Washington, D.C. -- U.S. Office of Personnel Management Deputy Director Dan G. Blair testified before a Senate panel February 24, 2004, on behalf of OPM Director Kay Coles James expressing the Bush Administration's strong opposition to a proposal that would transfer from the Postal Service to taxpayers responsibility for paying the retirement costs of military service performed by some postal employees.

"Last year, Congress passed legislation (the Postal Civil Service Retirement System Funding Reform Act of 2003) rightly granting the Postal Service needed pension funding relief - $78 billion in pension relief to be precise. It also provided for accurate and full funding of postal Civil Service Retirement System costs," said Blair before the Senate Committee on Governmental Affairs. While recognizing that other federal agencies do not fully fund CSRS costs, he emphasized the appropriate "good-government" response to the under-funding issues is to require all agencies to pay the full cost of CSRS, (and) "not to give the Postal Service a discount - a $27 billion discount - from the real cost."

Blair pointed out that the postal funding proposal under consideration would apply only to employees covered under the Civil Service Retirement System. However, he said that, should the Postal Service receive a break when it comes to full funding of its CSRS obligations, future attempts might be made to grant it similar treatment with regard to employees covered by the Federal Employees Retirement System.

Giving the Postal Service a break in its pension obligations moves us in the wrong direction, said Blair. "We have adopted full funding for FERS and full funding for postal CSRS." He urged the committee to reject actions that would permit the overall principle of postal self-funding to be carved away, one piece at a time.

The recommendation to transfer the pension liabilities were part of a broader package of recommendations on postal reform developed by the President's Commission on the United States Postal Service. Blair also was asked to discuss commission recommendations proposing that the Postal Service consider extending a pay-for-performance system to employees covered by collective bargaining agreements and what the potential impact on federal systems might be if the Postal Service's post-retirement health benefits and retirement benefits were subject to collective bargaining.

Noting the Administration's strong support of performance-based pay in President Bush's Management Agenda, Blair cited recent implementation of a pay-for-performance program in the Senior Executive Service (SES), the federal government's top cadre of managers. And he thanked the panel's chair, Senator Susan Collins, for her support of the President's SES pay initiative and for passing the Human Capital Performance Fund, which will compensate the very best performers throughout the federal government's rank-and-file work force.

"Performance-based compensation systems have been around for decades in the private sector, and experimentation and evaluation of such systems with the federal government dates at least back to the late 1970s, with federal personnel demonstration projects leading to agency-wide efforts in the Federal Aviation Administration and the Internal Revenue Service," said Blair. "Virtually, without exception, experience under these systems has shown they can work. It takes preparation and commitment. But where these exist, organizations - including many in the federal government have been able to make meaningful, performance-based pay distinctions in a way that is fair and equitable and sends the right message to those who demonstrate the highest performance."

On the issue of collective bargaining over the Postal Service's pension and retiree health benefits programs, Blair asked the committee to carefully consider the potential impact such a recommendation could have on the current retirement and health insurance program. He said OPM is working on a report for Collins on this subject, but he noted the "significant challenges" to the benefits structure if the Postal Service is severed from the retirement system.

"Retirement funding is based upon predictability and continuity. Further, the postal benefit structure is currently fully integrated with the non-Postal Service structure," said Blair. "Hence, bargaining over retirement benefits could be adopted to the extent it does not destabilize retirement funding."

He added that changes to the Federal Employees Health Benefits Program, which covers nearly nine million federal employees and their dependents, would have to be considered with an eye to avoiding the potential for adverse selection to drive-up costs, or reduce the number of fee-for-service plans.

"While we do not know what options the Postal Service is considering, adverse selection could occur if a plan were developed allowing the Postal Service to take active employees out of the system, while leaving retirees in either the current system or a new system with negotiated arrangements," said Blair. "This would be completely unacceptable to Director James, who has fought long and hard on behalf of federal employees to reign-in costs and premium increases.

"If the Postal Service took over health benefits responsibility for its employees and retirees, it could potentially reduce the number of plans offered to employees," said Blair. "Since many of the current carriers in the FEHBP are postal-related, the impact on the program could be substantial should the Postal Service cover its employee or retirees under a separate health insurance program and should these plans then drop out of the FEHBP.

"While no such blueprint can be adopted without careful examination and adjustment," said Blair, "the commission's recommendations represent a thoughtful review of a complex subject and an excellent starting point to address the nation's postal needs."