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. 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. 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. 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. 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. 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.