[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] AT A CROSSROADS: THE POSTAL SERVICES'S $100 BILLION IN UNFUNDED LIABILITIES ======================================================================= HEARING before the SUBCOMMITTEE ON FEDERAL WORKFORCE, US POSTAL SERVICE AND THE CENSUS of the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION __________ MARCH 4, 2014 __________ Serial No. 113-100 __________ Printed for the use of the Committee on Oversight and Government Reform [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.fdsys.gov http://www.house.gov/reform ---------- U.S. GOVERNMENT PRINTING OFFICE 87-647 PDF WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800 DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM DARRELL E. ISSA, California, Chairman JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland, MICHAEL R. TURNER, Ohio Ranking Minority Member JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of JIM JORDAN, Ohio Columbia JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts TIM WALBERG, Michigan WM. LACY CLAY, Missouri JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts JUSTIN AMASH, Michigan JIM COOPER, Tennessee PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT, TREY GOWDY, South Carolina Pennsylvania BLAKE FARENTHOLD, Texas TAMMY DUCKWORTH, Illinois DOC HASTINGS, Washington ROBIN L. KELLY, Illinois CYNTHIA M. LUMMIS, Wyoming DANNY K. DAVIS, Illinois ROB WOODALL, Georgia TONY CARDENAS, California THOMAS MASSIE, Kentucky STEVEN A. HORSFORD, Nevada DOUG COLLINS, Georgia MICHELLE LUJAN GRISHAM, New Mexico MARK MEADOWS, North Carolina Vacancy KERRY L. BENTIVOLIO, Michigan RON DeSANTIS, Florida Lawrence J. Brady, Staff Director John D. Cuaderes, Deputy Staff Director Stephen Castor, General Counsel Linda A. Good, Chief Clerk David Rapallo, Minority Staff Director Subcommittee on Federal Workforce, U.S. Postal Service and the Census BLAKE FARENTHOLD, Texas, Chairman TIM WALBERG, Michigan STEPHEN F. LYNCH, Massachusetts, TREY GOWDY, South Carolina Ranking Minority Member DOUG COLLINS, Georgia ELEANOR HOLMES NORTON, District of RON DeSANTIS, Florida Columbia WM. LACY CLAY, Missouri C O N T E N T S ---------- Page Hearing held on March 13, 2014................................... 1 WITNESSES Mr. Frank Todisco, Chief Actuary, U.S. Government Accountability Office Oral Statement............................................... 5 Written Statement............................................ 7 Mr. Jeffrey Williamson, Chief Human Resources Officer and Executive Vice President, U.S. Postal Service Oral Statement............................................... 25 Written Statement............................................ 27 Mr. Robert Moss, Chief, Budget and Resource Management, Defense Health Agency Oral Statement............................................... 43 Written Statement............................................ 45 APPENDIX Jeffrey Williamson's response to questions for the record, by Rep. Farenthold................................................ 64 GAO response to questions for the record by Rep. Farenthold...... 84 AT A CROSSROADS: THE POSTAL SERVICE'S $100 BILLION IN UNFUNDED LIABILITIES ---------- Thursday, March 13, 2014, House of Representatives, Subcommittee on Federal Workforce, U.S. Postal Service and the Census, Committee on Oversight and Government Reform, Washington, D.C. The subcommittee met, pursuant to call, at 2:27 p.m., in Room 2247, Rayburn House Office Building, Hon. Blake Farenthold [chairman of the subcommittee] presiding. Present: Representatives Farenthold, Walberg, Collins, Clay, and Lynch. Staff present: Ali Ahmad, Majority Professional Staff Member; Will L. Boyington, Majority Deputy Press Secretary; Sharon Casey, Majority Senior Assistant Clerk; Jeffrey Post, Majority Senior Professional Staff Member; Jaron Bourke, Minority Director of Administration; Kevin Corbin, Minority Professional Staff Member; Adam Koshkin, Minority Research Assistant; Mark Stephenson, Minority Director of Legislation. Mr. Farenthold. I would like to begin this hearing by stating the Oversight Committee's Mission Statement. We exist to secure two fundamental principles. First, Americans have a right to know that the money that Washington takes from them is well spent. And second, Americans deserve an effective, efficient government that works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers, because taxpayers have a right to know what they get from their government. We work tirelessly in partnership with citizen watchdogs to deliver the facts to the American people and bring genuine reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee. Today we are going to talk about the Post Office. The Postal Service is broke. In the last two years alone, the Postal Service has defaulted on $16.7 billion in payments to the Treasury to pay down accrued retiree health care liability. In recent years, the Postal Service has also temporarily ceased making statutorily required pension funding payments to the government. Then, this year, the Postal Service was forced to resort to an implementation of an unprecedented, exorbitant rate increase as part of a last ditch effort to break even. The rate increase is at best a temporary fix that will improve revenue a little now. But higher prices will only encourage customers to transition from more expensive paper mail to virtually free electronic communication and commerce. Over the last several years, a number of reform plans have been put forward to serve the Postal Service and to save the Postal Service, some good, some bad. Last July, the full committee considered our own plan, H.R. 2748, the Postal Reform Act, which I believe stands the best chance to move the Postal Service forward and into financial solvency. While I ask my friends on the other side of the aisle to work with us on H.R. 2748 and other postal initiatives, such as President Obama's repeated suggestion to move to a modified six-day delivery, we are here today to take a step back from debating specific legislation and to hear from the experts on the current financial position of the Postal Service and the true scope of these unfunded liabilities facing the Postal Service. As many know, mail volume has declined by more than 25 percent since 2006. Virtually the entire decline has been attributable to the diversion of paper to digital forms of communication. As we proceed, this has accelerated more by our economic times. Until the last few years, the Postal Service business model has been predicated on the idea that paper mail volume would continue to increase and the Postal Service would always need to grow. For any organization, shifting from expansion to contraction is difficult. But the Postal Service has made great strides to increase efficiency in the last 15 years. They have right-sized the workforce almost exclusively through voluntary means. However, the Postal Service's legacy, as a much larger institution, will continue to heavily impact its financial future. At the end of fiscal year 2013, the Postal Service had unfunded obligations and liabilities of more than $112 billion, the vast majority of which were directly to postal employees and retirees: $48 billion for retiree health care, $19 billion for pension and $17 billion for workers compensation. As we will hear today, even if the Postal Service is able to break even in the short term, the agency has no plan under current law to ever address even a small fraction of these liabilities. I am looking forward to hearing testimony today about the various obligations and liabilities and what will happen in the coming years if the Post Office cannot afford to address them. Additionally, as a strong believer in confronting these financial obligations head-on, I am looking forward to hearing testimony from the Defense Health Agency to hear how the DOD has been taking steps to ensure the proper funding of TriCare costs for Medicare-eligible retirees. In closing, I would like to thank the witnesses for being here. I apologize for the delay. We are at the mercy of a rather fickle House voting schedule. I now recognize the distinguished ranking member, the gentleman from Massachusetts, Mr. Lynch, for his opening statement. Mr. Lynch. Thank you, Mr. Chairman. Thank you for holding this hearing. I want to thank the witnesses for their willingness to appear before the committee and help us with our work. Despite positive developments in the area of revenue growth, the U.S. Postal Service clearly remains in dire financial straits. As evidenced by the most recent quarterly financial report, the agency experienced a net loss of $354 million for the first quarter of fiscal year 2014, marking the 19th out of the last 21 quarters that it has reported a loss. The Postal Service has also notified Congress that absent the enactment of comprehensive postal reform, it will be forced to default on its annual future retiree health benefit payment, when a $5.7 billion bill becomes overdue on October 1st. This will be the fourth consecutive such default. Moreover, the Postal Service has reported that it carries a series of unfunded liabilities totaling approximately $100 billion. Among the specific obligations cited by the agency are an estimated $49 billion in retiree health benefit funds, $19 billion in civil service and Federal employee retirement system costs, $17 billion in Department of Labor workers compensation payments and a debt owed to the United States Treasury with an aggregate principal balance of $15 billion. These figures not only evidence the financial condition of the U.S. Postal Service that is still grave, but also reiterates the urgent need for Congress to enact a meaningful postal reform package that is founded on a bipartisan agreement and aims to strengthen the Postal Service by building upon its unparalleled mail network and dedicated workforce. In the context of today's focus on unfunded postal liabilities, I would note that we could immediately and significantly reduce the Postal Service's net unfunded liability by addressing the billions of dollars in overpayments that the agency has made into the Federal Employee Retirement System. In particular, we could require the Office of Personnel Management to recalculate the amount of Postal Service FERS overpayment, using a more accurate actuarial formula that takes into account the unique position, salary growth and demographic characteristics of postal employees. As reported by the Office of the Postal Service Inspector General in September last year, the use of so-called postal- specific assumptions in calculating the Federal Employee Retirement System overpayment would result in a $12.5 billion surplus that could be returned to the Postal Service and used by the agency to pay down its debt and other outstanding obligations. I have already introduced legislation to this effect in the 113th Congress. H.R. 961, the U.S. Postal Service Stabilization Act, has received over 160 co-sponsors, including ten Republicans. I urge the committee to move this bill forward. In addition, we need to revisit the onerous mandate that the agency prefund its future retiree health benefits 75 years before it is necessary. It is a requirement that is asked of no other corporation, public or private, and given that the Postal Service has already funded 49 percent of the actuarial liability relating to prefunding, it is a requirement that has drastically reduced the agency's cash supply in recent years. Now, I understand that the majority has called the Department of Defense to testify this afternoon on DOD's experience in setting aside funds to pay for future retiree health benefits under the TriCare for Life program, which is only 39 percent funded. While I appreciate the Department's perspective, I would caution my colleagues against comparing apples to oranges. Importantly, Defense Department costs for TriCare for Life are funded through the annual Congressional appropriations process, while the Postal Service is operated as a self-supporting government agency since 1971 and does not receive taxpayer dollars. In addition, I would note that the health care costs of retired Defense Department personnel are primarily covered by Medicare with only supplemental coverage provided under TriCare for Life. In contrast, the health care costs of postal retirees are primarily covered by plans under the Federal Employee Health Benefit Program, with the Postal Service required to cover the employer's shared costs. Mr. Chairman, I look forward to discussing these and other issues as we continue to work together to enact comprehensive postal reform. I thank you again, Mr. Chairman, for holding this hearing and I yield back the balance of my time. Mr. Farenthold. Thank you very much, Mr. Lynch. Members will have seven days to submit opening statements for the record. We will now recognize our panel. Mr. Frank Todisco is the Chief Actuary at the U.S. Government Accountability Office. Mr. Jeffrey Williamson is Chief Human Resources Officer and Executive Vice President at the U.S. Postal Service. Mr. Robert Moss is Chief of Budget and Resource Management at the Defense Health Agency. And Mr. Joel Sitrin is the Chief Actuary in the Office of the Actuary at the U.S. Department of Defense. I feel like I need green eyeshades with all these actuaries, but we are excited to have your testimony. Pursuant to committee rules, all witnesses will be sworn in before they testify. Gentlemen, would you please rise and raise your right hand. Do you solemnly swear that the testimony you are about to give will be the truth, the whole truth and nothing but the truth? [Witnesses respond in the affirmative]. Mr. Farenthold. You may be seated. Let the record reflect that all witnesses have answered in the affirmative. In order to allow time for questions and discussions, we ask that you limit your testimony to five minutes. We have your complete written testimony here in our folders. So if you will summarize, hit the high points and give us a chance to ask you questions, that would be the most efficient use of the time. In front of you there is a timer that will count down from five minutes. When you are about to run out of time the light will go from green to yellow, which as it does on the streets, means speed up. And then the red light means stop, your time is expired. So we will start off with Mr. Todisco, your five minutes begins now. WITNESS STATEMENTS STATEMENT OF FRANK TODISCO Mr. Todisco. Chairman Farenthold, Ranking Member Lynch, members of the subcommittee, thank you for the opportunity to testify today on the Postal Service's unfunded liabilities. The Postal Service continues to face serious financial challenges with insufficient revenue to cover its expenses and financial obligations, and the continuing decline of first class mail volume. As shown in table 1 of our written testimony, the Postal Service had $100 billion of debt and unfunded benefit liabilities at the end of fiscal year 2013, consisting of $48 billion for retiree health, $20 billion for CSRS pension, $17 billion for workers compensation, the $15 billion debt to Treasury and a small surplus, half a billion dollars for FERS pensions. As shown in figure 1 of our written testimony, the total of these unfunded liabilities and debt has grown in scale relative to the size of the Postal Service's operations, from 83 percent of postal revenue in 2007 to 148 percent in 2013. The extent of prefunding varies by program. Prefunding of the Postal Service's pension benefits has been required over decades, so that they are over 90 percent funded. Prefunding of retiree health only began in 2007, and the liability is about half funded at present. Workers compensation is pay as you go, so the entire liability is unfunded, the three programs that are prefunded, CSRS, FERS and retiree health, are all subject to different technical rules, regarding such factors as amortization periods, assumptions and use of surplus. It should be understood that these benefit liabilities are long-term estimates that contain a significant degree of uncertainty. As such, they are moving targets. But they are still important targets, as they represent estimated bills for employee service already rendered. There are several advantages to having the Postal Service prefund retirement benefits. These include first, protecting the future viability of the Postal Service by not saddling it with bills later on after employees have already retired. Second, protecting the retirement benefits of postal employees, retirees and their beneficiaries. Fully-funded benefits are more secure than unfunded benefits. Third, charging postal ratepayers for the full cost of current services, including retirement accruals. And fourth, protecting any third parties that could potentially become responsible for any unfunded liability. That said, no prefunding approach will be viable unless the Postal Service can make the required payments. There is a balance between providing short-term breathing room and protecting all stakeholders in the long term. In our prior reports, we have addressed several specific issues concerning the prefunding of the Postal Service's pension and retiree health benefits. Our points have included first, support for the use of actuarial assumptions that are specific to the postal workforce, subject to third-party recommendation. Second, support for modifying the retiree health prefunding schedule in a fiscally responsible manner. Third, concern about lowering the retiree health prefunding target from 100 percent to 80 percent, which would mean a permanent unfunded liability. And fourth, fixing the current law treatment of FERS surplus in a fiscally responsible manner. We made specific suggestions in each of these areas that I would be happy to discuss. Ultimately, the viability of funding promised benefits depends on the financial viability of the Postal Service's underlying business model. We continue to recommend that Congress adopt a comprehensive package of actions that will facilitate the Postal Service's ability to align costs and revenues and to cover all of its financial obligations. This concludes my prepared statement. I would be pleased to answer your questions. [Prepared statement of Mr. Todisco follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Mr. Farenthold. Thank you very much. We will finish with the testimony before we get to questions. We will now go to Mr. Williamson. STATEMENT OF JEFFREY WILLIAMSON Mr. Williamson. Good afternoon, Chairman Farenthold, Ranking Member Lynch and members of the subcommittee. My name is Jeffrey Williamson, and I am the Chief Human Resources Officer and Executive Vice President at the U.S. Postal Service. Thank you, Mr. Chairman, for calling this important hearing today to discuss the Postal Service's unfunded liabilities. As we have stressed over the past several years, the Postal Service urgently needs comprehensive reform legislation. We greatly appreciate the efforts of both the House and the Senate oversight committees to date, and we strongly urge Congress to pass comprehensive reform legislation this year. The Postal Service continues to do its part within the bounds of existing law to place the organization in a sound financial footing. We are positively pleased with our results. We reduced our costs by a billion dollars in 2013, and in total by $15 billion since the passage of the Postal Accountability and Enhancement Act in 2006. In addition, we have grown revenue by almost a billion dollars in 2013, which is the first revenue growth we have seen since 2008. We are especially proud of our employees, who are determined to do their part to ensure the long-term viability of the Postal Service through continued revenue growth and cost cutting, without sacrificing their commitment to high degrees of service, both from customers and the delivery standpoint. Despite our efforts and our hard work, we cannot return the organization to profitability or secure our long-term financial outlook without the passage of comprehensive reform legislation. The lingering effects of the great recession and the related impact of digital diversion continue to negatively impact financial results. And the pressure of significant unfunded liabilities continues to leave the Postal Service in a dire financial situation. We ended fiscal year 2013 with a net loss of $5 billion and liabilities of $61 billion. As we ended first quarter of 2014, we experienced a net loss of $354 million and saw liabilities grow to $63 billion, which exceeded our assets by approximately $40 billion. It is important, however, to consider items not included on our GAPP financial statement. The major factors contributing to our unfunded liabilities include retiree health benefits, pension obligations, workers compensation and debt to the treasury. OPM has calculated a total unfunded retiree health benefit liability of $48.3 billion, which is greater than the $18.1 billion which is shown on our GAPP accounting statement, which represents only the statutorily prefunded obligations we have defaulted on. We have proposed a solution to this retiree health benefit which requires FEHB programs to set aside health care plans that will fully integrate with Medicare for current and future postal retirees, which would virtually eliminate this future unfunded liability. From a pension standpoint, OPM has estimated a FERS surplus of half a billion dollars, rather than the $6 billion surplus that would exist if postal-specific salary growth and demographic assumptions were used. While addressing the current surplus, and returning it to the Postal Service is critical, a long-term solution does exist, which would be to create a defined contribution system similar to the TSP system that is currently within the FERS program. Employee safety and injury prevention is also a top priority. Unfortunately, given the size and the nature of our workforce, some employees do get injured. The Postal Service has an unfunded liability of $15.9 billion at the end of quarter one on workers compensation. And while we continue to work with our employees to bring them back to productive work, we ask for a FECA reform that would allow us to further reduce this liability. Due to constraints that can only be lifted through legislation, the organization has been forced to borrow to its $15 billion statutory obligation. Without legislative change, the Postal Service is almost certain to default on its upcoming $5.7 billion retiree prefunding payment. We also will continue to struggle with low levels of liquidity, which on December 31st of 2013 represented only 14 days of average operating expense. A private sector company of comparable size could have as much as five times that amount. The bottom line is the Postal Service's total obligations exceed our assets by approximately $90 billion. While these imbalances are substantial, it is important to note the Postal Service has substantially funded many of these liabilities. And with comprehensive reform legislation, we will be able to fulfill our obligations to the American people and our employees. The problems we face are significant, but they are solvable. With help from Congress, we are confident that the future of the Postal Service can be very bright. Mr. Chairman, we look forward to continuing the work with you and the subcommittee to accomplish meaningful postal reform and I am pleased to answer any questions you may have. [Prepared statement of Mr. Williamson follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Mr. Farenthold. You hit that at exactly five minutes. Mr. Williamson. I practiced. [Laughter.] Mr. Farenthold. This may be the best timed testimony I have seen in my three years in Congress. Congratulations. Mr. Williamson. Thank you. Mr. Farenthold. It is my understanding our two folks from the DOD actually are going to do only one set of prepared testimony. Mr. Moss, I believe we are going to go to you for that. STATEMENT OF ROBERT MOSS Mr. Moss. Good afternoon, Chairman Farenthold and Ranking Member Lynch and other members of the committee. The Department of Defense thanks you for the opportunity to be here today to discuss the operation of our health care liability trust fund. Public Law 106-398, also known as the Floyd D. Spence National Defense Authorization Act for fiscal year 2001 authorized the establishment of two TriCare benefits for uniformed service retirees, their dependents and survivors who are Medicare eligible. Section 711 addressed implementation of the TriCare senior pharmacy benefit and Section 712 established eligibility conditions for CHAMPUS and TriCare upon the attainment of Medicare eligibility. To provide mandatory funding for these two new health care entitlements, the fiscal year 2001 NDAA also established on the books of the Treasury the Department of Defense Medicare Eligible Retiree Health Care Fund, also referred to as The Fund, codified in Title 10, Subtitle A, Part 2, Chapter 56 of the United States Code. The Fund is used for the accumulation of funds in order to finance on an actuarially sound basis liabilities of the Department of Defense under uniformed service retiree health care programs for Medicare eligible beneficiaries. The Fund covers certain Medicare eligible DOD, U.S. Coast Guard, Public Health Service and NOAA retirees, retiree family members and survivors, not simply over 65s and not active duty dependents who are Medicare eligible. It pays directly for medical treatment facility care, serves as a secondary payer to Medicare for purchased care and pays for pharmacy benefits provided in either setting to Medicare eligible uniformed service beneficiaries. Using an actuarially funding mechanism for the new benefits was consistent with the Congressional belief that decision makers should be confronted with the full cost of future benefits incurred by current personnel decisions and that Federal agencies should recognize the cost of all compensation and benefits offered to Federal employees at the time costs are incurred. The Fund's revenues are derived from three sources. The first source is Treasury funded unfunded actuarial liability payments, so determined by the Fund's board of actuaries. The original unfunded liability represents service performed prior to the Fund's establishment date of October 1st, 2002. This liability is currently being amortized over 45 years, starting in fiscal year 2003. The second source is annual uniformed services actual normal cost contributions, also determined by the Fund's board of actuaries. These contributions fund the health care liability attributable to service performed in the current year by uniformed service members and are paid annually by Treasury on behalf of the uniformed services. The third revenue source is investment earnings from investment in Treasury securities. The Fund invests in these securities to the extent annual fund contributions exceed annual health care expenditures. The Secretary of Defense annually transfers from the Fund to applicable appropriations of the Department of Defense amounts necessary to cover the costs chargeable to those appropriations for uniformed service retiree health care programs for beneficiaries who are Medicare eligible. Amounts so transferred are merged with and available for the same purposes, for the same time period, as the appropriation to which transferred. Upon a determination that all or part of the funds transferred from the Fund are not necessary for the purposes for which transferred, such amounts may be transferred back to the Fund no later than the end of the second fiscal year after the fiscal year for which the appropriation is available for obligation. The fiscal year 2001 NDAA also directed the establishment of a Medicare eligible retiree health care board of actuaries. The board consists of three members who are appointed by the Secretary of Defense from among qualified professional actuaries who are members of the Society of Actuaries. The members of the board serve for a term of 15 years. The board reports to the Secretary of Defense annually on the actuarial status of the Fund and furnishes its advice and opinion on matters referred to by the Secretary. It also reports not less than once every four years to the President and Congress on the status of the Fund. One of its primary responsibilities is the actuarial based computation of the Treasury's amortized payment against the unfunded liability and the uniformed services normal cost contribution. That concludes my statement, and I am happy to answer any questions you may have. Thank you. [Prepared statement of Mr. Moss follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Mr. Farenthold. Thank you very much. And you were less than two seconds over. We have a great panel here. Thank you all very much for being more considerate of our time than we were with your with the unscheduled votes. I will now recognize myself for some questions, then we will go to Mr. Lynch and the other members of the committee. Mr. Todisco, there was an editorial in the Wall Street Journal last week, Senator Bernie Sanders of Vermont said Congress in 2006 passed legislation that required the Postal Service to prefund over a 10-year period 75 years worth of future retirement benefits. Is that accurate? Mr. Todisco. No, Mr. Chairman, that is not quite accurate. There has been some misunderstanding about that, which we addressed in our 2012 report on this topic. There is no set number of years that that is prefunded for. What is actually prefunded, the funding target consists of all the estimated future payments for those who are already retired. And for those who are still working, current postal employees, a more or less pro rata portion of their future benefit payments based on their term of service so far. That means some of those payments will go beyond 75 years, because some of the current workers will live beyond 75 years from today. But it also does not include some payments that will be made in less than 75 years. So it is an approximation. The other point about that is it is not being funded in the 10-year period. The funding schedule in the 2006 law was over 50 years or more, although somewhat frontloaded in the first 10 years. Mr. Farenthold. I just wanted to make sure we had gotten that clear. Mr. Williamson, you have some great employees at the Postal Service. I am friends with my letter carrier, I don't see him nearly as much now that I am here in Washington. The only time I get frustrated is when there is a long line at the post office, and that is not your fault, it is people refuse to mail early at Christmas, just like I do. But as someone who wants to look, I assume you want to look out for and take care of your employees, just like I would want to look after and take care of my employees, do you think it is a good idea that we actually have these benefits prefunded so we are sure there is money there and we are not at the whim of a Congressional appropriation to allocate money in the future? Mr. Williamson. Mr. Chairman, we absolutely agree. In fact, as I said in my opening statement, it is extremely important to us to be able to fund our requirements and maintain the commitment that were made to our employees out into the future. Mr. Farenthold. So if we were to follow what some folks have asked and actually, and I will ask Mr. Todisco, if we actually go to more of a pay as you go type system and don't prefund, what are the downsides to doing that, besides the whim of Congressional appropriations? Which is a pretty big one. Mr. Todisco. Given that the Postal Service is intended to be a self-sustaining agency, to the extent there are unfunded liabilities, there is always a concern about whether those will be able to be funded in the future. Mr. Farenthold. So mail volume is going down, right? So it is not like there is going to be, unless there is some sort of major paradigm change, there is not going to be more money coming into the Postal Service in the foreseeable future. Would that be an accurate forecast? Mr. Todisco. What is happening and what has happened over the last number of years is that these obligations have grown in size relative to the size of the organization supporting it. Mr. Farenthold. And Mr. Williamson, you would agree, you don't really see a turnaround in mail volume, though we may have some revenue enhancement opportunities elsewhere? Mr. Williamson. I think there are a couple of areas within mail volume. With first class single piece letters, it is unlikely for first class single piece letters, for the continued decline to rise. However, with standard mail, advertising mail, some of the innovative things we are doing there, it is likely that we can maintain that volume in the system. And then the package growth in the organization. Mr. Farenthold. You don't think that would be enough if we were to go on a pay as you go basis without massive rate increases to pay the retiree benefits? Mr. Williamson. I think the important element here is, as Mr. Todisco mentioned earlier, we are 91 percent funded on our CSRS obligation, we are overfunded on our FERS obligation. And we do have a plan that would allow us to virtually fully fund our retirement health care obligation. So from a Postal Service standpoint, we view that we have solutions and plans that would allow us to fully fund those obligations. Mr. Farenthold. So you would like to see some of the postal reform we are talking about here come to be? Mr. Williamson. Yes. Mr. Farenthold. All right. I will now go to Mr. Lynch and allow him his chance to do some questions. Mr. Lynch. Thank you, Mr. Chairman. Let me just follow up on the pay as you go sort of scenario. From 1970 to 2006, we were on a pay as you go. When I say pay as you go, what I mean is, I sat on the pension fund for the Iron Workers, we had to make sure that our obligations were met as they arose. So that is what I mean by a pay as you go system, in case there is some question about that term. So if we look at the, let's look at the obligations of the FERS situation first. The Office of Personnel Management's most recent calculation estimated that the Postal Service had overpaid its FERS pension account by approximately $500 million. This surplus has significantly decreased since 2011 when it was reported that the surplus was $11.4 billion. The key here is, however, that we would like to use demographics specific to postal employees, because there are a lot of ups and downs in private industry. I know, I was in the construction industry, work was very choppy. But for most of our postal employees, they go in there, they go to work, they have a set number of hours they work each week, there are no ups and downs in the economy basically that disrupts that Postal Service. Got to get the mail out every single week. And the Hay Group reported that the total using postal specific demographics, that the surplus could be as high as $12.5 billion. Mr. Todisco, are you familiar with that? Mr. Todisco. Yes, I am. Mr. Lynch. Are you in agreement with sort of the calculation there, or is that off base here? Mr. Todisco. Well, we haven't analyzed their calculation. It is plausible that it could turn out that way, and we do support the use of postal specific assumptions. Mr. Lynch. Okay, that would result in a more accurate number? Mr. Todisco. Yes, that is right. Mr. Lynch. Mr. Williamson, why would that be important? Could you elaborate on why it is important to use the postal specific characteristics in determining what the FERS overpayment or the unfunded liability might be? Mr. Williamson. Absolutely. From our perspective, using assumptions that match our workforce and our demographics, given we are self-sustaining and self-funding, makes sense when you think about what that true long-term liability and obligation is. So we support using the salary growth and demographic assumptions to calculate the FERS payment. Mr. Lynch. Great. Mr. Williamson, would you support returning the surplus to the United States Postal Service? Mr. Williamson. Yes. Mr. Lynch. And Mr. Todisco, is it correct that Congress has not yet instructed OPM how to deal with any surpluses generated within the FERS pension account? Mr. Todisco. That is correct, Congressman. Under current law, the Postal Service cannot realize any financial benefit from that surplus. Mr. Lynch. Okay. Thank you. Would GAO support a one-time transfer of the surplus to go to paying down some of the liabilities? I have a bill out there, not to ring my own bell, but under one of the bills I have, H.R. 961, it would actually cause the transfer of the surplus to pay down some of these liabilities. Is that something you would support? Mr. Todisco. To transfer the surplus to take care of the unfunded liabilities? Mr. Lynch. The obligations, yes. Not to use it for operational, but for paying down some of the debt that is outstanding? Mr. Todisco. Yes, that makes complete sense from a holistic standpoint, yes. Mr. Lynch. Has the GAO provided any legislative suggestions on how to deal with this? Mr. Todisco. We haven't drafted any language but we have offered a number of suggestions for how to deal with the surplus. Mr. Lynch. Okay. I hate to drag the DOD in here, but we have already brought you in. Let me just ask, Mr. Moss, in your testimony you stated that under the DOD system, most payments derive from three sources, is that correct? Mr. Moss. Yes, sir. Mr. Lynch. Are any of those sources funded by Congressional appropriations? Mr. Moss. The payment that the Department of Defense pays in to fund the normal cost contribution, that is part of their appropriated top line that comes to them each year. Mr. Lynch. Okay, so Congress appropriates money for you to meet your prefunding requirement? Mr. Moss. That is correct. Mr. Lynch. Okay. That is quite different than what the Postal Service is dealing with. Mr. Williamson, does any of the Postal Service receive appropriations from Congress to meet its prefunding liability? Mr. Williamson. No, we do not. Mr. Lynch. So apples and oranges here. I see I have 12 seconds left, so why don't I stop right there. Thank you. Mr. Farenthold. Thank you very much. We will now go to our Vice Chair, Mr. Walberg, for questions. Mr. Walberg. Thank you, Mr. Chairman. Mr. Todisco, your testimony stated that GAO supports legislation that would shift USPS remaining retiree health care fixed payments to actuarially determined payments, which is a provision of both the House version and the Senate version, as I understand it, of the Postal Reform Act in the President's fiscal year 2015 budget proposal. But GAO has expressed concern about proposals that would lower the funding target for the retiree health care liability from 100 percent to 80 percent, something currently in the Senate version of the Postal Reform Act and in the President's fiscal year 2015 budget. If the funding targets are lowered, what happens if USPS doesn't have the funds set aside to pay the benefits? Mr. Todisco. OPM has indicated that they are not sure legally what exactly would happen if those benefits can't be paid at some point. There is uncertainty about that. Mr. Walberg. So that just sits out there? Mr. Todisco. That sits out there. Mr. Walberg. Without the ability to plan? Mr. Todisco. Hypothetically, people could lose benefits. Taxpayers could be burdened. But we don't know exactly what will happen. Mr. Walberg. I guess that went to my follow-up question, how might taxpayers be affected by the decision to lower funding targets. And you are saying we don't know. They could be brought in? Mr. Todisco. That is right. OPM has told us they don't know. Mr. Walberg. Okay. USPS, Mr. Todisco, currently has an unfunded liability for retiree health care of $48 billion. How sensitive is this projection to the assumptions for medical inflation? And secondly, if for instance, medical inflation increases by 1 percent, what happens to the size of the unfunded liability? Mr. Todisco. The most recent, it is a highly sensitive number to those assumptions, Congressman. The most recent estimates are that if medical inflation were, say, 1 percent higher, the unfunded liability would be somewhere on the order of $15 billion more than it is today. Mr. Walberg. Fifteen billion. You are testifying that an increase of 1 percent in medical inflation would result in over a 30 percent increase. Does this sensitivity to medical inflation factor in GAO's recommendation that USPS fully fund the benefit? Mr. Todisco. No, it doesn't. Our recommendation is really for other reasons outside of that issue. Mr. Walberg. According to your testimony, USPS's debt 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. Your testimony also notes that USPS holds unrestricted cash of $2.3 billion, which would cover only nine days of average daily expenses. What effect does USPS debt and unfunded liability have on the agency's ability to make capital improvements? Mr. Todisco. Well, it is a severe constraint, certainly. Mr. Walberg. So I guess again we are looking here at a setting that everything is affected, the viability, the planning, the uncertainty. All goes to the bottom line of more than just the problem, but ultimately a taxpayer problem as well? Mr. Todisco. That is potentially, but again legally how it would play out, we don't know. Mr. Walberg. Okay. Mr. Chairman, I yield back. Mr. Farenthold. Thank you very much. We will now recognize Mr. Clay for five minutes. Mr. Clay. Thank you, Mr. Chairman. Congress does not provide any funds to the Postal Service to meet its prefunding requirement. And that is a pretty big difference. In fact, comparing the DOD to Postal Service is a little bit like comparing apples to oranges. And you know, today's hearing is meant to look at the Postal Service's unfunded liabilities. Since the Majority invited DOD to testify, I wondered what DOD's unfunded liability is for their retiree health care program. And committee staff found that at the end of fiscal year 2013, DOD's Medicare eligible fund had assets of approximately $187 billion, while containing a liability of $502.4 billion. Mr. Chairman, let me caution my colleagues about where we are going on this path. And I hope it is not to dismantle the Postal Service. I know my constituents rely heavily on the U.S. Postal Service, and just like you do, Mr. Chairman, at Christmas time. It is perplexing to hold this agency to one standard and not other agencies. We are talking about $100 billion in liabilities, but yet nobody has talked about dismantling the Federal Government when we have $17 trillion in national debt. It is just perplexing to me. And then I see that the President has come out in his budget advocating five-day service. I know the Majority couldn't be for anything the President has offered up. [Laughter.] Mr. Clay. Let me ask a question. Since there is $502.4 billion in liability from DOD's Medicare eligible fund, is that correct, Mr. Moss? Mr. Moss. That is the total liability, sir. The unfunded portion of that liability, I would defer to Mr. Sitrin, is far less than that. Mr. Clay. Would it be the difference between $187 billion and $502 billion, is that right? Mr. Sitrin? Okay. You are a mathematician. What is that, about $300 billion? Mr. Sitrin. Yes, sir. Mr. Clay. About $315 billion, right? Mr. Sitrin. Yes. Mr. Clay. At the end of fiscal year 2013, the Postal Service had assets of approximately $47.3 billion, and liability of approximately $95.6 billion, is that correct, Mr. Williamson? Mr. Williamson. That is correct. Mr. Clay. Based on these numbers, the Postal Service is 49 percent funded, while the DOD is just 39 percent funded. In other words, DOD's unfunded liability is much larger than the Postal Service's. So, Mr. Moss, should we be concerned that DOD will not be able to meet its unfunded liability, given that they are so much larger? Mr. Moss. No, sir, I don't think that given the current circumstances and the way the fund is funded each year by DOD and by Treasury as that continues then I don't think there is a problem with the Department of Defense meeting its unfunded liability at the end of that 45 year period. Mr. Clay. What if Congress decides not to appropriate any more funds for that? Mr. Moss. Then there would obviously be a problem. Mr. Clay. Let me ask Mr. Todisco, what would be the increased rate to consumers of the U.S. Postal Service in order to eliminate the unfunded liability and to fix the issue? Mr. Todisco. I don't know that figure, Congressman, as to how it would translate into a postage rate. Mr. Clay. Okay. It seems to me that Congress is a large part of the reason to blame for this problem and this hearing is intended to focus on that. DOD's requirement to prefund its health care liability isn't the same as the Postal Service's. Mr. Todisco, would you agree that the Postal Service is being required to prefund in more aggressive pace than DOD? Mr. Todisco. They are both using a 100 percent funding target. The Postal Service is farther ahead. And yes, as we have reported, the schedule that the Postal Service has had to follow has been an ambitious schedule in that while it is a 50- year schedule, approximately, payments are frontloaded in the first 10 years. Mr. Clay. Mr. Chairman, I see my time is expired. I yield back. Mr. Farenthold. Thank you very much. I would like to follow up. I know my colleagues on the other side of the aisle have made a distinction that we may be comparing apples to oranges here based on funding sources. I wanted to examine that and talk a little bit about the rationale for what we are doing. The Department of Defense is funded almost exclusively through appropriations, is that not correct, Mr. Moss? Mr. Moss. Yes, sir. Mr. Farenthold. And Mr. Williamson, the Postal Service basically gets no appropriations and funds itself through the rates it charges its customers, is that correct? Mr. Williamson. That is correct. Mr. Farenthold. So even though we are talking about, they say apples and oranges, because the Defense Department gets appropriations, well, they are using part of the money that they get from whatever source to prefund their retirement and the Postal Service, I think we are asking that they do the same. Let me ask you, Mr. Moss. You touch a little bit in your testimony on the rationale for why DOD should have to, or is required to do this prefunding. Could you elaborate on that a little bit? Mr. Moss. Yes, sir. Prior to the establishment of the fund, whenever there was discussion about the funding of the old CHAMPUS program or TriCare, it was primarily focused with the medics and looking at what were the additional benefits or the expansion of benefits that would be afforded to our beneficiaries. With the establishment of the trust fund and the Department having to pay into the fund each year, and I would add that when the Department pays into the fund, as the fund stood up, the DOD top line was not increased by the amount of the payment into the trust fund. So DOD was told, you still have your essential basic funding level, and from that you will fund, you will start to prefund the trust fund. When that happens, now you have much more involvement and much more scrutiny from senior management within the Department, looking at what are the various benefits and what is the impact of expanding or in some way changing those benefits, as related to the payment into the fund. So there is much more involvement and much more interest on the part of senior management other than just the medics about the health care benefit that we are affording our beneficiaries. Mr. Farenthold. And then at the risk of sounding like Captain Obvious, I had some folks from the Post Office in my office this week talking to me. And one of their talking point was that they are the only agency within the U.S. Government that is required to prefund. Mr. Moss, is the Defense Department an agency of the United States government? Mr. Moss. It is. Mr. Farenthold. And you are required to prefund? Mr. Moss. That is correct. Mr. Farenthold. I just want to have them scratch that talking point off so we could talk about some other things next time that we are up. Let me see, I think I have one more question here, if you can give me one second to find it. It actually already got asked by one of my colleagues, so Mr. Lynch, we will let you have another round of questioning. Mr. Lynch. Thank you, sir. I appreciate that, Mr. Chairman. I think the point we are trying to make is, and the Postal Service is trying to make is, they are the only U.S. agency government department that is required to prefund and pay it for themselves. I think the distinction is that you receive money from Congress in an appropriation every year to prefund your benefits. That is the distinction that we are trying to make there. According to Mr. Williamson's testimony earlier, about 20 cents of every dollar of revenue that the Postal Service brings in, and their revenue is they sell stamps, that is basically it, that is how the Postal Service funds its operations. People can't believe that, they don't get tax money, they just sell stamps. That is why stamps cost what they do. So 20 percent of every dollar goes for paying the health care expenses. And in 2013, total health care costs for the Postal Service was approximately $13.4 billion. Now, Mr. Williamson, how much of those costs were for current employees versus retirees? Can you tell me that? Mr. Williamson. Yes. Only $4.7 billion of that $13.4 billion was for active employee premiums. The bulk of it. Mr. Lynch. So the huge part is all retirees? That makes sense, they are older, they are using more medical services. That makes sense. So if eligible, are Postal employees mandated to enroll in Medicare, since most of these people are all retired, are they required to enroll in Medicare? Mr. Williamson. No, they are not required to enroll in Medicare. Only 90 percent of our current retirees are in Medicare Part A, and 76 percent in Medicare Part B. Mr. Lynch. So there is a huge chunk of them that are not? Mr. Williamson. Correct. Mr. Lynch. Mr. Moss, can I ask you, are military service members required to enroll in Medicare if they are eligible? Mr. Moss. Yes, sir. Mr. Lynch. Okay, well, that might be a huge difference. Mr. Williamson, in your testimony you mentioned the Postal Service proposal to integrate current health care benefits with Medicare to create a Medicare wraparound plan for employees. Could you explain why this is important for the Postal Service? Mr. Williamson. Absolutely. Currently, our unfunded liability is based on a FEHB plan that does not integrate nor coordinate benefits with Medicare, which means the cost of that plan is much higher. So when you calculate, and Mr. Todisco and some of the other actuaries can get into the details, but when you calculate the actuarial estimate of what that cost is on a higher per capita cost plan, your liability grows. What we are proposing is, we have already paid us and our employees $27 billion in contributions to Medicare, and we would like to require our employees to take on Medicare once they become eligible and create wraparound type plans that would coordinate their benefits and fully integrate with Medicare, therefore Medicare being the primary payer and the FEHB plans, the Postal Health care plans, to be the secondary. Mr. Lynch. I have to say, Mr. Moss, that sounds a lot like TriCare. That sounds a lot like how you handle DOD benefits through TriCare. Mr. Moss. Yes, sir. We share with CMS our manpower documents as far as our retirees. And when a beneficiary obtains care from a civilian provider and the bill is sent to CMS and they pay their share, then they see that that beneficiary is dual eligible, they electronically transfer that claim over to our fiscal intermediary and then we wind up paying the rest of that health care bill. Mr. Lynch. Now, this might be obvious, but does having Medicare as the primary insurer, does that reduce DOD's health care expenses? Mr. Moss. It does reduce health care expenses as they are today. But prior to the establishment of the TriCare for Life program in 2001, DOD was not paying anything toward the care of those beneficiaries once they became Medicare eligible. Mr. Lynch. Okay, so now you are picking up some. Mr. Moss. Now we are picking up some, but it is still far less than it would be if we had to fund the entire benefit. Mr. Lynch. Which is what Mr. Williamson's situation is. Mr. Moss. Yes, sir. Mr. Lynch. Mr. Williamson, has the Postal Service estimated the cost savings derived from this integration proposal where you have a wraparound Medicare situation? Mr. Williamson. Yes, sir, we have. We, based on our actuarial estimates, full Medicare integration would reduce our unfunded liability from the $48.3 billion to $3 billion. Mr. Lynch. Say that again? Mr. Williamson. It would virtually eliminate our unfunded liability and maintain the same level of benefits for our retirees. Mr. Lynch. Wow. Mr. Williamson. Yes. It would reduce from the $48.3 billion to $3 billion. Mr. Lynch. Now, would the Postal Service need authorization from Congress to initiate that integration plan? Mr. Williamson. Yes. We would need OPM to be required to set aside specific plans within FEHB that would be required to integrate with Medicare and coordinate the benefits. Mr. Lynch. Okay, and I am a former union president, so I want to ask you, is this integration plan, is this subject to collective bargaining with the postal unions? Mr. Williamson. We have already, over a year ago we proposed a plan that would actually take postal retirees outside of the FEHB plan and create our own plan. Subsequent to that, we have worked very closely with our stakeholders, the unions' management associations, to come up with a proposal that we can all agree on that would maintain these components but do it within the umbrella of FEHB. So we are not proposing that it would be something we would collectively bargain in terms of the design. What we are requiring is that OPM, for retirees, require Medicare and require the integration within those plans. Mr. Lynch. Right. Well, I think design is probably a management function. But I would encourage you to continue your talks with those unions, because they have been very, very cooperative and progressive in terms of meeting the Postal Service's challenges. Mr. Chairman, I yield back. Mr. Farenthold. Thank you very much, and we will now go to Mr. Walberg for a second round of questions. Mr. Walberg. Thank you, Mr. Chairman. Just basically one question, Mr. Todisco. As I understand it, the CRS account of USPS has a projected deficit of $19.8 billion, while the FERS account has a projected surplus of just $500 million. While using the USPS specific demographic assumptions may slightly change these numbers, I think for the purposes of today they would be illustrative. As an actuary, do you think it makes sense to treat these and other employee benefit liabilities in a holistic manner? Mr. Todisco. Yes, I do, Congressman. I would actually expand that to include the debt to Treasury. Over the last 10 years, the debt has increased in part to make retiree health prefunding payments that were made. So you have money going from one section to another. Economically, the CSRS falls from retiree health and debt to Treasury. In one sense, there is unfunded obligations and debt, they are all debt, they are all payments that have to be made. Mr. Walberg. Thank you. Thank you, Mr. Chairman. Mr. Farenthold. Thank you very much. Did you have any more questions, Mr. Lynch? I will say we appreciate your testimony. It will help us as we move forward with various iterations of postal reform. I should have caught Mr. Clay before he left, but we actually don't agree with the President on five-day delivery. We want modified six-day delivery. So it not a complete agreement there, but we are moving on our side in the same direction. Mr. Lynch. I was getting nervous there. [Laughter.] Mr. Farenthold. We appreciate our witnesses' testimony and the members. Thank you very much, and we are adjourned. [Whereupon, at 3:25 p.m., the committee was adjourned.] APPENDIX ---------- Material Submitted for the Hearing Record [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]