The masquerade continues: Playing politics with the Postal Service's unfunded liabilities
March 17, 2014
The House subcommittee on Federal Workforce, US Postal Service, & the Census held a hearing on Thursday, March 13, to receive testimony on the Postal Service’s $100 billion “unfunded liability.” Initially the hearing was billed as another Darrell Issa special. Issa is chairman of the Oversight and Government Reform Committee, under which this subcommittee serves, and the hearings he has scheduled to look into controversies and scandal — real, imagined, or manufactured — have become notorious for showcasing Issa’s brand of political theater and for their pure entertainment value.
Thursday’s hearing was not chaired by Issa, though, and he was nowhere to be seen. The subcommittee is chaired by Blake Farenthold, a Tea Party favorite from Texas, and his hearing turned out to be rather anticlimactic. (The video is here.)
Billed as an inquiry into the Postal Service's large and troubling unfunded liabilities, the hearing featured Frank Todisco, the chief actuary from GAO and a regular at postal related hearings. Jeffrey Williamson, the Chief Human Resources Officer and Executive Vice-President of the Postal Service, was also on hand, as were two actuaries from the Department of Defense (don’t ask why). Their written statements can be found here.
The centerpiece of the Postal Service’s ongoing financial crisis has been the idea that the agency has accumulated large unfunded liabilities that threaten its very existence. We are given to believe that the ratepayers, postal employees and retirees, and, God forbid, the taxpayers may be on the hook for billions of dollars of liabilities. In order to justify their agenda, the downsizers and dismantlers make these liabilities sound as dangerous and threatening as possible, even though the obligations represent decades of costs – in some cases as much as 75 years.
The fact is that the Postal Service is in the situation it’s in today largely because Congress created funding schedules and funding levels for pension and retiree healthcare obligations that exceeded standard accounting practice. Only the most naïve or ideologically predisposed observer would believe that the way these obligations have been presented and accounted for represents anything other than an attempt to put the Postal Service in the most damaging financial straits possible.
The history of these obligations is long and well known. We’ve discussed the nature of these liabilities here at STPO many times, including in this recent post that detailed the latest attempts to gin up hysteria through the use of emotionally charged words like “bailout”, “bankruptcy,” and “default.” Rather than repeat the same story again, perhaps it would be useful to take a step back and look at what these obligations represent and what dangers they really present.
The meaning of unfunded obligation
First of all, what is an unfunded obligation? Well, look at it this way. If you’ve got a mortgage for $200,000 on your house and you don’t have the cash to pay the whole thing off today, you have an unfunded liability for whatever amount you can’t cover. Of course, the bank has probably given you thirty years to pay off the mortgage, and it’s likely you have a job or some other income stream (from investments or whatever) that will allow you to make your regular mortgage payments. And, of course you’ve also got an asset — the house itself — to back up the liability.
In most cases, then, a $200,000 mortgage is not all that horrible of an obligation. It may be of some concern if your job is in danger and your income could be eliminated. You might also be worried because you have other financial obligations besides the mortgage, like college tuition for the kids or health care bills. But generally speaking, most people wouldn’t be terribly concerned about having an unfunded liability like a mortgage.
Of course, there are some differences when we talk about the Postal Service’s unfunded liabilities. Most obvious is the scale. An individual may be comfortable with a mortgage obligation of $200,000, but most of us have a hard time conceiving of an obligation of over $100 billion, which is approximately the size of the Postal Service’s unfunded liabilities. To most of us, numbers like that sound immense and scary. But when you consider that the Postal Service brings in about $67 billion per year, the scale of its unfunded liability should be viewed as no more unmanageable than a typical mortgage is to the average homeowner.
In the case of a home mortgage, the amount and the length of time are clearly defined. That’s another big difference between the Postal Service and an individual. The obligations of the Postal Service are subject to certain guesses — actuaries call them assumptions — which means that the amounts and time frames are largely unknown. Using realistic assumptions, actuarial science can offer a pretty good idea of the magnitude of the obligation (with certain caveats), but there’s still a lot of disagreement about these matters. So we simply don’t know for sure exactly how large (or small) the obligations of the Postal Service are.
Far, far into the future
Unlike an individual whose life is finite, the Postal Service is an ongoing entity. Certainly there are questions about how “ongoing” the Postal Service is. The bottom could fall through in the mailing industry. Or Congress could put the Postal Service out of business tomorrow. Or due to its low level of liquidity, the Postal Service could find itself temporarily unable to pay its bills or meet its payroll. But realistically, the Postal Service is not going away anytime soon.
Congress has decided, for reasons both good and bad, that the Postal Service should be wholly self-supporting, that is, that the agency must live and die by the revenues it collects. In its infinite wisdom, Congress also decides what revenues the Postal Service may collect, what levels of service the Postal Service must provide, and so on. It’s also Congress that determines what portion of its pension and healthcare liabilities must be funded and what portion can be left for the future to deal with.
Congress ultimately decides something more: should the Postal Service act like an essential public service or should it function like a corporation in the delivery business, or perhaps some mix of the two. If the Postal Service performs a service as part of the government, then it, like the government itself, would be expected to have an indefinite life. If, on the other hand, the Postal Service is more like a private corporation, we might look at its future —and its liabilities — very differently.
For now, anyway, the actuaries are considering the Postal Service an entity with a long life ahead of it, so their assumptions stretch out as much as 75 years into the future. That’s one of the reasons they loom so large.
Questioning the assumptions
The size of the calculated obligations also depend quite a bit on assumptions about medical inflation, general inflation, the life span of individuals, and potential postal revenues. Because these assumptions involve the unknown, it’s easy to pick numbers that will advance your agenda or ideology.
For example, in a hearing last September, Senator Ron Johnson, a fiscal conservative from Wisconsin, made a very big deal over the interest rate assumptions the GAO was using. Even though the GAO’s Mr. Todisco pointed out that GAO had used a rather conservative assumption — an assumption on what rates might be over ten or even twenty years — Senator Johnson was adamant that the rate was too high and that things had to be much worse for the Postal Service than GAO was predicting. Having a background as an accountant himself, Senator Johnson might have been expected to know how rates were selected, but he was intent on finding the darkest cloud possible. He wanted to choose assumptions that created outcomes that fit his narrative.
At last week’s hearing, Congressman Walberg, the Republican from Michigan’s 7th District, questioned Mr. Todisco intently about assumptions related to medical inflation. He wanted to know if an increase of 1% in the medical inflation rate would yield much higher obligations. The answer, of course, is that it would.
The problem is that medical inflation has been, up until the last few years, very high, and GAO’s assumptions reflect that. Over the last couple of years, medical inflation has begun coming down, and estimates by CBO and CMS, the board that oversees Medicare, indicate that the Affordable Care Act (ACA) will have salutary impacts on medical inflation. It’s more likely to come down than go up, which would yield lower, not higher, obligations for the Postal Service.
Chairman Farenthold was also intent on discussing assumptions, specifically those regarding the periods being looked at. He specifically referred to an op-ed by Senator Bernie Sanders in the Wall Street Journal that repeated the oft-cited argument that the Retiree Health Benefits Fund (RHBF) is paying for employees 75 years into the future, employees who haven’t been born yet. Congressman Farenthold wanted very much to have Mr. Todisco say that the Senator’s statement was inaccurate.
Mr. Todisco obliged to some extent by explaining that the calculations regarding the size of the RHBF don’t take into account employees who aren’t currently on the rolls; in other words, they aren’t about employees who haven’t been born yet. Senator Sanders was right, though, about the calculations looking out over 75 years, since some employees currently on the rolls may still be receiving benefits that far into the future. Congressman Farenthold only seemed to hear the part he wanted to hear.
Actually, it’s a bit more complicated than that because GAO’s assumptions do make predictions about employee complement, wages, and inflation going into the future and their look out does extend for 75 years. So the way RHBF is set up, prefunding over a fifty year timeline but heavily weighting that prefunding over the first ten years of that timeline, is unfair, just not quite as unfair as critics have made it out to be.
Deferred revenue and accrual accounting
So let’s look at the Postal Service’s unfunded liabilities. The total is now being reported as being about $100 billion. In a postlast week on Save the Post Office, we figured it at around $112 billion, based on figures in the FY 2014 Integrated Financial Plan.
About $12 billion of the total involves revenue that has already been received for services not yet rendered and for other items that require accrual accounting like Forever stamps and deferred executive compensation. This is not a long-term liability like the pensions but rather a rolling figure related to ongoing operations. For example, when I pay my box rent for six months, the Postal Service books the revenue when it receives my payment, but it also incurs a liability to provide the box service for months ahead. The same procedure is applied to postage sold in advance. Forever stamps also require special accounting since the value of the services they represent may change.
Treating deferred revenue under an accrual system that recognizes a liability along with the revenue is a standard accounting practice. The other two items in this category — deferred executive compensation and the catchall “other” — are also subject to this sort of treatment. For the purposes of this discussion, however, this amount clearly doesn’t represent a liability in the same sense as the pension and retiree healthcare liabilities, and it should be seen as a separate matter (although some folks may be extremely concerned that the millions due in deferred compensation to postal executives, essentially pension bonuses crafted to evade maximum compensation statutes, might be at risk).
The Postal Service has two pension plans, FERS and CSRS. The FERS plan is currently overfunded by about $500 million, but some calculations indicate the overfunding could be as much as $12 billion. It should be noted that Generally Accepted Accounting Practice (GAAP) generally calls for entities with pension liabilities to fund them at an 80% level. The reason for this, as Mr. Todisco pointed out in last week’s hearing, is that assumptions about these sorts of liabilities get very sensitive and much less accurate as the timeline stretches out.
The calculations are supposed to be made on an ongoing basis and adjusted accordingly. An 80% funding level is generally considered more than sufficient to allow for adjustments should shortfalls appear imminent. It makes no sense for an organization to fund at 100%, which just ties up current assets that could be more productively invested elsewhere. An organization is thus being more than prudent by funding at 80%. If adjustments are needed, they can be done gradually.
The issue with the postal pension liability is similar to the argument over Social Security, and it’s subject to the same sort of partisan politics and demagoguery. As this discussion by Dale Coberly of the Angry Bear Econoblog explains, Social Security is not going bankrupt and it’s not leading us to financial ruin, despite what we hear from a good many politicians, folks like Pete Peterson, and organizations like Fix the Debt. A report from the trustees of Social Security shows that the system is fully funded through 2035 and that thereafter it can pay benefits at about 75% of scheduled rates without additional revenues.
Mr. Coberly has shown convincingly (and a number of economists have checked his work) that with minor increases in the payroll tax — about 80 cents per worker per week spread out over a number years —that Social Security can be put on solid footing indefinitely. That’s not a huge adjustment, and as Dean Baker explains in an article for the Center for Economic and Policy Research, it certainly ought to give pause to those who claim that we are bankrupting our children and grandchildren, a claim that is ludicrous on several levels.
Those who wish to dismantle or privatize the Postal Service use similar arguments to defend the view that the Postal Service should be fully funding its pension obligations far beyond generally recommended levels. Their goal is not to ensure that the Postal Service can cover its liabilities but rather to paralyze the Postal Service. They are using numbers that are totally out of scale and ignoring the opportunity to make minor changes that would be perfectly reasonable. They demand that the pensions be 100 percent funded in order to make the burden and the conditions untenable. What better way to justify cutting service and harming workers and communities?
So FERs is overfunded. The other retirement system, CSRS, is an interesting case. CSRS is essentially a closed system. After 1984, new employees were covered by FERS and no new employees could join the CSRS.
That means that nearly everyone in CSRS now is eligible to retire beginning this year (everyone would have the required thirty years service although some may lack the minimum age of 55). The youngest CSRS employees are likely to be at least 48 (presuming they were 18 when they entered service in 1983). Most CSRS employees have already retired, and most of the rest will be retiring in the next ten to fifteen years. Actually this makes for an interesting experiment because we can check just how accurate our assumptions have been.
The current CSRS pension obligation is calculated to be $306.2 billion, and it is funded to a 91% level leaving, which means about $19.8 billion is supposedly unfunded. It is interesting to note that as recently as 2010, estimates showed that CSRS was overfunded by $1.7 billion. The calculations regarding CSRS have fluctuated pretty wildly, and that doesn’t even reflect settlement of the issues raised by the Segal report or the proposal, which GAO endorses, to allow postal specific assumptions in calculating Postal Service obligations.
Since the Postal Service’s pension and healthcare obligations are segregated from those of other Federal employees, it makes sense to use mortality tables and other assumptions that are based on the unique composition of the postal workforce. The OIG has done studies for all three major pension obligations — CSRS, FERS, and healthcare — and found that using postal specific assumptions would lead to more accurate and generally lower calculations of postal obligations.
Since CSRS is essentially a closed system, it is likely to be very sensitive to postal-specific assumptions related to mortality and life expectancy. It is also likely that CSRS calculations would be less sensitive to assumptions about wage increases since there are fewer CSRS employees and they likely have minimal remaining time in service. By the same token, calculations regarding future inflation and COLAs would have a large impact on the CSRS liability.
For those who wish to paint the darkest picture possible, the current estimate of $19.8 billion in unfunded liability serves their purpose well. A more honest appraisal of the situation tells us that our confidence in this number should be limited. Furthermore, the fact that the CSRS pensions are 91% funded, above GAAP, ought to be a source of security.
The next unfunded liability is $17.2 billion for Workers’ Compensation. There are several serious and legitimate issues here, but the problem isn’t an out-of control liability. Rather, it’s another example of how the Postal Service has intentionally been put in a hole.
The current law governing Federal workers’ compensation, FECA, has several problems. First and foremost, it has a number of unintended consequences that create exorbitant costs. Employees who are injured on the job have limited ways to either move back to the work force or, when they get old enough, move into retirement.
No one should be able to collect FECA into his or her nineties. There has to be a fair way to move people out of FECA into retirement. Moreover, there has to be a fair way to move people back to work. If they cannot re-enter their previous job, then training and even income support ought to be available to help them to some productive career. A mail carrier who blows out his knees should be compensated, but the system should also provide retraining and alternative work. We might also make better use of cash settlements that recognize physical damage and disability while ensuring a person has an opportunity to return to productive employment.
This is less an issue of liability than one of political will and basic fairness. It might also help to mention that part of what is driving the workers’ comp issue is the Postal Service’s antagonistic and adversarial management system along with unrealistic expectations of what individuals can do. When the goal is to keep carriers on the street eight hours a day — or even more with the sort of unlimited overtime we’re seeing — you’re inevitably going to cause physical problems. DPS and FSS bundling systems have their advantages, but they can be very hard on carriers on walking and park and loop routes. Injury and workplace accident and disease rates may be driving some of the increases in estimates of the workers’ comp liability.
Whatever changes Congress chooses to make to FECA — and this is another example of a situation where the solution lies wholly within the grasp of Congress — lawmakers should take their head out of the sand and take a close look at how poor management and supervisory practices have contributed to workplace injuries and workers’ comp claims. At the very least Congress should authorize an independent study of postal line management and how it contributes to these problems.
Retiree health care
The last obligation is the retiree healthcare obligation, which is listed in GAO’s most recent testimony as being $48.3 billion in unfunded liability. It might also be useful to think of the $15 billion in Treasury obligations the Postal Service owes as part of this category, since the money was borrowed to meet the ridiculous prefunding schedule imposed by PAEA.
By now anyone who has been paying attention to the Postal Service’s financial situation knows that the healthcare prefunding mandate was created less out of concern for meeting obligations than in making sure that PAEA scored budget neutral. The RHBF was a guided missile designed to bring the Postal Service down, and it has done exactly that. I’ve saved this one for last because it is the easiest one to solve.
You can argue about the amount of prefunding, the purpose of prefunding, and the abusiveness of the prefunding schedule, but there is one simple fact that makes all that discussion completely unnecessary. The healthcare prefunding issue is a complete red herring. There is an easy solution that essentially eliminates any further need for prefunding, a solution in which the numbers are widely accepted and uncontested.
The changes in Medicare law in 1984 brought Federal employees into the Medicare system, but they were not required to enroll in Medicare when they became eligible. As a result, significant numbers of postal (and federal) employees do not enroll in Medicare, which means that FEHBP insurance plans act as primary coverage even though employees and their agencies have paid into Medicare. FEHBP does not offer supplemental or wraparound plans, which reduces the incentive for eligible employees to enroll in Medicare.
And here’s the kicker. If Medicare enrollment were required, just like almost every employer plan in the country requires, then the retiree health benefit unfunded liability melts away to about $3 billion. That’s the testimony of Jeffrey Williamson, the Chief Human Resources Officer of the Postal Service. It is testimony that is undisputed. Darrell Issa has even acknowledged that it solves the problem.
Require eligible employees to fully enroll in Medicare, have FEHBP offer appropriate Medicare supplemental plans, use postal specific assumptions to calculate any potential liability, use reasonable rates of medical inflation and fund to common industry levels of 50% or less, and the unfunded liability not only evaporates but money borrowed from the Treasury to fund the RHBF can be returned, thereby eliminating that debt. If concerns remain that the RHBF is insufficient to fully fund retiree health benefits, then continue pay-as-you-go but use the fund to subsidize retiree healthcare premiums in any year the Postal Service doesn’t break even.
There are some, like Senator Coburn and Senator Johnson, who have attempted to raise questions about this solution by claiming it will add a burden to an already stressed Medicare. That is a complete red herring, and those who try to demagogue the issue in this way ought to be ashamed for being so baldly disingenuous. Apart from the fact that it is simply the fair thing to do, employees and agencies have fully contributed to Medicare, and the expectation ought to be that they will fully participate in the program. Arguments that Medicare is failing are the sort of specious demagoguery that the right wing makes to undermine our basic safety net.
We have the most expensive medical system in the world. Per capita we pay double over the next highest developed nation. For this we receive outcomes — based on all accepted measures, such as infant mortality and life expectancy — that are in the middle of the pack. For all intents and purposes, we throw half of every health care dollar away. That’s a problem of medical costs, not Medicare. Rather than having the House attempt to repeal Obamacare forty or more times, maybe the folks on that side of the aisle ought to start offering solutions and improvements to the system.
A political problem
The people who claim to be troubled by the Postal Service’s “unfunded liabilities” use words like “bankrupt” and “bailout” because they know this kind of hysterical language sells. Postal officials, our legislators in Washington, and, sadly, the Administration as well, are all too willing to exaggerate and misrepresent the numbers just to scare and manipulate the average citizen. They have painted as dire a picture as they can, in as prejudicial a way as possible. They have resorted to bald political manipulation to undermine one of our most basic national institutions, the post office.
But the Postal Service is in crisis today not because of the condition of its pension and health benefit funds. The Postal Service is in crisis because for the past forty years those in power have been committed to a vision of privatization. Call it that or call it something else, but that is what it is, plain and simple.
Our leaders claim that downsizing the Postal Service is just a common sense response to falling mail volumes. But it isn’t common sense to be frightened by financial bogeymen that don’t exist. And it isn’t common sense to dismantle useful infrastructure, or abandon universal service, or harm communities, or eliminate 300,000 good useful jobs.
What we have here is not a financial problem. What we have is a political problem. The solution to the so-called crisis facing the Postal Service is not going to be found in cost-saving measures like ending Saturday delivery or searching for new sources of revenues like postal banking or focusing on a chimera like “unfunded liabilities.” The solution can only be political — sending people to Washington who are committed to a vision of the Postal Service as a public institution that serves the public interest.
(Photo credit: Witnessses being sworn in at the hearing)