Reform, FASB, and Tough Decisions

The following is a perspective by postal commentator Gene Del Polito

During the long, long march toward postal legislative reform, advocates of reform have been insistent that elimination of the P.L. 108-18 retirement annuity escrow and return of the military retiree obligation to the Treasury were must-haves in any reform bill. At times during the years of debate, it almost seemed as if this was the only matter on which everyone could agree, and that the rest of reform was more or less a take-it or leave-it matter. Some prefered to take it; others felt differently.

The House and the Senate have approved their versions of postal reform (H.R. 22), and now it's up to a House-Senate conference to see if differences can be ironed out, while still presenting the White House with a measure the President will sign.

As of this writing, the House has still to name its conferees. Word has it that Speaker of the House has made clear to the bill's sponsors that no conference will be held unless it can be assured that any measure returned to the House will meet with the Administration's approval. (The Majority Leader of the Senate has issued similar instructions to his chamber's conferees.)

Reform advocates have been urging House and Senate reform sponsors to stay the course and hold a tough line on the escrow and military retirement provisions. At the same time, the White House has made abundantly clear it will not accept a postal reform bill that isn't budget neutral. In other words, the President will not sign a bill that results in any loss to the Treasury. The Administration is insisting that the military obligation remain with the Postal Service and that any released escrow funds be applied toward paying down the Postal Service's retiree health obligations.

The matter of what and how much of an obligation the Postal Service has to fund has been a matter of considerable dispute. The Postal Service, which accounts on an accrual basis, has chosen consistently to follow accounting rules set forth by the Financial Accounting Services Board (FASB), a private entity that formulates the standards and accepted best-practices for the accounting industry. When it comes to booking retirement-related obligations, FASB sets forth two standards: one that applies to what are called multi-employer plans, and one that holds for single-employer plans.

According to FASB Standard No. 106 (promulgated in 1990):

"a multiemployer plan is a postretirement benefit plan to which two or more unrelated employers contribute, usually pursuant to one or more collective-bargaining agreements. A characteristic of multiemployer plans is that assets contributed by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer."

If you fail to meet this provision, then "single-employer" rules apply. With single-employer plans, an enterprise must reflect the full amount of any future obligation on its balance sheet. With multi-employer plans, an enterprise is required only to reflect those payments that come due on an annual basis. While the rules permit participants in multi-employer plans this obligation via a financial statement footnote, a footnote does not have the same impact as a balance sheet entry when it comes to assessing the enterprise's fiscal health.

The U.S. Postal Service (USPS), for its part, has argued that its health retirement obligation stems from a multi-employer plan. It has maintained that, as an independent federal entity, it is an employer in its own right, separate and distinct from other branches and agencies of the federal government.

The Treasury Department, on the other hand, argues that since the Postal Service is nothing more than a federal agency, since it doesn't collectively bargain the core of its employee retirement obligations, and since the federal government's retirement plan is administered by the Office of Personnel Management in behalf of the entire federal government as a single employer, the USPS should be using the single-employer plan rule.

The differences to mailers and the Postal Service in doing one or the other are light-years apart. As a participant in a single-employer plan, the Postal Service would have to reflect fully on its balance sheet a $64 billion obligation for health-retirement benefits. Once this shows up on the USPS' balance sheets, under current postal law, the Postal Rate Commission the would become a party in determining how this obligation is reflected in future rate cases and increases. The long and the short of it is that postal rates, in all likelihood, would rise at a much greater rate than if the Postal Service continued to account under the multi-employer rule.

So, which is it? Are the USPS' retirement obligations more rightly accounted under single-employer or multi-employer rules? Even as far back as 1990, FASB seemed to have some questions on which method of accounting was most appropriate. In a later part of Standard No. 106, it noted that:

"Some postretirement benefit plans to which two or more unrelated employers contribute are not multiemployer plans. Rather, those multiple-employer plans are in substance aggregations of single-employer plans, combined to allow participating employers to pool plan assets for investment purposes or to reduce the costs of plan administration. Those plans ordinarily do not involve collective-bargaining agreements. They may also have features that allow participating employers to have different benefit formulas, with the employer's contributions to the plan based on the benefit formula selected by the employer. Those plans shall be considered single-employer plans rather than multiemployer plans for purposes of this Statement, and each employer's accounting shall be based on its respective interest in the plan."

The Postal Service, for the most part, simply chose to ignore this particular caveat.

Without question, the Postal Service wasn't alone in doing this. Indeed, FASB has now issued a notice "to improve acounting for postretirement benefit plans, including pensions." In a press release issued on March 31, 2006, FASB said:

"Current accounting standards do not provide complete information about postretirement benefit obligations. For example, those standards allow an employer to recognize an asset or liability in its balance sheet that almost always differs from its overfunded or underfunded positions. Instead, they require that information about the current funded status of such plans be reported in the notes to financial statements. That incomplete reporting results because existing standards allow delayed recognition of certain changes in plan assets and obligations that affect the costs of providing such benefits.

"Many constituents, including our advisory councils, investors, creditors, and the SEC staff believe that the current incomplete accounting makes it difficult to assess an employer's financial position and its ability to carry out the obligations of its plans," said George Batavick, FASB member. "We agree. Today's proposal, by requiring sponsoring employers to reflect the current overfunded or underfunded positions of postretirement benefit plans in the balance sheet, makes the basic financial statements more complete, useful, and transparent."

"The proposed changes, other than the requirement to measure plan assets and obligations as of the balance sheet date, would be effective for fiscal years ending after December 15, 2006. Public companies would be required to apply the proposed changes to the measurement date for fiscal years beginning after December 15, 2006 and nonpublic entities, including not-for-profit organizations, would become subject to that requirement in fiscal years beginning after December 15, 2007."

In other words, FASB no longer wants to permit firms to claim the single-employer option when they fail to rigorously comport with the multi-employer rule requirements. Starting in 2006 and continuing through 2007, firms would have to bring their books into full FASB rule compliance, if they wished to have the kind of clean audits that most businesses prize.

As noted earlier, reform advocates (including PostCom) have been insistent that postal reform must return the military retirement obligation to the Treasury and must eliminate the P.L. 108-18 escrow without dictating how those escrow funds are to be used. The Administration wants the military obligation to stay where it is and to apply all released escrow funds toward the $64 billion health retirement obligation. The Administration has on its side the Speaker of the House and the Majority Leader of the Senate, both of whom have made clear they will not present the President a reform bill he is reluctant to sign.

The Postal Service has signaled that it wouldn't be too upset with a legislative stalemate. The worst it believes that could happen is that it would continue to have to make escrow payments and still pay down its health-retirement obligation in accordance with multi-employer plan rules.

For its part, the Treasury has signaled that this sort of outcome won't be permitted. If no postal reform gets enacted, it says the USPS not only would have to continue to make P.L. 108-18 escrow payments, but also would have to account its health-retirement obligation in line with the FASB single-employer rule.

If Treasury's views prevail, a legislative impasse would have significant consequences for postal ratepayers. The USPS would continue to pay money into an escrow account for no good reason, and it would have to begin to pay down its $64 billion obligation in future rate increases. This would begin to drive postal rates through the roof--precisely at a time when the Postal Service is under increasing competitive pressures. As postal rates rise, more and more of its customers would move more and more of their business out of the mail and into other media or through other providers. Without a reform bill that provides the USPS additional administrative flexibility over the design of its workforce or network, costs couldn't be cut fast enough to compensate for the deleterious pressure for higher rates.

The decision now facing mailers and the Postal Service boils down to this. Should H.R. 22 continued to be entreated to stick to their guns regarding the escrow and the military, and face the very high probability that compliance with FASB will send postal rates through the roof? Or, do we tell the sponsors it's okay to recede to the White House's position on the military and the escrow, pass reform, and minimize the impact FASB compliance might have on postal rates?

These options are not very pretty. But, as Roseanne Roseannadanna once said: "It just goes to show you. If it isn't one thing, it's another."