Postal Pension Funding Reform: Issues Related to the Postal Service's Proposed Use of Pension Savings
Published: 2003-11-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In April 2003, Congress enacted the Postal Civil Service Retirement System (CSRS) Funding Reform Act of 2003 (P.L. 108-18), which\ lowered the Postal Service's (Service) annual payment for its CSRS obligation by over $2.5 billion beginning in fiscal year 2003. P.L. 108-18 includes requiring (1) the Service to begin making payments into an escrow account in fiscal year 2006, (2) the Service to issue a report on its proposed use of "savings" resulting from the lower CSRS payments, and (3) GAO to evaluate the Service's report and present its findings to Congress. GAO evaluated whether the Service's proposals were consistent with P.L. 108-18; the impact of the escrow account; and whether the proposals were fair to current and future ratepayers, affordable, and helped achieve transformation goals.
section_title: What GAO Found
paragraphs: The Service's report presented two proposals for how it would use the "savings," and GAO found both to be generally consistent with P.L. 108-18. The first proposal assumes that responsibility for military service pension costs shifts to the Treasury Department and proposes prefunding retiree health benefits for retirees and current employees. The second proposal assumes that the Service retains responsibility for military service pension costs and proposes prefunding retiree health benefits only for new employees. Both proposals assume that the Service would pay down debt and fund capital investment through inflation-based rate increases. Under both proposals, the Service proposes that the escrow requirement be eliminated, so that the Service would not have to include $3 billion as a mandated incremental operating expense beginning in fiscal year 2006. The Service cannot use the escrow funds unless Congress eliminates the escrow requirement or specifies by law how these funds may be used. If no action is taken, the Service believes that it would have to raise rates higher than would otherwise be necessary. The escrow requirement provides Congress an opportunity to review how the Postal Service will address a number of long-term challenges, such as progress toward transformation and funding its retiree health benefits obligation. Once Congress is satisfied, it could repeal the escrow requirement so that an escrow account is not needed. GAO assessed the Service's two proposals according to their fairness, affordability, and the ability to achieve transformation goals. Fairness: Proposal I strikes a more equitable balance of allocating costs between current and future ratepayers, because benefits earned by today's employees will be built into the current rate base. Under Proposal II, much of the retiree health benefits obligation would remain unfunded, thereby placing the burden of the benefits being earned today on future ratepayers. Affordability: The Service's proposals attempt to balance short-term rate mitigation with some level of prefunding to address its long-term obligations. The first proposal would require a larger postal rate increase than the second proposal and would prefund more of the retiree health benefits. The second proposal focuses more on rate mitigation. Given the Service's uncertain financial future, its ability to raise revenues, reduce costs, and improve productivity and efficiency is critical to affordability. Transformation goals: Although the Service believes it can pay down debt and fund the capital investments associated with its transformation initiatives, this is not clear because the Service has not yet presented a comprehensive, integrated infrastructure and workforce rationalization plan. GAO has previously recommended that the Service provide Congress with such a plan and periodic reports on its transformation progress. The Service disagrees with GAO that the escrow repeal should be tied to a plan.

section_title: Letter
paragraphs: The Postal Service (Service) faces significant financial challenges,  including declining mail volume, the need to fund productivity  improvement and cost saving initiatives necessary to transform itself into a  more efficient organization, and a growing obligation for retiree health  benefits that the Service estimated will reach $54 billion by the end of fiscal  year 2003. In April 2003, Congress enacted the Postal Civil Service  Retirement System (CSRS) Funding Reform Act of 2003 (P.L. 108-18),  which afforded the Service the opportunity to address some of these  challenges by lowering the annual payment the Service is required to make  into the Civil Service Retirement & Disability Fund (CSRDF) by over $2.5  billion annually beginning in fiscal year 2003. The legislation specified how  these savings were to be used for fiscal years 2003-2005. It also required the  Service to begin making payments into an escrow account beginning in  fiscal year 2006 in an amount equal to the difference between the estimated  CSRS payments prior to, and after, enactment of the legislation. The  amount of the payments into the escrow account would have to be  included in the Service’s rate base. Under the legislation, the Service  cannot use the funds in the escrow account unless Congress eliminates the  escrow requirement or specifies by law how the escrow funds may be used.   In our view, this escrow requirement provides Congress an opportunity to  review how the Service will address a number of long-term challenges,  including debt repayment, capital projects, and its unfunded retiree health  benefits obligation. The legislation also required the Service to report by  September 30, 2003, on how it proposes to use these pension savings and  required GAO to evaluate the Service’s submission and present our findings to the appropriate oversight committees.  The legislation states that not  later than 180 days after receiving our report, the Congress shall revisit the  issue of how the savings accruing to the Service as a result of enactment of  the legislation should be used.
P.L. 108-18 also transferred responsibility for CSRS pension benefits  attributable to military service in the amount of $27 billion from the  Department of the Treasury (Treasury) to the Postal Service. The law  required the Service, the Office of Personnel Management (OPM), and the  Treasury to prepare reports by September 30, 2003, articulating who should  be responsible for these costs in the future. The Postal Service’s report on  this issue recommended that the responsibility for military service costs be  transferred back to the Treasury. However, the joint report of Treasury and  OPM recommended that the Postal Service should be responsible (1) for all  pension costs related to military service for its employees that were hired  after the Service’s reorganization in 1971 and (2) for a portion of the  military service costs for employees hired before 1971.  Further, the  legislation required GAO to review these reports and submit our findings to  the appropriate oversight committees, which we are providing in a separate  report (GAO-04-281) also issued on this date.
To guide the Service in its proposed use of pension-related savings  beginning in fiscal year 2006, the legislation included specific “Matters to  Consider” and a “Sense of Congress.” The “Matters to Consider” included  the following matters: (i) debt repayment; (ii) prefunding of postretirement  health care benefits for current and former postal employees; (iii)  productivity and cost-saving capital investments; (iv) delaying or  moderating increases in postal rates; and (v) any other matter. The “Sense  of Congress” stated that  “the savings accruing to the Postal Service as a result of the enactment  of this act will be sufficient to allow the Postal Service to fulfill its  commitment to hold postage rates unchanged until at least 2006;  because the Postal Service still faces substantial obligations related to  postretirement health benefits for its current and former employees,  some portion of the savings . . . should be used to address those  unfunded obligations; and   none of the savings . . . should be used in the computation of any  bonuses for Postal Service executives.”
In addition, the legislation stated that the Service should also consider the  work of the President’s Commission on the United States Postal Service  (the Commission), whose report, issued in July 2003, identified the need for  the Service to operate more efficiently.  The Commission’s report  recommended, among other things, that  “the Service should review its current policy relating to the accounting  treatment of retiree health care benefits, and work with its independent  auditor to determine the most appropriate treatment of such costs in  accordance with applicable accounting standards and in consideration  of the Postal Service’s need for complete transparency in the reporting  of future liabilities;   the Postal Service should consider funding a reserve account for  unfunded retiree health care obligations to the extent that its financial  condition allows; and  responsibility for funding Civil Service Retirement System pension  benefits relating to the military service of Postal Service retirees should  be returned to the Department of the Treasury.”
The Service’s report on the use of the savings contained two proposals that  are linked to the outcome of the military service issue. The first proposal  (Proposal I) is predicated on the assumption that the Service is relieved of  responsibility for military service costs and proposes that the Service  would prefund retiree health benefits for retirees and current employees.  In its second proposal (Proposal II), the Service assumes that it retains  responsibility for the military costs and proposes that it would prefund  retiree health benefits only for new employees, pay down debt, and finance  selected capital investments. The Service also stated that this proposal  would have what the Service characterized as an “indirect benefit” of  mitigating rate increases. By using most of the pension savings to fund  normal operating expenses, the only additional rate increase needed would  be a 0.3 percent increase over the rate of inflation to cover the prefunding  for its new employees.
This report addresses four objectives. First, it evaluates whether the Postal  Service’s report on the use of the pension savings is consistent with P.L.  108-18.  Second, it evaluates the issues surrounding the impact of the  escrow requirement that the Service identified in its report. Third, it  assesses the Service’s two proposals according to the following questions,  which are based upon our previous work:  Are these proposals fair and balanced between current and future  ratepayers and taxpayers?
Can the Service afford to do as it proposes in light of its financial  challenges?
Do these proposals help promote and accelerate the Service’s  transformation efforts, including related cost savings and productivity  improvement efforts?
Finally, our report discusses other pertinent issues, such as how the  proposals might be implemented, that we identified in the course of our  review. Our work is based on our review of Postal Service documents, the  report of the President’s Commission on the United States Postal Service,  our prior reports, and interviews with officials at the Postal Service and the  Congressional Budget Office (CBO). A more detailed discussion of our  objectives, scope, and methodology is included in appendix I. We requested  comments on a draft of this report from the Postal Service, and its  comments are discussed later in this report and reproduced in appendix II.
subsections: section_title: Background
paragraphs: In April 2003, Congress enacted P.L. 108-18, which reduced the Service’s  annual payment into the CSRS pension fund, in part, to reflect a reduction  in the Service’s estimated unfunded obligation for prior years’ service from  about $30 billion to about $5 billion. The difference between the Service’s  CSRS payment required prior to enactment of P.L. 108-18 and the payment  after enactment is labeled the “savings” in the legislation. However, P.L.  108-18 requires the Service to use the savings in fiscal years 2003 and 2004  to pay down outstanding debt and in fiscal year 2005 to extend the current  rate cycle. Therefore, according to the Service, all of the overfunding  generated by current rates will be completely consumed by the end of fiscal  year 2005. In fiscal year 2006, the Service is required to begin making  payments into an escrow account that it cannot use until otherwise  provided for by law.  The amount of the payments into the escrow account  would have to be included in the Service’s rate base.  The Service’s report  recommended that the escrow requirement be repealed, and provided two  proposals for use of the “savings.”  A brief description of each proposal is  given below.
subsections: section_title: Proposal I
paragraphs: Transferring the military costs from the Service to the Treasury, as detailed  in Proposal I, increases the projected overfunding of the postal CSRS  pension fund from $78 billion to $105 billion. This would result in an overall  cost reassignment of $27 billion and a $10 billion overfunding of the postal  CSRS pension fund as of the end of fiscal year 2002.  The Service proposes  that the $10 billion in overfunding would remain in the pension fund, in a  separate account designated as the “Postal Service Retiree Health Benefit  Fund (Retiree Health Fund).”  The Service made a payment of about $1.3  billion for its pension obligation into the CSRS pension fund in fiscal year  2003.  Under current legislation, it would continue to make payments of  $2.2 billion in fiscal year 2004 and $2.1 billion in fiscal year 2005.  If  responsibility for all military service costs is transferred back to the  Treasury, the resulting overfunded status would negate the need for further  Postal Service annual CSRS payments. The Service proposes that the  CSRS payments it made in fiscal year 2003, and will make in fiscal years  2004 and 2005, remain in the CSRDF in the newly designated Retiree Health  Fund.  Beginning in fiscal year 2006, the Service proposes to make annual  payments into the Retiree Health Fund. This new fund would be used to  pay retiree health insurance premiums in the future.
This proposal assumes that the escrow requirement would be eliminated.   However, the Service estimates that the expense for prefunding retiree  health obligations would add $1.2 billion to its expenses in fiscal year 2006.   The Service estimates that this expense would require a rate increase that  would be 2 percent higher than would be necessary to cover inflationary  expense growth. Otherwise, the Service believes it can pay down debt and  finance its capital investment needs through its normal cycle of inflation- based rate increases.
section_title: Proposal II
paragraphs: Proposal II, other than funding a small amount of the retiree health benefits  obligation, results primarily in rate mitigation. This proposal is based on  the assumption that the escrow requirement would be repealed and that  the Service would remain responsible for military service costs. Under this  scenario, the Service proposes to prefund the retiree health benefits cost  for employees hired after fiscal year 2002. It would not fund the retiree  health benefits cost already incurred for current and former employees,  which comprises most of the obligation. The Service estimates that the  expense created to prefund retiree health benefit costs for new employees  would require a rate increase in fiscal year 2006 that would be 0.3 percent  higher than necessary to cover normal inflationary expense growth.  Although the Service’s proposal stated that some funds would be used to  pay down debt and fund capital investments, postal officials have told us  that the proposed debt repayment and capital investment costs are equal to  what they had planned to spend regardless of enactment of P.L. 108-18.  Consequently, the Service believes that, absent the escrow requirement, it  would be able to continue to pay the retiree health premium costs for  current and former employees on a pay-as-you-go basis, pay down debt,  and finance its capital investment needs through normal rate increases that  would correspond with general inflation trends.
section_title: Both Proposals Are Generally Consistent with P.L. 108-18
paragraphs: We believe that both proposals are generally consistent with the “Sense of  Congress” expressed in P.L. 108-18, that some portion of the savings should  be used to address the Service’s unfunded obligations.  However, Proposal I  goes much further in this area because it proposes prefunding a substantial  portion of retiree health benefits for all current and former employees,  while Proposal II would prefund these costs only for employees hired after  fiscal year 2002.  Both proposals also address, to varying degrees, the  Matters to Consider, outlined in P.L. 108-18.  Proposal I addresses, almost  exclusively, matter (ii)—prefunding of postretirement health benefits for  current and former employees.  Proposal II addresses matter (ii) to a  limited extent, and matter (iv)—delaying or moderating increases in postal  rates.  Under both proposals, the Service believes that it can address matter  (i)—debt repayment—and matter (iii)—productivity and cost saving  capital investments—through inflation-based rate increases.
The legislation also directed the Postal Service to consider the work of the  Commission.  The Commission recommendations, like our previous work,  stressed the significance of funding the retiree health benefits cost to the  extent that the Service’s finances permit. The Commission pointed out that  the pension obligation is funded as benefits are earned and recovered  through rates, but the retiree health benefits obligation is funded as the  benefits are paid and not as they are earned. The Commission strongly  urged the Service to consider funding a reserve account to begin paying  down the retiree health benefits obligation so future ratepayers are not  forced to pay for costs associated with postal services delivered today. The  Commission also stated that raising rates should be the last recourse, not  the first, to cover rising costs. In our November 2003 testimony before the  Senate Committee on Governmental Affairs, we also raised concerns about  rate increases, stating that raising rates may provide an immediate boost to  the Service’s revenues but would likely accelerate the transition of mailed  communications to electronic alternatives. In addition, the Commission  expressed concern regarding the Service’s ability to repay its debt and  stressed the importance of the Service improving its operational efficiency.   Another important recommendation of the Commission was that the  Service should review its current policy relating to the accounting  treatment of retiree health care benefits, and work with its independent  auditor to determine the most appropriate treatment of such costs in  accordance with applicable accounting standards and in consideration of  the Postal Service’s need for complete transparency in the reporting of  future liabilities. We have also discussed these issues in our previous  work. Proposal I addresses the issue of funding retiree health benefits to a  greater extent than Proposal II, while Proposal II addresses the matter of  mitigating rates to a greater extent than Proposal I. Both proposals  address the issue of debt repayment and capital investment through  inflation-based rate increases.
section_title: Escrow Requirement Places Pressure on Rates
paragraphs: The Service recommended in its report that Congress eliminate the escrow  requirement, because of its negative impact on postage rates and the  mailing industry, the general public, and the economy as a whole. The  Service estimates that it would need an additional rate increase of 5.4  percent, including 2 cents on the 37-cent First-Class stamp, in order to  generate the $3.2 billion required to be placed in an escrow account in  fiscal year 2006.  This is because P.L. 108-18 requires all “savings”  attributable to fiscal years after 2005 to be considered an “operating  expense” and placed into an account that the Service cannot use until  Congress specifies how the funds may be used.  All of the “savings”  accruing under current rates would likely be expended or absorbed by  inflationary cost increases by the end of fiscal year 2005. Thus, in order to  pay this “operating expense” the Service would need to include the $3.2  billion in its rate base in fiscal year 2006 and collect the money from its  ratepayers or lower expenses by a corresponding amount. The Service has  taken steps to reduce its total expenses over the past 2 fiscal years, and we  believe it is important for the Service to continue its cost-cutting efforts.  However, setting aside unused funds in an escrow account that must be  considered an “operating expense” would serve to lessen the financial  benefits of the Service’s cost-cutting efforts.
For fiscal years after 2006, an increasing amount—estimated to eventually  reach a peak of $8.7 billion—would have to be placed annually in the  escrow account. This would be in addition to its operating expenses, such  as compensation and retiree health premiums, as well as any amounts  needed to pay down debt or fund capital investments. The Service  estimates that it would require additional biannual rate increases between  1 percent and 1.5 percent to cover the required escrow amount.  Frequent  rate increases of this magnitude would likely hasten the decline in First- Class Mail volume and increase the risk of volume declines in other mail  classes.
In our view, the escrow requirement could be viewed as one means to  direct funding for specific purposes that Congress may believe to be  especially important. We also believe it is critical to the Service’s future  viability that it continue to make progress on addressing its financial  challenges, such as prefunding retiree health obligations, repaying debt,  and financing capital needed to implement its transformation initiatives.  Several options include (1) tying the repeal of the escrow requirement to  congressional review of the Service’s progress on transformation, which  could include the Service providing Congress with an acceptable plan for  realigning its infrastructure and workforce; (2) repealing the escrow  requirement but specifying the use of funds; or (3) repealing the escrow  requirement and allowing the Service to fund activities as specified in its  proposals. Another option would be to retain the escrow requirement and  direct funding for specific purposes, which would likely require Congress  to periodically revisit the use of funds. We believe this option could be  problematic if an impasse arose, which could make the funds unavailable  to the Service to spend on specific purposes.
If Congress does not want to specify by law the purposes and amounts that  should be funded, but rather permit the Service to decide which activities  to fund, we believe that Congress would need to have sufficient  information to determine that the Service is making or accelerating  progress in achieving its transformation goals. In this regard, we have  already recommended that the Service provide periodic reports on the  status of its transformation initiatives and other Commission  recommendations that fall within the scope of its existing authority. The  Chairman of the Senate Committee on Governmental Affairs, along with  Senator Carper, requested in a letter to the Postmaster General dated  November 19, 2003, that the Service provide the Committee with a  comprehensive plan that lays out how the Service intends to optimize its  infrastructure and workforce. Further, the letter requested biannual  updates on the status of implementing transformation initiatives and  recommendations of the Presidential Commission. In November 2003, the  Service provided the congressional oversight committees with a progress  report on its transformation initiatives.
section_title: Key Issues Used to Assess the Postal Service’s Proposals
paragraphs: We also assessed the Service’s two proposals in the context of three key  issues emerging from our previous work and the Commission’s  recommendations. The first issue is whether the proposals are fair and  balanced between current and future ratepayers regarding who pays for  employee benefits earned today.  Another aspect of this issue is fairness  between ratepayers and taxpayers regarding responsibility for military  service costs and the effect of the proposals on the federal budget. The  second issue is whether the proposals are affordable in light of the  Service’s current financial situation. Given declining First-Class Mail  volume, rising compensation costs, and a significant retiree health benefits  obligation, if the Service’s proposals greatly exacerbate these financial  challenges, affordable universal service could be jeopardized. The third  issue is how these proposals assist the Service in achieving or accelerating  its transformation initiatives. The importance of this issue lies in the need  for the Service to become a more efficient and effective organization in  order to remain financially viable.
subsections: section_title: Fairness Issues
paragraphs: One factor that should be kept in mind when evaluating these proposals is  the issue of maintaining an equitable balance between the postal costs paid  for by current and future ratepayers and the impact of these proposals on  taxpayers.  As we noted in our November 2003 testimony, under the  Service’s current accounting and rate-setting methods, current ratepayers  have not fully covered the total costs of the postal services they have  received. Further, future ratepayers are likely to face more significant and  frequent rate increases to cover the cost of benefits being earned by  current employees.  The equity of this arrangement should be considered in  evaluating these proposals.  Likewise, the effects of these proposals on the  federal budget—which specifies the spending and financing of the federal  government—and whether these effects are equitable to both ratepayers  and taxpayers, should also be considered.
Proposal I strikes a better balance between current and future ratepayers  by prefunding the retiree health benefits obligation for both retirees and  current employees and providing a mechanism for better aligning current  expenses with current revenues. Therefore, benefits being earned by  today’s employees would be built into the current rate base.
While Proposal II does partially address the issue of striking a balance  between current and future ratepayers in regard to the retiree health  benefits obligation, it does not go as far as Proposal I in this area. By only  prefunding the retiree health benefits cost for new employees, it leaves a  sizable portion of this obligation unfunded. This means that future  ratepayers will still be required to pay for most of the retiree health benefits  earned by today’s workforce. In addition, mailers argue that prior to  enactment of P.L. 108-18, they were paying too much for the CSRS  obligation; therefore, mitigating rate increases now is merely recompense.  However, while mailers may have been paying more than necessary to fund  the pension obligation, they were paying less than necessary to fund the  retiree health benefits obligation.
section_title: Fairness between Ratepayers and Taxpayers
paragraphs: Another important consideration is the effect these proposals would have  on the federal budget and, therefore, the taxpayer.  An issue currently  before Congress is who should be responsible for paying the military  service pension costs of postal employees covered by CSRS. Proposal II is  predicated on the assumption that current ratepayers pay for pension costs  related to military service, much of which was vested prior to creation of  the Postal Service and had already been paid by Treasury. If Congress  decides that the Service should retain responsibility for these costs, the  postal ratepayers would bear the costs. If Congress determines that the  Treasury should be responsible for these costs, then the costs would be  borne by taxpayers. The Service has stated that the impact on the federal  budget of transferring these costs under Proposal I would likely be  minimal. The budgetary effects of the Service’s proposals have not been  scored by CBO.  However, based on its scoring of the Postal Civil Service  Retirement System Funding Reform Act, we believe that Proposal I might  be scored as having little effect on the deficit in the short term. In the long  term, it could have an effect when the Service’s cash flow changes in later  years as the prefunded benefits are paid. However, insufficient detail has  been provided on both proposals to determine their overall budget effects.
The CBO is required to “score,” or estimate, the budgetary effects of  legislation reported out of committees, so it has not scored the Service’s  proposals. However, the CBO scoring report on the bill that resulted in the  pension legislation provides some insight into how this proposal might be  scored.
CBO scoring considers both on-budget and off-budget effects of legislative  proposals. As an off-budget entity, any payments that the Service makes to  the retirement trust fund (an on-budget entity) are considered offsetting  receipts; reducing those payments would reduce on-budget receipts. Under  P.L. 108-18, after fiscal year 2005, savings resulting from the act are to be  considered operating expenses of the Service. Therefore, these expenses  would be included in rate setting, even though the Service’s actual  expenses would decline by the amount placed in escrow. As a result, net  off-budget outlays of the Postal Service would decline by the same amount  as the savings from lower pension payments, beginning in fiscal year 2006.   This is reflected in the CBO scoring report. These lower off-budget outlays  would offset the on-budget impact of lower payments to CSRS. Thus, any  proposal that uses the escrowed savings could affect the overall federal  budget deficit.
Scoring of the Service’s proposals hinges on what the Service would do  with the escrowed savings. Proposal I, in shifting the cost of military  service back to the Treasury, would result in a reduction in on-budget  receipts. But Proposal I, in using most of the savings to prefund retiree  health benefits, would also keep those amounts in a separate CSRS  account. The combined impact might be scored as having little effect on  the deficit in the short term. However, in the long term, it could have an  effect because at some point, the prefunded benefits would be paid out,  resulting in changes in cash flows in later years. In addition, Proposal I  would use a small amount of the savings for debt reduction, which would  cause on-budget interest receipts to be lower.
Under Proposal II, which assumes that the Service would retain  responsibility for the military service costs, the Service said it would fund  its retiree health benefits obligation only for its employees hired after fiscal  year 2002 and then fund, in priority sequence, debt repayment and capital  investments to improve productivity and cost-savings. This proposal also  raises issues related to the federal budget. The continuation of payments  for military service costs would mean that there would be no reduction in  on-budget receipts. In the short term, prefunding some retiree health  benefits could have a small positive effect on the budget, because the  Service would be collecting revenue that would not be immediately paid  out. In general, any reduction in the Service’s debt would reduce on-budget  interest receipts. Any additional capital investments would increase off- budget outlays. However, if the Service can provide credible support that  the investments would result in cost savings, the scoring may show  increased outlays initially and savings subsequently.
section_title: Affordability of Proposals Is Unclear
paragraphs: The Service believes that its proposals are affordable, meaning they would  not cause rate increases that irreparably harm volume, or hinder the  Service’s ability to sustain current operations and implement  transformation initiatives. We are concerned that the Service may not be  able to achieve all of these goals if its financial situation worsens.  Therefore, we believe it is imperative for the Service to continue  addressing its key financial challenges—long-term obligations and debt,  difficulty raising revenue, and aggressive cost-cutting measures—to the  extent that it is able. The Service faces a difficult challenge in trying to  balance all of these issues. The Service’s proposals attempt to balance both  short-term rate mitigation and some level of prefunding of retiree health  obligations to address its long-term obligations, while also providing for  debt repayment and capital investment. However, the Service did not  present an analysis of how its proposals would affect the overall financial  condition of the Postal Service. Consequently, it is difficult to assess which,  if either, of these proposals would improve the long-term financial situation  of the Postal Service or ensure its future financial viability. Therefore, we  believe that the Service’s financial situation will need to be closely  monitored to ensure that its proposals are indeed affordable.
The affordability of these proposals to ratepayers is also a consideration, as  is the effect of rate increases on volume because, as we have previously  reported, the Service faces uncertainty regarding its future revenue  stream. Since fiscal year 2000, the Service’s total mail volume has declined  by almost 6 billion pieces and is estimated to continue declining. In a report  for the Commission, the Institute for the Future developed a mail volume  estimate that shows a gradual 10 percent decline from 202.8 billion pieces  in fiscal year 2002 to 181.7 billion pieces in 2017. Also, First-Class Mail  volume, which provides the bulk of the Service’s revenue, has been  declining and shows no sign of rebounding.  Declines in First-Class Mail are  particularly troublesome to the Service, because First-Class Mail pays  almost 70 percent of the Service’s institutional costs. These costs, which  are approximately 40 percent of all postal expenses, include some  administrative, facility, postmaster, and supervisor costs, and a large  portion of the expanding delivery network costs. Therefore, if First-Class  Mail volume continues to decline, it would become more difficult for the  Service to fund its institutional costs without raising postal rates.
Historically, when the Service has raised postal rates, mail volume growth  declined in the fiscal year immediately following the rate increase but  rebounded in the next fiscal year. However, over the last 3 years this has  not been the case. The Service raised rates twice in fiscal year 2001 and  once in fiscal year 2002. Total estimated mail volume at the end of fiscal  year 2003 was almost 6 billion pieces lower than total mail volume was in  fiscal year 2000. In this climate, rate increases may lead to further volume  declines, which in turn would necessitate additional rate increases and  begin a cycle often referred to as the “death spiral.”
The Service’s first proposal would require a larger rate increase than the  second proposal. Under Proposal I, the Service estimates that prefunding  retiree health benefits would add $1.2 billion to its expenses in fiscal year  2006 compared with its expenses in that year under the current law,  assuming the escrow requirement were eliminated.  According to the  Service, this additional expense would require a rate increase in fiscal year  2006 that is 2 percent higher than the increase that would be necessary due  to inflationary expense growth alone. In fiscal years after 2006, the Service  would continue to make these additional payments and future rate  increases would likely be marginally higher than would be necessary to  reflect inflationary pressures alone. Figure 1 shows the annual additional  amount the Service proposes to spend on prefunding under Proposal I.
If the Service’s mail volume continues to decline and the Service is unable  to cut costs accordingly, or if the Service is faced with higher retiree health  premium costs than estimated, the Service may not be able to afford to  continue prefunding the retiree health benefits obligation.  Therefore, the  Service’s financial condition must be carefully monitored under this  proposal.
Proposal II would require a lower rate increase than Proposal I in fiscal  year 2006, and thus would likely have less of an impact on postal volumes  in the short term. However, in the long-term it may require larger rate  increases that could have a negative impact on future volumes.  As seen in  figure 2, the estimated retiree health premium expense will eventually  outpace the estimated difference between the CSRS payment prior to  enactment of P.L. 108-18 and the payment required under the legislation.   Consequently, in order to pay the retiree health premiums in the future, the  Service would need to raise additional revenue through rate increases or  lower its operating expenses.
The Postal Service is required to pay the retiree health premiums  regardless of whether it prefunds some or all of these costs, and the annual  costs are expected to increase over the next 20 years. If prefunding retiree  health benefits for new employees proves to be more costly than estimated,  or if the premiums for current retirees continue to grow rapidly, the Service  could find itself facing a significant obligation at a time when revenues are  shrinking. It seems prudent to set aside funds now, while they are available,  to address escalating future costs rather than waiting until costs are higher  and adequate revenue may not be forthcoming. Because Proposal II would  result in a smaller rate increase in fiscal year 2006 than Proposal I, it raises  the question of whether it would be possible for the Service to increase its  proposed level of prefunding retiree health benefits under Proposal II. By  setting aside an additional $1 billion in funding for this obligation, the  Service would need an additional rate increase of 2 percent, the same  increase the Service proposes under Proposal I. The Service has stated that  the decision to prefund only retiree health benefits for new employees  arose from the desire to have a logical basis for its funding proposal.  Because the legislation was enacted in fiscal year 2003, the Service decided  to begin prefunding with a corresponding time period. While this may  provide a baseline, we agree with the Commission that the Service should  address its retiree health benefits obligation to the extent that its financial  situation allows. Again, we believe the Service’s financial situation will  have to be carefully monitored to ensure that this option remains  affordable.
Another factor associated with the affordability of the proposals concerns  how they address the Service’s outstanding debt level, which in fiscal year  2002 was close to statutory limits and was threatening the Service’s ability  to fund capital improvements. The Service made significant progress in  reducing its outstanding debt in fiscal year 2003, from $11.1 billion to an  estimated $7.3 billion, and plans to continue paying down its debt in fiscal  years 2004 and 2005. The Service has estimated that debt outstanding as of  the end of fiscal year 2005 will be $3 billion. Under both proposals, the  Service proposes to repay the same amount of debt in fiscal years 2006- 2010. As seen in table 1, the Service estimates that its outstanding debt will  be paid off by 2010. These estimates assume that the Service would raise  rates when necessary to break even for each of the fiscal years 2006  through 2010. If this break-even assumption is not correct, or if the Service  faces unforeseen financial problems, the Service may not be able to pay  down the amount of debt it proposes, and may, in fact, have to borrow  more.
The affordability of these proposals is also tied to a separate matter  currently before Congress—who should bear responsibility for military  service pension costs and how these costs should be determined. If  Congress determines that the Treasury should bear responsibility for  military service costs, then the Service believes that it can afford to prefund  retiree health care costs for all of its current and former employees. If  Congress determines that the Service should retain responsibility for the  military service costs, then the Service believes that it can only afford to  prefund the retiree health benefits cost for employees hired after fiscal year  2002, which would leave the obligation for current and former employees  unfunded.
As both the Commission and we have noted, the Service has had limited  success in its pursuit of new revenue streams. Therefore, to counter the  loss in revenue due to declining mail volume without resorting to frequent  rate increases, the Service must aggressively cut costs. To its credit, the  Service has decreased work hours, reduced its workforce, and closed some  facilities.  However, we do not believe that these incremental savings will  be enough to ensure a financially viable Postal Service over the longer  term, especially if mail volumes continue to decline.  For this reason, we  believe the Service must continue to make progress in implementing its  transformation goals.
section_title: Transformation Issues
paragraphs: In assessing these proposals, we also considered how the Service would be  able to fund cost saving and productivity initiatives needed to successfully  transform itself into a viable organization for the 21st century. In April 2002,  in response to a GAO recommendation and a request by the Senate  Committee on Governmental Affairs, the Postal Service prepared a  Transformation Plan that outlined strategies for transforming the  organization into an efficient and performance-based entity. Among those  initiatives were plans to standardize operations, increase customer access,  and realign the processing and distribution network. The Commission’s  report also made suggestions for improving postal efficiency. We agree with  the Commission that the Service must continue to pursue aggressive cost- cutting strategies and productivity gains in an effort to become more  efficient. We also believe that the mandate for the Service to report on the  potential use of savings from P.L. 108-18 was an opportunity for the Service  to present its plans in this area, and the Service’s proposals must be  evaluated with the need for cost-cutting and productivity gains in mind.
Under both proposals, the Service believes it can finance capital  investments related to upgrading existing assets and the investment needed  to implement transformation initiatives through inflation-based rate  increases. We are concerned that the Service’s financing plan may not be  adequate to provide for its capital investment needs, because historically,  the Service has found it problematic to finance its capital needs with  operating revenues. Thus, it has often resorted to borrowing to finance its  capital needs.  In contrast, under both proposals, the Service would finance  its capital needs while continuing to pay down debt through inflation-based  rate increases. Another possible source of capital funds could be the  proceeds from the sale of excess property. However, the Service did not  discuss this issue in its report.
We are also concerned with the Service’s lack of specifics on capital  investments under both proposals. While the Service stated that its capital  investments for productivity gains and cost saving initiatives were related  to its Transformation Plan, it has provided little detail on any of these  initiatives in its pension savings report, its Five-Year Strategic Plan FY 2004- 2008, or its Five-Year Strategic Capital Investment Plan 2004-2008. The  Service did provide a breakdown of some capital investments related to its  Transformation Plan initiatives, but did not provide sufficient back-up data  or description to enable us to determine to what transformation initiatives  these investments were related or to what extent they would meet  transformation goals.
In our November 2003 testimony, we also noted our concern that since the  Service issued its Transformation Plan in April 2002, it has not provided  adequate transparency on its plans to rationalize its infrastructure and  workforce; the status of initiatives included in its Transformation Plan; and  how it plans to integrate the strategies, timing, and funding necessary to  implement its plans. While the Postal Service is moving forward with its  Transformation Plan initiatives, and has made meaningful progress in a  number of areas, it is not clear how it will be able to finance these  initiatives within inflation-based rate increases, especially if mail volume  continues to decline. Therefore, we recommended in our November  testimony that the Postmaster General develop a comprehensive and  integrated plan to optimize the Service’s infrastructure and workforce, in  collaboration with its key stakeholders, and make it available to Congress  and the general public. We also recommended that the Postmaster General  provide periodic reports to Congress and the public on the status of  implementing its transformation initiatives and other Commission  recommendations that fall within the scope of its existing authority. Postal  officials have agreed to develop a comprehensive and integrated plan to  optimize its infrastructure and provide periodic reports on the  implementation of its transformation initiatives and make them available to  Congress and the public. As previously mentioned, the Service provided its  congressional oversight committees with a progress report on its  transformation initiatives in November 2003. The infrastructure and  workforce plan and the periodic reports on the status of transformation  initiatives will be critical to oversight in this area.
section_title: Issues Related to the Implementation of Proposals I and II
paragraphs: During our review, we identified implementation issues that Congress may  want to consider if it determines that the Service should prefund some or  all of its retiree health benefits obligation.  Under Proposal I,  implementation issues involve the method that would be used to fund the  retiree health benefits, and the demographic and economic assumptions  that would be used to determine the amount of the total obligation as well  as the annual funding amount. Under Proposal II, the question arises as to  how the annual cost of retiree health benefits for employees hired after  fiscal year 2002 would be calculated.  In addition, neither proposal ensures  that the Service would continue to prefund the retiree health benefits  obligation. Additional questions arise about the Service’s accounting  treatment for retiree health benefits under both proposals.
If Congress decides to accept one of the proposals, technical issues related  to implementing the proposal would need to be addressed.  Under Proposal  I, the Service would fund the retiree health benefits obligation by making  payments into a fund currently maintained by OPM.  Postal officials raised  questions about which agency—the Service or OPM—should determine the  amount of the obligation, and what economic and demographic  assumptions should be used.  In addition, we have questions about the  Service’s proposed funding mechanism, because it does not amortize the  obligation over a specific time period.  In Proposal II, the Service would  maintain control of the retiree health benefits fund.  Under both proposals,  the Service would continue to make payments into the respective funds  after 2010; however, under P.L. 108-18, the Service would be under no  obligation to prefund the retiree health benefits obligation.
subsections: section_title: Technical Issues Related to Proposal I
paragraphs: One issue pertains to the assumptions used by the Service to estimate its  retiree health benefits obligation. If these assumptions change, then the  future funded status of the obligation would also change.  This estimated  obligation is based on several assumptions, such as premium costs,  retirement rates, termination rates, mortality assumptions, disability  assumptions, plan enrollment, and coverage election that could change  annually and may differ between the Postal Service and other agencies.   These assumptions materially affect the future funded status of the  obligation. An illustration of the practical effect of using different  assumptions can be seen in the estimate of the Service’s total retiree health  benefits obligation. A postal estimate of its retiree health benefits  obligation as of the end of fiscal year 2003 differs from an estimate for the  same period prepared by OPM by about 4 percent, or $2.2 billion.  According to the Service, the difference in these two estimates is primarily  due to differences in the measurement date, the discount rate, the health  care trend rate, the cost basis, and the attribution method used. The  Service’s estimate was actuarially certified as reasonable. However, a  different set of results could also be considered reasonable actuarial  results, because the actuarial standards describe a “best-estimate range”  for each assumption rather than a single best-estimate value.
In addition, the Service said it would not amortize the retiree health  benefits obligation within a specified time frame. Instead, the proposed  funding that the Service calculates to address its retiree health benefits  obligation is the amount that would be required to fund the annual retiree  premium cost plus the estimated future cost of retiree health premiums for  current employees (service costs), and interest expense on both the  outstanding obligation and the new service cost. According to the Postal  Service, while it is the Service’s intention to eventually fully fund its retiree  health benefits obligation under Proposal I, this proposal does not fully  fund all prior years’ service costs—the $54 billion obligation—within a  specified time period.  In fact, because the proposed funding under  Proposal I includes a beginning asset balance of $10 billion, but does not  amortize any of the retiree health benefits obligation, approximately $45  billion of the obligation would not be funded.  The Service’s proposed  funding for the retiree health benefits obligation is modeled after the  funding method used by some utilities to prefund their retiree health  benefits. However, other options might allow the Service to amortize its  existing obligation and prefund the retiree health benefits obligation for  future retirees.  While postal officials indicated that under these proposals  the Service intends to make annual payments for prefunding, the Service  would be under no obligation to do so. Consequently, if Congress wanted to  ensure that the Service prefunds its retiree health benefits, legislative  action would be required.
In considering Proposal I, we identified the following unresolved questions:  Should prefunding Postal Service retiree health benefits be mandated by  Congress, or left to the Service’s discretion?
Should the Postal Service, OPM, or another entity determine the amount  of the Service’s total retiree health benefits obligation?
Who should determine the proper funding mechanism for the retiree  health benefits obligation?
Should the Postal Service be required to amortize its prior years’ service  obligation within a set time frame?  If so, what is the appropriate time  frame?
What economic and demographic assumptions should be used to  determine the current obligation, service costs, and asset balance, and  future estimates of these amounts?  Furthermore, how often should  these assumptions be updated, and what process should be used to  update future estimates?
What recourse, if any, should parties have if they disagree with this  funding mechanism?
What oversight, if any, is needed in this area?
section_title: Technical Issues Related to Proposal II
paragraphs: According to postal officials, unlike Proposal I, in Proposal II the Service  would maintain control of the funds used to prefund the retiree health  benefits cost for new employees. These officials have also stated that the  Service would be responsible for determining the proper economic and  demographic assumptions to be used in calculating the annual fund  amount. However, questions arise about how the Service estimated these  costs for fiscal years 2006-2010. For example, the Service provided us with  estimates of these costs that ranged from $214 million in fiscal year 2006 to  $687 million in fiscal year 2010. The Service then adjusted these numbers  downward to $100 million for fiscal year 2006 and to $300 million for fiscal  year 2010. According to postal officials, this downward adjustment was  made to reflect attrition. Although we attempted to verify the method used  to lower these estimated costs, we were unable to obtain the necessary  data in the time available to complete our work. As with Proposal I, while  the Service has said that it intends to fund this obligation for employees  hired after fiscal year 2002, it is not currently required to prefund.  Questions similar to those raised in Proposal I would also relate to  consideration of this proposal, including the following:  Should prefunding retiree health benefits for new employees be  voluntary or legislatively mandated?
How should the annual funding amount be determined?
What oversight, if any, is needed in this area?
section_title: Questions Remain about the Accounting Treatment of the Retiree Health Benefits Obligation
paragraphs: Regardless of which proposal is adopted, questions remain about how the  retiree health benefits obligation should be reflected in the Service’s  financial statements. The Service currently uses a pay-as-you go basis of  accounting for its retiree health benefits obligation. We previously reported  that we believe the Service should consider whether the accrual basis of  accounting is both the acceptable and appropriate method for this  obligation, especially considering the importance of giving full  consideration to economic realities as the Service attempts to transform  itself in order to respond to major operational and financial challenges.  Postal Service management and the Board of Governors, the Postal Rate  Commission, Congress, and other stakeholders need to have a clear  understanding of the Service’s true financial condition as difficult  transformation decisions are being considered.
It is our understanding that the Service would not adopt the accrual basis  of accounting under either of the proposals presented, but would disclose  the amount of its retiree health benefits obligation in the footnotes to its  financial statements.  While enhanced disclosure would be a positive step,  we continue to believe that accrual accounting is needed in order to  provide all stakeholders with the soundest and most transparent basis for  decisionmaking.  In our view, the enactment of P.L. 108-18 could be viewed  as a significant event that triggers the need to reassess the accounting  treatment currently used by the Service with respect to these obligations,  and even more strongly reinforces our view that full accrual accounting  should be adopted for financial statement reporting purposes.  Given the  unique nature of the Postal Service retiree health benefits obligation and  the impact of P.L. 108-18, it may be prudent for the Service and its auditors  to consult with the Financial Accounting Standards Board (FASB) on the  appropriate accounting treatment for this obligation for financial statement  reporting purposes.
A postal official has expressed concern that accrual accounting for this  obligation would result in immediate rate increases of significant  magnitude. We recognize that such an approach may initially result in  higher rate increases than would otherwise be the case under a pay-as-you- go basis; however, rate increases would likely be more moderate in the  longer term. Various options may exist for addressing the effect of  recognizing this obligation, including possible amortization of any current  unfunded obligation over a reasonable time period, such as 20-40 years. To  further explore these options, we believe that the Service should work with  the Postal Rate Commission and other appropriate stakeholders to  determine options for phasing in any potential effect on postal rates.
We will be assessing the impact of the accounting treatment for the retiree  health benefits obligation for whichever proposal is adopted, as well as for  the Service’s pension obligation, as part of our ongoing work.
section_title: Conclusions
paragraphs: The Service faces an uncertain future. First-Class Mail volume continues to  decline, and new revenue sources are not apparent. The Service faces  significant unfunded obligations, the largest of which is for retirees, which  must be addressed. Further, decisions must be made as to whether current  or future ratepayers, or taxpayers, should be responsible for paying these  obligations. The Service has acknowledged that it needs to reduce its  operating costs to deal with the decline in First-Class Mail volume and meet  its obligations. The most direct way for the Service to do this is to become  more efficient by standardizing its operations and reducing excess capacity  in its network as part of an integrated strategy to rationalize its  infrastructure and workforce. The Service has stated that it plans to reduce  its debt and finance capital investment necessary to transform itself from  rate increases within the rate of inflation. It also proposes to prefund at  least some of its retiree health benefits obligation. However, it is not clear  based upon available information from the Postal Service whether it can  accomplish these goals. If sufficient funding for transformation initiatives  is not available, or if it does not achieve additional cost savings, significant  additional efficiency gains may not be achieved. In addition, if larger postal  rate increases are needed, further declines in mail volume could result.  These scenarios could thereby threaten the Service’s future financial  viability.
It is against this backdrop of fairness to current and future ratepayers and  taxpayers, affordability, and the ability of the Service to achieve its  transformation goals that the Service’s proposal to eliminate the escrow  requirement and its two funding proposals must be weighed. We believe  that the continuation of the escrow requirement after fiscal year 2005  without allowing the Service to use the funds has the potential for  significantly raising postal rates unnecessarily. Rate increases of the  magnitude necessary to fund this escrow requirement in the future may  precipitate further declines in mail volume and could hinder the Service’s  ability to achieve other financial goals. Furthermore, Congress has other  means by which it can direct or guide the Service in its use of funds if it  chooses to do so.
Both funding proposals presented by the Service are generally consistent  with the provisions of P.L. 108-18. Proposal I, which is preferred by the  Service, hinges on transferring the responsibility for military service  pension costs from the Service to the Treasury. Proposal I would result in a  greater postal rate increase and would shift more of the responsibility for  the retiree health benefits obligation to current ratepayers.  Proposal II, on  the other hand, would require less of a postal rate increase, focus more on  rate mitigation, and shift less of the responsibility for the retiree health  benefits obligation to current ratepayers than Proposal I. This would leave  future postal ratepayers with more of the burden of paying for costs  unrelated to products and services they receive.
Under both proposals, a portion of the retiree health benefits obligation  would remain unfunded, and the Service currently does not intend to  account for or report on its retiree health benefits obligation on an accrual  basis under either proposal. Thus, the full extent of the Service’s obligation  would not be recognized on its financial statements. Finally, the Service  anticipates that it will be able to pay down debt and fund capital  investments through inflation-based rate increases under both proposals.   In our view, the Service needs to begin addressing its retiree health benefits  obligation as soon as it can afford to do so, and to the extent it can. The  most substantive way it will be able to do this, as well as enhance its overall  financial viability, is by effectively implementing the transformation goals it  and the President’s Commission set forth, particularly by becoming more  efficient and rationalizing its infrastructure and workforce. It is therefore  critical for the Service to have the capital funding needed for  transformation. Although the Service believes it would be able to generate  enough funds, this is not clear because the Service has not yet presented a  comprehensive integrated infrastructure and workforce rationalization  plan. However, the Service has agreed to do so, as well as report  periodically on its progress in implementing its Transformation Plan.  Finally, a number of technical issues need to be considered that are  associated with the Service’s two funding proposals, including the  implementation of any prefunding of the Service’s retiree health benefits  obligation and the manner in which the Service should amortize and report  on its obligation.
section_title: Matters for Congressional Consideration
paragraphs: To ensure continuing progress in addressing the Service’s financial  challenges, we suggest that Congress consider the following:  Repealing the escrow requirement after receiving an acceptable plan  from the Service describing how it intends to rationalize its  infrastructure and workforce and is confident that the Service is making  satisfactory progress on transforming itself into a more efficient  organization and implementing its transformation goals.
Directing the Service to fund specific purposes that Congress believes  are especially important—such as prefunding the retiree health benefits  obligation or supporting and possibly accelerating the Service’s  transformation efforts—if the Service does not provide an acceptable  plan for rationalizing its infrastructure and workforce, or show  satisfactory progress in implementing transformation, or if Congress  wants greater assurance that the Service will spend funds in a particular  manner. In this regard, we have already recommended that the Service  provide periodic reports on the status of its transformation initiatives  and other Commission recommendations.
Addressing implementation issues related to the retiree health benefits  obligation. For example, one key issue that would need to be further  explored is what options may be available that will allow the Service to  amortize its unfunded retiree health benefits obligation over a specified  time period (e.g., 20-40 years) and prefund the retiree health benefits  obligation for future retirees.
section_title: Agency Comments and Our Evaluation
paragraphs: The Postal Service provided comments on a draft of this report in a letter  from the Chief Financial Officer dated November 21, 2003. These  comments are summarized below and reproduced in appendix II. The  Service’s letter stated the following:  It was pleased that our report found its proposals to be consistent with  P.L. 108-18, and that its preferred proposal presented a more equitable  balance of costs between current and future ratepayers.
It would have to raise rates to generate funds for the escrow  requirement.
The issue of the affordability of the proposals should be viewed as a  question of whether the ratepayers can afford them.
It was concerned with our recommendation that Congress repeal the  escrow requirement after it receives an acceptable plan from the Service  concerning rationalization of its infrastructure and workforce, and if  Congress believes that the Service is making satisfactory progress on its  transformation goals.
The Service believes that it already provides adequate information to  Congress for reviewing its plans and progress on transformation. Thus,  the Service believes that using the escrow as an oversight mechanism is  not necessary and will result in forcing the Service to raise rates.
It believes that its Proposal I is in the best interest of the taxpayers and  postal stakeholders.
In response to the Service’s comment regarding the affordability issue, we  agree that affordability to ratepayers is an important consideration and  discuss the impact of these proposals on rate increases and volume. We  have also added language to our report to clarify this point.
Regarding the Service’s concern about tying the escrow requirement to an  acceptable infrastructure and workforce rationalization plan, we  understand the Service’s concern that if the escrow requirement is not  repealed, it would have to raise rates unnecessarily. We agree that  establishing an escrow account without allowing the Service to use the  funds would not be a desirable outcome, and that is one of the reasons why  we suggested that Congress consider repealing the escrow requirement. On  the other hand, contrary to the Service’s view, we believe the escrow  requirement is an opportunity for Congress to review how the Service plans  to address a number of long-term challenges, including debt repayment,  capital projects, an unfunded retiree health benefits obligation, and its  progress toward transformation. If the Service provides Congress with an  acceptable plan in the next several months and Congress finds the plan and  the Service’s transformation progress satisfactory, we believe Congress  should have sufficient time to repeal the escrow requirement so that an  escrow account would not be needed. Thus, the Service would not have to  include the operating expense associated with the escrow requirement in  its rate base for the next rate case filing. Alternatively, if Congress is not  satisfied, it could direct the Service to fund specific activities or purposes  through means other than an escrow requirement.
Finally, the Service believes that using the escrow requirement for  additional oversight is not needed, because it has provided Congress with  adequate information on its plans and progress toward transformation.   While we agree that the Service provides a variety of reports and plans to  Congress, including its November 2003 Transformation Plan Progress  Report, the Service has not provided Congress with a comprehensive and  integrated infrastructure and workforce rationalization plan. We believe  such a plan is needed because the Service’s rationalization of its  infrastructure and workforce is among the most important initiatives in the  Service’s Transformation Plan since it will significantly affect the Service as  well as so many employees, mailers, and communities. Recognizing the  widespread interest and potential controversy associated with any changes  in this area, it is critical that the Service inform Congress and the public  about its rationalization strategies and plans. We, as well as the President’s  Commission, believe that these initiatives are also key to the Service’s  efforts to cut costs and become more efficient. Accordingly, we believe  oversight in this area is necessary, and that information related to the cost  of these initiatives and the Service’s ability to fund them will be needed to  assure Congress that the Service is continuing to make progress in  implementing its Transformation Plan.
We will send copies of this report to the Chairmen and Ranking Minority  Members of the House and Senate Committees on Appropriations, as well  as Representative John M. McHugh, Chairman of the House Special Panel  on Postal Reform and Oversight; Representative Danny K. Davis, Senator  Daniel K. Akaka, Senator Thomas R. Carper, the Postmaster General, the  Secretary of the Treasury, the Director of the Office of Personnel  Management, the Director of the Office of Management and Budget, the  Chairman of the Postal Rate Commission, and other interested parties. We  will also make copies available to others on request. In addition, this report  will be available at no charge on GAO's Web site at http://www.gao.gov.
Staff acknowledgments are included in appendix III. If you have any  questions about this report, please contact Bernard L. Ungar, Director,  Physical Infrastructure Issues, at (202) 512-2834 or at ungarb@gao.gov.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives for this report were to fulfill our legislative mandate to  evaluate the Postal Service’s proposal for use of the savings accruing to the  Service from enactment of pension reform legislation.  We evaluated the  report based on its consistency with P.L. 108-18.  We also addressed the  escrow requirement that the Service identified as an issue in its report, and  identified issues based upon our previous work that Congress may want to  consider in assessing the Service’s proposals, including the fairness and  affordability of the proposals, and the ability of the proposals to help the  Service achieve its transformation goals.  Finally, we discussed other  pertinent issues that we identified in the course of our review.
To assess whether the proposals were consistent with the provisions of P.L.  108-18, we reviewed the legislative history of P.L. 108-18. We then assessed  how well each of these proposals addressed the Sense of Congress and the  Matters to Consider expressed in that legislation.  We also reviewed the  Commission recommendations to determine if the proposals were  consistent with this work.
To assess the escrow requirement, we reviewed the Service’s report,  interviewed postal officials, and analyzed the Postal Service’s financial data  to assess the impact of the escrow requirement on the Service’s financial  situation. We also interviewed congressional staff to discuss the purpose of  this account.
To identify issues we had previously reported on, we reviewed our previous  work.  To assess how well each proposal addressed fairness issues, we  reviewed Postal Service documents and interviewed Postal Service  officials.  We also assessed the affordability of each proposal by obtaining  and analyzing Postal Service documents, including the Five-Year Strategic  Plan FY 2004-2008, the Integrated Financial Plan for Fiscal Year 2004, the  Five-Year Strategic Capital Investment Plan 2004-2008, annual reports, and  materials provided by the Service in support of its proposals.  We did not  independently verify any of the financial data provided by the Postal  Service. We also reviewed actuarial reports regarding the retiree health  benefits obligation, and analyzed the Service’s proposed funding  mechanism.  We did not independently verify any of the actuarial reports.  We also reviewed the Service’s April 2002 Transformation Plan to assess  progress in this area.  To assess the impact on the federal budget, we  reviewed the federal budget and documents prepared by the Congressional  Budget Office related to the effect of P.L. 108-18 on the federal budget, and  we conducted interviews with officials from the Congressional Budget  Office.
To identify other pertinent issues that Congress may want to consider, we  reviewed Postal Service documents, the Commission’s report, and our  previous work.  We also conducted interviews with congressional staff,  OPM, and Postal Service officials.
The Service raised another issue in its report that was not within the scope  of our review.  The Service has expressed concern with the method that  OPM used to determine the amount of the postal CSRS fund.  The Service  believes that OPM’s methodology assigns an unreasonably low portion of  the retirement benefit to the federal government, so it provided OPM with  two alternatives to consider.  OPM did not agree with the first alternative  and did not respond to the second alternative.  P.L. 108-18 required OPM, in  consultation with the Postal Service, to develop the methodology used to  determine the amount of the postal CSRS fund.  The law also afforded the  Service the opportunity to appeal OPM’s methodology to the Board of  Actuaries of the Civil Service Retirement System, which the Service is  currently considering.   Thus, we did not include this issue in the scope of  our review.
We conducted our review at Postal Service headquarters in Washington,  D.C., from October 1, 2003, through November 25, 2003, in accordance with  generally accepted government auditing standards.
section_title: Comments from the U.S. Postal Service
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Bernard L. Ungar, (202) 512-2834.
section_title: Staff Acknowledgments
paragraphs: Teresa L. Anderson, Alan N. Belkin, Christine Bonham, Margaret Cigno,  Nikki Clowers, Kathy Gilhooly, and Kenneth E. John made key  contributions to this report.
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