The Postal Civil Service Retirement System Funding Reform Act of 2003, P.L. 108-18 requires that:

 

“The United States Postal Service, the Department of the Treasury, and the Office of Personnel Management shall, by September 30, 2003, each prepare and submit to the President, the Congress, and the General Accounting Office proposals detailing whether and to what extent the Department of the Treasury or the Postal Service should be responsible for the funding of benefits attributable to the military service of current and former employees of the Postal Service that, prior to the date of the enactment of this Act, were provided for under section 8348(g)(2) of title 5, United States Code.”

Executive Summary

It is the Administration’s position that the U.S. Postal Service (USPS) should be responsible for a share of the costs paid to retired employees of the Postal Service that arise from increasing Civil Service pension benefits because of military service. One of the primary goals for the reorganization of the Post Office into the USPS was to ensure that all the costs associated with the new organization be paid through stamp revenue and not through taxpayer dollars. Therefore, all pension costs for employees that are attributable to service after the reorganization should be borne by the Postal Service.

The question then is how to determine what portion of the cost of military credit is attributable to service since the Postal Service became independent in 1971. We maintain that the attribution method adopted in the new legislation (P.L. 108-18) is an easy-to-administer method that is fair to both the Postal Service and the Federal taxpayer.

The Postal Service should be Responsible for the Cost of Military Service Credits Attributable to Service Since the Postal Service Became Independent in 1971

The Postal Service Should Pay the Full Cost of Benefits Received by its Employees

We maintain that it has been a basic principle of the legislation that created the Postal Service that revenue and expenses for Postal Service should be kept separate from the rest of the Federal Government, and that the Postal Service should pay for all of its expenses through Postal rates. The benefits attributable to military service are a retirement benefit that Postal employees receive just like other benefits, such as the Cost of Living Allowances (COLAs) increases for annuitants, and Postal Service customers should pay for the full cost of all benefits received by its employees. 

Some have argued that it is not fair to ask the Postal Service to finance the cost of military service for Civil Service Retirement System (CSRS) employees, as it would be the only agency required to operate under this financing mechanism. However, for other agencies the special treatment of military service under the CSRS merely shifts the timing of when the contributions are made and whether they are charged to the Treasury or charged to agency budgets. In either case, the costs would still ultimately be borne by the taxpayer. By contrast, Postal Service costs are paid through postage revenues rather than funded by the Treasury.

The special treatment of military service that applied to Postal Service employees under the old law can be viewed as more of an historic accident than a deliberate policy choice.

As described in Appendix A, the prior funding mechanism for the Postal Service under CSRS (including the special treatment of military service) was developed in a piecemeal fashion that never fully addressed all of the factors that affect the costs of the system.

By contrast to CSRS, each time a comprehensive system for funding Federal annuities was developed there was no special treatment of military service. For example, in the Federal Employees’ Retirement System (FERS) that was enacted in 1984, the cost of benefits attributable to military service is borne by the agencies (including the Postal Service) through the normal cost. The Administration has also proposed the same method for funding the cost of CSRS benefits attributable to military service for non-Postal agencies under the Managerial Flexibility Act.

In view of the long history of Congressional action, it is reasonable to assume that Congress may have taken further action to address the issues of excess interest earnings and the costs of military service, if OPM had not identified the problems with the static funding methodology.

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.

The adoption of a new financing system for the Postal Service under P.L. 108-18 provided an opportunity to design a complete funding system for the Postal Service retroactive to when the Postal Service became independent in 1971. Although the old law static funding of CSRS 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. Experience shows that the retirement system benefited from extremely high interest rates during the 1980’s. The gains from interest earnings in excess of the static interest rate far exceed the additional costs of military service. The Postal Service should not benefit from the positive dynamic experience of the pension fund without assuming the other responsibilities that come with dynamic funding.

The Attribution Method Adopted in P.L. 108-18 is a Fair Approach for Determining the Benefits Attributable to Pre-1971 Military Service.

Although it is clear that the Postal Service should be responsible for all employee benefit costs that arise due to employment under its tenure, there remains the question of what its responsibility should be for military service costs for employees who worked for both organizations.

The Postal Service should be responsible for a share of the costs associated with military service based on the portion of the career that is served with the Postal Service. This is the method that was adopted in the Postal Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18). It is consistent with the funding provisions of FERS and with the policy that the Postal Service should pay for all of its expenses through Postal rates.

The following describes several ways to allocate military costs for Postal Service employees. An illustrative example of each method is shown in Appendix B.

“USPS Pays All” for Post-1971 Retirement

The most straightforward method of allocating costs would be to assume that the Treasury should be responsible for the cost of military service for employees who retired from the old Post Office Department before July 1, 1971, and that the Postal Service should be responsible for the cost for employees who retired after June 30, 1971.

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.

“P.L. 108-18 -- USPS Pays Pro-rata Share” Based on the Portion of Total Career Served under the Post Office Department

Under the Administration’s approach (as adopted in P.L. 108-18) the cost of military service for employees who were hired before July 1, 1971, but who retired on or after this date, is pro-rated based on the ratio of pre-1971 civilian service to total civilian service. We believe this pro-rata method provides a fair way of allocating the cost of military service for these employees and is the most consistent with FERS funding.

“Treasury Pays for Pre-1971 Hires”

Under this allocation the Postal Service would only be responsible for the cost of military service for employees hired after June 30, 1971. For example, an employee hired in 1970 who spends almost all of his/her career at the Postal Service would, of course, receive credit for their military service. However, under this approach, the Postal Service would not be charged with any of the cost of these benefits, even though they are being paid as a result of the employee having worked for almost an entire career at the Postal Service.

“USPS Pays for Post-September 30, 2002 Military Service Benefits”

An allocation suggested in discussions with Congressional staff was to charge the Postal Service only for the cost of military service benefits that are payable after September 30, 2002. This method was based on the notion that “the Treasury already paid for the military service” before this date. However if the objective after Postal Service reorganization was to raise revenue to pay the employment costs of Postal workers from the sale of stamps instead of the payment of taxes, this proposed method continues to require Government revenues to fund benefits paid to Postal employees.

It is our position that the Postal Service should not benefit from the positive dynamic experience of the pension fund without assuming the other responsibilities that come with dynamic funding.[1] As was mentioned previously, we believe that Postal Service should be responsible for all of its retirement costs, and it is irrelevant what may or may not have been paid for by Treasury under the old law. This method does not provide a reasonable way of allocating the cost based on pre-1971 and post-1971 service.

“Treasury Pays All”

Treasury would be responsible to pay all of the costs of military service and the Postal Service would pay none of the costs of military service.

It is our position that this policy violates the principle that the Postal Service should pay for its own expenses through Postal rates. Individuals retiring from the Postal Service receive CSRS credit for their military service only because of their employment with the Postal Service.

The following table summarizes the costs of these different ways of treating military service, with more complete information shown in Appendix C:

	USPS Responsible for:	Total Additional Cost To Treasury (in billions of dollars)
USPS Pays All	All military for post-71 retirees	(20.7)
P.L 108-18 - - USPS Pays a Pro-Rata Share	All military for post-71 hires, pro-rata share for pre-71 hires	0
Treasury Pays for Pre-1971 Hires	All military for post-71 hires, no military for pre-71 hires	7.1
USPS Pays post-9/30/02 Military Service Benefits	Only for military service benefits paid in the future	16.6
Treasury Pays All	No military service, past or future	27.2

 

Budgetary Implications of the Allocations Presented Above

Under P.L. 108-18, the military service for pre-1971 hires is allocated between Treasury and the Postal Service based on the ratio of pre-1971 civilian service to total civilian service. Appendix C shows that, as of September 30, 2002, USPS is still required to fund a supplemental liability of $4.8 billion under this approach. This supplemental liability would be amortized by the Postal Service through 40-year amortization payments. Current law (P.L. 108-18) has already incorporated these supplemental liability payments into the scoring of the legislation.

If the Postal Service paid for all of the cost of military service for its post-1971 retirees, the supplemental liability to be amortized by the Postal Service would be $25.5 billion, an increase of $20.7 billion over the current law.

Under the allocation where the Postal Service is responsible only for the cost of military service benefits that are paid after September 30, 2002 (“USPS Pays for Post-9/30/02 Military Service”), USPS would carry a supplemental liability of negative $11.8 billion, or, in other words, there would be an over-funding of $11.8 billion. This assumes that the Postal Service would continue to pay the full normal cost of 24.4 percent of payroll. However the over-funding position would likely necessitate the elimination of all future Postal agency contributions (only the employee contributions would remain). The $16.6 billion difference between the $4.8 billion supplemental liability under P.L. 108-18 and the negative $11.8 billion under the “USPS Pays for Post-9/30/02 Military Service” Method represents the additional cost to the Treasury.

Appendix A

Background

The benefit payments under Civil Service Retirement System (CSRS) include credit for military service. Generally, employees must pay a deposit of the 7 percent employee contributions on their military pay to receive this credit. The policy issue addressed here is to what degree the cost of the benefits attributable to military service in excess of the employee deposits should be paid for by the Postal Service. The U.S. Department of the Treasury must pay any portion of this cost not paid by the Postal Service.

Static Funding of CSRS – 1969 Law

P.L. 91-93, which was passed in 1969, set up the basic funding methodology for CSRS Government-wide. This methodology did not provide full funding of CSRS under private sector standards that were later incorporated into the Employee Retirement Income Security Act (ERISA) and into the dynamic funding methodology for the Federal Employees’ Retirement System (FERS). Under the static funding of CSRS, the increases in retirement costs due to general salary increases and Cost of Living Allowances COLAs for annuitants are not anticipated or financed in advance. Each general salary increase is financed by means of a new series of 30-year amortization payments that is set up after that salary increase has occurred. Under the original law, there was no separate financing of the cost of COLAs for annuitants, although this was later added for the Postal Service only.

Employees and agencies each contribute 7 percent of pay, which approximates the ongoing or normal cost, and which does not pay for the cost of salary increases or COLAs for annuitants.

The Treasury is required to pay for the cost of military service through military service payments that are made each year, which are equal to the total amount of benefits attributable to military service that were paid out during that fiscal year. Finally, the Treasury also pays interest on the static unfunded liability, which covers any costs that are not otherwise being financed, such as the cost of COLAs for annuitants. [2] Any gains from excess interest earnings, beyond what were assumed under the static interest rate assumption, would reduce the unfunded liability, and thus lower the Treasury payments of interest on the unfunded liability. Thus, all of the gains due to excess interest earnings flow through to the Treasury.

Postal Service Financing of CSRS

Shortly after the Postal Service became independent in 1971, Congress passed P.L. 93-349 which required the Postal Service to finance the cost of all Postal salary increases by means of separate thirty-year amortization payments. These payments covered the entire cost of all Postal salary increases, and did not distinguish between the portions of the salary increases attributable to the pre- or the post-1971 service of Postal employees.

Under the Omnibus Budget Reconciliation Acts of 1987, 1989, 1990, and 1993, Congress gradually instituted a series of measures that eventually required the Postal Service to finance the entire cost of COLAs for Postal annuitants attributable to service since 1971 by means of fifteen-year amortization payments.[3]

In summary, the Postal Service financing of CSRS gradually evolved over time through a series of steps that resulted in the Postal Service paying for the full cost of all salary increases and the cost of COLAs attributable to post-1971 service. There was no comprehensive plan for Postal financing of CSRS such as was adopted under FERS. Any gains from excess interest earnings, and the costs of military service, stayed with the Treasury.

FERS Financing Provisions

FERS was a result of Congress taking a comprehensive approach to designing a new retirement system for Federal employees who were also covered under Social Security. Under the dynamic funding methodology that was adopted for FERS in 1986, there was separate accounting for the assets and liabilities for Postal and non-Postal employees. Postal Service was required to pay for all of the retirement costs for Postal employees, including the cost of military service.

 

Appendix B

 

Examples of Methods for Allocating the Cost of Military Service
For an Employee Hired Before 1971 Who Retired After 1971

Employee Retired in 1991 (on 7/1/1991) with 30 years total service (including 3 yrs. military and 1 yr. sick leave)

1991 Final Average Salary: $50,000

1971 Salary: $20,000 ( = High-3 Average Salary in 1991 assuming no post-1971 pay increases)

 

CSRS Benefit Formula: 1.5% of High-3 Average Salary for first 5 years of service, 1.75% for next

5 years of service, 2.0% for remaining years of service.

Total Service = 30 yrs.

Total Benefit = $ 50,000 * [ (5 yrs.) * 0.015 + (5 yrs.) * 0.0175 + (20 yrs.) * 0.02 ]

= $ 50,000 * 0.5625

= $ 28,125

 

Civilian Service = 30 – 3 = 27 yrs

 

Civilian Service Benefit = $ 50,000 * [ ( 5 yrs.) * 0.015 + (5 yrs.) * 0.0175 + (17 yrs.) * 0.02 ]

= $ 50,000 * 0.5025

= $ 25,125

 

Military Service Benefit = Total Benefit – Civilian Service Benefit

= $ 28,125 - $25,125

= $ 3,000

Military Service = 3 yrs.

Sick Leave = 1 yr.

Actual Civilian Service = 27 yrs. – 1 yr. = 26 yrs.

Civilian Year of Hire = 1991 – (30 – 3 – 1) = 1965

Pre-1971 Actual Civilian Service = 1971 – 1965 = 6 yrs.

Ratio of Pre-1971 Actual Civilian Service to Actual Civilian Service = (6 / 26)

 

 

Method 1 - “USPS Pays All” for Post-1971 Retirement

 

Federal Civilian Service = 6 yrs. + [ 1 yr. * (6 / 26) ] = 6.231 yrs.

 

Federal Share = Federal Civilian Service Benefit

= $ 20,000 * [ ( 5 yrs.) * 0.015 + (1.231 yrs.) * 0.0175 ]

= $ 20,000 * 0.09654

= $ 1,931

 

Method 2 - “P.L. 108-18 -- USPS Pays Pro-rata Share” Based on the Portion of Total Career Served under the Post Office Department

 

Federal Service = 6 yrs. + [ (3 yrs. + 1 yr.) * (6 / 26) ] = 6.923 yrs.

 

Federal Share = $ 20,000 * [ (5 yrs.) * 0.015 + (1.923 yrs.) * 0.0175 ]

= $ 20,000 * [0.10865]

= $ 2,173

 

 

Method 3 - “Treasury Pays for Pre-1971 Hires”

 

Federal Service = Federal Civilian Service + Military Service = 6 + [1 * (6/26)] + 3 = 9.231 years

 

Federal Share = $ 20,000 * [ (5 yrs.) * .015 + (4.231 yrs.) * .0175 ]

= $ 20,000 * .14904

= $ 2,981

 

 

 

Method 4 - “USPS Pays for Post-September 30, 2002 Military Service Benefits”

 

Federal Civilian Service = 6 + [ 1 * (6 / 26) ] = 6.231 yrs.

 

Federal Civilian Service Benefit = $ 20,000 * [ ( 5 yrs.) * 0.015 + (1.231 yrs.) * 0.0175 ]

= $ 20,000 * 0.09654

= $ 1,931

 

Federal Share before 10/1/2002 = Federal Civilian Service Benefit + Military Service Benefit

= $1,931 + $3,000 = $4,931 initial benefit, adjusted by COLA’s

 

Federal Share after 9/30/2002 = Federal Civilian Service Benefit

= $ 1,931 initial benefit, adjusted by COLA’s

Method 5 - “Treasury Pays All”

 

Federal Civilian Service = 6 + [ 1 * (6 / 26) ] = 6.231 yrs.

 

Federal Civilian Service Benefit = $ 20,000 * [ ( 5 yrs.) * 0.015 + (1.231 yrs.) * 0.0175 ]

= $ 20,000 * 0.09654

= $ 1,931

 

Federal Share = Federal Civilian Service Benefit + Military Service Benefit

= $ 1,931 + $ 3,000

= $ 4,931

Appendix C

 

Comparison of Allocation Methods for Postal CSRS Benefits Attributable to Military Service

 

(in billions of dollars)

 

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