Can USPS Eliminate $5.5B Annual Prefunding Retiree Obligation?

Dec 22, 2011 10:43 PM  By

Tony Vegliante, chief human resources officer and executive vice president of the U.S. Postal Service, says not only does the annual prefunding of retiree health benefits to the tune of $5.5 billion need to be resolved for the USPS to become profitable again, he knows it can be done through a new health insurance plan for postal workers.

“We want to create a plan more in line with private sector, and one that offers more options and choices for employees,” he says. “We would have between 500,000 to 1 million people in this plan.”

Foremost among the Postal Service’s financial woes has been the annual $5.5 billion albatross prefunding payment for retiree health benefits, thanks to Postal Reform legislation passed in 2006.

Returning the USPS to profitability would be welcome news for the federal agency and to the countless mailers around the country.

Vegliante says a major health insurance company would have to handle the program since up to 1 million people could be enrolled in such a plan.

“We can eliminate the entire prefunding issue,” Vegliante says. “This is very doable.”

So how would a new health-care plan for USPS employees eliminate the prefunding obligation for retiree health benefits?

1) Change to FASB 106 Accounting Rules.

2) Integration with Medicare parts A, B, and D.

3) Leverage our size in the marketplace.

4) Use best practices and innovations that we don’t currently participate in FEHB (Federal Employees Health Benefits) such as: Single supplier for Pharma; durable medical goods; and disease management.

Vegliante says the plan for a new health-care plan for postal workers could be part of comprehensive postal legislation that the USPS is pushing for in Congress.

“Part of this could be done with negotiations with unions,” he says. “If we eliminate the prefunding of retiree health benefits, that would take us into profitability and we’d be on a self-sustainable playing field with the private sector.”

The Postal Service believes it should have its own health-care program for three reasons.

First, fringe benefit costs constitute roughly 33% of total labor costs. About 80% of the Postal Service’s total costs are labor costs. The Postal Service cannot address its current economic challenges without gaining control of its legacy costs, defining their breadth and scope, and setting up a reasonable program to fund them, Vegliante says.

Second, under the Postal Reorganization Act, the USPS is obligated to provide wages and benefits comparable to those provided in the private sector. The private sector is adjusting constantly to changing market conditions with changes in plan design, care management, eligibility, cost management (including the availability of network discounts), and a host of other factors that reflect “best practices” in compensation and benefit policies. The Postal Service cannot fully meet the private sector standard as part of the FEHB system, Vegliante adds.

Third, the Postal Service believes it is in the interest of the federal government, its retirees and active employees, stakeholders and the postal community as a whole to segregate once and for all the Postal Service’s health benefit obligations—including the obligations for retirees as well as active employees and their families–from those of the rest of the federal government.

The Postal Accountability and Enhancement Act of 2006 (PAEA) imposed on the Postal Service the requirement that it prefund retiree health benefits by $59 billion for 10 years through 2016, over and above continuing to make annual premium contributions on behalf of retirees that are now approaching $2.5 billion. The sum of these premium contributions and prefunding obligations now exceed 12% of the Postal Service’s annual revenue projected for FY2011.

“At the end of day, we feel extremely comfortable that people will have choices, lower health costs, and be able to afford them and continue to give employees retiree health benefits,” Vegliante says.

How confident if Vegliante in Congress addressing this health-care proposal from the USPS?

“I’d like to see a lot of things resolved, but things don’t always move at the speed you’d like,” Vegliante says. “I think something will come out of this in late spring. There are a lot of different constituencies going in a lot of different directions.”

Vegliante, a 30-plus year veteran of the USPS, says the legacy costs problems “have to be fixed” and this health-care plan “makes sense. No one gets hurt. Employees and employers make out better. It takes off unnecessary pressure that has been on us. We don’t mind the problem. We just want to the ability to resolve it.”

And Vegliante adds: “It’s become my life’s work.”

From 2007 through 2010, mail volume declined 20%, from 213 billion to 171 billion pieces, while prices remained capped at the rate of inflation—resulting in net losses over the period of just over $20 billion, including a loss in FY2010 of $8.5 billion.

The decline in First-Class Mail—by 20% during that four-year period—has had a particularly significant negative impact on the bottom line as that one mail class provides two-thirds of the Postal Service’s income contribution.

These volume declines are the result of the recent economic slowdown, the shifting of hardcopy communications to digital alternatives, and the interaction between the two. Vegliante says that lost volume won’t return because the movement to electronic alternatives—accelerated by the recession—constitutes a fundamental and permanent change in mail use by households and businesses.

Jim Tierney (jim.tierney@penton.com) is a senior writer for Multichannel Merchant. You can connect with him on Twitter (TierneyMCM) and LinkedIn, or call him at 203-358-4265.