	Background

As table 1 shows, at the end of fiscal year 2013, USPS had about $100  billion in unfunded liabilities for pension, retiree health, and workers’  compensation benefits as well as outstanding debt. In addition, USPS’s outstanding debt to the U.S.  Treasury increased from $2.1 billion at fiscal year-end 2006 to its current  statutory borrowing limit of $15 billion.and unfunded liabilities have become a large and growing burden— increasing from 83 percent of USPS’s revenues in fiscal year 2007 to 148  percent of revenues in fiscal year 2013. USPS’s Funding of Its Benefit Liabilities Varies by Program

The extent to which USPS has funded its benefit liabilities varies as a  result of different statutory funding requirements specific to each benefit  program as well as USPS’s financial means to make funding payments. For example, prefunding of USPS’s pension benefits has been required  over decades, and as a result, USPS’s pension liability is over 90 percent  funded. Prefunding USPS’s retiree health benefits began in 2007, and at  a fairly aggressive pace, and the liability is about half funded at present. Also, as discussed further below, the ongoing prefunding  requirements—i.e., the rules for calculating the amount that USPS must  pay each year—differ among the pension, retiree health, and workers’  compensation programs. The unfunded liabilities, in order of decreasing  size, are $48 billion for retiree health, $19 billion for pensions, and $17  billion for workers’ compensation. USPS’s pension and retiree health liabilities are estimated using  demographic and pay-increase assumptions developed for the federal  workforce as a whole, rather than assumptions developed for the USPS  workforce in particular. These separate rules include variations  in amortization periods, recognition of any surpluses, use of actuarially  determined versus fixed payments, and actuarial assumptions. Retiree Health

Unlike its pension liability, prior to 2007 USPS had been funding its retiree  health liability on a pay-as-you-go basis—an approach in which USPS  paid its share of premiums for existing retirees, with no prefunding for any  future premiums expected to be paid on behalf of current retirees and  employees. Impact of Unfunded Benefit Liabilities Absent Actions by Congress to Address Them and Key Considerations

Without congressional action to address USPS’s benefit funding issues  and better align its costs and revenues, USPS faces continuing low  liquidity levels, insufficient revenues to make annual prefunding  payments, and increasing benefit liabilities. In addition, we  have reported that Congress needs to modify USPS’s retiree health  prefunding payment in a fiscally responsible manner, and that USPS  should prefund any unfunded retiree health liability to the maximum  extent that its finances permit. For USPS, this is about equity between current  and future postal ratepayers. Providing greater benefit security to employees, retirees, and  their beneficiaries. Prefunding decisions also involve trade-offs between USPS’s current  financial condition and its long-term prospects. In our prior reports, we have identified funding issues related to USPS’s  unfunded liabilities that remain unresolved and have identified potential  methods for addressing these issues:
Actuarial assumptions: We support making the most accurate  measurements possible of USPS’s benefit liabilities, and support the  development and use of assumptions specific to USPS’s population of  plan participants.assumptions are used, that the assumptions should continue to be  recommended by an independent body, such as OPM’s Board of  Actuaries. Such a  reduction would have the effect of carrying a permanent unfunded  liability equal to roughly 20 percent of USPS’s liability, which could be  a significant amount. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

USPS continues to be in a serious financial crisis, with insufficient revenue to cover its expenses and financial obligations as the volume of USPS's most profitable product, First-Class Mail, continues to decline. At the end of fiscal year 2013, USPS had about $100 billion in unfunded liabilities: $85 billion in unfunded liabilities for benefits, including retiree- health, pension, and workers' compensation liabilities, and $15 billion in outstanding debt to the U.S. Treasury—the statutory limit. These unfunded liabilities are a large and growing financial burden, increasing from 83 percent of USPS revenues in fiscal year 2007 to 148 percent of revenues in fiscal year 2013. Unfunded benefit liabilities represent estimated future benefit payments to current and retired employees for which USPS has not set aside sufficient money to pay. This testimony discusses (1) the extent to which USPS's benefit liabilities are unfunded and (2) the potential impacts of USPS's unfunded benefit liabilities absent action by Congress to address them and key policy issues for consideration. This testimony is based primarily on GAO's work over the past 4 years and updated USPS financial information for fiscal year 2013.
GAO has previously reported that a comprehensive package of legislative actions is needed so that USPS can achieve financial viability and assure adequate benefits funding for more than 1 million postal employees and retirees. GAO has also previously identified various approaches Congress could consider to restructure the funding of USPS retiree health benefits and pensions.

What GAO Found

The extent to which the U.S. Postal Service (USPS) has funded its liabilities varies due to different statutory funding requirements specific to each benefit program and USPS's financial means to make payments. For example, USPS has been required to prefund its pension benefit liability over decades, and as shown in the table below, its pension liability is 94 percent funded. Prefunding USPS's retiree health benefits began in 2007, and the liability is about half funded. In contrast, USPS funds its workers' compensation benefits on a pay-as-you-go basis, and the entire liability is unfunded. The largest unfunded liabilities, in order of decreasing size, are $48 billion for retiree health, $19 billion for pensions, and $17 billion for workers' compensation. The rules for calculating the amount that USPS must fund each year differ among the pension and retiree health programs, including variations in amortization periods, recognition of any surpluses, use of actuarially determined versus fixed payments, and actuarial assumptions.
Reasons for prefunding include fairly allocating costs between current and future ratepayers, protecting USPS's future viability, providing greater benefit security to employees and retirees, and protecting potential third parties.
Prefunding decisions involve trade-offs between USPS's current financial condition and its long-term prospects.
Congress needs to modify USPS's retiree health prefunding payments in a fiscally responsible manner, and USPS should prefund any unfunded retiree- health benefits liability to the maximum extent that its finances permit.
Lowering the retiree health funding target from 100 to 80 percent would have the effect of carrying a permanent unfunded liability.
USPS liabilities are estimated using assumptions for the federal workforce as a whole, rather than USPS-specific assumptions. GAO supports the use of the most accurate actuarial assumptions available, and if USPS-specific assumptions are used, that they be recommended by an independent body.