US Postal Service 2007 Annual Report Download - page 26

26 | 2007 Annual Report United States Postal Service
Financial Section Part II
P.L.109-435 made several changes to the way we fund and report our
obligations for postretirement health benefits. The new law established
the PSRHBF and directed OPM to determine any Postal Service surplus
in the Civil Service Retirement and Disability Fund as of September 30,
2006 and to deposit the surplus into the PSRHBF by June 30, 2007. OPM
attributed to the Postal Service, a surplus of $17.1 billion in the CSRS fund
as of September 30, 2006 and transferred the funds as required on June
29, 2007. P.L.109-435 also required that we begin to fund the OPM-
determined obligation for retiree health benefits by paying into the PSRHBF
the 2006 escrow resulting from P.L.108-18 ($2.958 billion) and by making
additional annual payments averaging $5.6 billion per year through 2016.
Beginning in 2017, the PSRHBF will begin to pay our portion of the premium
payments. The 2007 payment to the PSRHBF was $5.4 billion.
Under P.L.109-435, OPM will continue to charge us for our portion of the
premiums for postal retirees currently participating in FEHBP and we will
continue to expense these payments as they become due until 2017. The
major drivers of our retiree health benefits premium costs are the number
of current participants on the rolls, the mix of plans selected by retirees,
the premium costs of those plans, and the apportionment of premium costs
to the federal government for retiree service prior to 1971. Retiree health
benefit premium expense, exclusive of the expense for the PSRHBF, has
increased every year. The 5.4% increase in 2007 was smaller than in prior
years due to lower premium costs and the application of plan reserves
to lower premiums. In 2006, retiree health benefit expenses increased
9.5%. The number of Postal Service annuitants and survivors has grown
to approximately 450,000 in 2007 compared to 448,000 in 2006 and
444,000 in 2005. The average monthly apportionment, the percentage of
retiree premiums charged to the Postal Service, has increased from 64.7%
in 2005 to 69.1% in 2007.
A summary of the retiree health benefits expense for 2007, 2006, and
2005 is included in the table below.
Retiree Health Benefits Expense 2007 2006 2005
(Dollars in millions)
Employer Premium Expense $ 1,726 $ 1,637 $ 1,495
Transfer of 2006 Escrow to PSRHBF 2,958 - -
P.L.109-435 Scheduled Payment 5,400 - -
Total $ 10,084 $ 1,637 $ 1,495
Beginning in 2008, P.L.109-435 also requires that OPM provide, and that
we report, certain information concerning the obligations, costs, and fund-
ing status of the PSRHBF. The OPM estimate was prepared in accordance
with Federal Accounting Standards Advisory Board (FASAB) Statement of
Federal Financial Accounting Standards (SFFAS) 5. SFFAS 5 requires the
use of the aggregate Entry Age Normal actuarial cost method. As discussed
below, this method is different from the one we used in calculating our
obligation in 2006. The following table provides some of the required
P.L.109-435 disclosures.
Present Value Analysis of Retiree Health Benefits Fund as Calculated
by OPM (Medical Inflation Assumption @ 7%)
(Dollars in millions)
Obligations at Inception* $ 74,815
Plus Interest @ 6.25% 4,676
Plus Normal Payments 3,175
Less Premium Payments 1,880
Subtotal 80,786
Contributions & Transfers** 25,458
Earnings @ 5% 287
Ending Obligations 9/30/07 $ 55,041
* OPM calculated the beginning obligation as of 9/30/06.
** Contributions and transfers of $2,958 million, $17,100 million and $5,400 million were made
April 6, 2007, June 29, 2007, and September 28, 2007, respectively.
Because there are several areas of judgment involved in calculating this
obligation, estimates can vary widely depending on the assumptions used.
Utilizing the same underlying data that was used in preparing the estimate
in the chart above, the September 30, 2007 obligation could range from
$49 billion to $69 billion, solely by varying the inflation rate by plus or
minus 1%.
As an “independent establishment of the executive branch of the
Government of the United States,” we are required to account for our
participation in FEHBP using multiemployer plan accounting rules. If we
were not a participant in the federal government plan and not subject
to the provisions of P.L.109-435, we would be required to record and
disclose our obligation for future health benefit obligations under FAS 106.
In 2006, we contracted with an independent actuarial firm to estimate
our future retiree health benefit obligations under FAS 106. The FAS
106 methodology is different from the one used by OPM to calculate our
estimated 2007 obligation. Because there are several areas of judgment
involved in calculating this obligation, estimates can vary widely based
on the assumptions used. Our assumptions used for long-term medical
inflation premiums in calculating our liability ranged from 5% to 6%. Based
on September 30, 2006 data, we estimated that if we sponsored our own
plan with costs and benefits similar to the federal plans, the 2006 value of
future payments would be between $50 billion and $58 billion. The range
in the estimate exists only because long-term medical inflation assump-
tions differed by 1%.
Workers’ Compensation
Our employees are covered by the Federal Employees’ Compensation
Act, administered by the Department of Labor’s Office of Workers’
Compensation Programs (OWCP), which makes all decisions regarding
injured workers’ eligibility for benefits. However, we pay all workers’
compensation claims from postal funds.
We record as a liability the present value of all future payments we expect
to make to those employees receiving workers’ compensation. At the end of
2007, we estimate our total liability for future workers’ compensation costs