Note 9 — Workers’ compensation

Postal employees are covered by the Federal Employees’ Compensation Act, administered by the Department of Labor (DOL) Office of Workers’ Compensation Programs (OWCP), which makes all decisions regarding injured workers’ eligibility for benefits and administers payment of claims. The Postal Service reimburses the DOL for all workers’ compensation claims paid on its behalf and pays an administrative fee to the DOL.

An estimation model that combines four generally accepted actuarial valuation techniques is used to project future claim payments based upon currently open claims and past claim payment experience.

A liability is recorded for the present value of estimated future payments to postal employees, or their qualified survivors, who have been injured through the end of the period. The estimated total cost of a claim is based on the date of the injury, pattern of historical payments, frequency or severity of the claim-related injury or injuries, and the expected trend in future costs. The liability for claims arising more than 10 years ago is determined by an independent actuary. The payout of the estimated liability will, in some cases, be for the rest of the lives of the claimants.

As noted, the liability for estimated future workers’ compensation payments is recorded at its present value. This means that, in recording the liability and annual expense, an estimate must be made of the amount of funding that must be invested at current interest rates, in order to fully fund all estimated future payments. The Postal Service updates inflation and discount (interest) rates as of the date of its financial statements to determine the present value of the workers’ compensation liability at fair value in accordance with GAAP. The impact of changes in the discount and inflation rates is accounted for as a change in accounting estimate and included in operating expenses.

The estimation of the liability is highly sensitive to changes in inflation and discount rates. An increase of 1% in the discount rate would decrease the September 30, 2010 liability and 2010 expense by $1,029 million. A decrease of 1% would increase the September 30, 2010 liability and 2010 expense by $1,255 million.

At September 30, 2010, the present value of the liability for future workers’ compensation payments is $12,589 million, an increase of $2,456 million, or 24.2%, from $10,133 million at September 30, 2009. The current portion of the liability is $1,115 million and $1,069 million at September 30, 2010 and 2009, respectively.

Changes in the workers’ compensation liability are primarily attributable to the combined impact of changes in the discount and inflation rates, and, to a lesser extent, routine changes in actuarial estimation, new compensation and medical cases and the progression of existing cases. The impact of the changes in discount and inflation rates accounted for $2,017 million and $718 million of the increase in the 2010 liability and 2009 liability, respectively.

The inflation and discount rates used to estimate the liability at September 30, 2010, 2009, and 2008 are shown in the following table.

In 2010, the Postal Service began to use the average rate of medical inflation experienced by its workers’ compensation claimants over the past five years as an estimate for future medical inflation. Prior to 2010, forecasted medical inflation rates published by an independent source had been used. During 2010, the Postal Service determined that its own history served as a better indicator of future costs and revised our estimation accordingly. The impact of this change was to increase the liability by $50 million and is accounted for as a change in accounting estimate.

In 2010, workers’ compensation expense was $3,566 million compared to $2,223 million in 2009 and $1,227 million in 2008. The components of workers’ compensation expense are as follows:

In 2010, the Postal Service experienced a $48 million or 4.6% increase in total claims paid on our behalf to $1,085 million. Medical claims payments increased 7.2% or $30 million while payments of compensation claims increased 2.9% or $18 million compared to 2009. Actual claim payments of $1,037 million in 2009 increased $78 million, or 8.1%, over 2008.