US Postal Service 2004 Annual Report Download - page 28

financial review
26 | 2004 annual report united states postal service
As฀required฀by฀P.L.108-18,฀in฀May฀2003฀we฀began฀to฀fund฀our฀
obligations฀to฀the฀CSRDF฀based฀on฀dynamic฀assumptions.฀This฀
increased฀our฀biweekly฀payroll฀contribution฀for฀CSRS฀employ-
ees’฀retirement฀from฀7.0%฀of฀basic฀pay฀to฀17.4%.฀
In฀2004฀we฀also฀made฀the฀first฀required฀annual฀payment฀on฀the฀
“supplemental฀liability”฀calculated฀by฀OPM.฀This฀“supplemental฀
liability”฀represents฀the฀excess฀of฀the฀actuarial฀present฀value฀of฀
future฀benefits฀over฀the฀actuarial฀present฀value฀of฀plan฀assets,฀
future฀plan฀contributions,฀earnings,฀and฀other฀factors.฀
P.L.108-18฀requires฀that฀the฀dynamic฀funding฀assumptions฀
include฀the฀full฀value฀of฀future฀benefits฀related฀to฀military฀or฀
volunteer฀service฀when฀calculating฀the฀actuarial฀present฀value฀
of฀future฀benefits.฀This฀provision฀of฀P.L.108-18฀transfers฀to฀
us฀from฀the฀U.฀S.฀Treasury฀the฀responsibility฀for฀funding฀the฀
costs฀of฀CSRS฀benefits฀that฀current฀and฀former฀Postal฀Service฀
employees฀have฀earned฀through฀military฀service.฀P.L.108-18฀
thus฀transfers฀$27฀billion฀in฀obligations฀from฀U.S.฀taxpayers฀to฀
our฀ratepayers.฀
P.L.108-18฀stipulates฀that฀the฀Postal฀Service฀shall฀be฀allowed฀
to฀request฀a฀reconsideration฀and฀review฀of฀the฀OPM฀computa-
tions฀by฀the฀Board฀of฀Actuaries฀of฀the฀Civil฀Service฀Retirement฀
System.฀In฀January฀2004,฀we฀asked฀the฀Board฀of฀Actuaries฀
of฀the฀Civil฀Service฀Retirement฀System฀to฀review฀the฀method฀
and฀ computations฀ used฀ by฀ OPM฀ in฀ its฀ calculation฀ of฀ our฀
portion฀of฀CSRS฀benefits฀because฀we฀believe฀that฀OPM฀used฀
an฀allocation฀methodology฀to฀attribute฀CSRS฀pension฀costs฀of฀฀
pre-July฀ 1,฀ 1971,฀ service฀ that฀ assigns฀ an฀ unreasonably฀
large฀ share฀ of฀ the฀ burden฀ to฀ us฀ for฀ payment.฀The฀ Civil฀
Service฀Board฀of฀Actuaries฀upheld฀the฀OPM฀methodology฀in฀
September฀2004.
In฀September฀2004,฀OPM฀informed฀us฀that฀our฀first฀supple-
mental฀payment,฀based฀on฀the฀September฀30,฀2003฀valuation,฀
would฀ be฀ $240฀ million.฀We฀ included฀ $125฀ million฀ of฀ this฀
payment฀in฀our฀2003฀expenses฀and฀$115฀million฀in฀2004.฀See฀
note฀7฀to฀our฀Financial฀Statements฀for฀further฀explanation.
P.L.108-18฀identifies฀as฀“savings”฀the฀difference฀between฀the฀
contributions฀we฀would฀have฀made฀to฀the฀CSRDF฀had฀the฀legis-
lation฀not฀been฀enacted,฀and฀the฀contributions฀we฀now฀make฀
under฀the฀law.฀In฀2003฀and฀2004฀we฀were฀required฀to฀use฀
these฀“savings”฀to฀reduce฀our฀debt.฀In฀2003,฀we฀calculated฀our฀
“savings”฀to฀be฀$3.5฀billion,฀and฀we฀reduced฀our฀debt฀with฀the฀
U.S.฀Treasury฀by฀$3.8฀billion,฀thus฀exceeding฀the฀requirements฀
of฀the฀law.฀In฀2004,฀we฀used฀“savings”฀of฀$2.7฀billion฀to฀reduce฀
our฀outstanding฀debt฀to฀the฀U.฀S.฀Treasury,฀and฀we฀reduced฀our฀
debt฀by฀an฀additional฀$2.8฀billion,฀for฀a฀total฀debt฀reduction฀of฀
$5.5฀billion฀in฀2004.฀We฀will฀use฀the฀“savings”฀in฀2005฀to฀offset฀
operational฀expenses฀and฀to฀hold฀postal฀rates฀steady.฀
Future฀Use฀of฀“Savings”
Congress฀will฀consider฀what฀to฀do฀with฀the฀post-2005฀“savings”฀
but฀until฀Congress฀acts,฀any฀“savings”฀after฀2005฀must฀be฀
placed฀ in฀escrow.฀This฀escrow฀provision,฀if฀not฀repealed฀or฀
substantially฀modified,฀will฀significantly฀impact฀our฀financial฀
results฀and฀ultimately฀postage฀rates.฀We฀estimate฀that฀without฀
Congressional฀action,฀the฀escrow฀requirement฀of฀P.L.108-18฀
will฀require฀postal฀rate฀increases฀in฀2006฀to฀be฀approximately฀
5%฀higher฀ than฀they฀otherwise฀would฀have฀been.฀This฀will฀
adversely฀impact฀the฀mailing฀industry,฀the฀general฀public,฀and฀
ultimately฀ the฀Postal฀ Service฀itself,฀by฀further฀ exacerbating฀
existing฀trends฀of฀revenue฀and฀volume฀weakness.
As฀ required฀ by฀ P.L.108-18,฀ on฀ September฀ 30,฀ 2003,฀ we฀
submitted฀ two฀ proposals฀ to฀ the฀ President,฀ Congress,฀ and฀
the฀Government฀฀Accountability฀Office.฀The฀first฀presents฀our฀
position฀as฀to฀how฀the฀“savings”฀realized฀after฀2005฀should฀be฀
used;฀the฀second฀presents฀our฀position฀that฀CSRS฀obligations฀
arising฀from฀military฀service฀be฀returned฀to฀the฀U.S.฀Treasury.฀
In฀ both฀ proposals,฀ we฀ recommend฀ eliminating฀ the฀ escrow฀
requirement฀and฀propose฀using฀a฀portion฀of฀the฀“savings”฀after฀
2005฀to฀help฀finance฀retirement฀health฀benefit฀obligations.฀The฀
escrowed฀“savings”฀requirement฀of฀P.L.108-18฀will฀require฀
postal฀ rate฀ increases฀ which฀ negatively฀ affect฀ the฀ mailing฀
industry฀and฀the฀general฀public.฀From฀the฀standpoint฀of฀the฀
postal฀ratepayer,฀there฀can฀be฀no฀“savings”฀under฀P.L.108-18฀
so฀long฀as฀its฀escrow฀requirement฀is฀in฀effect.฀
Our฀preferred฀proposal฀would฀return฀responsibility฀for฀funding฀
CSRS฀military฀service฀obligations฀to฀the฀U.S.฀Treasury.฀Under฀
this฀proposal,฀our฀CSRS฀pension฀obligation฀would฀ be฀over-
funded฀by฀$10฀billion.฀This฀excess฀CSRS฀funding฀would฀be฀
transferred฀ to฀ a฀ newly฀ established฀ “Postal฀ Service฀ Retiree฀
Health฀Benefit฀Fund.”฀We฀would฀then฀fund฀the฀“full฀cost”฀of฀
retirement฀health฀benefit฀costs฀on฀a฀current฀basis.฀Any฀remain-
ing฀“savings”฀would฀be฀used฀to฀reduce฀debt.
Our฀alternate฀proposal฀assumes฀that฀CSRS฀military฀service฀
obligations฀remain฀the฀responsibility฀of฀the฀Postal฀Service.฀
Under฀this฀proposal,฀we฀would฀use฀the฀“savings,”฀in฀a฀prior-
ity฀sequence,฀to:฀first,฀fund฀ and฀pre-fund฀retirement฀ health฀
care฀benefits;฀second,฀repay฀debt;฀and฀third,฀fund฀productivity฀
and฀cost฀saving฀capital฀investments.฀Beginning฀in฀2006,฀this฀
proposal฀would฀pre-fund฀retirement฀health฀care฀benefits฀for฀all฀
new฀employees฀hired฀in฀2003฀or฀later.
Part II