a

GAO

United States General Accounting Office

Report to Congressional Committees

November 2003 POSTAL PENSION 

FUNDING REFORM

Review of Military 

Service Funding 

Proposals

GAO-04-281
www.gao.gov/cgi-bin/getrpt?GAO-04-281.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Linda Calbom 

at (202) 512-8341 or calboml@gao.gov. 

Highlights of GAO-04-281, a report to the 

Committee on Governmental Affairs, 

United States Senate, and the Committee 

on Government Reform, House of 

Representatives 

November 2003 

POSTAL PENSION FUNDING REFORM 

Review of Military Service Funding 

Proposals 

The positions taken by OPM and Treasury and the Postal Service were 

driven in part by differing views on the nature and extent of the relationship 

between military service and an entity’s operations. The Postal Service 

favors returning the responsibility for funding benefits attributable to 

military service to the Treasury, making arguments that include Treasury’s 

historic responsibility for these benefits, the legislative history surrounding 

the Postal Service’s funding of retirement benefits, the fact that the majority 

of military service by CSRS employees was rendered before the current 

Postal Service was created, and that military service has no connection to 

the Postal Service’s functions or operations. OPM and Treasury favor the 

recently enacted law, arguing that the Postal Service was intended to be selfsupporting, military service is a benefit like other CSRS benefits that should 

be allocated proportionally over an employee’s career, and the current law is 

one in a series that developed today’s approach to funding the Postal 

Service’s CSRS costs. 

GAO observed that there is no direct relationship between an employee’s 

military service and an entity’s operations, but an indirect relationship is 

established once an employee is hired into a position whose retirement plan 

provisions credit military service when computing a civilian benefit. GAO 

has long held the position that federal entities should be charged the full 

costs of retirement benefits not covered by employee contributions in the 

belief that it enhances recognition of costs and budgetary discipline at the 

same time it promotes sounder fiscal and legislative decisions. However, 

our previous recommendations and matters for congressional consideration 

did not specifically address whether the cost of military service benefits 

should be included in CSRS employee benefit costs. Currently there is 

inconsistency in how various self-supporting government entities treat these 

costs. 

The military service of many Postal Service retirees was already creditable 

to a civilian pension when the Postal Service began operations in 1971. 

OPM’s current approach, however, allocated the years of creditable military 

service of these employees over their entire civilian careers. If Congress 

decides that the Postal Service should be responsible for military service 

costs applicable to its employees, then consideration of an allocation 

alternative reflecting the extent to which the military service of current and 

former employees was already creditable towards a civilian pension when 

the Postal Service began operating would enhance the decision-making 

process. 

The Postal Civil Service Retirement 

System Funding Reform Act of 

2003 (the Act) required the United 

States Postal Service, Department 

of the Treasury, and Office of 

Personnel Management (OPM) to 

prepare proposals detailing 

whether and to what extent the 

Treasury and Postal Service should 

fund the benefits attributable to the 

military service of the Postal 

Service’s current and former Civil 

Service Retirement System (CSRS) 

employees. The Act required GAO 

to evaluate the proposals. Our 

objective in doing so was to assess 

the agencies’ positions and provide 

additional information where it 

may be useful. 

GAO suggests that Congress 

consider requiring that, similar to 

Postal Service, all other selfsupporting agencies pay the full 

dynamic cost of CSRS pension 

benefits. If the Congress requires 

the Postal Service to fund the 

military service component of 

CSRS benefits, then it may wish to 

have other self-supporting agencies 

do so as well. Further, GAO 

recommends that OPM provide 

estimates of the added cost to 

Treasury of making Postal Service 

responsible for only the cost of 

benefits that had not yet vested as 

of June 30, 1971. Postal Service 

and OPM/Treasury provided some 

clarifying comments and expanded 

views on several issues discussed 

in our report. 
Page i GAO-04-281 Postal Pension Funding Reform

Contents

Letter 1

Results in Brief 4

Background 8

Summary of Key Issues and Our Observations 10

Relationship of Military Service to Employing Agency

Operations 11

Historical Funding of the CSRS Benefits Payable to Postal Service 

Employees 13

Applicability of FERS Cost Allocation and Funding Methods 

to CSRS 15

Funding of Military Service Benefits by Federal and Other

Entities 17

Observations on Alternative Military Service Cost Allocation 

Approaches 20

Conclusion 24

Matters for Congressional Consideration 24

Recommendation for Executive Action 25

Agency Comments and Our Evaluation 25

Appendixes

Appendix I: Report from OPM and Treasury 28

Appendix II: Report from the United States Postal Service 39

Appendix III: Comments from the United States Postal Service 45

Appendix IV: Comments from OPM and Treasury 47

Table Table 1: Estimated Costs to Treasury of Alternative Allocation 

Approaches 21
Contents

Page ii GAO-04-281 Postal Pension Funding Reform

Abbreviations

COLA cost-of-living adjustment

CSRDF Civil Service Retirement and Disability Fund

CSRS Civil Service Retirement System

DOE Department of Energy

FDIC Federal Deposit Insurance Corporation

FEHBP Federal Employees Health Benefits Program 

FERS Federal Employees’ Retirement System

MWAA Metropolitan Washington Airports Authority

OPM Office of Personnel Management

PBGC Pension Benefit Guaranty Corporation

PMA Power Marketing Administration

PRA Postal Reorganization Act

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Page 1 GAO-04-281 Postal Pension Funding Reform

United States General Accounting Office

Washington, D.C. 20548

Comptroller General A of the United States

November 26, 2003 Letr

The Honorable Tom Davis

Chairman

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

The Honorable Susan M. Collins

Chairman

The Honorable Joseph I. Lieberman

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

This report reflects the results of our review of the military service funding 

proposal submitted by the United States Postal Service and the joint 

proposal submitted by the Office of Personnel Management (OPM) and the 

Department of the Treasury. The Postal Civil Service Retirement System 

Funding Reform Act of 20031

 (P.L. 108-18) required that these agencies 

prepare and submit to the President, the Congress, and the GAO proposals 

detailing whether and to what extent the Treasury or the Postal Service 

should be responsible for funding the benefits attributable to the military 

service of current and former employees of the Postal Service that, prior to 

enactment of the 2003 Act, had been provided for by the Treasury under 

section 8348(g)(2) of title 5, United States Code.2

 The Act also mandated 

that we prepare and submit a written evaluation of each proposal no later 

than 60 days after the aforementioned agencies had submitted them. We 

received the agencies’ proposals on the mandated September 30, 2003, due 

date.

1

Pub. L. No. 108-18, 117 Stat. 624.

2

Section 8348(g)(2) requires that OPM notify the Secretary of the Treasury at the end of each 

fiscal year of the amount of that year’s Civil Service Retirement System (CSRS) annuity 

payments OPM estimates is attributable to credit allowed for military service, less an 

amount for employee deposits made in accordance with section 8334(j) of title 5. Section 

8348(g)(2) also requires that the Secretary of the Treasury credit the Civil Service 

Retirement and Disability Fund (CSRDF) out of money in the Treasury not otherwise 

appropriated a percentage of OPM’s calculated amount, starting with 10 percent in 1971 and 

increasing in 10 percent increments until the total percentage Treasury pays reaches 100 

percent for fiscal year 1980 and for each fiscal year thereafter.
Page 2 GAO-04-281 Postal Pension Funding Reform

The objective of our evaluation was to identify and assess the agencies' 

respective positions and to provide additional information where such 

information may be useful. In assessing the agencies' positions, we 

considered the accuracy of the various assertions presented, those aspects 

of equity and consistency raised by the agencies, the Postal Service's 

unique role in the financing of CSRS and Federal Employees’ Retirement 

System (FERS) benefits,3

 and its status as a self-supporting agency. There 

may be other issues or perspectives that the agencies did not present and 

we did not assess that the Congress may want to consider in deciding 

whether and to what extent the Postal Service should fund military service 

benefits.

We also provide our observations on the alternative approaches for 

allocating the cost of military service benefits that are discussed in the 

OPM and Treasury proposal. The Postal Service and, jointly, OPM and 

Treasury put forth various arguments and assertions to justify their 

opposing positions. We organized each of the agencies’ arguments and 

assertions into four common, overarching issues raised by the agencies to 

facilitate a comparison and discussion of the differences between the two 

proposals. The reader may find it helpful to read the body of this report 

along with the full text of the agencies’ proposals that are reproduced in 

appendix I (OPM / Treasury) and appendix II (Postal Service). 

To achieve our objective, we obtained documentation from the agencies to 

support their assertions and interviewed agency officials. We also reviewed 

various laws and their legislative histories, including those mentioned 

below, along with applicable regulations and OPM guidance: 

1. Those laws preceding P.L. 108-18, which established the approach to 

the Postal Service’s funding of CSRS benefits,4

2. the Civil Service Retirement Amendments of 1969,5 (P.L. 91-93) which 

established the current pay-as-you-go approach to funding the 

3

FERS has three components – a defined benefit plan, a defined contribution plan, and 

Social Security. For purposes of this report, any reference to FERS means the defined 

benefit plan.

4

See U.S. General Accounting Office, Review of the Office of Personnel Management’s 

Analysis of the United States Postal Service’s Funding of Civil Service Retirement System 

Costs, Appendix I– Key Legislation Affecting USPS’s Funding of CSRS Costs, GAO-03-448R

(Washington, D.C.: Jan. 31, 2003).
Page 3 GAO-04-281 Postal Pension Funding Reform

government’s share of the cost of CSRS military service benefits that 

continues to generally apply to employees of entities other than the 

Postal Service,

3. the Omnibus Budget Reconciliation Act of 1982,6 which required 

employees to make deposits in certain circumstances towards the cost 

of military service benefits, and

4. the Federal Employees’ Retirement System Act of 1986,7 which 

established the cost attribution and funding method OPM cites as being 

the model for its analyses and the administration’s original legislative 

proposal. 

Our discussion of the alternative cost allocation methods was based on 

figures calculated by OPM. The OPM and Treasury proposal presented five 

possible approaches for assigning the cost of benefits attributable to 

military service between the Treasury and the Postal Service. OPM 

calculated the financial effects of each approach using CSRS-wide actuarial 

assumptions.8

We did not perform an actuarial review of OPM’s estimates of the total cost 

to the Treasury of each alternative funding method or test the accuracy of 

the underlying data; consequently, we are not expressing an opinion on the 

material accuracy of these estimates. Furthermore, we did not attempt to 

present here all other possible approaches for allocating the cost of 

military service benefits or determine which allocation methodology is the 

most appropriate. We performed our work from October through 

November 2003 in accordance with generally accepted government 

auditing standards. 

We requested comments on a draft of this report from the Postmaster 

General, the Director of OPM, and the Secretary of the Treasury, or his/her 

designee. Written comments from the Postmaster General are reprinted in 

5

Pub. L. No. 91-93, sec. 103(a)(2), 83 Stat. 117, 136.

6

Pub. L. No. 97-253, sec. 306, 96 Stat. 763, 795.

7

Pub. L. No. 99-335, sec. 101(a), 100 Stat. 514, 517.

8

We presented OPM’s calculations for three of these five approaches using Postal Servicespecific actuarial assumptions in our January 31, 2003, report on OPM’s analyses (GAO-03-

448R).
Page 4 GAO-04-281 Postal Pension Funding Reform

appendix III. Joint written comments from the Secretary of the Treasury 

and Director of OPM are reprinted in appendix IV

Results in Brief The Postal Service favors returning to the Treasury the responsibility for 

funding all CSRS benefits attributable to military service rendered by its 

current and former employees. The Postal Service makes various 

arguments, including that this responsibility has historically been 

Treasury’s and that, prior to passage of P.L. 108-18, the Congress had 

reaffirmed this view each time legislation was enacted that changed the 

Postal Service’s CSRS contributions. The Postal Service also notes that its 

CSRS employees rendered the vast majority of their military service before 

the Postal Service was even created and, moreover, argues that military 

service has no connection with the Postal Service’s functions or operations. 

Furthermore, the Postal Service argues that CSRS was never required to be 

fully funded like FERS and believes that it should not have to fund the 

military service benefits of its CSRS employees as the price for receiving its 

share of the higher than expected investment returns earned on 

contributions the Service made since 1971. The Postal Service asserts that 

no agency other than the Postal Service – including other self-supporting 

agencies9

 – fully funds the cost of their employees’ CSRS benefits, including 

military service benefits. The President’s Commission on the United States 

Postal Service agreed with the Postal Service’s positions and recommended 

repeal of this requirement. 

OPM and Treasury favor what is now current law as outlined in P.L. 108-18. 

They argue that the Postal Service was reorganized in 1971 with a primary 

goal of being self-supporting and should, therefore, bear all costs 

attributable to service after its reorganization. OPM and Treasury further 

contend that military service credit is a benefit just like other CSRS 

benefits, the cost of which should be allocated proportionally over an 

employee’s civilian career in a manner that is consistent with the funding 

system that exists for the FERS. They also view P.L. 108-18 as one in a 

series of laws that over time developed the approach that exists today for 

the Postal Service’s funding of CSRS costs. OPM and Treasury further 

assert that, while the Postal Service was not required to fund CSRS military 

service benefits prior to enactment of P.L. 108-18, it also did not have to 

assume any of the actuarial risk of the system. Consequently, OPM and 

9

Self-supporting government entities are those that are generally required to recover their 

costs through rates or fees charged to the users of their services.
Page 5 GAO-04-281 Postal Pension Funding Reform

Treasury contend that the Postal Service should not share in the higher 

than expected investment returns10 of the CSRDF without assuming the 

military service costs that could have been funded with any such 

investment gains. OPM and Treasury provided estimates of five alternative 

approaches to allocating the cost of the military service benefits of the 

Service’s current and former CSRS employees and provided their views of 

the strengths or limitations of the alternatives. 

In our review of both proposals we observed that the parties’ positions as 

to whether the Postal Service should be responsible for the cost of CSRS 

military service benefits were driven in part by differing views of the nature 

and extent of the relationship between military service and an agency’s 

operations. We agree that there is no direct relationship between an 

employee’s military service and an agency’s operations. Consequently, one 

can reasonably argue that, as a matter of equity and attribution accuracy, 

the entity that directly benefited from an employee’s military service should 

be required to fund any related retirement costs. However, one might also 

argue that the employing entities should bear this cost because the right to 

receive credit for past military service arises only as a result of employment 

in a civilian position covered by CSRS or FERS. It should, however, be 

noted that this military service feature is a mandate for all federal entities 

with covered CSRS and FERS employees and that such service credit is not 

required or common for private sector entities. 

As a matter of consistency, one might also reasonably argue that the Postal 

Service should be treated like other entities with respect to the funding of 

pension costs, which it is for purposes of funding the FERS normal cost. 

However, the Postal Service is unlike most if not all other entities in certain 

respects. First, the Postal Service must pay for any actuarial losses and may 

benefit from any actuarial gains attributable to the pension obligations of 

its employees, retirees, and their survivors. In this sense, the Postal Service 

is treated as a separate employer for purposes of financing the CSRS and 

FERS plans. Second, it is required to fund the dynamic normal cost11 of 

CSRS benefits, whereas most other agencies pay only a portion of this cost. 

10The OPM and Treasury proposal focuses on the higher than expected investment returns 

because this is the one component of the actuarial risk of the system that is believed to be 

the most significant and is easily identifiable. However, their argument would presumably 

extend to other actuarial gains resulting from the demographic experience of the population 

of Postal Service’s CSRS employees. 

11Dynamic normal cost is defined in the background section of this report.
Page 6 GAO-04-281 Postal Pension Funding Reform

Third, the Postal Service is intended to be self-supporting and, therefore, 

expected to cover all of its costs through postal rates. There are, however, 

other self-supporting agencies, such as the Federal Deposit Insurance 

Corporation (FDIC) and Pension Benefit Guaranty Corporation (PBGC), 

that are not required to fund military service costs and do not otherwise 

fully fund the dynamic normal cost of their CSRS employees’ benefits as 

the Postal Service is now required to do. On the other hand, there are a few 

self-supporting entities that have either been required by law or have 

voluntarily chosen to fund the dynamic normal cost, including military 

service costs, of employees who retained CSRS coverage. Therefore, there 

is no consistency in this regard.

Our long-standing position has been that employer agencies should fund 

the dynamic cost of the government’s retirement programs not otherwise 

funded with employee withholdings and deposits. We also observed on 

numerous occasions that, as a result of charging less than the dynamic cost 

of CSRS not otherwise provided by employee withholdings, agencies 

whose operations are intended to be self-supporting receive large subsidies 

that are not recognized in the cost of their goods and services. However, 

our previous recommendations and matters for congressional 

consideration did not specifically address whether the cost of military 

service benefits should be included as part of a dynamic normal cost factor. 

Nor did we examine the issue of whether the entity that benefited from the 

service should ultimately pay for any related benefits. Additionally, with the 

exception of self-supporting agencies that pay the dynamic cost of these 

benefits, taxpayers ultimately fund the benefits, regardless of whether or 

not these costs are included in individual agency budgets. Therefore, 

charging the self-supporting agencies’ customers for the government’s 

share of the dynamic normal cost of pension benefits results in real savings 

to the taxpayers and, therefore, is not just a change in the timing and 

source of funding. 

The agencies present opposing views on whether FERS funding 

requirements can or should be applied to CSRS benefits. Whether or not 

the obligation to fund military service benefits should be linked with the 

benefit of higher than expected investment returns is crucial to their 

respective arguments. In addressing this issue, we found nothing that 

precludes changing how the Postal Service’s contributions are calculated 

under CSRS to a method similar to FERS. At the same time, we also did not 

find any requirement that past military service be included in the dynamic 

normal cost factor used for funding purposes in order to also benefit from 

past investment gains. 
Page 7 GAO-04-281 Postal Pension Funding Reform

For purposes of determining the extent to which the Postal Service should 

be responsible for military service costs, OPM’s current pro-rata approach 

allocates the years of creditable military service proportionally over 

employees’ entire civilian careers. The OPM and Treasury proposal 

included four allocation alternatives. However, it did not include an 

allocation alternative that reflects the extent to which the Postal Service’s 

current and former employees had, by the time the Service commenced 

operations in 1971, completed the 5 years of civilian service needed to have 

their past military service creditable towards the computation of an 

annuity. We believe this alternative would be important to consider in the 

overall decision-making process, if the Congress decides that the Postal 

Service should be responsible for CSRS military service costs associated 

with their civilian employees.

We offered a matter for congressional consideration, namely that, similar to 

the Postal Service, all other self supporting federal entities be required to 

fund the dynamic cost of CSRS pension benefits. If the Congress decides to 

include funding of the military service component in its definition of full 

pension funding for the Postal Service, we believe it should consider doing 

so for all self-supporting federal entities. We also recommended that, if the 

Postal Service is made responsible for funding military service pension 

benefit costs, then OPM should provide a sixth alternative funding scenario 

by providing an estimate of the cost to the Treasury and the Postal Service 

of having Postal Service assume only the cost of benefits that had not yet 

vested when the former Post Office Department was converted to its 

presented form.

Both the Postal Service and OPM/Treasury provided written comments on 

a draft of this report. The Postmaster General expressed concern with what 

he saw as an inference that the Postal Service should be responsible for the 

cost of an employee’s military service because it hires the employee 

knowing of the past military service. The Postmaster General also 

reaffirmed the Postal Service’s commitment to the fundamental policy of 

veterans’ preference. Our report did not imply that knowing of past military 

service was a relevant factor in determining whether the Postal Service 

should bear this cost. We simply stated the fact that the right to receive 

credit for past military service arises only as a result of employment in a 

civilian position covered by CSRS or FERS. 

The Secretary of the Treasury and Director of OPM disagreed with our 

position that there is no direct relationship between an employee’s prior 

military service and the operations of the Postal Service. They stated that 
Page 8 GAO-04-281 Postal Pension Funding Reform

granting credit for military service in calculating civilian pensions enables 

the Postal Service to recruit and retain veterans, who provide direct 

benefits to the operations of their employer. We agree that the crediting of 

military service facilitates the recruitment and retention of veterans who, 

subsequent to their military service, contribute to postal operations. 

However, we continue to view the relationship between military service 

and postal operations as indirect because the activities performed while 

serving in the military did not directly contribute to the daily operations of 

the Postal Service at the time the military service was rendered. The 

Secretary of the Treasury and Director of OPM also provided certain 

clarifications with respect to their policy positions and beliefs.

Background Public Law 108-18 was enacted after we reported on the results of our 

review of an analysis of the funded status of the Postal Service’s CSRS 

pension obligations that OPM prepared at our request.12 This act adopted 

the administration’s proposal that the Postal Service be responsible for 

funding the value of benefits attributable to military and volunteer service 

of all employees first hired into civilian service after June 30, 1971, and a 

pro-rata share of those benefits for employees hired before the July 1, 1971, 

effective date of the Postal Reorganization Act (PRA).13

In order to determine the funded status of the Postal Service’s CSRS 

obligations, OPM estimated the portion of the Civil Service Retirement and 

Disability Fund (CSRDF) that was attributable to the Postal Service, taking 

into consideration all past CSRS-related payments to CSRDF by the Service 

and its employees, including earnings on those payments, and the Service’s 

pro-rata share of all CSRS-related payments from CSRDF, including 

benefits attributable to military service, since July 1, 1971.

12See GAO-03-448R.

13For purposes of its initial and subsequent analyses, OPM estimated this pro-rata share of 

benefits by first allocating an employee’s total creditable military service based on the prorata amount of civilian service the employee accrued both before and after the effective date 

of PRA. OPM’s methodology also assumed that the Postal Service should be responsible for 

(1) the effect of post-1971 general pay increases and increasing benefit accrual rates on the 

final amount of military service benefits at retirement, including those military service 

credits allocated to the federal government, and (2) a proportional amount of post-1971 

annuitant cost-of-living adjustments.
Page 9 GAO-04-281 Postal Pension Funding Reform

The act also requires that the Postal Service begin funding the portion of 

CSRS dynamic normal cost not otherwise funded with employee 

withholdings. When calculated on a dynamic basis, normal cost represents 

an amount of money that if set aside during employees’ working years will, 

with investment earnings, be sufficient to cover future benefits and 

expenses when due, so long as the plan’s economic and demographic 

assumptions hold true. Dynamic normal cost reflects the effect of assumed 

future general pay increases and annuitant cost-of-living adjustments 

(COLA) on the amount of benefits that will be ultimately paid. 

Consequently, when a plan’s dynamic normal cost is fully funded, unfunded 

liabilities due to inflation in salaries and annuity payments are avoided. 

This contrasts with static normal cost, wherein assumed future general pay 

increases and annuitant COLAs are not considered. With static funding, 

new unfunded liabilities are created as salary and annuity inflation actually 

occur.14

There are different actuarial methods for determining dynamic normal 

cost. OPM calculates the dynamic normal cost for the CSRS and FERS 

plans using an actuarial cost method – aggregate entry age normal – which 

expresses normal cost as a level percentage of aggregate basic pay for a 

group of new plan entrants. Consequently, this method allocates costs 

without regard to how benefits actually accrue. It is calculated by dividing 

the actuarial present value of expected future benefits a group of new plan 

entrants is expected to receive after retirement by the actuarial present 

value of the group’s expected salaries over their working lives. OPM 

includes the past military service of new plan entrants in its calculation of 

expected future benefits. Consequently, OPM’s aggregate entry age normal 

method allocates the cost of military service benefits proportionally over 

an employee’s civilian career. For fiscal year 2003, the dynamic normal cost 

percentage for regular CSRS employees was 24.4 percent of basic pay, of 

which employees pay 7.0 percent and the Postal Service the remaining 17.4 

percent. Similarly, the dynamic normal cost of FERS, currently 11.5 percent 

of basic pay for regular employees, is fully funded with employer 

contributions of 10.7 percent and employee withholdings of 0.8 percent. 

Public Law 108-18 also requires that starting on September 30, 2004, the 

Postal Service begin funding any projected underfunding of its CSRS 

14P.L. 91-93 increased the required employer contributions and employee withholdings each 

from 6.5 percent to 7 percent of basic pay for regular CSRS employees, the total of which at 

that time approximated the CSRS static normal cost. 
Page 10 GAO-04-281 Postal Pension Funding Reform

obligations calculated by OPM as of September 30, 2003.15 This funding is to 

occur over a total of 40 years, with OPM recalculating the projected 

underfunding and the amortization payments as of the close of each 

subsequent fiscal year.16 In the event that a surplus exists as of September 

30, 2025,17 the Postmaster General is required to submit a report to the 

Congress describing how the Postal Service proposes to use such surplus. 

By changing the funding of military service benefits, the act made the 

Postal Service (1) retroactively responsible for funding a portion of military 

service benefits that have already been paid to annuitants and funded by 

Treasury on a pay-as-you-go basis and (2) prospectively responsible for 

funding some or all of the military service benefits expected to be paid to 

current and future Postal Service annuitants. The cumulative effect of this 

change in law was to shift responsibility for funding approximately $27 

billion (net present value as of September 30, 2002) in military service costs 

from taxpayers to postal ratepayers. 

Summary of Key Issues 

and Our Observations

The agencies made various arguments and assertions throughout their 

proposals, which we organize into the following four common, overarching 

issues: 

• relationship of military service to employing agency operations,

• historical funding of CSRS benefits payable to Postal Service employees,

• applicability of FERS cost allocation and funding methods to CSRS, and 

• funding of military service benefits by federal and other entities. 

15The law refers to the projected underfunding as a “supplemental liability” calculated as the 

estimated excess of the present value of future benefits over allocated assets and the 

present value of future normal cost contributions. In a fully funded plan, supplemental 

liabilities, as they are defined here, typically occur when the plan incurs actuarial losses 

resulting from such things as lower than expected investment returns or actual 

demographic experience of the participants (i.e., retirement, disability, death) being less 

favorable than was previously assumed.

16A similar definition in the FERS statute applies to the Postal Service, the most significant 

difference being that any supplemental liability is amortized over a period of 30 years. 

17Or at an earlier date when OPM determines that all CSRS Postal Service employees have 

retired.
Page 11 GAO-04-281 Postal Pension Funding Reform

The agencies’ positions reflect their own perceptions of what is fair to the 

taxpayers and ratepayers and how the Postal Service should be treated visà-vis other federal agencies and considering its mandate to be selfsupporting. As stated previously, in assessing the agencies' positions, we 

considered the accuracy of the various assertions presented, those aspects 

of equity and consistency raised by the agencies, the Postal Service's 

unique role in the financing of CSRS and FERS benefits, and its status as a 

self-supporting agency. The agencies’ positions with respect to each of 

these issues, as well as our observations on them, are presented below. We 

presented the agencies’ positions in the order that best framed the issue at 

hand. 

Relationship of Military 

Service to Employing 

Agency Operations 

Postal Service Position Military service has no relation to Postal Service operations, on which 

postal rates are based, and, in fact, had no relation to the operations of the 

former Post Office Department. Each of the federal employment services – 

military and civilian – have separate compensation, retirement benefit, and 

other benefits programs. Furthermore, the use of military service in the 

calculation of CSRS retirement benefits is a matter beyond the control of 

employer agencies. 

OPM and Treasury Position Receiving credit for past military service is a civilian retirement benefit that 

Postal Service employees receive just like other benefits, such as cost-ofliving increases on annuitant benefit payments. Furthermore, individuals 

retiring from the Postal Service receive CSRS credit for their military 

service only because of their employment with the Postal Service.

GAO Observations To a large extent, whether or not an employee’s military service has any 

relationship to agency operations is a function of whether or not the 

Congress requires that agencies fund a portion of the costs related to this 

service. The positions noted above go beyond mandated financial 

responsibilities and seek to first define more specifically the nature and 
Page 12 GAO-04-281 Postal Pension Funding Reform

extent of this relationship before deciding on whether postal ratepayers or 

taxpayers should fund CSRS military service benefits. 

Clearly, any service that is creditable towards a CSRS or FERS benefit but 

is rendered while employed by an entity other than the Postal Service has 

no direct relationship to the Service’s operations. This includes military 

service, service performed while employed by another agency and covered 

by CSRS or FERS, and service covered by another of the federal 

government’s defined benefit retirement plans, but is subsequently credited 

towards a CSRS or FERS benefit upon an employee’s acceptance of an 

appointment to a covered position and meeting other requirements.18 In 

addition to the uniformed services, a number of other federal agencies have 

compensation systems and benefit programs that are separate from those 

covering Postal Service employees. Having a retirement system that covers 

so many civilian employees and permitting the transfer of service between 

federal retirement systems19 promotes the portability of benefits, and so 

eases the movement of employees to other positions within the federal 

government. 

The crediting of military service towards a civilian service retirement 

benefit has been a feature of CSRS since it was established in 1920 and of 

FERS since it was established in 1986. This feature is one of many that 

collectively constitute a plan of benefits that defers a portion of an 

employee’s total compensation until retirement. Agencies and other 

entities whose employees are covered by CSRS and FERS have no control 

over the features offered, among them employee elections such as whether 

to provide a survivor benefit to a spouse, because the plan’s provisions are 

established by the plan sponsor, which in this case is the federal 

government. 

OPM and Treasury view military service of federal employees as related to 

employing agency operations by virtue of the fact that credit for such 

service is a feature of the CSRS and FERS plans in which the employees 

18 These requirements may include employees making deposits for their share of the costs of 

the transferred service and waiving any right to benefits under their predecessor retirement 

system.

19For example, some reciprocal transfer is permitted between the CSRS and FERS plans and 

the Foreign Service and the Board of the Federal Reserve Plans. However, the plan 

sponsored by the Tennessee Valley Authority is one example of a plan that does not accept 

the transfer of CSRS and FERS service.
Page 13 GAO-04-281 Postal Pension Funding Reform

participate. They further note that it is only because an employee serves in 

a covered civilian position for a minimum of 5 years that the employee’s 

military service can be used in the calculation of a CSRS or FERS benefit. 

The Postal Service’s statements suggest a view of military service as 

involving the performance of duties unrelated to the delivery of the mail 

and further imply that any related compensation – including retirement 

benefits – should be paid for by the taxpayer. Defining this relationship is 

particularly important for the Postal Service because the costs associated 

with its retirees’ service credits earned while employed by any other entity 

and which are not funded by the retiree while employed by the Postal 

Service must be passed onto postal ratepayers. This contrasts to those 

agencies that receive the vast majority of their funding through 

appropriations, where taxpayers ultimately fund all benefits regardless of 

whether and to what extent agencies recognize employee retirement costs 

in their budgets. One can reasonably argue that the cost of military service 

benefits would more equitably be borne by the entity that benefited from 

the military service (Department of Defense), which, in essence, would 

mean that taxpayers would ultimately bear these costs. 

Historical Funding of 

the CSRS Benefits 

Payable to Postal 

Service Employees

OPM and Treasury Position The funding of military service benefits by the Treasury Department was a 

feature of a funding methodology established by law in 1969 that did not 

require employer agencies to fund the full cost of all benefits not otherwise 

funded by employees. The prior funding mechanism for the Postal Service 

under CSRS (including the special treatment of military service) was 

developed in piecemeal fashion that never fully addressed all of the factors 

that affect the costs of the system. The special treatment of military service 

that applied to Postal Service employees can be viewed as more of an 

historic accident than a deliberate policy choice. This is supported by the 

fact that each time a comprehensive system for funding federal annuities 

was developed there was no special treatment of military service. In view 

of the long history of congressional action, it is reasonable to assume that 

the Congress may have taken action to address the issues of excess interest 
Page 14 GAO-04-281 Postal Pension Funding Reform

earnings and the costs of military service, even if OPM had not identified 

the problems with the static funding methodology. 

Postal Service Position Since 1969 the Treasury Department has been responsible for funding 

CSRS benefits attributable to military service. The Treasury Department 

remained responsible for funding these benefits for employees of all 

federal agencies even after laws had been subsequently enacted to make 

the Postal Service responsible for additional retirement costs attributable 

to its decisions and actions that result in increases in employee pay on 

which benefits are computed. Retroactively making the Postal Service 

responsible for funding military service benefits would result in a cost 

transfer of $27 billion to postal ratepayers, the great majority of which has 

already been paid for by Treasury. Furthermore, approximately 90 percent 

of the cost of military service was earned before the Postal Service was 

created in 1971.

GAO Observations The fact that the Congress had not acted until just recently to make the 

Postal Service responsible for funding the creditable military service of its 

employees is taken by the opposing parties to mean different things, which 

they assert, not surprisingly, support their respective positions. Both 

parties acknowledge that, prior to P.L. 108-18, when previously presented 

with the opportunity to reconsider the Postal Service’s funding of its 

employees’ CSRS benefits, the Congress chose to leave Treasury 

responsible for funding all CSRS military service benefits. 

The Postal Service contends that the passage of successive legislation 

relating to the financing of its CSRS costs without ever requiring that it 

fund CSRS military service costs was the Congress’s way of reaffirming its 

intention of having the Treasury fund these costs for Postal Service 

employees just as they do now for all other federal agency employees. OPM 

and Treasury contend that the piecemeal fashion with which the Congress 

made the Postal Service responsible for funding an increasing share of the 

CSRS benefits of its employees constitutes a pattern that indicates the 

Congress could have eventually made the Service responsible for military 

service costs. 

It is difficult to discern or even infer from the legislative history of the laws 

that preceded P.L. 108-18 any particular policy choice that can be seen as 

indicative of the Congress’s future intentions or predictive of what 

ultimately led to enactment of P.L. 108-18. Any legislative action must be 
Page 15 GAO-04-281 Postal Pension Funding Reform

viewed within the context of the particular facts and circumstances that 

existed at the time the Congress was considering specific legislation, 

including budgetary and fiscal considerations. For these reasons, we 

consider both parties’ arguments and assertions in connection with this 

point to be speculative and inconclusive.

With respect to the Postal Service’s assertion that approximately 90 percent 

of the cost of military service was earned before the Service was created in 

1971, we asked OPM to calculate the additional cost to the Treasury of 

making it responsible for the entire cost of benefits attributable to all 

military service estimated to have been rendered before 1972 by both 

former and current employees of the Postal Service. OPM estimated the 

additional cost to be approximately 75 percent of the $27 billion total cost 

to Treasury to fund all CSRS military service benefits.20

Based on our review of the documentation provided by the Postal Service’s 

actuarial consultants, it appears that the Service’s assertion was meant to 

convey that approximately 90 percent of the military service in years 

allocated to it by OPM’s pro-rata methodology was estimated to have 

occurred before 1972.21

Applicability of FERS 

Cost Allocation and 

Funding Methods to 

CSRS

20OPM’s calculations assume that Treasury is responsible for the effect of post-1971 general 

pay increases and increasing benefit accrual rates on the final amount of military service 

benefits at retirement and a proportional amount of post-1971 annuitant COLAs on these 

benefits. Furthermore, as a matter of clarification, the $27 billion figure is not the total value 

of military service benefits for Postal Service employees covered by CSRS and who retired 

after 1971. Rather, it is the additional cost to the Treasury beyond what Treasury is already 

responsible for under OPM’s P.L. 108-18 pro-rata methodology.

21OPM’s data indicates that approximately 94 percent of the military service in years 

rendered by employees who retired between fiscal years 1972 and 2002 was estimated to 

have been rendered before fiscal year 1972.
Page 16 GAO-04-281 Postal Pension Funding Reform

OPM and Treasury Position The payment of military service costs for Postal Service employees is 

consistent with the funding of FERS, the funding system on which the new 

law was patterned. Although the method for funding CSRS benefits prior to 

P.L. 108-18 did not require the Postal Service to fund the cost of military 

service, it also did not contemplate that the actuarial gains or losses of the 

retirement system would be attributed to the Postal Service. Consequently, 

the Postal Service should not benefit from the positive experience of the 

CSRDF without assuming the other responsibilities that come with an 

approach that funds the full cost of all benefits, including military service. 

Postal Service Position There is no identity between FERS funding and CSRS funding. FERS was 

created on a dynamically funded basis to phase out CSRS and to establish a 

more limited federal employment benefits program that would be fully 

funded by employees and employer agencies. CSRS is a totally different 

program from FERS, with different benefits and levels of contribution. In 

fact, CSRS was never fully funded by employees and employer agencies, 

with the exception of the Postal Service. Therefore, a change in funding 

methods that allows the Postal Service to receive credit for its share of 

higher than expected investment returns on contributions it made in 

accordance with the prior funding method does not justify the transfer of 

military service costs. There is no basis to substantiate this rationale either 

in accepted actuarial or financial practice.

GAO Observations The agencies present opposing views on whether FERS funding 

requirements can or should be applied to CSRS benefits. Whether or not 

the obligation to fund military service benefits should be linked with the 

benefit of higher than expected investment returns is crucial to their 

respective arguments. There are numerous similarities and differences 

between CSRS and FERS,22 one difference being the manner and extent to 

22Various publicly available documents exist that compare and contrast the features and 

funding of CSRS and FERS, and provide a detailed history of what led to enactment of the 

Federal Employees’ Retirement System Act of 1986. For more information, see the 

following: (1) The Federal Employees’ Retirement System Act of 1986, R. G. Schreitmueller, 

Transactions of the Society of Actuaries, 1988 Vol. 40 PT 1, (2) Federal Civilian and 

Military Retirement Systems, E. C. Hustead and T. Hustead, Pensions in the Public Sector, 

Pension Research Council, The Wharton School of the University of Pennsylvania, (3) U.S. 

General Accounting Office, Proposed Civil Service Supplemental Retirement System, 

128278 (Washington, D.C.: Oct. 28, 1985), and (4) U.S. General Accounting Office, Overview 

of Federal Retirement Programs, GAO/T-GGD-95-172 (Washington, D.C.: May 22, 1995). 
Page 17 GAO-04-281 Postal Pension Funding Reform

which the full cost of plan benefits have been funded, including military 

service benefits. The fact that there are currently differences between 

CSRS and FERS benefits and funding requirements does not preclude 

changing how the Postal Service’s contributions are calculated under CSRS 

to a method similar to FERS. That said, we also did not find any 

requirement that past military service be included in the dynamic normal 

cost factor used for funding purposes in order for the Postal Service to be 

treated as a separate employer for purposes of financing CSRS and, thus, 

benefit from past investment gains. In fact, there are actuarial methods that 

would fund the cost of military service benefits in a manner different than 

the one OPM currently uses. Therefore, there is nothing that inextricably 

links the past investment experience of the CSRDF to how military service 

benefits are funded. 

Funding of Military 

Service Benefits by 

Federal and Other 

Entities

Postal Service Position No agency other than the Postal Service – including other self-supporting 

agencies – fully funds the cost of its employees’ CSRS benefits, including 

military service benefits. Furthermore, private sector companies are not 

responsible for funding military service costs. 

OPM and Treasury Position With respect to the argument that it is not fair to ask the Postal Service to 

finance the cost of military service because it would be the only agency 

required to do so, the fact that Treasury funds CSRS benefits attributable to 

military service rather than employer agencies merely shifts the timing of 

when the contributions are made and whether they are charged to a 

Treasury appropriation or to agency budgets. In either case, the costs 

would still ultimately be borne by the taxpayer. In contrast, one of the 

primary goals of the Postal Reorganization Act was to ensure that all of the 

Postal Service’s costs are recovered through postal revenues, not taxpayer 

dollars. Therefore, all pension costs for employees that are attributable to 

service after the reorganization should be borne by the Postal Service.
Page 18 GAO-04-281 Postal Pension Funding Reform

GAO Observations There are numerous government entities whose programs are required by 

law to be financed by the users of their services and that pay less than the 

portion of the CSRS dynamic normal cost not otherwise paid for by 

employee withholdings, including military service costs. These include the 

Federal Deposit Insurance Corporation (FDIC) and the Pension Benefit 

Guaranty Corporation (PBGC). 

However, there have also been a few entities that have either been required 

by law or have voluntarily chosen to fund the dynamic normal cost of 

employees who retained CSRS or FERS coverage. For example, the 

Metropolitan Washington Airports Act of 198623 required that the 

Metropolitan Washington Airports Authority (MWAA) pay the difference 

between the dynamic normal cost of CSRS benefits (including military 

service costs) and the contributions made by those career civilian 

employees of the Federal Aviation Administration who transferred to 

MWAA with the leasing of the Metropolitan Washington Airports in 1986. In 

addition, the Power Marketing Administrations (PMA)24 agreed to recover 

the dynamic normal cost of CSRS (including military service costs) through 

their power rates prospectively beginning in fiscal year 1998.25 The PMAs 

agreed to do so in response to a series of reports we issued.26

One might reasonably argue that the Postal Service should be treated like 

other agencies with respect to its funding of pension costs. However, the 

fact that other federal entities are not currently fully funding the 

23Pub. L. No. 99-500, title VI, secs. 6005, 6008, 100 Stat. 1783, 1783-373, 1783-375, 1783-382; 

Pub. L. No. 99-591, title VI, secs. 6005, 6008, 100 Stat. 3341, 3341-376, 3341-378, 3341-385.

24The PMAs are part of the Department of Energy (DOE) and were established to sell and 

transmit electricity generated mainly from federal hydropower facilities and are required to 

be generally self-supporting.

25The PMAs also agreed to recover the dynamic normal cost for the postretirement health 

benefits available to eligible retirees through the Federal Employees Health Benefits 

Program (FEHBP).

26See the following General Accounting Office products: (1) Power Marketing 

Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities, 

GAO/AIMD-96-145 (Washington, D.C.: Sept. 19, 1996), (2) Federal Electricity Activities: The 

Federal Government’s Net Cost and Potential for Future Losses, GAO/AIMD-97-110 and 

110A (Washington, D.C.: Sept. 19, 1997), (3) Federal Power: Options for Selected Power 

Marketing Administration’s Role in a Changing Electricity Industry, GAO/RCED-98-43, 

(Washington, D.C. March 6, 1998) and (4) Power Marketing Administrations: Repayment 

of Power Costs Needs Closer Monitoring, GAO/AIMD-98-164 (Washington, D.C.: June 30, 

1998).
Page 19 GAO-04-281 Postal Pension Funding Reform

government’s share of CSRS normal costs does not necessarily support the 

argument that the Postal Service should not fund them. Likewise, it does 

not necessarily support the argument that other agencies start paying for 

these costs. Rather, it merely demonstrates the inconsistent treatment of 

agencies in this regard. 

Our long-standing position has been that employer agencies should fund 

the dynamic cost of the government’s retirement programs not otherwise 

funded with employee withholdings and deposits.27 We also observed on 

numerous occasions that, as a result of charging less than the dynamic cost 

of CSRS not otherwise provided by employee withholdings, agencies 

whose operations are intended to be self-supporting receive large subsidies 

that are not recognized in the cost of their goods and services.28 However, 

our previous recommendations and observations did not specifically 

address whether the cost of military service benefits should be included as 

part of a dynamic normal cost factor. Nor did we examine the issue of 

whether the entity that benefited from the service should ultimately pay for 

any related benefits. Additionally, with the exception of self-supporting 

agencies that pay the dynamic cost of these benefits, taxpayers ultimately 

fund the benefits, regardless of whether these costs are included in 

individual agency budgets. Therefore, charging the self-supporting 

agencies’ customers for the government’s share of the dynamic normal cost 

of pension benefits results in real savings to the taxpayers and, therefore, is 

not just a change in the timing and source of funding. 

Regarding the Postal Service’s statement that private sector companies are 

not responsible for military service costs, it is true that private sector 

companies are not required to give credit for past military service in their 

defined benefit pension plans. However, it should also be noted that the 

taxes these companies pay to the general fund of the Treasury are used to 

27For example, see the following General Accounting Office products: (1) Federal 

Retirement Systems: Unrecognized Costs, Inadequate Funding, Inconsistent Benefits, GAOFPCD-77-48 (Washington, D.C.: Aug. 3, 1977), (2) Need for Overall Policy and Coordinated 

Management of Federal Retirement Systems, GAO/FPCD-78-49 (Washington, D.C.: Dec. 29, 

1978), and (3) Overview of Federal Retirement Programs, GAO/T-GGD-95-172 (Washington, 

D.C.: May 22, 1995). 

28For example, see the following General Accounting Office products: (1) Need for 

Recognition of the Full Cost of Retirement Benefits for Federal Work Force, GAO-FPCD-79-

49 (Washington, D.C.: Apr. 11, 1979), (2) Federal Retirement Issues, 109874 (Washington, 

D.C.: July 12, 1979), and (3) Analysis of Grace Commission Proposals To Change the Civil 

Service Retirement System, GAO-GGD-85-31 (Washington, D.C.: Feb. 13, 1985).
Page 20 GAO-04-281 Postal Pension Funding Reform

pay for various costs incurred by the federal government, including the 

military service benefits of military retirees and those employees who 

retired from agencies other than the Postal Service. The Postal Service is 

exempt from paying any corporate income taxes.

Observations on 

Alternative Military 

Service Cost Allocation 

Approaches

The OPM and Treasury proposal presented five possible approaches for 

allocating the cost of benefits attributable to military service between the 

Treasury and the Postal Service. The Postal Service’s position is that 

taxpayers, not postal ratepayers, should be responsible for the full cost of 

CSRS military service benefits, and it did not offer any other funding 

alternatives as part of its military service funding proposal. 

The information from the OPM and Treasury proposal is reprinted below in 

table 1. OPM calculated the estimated cost to the Treasury of each 

approach using the pro-rata approach to allocating military service set 

forth in P.L. 108-18 as the baseline.29

29The OPM and Treasury proposal estimates were calculated using CSRS-wide demographic 

assumptions. The use of Postal Service-specific demographic assumptions in the calculation 

of the present value of future benefits and future normal cost and other contributions 

produces slightly different results. The ultimate cost of any particular alternative is 

determined once all benefits and other expenses have been paid to Postal Service 

annuitants. 
Page 21 GAO-04-281 Postal Pension Funding Reform

Table 1: Estimated Costs to Treasury of Alternative Allocation Approaches 

Source: Based on data provided by OPM.

a

Reference to “post-71” and “pre-1971” mean post June 30, 1971, and pre July 1, 1971, respectively.

b

The total estimated additional cost to the Treasury of the “Postal Service pays all” alternative does not 

agree with the “Treasury pays all” alternative because the baseline pro-rata alternative did not result in 

an equal split of costs between the Postal Service and Treasury.

OPM’s P.L. 108-18 pro-rata approach requires that the Postal Service fund 

(1) all CSRS military service benefits of employees hired into a civilian 

position after June 30, 1971, and (2) a pro-rata share of these benefits for 

employees hired before July 1, 1971. OPM estimated this pro-rata share of 

benefits by first allocating an employee’s total creditable military service 

based on the ratio of pre-1971 civilian service to the total civilian service 

which the employee accrued both before and after the effective date of the 

Postal Reorganization Act. OPM’s methodology also assumed that the 

Postal Service should be responsible for (1) the effect of post-1971 general 

pay increases and increasing benefit accrual rates on the final amount of 

military service benefits at retirement, including those military service 

credits allocated to the federal government, and (2) a proportional amount 

of post-1971 annuitant cost-of-living adjustments. These aspects of OPM’s 

methodology apply to the second, third, and fourth funding alternatives 

presented in the OPM and Treasury proposal. The other two alternatives – 

Treasury pays the entire cost of military service or Postal Service pays the 

entire cost after September 30, 2002 – have the responsible agency funding 

all CSRS benefits attributable to military service, including all annuitant 

COLAs. Appendix B of the OPM and Treasury proposal provides examples 

of how an example retiree’s benefit payment would be allocated into 

civilian and military service portions and how the federal government’s 

Alternative Postal Service responsibilitya

Total estimated 

additional cost to 

Treasury (in billions)

Postal Service pays all All military service for post-71 

retirees

$ (20.7)b

P.L. 108-18: Postal Service 

pays a pro-rata share

All military for post-71 hires, 

pro-rata share for pre-71 hires

 $ 0

Treasury pays for pre-1971 

hires

All military for post-71 hires, 

no military for pre-71 hires

$ 7.1

Postal Service pays post9/30/02 military service 

benefits

Only for military service 

benefits paid in the future

$ 16.6

Treasury pays all No military service, past or 

future

$ 27.2
Page 22 GAO-04-281 Postal Pension Funding Reform

share of those amounts would be determined for each of the funding 

alternatives. 

The total estimated additional cost to the Treasury for each funding 

alternative is equal to the difference between the projected funded status – 

or “supplemental liability” – of the current law pro-rata approach with that 

of each alternative. Appendix C of the OPM and Treasury proposal provides 

the net asset, present value of future benefits, and present value of future 

contributions components of the “supplemental liability” for each funding 

alternative.

In addition to providing the total impact of each funding alternative on the 

Treasury as compared to the current law pro-rata approach, the OPM and 

Treasury proposal also provides their views of the strengths or limitations 

of the alternatives. Most of the commentary in this section of the OPM and 

Treasury proposal repeats assertions and arguments presented elsewhere. 

However, we believe some clarification of the following statements made 

in the first funding alternative is needed: 

“Because military service only becomes creditable at the time when an employee actually 

retires, it would not be unreasonable to charge Postal Service for the entire amount of 

military service for all employees who retired from the Postal Service after June 30, 1971. It 

was only because these employees retired from the Postal Service that they received credit 

for their military service.”

“Civil Service rules required that to receive a regular retirement benefit the employees must 

have at least five years of civilian service and then attain additional age and service 

requirements.” 

The rules governing the crediting of military service are established in law 

and regulation. Generally, military service can be used in the computation 

of any annuity after having completed 5 years of civilian service and if the 

following three conditions are met: (1) the military service was active and 

terminated under honorable conditions, (2) the military service was 

performed before separating from a civilian position covered by CSRS, and 

(3) the employee makes any required deposits. 

The OPM and Treasury statement that an employee must meet additional 

age and service requirements beyond the first 5 years to receive a regular 

(voluntary) retirement benefit is accurate, as is the statement that an 

employee must retire – in this case from the Postal Service – in order for 

military service to be counted in the computation of an annuity benefit. 

However, an employee is entitled to receive a disability retirement benefit 
Page 23 GAO-04-281 Postal Pension Funding Reform

at any age with 5 years of civilian service and a deferred annuity beginning 

at age 62 with 5 years of civilian service. Once employees meet the 

minimum years of civilian service necessary to be entitled to any type of 

annuity and meet the conditions listed above, they are entitled to have all of 

their military service included in the computation of their annuity.

For purposes of determining how best to allocate CSRS military service 

benefits, it is important to note that OPM assumed that employees render 

military service prior to when they first enter civilian service. This leads to 

the presumption that the military service credits of many of the Postal 

Service’s retirees were already creditable towards an annuity by the time 

the Service commenced operations in 1971.30 Yet, for purposes of 

estimating the Postal Service’s share of the CSRS portion of CSRDF assets 

and the actuarial present value of future benefits, OPM allocated the years 

of creditable military service of former and current Postal Service 

employees proportionally over the employees’ civilian career. 

For example, an employee who retired in 1991 with 10 years of civilian 

service before July 1, 1971, and 20 years after June 30, 1971, would have 

two-thirds of any military service allocated to the Postal Service, even 

though OPM assumes that all military service was rendered before the 

employee was hired into a covered civilian position. Consequently, this 

example employee’s military service would have been creditable towards a 

civilian pension benefit before the Postal Service commenced operations. 

The OPM and Treasury proposal did not include an allocation alternative 

that reflects the extent to which military service became creditable after 

the Postal Service commenced operations. 

The scoring of each alternative approach to funding military service hinges 

on how Postal Service would spend any additional savings. The Postal 

Service was required by P.L. 108-18 to submit a proposal detailing how it 

would expend any savings accruing to it after fiscal year 2005 as a result of 

enactment of P.L. 108-18. In that separate proposal, the Postal Service 

provided two alternatives to spending any savings. The first alternative 

assumes the responsibility for funding the CSRS military service benefits of 

its current and former employees will return to the Treasury, while the 

other alternative assumes that the Postal Service will retain this 

responsibility as defined under P.L. 108-18. Consequently, we present our 

30Due to limitations in the data readily available to it, OPM also assumed that all 

creditable civilian service occurred without breaks in between.
Page 24 GAO-04-281 Postal Pension Funding Reform

estimates of the budgetary implications of only these two military service 

funding alternatives in our companion report on the results of our 

mandated review of the Postal Service’s savings plan proposal. This report 

is entitled Postal Pension Funding Reform: Issues Related to the Postal 

Service’s Proposed Use of Pension Savings, GAO-04-238.

Conclusion The agencies made various arguments as to which agency – Postal Service 

or Treasury – should fund the cost of CSRS military service benefits. We 

made various observations that considered the accuracy of the various 

assertions presented, those aspects of equity and consistency raised by the 

agencies, the Postal Service's unique role in the financing of CSRS and 

FERS benefits, and its status as a self-supporting agency. Ultimately, the 

Congress must make this decision. Should the Congress decide that the 

Postal Service should be responsible for funding CSRS military service 

benefits attributable to its employees, the Congress should then decide the 

extent to which these benefits should be attributed to the Postal Service 

and perhaps to other self-supporting agencies. Even if the Congress 

decides that self-supporting agencies should not be required to fund CSRS 

military service benefits, the Congress should still consider whether these 

agencies should be required to fund the dynamic normal cost of their CSRS 

employees’ benefits that excludes the military service component.

The OPM and Treasury proposal provided five alternative allocation 

approaches; however, none of their approaches included an allocation 

alternative that reflects the extent to which the Postal Service’s current and 

former employees had, by the time the Service commenced operations in 

1971, completed the 5 years of civilian service needed to be entitled to have 

their past military service credits used in the computation of an annuity. 

This alternative would provide an estimate of Postal Service’s obligation 

that includes only military service benefits that became creditable after the 

Postal Service commenced operations.

Matters for 

Congressional 

Consideration

To help promote full and consistent funding of CSRS benefits among selfsupporting federal agencies, we suggest that the Congress consider

• requiring all self-supporting federal entities to pay the dynamic cost of 

employee pension benefit costs not paid for by employee contributions 

and deposits, excluding military service costs, and 
Page 25 GAO-04-281 Postal Pension Funding Reform

• treating all self-supporting federal entities consistently with regard to 

whatever decision is made on Postal Service funding of the military 

service component of CSRS employee benefits.

Recommendation for 

Executive Action

If the Congress decides that the Postal Service should be responsible for 

military service costs associated with its employees, we recommend that 

OPM provide the Congress with estimates of the additional cost to the 

Treasury of making the Postal Service responsible only for employee 

military service that became creditable after June 30, 1971. 

Agency Comments and 

Our Evaluation

Postal Service In written comments on a draft of this report the Postmaster General 

expressed concern with what he saw as an inference that the Postal Service 

should be responsible for the cost of an employee’s military service 

because it hires the employee knowing of the past military service. The 

Postmaster General also reaffirmed the Postal Service’s commitment to the 

fundamental policy of veterans’ preferences.

Our report did not imply that knowing of past military service was a 

relevant factor in determining whether the Postal Service should bear this 

cost, but rather simply stated the fact that the right to receive credit for 

past military service arises only as a result of employment in a civilian 

position covered by CSRS or FERS. 

The Postmaster General also stated that our suggestion that the Congress 

consider requiring all self-supporting entities to fund the dynamic costs of 

employee pension benefits is not an issue for the Postal Service because it 

began doing so as of April 2003. Our report states that there are other selfsupporting agencies that are not required to fund military service costs and 

do not otherwise fully fund the dynamic normal cost of their CSRS 

employees’ benefits as the Postal Service is now required to do. We 

highlighted this difference in funding requirements to illustrate an 

inconsistency that the Congress may want to consider as it contemplates 

CSRS employee benefits funding by the Postal Service. The Postmaster 

General’s written comments are reprinted in appendix III. 
Page 26 GAO-04-281 Postal Pension Funding Reform

OPM and Treasury In written comments on a draft of this report, the Secretary of the Treasury 

and Director of OPM disagreed with our statement that there is no direct 

relationship between an employee’s prior military service and the 

operations of the Postal Service. They stated that granting credit for 

military service in calculating civilian pensions enables the Postal Service 

to recruit and retain veterans, who provide direct benefits to the operations 

of their employer. We agree that the crediting of military service facilitates 

the recruitment and retention of veterans who, subsequent to their military 

service, contribute to postal operations. However, we continue to view the 

relationship between military service and postal operations as indirect 

because the activities performed while serving in the military did not 

directly contribute to the daily operations of the Postal Service at the time 

the military service was rendered.

In their comment letter, the Secretary of the Treasury and Director of OPM 

also provided certain clarifications with respect to their policy positions 

and beliefs. For example, they stated that their estimate, made at our 

request, of the value of benefit costs due to military service before 1971 

includes all increases in the value of those benefits that resulted from pay 

raises granted by the Postal Service, but that they do not endorse this 

method, especially insofar as it permits Postal Service pay increases to 

then increase the cost allocated to the Treasury. We do not endorse this or 

any other cost allocation method. As stated in our report, our position is 

that the Congress needs to decide whether the Postal Service should fund 

the cost of military service attributable to military service of its current and 

former employees. If the Congress decides that the Postal Service should 

fund these costs, then it needs to decide which method to use in allocating 

costs to the Postal Service. The written comments from the Secretary of 

the Treasury and Director of OPM are reprinted in appendix IV. 

We are sending copies of this report to the Director of the Office of 

Personnel Management, the Postmaster General, the Secretary of the 

Treasury, the Director of the Office of Management and Budget, and other 

interested parties. We are also sending this report to the Honorable John M. 

McHugh, House of Representatives, as the Chairman of the Special Panel 

on Postal Reform and Oversight, House Committee on Government 

Reform. The report is also available at no charge on GAO’s home page at 

http://www.gao.gov. If you have any questions about this report, please 

contact Linda Calbom, Director, Financial Management and Assurance, at 

(202) 512-8341, or Robert Martin, Acting Director, at (202) 512-6131. You 
Page 27 GAO-04-281 Postal Pension Funding Reform

may reach them by e-mail at calboml@gao.gov and martinr@gao.gov. Other 

key contributors to this report were Joseph Applebaum, Richard 

Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Scott McNulty, and 

Brooke Whittaker.

David M. Walker

Comptroller General

of the United States
Page 28 GAO-04-281 Postal Pension Funding Reform

Appendix I

Report from OPM and Treasury AAppenednxidexiIs
Appendix I

Report from OPM and Treasury

Page 29 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 30 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 31 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 32 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 33 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 34 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 35 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 36 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 37 GAO-04-281 Postal Pension Funding Reform
Appendix I

Report from OPM and Treasury

Page 38 GAO-04-281 Postal Pension Funding Reform
Page 39 GAO-04-281 Postal Pension Funding Reform

Appendix II

Report from the United States Postal Service ApendxiI
Appendix II

Report from the United States Postal Service

Page 40 GAO-04-281 Postal Pension Funding Reform
Appendix II

Report from the United States Postal Service

Page 41 GAO-04-281 Postal Pension Funding Reform
Appendix II

Report from the United States Postal Service

Page 42 GAO-04-281 Postal Pension Funding Reform
Appendix II

Report from the United States Postal Service

Page 43 GAO-04-281 Postal Pension Funding Reform
Appendix II

Report from the United States Postal Service

Page 44 GAO-04-281 Postal Pension Funding Reform
Page 45 GAO-04-281 Postal Pension Funding Reform

Appendix III

Comments from the United States Postal 

Service ApendxiI
Appendix III

Comments from the United States Postal 

Service

Page 46 GAO-04-281 Postal Pension Funding Reform
Page 47 GAO-04-281 Postal Pension Funding Reform

Appendix IV

Comments from OPM and Treasury ApendxiIV
Appendix IV

Comments from OPM and Treasury

Page 48 GAO-04-281 Postal Pension Funding Reform

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