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STUDY PROVES POSTAL SERVICE CUSTOMERS ARE SUBSIDIZING FEDERAL TREASURY
The following is an article prepared for the PostCom Bulletin by Saturation Mailers Coalition Executive Director Donna Hanbery. Hanbery also serves as the Executive Director of the Alliance of Independent Store Owners and Professionals and is a member of the Board of Directors of the Association for Postal Commerce and its Executive Committee.
The Saturation Mailers Coalition (SMC), a group of advertising mailers that includes free paper publishers, shared mailers, and coupon mailers, released a report in December that analyzes the history of the Postal Service’s pension problems and revealed that the Postal Service is on track to subsidize the federal treasury by $150 billion.
The SMC study, entitled “The State of Pension and Retiree Benefit Obligations for the Postal Service and the Need for Reform,” was commissioned as a result of the November, 2002 announcement by the Office of Personnel Management (OPM) that the Postal Service annual payments of “principal” and interest to the Treasury to fund postal pensions were based on erroneous calculations. Although the assumption had been that the Postal Service “owed” the general treasury money for pension costs, an actual audit of the amounts paid, a review of the true rates of return on funds received, and correction of prior actuarial assumptions showed the Postal Service was on pace to overfund the Civil Service Retirement System (CSRS) pension obligation by at least $70 billion. An obvious conclusion from the OPM announcement was that postal ratepayers were paying higher than necessary postage rates than what was required to cover Postal Service pension costs.
The industry reacted promptly and called on Congress to fix the problem. In April, 2003, Congress passed Public Law 108-18. The law was a compromise that only provided a short-term fix. It suspended overpayments through 2005 but thereafter all “savings” from the legislation must be paid into an escrow account. In addition, the new law transferred to the Postal Service, and in turn all postal ratepayers, the obligation to make payments to the Treasury for the costs of civil service pensions related to military service and other government service of postal employees. This was a new twist. The Postal Service had not been required to shoulder the costs for military service under prior law. The question and propriety of shifting military cost responsibility to the Postal Service was discussed briefly when Public Law 108-18 was passed. Supporters of the law recognized this was not fair to postal ratepayers and built into the law a plan for the Postal Service, the Treasury, and the General Accounting Office (GAO) to submit plans and proposals about how the military issues should be addressed so that the subject could be taken up in future legislative action.
On September 30, 2003, the Postal Service and the Treasury issued conflicting reports. A subsequent GAO report pointed to problems in both the Treasury and Postal Service proposals but did not offer any solutions or recommendations.
As a group of mailers whose members pay anywhere from 20% to 50% of their gross revenues on postage, SMC members questioned, “What’s going on with pension accounting?” To get to the bottom of the question, SMC members commissioned a research report on the history of Postal Service pension funding and the treatment of Postal Service retiree benefit obligations. SMC’s members, businesspeople who must keep a sharp eye on their own bottomline, recognized the need for a credible and factual overview of the entire Postal Service pension problem, both as it exists today and historically, before legislative and corrective action could be taken.
Report Highlights
In spite of the popular perception that the Postal Service is “subsidized” by the federal budget, postal ratepayers have been making excessive payments for Postal Service employee pensions. If corrections are not made, postal ratepayers will be responsible for past and future overcharges of $150 billion. This amounts to nearly $700 for every man, woman, and child in the country.
If the current law is not corrected, the Postal Service will be the only self-supporting, federal agency that is required to pay the costs of military service for its employees. As an employer required to give preference to job applicants with military service under the Veteran’s Preference Laws, this obligation shifts a significant portion of federal obligations and debt to postal ratepayers. It operates as a hidden and disproportionate tax on mailers. This obligation also includes other pension costs of government service including volunteer service time spent with the Peace Corps, Americorps, and VISTA programs.
There is precedent for Congress to step in and take over improperly transferred pension obligations. In 1979, Congress transferred responsibility for certain pension funds to the District of Columbia. In creating the District of Columbia, and transferring obligations to it relating to federal pension obligations, Congress recognized it had unfairly saddled the District of Columbia with an unfunded liability. Congress recognized that this transfer “did not occur because of any action taken or any failure to act that lay within the power of the District of Columbia government or the District of Columbia Retirement Board.” Accordingly, Congress took back and assumed responsibility for the unfunded liability for pension funds for the District’s federal employees.
If further pension reform legislation is not enacted, the Postal Service will need to increase rates in 2006 by over 6% just to cover the additional pension obligations. When these amounts are added to other inflationary costs, mailers are looking at a double digit rate increase.
The $150 billion of past and future overcharges to the Postal Service come from four different sources:
a. Annual payments for civil service pensions based on erroneous calculations, are required to be paid into an escrow account after the temporary rate relief provided by Public Law 108-18 ends in 2005.
b. The new obligation for civil service employee costs for military and government service pensions totaling $28 billion.
c. The existing obligation for the Postal Service to pay for the military and government service portion of employees covered by the Federal Employees Retirement System or FERS. The total amount of these costs has not been calculated.
d. A new and unfair formula for the allocation of obligations between pre-1971 employment (before the creation of the Postal Service) and post-1970 employment (when the old Post Office Department was abolished). After the OPM discovered and announced the Postal Service was paying more than its fair share of annual payments for civil service pensions, the OPM needed to do an allocation of the obligations between the pre-Postal Service (federal government) employee service and post-Post Office Department employee service. The OPM changed the methodology used to calculate these obligations. The new formula resulted in the Postal Service bearing a much higher portion (somewhere between $50 billion and $80 billion) of costs related to an employee’s entire years of service than the old formula. Under the new formula, the federal government and the treasury do not share in the costs of subsequent pay raises and COLAs that were fairly accounted for and shared between the federal treasury and ratepayers by the formula OPM always used in the past.
The Executive Summary and Introduction of the report debunks the commonly accepted notion that the Postal Service is subsidized by taxpayers and the federal government. These sections summarize the magnitude of transfers that have occurred, and will continue to occur, if permanent pension reform legislation is not addressed as part of long-term postal reform. The report stresses that left uncorrected, the subsidies will continue to place mounting challenges on a postal system that faces grave financial and business problems. The report asks for Congress, the Postal Service, and ratepayers to demand that this system of discriminatory taxation ends. The President’s appointment of a Commission to study the Postal Service, and the recommendations of the Commission, along with the growing efforts by elected officials in both the House and Senate to accomplish postal reform, make it timely and appropriate for the Postal Service’s balance sheet to be cleaned up so that excessive postal rates do not chase away existing or potential postal volumes before reform is accomplished.
Postal Service Retiree Benefits
In 1970, President Nixon signed into law the Postal Reorganization Act which abolished the Post Office Department and created the U.S. Postal Service. Under that law, Postal Service employees continue to participate in pension programs for federal employees. (CSRS and FERS) but the Postal Service is not responsible for retirement benefits earned due to Post Office Department service prior to the 1971 establishment of the Postal Service.
The CSRS Obligation and P.L. 108-18 Legislation
In 1971, CSRS was the only retirement program for postal employees. In 1987 the government created another retirement program for new hires, FERS. Over the years the Congress has changed the way CSRS has been funded. Each change (until P.L. 108-18 in 2003) put additional burdens on the Postal Service (and therefore on its consumers and customers because the Postal Service is self-funding). In total, the Postal Service was required by statute (prior to P.L. 108-18) to make amortization payments to the CSRS in the amount of $91.5 billion, regardless of whether that overfunded or underfunded its true obligations. As a result of a request from GAO, the OPM determined that at current payment rates, the Postal Service was on track to overfund its obligations for CSRS pensions by a total of $71 billion (that calculation was later revised to $78 billion).
P.L. 108-18 was enacted to address these overpayments. However, it also includes provisions that could eliminate the statute’s benefits. Beginning in FY 2006, the Postal Service is required to resume payments into escrow. Further, P.L. 108-18 added a new and unique burden to the Postal Service making it responsible for CSRS pension costs associated with military and federal volunteer service time (such as the Peace Corps). Prior to the law, CSRS benefits paid for time spent in the military were charged to the general treasury. GAO estimates this additional burden will cost the Postal Service approximately $28 billion over time.
Military and Government Service Pensions
Historically the Postal Service has not been required to fund pension obligations associated with military and volunteer service time under the civil service retirement system and the new obligation imposed by P.L. 108-18 should be repealed. Unlike other federal agencies, where it does not matter if the Department of Energy or the Air Force is allocated a share of pension costs because they all come out of the general treasury, the Postal Service is supported by the rates paid by its customers. The Postal Service is an independent government agency expected to compete in the private marketplace. It is not fair to saddle postal ratepayers, and businesses that rely on the Postal Service, with what is in essence a tax on postal rates to subsidize the pension costs of military and government service. This burden is particularly significant because the Postal Service is a major employer of veterans. Under the Veterans Preference laws, veterans “go to the head of the line” when it comes to postal hiring. The President’s Commission unanimously recommended that the responsibility for the CSRS military benefits portion of the retiree costs be transferred back to the Department of Treasury, where it resided before the recent legislation. For the same reasons, the Postal Service should be relieved of responsibility for funding military benefits under the FERS program as well. The amount of subsidies ratepayers are making to the general treasury to fund FERS pension costs is not known. The SMC report requests that the total amount of this funding be calculated and that this sum, plus the $28 billion in CSRS pensions recently shifted to the Postal Service, be properly accounted for as debts of the general treasury and the federal government.
Pre 19971 Obligations: New Pension Cost Allocation Formula Lowers Federal Government Share and Increases Costs for Postal Service and Ratepayers
When the Postal Service was created, the federal government retained the responsibility for employee pension obligations that occurred prior to July 1, 1971 when the Post Office was a federal cabinet department. The newly created, independent Postal Service assumed responsibility for obligations arising after June 30, 1971. When OPM calculated the Postal Service’s CSRS obligation last year, it was required by law to allocate the total pension obligations between the pre-Postal Service (federal government) employee service and post-Post Office Department employee service to determine the federal government and Postal Service share. The Postal Service reviewed the allocation methodology used by OPM and discovered OPM had changed the formula from the one used in the past. The new formula shifts another $50 billion to $80 billion in costs to the Postal Service and ratepayers. This is not fair. OPM should return to the allocation methodology used in the past to be consistent with past practice and to prevent further transfers of federal government obligations to the Postal Service and ratepayers.
Health Care
The Postal Service is responsible for the employer’s portion of the health care premium of its retirees. Currently, the Postal Service does not accrue contributions to cover future retiree health benefits for its current employees, but pays only its share of premiums for current retirees – so-called “pay as you go” accounting.
GAO has recommended that the Postal Service change to accrual accounting to recognize costs in the period its employees earn the benefit. Accrual accounting for retiree benefits should not, per se, have a large impact on the Postal Service. However, there is a major problem with the transition from pay-as-you-go to accrual accounting: recovering the currently unfunded amount while also paying, on a dynamic basis, for current employees. If these payments must be shown as annual expenses, then postal rates will increase more so than they would without the change. GAO has estimated that the Postal Service’s obligation for retiree health care benefits for current and future retirees is between $40 billion and $50 billion.
Congress Must Act to Prevent Devastating Rate Increases
If no action is taken, the Postal Service will need to file for a rate increase of 12.5% in FY 2006 (or 18.2% in 2007 if rates are not increased in 2006). A large rate increase would be devastating to the mailing industry and the overall economy, leading to job losses and possible business failures. The Postal Service itself would be harmed as higher rates lead to volume declines and a potential “death spiral” for the Service. While there is some merit to the Postal Service proposals submitted under P.L. 108-18, even they would require significant rate increases and are not politically feasible due to their effect on the federal budget.
Fortunately, it is possible to prevent large rate increases by addressing all of the pension and health benefit issues together as part of postal reform. Congress should take steps to correct all of these issues together for the sake of the Postal Service, its customers, and the nation.