PEO Letter to Lynch- 04.08.09

Click here to download the PDF version of this letter.

April 8, 2009

The Honorable Stephen F. Lynch
Chairman
Subcommittee on Federal Workforce, Postal Service
and the District of Columbia
United States House of Representatives
Washington, D.C. 20515


Dear Chairman Lynch:

On behalf of the several hundred thousand postal employees we represent as the
leaders of the undersigned seven postal organizations, we thank you for holding the
recent hearing, “Restoring the Financial Stability of the U.S. Postal Service: What Needs
to be Done?” We especially appreciated the opportunity to testify at this critical point in
the life of the Postal Service. The hearing certainly underscored the dire situation facing
the Postal Service in the midst of the economic crisis confronting our country.

We write for three reasons: to address the concerns you raised about the funding
of future retiree health benefits; to correct inaccurate testimony by the Government
Accountability Office (GAO); and to reaffirm our belief that H.R. 22 represents the first
of several necessary steps toward restoring the financial health of the Postal Service.


Assessing Postal Service Retiree Health Benefit Liability

At the hearing, you expressed concern that H.R. 22 would leave a large, $75
billion unfunded liability for retiree health benefits in 2017 and that this would endanger
the availability of these benefits in the future. We certainly share your desire to ensure
that future postal employees receive the health insurance coverage their employer has
committed itself to provide. After all, those retirees are our members. But we believe
that the estimate of the future unfunded liability, as represented by the GAO in its
testimony, is significantly overstated and must be understood in context.

First, let’s examine why the estimate is significantly overstated. At the end of
2008, the projected liability for all future Postal Service retiree health benefits stood at

$86 billion, as calculated by the Postal Service using actuarial methods and assumptions
prescribed by the Office of Personnel Management (OPM). This estimate is based on an
assumed rate of growth in future Federal Employees’ Health Benefits Plan (FEHBP)
health insurance premiums of 7.0% annually, essentially forever. This extremely high
growth rate assumption is unrealistic when it is compared with the 4.75% to 5.00% long-
term trend rate used by most private companies (see, for example, the attached results
from a Watson Wyatt survey of Fortune 1000 companies) and the GDP+1% rate used by
the Medicare trustees (see Long-Term Projection Assumptions for Medicare and
Aggregate National Health Expenditures, Centers for Medicare and Medicaid Services,
Office of the Actuary, March 25, 2008).

The estimate of a $75 billion unfunded liability in 2017 if H.R. 22 were enacted,
as suggested by the Government Accountability Office in its testimony, is based on the
same questionable assumption. This amount represents the difference between the
projected total cost of future retiree health benefits in 2017 ($146 billion) and the
projected balance in the Postal Service Retiree Health Benefit Fund (PSRHBF) in 2017
($71.5 billion), assuming the funding requirements under H.R. 22 are satisfied. A lower,
more realistic assumption of the rate of health inflation in FEHBP would dramatically
reduce the projected unfunded liability to much less than $75 billion.

Second, even assuming the estimate of a $75 billion unfunded liability is correct,
the responsibility of the Postal Service to reduce that liability should be placed in context
of the levels of pre-funding by other public and private sector institutions. Today the
Postal Service Retiree Health Benefits Fund (PSRHBF) has assets of $32 billion, and the
cost of future benefits is estimated to be $86 billion. That means that already the Postal
Service has pre-funded nearly 40% of its obligation. If H.R. 22 is enacted, the assets of
the PSRHBF would more than double to $71.5 billion and the Postal Service funding
ratio would increase to 50% by 2017.

No other agency in the federal government has pre-funded its future liabilities for
retiree health benefits, nor are they statutorily obligated to do so. Most state and local
governments have failed to put any money aside for these benefits either. (See the
February 15, 2009 edition of The USA Today, “Benefits Neglected for Civil Retirees.”)
Moreover, according to Watson Wyatt, only one-third of the Fortune 1000 companies
pre-fund their retiree health benefit obligations. Among that minority that pre-fund at all,
the median funding ratio stood at 31% last year, less than the 38% achieved by the Postal
Service. These companies are likely to significantly reduce their levels of pre-funding
over the next few years in response to the recession, because they are not obligated to
pre-fund in the way the Postal Service is. In the current economic climate, it simply does
not make sense to burden the Postal Service with the onerous schedule of payments
mandated by current law.

Thus, when it comes to pre-funding its future retiree health benefit obligations,
the Postal Service will continue to stand head and shoulders above both private sector and
public sector employers if H.R. 22 becomes law.

Testimony by the Government Accountability Office

We are obliged to address the inaccurate testimony provided, certainly
unintentionally, by Phillip Herr on behalf of the Government Accountability Office at the
March 25 hearing. When he was asked if he knew of any company that is required by
law to pre-fund retiree health benefits on such an “accelerated schedule” similar to that
which applies to the Postal Service, Mr. Herr did not answer the question directly, but
testified that the GAO itself pre-funds its retiree health benefits. That is not accurate.
GAO recognizes its future retiree health costs on its financial statements, but does not
pre-fund them. In this respect, GAO does what all American companies must do to
comply with accounting standards set by the Financial Accounting Standards Board
(FASB). FASB requires the recognition of costs, but does not require pre-funding.
GAO, like most companies and unlike the Postal Service, does not pre-fund its retiree
health benefits.

Mr. Herr also inaccurately testified that, at the time that postal reform legislation
was being developed, the Postal Service was “falling behind its obligation” to pre-fund
retiree health benefits and that it “needed to catch up.” In fact, there was no obligation to
pre-fund these benefits before passage of the PAEA in 2006. The Postal Service was not
“behind” schedule, did not need to “catch up,” and is, as we have shown, far ahead of
other private and public sector institutions in this area.


Additional Steps to Restore Postal Service Financial Stability

Finally, we believe that the best way to protect the health insurance benefits of
our members, both now and in the future, is to help the Postal Service weather the current
economic crisis and to strengthen its finances over the long-run. H.R. 22 is the first step
in support of that approach.

Thus, we urge the Subcommittee to mandate an independent review of the Postal
Service’s post-retirement obligations, including both its retiree health benefits and its
CSRS pension obligations. We believe that OPM significantly overstated the cost of
retiree health benefits. There is also a legitimate and substantial question concerning the
size of the “postal surplus” in the CSRS deserving examination. Finally, Congress
should terminate the subsidy of military pension benefits under FERS by the Postal
Service and reverse the decision to deny Medicare Part D subsidies to the Postal Service.
These corrective actions will contribute in significant and measurable terms to the
financial stability of the Postal Service.

H.R. 22 enjoys broad bipartisan support in the House of Representatives, with 252
co-sponsors, including most of the members of the Subcommittee and 24 of 38 members
of the Committee on Government Oversight and Reform. The legislation offers a
fundamentally sound approach toward restoring the financial viability of the Postal Service and the satisfaction of its commitments to its retirees.
We urge you to lead the Subcommittee toward a speedy markup of the measure.