Pension Issues Cloud Postal Reform Debate

Pension Issues Cloud Postal Reform Debate

Order Code RL32346
CRS Report for Congress
Received through the CRS Web
Pension Issues Cloud Postal Reform Debate
Updated January 26, 2006
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) was 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. The 108th Congress held a dozen hearings on the commission’s
report. Broad postal 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 $18.3 billion from
mail users over the next five years that cannot be used to deliver the mail or support
the system. The Administration opposes removal of the escrow because it would add
at least $3 billion annually to the budget deficit.
The second issue concerns the provision in the 2003 act transferring from the
Treasury to USPS 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. USPS 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 Federal
Employees Retirement System (FERS), to which all postal employees newly hired
since 1984 belong, fully funds military retirement costs through agency contributions.
These two issues prevented postal reform legislation, reported without dissent
by the House Government Reform and Senate Governmental Affairs Committees,
from reaching the floor in the 108th Congress. Both bills would have removed the
escrow requirement and relieved USPS of its current obligation to pay the military
pension costs of its employees. They would also require USPS to begin funding its
future retiree health care obligations.
The House bill was re-introduced and passed in the 109th Congress as H.R. 22.
The Senate bill, S. 662, was reported from committee by a vote of 15-1 on June 22,
2005. Since USPS was granted a 5.4% rate increase this month to cover the costs of
the escrow, and a compromise has emerged to split the military retirement costs,
pension issues may no longer be a block to consideration by the full Senate.
This report will be updated to reflect significant legislative developments.

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
Proposals for Allocating Responsibility for Military Costs . . . . . . . . . . 6
Retirement Funding Issues Addressed in Hearings . . . . . . . . . . . . . . . . . . . . 7
Legislation Introduced in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . 8
Legislative Action in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Analysis of Differences on the Escrow Requirement . . . . . . . . . . . . . . . . . 10
Analysis of Differences on Military Retirement Costs . . . . . . . . . . . . . . . . 12
Developments in the Second Session, 109th Congress . . . . . . . . . . . . . . . . . 14

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 kept 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 brought to
a temporary halt the postal reform effort that had gained some momentum from the
report of a presidential blue-ribbon commission. The issues have once again re-
appeared on the agenda in the 109th Congress.
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 IB10104, Postal Reform, by Nye Stevens; CRS
Report RS21640, The Legislative Recommendations of the President’s Commission
on the United States Postal Service: A Brief Overview, by Nye Stevens and Kevin
Kosar; and CRS Report RL32903: Postal Reform Bills: A Side-by-Side Comparison
of H.R. 22 and S. 662, by 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 personal and, more lately,
for business correspondence. Postal financial problems caused the Government
Accountability Office (GAO; formerly General Accounting Office) 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
nearly $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
1 For further analysis of 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
(continued...)

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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 annual payments USPS was
making to the Civil Service Retirement and Disability Fund (CSRDF) under current
law would eventually 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
1 (...continued)
point. The latest is U.S. Government Accountability Office, U.S. Postal Service: Despite
Recent Progress, Postal Reform Legislation is Still Needed, GAO-05-453T, April 14, 2005,
available at [http://www.gao.gov/new.items/d05453t.pdf].
2 CSRS was closed to new entrants in 1984. Employees hired since then are in the Federal
Employees Retirement System (FERS), a fully funded retirement system.
3 A 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 (out-of-print; available from the authors).
4 U.S. Government Accountability 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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$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,
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 affected 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
is needed to finance CSRS contributions at the new, actuarially determined 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-FY2013 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
5 Letter to Honorable Jim Nussle, Chairman, House Budget Committee, Jan. 27, 2003,
available at [http://www.cbo.gov/showdoc.cfm?index=4033&sequence=0].
6 Congressional Budget Office, Cost Estimate, H.R. 735, Mar. 14, 2003, available at
[http://www.cbo.gov/showdoc.cfm?index=4106&sequence=0].
7 GAO 03-448R, p. 28.

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makes the Postal Service reimburse Treasury for costs that have already been
paid. The shift will 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,
develop and submit a proposal for the use of savings that would accrue from the
8 U.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.
9 Rep. Tom Davis, remarks in the House, Congressional Record, daily edition, vol. 149, Apr.
8, 2003, p. H2904.
10 Senate debate, Congressional Record, daily edition, vol. 149, Apr. 2, 2003, pp. S4724-
4729.
11 House debate, Congressional Record, daily edition, vol. 149, Apr. 8, 2003, pp. H2901-
2909.

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law’s enactment 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, contemplated that Congress would revisit the
escrow requirement by the end of May, 2004.
Administration and USPS Proposals Differ
In the first two and one-half years that passed after enactment of P.L. 108-18,
little progress was 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
was sharply opposed to that taken by USPS and its stakeholders, and GAO’s reviews
of the contrasting analyses did not resolve the differences. Only in January 2006 has
a compromise emerged.
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 would be no savings because USPS
would 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
would 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. CBO estimated that the escrow requirement will cost USPS
(and therefore the mailing public) nearly $3 billion in 2006 and $36 billion over the
2006-2014 time period.13
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
12 U.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%20of%20Savings%20for%20FYs%20After%2020
05.pdf].
13 Congressional Budget Office, Cost Estimate, H.R. 4341, Postal Accountability and
Enhancement Act, revised July 13, 2004, p. 3.

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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 estimated at $47-57 billion. USPS proposed to devote
all of the “savings” to that purpose if Congress relieved it of the burden of paying
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
November, 2003.14 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.15 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 past 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
14 U.S. Government Accountability 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, at [http://www.gao.gov/new.items/d04238.pdf].
15 U.S. Postal Service, Postal Service Proposal: Military Service Payments Requirements,
P.L.. 108-18, undated, available at [http://reform.house.gov/UploadedFiles/Postal%20
Service%20Proposal%20-%20Military%20Service%20Payments%20Requirements.pdf].

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assignment to the Treasury “an historical accident.”16 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 by the government, no pension costs would have been incurred. In
other words, the Treasury and OPM were saying the credits should be regarded as a
fringe benefit of USPS employment rather than a fringe benefit of military service.
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.17 The GAO report did not consider
the budget scoring impact of the issue. 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.18
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
16 Report 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].
17 U.S. Government Accountability 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].
18 See 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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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
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.19
Since the release of the commission’s report on July 31, 2003, 13 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. 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 at 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’s is a pretty lonely voice on those two issues.”20
Legislation Introduced in the 108th Congress
Postal stakeholders recognized 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 strategy was to package military and
escrow provisions in a broader postal reform measure that enacts some of the far-
reaching recommendations of the President’s own blue-ribbon commission.
On May 12, 2004, Representatives Tom Davis, Waxman, Danny Davis, and
McHugh introduced H.R. 4341, a comprehensive postal reform measure drawn in
large part from previous postal reform efforts developed by Representative McHugh.
The bi-partisan bill also contained provisions repealing the escrow provision of P.L.
108-18, and returning responsibility for the military cost of postal retirees to the
Treasury Department, while also requiring the Postal Service to significantly fund its
retiree health benefit liability. The bill was ordered to be reported the same day by
the House Committee on Government Reform by a vote of 40-0.
19 President’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/].
20 U.S. Congress, The Postal Service in Crisis: A Joint Senate-House Hearing on Principles
for Meaningful Reform, Joint Hearing before the House Committee on Government Reform
and the Senate Committee on Governmental Affairs, 108th Cong., 2nd sess, Serial No. 108-
17, March 23, 2004, Washington: GPO, 2004) p. 33. (Cited hereafter as Joint Hearing.)

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Senators Collins and Carper introduced S. 2468 on May 20, 2004. The bill was
similar in many respects to H.R. 4341, and would also reverse the escrow and
military pension provisions of P.L. 108-18.21 S. 2468 was approved in the Senate
Governmental Affairs Committee by a 17-0 vote on June 2, 2004.
Both bills faced uncertainty in the crowded end-of-session legislative calendar.
In the end, neither bill was brought to the floor for a vote. One reason was that the
Administration raised the level of its opposition to the legislation very late in the
session.
On November 10, 2004, the Administration circulated to insiders on the Hill a
plain-paper criticism of the postal reform legislation. Later referred to as a “white
paper,” the two-page document led with an assertion that the bills failed the test of
self-financing for USPS, citing CBO’s estimates of its budget impact.
Treatment of Military Service Obligations — The Administration believes that
the Postal Service, not ratepayers, must continue to be responsible for its pension
costs connected with military service credit for postal employees under the Civil
Service Retirement System (CSRS). Last year, significant pension relief was
provided for USPS totaling $78 billion. The House and Senate bills would grant
an additional $27 billion in relief by transferring the military service obligation
to the Treasury.
Elimination of the Escrow Requirement — The House and Senate provisions
making funds available to the Postal Service by abolishing the existing statutory
escrow requirement in 2006 must be altered so there is no adverse budget impact.
The Administration supports the underlying policy of abolishing the escrow, and
has proposed a solution to eliminate the requirement in a budget neutral manner
by requiring the Postal Service to use these resources to fully pre-fund current
substantial unfunded liabilities for retiree health benefits.
As it became apparent that the legislation was bogged down, mailers began to
question whether P.L. 108-18 was the unalloyed boon to postal commerce that it
seemed to be at the time it was enacted. The escrow requirement established by the
law will cost mailers $18.3 billion out of pocket over the five-year period 2006-2010,
if it is not changed. 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.22
21 For a comparison of the two bills, see CRS Report RL32402, Postal Reform Bills: A Side-
by-Side Comparison of H.R. 4341 and S. 2468, by Kevin R. Kosar.
22 “Benefits from CSRS Fix Are Slipping Away,” Business Mailers Review, April 12, 2004,
(continued...)

CRS-10
Legislative Action in the 109th Congress
Representative McHugh re-introduced the House version of postal reform
legislation with only minor modifications as H.R. 22 on the first day of the 109th
Congress, for himself, Government Reform Committee Chairman Tom Davis,
Ranking Minority Member Waxman, and Representative Danny Davis. According
to the Committee’s website, “overall, the major provisions of the Postal
Accountability and Reform Act remain the same as the version introduced last
year.”23 H.R. 22 was reported by the House Government Reform Committee by a 39-
0 vote on April 13, 2005 (H.Rept. 109-66).
The Senate bill, S. 662, was introduced on March 17, 2005 by Senators Collins,
Carper, and Voinovich, and was referred to the Committee on Homeland Security
and Governmental Affairs. It was ordered reported by a 15-1 vote of the Committee
on June 22, 2005.
USPS increased pressure on Congress to act by announcing that it would file a
5.4% rate increase request with the Postal Rate Commission in April 2005. The
Postmaster General told the National Postal Forum on March 21 that the increase —
amounting to $3.1 billion and a 2-cent increase in the first class stamp beginning in
January 2006 — would not be necessary if Congress would act to allow USPS to use
the escrow fund for operational needs. This prospect of averting a rate increase was
not enough, however, to move the bill. The rate increase was approved by the Postal
Rate Commission and went into effect on January 8, 2006.
Analysis of Differences on the Escrow Requirement
Controversy about whether to maintain or do away with the escrow requirement
imposed by P.L. 108-18 centers entirely on its budget impact. For the first three
years, there was relatively little budget impact because pension costs were built into
existing postage rates, and most of the proceeds were being used to retire the $11.9
billion USPS debt to the Treasury, which was fully paid off in FY2005.
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.”24 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
22 (...continued)
p. 3.
23 [http://reform.house.gov/GovReform/News/DocumentSingle.aspx?DocumentID=6437].
24 Joint Hearing, pp. 31, 33.

CRS-11
postage increase needed to support the escrow fund would be bad for the economy.
“These are postal dollars that ultimately ought to be used for the post office.”25
The budget impact arises because if USPS were permitted to use the “savings”
(or more accurately, postage receipts above what is needed to finance CSRS
contributions at the current rate) for operational purposes, it would have the effect of
keeping postage rates down, since it would reduce the need to charge mailers for the
operational expenses covered by use of the escrow fund. A reduction in otherwise
expected postage rates would reduce overall receipts to the government as measured
by the unified federal budget. The problem would be solved if all of the funds were
collected and transferred to the Department of the Treasury and committed to funding
the Postal Service Retiree Health Benefits Fund established by the legislation; there
would be no reduction in the unified federal budget. However, this would be of little
benefit to mailers, because it would still keep postage rates higher than needed to
support postal operations.
Both of the bills attempt to strike a balance: they would begin pre-funding the
USPS obligation to pay health care costs for retirees, but at a payment level that
would still allow some rate relief. Both bills would credit the retiree health care fund
with the amount that P.L. 108-18 required USPS to pay for military retirement
obligations. The two bills differ, however, in their payment schedules for amortizing
the health care liability. S. 662 would require USPS to pay more into the retiree
health benefit fund in early years but payments would be stable thereafter — a level
“mortgage payments” approach. H.R. 22 requires a lower initial payment (of about
2%), but then would require sharply higher payments over the 10 subsequent years,
especially from 2010 to 2015. Both bills propose a faster funding pace than USPS
had proposed in its original report to Congress on the subject, but of the two, USPS
prefers the level payments approach. The House bill would allow about a third of the
escrow savings to be used for operational purposes and thus help keep down postage
rates; the Senate bill would reduce that to about a quarter. The USPS commitment
to withdraw its current rate case was predicated on being relieved of the escrow
requirement altogether.
CBO has said that enacting H.R. 22 would not affect how much the federal
government spends on pension or health care benefits for USPS retirees, but it would
increase future budget deficits as measured by the unified federal budget. There
would be an on-budget savings of $35.7 billion (from funding the Postal Service
Retiree Health Benefits Fund in the Treasury), but an off-budget cost of $41.6 billion
(nearly all from reducing postage rates), for a net cost to the unified budget of $5.9
billion for the FY2006-FY2015 period.26 S. 662 would result in on-budget savings
of $37.7 billion and off-budget costs of $41.6 billion over the same 10-year period,
for net cost to the unified budget of $3.9 billion.27
25 Joint Hearing, p. 77.
26 See Congressional Budget Office, Cost Estimate, H.R. 22, Postal Accountability and
Enhancement Act, April 25, 2005, p. 1.
27 See Congressional Budget Office, Cost Estimate, S. 662, Postal Accountability and
(continued...)

CRS-12
Analysis of Differences on Military Retirement Costs
Treasury Secretary John 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, took care to spell 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.28 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
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.”29 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.30
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.
27 (...continued)
Enhancement Act, July 1, 2005, p. 1.
28 U.S. Department of the Treasury, Hearing Testimony of the Honorable John W. Snow,
Mar. 23, 2004, available at [http://www.treas.gov/press/releases/js1255.htm].
29 Ibid., 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.
30 Department of the Treasury, Hearing Testimony, March 23, 2004, p. 3.

CRS-13
The Treasury and OPM again defended the Administration’s position of military
retirement obligations at an April 14, 2005 hearing of the Senate Committee on
Homeland Security and Governmental Affairs. While the basic argument remained
the same, some new thrusts were advanced. OPM Acting Director Dan Blair
emphasized that the federal government’s retirement benefit, which includes credit
for military service, is a valuable component of the government’s overall
compensation package. USPS gains the benefits of that tool in recruitment and
retention of employees, so it should pay for its full cost. In addition, he noted that
Congress enacted similar pension treatment for the Patent and Trademark Office in
2004, and the President’s FY2006 budget proposes continuation of the practice.
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 USPS was required by law to give preference to
veterans in hiring, and when applicants 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.31
Mailers’ organizations have circulated widely a study that asserts “(i)nstead of
draining the federal budget, USPS has actually been subsidizing it.”32
While the views of USPS and mailers on the military retirement issue may be
discounted because of self-interest, their position has been endorsed by at least three
independent but official observers. One, as mentioned on pages 7 and 8 of this
report, was the President’s Commission on the U.S. Postal Service. The Postal
Service Office of the Inspector General (OIG) has also weighed in on the issue. The
OIG issued a report saying that the decision to place additional liabilities on USPS
for the escrow and military retirement costs is “wrong,” and motivated by an attempt
to keep higher payments coming into the CSRDF than is necessary to cover the
expenses borne by postal customers. “The money should not be given to OPM to
subsidize appropriated tax dollars. This would constitute a hidden tax for Postal
Service customers that has not been appropriated by Congress.”33
31 For more information on appropriations to USPS, see CRS Report RS21025, The Postal
Revenue Forgone Appropriation: Overview and Current Issues, by Nye Stevens.
32 Saturation Mailers Coalition, The State of Pension and Retiree Benefit Obligations for the
Postal Service and the Need for Reform, Dec. 2003, available at [http://www.postcom.org/
public/2004/pension.and.benefit.pdf].
33 U.S. Postal Service, Office of the Inspector General, Postal Service’s Funding of the Civil
Service Retirement System, product number FT-OT-04-002, April 9, 2004, p.2.

CRS-14
Finally, when asked at the April 14, 2005 Senate hearing for his views on
military retirement obligations, Comptroller General David Walker responded in a
way that supporters of the reform bills’ approach regarded as an endorsement. He
suggested that Senators use the standards of “matching” and “consistency” in
evaluating the alternatives. “We should match who benefitted from the military
service with the costs. I would argue that all Americans benefitted [from employees’
military service].” With regard to consistency, he noted that other self-supporting
organizations, including the Pension Benefit Guarantee Corporation and the Federal
Deposit Insurance Corporation, do not bear responsibility for the military service
costs of their employees.34
Developments in the Second Session, 109th Congress
Although the Senate Committee on Governmental Affairs and Homeland
Security ordered S. 662 reported on June 22, 2005, the bill languished for the rest of
the First Session of the 109th Congress. While there were a number of reasons for
this, including Senate preoccupation with other matters and a reported “hold” on the
bill because of objections over standards for reviewing postage rates, the opposition
of the Administration on budget impact grounds was certainly a factor. The
leadership did not want a protracted floor debate, preferring to send the bill the
conference by unanimous consent, and that requires working out serious objections
in advance.
The implementation of a 5.4% postage rate increase on January 8, 2006
removed a reason for prompt action on the bill. USPS had made the case that no rate
increase would be required if the need to build the escrow fund were removed,35 but
now that the cost is built into rates, there is less urgency for legislative action. In
fact, the Postal Service has belatedly decided to oppose postal reform legislation
altogether, because perceived inroads into management prerogatives assume more
importance once the prospect of a financial gain is eroded.36
Nevertheless, there is increasing speculation in postal circles of a compromise
with the Administration on postal pension issues that have clouded postal reform
legislation. On the escrow provision, all of the “savings” would be set aside in a
Treasury fund for the health care expenses of retirees, thereby offsetting any potential
budget deficit impact. On military retirement costs, the compromise would relieve
USPS of its current obligation under P.L. 108-18 to pay retroactively for the military
service credits of its employees in the past, but it would assume responsibility for
future payments to CSRS retirees, beginning in FY2007. This would greatly reduce
the financial impact on USPS, and put CSRS and FERS retirees on an equal footing.
34 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, U.S.
Postal Service: What is Needed to Ensure its Future Viability, hearings, 109th Cong., 1st
sess., April 14, 2005 (Washington: GPO, 2005), p. 25.
35 This argument has been questioned as “misleading.” See Michael Schuyler, “Good News
and Bad News In the January 8 Postal Rate Increase,” Institute for Research on the
Economics of Taxation, Dec. 20, 2005. Available at [http://www.iret.org/].
36 Stephen Barr, “Postal Service Goes Offensive in Fight With Senators Over System to Set
Mail Rates,” Washington Post, Jan. 26, 2006, p. B-2.