Postal Pension Funding Reform: Review of Military Service Funding Proposals
Published: 2003-11-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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 self-supporting, 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.

section_title: Letter
paragraphs: 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 2003 (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. 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.
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, 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,2. the Civil Service Retirement Amendments of 1969, (P.L. 91-93) which  established the current pay-as-you-go approach to funding the  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, 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, 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.
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.
subsections: section_title: Background
paragraphs: 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. 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).
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.
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.
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  obligations calculated by OPM as of September 30, 2003. 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. In the event that a surplus exists as of September  30, 2025, 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.
section_title: Summary of Key Issues and Our Observations
paragraphs: 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.
The agencies’ positions reflect their own perceptions of what is fair to the  taxpayers and ratepayers and how the Postal Service should be treated vis- à-vis other federal agencies and considering its mandate to be self- supporting. 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.
section_title: Relationship of Military Service to Employing Agency Operations
subsections: section_title: Postal Service Position
paragraphs: 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.
section_title: OPM and Treasury Position
paragraphs: Receiving credit for past military service is a civilian retirement benefit that  Postal Service employees receive just like other benefits, such as cost-of- living 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.
section_title: GAO Observations
paragraphs: 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  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. 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 systems 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  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.
section_title: Historical Funding of the CSRS Benefits Payable to Postal Service Employees
subsections: section_title: OPM and Treasury Position
paragraphs: 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  earnings and the costs of military service, even if OPM had not identified  the problems with the static funding methodology.
section_title: Postal Service Position
paragraphs: 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.
section_title: GAO Observations
paragraphs: 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  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.
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.
section_title: Applicability of FERS Cost Allocation and Funding Methods to CSRS
subsections: section_title: OPM and Treasury Position
paragraphs: 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.
section_title: Postal Service Position
paragraphs: 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.
section_title: GAO Observations
paragraphs: 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, one difference being the manner and extent to  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.
section_title: Funding of Military Service Benefits by Federal and Other Entities
subsections: section_title: Postal Service Position
paragraphs: 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.
section_title: GAO Observations
paragraphs: 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 1986 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) agreed to recover  the dynamic normal cost of CSRS (including military service costs) through  their power rates prospectively beginning in fiscal year 1998. The PMAs  agreed to do so in response to a series of reports we issued.
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  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. 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 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  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.
section_title: Observations on Alternative Military Service Cost Allocation Approaches
paragraphs: 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.
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  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. “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  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. 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  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.
section_title: Conclusion
paragraphs: 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.
section_title: Matters for Congressional Consideration
paragraphs: To help promote full and consistent funding of CSRS benefits among self- supporting 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   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.
section_title: Recommendation for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
subsections: section_title: Postal Service
paragraphs: 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 self- supporting 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.
section_title: OPM and Treasury
paragraphs: 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://wwww.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  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.
section_title: Report from OPM and Treasury
section_title: Report from the United States Postal Service
section_title: Comments from the United States Postal Service
section_title: Comments from OPM and Treasury
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