Postal employees are covered by the Federal Employees’ Compensation Act, administered by the Department of Labor’s Office of Workers’ Compensation Programs (OWCP), which makes all decisions regarding injured workers’ eligibility for benefits. However, we pay the Department of Labor (DOL) all workers’ compensation claims, as well as an administrative fee, from postal funds.
We record as a liability the present value of all future payments we expect to make for those employees receiving workers’ compensation. At the end of 2009, we estimate our total liability for future workers’ compensation costs at $10,133 million, an increase of $2,165 million, or 27.2%, from 2008. In 2008, our liability increased $197 million, or 2.5%, from 2007. Our workers’ compensation expense was $2,223 million for 2009, $1,227 million for 2008 and $880 million for 2007.
As discussed in Note 12, Workers’ Compensation, in the Notes to the Financial Statements, $1,051 million of the increase in the liability at September 30, 2009, results from a change in the timing of the annual payment to DOL for claims paid on our behalf. Beginning in 2009, we are making the payment on the statutorily required deadline of October 15, instead of September 15 as we had done in previous years.
Beginning in Quarter III, 2009, we experienced a significant change in our discount and inflation rates used in our liability estimate on a quarterly basis. The economic recession that began in December 2007 and corresponding response by the Federal Reserve have resulted in interest rates declining significantly. Accordingly, the projected rates of return on various maturities of treasury securities, which we use in discounting our workers’ compensation model, have declined by 0.7% and 1.0% on compensation and medical liabilities, respectively, to 4.9% and 4.4% from what was used in our estimation model at September 30, 2008. The projected return rates are especially low for 2009 and 2010. While we believe these historically low rates are only temporary, GAAP requires us to use discount rates based on the best available information at the measurement date.
The impact of the changes in the discount and inflation rates in 2009 increased our 2009 estimated liability and expense by $718 million. The remaining increase in the liability resulted from other routine changes in the annual actuarial update, resulting from new compensation and medical cases and the development of existing cases.
In 2008, we implemented an improved model for estimating our liability for workers’ compensation, with the assistance of an independent actuary. The revised model is similar to that used in the independent actuarial valuation, which formed the basis for the recorded liability in 2007. The revised model combines four generally accepted actuarial valuation techniques to project future claim payments based upon currently open claims and past claim payment experience. In addition, we refined our estimation in 2008 by taking a longer period of claim payment experience into consideration. The cumulative impact of the changes in estimate reduced our 2008 liability and expense by $154 million.
In 2009, we experienced a 1.4% decrease in the number of medical claims receiving payments and a 3.2% increase in the number of compensation claims receiving payments. The actual claim payments increased $78 million, or 8.1%, over 2008. Medical claims payments during the year grew by 9.8%.
In 2008, we experienced a 1.5% increase in the number of medical claims receiving payments and a 3.8% increase in the number of compensation claims receiving payments. The actual claim payments increased $56 million, or 6.2% over 2007. Medical claims payments during the year grew by 8.9%.
