US Postal Service 2012 Annual Report Download - page 102

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2012 Report on Form 10-K United States Postal Service- 101 -
the injury, pattern of historical payments, frequency or severity of the claim-related injury or injuries, and the
expected trend in future costs. The Postal Service uses the average rate of medical inflation experienced by
its workers’ compensation claimants over the past five years as an estimate for future medical inflation. The
liability for claims arising more than ten years ago is determined by an independent actuary.
The FECA benefit structure is often superior to benefits available under normal federal retirement, and
these more lucrative payments will, in some cases, be for the rest of the lives of the claimants.
The liability for estimated future workers’ compensation payments is recorded at its present value. To
record the liability and annual expense, an estimate is made of the amount of funding that would need to be
invested at current interest rates in order to fully fund all estimated future payments. Inflation and discount
(interest) rates are updated as of the date of the financial statements to determine the present value of the
workers’ compensation liability at the balance sheet date in accordance with GAAP. The impact of changes
in the discount rates is accounted for as a change in accounting estimate and included in operating
expenses.
The estimation of the liability is highly sensitive to changes in inflation and discount rates. An increase of
1% in the discount rate would decrease the September 30, 2012 liability and 2012 expense by
approximately $1.8 billion. A decrease of 1% in the discount rate would increase the September 30, 2012
liability and 2012 expense by approximately $2.3 billion.
The inflation and discount rates used to estimate the liability at September 30, 2012, 2011, and 2010 are
shown in the following table:
Workers' Compensation Liability
Inflation and Discount Rates
2012
2011
2010
Compensation Claims Liability
Discount Rate
2.1%
2.3%
2.9%
Wage Inflation
2.9%
2.9%
2.9%
Medical Claims Liability
Discount Rate
2.2%
2.4%
3.0%
Medical Inflation
8.9%
8.6%
7.4%
September 30,
In Quarter IV, 2012, the Postal Service enhanced the estimation process by refining the variables employed
to estimate its workers’ compensation liability. As a result of this enhancement, the liability for workers’
compensation was increased by $361 million. This change was considered a change in accounting estimate
under GAAP and, accordingly, the impact of the change was reflected in Quarter IV, 2012.
At September 30, 2012, the present value of the liability for future workers’ compensation payments was
$17,567 million, compared to $15,142 million at September 30, 2011, an increase of $2,425 million. The
current portion of this liability was $1,337 million at September 30, 2012, and $1,255 million at September
30, 2011. These amounts are accrued under “Workers’ compensation” on the Balance Sheets.
Changes in the workers’ compensation liability are attributable to the combined impact of changes in the
discount and inflation rates, routine changes in actuarial estimation, new compensation and medical cases,
and the progression of existing cases. The impact of the changes in discount rates accounted for $346
million, $978 million, and $2,017 million of the 2012, 2011, and 2010 expense, respectively.