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[Senate Report 108-35]
[From the U.S. Government Publishing Office]

108th Congress                                                   Report
                                 SENATE
 1st Session                                                     108-35

======================================================================

                                     

   POSTAL CIVIL SERVICE RETIREMENT SYSTEM FUNDING REFORM ACT OF 2003

                               __________

                              R E P O R T

                                 of the

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                 S. 380

   TO AMEND CHAPTER 83 OF TITLE 5, UNITED STATES CODE, TO REFORM THE 
   FUNDING OF BENEFITS UNDER THE CIVIL SERVICE RETIREMENT SYSTEM FOR 
 EMPLOYEES OF THE UNITED STATES POSTAL SERVICE, AND FOR OTHER PURPOSES

                 April 8, 2003.--Ordered to be printed
                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas
           Michael D. Bopp, Staff Director and Chief Counsel
                Ann C. Fisher, Professional Staff Member
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                   Susan E. Propper, Minority Counsel
                     Darla D. Cassell, Chief Clerk

108th Congress                                                   Report
                                 SENATE
 1st Session                                                     108-35

======================================================================

 
   POSTAL CIVIL SERVICE RETIREMENT SYSTEM FUNDING REFORM ACT OF 2003

                                _______
                                

                 April 8, 2003.--Ordered to be printed

                                _______
                                

Ms. Collins, from the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                         [To accompany S. 380]

    The Committee on Governmental Affairs, to which was 
referred the bill (S. 380) to amend chapter 83 of title 5, 
United States Code, to reform the funding of benefits under the 
Civil Service Retirement System for employees of the United 
States Postal Service, and for other purposes, having 
considered the same, reports favorably thereon with an 
amendment and recommends that the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. Purpose and Summary..............................................1
 II. Background.......................................................2
III. Legislative History..............................................5
 IV. Section-by-Section Analysis......................................6
  V. Evaluation of Regulatory Impact..................................9
 VI. CBO Cost Estimate...............................................10
VII. Changes to Existing Law.........................................14

                         I. Purpose and Summary

    S. 380, the Postal Civil Service Retirement System Funding 
Reform Act of 2003, is a bipartisan bill to reform the funding 
of benefits under the Civil Service Retirement System for 
employees of the Postal Service, and for other purposes.
    S. 380 would require USPS to contribute annually to the 
Civil Service Retirement and Disability Fund (CSRDF) on behalf 
of employees covered by CSRS an amount equal to the dynamic 
normal cost of CSRS minus the amount contributed by employees. 
(The dynamic normal cost of CSRS is currently estimated to be 
equal to 24.4 percent of payroll. Employees covered by CSRS are 
required to have 7 percent of pay withheld and deposited in the 
CSRDF. Thus, the required USPS contribution would be equal to 
17.4 percent of payroll.) Because the dynamic normal cost of 
CSRS includes the effects of future employee 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.
    Under S. 380, OPM would be required to estimate any 
``supplemental liability'' of the Postal Service with respect 
to CSRS benefits earned by current or former USPS employees and 
to amortize this supplemental liability over 40 years. In 
addition, S. 380 would include the value of CSRS benefits 
attributable to military service as a financial obligation of 
the Postal Service in the calculation of the Postal Service's 
supplemental liability.
    The Reform Act expresses the ``Sense of Congress'' that the 
savings accruing to the USPS will be sufficient to allow the 
USPS to fulfill its commitment to hold postage rates stable 
until at least 2006. The Committee also notes that some portion 
of the savings should be used to address the Postal Service's 
substantial unfunded post-retirement health obligations; and 
that none of the savings should be used in the computation of 
bonuses to Postal Service executives or managers.
    S. 380 requires that the Secretary of the Treasury shall 
specify the manner and extent to which the savings accruing as 
a result of the enactment of the Act shall be used to pay down 
postal debt. The bill also requires the USPS to submit a report 
to Congress by December 31, 2003, describing how it proposes to 
address its obligations relating to unfunded post-retirement 
health care costs of current and former employees. The Postal 
Service also would be required to send a report to GAO, the 
Senate Governmental Affairs Committee and House Government 
Reform and Oversight Committee detailing how much of the future 
savings attributable to the legislation the Postal Service 
would use for debt repayment, pre-funding of post-retirement 
health care costs for postal employees, capital improvements, 
holding rates stable, and other purposes.

                             II. Background

                     OVER-FUNDING OF CSRS LIABILITY

    On November 1, 2002, the Office of Personnel Management 
(OPM) had good news for the Postal Service (USPS). A review of 
USPS payments to the civil service retirement fund for pension 
obligations to employees on board before 1984 revealed a far 
more positive picture than had previously been believed. USPS--
unlike any other federal agency--is required to pay into the 
fund an amount that approximates the full cost of its 
employees' participation in the Civil Service Retirement System 
(CSRS). Because pension investments have been earning interest 
at a higher rate than presumed in the statutory funding 
formula, OPM reported that the Postal Service's deferred 
liability for pension obligations was only $5 billion instead 
of $32 billion. According to OPM, if USPS continues to make 
payments based on the latter figure, the liability will 
eventually be over-funded by $78 billion. OPM stated that, 
``the major reason for the projected over-funding is due to the 
excess interest earned by the CSRS fund; that is, interest 
earnings in excess of the 5 percent that was assumed under the 
statutory funding method.''
    Because of the potential over-funding, and the fact that 
needed changes in scheduled payments cannot occur without 
changes to existing laws, OPM sent a legislative proposal to 
Congress to rectify the situation, while ``protecting employee 
interests and the integrity of the [postal] retirement 
system.'' According to OPM, there are two elements of the 
Postal Service's financing of CSRS benefits that distinguish 
the agency from other federal agencies, and which are important 
factors in the potential over-funding of CSRS benefits for its 
employees. First, the Postal Service is responsible only for 
CSRS benefits that were earned by USPS employees after June 30, 
1971. Consequently, a significant proportion of the Postal 
Service's early contributions to the Civil Service Retirement 
and Disability Fund have remained in the Fund for a number of 
years, during which interest has accrued. Second, due to a 
series of laws passed between 1989 and 1993, USPS is required 
to pay for the increases in CSRS pensions that result from 
annual cost-of-living adjustments. As a result, the Postal 
Service--unlike any other federal agency--is required to pay 
into CSRDF an amount that approximates the full cost of the 
CSRS. It is these two factors, in combination with the interest 
earnings in excess of the assumed 5 percent rate of return, 
that have led to projected pension contributions and interest 
earnings exceeding the value of CSRS benefits owed to USPS 
retirees and survivors.
    According to OPM, the assumed interest rate used in CSRS 
financing has been set at 5 percent since 1972. However, while 
OPM uses a 5 percent interest rate in its static valuation of 
CSRS, it currently uses a nominal interest rate of 6.75 percent 
when valuing the liabilities of the CSRS on a dynamic basis. 
The dynamic valuation of CSRS liabilities is a more accurate 
measure of the present value of future CSRS annuities. Since 
the enactment of the Omnibus Budget Reconciliation Act (OBRA) 
of 1990--which required the Postal Service to pay for the 
increase in CSRS liabilities resulting from COLAs granted since 
1971 and to amortize the cost of future COLAs--USPS has been 
paying the full dynamic cost of its CSRS liabilities.
    S. 380 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. 
It also makes the Postal Service responsible for retirement 
benefits due to its CSRS enrollees as a result of prior 
military service, an obligation the Postal Service has agreed 
to assume. The Committee notes that the Reform Act's treatment 
of these payments by the Postal Service is not an adoption of 
any position by the Committee on whether any agency or 
Department of the executive branch should have responsibility 
for these costs attributable to its employees covered by CSRS.

                      DELAYED POSTAL RATE INCREASE

    The Reform Act expresses the ``Sense of Congress'' that the 
savings accruing to the USPS will be sufficient to allow the 
USPS to fulfill its commitment to hold postage rates stable 
until at least 2006. This issue is of high importance to the 
mailing community. Upon introduction of S. 380, Postmaster 
General Jack Potter announced that enactment of the bill would 
allow the Postal Service to hold off raising rates until 2006, 
rather than 2004, as it had planned. The Committee believes it 
is especially important in these difficult economic times to 
note the significant adverse impact such an untimely postal 
rate increase would have on the $900 billion mailing industry, 
which employs nine million Americans in fields as diverse as 
magazine and newspaper publishing, direct mailing, printing and 
paper production. Postal rates have already risen three times 
in the past two years.

                             DEBT REDUCTION

    The deteriorating state of the Postal Service's finances 
has been a source of concern to the Committee. Over the past 
few years, the Postal Service has come perilously close to 
reaching its statutory debt limit of $15 billion. The Postal 
Service Board of Governors has made it clear that it will not 
seek authorization from Congress for a higher borrowing limit, 
as it has done in the past. The Postal Service deserves 
recognition for decreasing its debt level by $200 million this 
past year. With enactment of this legislation, the Postal 
Service will be able to use part of the savings to pay down its 
debt. To ensure that a portion is indeed used for debt 
repayment, the Committee approved language requiring the 
Secretary of the U.S. Treasury to specify a plan that the 
Postal Service must follow to use these savings to reduce its 
debt.

                   UNFUNDED HEALTH CARE COSTS REPORT

    The Postal Service has a statutory obligation to fund a 
portion of the health insurance premiums of its current and 
future retirees--an obligation estimated to be between $40 and 
$50 billion as of September 30, 2002. To this point, the Postal 
Service has not indicated how this obligation and future costs 
will be funded. For that reason, the Committee included 
language in S. 380 that requires USPS to report to Congress by 
December 31, 2003 on how it proposes to address this currently 
unfunded obligation and future costs for the purpose of (1) 
funding, (2) financial statement reporting, and (3) rate-
setting. Furthermore, the bill requires GAO to prepare and 
submit a written evaluation of the USPS proposal. It is 
anticipated that the White House Commission on the Postal 
Service will also address the issue of how best to satisfy this 
outstanding obligation. The Committee looks forward to 
receiving the Commission's report in July.

                     DISPOSITION OF SAVINGS REPORTS

    The Postal Service has stated that, because of the savings 
it would realize under the provisions of this legislation, it 
would not have to file a new rate case seeking to increase 
postal 4 rates until the end of 2005, for rates that would go 
into effect in 2006. However, the benefits of this legislation 
will continue to be realized by the Postal Service for many 
years. It is the view of this Committee that the substantial 
reductions in the Postal Service's obligation to the Treasury 
occasioned by this bill warrant continued oversight by Congress 
to ensure that a portion of these savings are used to meet 
other key obligations of the Postal Service.
    For this reason, S. 380 requires that, before filing its 
rate case in 2005 and at least eight months before filing any 
subsequent rate case, the Postal Service must submit a report 
to this Committee and to the House Committee on Government 
Reform and Oversight recommending how much of the future 
savings the Postal Service would receive as a result of this 
legislation should be used for the following: debt repayment to 
the U.S. Treasury; prepaying to the U.S. Treasury post-
retirement health care costs for postal employees; capital 
investments to improve productivity and cost saving; keeping 
postal rates stable; and other purposes. The recommendations 
should also take into consideration, as appropriate, the report 
of the President's Commission on the United States Postal 
Service.
    The report required by this legislation is to be 
accompanied by a letter from the Secretary of the Treasury 
commenting on the recommendations, and must also be transmitted 
to the General Accounting Office (GAO) for its review and 
evaluation. GAO will have 45 days to prepare and submit an 
evaluation of the Postal Service's report to this Committee and 
the House Committee on Government Reform on Oversight. The 
Postal Service shall not take any action to implement the 
recommendations in the report until 90 days after the report 
has been submitted. This timetable will allow the Committees to 
take actions that might be necessary to respond to the proposed 
allocation of savings outlined in the report before the Postal 
Service begins the process of preparing a new rate case.

                        III. Legislative History

    S. 380, the Postal Civil Service Retirement System Funding 
Reform Act of 2003, was introduced by Sen. Susan M. Collins of 
Maine and Sen. Thomas R. Carper of Delaware on February 12, 
2003 and referred to the Governmental Affairs Committee. The 
bill was cosponsored by Sen. Joseph Lieberman of Connecticut, 
Sen. Ted Stevens of Alaska, Sen. George Voinovich of Ohio, Sen. 
Richard Durbin of Illinois, Sen. Sam Brownback of Kansas, Sen. 
Robert Bennett of Utah, Sen. George Allen of Virginia, Sen. 
Mark Pryor of Arkansas, Sen. Norm Coleman of Minnesota, Sen. 
James Jeffords of Vermont, and Sen. John Sununu of New 
Hampshire.
    The Committee met on March 5, 2003, to consider S. 380. A 
manager's amendment in the nature of a substitute was adopted 
by voice vote.
    The manager's amendment, offered by Chairman Collins and 
cosponsored by Ranking Member Lieberman and Senators Carper and 
Voinovich, made technical changes to improve upon the clarity 
of certain definitions within the bill. It also added a new 
reporting requirement for the Postal Service.
    On that same date, the Committee ordered the bill reported 
by voice vote, with nomembers present dissenting. Senators 
present were Stevens, Coleman, Bennett, Fitzgerald, Sununu, Akaka, 
Durbin, Carper, Lautenberg and Collins.

                    IV. Section-by-Section Analysis

    To accompany the Manager's Amendment to S. 380.

Section 1. Short Title

    This section would provide that the bill may be cited as 
the ``Postal Civil Service Retirement System Funding Reform Act 
of 2003''.

Section 2. Civil Service Retirement System

    This section would amend provisions of subchapter III of 
chapter 83 of title 5, United States Code, to reform the 
provisions for funding retirement benefits for employees of the 
United States Postal Service under the Civil Service Retirement 
System.
    Paragraph (1) of subsection (a) would amend section 8331 of 
title 5, by changing the term defined in paragraph (17) of that 
section from ``normal cost'' to ``normal cost percentage.'' The 
insertion of the phrase ``and standards (using dynamic 
assumptions)'' after ``actuarial practice'' changes the method 
of computing normal cost from a static basis to a dynamic one. 
While the term ``normal cost'' was defined in section 8331, it 
had not actually been used in chapter 83 since the last 
reference to it was repealed some years ago.
    Paragraph (2) would redefine ``Fund balance'' to provide 
consistency between financial reporting and actuarial 
computations, thereby ensuring proper accounting for 
liabilities.
    Paragraphs (3) and (4) would make technical changes.
    Paragraph (5) would add a definition of the term ``dynamic 
assumptions,'' incorporating the language used in the 
definition in paragraph (9) of section 8401, which is used in 
the administration of the Federal Employees' Retirement System.
    Subsection (b) would amend the provisions of section 
8334(a)(1) to change the provisions applicable to employer 
retirement contributions made by the Postal Service. The 
amendments would exempt the Postal Service from the requirement 
to make agency contributions that match employee deductions, 
and would provide that the Postal Service employer contribution 
will be a percentage of basic pay equal to the difference 
between the product of the normal cost percentage for the type 
of employee (i.e., regular employee, law enforcement officer, 
etc.), and the basic pay of that employee, and the product of 
the percentage of basic pay deducted from the employee's basic 
pay, and the basic pay of that employee.
    Subsection (c) would provide for computation of any 
retirement costs not covered by past or future Postal Service 
or employee payments to the Retirement Fund, and for 
amortization of those costs by Postal Service payments over a 
40 year amortization schedule. It would completely eliminate 
the existing provisions of section 8348 dealing with Postal 
Service payments.
    Paragraph (1) would rewrite section 8348(h). It would 
repeal the existing provisions requiring Postal Service 
payments for costs ``attributable to any benefits payable from 
the Fund 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 of the 
United States Code, or any administrative action by the Postal 
Service taken pursuant to law, which authorizes increases in 
pay on which benefits are computed.''
    As amended, section 8348(h)(1)(A) would establish a new 
concept, the ``Postal supplemental liability,'' which is 
essentially the actuarial present value of retirement 
obligations for Postal Service employees, less the sum of 
several items, including the present value of future employer 
and employee payments to the Retirement Fund; the portion of 
the Fund balance attributable to payments to the Fund by the 
Postal Service; benefit payments attributable to the Postal 
Service, and any other appropriate amount determined by the 
Office of Personnel Management under generally accepted 
actuarial practices and accounting principles.
    Section 8348(h)(1)(B) would set the basis for inclusion of 
the value of benefits based upon military and volunteer service 
(i.e. Peace Corps, VISTA, etc.), providing for proration in the 
case of postal employees hired before the Postal Reorganization 
Act was enacted on June 30, 1971. It would exclude military 
service in the computation of the amount of the annual Treasury 
payment required to pay for costs attributable to military 
service.
    Section 8348(h)(2) would require the Office of Personnel 
Management (OPM) to determine an appropriate amortization 
schedule, including a series of equal annual installments 
commencing September 30, 2004, providing for the liquidation of 
the Postal supplemental liability by September 30, 2043. Then, 
for each fiscal year beginning after September 30, 2003, 
through the fiscal year ending September 30, 2038, OPM would be 
required to redetermine the Postal supplemental liability at 
the close of the fiscal year and to establish a new 
amortization schedule, including a series of installments 
commencing on September 30 of the subsequent fiscal year, 
providing for the liquidation of that redetermined Postal 
supplemental liability by September 30, 2043. For each fiscal 
year beginning after September 30, 2038, OPM would be required 
to redetermine the Postal supplemental liability at the close 
of the fiscal year and to establish a new amortization 
schedule, including a series of equal annual installments 
commencing on September 30 of the subsequent fiscal year, 
providing for the liquidation of that redetermined Postal 
supplemental liability over five years. All amortization 
schedules established under this section would be required to 
be set in accordance with generally accepted actuarial 
practices and principles, based on the dynamic interest rate. 
The Postal Service would be required to pay the amounts 
determined by OPM, no later than the date established by OPM.
    Section 8348(h)(3) would provide that in computing the 
amount of any payment under any other subsection of section 
8348 that is based upon the amount of the Retirement Fund's 
unfunded liability, such payment shall be computed disregarding 
any portion of the unfunded liability that OPM determines will 
be liquidated by the Postal Service's amortization payments.
    Paragraph (2) of subsection (c) would repeal the existing 
provisions of section 8348(m), that currently require Postal 
Service payments based upon retirement costs attributable to 
retirement cost-of-living increases.
    Subsection (d) would prospectively repeal provisions of the 
Omnibus Budget Reconciliation Act of 1990 requiring additional 
Postal Service payments to the Retirement Fund, and provide a 
rule of construction for those repealed provisions.

Section 3. Disposition of Savings Accruing to the USPS

    Subsection (a) defines ``postal debt'' as the outstanding 
obligations of the USPS.
    Subsection (b) requires that the Secretary of the Treasury, 
in consultation with the USPS, shall determine the extent to 
which savings generated by the Act shall be used to pay down 
postal debt to the Treasury.
    Paragraph (1) of subsection (c) states that each fiscal 
year OPM will compute the amount of savings accruing to the 
USPS as a result of the Act.
    Paragraph (A) provides that, no later than July 31, 2003, 
OPM shall formulate a plan for calculating these savings, 
specifically describing the actuarial methods and assumptions 
they will use.
    Paragraph (B) requires that OPM's plan be submitted to the 
Senate Governmental Affairs Committee and the House Government 
Reform Committee.
    Paragraph (3) requires that the plan be formulated in 
consultation with the Postal Service and shall allow the USPS 
the opportunity to request a review of the plan by the Board of 
Actuaries of the Civil Service Retirement System. The Board 
will have the authority to make any necessary adjustments to 
the plan.
    Paragraph (4) states that nothing in this subsection or 
subsection (b) shall be considered to apply to any fiscal year 
beginning on or after October 1, 2007.
    Subsection (d) requires the Postal Service to issue a 
report relating to the period after the enactment of the Act 
and before October 1, 2007 that details the amount of the 
savings applied toward reducing the postal debt, and the size 
of the postal debt before and after the application of 
subsection (b).
    Paragraph (1) of subsection (e) states that it is the Sense 
of Congress that the savings accruing to the USPS as a result 
of this Act shall be sufficient to hold rates stable until at 
least 2006.
    Paragraph (2) states that it is the Sense of Congress that 
some portion of the savings should be used to address the 
USPS's substantial unfunded health care obligations for its 
current and former employees.
    Paragraph (3) states that it is the Sense of Congress that 
none of these savings should be used in the computation of 
bonuses for executives or managers.
    Paragraph (1) of subsection (f) requires the USPS to 
prepare a report related to unfunded health care costs and 
submit it to the President and Congress no later than December 
31, 2003.
    Paragraph (A) states that the report should describe how 
the USPS proposes to address its unfunded post-retirement 
health care costs of current and former employees.
    Paragraph (B) states that the report should outline how 
prior and future actuarial accrued costs for post-retirement 
health care benefits and the amounts necessary to prefund those 
costs are treated for purposes of financial statement reporting 
and establishing rates of postage and fees for postal services.
    Paragraph (2) suggests that the USPS should consider the 
recommendations of the White House Commission on the Postal 
Service when preparing its report under subsection (f).
    Paragraph (3) provides that not later than 60 days after 
USPS submits its health care report, required by subsection (f) 
of paragraph (1), to Congress and the President, the GAO shall 
prepare and submit a written evaluation of the report to the 
Senate Committee on Governmental Affairs and the House 
Government Reform Committee.
    Paragraphs (1) (A) and (B) of subsection (g) states that as 
of September 30, 2025, or whenever the last CSRS covered 
employee retires, if OPM, after consulting with the Postmaster 
General (PMG) determines, in the process of conducting their 
annual computation, that the Postal Service has not only paid 
off its CSRS liability, but has in fact overpaid into the CSRS 
fund, then OPM shall alert the Postmaster General as to the 
size of the overpayment and the PMG shall then submit a report 
to Congress describing how that overpayment should be used. If 
necessary, the PMG shall submit draft legislation to Congress.
    Paragraph (1) of subsection (h) states that no later than 
December 31, 2004, and after that date, not later than 8 months 
prior to the USPS filing a rate case, the Postal Service shall 
submit a report to the Senate Governmental Affairs Committee, 
House Government Reform and Oversight Committee and GAO making 
recommendations for the disposition of future savings accruing 
to the Postal Service as a result of the Act. The report shall 
be accompanied by a letter of comment from the Secretary of the 
Treasury.
    Paragraph (A) states that the report should describe 
whether, and to what extent, those savings should be used to 
address debt repayment, prefunding of post-retirement health 
care benefits, productivity and cost savings capital 
investments, maintaining postal rate stability, or any other 
matter.
    Paragraph (B) states that the report should take into 
consideration the findings of the President's Commission on the 
United States Postal Service.
    Paragraph (2) requires that GAO prepare, and submit to 
Congress, a written evaluation of the Postal Service's report 
not later than 45 days after the USPS submits their report.
    Paragraph (3) prohibits USPS from taking any action to 
implement their recommendations for disposition of the savings 
until 90 days after the report is submitted to Congress.

Section 4. Effective Date

    Subsection (a) requires that the Act take effect on the 
date of enactment.
    Subsection (b) requires that the Act shall only apply to 
pay periods beginning on or after the date of enactment of this 
Act.

                   V. Evaluation of Regulatory Impact

    S. 380 contains no intergovernmental or private-sector 
mandates as defined in UMRA and would impose no costs on state, 
local, or tribal governments.

                         VI. CBO Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 19, 2003.
Hon. Susan M. Collins,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
    Dear Ms. Chairman: The Congressional Budget Office has 
prepared the enclosed revised cost estimate for S. 380, the 
Postal Civil Service Retirement System Funding Reform Act of 
2003. This estimate supersedes the CBO estimate of S. 380 dated 
March 17, 2003. The previous version of the estimate contained 
an error in the discussion of the bill's on-budget costs. 
However, this error does not affect the on-budget or off-budget 
cost of the bill, so this revised cost estimate does not change 
CBO's estimate of the cost of enacting the legislation.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark 
Grabowicz and Geoffrey Gerhardt.
            Sincerely,
                                       Douglas Holtz-Eakin,
                                                          Director.
    Enclosure.

S. 380--Postal Civil Service Retirement System Funding Reform Act of 
        2003

    Summary: Enacting S. 380 would permanently reduce payments 
by the United States Postal Service (USPS) to the Civil Service 
Retirement and disability Fund (CSRDF) starting in 2003. CBO 
estimates that enacting the bill would result in net outlays of 
$17 billion over the 2003-2008 period, and about $40 billion 
over the 2003-2013 period. That estimate is the total budgetary 
impact of the proposal, combining both on-budget and off-budget 
effects. (USPS cash flows are considered off-budget.)
    Under the bill, the Postal Service would see its required 
payments to the CSRDF reduced by $3 billion to $5 billion a 
year. The legislation specifies that the Postal Service and the 
Department of the Treasury would determine how to apply the 
savings. CBO expects the Postal Service would use those savings 
to repay debt, delay future rate increases, and invest in 
capital projects or other activities to increase productivity.
    By reducing USPS payments to the retirement fund, CBO 
estimates the bill would lower the agency's costs (off-budget) 
by about $2 billion over the 2003-2008 period. We also estimate 
that enacting S. 380 would increase on-budget costs by about 
$19 billion over the same period. Thus the net effect of this 
legislation on the unified federal budget would be a cost of 
about $17 billion over the 2003-2008 period largely because on-
budget offsetting receipts--representing payments from the 
Postal Service to the CSRDF--would be reduced. Over the 2003-
2013 period, enacting S. 380 would combine off-budget savings 
of about $2 billion with on-budget costs of around $42 billion 
to produce a net cost of about $40 billion.
    S. 380 contains no intergovernmental or private sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on State, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 380 is shown in the following table. The 
costs of this legislation fall within budget functions 370 
(commerce and housing credit), 900 (net interest), and 950 
(undistributed offsetting receipts).

----------------------------------------------------------------------------------------------------------------
                                                     By fiscal year, in billions of dollars--
                                --------------------------------------------------------------------------------
                                   2003     2004    2005   2006   2007   2008   2009   2010   2011   2012   2013
----------------------------------------------------------------------------------------------------------------
                                           CHANGES IN DIRECT SPENDING

On-Budget Effects--CSRDF:
    Estimated Budget Authority.      3.5      2.7    3.0    3.0    3.2    3.6    3.8    4.2    4.6    4.8    5.2
    Estimated Outlays..........      3.5      2.7    3.0    3.0    3.2    3.6    3.8    4.2    4.6    4.8    5.2
Off-Budget Effects--Postal
 Servivce:
    Estimated Budget Authority.     -2.5     -0.6    0.8    0.3      0      0      0      0      0      0      0
    Estimated Outlays..........     -2.5     -0.6    0.8    0.3      0      0      0      0      0      0      0
Total Budget Effects:
    Estimated Budget Authority.      1.0      2.1    3.8    3.3    3.2    3.6    3.8    4.2    4.6    4.8    5.2
    Estimated Outlays..........      1.0      2.1    3.8    3.3    3.2    3.6    3.8    4.2    4.6    4.8    5.2
----------------------------------------------------------------------------------------------------------------
 Note.--Components may not add to totals because of rounding.

Basis of estimate

    For this estimate, CBO assumes that S. 380 will be enacted 
in the spring of 2003. CBO estimates that reducing the Postal 
Service's payments to the retirement fund would reduce the 
agency's off-budget costs by about $2 billion over the 2003-
2008 period, but enacting S. 380 would increase on-budget costs 
by about $19 billion over the same period. The net effect of 
this legislation on the unified federal budget would be a cost 
of about $17 billion over those six years. Over the 2003-2013 
period, enacting S. 380 would combine off-budget savings of 
about $2 billion with on-budget costs of around $42 billion to 
produce a net cost of $40 billion.
            Background
    Although the Postal Service is a federal agency, its 
financial operations are classified as being off-budget. 
Despite this treatment, federal budget documents present the 
net incomeof the agency in the budgetary totals. The Postal 
Service is required by law to set postage rates to cover its full 
costs. In fiscal year 2002, the Postal Service generated $68.1 billion 
in collections, mostly from postage and user fees, and had $67.4 
billion in expenses. The agency has the authority to borrow up to $15 
billion from the Treasury; at the end of fiscal year 2002, its 
outstanding debt with the Treasury stood at $11.9 billion.
    Postal employees particapate in the federal government's 
two main defined benefit pension programs. Those workers first 
hird prior to 1984 are covered by the Civil Service Retirement 
System (CSRS) while those first hired after 1983, as well as 
former CSRS workers who elected to change coverage, participate 
in the Federal Employee's Retirement System (FERS). In 2002, 
about 30 percent of the USPS workforce was covered by CSRS, and 
the rest were under FERS.
    The Postal Service and its employees each make payroll 
contributions toward both CSRS and FERS. For CSRS workers, both 
the standard agency and employee contribution rates are 7 
percent. For FERS employees, the agency contribution rate for 
most employees is 10.7 percent, while the employee rate is 0.8 
percent. Although CSRS provides more generous benefits than 
FERS, unlike FERS, CSRS is not a fully funded pension system, 
meaning that agency and employee contributions alone are not 
enough to finance the program's benefits. In an effort to make 
up the shortfall between contributions and benefits for its 
current and former employees, the Postal Service makes lump-sum 
payments to the retirement system each year. In 2002, those 
payments amounted to about $3.9 billion.
    The Office of Personal Management projects that, under 
current law, the Postal Service will eventually overfund 
pension obligations for its workers by as much as $71 billion. 
The projected overfunding is due primarily to higher-than-
expected returns on assets held in the CSRDF.
            On-budget effects
    S. 380 would change the way the Postal Service finances 
retirement benefits for many of its current and former 
employees. The proposal would replace two amortization payments 
the Postal Service now makes to CSRDF--amounting to a combined 
$4 billion in 2003 and is expected to grow to nearly $6 billion 
in 2013--with a new annual payment of $434 million over the 
next 40 years that would amortize the agency's estimated 
unfunded liability of about $5 billion. The net effect of 
changes in amortization payments is to reduce Postal Service 
payments to the CSRDF by $4 billion in 2003, $19.5 billion over 
the 2004-2008 period, and $43.5 billion over the 2004-2013 
period.
    The legislation also would replace the fixed contribution 
rate, which the Postal Serice currently makes for its 
approximately 225,000 employees covered by the CSRS, with a 
rate intended to pay the full normal cost of CSRS benefits 
(including military service credits). This change would 
effectively increase the Postal Service's contribution rate for 
most covered employees from 7 percent to 17.4 percent of 
payroll. In 2004, the first full year of contributions at the 
higher rate, CBO estimates that this would increase the 
agency's retirement contributions by nearly $1 billion, but 
that increase would gradually decline as the CSRS covered 
workers retire. Employee contribution rates for those in CSRS, 
as well as agency and employee contributions for those in the 
Federal Employee's Retirement System, would be unaffected by 
the legislation.
    The Postal Service is an off-budget entity and 
contributions and payments that it makes to the retirement 
trust fund are considered offsetting receipts. Reducing overall 
payments the Postal Service makes to the CSRDF would result in 
a reduction of on-budget receipts to the government. To the 
extent that the Postal Service uses its savings to reduce its 
debt to the Federal Financing Bank, on-budget interest receipts 
would also be lower. Assuming the changes made by S. 380 are 
effective in April 2003, CBO projects the net on-budget effect 
of the bill would be cost of $3.5 billion in 2003, and 
approximately $19 billion over the 2003-2008 period.
            Off-budget effects
    CBO estimates that enactment of S. 380 would reduce net 
expenditures of the USPS by $2 billion over the 2003-2008 
period.
    Estimated Effects on Postal Outlays for Fiscal Years 2003-
2006. The Postal Service's response to the change in its 
pension payments in uncertain, but CBO anticipates that the 
agency will use the savings from S. 380 to:
           Repay $2 billion of its outstanding debt in 
        fiscal year 2003;
           Invest $1 billion in fiscal year 2003 and $2 
        billion in 2004 in additional capital projects or other 
        activities aimed at improving productivity; and
           Delay the next postal rate increase--
        anticipated late in fiscal year 2004, until fiscal year 
        2007.
    CBO expects that the Postal Service would repay about $2 
billion of its outstanding debt to the Treasury in 2003. That 
action would reduce the agency's interest expenses by about $60 
million annually, beginning in fiscal year 2004. Because the 
USPS pays an averageinterest rate on that debt of only 3 
percent, CBO expects the agency would seek to make capital investments 
with much of the savings that could more effectively contribute to 
lowering its operating costs and thus contribute to a postponement of 
its next rate increase. For fiscal years 2005 and 2006, CBO estimates 
such investments would lead to operational savings of about $300 
million and $600 million per year, respectively.
    In July 2002, the Postal Service raised the price of a 
first-class stamp from $0.34 to $0.37 and raised rates for 
other classes of mail. Based on information from the Postal 
Service and on postal revenues to date in 2003, CBO estimates 
that this rate increase will raise over $3 billion in 
additional revenue a year. The CBO baseline assumes a similar 
rate increase late in fiscal year 2004, including a price of 
$0.40 for a first-class stamp.
    We estimate that delaying the next rate increase would 
result in a small loss of revenue in fiscal year 2004 and 
losses of roughly $3.5 billion in each of fiscal years 2005 and 
2006. A delay in the rate increase also would increase 
operating expenses because the Postal Service would have to 
deliver higher volumes of mail than otherwise expected. (When 
rates go up, mail volume goes down.) Based on information from 
the Postal Service about the relationship between price 
increases, mail volumes, and operating costs, we expect that 
this increase in expenses would be about a billion dollars 
annually in 2005 and 2006.
    CBO estimates that those changes in postal revenues and 
expenses would result in lower net outlays of $2.5 billion in 
fiscal year 2003 and $600 million in 2004, with net increases 
in outlays of $800 million in 2005 and $300 million in 2006.
    Estimated Effects on Postal Outlays in Fiscal Years after 
2006. After 2006, CBO assumes that the Postal Service will use 
a combination of rate increases and controls on spending to 
ensure that its income covers the costs of its services, as 
required by law and as assumed in the CBO baseline. Thus, S. 
380 would have no effect on net postal outlays after fiscal 
year 2006 when we expect the next rate increase would occur.
    Intergovernmental and private-sector impact: S. 380 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Previous CBO Estimates: This cost estimate of S. 380 
supersedes and replaces the estimate for the same bill that CBO 
released on March 17, 2003. The previous cost estimate 
contained an error in the discussion under ``Basis of 
Estimate'' of the legislation's on-budget effects. The earlier 
estimate said that the on-budget effect of replacing the Postal 
Service's current amortization payments to the CSRDF would be 
to reduce offsetting receipts by $3.5 billion in 2003, $15.5 
billion over the 2004-2008 period, and $38 billion during the 
2004-2013 period. Those figures were incorrect. CBO estimates 
the change in amortization payments would reduce receipts by $4 
billion in 2003, $19.5 billion during the 2004-2008 period, and 
$43.5 billion over the 2004-2013 period. This correction does 
not change CBO's estimate of either the on-budget or off-budget 
cost of enacting the legislation. The numbers shown in the 
table and cited in the ``Summary'' are unchanged.
    On March 14, 2003, CBO transmitted a cost estimate for H.R. 
735, the Postal Civil Service Retirement System Funding Reform 
Act of 2003, as ordered reported by the House Committee on 
Government Reform on March 6, 2003. CBO estimated that enacting 
that bill would result in net outlays of $7.1 billion over the 
2003-2008 period and $7.2 billion over the 2003-2013 period. 
Estimated outlays for H.R. 735 are lower because, for fiscal 
years after 2005, that bill would require that savings 
resulting from reduced payments to the CSRDF be held in escrow 
and remain unavailable for obligation unless authorized by 
subsequent legislation. S. 380 does not contain any such 
requirement.
    Estimate prepared by: Federal costs--Postal Service: Mark 
Grabowicz; CSRDF: Geoffrey Gerhardt; impact on state, local, 
and tribal governments: Victoria Heid Hall; impact on the 
private sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                      VII. Changes to Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing laws made by 
S. 380 as reported are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                           UNITED STATES CODE

             TITLE 5--GOVERNMENT ORGANIZATION AND EMPLOYEES

                          PART III. EMPLOYEES

                   Subpart G. Insurance and Annuities

                         CHAPTER 83. RETIREMENT

                Subchapter III. Civil Service Retirement

Sec. 8331. Definitions

           *       *       *       *       *       *       *

          (17) [``normal cost''] ``normal cost percentage'' 
        means the entry-age normal cost computed by the Office 
        of Personnel Management in accordance with generally 
        accepted actuarial practice and standards (using 
        dynamic assumptions) and expressed as a level 
        percentage of aggregate basic pay;
          (18) [``Fund balance'' means the sum of--] ``Fund 
        balance''--
                  (A) [the investments of the Fund calculated 
                at par value; and] means the current net assets 
                of the Fund, as determined by the Office in 
                accordance with appropriate accounting 
                standards; and
                  (B) [the cash balance of the Fund on the 
                books of the Treasury; but does not include any 
                amount attributable to--] shall not include any 
                amount attributable to--
                          (i) the Federal Employees' Retirement 
                        System; or
                          (ii) contributions made under the 
                        Federal Employees' Retirement 
                        Contribution Temporary Adjustment Act 
                        of 1983 by or on behalf of any 
                        individual who became subject to the 
                        Federal Employees' Retirement System;

           *       *       *       *       *       *       *

          (27) ``Nuclear materials courier''--
                  (A) means an employee of the Department of 
                Energy, the duties of whose position are 
                primarily to transport, and provide armed 
                escort and protection during transit of, 
                nuclear weapons, nuclear weapon components, 
                strategic quantities of special nuclear 
                materials or other materials related to 
                national security; and
                  (B) includes an employee who is transferred 
                directly to a supervisory or administrative 
                position within the same Department of Energy 
                organization, after performing duties referred 
                to in subparagraph (A) for at least 3 years; 
                [and]
          (28) ``Government physician'' has the meaning given 
        that term under section 5948[.]; and
          (29) ``dynamic assumptions'' means economic 
        assumptions that are used in determining actuarial 
        costs and liabilities of a retirement system and in 
        anticipating the effects of long-term future--
                  (A) investment yields;
                  (B) increases in rates of basic pay; and
                  (C) rates of price inflation.

           *       *       *       *       *       *       *

Sec. 8334. Deductions, contributions, and deposits

    [(a)(1) The employing agency shall deduct and withhold from 
the basic pay of an employee, Member, Congressional employee, 
law enforcement officer, firefighter, bankruptcy judge, judge 
of the United States Court of Appeals for the Armed Forces, 
United States magistrate, Court of Federal Claims judge, member 
of the Capitol Police, member of the Supreme Court Police, or 
nuclear materials courier, as the case may be, the percentage 
of basic pay applicable under subsection (c). An equal amount 
shall be contributed from the appropriation or fund used to pay 
the employee or, in the case of an elected official, from an 
appropriation or fund available for payment of other salaries 
of the same office or establishment. When an employee in the 
legislative branch is paid by the Chief Administrative Officer 
of the House of Representatives, the Chief Administrative 
Officer may pay from the applicable accounts of the House of 
Representatives the contribution that otherwise would be 
contributed from the appropriation or fund used to pay the 
employee.]
    (a)(1)(A) The employing agency shall deduct and withhold 
from the basic pay of an employee, Member, congressional 
employee, law enforcement officer, firefighter, bankruptcy 
judge, judge of the United States Court of Appeals for the 
Armed Forces, United States magistrate judge, Court of Federal 
Claims judge, member of the Capitol Police, member of the 
Supreme Court Police, or nuclear materials courier, as the case 
may be, the percentage of basic pay applicable under subsection 
(c).
    (B)(i) Except in the case of an employee of the United 
States Postal Service, an equal amount shall be contributed 
from the appropriation or fund used to pay the employee or, in 
the case of an elected official, from an appropriation or fund 
available for payment of other salaries of the same office or 
establishment. When an employee in the legislative branch is 
paid by the Chief Administrative Officer of the House of 
Representatives, the Chief Administrative Officer may pay from 
the applicable accounts of the House of Representatives the 
contribution that otherwise would be contributed from the 
appropriation or fund used to pay the employee.
    (ii) In the case of an employee of the United States Postal 
Service, an amount shall be contributed from the appropriation 
or fund used to pay the employee equal to the difference 
between--
          (I) the product of--
                  (aa) the basic pay of that employee; and
                  (bb) the normal cost percentage applicable to 
                the employee category of that employee under 
                paragraph (1) (A); and
          (II) the product of--
                  (aa) the basic pay of that employee; and
                  (bb) the percentage applicable to that 
                employee under subsection (c) deducted from 
                basic pay under paragraph (1)(A).

           *       *       *       *       *       *       *

    [(m) A Member who has served in a position in the executive 
branch for which the rate of basic pay was reduced for the 
duration of the service of the Member to remove the impediment 
to the appointment of the Member imposed by article I, section 
6, clause 2 of the Constitution, or the survivor of such a 
Member, may deposit to the credit of the Fund an amount equal 
to the difference between the amount deducted from the basic 
pay of the Member during that period of service and the amount 
that would have been deducted if the rate of basic pay which 
would otherwise have been in effect during that period had been 
in effect, plus interest computed under subsection (e).]

           *       *       *       *       *       *       *

Sec. 8348. Civil Service Retirement and Disability Fund

           *       *       *       *       *       *       *

    [(h)(1) Notwithstanding any other statute, the United 
States Postal Service shall be liable for that portion of any 
estimated increase in the unfunded liability of the Fund which 
is attributable to any benefits payable from the Fund 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 Office of Personnel Management. The United 
States Postal Service shall pay the amount so determined to the 
Office in 30 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.]
    (h)(1)(A) In this subsection, the term ``Postal 
supplemental liability'' means the estimated excess, as 
determined by the Office of Personnel Management, of the 
difference between--
          (i) the actuarial present value of all future 
        benefits payable from the Fund under this subchapter 
        attributable to the service of current or former 
        employees of the United States Postal Service; and
          (ii) the sum of--
                  (I) the actuarial present value of deductions 
                to be withheld from the future basic pay of 
                employees of the United States Postal Service 
                currently subject to this subchapter under 
                section 8334;
                  (II) the actuarial present value of the 
                future contributions to be made under section 
                8334 with respect to employees of the United 
                States Postal Service currently subject to this 
                subchapter;
                  (III) that portion of the Fund balance, as of 
                the date the Postal supplemental liability is 
                determined, attributable to payments to the 
                Fund by the United States Postal Service and 
                employees of the United States Postal Service, 
                including earnings on those payments; and
                  (IV) any other appropriate amount as 
                determined by the Office in accordance with 
                generally accepted actuarial practices and 
                principles.
    (B)(i) In computing the actuarial present value of future 
benefits, the Office shall include the full value of benefits 
attributable to military and volunteer service for United 
States Postal Service employees first employed after June 30, 
1971, and prorated share of the value of benefits attributable 
to military and volunteer service for United States Postal 
Service employees first employed before July 1, 1971.
    (ii) Military service included in the computation under 
clause (i) shall not be included in computation of the payment 
required under subsection (g) (2).
    (2)(A) Not later than June 30, 2004, the Office of 
Personnel Management shall determine the Postal supplemental 
liability, as of September 30, 2003. The Office shall establish 
an amortization schedule, including a series of equal annual 
installments commencing September 30, 2004, which provides for 
the liquidation of such liability by September 30, 2043.
    (B) The Office shall redetermine the Postal supplemental 
liability as of the close of the fiscal year, for each fiscal 
year beginning after September 30, 2003, through the fiscal 
year ending September 30, 2038, and shall establish a new 
amortization schedule, including a series of equal annual 
installments commencing on September 30 of the subsequent 
fiscal year, which provides for the liquidation of such 
liability by September 30, 2043.
    (C) The Office shall redetermine the Postal supplemental 
liability as of the close of the fiscal year for each fiscal 
year beginning after September 30, 2038, and shall establish a 
new amortization schedule, including a series of equal annual 
installments commencing on September 30 of the subsequent 
fiscal year, which provides for the liquidation of such 
liability over 5 years.
    (D) Amortization schedules established under this paragraph 
shall be set in accordance with generally accepted actuarial 
practices and principles based on the dynamic interest rate.
    (E) The United States Postal Service shall pay the amounts 
determined under this paragraph for deposit in the Fund, with 
payments due not later than the date scheduled by the Office.
    (3) Notwithstanding any other provision of law, in 
computing the amount of any payment under any provision other 
than this subsection that is based upon the amount of the 
unfunded liability, such payment shall be computed disregarding 
that portion of the unfunded liability that the Office 
determines will be liquidated by payments under this 
subsection.

           *       *       *       *       *       *       *

                                
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