From the U.S. Government Accountability Office, www.gao.gov Transcript for: USPS's Funding of Retiree Health Benefits Description: Audio interview by GAO staff with Frank Todisco, Chief Actuary, and Lorelei St. James, Director, Physical Infrastructure Related GAO Work: GAO-13-112: U.S. POSTAL SERVICE: Status, Financial Outlook, and Alternative Approaches to Fund Retiree Health Benefits Released: January 2013 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's January 2013. The 2006 Postal Accountability and Enhancement Act requires the US Postal Service to contribute to a health benefit fund for its future retirees. Current payment requirements are about $5-1/2 billion a year, and USPS has been unable to make them for the last two years. A group led by Frank Todisco, GAO's chief actuary, and Lorelei St. James, a director in GAO's Physical Infrastructure team, recently reviewed the status and financial outlook of this fund as well as possible alternative approaches to funding retiree health benefits. GAO's Jeremy Cluchey sat down with Frank and Lorelei to learn more. [ Jeremy Cluchey: ] Lorelei, why is the prefunding requirement of the retiree health benefits fund such a challenge for the Postal Service? [ Lorelei St. James: ] Well, Congress passed a law in 2006 that required the Postal Service to make annual payments to a retiree healthcare fund over a number of years. However, since 2006, the mail volume has really dropped off significantly, and the gap between the Postal Service's expenses and their revenue has grown significantly. In fact, in fiscal year 2012, the Postal Service reported a net loss of $16 billion, which included $11.1 billion in retiree health benefits payments that it was unable to make. So the challenge is if the mail continues to decline, it's just going to be harder for the Postal Service to make these payments. [Jeremy Cluchey:] And your team looked in detail at the current status of the health benefits fund. What do you find there? [ Jeremy Cluchey: ] Well, at the end of fiscal year 2012, OPM estimated that the Postal Service's liability was almost $94 billion. And half this $94 billion is for current retirees and beneficiaries, and half is for current postal employees. And contrary to some misunderstandings that were reported in the press, none of this liability is for employees that are not yet hired or not yet born. And it has a balance of $46 billion, which means that it has funded 49 percent of the liability. And that leaves an unfunded liability of about $48 billion, and we think this is a sizeable amount given the losses that the Postal Service has been experiencing. [ Jeremy Cluchey: ] Frank, you helped lead a review of a few alternative approaches to dealing with the Postal Service's obligations in this area. Can you talk about what you found when you looked there? [ Frank Todisco: ] Sure. Well first, Jeremy, we looked at six alternative approaches to funding these benefits. Those included the prefunding approaches that—an approach that is in current law, and those that are in the Senate Bill, a House Bill, an Administration budget proposal, plus an approach in letting the ceiling grow in which the fund is temporarily left alone to grow with interest, and a pure Pay-as-You-Go approach. So what we found is that two of the six approaches would reduce the unfunded liabilities more aggressively, but they would require significantly higher payments in the short term. The other approaches would reduce the near-term payments, which would ease the Postal Service's immediate cash flow problems. But these approaches would increase the unfunded liability to differing degrees—sometimes substantially—and require greater payments later. We also found that if the Postal Service stopped prefunding entirely and used the existing fund to pay benefits, that fund would be exhausted in just 14 years, by 2026. [ Jeremy Cluchey: ] As policymakers look at this issue, what are some of the considerations that GAO thinks are important to keep in mind? [ Frank Todisco: ] We discussed several key issues for policymakers to consider. One is simply the rationale for prefunding these benefits, which has to do with protecting the viability of the enterprise as well as equitable allocations of costs. Second is tradeoffs regarding the Postal Service's financial condition, the size of annual payments and unfunded liabilities, the allocation of costs between current and future postal ratepayers, and the allocation of risk. [ Jeremy Cluchey: ] Finally, Lorelei, for taxpayers under the impression that the Postal Service is supposed to be a self-sustaining entity, what's the bottom line of this report? [ Lorelei St. James: ] Yes, this is the public's impression, and it is correct. The Postal Service is intended to be self-sustaining and funded almost entirely by postal ratepayers. But its financial losses are really challenging its financial sustainability. And in the past, we've reported that the Postal Service should prefund its retiree health benefit liabilities to the extent that its finances allow it. But we and the Postal Service have quickly come to realize that none of the approaches that Frank talked about will work unless the Postal Service has the ability to actually make the payments. The Postal Service missed two of its annual retiree health benefits payments, and it's reached its borrowing limit. And that's the reason why we have strongly urged Congress and the Postal Service to develop a comprehensive package to get the Postal Service out of the red and into the black. [ Background Music ] [ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional Watchdog, the U.S. Government Accountability Office.