Postal Pension Funding Reform: Review of Military Service Funding
Proposals (26-NOV-03, GAO-04-281).				 
                                                                 
The Postal Civil Service Retirement System Funding Reform Act of 
2003 (the Act) required the United States Postal Service,	 
Department of the Treasury, and Office of Personnel Management	 
(OPM) to prepare proposals detailing whether and to what extent  
the Treasury and Postal Service should fund the benefits	 
attributable to the military service of the Postal Service's	 
current and former Civil Service Retirement System (CSRS)	 
employees. The Act required GAO to evaluate the proposals. Our	 
objective in doing so was to assess the agencies' positions and  
provide additional information where it may be useful.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-281 					        
    ACCNO:   A08950						        
  TITLE:     Postal Pension Funding Reform: Review of Military Service
Funding Proposals						 
     DATE:   11/26/2003 
  SUBJECT:   Civil service pensions				 
	     Funds management					 
	     Interagency relations				 
	     Postal service employees				 
	     Retirement pensions				 
	     Retired military personnel 			 
	     Federal Employees' Retirement System		 
	     Civil Service Retirement System			 

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GAO-04-281

United States General Accounting Office

                     GAO Report to Congressional Committees

November 2003

POSTAL PENSION FUNDING REFORM

                  Review of Military Service Funding Proposals

                                       a

GAO-04-281

Highlights of GAO-04-281, a report to the Committee on Governmental
Affairs, United States Senate, and the Committee on Government Reform,
House of Representatives

The Postal Civil Service Retirement System Funding Reform Act of 2003 (the
Act) required the United States Postal Service, Department of the
Treasury, and Office of Personnel Management (OPM) to prepare proposals
detailing whether and to what extent the Treasury and Postal Service
should fund the benefits attributable to the military service of the
Postal Service's current and former Civil Service Retirement System (CSRS)
employees. The Act required GAO to evaluate the proposals. Our objective
in doing so was to assess the agencies' positions and provide additional
information where it may be useful.

GAO suggests that Congress consider requiring that, similar to Postal
Service, all other selfsupporting agencies pay the full dynamic cost of
CSRS pension benefits. If the Congress requires the Postal Service to fund
the military service component of CSRS benefits, then it may wish to have
other self-supporting agencies do so as well. Further, GAO recommends that
OPM provide estimates of the added cost to Treasury of making Postal
Service responsible for only the cost of benefits that had not yet vested
as of June 30, 1971. Postal Service and OPM/Treasury provided some
clarifying comments and expanded views on several issues discussed in our
report.

November 2003

POSTAL PENSION FUNDING REFORM

Review of Military Service Funding Proposals

The positions taken by OPM and Treasury and the Postal Service were driven
in part by differing views on the nature and extent of the relationship
between military service and an entity's operations. The Postal Service
favors returning the responsibility for funding benefits attributable to
military service to the Treasury, making arguments that include Treasury's
historic responsibility for these benefits, the legislative history
surrounding the Postal Service's funding of retirement benefits, the fact
that the majority of military service by CSRS employees was rendered
before the current Postal Service was created, and that military service
has no connection to the Postal Service's functions or operations. OPM and
Treasury favor the recently enacted law, arguing that the Postal Service
was intended to be selfsupporting, military service is a benefit like
other CSRS benefits that should be allocated proportionally over an
employee's career, and the current law is one in a series that developed
today's approach to funding the Postal Service's CSRS costs.

GAO observed that there is no direct relationship between an employee's
military service and an entity's operations, but an indirect relationship
is established once an employee is hired into a position whose retirement
plan provisions credit military service when computing a civilian benefit.
GAO has long held the position that federal entities should be charged the
full costs of retirement benefits not covered by employee contributions in
the belief that it enhances recognition of costs and budgetary discipline
at the same time it promotes sounder fiscal and legislative decisions.
However, our previous recommendations and matters for congressional
consideration did not specifically address whether the cost of military
service benefits should be included in CSRS employee benefit costs.
Currently there is inconsistency in how various self-supporting government
entities treat these costs.

The military service of many Postal Service retirees was already
creditable to a civilian pension when the Postal Service began operations
in 1971. OPM's current approach, however, allocated the years of
creditable military service of these employees over their entire civilian
careers. If Congress decides that the Postal Service should be responsible
for military service costs applicable to its employees, then consideration
of an allocation alternative reflecting the extent to which the military
service of current and former employees was already creditable towards a
civilian pension when the Postal Service began operating would enhance the
decision-making process.

www.gao.gov/cgi-bin/getrpt?.GAO-04-281

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202)
512-8341 or [email protected].

Contents

  Letter

Results in Brief
Background
Summary of Key Issues and Our Observations
Relationship of Military Service to Employing Agency

Operations
Historical Funding of the CSRS Benefits Payable to Postal Service
Employees
Applicability of FERS Cost Allocation and Funding Methods
to CSRS
Funding of Military Service Benefits by Federal and Other
Entities
Observations on Alternative Military Service Cost Allocation

Approaches
Conclusion
Matters for Congressional Consideration
Recommendation for Executive Action
Agency Comments and Our Evaluation

                                                                     1 4 8 10

11

13

15

17

20 24 24 25 25

Appendixes

                                  Appendix I: Report from OPM and Treasury 28
                 Appendix II: Report from the United States Postal Service 39
              Appendix III: Comments from the United States Postal Service 45
                               Appendix IV: Comments from OPM and Treasury 47

Table Table 1:	Estimated Costs to Treasury of Alternative Allocation
Approaches

Contents

Abbreviations

COLA cost-of-living adjustment
CSRDF Civil Service Retirement and Disability Fund
CSRS Civil Service Retirement System
DOE Department of Energy
FDIC Federal Deposit Insurance Corporation
FEHBP Federal Employees Health Benefits Program
FERS Federal Employees' Retirement System
MWAA Metropolitan Washington Airports Authority
OPM Office of Personnel Management
PBGC Pension Benefit Guaranty Corporation
PMA Power Marketing Administration
PRA Postal Reorganization Act

This is a work of the U.S. government and is not subject to copyright
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separately.

A

United States General Accounting Office Washington, D.C. 20548

November 26, 2003

The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
Minority Member Committee on Government Reform House of Representatives

The Honorable Susan M. Collins Chairman The Honorable Joseph I. Lieberman
Ranking Minority Member Committee on Governmental Affairs United States
Senate

This report reflects the results of our review of the military service
funding proposal submitted by the United States Postal Service and the
joint proposal submitted by the Office of Personnel Management (OPM) and
the Department of the Treasury. The Postal Civil Service Retirement System
Funding Reform Act of 20031 (P.L. 108-18) required that these agencies
prepare and submit to the President, the Congress, and the GAO proposals
detailing whether and to what extent the Treasury or the Postal Service
should be responsible for funding the benefits attributable to the
military service of current and former employees of the Postal Service
that, prior to enactment of the 2003 Act, had been provided for by the
Treasury under section 8348(g)(2) of title 5, United States Code.2 The Act
also mandated that we prepare and submit a written evaluation of each
proposal no later than 60 days after the aforementioned agencies had
submitted them. We received the agencies' proposals on the mandated
September 30, 2003, due date.

1Pub. L. No. 108-18, 117 Stat. 624.

2Section 8348(g)(2) requires that OPM notify the Secretary of the Treasury
at the end of each fiscal year of the amount of that year's Civil Service
Retirement System (CSRS) annuity payments OPM estimates is attributable to
credit allowed for military service, less an amount for employee deposits
made in accordance with section 8334(j) of title 5. Section 8348(g)(2)
also requires that the Secretary of the Treasury credit the Civil Service
Retirement and Disability Fund (CSRDF) out of money in the Treasury not
otherwise appropriated a percentage of OPM's calculated amount, starting
with 10 percent in 1971 and increasing in 10 percent increments until the
total percentage Treasury pays reaches 100 percent for fiscal year 1980
and for each fiscal year thereafter.

The objective of our evaluation was to identify and assess the agencies'
respective positions and to provide additional information where such
information may be useful. In assessing the agencies' positions, we
considered the accuracy of the various assertions presented, those aspects
of equity and consistency raised by the agencies, the Postal Service's
unique role in the financing of CSRS and Federal Employees' Retirement
System (FERS) benefits,3 and its status as a self-supporting agency. There
may be other issues or perspectives that the agencies did not present and
we did not assess that the Congress may want to consider in deciding
whether and to what extent the Postal Service should fund military service
benefits.

We also provide our observations on the alternative approaches for
allocating the cost of military service benefits that are discussed in the
OPM and Treasury proposal. The Postal Service and, jointly, OPM and
Treasury put forth various arguments and assertions to justify their
opposing positions. We organized each of the agencies' arguments and
assertions into four common, overarching issues raised by the agencies to
facilitate a comparison and discussion of the differences between the two
proposals. The reader may find it helpful to read the body of this report
along with the full text of the agencies' proposals that are reproduced in
appendix I (OPM / Treasury) and appendix II (Postal Service).

To achieve our objective, we obtained documentation from the agencies to
support their assertions and interviewed agency officials. We also
reviewed various laws and their legislative histories, including those
mentioned below, along with applicable regulations and OPM guidance:

1.	Those laws preceding P.L. 108-18, which established the approach to the
Postal Service's funding of CSRS benefits,4

2.	the Civil Service Retirement Amendments of 1969,5 (P.L. 91-93) which
established the current pay-as-you-go approach to funding the

3FERS has three components - a defined benefit plan, a defined
contribution plan, and Social Security. For purposes of this report, any
reference to FERS means the defined benefit plan.

4See U.S. General Accounting Office, Review of the Office of Personnel
Management's Analysis of the United States Postal Service's Funding of
Civil Service Retirement System Costs, Appendix I- Key Legislation
Affecting USPS's Funding of CSRS Costs, GAO-03-448R (Washington, D.C.:
Jan. 31, 2003).

government's share of the cost of CSRS military service benefits that
continues to generally apply to employees of entities other than the
Postal Service,

3.	the Omnibus Budget Reconciliation Act of 1982,6 which required
employees to make deposits in certain circumstances towards the cost of
military service benefits, and

4.	the Federal Employees' Retirement System Act of 1986,7 which
established the cost attribution and funding method OPM cites as being the
model for its analyses and the administration's original legislative
proposal.

Our discussion of the alternative cost allocation methods was based on
figures calculated by OPM. The OPM and Treasury proposal presented five
possible approaches for assigning the cost of benefits attributable to
military service between the Treasury and the Postal Service. OPM
calculated the financial effects of each approach using CSRS-wide
actuarial assumptions.8

We did not perform an actuarial review of OPM's estimates of the total
cost to the Treasury of each alternative funding method or test the
accuracy of the underlying data; consequently, we are not expressing an
opinion on the material accuracy of these estimates. Furthermore, we did
not attempt to present here all other possible approaches for allocating
the cost of military service benefits or determine which allocation
methodology is the most appropriate. We performed our work from October
through November 2003 in accordance with generally accepted government
auditing standards.

We requested comments on a draft of this report from the Postmaster
General, the Director of OPM, and the Secretary of the Treasury, or
his/her designee. Written comments from the Postmaster General are
reprinted in

5Pub. L. No. 91-93, sec. 103(a)(2), 83 Stat. 117, 136.

6Pub. L. No. 97-253, sec. 306, 96 Stat. 763, 795.

7Pub. L. No. 99-335, sec. 101(a), 100 Stat. 514, 517.

8We presented OPM's calculations for three of these five approaches using
Postal Servicespecific actuarial assumptions in our January 31, 2003,
report on OPM's analyses (GAO-03448R).

appendix III. Joint written comments from the Secretary of the Treasury
and Director of OPM are reprinted in appendix IV

Results in Brief	The Postal Service favors returning to the Treasury the
responsibility for funding all CSRS benefits attributable to military
service rendered by its current and former employees. The Postal Service
makes various arguments, including that this responsibility has
historically been Treasury's and that, prior to passage of P.L. 108-18,
the Congress had reaffirmed this view each time legislation was enacted
that changed the Postal Service's CSRS contributions. The Postal Service
also notes that its CSRS employees rendered the vast majority of their
military service before the Postal Service was even created and, moreover,
argues that military service has no connection with the Postal Service's
functions or operations. Furthermore, the Postal Service argues that CSRS
was never required to be fully funded like FERS and believes that it
should not have to fund the military service benefits of its CSRS
employees as the price for receiving its share of the higher than expected
investment returns earned on contributions the Service made since 1971.
The Postal Service asserts that no agency other than the Postal Service -
including other self-supporting agencies9 - fully funds the cost of their
employees' CSRS benefits, including military service benefits. The
President's Commission on the United States Postal Service agreed with the
Postal Service's positions and recommended repeal of this requirement.

OPM and Treasury favor what is now current law as outlined in P.L. 108-18.
They argue that the Postal Service was reorganized in 1971 with a primary
goal of being self-supporting and should, therefore, bear all costs
attributable to service after its reorganization. OPM and Treasury further
contend that military service credit is a benefit just like other CSRS
benefits, the cost of which should be allocated proportionally over an
employee's civilian career in a manner that is consistent with the funding
system that exists for the FERS. They also view P.L. 108-18 as one in a
series of laws that over time developed the approach that exists today for
the Postal Service's funding of CSRS costs. OPM and Treasury further
assert that, while the Postal Service was not required to fund CSRS
military service benefits prior to enactment of P.L. 108-18, it also did
not have to assume any of the actuarial risk of the system. Consequently,
OPM and

9Self-supporting government entities are those that are generally required
to recover their costs through rates or fees charged to the users of their
services.

Treasury contend that the Postal Service should not share in the higher
than expected investment returns10 of the CSRDF without assuming the
military service costs that could have been funded with any such
investment gains. OPM and Treasury provided estimates of five alternative
approaches to allocating the cost of the military service benefits of the
Service's current and former CSRS employees and provided their views of
the strengths or limitations of the alternatives.

In our review of both proposals we observed that the parties' positions as
to whether the Postal Service should be responsible for the cost of CSRS
military service benefits were driven in part by differing views of the
nature and extent of the relationship between military service and an
agency's operations. We agree that there is no direct relationship between
an employee's military service and an agency's operations. Consequently,
one can reasonably argue that, as a matter of equity and attribution
accuracy, the entity that directly benefited from an employee's military
service should be required to fund any related retirement costs. However,
one might also argue that the employing entities should bear this cost
because the right to receive credit for past military service arises only
as a result of employment in a civilian position covered by CSRS or FERS.
It should, however, be noted that this military service feature is a
mandate for all federal entities with covered CSRS and FERS employees and
that such service credit is not required or common for private sector
entities.

As a matter of consistency, one might also reasonably argue that the
Postal Service should be treated like other entities with respect to the
funding of pension costs, which it is for purposes of funding the FERS
normal cost. However, the Postal Service is unlike most if not all other
entities in certain respects. First, the Postal Service must pay for any
actuarial losses and may benefit from any actuarial gains attributable to
the pension obligations of its employees, retirees, and their survivors.
In this sense, the Postal Service is treated as a separate employer for
purposes of financing the CSRS and FERS plans. Second, it is required to
fund the dynamic normal cost11 of CSRS benefits, whereas most other
agencies pay only a portion of this cost.

10The OPM and Treasury proposal focuses on the higher than expected
investment returns because this is the one component of the actuarial risk
of the system that is believed to be the most significant and is easily
identifiable. However, their argument would presumably extend to other
actuarial gains resulting from the demographic experience of the
population of Postal Service's CSRS employees.

11Dynamic normal cost is defined in the background section of this report.

Third, the Postal Service is intended to be self-supporting and,
therefore, expected to cover all of its costs through postal rates. There
are, however, other self-supporting agencies, such as the Federal Deposit
Insurance Corporation (FDIC) and Pension Benefit Guaranty Corporation
(PBGC), that are not required to fund military service costs and do not
otherwise fully fund the dynamic normal cost of their CSRS employees'
benefits as the Postal Service is now required to do. On the other hand,
there are a few self-supporting entities that have either been required by
law or have voluntarily chosen to fund the dynamic normal cost, including
military service costs, of employees who retained CSRS coverage.
Therefore, there is no consistency in this regard.

Our long-standing position has been that employer agencies should fund the
dynamic cost of the government's retirement programs not otherwise funded
with employee withholdings and deposits. We also observed on numerous
occasions that, as a result of charging less than the dynamic cost of CSRS
not otherwise provided by employee withholdings, agencies whose operations
are intended to be self-supporting receive large subsidies that are not
recognized in the cost of their goods and services. However, our previous
recommendations and matters for congressional consideration did not
specifically address whether the cost of military service benefits should
be included as part of a dynamic normal cost factor. Nor did we examine
the issue of whether the entity that benefited from the service should
ultimately pay for any related benefits. Additionally, with the exception
of self-supporting agencies that pay the dynamic cost of these benefits,
taxpayers ultimately fund the benefits, regardless of whether or not these
costs are included in individual agency budgets. Therefore, charging the
self-supporting agencies' customers for the government's share of the
dynamic normal cost of pension benefits results in real savings to the
taxpayers and, therefore, is not just a change in the timing and source of
funding.

The agencies present opposing views on whether FERS funding requirements
can or should be applied to CSRS benefits. Whether or not the obligation
to fund military service benefits should be linked with the benefit of
higher than expected investment returns is crucial to their respective
arguments. In addressing this issue, we found nothing that precludes
changing how the Postal Service's contributions are calculated under CSRS
to a method similar to FERS. At the same time, we also did not find any
requirement that past military service be included in the dynamic normal
cost factor used for funding purposes in order to also benefit from past
investment gains.

For purposes of determining the extent to which the Postal Service should
be responsible for military service costs, OPM's current pro-rata approach
allocates the years of creditable military service proportionally over
employees' entire civilian careers. The OPM and Treasury proposal included
four allocation alternatives. However, it did not include an allocation
alternative that reflects the extent to which the Postal Service's current
and former employees had, by the time the Service commenced operations in
1971, completed the 5 years of civilian service needed to have their past
military service creditable towards the computation of an annuity. We
believe this alternative would be important to consider in the overall
decision-making process, if the Congress decides that the Postal Service
should be responsible for CSRS military service costs associated with
their civilian employees.

We offered a matter for congressional consideration, namely that, similar
to the Postal Service, all other self supporting federal entities be
required to fund the dynamic cost of CSRS pension benefits. If the
Congress decides to include funding of the military service component in
its definition of full pension funding for the Postal Service, we believe
it should consider doing so for all self-supporting federal entities. We
also recommended that, if the Postal Service is made responsible for
funding military service pension benefit costs, then OPM should provide a
sixth alternative funding scenario by providing an estimate of the cost to
the Treasury and the Postal Service of having Postal Service assume only
the cost of benefits that had not yet vested when the former Post Office
Department was converted to its presented form.

Both the Postal Service and OPM/Treasury provided written comments on a
draft of this report. The Postmaster General expressed concern with what
he saw as an inference that the Postal Service should be responsible for
the cost of an employee's military service because it hires the employee
knowing of the past military service. The Postmaster General also
reaffirmed the Postal Service's commitment to the fundamental policy of
veterans' preference. Our report did not imply that knowing of past
military service was a relevant factor in determining whether the Postal
Service should bear this cost. We simply stated the fact that the right to
receive credit for past military service arises only as a result of
employment in a civilian position covered by CSRS or FERS.

The Secretary of the Treasury and Director of OPM disagreed with our
position that there is no direct relationship between an employee's prior
military service and the operations of the Postal Service. They stated
that

granting credit for military service in calculating civilian pensions
enables the Postal Service to recruit and retain veterans, who provide
direct benefits to the operations of their employer. We agree that the
crediting of military service facilitates the recruitment and retention of
veterans who, subsequent to their military service, contribute to postal
operations. However, we continue to view the relationship between military
service and postal operations as indirect because the activities performed
while serving in the military did not directly contribute to the daily
operations of the Postal Service at the time the military service was
rendered. The Secretary of the Treasury and Director of OPM also provided
certain clarifications with respect to their policy positions and beliefs.

Background	Public Law 108-18 was enacted after we reported on the results
of our review of an analysis of the funded status of the Postal Service's
CSRS pension obligations that OPM prepared at our request.12 This act
adopted the administration's proposal that the Postal Service be
responsible for funding the value of benefits attributable to military and
volunteer service of all employees first hired into civilian service after
June 30, 1971, and a pro-rata share of those benefits for employees hired
before the July 1, 1971, effective date of the Postal Reorganization Act
(PRA).13

In order to determine the funded status of the Postal Service's CSRS
obligations, OPM estimated the portion of the Civil Service Retirement and
Disability Fund (CSRDF) that was attributable to the Postal Service,
taking into consideration all past CSRS-related payments to CSRDF by the
Service and its employees, including earnings on those payments, and the
Service's pro-rata share of all CSRS-related payments from CSRDF,
including benefits attributable to military service, since July 1, 1971.

12See GAO-03-448R.

13For purposes of its initial and subsequent analyses, OPM estimated this
pro-rata share of benefits by first allocating an employee's total
creditable military service based on the prorata amount of civilian
service the employee accrued both before and after the effective date of
PRA. OPM's methodology also assumed that the Postal Service should be
responsible for (1) the effect of post-1971 general pay increases and
increasing benefit accrual rates on the final amount of military service
benefits at retirement, including those military service credits allocated
to the federal government, and (2) a proportional amount of post-1971
annuitant cost-of-living adjustments.

The act also requires that the Postal Service begin funding the portion of
CSRS dynamic normal cost not otherwise funded with employee withholdings.
When calculated on a dynamic basis, normal cost represents an amount of
money that if set aside during employees' working years will, with
investment earnings, be sufficient to cover future benefits and expenses
when due, so long as the plan's economic and demographic assumptions hold
true. Dynamic normal cost reflects the effect of assumed future general
pay increases and annuitant cost-of-living adjustments (COLA) on the
amount of benefits that will be ultimately paid. Consequently, when a
plan's dynamic normal cost is fully funded, unfunded liabilities due to
inflation in salaries and annuity payments are avoided. This contrasts
with static normal cost, wherein assumed future general pay increases and
annuitant COLAs are not considered. With static funding, new unfunded
liabilities are created as salary and annuity inflation actually

14

occur.

There are different actuarial methods for determining dynamic normal cost.
OPM calculates the dynamic normal cost for the CSRS and FERS plans using
an actuarial cost method - aggregate entry age normal - which expresses
normal cost as a level percentage of aggregate basic pay for a group of
new plan entrants. Consequently, this method allocates costs without
regard to how benefits actually accrue. It is calculated by dividing the
actuarial present value of expected future benefits a group of new plan
entrants is expected to receive after retirement by the actuarial present
value of the group's expected salaries over their working lives. OPM
includes the past military service of new plan entrants in its calculation
of expected future benefits. Consequently, OPM's aggregate entry age
normal method allocates the cost of military service benefits
proportionally over an employee's civilian career. For fiscal year 2003,
the dynamic normal cost percentage for regular CSRS employees was 24.4
percent of basic pay, of which employees pay 7.0 percent and the Postal
Service the remaining 17.4 percent. Similarly, the dynamic normal cost of
FERS, currently 11.5 percent of basic pay for regular employees, is fully
funded with employer contributions of 10.7 percent and employee
withholdings of 0.8 percent.

Public Law 108-18 also requires that starting on September 30, 2004, the
Postal Service begin funding any projected underfunding of its CSRS

14P.L. 91-93 increased the required employer contributions and employee
withholdings each from 6.5 percent to 7 percent of basic pay for regular
CSRS employees, the total of which at that time approximated the CSRS
static normal cost.

obligations calculated by OPM as of September 30, 2003.15 This funding is
to occur over a total of 40 years, with OPM recalculating the projected
underfunding and the amortization payments as of the close of each
subsequent fiscal year.16 In the event that a surplus exists as of
September 30, 2025,17 the Postmaster General is required to submit a
report to the Congress describing how the Postal Service proposes to use
such surplus.

By changing the funding of military service benefits, the act made the
Postal Service (1) retroactively responsible for funding a portion of
military service benefits that have already been paid to annuitants and
funded by Treasury on a pay-as-you-go basis and (2) prospectively
responsible for funding some or all of the military service benefits
expected to be paid to current and future Postal Service annuitants. The
cumulative effect of this change in law was to shift responsibility for
funding approximately $27 billion (net present value as of September 30,
2002) in military service costs from taxpayers to postal ratepayers.

                             Summary of Key Issues
                              and Our Observations

The agencies made various arguments and assertions throughout their
proposals, which we organize into the following four common, overarching
issues:

o  relationship of military service to employing agency operations,

o  historical funding of CSRS benefits payable to Postal Service
employees,

o  applicability of FERS cost allocation and funding methods to CSRS, and

o  funding of military service benefits by federal and other entities.

15The law refers to the projected underfunding as a "supplemental
liability" calculated as the estimated excess of the present value of
future benefits over allocated assets and the present value of future
normal cost contributions. In a fully funded plan, supplemental
liabilities, as they are defined here, typically occur when the plan
incurs actuarial losses resulting from such things as lower than expected
investment returns or actual demographic experience of the participants
(i.e., retirement, disability, death) being less favorable than was
previously assumed.

16A similar definition in the FERS statute applies to the Postal Service,
the most significant difference being that any supplemental liability is
amortized over a period of 30 years.

17Or at an earlier date when OPM determines that all CSRS Postal Service
employees have retired.

The agencies' positions reflect their own perceptions of what is fair to
the taxpayers and ratepayers and how the Postal Service should be treated
vis`a-vis other federal agencies and considering its mandate to be
selfsupporting. As stated previously, in assessing the agencies'
positions, we considered the accuracy of the various assertions presented,
those aspects of equity and consistency raised by the agencies, the Postal
Service's unique role in the financing of CSRS and FERS benefits, and its
status as a self-supporting agency. The agencies' positions with respect
to each of these issues, as well as our observations on them, are
presented below. We presented the agencies' positions in the order that
best framed the issue at hand.

  Relationship ofMilitary Service to Employing Agency Operations

Postal Service Position	Military service has no relation to Postal Service
operations, on which postal rates are based, and, in fact, had no relation
to the operations of the former Post Office Department. Each of the
federal employment services - military and civilian - have separate
compensation, retirement benefit, and other benefits programs.
Furthermore, the use of military service in the calculation of CSRS
retirement benefits is a matter beyond the control of employer agencies.

OPM and Treasury Position	Receiving credit for past military service is a
civilian retirement benefit that Postal Service employees receive just
like other benefits, such as cost-ofliving increases on annuitant benefit
payments. Furthermore, individuals retiring from the Postal Service
receive CSRS credit for their military service only because of their
employment with the Postal Service.

GAO Observations	To a large extent, whether or not an employee's military
service has any relationship to agency operations is a function of whether
or not the Congress requires that agencies fund a portion of the costs
related to this service. The positions noted above go beyond mandated
financial responsibilities and seek to first define more specifically the
nature and

extent of this relationship before deciding on whether postal ratepayers
or taxpayers should fund CSRS military service benefits.

Clearly, any service that is creditable towards a CSRS or FERS benefit but
is rendered while employed by an entity other than the Postal Service has
no direct relationship to the Service's operations. This includes military
service, service performed while employed by another agency and covered by
CSRS or FERS, and service covered by another of the federal government's
defined benefit retirement plans, but is subsequently credited towards a
CSRS or FERS benefit upon an employee's acceptance of an appointment to a
covered position and meeting other requirements.18 In addition to the
uniformed services, a number of other federal agencies have compensation
systems and benefit programs that are separate from those covering Postal
Service employees. Having a retirement system that covers so many civilian
employees and permitting the transfer of service between federal
retirement systems19 promotes the portability of benefits, and so eases
the movement of employees to other positions within the federal
government.

The crediting of military service towards a civilian service retirement
benefit has been a feature of CSRS since it was established in 1920 and of
FERS since it was established in 1986. This feature is one of many that
collectively constitute a plan of benefits that defers a portion of an
employee's total compensation until retirement. Agencies and other
entities whose employees are covered by CSRS and FERS have no control over
the features offered, among them employee elections such as whether to
provide a survivor benefit to a spouse, because the plan's provisions are
established by the plan sponsor, which in this case is the federal
government.

OPM and Treasury view military service of federal employees as related to
employing agency operations by virtue of the fact that credit for such
service is a feature of the CSRS and FERS plans in which the employees

18 These requirements may include employees making deposits for their
share of the costs of the transferred service and waiving any right to
benefits under their predecessor retirement system.

19For example, some reciprocal transfer is permitted between the CSRS and
FERS plans and the Foreign Service and the Board of the Federal Reserve
Plans. However, the plan sponsored by the Tennessee Valley Authority is
one example of a plan that does not accept the transfer of CSRS and FERS
service.

participate. They further note that it is only because an employee serves
in a covered civilian position for a minimum of 5 years that the
employee's military service can be used in the calculation of a CSRS or
FERS benefit.

The Postal Service's statements suggest a view of military service as
involving the performance of duties unrelated to the delivery of the mail
and further imply that any related compensation - including retirement
benefits - should be paid for by the taxpayer. Defining this relationship
is particularly important for the Postal Service because the costs
associated with its retirees' service credits earned while employed by any
other entity and which are not funded by the retiree while employed by the
Postal Service must be passed onto postal ratepayers. This contrasts to
those agencies that receive the vast majority of their funding through
appropriations, where taxpayers ultimately fund all benefits regardless of
whether and to what extent agencies recognize employee retirement costs in
their budgets. One can reasonably argue that the cost of military service
benefits would more equitably be borne by the entity that benefited from
the military service (Department of Defense), which, in essence, would
mean that taxpayers would ultimately bear these costs.

  Historical Funding of the CSRS Benefits Payable to Postal Service Employees

OPM and Treasury Position	The funding of military service benefits by the
Treasury Department was a feature of a funding methodology established by
law in 1969 that did not require employer agencies to fund the full cost
of all benefits not otherwise funded by employees. The prior funding
mechanism for the Postal Service under CSRS (including the special
treatment of military service) was developed in piecemeal fashion that
never fully addressed all of the factors that affect the costs of the
system. The special treatment of military service that applied to Postal
Service employees can be viewed as more of an historic accident than a
deliberate policy choice. This is supported by the fact that each time a
comprehensive system for funding federal annuities was developed there was
no special treatment of military service. In view of the long history of
congressional action, it is reasonable to assume that the Congress may
have taken action to address the issues of excess interest

earnings and the costs of military service, even if OPM had not identified
the problems with the static funding methodology.

Postal Service Position	Since 1969 the Treasury Department has been
responsible for funding CSRS benefits attributable to military service.
The Treasury Department remained responsible for funding these benefits
for employees of all federal agencies even after laws had been
subsequently enacted to make the Postal Service responsible for additional
retirement costs attributable to its decisions and actions that result in
increases in employee pay on which benefits are computed. Retroactively
making the Postal Service responsible for funding military service
benefits would result in a cost transfer of $27 billion to postal
ratepayers, the great majority of which has already been paid for by
Treasury. Furthermore, approximately 90 percent of the cost of military
service was earned before the Postal Service was created in 1971.

GAO Observations	The fact that the Congress had not acted until just
recently to make the Postal Service responsible for funding the creditable
military service of its employees is taken by the opposing parties to mean
different things, which they assert, not surprisingly, support their
respective positions. Both parties acknowledge that, prior to P.L. 108-18,
when previously presented with the opportunity to reconsider the Postal
Service's funding of its employees' CSRS benefits, the Congress chose to
leave Treasury responsible for funding all CSRS military service benefits.

The Postal Service contends that the passage of successive legislation
relating to the financing of its CSRS costs without ever requiring that it
fund CSRS military service costs was the Congress's way of reaffirming its
intention of having the Treasury fund these costs for Postal Service
employees just as they do now for all other federal agency employees. OPM
and Treasury contend that the piecemeal fashion with which the Congress
made the Postal Service responsible for funding an increasing share of the
CSRS benefits of its employees constitutes a pattern that indicates the
Congress could have eventually made the Service responsible for military
service costs.

It is difficult to discern or even infer from the legislative history of
the laws that preceded P.L. 108-18 any particular policy choice that can
be seen as indicative of the Congress's future intentions or predictive of
what ultimately led to enactment of P.L. 108-18. Any legislative action
must be

viewed within the context of the particular facts and circumstances that
existed at the time the Congress was considering specific legislation,
including budgetary and fiscal considerations. For these reasons, we
consider both parties' arguments and assertions in connection with this
point to be speculative and inconclusive.

With respect to the Postal Service's assertion that approximately 90
percent of the cost of military service was earned before the Service was
created in 1971, we asked OPM to calculate the additional cost to the
Treasury of making it responsible for the entire cost of benefits
attributable to all military service estimated to have been rendered
before 1972 by both former and current employees of the Postal Service.
OPM estimated the additional cost to be approximately 75 percent of the
$27 billion total cost to Treasury to fund all CSRS military service
benefits.20

Based on our review of the documentation provided by the Postal Service's
actuarial consultants, it appears that the Service's assertion was meant
to convey that approximately 90 percent of the military service in years
allocated to it by OPM's pro-rata methodology was estimated to have
occurred before 1972.21

  Applicability of FERS Cost Allocation and Funding Methods to CSRS

20OPM's calculations assume that Treasury is responsible for the effect of
post-1971 general pay increases and increasing benefit accrual rates on
the final amount of military service benefits at retirement and a
proportional amount of post-1971 annuitant COLAs on these benefits.
Furthermore, as a matter of clarification, the $27 billion figure is not
the total value of military service benefits for Postal Service employees
covered by CSRS and who retired after 1971. Rather, it is the additional
cost to the Treasury beyond what Treasury is already responsible for under
OPM's P.L. 108-18 pro-rata methodology.

21OPM's data indicates that approximately 94 percent of the military
service in years rendered by employees who retired between fiscal years
1972 and 2002 was estimated to have been rendered before fiscal year 1972.

OPM and Treasury Position	The payment of military service costs for Postal
Service employees is consistent with the funding of FERS, the funding
system on which the new law was patterned. Although the method for funding
CSRS benefits prior to P.L. 108-18 did not require the Postal Service to
fund the cost of military service, it also did not contemplate that the
actuarial gains or losses of the retirement system would be attributed to
the Postal Service. Consequently, the Postal Service should not benefit
from the positive experience of the CSRDF without assuming the other
responsibilities that come with an approach that funds the full cost of
all benefits, including military service.

Postal Service Position	There is no identity between FERS funding and CSRS
funding. FERS was created on a dynamically funded basis to phase out CSRS
and to establish a more limited federal employment benefits program that
would be fully funded by employees and employer agencies. CSRS is a
totally different program from FERS, with different benefits and levels of
contribution. In fact, CSRS was never fully funded by employees and
employer agencies, with the exception of the Postal Service. Therefore, a
change in funding methods that allows the Postal Service to receive credit
for its share of higher than expected investment returns on contributions
it made in accordance with the prior funding method does not justify the
transfer of military service costs. There is no basis to substantiate this
rationale either in accepted actuarial or financial practice.

GAO Observations	The agencies present opposing views on whether FERS
funding requirements can or should be applied to CSRS benefits. Whether or
not the obligation to fund military service benefits should be linked with
the benefit of higher than expected investment returns is crucial to their
respective arguments. There are numerous similarities and differences
between CSRS and FERS,22 one difference being the manner and extent to

22Various publicly available documents exist that compare and contrast the
features and funding of CSRS and FERS, and provide a detailed history of
what led to enactment of the Federal Employees' Retirement System Act of
1986. For more information, see the following: (1) The Federal Employees'
Retirement System Act of 1986, R. G. Schreitmueller, Transactions of the
Society of Actuaries, 1988 Vol. 40 PT 1, (2) Federal Civilian and Military
Retirement Systems, E. C. Hustead and T. Hustead, Pensions in the Public
Sector, Pension Research Council, The Wharton School of the University of
Pennsylvania, (3) U.S. General Accounting Office, Proposed Civil Service
Supplemental Retirement System, 128278 (Washington, D.C.: Oct. 28, 1985),
and (4) U.S. General Accounting Office, Overview of Federal Retirement
Programs, GAO/T-GGD-95-172 (Washington, D.C.: May 22, 1995).

which the full cost of plan benefits have been funded, including military
service benefits. The fact that there are currently differences between
CSRS and FERS benefits and funding requirements does not preclude changing
how the Postal Service's contributions are calculated under CSRS to a
method similar to FERS. That said, we also did not find any requirement
that past military service be included in the dynamic normal cost factor
used for funding purposes in order for the Postal Service to be treated as
a separate employer for purposes of financing CSRS and, thus, benefit from
past investment gains. In fact, there are actuarial methods that would
fund the cost of military service benefits in a manner different than the
one OPM currently uses. Therefore, there is nothing that inextricably
links the past investment experience of the CSRDF to how military service
benefits are funded.

  Funding of Military Service Benefits by Federal and Other Entities

Postal Service Position	No agency other than the Postal Service -
including other self-supporting agencies - fully funds the cost of its
employees' CSRS benefits, including military service benefits.
Furthermore, private sector companies are not responsible for funding
military service costs.

OPM and Treasury Position	With respect to the argument that it is not fair
to ask the Postal Service to finance the cost of military service because
it would be the only agency required to do so, the fact that Treasury
funds CSRS benefits attributable to military service rather than employer
agencies merely shifts the timing of when the contributions are made and
whether they are charged to a Treasury appropriation or to agency budgets.
In either case, the costs would still ultimately be borne by the taxpayer.
In contrast, one of the primary goals of the Postal Reorganization Act was
to ensure that all of the Postal Service's costs are recovered through
postal revenues, not taxpayer dollars. Therefore, all pension costs for
employees that are attributable to service after the reorganization should
be borne by the Postal Service.

GAO Observations	There are numerous government entities whose programs are
required by law to be financed by the users of their services and that pay
less than the portion of the CSRS dynamic normal cost not otherwise paid
for by employee withholdings, including military service costs. These
include the Federal Deposit Insurance Corporation (FDIC) and the Pension
Benefit Guaranty Corporation (PBGC).

However, there have also been a few entities that have either been
required by law or have voluntarily chosen to fund the dynamic normal cost
of employees who retained CSRS or FERS coverage. For example, the
Metropolitan Washington Airports Act of 198623 required that the
Metropolitan Washington Airports Authority (MWAA) pay the difference
between the dynamic normal cost of CSRS benefits (including military
service costs) and the contributions made by those career civilian
employees of the Federal Aviation Administration who transferred to MWAA
with the leasing of the Metropolitan Washington Airports in 1986. In
addition, the Power Marketing Administrations (PMA)24 agreed to recover
the dynamic normal cost of CSRS (including military service costs) through
their power rates prospectively beginning in fiscal year 1998.25 The PMAs
agreed to do so in response to a series of reports we issued.26

One might reasonably argue that the Postal Service should be treated like
other agencies with respect to its funding of pension costs. However, the
fact that other federal entities are not currently fully funding the

23Pub. L. No. 99-500, title VI, secs. 6005, 6008, 100 Stat. 1783,
1783-373, 1783-375, 1783-382; Pub. L. No. 99-591, title VI, secs. 6005,
6008, 100 Stat. 3341, 3341-376, 3341-378, 3341-385.

24The PMAs are part of the Department of Energy (DOE) and were established
to sell and transmit electricity generated mainly from federal hydropower
facilities and are required to be generally self-supporting.

25The PMAs also agreed to recover the dynamic normal cost for the
postretirement health benefits available to eligible retirees through the
Federal Employees Health Benefits Program (FEHBP).

26See the following General Accounting Office products: (1) Power
Marketing Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities, GAO/AIMD-96-145 (Washington, D.C.: Sept. 19, 1996),
(2) Federal Electricity Activities: The Federal Government's Net Cost and
Potential for Future Losses, GAO/AIMD-97-110 and 110A (Washington, D.C.:
Sept. 19, 1997), (3) Federal Power: Options for Selected Power Marketing
Administration's Role in a Changing Electricity Industry, GAO/RCED-98-43,
(Washington, D.C. March 6, 1998) and (4) Power Marketing Administrations:
Repayment of Power Costs Needs Closer Monitoring, GAO/AIMD-98-164
(Washington, D.C.: June 30, 1998).

government's share of CSRS normal costs does not necessarily support the
argument that the Postal Service should not fund them. Likewise, it does
not necessarily support the argument that other agencies start paying for
these costs. Rather, it merely demonstrates the inconsistent treatment of
agencies in this regard.

Our long-standing position has been that employer agencies should fund the
dynamic cost of the government's retirement programs not otherwise funded
with employee withholdings and deposits.27 We also observed on numerous
occasions that, as a result of charging less than the dynamic cost of CSRS
not otherwise provided by employee withholdings, agencies whose operations
are intended to be self-supporting receive large subsidies that are not
recognized in the cost of their goods and services.28 However, our
previous recommendations and observations did not specifically address
whether the cost of military service benefits should be included as part
of a dynamic normal cost factor. Nor did we examine the issue of whether
the entity that benefited from the service should ultimately pay for any
related benefits. Additionally, with the exception of self-supporting
agencies that pay the dynamic cost of these benefits, taxpayers ultimately
fund the benefits, regardless of whether these costs are included in
individual agency budgets. Therefore, charging the self-supporting
agencies' customers for the government's share of the dynamic normal cost
of pension benefits results in real savings to the taxpayers and,
therefore, is not just a change in the timing and source of funding.

Regarding the Postal Service's statement that private sector companies are
not responsible for military service costs, it is true that private sector
companies are not required to give credit for past military service in
their defined benefit pension plans. However, it should also be noted that
the taxes these companies pay to the general fund of the Treasury are used
to

27For example, see the following General Accounting Office products: (1)
Federal Retirement Systems: Unrecognized Costs, Inadequate Funding,
Inconsistent Benefits, GAO-FPCD-77-48 (Washington, D.C.: Aug. 3, 1977),
(2) Need for Overall Policy and Coordinated Management of Federal
Retirement Systems, GAO/FPCD-78-49 (Washington, D.C.: Dec. 29, 1978), and
(3) Overview of Federal Retirement Programs, GAO/T-GGD-95-172 (Washington,
D.C.: May 22, 1995).

28For example, see the following General Accounting Office products: (1)
Need for Recognition of the Full Cost of Retirement Benefits for Federal
Work Force, GAO-FPCD-7949 (Washington, D.C.: Apr. 11, 1979), (2) Federal
Retirement Issues, 109874 (Washington, D.C.: July 12, 1979), and (3)
Analysis of Grace Commission Proposals To Change the Civil Service
Retirement System, GAO-GGD-85-31 (Washington, D.C.: Feb. 13, 1985).

pay for various costs incurred by the federal government, including the
military service benefits of military retirees and those employees who
retired from agencies other than the Postal Service. The Postal Service is
exempt from paying any corporate income taxes.

  Observations on Alternative Military Service Cost Allocation Approaches

The OPM and Treasury proposal presented five possible approaches for
allocating the cost of benefits attributable to military service between
the Treasury and the Postal Service. The Postal Service's position is that
taxpayers, not postal ratepayers, should be responsible for the full cost
of CSRS military service benefits, and it did not offer any other funding
alternatives as part of its military service funding proposal.

The information from the OPM and Treasury proposal is reprinted below in
table 1. OPM calculated the estimated cost to the Treasury of each
approach using the pro-rata approach to allocating military service set
forth in P.L. 108-18 as the baseline.29

29The OPM and Treasury proposal estimates were calculated using CSRS-wide
demographic assumptions. The use of Postal Service-specific demographic
assumptions in the calculation of the present value of future benefits and
future normal cost and other contributions produces slightly different
results. The ultimate cost of any particular alternative is determined
once all benefits and other expenses have been paid to Postal Service
annuitants.

Table 1: Estimated Costs to Treasury of Alternative Allocation Approaches

               P.L. 108-18: Postal Service pays a pro-rata share
                                                                       All                        
      Total   additional             Postal Service   Treasury  Postal military                   
  estimated      cost to Alternative responsibilitya       (in Service service                    
                                                     billions)    pays for            $           
                                                                   all post-71  (20.7)b  retirees 

All military for post-71 hires, pro-rata share for pre-71 hires

                                      $ 0

Treasury pays for pre-1971 hires

All military for post-71 hires, no military for pre-71 hires

                                     $ 7.1

           Postal Service pays post-       Only for military service   $ 16.6 
            9/30/02 military service     benefits paid in the future 
                            benefits                                 
                   Treasury pays all    No military service, past or   $ 27.2 
                                                              future 

Source: Based on data provided by OPM.

aReference to "post-71" and "pre-1971" mean post June 30, 1971, and pre
July 1, 1971, respectively.

bThe total estimated additional cost to the Treasury of the "Postal
Service pays all" alternative does not agree with the "Treasury pays all"
alternative because the baseline prorata alternative did not result in an
equal split of costs between the Postal Service and Treasury.

OPM's P.L. 108-18 pro-rata approach requires that the Postal Service fund
(1) all CSRS military service benefits of employees hired into a civilian
position after June 30, 1971, and (2) a pro-rata share of these benefits
for employees hired before July 1, 1971. OPM estimated this pro-rata share
of benefits by first allocating an employee's total creditable military
service based on the ratio of pre-1971 civilian service to the total
civilian service which the employee accrued both before and after the
effective date of the Postal Reorganization Act. OPM's methodology also
assumed that the Postal Service should be responsible for (1) the effect
of post-1971 general pay increases and increasing benefit accrual rates on
the final amount of military service benefits at retirement, including
those military service credits allocated to the federal government, and
(2) a proportional amount of post-1971 annuitant cost-of-living
adjustments. These aspects of OPM's methodology apply to the second,
third, and fourth funding alternatives presented in the OPM and Treasury
proposal. The other two alternatives - Treasury pays the entire cost of
military service or Postal Service pays the entire cost after September
30, 2002 - have the responsible agency funding all CSRS benefits
attributable to military service, including all annuitant

COLAs. Appendix B of the OPM and Treasury proposal provides examples of
how an example retiree's benefit payment would be allocated into civilian
and military service portions and how the federal government's share of
those amounts would be determined for each of the funding alternatives.

The total estimated additional cost to the Treasury for each funding
alternative is equal to the difference between the projected funded status
- or "supplemental liability" - of the current law pro-rata approach with
that of each alternative. Appendix C of the OPM and Treasury proposal
provides the net asset, present value of future benefits, and present
value of future contributions components of the "supplemental liability"
for each funding alternative.

In addition to providing the total impact of each funding alternative on
the Treasury as compared to the current law pro-rata approach, the OPM and
Treasury proposal also provides their views of the strengths or
limitations of the alternatives. Most of the commentary in this section of
the OPM and Treasury proposal repeats assertions and arguments presented
elsewhere. However, we believe some clarification of the following
statements made in the first funding alternative is needed:

"Because military service only becomes creditable at the time when an
employee actually retires, it would not be unreasonable to charge Postal
Service for the entire amount of military service for all employees who
retired from the Postal Service after June 30, 1971. It was only because
these employees retired from the Postal Service that they received credit
for their military service."

"Civil Service rules required that to receive a regular retirement benefit
the employees must have at least five years of civilian service and then
attain additional age and service requirements."

The rules governing the crediting of military service are established in
law and regulation. Generally, military service can be used in the
computation of any annuity after having completed 5 years of civilian
service and if the following three conditions are met: (1) the military
service was active and terminated under honorable conditions, (2) the
military service was performed before separating from a civilian position
covered by CSRS, and (3) the employee makes any required deposits.

The OPM and Treasury statement that an employee must meet additional age
and service requirements beyond the first 5 years to receive a regular
(voluntary) retirement benefit is accurate, as is the statement that an

employee must retire - in this case from the Postal Service - in order for
military service to be counted in the computation of an annuity benefit.
However, an employee is entitled to receive a disability retirement
benefit at any age with 5 years of civilian service and a deferred annuity
beginning at age 62 with 5 years of civilian service. Once employees meet
the minimum years of civilian service necessary to be entitled to any type
of annuity and meet the conditions listed above, they are entitled to have
all of their military service included in the computation of their
annuity.

For purposes of determining how best to allocate CSRS military service
benefits, it is important to note that OPM assumed that employees render
military service prior to when they first enter civilian service. This
leads to the presumption that the military service credits of many of the
Postal Service's retirees were already creditable towards an annuity by
the time the Service commenced operations in 1971.30 Yet, for purposes of
estimating the Postal Service's share of the CSRS portion of CSRDF assets
and the actuarial present value of future benefits, OPM allocated the
years of creditable military service of former and current Postal Service
employees proportionally over the employees' civilian career.

For example, an employee who retired in 1991 with 10 years of civilian
service before July 1, 1971, and 20 years after June 30, 1971, would have
two-thirds of any military service allocated to the Postal Service, even
though OPM assumes that all military service was rendered before the
employee was hired into a covered civilian position. Consequently, this
example employee's military service would have been creditable towards a
civilian pension benefit before the Postal Service commenced operations.
The OPM and Treasury proposal did not include an allocation alternative
that reflects the extent to which military service became creditable after
the Postal Service commenced operations.

The scoring of each alternative approach to funding military service
hinges on how Postal Service would spend any additional savings. The
Postal Service was required by P.L. 108-18 to submit a proposal detailing
how it would expend any savings accruing to it after fiscal year 2005 as a
result of enactment of P.L. 108-18. In that separate proposal, the Postal
Service provided two alternatives to spending any savings. The first
alternative assumes the responsibility for funding the CSRS military
service benefits of

30Due to limitations in the data readily available to it, OPM also assumed
that all creditable civilian service occurred without breaks in between.

its current and former employees will return to the Treasury, while the
other alternative assumes that the Postal Service will retain this
responsibility as defined under P.L. 108-18. Consequently, we present our
estimates of the budgetary implications of only these two military service
funding alternatives in our companion report on the results of our
mandated review of the Postal Service's savings plan proposal. This report
is entitled Postal Pension Funding Reform: Issues Related to the Postal
Service's Proposed Use of Pension Savings, GAO-04-238.

Conclusion	The agencies made various arguments as to which agency - Postal
Service or Treasury - should fund the cost of CSRS military service
benefits. We made various observations that considered the accuracy of the
various assertions presented, those aspects of equity and consistency
raised by the agencies, the Postal Service's unique role in the financing
of CSRS and FERS benefits, and its status as a self-supporting agency.
Ultimately, the Congress must make this decision. Should the Congress
decide that the Postal Service should be responsible for funding CSRS
military service benefits attributable to its employees, the Congress
should then decide the extent to which these benefits should be attributed
to the Postal Service and perhaps to other self-supporting agencies. Even
if the Congress decides that self-supporting agencies should not be
required to fund CSRS military service benefits, the Congress should still
consider whether these agencies should be required to fund the dynamic
normal cost of their CSRS employees' benefits that excludes the military
service component.

The OPM and Treasury proposal provided five alternative allocation
approaches; however, none of their approaches included an allocation
alternative that reflects the extent to which the Postal Service's current
and former employees had, by the time the Service commenced operations in
1971, completed the 5 years of civilian service needed to be entitled to
have their past military service credits used in the computation of an
annuity. This alternative would provide an estimate of Postal Service's
obligation that includes only military service benefits that became
creditable after the Postal Service commenced operations.

Matters for To help promote full and consistent funding of CSRS benefits
among self-Congressional supporting federal agencies, we suggest that the
Congress consider

  Consideration

o 	requiring all self-supporting federal entities to pay the dynamic cost
of employee pension benefit costs not paid for by employee contributions
and deposits, excluding military service costs, and

o 	treating all self-supporting federal entities consistently with regard
to whatever decision is made on Postal Service funding of the military
service component of CSRS employee benefits.

Recommendation for 	If the Congress decides that the Postal Service should
be responsible for military service costs associated with its employees,
we recommend that

Executive Action	OPM provide the Congress with estimates of the additional
cost to the Treasury of making the Postal Service responsible only for
employee military service that became creditable after June 30, 1971.

  Agency Comments and Our Evaluation

Postal Service	In written comments on a draft of this report the
Postmaster General expressed concern with what he saw as an inference that
the Postal Service should be responsible for the cost of an employee's
military service because it hires the employee knowing of the past
military service. The Postmaster General also reaffirmed the Postal
Service's commitment to the fundamental policy of veterans' preferences.

Our report did not imply that knowing of past military service was a
relevant factor in determining whether the Postal Service should bear this
cost, but rather simply stated the fact that the right to receive credit
for past military service arises only as a result of employment in a
civilian position covered by CSRS or FERS.

The Postmaster General also stated that our suggestion that the Congress
consider requiring all self-supporting entities to fund the dynamic costs
of employee pension benefits is not an issue for the Postal Service
because it began doing so as of April 2003. Our report states that there
are other selfsupporting agencies that are not required to fund military
service costs and do not otherwise fully fund the dynamic normal cost of
their CSRS employees' benefits as the Postal Service is now required to
do. We

highlighted this difference in funding requirements to illustrate an
inconsistency that the Congress may want to consider as it contemplates
CSRS employee benefits funding by the Postal Service. The Postmaster
General's written comments are reprinted in appendix III.

OPM and Treasury	In written comments on a draft of this report, the
Secretary of the Treasury and Director of OPM disagreed with our statement
that there is no direct relationship between an employee's prior military
service and the operations of the Postal Service. They stated that
granting credit for military service in calculating civilian pensions
enables the Postal Service to recruit and retain veterans, who provide
direct benefits to the operations of their employer. We agree that the
crediting of military service facilitates the recruitment and retention of
veterans who, subsequent to their military service, contribute to postal
operations. However, we continue to view the relationship between military
service and postal operations as indirect because the activities performed
while serving in the military did not directly contribute to the daily
operations of the Postal Service at the time the military service was
rendered.

In their comment letter, the Secretary of the Treasury and Director of OPM
also provided certain clarifications with respect to their policy
positions and beliefs. For example, they stated that their estimate, made
at our request, of the value of benefit costs due to military service
before 1971 includes all increases in the value of those benefits that
resulted from pay raises granted by the Postal Service, but that they do
not endorse this method, especially insofar as it permits Postal Service
pay increases to then increase the cost allocated to the Treasury. We do
not endorse this or any other cost allocation method. As stated in our
report, our position is that the Congress needs to decide whether the
Postal Service should fund the cost of military service attributable to
military service of its current and former employees. If the Congress
decides that the Postal Service should fund these costs, then it needs to
decide which method to use in allocating costs to the Postal Service. The
written comments from the Secretary of the Treasury and Director of OPM
are reprinted in appendix IV.

We are sending copies of this report to the Director of the Office of
Personnel Management, the Postmaster General, the Secretary of the
Treasury, the Director of the Office of Management and Budget, and other
interested parties. We are also sending this report to the Honorable John
M. McHugh, House of Representatives, as the Chairman of the Special Panel
on Postal Reform and Oversight, House Committee on Government

Reform. The report is also available at no charge on GAO's home page at
http://wwww.gao.gov. If you have any questions about this report, please
contact Linda Calbom, Director, Financial Management and Assurance, at
(202) 512-8341, or Robert Martin, Acting Director, at (202) 512-6131. You
may reach them by e-mail at [email protected] and [email protected]. Other key
contributors to this report were Joseph Applebaum, Richard Cambosos, Lisa
Crye, Frederick Evans, Darren Goode, Scott McNulty, and Brooke Whittaker.

David M. Walker Comptroller General of the United States

                                   Appendix I

                          Report from OPM and Treasury

Appendix I Report from OPM and Treasury Appendix I Report from OPM and
Treasury Appendix I Report from OPM and Treasury Appendix I Report from
OPM and Treasury Appendix I Report from OPM and Treasury Appendix I Report
from OPM and Treasury Appendix I Report from OPM and Treasury Appendix I
Report from OPM and Treasury Appendix I Report from OPM and Treasury
Appendix I Report from OPM and Treasury

                                  Appendix II

                  Report from the United States Postal Service

Appendix II Report from the United States Postal Service Appendix II
Report from the United States Postal Service Appendix II Report from the
United States Postal Service Appendix II Report from the United States
Postal Service Appendix II Report from the United States Postal Service

Appendix III

Comments from the United States Postal Service

Appendix III
Comments from the United States Postal
Service

                                  Appendix IV

                         Comments from OPM and Treasury

Appendix IV
Comments from OPM and Treasury

                                       (

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