USPS, an independent establishment of the executive branch, is intended to be a financially self-sufficient entity that covers its expenses almost entirely through postal revenues. In April 2001, we placed USPS on our First, in the short term, USPS’s ability to high-risk list for two reasons.continue to fulfill its mission on a self-supporting basis was threatened because of projected annual losses of $2 billion to $3 billion, severe cash flow pressures, and debt approaching its statutory borrowing limit without any debt reduction plan. Second, in the long term, increasing retirement- related expenses threatened to reduce USPS’s future cash flows and place upward pressures on postal rates. We have been reporting on USPS’s financial challenges, including those related to funding its retiree health benefit liability, over the past decade. In May 2002, the Comptroller General testified that USPS had about $100 billion in liabilities, including an estimated $49 billion in unfunded retiree health benefit liability. Unlike pension liabilities, USPS had been funding its retiree health benefit liability on a pay-as-you-go basis—an approach in which USPS paid its share of premiums for existing retirees, with no prefunding for any future premiums expected to be paid on behalf of current retirees and workers. In May 2003, the Comptroller General testified that USPS’s accounting treatment—which reflected the pay-as- you-go nature of its funding—did not reflect the economic reality of its legal liability to pay for its retiree health benefits, and that current ratepayers were not paying for the full costs of the services they were receiving. Consequently, the pension benefits being earned by USPS employees—which were being prefunded—were recovered through current postal rates, but the retiree health benefits of those same employees were not being recognized in rates until after they retired. The Comptroller General testified that without a change, a sharp escalation in postal rates in future years would be necessary to fund the cost of retiree health benefits on a pay-as-you-go basis. Two laws, enacted in 2003 and 2006, reformed USPS’s pension liabilities and required it to prefund retiree health benefits: The Postal Civil Service Retirement System Funding Reform Act of changed USPS funding of its Civil Service Retirement System (CSRS) pension liabilities (based on “dynamic assumptions” ) while retroactively transferring responsibility for funding the cost of CSRS benefits attributable to the military service of postal employees from the U.S. Treasury to USPS; required USPS to escrow the reduction in annual CSRS payments resulting from the funding changes in the act (about $3 billion); and required USPS to report to Congress on how it could use the CSRS savings realized after fiscal year 2005. USPS proposed to Congress in 2003 that the responsibility for funding the cost of CSRS benefits attributable to the military service of postal employees be transferred back to the U.S. Treasury and that it use the resulting savings to prefund its retiree health benefit liability. PAEA, enacted in 2006,transferred all responsibility for costs related to CSRS military service credit from USPS back to the U.S. Treasury, both retroactively and prospectively; this included all CSRS military service costs for postal employees since the inception of the Postal Service in 1971; established the PSRHBF to begin prefunding the health benefits of current and future postal retirees and transferred about $20 billion of “start-up” funds into the PSRHBF ($3 billion from the discontinued CSRS escrow—as USPS’s annual CSRS payment was suspended—and $17 billion from the surplus in the CSRS fund); required USPS to make annual payments ranging from $5.4 billion to $5.8 billion per year into the PSRHBF from fiscal years 2007 through 2016 to begin prefunding its retiree health benefit liability; and required OPM to calculate the remaining unfunded liability in 2017 and each subsequent year, and to calculate an amortization payment based on an amortization period that extends to 2056 or, if later, 15 years from the then-current fiscal year. As a result, in 2007 USPS began prefunding its retiree health benefits as its CSRS pension liability was significantly reduced and its annual CSRS payment was suspended. USPS stated in its 2007 Annual Report that such prefunding was a farsighted and responsible action that placed USPS in the vanguard of both the public and private sectors in providing future security for its employees, and augured well for its long-term financial stability, but also acknowledged that the required payments Contrary would be a considerable financial challenge in the near term.to statements made by some employee groups and other stakeholders, PAEA did not require USPS to prefund 75 years of retiree health benefits over a 10-year period. Rather, pursuant to OPM’s methodology, such payments would be projected to fund the liability over a period in excess of 50 years, from 2007 through 2056 and beyond (with rolling 15-year amortization periods after 2041). However, the payments required by PAEA were significantly “frontloaded,” with the fixed payment amounts in the first 10 years exceeding what actuarially determined amounts would have been using a 50-year amortization schedule. We testified in April 2007 that we had removed USPS from our high-risk list due in part to USPS’s financial improvements resulting from these congressional actions. From fiscal years 2003 to 2005, USPS’s annual pension expense declined by $9 billion. USPS had repaid over $11 billion of outstanding debt, reported $5.4 billion in cost savings and record high net incomes, and delayed rate increases from fiscal year 2003 until January 2006. Since fiscal year 2007, however, USPS has experienced significant financial challenges. USPS’s gap between expenses and revenues has grown significantly, as shown in figure 1. In addition, USPS’s outstanding debt to the U.S. Treasury increased from $2.1 billion at fiscal year-end 2006 to its current statutory-borrowing limit of $15 billion. In fiscal year 2009, we returned USPS to our high-risk list due, in part, to a projected loss of $7 billion—and an actual loss of over $8.5 billion—in fiscal year 2010. For fiscal year 2012, USPS had a net loss of almost $16 billion, which included $11.1 billion for required PSRHBF prefunding payments Furthermore, USPS’s future financial outlook that USPS did not make.is bleak as it projects further declines in mail volume and revenue by fiscal year 2020. USPS projects that First-Class Mail—which is highly profitable and generated about 44 percent of USPS’s revenue in fiscal year 2012—will decline in volume by about 42 percent by fiscal year 2020, as shown in figure 2. During the economic downturn, there has been an accelerated diversion of business and individual mail to electronic alternatives, and some businesses have left the mail entirely. USPS further projects that an economic recovery will not bring a corresponding recovery in mail volume because of continuing social and technological trends that have changed the way that people communicate and use the mail. USPS has several initiatives to generate new revenue; however, such efforts are unlikely to generate enough revenue in time to offset the projected decline in mail volume.cost-saving initiatives to achieve financial stability. Limited increases in revenue require USPS to seek aggressive consolidating its mail processing and transportation networks; $5 billion in compensation and benefits; and $8.5 billion through legislative changes, such as moving to a 5-day delivery schedule. At the same time, USPS’s plan would also reduce the overall size of the postal workforce by roughly 155,000 career employees, with many of those reductions expected to result from attrition. USPS reports in the plan that half of its current career employees—283,000 employees—will be retirement eligible by 2016. In March 2010, USPS presented a detailed proposal to the Postal Regulatory Commission (PRC) to move from a 6- day to a 5-day delivery schedule to achieve its workforce-reduction and cost-savings goals. USPS projected that its proposal to move to 5-day delivery by ending Saturday delivery would save about $3 billion annually and would reduce mail volume by less than 1 percent. However, on the basis of its review, PRC estimated a lower annual net savings—about $1.7 billion after a 3-year phase-in period—as it noted that higher revenue losses were possible. In February 2012, USPS updated its projected net savings from 5-day delivery to $2.7 billion after a 3-year implementation period. As noted earlier, USPS has also proposed withdrawing from the Federal Employees Health Benefits Program (FEHBP) and administering its own health care plan for its employees and retirees. This report looks at retiree health benefit funding options assuming that USPS continues to participate in FEHBP under current provisions. Adoption of any of the funding approaches analyzed in this report would not by itself preclude USPS from continuing to pursue its proposal to administer its own plan. If USPS’s proposal was adopted and if it was expected to result in cost savings, these projected savings would be reflected in a lower liability, a lower unfunded liability, and lower prefunding contributions than otherwise. We will be issuing a separate report evaluating USPS’s proposal to administer its own health care plan. Related to whether USPS should prefund retiree health benefits, some stakeholders have argued that such prefunding is primarily responsible for USPS’s dismal financial condition and is unfair, arguing that no other entity is required to conduct such prefunding.