RE’?EIVE!,
USPS-T-l
J!!t I3 3 13 PII ‘$7
BEFORE THE
POSTAL RATE COMMIS!W$
F:;E L::<,,,,<:,s
,,I/
WASHINGTON. D.C. 20268~O1i0loi THE:i~:::r.:r::~
ROTE AND FEE CHANGES, 1997
I
I
DIRECT TESTIMONY
/-
Docket No. R97-1
OF
R. TIMOTHY MAdDONALD
ON BEHALF OF
UNITED STATES POSTAL SERVICE
P
0
TABLE OF CONTENTS
Autobiographical
Sketch ...................................................................................
1
Purpose and Scope of Testimony .....................................................................
3
Workers’ Compensation.
4
...................................................................................
The Liability Estimation Model .................................................................
6
The Net Discount Factor ..........................................................................
6
DIRECT TESTIMONY
OF
R. TIMOTHY MACDONALD
AUTOBIOGRAPHICAL
2
,-
SKETCH
My name is R. Timothy Macdonald, and I am an account:ant in the
3
National Accounting
4
Certified Public Accountant
5
Service for over six years, most recently at Headquarters
6
responsibilities
7
financial statements, the Annual Report and the Comprehensive
0
Congress.
In addition, I perform analysis of accounting
9
periodically
am involved in special projects.
10
function of the United States Postal Servicse. I am a
in the state of Virginia and have been with the Postal
since May of 1996. My
at the Postal Service include the preparation
of lihe annual
Statement to
issues and policies, and
Prior to joining the Postal Service, I was employed for 15 years as a
11
systems accountant with the public utility company, Potomac Electric Power
12
Company (PEPCO).
13
program design and maintenance
14
state regulated utility. Prior to that, I worked in public accounting with the firms
15
Coopers & Lybrand and Laventhol & Horwath.
16
consisted of rnanagement
17
profit organrzations
18
My experience
at PEPCO consisted of the documentation,
of all accounting
systems at the federal and
My public accoulnting experience
consulting and auditing of private companies, not-for-
and government
agencies.
I hold two degrees from Georgetown
University, a Bachelor of Science
..19
Degree in International
Economics from the School of Foreign Service and a
2
1
Master of Science in Accounting
2
member of the American
from the Graduate School of Elusiness.
Institute of Certified Public Accountants.
I am a
3
PURPOSE AND SCOPE OF TESTIMON\:
,-.
1
The purpose of my testimony is to explain the Postal Service’s ejstimates
2
of Workers’ Compensation
expense in the test year.
3
discussion,
4
which the estimates are calculated and the justification
5
year expense.
I will explain the components
In the course of the
of this expense, the methodology
by
for the estimated test
4
WORKERS’
1
COMPENSATION
The Postal Service is projecting an expense of $733.1 million for workers’
2
compensation
3
‘years 1994, 1995. 1996 and 1997 are $326.8 million, $877.3 million, $736.5
4
million and $593.3 million, respectively.
5
attributable
6
establishment
7
costs in the FY 1998 test year.
Comparable
expenses for fiscal
These amounts excludle all cost:s
to Post Office Department employees
injured prior to the
of the Postal Service on July 1, 1971.
The Postal Service is subject to the Federal Employees’ Compensation
Accordingly,
the workers’ compensation
program for Postal Service
8
Act (FECA).
9
claimants is managed by the Office of Workers’ Compensation
Programs
10
(OWCP) of the Department
11
by the OWCF’ for reimbursement
12
Service workers’ compensation
13
“chargeback
14
OWCP also charges the Postal Service a pro-rata share of its estimated
15
administrative
16
of Labor (DOL). The Postal Service is billed annually
of all payments made to, or on behalf of, Postal
claimants over the course of the prior OWCP
year” (July 1 through June 30). With its reimbursement
billing, the
costs.
The annual Postal Service workers’ compensation
expense includses [or
17
you can say: “is comprised of’lthree components:
18
the total estimated long-term liability for those claims which first become iactive
19
during the current chargeback
20
existing liability for claims that first became active in prior years, and (3) the pro-
21
rata share of OWCP administrative
year, (2) adjustments
expenses.
(1) the net present value of
to the estimate of the
Adjustments
in the estimated
5
1
liability result from changes in the numbers of active claims, c:ash outlays per
2
claim, and the estimated future durations of claims. Separate liability estimations
3
are made for (1) future costs arising from payments to be provided as
4
compensation
5
claims) and (2) costs arising from future medical payments on behalf of injured
6
postal claimants (“medical” claims).
to injured postal claimants and their survivors (“compensation”
As noted above, Postal Service workers’ compensation
7
expense is
8
estimated to be $733.1 million in the FY 1998 test year. This amount represents
9
a continuation
IO
1994 forward.
11
volatile expense component
12
undertaken
13
workers’ compensation
14
1993.
15
Workers’ Compensation
16
include the National Workers’ Compensation
17
patient hospital expenses,
18
Service efforts to detect fraud and abuse.
19
intervention
20
initiatives.
Taken together, these efforts have arrested the trend towarcls
21
escalation
in postal workers’ compensation
.F
of a trend towards moderation that has been seen from fiscal year
This trend towards reductions in, and the leveling off of, this
reflect the effects of cost reduction efforts
by Postal Service management
as a response to -the increases in our
expense seen in the period of fiscal years 1988 through
This trend also reflects actions undertaken
Programs.
by the DOL’s Office of
Efforts undertaken
by the Postal Service
Task Force, contractor
review of in-
the Limited Duty Task Force, and ongoing Inspection
DOL efforts include their nurse
program, Periodic Roll review teams and quality c:ase management
expense.
6
1
2
The Liabilitv Estimation Model
In reporting its financial results, the Postal Service uses t,he workers’
3
compensation1 estimation model to determine the year-end liabiliity. Changes
in
4
that liability relative to the prior fiscal year end represent an expense component,
5
In its estimations,
6
These data are processed at the Minneapolis
7
prepare summary data by year of injury and severity of injury. These summary
8
OWCP data, including paid claims, average costs per claim, ancl a distribution
9
claimant age at time of injury, are used as estimation model input.
the model uses payment data provided on tape by the OWCP.
Accounting Servke Center .to
of
10
Since fiscal year 1991, the Postal Service has used the “extended iage”
11
estimation model. This model uses actual historic claimant transition ratios, or
12
derivations
13
to estimate “surviving” claims that will be paid in future years. These transition
14
ratios are used to estimate surviving claims for the first twenty-five payment
15
years. After twenty-five
16
and the numbers of subsequent
17
tables in conjunction
18
the adoption of the “extended age” model, the Postal Service used a model that
19
assumed all claims became permanent after eight payment years.
of the mathematical
likelihoods of claims being paid in the next year,
years of payment, claims are deemed to be permanent
surviving claims are estimated using life annuity
with the claimant age at time of injury distribution.
Prior to
20
21
22
23
The Net Discount Factor
An important component of the workers’ compensation
expense estimation
liability and
is the net discount factor used to determine ,the preselit
/--
1
value of estimated future payments.
The Postal Service currently uses net
2
discount factors of 0.1 percent for medical claims and 3.0 percent for
3
compensation
4
discount factors on an ongoing basis to validate their appropri.ateness.
5
summary of all discount rate analyses over the last ten years is included as
6
Exhibit USPS-IOA.
7
analyses for medical and compensation
8
IOB, USPS-IOC,
9
analyses are based on data published in DRVMcGraw-Hill’s
claims. The Postal Service conducts a review of these net
A
Our most recent prospective and historical discouni
USPS-IOD,
Focus.
claims are included as Exhibits USPS-
USPS-1OE. USPS-IOF and USPS-IOG.
These
Review of the U.S.
10
Economy,
11
discount rates currently used for medical and compensation
12
reasonable
13
of return on government
14
approximate
15
that the factors currently used reflect the value of the two individual liabillity
16
comoonents
I-.
Long-Range
rate
In the opinion of postal management,
the
cl,aims represent a
,difference between medical and societal discount rates and the rates
debt instruments of comparable terms to the
likely lives of medical and compensation
claims.
and the value of the workers’ comoensation
It is our opinion
liabilitv as a whole.
Workers’ Compensation
Discount Rate Analysis
Summary Table of Results of Estimated
Derived from DRI Data
1987
1996
USPS-IOA
Discount
Rates
Prospective
Analyses
Compensation
Publication
Date
Summer, 1987
Winter, 1987-88
Summer. 1988
Winter, 1988-89
Summer, 1989
Winter, 1989-90
Summer. 1990
Winter, 1990-91
Summer, 1991
Winter, 1990-91
Summer, 1992
Winter, 1991-92
Summer, 1993
Winter, 1993.94
Winter, 1994-95
Summer, 1995
Winter, 1995-96
Summer, 1996
Winter. 1996.97
Averages
Trend
Rate
Medical
-Cyclical
Rate
2.92%
3.14%
2.82%
2.97%
2.57%
2.88%
3.00%
3.27%
3.47%
3.41%
2.96%
3.42%
3.23%
3.00%
3.30%
1.88%
1.69%
2.78%
2.89%
2.93%
Trend
Rate
3.37%
3.20%
2.95%
3.04%
2.67%
4.96%
4.50%
3.22%
3.82%
2.63%
3.04%
3.36%
3.36%
2.89%
3.11%
2.02%
2.13%
3.17%
3.11%
3.21%
Historic
Cyclical
Rate
0.11%
-0.03%
-0.08%
0.14%
-0.26%
-0.35%
0.14%
0.29%
0.22%
0.07%
-0.65%
-0.23%
-0.18%
0.01%
0.52%
0.37%
0.08%
-0.02%
0.06%
0.01%
0.57%
0.38%
0.01%
0.00%
0.04%
1.86%
1.74%
0.40%
0.53%
-0.44%
-0.90%
-0.42%
-0.21%
-0.26%
0.25%
0.55%
-0.12%
-0.07%
-0.02%
0.20%
Analyses
Comoensation
1989
1990
1991
1992
1993
1994
1995
1996
2.65%
2.77%
2.86%
2.96%
3.02%
3.14%
3.53%
3.78%
3.87%
0.00%
0.03%
0.14%
0.14%
0.09%
-0.15%
-0.13%
0.18%
0.52%
Workers’ Compensation
Medical Discount Rate Analysis
Trend Projection
MedIcal
Services
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Average
Source:
1.90
3.00
4.30
4.70
4.80
4.90
4.90
4.90
5.00
5.20
5.30
5.50
5.60
5.60
5.50
5.50
5.50
5.60
5.50
5.60
USPS-IOB
3-Month
T-Bills
5.14
5.38
5.50
5.34
5.02
4.92
4.89
4.88
4.90
4.92
4.92
4.92
4.92
4.91
4.91
4.90
4.90
4.91
4.91
4.91
NET
3.24
2.38
1.20
0.64
0.22
0.02
-0.01
-0.02
-0.10
-0.28
-0.38
-0.58
-0.68
-0.69
-0.59
-0.60
-0.60
-0.69
-0.59
-0.69
0.06
DRI Review of the U.S. Economy, Winter 1996-97
Trend Projection
Medical Services Index from Table 15. “Inflation and Productiviv
Short-Term Rates for 3-Month Treasury Bills from Table 21.
“Interest Rates, Money Flows, and Other Financial Variables”
Workers’ Compensation
Medical Discount Rate Analysis
Cycle Projection
Medical
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Average:
1.90
3.00
4.30
4.80
6.00
7.40
6.50
4.60
4.30
5.70
7.40
8.20
7.00
5.30
4.40
5.40
7.30
8.10
6.10
4.40
LIsPs-1oc
3-Month
T-Bills
5.14
5.38
5.50
6.07
6.61
4.68
4.52
4.72
5.38
6.63
6.35
5.23
4.82
4.62
5.43
6.64
6.94
5.89
5.35
5.72
NET
3.24
2.38
1.20
1.27
0.61
-2.72
-1.98
0.12
1.08
0.93
-1.05
-2.97
-2.18
-0.68
1.03
1.24
-0.36
-2.21
-0.75
1.32
-0.02
DRI Re\/iew of the U.S. Economy, Winter 1996-97
Cycle Projection
Medlcal Services Index from Table 15. “Inflation and Productivity”
Short-Term Rates for 3.Month Treasury Bills from Table 21,
“Interest Rates, Money Flows, and Other Financial Variables”
Workers’ Compensation
Discount Rate Analysis
Trend Projection
USPS-IOD
(1)
Urban Wage &
Clerical Workers
Year
(2)
30 Year
U.S. Bonds
(3)
NET
(4)
10 Year
U S. Bonds
2-l
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2.90
2.60
2.60
2.90
3.20
3.30
3.40
3.50
3.70
3.80
3.90
3.90
6.70
6.77
7.05
3.80
4.17
4.45
6.95
6.72
6.67
6.67
6.67
6.62
6.56
6.54
6.57
4.05
3.52
3.37
3.27
3.17
2.92
2.76
2.64
2.67
6.44
6.55
6.85
6.74
6.48
6.43
6.40
6.40
6.36
6.32
6.31
6.34
2008
2009
2010
2011
2012
2013
2014
2015
3.90
3.90
3.90
4.00
3.90
3.80
3.80
3.90
6.59
6.62
6.67
6.73
6.75
6.72
6.73
6.78
2.69
2.72
2.77
2.73
2.85
2.92
2.93
2.88
6.35
6.37
6.41
6.45
6.47
6.44
6.45
6.49
3.16
Averages:
Average
Source:
All:
(6)
(5)
NET
4-1
5 Year
U.S. Bonds
3.54
3.95
4.25
2.44
2.45
2.47
2.51
2.45
2.57
2.64
2.65
6.55
6.43
6.15
6.08
6.06
6.06
6.03
6.00
5.99
6.01
6.02
6.04
6.07
6.10
6.12
6.10
6~11
2.59
6.14
3.84
3.28
3.13
3.00
2.90
2.66
2.52
2.41
2.91
2.89
DRI Review of the U.S. Economy, Winter 1996.97
Trend Projection
Urban Wage & Clerical Workers Index from Table 15, “Inflation and Productivity”
Interest Rates from Table 21, “Interest Rates, Money Flows, and Other Financial
6.17
6.31
Variables”
(7)
NET
6-l
3.27
3.71
3.95
3.53
2.95
2.78
2.66
2.56
2.33
2.20
2.09
2.11
2.12
2.14
2.17
2.10
2.22
2.30
2.31
2.24
2.59
Workers’
Compensatior?
USPS-IOE
Discount Rate Analysis
Cycle Projection
(1)
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
(2)
Urban Wage &
Clerical Workers
2.90
2.60
2.60
3.30
5.30
4.40
4.40
3.70
3.30
5.30
6.10
5.20
5.00
4.00
3.20
4.30
6.30
4.70
3.90
3.10
30 Yr.
U.S. Bonds
6.70
6.77
7.05
7.29
8.11
7.85
7.48
7.14
7.02
7.72
8.41
8.21
7.72
7.19
7.09
7.66
8.53
8.55
7.84
7~60
(3)
NET
2-1
(4)
IOYr.
U.S. Bonds
3.80
4.17
4.45
3.99
2.81
3.45
3.08
3.44
3.72
2.42
2.31
3.01
2.72
3.19
3.89
3.36
2.23
3.85
3.94
4;5n
6.44
6.55
6.85
7.15
7.95
7.43
7.06
6.79
6.79
7.61
8.17
7.83
7.33
6.83
6.85
7.55
8.36
8.21
7.48
7~31
3.42
Averages:
(6)
(5)
NET
4-1
5 Yr.
U.S. Bonds
3.54
3.95
4.25
3.85
2.65
3.03
2.66
3.09
3.49
2.31
6.17
6.31
6.55
6.91
7.66
6.85
6.53
6.34
6.48
7.38
2.07
2.63
2.33
2.83
3.65
3.25
2.06
3.51
3.58
4.21
7.78
7.28
6.80
6.35
6.54
7.35
8.06
7.73
7.04
6.98
3.15
3.?!
Source:
DRI Review of the U.S. Economy, Winter 1996-97
Cycle Projection
Urban Wage 8 Clerical Workers Index from Table 15, “Inflation and Productivity”
Interest Rates from Table 21. “Interest Rates, Money Flows, and Other Financial
Variables”
(7)
NET
6-i
3.27
3.71
3.95
3.61
2.36
2.45
2.13
2.64
3.18
2.08
1.68
2.08
1.80
2.35
3.34
3.05
I .76
3.03
3.14
3.88
2.77
Workers’ Compensation
Medical Discount Rate Analysis
Historical Trends:
1977. 1996
Fiscal
Year
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Medical
Inflation
9.70
7.90
8.60
11.30
11.60
9.60
7.20
6.70
5.80
4.60
5.80
6.80
6.80
5.50
6.50
5.50
5.10
4.00
3.80
1.90
Averages
Sources:
3.Month
T-Bills
5.27
7.19
10.07
11.43
14.03
10.61
8.61
9.52
7.48
5.98
5.77
6.67
8.11
7.49
5.38
3.43
3.00
4.35
5.65
5.14
USPS-I
NET
4.43
-0.71
1.47
0.13
2.43
1.01
1.41
2.82
1.68
1.38
-0.03
-0.13
1.31
1.99
-1.12
-2.07
-2.10
0.35
1.85
3.24
0.52
1975
1989
1990
1991
1992
1993
1994
1995
1996
- 1988 from DRI U.S. Long-Term
Review, Fall,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy, Winter,
from DRI Review of the U.S. Economy. Winter,
from DRI Review of the U.S. Economy, Winter,
1986
1989-90
1990-91
1991-92
1992-93
1993.94
1994-95
1995-96
1996-97
OF
WORKERS’ COMPENS.ATION
DISCOUNT RATE ANALYSIS
(HISTORICAL
TRENDS)
FY 1996
(1)
USPS-IOG
Page 1 of 2
(2)
Year
Urban Wage &
Clerical Workers
20 Years
U.S. Bonds
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
6.50
7.60
11.40
13.50
10.30
6.00
3.00
3.40
3.50
1.50
3.60
4.00
4.80
7.70
8.50
9.30
11.40
13.70
12.90
11.30
12.50
11.00
7.90
8.70
9.10
8.44
1990
1991
1992
1993
1994
1995
1996
5.30
4.00
2.90
2.80
8.61
8.14
7.67
6.60
7.37
6.88
6.70
2 50
2.80
2.90
*
*
*
*
*
l
*
*
(4)
10 Yr.
U.S. Bonds
ALL
NOTES:
l
(5)
NET
4-l
(6)
7.40
8.40
9.40
11.50
13.90
13.00
0.90
0.80
(2.00)
(2.00)
3.60
7.00
6.80
8.30
9.60
11.50
14.30
13.00
8.30
9.10
7.50
6.40
5.10
5.10
3.64
11.10
12.40
10.70
7.70
8.40
8.90
8.50
0.10
9.00
7.20
6.20
4.80
4.90
3.70
3.31
4.14
4.77
8.55
7.86
7.01
5.87
7.08
6.58
6.44
3.25
3.86
4.11
10.60
12.10
9.90
7.20
7.80
8.40
8.53
8.32
3.80
4.87
4.08
3.80
3.07
* = 20 year bond index discontinued;
30 year bond index used instead
* = 3-5 year bond index discontinued;
4 year bond index used instead
+ = 4 year bond index discontinued;
5 year bond index used instead.
3.07
4.58
3.78
3.54
3.92
(7)
NET
6-I
3-5 Yr.
U.S Bonds
1.20
0.90
(2.10)
(2.10)
3.40
6.90
4.11
AVERAGE
AVERAGE
(3)
NET
2-l
l *
l ’
6.96
*’
6.18
5.13
6.68
6.38
6.17
+
+
+
+
+
0.30
0.70
(1.80)
(2.00)
4.00
7.00
7.60
8.70
6.40
5.70
4.20
4.40
3.73
3.02
2.96
3.28
2.33
4.18
3.58
3.27
3.58
USPS-IOG
Page 2 of 2
SOURCES:
Source
Source
Source
Source
Source
Source
Source
Source
Source
Source
1996 data: DRI/McGraw-Hill
1995 data: DRliMcGraw-Hill
1994 data: DRVMcGraw-Hill
1993 data: DRI/McGraw-Hill
1992 data: DRVMcGraw-Hill
1991 data: DRVMcGraw-Hill
1990 data: DRI/McGraw-Hill
1989 data: DRVMcGraw-Hill
1987.86 data: DRIIMcGraw-Hill
1977-86 data: DRI/McGraw-Hill
Review
Review
Review
Review
Review
Review
Review
Review
U.S.
U S.
of the U.S.
of the U.S.
of the U.S.
of the U S.
of the U S.
of the U.S.
of the U.S.
of the U.S.
Long-Term
Long-Term
Economy, Long-Range
Economy, Long-Range
Economy, Long-Range
Economy, Lang-Range
Economy, Long-Range
Economy, Long-Range
Economy, Long-Range
Economy, Long-Range
Review, Spring, 1986
Review, Fall, 1986
Focus,
Focus.
Focus,
Focus,
Focus.
Focus,
Focus.
Focus,
Winter
Winter
Winter
Winter
Winter
Winter
Winter
Winter
1996.97
1995.96
1994-95
1993.94
1992.93
1991-92
1990-91
1989-90