What you do speaks so loudly that I cannot hear what you say.
Ralph Waldo Emerson
USPS Reform/Privatization: Thumbs UP!
Fox News Channel, among other media outlets, has been running in heavy rotation a postal worker union ad (embedded below). Political videos are sometimes withdrawn from media websites without notice, so in the event the video is no longer available through the webserver, here is a relevant transcript:
The Postal Service is critical to our economy – delivering mail, medicine and packages," the ad says. "Yet they’re closing thousands of offices, slashing service, and want to lay off over 100,000 workers. The Postal Service is reporting financial losses but not for reasons you might think. The problem: a burden no other agency or company bears, a 2006 law that drains $5 billion a year from post office revenue, while the Postal Service is forced to overpay billions more into federal accounts. Congress created this problem, and Congress can fix it.
Let me summarize the background and overall framework: in 1971, the old Post Office Department became the USPS, a quasi-independent GSE. Michael Schuyler provided a good history of some of the underlying issues. I have discussed in past posts that the federal government has CSRS, an older defined benefit pension system, and the more recent FERS (since 1983). Defined benefit systems typically focus on 2 characteristics: length of service and an aggregate of the typically 3 highest income years period.
Clearly the POD portion is the responsibility of the US Treasury. If Congress no longer had oversight of USPS operations, e.g., was not party to postal union negotiations with USPS, how could the US taxpayer be held responsible to pay for pension amounts based on more recent USPS-negotiated salaries? Thus the Congress in 1974 sought to limit the USPS' ability to charge back undue pension costs beyond its control (PL 93-349). The House Report said:
"The situation with respect to the Postal Service is quite unique and results from passage of the Postal Reorganization Act. The Congress now has no control—no oversight whatsoever—with respect to the pay machinery in the Postal Service. Since each future pay raise, negotiated or otherwise granted to employees in the Postal Service, will result in a specific unfunded liability and a new financial drain on the Retirement Fund, the cost of this liability should properly and equitably be borne by the Postal Service."The Senate Report said:
"The bill will permit the Postal Service to include the cost of financing unfunded retirement liability in its rate base for purposes of future postal rate adjustments."In plain English, the federal government's portion of a worker's retirement was limited to its value at the time the employee transitioned to USPS. The USPS was authorized to include relevant incremental retirement costs in its postal rate negotiations to be passed along to postal customers.
The USPS retirement payments through the end of the century were based on some static interest rate assumptions (of about 5%), unlike FERS (based on more dynamic economic assumptions). In essence, if and when the actual interest exceeded a specified rate, a contribution based on lower interest income would be overstated. By 2002, OPM, the pension administrator, had determined that USPS had almost fully funded its obligation and would be overfunding it without changes. The 2003 postal pension reform act reduced $78B in future pension contributions, implemented FERS-like dynamic assumptions and demanded annual checks to ensure any future necessary adjustments were made on a more timely basis. It also included a controversial prior military service which shifted some federal cost burden for postal workers with prior military service. The 2006 PAEA legislation repealed the military service provision adding back $27B.
The 2003 legislation led the USPS and its inspector general to revisit the CSRS POD/USPS allocation issue, with USPS arguing the 2003 effectively repealed the 1974 bill and that the federal government owes it another $75B in a retroactive accumulation of a "fairer" share of burden of inflation and pay hikes. (A related study (PRC/Segal, based on the assumption that the 1974 law was superseded by the 2003 law, suggests a more modest $50-55B, the lower estimate being due to a lower calculation for POD service.) [Let me point out here the argument of the Postal IG that the government owes it for inflation adjustments is debatable; many annuity arrangements are based on promising a certain amount, not inflation-adjusted amounts; in fact, the Social Security Administration makes the very same point in discussing the Galveston Plan, that Presidential candidate Rick Perry referenced earlier in the campaign.] The OPM IG (inspector general) vigorously rejects the Postal IG reasoning and has gotten support from the CSRS Board of Actuaries and implicitly the GAO.
This situation is complex, but I am firmly on the side of the OPM IG on this issue:
- Any "overpaid" retirement costs during that period have already been passed onto past postal customers.
- The CSRS allocation issue came up, conveniently, over 30 years, after the start of USPS, roughly 20 years after FERS. Just to provide some context, the general rule for the IRS, personal or business taxes, is 7 years (normally 3 for an audit). Schuyler points out that in many cases of addressing tax fairness (say, the "marriage penalty"), there are no retroactive refunds. The past is spilled milk. I would argue, as I did in opposing the Lilly Ledbetter legislation, it is intrinsically unfair to make allegations based in the indefinite past and rolled forward: how can managers address problems in a responsive manner which will not compound their exposure without some common sense time limitations? Relevant witnesses have gone away, etc. It constitutes moral hazard.
- The postal IG is taking an activist interpretation view of the 2003 law (i.e., superseding 1974); Schuyler notes that the GAO did not challenge the traditional/OPM-utilized allocation method, making a few minor tweaks; in addition, the 2003 and 2006 bill calculations were made using traditional allocation, the military overcharge was fully costed out, but there were no calculations to account for a change in allocation.
The fact that the union is referring to the OPM/USPS IG dispute is clear from this union-friendly post:
"Any business would not put $20 billion in cash into future pre-funding" of the health care costs, as USPS has been forced to do since 2006, Rolando said. And no business "would be forced to leave $50 billion-$75 billion in excess payments in its pension account," again as the 2006 Bush-pushed law forces USPS to do, he added.Notice the subtle shift here; he's not saying the overpayments are ongoing. but is referring to the cost allocation dispute over the government's share of the pension costs of USPS employees/retirees whom started work under the old POD. (Note also they are not talking about the employees whom started in USPS under CSRS whose pension costs were under the same static assumptions.) And keep in mind the CSRS static economic assumption issue was not uncovered by USPS, but a government agency.
On the health care prefunding issue: of course, we expect a GSE to properly fund its retirement benefits, including a grossly underfunded retiree health care benefit program. These costs should passed on to postal customers, not federal taxpayer. The USPS should have been funding this benefit all along; many entities (say, for example, the state of Illinois) have underfunded employee retirement funds in juggling their unsustainable bills. The USPS, with a failing business model, would prefer to use available capital for other purposes (given huge deficits they've been running). The problem is, those obligations represent real, future costs. If the GSE fails, who picks up the obligations? Most likely, the taxpayer, instead of more properly the postal customer. The USPS essentially wants to raid the federal retirement system, by changing the rules of the game 3 decades after the fact, i.e., the 1974-settled cost sharing for POD/USPS employees, in essence to fund another retirement obligation it has (health care). In essence, the USPS wants the taxpayers to bail them out--which expands the $15T federal deficit instead of having postal consumers pay the full burden of the USPS' unsustainable compensation packages. The problem is that higher prices to postal customers will probably exacerbate declining demand for postal services. We taxpayers believe that USPS and its unions have to make some hard decisions, e.g., trim money-losing operations and payrolls, and/or negotiate the retirement benefit (e.g., consider the case of most private sector employees whom enroll in Medicare).
Now, granted, the USPS GSE has a mixed picture: it gets rock-bottom government financing and a generous credit limit and a number of perks that its private sector competitors don't have:
The USPS is exempt from vehicle licensing requirements, sales taxes, and local property taxes. It doesn’t have to pay parking tickets, and it has eminent domain powers. It pays to itself the income taxes that it would owe if it were a private business.Of course, there's the fact that the Congress doesn't give the USPS a free hand in reducing operational expenses (never mind the bloated, unsustainable postal union agreements); for example, 4 out of every 5 post offices (36,000 overall) lose money; the GAO estimates more than half of some 600 processing facilities aren't needed. USPS management wanted to shutter 3200 facilities; when outraged Congressmen screamed out, the number was whittled down to 162.
Without changes to unsustainable union contracts, despite increased automation and retirements, personnel costs, some 80% of USPS costs, are expected to increase by another 50% by 2020. As of 2009, the USPS has liabilities of some $88B, some $62B of which are unfunded health care mandates.
GAO has USPS on its high risk agency list; its cash cow first-class mail volume is falling annually. After for most of its history keeping debt under, say, $4B, it has lost $20B from 2007-2010 and is expected to reach its $15B credit limit if not this year, next year.
So it is attempting desperately, supported by the Postal IG, to lower its contributions for 80% of FERS and to 30% of retiree health obligations--which the OPM IG vigorously opposes, arguing that the USPS is essentially trying to raid retirement lockboxes to provide working capital for a failing business model. If and when the model fails, the taxpayer will probably get stuck with the obligations; that is to say, the taxpayer will end up subsiding the costs instead of postal customers.
The idea that we should be bailing out a GSE (again, i.e., Fannie Mae and Freddie Mac, FHA) for an organization where compensation is up to 35% higher than comparable work in the private sector is unconscionable. We rank among the worst of developed countries on the Index of Postal Freedom (see below). It's time to look at privatization. Whether or not we can or should spread out health retirement prefunding for postal employees (I might support an agreement to stretch out the payments if the USPS management was to win substantive givebacks from the unions), it is only prudent that the Congress should seek to minimize exposure of the federal taxpayer.
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| Courtesy of postalconsumers.org |
Foreigner, "Dirty White Boy"
