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108th Congress Report
SENATE
1st Session 108-35
======================================================================
POSTAL CIVIL SERVICE RETIREMENT SYSTEM FUNDING REFORM ACT OF 2003
__________
R E P O R T
of the
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
to accompany
S. 380
TO AMEND CHAPTER 83 OF TITLE 5, UNITED STATES CODE, TO REFORM THE
FUNDING OF BENEFITS UNDER THE CIVIL SERVICE RETIREMENT SYSTEM FOR
EMPLOYEES OF THE UNITED STATES POSTAL SERVICE, AND FOR OTHER PURPOSES
April 8, 2003.--Ordered to be printed
COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Ann C. Fisher, Professional Staff Member
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Susan E. Propper, Minority Counsel
Darla D. Cassell, Chief Clerk
108th Congress Report
SENATE
1st Session 108-35
======================================================================
POSTAL CIVIL SERVICE RETIREMENT SYSTEM FUNDING REFORM ACT OF 2003
_______
April 8, 2003.--Ordered to be printed
_______
Ms. Collins, from the Committee on Governmental Affairs, submitted the
following
R E P O R T
[To accompany S. 380]
The Committee on Governmental Affairs, to which was
referred the bill (S. 380) to amend chapter 83 of title 5,
United States Code, to reform the funding of benefits under the
Civil Service Retirement System for employees of the United
States Postal Service, and for other purposes, having
considered the same, reports favorably thereon with an
amendment and recommends that the bill as amended do pass.
CONTENTS
Page
I. Purpose and Summary..............................................1
II. Background.......................................................2
III. Legislative History..............................................5
IV. Section-by-Section Analysis......................................6
V. Evaluation of Regulatory Impact..................................9
VI. CBO Cost Estimate...............................................10
VII. Changes to Existing Law.........................................14
I. Purpose and Summary
S. 380, the Postal Civil Service Retirement System Funding
Reform Act of 2003, is a bipartisan bill to reform the funding
of benefits under the Civil Service Retirement System for
employees of the Postal Service, and for other purposes.
S. 380 would require USPS to contribute annually to the
Civil Service Retirement and Disability Fund (CSRDF) on behalf
of employees covered by CSRS an amount equal to the dynamic
normal cost of CSRS minus the amount contributed by employees.
(The dynamic normal cost of CSRS is currently estimated to be
equal to 24.4 percent of payroll. Employees covered by CSRS are
required to have 7 percent of pay withheld and deposited in the
CSRDF. Thus, the required USPS contribution would be equal to
17.4 percent of payroll.) Because the dynamic normal cost of
CSRS includes the effects of future employee pay raises and
retiree COLAs, the separate payments that USPS is required to
make under current law to fund the future increases in CSRS
annuities that result from pay raises and COLAs would no longer
be necessary. Consequently, S. 380 would repeal the provisions
of law that require the Postal Service to amortize over 15
years the increases in future CSRS annuities that result from
annual employee pay raises and retiree COLAs.
Under S. 380, OPM would be required to estimate any
``supplemental liability'' of the Postal Service with respect
to CSRS benefits earned by current or former USPS employees and
to amortize this supplemental liability over 40 years. In
addition, S. 380 would include the value of CSRS benefits
attributable to military service as a financial obligation of
the Postal Service in the calculation of the Postal Service's
supplemental liability.
The Reform Act expresses the ``Sense of Congress'' that the
savings accruing to the USPS will be sufficient to allow the
USPS to fulfill its commitment to hold postage rates stable
until at least 2006. The Committee also notes that some portion
of the savings should be used to address the Postal Service's
substantial unfunded post-retirement health obligations; and
that none of the savings should be used in the computation of
bonuses to Postal Service executives or managers.
S. 380 requires that the Secretary of the Treasury shall
specify the manner and extent to which the savings accruing as
a result of the enactment of the Act shall be used to pay down
postal debt. The bill also requires the USPS to submit a report
to Congress by December 31, 2003, describing how it proposes to
address its obligations relating to unfunded post-retirement
health care costs of current and former employees. The Postal
Service also would be required to send a report to GAO, the
Senate Governmental Affairs Committee and House Government
Reform and Oversight Committee detailing how much of the future
savings attributable to the legislation the Postal Service
would use for debt repayment, pre-funding of post-retirement
health care costs for postal employees, capital improvements,
holding rates stable, and other purposes.
II. Background
OVER-FUNDING OF CSRS LIABILITY
On November 1, 2002, the Office of Personnel Management
(OPM) had good news for the Postal Service (USPS). A review of
USPS payments to the civil service retirement fund for pension
obligations to employees on board before 1984 revealed a far
more positive picture than had previously been believed. USPS--
unlike any other federal agency--is required to pay into the
fund an amount that approximates the full cost of its
employees' participation in the Civil Service Retirement System
(CSRS). Because pension investments have been earning interest
at a higher rate than presumed in the statutory funding
formula, OPM reported that the Postal Service's deferred
liability for pension obligations was only $5 billion instead
of $32 billion. According to OPM, if USPS continues to make
payments based on the latter figure, the liability will
eventually be over-funded by $78 billion. OPM stated that,
``the major reason for the projected over-funding is due to the
excess interest earned by the CSRS fund; that is, interest
earnings in excess of the 5 percent that was assumed under the
statutory funding method.''
Because of the potential over-funding, and the fact that
needed changes in scheduled payments cannot occur without
changes to existing laws, OPM sent a legislative proposal to
Congress to rectify the situation, while ``protecting employee
interests and the integrity of the [postal] retirement
system.'' According to OPM, there are two elements of the
Postal Service's financing of CSRS benefits that distinguish
the agency from other federal agencies, and which are important
factors in the potential over-funding of CSRS benefits for its
employees. First, the Postal Service is responsible only for
CSRS benefits that were earned by USPS employees after June 30,
1971. Consequently, a significant proportion of the Postal
Service's early contributions to the Civil Service Retirement
and Disability Fund have remained in the Fund for a number of
years, during which interest has accrued. Second, due to a
series of laws passed between 1989 and 1993, USPS is required
to pay for the increases in CSRS pensions that result from
annual cost-of-living adjustments. As a result, the Postal
Service--unlike any other federal agency--is required to pay
into CSRDF an amount that approximates the full cost of the
CSRS. It is these two factors, in combination with the interest
earnings in excess of the assumed 5 percent rate of return,
that have led to projected pension contributions and interest
earnings exceeding the value of CSRS benefits owed to USPS
retirees and survivors.
According to OPM, the assumed interest rate used in CSRS
financing has been set at 5 percent since 1972. However, while
OPM uses a 5 percent interest rate in its static valuation of
CSRS, it currently uses a nominal interest rate of 6.75 percent
when valuing the liabilities of the CSRS on a dynamic basis.
The dynamic valuation of CSRS liabilities is a more accurate
measure of the present value of future CSRS annuities. Since
the enactment of the Omnibus Budget Reconciliation Act (OBRA)
of 1990--which required the Postal Service to pay for the
increase in CSRS liabilities resulting from COLAs granted since
1971 and to amortize the cost of future COLAs--USPS has been
paying the full dynamic cost of its CSRS liabilities.
S. 380 continues the Postal Service's liability for the
retirement costs attributable to its employees covered by the
CSRS, which was imposed when the Post Office Department became
the self-supporting United States Postal Service in July 1971.
It also makes the Postal Service responsible for retirement
benefits due to its CSRS enrollees as a result of prior
military service, an obligation the Postal Service has agreed
to assume. The Committee notes that the Reform Act's treatment
of these payments by the Postal Service is not an adoption of
any position by the Committee on whether any agency or
Department of the executive branch should have responsibility
for these costs attributable to its employees covered by CSRS.
DELAYED POSTAL RATE INCREASE
The Reform Act expresses the ``Sense of Congress'' that the
savings accruing to the USPS will be sufficient to allow the
USPS to fulfill its commitment to hold postage rates stable
until at least 2006. This issue is of high importance to the
mailing community. Upon introduction of S. 380, Postmaster
General Jack Potter announced that enactment of the bill would
allow the Postal Service to hold off raising rates until 2006,
rather than 2004, as it had planned. The Committee believes it
is especially important in these difficult economic times to
note the significant adverse impact such an untimely postal
rate increase would have on the $900 billion mailing industry,
which employs nine million Americans in fields as diverse as
magazine and newspaper publishing, direct mailing, printing and
paper production. Postal rates have already risen three times
in the past two years.
DEBT REDUCTION
The deteriorating state of the Postal Service's finances
has been a source of concern to the Committee. Over the past
few years, the Postal Service has come perilously close to
reaching its statutory debt limit of $15 billion. The Postal
Service Board of Governors has made it clear that it will not
seek authorization from Congress for a higher borrowing limit,
as it has done in the past. The Postal Service deserves
recognition for decreasing its debt level by $200 million this
past year. With enactment of this legislation, the Postal
Service will be able to use part of the savings to pay down its
debt. To ensure that a portion is indeed used for debt
repayment, the Committee approved language requiring the
Secretary of the U.S. Treasury to specify a plan that the
Postal Service must follow to use these savings to reduce its
debt.
UNFUNDED HEALTH CARE COSTS REPORT
The Postal Service has a statutory obligation to fund a
portion of the health insurance premiums of its current and
future retirees--an obligation estimated to be between $40 and
$50 billion as of September 30, 2002. To this point, the Postal
Service has not indicated how this obligation and future costs
will be funded. For that reason, the Committee included
language in S. 380 that requires USPS to report to Congress by
December 31, 2003 on how it proposes to address this currently
unfunded obligation and future costs for the purpose of (1)
funding, (2) financial statement reporting, and (3) rate-
setting. Furthermore, the bill requires GAO to prepare and
submit a written evaluation of the USPS proposal. It is
anticipated that the White House Commission on the Postal
Service will also address the issue of how best to satisfy this
outstanding obligation. The Committee looks forward to
receiving the Commission's report in July.
DISPOSITION OF SAVINGS REPORTS
The Postal Service has stated that, because of the savings
it would realize under the provisions of this legislation, it
would not have to file a new rate case seeking to increase
postal 4 rates until the end of 2005, for rates that would go
into effect in 2006. However, the benefits of this legislation
will continue to be realized by the Postal Service for many
years. It is the view of this Committee that the substantial
reductions in the Postal Service's obligation to the Treasury
occasioned by this bill warrant continued oversight by Congress
to ensure that a portion of these savings are used to meet
other key obligations of the Postal Service.
For this reason, S. 380 requires that, before filing its
rate case in 2005 and at least eight months before filing any
subsequent rate case, the Postal Service must submit a report
to this Committee and to the House Committee on Government
Reform and Oversight recommending how much of the future
savings the Postal Service would receive as a result of this
legislation should be used for the following: debt repayment to
the U.S. Treasury; prepaying to the U.S. Treasury post-
retirement health care costs for postal employees; capital
investments to improve productivity and cost saving; keeping
postal rates stable; and other purposes. The recommendations
should also take into consideration, as appropriate, the report
of the President's Commission on the United States Postal
Service.
The report required by this legislation is to be
accompanied by a letter from the Secretary of the Treasury
commenting on the recommendations, and must also be transmitted
to the General Accounting Office (GAO) for its review and
evaluation. GAO will have 45 days to prepare and submit an
evaluation of the Postal Service's report to this Committee and
the House Committee on Government Reform on Oversight. The
Postal Service shall not take any action to implement the
recommendations in the report until 90 days after the report
has been submitted. This timetable will allow the Committees to
take actions that might be necessary to respond to the proposed
allocation of savings outlined in the report before the Postal
Service begins the process of preparing a new rate case.
III. Legislative History
S. 380, the Postal Civil Service Retirement System Funding
Reform Act of 2003, was introduced by Sen. Susan M. Collins of
Maine and Sen. Thomas R. Carper of Delaware on February 12,
2003 and referred to the Governmental Affairs Committee. The
bill was cosponsored by Sen. Joseph Lieberman of Connecticut,
Sen. Ted Stevens of Alaska, Sen. George Voinovich of Ohio, Sen.
Richard Durbin of Illinois, Sen. Sam Brownback of Kansas, Sen.
Robert Bennett of Utah, Sen. George Allen of Virginia, Sen.
Mark Pryor of Arkansas, Sen. Norm Coleman of Minnesota, Sen.
James Jeffords of Vermont, and Sen. John Sununu of New
Hampshire.
The Committee met on March 5, 2003, to consider S. 380. A
manager's amendment in the nature of a substitute was adopted
by voice vote.
The manager's amendment, offered by Chairman Collins and
cosponsored by Ranking Member Lieberman and Senators Carper and
Voinovich, made technical changes to improve upon the clarity
of certain definitions within the bill. It also added a new
reporting requirement for the Postal Service.
On that same date, the Committee ordered the bill reported
by voice vote, with nomembers present dissenting. Senators
present were Stevens, Coleman, Bennett, Fitzgerald, Sununu, Akaka,
Durbin, Carper, Lautenberg and Collins.
IV. Section-by-Section Analysis
To accompany the Manager's Amendment to S. 380.
Section 1. Short Title
This section would provide that the bill may be cited as
the ``Postal Civil Service Retirement System Funding Reform Act
of 2003''.
Section 2. Civil Service Retirement System
This section would amend provisions of subchapter III of
chapter 83 of title 5, United States Code, to reform the
provisions for funding retirement benefits for employees of the
United States Postal Service under the Civil Service Retirement
System.
Paragraph (1) of subsection (a) would amend section 8331 of
title 5, by changing the term defined in paragraph (17) of that
section from ``normal cost'' to ``normal cost percentage.'' The
insertion of the phrase ``and standards (using dynamic
assumptions)'' after ``actuarial practice'' changes the method
of computing normal cost from a static basis to a dynamic one.
While the term ``normal cost'' was defined in section 8331, it
had not actually been used in chapter 83 since the last
reference to it was repealed some years ago.
Paragraph (2) would redefine ``Fund balance'' to provide
consistency between financial reporting and actuarial
computations, thereby ensuring proper accounting for
liabilities.
Paragraphs (3) and (4) would make technical changes.
Paragraph (5) would add a definition of the term ``dynamic
assumptions,'' incorporating the language used in the
definition in paragraph (9) of section 8401, which is used in
the administration of the Federal Employees' Retirement System.
Subsection (b) would amend the provisions of section
8334(a)(1) to change the provisions applicable to employer
retirement contributions made by the Postal Service. The
amendments would exempt the Postal Service from the requirement
to make agency contributions that match employee deductions,
and would provide that the Postal Service employer contribution
will be a percentage of basic pay equal to the difference
between the product of the normal cost percentage for the type
of employee (i.e., regular employee, law enforcement officer,
etc.), and the basic pay of that employee, and the product of
the percentage of basic pay deducted from the employee's basic
pay, and the basic pay of that employee.
Subsection (c) would provide for computation of any
retirement costs not covered by past or future Postal Service
or employee payments to the Retirement Fund, and for
amortization of those costs by Postal Service payments over a
40 year amortization schedule. It would completely eliminate
the existing provisions of section 8348 dealing with Postal
Service payments.
Paragraph (1) would rewrite section 8348(h). It would
repeal the existing provisions requiring Postal Service
payments for costs ``attributable to any benefits payable from
the Fund to active and retired Postal Service officers and
employees, and to their survivors, when the increase results
from an employee-management agreement under title 39 of the
United States Code, or any administrative action by the Postal
Service taken pursuant to law, which authorizes increases in
pay on which benefits are computed.''
As amended, section 8348(h)(1)(A) would establish a new
concept, the ``Postal supplemental liability,'' which is
essentially the actuarial present value of retirement
obligations for Postal Service employees, less the sum of
several items, including the present value of future employer
and employee payments to the Retirement Fund; the portion of
the Fund balance attributable to payments to the Fund by the
Postal Service; benefit payments attributable to the Postal
Service, and any other appropriate amount determined by the
Office of Personnel Management under generally accepted
actuarial practices and accounting principles.
Section 8348(h)(1)(B) would set the basis for inclusion of
the value of benefits based upon military and volunteer service
(i.e. Peace Corps, VISTA, etc.), providing for proration in the
case of postal employees hired before the Postal Reorganization
Act was enacted on June 30, 1971. It would exclude military
service in the computation of the amount of the annual Treasury
payment required to pay for costs attributable to military
service.
Section 8348(h)(2) would require the Office of Personnel
Management (OPM) to determine an appropriate amortization
schedule, including a series of equal annual installments
commencing September 30, 2004, providing for the liquidation of
the Postal supplemental liability by September 30, 2043. Then,
for each fiscal year beginning after September 30, 2003,
through the fiscal year ending September 30, 2038, OPM would be
required to redetermine the Postal supplemental liability at
the close of the fiscal year and to establish a new
amortization schedule, including a series of installments
commencing on September 30 of the subsequent fiscal year,
providing for the liquidation of that redetermined Postal
supplemental liability by September 30, 2043. For each fiscal
year beginning after September 30, 2038, OPM would be required
to redetermine the Postal supplemental liability at the close
of the fiscal year and to establish a new amortization
schedule, including a series of equal annual installments
commencing on September 30 of the subsequent fiscal year,
providing for the liquidation of that redetermined Postal
supplemental liability over five years. All amortization
schedules established under this section would be required to
be set in accordance with generally accepted actuarial
practices and principles, based on the dynamic interest rate.
The Postal Service would be required to pay the amounts
determined by OPM, no later than the date established by OPM.
Section 8348(h)(3) would provide that in computing the
amount of any payment under any other subsection of section
8348 that is based upon the amount of the Retirement Fund's
unfunded liability, such payment shall be computed disregarding
any portion of the unfunded liability that OPM determines will
be liquidated by the Postal Service's amortization payments.
Paragraph (2) of subsection (c) would repeal the existing
provisions of section 8348(m), that currently require Postal
Service payments based upon retirement costs attributable to
retirement cost-of-living increases.
Subsection (d) would prospectively repeal provisions of the
Omnibus Budget Reconciliation Act of 1990 requiring additional
Postal Service payments to the Retirement Fund, and provide a
rule of construction for those repealed provisions.
Section 3. Disposition of Savings Accruing to the USPS
Subsection (a) defines ``postal debt'' as the outstanding
obligations of the USPS.
Subsection (b) requires that the Secretary of the Treasury,
in consultation with the USPS, shall determine the extent to
which savings generated by the Act shall be used to pay down
postal debt to the Treasury.
Paragraph (1) of subsection (c) states that each fiscal
year OPM will compute the amount of savings accruing to the
USPS as a result of the Act.
Paragraph (A) provides that, no later than July 31, 2003,
OPM shall formulate a plan for calculating these savings,
specifically describing the actuarial methods and assumptions
they will use.
Paragraph (B) requires that OPM's plan be submitted to the
Senate Governmental Affairs Committee and the House Government
Reform Committee.
Paragraph (3) requires that the plan be formulated in
consultation with the Postal Service and shall allow the USPS
the opportunity to request a review of the plan by the Board of
Actuaries of the Civil Service Retirement System. The Board
will have the authority to make any necessary adjustments to
the plan.
Paragraph (4) states that nothing in this subsection or
subsection (b) shall be considered to apply to any fiscal year
beginning on or after October 1, 2007.
Subsection (d) requires the Postal Service to issue a
report relating to the period after the enactment of the Act
and before October 1, 2007 that details the amount of the
savings applied toward reducing the postal debt, and the size
of the postal debt before and after the application of
subsection (b).
Paragraph (1) of subsection (e) states that it is the Sense
of Congress that the savings accruing to the USPS as a result
of this Act shall be sufficient to hold rates stable until at
least 2006.
Paragraph (2) states that it is the Sense of Congress that
some portion of the savings should be used to address the
USPS's substantial unfunded health care obligations for its
current and former employees.
Paragraph (3) states that it is the Sense of Congress that
none of these savings should be used in the computation of
bonuses for executives or managers.
Paragraph (1) of subsection (f) requires the USPS to
prepare a report related to unfunded health care costs and
submit it to the President and Congress no later than December
31, 2003.
Paragraph (A) states that the report should describe how
the USPS proposes to address its unfunded post-retirement
health care costs of current and former employees.
Paragraph (B) states that the report should outline how
prior and future actuarial accrued costs for post-retirement
health care benefits and the amounts necessary to prefund those
costs are treated for purposes of financial statement reporting
and establishing rates of postage and fees for postal services.
Paragraph (2) suggests that the USPS should consider the
recommendations of the White House Commission on the Postal
Service when preparing its report under subsection (f).
Paragraph (3) provides that not later than 60 days after
USPS submits its health care report, required by subsection (f)
of paragraph (1), to Congress and the President, the GAO shall
prepare and submit a written evaluation of the report to the
Senate Committee on Governmental Affairs and the House
Government Reform Committee.
Paragraphs (1) (A) and (B) of subsection (g) states that as
of September 30, 2025, or whenever the last CSRS covered
employee retires, if OPM, after consulting with the Postmaster
General (PMG) determines, in the process of conducting their
annual computation, that the Postal Service has not only paid
off its CSRS liability, but has in fact overpaid into the CSRS
fund, then OPM shall alert the Postmaster General as to the
size of the overpayment and the PMG shall then submit a report
to Congress describing how that overpayment should be used. If
necessary, the PMG shall submit draft legislation to Congress.
Paragraph (1) of subsection (h) states that no later than
December 31, 2004, and after that date, not later than 8 months
prior to the USPS filing a rate case, the Postal Service shall
submit a report to the Senate Governmental Affairs Committee,
House Government Reform and Oversight Committee and GAO making
recommendations for the disposition of future savings accruing
to the Postal Service as a result of the Act. The report shall
be accompanied by a letter of comment from the Secretary of the
Treasury.
Paragraph (A) states that the report should describe
whether, and to what extent, those savings should be used to
address debt repayment, prefunding of post-retirement health
care benefits, productivity and cost savings capital
investments, maintaining postal rate stability, or any other
matter.
Paragraph (B) states that the report should take into
consideration the findings of the President's Commission on the
United States Postal Service.
Paragraph (2) requires that GAO prepare, and submit to
Congress, a written evaluation of the Postal Service's report
not later than 45 days after the USPS submits their report.
Paragraph (3) prohibits USPS from taking any action to
implement their recommendations for disposition of the savings
until 90 days after the report is submitted to Congress.
Section 4. Effective Date
Subsection (a) requires that the Act take effect on the
date of enactment.
Subsection (b) requires that the Act shall only apply to
pay periods beginning on or after the date of enactment of this
Act.
V. Evaluation of Regulatory Impact
S. 380 contains no intergovernmental or private-sector
mandates as defined in UMRA and would impose no costs on state,
local, or tribal governments.
VI. CBO Cost Estimate
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 19, 2003.
Hon. Susan M. Collins,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
Dear Ms. Chairman: The Congressional Budget Office has
prepared the enclosed revised cost estimate for S. 380, the
Postal Civil Service Retirement System Funding Reform Act of
2003. This estimate supersedes the CBO estimate of S. 380 dated
March 17, 2003. The previous version of the estimate contained
an error in the discussion of the bill's on-budget costs.
However, this error does not affect the on-budget or off-budget
cost of the bill, so this revised cost estimate does not change
CBO's estimate of the cost of enacting the legislation.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Mark
Grabowicz and Geoffrey Gerhardt.
Sincerely,
Douglas Holtz-Eakin,
Director.
Enclosure.
S. 380--Postal Civil Service Retirement System Funding Reform Act of
2003
Summary: Enacting S. 380 would permanently reduce payments
by the United States Postal Service (USPS) to the Civil Service
Retirement and disability Fund (CSRDF) starting in 2003. CBO
estimates that enacting the bill would result in net outlays of
$17 billion over the 2003-2008 period, and about $40 billion
over the 2003-2013 period. That estimate is the total budgetary
impact of the proposal, combining both on-budget and off-budget
effects. (USPS cash flows are considered off-budget.)
Under the bill, the Postal Service would see its required
payments to the CSRDF reduced by $3 billion to $5 billion a
year. The legislation specifies that the Postal Service and the
Department of the Treasury would determine how to apply the
savings. CBO expects the Postal Service would use those savings
to repay debt, delay future rate increases, and invest in
capital projects or other activities to increase productivity.
By reducing USPS payments to the retirement fund, CBO
estimates the bill would lower the agency's costs (off-budget)
by about $2 billion over the 2003-2008 period. We also estimate
that enacting S. 380 would increase on-budget costs by about
$19 billion over the same period. Thus the net effect of this
legislation on the unified federal budget would be a cost of
about $17 billion over the 2003-2008 period largely because on-
budget offsetting receipts--representing payments from the
Postal Service to the CSRDF--would be reduced. Over the 2003-
2013 period, enacting S. 380 would combine off-budget savings
of about $2 billion with on-budget costs of around $42 billion
to produce a net cost of about $40 billion.
S. 380 contains no intergovernmental or private sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on State, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 380 is shown in the following table. The
costs of this legislation fall within budget functions 370
(commerce and housing credit), 900 (net interest), and 950
(undistributed offsetting receipts).
----------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
--------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
----------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
On-Budget Effects--CSRDF:
Estimated Budget Authority. 3.5 2.7 3.0 3.0 3.2 3.6 3.8 4.2 4.6 4.8 5.2
Estimated Outlays.......... 3.5 2.7 3.0 3.0 3.2 3.6 3.8 4.2 4.6 4.8 5.2
Off-Budget Effects--Postal
Servivce:
Estimated Budget Authority. -2.5 -0.6 0.8 0.3 0 0 0 0 0 0 0
Estimated Outlays.......... -2.5 -0.6 0.8 0.3 0 0 0 0 0 0 0
Total Budget Effects:
Estimated Budget Authority. 1.0 2.1 3.8 3.3 3.2 3.6 3.8 4.2 4.6 4.8 5.2
Estimated Outlays.......... 1.0 2.1 3.8 3.3 3.2 3.6 3.8 4.2 4.6 4.8 5.2
----------------------------------------------------------------------------------------------------------------
Note.--Components may not add to totals because of rounding.
Basis of estimate
For this estimate, CBO assumes that S. 380 will be enacted
in the spring of 2003. CBO estimates that reducing the Postal
Service's payments to the retirement fund would reduce the
agency's off-budget costs by about $2 billion over the 2003-
2008 period, but enacting S. 380 would increase on-budget costs
by about $19 billion over the same period. The net effect of
this legislation on the unified federal budget would be a cost
of about $17 billion over those six years. Over the 2003-2013
period, enacting S. 380 would combine off-budget savings of
about $2 billion with on-budget costs of around $42 billion to
produce a net cost of $40 billion.
Background
Although the Postal Service is a federal agency, its
financial operations are classified as being off-budget.
Despite this treatment, federal budget documents present the
net incomeof the agency in the budgetary totals. The Postal
Service is required by law to set postage rates to cover its full
costs. In fiscal year 2002, the Postal Service generated $68.1 billion
in collections, mostly from postage and user fees, and had $67.4
billion in expenses. The agency has the authority to borrow up to $15
billion from the Treasury; at the end of fiscal year 2002, its
outstanding debt with the Treasury stood at $11.9 billion.
Postal employees particapate in the federal government's
two main defined benefit pension programs. Those workers first
hird prior to 1984 are covered by the Civil Service Retirement
System (CSRS) while those first hired after 1983, as well as
former CSRS workers who elected to change coverage, participate
in the Federal Employee's Retirement System (FERS). In 2002,
about 30 percent of the USPS workforce was covered by CSRS, and
the rest were under FERS.
The Postal Service and its employees each make payroll
contributions toward both CSRS and FERS. For CSRS workers, both
the standard agency and employee contribution rates are 7
percent. For FERS employees, the agency contribution rate for
most employees is 10.7 percent, while the employee rate is 0.8
percent. Although CSRS provides more generous benefits than
FERS, unlike FERS, CSRS is not a fully funded pension system,
meaning that agency and employee contributions alone are not
enough to finance the program's benefits. In an effort to make
up the shortfall between contributions and benefits for its
current and former employees, the Postal Service makes lump-sum
payments to the retirement system each year. In 2002, those
payments amounted to about $3.9 billion.
The Office of Personal Management projects that, under
current law, the Postal Service will eventually overfund
pension obligations for its workers by as much as $71 billion.
The projected overfunding is due primarily to higher-than-
expected returns on assets held in the CSRDF.
On-budget effects
S. 380 would change the way the Postal Service finances
retirement benefits for many of its current and former
employees. The proposal would replace two amortization payments
the Postal Service now makes to CSRDF--amounting to a combined
$4 billion in 2003 and is expected to grow to nearly $6 billion
in 2013--with a new annual payment of $434 million over the
next 40 years that would amortize the agency's estimated
unfunded liability of about $5 billion. The net effect of
changes in amortization payments is to reduce Postal Service
payments to the CSRDF by $4 billion in 2003, $19.5 billion over
the 2004-2008 period, and $43.5 billion over the 2004-2013
period.
The legislation also would replace the fixed contribution
rate, which the Postal Serice currently makes for its
approximately 225,000 employees covered by the CSRS, with a
rate intended to pay the full normal cost of CSRS benefits
(including military service credits). This change would
effectively increase the Postal Service's contribution rate for
most covered employees from 7 percent to 17.4 percent of
payroll. In 2004, the first full year of contributions at the
higher rate, CBO estimates that this would increase the
agency's retirement contributions by nearly $1 billion, but
that increase would gradually decline as the CSRS covered
workers retire. Employee contribution rates for those in CSRS,
as well as agency and employee contributions for those in the
Federal Employee's Retirement System, would be unaffected by
the legislation.
The Postal Service is an off-budget entity and
contributions and payments that it makes to the retirement
trust fund are considered offsetting receipts. Reducing overall
payments the Postal Service makes to the CSRDF would result in
a reduction of on-budget receipts to the government. To the
extent that the Postal Service uses its savings to reduce its
debt to the Federal Financing Bank, on-budget interest receipts
would also be lower. Assuming the changes made by S. 380 are
effective in April 2003, CBO projects the net on-budget effect
of the bill would be cost of $3.5 billion in 2003, and
approximately $19 billion over the 2003-2008 period.
Off-budget effects
CBO estimates that enactment of S. 380 would reduce net
expenditures of the USPS by $2 billion over the 2003-2008
period.
Estimated Effects on Postal Outlays for Fiscal Years 2003-
2006. The Postal Service's response to the change in its
pension payments in uncertain, but CBO anticipates that the
agency will use the savings from S. 380 to:
Repay $2 billion of its outstanding debt in
fiscal year 2003;
Invest $1 billion in fiscal year 2003 and $2
billion in 2004 in additional capital projects or other
activities aimed at improving productivity; and
Delay the next postal rate increase--
anticipated late in fiscal year 2004, until fiscal year
2007.
CBO expects that the Postal Service would repay about $2
billion of its outstanding debt to the Treasury in 2003. That
action would reduce the agency's interest expenses by about $60
million annually, beginning in fiscal year 2004. Because the
USPS pays an averageinterest rate on that debt of only 3
percent, CBO expects the agency would seek to make capital investments
with much of the savings that could more effectively contribute to
lowering its operating costs and thus contribute to a postponement of
its next rate increase. For fiscal years 2005 and 2006, CBO estimates
such investments would lead to operational savings of about $300
million and $600 million per year, respectively.
In July 2002, the Postal Service raised the price of a
first-class stamp from $0.34 to $0.37 and raised rates for
other classes of mail. Based on information from the Postal
Service and on postal revenues to date in 2003, CBO estimates
that this rate increase will raise over $3 billion in
additional revenue a year. The CBO baseline assumes a similar
rate increase late in fiscal year 2004, including a price of
$0.40 for a first-class stamp.
We estimate that delaying the next rate increase would
result in a small loss of revenue in fiscal year 2004 and
losses of roughly $3.5 billion in each of fiscal years 2005 and
2006. A delay in the rate increase also would increase
operating expenses because the Postal Service would have to
deliver higher volumes of mail than otherwise expected. (When
rates go up, mail volume goes down.) Based on information from
the Postal Service about the relationship between price
increases, mail volumes, and operating costs, we expect that
this increase in expenses would be about a billion dollars
annually in 2005 and 2006.
CBO estimates that those changes in postal revenues and
expenses would result in lower net outlays of $2.5 billion in
fiscal year 2003 and $600 million in 2004, with net increases
in outlays of $800 million in 2005 and $300 million in 2006.
Estimated Effects on Postal Outlays in Fiscal Years after
2006. After 2006, CBO assumes that the Postal Service will use
a combination of rate increases and controls on spending to
ensure that its income covers the costs of its services, as
required by law and as assumed in the CBO baseline. Thus, S.
380 would have no effect on net postal outlays after fiscal
year 2006 when we expect the next rate increase would occur.
Intergovernmental and private-sector impact: S. 380
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Previous CBO Estimates: This cost estimate of S. 380
supersedes and replaces the estimate for the same bill that CBO
released on March 17, 2003. The previous cost estimate
contained an error in the discussion under ``Basis of
Estimate'' of the legislation's on-budget effects. The earlier
estimate said that the on-budget effect of replacing the Postal
Service's current amortization payments to the CSRDF would be
to reduce offsetting receipts by $3.5 billion in 2003, $15.5
billion over the 2004-2008 period, and $38 billion during the
2004-2013 period. Those figures were incorrect. CBO estimates
the change in amortization payments would reduce receipts by $4
billion in 2003, $19.5 billion during the 2004-2008 period, and
$43.5 billion over the 2004-2013 period. This correction does
not change CBO's estimate of either the on-budget or off-budget
cost of enacting the legislation. The numbers shown in the
table and cited in the ``Summary'' are unchanged.
On March 14, 2003, CBO transmitted a cost estimate for H.R.
735, the Postal Civil Service Retirement System Funding Reform
Act of 2003, as ordered reported by the House Committee on
Government Reform on March 6, 2003. CBO estimated that enacting
that bill would result in net outlays of $7.1 billion over the
2003-2008 period and $7.2 billion over the 2003-2013 period.
Estimated outlays for H.R. 735 are lower because, for fiscal
years after 2005, that bill would require that savings
resulting from reduced payments to the CSRDF be held in escrow
and remain unavailable for obligation unless authorized by
subsequent legislation. S. 380 does not contain any such
requirement.
Estimate prepared by: Federal costs--Postal Service: Mark
Grabowicz; CSRDF: Geoffrey Gerhardt; impact on state, local,
and tribal governments: Victoria Heid Hall; impact on the
private sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
VII. Changes to Existing Law
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing laws made by
S. 380 as reported are shown as follows (existing law proposed
to be omitted is enclosed in black brackets, new matter is
printed in italic, existing law in which no change is proposed
is shown in roman):
UNITED STATES CODE
TITLE 5--GOVERNMENT ORGANIZATION AND EMPLOYEES
PART III. EMPLOYEES
Subpart G. Insurance and Annuities
CHAPTER 83. RETIREMENT
Subchapter III. Civil Service Retirement
Sec. 8331. Definitions
* * * * * * *
(17) [``normal cost''] ``normal cost percentage''
means the entry-age normal cost computed by the Office
of Personnel Management in accordance with generally
accepted actuarial practice and standards (using
dynamic assumptions) and expressed as a level
percentage of aggregate basic pay;
(18) [``Fund balance'' means the sum of--] ``Fund
balance''--
(A) [the investments of the Fund calculated
at par value; and] means the current net assets
of the Fund, as determined by the Office in
accordance with appropriate accounting
standards; and
(B) [the cash balance of the Fund on the
books of the Treasury; but does not include any
amount attributable to--] shall not include any
amount attributable to--
(i) the Federal Employees' Retirement
System; or
(ii) contributions made under the
Federal Employees' Retirement
Contribution Temporary Adjustment Act
of 1983 by or on behalf of any
individual who became subject to the
Federal Employees' Retirement System;
* * * * * * *
(27) ``Nuclear materials courier''--
(A) means an employee of the Department of
Energy, the duties of whose position are
primarily to transport, and provide armed
escort and protection during transit of,
nuclear weapons, nuclear weapon components,
strategic quantities of special nuclear
materials or other materials related to
national security; and
(B) includes an employee who is transferred
directly to a supervisory or administrative
position within the same Department of Energy
organization, after performing duties referred
to in subparagraph (A) for at least 3 years;
[and]
(28) ``Government physician'' has the meaning given
that term under section 5948[.]; and
(29) ``dynamic assumptions'' means economic
assumptions that are used in determining actuarial
costs and liabilities of a retirement system and in
anticipating the effects of long-term future--
(A) investment yields;
(B) increases in rates of basic pay; and
(C) rates of price inflation.
* * * * * * *
Sec. 8334. Deductions, contributions, and deposits
[(a)(1) The employing agency shall deduct and withhold from
the basic pay of an employee, Member, Congressional employee,
law enforcement officer, firefighter, bankruptcy judge, judge
of the United States Court of Appeals for the Armed Forces,
United States magistrate, Court of Federal Claims judge, member
of the Capitol Police, member of the Supreme Court Police, or
nuclear materials courier, as the case may be, the percentage
of basic pay applicable under subsection (c). An equal amount
shall be contributed from the appropriation or fund used to pay
the employee or, in the case of an elected official, from an
appropriation or fund available for payment of other salaries
of the same office or establishment. When an employee in the
legislative branch is paid by the Chief Administrative Officer
of the House of Representatives, the Chief Administrative
Officer may pay from the applicable accounts of the House of
Representatives the contribution that otherwise would be
contributed from the appropriation or fund used to pay the
employee.]
(a)(1)(A) The employing agency shall deduct and withhold
from the basic pay of an employee, Member, congressional
employee, law enforcement officer, firefighter, bankruptcy
judge, judge of the United States Court of Appeals for the
Armed Forces, United States magistrate judge, Court of Federal
Claims judge, member of the Capitol Police, member of the
Supreme Court Police, or nuclear materials courier, as the case
may be, the percentage of basic pay applicable under subsection
(c).
(B)(i) Except in the case of an employee of the United
States Postal Service, an equal amount shall be contributed
from the appropriation or fund used to pay the employee or, in
the case of an elected official, from an appropriation or fund
available for payment of other salaries of the same office or
establishment. When an employee in the legislative branch is
paid by the Chief Administrative Officer of the House of
Representatives, the Chief Administrative Officer may pay from
the applicable accounts of the House of Representatives the
contribution that otherwise would be contributed from the
appropriation or fund used to pay the employee.
(ii) In the case of an employee of the United States Postal
Service, an amount shall be contributed from the appropriation
or fund used to pay the employee equal to the difference
between--
(I) the product of--
(aa) the basic pay of that employee; and
(bb) the normal cost percentage applicable to
the employee category of that employee under
paragraph (1) (A); and
(II) the product of--
(aa) the basic pay of that employee; and
(bb) the percentage applicable to that
employee under subsection (c) deducted from
basic pay under paragraph (1)(A).
* * * * * * *
[(m) A Member who has served in a position in the executive
branch for which the rate of basic pay was reduced for the
duration of the service of the Member to remove the impediment
to the appointment of the Member imposed by article I, section
6, clause 2 of the Constitution, or the survivor of such a
Member, may deposit to the credit of the Fund an amount equal
to the difference between the amount deducted from the basic
pay of the Member during that period of service and the amount
that would have been deducted if the rate of basic pay which
would otherwise have been in effect during that period had been
in effect, plus interest computed under subsection (e).]
* * * * * * *
Sec. 8348. Civil Service Retirement and Disability Fund
* * * * * * *
[(h)(1) Notwithstanding any other statute, the United
States Postal Service shall be liable for that portion of any
estimated increase in the unfunded liability of the Fund which
is attributable to any benefits payable from the Fund to active
and retired Postal Service officers and employees, and to their
survivors, when the increase results from an employee-
management agreement under title 39, or any administrative
action by the Postal Service taken pursuant to law, which
authorizes increases in pay on which benefits are computed.
[(2) The estimated increase in the unfunded liability,
referred to in paragraph (1) of this subsection, shall be
determined by the Office of Personnel Management. The United
States Postal Service shall pay the amount so determined to the
Office in 30 equal annual installments with interest computed
at the rate used in the most recent valuation of the Civil
Service Retirement System, with the first payment thereof due
at the end of the fiscal year in which an increase in pay
becomes effective.]
(h)(1)(A) In this subsection, the term ``Postal
supplemental liability'' means the estimated excess, as
determined by the Office of Personnel Management, of the
difference between--
(i) the actuarial present value of all future
benefits payable from the Fund under this subchapter
attributable to the service of current or former
employees of the United States Postal Service; and
(ii) the sum of--
(I) the actuarial present value of deductions
to be withheld from the future basic pay of
employees of the United States Postal Service
currently subject to this subchapter under
section 8334;
(II) the actuarial present value of the
future contributions to be made under section
8334 with respect to employees of the United
States Postal Service currently subject to this
subchapter;
(III) that portion of the Fund balance, as of
the date the Postal supplemental liability is
determined, attributable to payments to the
Fund by the United States Postal Service and
employees of the United States Postal Service,
including earnings on those payments; and
(IV) any other appropriate amount as
determined by the Office in accordance with
generally accepted actuarial practices and
principles.
(B)(i) In computing the actuarial present value of future
benefits, the Office shall include the full value of benefits
attributable to military and volunteer service for United
States Postal Service employees first employed after June 30,
1971, and prorated share of the value of benefits attributable
to military and volunteer service for United States Postal
Service employees first employed before July 1, 1971.
(ii) Military service included in the computation under
clause (i) shall not be included in computation of the payment
required under subsection (g) (2).
(2)(A) Not later than June 30, 2004, the Office of
Personnel Management shall determine the Postal supplemental
liability, as of September 30, 2003. The Office shall establish
an amortization schedule, including a series of equal annual
installments commencing September 30, 2004, which provides for
the liquidation of such liability by September 30, 2043.
(B) The Office shall redetermine the Postal supplemental
liability as of the close of the fiscal year, for each fiscal
year beginning after September 30, 2003, through the fiscal
year ending September 30, 2038, and shall establish a new
amortization schedule, including a series of equal annual
installments commencing on September 30 of the subsequent
fiscal year, which provides for the liquidation of such
liability by September 30, 2043.
(C) The Office shall redetermine the Postal supplemental
liability as of the close of the fiscal year for each fiscal
year beginning after September 30, 2038, and shall establish a
new amortization schedule, including a series of equal annual
installments commencing on September 30 of the subsequent
fiscal year, which provides for the liquidation of such
liability over 5 years.
(D) Amortization schedules established under this paragraph
shall be set in accordance with generally accepted actuarial
practices and principles based on the dynamic interest rate.
(E) The United States Postal Service shall pay the amounts
determined under this paragraph for deposit in the Fund, with
payments due not later than the date scheduled by the Office.
(3) Notwithstanding any other provision of law, in
computing the amount of any payment under any provision other
than this subsection that is based upon the amount of the
unfunded liability, such payment shall be computed disregarding
that portion of the unfunded liability that the Office
determines will be liquidated by payments under this
subsection.
* * * * * * *
