• on Oct 16th, 2012 in Strategy & Public Policy | 13 comments
    There has been a surplus in the U.S. Postal Service’s Federal Employees’ Retirement System (FERS) pension program since 1992. Most recently, the FERS surplus was projected to be $11.4 billion, accounting for most of the Postal Service’s total $13.1 billion pension surplus. The Office of Inspector General (OIG) asked Hay Group, an actuarial firm, to examine the causes of the FERS surplus, and a new OIG white paper presents the results of Hay Group’s work. Hay Group found that the main reason for the surplus was differences between the Postal Service and the rest of the federal government. In particular, postal salary growth was lower than the assumptions made in the liability estimates. The surplus grew as actual postal experience replaced the initial assumptions used for the entire FERS population. Hay Group recommends using Postal Service-specific assumptions to provide a more accurate estimate of the liability. When Postal Service-specific assumptions are used to measure the Postal Service’s liability, the surplus increases from $11.4 billion to $24 billion. Given the Postal Service’s current financial health, the existence of the FERS surplus raises some questions. What should be done about the postal FERS surplus? Right now, there is no mechanism to return a FERS surplus once it occurs. Also, what about the contribution rate? The Postal Service currently pays the same FERS contribution rate as other federal agencies, 11.9 percent of payroll for most employees. This contribution rate has increased twice in the past 3 years despite the existence of a surplus for the Postal Service. Should the Postal Service’s contributions be adjusted to reflect its specific characteristics? What do you think? Share your thoughts in the comments below.
  • on Apr 2nd, 2012 in Five Elements of a Postal Solution | 1 comment
    This is the fifth topic in our "Five Elements of a Postal Solution" blog series. Link to last week's topic. Link to the blog by Elmar Toime. Link to the blog by Jim Sauber. Link to the blog by Roger Kodat.
      Guest Blogger Elmar Toime, independent advisor to the postal sector
    Elmar Toime
    There is nothing new in the U.S. Postal Service’s concern about retirement liabilities, but this is part of a larger issue of employee compensation. In developed economies around the world, postal employees enjoyed or still enjoy civil service labor conditions. This is not just about take-home pay. Civil servants typically have better leave and medical arrangements, better working hours, and importantly, more generous pension and medical schemes. This is my first point. Comparisons of postal compensation to compensation in other industries must be made on the value of total remuneration. In itself, higher compensation need not be a problem. The crucial element is whether superior remuneration can be matched by superior productivity. If it can, then the labor cost is justified. And to be fair, in this context, productivity should include both efficiency (as measured for example by labor cost per postal item) and service (for example timely delivery of mail). Whatever the situation, postal services have to be paid for, either by users (when they buy postage) or by the government through subsidies and market protection for mail services. That’s a public policy choice that governments cannot duck. If you want users to pay, then either postage prices have to increase, or services reduced, or labor productivity improved, or assets worked harder. We see all approaches being implemented in other countries. In some places, total labor remuneration growth has been slower than the market, rebalancing in that way. We have seen dual pay structures emerge – existing civil servants retain all benefits, new employees simply don’t get them. We have seen service quality change, through post office closures or a five day service. Everywhere there has been investment in new sorting technology and work practices that require less labor for the volume of mail processed. And we have seen governments allow prices to rise more than inflation, protecting the postal company from competition at the same time. New services have emerged, such as banking in post offices, in order to better use assets or fixed costs. It's an optimization problem that can't avoid difficult decisions. Want my 5 cents worth? Transfer existing pensions and medical insurance liabilities to the federal government. That is soon going to happen in the United Kingdom. Separate these 'old' benefits from a new employment contract based on existing conditions but which can be allowed to evolve with the business. Implement five-day a week delivery (Monday to Friday), accept private sector provision of retail services, rationalize the sorting center network, and increase prices to provide a 5 percent return on capital invested for the first three years. Announce that market liberalization will occur in the third year. In other words, do what most other countries have done! Back to top
      Guest Blogger Jim Sauber, Chief of Staff, National Association of Letter Carriers
    Jim Sauber
    Legacy costs: The Postal Service’s hidden strengths I often joke that the Postal Service is the most financially sound ‘failing business’ in the country. It has two overfunded pension plans (FERS and CSRS), even with the application of grossly inequitable cost allocations methods in the postal portion of the CSRS fund and it has pre-funded nearly 50% of its future retiree health liability when the median level of funding for such benefits among Fortune 1000 companies is zero (0%), according to an annual survey by Towers Watson. These strengths suggest that the financial crisis at the Postal Service is not hopeless. Smart policy on pensions and retiree health costs can help save one of America’s greatest economic assets, a last-mile delivery network that links 150 million households and businesses for an industry that employs 7.5 million Americans. One solution already proposed would be to suspend the retiree health pre-funding during the near term emergency. Restructuring must take priority over pre-funding now. No other agency or private company faces such a mandate. The remaining unfunded liability for retiree health could be covered by implementing the recommendations of the PRC/Segal company audit of CSRS benefits as called for by H.R. 1351, a bill with bipartisan majority support in the House of Representatives. Although the October 2011 GAO report on this issue backed the OPM’s interpretation of the law, and the methods it used for allocating pre-1971 pension costs between USPS and the Treasury, it also concluded that the methods endorsed by the OIG and PRC audits were “reasonable” and that the choice of methods is essentially a “policy decision.” I agree – Congress should make the policy decision, not OPM. There is more that can be done to handle future legacy costs. First, Congress should allow USPS and its employees to invest the assets in the Postal Service Retiree Health Benefits Fund (PSRHBF) in a more appropriate manner. A fund with $45 billion in it, operating on a 75-year time horizon that will pay out $3 billion per year for retiree insurance premiums, should not be invested exclusively in low-yielding Treasury securities. The group of diversified index funds in the Thrift Savings Plan (which also invest for employees’ retirement years) have earned 7.3% annually since their inception. Raising the returns in the PSRHB to this level would cut prefunding cost significantly. Second, legislation to facilitate the intelligent integration of FEHBP and Medicare benefits as well as bargaining between the Postal Service and its unions on health benefits within a FEHBP context could dramatically reduce future retiree health benefit costs. NALC is aggressively exploring the options right now. Of course, these policy changes alone won’t be enough to save the USPS. NALC knows that costs must be properly aligned with the economic realities of the 21st Century through pain-staking collective bargaining – a process that is still underway. More importantly, the Postal Service needs a new business model and a growth strategy that will preserve a robust national network to serve the nation. That will require Congress and all the stakeholders in our industry to come together to reach a consensus on a vision for the future. Back to top
      Guest Blogger Roger Kodat, former official at the Department of the Treasury.
    Roger Kodat
    The legislative process often leaves us wondering if form trumps substance. Take the Postal Accountability and Enhancement Act of 2006, particularly Section 803. This section requires the Postal Service to make cumulative $58.8 billion of specified annual pre-payments from 2007-2016 into a Retiree Health Benefits Fund (CBO report on HR 6407); over $5 billion per year for 10 years in a row. In hindsight, we know now that the law’s payment schedule has since been modified – to date, the Postal Service has been permitted to pay $9.5 billion less than the amounts called for in the bill, but payments totaling $11.1 billion are now due by the end of this year. Even so, the question still remains: How could the Postal Service possibly survive such financially crippling, front-loaded, payments to cover unfunded retiree health liabilities? As legislation was drafted, OPM estimated the Postal Service’s accrued unfunded retiree health liabilities to be about $64 billon; it is now calculated to be around $90 billion. Given the legal requirement for the Postal Service to meet all of its obligations through operating profits, it was deemed prudent that the Postal Service incrementally prefund such an enormous future cost to its employees. As a finance guy, I preferred a 30-year straight-line amortization schedule for Postal to incrementally prefund this future obligation, in keeping with how a private sector corporation might operate. Smooth and steady contributions help ensure a more secure future for the Postal Service and its employees - a key policy objective. Due to budget rules, government does not always work this way. Enter CBO (and don’t forget fiscal constraints the nation faced at the time). In order to gain congressional and administration support to enact a Postal Service reform bill, it was imperative to structure the financial flows in order to minimize, or even zero-out, net cost to the unified budget over the 10-year period following enactment (CBO’s analytical scope in calculating budget cost impacts). Once it was decided by congressional leaders to use this bill also to return the cost of military service retirement credits back to the Treasury (previously a Postal Service obligation), a balancing cash inflow had to be structured to gain support for the legislation. Credit those in Congress who worked creatively and tirelessly to weave a passable reform bill – we needed one. Also remember: the Postal Service had minimal debt at that time; and we could not know how extensive electronic diversion of mail would be; nor the depth of the economic downturn we would face. The $5+ billion yearly obligation, passed with bipartisan support by Congress and the White House, kept the reform budget neutral and did not result in increased costs for the taxpayer. What can be done? Remain vigilant to identify and implement cost savings; expand operating flexibility to drive greater efficiencies; evaluate whether excess CSRS and FERS account balances could be applied to satisfy a portion of this obligation (bear in mind that OPM, in future, could change its long term assumptions, which might result in the Postal Service having a negative fund balance); and ask Congress for a more smooth and steady prefunding schedule. As for the last prescription, I have come full circle. Back to top
    What should be done about overfunding, overpayment, and other unfunded federal mandates? As the Postal Service’s financial crisis deepens, we often hear about overfunding and overpayments by the Postal Service for retiree benefits. This issue is complex and controversial. While some argue that there are overpayments, others respond that the Postal Service has not overpaid but simply paid what is required to ensure that taxpayers are not burdened with future Postal Service liabilities. Postal employees participate in federal pension and retiree health programs, and the Postal Service must set aside money to fund these obligations. On the pension side, the Postal Service has covered the obligations accrued to date. According to the most recent projection by the Office of Personnel Management, the Postal Service’s 2011 pension surplus was over $13 billion. (Most of this surplus was for the newer FERS pension plan.) The Postal Service has only partially funded its retiree health obligations. The federal government does not prefund retiree health benefits, and the Postal Service only started funding these obligations in 2007. Since 2007, the Postal Service has amassed $44 billion, 49 percent of its $90 billion in current liabilities. However, because of its financial problems, the Postal Service is having difficulty making its annual payments to fund retiree health benefits. Last year, Congress delayed the $5.5 billion payment due at the end of September 2011 until August 2012. The Postal Service does not believe it will be able to make the $11.1 billion in retiree health payments it owes for both this year and last year. What should be done about these looming bills? This issue is part of a broader issue of entanglements with the federal government. As part of the federal government, the Postal Service uses federal benefit programs but has little control over their structure; as a self-financed entity, the Postal Service is expected to set aside funds to pay for obligations incurred by these programs. In fact, to gain more control over the cost of health benefits, the Postal Service has proposed moving to a health benefit plan that it operates rather than using the federal plan. Any effort to set the Postal Service on a course for financial sustainability will need to address the question of how to approach retiree benefit funding and federal entanglements. This week, we’ve asked the following guest commentators to discuss the topic over the next few days: • Roger Kodat, former official at the Department of the Treasury. • Jim Sauber, Chief of Staff, National Association of Letter Carriers. • Elmar Toime, independent advisor to the postal sector. We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, April 6, we will summarize and conclude the discussion. Our Guest Bloggers
    Roger Kodat Jim Sauber Elmar Toime
    Roger Kodat Jim Sauber Elmar Toime
    Roger Kodat was Deputy Assistant Secretary of the Treasury from 2001 to 2007 and logged more than 130 different postal-related meetings while working on the reform bill enacted in 2006. In addition, he has over 20 years of investment and commercial banking experience with JPMorgan in Europe, NYC, and Washington, DC. He is currently Principal of The Kodat Group, a consulting firm specializing in helping businesses expand international markets, finance exports, and mitigate risk.. Jim Sauber is the Chief of Staff to President of National Association of Letter Carriers (NALC), where he served many years as its Research Director. He joined the staff of the NALC as an economist in 1985 and has participated in seven rounds of collective bargaining with the United States Postal Service. He is responsible for coordinating the research, collective bargaining, public policy and legislative activities of the union. Elmar Toime is an independent advisor to the postal sector based in London. He is chairman of Postea, Inc, a postal technology group, and a member of the Supervisory Board of Deutsche Post DHL, the world’s leading logistics company. Elmar was the chief executive of New Zealand Post Limited from 1993 to 2003 and Executive Deputy Chairman of the Royal Mail Group from 2003 to 2004. In 2004 Elmar was awarded a life-time achievement award for leadership in the postal industry. Back to top
  • on Feb 27th, 2012 in Five Elements of a Postal Solution | 5 comments

    The Postal Service is one of America’s great institutions. It connects 150 million households and businesses and is the bedrock infrastructure of the American economy and society. Yet the Postal Service faces powerful and unpredictable forces. These forces – the economic downturn, the Digital Age, globalization, and statutory and regulatory demands – are fundamentally changing its outlook for the future. Actions are needed by postal management and Congress to assure that all Americans have universal access and the opportunity to take part in the emerging new world. But, what are those actions?

    The OIG is pleased to announce that, beginning in March, we will host a series of five week-long blogs discussing the elements of a postal solution. The five elements will ask questions on the Postal Service’s mission, infrastructure, role in the Digital Age, and federal mandates. We will invite guest commentators with a wide range of views inside and outside the postal community to contribute to the series.

    On the Monday of each week, the OIG will introduce the element of a postal solution and three guest commentators. On the Tuesday, Wednesday, and Thursday, one guest commentator will contribute an opening post. During the week’s exchange, the guest commentators will submit comments and replies. On the Friday, the OIG will summarize and conclude the discussion. Of course, we invite your comments on each topic at any time.

    The Five Elements of a Postal Solution

    • March 5 – March 9: Should the Postal Service be a competitive business, an enabling infrastructure, or something in–between?
    • March 12 – March 16: What would an optimized Postal Service infrastructure look like in the 21st century and beyond?
    • March 19 – March 23: What opportunities exist for the Postal Service to integrate its traditional role in the digital world?
    • March 26 – March 30: How should Postal Service pricing be redefined in support of a lean and simple national infrastructure with a right-sized workforce in the 21st century and beyond?
    • April 2 – April 6: What should be done about the overfunding, overpayment, and other unfunded federal mandates?

    Scheduled Guest Contributors

    • John Callan, Managing Director, Ursa Major Associates, LLC
    • James Campbell, Attorney and Consultant
    • Jeff Colvin, Director Economist, OIG
    • Dan Combs, CEO, eCitizen Foundation
    • Steve Hutkins, Editor and Administrator, Save the Post Office
    • Richard Kielbowicz, Associate Professor, Communication Networks
    • Roger Kodat, former Official, Department of the Treasury
    • Jessica Lowrance, Executive Vice President, Association for Postal Commerce
    • John Payne, CEO, Zumbox
    • Alan Robinson, Courier, Express, and Postal Observer
    • John Waller, former Director of Office of Accountability and Compliance, Postal Regulatory Commission

    Please join us and invite others to participate. We look forward to hearing from you.

    This blog is hosted by the OIG’s Risk Analysis Research Center.