The Truth About The Post Office's Financial Mess
CNBC Senior Talent Producer
The financial woes of the U.S. Postal System have become a point of contention on Capitol Hill. The Postal Service is supposed to make a $5.5 billion payment to its retiree health care fund by November 18th... but doesn't have the money.
US Postal Service workers have a retiree health care benefit in addition to their pension. Before Congress passed the Postal Accountability and Enhancement Act of 2006, the USPS operated under a pay-as-you-go model for retiree health care funding. The new law requires the Postal Service to pre-fund its benefit obligations.
"The idea is that enough money is saved over the course of a career that the benefit is fully paid for by the time the worker retires.
Thanks to these prefunding payments, the Postal Service has greatly reduced its unfunded obligations for retiree health benefits. At the end of fiscal year 2010, these obligations were under $49 billion – a substantial sum, but much more manageable. If the Postal Service continues making its prefunding payments, its unfunded obligations for retiree health benefits will be around $33 billion by the end of the decade. And the postal service will be on course to pay these benefits over time," a Congressional insider explained.
But this pre-funding has become a lightning rod of controversy.
Members of the postal workers union say the pre-funding requirement has created a fiscal mess. Some people have even claimed that law has the effect of requiring the postal service to fund retirement obligations for people who are not yet employed by the USPS--potential future employees.
No one ever intended the law to work that way. And, in fact, it doesn't. Although accounting rules require the postal service to calculate future liabilities, including those for projected future employees, the law only requires pre-funding of obligations to actual current and past employees.
In light of all the controversy, House Oversight Committee Chairman Darrell Issa (R-CA) sent off a series of questions on the pre-funding controversy to the Congressional Research Service to get to the bottom of the question: is pre-funding the reason for the USPS fiscal woes?
C-Suite Insider has exclusively obtained the CRS Memorandum on Postal Service Retiree Health Issue to Chairman Issa as well as an email explaining in further detail their findings. Below is a verbatim email correspondence between the CRS and Chairman Issa's office on the prefunding of 75 years of retiree health care benefits in just 10 years.
"The confusion over 75 years may be due to an "accounting" and not an "actuarial or funding" issue. They only have to fund the future liability of their current or former workforce. This would include some actuarial estimate about the mortality rates of their current workers (I.e. how long they live). So a 25 year old worker would have an average life expectancy (from birth) of 78.7 years. Thus, they would have to project future retiree health benefits for this individual up to about 54 years in the future.
But for accounting purposes they must estimate the future liability over a 75 year period (according to OPM financial accounting guidelines). In this case, they would make some assumptions about new entrants into the workforce and addresses your second question.
Theoretically, these new entrants could include someone who is not born yet. While they have to account for these future liabilities on their financial statements they do not have to fund them if they are not related to their current or former workforce."
Based on the findings of this memorandum, I asked Chairman Issa what his message is to the US Postal Service Unions who say Congress is to be blamed for this crisis.
Chairman Issa: Union leaders must understand that there is no easy fix to a crisis created by declining mail revenues. The often non-existent accounting issues unions want to talk about don’t address fundamental changes to delivery created by the growth of the Internet. Union leaders need to work with, not against, Congress on postal reform, because the alternative is a possible shut-down of the Postal Service next summer.
LL: The Postal unions are urging Congress to allow the Postal Service to stop making these prefunding payments. What would happen?
Chairman Issa: The Postal Service's unfunded liabilities will soar to around $100 billion by the end of the decade. This will reverse hard-won progress. The unfunded obligations will be 25% higher than they were before the Postal Service started its prefunding payments.
With declining revenue, this huge unfunded liability would be a burden that the Postal Service could not afford to bear.
LL: So bottom line, the unions claim of the postal service pre-funding pensions for future workers is false?
Chairman Issa: Absolutely false. The non-partisan Congressional Research Service recently found that pre-funding requirements match Congress’ intent when they were enacted in 2006. The intent is to ensure that the growing unfunded liability for retiree health care for current employees is covered. These employees negotiated for and earned these benefits with their work, so USPS should pay for them.
Likewise, USPS must be self-sustaining, and not funded by the taxpayers. Prefunding is a prudent measure to protect employee’s earned benefits and taxpayer money.
LL: Are the postal unions resorting to fear tactics and myths to scare Americans about what is really going on?
Chairman Issa: Postal workers who have been writing their members of Congress or protesting are just responding to the information that they have been given by their own union leadership. They have been told this money is not covering their benefits, but in fact covering benefits of people who haven’t been born yet. That’s absolutely false.
They have been told there is an overpayment in another pension account that could cover their retiree health care benefits. The non-partisan Government Accountability Office, which audits financial reports for the entire federal government, has weighed in to clearly state that allegation is false. They have been led to believe outrageously false things about Congress “stealing” their money to pay for other things.
The truth will get out there and postal union members will finally understand we’re looking out for them as well as the taxpayer. Postal reform is necessary to secure their earned benefits.
LL: There are a lot of plans out there when it comes to reforming and strengthening the US Postal System including yours. What is the viability of a Senate Bill?
Chairman Issa: What Senate bill? The Senate has a number of different proposals, including one that mirrors the House proposal, but haven’t been able to move forward with anything. So far, only the Issa-Ross Postal Reform Act has shown that it has the necessary support to advance. I believe there needs to be a negotiated bill that can pass both the House and Senate, but so far only the House bill has demonstrated an ability to serve as a viable beginning for discussion.
LL: Americans are tired of bailouts. Should the US Government bailout the US Postal Service?
Chairman Issa: Even if taxpayers forked over every dollar that the Postal Service has ever asked for through multiple backdoor bailout requests, it would only kick the can down the road. The Postmaster General told New York City letter carriers that even if their preferred bailout bill was signed into law they would still probably shut down next summer. A bailout is simply not an option. We need real reform.
LL: If the postal service cannot pay, American taxpayers will be on the hook for those postal benefits correct?
Chairman Issa: That’s correct. Postal employees are federal employees. All federal pension and retirement benefits are paid from the U.S. Treasury. Since the Postal Service’s operating costs are collected from ratepayers, the Postal Service pays the U.S. Treasury for the costs of federal pension benefits postal workers are legally entitled to receive. Even if the Postal Service cannot or does not make these payments, postal workers are still entitled to pension benefits from the Federal government. So it’s ultimately taxpayers who get stuck with the bill if the Postal Service can’t pay the Treasury for the costs of pensions. Check out this video for an animated explanation.
LL: Based on the restructuring proposed, how many jobs are expected to be lost?
Chairman Issa: Downsizing the Postal Service can be done without major disruption to postal workers in the middle of their careers. There are 150,000 postal employees eligible to retire today, with full benefits.
In the next four years, there will be an additional 100,000 employees ready to retire with full benefits. The Postmaster General has proposed changes that would shrink the workforce by 220,000 individuals. If we can agree on a method to incentivize retirement or focus workforce reductions on those who can retire with full benefits, downsizing can occur without adding to the unemployment rolls.
LL: For those Americans who do not want to see their Saturday mail delivery discontinued or post office closed. What's your message to them?
Chairman Issa: Personally, I do not want to see the Postal Service end Saturday delivery or see post offices closed. But the Postal Service is losing $10 billion a year and needs to find ways to cut costs.
It’s a common refrain in this debate to hear particular stakeholders express support for cutting costs – but just not costs that affect expensive aspects of the Postal Service that are most individually important to them. Saturday delivery is a benefit we all enjoy but, when we look at the finances, it is something that may not be worth the $3 billion annual cost. According to polling by Quinnipiac University, 79% of voters favor ending Saturday mail delivery to help solve the Postal Service's financial problems.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."