Order Code RL32346
CRS Report for Congress
Received through the CRS Web
Pension Issues Cloud Postal Reform Debate
April 12, 2004
Nye Stevens
Specialist in American National Government
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Pension Issues Cloud Postal Reform Debate
Summary
Reform of the business model of the U.S. Postal Service (USPS) has been given
new momentum by the July, 2003 report of a blue-ribbon presidential commission.
The commission concluded that USPS faces a long-term decline in mail volume and
revenues, and unless its finances are shored up, a taxpayer bailout or loss of universal
service is threatened. Congress has held a dozen hearings on the commission’s
report. Broad reform proposals, however, have been somewhat overshadowed by
controversy over two pension funding issues left unsettled by passage of P.L. 108-18,
the Postal Civil Service Retirement System Funding Reform Act of 2003.
The first issue is what to do with the “savings” to USPS from the reduction in
its payments to the Civil Service Retirement Fund allowed by the law. Savings for
the first three years were to be used to pay off the USPS debt to the Treasury, but for
FY2006 and later years, the law provided that they be held in escrow pending further
congressional action. Continuation of the escrow requirement greatly concerns
mailers’ organizations, because anticipated new rates will extract money from them
that cannot be used to deliver the mail or support the system. The Administration
opposes removal of the escrow because it would add $3 billion this year to the budget
deficit. USPS would like to use it to set up a separate fund for retiree health benefits.
The second issue concerns the provision in the 2003 act transferring from the
Treasury to the Postal Service responsibility for paying the retirement benefits earned
by postal employees when they were members of the armed forces, a $27 billion
obligation. USPS argues that the Treasury pays for military service credits held by
employees of every other agency, and there is no connection between the USPS
mission and that of the military. The Postmaster General points out that 90% of the
obligation was incurred before USPS was established as an independent entity in
1971. The Administration, however, believes that USPS should pay the full cost of
its employees’ pensions, including those earned in military service, because the
credits have pension value only by virtue of USPS having hired veterans in the first
place. The Administration points out that the Federal Employees Retirement System
(FERS), to which all postal employees newly hired since 1984 belong, fully funds
military retirement obligations through agency contributions.
Because the Postal Service has said it must raise rates in 2006, there is some
urgency to resolving these two issues before rate case preparations begin this
summer. If there is no resolution, the new rates for 2006 will reflect $3 billion for
an escrow fund that cannot be used, and $1.5 billion for repaying the Treasury for the
past military service of present or former postal employees. P.L. 108-18 required
multiple reports on the issues and provided that Congress “shall revisit” the escrow
provision by the end of May 2004. The strategy of postal stakeholders has been to
package acceptable escrow and military retirement provisions with a broader postal
reform measure that enacts some of the bold recommendations of the President’s own
blue-ribbon commission. In a dozen congressional hearings to date, however, these
two issues have overshadowed discussion of the commission’s recommendations.
This report will be updated to reflect significant legislative events.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Postal Civil Service Retirement System Funding Reform Act of 2003 . 2
Escrow and Military Pension Issues To Be Revisited . . . . . . . . . . . . . . . . . . 4
Administration and USPS Proposals Differ . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Proposals for Use of Escrow Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Retirement Funding Issues Addressed in Hearings . . . . . . . . . . . . . . . . . . . . 7
Differences on Escrow Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Differences on Military Retirement Costs . . . . . . . . . . . . . . . . . . . . . . . 9
Legislative Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Pension Issues Cloud Postal Reform
Debate
Reform of the U.S. Postal Service (USPS) business model has become closely
entwined with the congressional commitment to revisit the USPS pension funding
reforms that Congress enacted in 2003. On the one hand, the prospect of a double-
digit postage rate increase to cover pension-related obligations imposed by an act of
the 108th Congress is keeping postal issues on the crowded legislative agenda in an
election year. On the other hand, sharp differences between the Bush Administration
and postal stakeholders over how postal pension obligations are to be handled
threatens to stall the postal reform effort that has gained some momentum from the
report of a presidential blue-ribbon commission.
This report explains and analyzes the postal employee pension issues currently
before Congress. It supplements other CRS products that analyze broader postal
reform issues: CRS Issue Brief 10104, Postal Reform, by Nye Stevens; and CRS
Report RS21640, The Legislative Recommendations of the President’s Commission
on the United States Postal Service: An Overview
, by Nye Stevens and Kevin Kosar.
Background
For the past four years, USPS has been experiencing severe financial pressures
stemming from a long-term decline in use of the mail for business and personal
correspondence. Postal financial problems caused the General Accounting Office
(GAO) to put USPS’s transformation efforts on its High-Risk List of federal
programs in April, 2001, warning of the loss of universal service or a massive
taxpayer bailout. The Comptroller General joined others in warning of a “death
spiral” of rising rates causing further erosion in mail volume, and requiring further
rate increases to cover the costs of the ever-growing delivery network. Three rate
increases in 2001 and 2002 did not keep USPS from ending both of those years in the
red. USPS also faced $100 billion in unfunded liabilities for pensions, health
benefits for retirees, and workers compensation obligations. USPS, its board of
governors, mailers associations, and GAO all agreed that the Postal Reorganization
Act of 1970 no longer provides a viable business model and must be reformed.1
1For further information on the causes of the long-term erosion in USPS financial prospects,
see CRS Report RL31069, Postal Service Financial Problems and Stakeholder Proposals,
by Nye Stevens. GAO has also issued a score of reports and testimonies demonstrating the
point. The latest and most succinct is U.S. General Accounting Office, U.S. Postal Service:
Key Reasons for Postal Reform,
GAO-04-565T (Washington, March 23, 2004), available
at [http://www.gao.gov/new.items/d04565t.pdf].

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Having placed USPS on its High Risk List, GAO found fault with the fact that
no one had ever determined whether the $32 billion liability USPS was carrying on
its books for retirement obligations of its employees who are still under the Civil
Service Retirement System (CSRS) was an accurate figure.2 GAO, along with nearly
all other postal analysts, suspected that it was too low. GAO therefore asked the
Office of Personnel Management (OPM) to recalculate the obligation so that the true
extent of postal liabilities could be known. OPM’s actuaries went back into the
books to isolate Postal Service and postal employee contributions and interest earned
on those contributions since 1971, when USPS became a standalone entity
responsible for funding its own retirement obligations.
Thus it was welcome news when, on November 1, 2002, OPM Director Kay
Coles James wrote the Postmaster General that the payments USPS was making to
the Civil Service Retirement and Disability Fund (CSRDF) under current law would
overfund the USPS liability for pensions to its CSRS retirees by $71 billion. A
principal reason was that interest earnings of past contributions had been credited at
a statutory rate of 5%, when in fact the average rate of return on the bonds held by
the trust fund has been substantially higher.3 In reviewing the OPM calculations,
GAO put the potential overfunding even higher – as much as $103 billion – since
under then-current law the Treasury rather than USPS was responsible for retirement
benefits based on prior military service of postal employees, and OPM’s calculations
treated these as obligations of the Postal Service.4
The Postal Civil Service Retirement System Funding Reform
Act of 2003

The Postal Service, its unions, mailers’ organizations, OPM, the Treasury, and
the Office of Management and Budget all coalesced in support of legislation, drafted
originally by OPM, to change the statutory funding formula and relieve USPS of the
obligation to overfund its liability. On April 23, 2003, President Bush signed into
law the Postal Civil Service Retirement System Funding Reform Act of 2003, P.L.
108-18. The Act authorized USPS to reduce its annual payments to the CSRDF by
$3.5 billion in FY2003 and $2.7 billion in FY2004. Although the law was quickly
passed without dissent in either chamber, two obstacles had to be bypassed along the
way. One was the budget impact.
In reviewing OPM’s draft of the legislation, the Congressional Budget Office
(CBO) said that while the legislation would improve the financial position of USPS,
2CSRS was closed to new entrants in 1984. Employees hired since then are in the Federal
Employees Retirement System (FERS), a fully funded retirement system.
3A much more comprehensive overview of the factors involved in OPM’s recalculation,
including the application of dynamic principles to valuing CSRS liabilities, is contained in
CRS Report RL31684, Funding Postal Service Obligations to the Civil Service Retirement
System,
by Patrick Purcell and Nye Stevens.
4U.S. General Accounting Office, Review of the Office of Personnel Management’s Analysis
of the United States Postal Service’s Funding of Civil Service Retirement System Costs,
GAO-03-448R, Jan. 31, 2003, available at [http://www.gao.gov/new.items/d03448r.pdf].

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it could increase deficits (or reduce surpluses) by as much as $41 billion in the
unified federal budget over the 10-year period from FY2003 to FY2013, depending
in part on what USPS did with the savings.5 If USPS were to use the savings to hold
down postage rates, this would reduce overall government receipts; the unified
federal budget would be reduced since mailers would pay less and the flow of funds
to the CSRDF would be diminished. If, on the other hand, rates were not restrained
and the “saved” money were used to pay down the $11.9 billion USPS debt to the
Treasury’s Federal Financing Bank, the impact on the unified federal budget would
be limited to the reduction in the Bank’s interest income. Partly in response to the
CBO’s report, the Senate (S. 380) and House (H.R. 735) bills directed USPS to use
savings for FY2003 , FY2004, and FY2005 to reduce the Postal Service’s debt to the
Federal Financing Bank. Savings (or more accurately, postage receipts above what
had been needed to finance CSRS contributions at the former rate) in subsequent
fiscal years were to be held in escrow until otherwise provided in law. The final CBO
cost estimate for the legislation projected a maximum budget cost of $7.2 billion over
the FY2003-2013 period.6
The second issue was a provision included in the measure by OPM, where the
first draft originated, relating to responsibility for military retirement obligations.
This provision reversed a long-standing accounting practice that had required the
taxpayer, rather than USPS, to pay the retirement costs associated with retirement
credits earned by USPS employees in CSRS while they had been members of the
armed forces. The legislative proposal would have USPS fund a portion of the
military service costs for employees hired before 1972, and all military costs for
employees hired after 1971 when USPS became independent. GAO estimated the
cost of this provision to USPS as $27.9 billion.7
This provision troubled proponents of the bill. Eight Democrats summarized
their objection to this provision in an “additional views” addendum to the House
committee report on the bill:
... (W)e do not believe that requiring the Postal Service to pay the pension
costs associated with military service is a good idea.... Under current law,
Treasury pays the retirement costs related to the military service of
employees in CSRS. H.R. 735 shifts the burden of costs related to military
service of postal employees covered by CSRS to the Postal Service. In
fact, the bill not only requires the Postal Service to pay military pensions
for current and future retirees, but it also makes the Postal Service
reimburse Treasury for costs that have already been paid. The shift will
5Letter to Honorable Jim Nussle, Chairman, House Budget Committee, Jan. 27, 2003,
available at [http://www.cbo.gov/showdoc.cfm?index=4033&sequence=0].
6Congressional Budget Office, Cost Estimate, H.R. 735, March 14, 2003, available at
[http://www.cbo.gov/showdoc.cfm?index=4106&sequence=0].
7GAO 03-448R, p. 28.

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require the Postal Service to pay $27.2 billion more than it otherwise
would have to pay. This is unfair to the Postal Service.8
Because the White House signaled that it would oppose the legislation if the
military pension provision were removed, Members in the House compromised on
a proposal to revisit the question later. In the words of the floor manager of the bill,
Chairman Tom Davis of the Government Reform Committee,
I think this is an issue that demands further study because no other agency in the
Federal Government that I am aware of funds its CSRS military obligations
within the department. It may ultimately be unfair to make postal customers and
ratepayers fund military retirement benefits.
Working with the gentleman from California (Mr. Waxman), my ranking
member, I prepared an amendment to the House version of the bill, H.R. 735,
requiring the Department of the Treasury, the Office of Personnel Management,
and the Postal Service to develop proposals on this issue. So this is an issue that
will be revisited.9
Escrow and Military Pension Issues To Be Revisited
The military retirement issue was temporarily resolved by including in H.R. 735
a provision (section 2 (e)) requiring USPS, the Treasury Department, and OPM each
to prepare and submit to the President, Congress, and GAO, by September 30, 2003,
“proposals detailing whether and to what extent the Department of the Treasury or
the Postal Service should be responsible for the funding of benefits attributable to the
military service of current and former employees of the Postal Service....”
With this provision added, the Senate agreed to substitute the text of S. 735 for
that of S. 380, and passed the measure by voice vote on April 2, 2003.10 Since S. 380
as passed by the Senate contained the above language approved by the House
Government Reform Committee, passage of S. 380 in the House was not
controversial. It passed on April 8, 2003 by a vote of 424-0.11 President George W.
Bush signed the bill into law, as P.L.108-18, on April 23, 2003.
As enacted, P.L. 108-18 clearly contemplated that both the escrow and the
military retirement provisions would need to be reconsidered. In addition to the
reports required of USPS, the Treasury, and OPM on the military retirement cost
issue, the law also required (Section 3(e)) that USPS, by September 30, 2003,
8U.S. Congress, House Committee on Government Reform, Postal Civil Service Retirement
System Funding Reform Act of 2003,
report to accompany H.R. 735, H.Rept. 108-49, 108th
Cong., 1st sess. (Washington: GPO, 2003), p. 22.
9Rep. Tom Davis, remarks in the House, Congressional Record, daily edition, vol. 149,
April 8, 2003, p. H2904.
10Senate debate, Congressional Record, daily edition, vol. 149, April 2, 2003, pp. S4724-
4729.
11 House debate, Congressional Record, daily edition, vol. 149, April 8, 2003, pp. H2901-
2909.

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develop and submit a proposal for the use of savings that would accrue after FY2005.
GAO was directed to review the reports from USPS and the executive branch on
military retirement costs, and, within 60 days of receiving the USPS proposal for use
of the escrowed savings, to submit to Congress a written evaluation of this proposal.
Section 4 of the act (“Legislative Action”) provided that
Not later than 180 days after it has received both the proposal of the Postal
Service and the evaluation of such proposal by the General Accounting Office
under this subsection, Congress shall revisit the question of how the savings
accruing to the Postal Service as a result of the enactment of this Act should be
used.
This provision, while not binding, contemplates that Congress would revisit the
escrow requirement by the end of May, 2004.
Administration and USPS Proposals Differ
In the year that has passed since enactment of P.L. 108-18, little progress has
been made in resolving the issues that were left open by that legislation, despite the
preparation of multiple reports and the holding of a dozen congressional hearings
where the issues were discussed. The position taken by the Administration is sharply
opposed to that taken by USPS and its stakeholders, and GAO’s reviews of the
contrasting analyses have not resolved the differences. GAO has essentially
concluded that the differences are policy matters for Congress to decide.
Proposals for Use of Escrow Funds.
In its report on use of the savings in escrow after 2005, USPS pointed out that
“savings” is really a misnomer for the “potential amount of overfunding of CSRS
pension costs in any given year had corrective action not been enacted.”12 By the end
of FY2005, USPS said that all of the overfunding in FY2003 through FY2005 will
have been used to reduce debt and keep postage rates steady. In the future, there will
be no savings because USPS will need to build into its rates the cost of funding the
escrow account, an amount that would add 5.4% (or 2 cents on a first class stamp)
to whatever rate increase will otherwise be required in 2006. While it would be
forced to collect the funds from the mailing public, it would not be able to use them
for any purpose under the terms of P.L. 108-18.
Nevertheless, USPS recognized that simply revoking the escrow requirement
and not collecting the funds was not a realistic option, because of its negative effect
on the unified federal budget. Instead, it took into account the need (emphasized by
GAO and specifically identified in the statute for USPS to consider in its plan) to
begin funding the liability USPS faces for the future health benefits of its retirees and
their dependents, an amount it estimates at $47-57 billion. USPS proposed to devote
all of the “savings” to that purpose if Congress relieved it of the burden of paying
12U.S. Postal Service, Postal Service Proposal : Use of Savings For Fiscal Years After 2005,
P.L. 108-18,
undated, available at
[http://reform.house.gov/UploadedFiles/Postal%20Service%20Proposal%20-%20Use%2
0of%20Savings%20for%20FYs%20After%202005.pdf].

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retirement benefits for military service. If Congress does not change the military
service requirement, then USPS would propose to use the escrow fund amount to pre-
fund retiree health benefits only for new employees, and ameliorate future rate
increases by using the rest of the funds for debt repayment and capital investments.
This would at least assure that postal ratepayers providing the funds would get some
benefit in terms of a contribution to the costs of delivering the mail, rather than
having them sit unused. USPS also expected that continuing to collect the funds but
setting them aside in a fund controlled by the executive branch would neutralize the
budget impact. USPS included tables in its report showing how the escrow would
grow in the years after 2006, eventually peaking at $8.7 billion annually.
GAO, as required, issued a report analyzing the two USPS proposals in late
November.13 GAO did not argue for retaining the escrow provision. It found that the
most equitable option was the first one (setting funds aside for all pensioners),
because it struck the most equitable balance between current and future ratepayers
by building benefits earned by today’s employees into its rate base. Leaving those
costs largely unfunded, as the second option would do, was less fair to future
ratepayers. GAO expressed some skepticism about using some of the funds for
capital investments since it did not believe that USPS had provided Congress with
a careful investment plan tied to reducing its workforce and its physical
infrastructure.
Proposals for Allocating Responsibility for Military Costs.
The USPS report on military pay asked Congress to reverse the provision of P.L.
108-18 requiring USPS to pay $27 billion in military retirement costs for its
employees, pointing out that more than 90% of the financial obligation is the result
of military service performed before the Postal Service was created.14 Had OPM
adhered to the practice of assigning costs of military service to the Treasury, USPS
would not be in the situation of overfunding its CSRS obligations in the future; they
would already be overfunded by $10 billion. The USPS proposal was to return the
obligation to the Treasury, and to credit the $27 billion (most of it was paid out long
ago to veterans of World War II and Korea) to a separate Treasury account
designated as the “Postal Service Retiree Health Benefit Fund.” USPS emphasized
that no agency other than USPS is responsible for CSRS costs based on military
service; the Treasury pays these costs for all federal employees under CSRS.
The Treasury/OPM report on behalf of the Administration defended the
requirement that USPS, rather than the Treasury, pay these costs, calling their
13U.S. General Accounting Office, Postal Pension Funding Reform: Issues Related to the
Postal Service’s Proposed Use of Pension Savings,
GAO Report GAO-04-238, Nov. 26,
2003. [http://www.gao.gov/new.items/d04238.pdf].
14U.S. Postal Service, Postal Service Proposal: Military Service Payments Requirements,
P.L.. 108-18,
undated, available at
[http://reform.house.gov/UploadedFiles/Postal%20Service%20Proposal%20-%20Militar
y%20Service%20Payments%20Requirements.pdf].

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assignment to the Treasury “an historical accident.”15 The Administration’s report
started from the principle that all costs attributable to employee service after the 1971
reorganization should be paid by ratepayers rather than taxpayers. The Treasury
(and the taxpayer) should cover only a pro-rated share of military service for
employees who retired after 1971, based on the ratio of pre-1971 civilian service to
total civilian service. Postal employees qualified for pensions based on military
service (like other civil service benefits) only because USPS hired them; if they had
not been hired, no pension costs would have been incurred. The report pointed out
that FERS, which now covers most postal employees, includes the cost of military
service in its dynamic funding principles, and implied that Congress would have
assigned these costs to USPS in 1971 if anyone had been thinking about such issues
then.
GAO’s report on the military retirement issue essentially said that the issues
were matters of policy for Congress to decide.16 The GAO report did not consider
the budget scoring impact of the issue. It is of key importance that costs assigned to
the Treasury are part of the Administration’s budget, while costs paid by USPS are
off-budget.
Retirement Funding Issues Addressed in Hearings
Coinciding with discussion of pension funding issues was the emergence of
serious debate on broader issues of postal reform in the 108th Congress. While
Representative John McHugh had tried for years to gain attention to the need for
reform of the failing USPS business model, legislation drafted by his House
Government Reform Postal Subcommittee had never made much headway. Postal
reform re-emerged as a serious issue with the July, 2003 report of the President’s
Commission on the United States Postal Service. The commission confirmed a
long-term decline in demand for postal services, and made 35 reform
recommendations to stabilize USPS financing, 18 of which would require legislative
action.17
One of the recommendations of the President’s Commission was that
“[r]esponsibility for funding Civil Service Retirement System pension benefits
relating to the military service of Postal Service retirees should be returned to the
Department of the Treasury.” In its discussion of the issue, the commission said
No other Federal agency is required to pay such costs for its retirees under
CSRS. In the Commission’s view, it is inappropriate to require the Postal
15Report to Congress on the Financing of Benefits Attributable to the Military Service of
Current and Former Employees of the Postal Service,
undated, available at
[http://www.treas.gov/press/releases/js775.htm].
16U.S. General Accounting Office, Postal Pension Funding Reform: Review of Military
Service Funding Proposals,
GAO Report GAO-04-281, Nov. 26, 2003.
[http://www.gao.gov/new.items/d04281.pdf].
17See CRS Report RS21640, The Legislative Recommendations of the President’s
Commission on the United States Postal Service: An Overview
, by Nye Stevens and Kevin
Kosar.

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Service, as a self-financing entity that is charged with operating as a
business, to fund costs that would not be borne by any private sector
corporation (costs associated with benefits earned while the retiree was
employed by another employer). In addition, requiring federal agencies
financed through Congressional appropriations to cover the military
retirement benefits of its employees still taps resources from the same
appropriate revenue source – taxpayers. Requiring a self-financing federal
entity to follow suit is wholly different. It asks those who use the nation’s
postal system to subsidize the U.S. military every time they use the mail.18
Since the release of the commission’s report on July 31, 2003, 12 hearings have
been held by the House Government Reform or the Senate Governmental Affairs
Committee, including one joint hearing on March 23, 2004. While the overall focus
of the hearings was on reform proposals, most witnesses addressed the escrow and
military retirement cost issues in their statements. Nearly all of the witnesses urged
that these two provisions of P.L. 108-18 be repealed because of their major impact
on postage rates. The Postmaster General intimated that the rate increase in 2006
will be “in the double digits” including 5.4% for the escrow account alone. Press
reports translated this into a 4-cent increase in the cost of a first-class stamp. Senator
Susan Collins, Chair of the Senate Committee on Governmental Affairs, told
Treasury Secretary John Snow at the March 23 joint hearing that “two issues that
united every single witness who has testified before our committee in these six
previous hearings ... are a desire to see the escrow account repealed and the return of
the military pension obligation to the Treasury Department.... So the administration
has a pretty lonely voice on those two issues.”19
Differences on Escrow Requirement.
At the March 23, 2004 joint hearing, Treasury Secretary John Snow pointed out
that the escrow requirement did not originate with the Administration. He did not
defend it conceptually, beyond observing that by budget scoring conventions, “if the
monies are allowed to flow out of the escrow account, they would be charged against
the deficit and add $3 billion to the deficit.”20 The Administration would accept an
offset of this amount elsewhere in the budget, but would oppose lifting the
requirement without an offset. House Government Reform Chairman Tom Davis
countered that the requirement is a “job killer,” because a 5.4% across the board
18President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service: Report of the President’s
Commission on the United States Postal Service
, (Washington: GPO, July 31, 2003) pp.
125-126. The report is available at
[http://www.treas.gov/offices/domestic-finance/usps/].
19Senate Governmental Affairs and House Government Reform Committees Hold Joint
Hearing on Restructuring the U.S. Postal Service,
FDCH Transcripts, March 23, 2004, pp.
17-18.
20Ibid., pp. 15-16, 38-39.

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postage increase would be bad for the economy. “These are postal dollars that
ultimately ought to be used for the post office.”21
Apparently the Committee is seeking to obtain this objective by structuring an
arrangement that would be neutral from the perspective of the unified budget, yet still
allow postal ratepayers to gain some benefit from the dollars that are now scheduled
to flow into the escrow fund. According to a policy statement adopted by voice vote
of the Committee on February 26, 2004,
This year, the Committee intends to include in postal reform legislation language
cancelling the escrow requirement.... If the escrow is allowed to take effect, the
Postal Service would be required to raise billions of dollars from ratepayers that
it would be unable to spend, which inflates the baseline unified budget.
Cancelling the escrow will have the inverse effect. Using CBO’s baseline
estimate of the effect of the escrow, we estimate that canceling the escrow will
cost the unified budget $12.5 billion through FY09 and $35.7 billion through
FY14.22
The Committee went on to say that these amounts would be partially offset by
establishing the Postal Service Retiree Health Benefits Fund in OPM and funding it
with USPS payments above what is now going into CSRS of $5.1 billion over five
years and $11.0 billion over 10 years. This still leaves a hole in the unified budget
of $7.4 billion through FY2009 and $24.7 billion through FY2014. The Committee
is working with the Congressional Budget Office to determine whether changes to
the postal rate-setting process, certain to be addressed in postal reform legislation,
could be fashioned in such a way as to have a positive effect on the unified budget.23
Differences on Military Retirement Costs.
Treasury Secretary Snow discerned that the Administration’s position on the
incidence of military retirement costs was not well understood by its critics in
Congress and the mailing community. His statement before the March 23, 2004 joint
hearing, therefore, spelled out in more detail the rationale behind the
Administration’s strong opposition to reversing the provision of P.L. 108-18 that
relieved the Treasury of its obligation to pay pension costs of postal employees
arising from their service in the armed forces.24 In some contrast to the arguments
made in the September 2003 OPM-Treasury report to Congress, Secretary Snow cast
the argument this time in terms of general principles of equity, fairness, good
government, and financial prudence.
An important element of the Administration’s defense of its position is that “no
other agency has ever received the benefit of a dynamic analysis of its investment
21Ibid., pp. 38-40.
22U.S. Congress, House Committee on Government Reform, Views and Estimates on the
Fiscal Year 2005 Budget of the United States,
committee print, Feb. 26. 2004, p. 7.
23Ibid.
24U.S. Department of the Treasury, Hearing Testimony of the Honorable John W. Snow,
March 23, 2004, available at [http://www.treas.gov/press/releases/js1255.htm].

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flows, as was the case for the Postal Service. It provided the Postal Service with a
properly calculated, enormous gain of $78 billion at the expense of other CSRS
participants.”25 The statement pointed out that USPS, unlike virtually all other
federal agencies, is obliged to manage its finances in a manner that covers its full
costs. The Secretary also said that the Administration’s proposal “is fair and
equitable because the Postal Service has also been the beneficiary of significant
taxpayer funded appropriations, which more than cover the attribution to Postal of
the $27 billion in military costs.”
The Secretary’s testimony characterized the application of FERS-like principles
to CSRS payments as “a ‘good government’ initiative.”
There are a number of voices that advocate a return of these obligations to the
taxpayer because the impact on the federal budget can be minimized by having
the Postal service allocate these funds to cover other unfunded retirement
obligations.... Good government dictates that we consider this as a real economic
cost, dollar for dollar, no matter how these funds might be accounted for in the
federal budget.26
Finally, the statement said it would be financially imprudent to treat USPS in
a manner different from the FERS funding paradigm, because to “tinker with” FERS
across agencies would have implications throughout the government retirement
structure, with potentially enormous costs.
Most postal stakeholders adhere to the view that the costs of military defense
should not be attributed to postal ratepayers, because they are a national obligation.
While it is unlikely that USPS will be hiring many new employees who are in the
CSRS system, it strikes postal stakeholders as unfair to penalize USPS for having
hired veterans in the past, when those without military service credits would have
been cheaper.
USPS and mailers groups also dispute that USPS has been the beneficiary of
generous appropriations from Congress. It should be noted in this regard that USPS,
though entitled to by law, has not requested a public service appropriation to cover
the costs of universal service since 1982, well before the advent of FERS. While
USPS has received regular appropriations totaling billions as a congressional subsidy
for free or reduced rate mail for non-profit organizations, the blind, and overseas
voters, this was to reimburse it for not charging full costs to such beneficiaries.27
Mailers organizations have circulated widely a study that asserts “(i)nstead of
draining the federal budget, USPS has actually been subsidizing it.”28
25Ibid., p. 2. It should be noted, however, that P.L. 108-18 made no changes in the law that
raised the costs of other CSRS participants.
26Department of the Treasury, Hearing Testimony, March 23,, 2004, p. 3.
27For more information on appropriations to USPS, see CRS Report RS21025, The Postal
Revenue Forgone Appropriation: Overview and Current Issues,
by Nye Stevens.
28Saturation Mailers Coalition, The State of Pension and Retiree Benefit Obligations for the
Postal Service and the Need for Reform
, Dec., 2003, available at
(continued...)

CRS-11
Legislative Prospects
Postal stakeholders recognize that the President would likely veto a free-
standing bill that would add the escrow account to the deficit and return the military
retirement obligation to the Treasury. Their hope is that acceptable military and
escrow provisions can be packaged in a broader postal reform measure that enacts
some of the far-reaching recommendations of the President’s own blue-ribbon
commission. Alternatively, provisions affecting the escrow and military issues could
be inserted in an appropriations measure.

One problem with either approach is timing. USPS plans to raise its rates (for
the first time in three and one-half years) early in 2006. Preparations for the rate case
before the Postal Rate Commission must begin by early summer. If the military and
escrow provisions are not resolved by then, the rate case will need to incorporate
their costs in the new rate request. (In 2006, this would mean $3 billion for the
escrow fund, and $1.5 billion for the military retirement repayment.) However,
postal reform bills have not fared well in Congress in recent years, and according to
House Government Reform Chairman Davis, House and Senate leaders are
“unenthusiastic” about moving a bill this year.29
In the meantime, mailers are beginning to question whether P.L. 108-18 was the
unalloyed boon to postal commerce that it seemed to be at the time. According to a
widely read mailers newsletter
While the immediate windfall from the change in the funding formula allowed
the USPS to postpone the next rate increase by two years, the organization now
finds itself facing the real possibility it will have to build those $3 billion costs
back into the next rate case and absorb the military retirement costs. In short,
it gets no savings in 2006 plus it has to pick up the military costs of $27 billion
– a cost it didn’t have to pay in the past.... (P)erhaps the industry would have
been better off if the CSRS law were never changed. The question will be moot
only if Congress can pass legislation lifting the escrow requirement and shifting
the military costs to the Treasury.30
28(...continued)
[http://www.postcom.org/public/2004/pension.and.benefit.pdf]
29Melissa Campanelli, “Time Becomes Factor in Postal Reform Passage,” DMNews, April
5, 2004, p.1.
30“Benefits from CSRS Fix Are Slipping Away,” Business Mailers Review, April 12, 2004,
p. 3.