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Report to Congressional Committees:

November 2003:

POSTAL PENSION FUNDING REFORM:

Issues Related to the Postal Service's Proposed Use of Pension Savings:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-238] GAO-04-238:

GAO Highlights:

Highlights of GAO-04-238, a report to congressional committees 

Why GAO Did This Study:

In April 2003, Congress enacted the Postal Civil Service Retirement 
System (CSRS) Funding Reform Act of 2003 (P.L. 108-18), which lowered 
the Postal Service’s (Service) annual payment for its CSRS obligation 
by over $2.5 billion beginning in fiscal year 2003. P.L. 108-18 
includes requiring (1) the Service to begin making payments into an 
escrow account in fiscal year 2006, (2) the Service to issue a report 
on its proposed use of “savings” resulting from the lower CSRS 
payments, and (3) GAO to evaluate the Service’s report and present its 
findings to Congress.

GAO evaluated whether the Service’s proposals were consistent with 
P.L. 108-18; the impact of the escrow account; and whether the 
proposals were fair to current and future ratepayers, affordable, and 
helped achieve transformation goals.

What GAO Found:

The Service’s report presented two proposals for how it would use the 
“savings,” and GAO found both to be generally consistent with P.L. 
108-18. The first proposal assumes that responsibility for military 
service pension costs shifts to the Treasury Department and proposes 
prefunding retiree health benefits for retirees and current employees. 
The second proposal assumes that the Service retains responsibility 
for military service pension costs and proposes prefunding retiree 
health benefits only for new employees. Both proposals assume that the 
Service would pay down debt and fund capital investment through 
inflation-based rate increases. 

Under both proposals, the Service proposes that the escrow requirement 
be eliminated, so that the Service would not have to include $3 
billion as a mandated incremental operating expense beginning in 
fiscal year 2006. The Service cannot use the escrow funds unless 
Congress eliminates the escrow requirement or specifies by law how 
these funds may be used. If no action is taken, the Service believes 
that it would have to raise rates higher than would otherwise be 
necessary. The escrow requirement provides Congress an opportunity to 
review how the Postal Service will address a number of long-term 
challenges, such as progress toward transformation and funding its 
retiree health benefits obligation. Once Congress is satisfied, it 
could repeal the escrow requirement so that an escrow account is not 
needed.

GAO assessed the Service’s two proposals according to their fairness, 
affordability, and the ability to achieve transformation goals, as 
follows:

Fairness: Proposal I strikes a more equitable balance of allocating 
costs between current and future ratepayers, because benefits earned 
by today’s employees will be built into the current rate base. Under 
Proposal II, much of the retiree health benefits obligation would 
remain unfunded, thereby placing the burden of the benefits being 
earned today on future ratepayers.

Affordability: The Service’s proposals attempt to balance short-term 
rate mitigation with some level of prefunding to address its long-term 
obligations. The first proposal would require a larger postal rate 
increase than the second proposal and would prefund more of the 
retiree health benefits. The second proposal focuses more on rate 
mitigation. Given the Service’s uncertain financial future, its 
ability to raise revenues, reduce costs, and improve productivity and 
efficiency is critical to affordability.

Transformation goals: Although the Service believes it can pay down 
debt and fund the capital investments associated with its 
transformation initiatives, this is not clear because the Service has 
not yet presented a comprehensive, integrated infrastructure and 
workforce rationalization plan. GAO has previously recommended that 
the Service provide Congress with such a plan and periodic reports on 
its transformation progress. The Service disagrees with GAO that the 
escrow repeal should be tied to a plan.

What GAO Recommends:

To ensure continuing progress in addressing the Service’s financial 
challenges, Congress should consider repealing the escrow requirement 
after it receives an acceptable plan on rationalizing the Service’s 
infrastructure and workforce. Absent an acceptable plan, Congress 
could direct the Service to fund specific purposes, such as prefunding 
its retiree health benefits obligation or supporting the Service’s 
transformation. GAO makes additional matters for Congress to consider 
in the report.

www.gao.gov/cgi-bin/getrpt?GAO-04-238.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Bernard L. Ungar at 
(202) 512-2834 or ungarb@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Both Proposals Are Generally Consistent with P.L. 108-18: 

Escrow Requirement Places Pressure on Rates: 

Key Issues Used to Assess the Postal Service's Proposals: 

Issues Related to the Implementation of Proposals I and II: 

Conclusions: 

Matters for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the U.S. Postal Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Staff Acknowledgments: 

Table: 

Table 1: Estimated Debt Repayment and Capital Investment under Proposal 
II: 

Figures: 

Figure 1: Additional Expense Generated from Proposal I: 

Figure 2: Comparison of Retiree Health Premiums and "Savings" under 
Proposal II: 

Abbreviations: 

CBO: Congressional Budget Office:

CSRS: Civil Service Retirement System:

CSRDF: Civil Service Retirement and Disability Fund:

FASB: Financial Accounting Standards Board:

OPM: Office of Personnel Management:

PRC: Postal Rate Commission:

Letter November 26, 2003:

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Governmental Affairs: 
United States Senate:

The Honorable Tom Davis: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives:

The Postal Service (Service) faces significant financial challenges, 
including declining mail volume, the need to fund productivity 
improvement and cost saving initiatives necessary to transform itself 
into a more efficient organization, and a growing obligation for 
retiree health benefits that the Service estimated will reach $54 
billion by the end of fiscal year 2003. In April 2003, Congress enacted 
the Postal Civil Service Retirement System (CSRS) Funding Reform Act of 
2003 (P.L. 108-18), which afforded the Service the opportunity to 
address some of these challenges by lowering the annual payment the 
Service is required to make into the Civil Service Retirement & 
Disability Fund (CSRDF) by over $2.5 billion annually beginning in 
fiscal year 2003. The legislation specified how these savings were to 
be used for fiscal years 2003-2005. It also required the Service to 
begin making payments into an escrow account beginning in fiscal year 
2006 in an amount equal to the difference between the estimated CSRS 
payments prior to, and after, enactment of the legislation. The amount 
of the payments into the escrow account would have to be included in 
the Service's rate base. Under the legislation, the Service cannot use 
the funds in the escrow account unless Congress eliminates the escrow 
requirement or specifies by law how the escrow funds may be used. In 
our view, this escrow requirement provides Congress an opportunity to 
review how the Service will address a number of long-term challenges, 
including debt repayment, capital projects, and its unfunded retiree 
health benefits obligation. The legislation also required the Service 
to report by September 30, 2003, on how it proposes to use these 
pension savings and required GAO to evaluate the Service's submission 
and present our findings to the appropriate oversight 
committees.[Footnote 1] The legislation states that not later than 180 
days after receiving our report, the Congress shall revisit the issue 
of how the savings accruing to the Service as a result of enactment of 
the legislation should be used.

P.L. 108-18 also transferred responsibility for CSRS pension benefits 
attributable to military service in the amount of $27 billion from the 
Department of the Treasury (Treasury) to the Postal Service. The law 
required the Service, the Office of Personnel Management (OPM), and the 
Treasury to prepare reports by September 30, 2003, articulating who 
should be responsible for these costs in the future.[Footnote 2] The 
Postal Service's report on this issue recommended that the 
responsibility for military service costs be transferred back to the 
Treasury. However, the joint report of Treasury and OPM recommended 
that the Postal Service should be responsible (1) for all pension costs 
related to military service for its employees that were hired after the 
Service's reorganization in 1971 and (2) for a portion of the military 
service costs for employees hired before 1971. Further, the legislation 
required GAO to review these reports and submit our findings to the 
appropriate oversight committees, which we are providing in a separate 
report ( [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-281] 
GAO-04-281) also issued on this date.[Footnote 3]

To guide the Service in its proposed use of pension-related savings 
beginning in fiscal year 2006, the legislation included specific 
"Matters to Consider" and a "Sense of Congress." The "Matters to 
Consider" included the following matters: (i) debt repayment; (ii) 
prefunding of postretirement health care benefits for current and 
former postal employees; (iii) productivity and cost-saving capital 
investments; (iv) delaying or moderating increases in postal rates; and 
(v) any other matter. The "Sense of Congress" stated that:

* "the savings accruing to the Postal Service as a result of the 
enactment of this act will be sufficient to allow the Postal Service to 
fulfill its commitment to hold postage rates unchanged until at least 
2006;

* because the Postal Service still faces substantial obligations 
related to postretirement health benefits for its current and former 
employees, some portion of the savings . . . should be used to address 
those unfunded obligations; and:

* none of the savings . . . should be used in the computation of any 
bonuses for Postal Service executives.":

In addition, the legislation stated that the Service should also 
consider the work of the President's Commission on the United States 
Postal Service (the Commission), whose report, issued in July 2003, 
identified the need for the Service to operate more 
efficiently.[Footnote 4] The Commission's report recommended, among 
other things, that:

* "the Service should review its current policy relating to the 
accounting treatment of retiree health care benefits, and work with its 
independent auditor to determine the most appropriate treatment of such 
costs in accordance with applicable accounting standards and in 
consideration of the Postal Service's need for complete transparency in 
the reporting of future liabilities;

* the Postal Service should consider funding a reserve account for 
unfunded retiree health care obligations to the extent that its 
financial condition allows; and:

* responsibility for funding Civil Service Retirement System pension 
benefits relating to the military service of Postal Service retirees 
should be returned to the Department of the Treasury.":

The Service's report on the use of the savings contained two proposals 
that are linked to the outcome of the military service issue. The first 
proposal (Proposal I) is predicated on the assumption that the Service 
is relieved of responsibility for military service costs and proposes 
that the Service would prefund retiree health benefits for retirees and 
current employees. In its second proposal (Proposal II), the Service 
assumes that it retains responsibility for the military costs and 
proposes that it would prefund retiree health benefits only for new 
employees, pay down debt, and finance selected capital investments. The 
Service also stated that this proposal would have what the Service 
characterized as an "indirect benefit" of mitigating rate increases. By 
using most of the pension savings to fund normal operating expenses, 
the only additional rate increase needed would be a 0.3 percent 
increase over the rate of inflation to cover the prefunding for its new 
employees.

This report addresses four objectives. First, it evaluates whether the 
Postal Service's report on the use of the pension savings is consistent 
with P.L. 108-18. Second, it evaluates the issues surrounding the 
impact of the escrow requirement that the Service identified in its 
report. Third, it assesses the Service's two proposals according to the 
following questions, which are based upon our previous work:

* Are these proposals fair and balanced between current and future 
ratepayers and taxpayers?

* Can the Service afford to do as it proposes in light of its financial 
challenges?

* Do these proposals help promote and accelerate the Service's 
transformation efforts, including related cost savings and productivity 
improvement efforts?

Finally, our report discusses other pertinent issues, such as how the 
proposals might be implemented, that we identified in the course of our 
review. Our work is based on our review of Postal Service documents, 
the report of the President's Commission on the United States Postal 
Service, our prior reports, and interviews with officials at the Postal 
Service and the Congressional Budget Office (CBO). A more detailed 
discussion of our objectives, scope, and methodology is included in 
appendix I. We requested comments on a draft of this report from the 
Postal Service, and its comments are discussed later in this report and 
reproduced in appendix II.

Results in Brief:

Both proposals are generally consistent with the Sense of Congress 
expressed in P.L. 108-18 because they address, to varying degrees, 
prefunding the retiree health benefits obligation. They also address 
some of the Matters to Consider outlined in P.L. 108-18, including rate 
mitigation and, to a lesser degree, debt repayment and productivity and 
cost-saving capital investments. In addition, the proposals are 
generally consistent with the Commission's recommendations and our 
previous work. In considering the Service's proposals, we note that 
this legislation, by significantly reducing the Service's pension 
costs, has provided an opportunity for the Service to address some of 
its long-standing challenges, including prefunding its retiree health 
obligations and accelerating its transformation to a more efficient and 
viable organization. While the Service's proposals addressed the 
prefunding obligation, and the Service has indicated that it can 
support its transformation initiatives through normal rate increases, 
the extent to which it would be able to support or accelerate its 
transformation was not clear. Consequently, careful monitoring of the 
Service's financial situation and the pace of its progress in 
implementing its transformation initiatives will be necessary.

One of the issues we considered in evaluating these proposals was the 
impact of the escrow requirement. The Service's report proposes that 
the escrow requirement be eliminated, because the Service cannot use 
these funds unless Congress eliminates the escrow requirement or 
specifies by law how the escrow funds may be used. If no action were 
taken, the Service would not realize a reduction in its annual 
operating expense of over $3 billion beginning in fiscal year 2006. 
Consequently, the Service believes it would have to raise rates higher 
than would otherwise be necessary. In our view, the escrow requirement 
could be one means to direct funding for specific purposes that 
Congress may believe to be especially important. Once Congress is 
satisfied, it could repeal the escrow requirement so that an escrow 
account is not needed, or it could indicate its preferences through 
means other than an escrow requirement.

Moreover, it is critical to the Service's future viability that it 
continue to make progress on addressing its financial challenges, such 
as prefunding retiree health obligations, repaying debt, and financing 
capital needed to implement its transformation initiatives. We believe 
that Congress will need to have sufficient information to determine 
that the Service is making or accelerating progress in achieving its 
transformation goals. In this regard, we have already recommended that 
the Service provide periodic reports on the status of its 
transformation initiatives and other Commission recommendations, which 
the Service recently provided to its congressional oversight 
committees. In addition, the Chairman of the Senate Committee on 
Governmental Affairs and Senator Carper sent a letter to the Postmaster 
General dated November 19, 2003, asking for a comprehensive plan by 
early April 2004 that lays out how the Postal Service intends to 
optimize its infrastructure and workforce.

We also assessed Proposals I and II according to their fairness, 
affordability, and how they address the Service's transformation 
efforts, including its cost saving and productivity improvement 
initiatives, as follows:

* Fairness: Proposal I strikes a more equitable balance of allocating 
costs between current and future ratepayers because benefits being 
earned by today's employees would be built into the current postal rate 
base. Under Proposal II, a substantial portion of the retiree health 
benefits obligation would remain unfunded, thereby placing the burden 
of the retiree health benefits being earned today on future ratepayers. 
Fairness between ratepayers and taxpayers is also an issue, because 
P.L. 108-18 transferred $27 billion in pension costs related to 
military service from the Treasury Department to the Postal Service--or 
in effect, from taxpayers to ratepayers--but required further study of 
who should be responsible for these costs. This issue is discussed in 
more detail in GAO's related report.

* Affordability: The Service's proposals attempt to balance both short-
term rate mitigation and some level of prefunding to address its long-
term obligations. Given the Service's uncertain financial future, the 
affordability of these proposals is tied to the Service's ability to 
raise revenue, cut costs, and improve productivity and efficiency. In 
recent years, the Service has made some progress in cutting its costs 
and improving productivity but has had trouble raising sufficient 
revenue to offset declines in First-Class Mail volume. Under both 
proposals, the Service assumes that it can pay down debt and fund 
capital investment needs through periodic rate increases within normal 
inflationary trends. The Service's proposals for prefunding some level 
of its retiree health benefits obligation would require modest 
additional rate increases over the amount needed to cover inflationary 
cost increases. The Service estimated that Proposal I would require an 
additional rate increase in fiscal year 2006 of 2 percent over the rate 
of inflation, while Proposal II would require only an additional 
increase of 0.3 percent over the rate of inflation since it is funding 
a smaller portion of the retiree health benefits obligation. The 
Service did not estimate the impact of either proposal on postal rates 
beyond fiscal year 2006. Furthermore, the Service did not propose to 
fully fund its retiree health benefits obligation in a specified time 
period under either proposal. However, even moderate rate increases to 
prefund some portion of the retiree health benefits obligation now 
could help the Service avoid more dramatic postal rate increases later.

* Transformation: In passing P.L. 108-18, several Members of Congress 
expressed the need for the Service to continue its modernization 
efforts to transform itself into a more efficient and effective 
organization. Further, the Commission and GAO have reported on the need 
for the Service to enhance its efficiency through such efforts as 
standardization of its mail processing operations, improving retail 
access, and rationalizing its infrastructure and workforce. The Service 
has begun implementing a number of its transformation initiatives to 
improve its efficiency and has made meaningful progress in a number of 
areas, including reducing its workforce, cutting costs, and improving 
productivity. To achieve additional results, sufficient capital 
investment will need to be made. Both proposals assume that the Service 
can raise sufficient capital through inflation-based rate increases. 
Although the Service has provided some information to us showing what 
capital investments it plans to make related to its transformation 
goals, it has not yet prepared a comprehensive, integrated plan showing 
how it plans to rationalize its infrastructure and workforce and the 
funding that would be needed to implement such a plan, as well as the 
savings or additional revenue the plan would be expected to generate. 
Without such a plan, and periodic updates on the status of 
transformation initiatives as we have previously recommended, as well 
as their cost and funding, it is not clear whether the Service's 
planned funding would be sufficient.[Footnote 5]

Under both proposals, we also identified technical issues related to 
implementation of prefunding retiree health benefits obligation, 
including whether the Service should explore the implications of fully 
funding its retiree health benefits obligation over a specific time 
period; the proper demographic and economic assumptions to employ in 
estimating the obligation; and what agency should be responsible for 
making these decisions.

To ensure continuing progress in addressing the Service's financial 
challenges, we suggest that Congress consider the following:

* Repealing the escrow requirement after receiving an acceptable plan 
from the Service describing how it intends to rationalize its 
infrastructure and workforce and is confident that the Service is 
making satisfactory progress on transforming itself into a more 
efficient organization and implementing its transformation goals.

* Directing the Service to fund specific purposes that Congress 
believes are especially important--such as prefunding the retiree 
health benefits obligation or supporting and possibly accelerating the 
Service's transformation efforts--if the Service does not provide an 
acceptable plan for rationalizing its infrastructure and workforce, or 
show satisfactory progress in implementing transformation, or if 
Congress wants greater assurance that the Service will spend funds in a 
particular manner. In this regard, we have already recommended that the 
Service provide periodic reports on the status of its transformation 
initiatives and other Commission recommendations.

* Addressing implementation issues related to prefunding the retiree 
health benefits obligation. For example, one key issue that would need 
to be further explored is what options may be available that would 
allow the Service to amortize its unfunded retiree health benefits 
obligation over a specified time period (e.g., 20-40 years) and prefund 
the retiree health benefits obligation for future retirees.

In commenting on a draft of our report, the Service disagreed with our 
Matters for Congressional Consideration that repeal of the escrow 
requirement should be tied to an acceptable plan. We agree that 
establishing an escrow account without allowing the Service to use the 
funds would not be a desirable outcome and that is one of the reasons 
why we suggested that Congress consider repealing the escrow 
requirement. On the other hand, contrary to the Service's view, we 
believe the escrow requirement is an opportunity for Congress to review 
how the Service plans to address a number of long-term challenges, 
including debt repayment, capital projects, its unfunded retiree health 
benefits obligation, and its progress toward transformation. If the 
Service provides Congress with an acceptable plan in the next several 
months and Congress finds the plan and the Service's transformation 
progress satisfactory, we believe Congress should have sufficient time 
to repeal the escrow requirement so that an escrow account would not be 
needed. Thus, the Service would not have to include the operating 
expense associated with the escrow requirement in its rate base for the 
next rate case filing.

Background:

In April 2003, Congress enacted P.L. 108-18, which reduced the 
Service's annual payment into the CSRS pension fund, in part, to 
reflect a reduction in the Service's estimated unfunded obligation for 
prior years' service from about $30 billion to about $5 billion. The 
difference between the Service's CSRS payment required prior to 
enactment of P.L. 108-18 and the payment after enactment is labeled the 
"savings" in the legislation. However, P.L. 108-18 requires the Service 
to use the savings in fiscal years 2003 and 2004 to pay down 
outstanding debt and in fiscal year 2005 to extend the current rate 
cycle. Therefore, according to the Service, all of the overfunding 
generated by current rates will be completely consumed by the end of 
fiscal year 2005. In fiscal year 2006, the Service is required to begin 
making payments into an escrow account that it cannot use until 
otherwise provided for by law. The amount of the payments into the 
escrow account would have to be included in the Service's rate base. 
The Service's report recommended that the escrow requirement be 
repealed, and provided two proposals for use of the "savings." A brief 
description of each proposal is given below.

Proposal I:

Transferring the military costs from the Service to the Treasury, as 
detailed in Proposal I, increases the projected overfunding of the 
postal CSRS pension fund from $78 billion to $105 billion. This would 
result in an overall cost reassignment of $27 billion and a $10 billion 
overfunding of the postal CSRS pension fund as of the end of fiscal 
year 2002. The Service proposes that the $10 billion in overfunding 
would remain in the pension fund, in a separate account designated as 
the "Postal Service Retiree Health Benefit Fund (Retiree Health Fund)." 
The Service made a payment of about $1.3 billion for its pension 
obligation into the CSRS pension fund in fiscal year 2003. Under 
current legislation, it would continue to make payments of $2.2 billion 
in fiscal year 2004 and $2.1 billion in fiscal year 2005. If 
responsibility for all military service costs is transferred back to 
the Treasury, the resulting overfunded status would negate the need for 
further Postal Service annual CSRS payments.[Footnote 6] The Service 
proposes that the CSRS payments it made in fiscal year 2003, and will 
make in fiscal years 2004 and 2005, remain in the CSRDF in the newly 
designated Retiree Health Fund. Beginning in fiscal year 2006, the 
Service proposes to make annual payments into the Retiree Health Fund. 
This new fund would be used to pay retiree health insurance premiums in 
the future.

This proposal assumes that the escrow requirement would be eliminated. 
However, the Service estimates that the expense for prefunding retiree 
health obligations would add $1.2 billion to its expenses in fiscal 
year 2006. The Service estimates that this expense would require a rate 
increase that would be 2 percent higher than would be necessary to 
cover inflationary expense growth. Otherwise, the Service believes it 
can pay down debt and finance its capital investment needs through its 
normal cycle of inflation-based rate increases.

Proposal II:

Proposal II, other than funding a small amount of the retiree health 
benefits obligation, results primarily in rate mitigation. This 
proposal is based on the assumption that the escrow requirement would 
be repealed and that the Service would remain responsible for military 
service costs. Under this scenario, the Service proposes to prefund the 
retiree health benefits cost for employees hired after fiscal year 
2002. It would not fund the retiree health benefits cost already 
incurred for current and former employees, which comprises most of the 
obligation. The Service estimates that the expense created to prefund 
retiree health benefit costs for new employees would require a rate 
increase in fiscal year 2006 that would be 0.3 percent higher than 
necessary to cover normal inflationary expense growth. Although the 
Service's proposal stated that some funds would be used to pay down 
debt and fund capital investments, postal officials have told us that 
the proposed debt repayment and capital investment costs are equal to 
what they had planned to spend regardless of enactment of P.L. 108-18. 
Consequently, the Service believes that, absent the escrow requirement, 
it would be able to continue to pay the retiree health premium costs 
for current and former employees on a pay-as-you-go basis, pay down 
debt, and finance its capital investment needs through normal rate 
increases that would correspond with general inflation trends.

Both Proposals Are Generally Consistent with P.L. 108-18:

We believe that both proposals are generally consistent with the "Sense 
of Congress" expressed in P.L. 108-18, that some portion of the savings 
should be used to address the Service's unfunded obligations. However, 
Proposal I goes much further in this area because it proposes 
prefunding a substantial portion of retiree health benefits for all 
current and former employees, while Proposal II would prefund these 
costs only for employees hired after fiscal year 2002. Both proposals 
also address, to varying degrees, the Matters to Consider, outlined in 
P.L. 108-18. Proposal I addresses, almost exclusively, matter (ii)--
prefunding of postretirement health benefits for current and former 
employees. Proposal II addresses matter (ii) to a limited extent, and 
matter (iv)--delaying or moderating increases in postal rates. Under 
both proposals, the Service believes that it can address matter (i)--
debt repayment--and matter (iii)--productivity and cost saving capital 
investments--through inflation-based rate increases.

The legislation also directed the Postal Service to consider the work 
of the Commission. The Commission recommendations, like our previous 
work, stressed the significance of funding the retiree health benefits 
cost to the extent that the Service's finances permit. The Commission 
pointed out that the pension obligation is funded as benefits are 
earned and recovered through rates, but the retiree health benefits 
obligation is funded as the benefits are paid and not as they are 
earned. The Commission strongly urged the Service to consider funding a 
reserve account to begin paying down the retiree health benefits 
obligation so future ratepayers are not forced to pay for costs 
associated with postal services delivered today. The Commission also 
stated that raising rates should be the last recourse, not the first, 
to cover rising costs. In our November 2003 testimony before the Senate 
Committee on Governmental Affairs, we also raised concerns about rate 
increases, stating that raising rates may provide an immediate boost to 
the Service's revenues but would likely accelerate the transition of 
mailed communications to electronic alternatives.[Footnote 7] In 
addition, the Commission expressed concern regarding the Service's 
ability to repay its debt and stressed the importance of the Service 
improving its operational efficiency. Another important recommendation 
of the Commission was that the Service should review its current policy 
relating to the accounting treatment of retiree health care benefits, 
and work with its independent auditor to determine the most appropriate 
treatment of such costs in accordance with applicable accounting 
standards and in consideration of the Postal Service's need for 
complete transparency in the reporting of future liabilities. We have 
also discussed these issues in our previous work.[Footnote 8] Proposal 
I addresses the issue of funding retiree health benefits to a greater 
extent than Proposal II, while Proposal II addresses the matter of 
mitigating rates to a greater extent than Proposal I.[Footnote 9] Both 
proposals address the issue of debt repayment and capital investment 
through inflation-based rate increases.

Escrow Requirement Places Pressure on Rates:

The Service recommended in its report that Congress eliminate the 
escrow requirement, because of its negative impact on postage rates and 
the mailing industry, the general public, and the economy as a whole. 
The Service estimates that it would need an additional rate increase of 
5.4 percent, including 2 cents on the 37-cent First-Class stamp, in 
order to generate the $3.2 billion required to be placed in an escrow 
account in fiscal year 2006. This is because P.L. 108-18 requires all 
"savings" attributable to fiscal years after 2005 to be considered an 
"operating expense" and placed into an account that the Service cannot 
use until Congress specifies how the funds may be used. All of the 
"savings" accruing under current rates would likely be expended or 
absorbed by inflationary cost increases by the end of fiscal year 2005. 
Thus, in order to pay this "operating expense" the Service would need 
to include the $3.2 billion in its rate base in fiscal year 2006 and 
collect the money from its ratepayers or lower expenses by a 
corresponding amount. The Service has taken steps to reduce its total 
expenses over the past 2 fiscal years, and we believe it is important 
for the Service to continue its cost-cutting efforts. However, setting 
aside unused funds in an escrow account that must be considered an 
"operating expense" would serve to lessen the financial benefits of the 
Service's cost-cutting efforts.

For fiscal years after 2006, an increasing amount--estimated to 
eventually reach a peak of $8.7 billion--would have to be placed 
annually in the escrow account. This would be in addition to its 
operating expenses, such as compensation and retiree health premiums, 
as well as any amounts needed to pay down debt or fund capital 
investments. The Service estimates that it would require additional 
biannual rate increases between 1 percent and 1.5 percent to cover the 
required escrow amount. Frequent rate increases of this magnitude would 
likely hasten the decline in First-Class Mail volume and increase the 
risk of volume declines in other mail classes.

In our view, the escrow requirement could be viewed as one means to 
direct funding for specific purposes that Congress may believe to be 
especially important. We also believe it is critical to the Service's 
future viability that it continue to make progress on addressing its 
financial challenges, such as prefunding retiree health obligations, 
repaying debt, and financing capital needed to implement its 
transformation initiatives. Several options include (1) tying the 
repeal of the escrow requirement to congressional review of the 
Service's progress on transformation, which could include the Service 
providing Congress with an acceptable plan for realigning its 
infrastructure and workforce; (2) repealing the escrow requirement but 
specifying the use of funds; or (3) repealing the escrow requirement 
and allowing the Service to fund activities as specified in its 
proposals. Another option would be to retain the escrow requirement and 
direct funding for specific purposes, which would likely require 
Congress to periodically revisit the use of funds. We believe this 
option could be problematic if an impasse arose, which could make the 
funds unavailable to the Service to spend on specific purposes.

If Congress does not want to specify by law the purposes and amounts 
that should be funded, but rather permit the Service to decide which 
activities to fund, we believe that Congress would need to have 
sufficient information to determine that the Service is making or 
accelerating progress in achieving its transformation goals. In this 
regard, we have already recommended that the Service provide periodic 
reports on the status of its transformation initiatives and other 
Commission recommendations that fall within the scope of its existing 
authority. The Chairman of the Senate Committee on Governmental 
Affairs, along with Senator Carper, requested in a letter to the 
Postmaster General dated November 19, 2003, that the Service provide 
the Committee with a comprehensive plan that lays out how the Service 
intends to optimize its infrastructure and workforce. Further, the 
letter requested biannual updates on the status of implementing 
transformation initiatives and recommendations of the Presidential 
Commission. In November 2003, the Service provided the congressional 
oversight committees with a progress report on its transformation 
initiatives.

Key Issues Used to Assess the Postal Service's Proposals:

We also assessed the Service's two proposals in the context of three 
key issues emerging from our previous work and the Commission's 
recommendations. The first issue is whether the proposals are fair and 
balanced between current and future ratepayers regarding who pays for 
employee benefits earned today. Another aspect of this issue is 
fairness between ratepayers and taxpayers regarding responsibility for 
military service costs and the effect of the proposals on the federal 
budget. The second issue is whether the proposals are affordable in 
light of the Service's current financial situation. Given declining 
First-Class Mail volume, rising compensation costs, and a significant 
retiree health benefits obligation, if the Service's proposals greatly 
exacerbate these financial challenges, affordable universal service 
could be jeopardized. The third issue is how these proposals assist the 
Service in achieving or accelerating its transformation initiatives. 
The importance of this issue lies in the need for the Service to become 
a more efficient and effective organization in order to remain 
financially viable.

Fairness Issues:

One factor that should be kept in mind when evaluating these proposals 
is the issue of maintaining an equitable balance between the postal 
costs paid for by current and future ratepayers and the impact of these 
proposals on taxpayers. As we noted in our November 2003 testimony, 
under the Service's current accounting and rate-setting methods, 
current ratepayers have not fully covered the total costs of the postal 
services they have received.[Footnote 10] Further, future ratepayers 
are likely to face more significant and frequent rate increases to 
cover the cost of benefits being earned by current employees. The 
equity of this arrangement should be considered in evaluating these 
proposals. Likewise, the effects of these proposals on the federal 
budget--which specifies the spending and financing of the federal 
government--and whether these effects are equitable to both ratepayers 
and taxpayers, should also be considered.

Proposal I strikes a better balance between current and future 
ratepayers by prefunding the retiree health benefits obligation for 
both retirees and current employees and providing a mechanism for 
better aligning current expenses with current revenues. Therefore, 
benefits being earned by today's employees would be built into the 
current rate base.

While Proposal II does partially address the issue of striking a 
balance between current and future ratepayers in regard to the retiree 
health benefits obligation, it does not go as far as Proposal I in this 
area. By only prefunding the retiree health benefits cost for new 
employees, it leaves a sizable portion of this obligation unfunded. 
This means that future ratepayers will still be required to pay for 
most of the retiree health benefits earned by today's workforce. In 
addition, mailers argue that prior to enactment of P.L. 108-18, they 
were paying too much for the CSRS obligation; therefore, mitigating 
rate increases now is merely recompense. However, while mailers may 
have been paying more than necessary to fund the pension obligation, 
they were paying less than necessary to fund the retiree health 
benefits obligation.

Fairness between Ratepayers and Taxpayers:

Another important consideration is the effect these proposals would 
have on the federal budget and, therefore, the taxpayer. An issue 
currently before Congress is who should be responsible for paying the 
military service pension costs of postal employees covered by CSRS. 
Proposal II is predicated on the assumption that current ratepayers pay 
for pension costs related to military service, much of which was vested 
prior to creation of the Postal Service and had already been paid by 
Treasury. If Congress decides that the Service should retain 
responsibility for these costs, the postal ratepayers would bear the 
costs. If Congress determines that the Treasury should be responsible 
for these costs, then the costs would be borne by taxpayers. The 
Service has stated that the impact on the federal budget of 
transferring these costs under Proposal I would likely be minimal. The 
budgetary effects of the Service's proposals have not been scored by 
CBO. However, based on its scoring of the Postal Civil Service 
Retirement System Funding Reform Act, we believe that Proposal I might 
be scored as having little effect on the deficit in the short term. In 
the long term, it could have an effect when the Service's cash flow 
changes in later years as the prefunded benefits are paid. However, 
insufficient detail has been provided on both proposals to determine 
their overall budget effects.

The CBO is required to "score," or estimate, the budgetary effects of 
legislation reported out of committees, so it has not scored the 
Service's proposals. However, the CBO scoring report on the bill that 
resulted in the pension legislation provides some insight into how this 
proposal might be scored.

CBO scoring considers both on-budget and off-budget effects of 
legislative proposals. As an off-budget entity, any payments that the 
Service makes to the retirement trust fund (an on-budget entity) are 
considered offsetting receipts; reducing those payments would reduce 
on-budget receipts. Under P.L. 108-18, after fiscal year 2005, savings 
resulting from the act are to be considered operating expenses of the 
Service. Therefore, these expenses would be included in rate setting, 
even though the Service's actual expenses would decline by the amount 
placed in escrow. As a result, net off-budget outlays of the Postal 
Service would decline by the same amount as the savings from lower 
pension payments, beginning in fiscal year 2006. This is reflected in 
the CBO scoring report. These lower off-budget outlays would offset the 
on-budget impact of lower payments to CSRS. Thus, any proposal that 
uses the escrowed savings could affect the overall federal budget 
deficit.

Scoring of the Service's proposals hinges on what the Service would do 
with the escrowed savings. Proposal I, in shifting the cost of military 
service back to the Treasury, would result in a reduction in on-budget 
receipts. But Proposal I, in using most of the savings to prefund 
retiree health benefits, would also keep those amounts in a separate 
CSRS account.[Footnote 11] The combined impact might be scored as 
having little effect on the deficit in the short term. However, in the 
long term, it could have an effect because at some point, the prefunded 
benefits would be paid out, resulting in changes in cash flows in later 
years. In addition, Proposal I would use a small amount of the savings 
for debt reduction, which would cause on-budget interest receipts to be 
lower.

Under Proposal II, which assumes that the Service would retain 
responsibility for the military service costs, the Service said it 
would fund its retiree health benefits obligation only for its 
employees hired after fiscal year 2002 and then fund, in priority 
sequence, debt repayment and capital investments to improve 
productivity and cost-savings. This proposal also raises issues related 
to the federal budget. The continuation of payments for military 
service costs would mean that there would be no reduction in on-budget 
receipts. In the short term, prefunding some retiree health benefits 
could have a small positive effect on the budget, because the Service 
would be collecting revenue that would not be immediately paid out. In 
general, any reduction in the Service's debt would reduce on-budget 
interest receipts. Any additional capital investments would increase 
off-budget outlays. However, if the Service can provide credible 
support that the investments would result in cost savings, the scoring 
may show increased outlays initially and savings subsequently.

Affordability of Proposals Is Unclear:

The Service believes that its proposals are affordable, meaning they 
would not cause rate increases that irreparably harm volume, or hinder 
the Service's ability to sustain current operations and implement 
transformation initiatives. We are concerned that the Service may not 
be able to achieve all of these goals if its financial situation 
worsens. Therefore, we believe it is imperative for the Service to 
continue addressing its key financial challenges--long-term 
obligations and debt, difficulty raising revenue, and aggressive cost-
cutting measures--to the extent that it is able. The Service faces a 
difficult challenge in trying to balance all of these issues. The 
Service's proposals attempt to balance both short-term rate mitigation 
and some level of prefunding of retiree health obligations to address 
its long-term obligations, while also providing for debt repayment and 
capital investment. However, the Service did not present an analysis of 
how its proposals would affect the overall financial condition of the 
Postal Service. Consequently, it is difficult to assess which, if 
either, of these proposals would improve the long-term financial 
situation of the Postal Service or ensure its future financial 
viability. Therefore, we believe that the Service's financial situation 
will need to be closely monitored to ensure that its proposals are 
indeed affordable.

The affordability of these proposals to ratepayers is also a 
consideration, as is the effect of rate increases on volume because, as 
we have previously reported, the Service faces uncertainty regarding 
its future revenue stream.[Footnote 12] Since fiscal year 2000, the 
Service's total mail volume has declined by almost 6 billion pieces and 
is estimated to continue declining. In a report for the Commission, the 
Institute for the Future developed a mail volume estimate that shows a 
gradual 10 percent decline from 202.8 billion pieces in fiscal year 
2002 to 181.7 billion pieces in 2017. Also, First-Class Mail volume, 
which provides the bulk of the Service's revenue, has been declining 
and shows no sign of rebounding. Declines in First-Class Mail are 
particularly troublesome to the Service, because First-Class Mail pays 
almost 70 percent of the Service's institutional costs. These costs, 
which are approximately 40 percent of all postal expenses, include some 
administrative, facility, postmaster, and supervisor costs, and a large 
portion of the expanding delivery network costs. Therefore, if First-
Class Mail volume continues to decline, it would become more difficult 
for the Service to fund its institutional costs without raising postal 
rates.

Historically, when the Service has raised postal rates, mail volume 
growth declined in the fiscal year immediately following the rate 
increase but rebounded in the next fiscal year. However, over the last 
3 years this has not been the case. The Service raised rates twice in 
fiscal year 2001 and once in fiscal year 2002. Total estimated mail 
volume at the end of fiscal year 2003 was almost 6 billion pieces lower 
than total mail volume was in fiscal year 2000. In this climate, rate 
increases may lead to further volume declines, which in turn would 
necessitate additional rate increases and begin a cycle often referred 
to as the "death spiral.":

The Service's first proposal would require a larger rate increase than 
the second proposal. Under Proposal I, the Service estimates that 
prefunding retiree health benefits would add $1.2 billion to its 
expenses in fiscal year 2006 compared with its expenses in that year 
under the current law, assuming the escrow requirement were eliminated. 
According to the Service, this additional expense would require a rate 
increase in fiscal year 2006 that is 2 percent higher than the increase 
that would be necessary due to inflationary expense growth alone. In 
fiscal years after 2006, the Service would continue to make these 
additional payments and future rate increases would likely be 
marginally higher than would be necessary to reflect inflationary 
pressures alone.[Footnote 13] Figure 1 shows the annual additional 
amount the Service proposes to spend on prefunding under Proposal I.

Figure 1: Additional Expense Generated from Proposal I:

[See PDF for image]

[End of figure]

If the Service's mail volume continues to decline and the Service is 
unable to cut costs accordingly, or if the Service is faced with higher 
retiree health premium costs than estimated, the Service may not be 
able to afford to continue prefunding the retiree health benefits 
obligation. Therefore, the Service's financial condition must be 
carefully monitored under this proposal.

Proposal II would require a lower rate increase than Proposal I in 
fiscal year 2006, and thus would likely have less of an impact on 
postal volumes in the short term. However, in the long-term it may 
require larger rate increases that could have a negative impact on 
future volumes. As seen in figure 2, the estimated retiree health 
premium expense will eventually outpace the estimated difference 
between the CSRS payment prior to enactment of P.L. 108-18 and the 
payment required under the legislation. Consequently, in order to pay 
the retiree health premiums in the future, the Service would need to 
raise additional revenue through rate increases or lower its operating 
expenses.

Figure 2: Comparison of Retiree Health Premiums and "Savings" under 
Proposal II:

[See PDF for image]

[End of figure]

The Postal Service is required to pay the retiree health premiums 
regardless of whether it prefunds some or all of these costs, and the 
annual costs are expected to increase over the next 20 years. If 
prefunding retiree health benefits for new employees proves to be more 
costly than estimated, or if the premiums for current retirees continue 
to grow rapidly, the Service could find itself facing a significant 
obligation at a time when revenues are shrinking. It seems prudent to 
set aside funds now, while they are available, to address escalating 
future costs rather than waiting until costs are higher and adequate 
revenue may not be forthcoming. Because Proposal II would result in a 
smaller rate increase in fiscal year 2006 than Proposal I, it raises 
the question of whether it would be possible for the Service to 
increase its proposed level of prefunding retiree health benefits under 
Proposal II. By setting aside an additional $1 billion in funding for 
this obligation, the Service would need an additional rate increase of 
2 percent, the same increase the Service proposes under Proposal I. The 
Service has stated that the decision to prefund only retiree health 
benefits for new employees arose from the desire to have a logical 
basis for its funding proposal. Because the legislation was enacted in 
fiscal year 2003, the Service decided to begin prefunding with a 
corresponding time period. While this may provide a baseline, we agree 
with the Commission that the Service should address its retiree health 
benefits obligation to the extent that its financial situation allows. 
Again, we believe the Service's financial situation will have to be 
carefully monitored to ensure that this option remains affordable.

Another factor associated with the affordability of the proposals 
concerns how they address the Service's outstanding debt level, which 
in fiscal year 2002 was close to statutory limits and was threatening 
the Service's ability to fund capital improvements. The Service made 
significant progress in reducing its outstanding debt in fiscal year 
2003, from $11.1 billion to an estimated $7.3 billion, and plans to 
continue paying down its debt in fiscal years 2004 and 2005. The 
Service has estimated that debt outstanding as of the end of fiscal 
year 2005 will be $3 billion. Under both proposals, the Service 
proposes to repay the same amount of debt in fiscal years 2006-2010. As 
seen in table 1, the Service estimates that its outstanding debt will 
be paid off by 2010. These estimates assume that the Service would 
raise rates when necessary to break even for each of the fiscal years 
2006 through 2010. If this break-even assumption is not correct, or if 
the Service faces unforeseen financial problems, the Service may not be 
able to pay down the amount of debt it proposes, and may, in fact, have 
to borrow more.

Table 1: Estimated Debt Repayment and Capital Investment under Proposal 
II:

Dollars in millions.

2006; Beginning debt balance: $3,000; Estimated debt payment: $776; 
Ending debt balance: $2,224.

2007; Beginning debt balance: 2,224; Estimated debt payment: 540; 
Ending debt balance: 1,684.

2008; Beginning debt balance: 1,684; Estimated debt payment: 612; 
Ending debt balance: 1,073.

2009; Beginning debt balance: 1,073; Estimated debt payment: 521; 
Ending debt balance: 552.

2010; Beginning debt balance: 552; Estimated debt payment: 559; 
Ending debt balance: (7).

Source: U.S. Postal Service.

[End of table]

The affordability of these proposals is also tied to a separate matter 
currently before Congress--who should bear responsibility for military 
service pension costs and how these costs should be determined. If 
Congress determines that the Treasury should bear responsibility for 
military service costs, then the Service believes that it can afford to 
prefund retiree health care costs for all of its current and former 
employees. If Congress determines that the Service should retain 
responsibility for the military service costs, then the Service 
believes that it can only afford to prefund the retiree health benefits 
cost for employees hired after fiscal year 2002, which would leave the 
obligation for current and former employees unfunded.

As both the Commission and we have noted, the Service has had limited 
success in its pursuit of new revenue streams. Therefore, to counter 
the loss in revenue due to declining mail volume without resorting to 
frequent rate increases, the Service must aggressively cut costs. To 
its credit, the Service has decreased work hours, reduced its 
workforce, and closed some facilities. However, we do not believe that 
these incremental savings will be enough to ensure a financially viable 
Postal Service over the longer term, especially if mail volumes 
continue to decline. For this reason, we believe the Service must 
continue to make progress in implementing its transformation goals.

Transformation Issues:

In assessing these proposals, we also considered how the Service would 
be able to fund cost saving and productivity initiatives needed to 
successfully transform itself into a viable organization for the 21st 
century. In April 2002, in response to a GAO recommendation[Footnote 
14] and a request by the Senate Committee on Governmental Affairs, the 
Postal Service prepared a Transformation Plan that outlined strategies 
for transforming the organization into an efficient and performance-
based entity. Among those initiatives were plans to standardize 
operations, increase customer access, and realign the processing and 
distribution network. The Commission's report also made suggestions for 
improving postal efficiency. We agree with the Commission that the 
Service must continue to pursue aggressive cost-cutting strategies and 
productivity gains in an effort to become more efficient. We also 
believe that the mandate for the Service to report on the potential use 
of savings from P.L. 108-18 was an opportunity for the Service to 
present its plans in this area, and the Service's proposals must be 
evaluated with the need for cost-cutting and productivity gains in 
mind.

Under both proposals, the Service believes it can finance capital 
investments related to upgrading existing assets and the investment 
needed to implement transformation initiatives through inflation-based 
rate increases. We are concerned that the Service's financing plan may 
not be adequate to provide for its capital investment needs, because 
historically, the Service has found it problematic to finance its 
capital needs with operating revenues. Thus, it has often resorted to 
borrowing to finance its capital needs. In contrast, under both 
proposals, the Service would finance its capital needs while continuing 
to pay down debt through inflation-based rate increases. Another 
possible source of capital funds could be the proceeds from the sale of 
excess property. However, the Service did not discuss this issue in its 
report.

We are also concerned with the Service's lack of specifics on capital 
investments under both proposals. While the Service stated that its 
capital investments for productivity gains and cost saving initiatives 
were related to its Transformation Plan, it has provided little detail 
on any of these initiatives in its pension savings report, its Five-
Year Strategic Plan FY 2004-2008, or its Five-Year Strategic Capital 
Investment Plan 2004-2008. The Service did provide a breakdown of some 
capital investments related to its Transformation Plan initiatives, but 
did not provide sufficient back-up data or description to enable us to 
determine to what transformation initiatives these investments were 
related or to what extent they would meet transformation goals.

In our November 2003 testimony, we also noted our concern that since 
the Service issued its Transformation Plan in April 2002, it has not 
provided adequate transparency on its plans to rationalize its 
infrastructure and workforce; the status of initiatives included in its 
Transformation Plan; and how it plans to integrate the strategies, 
timing, and funding necessary to implement its plans.[Footnote 15] 
While the Postal Service is moving forward with its Transformation Plan 
initiatives, and has made meaningful progress in a number of areas, it 
is not clear how it will be able to finance these initiatives within 
inflation-based rate increases, especially if mail volume continues to 
decline. Therefore, we recommended in our November testimony that the 
Postmaster General develop a comprehensive and integrated plan to 
optimize the Service's infrastructure and workforce, in collaboration 
with its key stakeholders, and make it available to Congress and the 
general public. We also recommended that the Postmaster General provide 
periodic reports to Congress and the public on the status of 
implementing its transformation initiatives and other Commission 
recommendations that fall within the scope of its existing authority. 
Postal officials have agreed to develop a comprehensive and integrated 
plan to optimize its infrastructure and provide periodic reports on the 
implementation of its transformation initiatives and make them 
available to Congress and the public. As previously mentioned, the 
Service provided its congressional oversight committees with a progress 
report on its transformation initiatives in November 2003. The 
infrastructure and workforce plan and the periodic reports on the 
status of transformation initiatives will be critical to oversight in 
this area.

Issues Related to the Implementation of Proposals I and II:

During our review, we identified implementation issues that Congress 
may want to consider if it determines that the Service should prefund 
some or all of its retiree health benefits obligation. Under Proposal 
I, implementation issues involve the method that would be used to fund 
the retiree health benefits, and the demographic and economic 
assumptions that would be used to determine the amount of the total 
obligation as well as the annual funding amount. Under Proposal II, the 
question arises as to how the annual cost of retiree health benefits 
for employees hired after fiscal year 2002 would be calculated. In 
addition, neither proposal ensures that the Service would continue to 
prefund the retiree health benefits obligation. Additional questions 
arise about the Service's accounting treatment for retiree health 
benefits under both proposals.

If Congress decides to accept one of the proposals, technical issues 
related to implementing the proposal would need to be addressed. Under 
Proposal I, the Service would fund the retiree health benefits 
obligation by making payments into a fund currently maintained by OPM. 
Postal officials raised questions about which agency--the Service or 
OPM--should determine the amount of the obligation, and what economic 
and demographic assumptions should be used. In addition, we have 
questions about the Service's proposed funding mechanism, because it 
does not amortize the obligation over a specific time period. In 
Proposal II, the Service would maintain control of the retiree health 
benefits fund. Under both proposals, the Service would continue to make 
payments into the respective funds after 2010; however, under P.L. 108-
18, the Service would be under no obligation to prefund the retiree 
health benefits obligation.

Technical Issues Related to Proposal I:

One issue pertains to the assumptions used by the Service to estimate 
its retiree health benefits obligation. If these assumptions change, 
then the future funded status of the obligation would also change. This 
estimated obligation is based on several assumptions, such as premium 
costs, retirement rates, termination rates, mortality assumptions, 
disability assumptions, plan enrollment, and coverage election that 
could change annually and may differ between the Postal Service and 
other agencies. These assumptions materially affect the future funded 
status of the obligation. An illustration of the practical effect of 
using different assumptions can be seen in the estimate of the 
Service's total retiree health benefits obligation. A postal estimate 
of its retiree health benefits obligation as of the end of fiscal year 
2003 differs from an estimate for the same period prepared by OPM by 
about 4 percent, or $2.2 billion. According to the Service, the 
difference in these two estimates is primarily due to differences in 
the measurement date, the discount rate, the health care trend rate, 
the cost basis, and the attribution method used. The Service's estimate 
was actuarially certified as reasonable. However, a different set of 
results could also be considered reasonable actuarial results, because 
the actuarial standards describe a "best-estimate range" for each 
assumption rather than a single best-estimate value.

In addition, the Service said it would not amortize the retiree health 
benefits obligation within a specified time frame. Instead, the 
proposed funding that the Service calculates to address its retiree 
health benefits obligation is the amount that would be required to fund 
the annual retiree premium cost plus the estimated future cost of 
retiree health premiums for current employees (service costs), and 
interest expense on both the outstanding obligation and the new service 
cost. According to the Postal Service, while it is the Service's 
intention to eventually fully fund its retiree health benefits 
obligation under Proposal I, this proposal does not fully fund all 
prior years' service costs--the $54 billion obligation--within a 
specified time period. In fact, because the proposed funding under 
Proposal I includes a beginning asset balance of $10 billion, but does 
not amortize any of the retiree health benefits obligation, 
approximately $45 billion of the obligation would not be funded. The 
Service's proposed funding for the retiree health benefits obligation 
is modeled after the funding method used by some utilities to prefund 
their retiree health benefits. However, other options might allow the 
Service to amortize its existing obligation and prefund the retiree 
health benefits obligation for future retirees. While postal officials 
indicated that under these proposals the Service intends to make annual 
payments for prefunding, the Service would be under no obligation to do 
so. Consequently, if Congress wanted to ensure that the Service 
prefunds its retiree health benefits, legislative action would be 
required.

In considering Proposal I, we identified the following unresolved 
questions:

* Should prefunding Postal Service retiree health benefits be mandated 
by Congress, or left to the Service's discretion?

* Should the Postal Service, OPM, or another entity determine the 
amount of the Service's total retiree health benefits obligation?

* Who should determine the proper funding mechanism for the retiree 
health benefits obligation?

* Should the Postal Service be required to amortize its prior years' 
service obligation within a set time frame? If so, what is the 
appropriate time frame?

* What economic and demographic assumptions should be used to determine 
the current obligation, service costs, and asset balance, and future 
estimates of these amounts? Furthermore, how often should these 
assumptions be updated, and what process should be used to update 
future estimates?

* What recourse, if any, should parties have if they disagree with this 
funding mechanism?

* What oversight, if any, is needed in this area?

Technical Issues Related to Proposal II:

According to postal officials, unlike Proposal I, in Proposal II the 
Service would maintain control of the funds used to prefund the retiree 
health benefits cost for new employees. These officials have also 
stated that the Service would be responsible for determining the proper 
economic and demographic assumptions to be used in calculating the 
annual fund amount. However, questions arise about how the Service 
estimated these costs for fiscal years 2006-2010. For example, the 
Service provided us with estimates of these costs that ranged from $214 
million in fiscal year 2006 to $687 million in fiscal year 2010. The 
Service then adjusted these numbers downward to $100 million for fiscal 
year 2006 and to $300 million for fiscal year 2010. According to postal 
officials, this downward adjustment was made to reflect attrition. 
Although we attempted to verify the method used to lower these 
estimated costs, we were unable to obtain the necessary data in the 
time available to complete our work. As with Proposal I, while the 
Service has said that it intends to fund this obligation for employees 
hired after fiscal year 2002, it is not currently required to prefund. 
Questions similar to those raised in Proposal I would also relate to 
consideration of this proposal, including the following:

* Should prefunding retiree health benefits for new employees be 
voluntary or legislatively mandated?

* How should the annual funding amount be determined?

* What oversight, if any, is needed in this area?

Questions Remain about the Accounting Treatment of the Retiree Health 
Benefits Obligation:

Regardless of which proposal is adopted, questions remain about how the 
retiree health benefits obligation should be reflected in the Service's 
financial statements. The Service currently uses a pay-as-you go basis 
of accounting for its retiree health benefits obligation. We previously 
reported that we believe the Service should consider whether the 
accrual basis of accounting is both the acceptable and appropriate 
method for this obligation, especially considering the importance of 
giving full consideration to economic realities as the Service attempts 
to transform itself in order to respond to major operational and 
financial challenges.[Footnote 16] Postal Service management and the 
Board of Governors, the Postal Rate Commission, Congress, and other 
stakeholders need to have a clear understanding of the Service's true 
financial condition as difficult transformation decisions are being 
considered.

It is our understanding that the Service would not adopt the accrual 
basis of accounting under either of the proposals presented, but would 
disclose the amount of its retiree health benefits obligation in the 
footnotes to its financial statements. While enhanced disclosure would 
be a positive step, we continue to believe that accrual accounting is 
needed in order to provide all stakeholders with the soundest and most 
transparent basis for decisionmaking. In our view, the enactment of 
P.L. 108-18 could be viewed as a significant event that triggers the 
need to reassess the accounting treatment currently used by the Service 
with respect to these obligations, and even more strongly reinforces 
our view that full accrual accounting should be adopted for financial 
statement reporting purposes. Given the unique nature of the Postal 
Service retiree health benefits obligation and the impact of P.L. 108-
18, it may be prudent for the Service and its auditors to consult with 
the Financial Accounting Standards Board (FASB) on the appropriate 
accounting treatment for this obligation for financial statement 
reporting purposes.

A postal official has expressed concern that accrual accounting for 
this obligation would result in immediate rate increases of significant 
magnitude. We recognize that such an approach may initially result in 
higher rate increases than would otherwise be the case under a pay-as-
you-go basis; however, rate increases would likely be more moderate in 
the longer term. Various options may exist for addressing the effect of 
recognizing this obligation, including possible amortization of any 
current unfunded obligation over a reasonable time period, such as 20-
40 years. To further explore these options, we believe that the Service 
should work with the Postal Rate Commission and other appropriate 
stakeholders to determine options for phasing in any potential effect 
on postal rates.

We will be assessing the impact of the accounting treatment for the 
retiree health benefits obligation for whichever proposal is adopted, 
as well as for the Service's pension obligation, as part of our ongoing 
work.

Conclusions:

The Service faces an uncertain future. First-Class Mail volume 
continues to decline, and new revenue sources are not apparent. The 
Service faces significant unfunded obligations, the largest of which is 
for retirees, which must be addressed. Further, decisions must be made 
as to whether current or future ratepayers, or taxpayers, should be 
responsible for paying these obligations. The Service has acknowledged 
that it needs to reduce its operating costs to deal with the decline in 
First-Class Mail volume and meet its obligations. The most direct way 
for the Service to do this is to become more efficient by standardizing 
its operations and reducing excess capacity in its network as part of 
an integrated strategy to rationalize its infrastructure and workforce. 
The Service has stated that it plans to reduce its debt and finance 
capital investment necessary to transform itself from rate increases 
within the rate of inflation. It also proposes to prefund at least some 
of its retiree health benefits obligation. However, it is not clear 
based upon available information from the Postal Service whether it can 
accomplish these goals. If sufficient funding for transformation 
initiatives is not available, or if it does not achieve additional cost 
savings, significant additional efficiency gains may not be achieved. 
In addition, if larger postal rate increases are needed, further 
declines in mail volume could result. These scenarios could thereby 
threaten the Service's future financial viability.

It is against this backdrop of fairness to current and future 
ratepayers and taxpayers, affordability, and the ability of the Service 
to achieve its transformation goals that the Service's proposal to 
eliminate the escrow requirement and its two funding proposals must be 
weighed. We believe that the continuation of the escrow requirement 
after fiscal year 2005 without allowing the Service to use the funds 
has the potential for significantly raising postal rates unnecessarily. 
Rate increases of the magnitude necessary to fund this escrow 
requirement in the future may precipitate further declines in mail 
volume and could hinder the Service's ability to achieve other 
financial goals. Furthermore, Congress has other means by which it can 
direct or guide the Service in its use of funds if it chooses to do so.

Both funding proposals presented by the Service are generally 
consistent with the provisions of P.L. 108-18. Proposal I, which is 
preferred by the Service, hinges on transferring the responsibility for 
military service pension costs from the Service to the Treasury. 
Proposal I would result in a greater postal rate increase and would 
shift more of the responsibility for the retiree health benefits 
obligation to current ratepayers. Proposal II, on the other hand, would 
require less of a postal rate increase, focus more on rate mitigation, 
and shift less of the responsibility for the retiree health benefits 
obligation to current ratepayers than Proposal I. This would leave 
future postal ratepayers with more of the burden of paying for costs 
unrelated to products and services they receive.

Under both proposals, a portion of the retiree health benefits 
obligation would remain unfunded, and the Service currently does not 
intend to account for or report on its retiree health benefits 
obligation on an accrual basis under either proposal. Thus, the full 
extent of the Service's obligation would not be recognized on its 
financial statements. Finally, the Service anticipates that it will be 
able to pay down debt and fund capital investments through inflation-
based rate increases under both proposals. In our view, the Service 
needs to begin addressing its retiree health benefits obligation as 
soon as it can afford to do so, and to the extent it can. The most 
substantive way it will be able to do this, as well as enhance its 
overall financial viability, is by effectively implementing the 
transformation goals it and the President's Commission set forth, 
particularly by becoming more efficient and rationalizing its 
infrastructure and workforce. It is therefore critical for the Service 
to have the capital funding needed for transformation. Although the 
Service believes it would be able to generate enough funds, this is not 
clear because the Service has not yet presented a comprehensive 
integrated infrastructure and workforce rationalization plan. However, 
the Service has agreed to do so, as well as report periodically on its 
progress in implementing its Transformation Plan. Finally, a number of 
technical issues need to be considered that are associated with the 
Service's two funding proposals, including the implementation of any 
prefunding of the Service's retiree health benefits obligation and the 
manner in which the Service should amortize and report on its 
obligation.

Matters for Congressional Consideration:

To ensure continuing progress in addressing the Service's financial 
challenges, we suggest that Congress consider the following:

* Repealing the escrow requirement after receiving an acceptable plan 
from the Service describing how it intends to rationalize its 
infrastructure and workforce and is confident that the Service is 
making satisfactory progress on transforming itself into a more 
efficient organization and implementing its transformation goals.

* Directing the Service to fund specific purposes that Congress 
believes are especially important--such as prefunding the retiree 
health benefits obligation or supporting and possibly accelerating the 
Service's transformation efforts--if the Service does not provide an 
acceptable plan for rationalizing its infrastructure and workforce, or 
show satisfactory progress in implementing transformation, or if 
Congress wants greater assurance that the Service will spend funds in a 
particular manner. In this regard, we have already recommended that the 
Service provide periodic reports on the status of its transformation 
initiatives and other Commission recommendations.

* Addressing implementation issues related to the retiree health 
benefits obligation. For example, one key issue that would need to be 
further explored is what options may be available that will allow the 
Service to amortize its unfunded retiree health benefits obligation 
over a specified time period (e.g., 20-40 years) and prefund the 
retiree health benefits obligation for future retirees.

Agency Comments and Our Evaluation:

The Postal Service provided comments on a draft of this report in a 
letter from the Chief Financial Officer dated November 21, 2003. These 
comments are summarized below and reproduced in appendix II. The 
Service's letter stated the following:

* It was pleased that our report found its proposals to be consistent 
with P.L. 108-18, and that its preferred proposal presented a more 
equitable balance of costs between current and future ratepayers.

* It would have to raise rates to generate funds for the escrow 
requirement.

* The issue of the affordability of the proposals should be viewed as a 
question of whether the ratepayers can afford them.

* It was concerned with our recommendation that Congress repeal the 
escrow requirement after it receives an acceptable plan from the 
Service concerning rationalization of its infrastructure and workforce, 
and if Congress believes that the Service is making satisfactory 
progress on its transformation goals.

* The Service believes that it already provides adequate information to 
Congress for reviewing its plans and progress on transformation. Thus, 
the Service believes that using the escrow as an oversight mechanism is 
not necessary and will result in forcing the Service to raise rates.

* It believes that its Proposal I is in the best interest of the 
taxpayers and postal stakeholders.

In response to the Service's comment regarding the affordability issue, 
we agree that affordability to ratepayers is an important consideration 
and discuss the impact of these proposals on rate increases and volume. 
We have also added language to our report to clarify this point.

Regarding the Service's concern about tying the escrow requirement to 
an acceptable infrastructure and workforce rationalization plan, we 
understand the Service's concern that if the escrow requirement is not 
repealed, it would have to raise rates unnecessarily. We agree that 
establishing an escrow account without allowing the Service to use the 
funds would not be a desirable outcome, and that is one of the reasons 
why we suggested that Congress consider repealing the escrow 
requirement. On the other hand, contrary to the Service's view, we 
believe the escrow requirement is an opportunity for Congress to review 
how the Service plans to address a number of long-term challenges, 
including debt repayment, capital projects, an unfunded retiree health 
benefits obligation, and its progress toward transformation. If the 
Service provides Congress with an acceptable plan in the next several 
months and Congress finds the plan and the Service's transformation 
progress satisfactory, we believe Congress should have sufficient time 
to repeal the escrow requirement so that an escrow account would not be 
needed. Thus, the Service would not have to include the operating 
expense associated with the escrow requirement in its rate base for the 
next rate case filing. Alternatively, if Congress is not satisfied, it 
could direct the Service to fund specific activities or purposes 
through means other than an escrow requirement.

Finally, the Service believes that using the escrow requirement for 
additional oversight is not needed, because it has provided Congress 
with adequate information on its plans and progress toward 
transformation. While we agree that the Service provides a variety of 
reports and plans to Congress, including its November 2003 
Transformation Plan Progress Report, the Service has not provided 
Congress with a comprehensive and integrated infrastructure and 
workforce rationalization plan. We believe such a plan is needed 
because the Service's rationalization of its infrastructure and 
workforce is among the most important initiatives in the Service's 
Transformation Plan since it will significantly affect the Service as 
well as so many employees, mailers, and communities. Recognizing the 
widespread interest and potential controversy associated with any 
changes in this area, it is critical that the Service inform Congress 
and the public about its rationalization strategies and plans. We, as 
well as the President's Commission, believe that these initiatives are 
also key to the Service's efforts to cut costs and become more 
efficient. Accordingly, we believe oversight in this area is necessary, 
and that information related to the cost of these initiatives and the 
Service's ability to fund them will be needed to assure Congress that 
the Service is continuing to make progress in implementing its 
Transformation Plan.

:

We will send copies of this report to the Chairmen and Ranking Minority 
Members of the House and Senate Committees on Appropriations, as well 
as Representative John M. McHugh, Chairman of the House Special Panel 
on Postal Reform and Oversight; Representative Danny K. Davis, Senator 
Daniel K. Akaka, Senator Thomas R. Carper, the Postmaster General, the 
Secretary of the Treasury, the Director of the Office of Personnel 
Management, the Director of the Office of Management and Budget, the 
Chairman of the Postal Rate Commission, and other interested parties. 
We will also make copies available to others on request. In addition, 
this report will be available at no charge on GAO's Web site at 
[Hyperlink, http://www.gao.gov] http://www.gao.gov.

Signed by:

Staff acknowledgments are included in appendix III. If you have any 
questions about this report, please contact Bernard L. Ungar, Director, 
Physical Infrastructure Issues, at (202) 512-2834 or at [Hyperlink, 
ungarb@gao.gov.] ungarb@gao.gov.

Signed by: 

David M. Walker: 
Comptroller General of the United States:

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology:

Our objectives for this report were to fulfill our legislative mandate 
to evaluate the Postal Service's proposal for use of the savings 
accruing to the Service from enactment of pension reform legislation. 
We evaluated the report based on its consistency with P.L. 108-18. We 
also addressed the escrow requirement that the Service identified as an 
issue in its report, and identified issues based upon our previous work 
that Congress may want to consider in assessing the Service's 
proposals, including the fairness and affordability of the proposals, 
and the ability of the proposals to help the Service achieve its 
transformation goals. Finally, we discussed other pertinent issues that 
we identified in the course of our review.

To assess whether the proposals were consistent with the provisions of 
P.L. 108-18, we reviewed the legislative history of P.L. 108-18. We 
then assessed how well each of these proposals addressed the Sense of 
Congress and the Matters to Consider expressed in that legislation. We 
also reviewed the Commission recommendations to determine if the 
proposals were consistent with this work.

To assess the escrow requirement, we reviewed the Service's report, 
interviewed postal officials, and analyzed the Postal Service's 
financial data to assess the impact of the escrow requirement on the 
Service's financial situation. We also interviewed congressional staff 
to discuss the purpose of this account.

To identify issues we had previously reported on, we reviewed our 
previous work. To assess how well each proposal addressed fairness 
issues, we reviewed Postal Service documents and interviewed Postal 
Service officials. We also assessed the affordability of each proposal 
by obtaining and analyzing Postal Service documents, including the 
Five-Year Strategic Plan FY 2004-2008, the Integrated Financial Plan 
for Fiscal Year 2004, the Five-Year Strategic Capital Investment Plan 
2004-2008, annual reports, and materials provided by the Service in 
support of its proposals. We did not independently verify any of the 
financial data provided by the Postal Service. We also reviewed 
actuarial reports regarding the retiree health benefits obligation, and 
analyzed the Service's proposed funding mechanism. We did not 
independently verify any of the actuarial reports. We also reviewed the 
Service's April 2002 Transformation Plan to assess progress in this 
area. To assess the impact on the federal budget, we reviewed the 
federal budget and documents prepared by the Congressional Budget 
Office related to the effect of P.L. 108-18 on the federal budget, and 
we conducted interviews with officials from the Congressional Budget 
Office.

To identify other pertinent issues that Congress may want to consider, 
we reviewed Postal Service documents, the Commission's report, and our 
previous work. We also conducted interviews with congressional staff, 
OPM, and Postal Service officials.

The Service raised another issue in its report that was not within the 
scope of our review. The Service has expressed concern with the method 
that OPM used to determine the amount of the postal CSRS fund. The 
Service believes that OPM's methodology assigns an unreasonably low 
portion of the retirement benefit to the federal government, so it 
provided OPM with two alternatives to consider. OPM did not agree with 
the first alternative and did not respond to the second alternative. 
P.L. 108-18 required OPM, in consultation with the Postal Service, to 
develop the methodology used to determine the amount of the postal CSRS 
fund. The law also afforded the Service the opportunity to appeal OPM's 
methodology to the Board of Actuaries of the Civil Service Retirement 
System, which the Service is currently considering. Thus, we did not 
include this issue in the scope of our review.

We conducted our review at Postal Service headquarters in Washington, 
D.C., from October 1, 2003, through November 25, 2003, in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the U.S. Postal Service:

RICHARD J. STRASSER, JR. 
CHIEF FINANCIAL OFFICER 
EXECUTIVE VICE PRESIDENT:

UNITED STATES POSTAL SERVICE:

November 21, 2003:

Mr. Bernard L. Ungar:

Director, Physical Infrastructure Issues United States General 
Accounting Office Washington, D.C. 20548-0001:

Dear Mr. Ungar:

Thank you for providing the Postal Service the opportunity to review 
and comment on the General Accounting Office (GAO) draft report, Postal 
Pension Funding Reform: Issues Related to the Postal Service's Proposed 
Use of Pension Savings (GAO-04-238).

We are cognizant of the tight timeframe you are under and appreciate 
the draft you provided on November 19 for our review. We have not had 
sufficient time, however, to solicit input on these important issues 
from the Postal Service Governors.

We are pleased that the GAO's review of our proposals found that both 
proposals were consistent with the Postal Service Civil Service 
Retirement System Funding Reform Act of 2003 (P.L. 108-18). In 
particular, we note that in terms of fairness, GAO found that our 
preferred proposal which recognized OPM's determination that we were 
$10 billion overfunded under the old statute, resulted in a more 
equitable balance of costs between current and future ratepayers. We 
further note that affordability should not be viewed as an issue of 
whether the Postal Service can afford the proposals; rather, it is a 
question of whether the ratepayers can afford them. The mailing 
industry needs to have rates that generate volumes that in turn will 
generate revenues for the Postal Service.

We also stress, as GAO indicated on page 7 of its report, "[T]he 
Service would not realize a reduction in its annual operating expense 
of over $3 billion beginning in fiscal year 2006." The escrow in FY 
2006 can only be generated by new rates and, in fact, accelerates the 
need for further increases, thus contributing to the "death spiral" 
referenced on page 24 of the GAO report.

We are concerned with the recommendation contained in the report that 
Congress only repeal the escrow requirement after if it receives an 
acceptable plan from the Postal Service concerning rationalization of 
its infrastructure and workforce, and if Congress believes that the 
Postal Service is making satisfactory progress on its transformation 
goals. In fact, we believe that Congress currently has a variety of 
adequate avenues for reviewing the Postal Service's plans. The Postal 
Service publishes a Five-Year Strategic Plan and fully complies with 
the Government Performance and Results Act. Moreover, beyond these 
statutorily-mandated reports and consistent with prior GAO 
recommendations to Congress, the Postal Service undertook an 
unprecedented effort to develop a comprehensive Transformation Plan. 
The Transformation Plan reflects a consensus of all interested parties 
on the steps necessary for the Postal Service to remain a viable 
enterprise well into the future. The Postal Service has aggressively 
pursued implementation of Transformation Plan goals. In fact, a 
Transformation Plan Progress Report 
was just issued. That report emphasizes the progress made on 
improvements in customer satisfaction, cost reductions, and elimination 
of career positions, among other things, since the plan was released in 
April 2002. We believe that using the escrow requirement as an 
additional oversight mechanism simply is not necessary and further will 
force the Postal Service to raise rates to generate billions of dollars 
in revenues over which it will exercise little control.

Finally, the Postal Service believes that its preferred proposal, under 
which military pension costs are the responsibility of the Department 
of the Treasury and the Postal Service prefunds retiree health 
benefits, is in the best interests of the American taxpayers as well as 
all postal stakeholders. As the GAO report recognizes, this proposal 
achieves a fair balance between current and future ratepayers while 
allowing the Postal Service to prefund a greater portion of its long-
term obligations.

If you or your staff would like to discuss any of these comments, we 
are available at your convenience.

Sincerely,

Signed by: 

Richard J. Strasser, Jr.

[End of section]

Appendix III: GAO Contact and Staff Acknowledgments:

GAO Contact:

Bernard L. Ungar, (202) 512-2834.

Staff Acknowledgments:

Teresa L. Anderson, Alan N. Belkin, Christine Bonham, Margaret Cigno, 
Nikki Clowers, Kathy Gilhooly, and Kenneth E. John made key 
contributions to this report.

(543081):

FOOTNOTES

[1] U.S. Postal Service, Postal Service Proposal: Use of Savings for 
Fiscal Years after 2005, P.L. 108-18, Sept. 30, 2003.

[2] U.S. Postal Service, Postal Service Proposal: Military Service 
Payments Requirements, P.L. 108-18, Sept. 30, 2003. Joint report by the 
Office of Personnel Management and the Department of the Treasury, 
Report to Congress on the Financing of Benefits Attributable to the 
Military Service of Current and Former Employees of the Postal Service, 
Sept. 30, 2003.

[3] U.S. General Accounting Office, Postal Pension Funding Reform: 
Review of Military Service Funding Proposals, GAO-04-281 (Washington, 
D.C.: Nov. 26, 2003).

[4] President's Commission on the United States Postal Service, 
Embracing the Future: Making the Tough Choices to Preserve Universal 
Mail Service, (Washington, D.C.: July 31, 2003).

[5] U.S. General Accounting Office, U.S. Postal Service: Bold Action 
Needed to Continue Progress on Postal Transformation, GAO-04-108T 
(Washington, D.C.: Nov. 5, 2003).

[6] Postal employees would continue to make their contributions to the 
CSRS fund, which are currently 7 percent of pay. 

[7] GAO-04-108T.

[8] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.: 
January 2003); and U.S. Postal Service: Deteriorating Financial Outlook 
Increases Need for Transformation, GAO-02-355 (Washington, D.C.: Feb. 
28, 2002).

[9] It should be noted that Proposal I, by funding retiree health 
benefits for current and former employees only if it is relieved of 
responsibility for military service costs, also addresses rate 
mitigation because funding this obligation for current and former 
employees, while retaining responsibility for military service costs, 
would result in even higher rate increases.

[10] GAO-04-108T.

[11] Proposal I specifies that any overfunding not be withdrawn from 
the separate account. If it were withdrawn, there would also be on-
budget outlays.

[12] GAO-04-108T.

[13] It is important to note, however, that rate increases would not be 
higher than they would have been if P.L. 108-18 had not lowered the 
Service's annual CSRS pension payments.

[14] GAO-01-598T.

[15] GAO-04-108T.

[16] See U.S. General Accounting Office, U.S. Postal Service: 
Accounting for Postretirement Benefits, GAO-02-916R (Washington, D.C.: 
Sept. 12, 2002).

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