Bailout BS: Darrell Issa’s Misinformation Campaign about the Postal Retirement Funds


March 3, 2013

The House Committee on Oversight and Government Reform, chaired by Congressman Darrell Issa, has a website entitled “Saving the Postal Service.”  According to the website, “H.R. 2309, the Issa-Ross Postal Reform Act, is the only legislation that saves the Postal Service from financial collapse.” 

Issa would save the Postal Service by dismantling it.  His legislation would end Saturday delivery, cut benefits to postal workers, remove the no-layoff clause from union contracts, eliminate hundreds of thousands of jobs, reduce the oversight authority of the Postal Regulatory Commission, and make it easier to close post offices.  Its BRAC-style task force would “consolidate redundant post offices” in order to save at least $1 billion a year — a goal that would require closing at least a third of the country’s 32,000 post offices.

Issa’s website features a cute little video called “Postal Crisis 101.”  An animation shows dollar signs moving from taxpayers to postal workers while the narrator explains that unless Issa’s legislation becomes law, the taxpayer is going to be on the hook for the cost of retirement benefits for postal workers.  The word “bailout” gets a lot of attention.

The video says that opponents of postal reform want “to cover this up with a fake accounting gimmick.  They call this an overpayment.” 

The video is just over a minute long, so there’s no time to explain the overpayment “gimmick,” but the website has another page that goes into more detail.  It’s entitled “Why the ‘Postal Overpayment’ Is Really A Taxpayer-Funded Bailout.” 

On this page, Issa attempts to debunk what he characterizes as three “myths” about the overpayments in the retirement funds by giving us what he calls the "facts."   But Issa's narrative about the funds omits many important details and gives a very distorted picture.  

It's rather ironic that this misinformation campaign was paid for with our tax dollars — the same tax dollars Issa says he wants to protect.  

Here’s a rundown of the three “myths,” Issa’s “facts,” and the rest of the story.  

 

The CSRS Overpayments

Issa explains that in 1974, the Postal Service agreed to a formula to share the pension liability of individuals who worked for both the Post Office Department and the Postal Service.  Back then, the Postal Service said the formula was “proper, as a matter of principle,”  but now the Postal Service claims the formula is unfair and argues that if a better formula were used, it would be owed $50 to $75 billion by the US Treasury.  “This,” says Issa, “is an attempt to rewrite history.”

Actually, it’s not about rewriting history at all.  Issa's version of what happened distorts the argument about the CSRS overpayments and just gives one side of the story.

In 1971, when the Postal Reorganization Act (PRA) turned the Department of the Post Office into the Postal Service, Congress decided that postal employees would continue under the same benefit programs available to government employees generally, including the Civil Service Retirement System (CSRS).  The deal was that the government would be responsible for liabilities incurred before 1971, and the Postal Service for liabilities incurred after. 

That seemed fair enough, but it left one question unanswered: If the Postal Service gave a worker a raise that boosted the pension payments upon retirement, who should be responsible for the higher pension costs, the Postal Service, the Treasury, or both? 

In 1974, Congress addressed the question with Public Law 93-349 (the legislation to which Issa refers).  Congress decided that since it could not control the “pay machinery” inside the Postal Service, additional pension costs that resulted from wage increases should be born by the Postal Service, retroactive to 1971.  The law instructed the Office of Personnel Management (OPM) to determine the pension liability increases due to wage increases, and it required the Postal Service to pay off the amount over 30 equal annual installments, beginning on June 30, 1975.

In 2010, the USPS Office of Inspector General (OIG) issued a report saying that the OPM had overcharged the Postal Service by $75 billion during the four decades since 1971.  Here’s why. 

In order to determine what portions of the pension liability were owed by the Postal Service and by the federal government, the OPM used a “freeze frame” methodology.  As Inspector General David Williams explained in testimony to Congress, this approach essentially assumes “that former Post Office Department employees retired in 1971 and received no inflationary salary adjustments or the use of a final salary.”  In other words, it freezes an employee's salary at its 1971 level.

The OIG, working with the Hay Group, a global management consulting and actuarial firm, determined that the freeze-frame methodology was unfair and contrary to law.  The Hay Group calculated that if a more equitable formula were used, the Postal Service would be seen to have overpaid into the Treasury by $75 billion. 

There are two issues here, one of fairness issue and one of law.  The OIG and the Hay Group said the freeze-frame methodology was unfair because it was unreasonable and unrealistic to expect that if employees had continued working for the old Department of the Post Office, they would not have gotten pay increases at all over the forty year period 1971-2011.

The legal issue involves the 2003 Postal Pension Reform Act.  According to the OIG’s reading of the Act, this legislation “directed the OPM to abandon the 1974 legislation and use ‘dynamic assumptions’ that include inflation and pay increases.”                       

Using dynamic assumptions, if an employee worked half his career at the Post Office and half at the Postal Service, the federal government and the Postal Service would each be responsible for 50 percent of the pension obligations.  But as this chart from the Hay Group's report shows, using the OPM's methodology makes the Postal Service responsible for 70 percent of the pension costs.

When it presented its case for the overpayments, the OIG did not recommend that the federal government return the $75 billion to the Postal Service.  Instead, the OIG simply suggested that the money could be transferred from the CSRS to the Retiree Health Benefits Fund (RHBF).  (That’s exactly what happened in the 2006, after another large surplus was discovered in the CSRS.)  This would then make the annual payments of $5.5 billion unnecessary and relieve the Postal Service of a burden that is now responsible for 80 percent of the USPS deficit.

After the OIG’s report came out, the Postal Regulatory Commission hired the Segal Group, a consulting firm that specializes in compensation and benefits, to look into the matter.  Segal used somewhat different assumptions and methods than the Hay Group but came to a similar conclusion.  As the Segal report states, “a fair and equitable allocation methodology” would show that the Postal Service had overpaid its pension fund by over $50 billion. 

The PRC found that the report “provides a persuasive statement of how generally accepted accounting principles should be used to develop the current postal pension assets.”  Like the OIG, the Commission did not recommend a simple refund; it instead suggested that Congress “may wish” to transfer money from the CSRS to the RHBF.

After seeing what the OIG and the PRC had reported, Senators Thomas Carper and Susan Collins and Congressman Stephen Lynch introduced bills to address the problem.  Lynch’s bill (H.R. 5746, "United States Postal Service’s CSRS Obligation Modification Act of 2010") would have credited approximately $75 billion to the Postal Service.  The bill attracted 144 cosponsors, mostly Democrats, but it was opposed by Issa, who said it amounted to a “taxpayer bailout.”

In response to the findings of the OIG and PRC, the OPM argued that the overpayment claim was based on a misinterpretation of the 2003 Pension Reform Act.  In testimony to Issa's committee, John O'Brien of the OPM said his office could find no evidence in the legislative history of the Act or the 2006 PAEA that indicated Congress intended to change the allocation rule.

The OPM’s OIG weighed in as well with this report, saying pretty much the same thing: returning the $75 billion to the Postal Service would shift costs from postal ratepayers to taxpayers.  The GAO subsequently put in its two cents, also siding with the OPM.

All of which is to say, we’re dealing with a complex dispute about accounting practices, legislative history, and issues of logic and fairness.  The Postal Service, the USPS OIG, the PRC, and two consulting firms all say the overpayment is real, while the OPM, the OPM’s OIG, and the GAO say otherwise.

We’re not going to resolve these issues here.   The main point is simply this: Issa’s website gives a very one-sided view of the question.  Calling the overpayments a “myth” makes it sound as if some ill-informed people are spreading falsehoods to further their own agenda.  There’s no reference on his website to the fact that the USPS OIG, the PRC, and two independent actuarial studies all agreed that the Postal Service had overpaid into the CSRS by tens of billions.

Issa’s website also makes this specious argument about the overpayments.  He suggests that “if a different formula had been used all these years that had resulted in lower annual payments by USPS for its federal employee retirement costs, those savings would have been used to lower the cost of postage rates.”  

In other words, says Issa, if the Postal Service had been paying less into its pension fund, it would have been charging less for postage, so the money wouldn’t have been accumulating in the Treasury anyway.  There’d be no $50 or $75 billion because lower annual contributions to the pension fund would have simply meant lower postal rates.

That’s like saying an accountant has discovered that you’ve been overpaying your taxes for years, but the government won’t give you a refund because, it reasons, if you hadn’t been overpaying, you would have spent the money and not saved it. 

This argument doesn’t address the real, underlying issue at all.  If the Postal Service has been bearing an unfair portion of the pension liability, it is owed some sort of a refund.

 

The FERS surplus

Postal workers hired after December 31, 1983, participate in Federal Employees Retirement System (FERS).  The amount of the Postal Service’s contribution is determined by the OPM using actuarial assumptions for future rates of inflation, cost of living adjustments, annual salary increases, and an assumed rate of return.

Because these factors are always changing, the amount of the estimated liability changes, but it's been clear for several years that there's a surplus.  As of 2009, the surplus was $6.9 billion; as of 2010, it was $10.9 billion; as of 2011, $11.4 billion.  

According to the USPS 10-K for 2012, the OPM has revised the FERS surplus down to $3 billion, due to changes in its economic and demographic assumptions.  The Postal Service disputes that estimate, however, arguing that “the FERS surplus would be substantially larger if OPM calculated the liability using available postal data, as experience over the last decade clearly demonstrates that average Postal Service salary increases are significantly lower than the remainder of the federal government.”

However much it is, there’s definitely a surplus in the FERS fund, but Issa argues that because the surplus is based on a “projection,” it’s not real and should not be refunded.  It could, as he puts it, "melt away."  

That argument doesn’t hold up.  Congress has repeatedly readjusted the size of the Postal Service’s contributions to its retirement funds based on “projections.”  Sometimes the legislation increases the contributions, and sometimes it lowers them. 

During the late 1980s and early 1990s, for example, Congress passed a series of laws increasing the Postal Services contributions to its pension funds.  Then in 2003, the Pension Reform Act lowered the contributions to address the fact that the OPM had determined the Postal Service was on track to overfund the CSRS by $70 billion. 

When it comes to pension liabilities, in other words, it’s always a matter of “projections,” and that shouldn’t be a reason to say the surplus is a “myth.”  If that were the case, all of Issa’s concerns about a future taxpayer bailout would be irrelevant because they are all based on projected liabilities.

Another problem with Issa’s argument is that it simply assumes the Postal Service should fund the retirement pensions at 100 percent.  Not many businesses or government agencies fund their pension liabilities at that rate. 

In 2010, the USPS OIG studied other pension funds and issued a report showing that the median prefunding level for pensions for Fortune 1000 companies was 79 percent, while the federal government, state governments, and the military fund at even lower rates.  Here's how things stack up according to the OIG's report:

The USPS 2012 10-K states that the total projected liability for the two pension funds combined is $300 billion, and there’s currently $284 billion in the fund.  That means the pensions are funded at 95 percent of their projected liability. 

The GAO has reported that many experts consider at least 80 percent prefunding to be sound for government pensions.  Using this benchmark, the Postal Service would need only $240 billion in its two funds right now.  It’s thus overfunded by $44 billion.  There's certainly no danger that a deficit will require a taxpayer bailout.  But not a word about any of that on Issa’s website. 

 

Prefunding the Retiree Health Benefits Fund

“To protect taxpayers from covering USPS large unfunded liability on retiree health care benefits,” explains Issa, “Congress mandated that USPS make a series of catch-up payments, often called ‘prefunding,’ starting in 2007 and going through 2017."  He says that the only way “to prevent a taxpayer funded bailout” is to put enough into the fund now.  “If the Postal Service were allowed to immediately cease making these catch-up payments,” claims Issa, “it would have an unfunded liability of nearly $100 billion by 2017 . . . an unaffordable burden for an entity whose core business and revenue is steadily shrinking.”

As with Issa’s other attempts at debunking myths, this does not present the whole story. 

Back in 2002, Comptroller General David Walker (who’s now working on a plan to privatize the Postal Service) put the Postal Service on the GAO's High Risk list because of the huge retirement liabilities.  A few months later, the OPM determined that rather than facing a large pension liability, “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.”  

This overfunding, just to be clear, has nothing to do with the overpayments associated with the CSRS allocation methodology, as described above.  This one has to do with the fact that the pension fund was invested in Treasury bonds that were "earning interest at a higher rate than presumed in the statutory funding formula" (a static 5 percent).

Once the overpayments were discovered, the logical solution was to reduce the amount of the Postal Service's annual contributions to the Treasury, but the Bush administration and its allies in Congress would have none of that because it would have had a negative impact on the federal budget.  So the 2003 Postal Reform Act reduced the size of the payments but also had the Postal Service put the savings aside in escrow while Congress figured out what to do about the issue. 

Three years later, Congress passed the Postal Accountability and Enhancement Act (PAEA).  The Act created a Retiree Health Benefits Fund (RHBF) and mandated ten payments of over $5.5 billion a year.  The reason the payments were so large is not that the Postal Service needed to play “catch-up,” as Issa puts it.  Since the fund is for retirees for the next several decades, it would have been entirely reasonable to spread the contributions out over 40 years, which have meant payments on the order of a billion a year. 

But that wouldn’t have solved the problem of how to handle the reduction in the CSRS contributions, which came to about $4 billion a year.   Mandating those large RHBF payments was about ensuring that the PAEA was “budget neutral” and did not have a negative impact on the federal budget.  In other words, instead of putting several billion a year into the CSRS, the Postal Service was told to put the money in the RHBF.  It was basically a wash.

The result has been a disaster.  Since 2006, when the fund was created, the Postal Service has incurred a deficit of $40 billion.  About $32 billion of that deficit —  nearly 80 percent of it — can be credited to the RHBF payments, as shown in the following table.

(in millions of $)
2007
2008
2009
2010
2011
2012
Total
Operating revenue
$74,778
$74,932
$68,090
$67,052
$65,711
$65,223
 
Operating expenses (with RHBF)
$80,105
$77,738
$71,830
$75,426
$70,634
$80,964
 
Profit / Loss
-$5,327
-$2,806
-$3,740
-$8,374
-$4,923
-$15,741
-$40,911
RHBF payments
$8,358
$5,600
$1,400
$5,500
$0
$11,100
$31,958
Profit / loss without RHBF
$3,031
$2,794
-$2,340
-$2,874
-$4,923
-$4,641
-$8,953
Percent of deficit due to RHBF
 
 
 
 
 
 
78%

At this point, according to the USPS 10-K (p. 42), the projected liability for the RHBF is $90 billion, and there’s about $46 billion in the fund; the unfunded obligation is about $48 billion.  The liability, in other words, is about half funded.  That’s well beyond what most businesses do.

According to the OIG, most companies and government agencies don’t fund their retiree health benefit funds — if they even have one — at anything like 100 percent.  The OIG determined that the average Fortune 1000 company prefunded retiree health care at 28 percent of the liability; the military prefunds at 
29 percent; state governments that prefund average 30 percent; and the federal government does not prefund its retiree health care at all.   Here's what that looks like in a chart from the OIG report:

If the Postal Service used the 30 percent benchmark, the RHBF would already be overfunded to the tune of $17 billion.  The Inspector General has written a letter to Senator Bernie Sanders of Vermont stating that if the Postal Service were to stop making the $5.5 billion payments, the fund would grow with interest and reach its $90 billion liability by 2033.  There’s no need, in other words, to worry about a taxpayer bailout.

Issa, on the other hand, says the liability is going to grow so fast that the unfunded portion will reach $100 billion in a few years.  That, of course, is simply a “projection,” yet it’s on the basis of this projection that Issa cries “bailout” and rationalizes his plan to dismantle the country’s postal system.

In endorsing Issa’s legislation back in 2010, the Washington Post made a revealing acknowledgement.  Noting that the postal worker unions were lobbying Congress to end the RHBF prefunding, the Post urged Congress to say no.  “Pre-funding is the only leverage lawmakers have to force a long-term solution.”

In other words, the huge payments are not about ensuring there’s enough money to pay for retiree health care.  They are simply “leverage” to force cuts to public services and a unionized workforce.

Mainstream media news reports typically ignore the fact that the prefunding mandate is a big part of the postal deficit crisis, but that may be changing.  This ABC news report out of KGO in San Francisco on Friday actually explains the PAEA in some detail:

Milking the cow

Issa's attempts to debunk the “myths” of overpayments to the CSRS, the FERS, and the RHBF as an “accounting gimmick” just don't stand up to scrutiny.   His description of the history and condition of the funds is misleading, and he raises the specter of a taxpayer-funded bailout not because it might happen but to justify the Draconian cuts he wants to make.

Issa needs to show that the overpayments aren’t real or else face this reality: Due to an unfair allocation methodology, the Postal Service has overpaid the CSRS by $50 to $75 billion.  If a benchmark of 80 percent were used to measure the health of the two pension funds, the Postal Service has overpaid by another $44 billion.  If the RHBF liability were put in perspective, there is more than enough in the fund right now to justify suspending the $5.5 billion payments. 

That adds up to simply this. The Postal Service is not faced with retirement liabilities that it cannot meet.  There is no taxpayer bailout on the horizon.  Quite the opposite.

These overpayments amount to unnecessary transfers of billions of dollars from the Postal Service to the U.S. Treasury.  As PRC Chairman Ruth Goldway put it so succinctly last September, “The Postal Service has been a kind of cash cow for the federal government for the last 40 years.” 

Issa’s taxpayer-funded website has things backwards.  It’s not that taxpayers may need to bail out the Postal Service.  Rather, the Postal Service, its workers, and its ratepayers have been bailing out the government for decades.  Now postal employees and customers are being repaid — with cuts to the workforce and cuts to service.  And that's no myth.


For more about the three retirement funds and the overpayments, in addition to the links in the post, check out this IRET Congressional Advisory about the CSRS issue; this OIG report about the FERS surplus; this OIG report about the status of all three funds; and this previous post about how the RHBF prepayments came about, as well as this excellent piece by Kevin Brown.

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