US Postal Service 2008 Annual Report Download - page 60

60 | 2008 Annual Report United States Postal Service
Beginning in 2004, we had been required by P.L.108-18
to pay an additional annual amount into the CSRS retire-
ment plan, if necessary, each September, as determined by
OPM. The “supplemental liability” represented the excess
of the actuarial present value of the future benefits liability
over the actuarial present value of plan assets, future con-
tributions, earnings, and other actuarial factors related to
Postal Service participants in the CSRS plan. In 2006, we
paid $257 million including interest towards this liability, of
which $231 million was interest and the remaining $26 mil-
lion a reduction in the principal amount of the liability.
P.L.109-435 relieved the Postal Service of the obligation
to pay for the portion of the CSRS pension costs attribut-
able to the military service of its retirees that was previously
imposed by P.L.108-18. The cost of these benefits was
estimated by OPM to be $27 billion in 2003. The elimina-
tion of the military service funding requirement dramatically
impacted the funded status of the portion of the CSRS al-
located to the Postal Service. OPM determined that, as a
result of the changes imposed by P.L. 109-435, the Postal
Service portion of the CSRS had a surplus of $17.1 billion
as of September 30, 2006. Accordingly, the “supplemental
liability” payment previously required by P.L. 108-18 was
suspended and no amount was incurred or paid in 2008
or 2007.
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 “sup-
plemental liability” payments are necessary.
Note 11 — Workers’ compensation
We pay for workers’ compensation costs under a program
administered by DOL. These costs, recorded as an op-
erating expense, include employees’ medical expenses,
compensation for wage loss, and DOL administrative fees.
The program also provides for payment of benefits to de-
pendents of employees who die from work-related injuries
or diseases.
Our liability at September 30, 2008, represents the es-
timated present value of the total amount we expect to
pay in the future for postal workers injured through the
end of 2008. The estimated total cost of a claim is based
upon the date of injury, pattern of historical payments, fre-
quency and severity of the injuries, and the expected trend
in future costs.
We estimated our total liability for future workers’ compen-
sation costs to be $7,968 million at the end of 2008 and
$7,771 million at the end of 2007. 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 $732 million. A
decrease of 1% would increase our estimate of the liability
by approximately $871 million.
We implemented a revised actuarial model to calculate our
workers’ compensation liability on September 30, 2008. The
model’s methodology is similar to that used in the indepen-
dent consulting firm actuarial valuation, which formed the
basis for the recorded liability in 2007. The revised model
explicitly projects the estimated cost to resolve the most re-
cent 10 injury years. We continue to rely on an independent
actuarial consulting firm to perform an actuarial valuation on
injuries occurring more than 10 years in the past.
Our model estimates the liability for the most recent 10 years
using the paid loss development method, two frequency/
severity methods, and an expected unpaid method. The
paid loss development method estimates the liability based
on the historical pattern of payments observed over many
years. The frequency/severity methods estimate the liability
by considering not only the cost, but the number of claims
payments over many years. The frequency/severity meth-
ods require that we make explicit assumptions about the
future changes in the average payment amounts due to in-
flation or other cost increases. The expected unpaid method
estimates the liability by giving weight to both the expected
development from the paid loss development method and
the estimated ultimate value from the frequency/severity
method. For injuries occurring more than 10 years in the
past, an estimate of the ultimate liability is prepared by an
independent actuary and incorporated into the new model.
All of the methods used in calculating the 2008 and 2007
workers’ compensation liability are generally accepted ac-
tuarial techniques and are each valid for estimating a liability
such as ours.
We also annually review the inflation and discount rates used
to determine the present value of estimated future work-
ers’ compensation payments. Separate analyses of the ap-
propriate inflation rates for the medical and compensation
portions of the liability were performed, utilizing forecasts
of medical inflation and inflation in the general economy,
and forecasted rates of return on baskets of Treasury se-
curities of varying durations. During 2007, we validated our
assumptions and methodology with an independent actu-
arial firm. Our assumptions used to calculate the liability in
2008 and 2007 are projected returns on investments for
compensation claims of 5.6% and wage inflation of 3.0%.
Notes to the Financial Statements