The Balanced Budget Act of 1997: Retirement and Health Insurance Provisions for Postal and Federal Personnel

CRS Report for Congress
The Balanced Budget Act of 1997:
Retirement and Health Insurance Provisions for
Postal and Federal Personnel
Updated September 17, 1997
Carolyn L. Merck
Specialist in Social Legislation
Education and Public Welfare Division

Congressional Research Service ˜ The Library of Congress

The Balanced Budget Act of 1997:
Retirement and Health Insurance Provisions
for Postal and Federal Personnel
On June 25, 1997, the Senate and the House of Representatives each passed
FY1998 budget reconciliation bills covering spending and saving proposals. These
bills, which reflected assumptions included in the FY1998 congressional budget
resolution, included deficit reduction provisions pertaining to the federal civil service
retirement and health insurance programs. After approval by the House Committee
on Government Reform and Oversight and the Senate Committee on Governmental
Affairs, these proposals were included in the Balance Budget Act of 1997 enacted
on August 5, 1997 (P.L. 105-33).
On June 11, 1997, the House Committee on Government Reform and Oversight
approved budget reconciliation legislation to (a) increase postal and nonpostal
employee contributions to the federal retirement systems by 0.5% of pay (phased in)
starting October 1, 1997 (ending after 2002); (b) increase nonpostal agency payments
to the federal retirement trust fund on behalf of workers in the Civil Service
Retirement System (CSRS) starting October 1, 1997 (also ending after 2002); and
(c) establish a new formula governing health insurance premiums for federal
employees and annuitants under the Federal Employees’ Health Benefits Plan
(FEHBP) to retain the current government and enrollee premium shares. These
measures would reduce the federal budget deficit by $4.780 billion over 5 years
(including about $28 million in savings from the new FEHBP formula).
On June 17, 1997, the Senate Governmental Affairs Committee approved
reconciliation proposals that were the same as those approved in the House
Committee with one exception: The increase in nonpostal agency contributions for
CSRS employees would have been 1.6% of pay in the year 2002 instead of 1.51%.
The House version prevailed in the final legislation.
Some have questioned whether the employee retirement contribution increases
should apply to postal employees, for whom the CSRS is fully funded, and to federal
and postal workers participating in the Federal Employees’ Retirement System
(FERS), which is also fully funded. However, exempting postal or FERS workers
from the contribution increases might be perceived as unfair because the effect
would be that one group, federal workers covered by the CSRS, would be required
to absorb within 5 years the full $1.8 billion in deficit reduction this provision was
estimated to achieve.
An amendment to the budget reconciliation legislation to exempt postal
employees and FERS participants from the increase in contributions failed to pass
in the House Civil Service Subcommittee markup of the legislation June 10, 1997.

Retirement Programs...............................................1
Reducing the Budget Deficit.....................................1
Financing Federal Pensions......................................1
The FY1998 Budget Resolution..................................2
FY1998 Budget Reconciliation Proposals...........................2
Employee Retirement Contribution Increases........................3
Nonpostal Agency Contribution Increases for CSRS Participants........4
Issues Regarding the Retirement Program Provisions......................4
Increased Employee Contributions................................4
Funded and Unfunded Benefits...............................4
Reducing Long-term CSRS Unfunded Liabilities.................5
Increased Nonpostal Agency Contributions to the CSRS...............5
Reducing Federal Spending..................................5
Reducing Long-term Unfunded CSRS Liabilities.................6
Federal Employee and Retiree Health Insurance..........................6
Budget Reconciliation Proposal...................................7
List of Tables
Table 1. FY 1998 Budget Provisions Pertaining to Federal Retirement
(savings for FY1998 through FY2002).............................3
Table 2. Increased Federal Employee Retirement Withholding..............3

The Balanced Budget Act of 1997:
Retirement and Health Insurance Provisions
for Postal and Federal Personnel
Retirement Programs
Reducing the Budget Deficit
The Congress and the Administration agreed to balance the federal budget by
the year 2002. Many believe that, like any employer involved in a labor-intensive
business, when faced with the need to reduce expenditures, the federal government
must look carefully at its payroll costs. The federal pension plans are a major
component of those costs. To help with deficit reduction, the Administration and the
Congress agreed that federal employees should share more of the cost of their
retirement system during their working years and that nonpostal federal agencies
should finance more of the cost of their employees’ pensions by reducing other
spending. Under federal budget rules, increasing employee and agency contributions
to the retirement system are counted as revenues to the government and thus reduce
the federal budget deficit in the years in which those revenues are received.
In its FY1998 budget, the Administration had proposed to achieve additional
savings by delaying the date on which cost-of-living adjustments (COLAs) would
be implemented for federal civil service and postal retirees. However, the Congress
rejected that proposal in agreeing to the budget resolution for FY1998 (H.Con.Res.

84, approved June 5, 1997).

Financing Federal Pensions
A retirement plan is considered to be “fully funded” if adequate funds are set
aside during employees’ working years to pay the cost of their retirement benefits.
The Federal Employees’ Retirement System (FERS) is fully funded for both postal
and nonpostal federal workers, and the Civil Service Retirement System (CSRS), as
applicable to postal employees, is fully funded. However, the CSRS is only partially
funded for nonpostal federal workers. Thus, some contend that CSRS funding for
nonpostal federal employees should be increased. Others point out that federal
pension funding is achieved by crediting special issue Treasury securities to
retirement trust funds, but those securities can be redeemed to pay retiree benefits
only by replacing them with general revenues. They say that, even if CSRS pensions
were fully funded on an advance basis, the government’s share of federal pensions
would still have to be paid from general revenues.

In general, the trust fund through which federal pensions are financed is
primarily a bookkeeping device for keeping track of future pension obligations.
Because the trust fund consists of U.S. Treasury securities and is not invested in
private stocks or bonds, it does not generate cash for paying benefits.
The FY1998 Budget Resolution
A concurrent budget resolution is an agreement between the House of
Representatives and the Senate regarding federal spending and savings targets.
Those budget targets are based on assumptions about certain programmatic changes
the authorizing committees might make. For federal retirement programs, the
FY1998 congressional budget resolution assumes that employee and agency
contributions to the CSRS and the FERS would be increased by specified amounts
targeted to save $4.762 billion over 5 years in “direct” spending programs. (Direct
spending programs are entitlement programs for which the level of spending is not
limited by annual appropriations.)
The authorizing committees may accept the assumptions on which the
resolution is based, modify the assumptions, or substitute alternative provisions to
achieve the same level of savings. Each congressional committee is required to
report legislation pertaining to direct spending programs under its jurisdiction (if
any), and the committees’ proposals are combined by the budget committees into an
omnibus budget reconciliation bill. The House Committee on Government Reform
and Oversight and the Senate Committee on Governmental Affairs have jurisdiction
over civil service programs.
FY1998 Budget Reconciliation Proposals
On June 11, 1997, the House Government Reform and Oversight Committee
accepted the assumptions underlying the budget resolution and reported legislation
to include them in an omnibus budget reconciliation bill, as follows: (a) all federal
and postal workers would pay into the CSRS and FERS an additional 0.25% of pay
starting January 1, 1999; an additional 0.15% on January 1, 2000; and an additional
0.1% on January 1, 2001, for a total increase effective in 2001 of 0.5% of pay; and
(b) nonpostal agency payments to the federal retirement trust funds on behalf of
workers in the CSRS would increase from 7% to 8.51% starting October 1, 1997.
These increased employee and agency contributions would end after FY2002.
On June 17,1997, the Senate Committee on Governmental Affairs approved the
same provisions included in the House bill, with one difference. The Senate bill
would have increased the nonpostal agency payments for CSRS employees by 1.6%
of pay in the year 2002, rather than 1.51% in that year. This was done because of a
slight difference in the savings targets the Senate Committee was required to achieve.
However, the House version prevailed in the final budget legislation.
On June 25, the House passed H.R. 2015, including the provisions pertaining
to civil service retirement and health insurance, and the Senate passed S. 947 with
its similar civil service provisions. (The Senate then substituted the language of S.

947 into a bill numbered H.R. 2015). The differences in the House and Senate bills

were worked out in a conference committee. Tax measures were included in
separate reconciliation bills.
Table 1 shows the estimated savings associated with the retirement program
provisions in the FY1998 balanced budget legislation.
Table 1. FY 1998 Budget Provisions Pertaining to Federal Retirement
(savings for FY1998 through FY2002)
5-year savings
Function 950: Undistributed Offsetting Receipts
Increase nonpostal agency payments into the retirement fund on
behalf of CSRS workers by 1.51% of employee pay (effective
October 1, 1997, ending after FY2002)$2.933
General Revenue Receipts
Increase federal and postal employee payments into CSRS and
FERS (phased in starting in 1999, ending after FY2002)1.829
Total Savings$4.762
Employee Retirement Contribution Increases
Table 2 shows the employee retirement contribution rates which, under the final
budget legislation, will be applicable to all postal and nonpostal employees. (Certain
federal employees, including Members of Congress, congressional staff, federal law
enforcement officers, fire fighters, the Capital Police, and some air traffic controllers
currently pay higher rates than those shown in Table 2; the contribution rates for
these special groups would increase by the same percent of pay applicable to other
Table 2. Increased Federal Employee Retirement Withholding
(as a percent of employee pay)
1998 1999 2000 2001-2002
CSRS 7.0% 7.25% 7.4% 7.5%
FERS a 0.8% 1.05% 1.20% 1.3%
aFERS participants also pay the Social Security payroll tax of 6.2% of pay, up to a maximum pay rate
of $65,400 in 1997.

Nonpostal Agency Contribution Increases for CSRS Participants
The Balanced Budget Act of 1997 requires all federal agencies (excluding the
USPS) to increase their contributions on behalf of workers covered by the CSRS
from 7% of each worker’s pay to 8.51% of pay. (Because FERS is fully funded, no
increase in agency contributions is proposed for it.) Agencies will not receive
additional appropriations to pay the increased contributions, thus, they may need to
reduce spending for things other than retirement contributions in order to make the
increased payments to the retirement system. This provision is expected to decrease
the federal budget deficit because the increased agency contributions to the CSRS
are scored as a receipt of the government (budget function 950, “undistributed
offsetting receipts”), and other agency spending would have to be reduced to make
the required payment to the retirement system. (The Senate version of the bill would
have required the agency CSRS contributions to be 8.6% of pay in the year 2002.)1
Issues Regarding the Retirement Program Provisions
Under federal budget rules, postal and federal employee pension contributions
are scored as general revenue receipts. Therefore, increasing those receipts reduces
the budget deficit.
Increased Employee Contributions
Funded and Unfunded Benefits. The CSRS for employees of the USPS is
fully funded by the combination of postal employee and USPS employer
contributions. The FERS is fully funded also for all USPS and other nonpostal
federal employees by the combination of employee and employer contributions.
Thus, increasing postal employee contributions into the CSRS and postal and
nonpostal employee contributions into FERS without an offsetting reduction in the
agencies’ contributions would exceed the total amount needed to fund fully the
retirement plans for those workers.
Some say that because retirement for postal workers and FERS participants is
fully funded, those groups should be exempted from the retirement contribution
increase. Moreover, they argue that the “overpayments” by postal workers would
subsidize the underfunded benefits for nonpostal workers in the CSRS.
Opponents of exempting postal and FERS workers from the contribution
increases acknowledge that FERS and postal CSRS benefits are fully funded, but
they maintain that the underlying goal of the contribution increases is deficit

1 On April 18, 1997, the OPM published in the Federal Register revised estimates of the cost
of the pension component of FERS. These new estimates show that the cost of FERS has
declined since the last estimate in 1993. As a result, agency payments for pensions for FERS
employees will be reduced from 11.4% of pay to 10.7%, effective October 1, 1997. Thus,
although the reconciliation legislation would increase agency costs for CSRS employees by
1.51% of pay, that increase would be partially offset by the 0.7% reduction in agency costs
for FERS employees. On an agencywide basis, the extent of the offset would depend on the
proportions of CSRS and FERS employees.

reduction, not pension funding. They argue that exempting those groups would be
unfair because (a) nonpostal workers under the CSRS should not have to pay more
than postal workers for the same benefits; (b) it would break the agreement in the
FERS law that equalizes the required retirement contribution of CSRS and FERS
employees; (c) USPS/CSRS benefits and FERS benefits are fully funded because of
higher employer contributions, not because of higher employee contributions; and (d)
exemption of any employees from the proposed retirement contribution increase
would sacrifice deficit reduction unless larger increases were levied on the
nonexempted workers (i.e., nonpostal workers covered by the CSRS).
On June 10, 1997, when the House Subcommittee on Civil Service marked up
its budget reconciliation legislation, a majority party committee member proposed
an amendment to exempt postal employees in CSRS and all workers in FERS from
the increased employee contributions. The Subcommittee did not approve the
Reducing Long-term CSRS Unfunded Liabilities. A reason sometimes
advanced for increasing CSRS contributions from nonpostal federal employees is
that those contributions would reduce the $540 billion long-term unfunded liability
of that program. According to the Office of Personnel Management (OPM)
actuaries, the increased contributions would cause a reduction in CSRS unfunded
liabilities in the early years during which the increased contributions were in effect.
The reduction would be approximately equal to the amount of the increased
contributions ($1.829 billion). However, because of requirements in current law
regarding computation of government appropriations to the retirement fund, the
reduction in unfunded CSRS liabilities would be small over the long term, largely
because future payments that the government makes directly to the retirement fund
(i.e., not the agency contributions) would decline as a result of the increase in
employee contributions.
Increased Nonpostal Agency Contributions to the CSRS
Reducing Federal Spending. Increasing agency contributions to the retirement
system on behalf of CSRS employees (from 7% of worker pay to 8.51% under the
House bill and 8.6% under the Senate bill) increases agencies’ costs for CSRS-
covered workers and would require them to reduce spending for other purposes in
order to make the required retirement payments. Proponents say that agencies would
have an incentive to economize and budget their nonpersonnel costs more prudently.
The increased retirement contributions might make federal managers more cognizant
of the costs of personnel benefits and increase their incentive to compare the cost of
labor and the cost of capital in making decisions between employing a federal worker
and the cost of contract employees or automation. Moreover, because agency
retirement costs for FERS workers are substantially higher than for CSRS workers,
this increase in the agencies’ costs for CSRS workers would be a step toward
equalizing the cost of employees in the different retirement programs.2

2 For employees covered by the FERS, agencies must pay 11.4% of employee pay to the
pension component of FERS, 6.2% to Social Security, and up to 5% to the Thrift Savings

Critics of this proposal say that the mission of many federal agencies is such
that equipment cannot substitute for personnel and there are limited situations in
which a choice may be made between labor and capital. They say that any provision
that increases personnel costs could result in worker furloughs or layoffs which,
coming on top of the substantial downsizing that has occurred recently in the federal
workforce, could compromise the government’s ability to deliver required services.
Reducing Long-term Unfunded CSRS Liabilities. Proponents of the
proposal to increase agency contributions to the retirement fund on behalf of CSRS
employees say that it would reduce both the federal budget deficit and unfunded
CSRS liabilities. Opponents say its primary effect would be deficit reduction
($2.933 billion over 5 years) and that it would have a very small effect on the long-
term funding of the CSRS (again, largely because appropriations for the
government’s share of contributions would decline). Opponents also note that,
despite unfunded liabilities of about $540 billion, the CSRS trust fund balance
exceeds $340 billion and is no danger of insolvency.3
Federal Employee and Retiree Health Insurance
The Federal Employees’ Health Benefits Program (FEHBP) provides health
insurance to federal workers and retirees through a variety of fee-for-service plans,
Health Maintenance Organizations, and other managed care arrangements. The
premiums for these plans are shared by participants and their employer. Postal
workers collectively bargain the share of their premium that is paid by the USPS, but
the premiums for nonpostal federal employees and all retirees is determined by a
premium-sharing formula.4
By law, the employer’s share of FEHBP premiums has been based on a two-part
formula, generally referred to as the “Big-6" formula. This means that the
government’s share is a fixed dollar amount, set at (a) 60% of the average premium
of six specified plans, but it could not exceed (b) 75% of any particular plan’s
premium. Under this formula, on average, the government pays about 71% of
FEHBP premiums for nonpostal employees and annuitants, and participants pay


3 Currently, slightly more than half of the federal workforce is covered by FERS (including
employees of the USPS), and less than half is covered by the CSRS. Because the
government’s share of CSRS funding will decline in the future, OPM estimates that CSRS
benefit payments will begin to exceed total CSRS income in about 2010, and retirement fund
assets attributable to CSRS will be depleted by about 2024. Foreseeing that this situation
would arise as the transition is made from CSRS to FERS, the Congress established a
system whereby benefit payments under the CSRS will be authorized by FERS trust fund
securities, as needed, until there are no more CSRS benefits to be paid. However, those
“borrowed” FERS securities will be paid off through 30-year amortization payments. Using
a 75-year projection period, OPM estimates that the trust fund will continue to grow,
ultimately reaching a level of nearly 20 times the amount needed to pay annual benefits.
4 The employer share of premiums for active federal employees is paid by annual
appropriations to their employing agency; the USPS pays the employer share for postal
workers; and the OPM pays the employer share for all annuitants.

The formula currently governing the USPS share of premiums requires it to pay
(a) 71% of the Big-6 average premium for active postal employees (rather than the
60% paid for nonpostal employees), not to exceed (b) 88.75% of the premium of any
In 1989, one of the Big-6 insurance plans dropped out of the program, but was
continued in the formula as a “proxy” or “phantom” plan. The plan that dropped out
was a high-cost plan sponsored by Aetna. Because Aetna was a high-premium plan,
the average premium of the five remaining plans (“Big-5") would be lower than the
average “Big-6" premium. The legislation authorizing continued use of the Big-6
formula with a proxy plan expires at the end of 1998, and the Administration
maintained that it could implement a “Big-5" formula without new legislation.
Under such a formula, the government’s share of premium costs would decline
(because it would be 60% of the lower average Big-5 premium), and the participants’
share would rise by an estimated 20% (effective in 1999). This cost-shifting could
result in federal budget savings of nearly $1 billion in FY1999.
During discussions leading to the budget resolution, Congress and the
Administration agreed that the baseline budget assumptions would include
continuation of a premium-sharing formula that would not change the share of
premiums currently paid by the government. Thus, reconciliation legislation could
be enacted to revise the formula without causing an increase in the budget deficit.
However, the budget resolution included no assumptions regarding a replacement
Budget Reconciliation Proposal
The Balanced Budget Act of 1997 includes a revision of the formula
determining the government’s and participants’ shares of FEHBP premiums for
nonpostal participants, and the final legislation.5 The new formula will go into effect
for health insurance premiums in 1999. The new formula will be based on the
average total premium cost of all plans in the FEHBP, weighted by the number of
participants in each plan. The government’s share of the weighted average premium
will be set at a level that will replicate as closely as possible the share of each
premium the government pays under current law. Thus, plan participants should not
experience an increase in their premiums in 1999 due to the expiration of the current
formula. Under the budget baseline assumptions agreed to by the Administration and
the congressional budget committees, this change will reduce the government’s share
of FEHBP costs by about $28 million over 5 years

5 FHEBP premium sharing arrangements for the USPS and postal employees are collectively
bargained and would be unaffected by a revision in the formula for nonpostal participants.