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entitled 'U.S. Postal Service: Allocation of Responsibility for 
Pension Benefits between the Postal Service and the Federal 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

October 2011: 

U.S. Postal Service: 

Allocation of Responsibility for Pension Benefits between the Postal 
Service and the Federal Government: 

GAO-12-146: 

GAO Highlights: 

Highlights of GAO-12-146, a report to congressional committees. 

Why GAO Did This Study: 

The Office of Personnel Management (OPM) is responsible for 
administering the Civil Service Retirement System (CSRS), including 
the United States Postal Service (USPS) CSRS benefits. Two independent 
agencies-—USPS Office of Inspector General (OIG) and Postal Regulatory 
Commission (PRC)—-have issued reports stating that OPM’s current 
method of allocating responsibility for CSRS benefits allocates a 
disproportionately large share to USPS. The USPS OIG and the PRC 
proposed alternate methodologies that they estimate would shift 
responsibility for from $56 billion to $85 billion in CSRS benefits 
from USPS to the federal government. 

GAO’s objectives were to comment on (1) whether OPM’s current 
methodology for allocating responsibility for CSRS benefits between 
USPS and the federal government is consistent with the law, (2) the 
analysis used by the USPS OIG and PRC to conclude that OPM should 
refund the CSRS contributions in question, (3) the potential impacts 
such a refund would have on the CSRS fund and CSRS stakeholders, and 
(4) the potential impacts that such a refund would have on USPS’s 
financial outlook. GAO reviewed legislation regarding the allocation 
of responsibility for CSRS benefits and methodologies used in all 
three reports. OPM and the OPM OIG agreed with GAO’s draft report, but 
USPS and the USPS OIG stated that OPM’s methodology was not consistent 
with current law and they, in addition to the PRC, reiterated their 
views that the cost allocation is unfair. GAO continues to believe 
that its analysis is accurate. 

What GAO Found: 

The current methodology used by OPM for allocating responsibility for 
CSRS benefits between USPS and the federal government is consistent 
with applicable law. Congress created USPS in 1971 as an independent, 
self-sustaining entity, with a package of assets and obligations, as 
well as competitive advantages and disadvantages. In 1974, Congress 
explicitly allocated responsibility to USPS for CSRS benefits 
attributable to post-1971 USPS pay increases and, although it revised 
aspects of the CSRS funding process in 2003 and 2006, it did not alter 
the fundamental allocation of responsibility for CSRS benefits.
Although the USPS OIG and PRC reports present alternative 
methodologies for determining the allocation of pension costs, this 
determination is ultimately a policy choice rather than a question of 
accounting or actuarial standards. Some have referred to “overpayments”
that USPS has made to the CSRS fund, which can imply an error of some 
type-—mathematical, actuarial, or accounting. We have not found 
evidence of error of these types. While the USPS OIG and PRC reports 
make judgments about fairness, the 1974 law also implicitly reflected 
fairness. Congress considered that USPS was to be self-sustaining and 
that the federal government, which had no control over USPS pay 
increases, should not be liable for pension benefits attributable to 
those increases. Also, the USPS OIG and PRC reports assess the 
fairness of the allocation in isolation, looking only at pension 
costs. In the private sector, the fairness of the allocation of 
pension obligations between two businesses depends on the total 
package of assets and obligations—both pension and nonpension. 
Finally, the cost of USPS’s CSRS pension allocation based on the 1974 
law has already been reflected in postal rates for most of the past 
four decades. 

The key impacts of transferring assets out of the CSRS fund to USPS 
based on the current proposals would be to increase the federal 
government's current and future unfunded pension liability by an 
estimated $56 billion to $85 billion. This liability would then be 
funded by the federal government using tax revenue, borrowing, or 
both. Also, CSRS beneficiaries would continue to receive their 
benefits under current law, even if the federal government’s unfunded 
CSRS liability increases, but this could indirectly create pressure to 
reduce pension benefits. Furthermore, legislation would be required 
for the CSRS funds transferred under the recommendations in the PRC 
and USPS OIG reports to be used by USPS for purposes other than 
funding the Postal Service Retiree Health Benefits Fund. 

Any change in the USPS’s share of responsibility for CSRS benefits 
would provide some temporary relief from the pressures USPS faces 
because of declining volume, revenue, and inflexible costs, but would 
not by itself address USPS’s long-term financial outlook. Such a 
transfer of CSRS funds would not be sufficient to repay all of USPS’s 
debt and address current and future operating deficits related to USPS’
s inability to cut costs quickly enough to match declining mail volume 
and revenue. Last year, GAO issued a report (GAO-10-455) that outlined 
a number of options to address USPS’s financial viability that 
Congress could consider—-such as realigning its operations, networks, 
and workforce—-so that USPS could modernize to meet changing customer 
needs. 

What GAO Recommends: 

View [hyperlink, http://www.gao.gov/products/GAO-12-146]. For more 
information, contact Lorelei St. James at (202) 512-2834 or 
stjamesl@gao.gov. 

Contents: 

Letter: 

Background: 

The Methodology Used by OPM to Allocate Responsibility for CSRS 
Benefits Is Consistent with Law: 

Studies Suggest Alternate Methodologies for Allocating Pension Costs, 
but Decisions about Allocation Are Matters for Congress: 

Potential Impacts of a Transfer of CSRS Pension Costs to the Federal 
Government: 

Potential Impacts on USPS Financial Condition: 

Agency Comments and Our Evaluation: 

Appendix I: Legal Analysis of OPM's Allocation Methodology for CSRS 
Benefit Contributions: 

Appendix II: Issues and Options Related to the Postal FERS Surplus: 

Appendix III: Objectives, Scope, and Methodology: 

Appendix IV: Comments from the Office of Personnel Management: 

Appendix V: Comments from the Office of Personnel Management, Office 
of the Inspector General: 

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

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

Appendix VIII: Comments from the Postal Regulatory Commission: 

Appendix IX: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Legislation and Events Affecting USPS's CSRS Obligations: 

Table 2: Comparison of CSRS Allocation Methodologies: 

Table 3: Allocation of CSRS Benefits Responsibility for a Hypothetical 
Postal Employee under Proposed Methodologies: 

Abbreviations: 

CBO: Congressional Budget Office: 

CSRDF: Civil Service Retirement and Disability Fund: 

CSRS: Civil Service Retirement System: 

FASB: Financial Accounting Standards Board: 

FERS: Federal Employees Retirement System: 

OPM: Office of Personnel Management: 

OPM OIG: Office of Personnel Management Office of the Inspector 
General: 

POD: Post Office Department: 

PRC: Postal Regulatory Commission: 

USPS: U.S. Postal Service: 

USPS OIG: U.S. Postal Service Office of Inspector General: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

October 13, 2011: 

Congressional Committees: 

The U.S. Postal Service (USPS) is in a serious financial crisis and, 
as mail volume continues to decline, has not generated sufficient 
revenue to cover its expenses and financial obligations. For example, 
the Postmaster General has testified that USPS would not be able to 
pay its statutorily mandated retiree health benefits payment that was 
due on September 30, 2011, and Congress delayed the payment due date 
until November 18, 2011.[Footnote 1] Several legislative proposals are 
pending to address USPS's financial crisis and some of these include 
different approaches for restructuring USPS's pension benefit 
obligations.[Footnote 2] 

Disagreements have emerged about options for restructuring USPS's 
benefit obligations. Reports issued in January and June 2010[Footnote 
3] by the USPS Office of Inspector General (USPS OIG) and the Postal 
Regulatory Commission (PRC)--independent agencies that have oversight 
responsibilities over USPS--have proposed that the federal government 
[Footnote 4] return to USPS from $50 billion to $75 billion because, 
in their view, the current allocation of responsibility for Civil 
Service Retirement System (CSRS) benefits for the post-1971 service of 
its employees is unfair.[Footnote 5] The most recent estimates of the 
amounts involved if responsibility for CSRS benefits were transferred 
were approximately $56 billion to $85 billion. The USPS OIG and PRC 
reports stated that the current method of allocating responsibility to 
USPS for the CSRS benefits that stem from post-1971 pay increases is 
inequitable and both reports proposed alternative allocation 
methodologies. USPS OIG also told us that in its view, amendments 
Congress made in 2003 legislation required the Office of Personnel 
Management (OPM) to change the allocation assigned to USPS and that 
OPM's current allocation, based on 1974 legislation, is inconsistent 
with current law. OPM, which is responsible for administering CSRS 
benefits, disagreed with the USPS OIG, stating that OPM does not have 
authority to reallocate the CSRS obligations in the manner suggested 
by these reports. Furthermore, OPM's Office of the Inspector General 
(OPM OIG) reported on this issue and stated that changing the 
allocation methodology would shift substantial pension funding costs 
from USPS to the federal government. According to the OPM OIG, using 
the federal retirement program as a vehicle for implementing other 
policy objectives, such as providing USPS with operating capital, 
would also be unwise, inefficient, and harmful to the program itself. 
[Footnote 6] 

Given the amount of funds at issue, the potential impact on the Civil 
Service Retirement and Disability Fund (CSRDF),[Footnote 7] and the 
need to resolve conflicting information and positions about this 
issue, you asked GAO to (1) determine if the current methodology used 
by OPM for allocating responsibility for CSRS benefits between USPS 
and the federal government is consistent with the law, (2) comment on 
the analysis in the USPS OIG and PRC reports used to conclude that OPM 
should refund the CSRS contributions in question, (3) comment on the 
potential impact that such a refund would have on CSRDF and CSRS 
stakeholders, and (4) comment on the potential effects that such a 
refund would have on USPS's financial outlook. Appendix I provides a 
detailed discussion of the legal analysis we undertook to answer the 
first objective above. We were also asked to provide information on a 
USPS request to transfer surplus Federal Employee Retirement System 
(FERS) funds to USPS. Information on this proposal is presented in 
appendix II. 

To determine if the current methodology employed by OPM for allocating 
responsibility for CSRS benefits between USPS and the federal 
government is consistent with law, we reviewed relevant laws, 
statutes, and legislative history. To provide commentary on the 
analysis used in the USPS OIG and PRC reports, we reviewed and 
analyzed reports on this issue by relevant agencies, government 
entities, actuarial firms, and industry groups including the report by 
the USPS OIG and the actuarial analysis it commissioned from the Hay 
Group, the PRC report and the actuarial analysis it commissioned from 
the Segal Company, and the OPM OIG report. We also reviewed testimony 
and correspondence by USPS, OPM, and the U.S. Civil Service Retirement 
System Board of Actuaries. We interviewed officials at OPM, the PRC, 
the USPS OIG, and the OPM OIG to obtain information on the method by 
which responsibility for CSRS benefits is currently allocated and the 
potential impacts of a CSRS payment "refund" on the CSRS fund and 
stakeholders. To comment on USPS's request for a FERS refund, we 
analyzed OPM's most recent annual report on the CSRDF, interviewed OPM 
actuaries, reviewed commentary by USPS OIG and OPM on this issue, and 
reviewed approaches to surplus pension assets applicable to private 
sector pension plans. To provide commentary on the potential effects 
of a "refund" for CSRS payments on USPS's financial condition, we 
reviewed and summarized prior GAO work on this subject, including 
reports and testimonies related to the financial condition of USPS and 
the actions necessary to avoid financial insolvency, and spoke with 
officials at USPS. 

We conducted this performance audit from September 2011 to October 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. Appendix 
III contains a detailed discussion of our scope and methodology. 

Background: 

The Postal Reorganization Act of 1970 (1970 Act) created USPS as an 
"independent establishment" of the executive branch on July 1, 
1971,[Footnote 8] in place of the old Post Office Department (POD), a 
federal agency. Congress conceived of USPS as a financially self- 
sufficient entity, which was expected to cover its expenses almost 
entirely through postal revenues.[Footnote 9] The equity the U.S. 
government held in the former POD became the initial capital of USPS, 
and the U.S. government remained responsible for all the liabilities 
attributable to operations of the former POD.[Footnote 10] See table 1 
for a summary of legislation and events affecting USPS's CSRS 
obligations. 

Table 1: Legislation and Events Affecting USPS's CSRS Obligations: 

Year: 1970; 
Event: The Postal Reorganization Act of 1970 (P.L. 91-375) initiated 
the transition from POD to the independent USPS. 

Year: 1971; 
Event: USPS began operations on July 1, 1971. 

Year: 1974; 
Event: P.L. 93-349 required that for those employees employed by the 
POD before 1971 and USPS after 1971, responsibility for paying for the 
increase in retirement benefits resulting from increases in postal 
salaries after July 1, 1971 be transferred from the federal government 
to USPS. 

Year: 2003; 
Event: The Postal Civil Service Retirement System Funding Act of 2003 
(P.L. 108-18) changed the method of estimating USPS's funding 
obligations to the CSRDF. The prior method did not project future pay 
or cost of living increases and used a fixed interest rate assumption. 
The new method uses "dynamic assumptions" which anticipate the effects 
of long-term future investment yields, pay increases, and price 
inflation and are reassessed annually. 

Year: 2004; 
Event: At the request of USPS, OPM and the CSRS Board of Actuaries 
reconsidered OPM's methodology and determined that it was consistent 
with congressional intent. 

Year: 2006; 
Event: The Postal Accountability and Enhancement Act of 2006 (P.L. 109-
435) required that surpluses in the postal CSRDF be transferred to the 
Postal Service Retiree Health Benefits Fund in certain designated 
years (beginning in 2007) and that the annual determination made by 
OPM of the postal liability or surplus be subject to review by the PRC 
at the request of USPS.[A] 

Source: GAO analysis. 

Note: Other statutes, not relevant to the present questions, also have 
been passed amending USPS's CSRS responsibilities. 

[A] In 2006, Congress established a 10-year schedule of USPS payments 
into a fund (the Postal Service Retiree Health Benefits Fund) that 
averaged $5.6 billion per year through fiscal year 2016. Starting in 
fiscal year 2017, USPS's share of the health benefits premiums for 
current and future retirees will be paid from this fund and USPS will 
also fund the actuarially determined normal cost plus an amortization 
of any unfunded liability. Pub. L. No. 109-435, § 803(a), 120 Stat. 
3198, 3251. 

[End of table] 

Under the 1970 Act, all officers and employees of USPS (with the 
exception of those on the Board of Governors) remained covered by 
CSRS.[Footnote 11] CSRS features a defined-benefit pension based on an 
employee's term of federal service (years of service) and the highest 
3 consecutive year average of his or her rate of basic pay (pay is 
also referred to as salary in this report).[Footnote 12] Employees 
participating in CSRS have a defined percentage of their salary 
withheld and contributed to the CSRDF. The USPS OIG and PRC reports 
address the allocation of CSRS benefits attributable to USPS employees 
who participate in CSRS and were employed at both the POD (prior to 
July 1, 1971) and USPS (after July 1, 1971). 

The methods and rates at which USPS funds pension benefit costs were 
determined by Congress in 1974. Congress passed legislation (the 1974 
Act) requiring that for those employees who have been employed by both 
the POD and USPS, responsibility for paying for increases in 
retirement benefits resulting from increases in postal salaries after 
July 1, 1971 be transferred from the federal government to 
USPS.[Footnote 13] Because CSRS benefits are determined by applying 
the highest 3 consecutive years of salary to all years of service, pay 
increases can have a large effect on the amount of pension benefits. 
As such, the liability in the CSRDF for those USPS employees who began 
their careers in the POD and continued their careers in USPS grew as a 
result of USPS pay increases since the 1970 Act.[Footnote 14] 

When USPS was established as an independent federal entity in 1971, it 
was given a package of assets and liabilities, which included the 
preexisting postal infrastructure and business advantages and 
disadvantages. POD's last annual report covering the fiscal year ended 
June 30, 1971 stated that the net property, plant, and equipment of 
the POD transferred to USPS on July 1, 1971 was valued at about $1.4 
billion (about $6.2 billion in today's dollars). Business advantages 
and disadvantages included a business monopoly in certain areas and 
exemptions from certain laws applicable to private entities, offset by 
various mandates and restrictions such as universal service 
requirements.[Footnote 15] Having created USPS in 1971 as an 
independent, self-sustaining entity, with a package of assets and 
obligations, as well as competitive advantages and disadvantages, in 
the 1974 Act, Congress explicitly allocated responsibility for CSRS 
benefits between USPS and the federal government. 

Stakeholders have asserted that two pieces of legislation subsequent 
to the 1974 Act are relevant to the allocation of USPS's CSRS 
liabilities: the Postal Civil Service Retirement System Funding Reform 
Act of 2003 (2003 Act) and the Postal Accountability and Enhancement 
Act of 2006 (2006 Act). We discuss the effects of these statutes 
below.[Footnote 16] 

The Methodology Used by OPM to Allocate Responsibility for CSRS 
Benefits Is Consistent with Law: 

We examined the legal requirements pertaining to the methodology used 
by OPM for allocating responsibility for CSRS benefits between USPS 
and the federal government, and found that OPM's methodology is 
consistent with applicable law.[Footnote 17] The 1974 Act required 
USPS to pay for the increase in retirement costs for service at the 
POD attributable to pay increases granted by USPS (that is, increases 
since July 1, 1971). OPM has carried out this requirement by 
calculating the retirement costs for pre-1971 service (those that the 
federal government is responsible for) based on the employee's 
credited service and rate of basic pay on June 30, 1971, the last day 
the POD was in existence. In our view, the 2003 and 2006 Acts did not 
change the fundamental allocation made by the 1974 Act and thus OPM's 
current methodology continues to be consistent with law. 

As noted above, the 1970 Act established USPS as an independent, self- 
sustaining entity within the executive branch. The 1970 Act did not, 
however, explicitly assign responsibility for CSRS benefits 
attributable to salary increases granted by USPS after July 1, 1971. 
Consistent with the core principle of the 1970 Act that USPS should be 
self-sustaining, Congress addressed this issue in 1974 by amending the 
statute to allocate responsibility for these costs to USPS. As 
revised, the law provided that USPS "shall be liable" for such costs 
and that the mechanism for collection of these costs is a schedule of 
payments by USPS into the CSRDF of amounts determined by OPM following 
each USPS pay increase. 

Congress revised aspects of this funding process in 2003, but it did 
not alter the underlying allocation of liability to USPS. In response 
to GAO inquiries in 2001,[Footnote 18] OPM reviewed USPS's payments to 
the CSRDF to determine whether USPS was paying either more or less 
than was needed to cover its employees' retirement liabilities. 
[Footnote 19] OPM (and later, GAO[Footnote 20]) concluded that if USPS 
payments continued unchanged, by the time the last CSRS-related 
benefit would be paid, USPS would overfund projected costs by a 
significant margin.[Footnote 21] OPM therefore proposed amendments to 
the statutory funding mechanism, and with some revisions, these 
amendments were enacted in the 2003 Act.[Footnote 22] 

In place of the 1974 Act's required payments into the CSRDF by USPS 
following each USPS pay increase, the 2003 Act instituted a funding 
methodology modeled on FERS, the successor to CSRS. In particular, the 
2003 Act required USPS to contribute the employer's share of the 
"dynamic normal cost" (which is a normal cost computed using dynamic 
assumptions),[Footnote 23] plus a schedule of payments to liquidate 
any underfunding, called the Postal supplemental liability. The act 
provided that both of these amounts due from USPS would be determined 
by OPM.[Footnote 24] Although "dynamic assumptions" included 
projections of future pay increases, the consequence of the 2003 Act 
was to leave the 1974 allocation unchanged, notwithstanding the 
removal of the explicit allocation provision. In other words, the 2003 
Act required OPM to change the funding methodology for USPS, but in 
our view, the act did not change the underlying allocation of benefit 
responsibility between USPS and the federal government.[Footnote 25] 

Congress amended the USPS pension benefit provisions again in 2006, as 
part of the 2006 Act.[Footnote 26] As with the 2003 Act, however, the 
2006 Act did not change the fundamental allocation of benefit 
responsibility between USPS and the federal government with regard to 
the USPS employees and annuitants who had accrued CSRS benefits as POD 
employees prior to 1971. Among other things, the 2006 Act altered the 
Postal supplemental liability established by the 2003 Act to change 
the responsibility for pension costs arising out of prior military 
service by USPS employees (the 2003 Act had allocated the 
responsibility to USPS,[Footnote 27] whereas the 2006 Act returned the 
responsibility to the federal government[Footnote 28]). The 2006 Act 
also contemplated the possibility of a postal supplemental surplus as 
well as a supplemental liability. It required that any postal 
supplemental surplus in certain designated years be transferred to a 
new fund for USPS retiree health benefits, and established a procedure 
by which USPS could request a review of OPM's determination of a 
liability or surplus by the PRC. 

Studies Suggest Alternate Methodologies for Allocating Pension Costs, 
but Decisions about Allocation Are Matters for Congress: 

Although the methodologies suggested in the USPS OIG and PRC reports 
present alternatives for determining the allocation of pension costs, 
determining the appropriate allocation of responsibility for CSRS 
benefits is ultimately a policy choice rather than a question of 
accounting or actuarial standards. Application of the approaches 
proposed by the USPS OIG and PRC reports would result in a significant 
transfer of pension costs from USPS to the federal government and 
thereby to taxpayers. Some have referred to overpayments that USPS has 
made to the CSRS fund. The term "overpayment" can imply an error of 
some type--mathematical, actuarial, or accounting. We have not found 
evidence of error of these types. Hence, any reallocation of CSRS 
benefit responsibility would be a significant change from a policy 
that has been in place since 1974 and not a correction of any 
actuarial or accounting methodological error. Congress may determine 
that the allocation of responsibility for CSRS benefits should be 
revisited within the context of a package of reforms for USPS. 

Approaches for Allocating Benefit Responsibility: 

CSRS benefits are calculated in part by applying an accrual percentage 
to an employee's high 3-year average salary to determine the 
percentage of that average that will be paid in a yearly pension 
benefit.[Footnote 29] The accrual rates are 1.5 percent per year for 
each of the first 5 years of service, 1.75 percent per year for each 
of the next 5 years of service, and 2.0 percent per year for the 11th 
and subsequent years of service. Because the accrual rates are higher 
in the later years of an employee's career, the formula is said to be 
"backloaded." 

The methodologies proposed by the USPS OIG and PRC reports would make 
changes to the formula for allocating responsibility for CSRS 
benefits, but differ in their approach, as shown in tables 2 and 3. 
The transfer of costs under both of these recommendations would have 
both a retrospective and a prospective component. The retrospective 
component would be a reallocation of responsibility for benefit 
payments already made in the four decades since 1971; this is 
estimated to be roughly in the range of $50 billion to $75 billion. In 
addition, a prospective component would reallocate responsibility for 
another approximately $6 billion to $10 billion in benefit payments to 
be made in the future (for a total cost transfer of approximately $56 
billion to $85 billion).[Footnote 30] Table 2 summarizes the CSRS 
benefit allocation methodologies discussed in the reports issued by 
the USPS OIG, the PRC, and the OPM OIG. 

Table 2: Comparison of CSRS Allocation Methodologies: 

U.S. Postal Service Office of Inspector General: 
Methodology: Both the federal government and USPS are assigned 
responsibility for a portion of the benefit at the time of retirement 
in proportion to years of service under each entity; 
Positions presented in USPS OIG, PRC, and OPM OIG reports: The USPS 
OIG report stated the following: 
* The 2003 law (see table 1) completely redefined the USPS 
responsibility for CSRS benefits: the "dynamic actuarial model" put 
into place at that time anticipates the effect of inflation, which 
includes both increases in salary and cost of living adjustments on 
pensions; 
* Since the highest salaries earned over a career are the only 
salaries used to calculate the amount of an annual CSRS pension, 1971 
salary levels should not be considered in the allocation of 
liabilities; 
* Unlike private sector situations, USPS does not have the ability to 
modify the pension benefit levels earned by its employees after 1971; 
* Because of the backloaded nature of the CSRS formula, a 
disproportionate share of the accrual percentage is allocated to USPS; 
Recommendation/conclusion: Recommends a return of assets estimated at 
$75 billion to the postal CSRS account. 

Postal Regulatory Commission; 
Methodology: Uses Financial Accounting Standards Board (FASB) 
standards[A] to alter the current CSRS formula by using the final 
average (high 3) salary, rather than the 1971 salary; 
Positions presented in USPS OIG, PRC, and OPM OIG reports: The PRC 
report stated the following: 
* The private sector pension accounting standard, although it applies 
to financial reporting and not the allocation of benefits, nonetheless 
offers a methodology that would be fair and appropriate for allocating 
CSRS costs between USPS and the federal government; 
* This methodology matches the USPS OIG recommendation in using 
projected salary increases, and matches the current methodology used 
by OPM in allocating accrual percentages; 
Recommendation/conclusion: Recommends a return of assets estimated to 
range from $50 billion to $55 billion to the postal CSRS account. 

U.S. Office of Personnel Management Office of the Inspector General; 
Methodology: The benefit responsibility of the federal government is 
calculated based on the employee's service and pay as of June 30, 1971; 
Positions presented in USPS OIG, PRC, and OPM OIG reports: The OPM OIG 
report stated the following: 
* It is beyond the OPM's legal authority to adopt a change in the 
allocation of CSRS responsibility without congressional action; 
* The changes proposed by the USPS OIG and PRC would shift the costs 
of USPS CSRS benefits from USPS ratepayers to the federal government 
and, ultimately, to taxpayers, without any corresponding increase in 
government oversight of USPS; 
* Congress granted USPS fiscal independence in exchange for a promise 
of fiscal responsibility; 
Recommendation/conclusion: Recommends no change without further action 
from Congress. 

Source: GAO analysis. 

[A] The PRC report states that the FASB standards provide the most 
"well reasoned, widely respected, and historically stable guidepost 
for allocating pension costs to time periods." The FASB standards 
apply to financial reporting. The particular standards applicable to 
pension benefits were developed in the 1980s, with subsequent 
modifications that did not alter the overall approach for assigning 
pension costs to time periods. 

[End of table] 

The USPS OIG has stated that the allocation of responsibility for CSRS 
benefits required by the 1974 law (see table 1) is not appropriate and 
that the effects of post-1971 salary increases on pension benefits 
attributable to pre-1971 service should be the responsibility of the 
federal government. Furthermore, as noted earlier, the USPS OIG has 
stated that the allocation of responsibility based on CSRS's 
backloaded benefit formula is similarly inappropriate. The CSRS 
benefit formula applies an accrual percentage to the high 3-year 
average salary. Because benefits are accrued at a lower rate early in 
an employee's career, employees who worked at both the POD and USPS 
would have earned smaller accrual percentages at the POD than at USPS. 
Thus, the costs for USPS under the current formula are greater than 
those for the federal government. The USPS OIG recommendation would 
change the allocation by prorating the total accrual percentage based 
on years of service with the POD and USPS, thus shifting 
responsibility for some of the higher accruals earned at USPS to the 
POD (i.e., to the federal government). The USPS OIG report states that 
under the current methodology, USPS could, for example, "be 
responsible for 70 percent of the pension of an employee who worked 
only 50 percent of his or her career for the Postal Service." The USPS 
OIG report also states that "had new pension plans been created for 
postal employees on July 1, 1971, and the Postal Service made 
responsible for all liabilities, it would have paid less than under 
the current methodology." 

The PRC report agrees with the USPS OIG report's statement that the 
effects of post-1971 salary increases on pension benefits attributable 
to pre-1971 service should be the responsibility of the federal 
government. However, the recommendation in the PRC report would 
maintain the current CSRS formula of backloading benefit accrual. This 
recommendation is guided by the current private sector (FASB) pension 
accounting standards.[Footnote 31] Although the purpose of these 
accounting standards is financial reporting, the PRC report views 
their application as a fair approach for allocating responsibility for 
benefits between USPS and the federal government. Table 3 provides an 
example of how responsibility for benefits could shift between USPS 
and the federal government using the alternative approaches to post-
1971 salary increases and to the backloaded accrual formula for a 
hypothetical postal employee. 

Table 3: Allocation of CSRS Benefits Responsibility for a Hypothetical 
Postal Employee under Proposed Methodologies: 

Hypothetical employee characteristics: 
* 10 years of POD service, 1961-1971. Final 1971 annual salary: 
$10,000; 
* 15 years of USPS service, 1971-1986. Final 1986 high 3-year average 
salary: $20,000. 

Benefit calculations: 
* Accrual percentage for POD service = 5 years x 1.5% + 5 years x 
1.75% = 16.25%; 
* Accrual percentage for USPS service = 15 years x 2% = 30%; 
* Total accrual percentage = 16.25% + 30% = 46.25%; 
* Total annual benefit = 46.25% of $20,000 = $9,250. 

Allocation of benefit responsibility: Methodology for federal 
government CSRS benefit; 
Current methodology: Based on POD accruals and POD final pay: 16.25% 
of $10,000 = $1,625; 
Recommendation in the PRC report: Based on POD accruals and career 
final average pay: 16.25% of $20,000 = $3,250; 
Recommendation in USPS OIG report: Based on proportion of years of 
service at POD: (10/25) x $9,250 = $3,700. 

Allocation of benefit responsibility: Total annual CSRS benefit; 
Current methodology: $9,250; 
Recommendation in the PRC report: $9,250; 
Recommendation in USPS OIG report: $9,250. 

Allocation of benefit responsibility: USPS CSRS responsibility; 
Current methodology: $7,625; 
Recommendation in the PRC report: $6,000; 
Recommendation in USPS OIG report: $5,500. 

Allocation of benefit responsibility: USPS percentage; 
Current methodology: 82%; 
Recommendation in the PRC report: 65%; 
Recommendation in USPS OIG report: 60%. 

Allocation of benefit responsibility: Federal government CSRS 
responsibility; 
Current methodology: $1,625; 
Recommendation in the PRC report: $3,250; 
Recommendation in USPS OIG report: $3,700. 

Allocation of benefit responsibility: Federal government percentage; 
Current methodology: 18%; 
Recommendation in the PRC report: 35%; 
Recommendation in USPS OIG report: 40%. 

Source: GAO variation on example in the PRC report. 

[End of table] 

The hypothetical employee profiled in table 3 spent 40 percent of her 
career at the POD. Accordingly, the USPS OIG report would assign the 
federal government responsibility for 40 percent of her pension 
benefits. The PRC report would assign the federal government 
responsibility for a smaller portion, 35 percent of the pension 
benefits, to reflect the lower accrual percentages earned during 
service with the POD while incorporating the higher average salary 
earned at USPS. The current methodology in use by OPM assigns the 
federal government responsibility for the smallest portion--18 percent 
of the pension benefits--to reflect both the lower accrual percentages 
earned during service with the POD and the lower final salary at the 
POD. 

Analysis of Proposed Allocations for CSRS Benefits: 

As discussed in further detail below, our analysis of these proposals 
determined the following: 

* All three methodologies (current, PRC, and USPS OIG) fall within the 
range of reasonable actuarial methods for allocating cost to time 
periods. However, the allocation of costs between two entities is 
ultimately a business or policy decision. 

* In the private sector, responsibility for benefits is generally 
determined by negotiation and the markets, while in the public sector 
such responsibility is determined by negotiation, public policy, and 
legal requirements. 

* While the USPS OIG and PRC reports make arguments based on fairness, 
the 1974 law also implicitly reflected fairness. Congress considered 
that USPS was a self-sustaining entity and that the federal 
government, which had no control over USPS pay increases, should not 
be liable for pension benefits attributable to those increases. 

* The USPS OIG and PRC reports assess fairness in isolation, looking 
only at the allocation of pension costs. In the formation of a new 
business entity, the fairness of a particular allocation of pension 
obligations depends also on the total package of assets and 
obligations--both pension and nonpension--being allocated to the new 
entity. 

* The cost of USPS's CSRS pension allocation, based on the 1974 law, 
has already been reflected in postal rates for most of the past four 
decades, so these costs have already been included in rates paid by 
postal customers. 

While accounting and actuarial standards may inform a decision about 
assignment of costs to time periods, they do not determine the policy 
choice of who is responsible for benefits. In its report, the USPS OIG 
describes its recommendation as "more equitable," but acknowledges 
that there is no actuarial standard for allocating retirement 
liabilities between two employers. Similarly, in reviewing both the 
current methodology and the USPS OIG's recommendation, the PRC report 
states that both of these methodologies are within the range of 
acceptable methodologies for allocation of costs and benefits. Within 
a single organization, relevant accounting standards must be followed 
to assign costs to time periods for financial reporting purposes, but 
they do not govern the allocation of responsibility between two 
separate entities. Similarly, there are actuarial standards of 
practice that apply to such tasks as estimating the amount and timing 
of future benefit payments, estimating the value of the overall 
obligation, and setting up a funding schedule to cover the obligation 
but not for determining who is responsible for the obligation. 

While the allocation of benefit responsibility between two different 
entities is not the purview of financial reporting standards, the PRC 
report views them as a useful guidepost to fairness. The PRC report 
stated that the FASB pension accounting standards' "general 
application to the current situation is logical and, within the 
objective of fairness and equity, represents our preferred set of 
principles as well as a reasonable compromise." However, while the 
report characterizes this private sector FASB pension accounting 
methodology as "an unchallenged part of generally accepted accounting 
principles today," which "establishes a compelling definition of cost 
allocation equity for 2010," there is a significant school of thought 
among pension experts that has challenged this private sector 
methodology and deems it inappropriate. For example, the American 
Academy of Actuaries has commented to FASB that it believes the 
inclusion of the effects of future salary increases is inappropriate. 
[Footnote 32] Under this alternative view, the effects of projected 
future salary increases are not recognized until the salary increases 
actually occur. This alternative approach is consistent with the one 
currently used by OPM. 

Both the USPS OIG and PRC reports assess fairness in isolation, 
looking only at pension costs. However, when USPS was formed in 1971, 
it was given a package of assets, and liabilities, which included the 
preexisting postal infrastructure and business advantages and 
disadvantages. Congress has made adjustments to this package since 
then, in 1974 and subsequently. With regard to allocation of 
responsibility for pension benefits, in enacting the 1974 Act, 
Congress focused on the fact that USPS was to function as a self-
supporting entity with control over, and responsibility for, the 
impacts of its employees' future salaries.[Footnote 33] As it reviews 
the current prospects of USPS, Congress can, if it chooses, make 
another determination about the allocation of the current assets and 
obligations of USPS, of which pension obligations are but one 
component. 

One additional consideration in assessing the fairness of the current 
allocation of pension responsibility is whether USPS has already been 
compensated for these costs. The cost of USPS's CSRS pension 
obligation has already been reflected in postal rates for most of the 
past four decades, so that USPS has already received payment for these 
costs by postal rate payers. 

Potential Impacts of a Transfer of CSRS Pension Costs to the Federal 
Government: 

The key impact on CSRDF and stakeholders of transferring costs from 
USPS to the federal government would be to increase the federal 
government's unfunded liability for nonpostal CSRS by approximately 
$56 billion to $85 billion, according to the recommendations made in 
the USPS OIG and PRC reports.[Footnote 34] If responsibility for CSRS 
pension benefits were reallocated in accordance with either the USPS 
OIG or PRC recommendations, there would be a transfer of assets from 
the nonpostal CSRS subaccount to the postal CSRS subaccount.[Footnote 
35] Our analysis of potential impacts on the CSRDF and its 
stakeholders determined the following: 

* Any assets that are transferred from the nonpostal to the postal 
subaccount of CSRS would increase the federal government's nonpostal 
CSRS unfunded liability, which must then be paid by the federal 
government through tax revenue, borrowing, or both.[Footnote 36] For 
example, adoption of the recommendation in the PRC report would result 
in an asset transfer of about $50 billion to $55 billion, which would 
then need to be repaid by the federal government and taxpayers. 
[Footnote 37] 

* Beyond the substantial impacts on the federal government's unfunded 
liability, a reallocation of benefit responsibility from USPS to the 
federal government would not directly threaten the benefit security of 
CSRS and FERS participants under current law. Benefits are projected 
to continue to be paid to nonpostal CSRS participants via transfers 
from the nonpostal subaccount of FERS. The U.S. Treasury funds any 
supplemental increases in liabilities through tax revenue and 
borrowing. 

* There is an indirect risk if the increased unfunded liability were 
to create pressure to reduce CSRS and FERS benefits. Any reductions in 
program benefits could apply to all participants, including postal 
participants. 

* Legislation would be required to transfer CSRS funds as proposed 
under the PRC or USPS OIG recommendations and to allow these funds to 
be used by USPS for purposes other than funding the Postal Service 
Retiree Health Benefits Fund. The use of any CSRS funds transferred to 
USPS is currently restricted. Under current law, any transfer of 
assets from the nonpostal CSRS subaccount to the postal CSRS 
subaccount would remain in the CSRS subaccount until 2015 and could 
not be used to address other postal financial shortages. In 2015, any 
surplus assets, as determined by an actuarial analysis, would be 
transferred to the Postal Service Retiree Health Benefits Fund. Thus, 
the amount that would be transferred under either the PRC or USPS OIG 
proposal could be used to fund benefit obligations under the Retiree 
Health Benefits Program.[Footnote 38] 

Potential Impacts on USPS Financial Condition: 

Any change in the USPS's share of responsibility for CSRS benefits 
would provide some temporary relief from the pressures USPS faces 
because of declining volume, revenue, and inflexible costs, but would 
not by itself wholly address USPS's long-term financial outlook. If, 
for example, $50 billion were transferred to USPS, this could be used 
to fund its retiree health benefits liability. However, such a 
transfer of CSRS funds would not be sufficient to repay all of USPS's 
debt and address current and future operating deficits related to 
USPS's inability to cut costs quickly enough to match declining mail 
volume and revenue. As we have testified, resolving large funding 
requirements for USPS's pension and retiree health benefits is 
important. It is equally important to address constraints and legal 
restrictions, such as those related to closing facilities, so that 
USPS can take more aggressive action to reduce costs.[Footnote 39] We 
have also testified that in fiscal year 2010, USPS had $67 billion in 
revenue and $75.5 billion in expenses, resulting in a loss of $8.5 
billion, which it expects to grow to a $20 billion annual loss by 
2015.[Footnote 40] 

These financial problems are related to customers' changing mail use 
combined with the fixed nature and inflexibility associated with 
USPS's costs. The decline of First-Class Mail--USPS's most profitable 
product--has accelerated as Americans shift to using electronic 
communications and other payment alternatives. This trend exposes 
weaknesses in USPS's business model, which has relied on volume growth 
to help cover costs. To meet these changing customer needs, become 
more efficient, control costs, and keep rates affordable, USPS must 
modernize and restructure. To do so, it will need to become much 
leaner and more flexible.[Footnote 41] USPS has provided Congress with 
a set of comprehensive legislative proposals that would reduce costs 
and improve operational efficiency include reducing costs by moving to 
5-day delivery, reducing excess capacity in USPS's mail processing 
network, adjusting its workforce mix to more part-time staff, and 
closing unneeded retail facilities, among others. 

Last year, we issued a report that outlined a number of options to 
address USPS's financial viability that Congress could consider. 
[Footnote 42] Further, we have reported that Congress needs to approve 
a comprehensive package of actions to improve USPS's financial 
viability by (1) modifying its retiree health benefits cost structure 
in a fiscally responsible manner; (2) facilitating USPS cost 
reduction, for example, by modernizing and optimizing postal networks 
and workforce; and (3) requiring any binding arbitration in the 
negotiation process for USPS labor contracts to take USPS's financial 
condition into account.[Footnote 43] 

Agency Comments and Our Evaluation: 

We provided a draft of this report to OPM, the OPM OIG, USPS, the USPS 
OIG, and the PRC for review and comment. OPM and the OPM OIG agreed 
with our report, but USPS, the USPS OIG, and the PRC disagreed with 
our analysis. Their written comments are reprinted in appendixes IV 
through VIII. The comments of USPS, the USPS OIG, and the PRC are 
summarized below, along with our responses to their comments. OPM and 
the PRC also provided technical comments, which we incorporated as 
appropriate. 

USPS's main comments follow: 

* USPS believed that our report did not acknowledge actuarial 
principles that would govern in the private sector, as well as 
fundamental principles of fairness, and that our use of a criticism of 
current accounting standards by the American Academy of Actuaries is 
taken out of context. 

* USPS stated that our report fails to describe the allegedly false 
assumptions underlying the 1974 law or the legal environment under 
which USPS operates with respect to compensation policy. 

* It is USPS's view that our report fails to recognize that the effect 
of the 2003 and 2006 laws, when considered together, reflects 
congressional intent that OPM determine USPS's CSRS liabilities based 
on modern actuarial principles. USPS agreed with our conclusion that 
the 1974 Act allocated responsibility to USPS for benefits 
attributable to USPS pay increases after July 1, 1971, but disagreed 
with our conclusion that the 2003 and 2006 Acts did not change this 
fundamental allocation. USPS pointed to the 2003 Act's repeal of the 
1974 Act's provision explicitly allocating responsibility to USPS and 
specifying the funding mechanism for that allocation, and its 
replacement with a different funding mechanism using dynamic rather 
than static assumptions. It also pointed to the 2006 Act's creation of 
a process allowing PRC review of certain OPM determinations. 

* USPS also made the point that our position was flawed when we stated 
that a transfer of USPS pension obligations would mean that USPS would 
receive payment for these costs twice, once by ratepayers and once by 
taxpayers. 

Our response follows: 

1. Regarding USPS's comment that it believed our report ignored 
actuarial principles that would govern in the private sector, we note 
that both actuarial and accounting standards provide methods for 
allocating costs to time periods for an organization, but they do not 
govern the allocation of benefit responsibility between two separate 
entities. Ultimately, determining responsibility for benefits is a 
business choice (private sector) or policy choice for Congress 
(federal government). Similarly, as our report noted, the USPS OIG 
acknowledged that there is no actuarial standard for allocating 
retirement liabilities between two employers, and the PRC acknowledged 
that both the current methodology and the USPS OIG's recommendation 
(the PRC's recommendation is in the middle) are within the range of 
acceptable methodologies for allocation of costs and benefits. While 
acknowledging that the FASB private sector accounting standards do not 
govern the allocation of CSRS benefit responsibility, the PRC report 
stated that these standards are a logical guidepost for determining a 
fair allocation of benefit responsibility; the PRC report also 
characterized these standards as "an unchallenged part of generally 
accepted accounting principles today." This characterization is the 
context for our citation of criticism of these standards. 

2. As noted above, USPS commented that our report failed to describe 
the allegedly false assumptions underlying the 1974 law and commented 
that it did not believe the package of assets and liabilities 
resulting from the 1970 and 1974 laws was fair. However, our analysis 
shows that in enacting the 1974 Act, Congress focused on the fact that 
USPS was to function as a self-supporting entity with control over, 
and responsibility for, the impacts of its employees' future salaries. 
As the Senate report accompanying the 1974 Act explained, "the bill 
will permit the Postal Service to include the cost of financing 
unfunded retirement liability in its rate base for purposes of future 
postal rate adjustments." Further, the House report accompanying the 
1974 legislation stated that "[t]he Congress now has no control--no 
oversight whatsoever--with respect to the pay machinery in the Postal 
Service. Since each future pay raise . . . will result in specific 
unfunded liability and a new financial drain on [CSRDF], the cost of 
this liability should properly and equitably be borne by the Postal 
Service." 

3. Regarding the 2003 Act, USPS commented that the law eliminated the 
statutory language requiring OPM to follow the 1974 funding 
methodology, and required OPM to determine the benefits "attributable 
to the service of current or former employees of the United States 
Postal Service." In our view, USPS's interpretation misread the 2003 
Act and overstated the role that Congress intended for actuarial and 
accounting methods. Although the statute as amended by the 2003 Act no 
longer included an explicit allocation to USPS, it did not direct any 
change in allocation. Further, the original allocation was still 
reflected in the 2003 Act's requirement for an annual OPM calculation 
of "Postal supplemental liability." Because this calculation was to be 
made using dynamic assumptions, including projected future USPS pay 
increases, it was unnecessary to require USPS payments after each pay 
increase as the 1974 Act required, so this provision was removed 
without changing the allocation. There was no indication in 2003 that 
Congress intended to alter its prior decision, reflected in the 1970 
and 1974 Acts, that USPS was to be a self-supporting entity. Regarding 
the 2006 Act, USPS disagreed with our conclusion that the law did not 
fundamentally change the 1974 law's allocation of responsibility, 
relying on the act's creation of a process allowing PRC review of 
certain OPM determinations. The provision cited by USPS does not 
pertain to review of allocations of responsibility for pension 
benefits, however, but to OPM's annual determination of the postal 
supplemental liability or surplus, that is, whether USPS has overpaid 
or underpaid its allocation in a particular fiscal year. 

4. USPS did not disagree that ratepayers have already been charged, 
and USPS already reimbursed, for the costs of the current allocation 
of CSRS benefits. USPS pointed out that ratepayers in turn would 
deserve to benefit from any reallocation of these costs. Noting this 
point, we believe that who would benefit from any reimbursements is a 
question that would require additional analysis (for example, if a 
reimbursement to USPS were used to stabilize postage rates, a 
generation of ratepayers would benefit from such reimbursement later 
than the generation of ratepayers who paid for the current allocation 
of benefits). Accordingly, we deleted the sentence that addresses 
receiving payments for these costs twice, but retained the main point 
that the costs for the current allocation of pension benefits have 
already been received by USPS from postal ratepayers. 

In its comments, the USPS OIG disagreed with our report regarding how 
the 2003 law changed the 1974 law. It stated that the 2003 law changed 
the allocation directive to OPM and required it to adopt current 
dynamic methods. Additionally, it commented that the current OPM 
methodology is "neither fair nor modern nor does it comply with the 
2003 law." 

1. The USPS OIG's comments regarding the effects of the 2003 law were 
similar to USPS's comments. As discussed above, although the statute 
as amended by the 2003 Act no longer included an explicit allocation 
to USPS, it did not direct any change in allocation, and the original 
allocation was still reflected in the 2003 Act's requirement for an 
annual OPM calculation of "Postal supplemental liability." As noted 
above, because this calculation was to be made using dynamic 
assumptions, including projected future USPS pay increases, it was 
unnecessary to require USPS payments after each pay increase as the 
1974 Act required, so this provision was removed without changing the 
allocation. Further, contrary to the USPS OIG's comment that it is 
"not ... reasonable" to interpret repeal of the 1974 Act's explicit 
allocation provision as other than a change in the allocation, the 
Senate report accompanying the 2003 Act indicated the opposite, that 
Congress intended to "continue the Postal Service's liability for the 
retirement costs attributable to its employees by the CSRS which was 
imposed when the Post Office Department became the self-supporting 
[USPS] in July 1971." Finally, the USPS OIG's suggestion that the 2003 
Act should be read as directing OPM to allocate responsibility by 
applying actuarial and accounting standards is not well founded 
because allocation is a policy choice, not a mathematical calculation. 

2. The USPS OIG also stated that OPM's continued use of the 1974 
allocation of responsibility for CSRS benefits despite changes by the 
2003 law is either unfair or not consistent with modern pension 
standards that use dynamic assumptions. We concluded that OPM's 
methodology is consistent with applicable law and that the 2003 law 
did not direct OPM to make any changes in the current allocation of 
CSRS benefits. Further, as mentioned above, accounting and actuarial 
standards pertain to assignment of costs to time periods; they do not 
determine the policy choice of who is responsible for benefits. 

The PRC agreed with our framing of this issue as a matter of policy. 
However, it disagreed with our characterization of the Segal Company's 
report. For example, it stated that the Segal report did not 
characterize the overfunding of CSRS liabilities as an "overpayment." 
It also stated that criticism we cite of private sector pension 
accounting standards excludes government plans. Additionally, it noted 
disagreement between the USPS OIG and OPM about whether the 2003 and 
2006 Acts changed the 1974 Act's allocation to USPS. The PRC also 
disagreed with our implication that any change in the allocation would 
provide USPS with only limited relief from its financial pressures. 

1. Regarding the PRC's comment that the Segal report did not 
characterize the overfunding of CSRS liabilities as an "overpayment," 
we reviewed the report and agree that it did not use the term 
overpayment. We have changed the language in our report to better 
reflect the Segal Company's position. 

2. Regarding the PRC's comment that the cited criticism of private 
sector pension accounting standards excludes government plans, we 
modified our description and commentary about this criticism and 
reemphasized our main point that accounting standards ultimately do 
not govern the allocation of benefit responsibility between two 
entities. 

3. The PRC noted a "difference of opinion" between the USPS OIG and 
OPM about whether the 2003 and 2006 Acts changed the allocation made 
by the 1974 Act. Without explanation, the PRC stated its view that 
"the current legislative framework can accommodate a change" in the 
allocation by OPM if it chooses to do this. As we have stated above, 
the 2003 and 2006 Acts did not change the fundamental allocation made 
by the 1974 Act and thus OPM's current methodology continues to be 
consistent with law. 

4. The PRC disagreed with our statement that any change in the 
allocation would provide USPS with only limited relief from its 
financial pressures. The commission noted that if the excess funds 
from CSRS were transferred into the Postal Service Retiree Health 
Benefits Fund, the fund would be almost fully funded. However, in our 
view, this action alone would not make USPS financially viable for the 
long term. USPS still needs to adjust to declining mail volume by 
removing excess capacity from its operations, networks, and workforce. 

We are sending copies of this report to the Director of the Office of 
Personnel Management, the Office of Personnel Management Inspector 
General, the Postmaster General, the U.S. Postal Service Inspector 
General, the Chairman of the Postal Regulatory Commission, and other 
congressional committees and interested parties. In addition, the 
report is available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-2834 or stjamesl@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made key 
contributions to this report are listed in appendix IX. 

Signed by: 

Lorelei St. James: 
Director, Physical Infrastructure Issues: 

List of Committees: 

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable Scott P. Brown: 
Ranking Member: 
Subcommittee on Federal Financial Management, Government Information, 
Federal Services, and International Security: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Darrell E. Issa: 
Chairman: 
The Honorable Elijah E. Cummings: 
Ranking Member: 
Committee on Oversight and Governmental Reform: 
House of Representatives: 

The Honorable Dennis A. Ross: 
Chairman: 
The Honorable Stephen F. Lynch: 
Ranking Member: 
Subcommittee on Federal Workforce, U.S. Postal Service, and Labor 
Policy: 
Committee on Oversight and Governmental Reform: 
House of Representatives: 

[End of section] 

Appendix I: Legal Analysis of OPM's Allocation Methodology for CSRS 
Benefit Contributions: 

As part of GAO's review of the United States Postal Service's (USPS) 
pension benefit obligations, we examined whether the methodology 
employed by the Office of Personnel Management (OPM) for allocating 
the responsibility for Civil Service Retirement System (CSRS) costs 
between USPS and the federal government is consistent with applicable 
law. For the reasons discussed below, we conclude that OPM acted 
within the authority it was given by Public Law 93-349 (July 12, 1974) 
Public Law 108-18 (April 23, 2003), and Public Law 109-435 (December 
20, 2006). 

Background: 

The Postal Reorganization Act of 1970 (1970 Act) created USPS as an 
"independent establishment" of the executive branch on July 1, 1971, 
[Footnote 44] in place of the Post Office Department (POD), a federal 
agency. As discussed in greater detail in this report, under the 1970 
Act, all officers and employees of USPS (with the exception of those 
on the Board of Governors) remained covered by CSRS.[Footnote 45] 
However, under CSRS, the payroll-withholding and employer-matching 
contributions[Footnote 46] are insufficient to adequately fund the 
accrued liability to pay the benefits to which the employee is 
entitled. Thus, the Civil Service Retirement and Disability Fund 
(CSRDF) carries a partly unfunded liability to pay for future benefits 
for which the federal government is ultimately liable. Disagreements 
have emerged about the allocation of responsibility between USPS and 
the federal government for the unfunded liability (CSRS pension costs) 
attributable to USPS employees who began their careers with the POD. 

The 1970 Act required USPS to withhold a defined percentage of USPS 
employee salaries for contribution to the CSRDF.[Footnote 47] The 1970 
Act was silent, however, on the question of who--USPS or the federal 
government--was responsible for the pension costs of USPS employees 
who had worked for the POD. 

Congress explicitly addressed the unfunded liability allocation issue 
in 1974. Consistent with its previous determination that USPS should 
generally be self-supporting, Congress passed Public Law 93-349, 88 
Stat. 354 (July 12, 1974) (1974 Act). Section 1 of the 1974 Act, 
codified at section 8348(h) of title 5, U.S. Code, explicitly provided 
that (1) USPS "shall be liable" for that portion of any estimated 
increase in the unfunded liability of the CSRDF attributable to USPS 
pay increases,[Footnote 48] and (2) when USPS approved a pay increase 
for its employees, the Civil Service Commission (now OPM)[Footnote 49] 
would estimate how much this pay increase changed the unfunded 
liability in the CSRDF, and USPS would be responsible for contributing 
this sum to the CSRDF, amortized over 30 annual payments.[Footnote 50] 
Because the 1974 Act was made retroactive to the 1971 establishment of 
USPS,[Footnote 51] USPS was required to pay for the increase in 
retirement costs for service at the POD (that is, pre-July 1, 1971, 
service) attributable to pay increases granted by USPS (that is, 
increases since July 1, 1971). 

As the OPM Inspector General has explained, OPM calculates the 
retirement costs for pre-1971 service based on the employee's credited 
service and rate of basic pay on June 30, 1971, the last day the POD 
was in existence. That is, OPM calculates the annuity costs using the 
years of service at the POD and the salary paid during those years, 
meaning the cost remains the same no matter how long the employee 
works at USPS. Because this cost will never increase, it is sometimes 
referred to as a "frozen benefit." This amount, plus the cost of the 
annuity based on military service, is the federal government's share 
(federal share) and is funded by the U.S. Treasury. USPS funds the 
remainder of the cost of the annuity, the portion that is in excess of 
the federal share.[Footnote 52] 

As relevant here, after the 1974 Act, Congress next considered the 
funding of CSRS costs for postal employees in 2003.[Footnote 53] In 
response to inquiries GAO made in 2001,[Footnote 54] OPM reviewed the 
USPS payments to the CSRDF to determine whether USPS was paying either 
more or less than was needed to cover the retirement liabilities of 
its employees.[Footnote 55] OPM's analysis, along with a subsequent 
GAO review,[Footnote 56] concluded that if USPS payments continued 
unchanged, by the time the last CSRS-related benefit would be paid, 
USPS would overfund projected CSRDF costs by a significant margin. 
[Footnote 57] This projected overfunding resulted in part because the 
amortized contributions that USPS was making pursuant to the 1974 Act 
were calculated by OPM assuming a flat 5 percent interest rate, while 
the return on pension investments had generally been--and, according 
to OPM projections at the time, would continue to be--higher than 
that.[Footnote 58] Because changes needed to address this projected 
overfunding could not be made under the existing law,[Footnote 59] OPM 
sent a legislative proposal to Congress, which, with amendments, was 
enacted as the Postal Civil Service Retirement System Funding Reform 
Act of 2003 (2003 Act).[Footnote 60] 

The 2003 Act replaced the 1974 Act's explicit provision pertaining to 
allocation and funding with a funding methodology for USPS's CSRS 
obligations that was modeled on the way in which employing agency 
costs are calculated under the Federal Employees Retirement System 
(FERS), the retirement plan for federal employees that replaced CSRS. 
[Footnote 61] In place of the matching of employee withholding 
required of most employing agencies and the 1974 Act's required 
payments following any pay increase, the 2003 Act required USPS to 
contribute to the CSRDF the "normal cost percentage" of each 
employee's pay, as calculated by OPM using generally accepted 
actuarial practice and standards and using dynamic assumptions. 
[Footnote 62] The term "dynamic assumptions" was defined in subsection 
2(a) of the 2003 Act as economic assumptions that are used in 
determining actuarial costs and liabilities in a retirement system and 
in anticipating the effects of long-term future investment yields, 
future increases in rates of basic pay, and future rates of price 
inflation. This method is comparable to the way employing agency 
funding for FERS is determined. 

Because these dynamic assumptions include projections of future pay 
increases, the consequence of the 2003 Act was to leave the underlying 
1974 allocation unchanged, notwithstanding the removal of the explicit 
allocation provision. In place of the express allocation provision, 
Congress enacted a new concept called the Postal supplemental 
liability.[Footnote 63] As of September 30, 2003, OPM was required to 
calculate the present value of benefits payable to present or future 
CSRS annuitants that are "attributable to the service of current or 
former employees of [USPS]," as determined by OPM, and as offset by 
assets such as the present value of future employee contributions, the 
portion of the CSRDF balance that is attributable to past payments by 
USPS and its employees, and the earnings on those payments.[Footnote 
64] If OPM found a liability, USPS was required to pay that sum to the 
CSRDF, based on a 40-year amortization schedule. If OPM found a 
surplus, the Postmaster General was required to report to Congress 
with a proposal on how USPS would utilize this surplus.[Footnote 65] 
OPM was to recalculate the Postal supplemental liability each fiscal 
year. Thus, although the 2003 Act required OPM to change the funding 
methodology, in our view, it did not change the method of allocating 
the funding responsibility between USPS and the federal government 
with regard to the USPS employees and annuitants who had accrued CSRS 
benefits as Post Office Department employees prior to 1971.[Footnote 
66] The federal government's share with regard to those employees and 
annuitants remained frozen at a level based on credited service and 
the rate of basic pay of POD employees at the time when USPS was 
established. 

A few months after enactment of the 2003 Act, in July 2003, OPM 
submitted to Congress its plan identifying the actuarial methods and 
assumptions directed by the 2003 Act by which OPM would make its 
determinations. In 2004, OPM and the U.S. Civil Service Retirement 
System Board of Actuaries reconsidered OPM's methodology at the 
request of USPS and concluded that OPM's methodology was in accordance 
with congressional intent.[Footnote 67] OPM also rejected an 
alternative methodology offered by USPS. 

Congress amended the USPS pension benefit provisions again in 2006, as 
part of the Postal Accountability and Enhancement Act of 2006 (2006 
Act).[Footnote 68] Among other things, the 2006 Act altered the 
"Postal supplemental liability" established by the 2003 Act to change 
the responsibility for pension costs based on prior military service 
by USPS employees (the 2003 Act had allocated the responsibility to 
USPS,[Footnote 69] whereas the 2006 Act returned the responsibility to 
the federal government).[Footnote 70] The 2006 Act also required that 
any postal supplemental surplus in certain designated years be 
transferred to a new fund for USPS retiree health benefits and 
established a procedure by which USPS could request a review of OPM's 
determination of a liability or surplus by the Postal Regulatory 
Commission (PRC). As with the 2003 Act, however, the 2006 Act did not 
change the fundamental allocation of benefit responsibility between 
USPS and the federal government with regard to the USPS employees and 
annuitants who had accrued CSRS benefits as Post Office Department 
employees prior to 1971. 

In January 2010, the USPS Office of Inspector General (USPS OIG) 
issued a report stating that OPM's allocation of responsibility for 
CSRS benefits with respect to postal employees and retirees who had 
worked for the POD prior to July 1, 1971 is inequitable and has 
resulted in USPS overpaying into the CSRDF by $75 billion.[Footnote 
71] In testimony a few months later, the USPS OIG stated that the 2003 
Act's repeal of the 1974 Act's express allocation provision 
constituted a rejection of that allocation by Congress and that the 
2003 Act's addition of the requirement that OPM use dynamic 
assumptions necessitated, as a matter of fairness, the adoption of a 
more equitable actuarial allocation methodology.[Footnote 72] The USPS 
OIG suggested an alternate methodology, the same one that OPM rejected 
in 2004.[Footnote 73] USPS then asked the PRC to review OPM's 
allocation determination. According to the PRC contractor responding 
to this request, both OPM's and the USPS OIG's methodologies are 
within the range of acceptable allocations of costs and benefits to 
service periods based on current actuarial standards and practices, 
but in the contractor's view, OPM's methodology is not "'fair and 
equitable' except within the context of P.L. 93-349, the 1974 
legislation that underlies the OPM methodology."[Footnote 74] 

Analysis: 

At issue here is whether OPM's methodology for allocating 
responsibility for CSRS pension costs for USPS employees who worked 
for both USPS and the POD is consistent with applicable law. 

We begin with the 1974 Act, which established the allocation of 
responsibility for CSRS pension costs between USPS and the federal 
government. As discussed above, the 1974 law explicitly directed USPS 
to pay for CSRS costs attributable to pay increases granted by USPS 
after July 1, 1971. The 1974 Act created a new subsection 8348(h) of 
Title 5, U.S. Code, stating the following: 

"(h)(1) Notwithstanding any other statute, [USPS] shall be liable for 
that portion of any estimated increase in the unfunded liability of 
[CSRDF] which is attributable to any benefits payable from [CSRDF] to 
active and retired Postal Service officers and employees, and to their 
survivors, when the increase results from an employee-management 
agreement under title 39, or any administrative action by the Postal 
Service taken pursuant to law, which authorizes increases in pay on 
which benefits are computed. 

"(2) The estimated increase in the unfunded liability, referred to in 
paragraph (1) of this subsection, shall be determined by the Civil 
Service Commission. The [USPS] shall pay the amount so determined to 
the Commission in thirty equal annual installments with interest 
computed at the rate used in the most recent valuation of the civil 
service retirement system, with the first payment thereof due at the 
end of the fiscal year in which an increase in pay becomes effective." 
[Footnote 75] 

The express language of subsection (h)(1) made clear that regardless 
of any prior federal service by USPS employees, Congress determined 
that USPS was to bear responsibility for the entire change in the 
liabilities of the CSRDF arising from a USPS pay increase (that is, a 
pay increase after July 1, 1971). The legislative history of this 
provision explains the logic behind this language. The House report 
accompanying the legislation stated that "[t]he Congress now has no 
control--no oversight whatsoever--with respect to the pay machinery in 
the Postal Service. Since each future pay raise . . . will result in 
specific unfunded liability and a new financial drain on [CSRDF], the 
cost of this liability should properly and equitably be borne by the 
Postal Service."[Footnote 76] The Senate report explained further that 
"the bill will permit the Postal Service to include the cost of 
financing unfunded retirement liability in its rate base for purposes 
of future postal rate adjustments."[Footnote 77] Thus at the time of 
the 1974 Act, Congress clearly allocated the full cost of any future 
pay increases to USPS, both for employees who had worked for the POD 
and USPS as well as for USPS-only employees.[Footnote 78] 

The 2003 Act did not direct any change in this allocation. As 
discussed above, the 2003 Act required OPM to use more realistic 
"dynamic assumptions" rather than static assumptions in its annual 
calculation of USPS's CSRS funding obligation. Because these dynamic 
assumptions included projections of future pay increases, the 
consequence of the 2003 Act was to leave the underlying 1974 
allocation unchanged, notwithstanding the removal of the explicit 
allocation provision. The 2003 Act amended 5 U.S.C. § 8348(h) by 
replacing both the explicit assignment of liability to USPS in 
subsection (h)(1) and the responsibility for calculation of this 
liability by OPM after each USPS pay increase in subsection (h)(2) 
with the "Postal supplemental liability" concept. This new method of 
calculation is based upon the present value of benefits payable to 
present or future CSRS annuitants that are "attributable to the 
service of current or former employees of [USPS]," as determined by 
OPM, as offset by assets such as the present value of future employee 
contributions and the portion of the CSRDF balance that is 
attributable to past payments by USPS and its employees.[Footnote 79] 

Because of CSRS's then-static assumption methodology, which did not 
project future inflation or pay increases, in order to change USPS' 
CSRDF contributions to account for pay increases, USPS would be 
required to make a schedule of additional contributions each time it 
increased employee pay, as the 1974 Act had done. When the 2003 Act 
shifted to dynamic assumptions, it became unnecessary to require a 
schedule of additional USPS payments after each pay increase. The 
Senate report accompanying the 2003 Act provided the following 
explanation: 

"Because the dynamic normal cost of CSRS includes the effects of 
future employees' pay raises and retiree COLAs, the separate payments 
that USPS is required to make under current law to fund the future 
increases in CSRS annuities that result from pay raises and COLAs 
would no longer be necessary. Consequently, S. 380 would repeal the 
provisions of law that require the Postal Service to amortize over 15 
years the increases in future CSRS annuities that result from annual 
employee pay raises and retiree COLAs."[Footnote 80] 

While the statute no longer included the prior explicit statement 
regarding allocation to USPS, there was no indication in 2003 that 
Congress intended to alter the overriding principle, reflected in the 
1970 and 1974 Acts, that USPS was to be self-supporting and that the 
full cost of funding its pension liabilities was intended to be 
included in the operational costs to be supported by postal revenues. 
[Footnote 81] Further, because USPS is an "independent establishment," 
the 1970 Act requires that USPS obligations shall "not be obligations 
of, nor shall payment of the principal thereof or interest thereon be 
guaranteed by, the Government of the United States," absent a 
determination by the Secretary of the Treasury (which has not been 
made) that it would be in the public interest to do so.[Footnote 82] 

Finally, the 2006 Act, like the 2003 Act, directed no change in the 
fundamental allocation of benefit responsibility related to post-1971 
pay increases. As noted above, the only allocation change made by the 
2006 Act pertained to responsibility for pension costs arising out of 
prior military service by USPS employees; responsibility for all other 
retirement costs remained unchanged. The fact that Congress changed 
the allocation from USPS to the federal government for this one 
circumstance but not others, and that Congress did not use the 
occasion of legislating about postal pension benefits to direct OPM to 
change the direction it had taken in carrying out the 2003 Act, 
support the conclusion that the 2006 Act did not direct a change in 
the 1974 allocation. 

[End of section] 

Appendix II: Issues and Options Related to the Postal FERS Surplus: 

According to the most recent actuarial analysis, as of September 30, 
2009, the FERS postal subaccount had a surplus of $6.9 billion. USPS 
has requested a refund of this surplus. In considering this request, 
several issues are significant. 

* While USPS has a FERS surplus of $6.9 billion, it also has a CSRS 
deficit of $7.3 billion (under the current allocation of CSRS benefit 
responsibility). However, OPM expects the fiscal year 2011 year-end 
[Footnote 83] fund report to show improvement (i.e., a lower CSRS 
deficit and a higher FERS surplus) because of the lack of a cost of 
living increase and relatively low salary increases since the prior 
calculation. 

* Each year, USPS incurs additional FERS liabilities from an 
additional year of service of FERS participants. This component of 
annual growth in liability is known as the normal cost. USPS had been 
contributing its share[Footnote 84] of the normal cost to the fund 
each year, thereby offsetting the growth in liabilities with 
compensating assets; the amount is currently about $3 billion per 
year.[Footnote 85] However, USPS ceased making such contributions this 
past summer.[Footnote 86] Absent such contributions, the surplus would 
be depleted over time as participants earn additional years of service. 

Another factor to consider is that actuarial estimates of surplus or 
deficit contain a degree of uncertainty and could change over time (as 
exemplified by OPM's expectation of a significant change in the 
surplus and deficit amounts when the results of the most recent 
actuarial valuation are complete). Further, the ability of USPS to 
make any future contributions necessitated by "adverse experience" 
(for example, higher-than-estimated cost of living increases that 
create losses for the fund) is a consideration in any disposition of 
the surplus in the fund. We have identified four approaches to 
addressing the FERS surplus proposal and their corresponding 
implications: 

1. Current law. Under current law, USPS cannot access a FERS surplus 
and must continue to contribute approximately $3 billion, which is 
USPS's share of the normal cost. Conversely, when there is a FERS 
deficit, USPS must contribute both its share of the normal cost and a 
30-year amortization payment to work toward funding the deficit. The 
treatment of surpluses and deficits is asymmetric and arguably unfair. 

2. Amortization of the surplus. Earlier this year, the 
administration's budget proposal would have allowed USPS to reduce its 
FERS contribution by a 30-year amortization of the surplus. That would 
have reduced the required contribution by about $0.5 billion, from 
about $3 billion to $2.5 billion. The proposal would have made the 
treatment of surpluses symmetric with the treatment of deficits. 

3. Funding holiday. In the private sector, when surpluses exceed the 
normal cost, a "funding holiday" (the cessation of contributions) is 
permitted until the surplus is used up.[Footnote 87] This is 
essentially the approach USPS unilaterally adopted this summer when it 
stopped contributing to FERS. With a $6.9 billion surplus and an 
unfunded normal cost of $3 billion, this funding holiday, if it 
continued, would use up the surplus in a little over 2 years. With 
OPM's expectation that the surplus has increased, the funding holiday 
would last somewhat longer than that. Of course, the amount of surplus 
(or deficit) could change yet again next year, lengthening or 
shortening any funding holiday. 

4. Reversion. A reversion refers to the actual return of money from 
the pension plan to the plan sponsor (as opposed to a cessation of 
contributions). In the private sector, a reversion is only allowed 
upon plan termination, when the surplus measure is final. It is 
important to note that a reversion of the entire $6.9 billion surplus 
(or of an updated surplus amount) to USPS should mean that USPS would 
then need to resume contributing its share of the normal cost of $3 
billion per year; otherwise, the fund would go into deficit. Given 
that the FERS surplus has accumulated over a number of years with no 
reductions in USPS's contributions, OPM supports a reversion of the 
surplus to USPS over a 2-year period. 

[End of section] 

Appendix III: Objectives, Scope, and Methodology: 

To determine if the current methodology employed by OPM for allocating 
responsibility for CSRS benefits between USPS and the federal 
government is consistent with law, we reviewed relevant laws, 
statutes, and legislative history. 

To provide commentary on the actuarial analysis that the USPS Office 
of Inspector General (USPS OIG) and Postal Regulatory Commission (PRC) 
used in stating that OPM should refund the CSRS contributions in 
question, we reviewed and analyzed opinions and studies on this issue 
by relevant agencies and government entities including USPS, the USPS 
OIG, OPM, and the OPM OIG. We also reviewed and analyzed studies and 
opinions by actuarial firms and industry groups, including the Hay 
Group, the Institute for Research on the Economics of Taxation, and 
the Segal Company, Inc. To gain information on the method by which 
responsibility for CSRS benefits is currently allocated and the 
potential impacts of a CSRS payment refund on the CSRS fund and 
stakeholders, we interviewed officials at OPM. To gain information on 
the extent to which CSRS benefit costs have been recovered by USPS 
through postal rates to date, we interviewed officials at the PRC. To 
comment on USPS's request for a FERS refund, we analyzed OPM's most 
recent CSRDF annual report, interviewed OPM actuaries, reviewed 
commentary by USPS OIG and OPM on this issue, and reviewed approaches 
to surplus pension assets applicable to private sector pension plans. 

To provide commentary on the potential impacts of a refund of CSRS 
payments to USPS, we reviewed and summarized prior GAO work on this 
subject, including reports and testimonies related to the financial 
condition of USPS and the actions necessary to avoid financial 
insolvency. We also spoke with officials at USPS to gain information 
on USPS's current financial condition, and we interviewed officials at 
OPM to gain information on the legal requirements applying to any 
transfer of CSRS assets and the potential impacts on plan participants. 

We conducted this performance audit from September 2011 through 
October 2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix IV: Comments from the Office of Personnel Management: 

United States Office of Personnel Management: 
Office of the Director: 
Washington, DC 20415 

October 11, 2011: 

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

Dear Ms. St. James, 

Thank you for sending us GAO's draft report entitled, U.S. Postal 
Service: Allocation of Responsibility for Pension Benefits Between the 
Postal Service and the Federal Government, (GAO-12-146). Staff from 
the Office of Personnel Management have reviewed the report and concur 
with your findings and recommendations. 

OPM has consistently maintained that it has followed the law with 
respect to the allocation of responsibility for pension benefit 
payments between the Postal Service and the Federal Government. Your 
report supports this longstanding position. 

In Appendix II of the report, the authors outline four approaches to 
addressing the surplus in the FERS fund attributable to Postal Service 
employees. In describing the fourth approach, a one-time reversion of 
the surplus, the authors note: "Given that the FERS surplus has 
accumulated over a number of years with no reductions in USPS's 
contributions, OPM supports a one-time reversion to USPS as a "re-set" 
of the fund back to 100% funded." (p. 37) 

The President's Deficit Reduction proposal, "Living Within Our Means and
Investing in the Future," would "provide USPS with a refund over two 
years of the $6.9 billion surplus in Postal contributions to the FERS 
program." (p. 23) 

We suggest that the OPM position be stated as supporting a "reversion 
of the surplus to USPS over a two year period." 

Thank you for providing OPM with the opportunity to comment. 

Sincerely, 

Signed by: 

Jonathan R. Foley: 
Director: 
Planning and Policy Analysis: 

[End of section] 

Appendix V: Comments from the Office of Personnel Management, Office 
of the Inspector General: 

United States Office of Personnel Management: 
Office of the Inspector General: 
Washington, DC 25415: 

October 11, 2011: 

Memorandum for Lorelei St. James: 
Director, Physical Infrastructure Issues: 
Government Accountability Office: 

From: [Signed by] Patrick E. McFarland: 
Inspector General: 

Subject: Response to GAO Draft Report No. GAO-12-146: 

Thank you for the opportunity to comment upon the draft report 
produced by your office entitled "U.S. Postal Service: Allocation of 
Responsibility for Pension Benefits Between the Postal Service and the 
Federal Government," GAO-12-146. 

We agree with the legal conclusions contained in the draft report and 
find the policy questions raised to be very insightful. Specifically, 
we appreciate the analysis of the financial impact that various policy 
options would have upon the trust funds administered by the U.S. 
Office of Personnel Management. Protection of the financial integrity 
of these trust funds is our office's paramount concern. 

We expect that Congress will find this report useful as it works to 
develop a comprehensive plan to address the U.S. Postal Service's 
current financial situation. 

[End of section] 

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

Joseph Corbett: 
Chief Financial Officer: 
Executive Vice President: 
United States Postal Service: 
475 L'Enfant Plaza, SW: 
Washington, DC 20260-5050: 
202-268-5272: 
Fax: 202-265-4364: 
[hyperlink, http://www.usps.com] 

October 12, 2011: 

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

Dear Ms. St. James: 

Thank you for the opportunity to provide comments on the Government 
Accountability Office (GAO) report, Allocation of Responsibility for 
Pension Benefits between the Postal Service and the Federal Government 
(Report). 

The Postal Service is disappointed that the GAO has rejected the 
arguments of the Postal Service Office of Inspector General (01G) and 
the Postal Regulatory Commission (PRC) and their independent actuaries 
to reach a conclusion that, in our view, ignores actuarial principles 
that would govern in the private sector, as well as fundamental 
principles of fairness, by perpetuating the inequitable allocation of 
pension obligations under the Civil Service Retirement System (CSRS) 
for Postal Service employees who also worked for the Post Office 
Department (POD). In doing so, the Report fails to describe the false 
assumptions underlying the 1974 law, or the legal environment under 
which the Postal Service operates with respect to compensation policy. 
The Report also mistakenly endorses the Office of Personnel 
Management's (OPM's) position that the repealed 1974 law, rather than 
generally accepted actuarial practices and principles, should govern 
the determination of the Postal Service's CSRS liabilities under 
current law. 

The Report does not attempt to refute that the actuarial methodologies 
employed by the OIG and the PRC are standard actuarial methodologies 
typically employed in the private sector for the allocation of pension 
liabilities.[Footnote 1] This point is further underscored by the 
credibility and stature of the two actuarial firms employed by the OIG 
and the PRC. No independent actuary has endorsed OPM's approach, which 
is predicated on fundamentally unrealistic assumptions. Rather, the 
only basis cited by the GAO for the "fairness" of the pension cost 
allocation methodology used by OPM is its consistency with the 1974 law.
GAO's discussion of why the 1974 law is lair" fails to account for the 
specifics of postal law, and is only understandable if GAO believes 
that the Postal Service and Congress negotiated at arms-length over 
the terms of the law. GAO's discussion of the "fairness" of the 
current methodology is flawed and incomplete for the following reasons: 

* GAO does not provide an example in which the methodology set forth 
in the 1974 law would have been accepted by a party in the Postal 
Service's position as part of an arms-length transaction. This is not 
surprising, because no rational party would accept an transaction in
allocation as part of an arms-length which—-using GAO's example-—an
employee would spend only 60 percent of his career with that party, 
but the party would shoulder 82% of the pension costs, while 
completely lacking any authority to address the size of those costs. 
In a similar calculation, based on an employee with 15 years of 
service, including ten with the POD and five with the Postal Service 
(i.e., 2/3 POD and 1/3 Postal Service), the Postal Service would 
already be responsible for 53 percent of the individual's pension. 
Outcomes such as these would only have made sense if significant 
benefits were received for accepting that allocation methodology. The 
Postal Service, on the other hand, did not receive any such benefits 
as part of the 1974 law. 

* While GAO claims that one must consider the allocation of the 
pension costs in light of the "total package of assets and 
obligations" that were involved in the creation of the Postal Service, 
much greater context must be provided to achieve fair and balanced 
coverage. Full consideration of all assets, liabilities, and 
obligations argues against GAO's conclusion. In 1971, the Postal 
Service received assets in need of substantial upgrading, a workforce 
that it inherited from the POD along with its associated legacy costs, 
costly mandates (e.g., those regarding universal service, pay, and 
benefits), and a longstanding gap between revenues and costs. 

* Most relevant here, the Postal Service was formed, in large part, 
because employee wage demands led to wildcat strikes and associated 
service disruptions. Congress and the President agreed to an eight 
percent pay raise as part of the Postal Reorganization Act, in order 
to ensure employee support for the Act, on top of a six percent 
increase that had earlier been enacted to end the work stoppage. In 
addition, the Act required the Postal Service to provide its employees 
with pay and benefits comparable to those paid in the private sector 
for comparable work, and imposed a mandatory interest arbitration 
process for labor negotiations when management and labor failed to 
reach agreement. As such, the pension cost methodology currently used 
by OPM penalizes the Postal Service for doing what was made inevitable 
by the Act: an increase in wages. In addition, because the 1974 
methodology was made retroactive, the Postal Service bears full 
responsibility for the eight percent pay raise for Postal Service 
employees negotiated prior to passage of the Act and put in effect by 
that law. 

* For these reasons, the articulated basis for the 1974 law—that the 
Postal Service was entirely responsible for its post-1971 wage 
increases, and thus should have to finance the effect of those 
increases on its pension costs—is also fundamentally in error. 
Congress did not give the Postal Service such control, either over its 
wages or over its pension costs. First, Congress required in the 
Postal Reorganization Act that Postal Service employees remain covered 
in CSRS. Thus, the Postal Service had no ability to address the design 
of its pension benefits or the size of its pension costs. Second,
Congress required that Postal Service pay wages and benefits 
comparable to those in the private sector, and required that any 
failure to achieve a negotiated agreement on wages result in binding 
interest arbitration. The consequences of this decision were
made abundantly clear four years after passage of the 1974 law, when 
an interest arbitrator in 1978 required that Postal Service wage COLAs 
be uncapped, just as the country began experiencing double-digit 
inflation. 

* GAO's statement that addressing the allocation methodology would 
allow the Postal Service "to receive payment for these costs twice" is 
also flawed. Most fundamentally, it is mailers who have been 
overcharged for these costs, and who therefore deserve to benefit from 
correction to the overpayment. In addition, to the extent that the 
overpayments are used to finance retirement health benefits—as current 
legislative proposals endorse—they would be used to pay costs that 
were not part of the Postal Service's rate base for most of the time 
period after 1971, even though the benefits were being earned by its 
employees. 

Current law does not in any way preclude OPM from effectuating a fair 
and reasonable allocation of these liabilities, such as the approach 
set forth in the Segal Report. In concluding to the contrary, GAO 
ignores the effects of Public Law No. 108-18 of 2003 and the Postal 
Accountability and Enhancement Act of 2006 (PAEA), Public Law No. 109-
435. The 2003 law eliminated the statutory language requiring OPM to 
follow the 1974 allocation methodology, and required OPM to determine 
the benefits "attributable to the service of current or former 
employees of the United States Postal Service."[Footnote 2] GAO does 
not dispute this, but claims that because Congress did not expressly 
mandate a change to that methodology, OPM has no authority to adopt a 
contrary methodology. However, the 2003 and 2006 laws, when considered 
together, reflect intent on the part of Congress that OPM determine 
the Postal Service's CSRS liabilities based on modern actuarial 
principles, rather than the statutorily-imposed principles underlying 
the prior funding mechanism, in order to ensure that the Postal 
Service fully funds, but does not overfund, those liabilities. 
Congress assigned to OPM the authority to determine which actuarial 
practices are proper when determining the Postal Service's CSRS 
liability: Section 802(c) of the PAEA stated that any determination by 
OPM of the Postal Service's CSRS liabilities could be subject to 
review by the PRC, employing an independent actuary, who is required 
to review that determination "in accordance with generally accepted 
actuarial practices and principles." OPM is then required to 
reconsider its determination "in light of such report," and to "make 
any appropriate adjustments." Clearly, then, Congress intended that 
OPM determine the Postal Service's CSRS liabilities based on 
"generally accepted actuarial practices and principles," and gave OPM 
the authority to do so. As such, OPM's methodology must be defended on 
whether it meets that requirement, not whether it is consistent with a 
repealed, and fundamentally unfair, law. 

Finally, the Postal Service appreciates GAO's recognition that 
reallocation of a CSRS pension surplus would not by itself solve 
Postal Service financial problems or eliminate its debt, as such a 
conclusion would be far from correct. The Postal Service's 
comprehensive legislative proposals, were articulated most recently in 
Postmaster General Donahoe's testimony on September 6, 2011: 

* Resolve the pre-funding of Retiree Health Benefits; 

* Return the $6.9 billion overfunding of the Postal Service's 
obligations to the Federal Employees Retirement System; 

* Grant the Postal Service the authority to determine delivery 
frequency; 

* Allow the Postal Service the flexibility to restructure its 
healthcare and pension systems; 

* Permit the streamlining of pricing and product development. 

As stated in that testimony, the Postal Service believes that its non-
legislative initiatives and requested legislation must reduce annual 
expenses by $20 billion by 2015. These aggressive cost reductions are 
designed to address prospective future declines in mail volume and 
revenue, and place the Postal Service on a path to long-term financial 
sustainability. It is only through a combination of efforts, designed 
to ensure that the Postal Service's cost structure is sustainable, 
that the Postal Service's financial problems can be resolved. 

In conclusion, the Report offers no room for compromise, relying 
almost entirely as it does on the mistaken assumption that the 1974 
law represented Congress' final determination on the fairness of the 
allocation of pension costs between the Postal Service and the U.S. 
Treasury. In fact, Congress' direction, as expressed in the 2003 and 
2006 laws, indicates otherwise. Furthermore, the Report fails to 
support the reasonableness of the 1974 law under current actuarial 
standards, which govern OPM's determination of the Postal Service's 
CSRS liabilities. The fact that two independent actuaries have 
determined that a fair, rational, and actuarially-sound allocation of 
the CSRS liability would return between $50 billion and $75 billion to 
the Postal Service suggests that a sound and fair result would achieve 
a more rational balance between those costs allocated to the Postal 
Service and those costs that are properly the responsibility of the 
U.S. Treasury. We believe a more balanced report by GAO would include 
a more objective analysis and provide compromise options for the 
Congress to consider. 

Sincerely, 

Signed by: 

Joseph Corbett: 

cc: Mr. Donahoe: 
Mr. Stroman: 
Ms. Gibbons: 
Mr. Vegliante: 
CARM Manager: 

Footnotes: 

[1] The Report's criticism of the Segal Report at the bottom of page 
16 and continuing on to page 17 is fundamentally misguided. The 
statement in the letter from the American Academy of Actuaries has 
been taken out of its original context. The American Academy of 
Actuaries' comment letter to FASB dealt with the measurement of the 
liability for balance sheet purposes. The comment has nothing to do 
with the allocation of pensions earned by two related employers. 

[2] This "attributable" language was similar to that in another 
section of the U.S. Code (5 U.S.C. § 8406(g), as well as to the 
repealed CSRS COLA provisions, under which OPM used a different 
allocation methodology. 

[End of section] 

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

Office of Inspector General: 
United States Postal Service: 

October 11, 2011: 

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

Dear Ms. St. James: 

Thank you for the opportunity to comment on the Government 
Accountability Office's report titled "Allocation of Responsibility 
for Pension Benefits Between the Postal Service and the Federal 
Government." 

We disagree with the major conclusions of the report. Your review 
focuses on the 1974 law (P L. 93-349), which is not in dispute. All 
parties agree that the 1974 law made the Postal Service responsible 
for funding the additional CSRS liabilities resulting from pay 
increases after 1971. 

The issue in question surrounds the CSRS Funding Reform Act of 2003
(P L 108-18) as it pertains to the Office of Personnel Management's 
(OPM) share of CSRS liability. Your report fails to recognize how the 
2003 law changed the 1974 law. We do not understand your assertion 
that the "consequence of the 2003 Act was to leave the 1974 allocation 
unchanged, notwithstanding the removal of the explicit allocation 
provision." If, as you state, the allocation provision was removed, it 
does not seem reasonable to assume the intent of Congress was that the 
allocation remain unchanged. 

In fact, the 2003 law changed the directive to OPM. As the legislative 
history shows. it was intended to "repeal" the 1974 law (Senate Report 
No 108-35, page 6). OPM was required to adopt modern dynamic methods. 
Dynamic methods dictate that OPM take into account the effect of 
future salary increases on the total liability. Using these methods, 
OPM was to capture the size of the postal liability and the respective 
responsibilities of the Postal Service and OPM to satisfy the 
liability. Instead, OPM applied dynamic assumptions solely to the
Postal Service's share of the liability — not to its own share. It 
appears that OPM failed to follow the 2003 law and now must agree to 
do so or be compelled by law for a second time. 

Two separate and independent reviews have found that OPM's continued 
use of the 1974 methodology for its own share is either unfair or not 
consistent with modern pension standards that use dynamic assumptions 
and that are required in the 2003 law: 

* Our review, conducted with the assistance of the actuarial firm, the 
Hay Group, argued that the CSRS liability for employees with service 
prior to 1971 should be split between the Postal Service and the 
federal government on a years-of-service basis. A years-of-service 
basis was used to split the liability of retirees' cost-of-living 
adjustments (COLA) between OPM and the Postal Service prior to the 
2003 law. Additionally, we found that the Postal Service's retiree 
health benefits are also allocated between the Postal Service and OPM 
on a years-of-service basis, which is instructive regarding the proper 
structuring of the CSRS benefits. We estimated that the Postal Service 
had been overcharged $75 billion from fiscal years 1972 to 2009 for 
its share of CSRS pension benefits. 

* The Postal Regulatory Commission's independent actuary, The Segal
Company, advocated a methodology based on private sector accounting 
standards. Like our methodology, it takes into account the effect of 
future salary increases on the liability, but it does not split the 
costs evenly by years of service. Instead, it follows the CSRS pension 
formula, which provides a higher benefit for later years of service. 
Under this methodology, Segal estimated the Postal Service overpayment 
to be $50 to $55 billion. The Office of Inspector General believes 
that this method, though more moderate, represents a second rational 
approach to implement the 2003 law. 

We believe OPM can now, if it chooses, apply dynamic assumptions to 
the federal share since it has been directed to do so since 2003 Under
5 U S C § 8348, the Postal Service is responsible for the full amount 
of retirement benefits that are "attributable to civilian employment 
with the Postal Service." However, it is responsible only for that 
portion that is attributable to Postal Service employment. The Postal 
Service is not responsible for the amount attributable to service 
prior to 1971. 

Post Office Department (POD) service prior to 1971 is properly the 
responsibility of the federal government. The 2003 law established 
that these amounts should be calculated dynamically as the liability 
increases with inflation and other factors. As a result, both the 
Postal Service and federal shares should include the expected salary 
increases that are part of the final pension benefit. Non-postal 
federal salaries have also risen since 1971, and OPM accounts for and 
is responsible for meeting those increased liabilities. OPM's failure 
to pay the full CSRS cost of postal service prior to 1971 leaves a 
hole in the fund. The Postal Service and its employees have been 
forced to fill the gap. OPM's position, however, is that it needs to 
be directed more clearly to apply dynamic assumptions to the federal 
share by a new piece of legislation. 

Applying dynamic standards to only part of the liability is not only 
inconsistent with the law and with modern actuarial standards, but it 
also results in the extraordinarily unfair assignment of the largest 
share of the liability to the Postal Service. Under this methodology, 
the Postal Service could be responsible for 70 percent of the CSRS 
pension costs for an employee whose service was split evenly (50-50) 
between the Postal Service and the POD. By using the 1974 static 
method for the federal share, OPM is leaving a deficit in the CSRS 
funding by not paying for inflation or pay increases attributable to 
POD service. To make up the deficit. OPM has overcharged postal 
ratepayers. Your report argues that no change is necessary since 
postal ratepayers have already paid these costs. but we believe that 
these ratepayers have been overcharged long enough. A correction is 
long overdue. 

The current OPM methodology is neither fair nor modern nor does it 
comply with the 2003 law, We agree with you that action from Congress 
is necessary to settle this issue once and for all. We believe 
Congress did just that in 2003. If OPM cannot be convinced of the need 
to change its methodology, the only alternative is for Congress to 
compel OPM to act by adding even more explicit reform language to the 
legislation currently being prepared. 

Sincerely, 

Signed by: 

[Illegible] for, 

David C. Williams: 
Inspector General: 

[End of section] 

Appendix VIII Comments from the Postal Regulatory Commission: 

United States Of America: 
Postal Regulatory Commission: 
Ruth Y. Goldway, Chairman: 
Washington, DC 20268-0001: 

October 11, 2011: 

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

Dear Ms. St. James: 

Thank you for the opportunity to comment on the Government 
Accountability Office's review of the U.S. Postal Service 
contributions to the Civil Service Retirement System (CSRS). 

Your report correctly frames the CSRS issue as a matter of policy. 
However, it stops short of offering any guidance to inform that policy 
decision. The Commission has previously provided advice on this issue 
and believes that its advice remains relevant. 

The Commission's involvement in this matter arose from a Postal 
Service request, filed under section 802(c)[Footnote 1] of the Postal 
Accountability and Enhancement Act (PAEA), to review the fairness and 
equity of the method used by the Office of Personnel Management (OPM) 
to apportion the CSRS obligation between the Postal Service and the 
Post Office Department (POD).[Footnote 2] The Commission contracted 
with The Segal Company (Segal), a member in good standing of the 
American Academy of Actuaries, to study this issue. Segal issued its 
report on June 29, 2010. 

Contrary to your assertion, the Segal report did not characterize the 
overfunding of CSRS liabilities as an "overpayment" and did not imply 
that errors were made in the calculation of the liability. Segal 
considered the OPM allocation a reasonable methodology for 
implementing legislation enacted in 1974 (P.L. 93-349). However, 
viewed in the context of modern actuarial and accounting standards, 
the methodology provides an inequitable allocation of responsibilities 
for the Postal Service's share of the CSRS assets. 

Segal notes that there was very little guidance during the 1970s 
regarding the allocation of pension costs to time periods. Since that 
time, significant attention has been given to that issue, primarily in 
the current set of corporate pension accounting standards—FASB ASC2 
715, Compensation – Retirement Benefits. Additional sources reviewed 
by Segal include GASB 27, the pension accounting standard for state 
and local governments, and SFFAS, the pension accounting standard for 
the Federal government. Segal's report was, in essence, a fresh look 
at how the allocation would be made using modern generally accepted 
principles. 

According to Segal, the use of actuarial or accounting methods 
provides meaningful guidance in the proper allocation of CSRS benefits 
between the POD and the Postal Service. The accounting standard, FASB 
ASC 715, provides a logical and reasonable compromise that is fair and 
equitable in the current situation. An employer is required to reflect 
the actual benefit accrual formula embodied in a pension plan, as OPM 
does. Additionally, an employer is also required to reflect the impact 
of future salary increases on current accruals in a "high" or "final" 
average salary plan, as the United States Postal Service Office of 
Inspector General (LISPS OIG) does. This is consistent with current 
actuarial standards, generally accepted accounting principles, and 
public sector accounting standards. 

Your report claims that a significant body of pension experts deems 
the inclusion of the effects of salary increases on pension 
liabilities inappropriate. As an example, you cite comments submitted 
by the American Academy of Actuaries (the Academy), in early 2006, in 
response to FASB's Exposure Draft to Improve Accounting for 
Postretirement Benefit Plans.[Footnote 3] 

Review of the Academy's comments, in their entirety, reveals that they 
explicitly exclude government plans.[Footnote 4] 

Your report also claims that the allocation of pension liabilities 
made in 1974 implicitly reflects fairness because upon establishment 
in 1971, the Postal Service was given a "package of assets and 
liabilities, which included the preexisting postal infrastructure and 
business advantages and disadvantages."[Footnote 5] Your report 
implies that this package is akin to the formation of a new business 
where pension liabilities would be part of negotiations. The Segal 
report highlighted important differences between the formation of the 
Postal Service and the formation of a private business. At page 6 of 
its Report to the Postal Regulatory Commission on: Civil Service 
Retirement System Cost and Benefit Allocation Principles, Segal states: 

1. It is almost unprecedented to have a transfer of ownership of a 
private enterprise where the buyer becomes a participating employer in 
the seller's pension plan. 

2. In a typical transaction involving the sale of a business unit that 
has a defined benefit pension plan, there is an exchange of cash 
and/or securities from the buyer to the seller. This represents the 
market value of the entire enterprise. While each party may have in 
mind an adjustment to the purchase price to reflect the pension plan, 
they may not be the same, or their individual pricing models may serve 
some tax or non-pension accounting purpose, or it may reflect the 
relative importance to one of the parties of closing the deal. In the 
absence of an actual market for parties buying and selling pension 
plans based on final average pay to others independent of anything 
else, we do not believe one can say with authority that the private 
sector has a definitive model that clearly suggests what is 
appropriate in the USPS situation. 

3. Another typical private sector transaction is a spin-off of part
of an enterprise into its own separate company. Most often, this does 
not result in the new company continuing to participate in the 
original enterprise's pension plan, because the whole objective is 
separation. In any event, however, this is not normally an arms-length 
transaction, because immediately after the separation the shares of 
the new company are allocated to the original enterprise's 
shareholders in exactly the same proportion as they held in the 
original enterprise. While this may be the closest analogy to the spin-
off of the POD as a stand-alone entity, each allocation reflects the 
unique goals of the original parent (subject, of course, to the 
intervention of laws such as ERISA and those governing the sale of 
securities to the public that constrain private-sector transactions). 

The Postal Service was not established as a totally separate self-
sustaining entity, but rather as a self-sustaining entity within the 
executive branch of the government. This implies that the Federal 
government, not the Postal Service, sets the policies and basic 
management structure of the Postal Service, in addition to providing 
oversight over the organization in return for some monopoly power in 
the marketplace and exemption from some local laws and regulations. 
The Postal Service was given basic management control of government 
assets and liabilities related to the provision of those mail services. 

Your report also asserts that the Postal Service has already received 
payment for current and future pension obligations from ratepayers and 
that transfer of CSRS assets would constitute a double payment, The 
Commission respectfully disagrees with that assertion. The purpose of 
a break-even requirement, as it stood before the passage of the PAEA, 
was to charge users of mail services the full cost of providing those 
services. The attribution methodologies established by the Commission 
allocated these costs to mail products. Prices were set to recover all 
costs of the Postal Service. If Congress were to change the current 
allocation of CSRS pension costs in the manner recommended by the 
Segal report, the Postal Service would receive a refund of past 
payments to the Federal government. It was the ratepayers, not the 
taxpayers, who paid for those past costs and it will be ratepayers who 
will benefit from the recommended allocation, going forward, through 
more stable rates and more reliable, accessible services. 

This is similar to what occurred after it was discovered that the CSRS 
funding mechanism established in 1974 under Public Law 93-349 would 
cause a significant overfunding of the Postal Service's share of the 
CSRS liability for pension benefits. That finding resulted in 
enactment of Public Law 108-18, which significantly changed the Postal 
Service's CSRS funding requirements and resulted in substantial cost 
savings to the Postal Service. The Postal Service was required to use 
a portion of the savings to hold postage rates down, a benefit for 
ratepayers. 

The Commission also disagrees with the implication that any change in 
the allocation would provide the Postal Service with only limited 
relief from its financial pressures. In its Section 701 Report: 
Analysis of the Postal Accountability and Enhancement Act of 2006, 
[Footnote 6] released on September 22, 2011, the Commission identified 
the CSRS as one of the areas where key adjustments to postal laws 
could help address the liquidity crisis facing the Postal Service. 
Adjustments would improve the Postal Service's current financial 
situation in the near term and provide an opportunity to more fully 
assess long-term solutions. The Commission noted that if the excess 
funds from the CSRS were transferred into the Postal Service Retiree 
Health Benefit Fund, the fund would be almost fully funded.
Finally, there is a difference of opinion as to whether the existing 
legislation compels the omission of post-1971 pay increases in a 2010 
analysis. Both USPS OIG and OPM appear to agree that Public Law 93-349 
was intended to prohibit allocating the impact of post-1971 final 
average salary increases to the POD. The question is primarily whether 
or not Public Law 108-18, enacted in 2003, and the PAEA, enacted in 
2006, continued that prohibition. Should there be a determination by 
OPM to choose something other than continuation of the present 
methodology, we believe the current legislative framework can 
accommodate a change. 

In conclusion, the Commission agrees that the ultimate decision on 
allocation of pension costs between the Postal Service and the POD is 
a matter of policy. As requested by the Postal Service, the Commission 
sponsored the Segal report to provide guidance on this matter. The
Commission believes that Segal's guidance remains both sound and 
relevant. The present allocations, deemed reasonable before the 
development of modern practices, do not reflect application of current 
generally accepted practices and principles. 

Sincerely, 

Signed by: 

Ruth Y. Goldway: 

Footnotes: 

[1] Section 802(c) requires the Commission, upon receiving a request 
for review, to procure the services of an actuary who is a member of 
the Academy of American Actuaries and is qualified in the evaluation 
of pension obligations, to conduct a review in accordance with 
generally accepted actuarial practices and principles. Upon approving 
the report, the Commission is required to provide it to the Postal 
Service, OPM and Congress. Section 802 (c) further states that, upon 
receiving the report from the Commission, OPM shall reconsider its 
determination of the pension liability and make any appropriate 
adjustments in light of the report. 

[2] Docket No. PI2010-2, Request of the United States Postal Service 
for the Commission to Conduct a Review Pursuant to PAEA Section 802(c) 
of OPM Determinations Regarding CSRS, February 23, 2010. 

[3] In September 2006, the Board issued a final standard, SFAS 158, 
Employers' Accounting for Defined Benefit Pension and Other 
Postretirement Plans, completing the first phase of its ongoing two 
phase pension accounting project. SFAS 158 amends the prior accounting 
standards SFASs 87 and 106 by requiring recognition of the projected 
benefit obligation by a pension plan. 

[4] The letter states, "We assume that salary and total compensation 
are under the control of employer and employee, and that salaries are 
set to keep total compensation competitive. So long as both parties 
stick to ABO pricing, both parties emerge each year with a fair 
exchange. Increases in pension value can be easily coupled to
increases in compensation. Consider what happens with PBO pricing. The 
employer will have 'paid' more than the employee will have 'received' 
for a year of service. The employer may freeze or terminate the plan 
and take a curtailment gain. This moral hazard, from the employee's 
point of the view, is only avoidable if there is an enforceable multi-
period contract between the employer and the employee. Except in the 
government sector and in some negotiated plans (which are usually not 
salary-based), recent experience confirms that such multi-period 
contracts don't exist or are not enforceable, Thus, there is no basis 
for the employee to assume that he will be entitled to anything more 
than his accrued benefit and, if he does so, he will have accepted 
lower current pay in return for a renegable promise of his employer." 
See American Academy of Actuaries letter to Robert H. Herz,
Chairman, Financial Accounting Standards Board, February 6, 2006, at 2 
(footnote omitted). 

[5] See General Account Office, Allocation of Responsibility for 
Pension Benefits Between the Postal Service and the Federal 
Government, [hyperlink, http://www.gao.gov/products/GAO-12-146] 
(October 2011) at 6. 

[6] Under the PAEA, P. L. 109-435, 120 Stat, 3198 (2006), section 701, 
"The Postal Regulatory Commission is required to (a) Submit a report 
to the President and Congress concerning—Ill the operation of the 
amendments made by this Act [PAEA]; and (2) recommendations for any 
legislation or other measures necessary to improve the effectiveness 
or efficiency of the postal laws of the United States. (b) Postal 
Service views.-–A report under this section shall be submitted only 
after reasonable opportunity has been afforded to the Postal
Service to review the report and to submit written comments on the 
report. Any comments timely received from the Postal Service under the 
preceding sentence shall be attached to the report...." 

[End of section] 

Appendix IX: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

In addition to the contact named above, Teresa Anderson, Barbara 
Bovbjerg, Fred Evans, Jeanette Franzel, Kimberly Granger, Katie Hamer, 
Susan Irving, Jason Kirwan, Hannah Laufe, Kate Lenane, Kimberly 
McGatlin, Diane Morris, Susan Poling, Susan Ragland, Susan Sawtelle, 
Kate Siggerud, Ken Stockbridge, Frank Todisco, and Crystal Wesco made 
key contributions to this report. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 112-36, § 124 (Oct. 5, 2011). 

[2] The U.S. Postal Service Improvements Act of 2011, S. 353, 112th 
Cong. (2011); the Postal Operations Sustainment and Transformation Act 
of 2011, S. 1010, 112th Cong. (2011); the Postal Reform Act of 2011, 
H.R. 2309, 112th Cong. (2011); the United States Postal Service 
Pension Obligation Recalculation and Restoration Act of 2011, H.R. 
1351, 112th Cong. (2011); and the Innovate to Deliver Act of 2011, 
H.R. 2967, 112th Cong. (2011). 

[3] United States Postal Service, Office of Inspector General, The 
Postal Service's Share of CSRS Pension Responsibility, RARC-WP-10-001 
(Arlington, Va.: Jan. 20, 2010). The USPS OIG commissioned the 
actuarial firm Hay Group to review the allocation of CSRS liabilities 
between USPS and the federal government. Postal Regulatory Commission, 
Report to the Postal Regulatory Commission on: Civil Service 
Retirement System Cost and Benefit Allocation Principles, by the Segal 
Group, Inc. (Washington, D.C.: June 29, 2010). The PRC commissioned an 
actuarial report by the Segal Company on the allocation of CSRS 
liabilities between USPS and the federal government. 

[4] While USPS is part of the federal government, for purposes of this 
report, we differentiate between USPS, a self-sustaining, independent 
establishment within the executive branch, and the federal government 
as a whole. 

[5] Responsibility for paying for the increase in retirement benefits 
for pre-1971 service of postal employees caused by increases in postal 
salaries since July 1, 1971 was transferred from the U.S. Treasury to 
USPS by statute in 1974. Pub. L. No. 93-349 (July 12, 1974). See table 
1. 

[6] U.S. Office of Personnel Management Office of the Inspector 
General, A Study of the Risks and Consequences of the USPS OIG's 
Proposals to Change USPS's Funding of Retiree Benefits (Washington, 
D.C.: Feb. 28, 2011). 

[7] The CSRDF is a fund of the U.S. Treasury that provides defined 
benefits to retired and disabled federal employees covered by CSRS. 

[8] Pub. L. No. 91-375, 84 Stat. 719, 720. 

[9] Id. at 760. See also, Payments on Unfunded Liability by the U.S. 
Postal Service to Civil Service Retirement Fund: Hearing Before the 
Committee on Post Office and Civil Service, United States Senate, on 
H.R. 29, 93rd Cong. 73-74 (statement by Post Office and Civil Service 
Committee Chairman Gale McGee). 

[10] GAO, United States Postal Service: Information on Retirement 
Plans, [hyperlink, http://www.gao.gov/products/GAO-02-170] 
(Washington, D.C.: Dec. 31, 2001). 

[11] Pub. L. No. 91-375, 84 Stat. 719, 732. 

[12] See 5 U.S.C. §§ 8331, 8339. This calculation is often referred to 
as the "high-3" calculation. 

[13] USPS was not to be liable for that portion of any increase in the 
unfunded liability attributable to its employees that resulted from 
new or liberalized retirement benefits provided directly by amendment 
of chapter 83 of title 5, and applicable generally to all persons 
covered by CSRS. Rather, such increases were to be financed under 5 
U.S.C. § 8348(f). See Pub. L. No. 93-349, § 1, 88 Stat. 354 (July 12, 
1974); see also H.R. Rep. No. 93-120, at 43 (1973). 

[14] Payments on Unfunded Liability by the U.S. Postal Service to 
Civil Service Retirement Fund: Hearing Before the Committee on Post 
Office and Civil Service, United States Senate, on H.R. 29, 93rd Cong. 
73-74 (statement by Post Office and Civil Service Committee Chairman 
Gale McGee). 

[15] USPS is required by law to provide prompt, reliable, and 
efficient services to patrons in all areas and postal services to all 
communities. These and related requirements are commonly referred to 
as the universal service obligation. 39 U.S.C. § 101 (a). 

[16] Other statutes, not relevant to the present questions, also have 
been enacted amending USPS's CSRS responsibilities. 

[17] A detailed legal analysis of this issue is contained in app. I. 

[18] [hyperlink, http://www.gao.gov/products/GAO-02-170]. 

[19] S. Rep. No. 108-35, at 2 (2003). 

[20] GAO, Review of the Office of Personnel Management's Analysis of 
the United States Postal Service's Funding of Civil Service Retirement 
System Costs, [hyperlink, http://www.gao.gov/products/GAO-03-448R] 
(Washington, D.C.: Jan. 31, 2003). 

[21] Letter from John Berry, Director, Office of Personnel Management, 
to the Honorable Ruth Y. Goldway, Chairman, Postal Regulatory 
Commission, regarding the allocation of the costs of CSRS benefits 
paid to former POD employees, September 24, 2010. 

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

[23] The normal cost is the annual growth in pension liabilities 
resulting from an additional year of service by plan participants. 
"Dynamic assumptions" is defined in subsection 2(a) of the 2003 Act as 
economic assumptions that are used in determining actuarial costs and 
liabilities in a retirement system and in anticipating the effects of 
long-term future investment yields, future increases in rates of basic 
pay, and future rates of price inflation. The prior funding 
methodology had used "static assumptions," which did not project 
future pay or cost of living increases and used a fixed interest rate 
assumption. 

[24] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625 (amending 5 U.S.C. 
§ 8348(h)). 

[25] The legislative history of the 2003 Act supports this conclusion. 
The Senate Report accompanying the 2003 Act states that the Act 
"continues the Postal Service's liability for the retirement costs 
attributable to its employees covered by the CSRS which was imposed 
when the Post Office Department became the self-supporting [USPS] in 
July 1971" S. Rep. No. 108-35, at 3 (Apr. 8, 2003). 

[26] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249 (Dec. 20, 2006). 

[27] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 626. 

[28] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249. 

[29] There are other details of the formula that are not relevant for 
purposes of this analysis. 

[30] The proportion of prospective and retrospective costs transfers 
may have changed since these estimates were made with more of the cost 
transfer now likely to be retrospective. 

[31] The FASB standards apply to financial reporting. The particular 
standards applicable to pension benefits were developed in the 1980s, 
with subsequent modifications that did not alter the overall approach 
for assigning pension costs to time periods. 

[32] See American Academy of Actuaries letter to Technical Director, 
Financial Accounting Standards Board, May 31, 2006; letter to Robert 
H. Herz, Chairman, Financial Accounting Standards Board, February 10, 
2006; and News Release, "Actuaries Raise Concern with FASB Draft 
Guidance," June 7, 2006. The Academy argues that "Inclusion of the 
effect of future salary increases in a liability appears to be in 
conflict with [Accounting] Concept Statement 6," "Including future 
salary levels misrepresents the value of the contract," "Including 
future salary levels in pension liabilities does not provide 
shareholders with the most relevant information about the current 
value of their obligations," and "Including an allowance for future 
salary growth is inappropriate in a balance sheet liability." The 
Academy does note that an accounting case can be made for recognizing 
future pay increases where there is "an enforceable multi-period 
contract between the employer and the employee," which it says only 
exist in the government sector and for some negotiated (i.e., 
collectively bargained) plans, but also notes that recognition of 
future salary increases in pension accounting "would force recognition 
of future salary increases for sponsors of defined benefit plans but 
not otherwise, a distinction for which we see no justification." The 
Academy points to the incongruity of recognizing future salaries for 
pension plans when the cost of basic compensation itself is not 
recognized until earned. Our overall point here is that there is 
debate about the appropriateness of current private sector pension 
accounting standards. Our more fundamental point remains that 
accounting standards do not govern the allocation of benefit 
responsibility between two entities, which is ultimately a business or 
public policy matter. 

[33] See S. Rep. No. 93-947 at 3 (June 19, 1974); H.R. Rep. No. 93-
120, at 4 (Apr. 11, 1973). 

[34] In addition to the transfer of assets from nonpostal to postal 
CSRS (about $50 billion to $75 billion), there would be a transfer of 
liabilities for future benefits from postal to nonpostal CSRS (about 
$6 billion to $10 billion). 

[35] The CSRDF is divided into two accounts for CSRS and FERS, which 
are further divided by postal and nonpostal subaccounts. 

[36] The precise effect of the USPS OIG and PRC recommendations would 
be calculated by the Congressional Budget Office (CBO), which is the 
legislative branch agency charged with providing cost estimates and 
estimates of the impact of legislation on the federal budget. 

[37] Using the estimated effects of the PRC proposal as an example, 
the mechanism for the transfer of costs would be the following: The 
reallocation of responsibility for benefits already paid over the past 
four decades would be done via a transfer of assets from the nonpostal 
subaccount to the postal subaccount; the estimated amount is $50 
billion to $55 billion. The reallocation of responsibility for 
benefits still to be paid in the future would be done via a reduction 
of actuarial liability for the postal subaccount and a corresponding 
increase for the nonpostal subaccount; the estimated amount is $6 
billion to $8 billion. The overall cost to the federal government, 
over time, would be the sum of these two effects. Thus, the nonpostal 
subaccount would bear a total reduction in assets and increase in 
actuarial liability ranging from about $56 billion to $63 billion. 

[38] Under existing law, USPS would still have to make the current 
schedule of retiree health benefit prefunding payments for 2011 
through 2016, even if the benefits are fully funded after an asset 
transfer. Legislation would be required to alter or eliminate these 
required payments. 

[39] GAO, U.S. Postal Service: Legislation Needed to Address Key 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-11-244T] 
(Washington, D.C.: Dec. 2, 2011). 

[40] GAO, U.S. Postal Service: Actions Needed to Stave off Financial 
Insolvency, [hyperlink, http://www.gao.gov/products/GAO-11-926T] 
(Washington, D.C.: Sept. 6, 2011). 

[41] [hyperlink, http://www.gao.gov/products/GAO-11-244T]. 

[42] GAO, U.S. Postal Service: Strategies and Options to Facilitate 
Progress toward Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: April 12, 
2010). 

[43] See GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011). 

[44] Pub. L. No. 91-375, 84 Stat. 719, 720 (Aug. 12, 1970). 

[45] Pub. L. No. 91-375, 84 Stat. 719, 732. 

[46] 5 U.S.C. § 8334(a). 

[47] Pub. L. No. 91-375, 84 Stat. 719, 732, codified, as amended, at 
39 U.S.C. § 1005(d). USPS was also required to contribute annually to 
the costs of administering CSRS, but this requirement was later 
repealed (see Pub. L. No. 93-349, § 2(a), 88 Stat. 354 (July 12, 
1974)), and has no impact on the issues addressed here. 

[48] USPS was not to be liable for that portion of any increase in the 
unfunded liability attributable to its employees that resulted from 
new or liberalized retirement benefits provided directly by amendment 
of chapter 83 of title 5, and applicable generally to all persons 
covered by CSRS. Rather, such increases were to be financed under 5 
U.S.C. § 8348(f). See Pub. L. No. 93-349 §1, 88 Stat. 354 (July 12, 
1974); see also H.R. Rep. No. 93-120, at 43 (1973). 

[49] The Civil Service Commission ceased operations in accordance with 
the Civil Service Reform Act of 1978, Pub. L. No. 95-454, 92 Stat. 
1111 (Oct. 13, 1978), and its responsibility to oversee civil service 
retirement passed to OPM. 

[50] Pub. L. No. 93-349, § 1, 88 Stat. 354. See also S. Rep. No. 93- 
947, at 5 (1974). 

[51] Id., § 3, 88 Stat. 354. 

[52] U.S. Office of Personnel Management, Office of the Inspector 
General, A Study of the Risks and Consequences of USPS OIG's Proposals 
to Change USPS's Funding of Retiree Benefits: Shifting Costs from USPS 
Ratepayers to Taxpayers (Feb. 28, 2011), 28-29. 

[53] Congress passed other statutes amending USPS's CSRS 
responsibilities. See GAO, Review of the Office of Personnel 
Management's Analysis of the United States Postal Service's Funding of 
Civil Service Retirement System Costs, GAO-03-448R (Washington, D.C.: 
Jan. 31, 2003), 44-47. 

[54] GAO, United States Postal Service: Information on Retirement 
Plans, [hyperlink, http://www.gao.gov/products/GAO-02-170] 
(Washington, D.C.: Dec. 31, 2001). 

[55] OPM's analysis is discussed in the Senate report accompanying the 
Postal Civil Service Retirement System Funding Report Act of 2003, S. 
Rep. No. 108-35, at 2 (2003). 

[56] [hyperlink, http://www.gao.gov/products/GAO-03-448R]. 

[57] Letter from John Berry, Director, Office of Personnel Management, 
to the Honorable Ruth Y. Goldway, Chairman, Postal Regulatory 
Commission regarding the allocation of the costs of CSRS benefits paid 
to former Post Office Department employees, September 24, 2010; see 
also S. Rep. No. 108-35, at 2-3. 

[58] S. Rep. No. 108-35 at 3. 

[59] Id. 

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

[61] FERS covers most federal employees who started their careers on 
or after January 1, 1984. 

[62] Pub. L. No. 108-18, § 2(b), 117 Stat. 624, 625. 

[63] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625 (amending 5 U.S.C. 
§ 8348(h)). 

[64] Although the 2003 Act was passed based partly on a finding that 
USPS had overfunded CSRS, that law gave specific direction to USPS on 
the use of savings resulting from the act--specifically, savings in 
fiscal years 2003 and 2004 were to be used to repay USPS debt held by 
the U.S. Treasury, and savings for fiscal year 2005 were to be used 
both to reduce postal debt and to delay a planned postal rate 
increase. Pub. L. No. 108-18, § 3(a), 117 Stat.624, 627. 

[65] Id.§ 3(f), 117 Stat. 624,629. 

[66] GAO, U.S. Postal Service: Strategies and Options to Facilitate 
Progress toward Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12, 
2010), 27-28. 

[67] Letter from Douglas C. Borton, Chairman, Board of Actuaries for 
United States Civil Service Retirement System, Office of Personnel 
Management, to Dr. Ronald P. Sanders, Associate Director for Strategic 
Human Resources Policy, Office of Personnel Management, August 18, 
2004. 

[68] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3249 (Dec. 20, 2006). 

[69] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 626. 

[70] Pub. L. No. 109-435, § 802, 120 Stat. 3198, 3250. 

[71] United States Postal Service Office of Inspector General, The 
Postal Service's Share of CSRS Pension Responsibility, RARC-WP-10-001 
(Arlington, Va.: Jan. 20, 2010). 

[72] An Examination of the Postal Service's Current Financial Crisis 
and Future Viability, Hearing before the House of Representatives 
Committee on Oversight and Government Reform and the Subcommittee on 
the Federal Workforce, Postal Service, and District of Columbia, 111TH 
Cong., (Apr. 15, 2010) (Statement of David C. Williams, Inspector 
General, USPS). 

[73] Id. 

[74] Postal Regulatory Commission, Report of the Postal Regulatory 
Commission on: Civil Service Retirement System Cost and Benefit 
Allocation Principles, by the Segal Group, Inc. (Washington, D.C.: 
June 29, 2010), 2. 

[75] Pub. L. No. 93-349, § 1, 88 Stat. 354, formerly codified at 5 
U.S.C. § 8348(h)(1) (emphasis added). 

[76] H.R. Rep. No. 93-120, at 4 (Apr. 17, 1973). 

[77] S. Rep. No. 93-947, at 4 (June 19, 1974). 

[78] GAO, in commenting on the proposed 1974 Act, also noted that 
requiring USPS to pay for such unfunded liability "vindicates the 
policies of the Postal Reorganization Act, while preserving the 
integrity of the fund." Letter from the Deputy Comptroller General of 
the United States, to the Chairman of the Committee on Post Office and 
Civil Service, U.S. Senate, B-130441 (May 30, 1974). 

[79] Pub. L. No. 108-18, § 2(c), 117 Stat. 624, 625. 

[80] S. Rep. No. 108-35, at 2. 

[81] The conclusion that the 2003 Act did not change the allocation 
made by the 1974 Act is supported by the 2003 Act's legislative 
history. The Senate report accompanying the 2003 Act states that the 
act "continues the Postal Service's liability for the retirement costs 
attributable to its employees covered by the CSRS which was imposed 
when the Post Office Department became the self-supporting [USPS] in 
July 1971." S. Rep. No. 108-35, at 3 (Apr. 8, 2003). See also Payments 
on Unfunded Liability by the U.S. Postal Service to Civil Service 
Retirement Fund: Hearing Before the Committee on Post Office and Civil 
Service, United States Senate, on H.R. 29, 93rd Cong. 73-74 (statement 
by Post Office and Civil Service Committee Chairman Gale McGee). 

[82] Pub. L. No. 91-375, 84 Stat.719, 741 (Aug. 12, 1970), codified as 
amended at 39 U.S.C. §§ 2005(d)(5), 2006(c). 

[83] The fiscal year 2011 yearend report will update the actuarial 
valuation to September 30, 2010. 

[84] Part of the normal cost is funded by the employee contributions 
of 0.8 percent of payroll. 

[85] USPS's contribution in fiscal year 2010 was $2.9 billion. 

[86] USPS and OPM have told us that they are seeking the views of the 
Department of Justice's Office of Legal Counsel concerning the USPS 
decision to cease making these contributions. 

[87] The private sector approach has sometimes been driven by multiple 
considerations, not just pension policy--for example, not allowing an 
excessive amount of funds to be tax-sheltered, and revenue 
considerations. 

[End of section] 

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