fund post-retirement health benefits for all new employees who were hired in 2003 or later. It would also provide a funding source for the annual cost of these benefits for all retirees.
We believe that these proposals respond to concerns underlying the expression of the sense of Congress for the use of "savings" resulting from the passage of the Act. Both proposals would reduce our unfunded postretirement health benefits obligations presented above and provide an approach for the systematic funding of these obligations in
future years. This would allow us to continue
meeting our obligations to our current and
retired employees without overburdening our
current and future customers with large and
disruptive rate changes.
Under the FEHBP, OPM bills us for our cost
for participating in the plan related to retirees
and we record this cost as a current expense
as part of our compensation and benefits
expense. Our financial statements reflect
expenses related to retiree health benefits of
$1,133 million in 2003, $987 million in 2002
and $858 million in 2001. In 2003, the
increase in these costs represented 0.2% of
total costs.
These retiree health benefit costs are
currently included in our rate base. In 2003
retiree health benefits costs represent 1.7%
of our total costs.
We will continue to fulfill our obligation to
fund retiree health benefits according to
the requirements established by OPM and
Congress. Postal revenue will be used to fund
these costs in the future as they have in
the past.
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Retirement Expense
The Postal Civil Service Retirement
System Funding Reform Act of 2003 (Act),
signed by the President on April 23, 2003,
significantly affects our finances. The Act
changes the way we fund our Civil Service
Retirement System (CSRS) obligation.
According to a 2003 GAO report, we had
overfunded our pension obligation and,
without this legislation, were on course to
overfund by approximately $105 billion.
Previously, the Office of Personnel
Management (OPM) determined the liability
each year that resulted from any pay
increases we granted to our employees. We
were then required to discharge this liability
over 30 years at 5% interest. When all Civil
Service retirees received an annual cost-of-living
adjustment (COLA), OPM calculated the
future cost of that benefit, which we funded
over 15 years at 5% interest.
Using this funding method, our liability as of
September 30, 2002 was $32 billion.
However, OPM conducted a special analysis
that revealed we overfunded our CSRS obligation
because of higher than assumed historical
interest earnings, lower than assumed outlays
and other factors. With the retroactive transfer
of CSRS military service costs from the federal
government to us, OPM estimated that our
2002 unfunded retirement obligation was
closer to $4.8 billion. The Administration,
therefore, proposed the Act.
In May 2003, we began to pay 17.4% of
our current CSRS employees' wages to the retirement fund rather than the 7% we previously paid. Also, in 2004 we will be required to make the first of 40 annual payments, if necessary. The actual amount of our payment is to be derived from OPM's new calculation of the fund balance due June 30, 2004 under the Act.
The Act also transfers to us from the U. S. Treasury the responsibility for funding the costs of CSRS benefits that current and former Postal Service employees have earned through military service. Thus, the Act
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