U.S. Postal Service: Health and Pension Benefits Proposals Involve Trade-offs
Published: 2013-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USPS continues to be in a serious financial crisis, with little liquidity in the short term and a challenging financial outlook in the long term as profitable First-Class Mail volume continues to decline. Critical decisions by Congress are needed on postal reform legislation that has been proposed in both the U.S. Senate and the House of Representatives. Various proposals would restructure the financing of postal retiree health benefits, including required payments to prefund these benefits; enable USPS to introduce a new health plan for postal employees and retirees; and restructure the funding of postal pensions, including addressing a potential surplus in funding postal pensions under FERS.
GAO has previously testified that a comprehensive package of legislative actions is needed so that USPS can achieve financial viability and assure adequate benefits funding for more than 1 million postal employees and retirees. GAO has also previously reported on various approaches Congress could consider to restructure the funding of USPS retiree health benefits and pensions.
This testimony discusses (1) funding USPS retiree health benefits; (2) USPS's proposal to withdraw its employees and retirees from FEHBP and establish its own health plan; and (3) a potential surplus in funding postal pensions under FERS. This testimony is based primarily on GAO's past work.
section_title: What GAO Found
paragraphs: GAO has reported that Congress needs to modify the U.S. Postal Service's (USPS) retiree health benefit payments in a fiscally responsible manner. GAO also has reported that USPS should prefund any unfunded retiree health benefit liability to the maximum extent that its finances permit. Deferring funding for postal retiree health benefits could increase costs for future ratepayers and increase the risk that USPS may not be able to pay for these costs. Key considerations for funding postal retiree health benefits include:
Trade-offs regarding USPS's current and long-term financial condition: One rationale for prefunding is to protect USPS's future viability by paying for retirement benefits as they are being earned. However, USPS currently lacks liquidity to fund required payments for prefunding retiree health benefits. To the extent prefunding is postponed, larger payments will be required later, when they likely would be supported by less First-Class Mail volume. No prefunding approach will be viable unless USPS can make the payments.
Possible consequences to USPS employees and retirees: Fully funded benefits protect against an inability to make payments later and make promised benefits less vulnerable to cuts.
Allocating costs between current and future ratepayers : Deferring payments can pass costs from current to future postal ratepayers. Allocating costs among different generations of ratepayers is complicated by the unfunded liability that was not paid for in prior years.
Funding targets : An 80 percent funding target for postal retiree health benefits would effectively lead to a permanent unfunded liability of roughly 20 percent. An option could be to build in a schedule to achieve 100 percent funding in a later time period after the 80 percent level is achieved.
GAO has reported that USPS would likely realize large financial gains from its proposal to withdraw its employees and retirees from the Federal Employees Health Benefits Program (FEHBP) and establish its own health plan. According to USPS's estimates, these financial gains would significantly reduce its health benefits expenses and eliminate its unfunded retiree health benefit liability--with increased use of Medicare by retirees comprising most of the projected liability reduction. USPS also has projected that its proposal will increase Medicare spending. As Congress considers proposals for a USPS health care plan, it should weigh the impact on Medicare, which also faces fiscal pressure, and other issues, including establishing safeguards for assets of the USPS health plan and ensuring protections for plan participants are comparable to those in FEHBP.
GAO has also reported on key considerations regarding the release of any Federal Employees Retirement System (FERS) surplus to USPS. First, estimates of retirement benefits liabilities contain a significant degree of uncertainty and can change over time. Second, returning surpluses whenever they develop would likely result in an eventual unfunded liability. Alternative options to address funding surpluses include reducing USPS's annual FERS contribution either by amortizing the surplus over 30 years (which would mirror the treatment of deficits) or by offsetting the contribution against the full surplus each year until the surplus is used up.

section_title: Letter
paragraphs: We appreciate the opportunity to be here today to discuss U.S. Postal  Service (USPS) benefit issues in the context of proposed postal reform  legislation. USPS continues to be in a serious financial crisis, with little  liquidity in the short term and a challenging financial outlook in the long  term as profitable First-Class Mail volume continues to decline. Members  of this Committee have recently introduced comprehensive postal  legislation that would, among other things, restructure the financing of  postal retiree health benefits, including required payments to prefund  these benefits; authorize USPS to collectively bargain with its unions to  introduce a new health plan for postal employees; and restructure the  funding of postal pensions, including addressing a potential surplus in  funding postal pensions under the Federal Employees Retirement System  (FERS). In addition, USPS and others have offered proposals in these  areas. This testimony will focus on issues related to (1) funding USPS  retiree health benefits; (2) USPS’s proposal for its own health plan  outside of the Federal Employees Health Benefits Program (FEHBP) and  (3) funding postal pensions including addressing a potential surplus in  funding postal pensions under FERS.
GAO, U.S. Postal Service: Proposed Health Plan Could Improve Financial Condition, but  Impact on Medicare and Other Issues Should be Weighed before Approval, GAO-13-658  (Washington, D.C.: July 18, 2013); U.S. Postal Service: Status, Financial Outlook, and  Alternative Approaches to Fund Retiree Health Benefits, GAO-13-112 (Washington, D.C.:  Dec. 4, 2012); U.S. Postal Service: Allocation of Responsibility for Pension Benefits  between the Postal Service and the Federal Government, GAO-12-146 (Washington,  D.C.: Oct. 13, 2011); U.S. Postal Service: Strategies and Options to Facilitate Progress  toward Financial Viability, GAO-10-455 (Washington, D.C.: Apr. 12, 2010). that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. Each of the reports cited  in this testimony provides detailed information on our scope and  methodology.
subsections: section_title: Background
paragraphs: As table 1 shows, at the end of fiscal year 2012, USPS had $96.1 billion  in unfunded benefits and other liabilities: $63.5 billion in unfunded  liabilities for retiree health and pension benefits, as well as $15.0 billion in  outstanding debt—the statutory limit—and $17.6 billion in workers’  compensation liabilities. These liabilities have become a large and  growing financial burden, increasing from 83 percent of USPS revenues  in fiscal year 2007 to 147 percent of revenues in fiscal year 2012.
USPS’s dire financial condition makes paying for these liabilities highly  challenging. In the short term, USPS is in a financial crisis, has reached  its $15 billion statutory borrowing limit, and lacks liquidity to fund needed  capital investment. USPS has not made legally-required payments of  $11.1 billion to prefund retiree health benefits and does not expect to  make its required prefunding payment of $5.6 billion due at the end of this  month. In the long term, USPS will be challenged to pay for its liabilities  on a smaller base of profitable First-Class Mail. First-Class Mail volume  has declined 33 percent since it peaked in fiscal year 2001, and USPS  projects this volume will continue declining through fiscal year 2020.
section_title: Funding Postal Retiree Health Benefits
paragraphs: The Postal Accountability and Enhancement Act (PAEA) established the  Postal Service Retiree Health Benefits Fund (PSRHBF) and required  USPS to begin prefunding health benefits for its current and future postal  retirees, with annual payments of $5.4 billion to $5.8 billion from fiscal  years 2007 through 2016. Subsequent USPS payments are required to  be based on an actuarial approach to funding through fiscal years 2056  and beyond. USPS has made a total of $17.9 billion in prefunding  payments since the prefunding schedule began in fiscal year 2007, with  the most recent prefunding payment that was made being for $5.5 billion  in fiscal year 2010; a total of $33.9 billion in required prefunding payments  remain from the 10 years of fixed payments. USPS’s $5.5 billion retiree  health benefit payment requirement that was originally due at the end of  fiscal year 2011 was delayed until August 1, 2012. USPS missed that  payment, as well as the $5.6 billion payment that was due by September  30, 2012. USPS has reported that due to a low level of available cash, it  will be unable to make its $5.6 billion payment due by September 30,  2013. The required prefunding payments that USPS does not make are  reported as outstanding liabilities in USPS’s financial statements. Looking  forward, USPS has reported that low levels of liquidity will continue to  exist, absent legislative actions by Congress.
We have previously reported that Congress needs to modify USPS’s  retiree health benefit payments in a fiscally responsible manner.we also stated that USPS should prefund any unfunded retiree health  benefit liability to the maximum extent that its finances permit. Deferring  funding for postal retiree health benefits could increase costs for future  ratepayers and increase the risk that USPS may be unable to pay for  these costs.
Key considerations for Congress regarding the requirements for funding  postal retiree health benefits include the following:
Trade-offs regarding USPS’s current financial condition and long-term  prospects: One of the rationales for prefunding retirement benefits is  to protect the future viability of the organization by paying for  retirement benefits as they are being earned, rather than after  employees have already retired. However, USPS currently lacks  liquidity and postal costs would need to decrease, or postal revenues  to increase, or both, to fund required payments for prefunding retiree  health benefits. To the extent prefunding payments are postponed,  larger payments will be required later, when they likely would be  supported by less First-Class Mail volume. No prefunding approach  will be viable unless USPS can make the required payments.
Fixed versus actuarially determined payments: The retiree health  benefits payment schedule established under PAEA was significantly  frontloaded, with total payment requirements through fiscal year 2016  that were significantly in excess of what actuarially determined  amounts would be.
Possible consequences to USPS employees and retirees: Funded  benefits protect against an inability to make payments later, make  promised benefits less vulnerable to cuts, and reduce the risk that  employee pay and benefits may not be sustainable and could be  reduced.
Allocating costs between current and future ratepayers: Deferring  payments until later can have the effect of passing costs from current  to future postal ratepayers. One of the rationales for prefunding is for  current ratepayers to pay for retiree health benefits being earned by  current employees. The appropriate allocation of costs among  different generations of postal ratepayers is complicated by what  might be called the “legacy” unfunded liability that was not paid for in  prior years.
Funding targets: We have expressed concern about a proposed 80  percent funding target for postal retiree health benefits that would  have the effect of carrying a permanent unfunded liability equal to  roughly 20 percent of USPS’s liability, which could be a significant  amount. If an 80 percent funding target were implemented because  of concerns about USPS’s ability to achieve a 100 percent target level  within a particular time frame, an additional policy option to consider  could include a schedule to achieve 100 percent funding in a  subsequent time period after the 80 percent level is achieved.
section_title: USPS’s Proposed Health Plan Outside of FEHBP
paragraphs: We recently reported on USPS’s proposal to create a postal health care  plan outside of FEHBP. This proposal would offer health care coverage  to postal employees and retirees (about 1 million of whom currently  participate in FEHBP).employees’ and retirees’ share of premiums would first be established by  USPS and subsequently, for union-covered employees, in collective  bargaining.
Under this proposal, initial benefits and postal  USPS’s proposed health care plan is designed to increase postal retirees’  enrollment in Medicare as well as take advantage of Medicare subsidies  for employer-based prescription drug plans. Specifically, it is designed  so that all Medicare-eligible retirees would enroll in Medicare Parts A and  B, with Medicare acting as the primary insurer for those enrollees and the  USPS plan paying costs above what Medicare would cover for current  retirees. USPS’s proposed plan would include prescription drug benefits  that qualify it to receive a federal subsidy and drug discounts under  Medicare Part D. Under one USPS option for funding this plan, USPS  proposes that it would be authorized to invest plan assets without the  approval of the Secretary of the Treasury in non-Treasury securities, such  as stocks and bonds, as well as commodities, foreign currency, and real  property. (See app. I for more information on the USPS proposed health  plan.)
We have reported that USPS would likely realize large financial gains  from its proposed health care plan. According to USPS’s estimates,  USPS would reduce its health benefits expenses and eliminate its  unfunded retiree health benefit liability, primarily by increasing the use of  Medicare by postal retirees once they are eligible for Medicare generally  beginning at age 65. USPS estimated that its plan would reduce its retiree  health benefit liability by $54.6 billion, with the increased use of Medicare  accounting for most of this reduction.  USPS also estimated that the plan  would reduce its total annual required health care payments by $7.8  billion in the first year of implementation and by $33.2 billion over the first  5 years of implementation. In addition, some of the elements of the  proposal—notably an option to allow USPS to invest health plan funds  outside of Treasury securities, such as in stocks, commodities, and  foreign currency—would add uncertainties that could reduce funds  available for its employees’ and retirees’ future health care.
We have reported that under USPS’s health care plan as designed for  year one, postal employees and retirees would have coverage for a  similar package of services as under selected FEHBP plans, and the level  of coverage would be similar for many services, with some exceptions  (e.g., services received outside of USPS’s approved network). We  estimated that, had the proposed USPS plan been implemented in 2013,  most employees and retirees would have had similar or lower premiums  compared to selected FEHBP plans; but total costs—premiums and costs  for the use of care—could be higher for some.
We have also reported that withdrawing the approximately 1 million USPS  employees and retirees from FEHBP, which would be required under  USPS’s proposal, would reduce FEHBP’s enrollment by an estimated 25  percent. Despite the significant change in enrollment, most nonpostal  enrollees would likely not be affected by a USPS withdrawal beyond what  selected FEHBP plan representatives expect to be small increases or  decreases in premiums. However, USPS’s withdrawal could lead the  small number of FEHBP plans with primarily postal enrollment to  withdraw from the program. For example, if the 4 plans with 70 percent or  more postal enrollment discontinue participation in FEHBP under a USPS  withdrawal, an estimated 1 percent (about 29,000) of the approximately 3  million nonpostal enrollees in FEHBP would need to select a new health  plan.
As Congress considers proposals for a USPS health care plan, it should  weigh the impact on Medicare as well as other issues, including  establishing safeguards for plan assets and ensuring FEHBP-comparable  protections for plan participants. The primary policy decision for Congress  to make with respect to such proposals is whether to increase eligible  postal retirees’ use of Medicare. USPS projects that its plan would  increase Medicare spending by an average of $1.3 billion per year over  the first 5 years of its plan—about 0.2 percent of Medicare’s annual costs  of more than $550 billion. Our report also noted that Medicare is on a  fiscally unsustainable path over the long term. A USPS health plan that  would add costs to Medicare would have to be weighed alongside the  fiscal pressure already faced by Medicare.
If Congress decides to move forward with USPS’s proposed health plan  as part of a broader reform package, we have identified other important  policy issues that also should be addressed. Specifically, Congress  should consider:  safeguards for USPS health plan fund assets by placing appropriate  constraints on their asset allocations (for example, limiting  investments to Treasury securities, including inflation-indexed  Treasury securities; or, to the extent that more risky assets are  permitted, using a conservative approach to setting the prefunding  discount rate); standards for the disposition of any surplus health plan assets that  reduce the risk of a new unfunded liability emerging in the future (for  example, standards for amortizing any surplus to mirror the  amortization of any unfunded liability); designation of an independent entity responsible for selecting  actuarial assumptions used to determine the health plan’s funded  status; and protections for postal employees and retirees that are comparable to  those under FEHBP, including a formula for retirees’ contribution to  health costs.
section_title: The Potential FERS Surplus
paragraphs: USPS had an estimated FERS surplus of $3.0 billion at the end of fiscal  year 2012, according to the Office of Personnel Management (OPM), and  OPM will be calculating an updated estimate for the end of fiscal year  2013. USPS has reported an estimate that its FERS surplus would have  been substantially larger if its FERS liability had been estimated using  postal-specific demographic and pay increase assumptions. USPS has  stated that it believes, as a matter of equity, its FERS liability should be  estimated using USPS-specific pay increase and demographic  assumptions instead of government-wide pay increase and demographic  assumptions. As we have reported, legislation would be needed to return  to USPS any FERS surplus.
As we also have reported, we would support a remedy to the asymmetric  treatment of FERS surpluses and deficits under current law. conservative approach to permit USPS to access any FERS surplus  would be to use it to reduce USPS’s annual FERS contribution by  amortizing the surplus over 30 years (which would mirror the legally  required treatment of deficits). A second approach would be to reduce  USPS’s annual FERS contribution by offsetting it against the full amount  of surplus each year until the surplus is used up; this would be  comparable to what occurs for private-sector pension plans. We have  previously suggested that any return of the entire surplus all at once  should be done with care. A one-time-only return of the entire surplus  should be considered as a one-time exigent action only as part of a larger  package of reforms and restructurings. Otherwise, returning surpluses  whenever they develop would likely eventually result in an unfunded  liability.
Key issues for Congress to consider in connection with the potential  USPS FERS surplus include:
Fluctuations in estimated liabilities: Estimates of liabilities for  retirement benefits contain a significant degree of uncertainty and can  change over time.
Whether to use USPS-specific assumptions to measure USPS’s  FERS liability: We support using the most accurate numbers possible.  If USPS-specific assumptions are used in estimating USPS’s FERS  liability, we suggest that they also be used in estimating USPS’s  CSRS and retiree health liabilities. We suggest that if USPS-specific  assumptions are to be used, that the assumptions be recommended  by an independent body (such as OPM’s Board of Actuaries).
GAO, Responses to Questions for the Record; Committee on Homeland Security and  Governmental Affairs, February 13, 2013, Hearing on "Solutions to the Crisis Facing the  U.S. Postal Service" (Washington, D.C.: Apr. 5, 2013). Under current law, USPS must  fund towards any FERS deficit but does not benefit from any FERS surplus. See  GAO-12-146, p. 37.
Other liabilities: While USPS had an estimated FERS surplus of $3.0  billion dollars at the end of fiscal year 2012, it had an estimated CSRS  deficit of $18.7 billion at the same time. Both estimates could change  if USPS-specific assumptions are used. In addition, as noted earlier in  Table 1, USPS also has an unfunded liability for retiree health benefits  and liabilities for workers’ compensation and its debt to Treasury, for a  total of $96.1 billion of liabilities and unfunded benefit liabilities.  __________________________________________________________  In closing, we continue to believe that a comprehensive package of  legislative actions is needed so that USPS can achieve financial viability  and assure adequate benefits funding for more than 1 million postal  employees and retirees. Chairman Carper, Ranking Member Coburn, and  Members of the Committee, this concludes my prepared statement. I  would be pleased to answer any questions that you may have at this time.
section_title: GAO Contact and Key Acknowledgments
paragraphs: For further information about this statement, please contact Frank  Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods,  at (202) 512-2834 or todiscof@gao.gov; or John E. Dicken, Director,  Health Care at (202) 512-7114 or dickenj@gao.gov. Mr. Todisco meets  the qualification standards of the American Academy of Actuaries to  render the actuarial opinions contained in this testimony regarding the  measurement issues, funding issues, and risks associated with pension  and retiree health care obligations. Contact points for our Congressional  Relations and Public Affairs offices may be found on the last page of this  statement. In addition to the contacts named above, Lorelei St. James,  Director, Physical Infrastructure Issues; Teresa Anderson; Susan  Barnidge; Kenneth John; Jaclyn Nelson; Kristi Peterson; Steve Robblee;  Friendly Vang-Johnson; Betsey Ward-Jenks; and Crystal Wesco made  important contributions to this statement.
section_title: Appendix I: Key Elements of the Proposed U.S. Postal Service Health Care Plan
paragraphs: Appendix I: Key Elements of the Proposed U.S.  Postal Service Health Care Plan Description   The U.S. Postal Service’s (USPS) plan is designed so that all Medicare-eligible retirees  would enroll in Medicare Parts A and B. Those who do not enroll would have their  benefits reduced by the amount Medicare would have paid had the individual enrolled. As  is the case under the Federal Employees Health Benefits Program (FEHBP), Medicare  would serve as the primary payer of health care costs, and for existing retirees, the USPS  plan would cover 100 percent of any costs above the amounts covered by Medicare Parts  A and B.
USPS would design the prescription drug benefits under its plan to qualify as an  Employer Group Waiver Plan (EGWP) under Medicare Part D. This would qualify USPS  to receive—for those eligible for Medicare—a federal subsidy from the Medicare program  for drug costs, a discount from pharmaceutical companies for brand name drugs, and  federal coverage for drug costs above a catastrophic limit.
Introduction of two new tiers of coverage   The proposed plan would include four coverage tiers: self only, self and spouse, self and  children, and self and family. Premiums for each tier would be set according to the claims  experience of the group. USPS’s proposed addition of two tiers (self and spouse and self  and children) to the options available under FEHBP would be to reflect the various stages  of family status that participants may experience over the course of their career and  retirement.
USPS would contract with a single vendor to administer its plan; that vendor would  negotiate with providers for payment rates, process claims, and provide wellness and  disease management programs.
For employees retiring a year or more after the USPS plan becomes effective (i.e., “future  retirees”), Medicare would be the primary insurer once the enrollee becomes eligible, and  the USPS plan would cover costs above what Medicare pays. However, future retirees  would be required to meet the USPS plan deductible and pay coinsurance.
Under one option of USPS’s proposal (which USPS refers to as “Scenario 2”),a its health  plan would be financed by a newly created fund called the Health Benefits Fund (HBF)  that would include: (1) the entire Postal Service Retiree Health Benefits Fund that would  be abolished upon its transfer to the HBF; (2) the balance of the fund that finances  FEHBP allocable to contributions by USPS, postal employees and retirees, including any  reserve fund amounts; (3) USPS contributions under its health plan; (4) contributions of  postal employees and retirees under the USPS health plan; (5) any interest on HBF  investments; (6) any other USPS receipts allocable to the USPS health benefits plan; and  (7) appropriations based on the service of officers and employees of the former U.S. Post  Office Department.  Under its proposal, USPS would be authorized to invest HBF assets without the approval  of the Secretary of the Treasury in non-Treasury securities, such as stocks and bonds, as  well as commodities, foreign currency, and real property. Also, USPS indicates that HBF  assets could not be used for (1) loans to USPS, such as to enable it to remain solvent; (2)  USPS payments to the federal government, such as for pensions and workers’  compensation; or (3) to finance USPS investments or USPS nonpostal initiatives to  generate revenue.  In any year when the amount of HBF assets exceeds USPS’s estimated actuarial liability  for retiree health benefits, USPS could authorize the surplus amount to be transferred to  the Postal Service Fund that finances most USPS expenses, provided that such  authorization is made pursuant to a recommendation by a majority of the Committee  overseeing the HBF.
Description   USPS would continue to prefund retiree health benefits, but under a purely actuarial  approach, without the fixed (non-actuarial) payments required under current law through  2016. Payments to the HBF would be based on the “normal cost” and amortization of any  unfunded liability or surplus of its retiree health care liabilities over an amortization period  ending at the later of 40 years after implementation or 15 years from the then-current  year.
USPS has also proposed another option for financing its health plan (which USPS refers to as  “Scenario 1”) under which retiree health benefits would continue to be financed from the Postal  Service Retiree Health Benefits Fund (PSRHBF).
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