US Postal Service 2007 Annual Report Download - page 51

2007 Annual Report United States Postal Service | 51
Notes to the Financial Statements
The following table presents OPM’s estimate of the present value of our
CSRS “supplemental liability” as of September 30, 2006 and 2005. This
calculation assumed general salary increases of 2.8%, COLAs of 3.25%,
and interest of 6.25% and was intended to provide for the liquidation of
the “supplemental liability” over a 38-year period ending in September 30,
2043.
Present Value Analysis of CSRS
“Supplemental Liability” 2006 2005
(Dollars in billions as of September 30)
Present Value of Benefits $ 193.7 $ 196.9
Present Value of Contributions * 3.2 12.3
Current Fund Balance ** 207.6 180.9
Surplus (Deficit) $ 17.1 $ (3.7)
Transferred to PSRHBF in 2007 (17.1)
Surplus (Deficit) After Transfer $ -
* Expected employer and employee contributions
** Excess of contribution benefits paid as estimated by OPM
As explained above, the “supplemental liability” payments were suspended
until 2017 by P.L.109-435. At that time, OPM will perform an actuarial
valuation and determine whether additional “supplemental liability”
payments are necessary. Accordingly, no “supplemental liability” payment
was made in 2007. The “supplemental liability” payment in 2006 was
$257 million.
Note 11 – Workers’ compensation
We pay for workers’ compensation costs under a program administered by
DOL. These costs, recorded as an operating expense, include employees’
medical expenses, payments for continuation of wages, and DOL adminis-
trative fees.
Our liability at September 30, 2007, represents the estimated present value
of the total amount we expect to pay in the future for postal workers injured
through the end of 2007. The estimated total cost of a claim is based upon
the severity of the injury, the age of the injured employee, the estimated
duration of payments to the employee, the trend of our experience with
such an injury, and other factors.
We estimated our total liability for future workers’ compensation costs to
be to be $7,771 million at the end of 2007 and $7,863 million at the end of
2006. The payout period for this liability will, for some claimants currently
on the rolls, be for the rest of their lives.
The liability is sensitive to changes in inflation and discount rates. An
increase of 1% in the assumptions would decrease our estimate of the
liability by approximately $603 million. A decrease of 1% would increase
our estimate of the liability by approximately $904 million.
In 2007, we engaged an independent actuarial consulting firm to perform
an actuarial valuation of our workers’ compensation liability at September
30, 2007. They are also assisting us in developing our own model, which
we plan to implement in 2008. The methodology employed in the actuary’s
model is similar to that which will be employed in our new model.
The standard actuarial valuation techniques used in estimating the workers
compensation liability at September 30, 2007 included the paid loss
development and the incremental frequency / severity methods. The paid
loss development method estimates the liability based on the historical
pattern of payments observed over many years. The frequency / severity
method estimates liability by considering not only the cost, but the number
of claims payments over many years. The frequency / severity method
requires that we make explicit assumptions about future changes in the
average payment amounts due to inflation or other cost increases. Both
methods used in calculating the 2007 workers’ compensation liability are
generally accepted actuarial techniques and are equally valid for estimating
a liability such as ours. Accordingly, we used an average of the results of
the two methods in determining our liability as of September 30, 2007.
During 2007, we also conducted a review of the inflation and discount rates
used to determine the present value of estimated future workers’ compen-
sation payments. Separate analyses of the appropriate inflation rates for
medical and compensation portions of the liability were performed, utilizing
forecasts of medical inflation and inflation in the general economy. Due to
the differences between medical and compensation claims in the average
length of time that claimants stay on the rolls, we validated our assumptions
and methodology with an independent actuarial firm. Appropriate discount
rates were determined using forecasted rates of return on baskets of
Treasury securities of varying durations.
The workers’ compensation liability estimation technique used in 2006 and
prior years utilized a net discount rate, which was the estimated difference
between the expected return on investments in a basket of Treasury securi-
ties offset by the estimated inflation rate for medical costs and wages. The
net discount rate in 2006 was 3.3% for compensation claims and -0.8%
for medical claims. The new model uses separate calculations for returns
on investments and inflation factors rather than a net discount rate. The
rates used in the new model are returns on investments for compensation
claims of 5.6% and wage inflation of 3.0%. For medical claims the new
model uses 5.4% for returns on investments and 5.0% for medical future
inflation.
The total change to our liability as a result of the changes in actuarial
valuation techniques, including various individually insignificant underlying
assumptions, and inflation and discount rates was $685 million. This is
shown is the table below.
Workers’ Compensation
Assumption Changes
Old
Assumptions
Current
Assumptions
Net
Reduction
(Dollars in millions)
Compensation Claims $ 5,565 $ 5,272 $ 293
Medical Claims 2,820 2,428 392
Total Liability $ 8,385 $ 7,700 $ 685