Budget Impacts of 2003 Legislation: Escrow Fund and Military Service Benefits

In November 2002, the Office of Personnel Management reported that the Postal Service would overpay its retirement obligations over the long term for postal employees and retirees enrolled in the Civil Service Retirement System (CSRS) by $71 billion.

Within months, Congress passed the Postal Civil Service Retirement System Funding Reform Act of 2003, which became Public Law 108-18 on April 23, 2003. The act modified the way the Postal Service funded its obligations to the CSRS, to prevent overfunding. The act also dictated how the Postal Service would spend its estimated savings: to pay down debt in 2003 and 2004, and to maintain postage rates in 2005. In 2006, the act required that the Postal Service’s estimated annual savings — about $3.1 billion — be considered an operating expense of the Postal Service, to be held in escrow for future use as determined by Congress.

But the projected savings did not represent cash actually on hand. Although funds were available through 2005, by 2006 inflationary costs and reduced revenue had whittled away the financial benefit of lower CSRS payments. To fund the escrow account, in 2005 the Postal Service requested an across-the-board increase of 5.4 percent in rates and fees, while warning that a biannual increase of 1 to 1.5 percent to fund this account might be needed in the future. The Postal Rate Commission and the postal Governors approved the request. On January 8, 2006, most postal rates and fees increased by about 5.4 percent — including the price of a First-Class stamp, from 37 to 39 cents — solely to fund the escrow account.

The 2003 act also created another challenge for the Postal Service: it transferred to the Postal Service from the Department of the Treasury the responsibility for funding military pensions of current and former postal employees, amounting to $27 billion in costs transferred from taxpayers to postal ratepayers.