	Background

In April 2003, Congress enacted P.L. In fiscal year 2006, the Service is required to begin making  payments into an escrow account that it cannot use until otherwise  provided for by law. The Service proposes  that the $10 billion in overfunding would remain in the pension fund, in a  separate account designated as the “Postal Service Retiree Health Benefit  Fund (Retiree Health Fund).”  The Service made a payment of about $1.3  billion for its pension obligation into the CSRS pension fund in fiscal year  2003. This proposal assumes that the escrow requirement would be eliminated. 108-18. Both Proposals Are Generally Consistent with P.L. Several options include (1) tying the repeal of the escrow requirement to  congressional review of the Service’s progress on transformation, which  could include the Service providing Congress with an acceptable plan for  realigning its infrastructure and workforce; (2) repealing the escrow  requirement but specifying the use of funds; or (3) repealing the escrow  requirement and allowing the Service to fund activities as specified in its  proposals. Proposal I strikes a better balance between current and future ratepayers  by prefunding the retiree health benefits obligation for both retirees and  current employees and providing a mechanism for better aligning current  expenses with current revenues. Therefore, benefits being earned by  today’s employees would be built into the current rate base. Under Proposal II, which assumes that the Service would retain  responsibility for the military service costs, the Service said it would fund  its retiree health benefits obligation only for its employees hired after fiscal  year 2002 and then fund, in priority sequence, debt repayment and capital  investments to improve productivity and cost-savings. The Service’s proposals attempt to balance both  short-term rate mitigation and some level of prefunding of retiree health  obligations to address its long-term obligations, while also providing for  debt repayment and capital investment. However, it is not clear  based upon available information from the Postal Service whether it can  accomplish these goals. It is against this backdrop of fairness to current and future ratepayers and  taxpayers, affordability, and the ability of the Service to achieve its  transformation goals that the Service’s proposal to eliminate the escrow  requirement and its two funding proposals must be weighed. Proposal II, on  the other hand, would require less of a postal rate increase, focus more on  rate mitigation, and shift less of the responsibility for the retiree health  benefits obligation to current ratepayers than Proposal I. Finally, the Service  anticipates that it will be able to pay down debt and fund capital  investments through inflation-based rate increases under both proposals. Although the Service believes it would be able to generate  enough funds, this is not clear because the Service has not yet presented a  comprehensive integrated infrastructure and workforce rationalization  plan. 108-18, and that its preferred proposal presented a more equitable  balance of costs between current and future ratepayers. On  the other hand, contrary to the Service’s view, we believe the escrow  requirement is an opportunity for Congress to review how the Service plans  to address a number of long-term challenges, including debt repayment,  capital projects, an unfunded retiree health benefits obligation, and its  progress toward transformation. If the Service provides Congress with an  acceptable plan in the next several months and Congress finds the plan and  the Service’s transformation progress satisfactory, we believe Congress  should have sufficient time to repeal the escrow requirement so that an  escrow account would not be needed. We evaluated the  report based on its consistency with P.L. 108-18. We also addressed the  escrow requirement that the Service identified as an issue in its report, and  identified issues based upon our previous work that Congress may want to  consider in assessing the Service’s proposals, including the fairness and  affordability of the proposals, and the ability of the proposals to help the  Service achieve its transformation goals. To assess whether the proposals were consistent with the provisions of P.L. 108-18.
Why GAO Did This Study

In April 2003, Congress enacted the Postal Civil Service Retirement System (CSRS) Funding Reform Act of 2003 (P.L. 108-18), which\ lowered the Postal Service's (Service) annual payment for its CSRS obligation by over $2.5 billion beginning in fiscal year 2003. P.L. 108-18 includes requiring (1) the Service to begin making payments into an escrow account in fiscal year 2006, (2) the Service to issue a report on its proposed use of "savings" resulting from the lower CSRS payments, and (3) GAO to evaluate the Service's report and present its findings to Congress. GAO evaluated whether the Service's proposals were consistent with P.L. 108-18; the impact of the escrow account; and whether the proposals were fair to current and future ratepayers, affordable, and helped achieve transformation goals.

What GAO Found

The Service's report presented two proposals for how it would use the "savings," and GAO found both to be generally consistent with P.L. 108-18. The first proposal assumes that responsibility for military service pension costs shifts to the Treasury Department and proposes prefunding retiree health benefits for retirees and current employees. The second proposal assumes that the Service retains responsibility for military service pension costs and proposes prefunding retiree health benefits only for new employees. Both proposals assume that the Service would pay down debt and fund capital investment through inflation-based rate increases. Under both proposals, the Service proposes that the escrow requirement be eliminated, so that the Service would not have to include $3 billion as a mandated incremental operating expense beginning in fiscal year 2006. The Service cannot use the escrow funds unless Congress eliminates the escrow requirement or specifies by law how these funds may be used. If no action is taken, the Service believes that it would have to raise rates higher than would otherwise be necessary. The escrow requirement provides Congress an opportunity to review how the Postal Service will address a number of long-term challenges, such as progress toward transformation and funding its retiree health benefits obligation. Once Congress is satisfied, it could repeal the escrow requirement so that an escrow account is not needed. GAO assessed the Service's two proposals according to their fairness, affordability, and the ability to achieve transformation goals. Fairness: Proposal I strikes a more equitable balance of allocating costs between current and future ratepayers, because benefits earned by today's employees will be built into the current rate base. Under Proposal II, much of the retiree health benefits obligation would remain unfunded, thereby placing the burden of the benefits being earned today on future ratepayers. Affordability: The Service's proposals attempt to balance short-term rate mitigation with some level of prefunding to address its long-term obligations. The first proposal would require a larger postal rate increase than the second proposal and would prefund more of the retiree health benefits. The second proposal focuses more on rate mitigation. Given the Service's uncertain financial future, its ability to raise revenues, reduce costs, and improve productivity and efficiency is critical to affordability. Transformation goals: Although the Service believes it can pay down debt and fund the capital investments associated with its transformation initiatives, this is not clear because the Service has not yet presented a comprehensive, integrated infrastructure and workforce rationalization plan. GAO has previously recommended that the Service provide Congress with such a plan and periodic reports on its transformation progress. The Service disagrees with GAO that the escrow repeal should be tied to a plan.