USPS must pay for retirees now or later, GAO says

Legislators must choose between short-term fixes to the U.S. Postal Service and the long-term viability of the agency when addressing the future of retirees’ health benefits, according to a new report.

A Government Accountability Office study analyzed several approaches to a prefunding mandate for the benefits, finding cuts to what USPS must pay in the near future will result in a larger liability farther down the road. The agency’s difficult fiscal situation, however, limits its options.

The rising liability would be compounded by projections of continued revenue losses.  

“To the extent short-term prefunding payments are postponed,” GAO wrote in its report, “greater payments would be required later, supported by a smaller base of mail volume, with price caps further limiting revenue.”

The Postal Service, union groups and others have argued the prefunding mandate is unfair and hinders the agency’s ability to restore its solvency.

Current law -- resulting from the 2006 Postal Accountability and Enhancement Act -- requires the Postal Service to make annual payments into the Postal Service Retiree Health Benefits Fund to prepare for its future liabilities. Between 2006 and 2016, the agency has been and will be required to make annual payments ranging from $5.4 billion to $5.8 billion into the fund. Beginning in 2017, the Postal Service will have to make payments based on actuarial calculations made by the Office of Personnel Management.

USPS defaulted on the required payments in 2011 and 2012, totaling $11.1 billion.

To help ease the prefunding burden, both the Senate and the White House have proposed legislation to blunt the immediate impact of payments. Both plans would begin using the existing health benefits fund to pay out current obligations in 2013, while requiring USPS to continue to pay into the fund. The Senate plan -- which passed the chamber in April but has not been taken up in the House -- calls for the payments to be determined by actuarial payments immediately, which would be consistent with its other pension payments.

The White House plan calls for smaller payments through 2016, but follows current law starting in 2017.

These plans, GAO found, would help the Postal Service deal with its short-term fiscal challenges. However, they would provide less security for the future of the benefits and may place an inequitable burden on future postal workers.

A House proposal, which passed the Oversight and Government Reform Committee but has not been taken up on the full floor, would lower the payment into the retirement fund to $1 billion for 2013, but would make up for the reduction by 2016.

A fourth alternative, as recommended by the Postal Service’s inspector general, would eliminate the prefunding mandate altogether, creating a “pay as you go” system for retirees’ benefits. GAO found this option would create a “vastly bigger unfunded liability,” which would in turn result in higher postal rates.

GAO did not recommend any specific plan, only stating USPS must strike the right balance between easing its current obligations and maintaining long-term viability. In any compromise, the auditors said, the Postal Service should not abandon its prefunding requirement entirely.

“Given that USPS is intended to be a self-sustaining entity funded almost entirely by postal revenue…USPS should prefund its retiree health benefit liability to the maximum extent that its finances permit,” GAO wrote in its report.

The auditors also called for an immediate and comprehensive bill to reform the agency.

In response to the report, the Postal Service agreed with GAO’s call for reform legislation, but said it simply cannot afford to continue prefunding its retirees’ benefits.

“The Postal Service recognizes and accepts its obligation to provide effective, affordable health benefits to its employees and retirees,” Joseph Corbett, USPS’ chief financial officer, wrote in a letter to GAO. “However, it does not have the financial resources to make prefunding payments required by current law.”

Corbett called the report “inappropriate” because USPS is advocating for its dismissal from the Federal Employees Health Benefits Program so it can create its own retiree benefits system. GAO is currently working on a report to assess the impact of that change.

USPS’ inspector general’s office also wrote a letter to GAO, stating while it agrees with the auditors’ general propositions and conclusions, the report lacks proper context in assessing the more nuanced facets. 

Oversight and Government Reform Committee Chairman Rep. Darrell Issa, R-Calif., who sponsored the House’s postal reform bill, said the report proves the agency must find other ways to reach solvency.