Ongoing debate in the postal community about the size of the Postal Service's retiree health benefit liability has led congressional leaders to request an analysis by the Postal Regulatory Commission. In a June 9 letter to Chairman Dan Blair, Congressmen Stephen F. Lynch (D-MA), John M. McHugh (R-NY), and Danny K. Davis (D-IL) asked for an analysis of the "different approaches employed by the U.S. Postal Service Office of Inspector General (OIG) and the Office of Personnel Management (OPM) to calculate the present value of the Postal Service's obligations related to the Postal Service Retiree Health Benefit Fund."

    The question about the size of the liability first became public at the House postal oversight hearing this spring when Chairman Lynch expressed concern that H.R. 22 would leave a $75 billion unfunded liability for retiree health benefits in 2017. That voiced concern led to reviews of the OPM's unfunded liability projection, particularly its assumptions.

    Beginning in 2009, OPM projected total liability for all future Postal Service retiree health benefits to be $86 billion. Various assumptions used in the OPM calculations are being questioned, and it's a good step to have an independent analysis completed. Simple assumptions in the OPM methodology, if faulty, can lead to vastly understated or overstated liability figures.

    We're reminded of the revelation in 2002 that the Postal Service had overpayed its employee retirement fund. That episode also involved the Office of Personnel Management and faulty assumptions.

    Long before the retirement fund overpayment problem came to light, it was not uncommon for the Postal Service to find itself the target of funding for the federal government. As an independent establishment of the Executive branch, the Postal Service stopped receiving taxpayer support in 1982. Its operational funding since that time has come from mailers, not appropriated monies. That has made the Postal Service an attractive source of revenue when things get tight.

    Bob Tisch became Postmaster General in August 1986 and soon found that the Postal Service was a favorite source of revenue on Capitol Hill. A successful businessman, Mr. Tisch spent considerable time pushing back on Congress to stop the raids on postal revenues. In Postmaster General Tisch's opinion, the federal government saw the Postal Service as a "cash cow." And despite his considerable clout in Washington, Mr. Tisch had little success is dissuading the political establishment from treating the Postal Service as a cash cow.

    We're pleased that the PRC has been asked to conduct this analysis. With a due date of late July, the analysis should help resolve the question of what the liability really is. That is an important step in addressing the financial crisis facing the Postal Service.

    OIG Reviews Estimates of Postal Service's Liability for Retiree Health Care Benefits

    Prefunding the employer's share of future premiums for retiree health benefits while continuing to pay health care premiums for current retirees was established by the Postal Accountability and Enhancement Act of 2006 (the Act). The Act established a specific payment schedule ranging from $5.4 billion to $5.8 billion over the ten-year period from fiscal years (FYs) 2007 through 2016. These payments have added a crippling burden to the Postal Service's deteriorating financial position. The Office of Inspector General (OIG) for the United States Postal Service contracted the services of the Hay Group to review the assumptions used to estimate the Postal Service's liability for retiree health care benefits.

    The Hay Group concluded that the Office of Personnel Management's (OPM) assumption of an average 7 percent annual health care cost inflation rate for all future years is unreasonably high. The Hay Group surveyed Fortune 100 companies and state and local governments to determine the average health care inflation rate they used and found it to be approximately 5 percent.
    If the Postal Service continues the payment schedule required by the Act, calculations by the Hay Group indicate that the Postal Service could overfund its retiree health care liability by $5.6 billion by the end of fiscal year 2016. The Postal Service could pay on average $3.3 billion less each year from FYs 2009 to 2016 to prefund its retiree health benefits and still achieve the same level of funding anticipated under OPM's assumptions.

    In FY 2008, the Postal Service recorded a net loss of $2.8 billion. Without the $5.6 billion payment mandated by the Act to prefund retiree health benefits, the Postal Service would have had a net income of $2.8 billion. As of Quarter 2, FY 2009, the Postal Service had a year-to-date net loss of $2.3 billion. Had the prefunding charges not been expensed for this period, the Postal Service would have had a net income of approximately $400 million at of the end of Quarter 2, FY 2009.

    The OIG report recommends the Postal Service pursue legislative relief from the mandated schedule of payments into the Postal Service Retiree Health Benefit Fund. Ideally, the legislative relief would adopt an actuarially-based funding method, in which the payment requirements are adjusted each year to match estimated liabilities.

    Presently, a bill in Congress, H.R. 22, which would amend the 2006 Act and was introduced by Congressmen John McHugh and Danny Davis, addresses the prefunding requirement and would make a simple but significant change in the law. H.R. 22 to permit the Postal Service to satisfy its payment for the premiums of current retirees out of the $32 billion that the Postal Service has already set aside for future health benefits premiums. The bill has 331 co-sponsors.

    Postal Community To Lose Congressional Champion

    With President Obama's nomination of Congressman John McHugh (R-NY) to be the Secretary of Army, the postal community faces the loss of one of its top congressional leaders. With his confirmation by the Senate, Congressman McHugh will be departing the congressional scene at the worst possible time for postal stakeholders.

    Mr. McHugh came to Congress from upstate New York over 16 years ago and was appointed to serve on the Postal Service oversight committee. He chaired the Subcommittee on the Postal Service for six years and began the effort to pass postal reform legislation. Respected as thoughtful and fair, Mr. McHugh worked hard to find common ground among the many postal stakeholders.

    During his congressional service Congressman McHugh hired Robert Taub and subsequently promoted him to serve as chief of staff. Mr. Taub, like the Congressman, earned the respect of the postal community with his even-handed approach to issues. And, like the Congressman, Mr. Taub became well versed on complex postal issues.

    It's difficult to lose Congressman McHugh from the postal scene, and it will be even tougher if Robert Taub should also depart Capitol Hill.

    Postal Service Finances Continue to Deteriorate

    The Postal Service saw mail volume and revenue decline in April for every class of mail. Compared with the same period last year, total mail volume was down nearly 15% and revenue was off nearly 12%. First-Class Mail, the primary source of revenue to cover extensive postal overhead costs, was down 12% in volume and over 10% in revenue.

    The largest decline occurred in Standard Mail, with a drop of over 17% in volume and revenue. Year to date, First-Class Mail revenue is down 7% and Standard Mail revenue has dropped 15% compared to the same period last year.

    As noted in Business Mailers Review, the Postal Service reduced total workhours by 9% in April compared to the same period last year. However, that reduction equated to only a 4.3% reduction in compensation and benefits. The difference is due to increases in costs of wages and benefits compared to April 2008. The major factor involves salary increases for non-bargaining and bargaining employees. This included a large cost-of-living adjustment in September 2008 required by Postal Service contracts with its labor unions. Also increasing were the employer's share of health benefit costs.

    The Postal Service's freeze on new hiring also impacted the cost equation. Without new hires that start at the low end of the wage scales, the average salaries and benefits for postal workers are higher.