into a second prefunding obligation created its own 
problems. A 10-year schedule of prefunding payments was structured 
toward a 100-percent funding goal. The aggressive payment schedule 
appears to have been set based on byzantine "budget scoring" 
considerations rather than actuarial assumptions or an evaluation of 
the Postal Service's ability to make the payments. 

Second, there is the financial context. The Postal Service has never 
been able to afford a single payment. In the initial years the 
payments required borrowing. The long term liability has simply been 
shifted to a growing short term loan from the Treasury. Then later, 
the Postal Service began defaulting on the payments. Its ability to 
pay has even decreased as a result of a decline in the sale of many
of its traditional business products. Now, the Postal Service has 
reached the limit of the amount it can borrow. Clearly, the Postal 
Service cannot make the payments, particularly during a period of 
major downsizing of its large operational and retail components. 

The Inspector General's "seal and grow" proposal identified in your 
report was made in the context of this urgent situation. Our unusual 
proposal is reasonable in the context of these highly unusual 
circumstances. 

The report mistakenly represents the seal and grow proposal as a 
permanent payment plan rather than a temporary measure. We examined a 
4-year scenario as a possible time horizon in response to a Senate 
request. We also projected that the sealed fund would reach $90 
billion in 21 years as an illustration of the growth rate of the fund 
from interest earnings only. We did not attempt to estimate the future 
liability, increase or decrease, but did note that it was likely to 
change. In recent years, the liability has grown more slowly than 
first estimated. Actually, when the Postal Service proved unable to 
contribute to the fund, the seal and grow plan came into de facto 
existence. We are now entering the third year of this 4-year example 
of allowing the fund to accrue interest while making no expenditures. 

As additional background, it could be noted that the Postal Service 
has substantially funded its retiree benefit programs. The Postal 
Service's pensions are fully funded including overpayments, and the 
Postal Service's retiree health liabilities are already nearly half 
funded. The amount that has been taken and set aside from postal 
revenues now totals $330 billion. The present health prefunding covers 
the estimated lifetime obligations for current retirees. It will 
likely remain challenging for the Postal Service to divert cash it 
desperately needs now to make prefunding payments for employees who 
have not yet retired and may not receive benefits in many cases for 30 
years, possibly more. 

Our other major concern with the report is the fact that it does not 
adequately explore the use of the other assets the Postal Service 
holds as a means of satisfying this retiree health care obligation. My 
office has identified two sources of assets in the billions that can 
cover any unfunded liabilities should there be no Postal Service. One 
is the Postal Service's substantial real estate holdings. We have 
estimated their current value to be $85 billion that could be used to 
satisfy the current $48 billion liability. The properties can be sold 
in the event the Postal Service ceases operations. The other source 
comes from surpluses and overpayments in the Postal Service's pension 
funds, which could also be used to offset retiree health deficits. 
Together, these options provide a great insurance that assets meet or 
exceed the Postal Service's benefits funds future liabilities, unless 
additional prefunding requirements are added to the pension and health 
obligations. 

Lastly, the Government Accountability Office (GAO) report provides a 
useful discussion of the virtues of prefunding. However, we suggest 
that the report also examine the problems of prefunding and examine 
why no business or government entity, including the GAO or the Office 
of Personnel Management, has attempted to take advantage of such a 
seemingly appealing opportunity. It would certainly appear that 
despite the many virtues identified, the prefunding scheme is 
destroying the only entity that has taken the cure. It is important to 
recognize that making prefunding payments at the current levels will 
bankrupt the Postal Service regardless of whether mail volumes return 
or further decline. Before the recent drastic revenue declines, the 
Postal Service was still borrowing to make the prefunding payments. 

We believe a number of options exist to assure world-class levels and 
standards for prefunding. Today the Postal Service prefunding levels 
exceed those of any business, federal or state government entity that 
has been identified in the GAO report or by my office. Ironically, the 
principal risk in the current prefunding plan is the threat of 
creating conditions preventing the Postal Service from remaining self-
funded, since that is the very purpose of pre-funding in the first 
place. 

Sincerely, 

Signed by: 

David C. Williams: 
Inspector General: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contacts: 

Frank Todisco, (202) 512-2834 or todiscof@gao.gov: 

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov: 

Staff Acknowledgments: 

In addition to the individuals named above, Samer Abbas, Teresa 
Anderson, Beryl Davis, John Dicken, Kim Granger, Jacquelyn Hamilton, 
Hannah Laufe, Jennifer Leone, W. Stephen Lowrey, Kim McGatlin, 
Jonathan McMurray, Kristi Peterson, Steve Robblee, Amy Rosewarne, Aron 
Szapiro, and Crystal Wesco made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Originally due at the end of fiscal year 2011, USPS's $5.5 billion 
retiree health benefit payment requirement was delayed until August 1, 
2012. Pub. L. No. 112-74, § 632, 125 Stat. 786, 928 (Dec. 23, 2011). 
USPS missed that payment as well as the $5.6 billion that was due by 
September 30, 2012. 

[2] Pub. L. 109-435, § 803, 120 Stat. 3198 (Dec. 20, 2006). 

[3] For the purposes of this report, payments made by USPS refer to 
payments from the Postal Service Fund. The Postal Service Fund is a 
revolving fund established in the U.S. Treasury for the deposit of all 
revenues, interest, appropriations, proceeds from borrowing, or any 
other receipts from USPS's operations. The Fund is available to USPS 
to carry out the purposes, functions, and powers of USPS. 39 U.S.C. § 
2003. 

[4] Pursuant to PAEA, no later than June 30, 2017, OPM is required to 
compute, and by June 30 of each succeeding year, to recompute, a 
series of annual installments which provide for the liquidation of any 
liability or surplus by September 30, 2056, or within 15 years, 
whichever is later. 5 U.S.C. § 8909a(d)(2)(B). OPM told us it 
calculates these payments by determining the amount that, if 
contributed every year, would be projected to fully fund the remaining 
unfunded liability over an amortization period ending in the later of 
fiscal year 2056, or 15 years subsequent to the then-current fiscal 
year. 

[5] The $41 billion dollars in net losses for fiscal years 2007 
through 2012 are those reported by USPS in its financial reporting, 
which is on an accrual basis and not a cash basis. However, USPS 
reports its retiree health benefits cost in a manner that its reported 
expense for these benefits is equal to its required cash payments, as 
discussed later in this report. 

[6] The retiree health benefit liability represents the actuarial 
present value of the cost of the portion of future retiree health 
premiums for which USPS is responsible and that are attributable to 
past service; this liability reflects all such projected future costs 
for current retirees and beneficiaries and a portion of such projected 
future costs for current workers. Actuarial present values of this 
type, whether for retiree health benefits or pension benefits, are 
variously referred to as a "liabilities," "accrued liabilities," or 
"obligations," often depending on the user of the term (e.g., 
actuaries, accountants, or lawyers) and the context (e.g., financial 
reporting, statutes, or media). Throughout this report, we use the 
terms "liability" to refer to this actuarial present value of future 
costs attributable to past service and "unfunded liability" to refer 
to the excess of this liability over the amount of funds in the PSRHBF. 

[7] GAO, U.S. Postal Service: Transformation Challenges Present 
Significant Risks, [hyperlink, 
http://www.gao.gov/products/GAO-01-598T] (Washington, D.C.: Apr. 4, 
2001). 

[8] GAO, U.S. Postal Service: Moving Forward on Financial and 
Transformation Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-02-694T] (Washington, D.C.: May 13, 
2002). 

[9] GAO, U.S. Postal Service: Key Postal Transformational Issues, 
[hyperlink, http://www.gao.gov/products/GAO-03-812T] (Washington, 
D.C.: May 29, 2003). 

[10] Pub. L. No. 108-18, 117 Stat. 624 (April 23, 2003). 

[11] CSRS is a defined benefit, contributory retirement system for 
certain federal employees. It was replaced by the Federal Employees 
Retirement System (FERS) for federal employees who first entered 
covered service on and after January 1, 1987. 

[12] The 2003 Act required USPS to contribute the employer's share of 
the "dynamic normal cost" (which is a normal cost computed using 
"dynamic assumptions"). The normal cost is the annual growth in 
pension liabilities resulting from an additional year of service by 
plan participants. "Dynamic assumptions" are defined as economic 
assumptions that are used in determining actuarial costs and 
liabilities in a retirement system and in anticipating the effects of 
long-term future investment yields, future increases in rates of basic 
pay, and future rates of price inflation. Pub. L. No. 108-18, § 
2(a)(3) (Apr. 23, 2003). The prior-funding methodology had used 
"static assumptions," which did not project future pay or cost-of-
living increases and used a fixed interest-rate assumption. 

[13] Pub. L. No. 109-435, 120 Stat. 3198 (Dec. 20, 2006). 

[14] This shift created a postal actuarial funding surplus in CSRS of 
$17 billion, which was transferred to the PSRHBF. In addition, PAEA 
suspended USPS employer contributions to CSRS. Beginning in fiscal 
year 2017, if OPM determines a postal supplemental liability exists in 
CSRS, USPS must commence making annual employer contributions to CSRS 
in the following fiscal year. 

[15] OPM told us it calculates these payments by determining the 
amount that, if contributed every year, would be projected to fully 
fund the remaining unfunded liability over an amortization period 
ending in the later of fiscal year 2056, or 15 years subsequent to the 
then-current fiscal year. Therefore, for years subsequent to 2041, OPM 
would calculate an amortization amount that would be sufficient to 
liquidate the unfunded liability (or surplus) over the next 15 years. 
For example, in 2050, OPM would calculate an amortization amount that 
would be sufficient to liquidate the unfunded liability (or surplus) 
by 2065. This "rolling" amortization approach would never fully 
liquidate the unfunded liability (if experience matched the actuarial 
assumptions), but could be expected to approach full funding 
sufficiently closely. 

[16] USPS, United States Postal Service Annual Report 2007, 
(Washington, D.C.: Nov. 15, 2007). 

[17] GAO, U.S. Postal Service: Postal Reform Law Provides 
Opportunities to Address Postal Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-07-684T] (Washington, D.C.: Apr.17, 
2007). 

[18] 39 U.S.C. § 2005(a)(2). 

[19] Even though USPS did not make these payments, it recorded a loss 
for the obligation to make these payments, which remains outstanding. 

[20] We have ongoing work reviewing USPS's efforts in these areas. 

[21] USPS's annual appropriations acts have required USPS to provide 6-
day delivery of mail at not less than 1983 levels. See e.g., Pub. L. 
No. 112-74, 125 Stat. 786, 923 (Dec. 23, 2011). 

[22] PRC noted that USPS improperly deflated mailers' reported volume-
reduction projections and that the reported declines should not have 
been reduced, and determined, based on USPS's survey data, that it is 
likely to lose almost $600 million in net revenue because of mailer 
response to the proposal. See Postal Regulatory Commission, Advisory 
Opinion on Elimination of Saturday Delivery, Docket No. N2010-1 
(Washington, D.C.: Mar. 24, 2011). 

[23] As discussed later in this report, under some of the prefunding 
approaches, contributions would be lower than otherwise only in fiscal 
years 2017 and later, when contributions are determined on an 
actuarial basis. 

[24] OPM Office of Inspector General, A Study of the Risks and 
Consequences of the USPS OIG's Approaches to Change USPS's Funding of 
Retiree Benefits (Washington, D.C.: February 28, 2011). 

[25] OPM officials told us that not all USPS career employees are in 
FEHBP, such as those employees covered through another plan, (e.g., a 
spouse's employee health plan) or those who simply do not participate 
in FEHBP. Officials added that USPS's participation rate of eligible 
employees is generally about 90 percent. 

[26] Pub. L. No. 112-74, § 632. 

[27] H. R. 2309, 112th Cong. (2011). 

[28] S. 1789, 112th Cong. (2011). 

[29] We obtained data and projections from USPS and OPM, and built on 
this information by performing additional calculations and 
projections. Methodology and assumptions are presented in more detail 
in appendix I. 

[30] We refer to these payments as "fixed" because they are set 
amounts that do not vary with an actuarial assessment of future 
retiree health care costs. 

[31] The increase in premium payments is driven in part by a 
significant number of expected retirements. As a result, this increase 
in payments for retirees would be at least partially offset by 
otherwise lower payments for employees, since there would be fewer of 
them. 

[32] Reductions would occur in each year except 2016, when the 
prefunding payment would be slightly higher than under current law. 

[33] As calculated by OPM, the amortization period would run to the 
later of 2052 or 15 years from the then-current fiscal year, in 
contrast to the later of 2056 or 15 years from the then-current fiscal 
year under current law. USPS's share of premium payments would be paid 
from the PSRHBF, instead of payments made by USPS, beginning right 
away (which we modeled to begin in fiscal year 2013), instead of in 
fiscal year 2017 under current law. 

[34] As discussed later in this report, we modified assumptions to 
analyze the four prefunding approaches on a comparative basis, and 
also to demonstrate that the modification does not have a material 
effect on our findings. 

[35] All approaches discussed in the following sections, except the 
section on sensitivity to assumptions, are modeled under the current 
law assumption basis. Comparative results under the Senate bill 
assumption basis are discussed in the section on sensitivity to 
assumptions and presented more fully in appendix II. 

[36] There is no single actuarial approach, but an actuarially 
determined contribution will typically consist of a normal cost--which 
reflects future costs attributable to the current year of employee 
service--plus an amortization payment to pay down the unfunded 
liability. The size of the amortization payment will vary with the 
length of the amortization period selected. A longer amortization 
period requires lower annual payments but over a longer period. A 
shorter amortization period requires larger amortization payments but 
over a shorter period. 

[37] Compensation costs consist of projected employee salary and wage 
costs plus employee benefit costs exclusive of retiree health 
benefits, worker's compensation, or any forecasted contract 
negotiations savings. 

[38] We assumed compensation growth would vary across the two 
assumption bases because of the different underlying inflation 
assumptions. Further details of the projection are contained in 
appendix I. 

[39] Although the Modified Senate Approach bases amortization payments 
on the difference between PSRHBF assets and 80 percent of the 
liability, the normal cost portion of required payments is based on 
100 percent of the normal cost. Normal cost constitutes a higher 
portion of total payments towards the end of the projection period. 

[40] These projections were performed prior to the release of actual 
2012 results. 

[41] These percentages are from the projections under the current law 
assumption basis. 

[42] The changes were designed to reduce the year-to-year volatility 
in the value of the liabilities reported by some agencies, done via 
the use of an historical averaging period, as discussed in the text. 

[43] In addition to the three economic assumptions discussed in this 
section, the valuation and projection of retiree health benefit 
payments and liabilities depend on other assumptions as well, such as 
assumed mortality rates. These other assumptions would not vary 
between the current law assumption basis and the Senate Bill 
assumption basis. We have not audited the actuarial assumptions--
meaning the set of economic and demographic assumptions--used by OPM. 

[44] At least two other federal agencies that value large benefit 
programs with liabilities for future pension, medical, or disability 
benefits--the Department of Defense and the Veterans' Administration--
also use a 10-year historical averaging period, for consistency across 
federal agencies in federal financial reporting. 

[45] For example, the level of interest rates will generally be higher 
or lower depending upon expectations regarding future inflation. 

[46] This model is known as the Getzen model. 

[47] A 10-K Form is an annual report that many for-profit corporations 
must file with the SEC within 90 days of the close of their fiscal 
year. It is a publicly available document that contains audited 
financial statements and other information on a corporation's 
financial condition. 

[48] Results presented in this section are on the current law 
assumption basis. Comparative results, as constant dollars and 
percentage of compensation, are approximately the same under the 
current law and Senate bill assumption bases. 

[49] Letter from USPS OIG Inspector General David C. Williams to 
Senator Bernie Sanders, February 6, 2012. 

[50] If the liability were to become fully funded under this approach, 
the fund would then become "unsealed." USPS's share of premium 
payments would then start to be paid out of the PSRHBF, and USPS would 
start making prefunding payments into the PSRHBF to cover normal 
costs. As discussed earlier, the achievement of full funding does not 
mean that there are no further prefunding payments. 

[51] The liability rose to $93.6 billion at fiscal year-end 2012, a 
figure not known at the time of the USPS OIG's analysis in February 
2012. 

[52] This estimate uses the current law assumption basis. Under the 
Senate bill assumption basis, the corresponding figure is a 2032 
unfunded liability of $88 billion, which is equal to $49 billion in 
2012 dollars and 127 percent of 2032 compensation. 

[53] These estimates are under the current law assumption basis. Under 
the Senate bill assumption basis, the corresponding projected funded 
percentages in 2040 are 76 percent under the Seal and Grow Approach 
and 73 percent under the Modified Senate Approach. 

[54] OPM Office of Inspector General, A Study of the Risks and 
Consequences of the USPS OIG's Approaches to Change USPS's Funding of 
Retiree Benefits (Washington, D.C.: Feb. 28, 2011). 

[55] U.S. Postal Service Office of Inspector General, "Pension and 
Retiree Health Care Funding Levels: Management Advisory Report," FT-MA-
12-002 (June 18, 2012). 

[56] FT-MA-12-002. 

[57] GAO, U.S. Postal Service: Allocation of Responsibility for 
Pension Benefits between the Postal Service and the Federal 
Government, [hyperlink, http://www.gao.gov/products/GAO-12-146] 
(Washington, D.C.: Oct. 13, 2011). The amount of USPS's FERS pension 
surplus that we cited in this report was $6.9 billion, which was 
according to the then-most-recent actuarial analysis as of September 
30, 2009. More recent actuarial analyses put this surplus at $10.9 
billion as of September 30, 2010, and $2.6 billion as of September 30, 
2011. Over this same period, estimates of USPS's CSRS pension surplus 
went from a deficit (unfunded liability) of $7.3 billion as of 
September 30, 2009, to a surplus of $1.6 billion as of September 30, 
2010, to a deficit of $17.8 billion as of September 30, 2011. 

[58] USPS has since then reached its borrowing limit of $15.0 billion. 

[59] OPM Office of Inspector General, A Study of the Risks and 
Consequences of the USPS OIG's Approaches to Change USPS's Funding of 
Retiree Benefits (Washington, D.C.: Feb. 28, 2011). 

[60] S. Rep. No. 112-143, at 5 (2012). 

[61] As noted earlier, as long as USPS continues in operation with the 
retiree health plan intact, additional prefunding contributions would 
still be needed, even after full funding was achieved, for the annual 
growth in the liability for the cost of benefits attributable to 
ongoing employee service. 

[62] USPS does, however, disclose the value of its liability and 
unfunded liability (termed "obligation" rather than "liability," as 
discussed earlier), and the changes in such values from the prior 
year, in the footnotes to its financial statements and in its 
Management's Discussion and Analysis that accompanies the statements. 

[63] GAO, U.S. Postal Service: Accounting for Postretirement Benefits, 
[hyperlink, http://www.gao.gov/products/GAO-02-916R] (Washington, 
D.C.: Sept.12, 2002). 

[64] Retiree health benefits generally make up the largest part of 
OPEB. The "other" in OPEB was meant to refer to post-employment 
benefits other than pensions. 

[65] FT-MA-12-002. 

[66] GAO, State and Local Government Retiree Health Benefits, 
Liabilities are Largely Unfunded, but Some Governments Are Taking 
Action, [hyperlink, http://www.gao.gov/products/GAO-10-61] 
(Washington, D.C.: Nov. 30, 2009). 

[67] Department of Defense, Office of the Actuary, Valuation of the 
Medicare-Eligible Retiree Health Care Fund (Alexandria, VA: Sept. 30, 
2010) 

[68] Department of Defense, Board of Actuaries, Report to the 
President and the Congress on the DOD Medicare-Eligible Retiree Health 
Care Fund (Arlington, VA: Dec. 30, 2009). 

[69] The financial reporting rules vary by sector, and are generally 
governed by the FASB in the private sector, the GASB for state and 
local governments, and the FASAB for federal agencies and the federal 
government as a whole. The particular accrual rules within each sector 
vary in a number of ways, regarding such factors as actuarial methods 
and assumptions, amortization periods or lack thereof, and recognition 
on the employer's balance sheet. 

[70] [hyperlink, http://www.gao.gov/products/GAO-02-916R]. 

[71] FT-MA-12-002 

[72] If authorized by statute. 

[73] OPM, Civil Service Retirement and Disability Fund Annual Report, 
Fiscal Year Ended September 30, 2011 (issued January 2012). This 
report is available on request from OPM. 

[74] OPM does not normally project future liabilities. It needs to 
calculate current liabilities for future payments each year, but 
fulfilling its mission does not require any calculation of future 
liabilities. As such, OPM did not have previously developed software 
to do such projections, and had to do special programming specifically 
for this request. 

[End of section] 

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