PSRHBF

P.L. 109-435 requires that OPM provide, and that we report, certain information concerning the obligations, costs, and funding status of the PSRHBF. The following table is based upon information provided by OPM and shows the funded status and components of net periodic costs.

The OPM valuation of post retirement health liabilities and normal costs was prepared in accordance with Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 5 and SFFAS No. 33, which require the use of the aggregate entry age normal actuarial cost method.

Demographic assumptions and an interest rate assumption of 5.1% are consistent with the pension valuation assumptions, and decrements are based upon counts or numbers rather than dollars.

The normal cost, which is on a per-participant basis, is computed to increase annually by a constant medical inflation rate which is assumed to be 7.5% per annum as of the valuation date and trend down to an ultimate value of 4.5%. Past year medical inflation was assumed to be 6.3%. Normal costs are derived from the current FEHBP on-roll population with an accrual period from entry into FEHBP to assumed retirement. Entry into the FEHBP is generally later than entry into the retirement systems.

The accrued liability is equal to the total liability less future normal payments. The amounts used in these valuations use the same methodology and assumptions as for OPM’s financial statements except the average government share of premium payments for annuitants is substituted for annuitant medical costs less annuitant premium payments. This amount is assumed to increase at 7.5% per annum as of the valuation date and trend down to an ultimate value of 4.5%. For current postal annuitants, the government share of premium payments is adjusted to reflect the pro-rata share of civilian service to total service for which the Postal Service is responsible. The pro-rata adjustment is made by applying calculated factors based upon actual payments that vary by the age and Medicare status of the enrollments. For active Postal employees, the pro-rata share in retirement is assumed to be 93% of the total.

The following table shows the net assets of the PSRHBF.

The assets of the PSRHBF are comprised entirely of special issue Treasury securities with maturities of up to 15 years. The long-term securities bear interest rates ranging from 2.88% to 5.0% and the short-term securities have interest rates ranging from 2.13% to 2.88%. The expected rate of return was 5.10% for 2010 and 6.25% 2009 and the actual rates of return were 4.2% for 2010 and 4.5% for 2009.

Because calculation of this liability involves several areas of judgment, estimates of the liability could vary significantly depending on the assumptions used. Utilizing the same underlying data that was used in preparing the estimate in the table above, the September 30, 2010, unfunded obligation could range from $37 billion to $62 billion, solely by varying the inflation rate by plus or minus 1%, and the 2009 unfunded obligation would range from $37 billion to $65 billion.