Review of the Office of Personnel Management's Analysis of the	 
United States Postal Service's Funding of Civil Service 	 
Retirement System Costs (31-JAN-03, GAO-03-448R).		 
                                                                 
In our December 2001 report, "United States Postal Service:	 
Information on Retirement Plans" (GAO-02-170), we raised the	 
question of whether the United States Postal Service (USPS) was  
paying more or less than appropriate to cover benefit payments	 
for the Civil Service Retirement System (CSRS) for which it is	 
responsible. In May 2002, we asked the Office of Personnel	 
Management (OPM) to calculate a hypothetical "Postal Fund"	 
balance and projected funding status by estimating the present	 
value (PV) of the future benefits USPS is required to fund for	 
CSRS retirees and survivors under current law and extent to which
prior and projected future contributions required by current law 
would fund these benefits. OPM released its analysis in November 
2002, indicating that, based on current contributions, USPS's	 
CSRS obligations would be significantly overfunded in the future.
The Administration has proposed legislation that addresses this  
overfunding. In this correspondence we will (1) review OPM's	 
analysis for reasonableness and (2) analyze the legislative	 
proposal to identify any issues needing further consideration.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-448R					        
    ACCNO:   A06023						        
  TITLE:     Review of the Office of Personnel Management's Analysis  
of the United States Postal Service's Funding of Civil Service	 
Retirement System Costs 					 
     DATE:   01/31/2003 
  SUBJECT:   Future budget projections				 
	     Proposed legislation				 
	     Retirement benefits				 
	     Economic analysis					 
	     Funds management					 
	     Budget administration				 
	     Civil Service Retirement System			 

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GAO-03-448R

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

United States General Accounting Office Washington, DC 20548 Comptroller
General

of the United States

January 31, 2003 Congressional Requesters Subject: Review of the Office of
Personnel Management*s Analysis of the United

States Postal Service*s Funding of Civil Service Retirement System Costs
In our December 2001 report, United States Postal Service: Information on
Retirement Plans (GAO- 02- 170), we raised the question of whether the
United States Postal Service (USPS) was paying more or less than
appropriate to cover benefit payments for the Civil Service Retirement
System (CSRS) for which it is responsible. In May 2002, we asked the
Office of Personnel Management (OPM) to calculate a hypothetical *Postal
Fund* balance and projected funding status by estimating the

present value (PV) of the future benefits USPS is required to fund for
CSRS retirees and survivors under current law and

extent to which prior and projected future contributions required by
current law would fund these benefits.

OPM released its analysis in November 2002, indicating that, based on
current contributions, USPS*s CSRS obligations would be significantly
overfunded in the future. 1 The Administration has proposed legislation
that addresses this overfunding. Given the significance of this issue, you
asked us to (1) review OPM*s analysis for reasonableness and (2) analyze
the legislative proposal to identify any issues needing further
consideration. This report provides a summary of our briefing on January
30, 2003, and the attached slides highlight the results of our work and
the information we provided.

Results in Brief Review of OPM*s Analysis. To perform its analysis, OPM
determined the net assets (USPS agency and employee contributions plus
earnings benefits and administrative expenses) available in the
hypothetical *Postal Fund* as of September 30, 2002. OPM then calculated
the PV of future benefits payable and future contributions to determine
the extent to which *Postal Fund* net assets and required future
contributions would fund the projected remaining benefits to be paid. Its
analysis concluded that as of September 30, 2002

1 OPM*s projections are made through 2071, the estimated date at which the
last remaining USPS CSRS annuitant would receive a benefit payment.

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs Page 2

$20.5 billion in CSRS benefits for USPS employees and annuitants remained
to be funded and

contribution rates set in current law would ultimately result in an
overfunding of the amount needed to cover CSRS benefit obligations
attributable to USPS annuitants by $71.0 billion.

OPM included the cost of military service for USPS employees first hired
into civilian service after June 30, 1971, and a portion of the costs for
employees hired before July 1, 1971* the effective date of the Postal
Reorganization Act* in its reconstruction of the *Postal Fund* and
calculations of the PV of future benefits* even though under current law
the Department of the Treasury is responsible for funding these costs.
Applying current law regarding military service funding to OPM*s analysis,
and making other adjustments discussed below, results in

a current overfunding of $4.1 billion versus the $20.5 billion yet to be
funded according to OPM*s initial analysis and

a projected overfunding of $103.1 billion versus the $71.0 billion amount
OPM initially projected.

We found a similar issue regarding OPM*s treatment of certain spousal
benefit payments and payments for CSRS offset benefits. OPM assumed in its
analysis that USPS was responsible for these costs even though under
current law Treasury funds them. OPM has not analyzed the feasibility of
determining the effect of these issues on its calculations, but believes
the amounts would be insignificant.

We also found that in its analysis OPM gave credit to the *Postal Fund*
for a $285 million special payment USPS made with appropriations provided
to it in fiscal year 1975 to fund increases in pension liabilities that
resulted from pay increases in 1972 and 1973. The effect of this was to
increase the *Postal Fund* balance by about $2.9 billion, as of September
30, 2002, including compound interest.

In reviewing OPM*s calculation, we also identified several adjustments
that would improve its accuracy and collectively resulted in an increase
of about $5 billion to the *Postal Fund* net assets. These include

changing the basis of accounting for employee withholdings and USPS
contributions from cash to accrual,

reflecting certain employee voluntary and civilian service deposits and
redeposits in the analysis that were not in OPM*s initial analysis,

using actual data on 30- year and 15- year payments by USPS rather than
the estimated payments used in OPM*s initial analysis, and

making other miscellaneous adjustments.

Analysis of Proposed Legislation. As a result of OPM*s analysis, the
Administration has proposed legislation that reduces the payments USPS
would be required to make for CSRS benefits from approximately $4.7
billion annually to an estimated $1.8 billion in fiscal year 2003, a
savings of $2.9 billion. Several issues, some of which were discussed
above, could affect the amount of annual payments

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs Page 3 USPS would
be required to make under the proposed legislation. These issues are as

follows:

Treatment of military service costs* The legislative proposal would make
USPS responsible for military service costs, which decreases the projected
overfunding by almost $28 billion. The Congress needs to decide whether
USPS should be responsible for any or all of these costs. In this regard,
one possible alternative approach would be to require USPS to fund only
the military service of employees hired after June 30, 1971. This would
result in $16.6 billion yet to be funded by USPS and its employees (versus
$23.7 billion under the legislative proposal, as adjusted) and a projected
overfunding of $0.8 billion (versus an underfunding of $6.3 billion under
the legislative proposal, as adjusted).

Treatment of payments made with appropriated funds* OPM*s analysis
credited the *Postal Fund* with a $285 million special payment USPS made
in fiscal year 1975 with appropriated funds. The effect of this credit was
to increase the *Postal Fund* balance by $2.9 billion, as of September 30,
2002, including compound interest. The legislative proposal does not
address the treatment of these appropriated funds.

Treatment of underfunded or overfunded amounts and future refinements* The
legislative proposal generally calls for a 40- year amortization period
for any unfunded liability. This approach is consistent with the
Administration*s proposal for CSRS liabilities for non- USPS employees.
However, a shorter amortization period that more reasonably reflects the
average remaining working lives of CSRS employees may be more appropriate.
Additionally, the proposed legislation does not specify how to treat an
overfunded situation, or how future refinements in the calculation and
variances from projected versus actual experience that affect the over- or
underfunded position would be addressed.

Choice of demographic assumptions* Using CSRS- wide versus USPSspecific
demographics affects the funding status. For example, using CSRS
demographics instead of USPS- specific demographic assumptions under the
legislative proposal would decrease the overfunded amount by approximately
$1.5 billion. OPM*s projections will need to be adjusted based on the
decisions made regarding

these issues. In addition, USPS still faces substantial obligations
related to postretirement health benefits (estimated at $40 billion to $50
billion) as well as significant outstanding debt to the federal government
($ 11.1 billion as of September

30, 2002) that should be considered in determining the treatment of the
projected overfunding of CSRS obligations. The Congress needs to decide
(1) whether some or all of the difference in current versus proposed
future contributions should be used to reduce outstanding debt to the
federal government or address USPS*s unfunded postretirement health
obligations, and (2) what, if any, other restrictions should be placed on
the use of these funds.

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs Page 4

Scope and Methodology To achieve our objectives, we performed various
procedures to assess OPM*s analysis and the legislative proposal. These
procedures are described in detail in appendix III of the attached slides.
The procedures we performed do not constitute a financial audit or
actuarial review of OPM*s projections, and we are not expressing an
opinion on the material accuracy of the calculations contained herein.
Rather, our procedures focused on determining the reasonableness of OPM*s
methods, assumptions, and data. Thus, while we found significant issues
pertaining to OPM*s projections, there may be other issues that did not
come to our attention. We performed our work from November 2002 through
January 2003, in accordance with generally accepted government auditing
standards.

Agency Comments We discussed the findings of these briefing slides with
OPM officials, including the Director, Office of Actuaries, who generally
agreed with the facts presented. Based on their consideration of these
slides during our meeting, they provided the following observations:

The primary difference between the $103.1 billion potential overfunding
and the 71.0 billion originally reported by OPM is due to the treatment of
military service.

Although under current law governing funding of CSRS the USPS does not pay
for the cost of benefits attributable to military service, the
Administration*s proposed legislation is intended to replace the current
funding methodology with a new approach modeled after the funding of FERS.

Under the Administration*s proposal, the USPS would be responsible for the
cost of military service. The Administration believes that charging the
USPS is appropriate because under its proposal the *Postal Fund* would be
created with a proportional share of the excess investment returns earned
by the CSRDF over the past 30 years.

____________________________________ We are sending copies of this report
to the Director of OPM, the Postmaster General, the Director of OMB, the
Secretary of the Treasury, and other interested parties. The report is
also available at no charge on GAO*s home page at http:// www. gao. gov.
If you have questions about this report, please contact Linda Calbom,
Director, Financial Management and Assurance, at (202) 512- 8341, or
Robert Martin, Assistant Director, at (202) 512- 6131. You may also reach
them by E- mail at calboml@ gao. gov

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs Page 5 or martinr@
gao. gov. Other key contributors to this assignment were Kent Bowden,

Margaret Cigno, Fred Evans, Darren Goode, and Scott McNulty. David M.
Walker Comptroller General of the United States

Enclosure

GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs Page 6

List of Requesters

The Honorable Susan M. Collins Chairman Senate Committee on Governmental
Affairs The Honorable Thomas R. Carper United States Senate

The Honorable Tom Davis Chairman House Committee on Government Reform

The Honorable Ernest J. Istook Chairman Subcommittee on Treasury, Postal
Service and General Government House Committee on Appropriations

The Honorable Dan Burton The Honorable Steny Hoyer The Honorable John M.
McHugh The Honorable Dave Weldon House of Representatives

Enclosure Page 7 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

1

United States Postal Service Review of the Office of Personnel
Management*s Analysis of the United States Postal Service*s Funding

of Civil Service Retirement System Costs

Briefing for Congressional Requesters January 30, 2003

Enclosure Page 8 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

2 Contents

* Introduction  Objectives  Results in Brief  Scope and Methodology 
Background  Assessment of OPM*s Analysis  Analysis of the Legislative
Proposal  Conclusions  Agency Comments  Appendix I - Key Legislation
Affecting USPS*s Funding of

CSRS Costs  Appendix II - Data Limitations and Use of Estimation Methods
 Appendix III - Detailed Scope and Methodology

Enclosure Page 9 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

3 Introduction

Introduction

 In our December 2001 report, United States Postal Service: Information
on Retirement Plans (GAO- 02- 170), we raised the question of whether the
United States Postal Service (USPS) is paying more or less than needed to
cover future Civil Service Retirement System (CSRS) benefit payments.

 In May 2002, we asked the Office of Personnel Management (OPM) to, in
effect, calculate a hypothetical *Postal Fund* balance and projected
funding status by estimating the

 present value (PV) of the future benefits to CSRS retirees and survivors
that USPS is required to fund, and

 extent to which prior and projected future contributions required by
current law are estimated to fund these benefits.

Enclosure Page 10 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

4 Objectives

Objectives

Our objectives were to  review OPM*s analysis released in November 2002
for

reasonableness, and  analyze the legislative proposal and identify any
issues

needing further consideration.

Enclosure Page 11 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

5 Results in Brief

Results in Brief

 In November 2002, OPM reported that, based on the current level of
contributions, USPS would significantly overfund the amount needed in the
future to cover CSRS benefit obligations attributable to its annuitants.
We found that the amount of overfunding is considerably greater than OPM
initially calculated and reported, due primarily to OPM*s

treatment of military service costs in its analysis that differs from how
military service is funded under current law.

 While the Administration*s legislative proposal submitted by OPM
addresses the projected overfunding by reducing the annual payments USPS
makes to fund CSRS benefits, a number of issues, including treatment of
military service costs and USPS past payments made with appropriated
funds, could affect the projected and current CSRS funding

status.

Enclosure Page 12 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

6 Results in Brief

 OPM*s published projections will need to be adjusted based on decisions
regarding these issues, as well as refinements resulting from improved
data and methodologies. In addition, USPS still faces substantial
obligations related to postretirement health benefits for its present and
past

employees, as well as significant outstanding debt, that should be
considered in determining the treatment of the projected overfunding of
CSRS obligations.

Enclosure Page 13 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

7 Scope and Methodology

Scope and Methodology

 To achieve our objectives, we performed various procedures to assess
OPM*s analysis and the legislative proposal. These procedures are
described in detail in appendix III.  These procedures do not constitute
a financial audit or

actuarial review of OPM*s projections, and we are not expressing an
opinion on the material accuracy of the calculations contained herein.
Instead, we focused on the reasonableness of OPM*s methods, assumptions,
and data.

Enclosure Page 14 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

8 Scope and Methodology

 Thus, while we found several significant issues pertaining to OPM*s
reconstruction of the *Postal Fund* and projections and proposed various
adjustments, there may be other issues that would significantly impact
OPM*s projections that did not come to our attention in the course of this
review.

See appendix II for a description of known data limitations and OPM*s
estimation methods.  We performed our work from November 2002 through

January 2003, in accordance with generally accepted government auditing
standards.

Enclosure Page 15 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

9 Background

Background

 USPS commenced operations on July 1, 1971 in accordance with the
provisions of the Postal Reorganization Act of 1970 (P. L. 91- 375). 
USPS is an independent establishment of the executive

branch with a goal to operate on a break- even basis over time and cover
its expenses almost entirely through postal revenues.

 At inception, USPS did not have any unpaid liabilities to OPM for
retirement benefits. The federal government remained responsible for all
the liabilities attributable to the operations of the former Post Office
Department, including any unfunded retirement benefits.

Enclosure Page 16 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

10 Background

 USPS currently makes the following contributions to the Civil Service
Retirement and Disability Fund (CSRDF):  agency matching contributions,
which for most

employees is 7.0 percent of basic pay,  payments to fund the increase in
the present value of

future retirement benefits resulting from general pay increases (in 30
equal annual installments with interest at 5 percent), and  payments to
fund the increase in the present value of

future retirement benefits resulting from the granting of annuitant cost-
of- living adjustments - COLAs (in 15 equal annual installments with
interest at 5 percent).

Enclosure Page 17 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

11 Background

 The laws enacted over time creating the current approach to funding
USPS*s CSRS costs do not require the calculation of a USPS- specific
liability and do not create a *Postal Fund* within the CSRDF.

 Therefore, current law does not require a calculation of the funding
status of USPS*s benefit obligations. OPM performed these calculations for
the purpose of analyzing the extent to which USPS has funded the

CSRS benefits of its employees and annuitants.  Thus, investment and
actuarial risk * and any resulting

gains or losses that could reduce or increase actual retirement costs *
are currently borne by the the federal government.  See appendix I for a
list of the key laws and a short description of each.

Enclosure Page 18 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

12 Assessment of OPM*s Analysis

Assessment of OPM*s Analysis

 In performing its analysis, OPM  determined the *net assets* (USPS
agency and employee contributions plus net earnings on the fund

balance less benefits and administrative expenses) available in the
*Postal Fund* as of September 30, 2002,

 calculated the present value (PV) as of September 30, 2002 of

 future benefits payable to current employees and annuitants, and

 all required future contributions, and  determined the extent to which
*Postal Fund* net assets

and required projected future contributions would fund projected future
benefits to be paid.

Enclosure Page 19 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

13 Assessment of OPM*s Analysis

 OPM*s analysis concluded that  $20. 5 billion in future CSRS benefits
for USPS

employees and annuitants remained to be funded as of September 30, 2002,
and  USPS contribution rates set in current law would ultimately result
in an overfunding of the amount needed to cover CSRS benefit obligations
attributable to USPS

annuitants by $71.0 billion as of September 30, 2002.* * OPM*s analysis
was projected through 2071, the estimated date at which the last remaining
USPS CSRS annuitant would receive a benefit payment.

Enclosure Page 20 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

14 Assessment of OPM*s Analysis

 OPM included the cost of military service for USPS employees first hired
into civilian service after June 30, 1971 and a portion of the costs for
those employees hired before July 1, 1971 in its reconstruction of the
*Postal Fund* and calculations of the actuarial present value of future
benefits -

even though under current law Treasury is responsible for funding these
costs.  Applying current law regarding military service funding, and

making other adjustments (discussed in subsequent slides), to OPM*s
analysis of future benefits to be funded results in  a current
overfunding of $4. 1 billion (versus $20. 5 billion

yet to be paid per OPM*s initial analysis), and  a projected ultimate
overfunding of $103.1 billion (versus

$71.0 billion per OPM*s initial analysis).

Enclosure Page 21 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

15 Assessment of OPM*s Analysis

 We also found that, similar to the military service issue, OPM*s initial
analysis assumed that USPS had been responsible for the cost of certain
spousal benefit payments

and CSRS offset benefits that, under current law, Treasury is responsible
for funding.  OPM has not analyzed the feasibility of determining the

impact of these issues on its calculations, but believes the amounts would
be insignificant.

Enclosure Page 22 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

16 Assessment of OPM*s Analysis

 In addition, we found that in its analysis OPM credited the *Postal
Fund* for a special payment USPS made with $285 million in appropriations
it received in fiscal year 1975.

 Congress provided these appropriations to fund increases in pension
liabilities resulting from general pay increases that USPS negotiated for
in 1972 and 1973.  This special contribution, including compound
interest,

increases OPM*s calculation of the *Postal Fund* balance by $2. 9 billion
as of September 30, 2002.

Enclosure Page 23 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

17 Assessment of OPM*s Analysis

 In reviewing OPM*s calculation, we also identified several adjustments
that would improve its accuracy and would collectively result in an
increase to the *Postal Fund* net assets of about $5.0 billion. Those
adjustments, including interest, relate to

 changing the basis of accounting for employee withholdings and USPS
contributions from cash to accrual and other corrections ($ 2.2 billion),
 certain employee voluntary and civilian service deposits

and redeposits that were not reflected in OPM*s initial analysis ($ 1.8
billion),  using actual data on 30- year and 15- year payments by

USPS rather than estimated payments in OPM*s initial analysis ($ 0.5
billion), and  other miscellaneous adjustments, net ($ 0.5 billion).

Enclosure Page 24 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

18 Assessment of OPM*s Analysis

 A comparison of OPM*s calculation and a recalculation applying current
law regarding military service funding, eliminating the credit for the
special appropriation, and making other adjustments is shown in table 1.

 The special appropriation impact is shown separately in the table,
whereas the following are factored into the existing line items:

 adjustments for the military service issue,  addition of future
employee military service deposits that were not included in OPM*s initial
analysis ($ 0. 7 billion),

 the adjustments described above, and  changes in certain economic
assumptions and benefit estimation and allocation methods that were made
to improve accuracy and consistency of the calculations.

Enclosure Page 25 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

19 Assessment of OPM*s Analysis

Table 1: USPS*s Funding of CSRS Benefits as of September 30, 2002 as
initially reported by OPM and recalculated to reflect current law
regarding military service funding,* the impact of payments made with
appropriated funds, and various other adjustments.* (Dollars in Billions)
OPM initial calculation Recalculation Difference *Postal Fund* net assets
$ 152.1 $ 185.0 $ 32. 9 PV of future benefits ( 172. 6) (178. 0) (5. 4)
Benefits (yet to be funded)/ overfunded ( 20. 5) 7. 0 27. 5

Impact of payments made with appropriated funds 0. 0 ( 2. 9) ( 2.9)
Revised benefits (yet to be funded) / overfunded ( 20. 5) 4. 1 24. 6

PV of all future contributions 91.5 99. 0 7.5 Projected overfunding $ 71.0
$ 103.1 $ 32. 1

====== ====== ====== Source: Developed by GAO based on OPM*s data and
actuarial calculations. *Changes related to these items are factored in
throughout the calculation.

Enclosure Page 26 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

20 Assessment of the Legislative Proposal

Assessment of the Legislative Proposal

 The legislative proposal would reduce the amount of CSRS payments by
USPS from approximately $4. 7 billion annually under current law to an
estimated $1.8 billion annually (in fiscal year 2003) -- an annual savings
of $2.9 billion in 2003 based on OPM*s initial calculation. The amount of
savings in future years will change  once the adjustments we identified
are factored into the

over/ underfunding to be amortized, and  depending on decisions that are
made regarding issues

discussed in the following slides.

Enclosure Page 27 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

21 Assessment of the Legislative Proposal

 Several issues could affect the amount of annual payments required to be
made by USPS under the legislative proposal, as follows

 treatment of military service costs,  treatment of payments made with
appropriated funds,  amortization period for any overfunded or
underfunded

amounts, including those arising from data refinements and variances
between projected and actual experience,  use of the most appropriate
investment rate of return, and  choice of demographic and economic
assumptions.

Enclosure Page 28 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

22 Assessment of the Legislative Proposal

Treatment of Military Service

 The legislative proposal would make USPS responsible for military
service costs as assumed in OPM*s initial calculation, which decreases the
*Postal Fund* net assets by $27.9 billion.

 One possible alternative approach, among others, would be to require
USPS to fund the military service of employees hired after June 30, 1971.

Enclosure Page 29 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

23 Assessment of the Legislative Proposal

 Table 2 shows the financial effect of treating military costs under the
following three possible alternatives (as adjusted for the items
previously discussed):

 USPS funds a portion of the military service costs for employees hired
before 1972 and all military costs for employers hired after 1971 as per
the legislative proposal (Pro- rata funding by USPS),

 the alternative described on the previous slide (Partial funding by
USPS), and  the approach embodied in current law, whereby Treasury funds
the military costs (No funding by USPS).  For purposes of these
alternatives, we assume that regular

contributions would equal the full dynamic normal cost, which is currently
24. 4% of employee pay. Dynamic normal cost reflects CSRS economic and
demographic assumptions, and the full cost of all military service.

Enclosure Page 30 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

24 Assessment of the Legislative Proposal Table 2: The effect of possible
approaches to allocating the cost of military service on USPS*s Funding of
CSRS benefits as of September 30, 2002, using USPS- specific demographic
assumptions. (Dollars in Billions)

Pro- rata funding Partial funding No funding by USPS by USPS by USPS
*Postal Fund* net assets $ 168.4 $ 174. 2 $ 185. 0 PV of future benefits (
189.2) ( 187.9) ( 178.0) Benefits (yet to be funded) / overfunded ( 20. 8)
( 13. 7) 7. 0

Impact of payments made with appropriated funds ( 2. 9) ( 2. 9) ( 2. 9)
Revised benefits (yet to be funded) / overfunded ( 23. 7) ( 16. 6) 4. 1

PV of normal cost contributions (24. 4%) a 16. 7 b 16. 7 b 16. 7 b PV of
future employee military service deposits 0. 7 0. 7 0. 0 PV of 30- year
payments 0. 0 0. 0 0. 0 PV of 15- year payments 0. 0 0.0 0.0 PV of all
future income 17. 4 17. 4 16. 7

Projected (underfunding) / overfunding $( 6. 3) $ 0. 8 $ 20. 8 c ======
====== ====== a OPM did not calculate a USPS- specific dynamic normal cost
percentage that reflects the differing methods of allocating military
service and USPS- specific demographic assumptions.

b These figures were calculated by applying the CSRS dynamic normal cost
percentage to projections of future USPS payroll derived using USPS-
specific demographic assumptions. c The legislative proposal does not
specify the treatment of projected overfunding when future benefits are
currently overfunded. One alternative would be to permit USPS to reduce
its portion of normal cost contributions. Source: Developed by GAO based
on OPM data and actuarial calculations.

Enclosure Page 31 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

25 Assessment of the Legislative Proposal

Treatment of Payment Made with Appropriated Funds

 As discussed previously, OPM*s analysis credited the *Postal Fund* with
a $285 million special payment made with funds appropriated in fiscal year
1975 for that specific purpose.  The impact was to increase the *Postal
Fund* balance as

of September 30, 2002 by $2.9 billion (including compound interest).  The
legislative proposal does not address the treatment

of these appropriated funds.

Enclosure Page 32 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

26 Assessment of the Legislative Proposal

Treatment of Underfunded or Overfunded Amounts and Refinements

 The legislative proposal generally specifies a 40- year amortization
period for any unfunded liability.

 This is consistent with the Administration*s proposal for CSRS
liabilities related to nonpostal employees.

 A shorter amortization period that more reasonably reflects the likely
remaining working lives of CSRS employees may be more appropriate.  The
legislative proposal does not specify how an overfunded situation would be
treated or how future

refinements in the calculation that impact the over/ underfunded position
would be addressed.

Enclosure Page 33 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

27 Assessment of the Legislative Proposal

 In addition to the spousal benefit and CSRS offset issues previously
noted, OPM*s future calculations for USPS CSRS costs are subject to change
resulting from such items as data refinements, changes in estimation
methods, and actuarial gains and losses. For example

 OPM used estimated benefit payment data when some actual data are
available. Using actual data could result in more accurate projections.
OPM has not analyzed the feasibility of extracting the actual data.  OPM
and/ or others may ultimately determine that better

data or estimation methods exist to project the status of the *Postal
Fund.*

 OPM needs to determine and address future variances between projected
and actual experience in connection with key assumptions (e. g.,
retirement rates, rates of

return on investment, etc.).

Enclosure Page 34 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

28 Assessment of the Legislative Proposal

Use of the Most Appropriate Investment Rate of Return

 OPM allocated total CSRS investment returns to the *Postal Fund* based
on the ratio of average yearly *Postal Fund* net assets to all CSRS plan
net assets.

 This approach would be consistent with the view that, although USPS was
a new legal entity, USPS employees who previously worked for the Post
Office Department were not new participants in the CSRS plan.

 An alternative approach would be to use the average rate of return for
new plan investments each year beginning with the creation of USPS.

 This approach would be consistent with the view that USPS was a new
employer joining a multiple employer pension plan.

Enclosure Page 35 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

29 Assessment of the Legislative Proposal

 We were unable to determine the monetary impact this alternative
approach would have on the *Postal Fund*s* net assets as of September 30,
2002 because we were unable to obtain the necessary data regarding annual
investment returns on new CSRDF investments for the past 30 years.

Enclosure Page 36 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

30 Assessment of the Legislative Proposal

Choice of Demographic and Economic Assumptions

 Using CSRS- wide versus USPS- specific demographics impacts the funding
status. For example, using CSRS demographics instead of the USPS- specific
demographic assumptions OPM used in its initial analysis and reflected in
the legislative proposal would decrease the overfunded

amount by approximately $1.5 billion.  The funding status is also
impacted by the choice of economic assumptions. For example, OPM utilized
CSRS*s long- term economic assumptions (e. g., 3.75% rate of

inflation) in its revised projections. On the other hand, the Office of
Management and Budget*s (OMB) economic assumptions reflect short- term
expectations (e. g., 1.8% rate of inflation). The use of CSRS*s long- term
assumptions increases both the present value of future benefits and the
present value of future contributions in OPM*s analyses.

Enclosure Page 37 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

31 Assessment of the Legislative Proposal

 Currently, the law gives OPM*s Board of Actuaries the authority to
establish the demographic and economic assumptions to be used in all
valuations of the CSRS.

Enclosure Page 38 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

32 Assessment of the Legislative Proposal

Other USPS Financial Obligations

 Another significant issue that should be considered in conjunction with
the treatment of the CSRS overfunding is that USPS faces substantial
obligations related to  postretirement health care benefits estimated to
be between $40 - $50 billion that are yet to be funded, and  outstanding
debt to the federal government of $11.1

billion as of September 30, 2002.

Enclosure Page 39 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

33 Conclusions

Conclusions

 While we agree with OPM*s initial conclusion that current law would
result in a significant overfunding of USPS*s CSRS benefit costs, the
amount of the overfunding is considerably greater than initially
calculated and reported by OPM.  The legislative proposal would address
this overfunding

issue by reducing the amount of annual payments required to be made by
USPS to fund CSRS benefits.

Enclosure Page 40 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

34 Conclusions

 However, there are a number of issues that need to be considered that
could significantly impact both the projected and current CSRS funding
status of USPS under the legislative proposal.

 OPM*s projections will need to be adjusted based on the decisions made
regarding these issues.

 In addition, USPS still faces substantial obligations related to
postretirement health benefits for its present and past employees, as well
as significant outstanding debt, that should be considered in determining
the treatment of the projected overfunding of CSRS obligations.

Enclosure Page 41 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

35 Conclusions

 The Congress needs to decide  whether some or all of the difference in
current versus

proposed future contributions should be used to reduce outstanding debt to
the federal government or address USPS*s unfunded postretirement health
obligations, and

 what, if any, other restrictions should be placed on the use of these
funds.

Enclosure Page 42 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

36 Agency Comments

 We discussed a draft of these briefing slides with OPM officials on
January 29, 2003, who generally agreed with the facts presented. OPM
provided the following observations based on their brief consideration of
these slides:

 The primary difference between the $103.1 billion potential over-
funding and the $71.0 billion originally reported by OPM is due to the
treatment of military service.

 Although under the current law governing funding of CSRS the USPS does
not pay for the cost of benefits attributable to military service, the
Administration*s proposed legislation is intended to replace the current

funding methodology with a new approach modeled after the funding of FERS.

Enclosure Page 43 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

37 Agency Comments

 Under the Administration*s proposal, the USPS would be responsible for
the cost of military service. The Administration believes that charging
the USPS is appropriate because under its proposal the *Postal Fund* would
be credited with a proportional share of the

excess investment returns earned by the CSRDF over the past 30 years.

Enclosure Page 44 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

38 Appendix I * Key Legislation Affecting

USPS*s Funding of CSRS Costs  P. L. 91- 93, Civil Service Retirement
Amendments of 1969

Increased the statutory contributions made by employees and agency
employers and required Treasury to fund the future increases in pension
liabilities due to changes in benefits and increases in pay, the annual
interest on

existing unfunded liabilities, and the portion of benefit payments
attributable to creditable military service.

 P. L. 93- 349, Postal Service Payments to Retirement Fund Required USPS
to fund increases in pension liabilities resulting from USPS employee
general pay increases in 30 equal payments with interest beginning at the
end of the

fiscal year in which the pay increase becomes effective.

Enclosure Page 45 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

39 Appendix I * Key Legislation Affecting

USPS*s Funding of CSRS Costs  P. L. 93- 554, Supplemental Appropriations
Act

Provided USPS with a $281 million appropriation to pay for the first three
installments due on increases in its pension liabilities that resulted
from the 1972 pay increase and the first two installments for the 1973 pay
increases, plus interest. According to House Report No. 93- 1378, another
$4 million was made available to USPS for this purpose as part of the
Postal Service Appropriations Act of 1975 (P. L.

93- 381).  P. L. 100- 203, Omnibus Budget Reconciliation Act of 1987

Required that USPS deposit $350 million into the CSRDF. According to House
Report No. 101- 964, this payment was used to fund a portion of the cost
of USPS annuitant COLAs.

Enclosure Page 46 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

40 Appendix I * Key Legislation Affecting

USPS*s Funding of CSRS Costs  P. L. 101- 239, Omnibus Budget
Reconciliation Act of 1989

Required USPS to fund increases in pension liabilities resulting from
COLAs granted to USPS employees who first became annuitants on or after
October 1, 1986 or to the survivors of employees or employee annuitants
who die on or after October 1, 1986. The law provided payment

schedules for COLAs granted in 1987* 1989. Increases in pension
liabilities resulting from COLAs granted in 1990 and thereafter were to be
paid in 15 equal payments with interest beginning at the end of the fiscal
year in which the pay increase becomes effective. This law further
stipulated that USPS would be liable only for the portion of the increase
that is attributable to civilian service rendered after

June 30, 1971. In fiscal year 1990, USPS paid approximately $74 million
under the provisions of this law before it was amended by P. L. 101- 508.

Enclosure Page 47 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

41 Appendix I * Key Legislation Affecting

USPS*s Funding of CSRS Costs  P. L. 101- 508, Omnibus Budget
Reconciliation Act of 1990

Changed the date from which USPS was responsible for funding the cost of
annuitant COLAs from October 1, 1986 to July 1, 1971. Furthermore, P. L.
101- 508 amended the 1987* 1989 annual payments for COLAs set forth in P.
L. 101- 239 and established annual payments for pre- 1987 and 1990 COLAs.
However, the law did not require any payments for COLAs that were outside
the 15- fiscal- yearperiod

that began with the first fiscal year that the COLA took effect. This law
required USPS to pay a total of $1,685 million during fiscal years 1991-
1995 for pre- fiscal year 1987 COLAs.  P. L. 103- 66, Omnibus Budget
Reconciliation Act of 1993

Required that USPS deposit $693 million into the CSRDF no later than
September 30, 1998, to pay more towards the cost of previous annuitant
COLAs.

Enclosure Page 48 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

42 Appendix II * Data Limitations and Use of Estimation Methods

 OPM experienced obvious challenges in reconstructing 30 years of income
and expense to create a *Postal Fund* within the CSRS plan. In some cases
data were no longer available, such as regular employee and agency
contribution data from 1972 through 1982. In other cases,

such as employee salaries on July 1, 1971, it would have been too costly
and time- consuming to obtain data from the individual hardcopy personnel
and benefit files for hundreds of thousands of USPS employees and
annuitants.

 One key overarching limitation of these data is OPM*s reliance on
unaudited financial data for 25 of the 30 year span of its analysis. OPM
received an unqualified opinion

for the first time on its fiscal year 1997 financial statements of the
CSRDF.

Enclosure Page 49 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

43 Appendix II * Data Limitations and Use of Estimation Methods

 Following is a list of some of the most significant estimation methods
used to overcome the lack of readily available data  Regular employee and
agency contributions for 1972*

1982 were not available and, thus, OPM initially estimated these to be
equal to the average amount of regular contributions made by USPS and its
employees from 1983 * 2001 as a percent of total CSRS regular
contributions.

 After successfully reconciling USPS*s accrual- based agency
contributions to OPM*s cash- based figures for 1983 - 2001, OPM accepted
our suggestion to revise its estimates for 1972 * 1982 using USPS*s
accrual- based figures for those years.

Enclosure Page 50 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

44 Appendix II * Data Limitations and Use of Estimation Methods

 Employee voluntary and civilian service deposits and redeposits were
estimated to be equal to the ratio of total CSRS voluntary and service
deposits to total CSRS

employee withholdings multiplied by USPS employee withholdings.  Annual
CSRS investment returns were allocated to the

*Postal Fund* based on the ratio of average yearly *Postal Fund* net
assets to all CSRS plan net assets.

 Asset transfers to the Federal Employees* Retirement System (FERS) from
CSRS for USPS employees who were automatically transferred to FERS on
January 1, 1987 were estimated based on fiscal year- end investment
balances of the FERS *Postal Fund* for fiscal

years 1983 * 1987. These transfers are reflected as reductions in the
regular employee and agency employer contributions for these four fiscal
years.

Enclosure Page 51 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

45 Appendix II * Data Limitations and Use of Estimation Methods

 There was insufficient documentation to support how the $170 million
transferred to FERS for USPS employees who elected coverage during the
open season that

ended on December 31, 1987 was calculated. Furthermore, although this
transfer is reflected in OPM*s revised analysis as occurring on September
30, 1988, OPM could not provide evidence that this transfer or a

similar transfer of $1, 124 million for non- USPS CSRS employees ever
occurred.

 There remains a question as to whether OPM should have reflected a
transfer of assets in its analysis of the *Postal Fund* for those USPS
employees who elected to transfer from CSRS to FERS during the 1998 open
season.

Enclosure Page 52 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

46 Appendix II * Data Limitations and Use of Estimation Methods

 Benefit payments for each fiscal year were estimated by indexing each
annuitant*s most recent monthly benefit payment amount by the amount of
each annual COLA back to the annuity start date. OPM*s approach to

estimating benefit payments does not take into account any postretirement
elections or adjustments that may have changed an annuitant*s monthly
payment.

 Estimated benefit payments were adjusted to reflect a factor for dropped
records (e. g., child survivor annuitants), refunds of contributions to
separated employees, death claim payments, administrative expenses, and an
amount for the imprecision of benefit payment estimation methods. OPM
calculated a separate adjustment factor for each fiscal year that was
equal to the ratio of total CSRS benefits using the methods noted above to
total actual CSRS expenses per

published financial and actuarial reports.

Enclosure Page 53 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

47 Appendix II * Data Limitations and Use of Estimation Methods

 Estimated benefit payments to USPS nondisability annuitants were
allocated between *postal* and *federal* shares to reflect

 all civilian service rendered after June 30, 1971 and before July 1,
1971, respectively,

 estimated salary on July 1, 1971, and  benefit accrual rates on service
rendered after June 30, 1971 and before July 1, 1971, respectively.

Enclosure Page 54 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

48 Appendix II * Data Limitations and Use of Estimation Methods

 Disability retirement benefit payments were allocated based only on
service adjusted for applicable benefit accrual rates. Survivor benefits
are allocated using similar factors based on employee annuitant data. 
OPM*s annuity system maintains total years and months of creditable
military and civilian service, but not actual dates when military service
was performed and dates of hire into a civilian position. Consequently,
OPM

estimated employee date of hire by subtracting total civilian service from
the annuity commencing date. This approach assumes that there were no
significant breaks in federal civilian service. Also, military service is
assumed to have occurred immediately prior to the assumed civilian date of
hire.

Enclosure Page 55 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

49 Appendix II * Data Limitations and Use of Estimation Methods

 OPM*s annuity system maintains data on average highthree years salary
and final salary at retirement, but not an employee*s salary at every
point in time. To estimate salaries on July 1, 1971, OPM developed
assumptions regarding general and merit pay increases based on historical
data on USPS*s active population.

 Despite the use of estimation methods, there still remain limitations
for which OPM has not separately adjusted and for which it may not be cost
beneficial to develop estimation methods. These include the two following
matters.

Enclosure Page 56 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

50 Appendix II * Data Limitations and Use of Estimation Methods

 OPM maintains data within its annuity system on the last agency an
employee worked at before retirement, but not the amount of creditable
service an employee accumulated while employed at each agency during his/
her entire federal career. Consequently, benefit payments and regular
contributions are not prorated

based on service rendered at USPS and other federal agencies.

 The *Postal Fund* was credited with all contributions processed and
deposited into the CSRDF by USPS, such as military service deposits, made
only by employees during the time when they were employed by USPS and
salary offsets for annuitants who were reemployed by USPS, regardless of
the agency the employee retired from.

Enclosure Page 57 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

51 Appendix III * Detailed Scope and

Methodology  To achieve our objectives, we

 discussed with OPM*s actuarial staff their process for developing the
annual income and expense components of the *Postal Fund,* projections of
future benefits and contributions, and the underlying assumptions,
estimation methods, and data,

 reviewed the legislative history of laws that have affected USPS*s
funding of CSRS costs,  compared OPM data on the amount and timing of

employee and agency contributions to USPS data and evaluated OPM*s methods
for estimating contributions when data were unavailable,

Enclosure Page 58 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

52 Appendix III * Detailed Scope and

Methodology  compared OPM*s method for allocating investment

returns to the methods OPM employs when allocating total investment
returns between the CSRS and FERS plans and the *federal* and *USPS* FERS
funds,

 obtained documentation from OPM on the amount of funds transferred from
CSRS to FERS for USPS employees who were automatically transferred to FERS
on January 1, 1987, as well as those USPS employees who elected FERS
coverage during the 1987 open season,

 evaluated the reasonableness of OPM*s methods for estimating annual
benefit payments and allocating a prorata share of refunds and
administrative expenses,

Enclosure Page 59 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

53 Appendix III * Detailed Scope and

Methodology  evaluated the reasonableness of OPM*s methodologies

for allocating estimated benefit payments and other expenses between
service rendered before and after July 1, 1971 * the effective date of the
Postal Reorganization Act,

 reconciled the financial data used to develop the various income and
expense components of the *Postal Fund* with data from OPM*s published
financial and actuarial reports,

 tested the arithmetic accuracy of various computations and
summarizations, including reperforming OPM*s estimate of annual benefit
payments and related allocations for a nonrepresentative selection of nine
annuitants,

Enclosure Page 60 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

54 Appendix III * Detailed Scope and

Methodology  discussed with OPM*s actuaries

 their choice of economic and demographic assumptions and actuarial
models used to project future USPS- specific benefits and contributions,

 the extent to which these actuarial assumptions and models are similar
to those used to prepare projections of the entire CSRS for financial
statement purposes,

 the effect of using USPS- specific demographics versus CSRS- wide
demographics on the funded position as of September 30, 2002, and 
reviewed the legislative proposal and identified matters

that may need adjustment, clarification, or further consideration.

Enclosure Page 61 GAO- 03- 448R Review of OPM Analysis of USPS CSRS Costs

55 Appendix III * Detailed Scope and

Methodology  We did not perform a financial audit of the *Postal Fund* as
of September 30, 2002 or any of the annual income and

expense components. Further, we did not perform an actuarial review of
OPM*s projections of future benefits and contributions, and are not
expressing an opinion on the

material accuracy of these projections. Instead, we focused on the
reasonableness of OPM*s methods, assumptions, and data.  While we found
several significant issues pertaining to

OPM*s reconstruction of the *Postal Fund* and projections and proposed
various adjustments, there may be other issues that would significantly
impact OPM*s projections that did not come to our attention in the course
of this review.

 We performed our work in Washington, DC from November 2002 through
January 2003, in accordance with generally accepted government auditing
standards.
*** End of document. ***