Questions surround Postal Service pension payments

What initially looked like an easy fix to save the Postal Service billions of dollars has suddenly turned into a political quagmire that will require members of Congress to wade deep into waters they had hoped to avoid.

At issue is how, or if, to adjust the way the Postal Service pays into the Civil Service Retirement System. Last November, the Office of Personnel Management estimated that the Postal Service might be on the hook to overpay billions of dollars to cover workers' pensions.

OPM undertook the analysis at the request of the General Accounting Office, which has been trying to get a better handle on the Postal Service's pension and health care liabilities.

A GAO review of that work released Jan. 31 suggested that OPM made some broad assumptions that further complicate an already confounding situation. OPM's assessment found that the Postal Service would pay about $71 billion more than it actually needed to cover all the future costs of CSRS enrollees' pensions. But OPM's analysis, among other things, included costs for military service of Postal Service employees. Under current law, the Treasury Department covers the military portion, not the Postal Service. As a result, the projected overpayment-using current law-would total $103.1 billion.

"Our point was, let's first start with what is happening today," said Linda Calbom, director of financial management and assurance at GAO. "There is a difference with what OPM said and what is actually current law."

OPM officials were not available for comment. However, in a response to the GAO analysis (03-448R), OPM said it made the assumption to bring the payment methodology in line with the Federal Employees Retirement System, under which the Postal Service pays a retiree's full pension.

Based on its analysis, OPM proposed legislation to reduce the Postal Service's payments from $4.7 billion annually to $1.8 billion in fiscal 2003. The number would be adjusted in following years. The result would be a savings of $2.9 billion in 2003 alone. The Postal Service would use that money to pay down its $11.1 billion debt and hold mailing rates steady until 2006.

GAO's report does not change the fact that the Postal Service can still hold onto money it otherwise thought was forgone. The question is how much. Congress must first decide how to handle the military costs-whether the Postal Service assumes all of those costs or only a portion. Only then will lawmakers know how much of an overpayment the agency is looking at. GAO further suggested that Congress determine how the Postal Service use the money-to pay down its debt, cover health benefits, or for some other purpose.

GAO noted the Postal Service's "substantial" obligations associated with retirees' health benefits, a number the watchdog agency estimated between $40 billion and $50 billion. The Postal Service and GAO are at odds over that number and how it should be accounted for on year-end financial statements.

Richard Strasser, chief financial officer at the Postal Service, said he was disappointed with the recommendation that Congress set restrictions on the funds. Instead, he said Congress should let the agency determine the best use of those funds. Overall, Strasser was pleased that GAO confirmed there will be an overpayment if no legislative fix is made.

Lawmakers agree that something needs to be done. Sen. Majority Leader Bill Frist, R-Tenn., included language in a report on the omnibus fiscal 2003 appropriations bill saying that Congress should act on the issue. And Sen. Susan Collins, R-Maine, chairwoman of the Senate Governmental Affairs Committee, has drafted legislation based on OPM's analysis. According to Senate and industry sources, she is now rethinking her options based on GAO's findings.

To further confuse the situation, a Jan. 27 Congressional Budget Office report suggested that the OPM fix could increase the overall budget deficit by $10 billion to $15 billion between 2003 and 2007. That is based on the assumption that the Postal Service won't raise rates next year. Unbeknownst to Postal Service officials, CBO assumed a three-cent First Class stamp increase in 2004 when it presented a budget analysis to Congress at the beginning of the fiscal year.

Strasser said he plans to meet with CBO next week to discuss the report.

The bottom line for the Postal Service and mailers is that if Congress changes the payment methodology, the agency would not have to file a rate case this spring. Without a legislative fix, the agency will be ready to file a rate hike that would likely take effect in early 2004.