Game of Loans: The Postal Prefunding Debacle

If the U.S. Postal Service (USPS) pension and retiree health benefit plans really need to be funded separately from other government entities, this should be done properly. Otherwise, they should be returned to the government’s retirement program. And USPS’s overpayments should be returned to USPS.

Instead, the nation has been left with a near comical disaster and staggering debt at USPS for American taxpayers. How we got to this sad point is a tale worth telling.

The story begins in 2002. The U.S. Government Accountability Office (GAO) erroneously concludes that the USPS pension fund is underfunded and recommends that the U.S. Office of Personnel Management (OPM) determine the size of the shortfall and increase the assessed payments.

In response, OPM conducts the first real audit of the funds, finding that USPS has actually been overcharged and has not only fully prefunded its pension, but has a substantial surplus.

The surplus cannot be refunded however. The money by law was placed in the hands of the Treasury, who has spent the money and replaced it with IOUs. Because of historically low interest rates, the more than $300 billion in bonds in the fund soon do not generate enough annual income to cover annual expenses. The fund’s value is eroding.

It is decided in 2006 with the passage of the Postal Accountability and Enhancement Act (PAEA) that USPS will not get the overpayment back. Rather, it will all be applied to a newly invented obligation given to USPS, the retiree health benefits fund.

USPS must also now prepay its future retiree health care bills. Odd, since the rest of the government pays for health care with a pay-as-you-go system, in part because you cannot predict the size for such future liabilities. There are simply too many future unknowns, such as changing life expectancies, new diseases and new cures coming in the 21^st Century.

At the unveiling of the new law, Congress boasts that the giant pre-funds will assure that taxpayers will never be saddled with the postal retirement liability. Actually, with PAEA, the entire liability is now transferred entirely onto the backs of taxpayers. The $300 billion has been spent, and taxpayers will now have to pay for the bonds, as they are redeemed.

Congress also has placed OPM back in charge of managing the Postal retiree funds. The responsibilities include determining OPM’s own share of the liability.

OPM determined the amount USPS will owe for the remainder of the century. The premise of the exercise was that USPS might experience an apocalyptic collapse and would owe employee pensions until the last employee dies.

In determining that huge amount, OPM wrongfully assumed that 100% of the USPS workforce would be eligible for full benefits at this moment of this imaginary collapse. The 100% eligibility assumption is of course wrong. Only a fraction of employees are ever eligible for full retirements. This new assumption results in a hugely inflated liability estimate.

Next the OPM computes the respective liabilities for the old Postal Department, owed by OPM, and the liability portion owed by the Postal Service following its creation. They use the assumption that OPM’s portion will never increase with time. They then assume that the Postal portion will substantially increase with time. That, of course, moves a huge portion of the OPM estimate to the Postal Service — currently over $110 billion.

GAO, the USPS Office of Inspector General, and the Postal Regulatory Commission all did a review of the OPM math gymnastics and agreed that the two bills were not divided properly. GAO, however, concluded that the money now belongs to the Government and therefore Congress can do whatever it wants with its own money. Congress selected the very popular option — inaction.

Lastly, there was no valuation made for the huge postal property holdings. It is assumed by OPM that when the Postal Service collapsed, all its assets would evaporate. Actually, the real estate properties alone are worth many billions.

Now, when you add the USPS pension fund and the retiree health benefits fund together, the USPS had set aside over $330 billion to satisfy this exaggerated OPM estimate of $400 billion. The actual liability was substantially below the $300 billion mark. So, had the postal liability been fairly stated, both the retiree and health plans would have been fully prefunded at creation, with money still left over from the original overcharge.

PAEA also had other unfortunate consequences. It forced perpetual staff cuts, until an increasingly broken Congress was able to pass the next piece of legislation. The unending cuts became so severe that operational performance began collapsing.

Congress also limited price increases on mail services to changes in the Consumer Price Index, prevented infrastructure from being properly optimized, and said mail delivery frequency and processing speeds could not be reduced. This assured failure for USPS.

Under PAEA, Congress ordered USPS to pay more than $5 billion annually into the retiree health benefits fund. After 2010, there was not a penny available for this $5 billion annual payment. USPS was forced to borrow the money for each of its payments, ironically from the Treasury.

Meanwhile the poor return on Treasury bonds is quickly eating up the fund. Had the funds been properly invested, such as how state pension funds for government workers invest, the asset growth would have paid the annual retirement costs, with extra money put aside for a rainy day.

As the crisis grew, the Treasury showed up and demanded to be allowed to run the postal operation, despite the fact that the Treasury actions caused the crisis. Congress told them in no uncertain terms, that more Treasury involvement was the last thing this disaster needed.

Congress now wishes to repair the damage that PAEA caused. However, Congress’ ability to function has been decimated by infighting and the burden of political donor demands.

What is clearly needed is for Congress to set up an actual retirement fund or conclude this failed experiment and return USPS to the federal government retirement system, before GAO’s strange self-fulfilling prophecy actually comes true.

About the Author: David Williams is the former Vice Chairman of the U.S. Postal Service’s Board of Governors. He served as Inspector General of the U.S. Postal Service from 2003-16 and was responsible for a staff of more than 1,100.