United States Postal Service: Information on Retirement Plans	 
(31-DEC-01, GAO-02-170).					 
								 
This report responds to a March 2001 letter which identified	 
long-term structural or operational issues that may affect the U.
S. Postal Services's (USPS) ability to provide affordable	 
universal postal service on a break-even basis. One key 	 
operational issue involves the Service's retirement costs and	 
future liabilities. The Service had a net loss of $199 million in
fiscal year 2000 and recently announced a $1.7 billion net loss  
for fiscal year 2001. However, it is unknown what the impact of  
the events of September 11, 2001 and the subsequent delivery of  
anthrax spores through the mail system will have on the volume or
the cost of future mail service. According to USPS officials, its
annual retirement plan costs are projected to increase		 
significantly in the next ten years from $8.5 billion in fiscal  
year 2000 to $14 billion in fiscal year 2010. Contributing to the
Service's increasing annual retirement costs is a mounting debt  
due to pay increases resulting from new labor contracts and	 
annual cost-of-living adjustments for retirees, which were	 
prescribed by law. The Service pays for these costs on an	 
installment basis with related interest charges. Consequently,	 
the Service reported to the Office of Personnel Management (OPM) 
an outstanding liability for future retirement benefits an	 
obligation of $32.2 billion as of September 2000, and anticipates
paying an additional $16.5 billion in future interest charges on 
this retirement liability over a 30-year period. Although not	 
part of the retirement plan, the Post-Retirement Health Benefit  
Program is an additional benefit available to USPS retirees. The 
cost of this benefit was $744 million in fiscal year 2000. When  
this benefit cost is added to the retirement plan it raises the  
total retirement-related cost for fiscal year 2000 is $9.3	 
billion. The Service projects the cost of this additional	 
post-retirement health benefit to be $2 billion in fiscal year	 
2010. When this is added to the $14 billion of retirement plan	 
expenses, the Service may be faced with a total 		 
retirement-related cost of $16 billion in fiscal year 2010.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-170 					        
    ACCNO:   A02615						        
  TITLE:     United States Postal Service: Information on Retirement  
Plans								 
     DATE:   12/31/2001 
  SUBJECT:   Postal service					 
	     Budget obligations 				 
	     Financial analysis 				 
	     Losses						 
	     Future budget projections				 
	     Retirement benefits				 
	     Cost of living					 
	     Cost analysis					 
	     Civil Service Retirement and Disability		 
	     Fund						                                                                 
	     Civil Service Retirement System			 
	     Consumer Price Index for Urban Wage		 
	     Earners and Clerical Workers			 								 
	     Federal Employees Health Benefits			 
	     Program						 								 
	     Federal Employees Retirement System		 
	     Thrift Savings Plan				 
	     USPS Post-Retirement Health Benefit		 
	     Program						 								 
	     CSRS Offset Plan					 
	     Social Security Program				 
	     USPS Integrated Financial Plan			 

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GAO-02-170
     
A

Report to Congressional Requesters

December 2001 UNITED STATES POSTAL SERVICE Information on Retirement Plans

GAO- 02- 170

Letter 1 Results in Brief 2 Background 3 Scope and Methodology 7 Estimated
Future Annual Costs for the Three Plans 8 Costs and Payments of the Three
Individual Plans 10 Funding Status of the Three Plans 14 Portion of
Liability Due to Increases in Employee Pay 17 Portion of Liability
Attributable to Increases in Retiree COLAs 19 An Additional Retirement
Benefit: The Post- Retirement Health Benefit Program 20

Service Faces Major Challenges 21 Questions for Further Consideration and
Analysis 22 Agency Comments 22

Appendixes

Appendix I: USPS Total Annual Retirement Plan Costs 24

Appendix II: USPS Retirement Liability for Employees? Pay Increases 26

Appendix III: USPS Retirement Liability for Cost of Living Adjustments 27

Appendix IV: Comments From the Office of Personnel Management 28 GAO
Comments 30

Tables Table 1: USPS and Employee CSRS Contribution Rates, as a Percentage
of Basic Pay 5

Table 2: USPS and Employee FERS Contribution Rates, as a Percentage of Basic
Pay 6 Table 3: USPS and Employee CSRS Offset Plan Contribution Rates,

as a Percentage of Basic Pay 7 Figures Figure 1: Total Historical and
Projected Annual Retirement Costs 9

Figure 2: Historical and Projected Standard Annual Cost of CSRS 10 Figure 3:
Historical and Projected Total Costs for Pay Increases, COLAs, and Interest
Payments 12

Figure 4: Historical and Projected Cost of FERS 13 Figure 5: Historical and
Projected Annual Cost of the CSRS Offset Plan 14

Figure 6: Changes in Employee Pay Increases and COLA Liability Ending
Balance 15 Figure 7: Comparison of Cumulative Annual Pay Increases and COLA
Liability to Cumulative Payments 16

Figure 8: Retirement Liability Attributable to Increases in Employee Pay 18
Figure 9: Changes to Retirement Liability Due to Increases in

Retiree COLAs 20

Abbreviations

CSRDF Civil Service Retirement and Disability Fund CSRS Civil Service
Retirement System CPI- W Consumer Price Index for Urban Wage Earners and
Clerical Workers

COLA cost- of- living adjustments FEHBP Federal Employees Health Benefit
Program FERS Federal Employees Retirement System OPM Office of Personnel
Management TSP Thrift Savings Plan USPS United States Postal Service

Lett er

December 31, 2001 The Honorable Joseph I. Lieberman Chairman The Honorable
Fred Thompson Ranking Minority Member Committee on Governmental Affairs
United States Senate

The Honorable Daniel K. Akaka Chairman The Honorable Thad Cochran Ranking
Minority Member Subcommittee on International Security, Proliferation,

and Federal Services Committee on Governmental Affairs United States Senate

Your March 21, 2001, letter expressed concern about a number of issues
pertaining to the United States Postal Service?s (USPS) financial condition.
This report addresses one of the issues raised in your letter, namely,

identifying longer- term structural or operational issues that may affect
the Service?s ability to provide affordable universal postal service on a
breakeven basis. One key operational issue involves the Service?s retirement
costs and future liabilities. The Service?s financial outlook has
deteriorated

significantly over the past few years. The Service finished fiscal year 2000
with a $199 million net loss and recently announced a $1.7 billion net loss
for fiscal year 2001. The Service also projects a net loss of $1.35 billion
for fiscal year 2002. 1 However, it is unknown what the impact of the events
of

September 11, 2001 and the subsequent delivery of anthrax spores through the
U. S. mail will have on the volume and cost of future mail service.
Consequently, estimated losses, and other projections in this report, which
we and the Service?s independent auditors have not verified, may be changed
by USPS at a later date.

These current and projected losses are putting pressure on the Service?s
cash flows from operations and its debt situation. One major expense the
Service incurs each year is for retirement benefits, and the Service

1 For fiscal year 2001 USPS reported total revenue of $65. 8 billion, and
projects $68. 8 billion in total revenue for fiscal year 2002.

anticipates significant increases in its retirement benefit expenses in
future years. As agreed with your offices, we are providing information
about the cost and funding requirements of the Service for federal
retirement plans and other retirement benefits, which were 14. 7 percent of
total operating expenses in fiscal year 2000.

Results in Brief According to USPS officials, its annual retirement plan
costs are projected to increase significantly in the next 10 years from a
cost of $8.5 billion in fiscal year 2000 to approximately $14 billion in
fiscal year 2010. This significant increase presents a serious financial
challenge to USPS

management. The projected future cost of retirement benefits could have a
material impact on the Service?s ability to operate on a break- even basis
without significant increases to the rates charged for universal postal
service.

Contributing to the Service?s increasing annual retirement costs is a
mounting debt related to pay increases to employees resulting from new labor
contracts and annual cost- of- living adjustments (COLA) for retirees, which
were prescribed by law. USPS is responsible for paying both of these
additional retirement costs 2 as part of its goal to operate on a
selfsupporting,

break- even basis and cover its expenses almost entirely through postal
revenues, not taxpayer dollars. The Service pays for these costs on an
installment basis with related interest charges, as prescribed by law.
Consequently, the Service reported to the Office of Personnel Management
(OPM) an outstanding liability for future retirement benefits associated
with this obligation of $32.2 billion as of September 30, 2000,

and anticipates paying an additional $16.5 billion in future interest
charges on this retirement liability over a 30- year period. The Service?s
cumulative retirement liability for this obligation has been growing each
year even though the Service has been making significant, annual installment
payments. Although not part of a retirement plan, the Post- Retirement
Health Benefit Program is an additional benefit available to USPS retirees.
The cost of this benefit was $744 million in fiscal year 2000. When this
benefit cost is added 2 According to OPM, the U. S. Treasury makes a special
annual contribution to OPM on behalf of all other federal agencies to cover
increases in accumulated retirement benefits resulting from new or
liberalized benefits, increases in pay, or extension of coverage to new
employee groups.

to the retirement plan cost of $8.5 billion in fiscal year 2000, the total
retirement- related cost for fiscal year 2000 is $9.3 billion. The Service
projects the cost of this additional post- retirement health benefit to be
$2 billion in fiscal year 2010. When this is added to the $14 billion of
retirement plan expenses, the Service may be faced with a total
retirementrelated cost of $16 billion in fiscal year 2010.

USPS and OPM substantially agreed with our report. Matters of emphasis and
points of clarity accompanying USPS? oral comments have been reflected in
this report, as appropriate. OPM?s written response is reprinted in appendix
IV, along with our comments. Background The United States Postal Service
commenced operations on July 1, 1971, in accordance with the provisions of
the Postal Reorganization Act of 1970

(P. L. 91- 375). The Service is an independent establishment of the
executive branch with a goal to operate on a break- even basis and cover its
expenses almost entirely through postal revenues. The equity the U. S.
government held in the former Post Office Department became the initial
capital of USPS (approximately $3 billion), and the U. S. government
remained responsible for all the liabilities attributable to operations of
the former Post Office Department. At inception, the Postal Service did not
have any unpaid liabilities to OPM for retirement benefits. At that time,
USPS

employees participated in the federal Civil Service Retirement System
(CSRS), which provided them the same benefits as other federal employees,
that is, their future retirement benefits would be paid by OPM based on
payroll deductions and USPS contributions under provisions of law governing
CSRS. With over 900,000 employees at the end of fiscal year 2000, USPS has
the largest number of federal civilian employees, and Fortune magazine ranks
it as the second largest employer in the United States. Similar to other

federal career employees, USPS career employees participate in one of three
federal retirement systems primarily administered by OPM:

 the Civil Service Retirement System,

 the Federal Employees Retirement System (FERS), and

 the CSRS Offset Plan. At the end of fiscal year 2000, nearly 786,000 USPS
career employees, or 87 percent of the Service?s employees, were
participating in one of the three federal retirement programs. The remaining
13 percent were casual labor

and transitional employees who do not participate in the federal retirement
plans. Of the total career employees, 263, 383 employees (33.5 percent)
participated in CSRS; 510, 509 employees (65 percent) participated in FERS;

and 12,021 employees (1.5 percent) participated in the CSRS Offset Plan.
Plan 1 - Civil Service

CSRS is administered by OPM, which maintains a Civil Service Retirement
Retirement System and Disability Fund (CSRDF) for federal employees. CSRS is
a defined benefit retirement plan, 3 which provides a basic annuity 4 to
participants. Benefit payments to federal retirees and their survivors
participating in any

of the three retirement plans are made from CSRDF. CSRS covers employees
hired prior to January 1, 1984. Employees hired after December 31, 1983, are
not eligible for coverage in CSRS, but participate in either FERS or the
CSRS Offset Plan. Contributions to the CSRS plan are collected from the
Service and its employees and deposited into OPM?s

CSRDF, according to the proportionate sharing arrangement established in
law. 5 Participating USPS employees contribute in the same proportion and
percentage amounts as most other civilian federal employees. USPS and its
employees also contribute to Medicare at the rate prescribed by law.

3 A defined benefit plan specifies the benefit to be received at retirement
by the employee participant. The plan calculates the benefit based on an
established formula that incorporates the average or final salary and years
of service. 4 An annuity is a stream of equal periodic amounts either paid
to or received from parties according to an agreement specifying the terms
of the payment or receipt. 5 OPM reported in its fiscal year 2000 Actuarial
Valuation of the Civil Service Retirement and Disability Fund that it had an
unfunded actuarial liability of $512. 9 billion because the methods used to
compute the standard annual contributions differ from what is needed to
fully fund the retirement plans over the balance of federal employees?
working careers. This unfunded liability relates to the CSRS plan as a
whole, not FERS or the CSRS Offset Plan,

and is not specific to the Service. It is currently unknown whether OPM?s
unfunded pension liabilities for CSRS could have a future impact on USPS.

Table 1: USPS and Employee CSRS Contribution Rates, as a Percentage of Basic
Pay

Calendar year USPS Employee

1984 through 1998 7. 00% 7. 00% 1999 7. 00% 7. 25% 2000 7. 00% 7. 40%

In addition to the contributions to CSRS discussed above, the Service is
responsible for making additional contributions to CSRDF to fund the future
retirement costs of increases to pay that the Service granted to employees
under terms in new labor contracts and the annual COLAs to retirees, which
were prescribed by law. The provisions for the Service to make these
additional contributions to OPM were included in amendments to the law
governing CSRS and make the funding of USPS retirement plans

different from other federal agencies making annual contributions to the
federal CSRS retirement plan. 6 USPS makes these payments without any
additional contributions from employee pay. Plan 2 - Federal Employees

In the Social Security Amendments of 1983 (P. L. 98- 21), Congress mandated
Retirement System

participation in Social Security by all civilian federal employees initially
hired after December 31, 1983. Because Social Security provides both
retirement and disability benefits, and because enrolling federal workers in
both CSRS and Social Security would have resulted in employee

contributions of more than 13 percent of each worker?s salary, Congress
directed the development of a new federal employee retirement system with
Social Security as the cornerstone. The result of these efforts was FERS,
created by P. L. 99- 335, enacted on June 6, 1986.

6 See 5 U. S. C. sect. 8348 (h) and (m). See also 39 U. S. C. sect. 1005 (d).

All permanent federal employees, including USPS employees, whose initial
federal employment began after December 31, 1983, are covered by FERS, as
are employees who voluntarily switched from CSRS to FERS during specified
?open seasons.? FERS consists of three elements: Social Security, a FERS
annuity (a defined benefit plan), and a Thrift Savings Plan (TSP) (a defined
contribution retirement savings and investment plan 7 ). Table 2: USPS and
Employee FERS Contribution Rates, as a Percentage of Basic

Pay Calendar year USPS Employee

1987 13. 50% 1. 30% 1988 through 1989 12. 86% 0. 94% 1990 13. 00% 0. 80%
1991 through 1994 12. 90% 0. 80% 1995 through 1997 11. 40% 0. 80% 1998 10.
70% 0. 80% 1999 10. 70% 1. 05% 2000 10. 70% 1. 20%

The Service and its employees also contribute to Social Security and
Medicare at the rates prescribed by law. In addition, USPS is required to
contribute to TSP a minimum of 1 percent

per year of basic pay for employees covered by FERS. The Service also
matches voluntary employee contributions up to 3 percent of an employee?s
basic pay, and 50 percent of a contribution from 3 to 5 percent of basic
pay. Plan 3 - CSRS Offset Plan In the legislation that created FERS,
Congress also created the CSRS Offset Plan. Typically, CSRS Offset
retirement applies to employees who had

breaks in service that exceeded 1 year and ended after 1983 and had 5 years
7 A defined contribution plan specifies the amount of the periodic
contribution to be paid by the employer rather than the benefits to be
received by the employee participant, as in a defined benefit plan. A
participant?s benefits are usually based on the amount credited to the
individual?s account. Sponsor contributions are determined by applying a
specified rate against a variable, such as labor hours worked or wages
earned.

of creditable civilian service as of January 1, 1987. CSRS Offset retirement
coverage also applies to employees hired before January 1, 1984, who
acquired CSRS coverage for the first time after that date and had at least 5
years of creditable service by January 1, 1987. Under this plan, each
employee and employer contribute an equal amount into Social Security, as
prescribed by law. In retirement, these employees? CSRS benefits are reduced
(offset) by a portion of their Social Security benefits.

Under the provisions of the CSRS Offset Plan, both USPS and the employee
contribute a percentage of the employee?s basic pay to the CSRS fund, Social
Security, and Medicare at the statutorily prescribed rates.

Table 3: USPS and Employee CSRS Offset Plan Contribution Rates, as a
Percentage of Basic Pay Calendar year USPS Employee

1984 through 1998 7. 00% 0. 80% 1999 7. 00% 1. 05% 2000 7. 00% 1. 20%

Scope and To better understand the full nature and components of the
Service?s Methodology

retirement plans, we (1) interviewed officials at the Service and OPM, (2)
reviewed and analyzed documents, including legislation, funding plans,
budget documents, financial statements, USPS projections, and fiscal impact
statements, and (3) analyzed the future projected costs of these plans. Our
scope did not include identifying ways for the Service to respond to the
current legal framework for funding its retirement liabilities to OPM for
annual increases to CSRS basic pay and retiree COLAs. We conducted our work
from May 2001 through October 2001 in accordance with generally accepted
government auditing standards. We did not independently verify underlying
data. We obtained oral comments from USPS and written comments from OPM on a
draft of this report. OPM?s written comments are reprinted in appendix IV.

Estimated Future The Service projects that the total annual retirement costs
for the three

Annual Costs for the plans, including installment payments for its
additional liability for increases in pay and retiree COLAs under CSRS, will
increase over the next

Three Plans 10 years from $8. 5 billion in fiscal year 2000 to an estimated
$14 billion in fiscal year 2010. The FERS portion of that total, including
Social Security,

is estimated to more than double from $4. 1 billion in fiscal year 2000 to
$9 billion in fiscal year 2010. See figure 1 for the total of all the
retirement plans? historical and projected annual costs, including the
installment payments made by USPS for its additional obligation to OPM for
increases in pay and retiree COLAs under CSRS. See appendix I for the dollar
amounts of each plan?s cost, including payments for increases to CSRS
employees? basic pay and retirees? COLAs. 8 8 We did not review the Postal
Service?s underlying assumptions that would support the projected amounts
for fiscal years 2001 through 2010. Therefore, no comparison could be made
to OPM assumptions normally used for such projections. Such a comparison
would reveal any discrepancies in the method and amounts that may affect the
financial outcome and the reliability of the projections.

Figure 1: Total Historical and Projected Annual Retirement Costs 16,000

(Dollars in millions)

Projected

14,000 12,000 10,000

8,000 6,000 4,000 2,000

0 1972

1974 1976

1978 1980

1982 1984

1986 1988

1990 1992

1994 1996

1998 2000

2002 2004

2006 2008

2010

Annuitant COLA CSRS pay increases Social Security CSRS Offset FERS CSRS

Source: USPS data (not independently verified by GAO).

A discussion of the costs for each of the three individual plans follows.

Costs and Payments of the Three Individual Plans

CSRS The cost of the CSRS retirement plan for fiscal year 2000 was $800
million, excluding the payments made toward the Service?s additional
obligation to OPM. Although total pension costs for all three retirement
plans are

expected to increase significantly, USPS estimates that the cost for the
standard, annual CSRS contributions 9 will decrease in the future as current
employees participating in the plan begin to retire. (See figure 2.)

Figure 2: Historical and Projected Standard Annual Cost of CSRS 1,200

(Dollars in millions)

Projected

1,000 800 600 400 200

0 1972

1974 1976

1978 1980

1982 1984

1986 1988

1990 1992

1994 1996

1998 2000

2002 2004

2006 2008

2010

Source: USPS data (not independently verified by GAO).

9 For purposes of this report, the standard annual contributions to a
retirement plan administered by OPM refer to the employers? contributions,
based on employee pay, as set forth by law.

In addition to the standard, annual contributions to CSRS discussed above,
the Service is responsible for paying additional amounts to CSRDF to fund
the future costs of pay increases that USPS granted to its employees under
terms in new labor contracts and the annual COLAs to retirees, which were
prescribed by law. The provisions for USPS to make these additional
contributions to OPM

make the funding of the Service?s retirement plans for both pay increases
and COLAs different from other federal agencies making annual contributions
to the federal CSRS retirement plan. As described in more detail in a later
section of this report, USPS makes annual installment payments to OPM toward
its additional liability for CSRS employees? pay increases and retirees?
COLAs. The total installment payment for these liabilities in fiscal year
2000 was $3.6 billion, which

included $1. 6 billion in interest charges and $2 billion in principal
payments. The Service estimates that its annual payments for these
liabilities will continue to be significant, increasing steadily through
fiscal year 2010, then decreasing at some later point as the number of
employees,

retirees, and survivors under CSRS decreases. (See figure 3.)

Figure 3: Historical and Projected Total Costs for Pay Increases, COLAs, and
Interest Payments 5,000 (Dollars in millions)

Projected

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000

500 0

1972 1974

1976 1978

1980 1982

1984 1986

1988 1990

1992 1994

1996 1998

2000 2002

2004 2006

2008 2010

Source: USPS data (not independently verified by GAO).

FERS The cost of FERS for fiscal year 2000 was $4.1 billion. The Service
estimates that the annual cost of FERS will more than double to
approximately $9 billion by fiscal year 2010. The large increase in FERS

costs is expected because new employees (those hired after January 1, 1984)
are mostly only eligible to participate in FERS. (See figure 4.) As
employees in CSRS retire, they will be replaced by employees participating
in FERS. The employers? standard, annual contributions toward FERS are
higher than CSRS because FERS contributions are calculated by OPM on a
stronger actuarial basis than CSRS contributions. FERS contributions are on
a ?dynamic? basis, which includes assumptions for future rates of inflation,
future salary increases, and a provision for an assumed

percentage rate of return on plan investments. Together, USPS contributions
and employee withholdings are intended to fully fund the annual pension cost
for employees covered under FERS over the employees? working careers with
the Service.

Figure 4: Historical and Projected Cost of FERS 10,000

(Dollars in millions) 9,000

Projected

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000

0 1987

1988 1989

1990 1991

1992 1993

1994 1995

1996 1997

1998 1999

2000 2001

2002 2003

2004 2005

2006 2007

2008 2009

2010

Source: USPS data (not independently verified by GAO).

CSRS Offset Plan The cost of this plan for fiscal year 2000 was $35 million.
Although total pension costs for USPS are expected to increase
significantly, it estimates

that the standard, annual contributions to the CSRS Offset Plan will
decrease in the future as current employees participating in the plan begin
to retire. (See figure 5.) The plan became effective during fiscal year
1986, but it covered certain employees hired after 1983; consequently,
amounts paid in fiscal years 1986 and 1987 by the Service represent the
retroactive effect of those costs.

Figure 5: Historical and Projected Annual Cost of the CSRS Offset Plan 200
(Dollars in milli ons)

Projected

180 160 140 120 100

80 60 40 20

0 1986

1987 1988

1989 1990

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006

2007 2008

2009 2010

Source: USPS data (not independently verified by GAO).

Funding Status of the The Service pays in full its standard, annual
retirement payments to OPM Three Plans

under provisions of the laws governing all federal employees participating
in CSRS, FERS, and the CSRS Offset Plan. In addition, the Service reported
in its fiscal year 2000 audited financial statements an outstanding
liability for future retirement benefits of $32.2 billion (excluding $16. 5
billion of future related interest charges over 30 years) due to obligations
that made the Service liable for pay increases that employees received under
terms of new labor contracts and for COLAs to retirees, who retired on or
after July 1, 1971, and their survivors, under the CSRS retirement plan.
COLAs

are based on the rate of inflation as measured by the Consumer Price Index
for Urban Wage Earners and Clerical Workers (CPI- W). As prescribed by law,
all CSRS retirees and survivors receive yearly COLAs equal to the annual
percentage change in the CPI- W.

The Service?s total liability balance has generally been increasing each
year, even though it has been making annual installment payments toward this
retirement liability. (See figure 6.)

Figure 6: Changes in Employee Pay Increases and COLA Liability Ending
Balance 35,000 (Dollars in millions)

30,000 25,000 20,000 15,000 10,000

5,000 0

1972 1973

1974 1975

1976 1977

1978 1979

1980 1981

1982 1983

1984 1985

198 6

1987 1988

1989 1990

1991 1992

1993 199419951996

1997 19981999

2000

CSRS COLA

Source: USPS data (not independently verified by GAO).

The increase is occurring because the annual additions to the Service?s
liability have generally been greater than the annual principal payments
made under the installment payment provisions set forth by law. For
instance, the Service?s fiscal year 2000 additional liability was $2.7
billion,

while its required principal installment payment was $2 billion, plus
interest of $1.6 billion. Figure 7 displays how the annual increases in the
liability have cumulatively increased more rapidly than the annual
accumulated principal payments.

Figure 7: Comparison of Cumulative Annual Pay Increases and COLA Liability
to Cumulative Payments 60,000

(Dollars in millions) 50,000 40,000 30,000 20,000 10,000

0 197219731974

1975 1976

1977 1978

19791980 19811982

19831984 1985

1986 19871988

198919901991 1992

1993 1994

1995 1996

19971998 19992000

Cumulative liability Net liability balance Cumulative payments

Source: USPS data (not independently verified by GAO).

Portion of Liability Due By law, whenever USPS increases a CSRS employee?s
pay as a result of new

to Increases in labor union contracts, it is liable to OPM for the present
value of additional future retirement benefits to be paid to the employee
upon retirement as a

Employee Pay result of the pay increase. 10 When an increase in pay is
authorized, OPM

determines the Service?s present value of the retirement liability for the
future retirement benefits that will result from the pay increase. The
Service is required to pay for this incremental liability in 30 equal annual
installments, with interest computed at the rate used in the most recent
valuation of CSRS, with the first payment due at the end of the fiscal year
in which an increase in pay becomes effective. The interest rate for
calculating the present value of the incremental liability and for

determining the amortization payments has been 5 percent for 29 years.
According to OPM?s Office of the Actuary, the law prescribes that the
calculation of the additional annual cost of retirement benefits due to
increases in basic pay be made on the ?static? basis, which assumes no
future inflation and no future general schedule salary increases. OPM?s
Board of Actuaries has recommended a 5- percent discount rate for the
purpose of the static valuation. OPM does not make the calculations on a

?dynamic? basis, which would include an assumed annual rate of inflation,
future salary increases, and a provision for an assumed percentage rate of
return on plan investments.

For fiscal year 1972, the Service?s first fiscal year of operations, OPM
determined that the additional liability for basic pay increases was
approximately $1 billion. Under the 30- year installment arrangement, the

Service paid $63 million toward that additional cost for fiscal year 1972,
leaving an unpaid liability balance of $954 million to be paid for future
years. In each subsequent year, additional liabilities were accrued as a

result of pay increases in each of those years. Because the liabilities
being added each year are also being paid off in 30- year installments, the
overall liability for unpaid pension costs has grown dramatically, even
though the Service has been making annual payments on the accumulating
balance. Figure 8 shows the growth in the liability balance attributable to
increases in CSRS employee pay. For fiscal year 1972 through fiscal year
1981, the

liability balance grew from approximately $1 billion to $10.3 billion.
During the next 10 fiscal years (1982 through 1991), the balance grew to

10 See 5 U. S. C. sect. 8348 (h).

$21.8 billion (a 112- percent increase), and in the latest 9 fiscal years
(1992 through 2000), it grew to $25. 9 billion (a 19- percent increase). As
more of the current CSRS employees eligible for basic pay increases retire,
future increases in the liability balance should level off and, eventually,
the

balance due for pay increases should start to decrease. However, this
decrease will likely be accompanied by an increase in the growth of retiree
COLA liabilities until the CSRS retiree group begins to diminish.

Figure 8: Retirement Liability Attributable to Increases in Employee Pay
30,000

(Dollars in millions) 25,000 20,000 15,000 10,000

5,000 0

197 21973

197 4

1975 1976

1977 1978

1979198 0

1981 1982

198 3198

4 1985

198 6198

7198 8

198 9199

0199 1

1992 199

3 1994

199519961997 199

8 1999200

0

Source: USPS data (not independently verified by GAO).

In the 29 years from fiscal years 1972 through 2000, the OPM assessments for
pay increases totaled $42. 1 billion. During that same period, the Service
paid $16.2 billion in principal payments toward that liability, plus
interest of $21.6 billion, for total payments to OPM of $37. 8 billion. As
of September 30, 2000, the Service owed $25. 9 billion in principal, and its

annual principal payments have generally been less than the additional
liabilities assessed each year. Because the Service is making principal
payments in amounts less than the new liability added each year, the unpaid
balance is growing, as is the interest charged annually on the unpaid
balance. See appendix II for the annual liabilities added by OPM to the

Service?s balance for CSRS pay increases and the annual installment payments
made by the Service to OPM to reduce the liability balance. Portion of
Liability

By law, the Service is also liable for its share of the COLAs granted to
Attributable to retirees who retired after July 1, 1971, and their
survivors. As prescribed by law, CSRS retirees and survivors receive yearly
COLAs. Each year, OPM Increases in Retiree determines the estimated increase
in the Service?s liability for the COLA COLAs increase and establishes the
amount of the installment payments to be made over a 15- year period, plus
interest at 5 percent per year.

Since fiscal year 1990, the Service has recorded a total liability of $11.1
billion for retiree COLA increases. Of that liability amount, the Service
has paid OPM $4.8 billion, plus interest of $2. 3 billion for a total of $7.
1 billion. Because the Service is only required to pays a portion of the
annual increase of this liability, its payments have generally been less
than the additional liabilities added each year, and the balance, as well as
the interest on the unpaid balance, continues to grow. Even with projections
of

low inflation, the Service expects the new annual liability amounts to be
larger than its annual payments on the liability because the retiree/
survivor population will increase. Thus, the total liability for retiree
COLAs is expected to continue to grow over time until most of the CSRS
annuitants are deceased. Figure 9 depicts the change in the liability
amount. Also, see appendix III for the annual liabilities added by OPM to
the Service?s liability balance for COLA increases and the annual
installment payments made by the Service to OPM toward reducing the balance.

Figure 9: Changes to Retirement Liability Due to Increases in Retiree COLAs
7,000

(Dollars in mil lions) 6,000 5,000 4,000 3,000 2,000 1,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: USPS data (not independently verified by GAO).

An Additional Although not part of a retirement plan, the Post- Retirement
Health Benefit Retirement Benefit: Program is an additional benefit
available to USPS retirees. The postretirement

health benefit represents a significant cost, which is also The Post-
Retirement expected to increase in future years. USPS estimates that the
annual cost Health Benefit

of this benefit will increase from $744 million in fiscal year 2000 to about
Program $2 billion in fiscal year 2010. In the Service?s Integrated
Financial Plan for Fiscal Year 2002, health care costs are projected to
increase by 10 percent; however, subsequent to that projection it was
reported that the average premiums for employees will rise an average 13
percent in fiscal year 2002. These large, unexpected increases in health
care costs make projections of

future costs very uncertain.

USPS is required to pay the employer?s share of health insurance premiums
incurred through participation in the Federal Employees Health Benefit
Program (FEHBP) for all employees who retired on or after July 1, 1971, and
their survivors. 11 The annual cost for this program is included in the
Service?s Total Compensation and Benefits expense reported in its annual
financial statements and disclosed separately in the footnotes to those
statements.

When the cost of the post- retirement health benefits of $744 million for
fiscal year 2000 is added to the Service?s total retirement costs of $8. 5
billion for fiscal year 2000, the total for retirement- related costs
becomes $9. 3 billion in fiscal year 2000. USPS projects that in fiscal year

2010, these total retirement- related costs will increase to $2 billion and
$14 billion, respectively, for a total of $16 billion. The Service also
projected that these costs, in fiscal years 2001 and 2002, would increase to

$9. 9 billion and $10.3 billion, an increase of $600 million and $400
million over the preceding year for each of those years, respectively. These
increases exert upward pressure on postal rates and constrict cash flows

needed for operating purposes. Service Faces Major Many stakeholders are
calling for a structural transformation of the Service Challenges

because of the major financial, operational, human capital, and market
competition challenges confronting it. Accordingly, in April 4, 2001,
testimony 12 before the House Committee on Government Reform, the
Comptroller General announced that we had placed the Service?s
transformational efforts and long- term outlook on our high- risk list. This
focused needed attention on the challenges facing the Service. The Service
responded by establishing a Transformation Plan Task Force on July 25, 2001.
The task force will identify options to transform the Service so that it
will be able to resolve the many challenges it faces in the future.

11 See Budget Reconciliation Act of 1990 (P. L. 101- 508). 12 See
Transformation Challenges Present Significant Risks (GAO- 01- 598T, April 4,
2001).

Questions for Further As the Transformation Plan Task Force examines the
impact of these

Consideration and retirement costs and liabilities on the Service?s overall
financial condition and future operations, there are key questions that need
to be addressed. Analysis

Once the task force has analyzed these questions in detail, it can weigh
various options and their long- term implications for the Service. Some of
the specific questions that we see as being important include the following.

 What is the significance of USPS? growing retirement- related obligations
on various options that will be considered as part of its transformation?
How would issues relating to retirement- related obligations be addressed if
a specific option were to be chosen, such as transforming USPS into a
government corporation or a publicly owned company?

 What is the impact of USPS retirement- related obligations, including
retiree health care costs, on its overall financial condition, equity
position, cash flows from operations, and ability to fund capital outlays
that depend on positive cash flows? Also, what is the impact of the
Service?s retirement- related obligations on the scope and quality of postal
services that depend on the use of funds for continued modernization and
maintenance of capital assets?

 What is the potential impact of growing retirement- related expenses on
postal rates? Could this impact affect USPS? ability to be successful in a
marketplace with increasing competition from electronic alternatives,
private delivery companies, and foreign postal administrations?

 Under current law, is USPS fully covering OPM?s future retirement costs
for USPS employees, or is USPS paying more than is needed to cover OPM?s
future payments to USPS retirees? Has OPM estimated the amount of future
obligations to USPS retirees, and has OPM determined

that USPS has contributed a sufficient amount, or, possibly, more than
enough, toward plan assets that will pay USPS retirees? Agency Comments USPS
provided oral comments that substantially agreed with our report. Matters of
emphasis and points of clarity recommended by USPS have been

reflected in this report, as appropriate. OPM provided written comments that
are reprinted in appendix IV, along with our comments. We are sending copies
of this report to the Chairmen and Ranking Minority Members of the House and
Senate Committees on Appropriations, the Postmaster General, the Chairman of
the Postal Board of Governors, the Chairman of the Postal Rate Commission,
the Chief Financial Officer of the

U. S. Postal Service, the Director of the Office of Personnel Management,
and interested congressional committees. We will also provide copies to
others on request. If you have any questions on this report, please contact
me at (202) 5122600 or Jeanette M. Franzel, Acting Director, at (202) 512-
9471. We can also be reached by e- mail at steinhoffj@ gao. gov or franzelj@
gao. gov, respectively. Joseph Applebaum, Senior Actuary, Michael Fischetti,
Meg Mills, John Sawyer, and Fred Evans were key contributors to this report.

Jeffrey C. Steinhoff Managing Director Financial Management and Assurance

Appendi Appendi xes x I

USPS Total Annual Retirement Plan Costs Dollars in millions

FERS (including

CSRS Social

CSRS pay Annuitant

Fiscal Year CSRS TSP) Offset Security increases COLA Total

1972 $446 - - $ 13 $ 63 - $ 522

1973 452 - - 12 115 - 579

1974 517 - - 14 176 - 707

1975 545 - - 14 207 - 766

1976 617 - - 17 385 - 1,019

1977 627 - - 16 507 - 1,150

1978 655 - - 15 470 - 1,140

1979 736 - - 16 658 - 1,410

1980 782 - - 16 697 - 1,495

1981 801 - - 17 722 - 1,540

1982 868 - - 16 850 - 1,734

1983 887 - - 18 967 - 1,872

1984 897 - - 46 917 - 1,860

1985 1,008 - - 168 1,355 - 2,531

1986 1,005 - $187 277 1,353 - 2,822

1987 982 $ 447 76 343 1,353 - 3,201

1988 996 792 20 426 1,618 - 3,852

1989 977 927 27 523 1,618 - 4,072

1990 940 1, 064 28 607 1,659 - 4,298

1991 917 1, 222 29 695 1,775 $420 5,058

1992 942 1, 337 31 742 1,896 490 5,438

1993 828 1, 397 31 854 1,938 551 5,599

1994 830 1, 570 34 950 1,996 620 6,000

1995 843 1, 670 34 1,008 2,132 689 6,376

1996 877 1, 962 36 1,082 2,361 750 7,068

1997 870 2, 142 36 1,162 2,396 817 7,423

1998 849 2, 248 36 1,241 2,448 859 7,681

1999 816 2, 505 35 1,337 2,505 903 8,101

2000 795 2, 694 36 1,427 2,597 980 8,529

2001 771 2, 918 34 1,531 2,433 1, 398 9,085

2002 749 3, 160 33 1,643 2,407 1, 366 9,358

2003 727 3, 425 32 1,762 2,447 1, 425 9,818

2004 705 3, 713 31 1,892 2,449 1, 509 10, 299

(Continued From Previous Page)

Dollars in millions

FERS (including

CSRS Social

CSRS pay Annuitant

Fiscal Year CSRS TSP) Offset Security increases COLA Total

2005 684 4, 027 30 2,031 2,515 1, 577 10, 864

2006 664 4, 369 29 2,179 2,372 1, 647 11, 260

2007 644 4, 743 28 2,338 2,424 1, 722 11, 899

2008 625 5, 150 28 2,509 2,476 1, 833 12, 621

2009 607 5, 595 27 2,693 2,370 1, 982 13, 274

2010 589 6, 080 26 2,889 2,282 2, 164 14, 030

Source: USPS data (not independently verified by GAO).

USPS Retirement Liability for Employees? Pay

Appendi x II

Increases Dollars in thousands

Payments Additional

Ending Year liability Principal Interest Total balance

1972 $ 1,016,736 $ 62, 991 $ 62, 991 $ 953, 745

1973 677, 824 57, 298 $57,293 114,591 1, 574, 271

1974 1,117,000 95, 471 80, 814 176,285 2, 595, 800

1975 536, 784 77, 651 129,790 207,441 3, 054, 933

1976 2,880,330 232,294 152, 747 385,041 5, 702, 969

1977 1,038,661 159,544 347, 684 507,228 6, 582, 086

1978 809,164 148,088 322, 319 470,407 7, 243, 162

1979 2,637,358 308,707 349, 086 657,793 9, 571, 813

1980 632,661 234,367 462, 712 697,079 9, 970, 107

1981 522,697 228,686 493, 527 722,213 10, 264, 118

1982 1,825,052 341,930 508, 269 850,199 11, 747, 240

1983 1,207,506 346,436 620, 539 966,975 12, 608, 310

1984 362,692 291,969 625, 438 917,407 12, 679, 033

1985 5,624,794 697,660 657, 741 1,355,401 17, 606, 167

1986 945,930 472,748 880, 308 1,353,056 18, 079, 349

1987 803,332 449,089 903, 967 1,353,056 18, 433, 592

1988 2,653,868 697,467 920, 508 1,617,975 20, 389, 993

1989 811,411 598,012 1,019, 500 1,617,512 20, 603, 392

1990 661,998 628,355 1,030, 170 1,658,525 20, 637, 035

1991 1,882,813 743,320 1,031, 852 1,775,172 21, 776, 528

1992 1,900,849 804,504 1,091, 282 1,895,786 22, 872, 873

1993 731,492 794,612 1,143, 644 1,938,256 22, 809, 753

1994 930,608 855,421 1,140, 489 1,995,910 22, 884, 940

1995 2,198,945 986,887 1,145, 346 2,132,233 24, 096, 998

1996 3,696,728 1, 156,628 1,204, 853 2,361,481 26, 637, 098

1997 559,636 1, 064,074 1,331, 855 2,395,929 26, 132, 660

1998 835,936 1, 141,085 1,306, 634 2,447,719 25, 827, 511

1999 931,623 1, 214,016 1,291, 374 2,505,390 25, 545, 118

2000 1,639,396 1, 327,314 1,270, 150 2,597,464 26, 139, 593

Source: USPS data (not independently verified by GAO).

USPS Retirement Liability for Cost of Living

Appendi x II I Adjustments Dollars in thousands

Payments Additional

Ending Year liability Principal Interest Total balance

1990 $486,470 - - - $486, 470

1991 2,885,841 $306,225 $114, 740 $420,965 3, 066, 086

1992 831, 703 337, 473 152,872 490,345 3, 560, 316

1993 729, 650 372, 711 178,017 550,728 3, 917, 255

1994 868, 695 424, 171 195,864 620,035 4, 361, 779

1995 971, 513 470, 585 218,093 688,678 4, 862, 707

1996 951, 246 506, 725 243,138 749,863 5, 307, 228

1997 1, 041, 176 551, 926 265,364 817,290 5, 796, 478

1998 789, 604 569, 316 289,824 859,140 6, 016, 766

1999 537, 246 601, 895 300,839 902,734 5, 952, 117

2000 1, 056, 225 682, 632 297,593 980,225 6, 325, 710

Source: USPS data (not independently verified by GAO).

Comments From the Office of Personnel

Appendi x V I Management See comment 1.

See comment 2. See comment 3.

The following are GAO?s comments on the Office of Personnel Management?s
letter dated November 23, 2001.

GAO Comments 1. The ?fine tuning? items were not included in the report
because the amounts were paid to OPM by fiscal year 1998 and are no longer
outstanding liabilities of the Postal Service.

2. Our report has been revised to reflect that the Board of Actuaries of
CSRS determined the 5- percent discount rate used in the amortization tables
to calculate payments to be made to OPM. 3. Our Senior Actuary agreed with
the OPM comment; therefore, we have deleted the sentence from our report.

(194057) Lett er

a

GAO United States General Accounting Office

Page i GAO- 02- 170 United States Postal Service

Contents

Contents

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Appendix I

Appendix I USPS Total Annual Retirement Plan Costs

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Appendix II

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Appendix III

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Appendix IV

Appendix IV Comments From the Office of Personnel Management

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Appendix IV Comments From the Office of Personnel Management

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