PAEA, enacted in 2006,transferred all responsibility for costs related to CSRS military  service credit from USPS back to the U.S. Treasury, both  retroactively and prospectively; this included all CSRS military  service costs for postal employees since the inception of the  Postal Service in 1971; established the PSRHBF to begin prefunding the health benefits  of current and future postal retirees and transferred about $20  billion of “start-up” funds into the PSRHBF ($3 billion from the  discontinued CSRS escrow—as USPS’s annual CSRS payment  was suspended—and $17 billion from the surplus in the CSRS  fund);  required USPS to make annual payments ranging from $5.4 billion  to $5.8 billion per year into the PSRHBF from fiscal years 2007  through 2016 to begin prefunding its retiree health benefit liability;  and  required OPM to calculate the remaining unfunded liability in 2017  and each subsequent year, and to calculate an amortization  payment based on an amortization period that extends to 2056 or,  if later, 15 years from the then-current fiscal year. For fiscal year 2012, USPS had a net loss of almost $16 billion,  which included $11.1 billion for required PSRHBF prefunding payments   Furthermore, USPS’s future financial outlook  that USPS did not make.is bleak as it projects further declines in mail volume and revenue by  fiscal year 2020. This interest would have  reduced USPS’s future unfunded liabilities for these benefits. Because of USPS’s financial difficulties, however, USPS has not made all  of its required prefunding payments. Under PAEA, USPS is still  responsible for contributing an additional $33.9 billion to the PSRHBF by  fiscal year 2017 as shown in table 1, including $11.1 billion that USPS  has defaulted on over the past 2 years. While the PSRHBF balance covered about 49 percent of USPS’s retiree  health benefit liability at fiscal year-end 2012, USPS’s deteriorating  financial outlook will make it difficult under current requirements for USPS  to continue prefunding the remaining unfunded liability in the short term,  and possibly to continue funding the remaining unfunded liability over the  next several decades, as required under PAEA. USPS’s Future Payments and Unfunded Liabilities Vary Widely Based on Approaches to Fund Retiree Health Benefits

We considered current law (PAEA) requirements against five alternative  approaches for funding the costs of retiree health benefits, each of which  involves tradeoffs that could impact USPS’s short-term cash flow, its  future financial condition, different generations of postal ratepayers, and  over a million postal employees and retirees. Beginning in fiscal year 2017, the current law switches to an  “actuarial approach” for the remaining funding, under which USPS’s share  of premium payments for existing retirees and beneficiaries is paid from  the PSRHBF rather than by USPS, and USPS makes annual payments to  the PSRHBF consisting of two components:   1.  the actuarially determined cost of future benefits attributable to  employee service during the fiscal year (known as the annual  “normal cost”), and   2.  the actuarially determined amount that, as calculated by OPM,  would be projected to fully fund the remaining unfunded liability  over an amortization period ending in the later of fiscal year 2056  or 15 years subsequent to the then-current fiscal year. The House Bill (H.R. The Senate Bill (S. 1789) differs from current law, the House Bill, and  the Administration Approach in three key aspects. The existing fund would be left to grow with interest, with no  other cash inflow or outflow. Given that USPS is intended to  be a self-sustaining entity funded almost entirely by postal revenue, we  have previously stated that USPS should prefund its retiree health benefit  liability to the maximum extent that its finances permit. Size of the annual payment and the unfunded liability. While private sector, state and local government, and other federal  entities generally are not required to prefund these benefits, most are  required to recognize the future costs of these benefits on an accrual  basis as they are earned, rather than when they are paid, in their financial  reporting. USPS’s recent defaults on its retiree-health- prefunding payments and its  inability to borrow now that it has reached its $15 billion borrowing limit  create an even more urgent need for congressional action. We noted in our report that none of the funding  approaches will be viable unless USPS has the ability to make the  required payments, and that a comprehensive package of actions is  needed to improve USPS’s financial viability. While our report did not examine comprehensively  the reasons for other entities’ prefunding decisions, we noted that  although prefunding is not required, a number of private, state, local, and  federal entities have elected to prefund some percentage of their retiree  health benefits, as follows:
Standard & Poor’s (S&P) reported that 126 of the 296 companies  in the S&P 500 that offered “other post-employment benefits”  (OPEB) prefunded some percentage of the associated liabilities;   the USPS OIG reported that 38 percent of Fortune 1000  companies that offer retiree health benefits prefund them, at a  median funding level of 37 percent;
18 states and 13 of the 39 largest local governments had set  aside at least a combined $25 billion in assets to cover their  OPEB liabilities; and   the Department of Defense prefunds its retiree health benefits for  Medicare-eligible retirees and beneficiaries, with a 100 percent  target funding percentage, and that this fund, which was started in  2002 in reaction to rapidly rising health care costs, had assets of  $166 billion as of fiscal year-end 2010. Appendix I: Objectives, Scope, and Methodology

This report (1) describes the status and financial outlook of the Postal  Service Retiree Health Benefits Fund (PSRHBF), (2) analyzes how  alternative proposals for funding retiree health benefits could affect future  USPS payments and unfunded liabilities, and (3) determines key  considerations for policymakers assessing the alternative proposals or  other approaches. To determine the impact on USPS payments and unfunded liabilities  under alternative approaches to fund retiree health benefits, we analyzed  and compared current funding requirements and five alternatives.
Why GAO Did This Study

PAEA required USPS to prefund its future retiree health benefits as part of comprehensive postal reform by establishing the PSRHBF along with an initial target period to fund the unfunded liability in 50 years. This requirement included annual payments to this fund from 2007 to 2016 of between $5.4 billion to $5.8 billion. USPS, its employee groups, and others have argued that this prefunding requirement is a major source of USPS's financial woes--reported by USPS as contributing $32 billion toward its $41 billion of net losses over the past 6 years. USPS defaulted on the last 2 years of PSRHBF payments totaling $11.1 billion.
As requested, this report addresses the (1) status and financial outlook of the PSRHBF, (2) impact on future annual USPS payments and unfunded liabilities of alternative approaches, and (3) key considerations for policymakers. GAO reviewed and summarized PSRHBF financial data and analyzed and compared current law requirements with five alternative approaches by developing projections based on OPM and USPS data.

What GAO Found

The Postal Service Retiree Health Benefits Fund (PSRHBF) covered about 49 percent of the U.S. Postal Service's (USPS) $94 billion retiree health benefit liability at fiscal year-end 2012. USPS's deteriorating financial outlook, however, will make it difficult to continue the current prefunding schedule in the short term, and possibly to fully fund the remaining $48 billion unfunded liability over the remaining 44 years of the schedule on which the 2006 Postal Accountability and Enhancement Act (PAEA) was based. The liability covers the projected benefits for about 471,000 current postal retirees and a portion of the projected benefits for about 528,000 current employees; it does not cover employees not yet hired. Under PAEA, USPS is responsible for contributing an additional $33.9 billion to the PSRHBF by fiscal year 2017, including the $11.1 billion USPS has defaulted on over the past 2 years. PAEA also requires the Office of Personnel Management (OPM) to calculate the remaining unfunded liability in 2017 and develop an initial 40-year amortization payment schedule. USPS, however, projects further declines in mail volume and revenues that may continue to limit its ability to prefund the remaining retiree health benefit liability.
GAO's analysis of maintaining current law requirements compared to five alternative approaches showed differing impacts on USPS's future annual payments and unfunded liabilities. For example, three of the approaches--1) the Administration's Approach, 2) Senate Bill (S. 1789) and 3) "Pay-as-You-Go" (no prefunding)--would reduce USPS's annual payments in the short term, thereby easing its immediate cash flow problems and financial losses. However, these approaches would increase USPS's unfunded liability, sometimes substantially, and require larger payments later. Deferring funding could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for some or all of its liability. Conversely, a fourth approach--the House Bill (H.R. 2309)--and the current law requirement would reduce USPS's unfunded liabilities more aggressively but may result in significantly higher USPS financial losses in the near future. If USPS stopped prefunding and let the existing fund grow with interest, the unfunded liability is projected to significantly increase. Under a fifth approach, if USPS stopped prefunding and used the existing fund to pay current and future premiums, the fund is projected to be exhausted by 2026. Private sector, state, local, and other federal entities are not required to prefund these benefits, though some do so to a limited extent, and most are required to recognize the future costs in their financial reporting.
GAO identified several key considerations including: (1) the rationale and consequences of prefunding such benefits; (2) trade-offs affecting USPS's financial condition, such as sizes of the annual payments and unfunded liability; (3) fixed versus actuarially determined payments; (4) targeted funding levels; and (5) assumption criteria. USPS is intended to be a self-sustaining entity funded almost entirely by postal ratepayers, but its financial losses are challenging its sustainability. GAO has testified that USPS should prefund its retiree health benefit liabilities to the maximum extent that its finances permit, but none of the funding approaches may be viable unless USPS has the ability to make the payments. USPS's default on its last two required PSRHBF payments and its inability to borrow further make the need for a comprehensive package of actions to achieve sustainable financial viability even more urgent.

What GAO Recommends

GAO is not making new recommendations in this report, as it has already reported on strategies and options for USPS to achieve sustainable financial viability.