UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

Washington, DC 20415

The Director SEP2 4 2010

Honorable Ruth Y. Goldway

Chairman

Postal Regulatory Commission

Washington, D.C. 20268-0001

Dear Ms. Goldway:

Thank you for your letter transmitting the report from The Segal Company (Segal) regarding

"the allocation of the costs of Civil ServiceRetirement System (CSRS) benefits paid to former

Post Office Department (POD) employees." OPM's principal roles in this matter are those of a

program administrator and trust fund fiduciary. As such, our principal concerns must be for the

efficient operation and reliable funding of the retirement and insurance programs. As a trust

fund fiduciary, our principal relevant concern is with the adequate funding of the program and

not with the source of that funding.

The Segal report provides a useful discussion of issues that have been raised regarding the

current formula used to allocate funding shares between the Postal Service and the Treasury for

CSRS. The report, however, is also narrowly focused, addressing only one aspect of a complex

arrangement. The Segal report acknowledges as much when it statesthat its "recommendation is,

in essence, a 2010 fresh look, and does not attempt to deal with the history accumulated over

forty years since the PRA was enacted." We are happy to support a re-examination of the

current policy regarding Postal Service funding of CSRS taking into account the relevant

circumstances, but must note that the Segal report discusses only a subset of those circumstances.

Legislative History

OPM determinesthe Postal Service's responsibility for CSRS costs in accordance with current

law. OPM's methodology is based on the determinations made by prior Congresses that the

Postal Service is responsible for CSRS costs attributable to pay increases granted by the Postal

Service. Congress first established this policy in 1974,under Public Law 93-349, and no

subsequent legislation has established an alternative policy.

In 2003, the Congress enacted the Postal Civil ServiceRetirement System Funding Reform Act

of 2003 (P.L. 108-18). P.L. 108-18 established separate accounting of all USPS payments and

outlays to and from CSRS from the creation of the Postal Service in 1971. The law cancelled

prior payment requirements that if continued would have ultimately over-funded the Postal

Service's liabilities by $78 billion. The law made no provision to change the allocation of costs

between the government and the Postal Service. The Senate Committee Report notes that P.L.

108-18 "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 United States Postal Service in July 1971." [S.Rep.No. 108-35, at 3 (2003)]

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Honorable Ruth Y. Goldway -2-

Following enactment ofP.L. 108-18, aPM in 2003 provided a report to Congress detailing its

methodology for allocating CSRS costs to the Postal Service. In 2004, the Postal Service

appealed this methodology to aPM. aPM reviewed its methodology, and found that it was

correctly applying the methodology consistent with Congressional intent.

In 2006, the Congress again addressed Postal CSRS funding, via the Postal Accountability and

Enhancement Act (PAEA; P.L. 109-435),which included a provision for the Treasury to take

responsibility for the cost of military service credit in the computation of CSRS annuities. This

Congressional action was implemented by aPM and resulted in a savings of $28 billion to the

Postal Service. The legislative history of that bill does not indicate that the Congress questioned

the allocation methodology used to determine Postal CSRS obligations. The cost figures

incorporated in Congressional reports associated with both P.L. 109-435 and P.L. 108-18,were

based upon calculations using the current methodology. If the current methodology could have

been changed by either law, the cost would have been reflected in the Congressional reports.

CSRS Allocation Policy

The Segal report argues that the current allocation methodology is not fair and equitable "except

in the context of Congressional legislation" and the 1974law. That is, Segal acknowledgesthat

Congress spoke clearly on how the allocation was to be determined, and aPM has consistently followed these directions.

As you are aware, the original transfer of pension obligations to the Postal Service was but one

part of a larger transaction between the Postal Service and the taxpayer. When the Postal Service

was created in 1971, it assumed certain liabilities, such as those associated with the future CSRS

accruals for its workforce, but it also received certain considerations. Without further obligation,

all assets of the Post affice Department were transferred to the Postal Service. The Postal

Service was granted a monopoly over first-class mail. The Postal Service remained exempt from

Federal, State, and local taxes and vehicle licensing fees, among other things. As in private

sector merger and divestiture transactions, pension obligations were considered in the context of

the larger set of transactions.

Reprinted in a Senate Committee Report on H.R. 29 (subsequently enacted as P.L. 93-349) is a

March 27, 1973, letter from the Postal Service stating its position:

"This legislation has been proposed on the ground that the Postal Service should operate

on a financially self-sufficient basis, meeting its operating costs out of its revenues and

not out of hidden subsidies. After careful consideration-and in full awareness of the

financial burdens enactment of the bill will impose-the Postal Service has concluded

that it is proper, as a matter of principle, for these costs to be imposed on postal

ratepayers rather than the taxpayers." [S.Rep. No. 93-947, at 9 (1974)]

As for makingjudgments about how equitable the allocation methodology is, the Segal

recommendation relies heavily on Financial Accounting Standards Board (FASB) financial
Honorable Ruth Y. Goldway -3-

accounting standards, which require advance recognition of expected future salary increases in

corporate reporting of private sector pension liabilities. The Segal Report notes also, however,

that actual funding of private sector pensions is governed by the provisions of the Pension

Protection Act of 2006, which Segal notes provides "little or no allowance for the impact of

future salary increases." Thus, arguments based on current private pension funding practices can

go either way, for or against, the existing CSRS allocation method as it is currently administered

by OPM.

The Segal report estimates that an alternative allocation method would result in a reduction of

the Postal Service obligation to CSRS of approximately $55 billion. Given that the exact

determination of the impact of the alternative methodology would involve the analysis of nearly

40 years of accounting records, we cannot confirm the absolute accuracy of this estimate. We do,

however, believe that the Segal analyses were professionally conducted and provide a reasonable

order of magnitude basis for Congressto evaluate the cost of Segal's alternative allocation

method.

To recap, in 2003, Congress directed OPM to make changes to the accounting of Postal Service

CSRS obligations that led to a $78 billion decrease in future Postal CSRS funding payments.

Then in 2006, Congress directed OPM to change how military service costs should be allocated

under CSRS that led to a $28 billon adjustment. In both cases, the magnitude of the adjustment

was understood by Congress when the laws were passed. It appearsto OPM that when Congress

intends to make adjustments of the magnitude suggested by the Segal report, it does so by taking

specific legislative action.

Redetermination Provisions

We believe that the implication that OPM has the discretion to make basic changes in the

allocation method between the Postal Service and the Treasury goes beyond the intent of, and the

authority provided to OPM in, the 2006 Postal Accountability and Enhancement Act. That law

included a provision, section 802(c), allowing the Postal Service to appeal to OPM its annual

determination ofthe Postal Service CSRS supplemental liability under 5 U.S.C. 8348(h)(1).

Section 802(c) provides in pertinent part:

(A) Request for review.--Notwithstanding any other provision of this section

(including any amendment made by this section), any determination or redetermination

made by the Office of Personnel Management under this section (including any

amendment made by this section)shall, upon request of the United States Postal Service,

be subject to a review by the Postal Regulatory Commission under this subsection.

Footnote 1 of the PRC transmittal indicatesthat their action is based upon:

Request of the United States Postal Service for the Commission to Conduct a Review

Pursuant to PAEA Section 802(c) ofOPM Determinations Regarding CSRS, February
Honorable Ruth Y. Goldway -4-

23, 2010; Clarification of 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, March 2,2010.

Our view is that, section 802(c) is intended to permit review of specific calculations made by

OPM of the annual supplemental liability determination according to the established Fund

allocation methodology. The Segal report is something entirely different, a review of what

methodology should be employed generally in evaluating one aspect of Postal Service CSRS

obligations. Nevertheless, OPM is providing this response in the manner as would be applicable

under section 802(c)(2).

Conclusion

After careful review by counsel, we have concluded that OPM does not have the authority to

make a reallocation in the manner suggested in the Segal report. However, if Congress

determines that another methodology is more appropriate, OPM will of course comply with any

changes in the current law.

Once again, thank you for the opportunity to provide our views. Copies of this letter will be

furnished to the relevant committees of the Senate and House of Representatives, and to the

United States Postal Service.

Sincerely,

~eay~ U ~~~c~or f ~

cc: Committee on Homeland Security

and Governmental Affairs

United States Senate

Committee on Oversight

and Government Reform

United States House of Representatives

United States Postal Service