PSRHBF

P.L. 109-435 requires that OPM provide, and that we report, certain information concerning the obligations, costs and funding status of the PSRHBF. The following table shows the funded status and components of net periodic costs.

The OPM valuation of Post Retirement Health Liabilities and Normal Costs was prepared in accordance with Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 5. SFFAS 5 requires the use of the aggregate Entry Age Normal actuarial cost method.

Demographic assumptions and an interest rate assumption of 6.25% are consistent with the pension valuation assumptions, and decrements are based upon counts or numbers rather than dollars.

The normal cost, which is on a per-participant basis, is computed to increase annually by a constant medical inflation rate which is assumed to be 8% per annum as of the valuation date and grade down to an ultimate value of 5.5%. Past year medical inflation is assumed to be 7%. Normal costs are derived from the current FEHBP on-roll population with an accrual period from entry into FEHBP to assumed retirement. Entry into the FEHBP is generally later than entry into the retirement systems.

The accrued liability is equal to the total liability less future normal payments. The liabilities and normal costs that appear in the OPM financial statements used in agency reporting are based upon annuitant medical costs (including administration costs) less annuitant premium payments. The values used in these valuations are based upon the same methodology and assumptions as for the financial statements except the average government share of premium payments for annuitants is substituted for annuitant medical costs less annuitant premium payments. This amount is assumed to increase at 8% per annum as of the valuation date and grade down to an ultimate value of 5.5%. For current postal annuitants, this government share of premium payments is adjusted to reflect the pro-rata share of civilian service to total service for which the Postal Service is responsible. Postal annuitant counts include contracts for which the Postal Service makes no payment. The pro-rata adjustment is made by applying calculated factors based upon actual payments that vary by age and Medicare status of the enrollments. For active postal employees, the pro-rata share in retirement is assumed to be 93% of the total.

The following table shows the net assets of the PSRHBF.

The assets of the PSRHBF are comprised entirely of special issue Treasury securities with maturities ranging up to 15 years. The long-term securities bear interest rates ranging from 3.25% to 5.0%, while the short-term securities have interest rates ranging from 3.13% to 5.0%. The expected rate of return was 6.25% for both 2009 and 2008, while the actual rates of return were 4.5% for 2009 and 4.8% for 2008.

Because there are several areas of judgment involved in calculating this obligation, estimates could vary widely depending on the assumptions used. Utilizing the same underlying data that was used in preparing the estimate in the table above, the September 30, 2009, obligation could range from $37 billion to $65 billion, solely by varying the inflation rate by plus or minus 1%, while the 2008 unfunded obligation would range from $40 billion to $70 billion.