RETIREE HEALTH BENEFITS

Eligible postal employees, those with at least five consecutive years participation in the FEHBP immediately preceding retirement, are entitled to continue to participate in FEHBP after retirement. As outlined in ASC 715, the amount that is due to the PSRHBF in any given year, plus our portion of the current premium expense, is recognized as an expense when due.

P.L. 109-435 made several changes to the way we fund and report our obligations for post-retirement health benefits. The law established the PSRHBF, directed OPM to determine any Postal Service surplus in the CSRDF as of September 30, 2006, and further directed that the surplus be deposited into the PSRHBF by June 30, 2007. OPM attributed to the Postal Service a surplus of $17.1 billion in the CSRS fund as of September 30, 2006, and transferred the funds as required on June 29, 2007.

P.L. 109-435 also required that we begin to fund the OPM-determined obligation for retiree health benefits by paying into the PSRHBF the 2006 escrow resulting from P.L. 108-18 ($2.958 billion) and by making additional annual payments ranging from $1.4 billion to $5.8 billion per year through 2016. On October 1, 2009, P.L. 111-68 became law and decreased our FY 2009 payment required under the provisions of P.L. 109-435 by $4 billion — from $5.4 billion to $1.4 billion.

Although P.L. 109-435 dictates the funding requirements through 2016, the amounts to be funded and the timing of funding can be changed at any time with passage of a new law or upon an amendment of existing law as passed by Congress and signed into law by the President. After these annual payments are complete, OPM will conduct an actuarial valuation and determine whether any further payments into the fund are required. Beginning in 2017, the PSRHBF will begin to pay our portion of the premium payments.

The 2009 payment to the PSRHBF was $1.4 billion while payments in 2008 and 2007 were $5.6 billion and $5.4 billion, respectively. See Note 5, Subsequent Events, and Note 10, Health Benefit Programs, in Notes to the Financial Statements, for further discussion of the accounting treatment for P.L. 111-68.

Under P.L. 109-435, OPM will continue to charge us for our portion of the premiums for postal retirees currently participating in FEHBP, and we will continue to expense these payments as they become due until 2017. The major drivers of retiree health benefits premium costs are the number of current participants on the rolls, the mix of plans selected by retirees, the premium costs of those plans, and the apportionment of premium costs to the federal government for retiree service prior to 1971. Retiree health benefit premium expense, exclusive of the expense for the PSRHBF, has increased every year. Retiree health benefits premium expense increased 10.1% in 2009, 4.7% in 2008 and 5.4% in 2007. The number of Postal Service annuitants and survivors has grown to approximately 463,000 in 2009, compared to 452,000 in 2008 and 450,000 in 2007. The average monthly apportionment, the percentage of retiree premiums charged to the Postal Service, has increased from 68.1% in 2007 to 69.9% in 2008 and 72.0% in 2009.

The following table shows the retiree health benefits expense for 2009, 2008 and 2007.