[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
AT A CROSSROADS: THE POSTAL SERVICES'S $100 BILLION IN UNFUNDED
LIABILITIES
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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
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Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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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
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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
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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
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Material Submitted for the Hearing Record
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