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entitled 'Postal Pension Funding Reform: Review of Military Service
Funding Proposals' which was released on November 26, 2003.
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Report to Congressional Committees:
November 2003:
Postal Pension Funding Reform:
Review of Military Service Funding Proposals:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-281] GAO-04-281:
GAO Highlights:
Highlights of GAO-04-281, a report to the Committee on Governmental
Affairs, United States Senate, and the Committee on Government Reform,
House of Representatives
Why GAO Did This Study:
The Postal Civil Service Retirement System Funding Reform Act of 2003
(the Act) required the United States Postal Service, Department of the
Treasury, and Office of Personnel Management (OPM) to prepare
proposals detailing whether and to what extent the Treasury and Postal
Service should fund the benefits attributable to the military service
of the Postal Service’s current and former Civil Service Retirement
System (CSRS) employees. The Act required GAO to evaluate the
proposals. Our objective in doing so was to assess the agencies’
positions and provide additional information where it may be useful.
What GAO Found:
The positions taken by OPM and Treasury and the Postal Service were
driven in part by differing views on the nature and extent of the
relationship between military service and an entity’s operations. The
Postal Service favors returning the responsibility for funding
benefits attributable to military service to the Treasury, making
arguments that include Treasury’s historic responsibility for these
benefits, the legislative history surrounding the Postal Service’s
funding of retirement benefits, the fact that the majority of military
service by CSRS employees was rendered before the current Postal
Service was created, and that military service has no connection to
the Postal Service’s functions or operations. OPM and Treasury favor
the recently enacted law, arguing that the Postal Service was intended
to be self-supporting, military service is a benefit like other CSRS
benefits that should be allocated proportionally over an employee’s
career, and the current law is one in a series that developed today’s
approach to funding the Postal Service’s CSRS costs.
GAO observed that there is no direct relationship between an
employee’s military service and an entity’s operations, but an
indirect relationship is established once an employee is hired into a
position whose retirement plan provisions credit military service when
computing a civilian benefit. GAO has long held the position that
federal entities should be charged the full costs of retirement
benefits not covered by employee contributions in the belief that it
enhances recognition of costs and budgetary discipline at the same
time it promotes sounder fiscal and legislative decisions. However,
our previous recommendations and matters for congressional
consideration did not specifically address whether the cost of
military service benefits should be included in CSRS employee benefit
costs. Currently there is inconsistency in how various self-supporting
government entities treat these costs.
The military service of many Postal Service retirees was already
creditable to a civilian pension when the Postal Service began
operations in 1971. OPM’s current approach, however, allocated the
years of creditable military service of these employees over their
entire civilian careers. If Congress decides that the Postal Service
should be responsible for military service costs applicable to its
employees, then consideration of an allocation alternative reflecting
the extent to which the military service of current and former
employees was already creditable towards a civilian pension when the
Postal Service began operating would enhance the decision-making
process.
What GAO Recommends:
GAO suggests that Congress consider requiring that, similar to Postal
Service, all other self-supporting agencies pay the full dynamic cost
of CSRS pension benefits. If the Congress requires the Postal Service
to fund the military service component of CSRS benefits, then it may
wish to have other self-supporting agencies do so as well. Further,
GAO recommends that OPM provide estimates of the added cost to
Treasury of making Postal Service responsible for only the cost of
benefits that had not yet vested as of June 30, 1971. Postal Service
and OPM/Treasury provided some clarifying comments and expanded views
on several issues discussed in our report.
www.gao.gov/cgi-bin/getrpt?GAO-04-281
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Linda Calbom at (202)
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[End of section]
Contents:
Letter:
Results in Brief:
Background:
Summary of Key Issues and Our Observations:
Relationship of Military Service to Employing Agency Operations:
Historical Funding of the CSRS Benefits Payable to Postal Service
Employees:
Applicability of FERS Cost Allocation and Funding Methods to CSRS:
Funding of Military Service Benefits by Federal and Other Entities:
Observations on Alternative Military Service Cost Allocation
Approaches:
Conclusion:
Matters for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Report from OPM and Treasury:
Appendix II: Report from the United States Postal Service:
Appendix III: Comments from the United States Postal Service:
Appendix IV: Comments from OPM and Treasury:
Table:
Table 1: Estimated Costs to Treasury of Alternative Allocation
Approaches:
Abbreviations:
COLA: cost-of-living adjustment:
CSRDF: Civil Service Retirement and Disability Fund:
CSRS: Civil Service Retirement System:
DOE: Department of Energy:
FDIC: Federal Deposit Insurance Corporation:
FEHBP: Federal Employees Health Benefits Program:
FERS: Federal Employees' Retirement System:
MWAA: Metropolitan Washington Airports Authority:
OPM: Office of Personnel Management:
PBGC: Pension Benefit Guaranty Corporation:
PMA: Power Marketing Administration:
PRA: Postal Reorganization Act:
Letter November 26, 2003:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Honorable Susan M. Collins:
Chairman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Governmental Affairs:
United States Senate:
This report reflects the results of our review of the military service
funding proposal submitted by the United States Postal Service and the
joint proposal submitted by the Office of Personnel Management (OPM)
and the Department of the Treasury. The Postal Civil Service Retirement
System Funding Reform Act of 2003[Footnote 1] (P.L. 108-18) required
that these agencies prepare and submit to the President, the Congress,
and the GAO proposals detailing whether and to what extent the Treasury
or the Postal Service should be responsible for funding the benefits
attributable to the military service of current and former employees of
the Postal Service that, prior to enactment of the 2003 Act, had been
provided for by the Treasury under section 8348(g)(2) of title 5,
United States Code.[Footnote 2] The Act also mandated that we prepare
and submit a written evaluation of each proposal no later than 60 days
after the aforementioned agencies had submitted them. We received the
agencies' proposals on the mandated September 30, 2003, due date.
The objective of our evaluation was to identify and assess the
agencies' respective positions and to provide additional information
where such information may be useful. In assessing the agencies'
positions, we considered the accuracy of the various assertions
presented, those aspects of equity and consistency raised by the
agencies, the Postal Service's unique role in the financing of CSRS and
Federal Employees' Retirement System (FERS) benefits,[Footnote 3] and
its status as a self-supporting agency. There may be other issues or
perspectives that the agencies did not present and we did not assess
that the Congress may want to consider in deciding whether and to what
extent the Postal Service should fund military service benefits.
We also provide our observations on the alternative approaches for
allocating the cost of military service benefits that are discussed in
the OPM and Treasury proposal. The Postal Service and, jointly, OPM and
Treasury put forth various arguments and assertions to justify their
opposing positions. We organized each of the agencies' arguments and
assertions into four common, overarching issues raised by the agencies
to facilitate a comparison and discussion of the differences between
the two proposals. The reader may find it helpful to read the body of
this report along with the full text of the agencies' proposals that
are reproduced in appendix I (OPM / Treasury) and appendix II (Postal
Service).
To achieve our objective, we obtained documentation from the agencies
to support their assertions and interviewed agency officials. We also
reviewed various laws and their legislative histories, including those
mentioned below, along with applicable regulations and OPM guidance:
1. Those laws preceding P.L. 108-18, which established the approach to
the Postal Service's funding of CSRS benefits,[Footnote 4]
2. the Civil Service Retirement Amendments of 1969,[Footnote 5] (P.L.
91-93) which established the current pay-as-you-go approach to funding
the government's share of the cost of CSRS military service benefits
that continues to generally apply to employees of entities other than
the Postal Service,
3. the Omnibus Budget Reconciliation Act of 1982,[Footnote 6] which
required employees to make deposits in certain circumstances towards
the cost of military service benefits, and:
4. the Federal Employees' Retirement System Act of 1986,[Footnote 7]
which established the cost attribution and funding method OPM cites as
being the model for its analyses and the administration's original
legislative proposal.
Our discussion of the alternative cost allocation methods was based on
figures calculated by OPM. The OPM and Treasury proposal presented five
possible approaches for assigning the cost of benefits attributable to
military service between the Treasury and the Postal Service. OPM
calculated the financial effects of each approach using CSRS-wide
actuarial assumptions.[Footnote 8]
We did not perform an actuarial review of OPM's estimates of the total
cost to the Treasury of each alternative funding method or test the
accuracy of the underlying data; consequently, we are not expressing an
opinion on the material accuracy of these estimates. Furthermore, we
did not attempt to present here all other possible approaches for
allocating the cost of military service benefits or determine which
allocation methodology is the most appropriate. We performed our work
from October through November 2003 in accordance with generally
accepted government auditing standards.
We requested comments on a draft of this report from the Postmaster
General, the Director of OPM, and the Secretary of the Treasury, or
his/her designee. Written comments from the Postmaster General are
reprinted in appendix III. Joint written comments from the Secretary of
the Treasury and Director of OPM are reprinted in appendix IV:
Results in Brief:
The Postal Service favors returning to the Treasury the responsibility
for funding all CSRS benefits attributable to military service rendered
by its current and former employees. The Postal Service makes various
arguments, including that this responsibility has historically been
Treasury's and that, prior to passage of P.L. 108-18, the Congress had
reaffirmed this view each time legislation was enacted that changed the
Postal Service's CSRS contributions. The Postal Service also notes that
its CSRS employees rendered the vast majority of their military service
before the Postal Service was even created and, moreover, argues that
military service has no connection with the Postal Service's functions
or operations. Furthermore, the Postal Service argues that CSRS was
never required to be fully funded like FERS and believes that it should
not have to fund the military service benefits of its CSRS employees as
the price for receiving its share of the higher than expected
investment returns earned on contributions the Service made since 1971.
The Postal Service asserts that no agency other than the Postal Service
- including other self-supporting agencies[Footnote 9] - fully funds
the cost of their employees' CSRS benefits, including military service
benefits. The President's Commission on the United States Postal
Service agreed with the Postal Service's positions and recommended
repeal of this requirement.
OPM and Treasury favor what is now current law as outlined in P.L. 108-
18. They argue that the Postal Service was reorganized in 1971 with a
primary goal of being self-supporting and should, therefore, bear all
costs attributable to service after its reorganization. OPM and
Treasury further contend that military service credit is a benefit just
like other CSRS benefits, the cost of which should be allocated
proportionally over an employee's civilian career in a manner that is
consistent with the funding system that exists for the FERS. They also
view P.L. 108-18 as one in a series of laws that over time developed
the approach that exists today for the Postal Service's funding of CSRS
costs. OPM and Treasury further assert that, while the Postal Service
was not required to fund CSRS military service benefits prior to
enactment of P.L. 108-18, it also did not have to assume any of the
actuarial risk of the system. Consequently, OPM and Treasury contend
that the Postal Service should not share in the higher than expected
investment returns[Footnote 10] of the CSRDF without assuming the
military service costs that could have been funded with any such
investment gains. OPM and Treasury provided estimates of five
alternative approaches to allocating the cost of the military service
benefits of the Service's current and former CSRS employees and
provided their views of the strengths or limitations of the
alternatives.
In our review of both proposals we observed that the parties' positions
as to whether the Postal Service should be responsible for the cost of
CSRS military service benefits were driven in part by differing views
of the nature and extent of the relationship between military service
and an agency's operations. We agree that there is no direct
relationship between an employee's military service and an agency's
operations. Consequently, one can reasonably argue that, as a matter of
equity and attribution accuracy, the entity that directly benefited
from an employee's military service should be required to fund any
related retirement costs. However, one might also argue that the
employing entities should bear this cost because the right to receive
credit for past military service arises only as a result of employment
in a civilian position covered by CSRS or FERS. It should, however, be
noted that this military service feature is a mandate for all federal
entities with covered CSRS and FERS employees and that such service
credit is not required or common for private sector entities.
As a matter of consistency, one might also reasonably argue that the
Postal Service should be treated like other entities with respect to
the funding of pension costs, which it is for purposes of funding the
FERS normal cost. However, the Postal Service is unlike most if not all
other entities in certain respects. First, the Postal Service must pay
for any actuarial losses and may benefit from any actuarial gains
attributable to the pension obligations of its employees, retirees, and
their survivors. In this sense, the Postal Service is treated as a
separate employer for purposes of financing the CSRS and FERS plans.
Second, it is required to fund the dynamic normal cost[Footnote 11] of
CSRS benefits, whereas most other agencies pay only a portion of this
cost. Third, the Postal Service is intended to be self-supporting and,
therefore, expected to cover all of its costs through postal rates.
There are, however, other self-supporting agencies, such as the Federal
Deposit Insurance Corporation (FDIC) and Pension Benefit Guaranty
Corporation (PBGC), that are not required to fund military service
costs and do not otherwise fully fund the dynamic normal cost of their
CSRS employees' benefits as the Postal Service is now required to do.
On the other hand, there are a few self-supporting entities that have
either been required by law or have voluntarily chosen to fund the
dynamic normal cost, including military service costs, of employees who
retained CSRS coverage. Therefore, there is no consistency in this
regard.
Our long-standing position has been that employer agencies should fund
the dynamic cost of the government's retirement programs not otherwise
funded with employee withholdings and deposits. We also observed on
numerous occasions that, as a result of charging less than the dynamic
cost of CSRS not otherwise provided by employee withholdings, agencies
whose operations are intended to be self-supporting receive large
subsidies that are not recognized in the cost of their goods and
services. However, our previous recommendations and matters for
congressional consideration did not specifically address whether the
cost of military service benefits should be included as part of a
dynamic normal cost factor. Nor did we examine the issue of whether the
entity that benefited from the service should ultimately pay for any
related benefits. Additionally, with the exception of self-supporting
agencies that pay the dynamic cost of these benefits, taxpayers
ultimately fund the benefits, regardless of whether or not these costs
are included in individual agency budgets. Therefore, charging the
self-supporting agencies' customers for the government's share of the
dynamic normal cost of pension benefits results in real savings to the
taxpayers and, therefore, is not just a change in the timing and source
of funding.
The agencies present opposing views on whether FERS funding
requirements can or should be applied to CSRS benefits. Whether or not
the obligation to fund military service benefits should be linked with
the benefit of higher than expected investment returns is crucial to
their respective arguments. In addressing this issue, we found nothing
that precludes changing how the Postal Service's contributions are
calculated under CSRS to a method similar to FERS. At the same time, we
also did not find any requirement that past military service be
included in the dynamic normal cost factor used for funding purposes in
order to also benefit from past investment gains.
For purposes of determining the extent to which the Postal Service
should be responsible for military service costs, OPM's current pro-
rata approach allocates the years of creditable military service
proportionally over employees' entire civilian careers. The OPM and
Treasury proposal included four allocation alternatives. However, it
did not include an allocation alternative that reflects the extent to
which the Postal Service's current and former employees had, by the
time the Service commenced operations in 1971, completed the 5 years of
civilian service needed to have their past military service creditable
towards the computation of an annuity. We believe this alternative
would be important to consider in the overall decision-making process,
if the Congress decides that the Postal Service should be responsible
for CSRS military service costs associated with their civilian
employees.
We offered a matter for congressional consideration, namely that,
similar to the Postal Service, all other self supporting federal
entities be required to fund the dynamic cost of CSRS pension benefits.
If the Congress decides to include funding of the military service
component in its definition of full pension funding for the Postal
Service, we believe it should consider doing so for all self-supporting
federal entities. We also recommended that, if the Postal Service is
made responsible for funding military service pension benefit costs,
then OPM should provide a sixth alternative funding scenario by
providing an estimate of the cost to the Treasury and the Postal
Service of having Postal Service assume only the cost of benefits that
had not yet vested when the former Post Office Department was converted
to its presented form.
Both the Postal Service and OPM/Treasury provided written comments on a
draft of this report. The Postmaster General expressed concern with
what he saw as an inference that the Postal Service should be
responsible for the cost of an employee's military service because it
hires the employee knowing of the past military service. The Postmaster
General also reaffirmed the Postal Service's commitment to the
fundamental policy of veterans' preference. Our report did not imply
that knowing of past military service was a relevant factor in
determining whether the Postal Service should bear this cost. We simply
stated the fact that the right to receive credit for past military
service arises only as a result of employment in a civilian position
covered by CSRS or FERS.
The Secretary of the Treasury and Director of OPM disagreed with our
position that there is no direct relationship between an employee's
prior military service and the operations of the Postal Service. They
stated that granting credit for military service in calculating
civilian pensions enables the Postal Service to recruit and retain
veterans, who provide direct benefits to the operations of their
employer. We agree that the crediting of military service facilitates
the recruitment and retention of veterans who, subsequent to their
military service, contribute to postal operations. However, we continue
to view the relationship between military service and postal operations
as indirect because the activities performed while serving in the
military did not directly contribute to the daily operations of the
Postal Service at the time the military service was rendered. The
Secretary of the Treasury and Director of OPM also provided certain
clarifications with respect to their policy positions and beliefs.
Background:
Public Law 108-18 was enacted after we reported on the results of our
review of an analysis of the funded status of the Postal Service's CSRS
pension obligations that OPM prepared at our request.[Footnote 12] This
act adopted the administration's proposal that the Postal Service be
responsible for funding the value of benefits attributable to military
and volunteer service of all employees first hired into civilian
service after June 30, 1971, and a pro-rata share of those benefits for
employees hired before the July 1, 1971, effective date of the Postal
Reorganization Act (PRA).[Footnote 13]
In order to determine the funded status of the Postal Service's CSRS
obligations, OPM estimated the portion of the Civil Service Retirement
and Disability Fund (CSRDF) that was attributable to the Postal
Service, taking into consideration all past CSRS-related payments to
CSRDF by the Service and its employees, including earnings on those
payments, and the Service's pro-rata share of all CSRS-related payments
from CSRDF, including benefits attributable to military service, since
July 1, 1971.
The act also requires that the Postal Service begin funding the portion
of CSRS dynamic normal cost not otherwise funded with employee
withholdings. When calculated on a dynamic basis, normal cost
represents an amount of money that if set aside during employees'
working years will, with investment earnings, be sufficient to cover
future benefits and expenses when due, so long as the plan's economic
and demographic assumptions hold true. Dynamic normal cost reflects the
effect of assumed future general pay increases and annuitant cost-of-
living adjustments (COLA) on the amount of benefits that will be
ultimately paid. Consequently, when a plan's dynamic normal cost is
fully funded, unfunded liabilities due to inflation in salaries and
annuity payments are avoided. This contrasts with static normal cost,
wherein assumed future general pay increases and annuitant COLAs are
not considered. With static funding, new unfunded liabilities are
created as salary and annuity inflation actually occur.[Footnote 14]
There are different actuarial methods for determining dynamic normal
cost. OPM calculates the dynamic normal cost for the CSRS and FERS
plans using an actuarial cost method - aggregate entry age normal -
which expresses normal cost as a level percentage of aggregate basic
pay for a group of new plan entrants. Consequently, this method
allocates costs without regard to how benefits actually accrue. It is
calculated by dividing the actuarial present value of expected future
benefits a group of new plan entrants is expected to receive after
retirement by the actuarial present value of the group's expected
salaries over their working lives. OPM includes the past military
service of new plan entrants in its calculation of expected future
benefits. Consequently, OPM's aggregate entry age normal method
allocates the cost of military service benefits proportionally over an
employee's civilian career. For fiscal year 2003, the dynamic normal
cost percentage for regular CSRS employees was 24.4 percent of basic
pay, of which employees pay 7.0 percent and the Postal Service the
remaining 17.4 percent. Similarly, the dynamic normal cost of FERS,
currently 11.5 percent of basic pay for regular employees, is fully
funded with employer contributions of 10.7 percent and employee
withholdings of 0.8 percent.
Public Law 108-18 also requires that starting on September 30, 2004,
the Postal Service begin funding any projected underfunding of its CSRS
obligations calculated by OPM as of September 30, 2003.[Footnote 15]
This funding is to occur over a total of 40 years, with OPM
recalculating the projected underfunding and the amortization payments
as of the close of each subsequent fiscal year.[Footnote 16] In the
event that a surplus exists as of September 30, 2025,[Footnote 17] the
Postmaster General is required to submit a report to the Congress
describing how the Postal Service proposes to use such surplus.
By changing the funding of military service benefits, the act made the
Postal Service (1) retroactively responsible for funding a portion of
military service benefits that have already been paid to annuitants and
funded by Treasury on a pay-as-you-go basis and (2) prospectively
responsible for funding some or all of the military service benefits
expected to be paid to current and future Postal Service annuitants.
The cumulative effect of this change in law was to shift responsibility
for funding approximately $27 billion (net present value as of
September 30, 2002) in military service costs from taxpayers to postal
ratepayers.
Summary of Key Issues and Our Observations:
The agencies made various arguments and assertions throughout their
proposals, which we organize into the following four common,
overarching issues:
* relationship of military service to employing agency operations,
* historical funding of CSRS benefits payable to Postal Service
employees,
* applicability of FERS cost allocation and funding methods to CSRS,
and:
* funding of military service benefits by federal and other entities.
The agencies' positions reflect their own perceptions of what is fair
to the taxpayers and ratepayers and how the Postal Service should be
treated vis-à-vis other federal agencies and considering its mandate to
be self-supporting. As stated previously, in assessing the agencies'
positions, we considered the accuracy of the various assertions
presented, those aspects of equity and consistency raised by the
agencies, the Postal Service's unique role in the financing of CSRS and
FERS benefits, and its status as a self-supporting agency. The
agencies' positions with respect to each of these issues, as well as
our observations on them, are presented below. We presented the
agencies' positions in the order that best framed the issue at hand.
Relationship of Military Service to Employing Agency Operations:
Postal Service Position:
Military service has no relation to Postal Service operations, on which
postal rates are based, and, in fact, had no relation to the operations
of the former Post Office Department. Each of the federal employment
services - military and civilian - have separate compensation,
retirement benefit, and other benefits programs. Furthermore, the use
of military service in the calculation of CSRS retirement benefits is a
matter beyond the control of employer agencies.
OPM and Treasury Position:
Receiving credit for past military service is a civilian retirement
benefit that Postal Service employees receive just like other benefits,
such as cost-of-living increases on annuitant benefit payments.
Furthermore, individuals retiring from the Postal Service receive CSRS
credit for their military service only because of their employment with
the Postal Service.
GAO Observations:
To a large extent, whether or not an employee's military service has
any relationship to agency operations is a function of whether or not
the Congress requires that agencies fund a portion of the costs related
to this service. The positions noted above go beyond mandated financial
responsibilities and seek to first define more specifically the nature
and extent of this relationship before deciding on whether postal
ratepayers or taxpayers should fund CSRS military service benefits.
Clearly, any service that is creditable towards a CSRS or FERS benefit
but is rendered while employed by an entity other than the Postal
Service has no direct relationship to the Service's operations. This
includes military service, service performed while employed by another
agency and covered by CSRS or FERS, and service covered by another of
the federal government's defined benefit retirement plans, but is
subsequently credited towards a CSRS or FERS benefit upon an employee's
acceptance of an appointment to a covered position and meeting other
requirements.[Footnote 18] In addition to the uniformed services, a
number of other federal agencies have compensation systems and benefit
programs that are separate from those covering Postal Service
employees. Having a retirement system that covers so many civilian
employees and permitting the transfer of service between federal
retirement systems[Footnote 19] promotes the portability of benefits,
and so eases the movement of employees to other positions within the
federal government.
The crediting of military service towards a civilian service retirement
benefit has been a feature of CSRS since it was established in 1920 and
of FERS since it was established in 1986. This feature is one of many
that collectively constitute a plan of benefits that defers a portion
of an employee's total compensation until retirement. Agencies and
other entities whose employees are covered by CSRS and FERS have no
control over the features offered, among them employee elections such
as whether to provide a survivor benefit to a spouse, because the
plan's provisions are established by the plan sponsor, which in this
case is the federal government.
OPM and Treasury view military service of federal employees as related
to employing agency operations by virtue of the fact that credit for
such service is a feature of the CSRS and FERS plans in which the
employees participate. They further note that it is only because an
employee serves in a covered civilian position for a minimum of 5 years
that the employee's military service can be used in the calculation of
a CSRS or FERS benefit.
The Postal Service's statements suggest a view of military service as
involving the performance of duties unrelated to the delivery of the
mail and further imply that any related compensation - including
retirement benefits - should be paid for by the taxpayer. Defining this
relationship is particularly important for the Postal Service because
the costs associated with its retirees' service credits earned while
employed by any other entity and which are not funded by the retiree
while employed by the Postal Service must be passed onto postal
ratepayers. This contrasts to those agencies that receive the vast
majority of their funding through appropriations, where taxpayers
ultimately fund all benefits regardless of whether and to what extent
agencies recognize employee retirement costs in their budgets. One can
reasonably argue that the cost of military service benefits would more
equitably be borne by the entity that benefited from the military
service (Department of Defense), which, in essence, would mean that
taxpayers would ultimately bear these costs.
Historical Funding of the CSRS Benefits Payable to Postal Service
Employees:
OPM and Treasury Position:
The funding of military service benefits by the Treasury Department was
a feature of a funding methodology established by law in 1969 that did
not require employer agencies to fund the full cost of all benefits not
otherwise funded by employees. The prior funding mechanism for the
Postal Service under CSRS (including the special treatment of military
service) was developed in piecemeal fashion that never fully addressed
all of the factors that affect the costs of the system. The special
treatment of military service that applied to Postal Service employees
can be viewed as more of an historic accident than a deliberate policy
choice. This is supported by the fact that each time a comprehensive
system for funding federal annuities was developed there was no special
treatment of military service. In view of the long history of
congressional action, it is reasonable to assume that the Congress may
have taken action to address the issues of excess interest earnings and
the costs of military service, even if OPM had not identified the
problems with the static funding methodology.:
Postal Service Position:
Since 1969 the Treasury Department has been responsible for funding
CSRS benefits attributable to military service. The Treasury Department
remained responsible for funding these benefits for employees of all
federal agencies even after laws had been subsequently enacted to make
the Postal Service responsible for additional retirement costs
attributable to its decisions and actions that result in increases in
employee pay on which benefits are computed. Retroactively making the
Postal Service responsible for funding military service benefits would
result in a cost transfer of $27 billion to postal ratepayers, the
great majority of which has already been paid for by Treasury.
Furthermore, approximately 90 percent of the cost of military service
was earned before the Postal Service was created in 1971.
GAO Observations:
The fact that the Congress had not acted until just recently to make
the Postal Service responsible for funding the creditable military
service of its employees is taken by the opposing parties to mean
different things, which they assert, not surprisingly, support their
respective positions. Both parties acknowledge that, prior to P.L. 108-
18, when previously presented with the opportunity to reconsider the
Postal Service's funding of its employees' CSRS benefits, the Congress
chose to leave Treasury responsible for funding all CSRS military
service benefits.
The Postal Service contends that the passage of successive legislation
relating to the financing of its CSRS costs without ever requiring that
it fund CSRS military service costs was the Congress's way of
reaffirming its intention of having the Treasury fund these costs for
Postal Service employees just as they do now for all other federal
agency employees. OPM and Treasury contend that the piecemeal fashion
with which the Congress made the Postal Service responsible for funding
an increasing share of the CSRS benefits of its employees constitutes a
pattern that indicates the Congress could have eventually made the
Service responsible for military service costs.
It is difficult to discern or even infer from the legislative history
of the laws that preceded P.L. 108-18 any particular policy choice that
can be seen as indicative of the Congress's future intentions or
predictive of what ultimately led to enactment of P.L. 108-18. Any
legislative action must be viewed within the context of the particular
facts and circumstances that existed at the time the Congress was
considering specific legislation, including budgetary and fiscal
considerations. For these reasons, we consider both parties' arguments
and assertions in connection with this point to be speculative and
inconclusive.
With respect to the Postal Service's assertion that approximately 90
percent of the cost of military service was earned before the Service
was created in 1971, we asked OPM to calculate the additional cost to
the Treasury of making it responsible for the entire cost of benefits
attributable to all military service estimated to have been rendered
before 1972 by both former and current employees of the Postal Service.
OPM estimated the additional cost to be approximately 75 percent of the
$27 billion total cost to Treasury to fund all CSRS military service
benefits.[Footnote 20]
Based on our review of the documentation provided by the Postal
Service's actuarial consultants, it appears that the Service's
assertion was meant to convey that approximately 90 percent of the
military service in years allocated to it by OPM's pro-rata methodology
was estimated to have occurred before 1972.[Footnote 21]
Applicability of FERS Cost Allocation and Funding Methods to CSRS:
OPM and Treasury Position:
The payment of military service costs for Postal Service employees is
consistent with the funding of FERS, the funding system on which the
new law was patterned. Although the method for funding CSRS benefits
prior to P.L. 108-18 did not require the Postal Service to fund the
cost of military service, it also did not contemplate that the
actuarial gains or losses of the retirement system would be attributed
to the Postal Service. Consequently, the Postal Service should not
benefit from the positive experience of the CSRDF without assuming the
other responsibilities that come with an approach that funds the full
cost of all benefits, including military service.
Postal Service Position:
There is no identity between FERS funding and CSRS funding. FERS was
created on a dynamically funded basis to phase out CSRS and to
establish a more limited federal employment benefits program that would
be fully funded by employees and employer agencies. CSRS is a totally
different program from FERS, with different benefits and levels of
contribution. In fact, CSRS was never fully funded by employees and
employer agencies, with the exception of the Postal Service. Therefore,
a change in funding methods that allows the Postal Service to receive
credit for its share of higher than expected investment returns on
contributions it made in accordance with the prior funding method does
not justify the transfer of military service costs. There is no basis
to substantiate this rationale either in accepted actuarial or
financial practice.
GAO Observations:
The agencies present opposing views on whether FERS funding
requirements can or should be applied to CSRS benefits. Whether or not
the obligation to fund military service benefits should be linked with
the benefit of higher than expected investment returns is crucial to
their respective arguments. There are numerous similarities and
differences between CSRS and FERS,[Footnote 22] one difference being
the manner and extent to which the full cost of plan benefits have been
funded, including military service benefits. The fact that there are
currently differences between CSRS and FERS benefits and funding
requirements does not preclude changing how the Postal Service's
contributions are calculated under CSRS to a method similar to FERS.
That said, we also did not find any requirement that past military
service be included in the dynamic normal cost factor used for funding
purposes in order for the Postal Service to be treated as a separate
employer for purposes of financing CSRS and, thus, benefit from past
investment gains. In fact, there are actuarial methods that would fund
the cost of military service benefits in a manner different than the
one OPM currently uses. Therefore, there is nothing that inextricably
links the past investment experience of the CSRDF to how military
service benefits are funded.
Funding of Military Service Benefits by Federal and Other Entities:
Postal Service Position:
No agency other than the Postal Service - including other self-
supporting agencies - fully funds the cost of its employees' CSRS
benefits, including military service benefits. Furthermore, private
sector companies are not responsible for funding military service
costs.
OPM and Treasury Position:
With respect to the argument that it is not fair to ask the Postal
Service to finance the cost of military service because it would be the
only agency required to do so, the fact that Treasury funds CSRS
benefits attributable to military service rather than employer agencies
merely shifts the timing of when the contributions are made and whether
they are charged to a Treasury appropriation or to agency budgets. In
either case, the costs would still ultimately be borne by the taxpayer.
In contrast, one of the primary goals of the Postal Reorganization Act
was to ensure that all of the Postal Service's costs are recovered
through postal revenues, not taxpayer dollars. Therefore, all pension
costs for employees that are attributable to service after the
reorganization should be borne by the Postal Service.
GAO Observations:
There are numerous government entities whose programs are required by
law to be financed by the users of their services and that pay less
than the portion of the CSRS dynamic normal cost not otherwise paid for
by employee withholdings, including military service costs. These
include the Federal Deposit Insurance Corporation (FDIC) and the
Pension Benefit Guaranty Corporation (PBGC).
However, there have also been a few entities that have either been
required by law or have voluntarily chosen to fund the dynamic normal
cost of employees who retained CSRS or FERS coverage. For example, the
Metropolitan Washington Airports Act of 1986[Footnote 23] required that
the Metropolitan Washington Airports Authority (MWAA) pay the
difference between the dynamic normal cost of CSRS benefits (including
military service costs) and the contributions made by those career
civilian employees of the Federal Aviation Administration who
transferred to MWAA with the leasing of the Metropolitan Washington
Airports in 1986. In addition, the Power Marketing Administrations
(PMA)[Footnote 24] agreed to recover the dynamic normal cost of CSRS
(including military service costs) through their power rates
prospectively beginning in fiscal year 1998.[Footnote 25] The PMAs
agreed to do so in response to a series of reports we issued.[Footnote
26]
One might reasonably argue that the Postal Service should be treated
like other agencies with respect to its funding of pension costs.
However, the fact that other federal entities are not currently fully
funding the government's share of CSRS normal costs does not
necessarily support the argument that the Postal Service should not
fund them. Likewise, it does not necessarily support the argument that
other agencies start paying for these costs. Rather, it merely
demonstrates the inconsistent treatment of agencies in this regard.
Our long-standing position has been that employer agencies should fund
the dynamic cost of the government's retirement programs not otherwise
funded with employee withholdings and deposits.[Footnote 27] We also
observed on numerous occasions that, as a result of charging less than
the dynamic cost of CSRS not otherwise provided by employee
withholdings, agencies whose operations are intended to be self-
supporting receive large subsidies that are not recognized in the cost
of their goods and services.[Footnote 28] However, our previous
recommendations and observations did not specifically address whether
the cost of military service benefits should be included as part of a
dynamic normal cost factor. Nor did we examine the issue of whether the
entity that benefited from the service should ultimately pay for any
related benefits. Additionally, with the exception of self-supporting
agencies that pay the dynamic cost of these benefits, taxpayers
ultimately fund the benefits, regardless of whether these costs are
included in individual agency budgets. Therefore, charging the self-
supporting agencies' customers for the government's share of the
dynamic normal cost of pension benefits results in real savings to the
taxpayers and, therefore, is not just a change in the timing and source
of funding.
Regarding the Postal Service's statement that private sector companies
are not responsible for military service costs, it is true that private
sector companies are not required to give credit for past military
service in their defined benefit pension plans. However, it should also
be noted that the taxes these companies pay to the general fund of the
Treasury are used to pay for various costs incurred by the federal
government, including the military service benefits of military
retirees and those employees who retired from agencies other than the
Postal Service. The Postal Service is exempt from paying any corporate
income taxes.
Observations on Alternative Military Service Cost Allocation
Approaches:
The OPM and Treasury proposal presented five possible approaches for
allocating the cost of benefits attributable to military service
between the Treasury and the Postal Service. The Postal Service's
position is that taxpayers, not postal ratepayers, should be
responsible for the full cost of CSRS military service benefits, and it
did not offer any other funding alternatives as part of its military
service funding proposal.
The information from the OPM and Treasury proposal is reprinted below
in table 1. OPM calculated the estimated cost to the Treasury of each
approach using the pro-rata approach to allocating military service set
forth in P.L. 108-18 as the baseline.[Footnote 29]
Table 1: Estimated Costs to Treasury of Alternative Allocation
Approaches:
Alternative: Postal Service pays all; Postal Service responsibility[A]:
All military service for post-71 retirees; Total estimated additional
cost to Treasury (in billions): $(20.7)[B].
Alternative: P.L. 108-18: Postal Service pays a pro-rata share; Postal
Service responsibility[A]: All military for post-71 hires, pro-rata
share for pre-71 hires; Total estimated additional cost to Treasury (in
billions): $0.
Alternative: Treasury pays for pre-1971 hires; Postal Service
responsibility[A]: All military for post-71 hires,; no military for
pre-71 hires; Total estimated additional cost to Treasury (in
billions): $7.1.
Alternative: Postal Service pays post-9/30/02 military service
benefits; Postal Service responsibility[A]: Only for military service
benefits paid in the future; Total estimated additional cost to
Treasury (in billions): $16.6.
Alternative: Treasury pays all; Postal Service responsibility[A]: No
military service, past or future; Total estimated additional cost to
Treasury (in billions): $27.2.
Source: Based on data provided by OPM.
[A] Reference to "post-71" and "pre-1971" mean post June 30, 1971, and
pre July 1, 1971, respectively.
[B] The total estimated additional cost to the Treasury of the "Postal
Service pays all" alternative does not agree with the "Treasury pays
all" alternative because the baseline pro-rata alternative did not
result in an equal split of costs between the Postal Service and
Treasury.
[End of table]
OPM's P.L. 108-18 pro-rata approach requires that the Postal Service
fund (1) all CSRS military service benefits of employees hired into a
civilian position after June 30, 1971, and (2) a pro-rata share of
these benefits for employees hired before July 1, 1971. OPM estimated
this pro-rata share of benefits by first allocating an employee's total
creditable military service based on the ratio of pre-1971 civilian
service to the total civilian service which the employee accrued both
before and after the effective date of the Postal Reorganization Act.
OPM's methodology also assumed that the Postal Service should be
responsible for (1) the effect of post-1971 general pay increases and
increasing benefit accrual rates on the final amount of military
service benefits at retirement, including those military service
credits allocated to the federal government, and (2) a proportional
amount of post-1971 annuitant cost-of-living adjustments. These aspects
of OPM's methodology apply to the second, third, and fourth funding
alternatives presented in the OPM and Treasury proposal. The other two
alternatives - Treasury pays the entire cost of military service or
Postal Service pays the entire cost after September 30, 2002 - have the
responsible agency funding all CSRS benefits attributable to military
service, including all annuitant COLAs. Appendix B of the OPM and
Treasury proposal provides examples of how an example retiree's benefit
payment would be allocated into civilian and military service portions
and how the federal government's share of those amounts would be
determined for each of the funding alternatives.
The total estimated additional cost to the Treasury for each funding
alternative is equal to the difference between the projected funded
status - or "supplemental liability" - of the current law pro-rata
approach with that of each alternative. Appendix C of the OPM and
Treasury proposal provides the net asset, present value of future
benefits, and present value of future contributions components of the
"supplemental liability" for each funding alternative.
In addition to providing the total impact of each funding alternative
on the Treasury as compared to the current law pro-rata approach, the
OPM and Treasury proposal also provides their views of the strengths or
limitations of the alternatives. Most of the commentary in this section
of the OPM and Treasury proposal repeats assertions and arguments
presented elsewhere. However, we believe some clarification of the
following statements made in the first funding alternative is needed:
"Because military service only becomes creditable at the time when an
employee actually retires, it would not be unreasonable to charge
Postal Service for the entire amount of military service for all
employees who retired from the Postal Service after June 30, 1971. It
was only because these employees retired from the Postal Service that
they received credit for their military service.":
"Civil Service rules required that to receive a regular retirement
benefit the employees must have at least five years of civilian service
and then attain additional age and service requirements.":
The rules governing the crediting of military service are established
in law and regulation. Generally, military service can be used in the
computation of any annuity after having completed 5 years of civilian
service and if the following three conditions are met: (1) the military
service was active and terminated under honorable conditions, (2) the
military service was performed before separating from a civilian
position covered by CSRS, and (3) the employee makes any required
deposits.
The OPM and Treasury statement that an employee must meet additional
age and service requirements beyond the first 5 years to receive a
regular (voluntary) retirement benefit is accurate, as is the statement
that an employee must retire - in this case from the Postal Service -
in order for military service to be counted in the computation of an
annuity benefit. However, an employee is entitled to receive a
disability retirement benefit at any age with 5 years of civilian
service and a deferred annuity beginning at age 62 with 5 years of
civilian service. Once employees meet the minimum years of civilian
service necessary to be entitled to any type of annuity and meet the
conditions listed above, they are entitled to have all of their
military service included in the computation of their annuity.
For purposes of determining how best to allocate CSRS military service
benefits, it is important to note that OPM assumed that employees
render military service prior to when they first enter civilian
service. This leads to the presumption that the military service
credits of many of the Postal Service's retirees were already
creditable towards an annuity by the time the Service commenced
operations in 1971.[Footnote 30] Yet, for purposes of estimating the
Postal Service's share of the CSRS portion of CSRDF assets and the
actuarial present value of future benefits, OPM allocated the years of
creditable military service of former and current Postal Service
employees proportionally over the employees' civilian career.
For example, an employee who retired in 1991 with 10 years of civilian
service before July 1, 1971, and 20 years after June 30, 1971, would
have two-thirds of any military service allocated to the Postal
Service, even though OPM assumes that all military service was rendered
before the employee was hired into a covered civilian position.
Consequently, this example employee's military service would have been
creditable towards a civilian pension benefit before the Postal Service
commenced operations. The OPM and Treasury proposal did not include an
allocation alternative that reflects the extent to which military
service became creditable after the Postal Service commenced
operations.
The scoring of each alternative approach to funding military service
hinges on how Postal Service would spend any additional savings. The
Postal Service was required by P.L. 108-18 to submit a proposal
detailing how it would expend any savings accruing to it after fiscal
year 2005 as a result of enactment of P.L. 108-18. In that separate
proposal, the Postal Service provided two alternatives to spending any
savings. The first alternative assumes the responsibility for funding
the CSRS military service benefits of its current and former employees
will return to the Treasury, while the other alternative assumes that
the Postal Service will retain this responsibility as defined under
P.L. 108-18. Consequently, we present our estimates of the budgetary
implications of only these two military service funding alternatives in
our companion report on the results of our mandated review of the
Postal Service's savings plan proposal. This report is entitled Postal
Pension Funding Reform: Issues Related to the Postal Service's Proposed
Use of Pension Savings, [Hyperlink, http://www.gao.gov/cgi-bin/
getrpt?GAO-04-238] GAO-04-238.
Conclusion:
The agencies made various arguments as to which agency - Postal Service
or Treasury - should fund the cost of CSRS military service benefits.
We made various observations that considered the accuracy of the
various assertions presented, those aspects of equity and consistency
raised by the agencies, the Postal Service's unique role in the
financing of CSRS and FERS benefits, and its status as a self-
supporting agency. Ultimately, the Congress must make this decision.
Should the Congress decide that the Postal Service should be
responsible for funding CSRS military service benefits attributable to
its employees, the Congress should then decide the extent to which
these benefits should be attributed to the Postal Service and perhaps
to other self-supporting agencies. Even if the Congress decides that
self-supporting agencies should not be required to fund CSRS military
service benefits, the Congress should still consider whether these
agencies should be required to fund the dynamic normal cost of their
CSRS employees' benefits that excludes the military service component.
The OPM and Treasury proposal provided five alternative allocation
approaches; however, none of their approaches included an allocation
alternative that reflects the extent to which the Postal Service's
current and former employees had, by the time the Service commenced
operations in 1971, completed the 5 years of civilian service needed to
be entitled to have their past military service credits used in the
computation of an annuity. This alternative would provide an estimate
of Postal Service's obligation that includes only military service
benefits that became creditable after the Postal Service commenced
operations.
Matters for Congressional Consideration:
To help promote full and consistent funding of CSRS benefits among
self-supporting federal agencies, we suggest that the Congress
consider:
* requiring all self-supporting federal entities to pay the dynamic
cost of employee pension benefit costs not paid for by employee
contributions and deposits, excluding military service costs, and:
* treating all self-supporting federal entities consistently with
regard to whatever decision is made on Postal Service funding of the
military service component of CSRS employee benefits.
Recommendation for Executive Action:
If the Congress decides that the Postal Service should be responsible
for military service costs associated with its employees, we recommend
that OPM provide the Congress with estimates of the additional cost to
the Treasury of making the Postal Service responsible only for employee
military service that became creditable after June 30, 1971.
Agency Comments and Our Evaluation:
:
Postal Service:
In written comments on a draft of this report the Postmaster General
expressed concern with what he saw as an inference that the Postal
Service should be responsible for the cost of an employee's military
service because it hires the employee knowing of the past military
service. The Postmaster General also reaffirmed the Postal Service's
commitment to the fundamental policy of veterans' preferences.
Our report did not imply that knowing of past military service was a
relevant factor in determining whether the Postal Service should bear
this cost, but rather simply stated the fact that the right to receive
credit for past military service arises only as a result of employment
in a civilian position covered by CSRS or FERS.
The Postmaster General also stated that our suggestion that the
Congress consider requiring all self-supporting entities to fund the
dynamic costs of employee pension benefits is not an issue for the
Postal Service because it began doing so as of April 2003. Our report
states that there are other self-supporting agencies that are not
required to fund military service costs and do not otherwise fully fund
the dynamic normal cost of their CSRS employees' benefits as the Postal
Service is now required to do. We highlighted this difference in
funding requirements to illustrate an inconsistency that the Congress
may want to consider as it contemplates CSRS employee benefits funding
by the Postal Service. The Postmaster General's written comments are
reprinted in appendix III.
OPM and Treasury:
In written comments on a draft of this report, the Secretary of the
Treasury and Director of OPM disagreed with our statement that there is
no direct relationship between an employee's prior military service and
the operations of the Postal Service. They stated that granting credit
for military service in calculating civilian pensions enables the
Postal Service to recruit and retain veterans, who provide direct
benefits to the operations of their employer. We agree that the
crediting of military service facilitates the recruitment and retention
of veterans who, subsequent to their military service, contribute to
postal operations. However, we continue to view the relationship
between military service and postal operations as indirect because the
activities performed while serving in the military did not directly
contribute to the daily operations of the Postal Service at the time
the military service was rendered.
In their comment letter, the Secretary of the Treasury and Director of
OPM also provided certain clarifications with respect to their policy
positions and beliefs. For example, they stated that their estimate,
made at our request, of the value of benefit costs due to military
service before 1971 includes all increases in the value of those
benefits that resulted from pay raises granted by the Postal Service,
but that they do not endorse this method, especially insofar as it
permits Postal Service pay increases to then increase the cost
allocated to the Treasury. We do not endorse this or any other cost
allocation method. As stated in our report, our position is that the
Congress needs to decide whether the Postal Service should fund the
cost of military service attributable to military service of its
current and former employees. If the Congress decides that the Postal
Service should fund these costs, then it needs to decide which method
to use in allocating costs to the Postal Service. The written comments
from the Secretary of the Treasury and Director of OPM are reprinted in
appendix IV.
:
We are sending copies of this report to the Director of the Office of
Personnel Management, the Postmaster General, the Secretary of the
Treasury, the Director of the Office of Management and Budget, and
other interested parties. We are also sending this report to the
Honorable John M. McHugh, House of Representatives, as the Chairman of
the Special Panel on Postal Reform and Oversight, House Committee on
Government Reform. The report is also available at no charge on GAO's
home page at [Hyperlink, http://www.gao.gov]. If you have any questions about this
report, please contact Linda Calbom, Director, Financial Management and
Assurance, at (202) 512-8341, or Robert Martin, Acting Director, at
(202) 512-6131. You may reach them by e-mail at [Hyperlink,
calboml@gao.gov] and [Hyperlink, martinr@gao.gov]. Other key
contributors to this report were Joseph Applebaum, Richard Cambosos,
Lisa Crye, Frederick Evans, Darren Goode, Scott McNulty, and Brooke
Whittaker.
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of section]
Appendixes:
Appendix I: Report from OPM and Treasury:
OFFICE OF THE DIRECTOR:
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
WASHINGTON, DC 80915-0001:
The Honorable David M. Walker
Comptroller General of the United States
Washington, DC 20548:
SEP 30 2003:
Dear Mr. Walker:
On April 23, 2003, the President approved Public Law 108-18, the
"Postal Civil Service Retirement System Funding Reform Act of 2003."
Section 2(e) of the Act requires that. the Office of Personnel
Management, the Department of the Treasury, and the United States
Postal Service each prepare and submit, by September 30, 2003, to the
President, the Congress; and the General Accounting Office proposals
detailing whether and to what extent the Department of the Treasury or
the Postal Service should be responsible for the funding of benefits
attributable to the military service of current and former employees of
the Postal Service that, prior to the date of enactment of this
statute, were the responsibitity of the Department of the Treasury
under section 8348 of title 5, United States Code. The Office of
Personnel Management and the Department of the Treasury have prepared a
joint report in accordance with these provisions which we are pleased
to transmit to you.
The Office of Management and Budget advises that there is no objection
to the submission of this report from the standpoint of the
Administration's program.
Similar letters will be sent to the President of the United States, the
President of the Senate, and the Speaker of the House of
Representatives.
Sincerely,
Signed by:
Kay Coles James:
Director of the Office of Personnel Management:
Signed by:
John W. Snow:
Secretary of the Treasury:
Enclosure:
Report to Congress on the Financing of Benefits Attributable to the
Military Service of Current and Former Employees of the Postal Service:
The Postal Civil Service Retirement System Funding Reform Act of 2003,
P.L. 108-18 requires that:
"The United States Postal Service, the Department of the Treasury, and
the Office of Personnel Management shall, by September 30, 2003, each
prepare and submit to the President, the Congress, and the General
Accounting Office proposals detailing whether and to what extent the
Department of the Treasury or the Postal Service should be responsible
for the funding of benefits attributable to the military service of
current and former employees of the Postal Service that, prior to the
date of the enactment of this Act, were provided for under section
8348(g)(2) of title S, United States Code. ":
Executive Summary:
It is the Administration's position that the U.S. Postal Service (USPS)
should be responsible for a share of the costs paid to retired
employees of the Postal Service that arise from increasing Civil
Service pension benefits because of military service. One of the
primary goals for the reorganization of the Post Office into the USPS
was to ensure that all the costs associated with the new organization
be paid through stamp revenue and not through taxpayer dollars.
Therefore, all pension costs for employees that are attributable to
service after the reorganization should be borne by the Postal Service.
The question then is how to determine what portion of the cost of
military credit is attributable to service since the Postal Service
became independent in 1971. We maintain that the attribution method
adopted in the new legislation (P.L. 108-18) is an easy-to-administer
method that is fair to both the Postal Service and the Federal
taxpayer.
The Postal Service should be Responsible for the Cost of Military
Service Credits Attributable to Service Since the Postal Service Became
Independent in 1971:
The Postal Service Should Pay the Full Cost of Benefits Received by its
Employees:
We maintain that it has been a basic principle of the legislation that
created the Postal Service that revenue and expenses for Postal Service
should be kept separate from the rest of the Federal Government, and
that the Postal Service should pay for all of its expenses through
Postal rates. The benefits attributable to military service are a
retirement benefit that Postal employees receive just like other
benefits, such as the Cost of Living Allowances (COLAs) increases for
annuitants, and Postal Service customers should pay for the full cost
of all benefits received by its employees.
Some have argued that it is not fair to ask the Postal Service to
finance the cost of military service for Civil Service Retirement
System (CSRS) employees, as it would be the only agency required to
operate under this financing mechanism. However, for other agencies the
special treatment of military service under the CSRS merely shifts the
timing of when the contributions are made and whether they are charged
to the Treasury or charged to agency budgets. In either case, the costs
would still ultimately be borne by the taxpayer. By contrast, Postal
Service costs are paid through postage revenues rather than funded by
the Treasury.
The special treatment of military service that applied to Postal
Service employees under the old law can be viewed as more of an
historic accident than a deliberate policy choice.
As described in Appendix A, the prior funding mechanism for the Postal
Service under CSRS (including the special treatment of military
service) was developed in a piecemeal fashion that never fully
addressed all of the factors that affect the costs of the system.
By contrast to CSRS, each time a comprehensive system for funding
Federal annuities was developed there was no special treatment of
military service. For example, in the Federal Employees' Retirement
System (FERS) that was enacted in 1984, the cost of benefits
attributable to military service is borne by the agencies (including
the Postal Service) through the normal cost. The Administration has
also proposed the same method for funding the cost of CSRS benefits
attributable to military service for non-Postal agencies under the
Managerial Flexibility Act.
In view of the long history of Congressional action, it is reasonable
to assume that Congress may have taken further action to address the
issues of excess interest earnings and the costs of military service,
if OPM had not identified the problems with the static funding
methodology.
The payment of military service costs for Postal Service employees is
consistent with the funding of FERS, the funding system on which the
new law was patterned.
The adoption of a new financing system for the Postal Service under
P.L. 108-18 provided an opportunity to design a complete funding system
for the Postal Service retroactive to when the Postal Service became
independent in 1971. Although the old law static funding of CSRS did
not require the Postal Service to fund the cost of military service, it
also did not contemplate that the actuarial gains or losses of the
retirement system would be attributed to the Postal Service. Experience
shows that the retirement system benefited from extremely high interest
rates during the 1980's. The gains from interest earnings in excess of
the static interest rate far exceed the additional costs of military
service. The Postal Service should not benefit from the positive
dynamic experience of the pension fund without assuming the other
responsibilities that come with dynamic funding.
The Attribution Method Adopted in P.L. 108-18 is a Fair Approach for
Determining the Benefits Attributable to Pre-1971 Military Service.
Although it is clear that the Postal Service should be responsible for
all employee benefit costs that arise due to employment under its
tenure, there remains the question of what its responsibility should be
for military service costs for employees who worked for both
organizations.
The Postal Service should be responsible for a share of the costs
associated with military service based on the portion of the career
that is served with the Postal Service. This is the method that was
adopted in the Postal Civil Service Retirement System Funding Reform
Act of 2003 (P.L. 108-18). It is consistent with the funding provisions
of FERS and with the policy that the Postal Service should pay for all
of its expenses through Postal rates.
The following describes several ways to allocate military costs for
Postal Service employees. An illustrative example of each method is
shown in Appendix B.
"USPS Pays All" for Post-1971 Retirement:
The most straightforward method of allocating costs would be to assume
that the Treasury should be responsible for the cost of military
service for employees who retired from the old Post Office Department
before July 1, 1971, and that the Postal Service should be responsible
for the cost for employees who retired after June 30, 1971.
Because military service only becomes creditable at the time when an
employee actually retires, it would not be unreasonable to charge
Postal Service for the entire amount of military service for all
employees who retired from the Postal Service after June 30, 1971. It
was only because these employees retired from the Postal Service that
they received credit for their military service.
Civil Service rules required that to receive a regular retirement
benefit the employees must have at least five years of civilian service
and then attain additional age and service requirements.
="P L. 108-18 --USPS Pays Pro-rata Share" Based on the Portion of Total
Career Served under the Post Office Department:
Under the Administration's approach (as adopted in P.L. 108-18) the
cost of military service for employees who were hired before July 1,
1971, but who retired on or after this date, is pro-rated based on the
ratio of pre-1971 civilian service to total civilian service. We
believe this pro-rata method provides a fair way of allocating the cost
of military service for these employees and is the most consistent with
FERS funding.
"Treasury Pays for Pre-1971 Hires":
Under this allocation the Postal Service would only be responsible for
the cost of military service for employees hired after June 30, 1971.
For example, an employee hired in 1970 who spends almost all of his/her
career at the Postal Service would, of course, receive credit for their
military service. However, under this approach, the Postal Service
would not be charged with any of the cost of these benefits, even
though they are being paid as a result of the employee having worked
for almost an entire career at the Postal Service.
"USPS Pays for Post-September 30, 2002 Military Service Benefits":
An allocation suggested in discussions with Congressional staff was to
charge the Postal Service only for the cost of military service
benefits that are payable after September 30, 2002. This method was
based on the notion that "the Treasury already paid for the military
service" before this date. However if the objective after Postal
Service reorganization was to raise revenue to pay the employment costs
of Postal workers from the sale of stamps instead of the payment of
taxes, this proposed method continues to require Government revenues to
fund benefits paid to Postal employees.
It is our position that the Postal Service should not benefit from the
positive dynamic experience of the pension fund without assuming the
other responsibilities that come with dynamic funding.[NOTE 1] As was
mentioned previously, we believe that Postal Service should be
responsible for all of its retirement costs, and it is irrelevant what
may or may not have been paid for by Treasury under the old law. This
method does not provide a reasonable way of allocating the cost based
on pre-1971 and post-1971 service.
"Treasury Pays All":
Treasury would be responsible to pay all of the costs of military
service and the Postal Service would pay none of the costs of military
service.
It is our position that this policy violates the principle that the
Postal Service should pay for its own expenses through Postal rates.
Individuals retiring from the Postal Service receive CSRS credit for
their military service only because of their employment with the Postal
Service.
The following table summarizes the costs of these different ways of
treating military service, with more complete information shown in
Appendix C:
[See PDF for image]
[End of table]
Budgetary Implications of the Allocations Presented Above:
Under P.L. 108-18, the military service for pre-1971 hires is allocated
between Treasury and the Postal Service based on the ratio of pre-1971
civilian service to total civilian service. Appendix C shows that, as
of September 30, 2002, USPS is still required to fund a supplemental
liability of $4.8 billion under this approach. This supplemental
liability would be amortized by the Postal Service through 40-year
amortization payments. Current law (P.L. 108-18) has already
incorporated these supplemental liability payments into the scoring of
the legislation.
If the Postal Service paid for all of the cost of military service for
its post-1971 retirees, the supplemental liability to be amortized by
the Postal Service would be $25.5 billion, an increase of $20.7 billion
over the current law.
Under the allocation where the Postal Service is responsible only for
the cost of military service benefits that are paid after September 30,
2002 ("USPS Pays for Post-9/30/02 Military Service"), USPS would carry
a supplemental liability of negative $11.8 billion, or, in other words,
there would be an over-funding of $11.8 billion. This assumes that the
Postal Service would continue to pay the full normal cost of 24.4
percent of payroll. However the over-funding position would likely
necessitate the elimination of all future Postal agency contributions
(only the employee contributions would remain). The $16.6 billion
difference between the $4.8 billion supplemental liability under P.L.
108-18 and the negative $11.8 billion under the "USPS Pays for Post-9/
30/02 Military Service" Method represents the additional cost to the
Treasury.
Appendix A:
Background:
The benefit payments under Civil Service Retirement System (CSRS)
include credit for military service. Generally, employees must pay a
deposit of the 7 percent employee contributions on their military pay
to receive this credit. The policy issue addressed here is to what
degree the cost of the benefits attributable to military service in
excess of the employee deposits should be paid for by the Postal
Service. The U.S. Department of the Treasury must pay any portion of
this cost not paid by the Postal Service.
Static Funding of CSRS -1969 Law:
P.L. 91-93, which was passed in 1969, set up the basic funding
methodology for CSRS Government-wide. This methodology did not provide
full funding of CSRS under private sector standards that were later
incorporated into the Employee Retirement Income Security Act (ERISA)
and into the dynamic funding methodology for the Federal Employees'
Retirement System (FERS). Under the static funding of CSRS, the
increases in retirement costs due to general salary increases and Cost
of Living Allowances COLAs for annuitants are not anticipated or
financed in advance. Each general salary increase is financed by means
of a new series of 30-year amortization payments that is set up after
that salary increase has occurred. Under the original law, there was no
separate financing of the cost of COLAs for annuitants, although this
was later added for the Postal Service only.
Employees and agencies each contribute 7 percent of pay, which
approximates the ongoing or normal cost, and which does not pay for the
cost of salary increases or COLAs for annuitants.
The Treasury is required to pay for the cost of military service
through military service payments that are made each year, which are
equal to the total amount of benefits attributable to military service
that were paid out during that fiscal year. Finally, the Treasury also
pays interest on the static unfunded liability, which covers any costs
that are not otherwise being financed, such as the cost of COLAs for
annuitants.[NOTE 2] Any gains from excess interest earnings, beyond
what were assumed under the static interest rate assumption, would
reduce the unfunded liability, and thus lower the Treasury payments of
interest on the unfunded liability. Thus, all of the gains due to
excess interest earnings flow through to the Treasury.
Postal Service Financing of CSRS:
Shortly after the Postal Service became independent in 1971, Congress
passed P.L. 93-349 which required the Postal Service to finance the
cost of all Postal salary increases by means of separate thirty-year
amortization payments. These payments covered the entire cost of all
Postal salary increases, and did not distinguish between the portions
of the salary increases attributable to the pre-or the post-1971
service of Postal employees.
Under the Omnibus Budget Reconciliation Acts of 1987, 1989, 1990, and
1993, Congress gradually instituted a series of measures that
eventually required the Postal Service to finance the entire cost of
COLAs for Postal annuitants attributable to service since 1971 by means
of fifteen-year amortization payments. 3:
In summary, the Postal Service financing of CSRS gradually evolved over
time through a series of steps that resulted in the Postal Service
paying for the full cost of all salary increases and the cost of COLAs
attributable to post-1971 service. There was no comprehensive plan for
Postal financing of CSRS such as was adopted under FERS. Any gains from
excess interest earnings, and the costs of military service, stayed
with the Treasury.
FERS Financing Provisions:
FERS was a result of Congress taking a comprehensive approach to
designing a new retirement system for Federal employees who were also
covered under Social Security. Under the dynamic funding methodology
that was adopted for FERS in 1986, there was separate accounting for
the assets and liabilities for Postal and non-Postal employees. Postal
Service was required to pay for all of the retirement costs for Postal
employees, including the cost of military service.
[3] These statutes were P.L. 100-203, P.L. 101-239, P.L.101-508, and
P.L.103-66.
Appendix B:
[See PDF for image]
[End of figure]
Appendix C:
[See PDF for image]
[End of figure]
NOTES:
[1] The gains from interest earnings in excess of the static interest
rate far exceed the additional costs of military service. Assuming that
the Treasury were to fund all military costs, the present value of all
interest gains to the Postal Service from July 1, 1971 through
September 30, 2002 would be approximately $106.6 billion. The cost to
the Treasury of military service would be $16.6 billion, resulting in a
net gain of $90 billion.
[2] More precisely, the Treasury was required to contribute 10 percent
of the interest on the static unfunded liability and 10 percent of the
military service benefits in FY1971, and to contribute 20 percent in
FYI 972, and so on through 100 percent in FY1980 and future years.
[End of section]
Appendix II: Report from the United States Postal Service:
JOHN E. POTTER POSTMASTER GENERAL CEO:
-UNITED STATES POSTAL SERVICE:
September 30, 2003:
The Honorable David M. Walker
Comptroller General of the United States
United States General Accounting Office 441 G Street, NW:
Washington, DC 20548-0001:
Dear Mr. Comptroller General:
Pursuant to the requirements of P.L 108-18, the Postal ClvII Service
Retirement System Funding Reform Act of 2003, 1 am transmitting two
reports. The first addresses the funding of benefits attributable to
military service of.current and former employees of the U.S_ Postal
Service. The second details how the Postal Service proposes to expend
savings accruing to the Postal Service as a result of P.L. 108-1g.
I would be happy to answer any questions you may have regarding these
reports.
Sincerely,
Signed by:
John E. Potter:
475 L'ENFANT PLAZA SW
WASHINGTON DC 20260-0010
www.usps.com:
POSTAL SERVICE PROPOSAL MILITARY SERVICE PAYMENTS REQUIREMENTS P. L.
108-18:
P. L. 108-18, the Postal Civil Service Retirement System Funding Reform
Act (the Act) recognized that postal ratepayers would over-fund Postal
Service Civil Service Retirement System (CSRS) pension obligations and
was enacted to avert such over-funding. The Act also transferred from
the United States Treasury to the Postal Service the responsibility for
funding the costs of CSRS benefits that current and former Postal
Service employees have earned through military service. Over 90% of the
cost of military service, now charged to the Postal Service under the
Act, was earned before the creation of the Postal Service on July 1,
1971. In fact, the majority of this service was performed in World War
II, The Korean War and the Viet Nam War.
In relieving the Treasury of its historic responsibility for these
costs of military service, the Act has created a direct cost transfer
of $27 billion from U.S. taxpayers to Postal ratepayers. Of this
amount, $17 billion is wholly retroactive, relating to funding between
the years 1971 and 2002 by the United States Treasury in accordance
with section 8348(g)(2) of Title 5, United States Code. No agency other
than the Postal Service is responsible for these CSRS costs that
Treasury continues to pay for all other federal employees. Neither is
any private sector company responsible for these costs.
Because this change departs from fundamental public policy, P. L. 108-
18 provides an opportunity to reconsider funding responsibility of
these costs. The United States Postal Service, the Department of the
Treasury, and the Office of Personnel Management are each to submit
proposals "detailing whether and to what extent the Department of the
Treasury or the Postal Service should be responsible for the funding of
benefits attributable to the military service of current and former
employees of the Postal Service.":
P. L. 108-18 evolved from the Comptroller General's request that the
Office of Personnel Management (OPM) reexamine Postal Service CSRS
funding. OPM determined that, without change, the Postal Service would
over fund its CSRS obligations by $78 billion. As a correction, OPM
proposed that the Postal Service fund CSRS on a dynamic rather than a
static basis. OPM included the cost of retirement benefits earned
through military service in the dynamic funding rate assessed to the
Postal Service. GAO, in its January 31, 2003 report to Congress, stated
that this was a departure from current law under which the Department
of the Treasury is responsible for funding these military service
costs. GAO revealed that this change amounted to a $27 billion
cost transfer from Treasury to the Postal Service. Without this cost
transfer, USPS over-funding of CSRS would exceed $105 billion.
The Postal Service recommends that the responsibility for funding CSRS
benefits of military service be returned to the U.S. Treasury. This
proposal is consistent with the treatment of military service costs
specified in Civil Service law and still accorded to all other federal
agencies and all private sector companies. Charging the CSRS cost of
military service to the Postal Service is not justified because the
majority of this cost relates to military service performed before the
creation of the Postal Service; the military service had no connection
with Postal Service functions or operations; and because doing so
creates an unmerited disparate impact on the Postal Service under CSRS.
Returning the obligation for payment of military service costs to the
Treasury results in the Postal Service having not only fully funded its
CSRS obligations as of the end of FY 2002; but over-funding these
obligations by $10 billion. The Postal Service proposes that the $10
billion in over-funding remain in the Civil Service Retirement and
Disability Fund in a separate account designated as the "Postal Service
Retiree Health Benefit Fund." With this change, the Postal Service
would be in a financial position to pre-fund retiree health benefits
for its employees and retirees, a cost that is directly related to the
operations of the Postal Service. The Postal Service has incorporated
this recommendation in its proposal, also filed today as required by:
P. L. 108-18, detailing the use of "savings" to be achieved under the
Act for years after FY 2005.
THE POSTAL SERVICE BELIEVES THAT THE FUNDING OF THESE COSTS SHOULD BE
MAINTAINED BY THE UNITED STATES TREASURY FOR THE FOLLOWING REASONS:
Military service and federal civilian service are separate and
distinct.
Each of the federal employment services, military and civilian, has
separate compensation, retirement and benefits programs. Qualified
federal employees may elect to have the term of their military service
credited in the calculation of CSRS retirement benefits they earn
through civilian service. The federal agency employer has no role in
this election and the qualified employee and the Treasury pay the cost
associated with it.
Funding the costs of military service is the historic responsibility of
the Treasury.
In 1969, P. L. 91-93 established a mechanism for the Treasury to make
annual payments to the Civil Service Retirement and Disability Fund
(CSRDF) to pay for CSRS military service costs. That same legislation
required that the Treasury bear the funding responsibility for the
CSRS:
unfunded liability resulting from increases in pay. In 1973, P. L. 93-
349 made the Postal Service liable for any increases in the CSRS
unfunded liability resulting from increases in Postal Service employee
pay based on the same provisions as contained in P. L. 91-93. While
making the Postal Service responsible for costs attributable to its
decisions and actions, the 1973 law still maintained the responsibility
of the Treasury to pay the costs of CSRS military service as they do
now for all other federal agencies.
The Act creates a retroactive cost transfer for CSRS military service
credit earned prior to the creation of the Postal Service and unrelated
to its operations.
In considering the merits of who should bear responsibility for
military service costs, it must be understood that approximately 90% of
CSRS military service costs for postal employees and retirees earned by
military service was completed before the establishment of the Postal
Service in July, 1971. As the CSRS was closed to new enrollment in
1983, all Postal Service employees covered by CSRS had to begin their
civilian service before January 1, 1984, and most would have completed
their military service before 1971. By charging the cost of their
military service to the Postal Service, P. L. 108-18 assigns it the
liability for military service performed before the USPS was founded.
Further, the Treasury has already paid the great majority of these
costs on an annual basis since 1969. Clearly, charging the Postal
Service for these past obligations and payments of the U.S. Treasury is
a retroactive cost transfer of $27 billion to postal ratepayers. The
military service itself had no relation to Postal Service operations,
on which postal rates are based. In fact, that military service had no
relation to the operations of the former Post Office Department.
Crediting the Postal Service with actual interest earned does not
iustifv the transfer of military service costs.
GAO found in its report that shifting the cost of military service to
the Postal Service had been proposed on the basis of a belief that this
was "appropriate because under [the] proposal the "Postal Fund' would
be credited with a proportional share of the excess investment returns
earned by the CSRDF over the past 30 years." Neither in accepted
actuarial nor accepted financial practice can we find a substantiating
basis for this rationale. Under previous law, the Postal Service was
charged for the full cost of CSRS benefits resulting from Postal
Service pay increases and retiree COLAs. Accordingly, it should receive
the full benefit of actual investment returns on its funding of those
costs. No price should be imposed and no penalty exacted from the
Postal Service because it is to be credited with earnings of its own
funds.
There is no identity between FERS funding and CSRS funding.
FERS was created on a dynamically funded basis to phase out CSRS and to
establish a more limited federal employment benefits program that would
be funded fully by the employee and the employing agency. CSRS was left
standing whole and intact as a fully functioning retirement program on
which both employees and employers depend. It is a totally different
program from FERS, with different benefits and different levels of
contribution. In fact, CSRS was never fully funded by employers and
employees, with the exception of the U. S. Postal Service.
Under FERS, all federal agencies are treated consistently and years of
service are compensated at a maximum of 1% compared to the 2% maximum
rate of CSRS. Moreover, upon creation of FERS, military costs were
applied to new employees only. No retroactive assessments were charged
and all agencies were treated equally. Finally, it is by statute that
FERS is funded on a dynamic basis and it is by statute that, under
FERS, military service costs are included in the dynamic normal cost
assumptions. There is no statute or regulation that requires CSRS to be
funded on a dynamic basis and, under CSRS, the statute requires that
the U.S. Treasury pay the cost associated with military service.
No self-supporting federal aaencies other than the Postal Service fully
fund the costs of Civil Service retirement.
Like the Postal Service, some other federal agencies and government
corporations are self supporting, earning revenues from fees charged
for services performed. However, the Postal Service is alone when it
comes to funding the full costs of its obligations under the Civil
Service Retirement System. All other self-supporting federal entities,
as well as all appropriated agencies, contribute the CSRS static normal
cost of 7 percent on the pay of their covered CSRS employees. No other
agency, however, is charged additional funds required to fund the
increase in pension costs resulting from employees' pay increases and
retirees' COLAs. The U.S. Treasury fully fund, other agencies' CSRS
pension costs relating to pay increases, and also pays 5 percent
interest on the increase in the CSRS unfunded liability resulting from
COLA increases. Only the Postal Service has been accountable for fully
funding these costs for its employees and retirees, and only the Postal
Service is now charged with funding the CSRS military service
retirement cost of its employees and retirees.
The President's Commission on the United States Postal Service
recommended that 'taxpayers, not ratepayers, should finance costs
associated with military service.:
The July 31, 2003 report of the President's Commission on the United
States Postal Service stated that "no other Federal agency is required
to pay such costs for its retirees under CSRS" and concluded that "it
is inappropriate to require the Postal Service, as a
self-financing entity that is charged with operating as a business, to
fund costs" unrelated to its operations. Further, the Commission stated
that the Act "asks those who use the nation's postal system to
subsidize the U.S. military every time they use the mail. The
Commission recommends repeal of this requirement":
PROPOSAL OF THE UNITED STATES POSTAL SERVICE:
The Postal Service proposes to the President, the Congress and the
General Accounting Office that the military payments requirements of P.
L. 108-18 be amended, that the obligation for payments of military
service retirement benefits credited to Postal Service employees be
returned to the United States Treasury, and that the $27 billion costs
of these payments be returned to the credit of the Postal Service, to
remain in the CSRDF in a separate sub-fund for Postal Service pre-
funding of retiree health care benefits, as detailed in the separate
required Postal Service proposal for utilization of savings under the
Act.
The Postal Service believes this proposal is in the public interest. It
will help stabilize postal rates, use funds already paid by the Postal
Service for the general purpose for which they were intended and
collected from postal ratepayers, maintain these funds in the CSRDF for
the benefit of all CSRS and FERS employees and retirees, and address
the concerns surfaced by the GAO and reflected in the Sense of Congress
statements enacted in P. L. 108-18. This proposal is consistent with
the intent and practice of historic Civil Service law and regulation
and with the requirements of Title 39.
In returning to Treasury its historic responsibility for payment of
CSRS military service benefits, this proposal honors the service of
military veterans as Congress intended.
[End of section]
Appendix III: Comments from the United States Postal Service:
JOHN E. POTTER POSTMASTER GENERAL, CEO:
UNITED STATES POSTAL SERVICE:
November 21, 2003:
Mr. David M. Walker:
Comptroller General of the United States United States General
Accounting Office Washington, DC 20548-0001:
Dear Mr. Walker:
Thank you for providing the Postal Service the opportunity to review
and comment on the General Accounting Office (GAO) draft report, Postal
Pension Funding Reform: Review of Military Service Funding Proposals
(GAO-04-281).
We are in full agreement with the GAO conclusion, contained on page 14
of the report, that an employee's military service "has no direct
relationship to the Service's operations." We also are pleased to note
the GAO's clear recognition that military service benefits all
taxpayers. As the report states on page 16, "One can reasonably argue
that the cost of military service benefits would more equitably be
borne by the entity that benefited from the military service
(Department of Defense), which, in essence, would mean that taxpayers
would ultimately bear these costs.' We also agree with your conclusion
on page 22 that, contrary to the Office of Personnel Management and
Department of Treasury's premise, "there is nothing that inextricably
links the past investment experience (i.e. investment gains or
shortfalls) of the CSRDF to how military service benefits are funded.":
We disagree, however, with the GAO's apparent inference that it might
be reasonable to argue that the Postal Service should be responsible
for the cost of an employee's military service because it hires the
employee knowing of the past military service. We find this
inconsistent with the conclusions that military service has no direct
bearing on postal operations and that all taxpayers benefit from
military service. More importantly, the inference runs counter to
public law and policy, as well as a specific provision of the law
creating the Postal Service. Veteran's preference has been fundamental
public policy of the federal government since the Civil War and has
long been instituted in law. The Postal Service could not, and
certainly would not, refuse to hire a job applicant because the
applicant had past military service. Also, as part of the transition
from the Post Office Department to the Postal Service, Public Law 91-
375, Section 8, August 12, 1970, provided that all officers and
employees of the Post Office Department automatically became officers
and employees of the new Postal Service, so that the Postal Service had
no discretion in the matter.
We also note that the GAO recommends that Congress consider requiring
all self-supporting federal entities to fund the full dynamic costs of
employee pension benefits. This is not an issue for the Postal Service.
As of April 2003, we began funding employee pension benefits on a
dynamic basis, and this funding will cost the Postal Service $2.2
billion in FY2004.
Finally, we stress that the $10 billion by which the Postal Service had
overfunded the Civil Service Retirement System, coupled with making
military pension costs the responsibility of the Department of the
Treasury, will allow the Postal Service to prefund retiree health
benefits. Addressing these other long-term obligations of the system is
fully in line with previous recommendations of the GAO and the
President's Commission.
If you or your staff would like to discuss any of these comments, we
are available at your convenience.
Sincerely,
Signed by:
John E. Potter:
[End of section]
Appendix IV: Comments from OPM and Treasury:
[See PDF for image] - graphic text:
[End of figure] - graphic text:
OFFICE OF THE DIRECTOR:
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
WASHINGTON, DC 20415-1000:
November 24, 2003:
The Honorable David M. Walker
Comptroller General:
General Accounting Office 441 G Street, NW Washington, DC 20548 - 0001:
Dear Mr. Walker:
Thank you for the opportunity to comment on your report to Congress
entitled, "Review of Military Service Funding Proposals." After
reviewing your report, we remain convinced that the approach to funding
military service credits that was adopted in P.L. 108-08 is
appropriate. We believe the following additional observations will be
informative in the review of your report, and ask that they be included
in its submission to Congress.
We disagree with the report's conclusion that there is no direct
relationship between an employee's prior military service and Postal
Service's operations. Granting credit for military service in the
determination of pension benefits enables the Postal Service to recruit
and retain veterans as part of its team. Providing these benefits gives
the organization a competitive advantage in hiring employees whose
professionalism, level of experience, dedication to service and
commitment to excellence is well-demonstrated and who provide direct
benefits to the operations of their employer.
At your request we provided, and your report includes, an estimate of
the value of benefit costs due to military service before 1971 which
includes all increases in the value of those benefits that resulted
from pay raises granted by the Postal Service. However, we in no way
endorse this method, especially insofar as it permits Postal
compensation increases to increase the cost allocated to the Treasury.
In this regard, we believe any proposed alternative method for
allocating such costs should preserve the principle that any taxpayer-
funded subsidy for military service should not allow the Postal Service
to avoid responsibility for any increased cost to benefit accruals due
to salary increases it provided. This principle was established in 1974
by P.L. 93-349 and is the foundation of the allocation method we have
adopted.
Finally, we would like to address inconsistencies highlighted by the
report between the Postal Service and other self supporting agencies
that do not pay the CSRS dynamic normal cost including the portion for
military service. First, there is absolutely no inconsistency since the
advent of FERS. All participants in that system pay the dynamic normal
cost, including the portion that funds military service. Second, unlike
for the Postal Service, Congress never enacted special funding
provisions for self-supporting
agencies. As a consequence, the lack of funding for military service
should not be taken as an indicator of Congressional intent concerning
the appropriate funding methodology.
Sincerely,
Kay Coles James:
Director:
Signed by Kay Coles James:
John W. Snow:
Secretary of the Treasury:
Signed by John W. Snow:
[End of section]
(190111):
FOOTNOTES
[1] Pub. L. No. 108-18, 117 Stat. 624.
[2] Section 8348(g)(2) requires that OPM notify the Secretary of the
Treasury at the end of each fiscal year of the amount of that year's
Civil Service Retirement System (CSRS) annuity payments OPM estimates
is attributable to credit allowed for military service, less an amount
for employee deposits made in accordance with section 8334(j) of title
5. Section 8348(g)(2) also requires that the Secretary of the Treasury
credit the Civil Service Retirement and Disability Fund (CSRDF) out of
money in the Treasury not otherwise appropriated a percentage of OPM's
calculated amount, starting with 10 percent in 1971 and increasing in
10 percent increments until the total percentage Treasury pays reaches
100 percent for fiscal year 1980 and for each fiscal year thereafter.
[3] FERS has three components - a defined benefit plan, a defined
contribution plan, and Social Security. For purposes of this report,
any reference to FERS means the defined benefit plan.
[4] See U.S. General Accounting Office, Review of the Office of
Personnel Management's Analysis of the United States Postal Service's
Funding of Civil Service Retirement System Costs, Appendix I-Key
Legislation Affecting USPS's Funding of CSRS Costs, GAO-03-448R
(Washington, D.C.: Jan. 31, 2003).
[5] Pub. L. No. 91-93, sec. 103(a)(2), 83 Stat. 117, 136.
[6] Pub. L. No. 97-253, sec. 306, 96 Stat. 763, 795.
[7] Pub. L. No. 99-335, sec. 101(a), 100 Stat. 514, 517.
[8] We presented OPM's calculations for three of these five approaches
using Postal Service-specific actuarial assumptions in our January 31,
2003, report on OPM's analyses (GAO-03-448R).
[9] Self-supporting government entities are those that are generally
required to recover their costs through rates or fees charged to the
users of their services.
[10] The OPM and Treasury proposal focuses on the higher than expected
investment returns because this is the one component of the actuarial
risk of the system that is believed to be the most significant and is
easily identifiable. However, their argument would presumably extend to
other actuarial gains resulting from the demographic experience of the
population of Postal Service's CSRS employees.
[11] Dynamic normal cost is defined in the background section of this
report.
[12] See GAO-03-448R.
[13] For purposes of its initial and subsequent analyses, OPM estimated
this pro-rata share of benefits by first allocating an employee's total
creditable military service based on the pro-rata amount of civilian
service the employee accrued both before and after the effective date
of PRA. OPM's methodology also assumed that the Postal Service should
be responsible for (1) the effect of post-1971 general pay increases
and increasing benefit accrual rates on the final amount of military
service benefits at retirement, including those military service
credits allocated to the federal government, and (2) a proportional
amount of post-1971 annuitant cost-of-living adjustments.
[14] P.L. 91-93 increased the required employer contributions and
employee withholdings each from 6.5 percent to 7 percent of basic pay
for regular CSRS employees, the total of which at that time
approximated the CSRS static normal cost.
[15] The law refers to the projected underfunding as a "supplemental
liability" calculated as the estimated excess of the present value of
future benefits over allocated assets and the present value of future
normal cost contributions. In a fully funded plan, supplemental
liabilities, as they are defined here, typically occur when the plan
incurs actuarial losses resulting from such things as lower than
expected investment returns or actual demographic experience of the
participants (i.e., retirement, disability, death) being less favorable
than was previously assumed.
[16] A similar definition in the FERS statute applies to the Postal
Service, the most significant difference being that any supplemental
liability is amortized over a period of 30 years.
[17] Or at an earlier date when OPM determines that all CSRS Postal
Service employees have retired.
[18] These requirements may include employees making deposits for their
share of the costs of the transferred service and waiving any right to
benefits under their predecessor retirement system.
[19] For example, some reciprocal transfer is permitted between the
CSRS and FERS plans and the Foreign Service and the Board of the
Federal Reserve Plans. However, the plan sponsored by the Tennessee
Valley Authority is one example of a plan that does not accept the
transfer of CSRS and FERS service.
[20] OPM's calculations assume that Treasury is responsible for the
effect of post-1971 general pay increases and increasing benefit
accrual rates on the final amount of military service benefits at
retirement and a proportional amount of post-1971 annuitant COLAs on
these benefits. Furthermore, as a matter of clarification, the $27
billion figure is not the total value of military service benefits for
Postal Service employees covered by CSRS and who retired after 1971.
Rather, it is the additional cost to the Treasury beyond what Treasury
is already responsible for under OPM's P.L. 108-18 pro-rata
methodology.
[21] OPM's data indicates that approximately 94 percent of the military
service in years rendered by employees who retired between fiscal years
1972 and 2002 was estimated to have been rendered before fiscal year
1972.
[22] Various publicly available documents exist that compare and
contrast the features and funding of CSRS and FERS, and provide a
detailed history of what led to enactment of the Federal Employees'
Retirement System Act of 1986. For more information, see the following:
(1) The Federal Employees' Retirement System Act of 1986, R. G.
Schreitmueller, Transactions of the Society of Actuaries, 1988 Vol. 40
PT 1, (2) Federal Civilian and Military Retirement Systems, E. C.
Hustead and T. Hustead, Pensions in the Public Sector, Pension Research
Council, The Wharton School of the University of Pennsylvania, (3) U.S.
General Accounting Office, Proposed Civil Service Supplemental
Retirement System, 128278 (Washington, D.C.: Oct. 28, 1985), and (4)
U.S. General Accounting Office, Overview of Federal Retirement
Programs, GAO/T-GGD-95-172 (Washington, D.C.: May 22, 1995).
[23] Pub. L. No. 99-500, title VI, secs. 6005, 6008, 100 Stat. 1783,
1783-373, 1783-375, 1783-382; Pub. L. No. 99-591, title VI, secs. 6005,
6008, 100 Stat. 3341, 3341-376, 3341-378, 3341-385.
[24] The PMAs are part of the Department of Energy (DOE) and were
established to sell and transmit electricity generated mainly from
federal hydropower facilities and are required to be generally self-
supporting.
[25] The PMAs also agreed to recover the dynamic normal cost for the
postretirement health benefits available to eligible retirees through
the Federal Employees Health Benefits Program (FEHBP).
[26] See the following General Accounting Office products: (1) Power
Marketing Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities, GAO/AIMD-96-145 (Washington, D.C.: Sept. 19,
1996), (2) Federal Electricity Activities: The Federal Government's Net
Cost and Potential for Future Losses, GAO/AIMD-97-110 and 110A
(Washington, D.C.: Sept. 19, 1997), (3) Federal Power: Options for
Selected Power Marketing Administration's Role in a Changing
Electricity Industry, GAO/RCED-98-43, (Washington, D.C. March 6, 1998)
and (4) Power Marketing Administrations: Repayment of Power Costs Needs
Closer Monitoring, GAO/AIMD-98-164 (Washington, D.C.: June 30, 1998).
[27] For example, see the following General Accounting Office products:
(1) Federal Retirement Systems: Unrecognized Costs, Inadequate Funding,
Inconsistent Benefits, GAO-FPCD-77-48 (Washington, D.C.: Aug. 3, 1977),
(2) Need for Overall Policy and Coordinated Management of Federal
Retirement Systems, GAO/FPCD-78-49 (Washington, D.C.: Dec. 29, 1978),
and (3) Overview of Federal Retirement Programs, GAO/T-GGD-95-172
(Washington, D.C.: May 22, 1995).
[28] For example, see the following General Accounting Office products:
(1) Need for Recognition of the Full Cost of Retirement Benefits for
Federal Work Force, GAO-FPCD-79-49 (Washington, D.C.: Apr. 11, 1979),
(2) Federal Retirement Issues, 109874 (Washington, D.C.: July 12,
1979), and (3) Analysis of Grace Commission Proposals To Change the
Civil Service Retirement System, GAO-GGD-85-31 (Washington, D.C.: Feb.
13, 1985).
[29] The OPM and Treasury proposal estimates were calculated using
CSRS-wide demographic assumptions. The use of Postal Service-specific
demographic assumptions in the calculation of the present value of
future benefits and future normal cost and other contributions produces
slightly different results. The ultimate cost of any particular
alternative is determined once all benefits and other expenses have
been paid to Postal Service annuitants.
[30] Due to limitations in the data readily available to it, OPM also
assumed that all creditable civilian service occurred without breaks in
between.
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