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OFFICE OF INSPECTOR GENERALUNITED STATES POSTAL SERVICE

October 1 1 , 2011Ms. Lorelei St. JamesDirector, Physical InfrastructureU.S. Government Accountability Office441 G Street, N.W.Was hington, D.C. 20548Dear M s, St. James:Thank you for the opportunity to comment on the Government AccountabilityOffice's report titled "Allocation of Responsibility for Pension Benefits Betweenthe Postal Service and the Federal Government."We disagree with the major conclusions ofthe report. Your review focuses on the1 974 law (P.L. 93-349), w hich is not in dispute. All parties agree that the 1 974law made the Postal Sen/ice responsible for funding the additional CSRSliabilities resulting from pay increases after 1 97 1 .The issue in question surrounds the CSRS Funding Reform Act of 2003( PL . 108-18) as it pertains to the Office of Personnel Management's (OPM)share of CSRS liability. Your report fails to recognize how the 2003 law cha ngedthe 1974 law. We do not understand your assertion that the "consequence of the2003 Act was to leave the 1974 allocation unchanged, notwithstanding theremova l of th e explicit allocation provision." If. as you state, the allocationprovision was removed, it does not seem reasonable to assume the intent ofCongress was that the allocation remain unchanged.In fact, the 2003 law chang ed the d irective to OP M . As the legislative historyshows, it was intended to "repeal" the 1974 law (Senate Report No. 108-35,page 6). OPM was required to adopt modern dynamic methods. Dynamicmethods dictate that OPM take into account the effect of future salary increaseson the total liability. Using these methods, OPM was to capture the size ofthepostal liability and the respective responsibilities ofthe Postal Service and OPMto satisfy the liability. Instead, OPM applied dynamic assumptions solely to thePostal S en/ice's share of the liability not to its own share. It appears that OPMfailed to follow the 2003 law and now m ust agree to do so or be compe lled by lawfor a second time.

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Two separate and independent reviews have found that OPM's continued use ofthe 1974 methodology for its own share is either unfair or not consistent withmodern pension standards that use dynamic assumptions and that are requiredin the 2003 law:

Our review, conduc ted with the assistance of the actuarial firm, the HayGrou p, argued that the C SRS liability for employees w ith sen/ice prior to1971 should be split between the Postal Sen/ice and the federalgovernment on a years-of-sen/ice basis. A years-of-sen/ice basis wasused to s plit the liability of retirees' cost-of-living adjustments (COLA)between OPM and the Postal Sen/ice prior to the 2003 law. Additionally,we found tha t the Postal Service's retiree health benefits are alsoallocated between the Postal Sen/ice and OPM on a years-of-servicebasis, w hich is instructive regarding the proper structuring of the CSRSbenefits. We estimated that the Postal Sen/ice had been overcharged$75 billion from fiscal years 1 972 to 2009 for its share of CSRS pensionbenefits.

The Postal Regulatory Com mission's independent actuary, The SegalCompany, advocated a methodology based on private sector accountingstandards. Like our methodology, it takes into accounttheeffect of futuresalary increases on the liability, but it does not split the costs evenly byyears of sen/ice. Instead, it follows the CSRS pension formula, whichprovides a higher benefit for later years of service. Under thismethodology, Segal estimated the Postal Sen/ice overpayment to be$50 to $55 billion. The O ffice of Inspector Gene ral believes that thismethod, though more moderate, represents a second rational approach toimplement the 2003 law.

We believe OPM can now, if it chooses, apply dynamic assumptions to thefederal share since it has been directed to do so since 2003. Under5 U.S.C. 8348, the Postal Sen/ice is responsible for the full amount ofretirement benefits that are "attributable to civilian emp loyment with the PostalSen/ice." However, it is responsible onty for that portion that is attributable toPostal Service employment. The Postal Service is not responsible for the amountattributable to sen/ice prior to 1971.Post Office De partment (PO D) service prior to 1 971 is properly the responsibilityof the federal government. The 2003 law established that these amounts shouldbe calculated dynam ically as the liability increases w ith inflation and otherfactors. As a result, both the Postal Service and federal shares should includethe expected salary increases that are part of the final pension benefit. Non-postal federal salaries have also risen since 1971 , and OPM accounts for and isresponsible for m eeting those increased liabilities. OPM 's failure to pay the full

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CSR S cost of postal service prior to 1 971 leaves a hole in the fund. The PostalService and its employees have been forced to fill the gap, O PM 's position,however, is that it needs to be directed m ore clearly to apply dynam icassum ptions to the federal share by a new piece of legislation.Applying dynamic standards to only part of the liability is not only inconsistentwith the law and w ith modern a ctuarial standards, but it also results in theextraordinarily unfair assignmen t of the largest share of the liability to the PostalService. Under this methodology, the Postal Service could be responsible for70 percent ofthe CSRS pension costs for an employee whose service was splitevenly (50-50) between the Postal Service and the POD. By using the 1974static method for the federal share, OPM is leaving a deficit in the CSRS fundingby not paying for inflation or pay increases attributable to POD se rvice. To makeup the deficit, OPM has overcharged postal ratepayers. Your report argues thatno change is necessary since postal ratepayers have already paid these costs,but we believe that these ratepayers have been overcharged long enough. Acorrection is long overdue.The current OPM methodology is neither fair nor modern nor does it comply withthe 2003 law. W e agree with you that action from Congress is necessary to settlethis issue once and for a ll. W e believe C ongress did just that in 2003. If OPMcannot be convinced of the need to change its methodo logy, the only alternativeis for Congress to compel O PM to act by adding even m ore explicit reformlanguage to the legislation currently being p repared.Sincerely,

'David C W illiamsInspectorGeneral