Why does the USPS make prepayments?

[treis]

@levdrakon

So, loosen up on the prepayments, maybe extend them out longer or at least give them a one year’s postponement or something, and give them the same operational freedom other companies enjoy.

The USPS hasn’t actually made a prepayment in three years.

And the USPS is the company that had a special arrangement. Defined benefit pensions are required to be fully funded by companies:

Before the Pension Protection Act of 2006 (PPA), a defined benefit plan maintained a “funding standard account”, which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan’s liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan’s liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end.

In 2008, when the PPA funding rules went into effect, single-employer pension plans no longer maintain funding standard accounts. The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called “at-risk status”).

To reiterate, the USPS pays it’s employees X dollars and promises to pay them Y dollars in the future. Prepayment is simply setting aside enough money to pay the Y dollars in the future. Talking about profitability without those payments is saying “If the USPS didn’t have to pay their workers everything htey promised, they would be profitable”.

[levdrakon]

@treis

The USPS hasn’t actually made a prepayment in three years.

And the USPS is the company that had a special arrangement. Defined benefit pensions are required to be fully funded by companies:

To reiterate, the USPS pays it’s employees X dollars and promises to pay them Y dollars in the future. Prepayment is simply setting aside enough money to pay the Y dollars in the future. Talking about profitability without those payments is saying “If the USPS didn’t have to pay their workers everything htey promised, they would be profitable”.

Okay, thanks for the explanation.

What about this money they’ve overpaid, but can’t use?

[treis]

@levdrakon

Okay, thanks for the explanation.

What about this money they’ve overpaid, but can’t use?

There’s two over payments people talk about. The first is that when the Post Office was spun off into a standalone company there needed to be some agreement on how pensions were paid. So if you worked 15 years at the Department of the Post office and 15 years at the USPS, who is going to be responsible for your pension? What they agreed to 40 years ago is that the Government would pay pension costs incurred before the spinoff and the USPS would pay those incurred after.

But a pension is typically based on your ending salary. So for an employee making 30k when it was the department of the post office might have been making 100k 30 years later for the USPS when he retired. In this scenario, the government would be paying the pension of a person making 30k and the USPS had to pay the rest. The USPS argues that this arrangement isn’t fair and that a more fair arrangement would have had the government paying 50-75 billion more. So they want that money. There are two problems:

(1) You don’t get to change 40 year old agreements because you need money now.

(2) If the USPS hadn’t had to make those payments, they wouldn’t have put the money into an account. It would have resulted in slightly lower postage for 40 years.

In short, it’s a fairly absurd argument.

The second overpayment is into FERS. FERS is the federal employee retirement system, and contributions are based on actuarial data and what not. Recently, those projections seem to have overestimated the assets required. It’s gone up and down as demographics and predictions changed, but it’s been anywhere from 3-11 billion. This is a government wide thing and not specific to the post office. It’s debatable what the significance of that. If I estimate an annual rate of return of 5% and I get 6% for a few years, does that mean my assumptions were wrong or will these positive years be matched by negative ones in the future?

Ultimately, it’s not a lot of money compared to the unfunded liabilities the Post Office has and continues to occur. They’ve failed to make ~15 billion in payments to their retiree’s health fund, and it doesn’t look like they will make any more payments any time soon.

[levdrakon]

Thank you treis, that was a great explanation. I’d read a few articles about it, but always felt fuzzy on how it actually got started. The articles tended to take the position that the USPS was sort of a victim, and I suspected there was more to the story.