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What have been the consequences for the U. Postal Service? If the Postal Service were a private company, we would be engaged in Chapter 11 bankruptcy proceedings. The Service does not have enough cash to make its full RHBF contributions, but could it make partial contributions?
In , the first year it defaulted, the Postal Service truly had very little liquidity. By then, however, defaults had come to seem almost routine, and the Service was unwilling to pay any of its statutory RHBF obligation. The U. Because the Postal Service has defaulted on all subsequent contributions, however, fund assets have risen slowly since then, with interest earnings on prior contributions the only source of growth.
Yes, it is more than twice as big as the next largest. Are estimated liabilities too high because of demographic differences between postal workers and other federal workers? Unobjective, self-serving assumptions could easily skew the results. In contrast, pay-as-you-go means putting aside nothing when future benefits are promised and, instead, dealing with the costs only when they come due. For example, if an employer hopes to finance pension commitments as they come due in the future solely out of future earnings, that would be a percent pay-as-you-go approach.
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A rough analogy may also be helpful in distinguishing between the approaches. If a couple saves in anticipation of retirement, that is similar to the funded or pre-funded approach. If a couple decides not to worry about post-retirement-age expenses during their normal working years, but wait until after they have reached retirement age, that is similar to the pay-as-you-go approach, which may require them to keep working. It sounds like the RHBF shifts retiree health care financing away from the pay-as-you-go i.
United States Postal Service
Is that correct? If the Postal Service had made all its RHBF contributions, the retiree health benefits of current and former postal employees would now be close to fully funded. As it is, retiree health benefits promises, at 48 percent funded, are about halfway between pay-as-you-go and funded. The pay-as-you-go method allows an employer to make expensive promises that temporarily appear inexpensive because there is little or no negative impact in the short run on reported income and cash flow.
This causes short-term financial statements to understate true costs and may lead to a false sense of confidence. Eventually the bills come due. At that point, they can produce significant financial strains if the employer was not careful when making the commitments. Yes, it may be reasonable in three cases. Second, if the future obligations are small, it may not be worth the administrative expense of setting up a dedicated funding source. None of these conditions apply to the Postal Service. It cannot expect rapid future income growth when demand for its most profitable product, First-Class Mail, continues to decline; its future costs for retiree health care are huge; and its promise to provide retiree health benefits is binding.
The funded approach more accurately shows the costs of current operations on financial statements, which motivates employers to better manage costs and be more careful about what they promise.
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The most basic advantage, though, is that if employers put aside money as they promise benefits, the odds increase that they can make good on their promises. For government employers, the funded approach reduces the hazards that unfunded obligations will eventually require large tax increases, such as those being felt now by Chicago property owners as the city tries to shore up dangerously underfunded pensions,  drastic cuts in government services, and, in extreme cases like Detroit and Puerto Rico, contribute to bankruptcy or its equivalent.
For a government-owned enterprise with a large monopoly market, such as the Postal Service, the risks due to not funding deferred compensation are cutbacks in service quality for monopoly-market customers, higher postal rates within the monopoly, shifting costs to other government programs, and perhaps a taxpayer bailout.
Critics of the RHBF often level this charge. However, the present liability does not include any benefits that may be promised in the future to future workers; it only includes benefits that have already been earned. There is still much confusion on this point. This is true. For example, state governments, on average, have funded less than 10 percent of their retiree health care liabilities.
It might be added that the Postal Service is not the only organization where large unfunded retiree health care costs are a threat. It clearly was. Congress and the Administration told the Postal Service to eliminate within a decade 80 or 85 percent of an unfunded liability that had built up over several decades of pay-as-you-go financing, with the remainder to be eliminated more gradually over a longer time frame. Not at all. In retrospect, of course, we know that vision was too optimistic. Is their cost built into the postal rate base?
To a large degree it is. The explanation requires revisiting the rate-setting process that existed before PAEA became law. Under old law, rates were set on a cost-of-service basis. Accordingly, rates were set sufficiently high to cover costs, including the large amounts the Postal Service spent to fund its pension promises. The escrow payments, which the Service could not then touch, counted as an expense. In , the Service sought a 5. In early , the PRC approved this second request, with rate increases averaging 7. In other words, postal rates were increased to give the Service enough revenue to cover the escrow expense, as well as its other costs.
When PAEA eliminated the escrow account in favor of RHBF contributions, the dollar amount of expenses stayed roughly the same, even though the nature of the expenses changed. Accordingly, postal rates had been set high enough to cover the new RHBF contributions. The answer is that, under the old system, rates were set to generate enough sales revenue to cover costs — based on expectations of mail demand.
When demand suddenly and unexpectedly crashed, revenue plummeted and deficits resulted. Under the old rate-setting regime, the Service would probably have asked for very large rate increases, similar to those seen in countries like Canada and the U. Under the current rate-setting process, however, price increases for market dominant products are generally limited to the inflation rate. The Postal Service can raise the prices of competitive products at a faster clip, but it appears to be more interested in volume growth for those products than in profit maximization.
However, Congress made the wrong call in later years when it failed to permit further adjustments, except for a one-year delay in When it became clear that mail usage had shifted from growth to decline, Congress should have replaced the front-loaded RHBF contribution schedule with a much more gradual schedule. By not approving a midcourse correction, Congress forced the default and emboldened the Service to refuse, since then, to contribute even a cent to the RHBF.
Was it initially expected the Service would have its retiree health care obligations well in hand by ? Yes, it was thought the Service would have mostly funded its retiree health care obligations by and could then gradually amortize any small remaining unfunded liability based on the post contribution schedule.
No, the numbers are sobering. There have been warnings but they went mostly unheeded. Some of the clearest and most accurate came from GAO. However, GAO also recognized failing to make the contributions would mean greater burdens later on. A basic property of the pay-as-you-go approach is that it initially understates costs and overstates net income. The reason is that the deferred costs of current production are ignored until they come due years later. In future years, when the bills have to be paid, the pay-as-you-go approach has the reverse effects on financial statements: by its nature, it automatically creates legacy costs that increase future expenses relative to future income.
The reason is that the full costs of operations are reported when they occur. Does moving from the pay-as-you-go to the funded approach temporarily elevate reported costs and decrease reported income? This does occur during the transition. As a result of prior pay-as-you-go financing, there are legacy costs from past production that must be paid. The Postal Service suffered a multibillion-dollar loss every year during the period Why not let bygones be bygones and forget about the legacy costs of pay-as-you-go?
It would be nice if legacy costs could be wished away, but someone must pay them in some form. Another would be to shift costs to other government programs. A third option would be to place the burden on postal retirees by denying them the benefits they were promised.
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The costs have to be paid one way or another, and holding the Service to its promises may be more equitable and efficient than most alternatives. The Service has begun highlighting what it calls controllable income, which excludes RHBF contributions from expenses and makes several smaller adjustments.
The Postal Service has massive debts as a result of many decades of the pay-as-you-go approach. While a more gradual funding schedule would, in retrospect, have been sensible, it would have left more of the unfunded liability to be reported in future years and dragged down income then. When the Service defaults on statutory funding contributions, how is that recorded?
The required contribution amount is reported as a cost, and it reduces profits or widens losses. Segal recommends a three-tier governance structure, each having a separate but related purpose. The first tier deals with overall fund investment strategy. The second tier focuses on implementation issues. The third tier deals with the day-to-day management of the investments. This paper is a proof of concept analysis. Read full report. It is the little tidbits in your audits, blogs and white papers which make for interesting reading. For instance, in this report there is a great one I wish you would really dig in and explain the background of just one sentence.
The sentence is the last line of the second paragraph on page 6. I have my presumptions, please tell us the facts behind this deal. Critics of the postal system often claim that USPS has an unfair advantage. For questions, media inquiries, or to obtain more information regarding this report, please contact Agapi Doulaveris at or by email. The opioids epidemic, which President Trump declared a public health emergency in October , has had a national impact on many people, businesses, and organizations, including the U.
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