The workers compensation liability estimation technique used in 2006 and prior years utilized a net discount rate, which was the estimated difference between the expected return on investments in a basket of Treasury securities offset by the estimated inflation rate for medical costs and wages. The net discount rate in 2006 was 3.3% for compensation claims and -0.8% for medical claims. The estimation technique used by the independent actuarial consulting firm in 2007 and by our new model in 2008 uses separate calculations for returns on investment and inflation factors rather than a net discount rate. The combined reduction to our 2007 liability as a result of the changes in actuarial valuation technique, and the underlying assumptions of inflation and discount rates was $685 million. This is shown in the following table.
2007 Workers’ Compensation Assumption |
Old Assumptions |
Current Assumptions |
Net Reduction |
|---|---|---|---|
(Dollars in millions) |
|||
Compensation Claims |
$ 5,565 |
$ 5,272 |
$ 293 |
Medical Claims |
2,820 |
2,428 |
392 |
Total Liability |
$ 8,385 |
$ 7,700 |
$ 685 |
In 2008, the independent actuary changed their model calculating our liability related to injuries occurring more than 10 years in the past by increasing the length of the period of our past claim payment experience used as a basis to project future claim payments. This change decreased our liability for 2008 by approximately $154 million.
In 2008, we recorded $1,227 million in workers’ compensation expense, compared to the $880 million in 2007 and $1,279 million recorded in 2006. The effect of the 2008 and 2007 changes discussed above are accounted for as changes in the accounting estimate, as defined by GAAP.
In addition to the cost of workers’ compensation claims, DOL charges us an administrative fee for processing claims. In 2008, the administrative fee, which is included in the expense above, was $52 million, compared to $49 million in 2007 and $45 million in 2006.
Note 12 — Revenue forgone
Our operating revenue includes accruals for revenue forgone. Revenue is forgone when Congress mandates that we provide mail services for designated mailers at free or reduced rates. Congress then appropriates money to reimburse us for the revenue that we have forgone in providing these services.
We estimate the amount of services that will be provided during a given year and forward a funding request to Congress. At the end of the year we reconcile this request with the actual usage. Depending upon whether actual usage is higher or lower than our estimate, we will request additional funding or return the excess funding via a reduction to our next revenue forgone funding request.
In 2008, we included $103 million of revenue forgone as operating revenue, $63 million in 2007, and $99 million in 2006. We record requested amounts as government receivables until the appropriations are received.
The Revenue Forgone Reform Act of 1993 authorized Congress to make 42 annual payments of $29 million each, beginning in 1994 and continuing through 2035. These payments are reimbursement for two purposes: services we performed in 1991, 1992, and 1993 for which we have not yet been fully paid; and for shortfalls in the reimbursement for the costs we incurred for processing and delivering certain Nonprofit mail entitled to statutorily reduced costs from 1994 through 1998.
The future payments authorized by the Revenue Forgone Reform Act of 1993 totaled $1,218 million for which we calculated the present value, at 7% interest, to be approximately $390 million. We recognized the $390 million as revenue during fiscal years 1991 through 1998. The discounted present value of the remaining future payments as of the years ended September 30 was $349 million in 2008 and $353 million in 2007.
The total receivable for revenue forgone as of the years ended September 30 was $495 million in 2008 and $476 million in 2007.