UNITEDSTATESOFFICEOFPERSONNELMANAGEMENT

Washington,DC20415

TheDirector

SEP242010

HonorableRuthY.GoldwayChairmanPostalRegulatoryCommissionWashington,D.C.20268-0001DearMs.Goldway:ThankyouforyourlettertransmittingthereportfromTheSegalCompany(Segal)regarding"theallocationofthecostsofCivilServiceRetirementSystem(CSRS)benefitspaidtoformerPostOfficeDepartment(POD)employees."OPM'sprincipalrolesinthismatterarethoseofaprogramadministratorandtrustfundfiduciary.Assuch,ourprincipalconcernsmustbefortheefficientoperationandreliablefundingoftheretirementandinsuranceprograms.Asatrustfundfiduciary,ourprincipalrelevantconcerniswiththeadequatefundingoftheprogramandnotwiththesourceofthatfunding.TheSegalreportprovidesausefuldiscussionofissuesthathavebeenraisedregardingthecurrentformulausedtoallocatefundingsharesbetweenthePostalServiceandtheTreasuryforCSRS.Thereport,however,isalsonarrowlyfocused,addressingonlyoneaspectofacomplexarrangement.TheSegalreportacknowledgesasmuchwhenitstatesthatits"recommendationis,inessence,a2010freshlook,anddoesnotattempttodealwiththehistoryaccumulatedoverfortyyearssincethePRAwasenacted."Wearehappytosupportare-examinationofthecurrentpolicyregardingPostalServicefundingofCSRStakingintoaccounttherelevantcircumstances,butmustnotethattheSegalreportdiscussesonlyasubsetofthosecircumstances.LegislativeHistoryOPMdeterminesthePostalService'sresponsibilityforCSRScostsinaccordancewithcurrentlaw.OPM'smethodologyisbasedonthedeterminationsmadebypriorCongressesthatthePostalServiceisresponsibleforCSRScostsattributabletopayincreasesgrantedbythePostalService.Congressfirstestablishedthispolicyin1974,underPublicLaw93-349,andnosubsequentlegislationhasestablishedanalternativepolicy.In2003,theCongressenactedthePostalCivilServiceRetirementSystemFundingReformActof2003(P.L.108-18).P.L.108-18establishedseparateaccountingofallUSPSpaymentsandoutlaystoandfromCSRSfromthecreationofthePostalServicein1971.Thelawcancelledpriorpaymentrequirementsthatifcontinuedwouldhaveultimatelyover-fundedthePostalService'sliabilitiesby$78billion.ThelawmadenoprovisiontochangetheallocationofcostsbetweenthegovernmentandthePostalService.TheSenateCommitteeReportnotesthatP.L.108-18"continuesthePostalService'sliabilityfortheretirementcostsattributabletoitsemployeescoveredbytheCSRS,whichwasimposedwhenthePostOfficeDepartmentbecametheself-supportingUnitedStatesPostalServiceinJuly1971."[S.Rep.No.108-35,at3(2003)]

www.opm.gov

Recruit,RetainandHonoraWorld-ClassWorkforcetoServetheAmericanPeople

www.usajobs.gov

HonorableRuthY.Goldway

-2-FollowingenactmentofP.L.108-18,aPMin2003providedareporttoCongressdetailingitsmethodologyforallocatingCSRScoststothePostalService.In2004,thePostalServiceappealedthismethodologytoaPM.aPMrevieweditsmethodology,andfoundthatitwascorrectlyapplyingthemethodologyconsistentwithCongressionalintent.In2006,theCongressagainaddressedPostalCSRSfunding,viathePostalAccountabilityandEnhancementAct(PAEA;P.L.109-435),whichincludedaprovisionfortheTreasurytotakeresponsibilityforthecostofmilitaryservicecreditinthecomputationofCSRSannuities.ThisCongressionalactionwasimplementedbyaPMandresultedinasavingsof$28billiontothePostalService.ThelegislativehistoryofthatbilldoesnotindicatethattheCongressquestionedtheallocationmethodologyusedtodeterminePostalCSRSobligations.ThecostfiguresincorporatedinCongressionalreportsassociatedwithbothP.L.109-435andP.L.108-18,werebaseduponcalculationsusingthecurrentmethodology.Ifthecurrentmethodologycouldhavebeenchangedbyeitherlaw,thecostwouldhavebeenreflectedintheCongressionalreports.CSRSAllocationPolicyTheSegalreportarguesthatthecurrentallocationmethodologyisnotfairandequitable"exceptinthecontextofCongressionallegislation"andthe1974law.Thatis,SegalacknowledgesthatCongressspokeclearlyonhowtheallocationwastobedetermined,andaPMhasconsistentlyfollowedthesedirections.Asyouareaware,theoriginaltransferofpensionobligationstothePostalServicewasbutonepartofalargertransactionbetweenthePostalServiceandthetaxpayer.WhenthePostalServicewascreatedin1971,itassumedcertainliabilities,suchasthoseassociatedwiththefutureCSRSaccrualsforitsworkforce,butitalsoreceivedcertainconsiderations.Withoutfurtherobligation,allassetsofthePostafficeDepartmentweretransferredtothePostalService.ThePostalServicewasgrantedamonopolyoverfirst-classmail.ThePostalServiceremainedexemptfromFederal,State,andlocaltaxesandvehiclelicensingfees,amongotherthings.Asinprivatesectormergeranddivestituretransactions,pensionobligationswereconsideredinthecontextofthelargersetoftransactions.ReprintedinaSenateCommitteeReportonH.R.29(subsequentlyenactedasP.L.93-349)isaMarch27,1973,letterfromthePostalServicestatingitsposition:"ThislegislationhasbeenproposedonthegroundthatthePostalServiceshouldoperateonafinanciallyself-sufficientbasis,meetingitsoperatingcostsoutofitsrevenuesandnotoutofhiddensubsidies.Aftercarefulconsideration-andinfullawarenessofthefinancialburdensenactmentofthebillwillimpose-thePostalServicehasconcludedthatitisproper,asamatterofprinciple,forthesecoststobeimposedonpostalratepayersratherthanthetaxpayers."[S.Rep.No.93-947,at9(1974)]Asformakingjudgmentsabouthowequitabletheallocationmethodologyis,theSegalrecommendationreliesheavilyonFinancialAccountingStandardsBoard(FASB)financial

HonorableRuthY.Goldway-3-accountingstandards,whichrequireadvancerecognitionofexpectedfuturesalaryincreasesincorporatereportingofprivatesectorpensionliabilities.TheSegalReportnotesalso,however,thatactualfundingofprivatesectorpensionsisgovernedbytheprovisionsofthePensionProtectionActof2006,whichSegalnotesprovides"littleornoallowancefortheimpactoffuturesalaryincreases."Thus,argumentsbasedoncurrentprivatepensionfundingpracticescangoeitherway,fororagainst,theexistingCSRSallocationmethodasitiscurrentlyadministeredbyOPM.TheSegalreportestimatesthatanalternativeallocationmethodwouldresultinareductionofthePostalServiceobligationtoCSRSofapproximately$55billion.Giventhattheexactdeterminationoftheimpactofthealternativemethodologywouldinvolvetheanalysisofnearly40yearsofaccountingrecords,wecannotconfirmtheabsoluteaccuracyofthisestimate.Wedo,however,believethattheSegalanalyseswereprofessionallyconductedandprovideareasonableorderofmagnitudebasisforCongresstoevaluatethecostofSegal'salternativeallocationmethod.Torecap,in2003,CongressdirectedOPMtomakechangestotheaccountingofPostalServiceCSRSobligationsthatledtoa$78billiondecreaseinfuturePostalCSRSfundingpayments.Thenin2006,CongressdirectedOPMtochangehowmilitaryservicecostsshouldbeallocatedunderCSRSthatledtoa$28billonadjustment.Inbothcases,themagnitudeoftheadjustmentwasunderstoodbyCongresswhenthelawswerepassed.ItappearstoOPMthatwhenCongressintendstomakeadjustmentsofthemagnitudesuggestedbytheSegalreport,itdoessobytakingspecificlegislativeaction.

RedeterminationProvisions

WebelievethattheimplicationthatOPMhasthediscretiontomakebasicchangesintheallocationmethodbetweenthePostalServiceandtheTreasurygoesbeyondtheintentof,andtheauthorityprovidedtoOPMin,the2006PostalAccountabilityandEnhancementAct.Thatlawincludedaprovision,section802(c),allowingthePostalServicetoappealtoOPMitsannualdeterminationofthePostalServiceCSRSsupplementalliabilityunder5U.S.C.8348(h)(1).Section802(c)providesinpertinentpart:(A)Requestforreview.--Notwithstandinganyotherprovisionofthissection(includinganyamendmentmadebythissection),anydeterminationorredeterminationmadebytheOfficeofPersonnelManagementunderthissection(includinganyamendmentmadebythissection)shall,uponrequestoftheUnitedStatesPostalService,besubjecttoareviewbythePostalRegulatoryCommissionunderthissubsection.Footnote1ofthePRCtransmittalindicatesthattheiractionisbasedupon:RequestoftheUnitedStatesPostalServicefortheCommissiontoConductaReviewPursuanttoPAEASection802(c)ofOPMDeterminationsRegardingCSRS,February