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

Letter

Background

Public Law 108-18 was enacted after we reported on the results of our review of an analysis of the funded status of the Postal Service’s CSRS pension obligations that OPM prepared at our request. This act adopted the administration’s proposal that the Postal Service be responsible for funding the value of benefits attributable to military and volunteer service of all employees first hired into civilian service after June 30, 1971, and a pro-rata share of those benefits for employees hired before the July 1, 1971, effective date of the Postal Reorganization Act (PRA).

In order to determine the funded status of the Postal Service’s CSRS obligations, OPM estimated the portion of the Civil Service Retirement and Disability Fund (CSRDF) that was attributable to the Postal Service, taking into consideration all past CSRS-related payments to CSRDF by the Service and its employees, including earnings on those payments, and the Service’s pro-rata share of all CSRS-related payments from CSRDF, including benefits attributable to military service, since July 1, 1971.

The act also requires that the Postal Service begin funding the portion of CSRS dynamic normal cost not otherwise funded with employee withholdings. When calculated on a dynamic basis, normal cost represents an amount of money that if set aside during employees’ working years will, with investment earnings, be sufficient to cover future benefits and expenses when due, so long as the plan’s economic and demographic assumptions hold true. Dynamic normal cost reflects the effect of assumed future general pay increases and annuitant cost-of-living adjustments (COLA) on the amount of benefits that will be ultimately paid. Consequently, when a plan’s dynamic normal cost is fully funded, unfunded liabilities due to inflation in salaries and annuity payments are avoided. This contrasts with static normal cost, wherein assumed future general pay increases and annuitant COLAs are not considered. With static funding, new unfunded liabilities are created as salary and annuity inflation actually occur.

There are different actuarial methods for determining dynamic normal cost. OPM calculates the dynamic normal cost for the CSRS and FERS plans using an actuarial cost method – aggregate entry age normal – which expresses normal cost as a level percentage of aggregate basic pay for a group of new plan entrants. Consequently, this method allocates costs without regard to how benefits actually accrue. It is calculated by dividing the actuarial present value of expected future benefits a group of new plan entrants is expected to receive after retirement by the actuarial present value of the group’s expected salaries over their working lives. OPM includes the past military service of new plan entrants in its calculation of expected future benefits. Consequently, OPM’s aggregate entry age normal method allocates the cost of military service benefits proportionally over an employee’s civilian career. For fiscal year 2003, the dynamic normal cost percentage for regular CSRS employees was 24.4 percent of basic pay, of which employees pay 7.0 percent and the Postal Service the remaining 17.4 percent. Similarly, the dynamic normal cost of FERS, currently 11.5 percent of basic pay for regular employees, is fully funded with employer contributions of 10.7 percent and employee withholdings of 0.8 percent.

Public Law 108-18 also requires that starting on September 30, 2004, the Postal Service begin funding any projected underfunding of its CSRS obligations calculated by OPM as of September 30, 2003. This funding is to occur over a total of 40 years, with OPM recalculating the projected underfunding and the amortization payments as of the close of each subsequent fiscal year. In the event that a surplus exists as of September 30, 2025, the Postmaster General is required to submit a report to the Congress describing how the Postal Service proposes to use such surplus.

By changing the funding of military service benefits, the act made the Postal Service (1) retroactively responsible for funding a portion of military service benefits that have already been paid to annuitants and funded by Treasury on a pay-as-you-go basis and (2) prospectively responsible for funding some or all of the military service benefits expected to be paid to current and future Postal Service annuitants. The cumulative effect of this change in law was to shift responsibility for funding approximately $27 billion (net present value as of September 30, 2002) in military service costs from taxpayers to postal ratepayers.

Summary of Key Issues and Our Observations

The agencies made various arguments and assertions throughout their proposals, which we organize into the following four common, overarching issues: relationship of military service to employing agency operations, historical funding of CSRS benefits payable to Postal Service employees, applicability of FERS cost allocation and funding methods to CSRS, and funding of military service benefits by federal and other entities.

The agencies’ positions reflect their own perceptions of what is fair to the taxpayers and ratepayers and how the Postal Service should be treated vis- à-vis other federal agencies and considering its mandate to be self- supporting. As stated previously, in assessing the agencies' positions, we considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. The agencies’ positions with respect to each of these issues, as well as our observations on them, are presented below. We presented the agencies’ positions in the order that best framed the issue at hand.

Relationship of Military Service to Employing Agency Operations

Postal Service Position

Military service has no relation to Postal Service operations, on which postal rates are based, and, in fact, had no relation to the operations of the former Post Office Department. Each of the federal employment services – military and civilian – have separate compensation, retirement benefit, and other benefits programs. Furthermore, the use of military service in the calculation of CSRS retirement benefits is a matter beyond the control of employer agencies.

OPM and Treasury Position

Receiving credit for past military service is a civilian retirement benefit that Postal Service employees receive just like other benefits, such as cost-of- living increases on annuitant benefit payments. Furthermore, individuals retiring from the Postal Service receive CSRS credit for their military service only because of their employment with the Postal Service.

GAO Observations

To a large extent, whether or not an employee’s military service has any relationship to agency operations is a function of whether or not the Congress requires that agencies fund a portion of the costs related to this service. The positions noted above go beyond mandated financial responsibilities and seek to first define more specifically the nature and extent of this relationship before deciding on whether postal ratepayers or taxpayers should fund CSRS military service benefits.

Clearly, any service that is creditable towards a CSRS or FERS benefit but is rendered while employed by an entity other than the Postal Service has no direct relationship to the Service’s operations. This includes military service, service performed while employed by another agency and covered by CSRS or FERS, and service covered by another of the federal government’s defined benefit retirement plans, but is subsequently credited towards a CSRS or FERS benefit upon an employee’s acceptance of an appointment to a covered position and meeting other requirements. In addition to the uniformed services, a number of other federal agencies have compensation systems and benefit programs that are separate from those covering Postal Service employees. Having a retirement system that covers so many civilian employees and permitting the transfer of service between federal retirement systems promotes the portability of benefits, and so eases the movement of employees to other positions within the federal government.

The crediting of military service towards a civilian service retirement benefit has been a feature of CSRS since it was established in 1920 and of FERS since it was established in 1986. This feature is one of many that collectively constitute a plan of benefits that defers a portion of an employee’s total compensation until retirement. Agencies and other entities whose employees are covered by CSRS and FERS have no control over the features offered, among them employee elections such as whether to provide a survivor benefit to a spouse, because the plan’s provisions are established by the plan sponsor, which in this case is the federal government.

OPM and Treasury view military service of federal employees as related to employing agency operations by virtue of the fact that credit for such service is a feature of the CSRS and FERS plans in which the employees participate. They further note that it is only because an employee serves in a covered civilian position for a minimum of 5 years that the employee’s military service can be used in the calculation of a CSRS or FERS benefit.

The Postal Service’s statements suggest a view of military service as involving the performance of duties unrelated to the delivery of the mail and further imply that any related compensation – including retirement benefits – should be paid for by the taxpayer. Defining this relationship is particularly important for the Postal Service because the costs associated with its retirees’ service credits earned while employed by any other entity and which are not funded by the retiree while employed by the Postal Service must be passed onto postal ratepayers. This contrasts to those agencies that receive the vast majority of their funding through appropriations, where taxpayers ultimately fund all benefits regardless of whether and to what extent agencies recognize employee retirement costs in their budgets. One can reasonably argue that the cost of military service benefits would more equitably be borne by the entity that benefited from the military service (Department of Defense), which, in essence, would mean that taxpayers would ultimately bear these costs.

Historical Funding of the CSRS Benefits Payable to Postal Service Employees

OPM and Treasury Position

The funding of military service benefits by the Treasury Department was a feature of a funding methodology established by law in 1969 that did not require employer agencies to fund the full cost of all benefits not otherwise funded by employees. The prior funding mechanism for the Postal Service under CSRS (including the special treatment of military service) was developed in piecemeal fashion that never fully addressed all of the factors that affect the costs of the system. The special treatment of military service that applied to Postal Service employees can be viewed as more of an historic accident than a deliberate policy choice. This is supported by the fact that each time a comprehensive system for funding federal annuities was developed there was no special treatment of military service. In view of the long history of congressional action, it is reasonable to assume that the Congress may have taken action to address the issues of excess interest earnings and the costs of military service, even if OPM had not identified the problems with the static funding methodology.

Postal Service Position

Since 1969 the Treasury Department has been responsible for funding CSRS benefits attributable to military service. The Treasury Department remained responsible for funding these benefits for employees of all federal agencies even after laws had been subsequently enacted to make the Postal Service responsible for additional retirement costs attributable to its decisions and actions that result in increases in employee pay on which benefits are computed. Retroactively making the Postal Service responsible for funding military service benefits would result in a cost transfer of $27 billion to postal ratepayers, the great majority of which has already been paid for by Treasury. Furthermore, approximately 90 percent of the cost of military service was earned before the Postal Service was created in 1971.

GAO Observations

The fact that the Congress had not acted until just recently to make the Postal Service responsible for funding the creditable military service of its employees is taken by the opposing parties to mean different things, which they assert, not surprisingly, support their respective positions. Both parties acknowledge that, prior to P.L. 108-18, when previously presented with the opportunity to reconsider the Postal Service’s funding of its employees’ CSRS benefits, the Congress chose to leave Treasury responsible for funding all CSRS military service benefits.

The Postal Service contends that the passage of successive legislation relating to the financing of its CSRS costs without ever requiring that it fund CSRS military service costs was the Congress’s way of reaffirming its intention of having the Treasury fund these costs for Postal Service employees just as they do now for all other federal agency employees. OPM and Treasury contend that the piecemeal fashion with which the Congress made the Postal Service responsible for funding an increasing share of the CSRS benefits of its employees constitutes a pattern that indicates the Congress could have eventually made the Service responsible for military service costs.

It is difficult to discern or even infer from the legislative history of the laws that preceded P.L. 108-18 any particular policy choice that can be seen as indicative of the Congress’s future intentions or predictive of what ultimately led to enactment of P.L. 108-18. Any legislative action must be viewed within the context of the particular facts and circumstances that existed at the time the Congress was considering specific legislation, including budgetary and fiscal considerations. For these reasons, we consider both parties’ arguments and assertions in connection with this point to be speculative and inconclusive.

With respect to the Postal Service’s assertion that approximately 90 percent of the cost of military service was earned before the Service was created in 1971, we asked OPM to calculate the additional cost to the Treasury of making it responsible for the entire cost of benefits attributable to all military service estimated to have been rendered before 1972 by both former and current employees of the Postal Service. OPM estimated the additional cost to be approximately 75 percent of the $27 billion total cost to Treasury to fund all CSRS military service benefits.

Based on our review of the documentation provided by the Postal Service’s actuarial consultants, it appears that the Service’s assertion was meant to convey that approximately 90 percent of the military service in years allocated to it by OPM’s pro-rata methodology was estimated to have occurred before 1972.

Applicability of FERS Cost Allocation and Funding Methods to CSRS

OPM and Treasury Position

The payment of military service costs for Postal Service employees is consistent with the funding of FERS, the funding system on which the new law was patterned. Although the method for funding CSRS benefits prior to P.L. 108-18 did not require the Postal Service to fund the cost of military service, it also did not contemplate that the actuarial gains or losses of the retirement system would be attributed to the Postal Service. Consequently, the Postal Service should not benefit from the positive experience of the CSRDF without assuming the other responsibilities that come with an approach that funds the full cost of all benefits, including military service.

Postal Service Position

There is no identity between FERS funding and CSRS funding. FERS was created on a dynamically funded basis to phase out CSRS and to establish a more limited federal employment benefits program that would be fully funded by employees and employer agencies. CSRS is a totally different program from FERS, with different benefits and levels of contribution. In fact, CSRS was never fully funded by employees and employer agencies, with the exception of the Postal Service. Therefore, a change in funding methods that allows the Postal Service to receive credit for its share of higher than expected investment returns on contributions it made in accordance with the prior funding method does not justify the transfer of military service costs. There is no basis to substantiate this rationale either in accepted actuarial or financial practice.

GAO Observations

The agencies present opposing views on whether FERS funding requirements can or should be applied to CSRS benefits. Whether or not the obligation to fund military service benefits should be linked with the benefit of higher than expected investment returns is crucial to their respective arguments. There are numerous similarities and differences between CSRS and FERS, one difference being the manner and extent to which the full cost of plan benefits have been funded, including military service benefits. The fact that there are currently differences between CSRS and FERS benefits and funding requirements does not preclude changing how the Postal Service’s contributions are calculated under CSRS to a method similar to FERS. That said, we also did not find any requirement that past military service be included in the dynamic normal cost factor used for funding purposes in order for the Postal Service to be treated as a separate employer for purposes of financing CSRS and, thus, benefit from past investment gains. In fact, there are actuarial methods that would fund the cost of military service benefits in a manner different than the one OPM currently uses. Therefore, there is nothing that inextricably links the past investment experience of the CSRDF to how military service benefits are funded.

Funding of Military Service Benefits by Federal and Other Entities

Postal Service Position

No agency other than the Postal Service – including other self-supporting agencies – fully funds the cost of its employees’ CSRS benefits, including military service benefits. Furthermore, private sector companies are not responsible for funding military service costs.

OPM and Treasury Position With respect to the argument that it is not fair to ask the Postal Service to finance the cost of military service because it would be the only agency required to do so, the fact that Treasury funds CSRS benefits attributable to military service rather than employer agencies merely shifts the timing of when the contributions are made and whether they are charged to a Treasury appropriation or to agency budgets. In either case, the costs would still ultimately be borne by the taxpayer. In contrast, one of the primary goals of the Postal Reorganization Act was to ensure that all of the Postal Service’s costs are recovered through postal revenues, not taxpayer dollars. Therefore, all pension costs for employees that are attributable to service after the reorganization should be borne by the Postal Service.

GAO Observations

There are numerous government entities whose programs are required by law to be financed by the users of their services and that pay less than the portion of the CSRS dynamic normal cost not otherwise paid for by employee withholdings, including military service costs. These include the Federal Deposit Insurance Corporation (FDIC) and the Pension Benefit Guaranty Corporation (PBGC).

However, there have also been a few entities that have either been required by law or have voluntarily chosen to fund the dynamic normal cost of employees who retained CSRS or FERS coverage. For example, the Metropolitan Washington Airports Act of 1986 required that the Metropolitan Washington Airports Authority (MWAA) pay the difference between the dynamic normal cost of CSRS benefits (including military service costs) and the contributions made by those career civilian employees of the Federal Aviation Administration who transferred to MWAA with the leasing of the Metropolitan Washington Airports in 1986. In addition, the Power Marketing Administrations (PMA) agreed to recover the dynamic normal cost of CSRS (including military service costs) through their power rates prospectively beginning in fiscal year 1998. The PMAs agreed to do so in response to a series of reports we issued.

One might reasonably argue that the Postal Service should be treated like other agencies with respect to its funding of pension costs. However, the fact that other federal entities are not currently fully funding the government’s share of CSRS normal costs does not necessarily support the argument that the Postal Service should not fund them. Likewise, it does not necessarily support the argument that other agencies start paying for these costs. Rather, it merely demonstrates the inconsistent treatment of agencies in this regard.

Our long-standing position has been that employer agencies should fund the dynamic cost of the government’s retirement programs not otherwise funded with employee withholdings and deposits. We also observed on numerous occasions that, as a result of charging less than the dynamic cost of CSRS not otherwise provided by employee withholdings, agencies whose operations are intended to be self-supporting receive large subsidies that are not recognized in the cost of their goods and services. However, our previous recommendations and observations did not specifically address whether the cost of military service benefits should be included as part of a dynamic normal cost factor. Nor did we examine the issue of whether the entity that benefited from the service should ultimately pay for any related benefits. Additionally, with the exception of self-supporting agencies that pay the dynamic cost of these benefits, taxpayers ultimately fund the benefits, regardless of whether these costs are included in individual agency budgets. Therefore, charging the self-supporting agencies’ customers for the government’s share of the dynamic normal cost of pension benefits results in real savings to the taxpayers and, therefore, is not just a change in the timing and source of funding.

Regarding the Postal Service’s statement that private sector companies are not responsible for military service costs, it is true that private sector companies are not required to give credit for past military service in their defined benefit pension plans. However, it should also be noted that the taxes these companies pay to the general fund of the Treasury are used to pay for various costs incurred by the federal government, including the military service benefits of military retirees and those employees who retired from agencies other than the Postal Service. The Postal Service is exempt from paying any corporate income taxes.

Observations on Alternative Military Service Cost Allocation Approaches

The OPM and Treasury proposal presented five possible approaches for allocating the cost of benefits attributable to military service between the Treasury and the Postal Service. The Postal Service’s position is that taxpayers, not postal ratepayers, should be responsible for the full cost of CSRS military service benefits, and it did not offer any other funding alternatives as part of its military service funding proposal.

The information from the OPM and Treasury proposal is reprinted below in table 1. OPM calculated the estimated cost to the Treasury of each approach using the pro-rata approach to allocating military service set forth in P.L. 108-18 as the baseline.

OPM’s P.L. 108-18 pro-rata approach requires that the Postal Service fund (1) all CSRS military service benefits of employees hired into a civilian position after June 30, 1971, and (2) a pro-rata share of these benefits for employees hired before July 1, 1971. OPM estimated this pro-rata share of benefits by first allocating an employee’s total creditable military service based on the ratio of pre-1971 civilian service to the total civilian service which the employee accrued both before and after the effective date of the Postal Reorganization Act. OPM’s methodology also assumed that the Postal Service should be responsible for (1) the effect of post-1971 general pay increases and increasing benefit accrual rates on the final amount of military service benefits at retirement, including those military service credits allocated to the federal government, and (2) a proportional amount of post-1971 annuitant cost-of-living adjustments. These aspects of OPM’s methodology apply to the second, third, and fourth funding alternatives presented in the OPM and Treasury proposal. The other two alternatives – Treasury pays the entire cost of military service or Postal Service pays the entire cost after September 30, 2002 – have the responsible agency funding all CSRS benefits attributable to military service, including all annuitant COLAs. Appendix B of the OPM and Treasury proposal provides examples of how an example retiree’s benefit payment would be allocated into civilian and military service portions and how the federal government’s share of those amounts would be determined for each of the funding alternatives.

The total estimated additional cost to the Treasury for each funding alternative is equal to the difference between the projected funded status – or “supplemental liability” – of the current law pro-rata approach with that of each alternative. Appendix C of the OPM and Treasury proposal provides the net asset, present value of future benefits, and present value of future contributions components of the “supplemental liability” for each funding alternative. “Because military service only becomes creditable at the time when an employee actually retires, it would not be unreasonable to charge Postal Service for the entire amount of military service for all employees who retired from the Postal Service after June 30, 1971. It was only because these employees retired from the Postal Service that they received credit for their military service.” ”Civil Service rules required that to receive a regular retirement benefit the employees must have at least five years of civilian service and then attain additional age and service requirements.”

The rules governing the crediting of military service are established in law and regulation. Generally, military service can be used in the computation of any annuity after having completed 5 years of civilian service and if the following three conditions are met: (1) the military service was active and terminated under honorable conditions, (2) the military service was performed before separating from a civilian position covered by CSRS, and (3) the employee makes any required deposits.

The OPM and Treasury statement that an employee must meet additional age and service requirements beyond the first 5 years to receive a regular (voluntary) retirement benefit is accurate, as is the statement that an employee must retire – in this case from the Postal Service – in order for military service to be counted in the computation of an annuity benefit. However, an employee is entitled to receive a disability retirement benefit at any age with 5 years of civilian service and a deferred annuity beginning at age 62 with 5 years of civilian service. Once employees meet the minimum years of civilian service necessary to be entitled to any type of annuity and meet the conditions listed above, they are entitled to have all of their military service included in the computation of their annuity.

For purposes of determining how best to allocate CSRS military service benefits, it is important to note that OPM assumed that employees render military service prior to when they first enter civilian service. This leads to the presumption that the military service credits of many of the Postal Service’s retirees were already creditable towards an annuity by the time the Service commenced operations in 1971. Yet, for purposes of estimating the Postal Service’s share of the CSRS portion of CSRDF assets and the actuarial present value of future benefits, OPM allocated the years of creditable military service of former and current Postal Service employees proportionally over the employees’ civilian career.

For example, an employee who retired in 1991 with 10 years of civilian service before July 1, 1971, and 20 years after June 30, 1971, would have two-thirds of any military service allocated to the Postal Service, even though OPM assumes that all military service was rendered before the employee was hired into a covered civilian position. Consequently, this example employee’s military service would have been creditable towards a civilian pension benefit before the Postal Service commenced operations. The OPM and Treasury proposal did not include an allocation alternative that reflects the extent to which military service became creditable after the Postal Service commenced operations.

The scoring of each alternative approach to funding military service hinges on how Postal Service would spend any additional savings. The Postal Service was required by P.L. 108-18 to submit a proposal detailing how it would expend any savings accruing to it after fiscal year 2005 as a result of enactment of P.L. 108-18. In that separate proposal, the Postal Service provided two alternatives to spending any savings. The first alternative assumes the responsibility for funding the CSRS military service benefits of its current and former employees will return to the Treasury, while the other alternative assumes that the Postal Service will retain this responsibility as defined under P.L. 108-18. Consequently, we present our estimates of the budgetary implications of only these two military service funding alternatives in our companion report on the results of our mandated review of the Postal Service’s savings plan proposal. This report is entitled Postal Pension Funding Reform: Issues Related to the Postal Service’s Proposed Use of Pension Savings, GAO-04-238.

Conclusion

The agencies made various arguments as to which agency – Postal Service or Treasury – should fund the cost of CSRS military service benefits. We made various observations that considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. Ultimately, the Congress must make this decision. Should the Congress decide that the Postal Service should be responsible for funding CSRS military service benefits attributable to its employees, the Congress should then decide the extent to which these benefits should be attributed to the Postal Service and perhaps to other self-supporting agencies. Even if the Congress decides that self-supporting agencies should not be required to fund CSRS military service benefits, the Congress should still consider whether these agencies should be required to fund the dynamic normal cost of their CSRS employees’ benefits that excludes the military service component.

The OPM and Treasury proposal provided five alternative allocation approaches; however, none of their approaches included an allocation alternative that reflects the extent to which the Postal Service’s current and former employees had, by the time the Service commenced operations in 1971, completed the 5 years of civilian service needed to be entitled to have their past military service credits used in the computation of an annuity. This alternative would provide an estimate of Postal Service’s obligation that includes only military service benefits that became creditable after the Postal Service commenced operations.

Matters for Congressional Consideration

To help promote full and consistent funding of CSRS benefits among self- supporting federal agencies, we suggest that the Congress consider requiring all self-supporting federal entities to pay the dynamic cost of employee pension benefit costs not paid for by employee contributions and deposits, excluding military service costs, and treating all self-supporting federal entities consistently with regard to whatever decision is made on Postal Service funding of the military service component of CSRS employee benefits.

Recommendation for Executive Action

If the Congress decides that the Postal Service should be responsible for military service costs associated with its employees, we recommend that OPM provide the Congress with estimates of the additional cost to the Treasury of making the Postal Service responsible only for employee military service that became creditable after June 30, 1971.

Agency Comments and Our Evaluation

Postal Service

In written comments on a draft of this report the Postmaster General expressed concern with what he saw as an inference that the Postal Service should be responsible for the cost of an employee’s military service because it hires the employee knowing of the past military service. The Postmaster General also reaffirmed the Postal Service’s commitment to the fundamental policy of veterans’ preferences.

Our report did not imply that knowing of past military service was a relevant factor in determining whether the Postal Service should bear this cost, but rather simply stated the fact that the right to receive credit for past military service arises only as a result of employment in a civilian position covered by CSRS or FERS.

The Postmaster General also stated that our suggestion that the Congress consider requiring all self-supporting entities to fund the dynamic costs of employee pension benefits is not an issue for the Postal Service because it began doing so as of April 2003. Our report states that there are other self- supporting agencies that are not required to fund military service costs and do not otherwise fully fund the dynamic normal cost of their CSRS employees’ benefits as the Postal Service is now required to do. We highlighted this difference in funding requirements to illustrate an inconsistency that the Congress may want to consider as it contemplates CSRS employee benefits funding by the Postal Service. The Postmaster General’s written comments are reprinted in appendix III.

OPM and Treasury

In written comments on a draft of this report, the Secretary of the Treasury and Director of OPM disagreed with our statement that there is no direct relationship between an employee’s prior military service and the operations of the Postal Service. They stated that granting credit for military service in calculating civilian pensions enables the Postal Service to recruit and retain veterans, who provide direct benefits to the operations of their employer. We agree that the crediting of military service facilitates the recruitment and retention of veterans who, subsequent to their military service, contribute to postal operations. However, we continue to view the relationship between military service and postal operations as indirect because the activities performed while serving in the military did not directly contribute to the daily operations of the Postal Service at the time the military service was rendered.

In their comment letter, the Secretary of the Treasury and Director of OPM also provided certain clarifications with respect to their policy positions and beliefs. For example, they stated that their estimate, made at our request, of the value of benefit costs due to military service before 1971 includes all increases in the value of those benefits that resulted from pay raises granted by the Postal Service, but that they do not endorse this method, especially insofar as it permits Postal Service pay increases to then increase the cost allocated to the Treasury. We do not endorse this or any other cost allocation method. As stated in our report, our position is that the Congress needs to decide whether the Postal Service should fund the cost of military service attributable to military service of its current and former employees. If the Congress decides that the Postal Service should fund these costs, then it needs to decide which method to use in allocating costs to the Postal Service. The written comments from the Secretary of the Treasury and Director of OPM are reprinted in appendix IV.

We are sending copies of this report to the Director of the Office of Personnel Management, the Postmaster General, the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. We are also sending this report to the Honorable John M. McHugh, House of Representatives, as the Chairman of the Special Panel on Postal Reform and Oversight, House Committee on Government Reform. The report is also available at no charge on GAO’s home page at http://wwww.gao.gov. If you have any questions about this report, please contact Linda Calbom, Director, Financial Management and Assurance, at (202) 512-8341, or Robert Martin, Acting Director, at (202) 512-6131. You may reach them by e-mail at calboml@gao.gov and martinr@gao.gov. Other key contributors to this report were Joseph Applebaum, Richard Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Scott McNulty, and Brooke Whittaker.

Report from OPM and Treasury

Report from the United States Postal Service

Comments from the United States Postal Service

Comments from OPM and Treasury

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