U.S. Postal Service: Action Needed to Address Unfunded Benefit Liabilities
Published: 2014-03-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USPS continues to be in a serious financial crisis, with insufficient revenue to cover its expenses and financial obligations as the volume of USPS's most profitable product, First-Class Mail, continues to decline. At the end of fiscal year 2013, USPS had about $100 billion in unfunded liabilities: $85 billion in unfunded liabilities for benefits, including retiree- health, pension, and workers' compensation liabilities, and $15 billion in outstanding debt to the U.S. Treasury—the statutory limit. These unfunded liabilities are a large and growing financial burden, increasing from 83 percent of USPS revenues in fiscal year 2007 to 148 percent of revenues in fiscal year 2013. Unfunded benefit liabilities represent estimated future benefit payments to current and retired employees for which USPS has not set aside sufficient money to pay. This testimony discusses (1) the extent to which USPS's benefit liabilities are unfunded and (2) the potential impacts of USPS's unfunded benefit liabilities absent action by Congress to address them and key policy issues for consideration. This testimony is based primarily on GAO's work over the past 4 years and updated USPS financial information for fiscal year 2013.
GAO has previously reported that a comprehensive package of legislative actions is needed so that USPS can achieve financial viability and assure adequate benefits funding for more than 1 million postal employees and retirees. GAO has also previously identified various approaches Congress could consider to restructure the funding of USPS retiree health benefits and pensions.
section_title: What GAO Found
paragraphs: The extent to which the U.S. Postal Service (USPS) has funded its liabilities varies due to different statutory funding requirements specific to each benefit program and USPS's financial means to make payments. For example, USPS has been required to prefund its pension benefit liability over decades, and as shown in the table below, its pension liability is 94 percent funded. Prefunding USPS's retiree health benefits began in 2007, and the liability is about half funded. In contrast, USPS funds its workers' compensation benefits on a pay-as-you-go basis, and the entire liability is unfunded. The largest unfunded liabilities, in order of decreasing size, are $48 billion for retiree health, $19 billion for pensions, and $17 billion for workers' compensation. The rules for calculating the amount that USPS must fund each year differ among the pension and retiree health programs, including variations in amortization periods, recognition of any surpluses, use of actuarially determined versus fixed payments, and actuarial assumptions.
Reasons for prefunding include fairly allocating costs between current and future ratepayers, protecting USPS's future viability, providing greater benefit security to employees and retirees, and protecting potential third parties.
Prefunding decisions involve trade-offs between USPS's current financial condition and its long-term prospects.
Congress needs to modify USPS's retiree health prefunding payments in a fiscally responsible manner, and USPS should prefund any unfunded retiree- health benefits liability to the maximum extent that its finances permit.
Lowering the retiree health funding target from 100 to 80 percent would have the effect of carrying a permanent unfunded liability.
USPS liabilities are estimated using assumptions for the federal workforce as a whole, rather than USPS-specific assumptions. GAO supports the use of the most accurate actuarial assumptions available, and if USPS-specific assumptions are used, that they be recommended by an independent body.

section_title: Letter
paragraphs: We appreciate the opportunity to discuss the U.S. Postal Service’s  (USPS) unfunded liabilities. USPS continues to be in a serious financial  crisis, with insufficient revenue to cover its expenses and financial  obligations, a continuing decline in profitable First-Class Mail volume,  increasing unfunded benefit liabilities, and borrowing limitations due to  having reached its $15 billion statutory debt limit. Attention to USPS’s  unfunded benefit liabilities is important, as they represent scheduled  future benefit payments to current and retired employees for which USPS  has not set aside sufficient money to pay. This testimony focuses on 1)  the extent to which USPS’s current benefit liabilities are unfunded, and 2)  the potential impacts of USPS’s unfunded benefit liabilities absent action  by Congress to address them as well as key policy issues for  consideration.
This testimony is based primarily on reports and testimonies we issued in  the past 4 years that examined USPS’s financial condition, including its  liabilities. The reports and testimonies cited in this statement contain  detailed information on the methods used to conduct our work. For this  testimony, we also updated USPS financial information with results from  fiscal year 2013, which ended September 30, 2013. The work upon which  this testimony is based was conducted in accordance with generally  accepted government auditing standards. Those standards require that  we plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: As table 1 shows, at the end of fiscal year 2013, USPS had about $100  billion in unfunded liabilities for pension, retiree health, and workers’  compensation benefits as well as outstanding debt. These unfunded  liabilities have increased by 62 percent since fiscal year 2007.
Since fiscal year 2007, USPS has experienced significant financial  challenges. USPS’s gap between expenses and revenues has grown  significantly. In fiscal year 2009, we returned USPS to our high-risk list  due, in part, to a projected loss of $7 billion—and an actual loss of over   Also, USPS did not make retiree health  $8.5 billion—in fiscal year 2010.benefit prefunding payments totaling $16.7 billion due during fiscal years  2011 through 2013. In addition, USPS’s outstanding debt to the U.S.  Treasury increased from $2.1 billion at fiscal year-end 2006 to its current  statutory borrowing limit of $15 billion.and unfunded liabilities have become a large and growing burden— increasing from 83 percent of USPS’s revenues in fiscal year 2007 to 148  percent of revenues in fiscal year 2013.
As shown in figure 1, USPS’s debt  USPS’s dire financial condition makes paying for these liabilities highly  challenging. In the short term, USPS lacks liquidity to fund needed capital  investments and cannot increase its liquidity through borrowing since  USPS has hit its $15 billion statutory debt limit. At the end of fiscal year  2013, USPS held unrestricted cash of $2.3 billion, which it states  represents approximately 9 days of average daily expenses. This level of  liquidity could be insufficient to support operations in the event of another  significant downturn in mail volume. In the long term, USPS will be  challenged to pay for its unfunded liabilities on a smaller base of First- Class Mail, its most profitable product. First-Class Mail volume has  declined 37 percent since it peaked in fiscal year 2001. In addition,  USPS’s five-year business plan projects this volume will continue  declining by about 5 to 6 percent annually.
section_title: USPS’s Funding of Its Benefit Liabilities Varies by Program
paragraphs: The extent to which USPS has funded its benefit liabilities varies as a  result of different statutory funding requirements specific to each benefit  program as well as USPS’s financial means to make funding payments.  For example, prefunding of USPS’s pension benefits has been required  over decades, and as a result, USPS’s pension liability is over 90 percent  funded. Prefunding USPS’s retiree health benefits began in 2007, and at  a fairly aggressive pace, and the liability is about half funded at present.  In contrast, under the Federal Employees Compensation Act (FECA),  USPS funds its workers’ compensation benefits on a pay-as-you-go  basis, pursuant to statutory requirements, so the entire FECA liability is  unfunded. Also, as discussed further below, the ongoing prefunding  requirements—i.e., the rules for calculating the amount that USPS must  pay each year—differ among the pension, retiree health, and workers’  compensation programs.
For each of the four post-employment benefit programs—Civil Service  Retirement System (CSRS), Federal Employees Retirement System  (FERS), retiree health, and workers’ compensation—table 2 illustrates, as  of the end of fiscal year 2013, USPS’s liability, the value of the assets that  have been set aside, the funded percentage, and the unfunded liability.  The funded percentages are 91 percent for CSRS, 101 percent (i.e., a  slight surplus) for FERS, 49 percent for retiree health, and 0 percent for  workers’ compensation. The unfunded liabilities, in order of decreasing  size, are $48 billion for retiree health, $19 billion for pensions, and $17  billion for workers’ compensation. These total to about $85 billion, which,  together with USPS’s debt to the Treasury of $15 billion, adds to the $100  billion of total debt and unfunded liabilities cited earlier.
subsections: section_title: What USPS’s Liabilities Represent
paragraphs: USPS’s benefit liabilities are actuarial estimates of the present value of a  portion of the future benefits projected to be paid under each program  based on formulas in current law. Specifically, for both the pension and  retiree health programs, the liability includes two pieces: (1) the present  value of all projected future benefits for current retirees and their  beneficiaries, plus (2) the present value of a portion of the projected  future benefits for current employees and their beneficiaries, based on  employees’ service to date (with each additional year of service adding to  the liability, such that approximately the full liability is accrued when  employees reach retirement).employee groups and other stakeholders, these liabilities do not include  any amounts for future USPS employees not yet hired or born. The  workers’ compensation liability represents the present value of all  projected future benefits for former employees who have sustained an  injury and are eligible for benefits; it does not include a provision for  projected future injuries to current employees.
Contrary to statements made by some  These liability measurements depend on a combination of economic and  demographic assumptions regarding such factors as future investment  returns, interest rates, inflation, salary increases, medical costs, and  longevity. These liability measurements inherently contain significant  degrees of uncertainty, and can change from year to year, both because  of actual experience differing from the assumptions and because of  changes to the assumptions themselves, which can occur in response to  emerging experience and changing conditions. As an example of the  sensitivity of these liabilities to changes in assumptions, USPS has  estimated that its $48 billion unfunded liability for retiree health benefits  could have ranged from $35 billion to $64 billion, solely by varying the  inflation rate by 1 percent in either direction.
USPS’s pension and retiree health liabilities are estimated using  demographic and pay-increase assumptions developed for the federal  workforce as a whole, rather than assumptions developed for the USPS  workforce in particular. Some have suggested that USPS’s benefit  liabilities may be overstated in that the use of USPS-specific assumptions  would result in a lower liability measurement.we support using the most accurate numbers possible. We suggested  that if USPS-specific assumptions are used, the assumptions should   In 2013, we testified that  continue to be recommended by an independent body (such as OPM’s  Board of Actuaries).
section_title: Different Funding Rules Apply to Different Programs
paragraphs: USPS’s ongoing prefunding contributions are governed by separate rules  applying to the funding of its CSRS, FERS, retiree health benefit, and  workers’ compensation liabilities. These separate rules include variations  in amortization periods, recognition of any surpluses, use of actuarially  determined versus fixed payments, and actuarial assumptions.
The Postal Accountability and Enhancement Act (PAEA) eliminated  USPS’s agency contributions for CSRS, as the USPS had a CSRS  surplus at that time. The surplus of $17 billion was transferred to the new  Postal Service Health Benefits Fund (PSHRBF) to begin prefunding  USPS’s retiree health liability. Under current law, USPS is not required  to make any prefunding contributions for CSRS prior to fiscal year 2017. If  USPS were to have an unfunded CSRS liability in 2017 (for example, if  the current unfunded CSRS liability of $20 billion persists), USPS would  have to begin making prefunding payments to eliminate the unfunded  liability by September 30, 2043, i.e., over a 27-year amortization period  from fiscal years 2017 to 2043. If USPS were to have a CSRS surplus as  of the close of any of the fiscal years ending in 2015, 2025, 2035, and  2039, the CSRS surplus would be transferred to the PSHRBF.
For FERS, USPS is annually required to contribute its share of the  “normal cost” plus an amortization payment toward any existing unfunded  liability. The normal cost is the annual expected growth in the liability  attributable to an additional year of employees’ service. The amortization  payment toward any unfunded liability is determined using a 30-year  amortization period. Since USPS has had a FERS surplus for a number  of years, it has not had to make any amortization payments, only its  normal cost payments. Current law does not provide any provision for  utilization of any FERS surplus, as discussed further in the next section.  USPS made FERS normal cost payments of $3.5 billion in fiscal year  2013.
subsections: section_title: Retiree Health
paragraphs: Unlike its pension liability, prior to 2007 USPS had been funding its retiree  health liability on a pay-as-you-go basis—an approach in which USPS  paid its share of premiums for existing retirees, with no prefunding for any  future premiums expected to be paid on behalf of current retirees and  employees. We have drawn attention to USPS’s retiree health benefit  liability over the past decade. In May 2003, the Comptroller General  testified that USPS’s accounting treatment—which reflected the pay-as- you-go nature of its funding—did not reflect the economic reality of its  legal liability to pay for its retiree health benefits, and that current  ratepayers were not paying for the full costs of the services they were  receiving. Consequently, the pension benefits being earned by USPS  employees—which were being prefunded—were being recovered through  current postal rates, but the retiree health benefits of those same  employees were not being recognized in rates until after they retired. The  Comptroller General testified that without a change, a sharp escalation in  postal rates in future years would be necessary to fund the cost of retiree  health benefits on a pay-as-you-go basis.
In 2006, PAEA established requirements for USPS to begin prefunding its  retiree health benefits. USPS stated in its 2007 Annual Report that such  prefunding was a “farsighted and responsible action that placed the  Postal Service in the vanguard of both the public and private sectors in  providing future security for its employees, and augured well for our long- term financial stability,” but also acknowledged that the required  payments would be a considerable financial challenge in the near term.
PAEA required USPS to make “fixed” prefunding payments to the  PSRHBF, ranging from $5.4 billion to $5.8 billion per year, due each fiscal  year from 2007 through 2016. three required annual payments. We have referred to these 10 years of  required payments as “fixed” because the amounts are specified in  statute rather than calculated based on an actuarial measurement of the  liability. In addition to these prefunding requirements, USPS is also  required to continue paying its share of health benefit premiums for  current retirees and their beneficiaries, payments USPS has been  making. USPS paid $2.9 billion for its share of retiree health benefit  premiums in fiscal year 2013.
USPS’s $5.4 billion retiree health benefit prefunding payment due at the end of fiscal  year 2009 was reduced to $1.4 billion. Pub. L. No. 111-68, § 164 (Oct. 1, 2009). We  reported on USPS’s retiree health prefunding requirements in GAO-13-112. period of just 10 years, as has sometimes been stated. However, we  have reported that the required payments are significantly “frontloaded,”  in that the total payments required in the first 10 years (fiscal years 2007– 2016) were significantly in excess of estimates of what actuarially  determined amounts would be.
section_title: Workers’ Compensation
paragraphs: The Federal Employees’ Compensation Act (FECA) is the workers’  compensation program for federal employees, including USPS. FECA is  managed by the Department of Labor (DOL) and provides benefits paid  out of the Employees’ Compensation Fund to federal employees who  sustained injuries or illnesses while performing federal duties. USPS  funds its workers’ compensation under a pay-as-you go system by  annually reimbursing DOL for all workers’ compensation benefits paid to  or on behalf of postal employees in the previous year. USPS reimbursed  DOL $1.4 billion for fiscal year 2013.
section_title: Impact of Unfunded Benefit Liabilities Absent Actions by Congress to Address Them and Key Considerations
paragraphs: Without congressional action to address USPS’s benefit funding issues  and better align its costs and revenues, USPS faces continuing low  liquidity levels, insufficient revenues to make annual prefunding  payments, and increasing benefit liabilities. Deferring funding could  increase costs for future ratepayers and increase the possibility that  USPS may not be able to pay for these costs. USPS stated that in the  short term, should circumstances leave the agency with insufficient cash,  it would be required to implement contingency plans to ensure that mail  delivery continues. These measures could require that USPS prioritize  payments to employees and suppliers ahead of some payments to the  federal government. For example, as discussed previously, near the end  of fiscal year 2011, in order to maintain its liquidity USPS temporarily  halted its regular FERS contribution. However, USPS has since made up  those missed FERS payments. According to USPS, current projections  indicate that it will be unable to make the required $5.7 billion retiree  health benefit prefunding payment due in September 2014. USPS has  stated that its cash position will worsen in October 2014 when it is  required to make an estimated payment of $1.4 billion to DOL for its  annual workers’ compensation reimbursement. USPS’s statements about  its liquidity raise the issue of whether USPS will need additional financial  help to remain operational while it restructures and, more fundamentally,  whether it can remain financially self-sustainable in the long term.
We have previously reported that Congress and USPS need to reach  agreement on a comprehensive package of actions to improve USPS’s  financial viability. In previous reports, we have discussed a range of  strategies and options, to both reduce costs and enhance revenues, that  Congress could consider to better align USPS costs with revenues and  address constraints and legal restrictions that limit USPS’s ability to  reduce costs and improve efficiency. We have also reported that it is  important for USPS to align its expenses and revenues to avoid even  greater financial losses, repay its outstanding debt, and increase capital  for investments needed to sustain its national network. In addition, we  have reported that Congress needs to modify USPS’s retiree health  prefunding payment in a fiscally responsible manner, and that USPS  should prefund any unfunded retiree health liability to the maximum  extent that its finances permit. Implementing strategies and options to  better align costs with revenues would better enable USPS to be in a  financial position to fund and pay for its debt and unfunded benefit  liabilities.
subsections: section_title: Key Funding Considerations
paragraphs: With any unfunded liability comes the risk of being unable to pay for it in  the future. This risk can be heightened when future revenues are  declining or highly uncertain, as is the case for USPS. We have reported  on several rationales for prefunding pension and retiree health benefits.Some of the same reasoning could be applied to workers’ compensation  benefits as well. The benefits of prefunding include the following:
Achieving an equitable allocation of cost over time by paying for  retirement benefits during employees’ working years, when such  benefits are earned. For USPS, this is about equity between current  and future postal ratepayers. This is in line with helping USPS align  costs with revenues. An additional consideration here is the “legacy”  unfunded liability that was not paid by ratepayers in prior years.
Protecting the future viability of the enterprise by not saddling it  with bills later after employees have retired.
Providing greater benefit security to employees, retirees, and  their beneficiaries. Prefunded benefits are more secure against the  future risks of benefit cuts or inability to pay.
Providing security to any third party that might become  responsible in the event of the enterprise’s inability to pay for  some or all of the unfunded liability.
Prefunding decisions also involve trade-offs between USPS’s current  financial condition and its long-term prospects. While reducing unfunded  liabilities protects the future viability of the organization, no prefunding  approach will be viable unless USPS can make the required payments,  but attempting to do so in the short term could further strain its finances.  USPS currently lacks liquidity and postal costs would need to decrease or  postal revenues to increase, or both, to make required prefunding  payments. To the extent prefunding payments are postponed, larger  payments will be required later, when they likely would be supported by  less First-Class Mail volume and revenue.
In 2012, we developed projections of USPS’s future levels of liability and  unfunded liability for its retiree health benefits. These projections showed  that current law would result in a significant reduction of USPS’s future  unfunded liability if USPS resumed making the required payments.However, USPS has indicated that it does not expect to make any of the  remaining fixed prefunding payments, through fiscal year 2016, an  intention that means its unfunded liability would increase and its future  payments would be greater.
From the perspective of all USPS’s post-employment benefit programs,  any relaxation of funding requirements in the short term—for example, by  suspending retiree health prefunding for a period of years—will result in a  higher overall unfunded liability for these programs in total. Nonetheless,  Congress has to consider the balance between (1) providing USPS with  liquidity that provides breathing room in the short term in order to  restructure its operations for long-term success, and (2) protecting USPS,  its employees and retirees, and other stakeholders in the long term by  funding its liabilities for benefits that have already been earned or  accrued.
It is also important to note that unfunded liabilities can be reduced in  either of two ways. An unfunded liability is the difference between the  liability and its supporting assets. As such, an unfunded liability can be  reduced by increasing the amount of assets (i.e., through prefunding), but  it can also be reduced by decreasing the size of the liability, such as by  decreasing benefit levels or USPS’s share of such benefit costs, where  such a reduction is deemed to be feasible, fair, and appropriate. We have  reported on proposals to increase the integration of USPS’s retiree health  benefits with Medicare, which would have the effect of reducing USPS’s  liability but would also involve other policy considerations.
In our prior reports, we have identified funding issues related to USPS’s  unfunded liabilities that remain unresolved and have identified potential  methods for addressing these issues:
Actuarial assumptions: We support making the most accurate  measurements possible of USPS’s benefit liabilities, and support the  development and use of assumptions specific to USPS’s population of  plan participants.assumptions are used, that the assumptions should continue to be  recommended by an independent body, such as OPM’s Board of  Actuaries.
We have suggested that if USPS-specific
Fixed versus actuarially determined payments: We have reported that  the retiree health prefunding schedule established under PAEA was  significantly frontloaded, with total payment requirements through  fiscal year 2016 that were significantly in excess of what actuarially  determined amounts would be. We added that Congress needs to  modify these payments in a fiscally responsible manner. We support  proposals to replace the fixed payments with actuarially determined  amounts.
Funding targets: We have expressed concern about proposals to  reduce the ultimate funding target for USPS’s retiree health liability  from the current target of 100 percent down to 80 percent. Such a  reduction would have the effect of carrying a permanent unfunded  liability equal to roughly 20 percent of USPS’s liability, which could be  a significant amount. If an 80 percent funding target were  implemented because of concerns about USPS’s ability to achieve a  100 percent target level within a particular time frame, an additional  policy option to consider could include a schedule to achieve 100  percent funding in a subsequent time period after the 80 percent level  is achieved.
FERS surplus: Under current law, USPS’s payments to FERS  increase, appropriately, when USPS has an unfunded FERS liability,  but USPS realizes no financial benefit when it has a FERS surplus.  We have reported that we would support a remedy to this asymmetric  treatment, but we have reported on important trade-offs to consider  for different types of remedies. While the most recent estimate  shows a relatively small FERS surplus for USPS—an estimated $0.5  billion—USPS has stated that it believes its FERS surplus would have  been substantially larger if its FERS liability had been estimated using  postal-specific demographic and pay increase assumptions. A  conservative approach to permit USPS to access any FERS surplus  would be to use it to reduce USPS’s annual FERS contribution by  amortizing the surplus over 30 years (which would mirror the legally  required treatment of an unfunded FERS liability). Another approach  would be to reduce USPS’s annual FERS contribution by offsetting it  against the full amount of surplus each year until the surplus is used  up; this would be comparable to what occurs for private-sector  pension plans. We have previously suggested that any return of the  entire surplus all at once should be done with care, given the inherent  uncertainty of the estimated liability and the existence of USPS’s other  unfunded liabilities.should be considered as a one-time exigent action and only as part of  a larger package of postal reforms and restructurings. Any provision  that would return a surplus whenever one developed would likely  eventually result in an unfunded liability.
A one-time-only return of the entire surplus  In conclusion, we again emphasize that deferring funding liabilities in  benefit programs could increase costs for future ratepayers and increase  the possibility that USPS may not be able to pay for its benefit costs, and  that USPS should work to reduce its unfunded liabilities to the maximum  extent that its finances permit. Ultimately, however, the viability of funding  promised benefits depends on the financial viability of USPS’s underlying  business model. We continue to recommend that Congress adopt a  comprehensive package of actions that will facilitate USPS’s ability to  align costs with revenues based on changes in the workload and the use  of mail.
Chairman Farenthold, Ranking Member Lynch, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions that you may have at this time.
section_title: GAO Contact and Key Acknowledgments
paragraphs: For further information about this statement, please contact Frank  Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods,  at (202) 512-2834 or todiscof@gao.gov. Mr. Todisco meets the  qualification standards of the American Academy of Actuaries to render  the actuarial opinions contained in this testimony. Contact points for our  Congressional Relations and Public Affairs offices may be found on the  last page of this statement. In addition to the contact named above,  Lorelei St. James, Director, Physical Infrastructure Issues; Teresa  Anderson; Samer Abbas; Lauren Fassler; Thanh Lu; and Crystal Wesco  made important contributions to this statement.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.