Giving the Post Office CPR

The US Postal Service is in trouble, and we are facing a bailout that will make the auto makers’ bailout seem small by comparison.

The post office lost $8.5 billion last year. This year they probably will only ( ! ) lose $8.3 billion. And they’re running out of money. It would be bad enough if it was Postal Service money and a bankruptcy would cure things, but it’s our money. The US Postal Service has a $15 billion line of credit from the US Government, and by the end of the fiscal year (which ends this month) they will be out of our money.

Five years ago the Post Office was in trouble and Congress bailed them out. The US Government took on a greater share of the pension and retirement medical costs of  former US Military members who went to work at the Postal Service, which eliminated most of their deficit. Congress also extended a $15 billion dollar line of credit. The price on the Postal Service side was that they would have to fully fund their retirement obligations and the health care plan for retirees.

Ever since then, the requirement to fully fund the pensions and benefits of retirees has been represented by both the Postal Service and the unions that represent the postal workers as an unfair and unusual burden on the Post Office. It may be unusual. The retirement systems for California public employees were underfunded by over half a trillion dollars as of April, 2010. What falling stock prices have done to it since then probably gives the trustees ulcers. That requiring that the Postal Service actually fund its’ future obligations is considered “unusual” in governmental and quasi-governmental circles is a symptom of the nation’s larger problem.

When you start setting aside money for future retirement expenses you know that some people aren’t going to collect. Some will leave the job before becoming vested. Some will get fired (yes, even in a government union environment.) And some just won’t live long enough to collect. So there is an over payment for retirement costs, especially in an organization with over half a million employees. Even the GAO is OK with refunding overpayments or suspending payments till the overpayments are used up. The debate is about how big the overpayment is.

If you look at the comment thread for this Businessweek article you’ll find defenders of the post office claiming that the over payment is $75 billion, and if they had all that money everything would be hunky-dory. It’s true that $75 billion would be considerably more than a shot in the arm for the post office, but $75 billion is everything paid in since the last time Congress bailed out the Postal Service. In other words, the Postal Service and its’ unions want to go to a system of paying for future retirements out of future income. This, of course, assumes that there will actually be future income.

The House Committee on Oversight & Government Reform held hearings last March about the problems. Between those hearings and assorted news stories and editorials, it became clear that something would have to be done. In May Senator Carper (D-DE) introduced a bill that would provide some modest deregulation, but also lift the requirement that retiree pensions and benefits be funded at the time they are accrued by the employee. (One part of the deregulation might also permit the Postmaster General to select the Inspector General for the Postal Service, a recipe for mischief.)

This amounts to a $75 billion bailout of the Postal Service. The automaker bailout was only $57 billion. But to understand why it is a bailout you have to understand a bit of history. From 1792 (when Benjamin Franklin was the first Postmaster General) until 1971 the Post Office was officially the US Postal Department, a department of the Executive Branch of the US government. As a government agency they had government retirement benefits. In 1971 it was semi-privatized, and became the US Postal Service. It was officially a separate company, but everyone knew the government was behind it and would come running if there was trouble (as they did five years ago.)

For those working there at the time of the split it meant that their pension and retirement health benefits now had two entities that were responsible for paying. Some of you reading this might think they must all be gone by now, but someone starting in 1970 at age 18 would now be 59, with six years of work ahead of him before becoming one of the 300,000 postal workers expected to retire by 2020. But it’s not just the dwindling number of people who worked at the Post Office in 1971 that are involved. One can move from government service into the post office and carry over your government pension. Thus, any former government employee has a pension that the US government and the Postal Service are jointly responsible for. Likewise, former military pension & benefits carry over to the Postal Service (though as noted earlier the government took on a greater share of that expense five years ago.)

So not only a relatively few old folks are at risk. Anyone working at the Post Office who used to be a federal employee or a member of the military has a pension and health benefits that the Postal Service and the US government are jointly responsible for. If the Postal Service is unable to pay those costs out of shrinking revenues, the taxpayer is left holding the sack.

Congressman Issa (R-CA) and Congressman Ross (R-FL) have introduced HR 2309 that would remove some regulations that make the Postal Service particularly inefficient. For instance, at the moment it is illegal to close a post office just for financial reasons. In other words, the Postal Service that was spun off from the government to act much like a private company can’t take basic cost cutting measures that any company would take for granted. Nor can they put ads on their ubiquitous vehicles. It also allows delivery to be reduced to five days a week, which the Postmaster General has requested. While the short title of the bill is “Postal Reform Act of 2011″ the usual game of cute acronyms was played with the commission established in Article I:

This subtitle may be cited as the ‘‘Commission on Postal Reorganization Act’’ or the ‘‘CPR Act’’.

Five days a week is not as shocking as it might sound. I get Christmas cards, birthday cards, thank you notes, wedding invitations, and condolence notes via snail mail. Pretty much everything else has been paid via computer for a decade. The last time I wrote a check (to a plumber a couple of years ago) the bank actually called to make sure that I had written it. I literally can’t remember the last time I wrote a check and dropped it in the mail to pay a bill.  And I’m not alone – According to an April 2010 GAO report mail volume dropped by 36 million pieces (17%) from 2007 to 2009 (three fiscal years.)

The default on paying the next installment of retirement funds is almost upon us, as Businessweek noted:

On Mar. 2, Postmaster General Patrick R. Donahoe warned Congress that his agency would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue. “At the end of the year, we are out of cash,” Donahoe said. He noted that the unusual requirement was enacted five years ago by Congress before mail started to disappear.

(Note again that people who work in government and government-related agencies have a mindset that thinks it is “unusual” to set aside money to pay your debts.)

Now the Committee on Oversight & Government Reform (where Congressman Issa is chairman) has established a web site to inform the public about the problem. It contains links to news stories, the text of HR 2309, fact sheets about the bill (the bill itself is long and dull reading,) comparisons to senator Carper’s bill, videos from the hearings last March, and a tool that lets you pick your own solution to the problem by picking various ways to save money.

It’s hard to think about the Post Office having problems. The Mail Man (now “Letter Carrier”) is an enduring piece of Americana. In elementary school we tour a post office, looking at gleaming machines sorting hundreds of letters a minute. You may even have been made to memorize the unofficial Post Office Creed:

Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.

The mail is just there. You know about what time yours will arrive. In older neighborhoods it goes in a box hanging outside the door, or through a slot in the door. In rural or more recent construction the mail box is at the curb, and the carrier arrives in a small utility vehicle. If you’re a tiny community way out in the sticks you have gang boxes, which look like someone cut part of the wall of post office boxes out of an old post office and mounted them on a pair of poles at a wide spot in the road. The mail just IS, and we only think of it if it’s late or misdelivered.

One more thing: The US Post Office is BIG. Really, really big. As Businessweek put it in May of 2011:

The USPS is a wondrous American creation. Six days a week it delivers an average of 563 million pieces of mail—40 percent of the entire world’s volume. For the price of a 44¢ stamp, you can mail a letter anywhere within the nation’s borders. The service will carry it by pack mule to the Havasupai Indian reservation at the bottom of the Grand Canyon. Mailmen on snowmobiles take it to the wilds of Alaska. If your recipient can no longer be found, the USPS will return it at no extra charge. It may be the greatest bargain on earth.

It takes an enormous organization to carry out such a mission. The USPS has 571,566 full-time workers, making it the country’s second-largest civilian employer after Wal-Mart Stores (WMT). It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks (SBUX), and McDonald’s (MCD). Last year its revenues were $67 billion, and its expenses were even greater. Postal service executives proudly note that if it were a private company, it would be No. 29 on the Fortune 500.

But all that is at the heart of the problem. The Postal Service ceased to be a part of the Executive Branch of the US Government in 1971. It was performing what was essentially a commercial service, and already had 100% market penetration. Even if courier services cherry picked some fast package deliveries there was no competition.

Times have changed since 1971, but by and large the Postal Service hasn’t kept up. The machines are newer, there are more routes that use vehicles instead of door to door delivery, most Post Offices are cleaner and in better repair than I remember as a kid in the 60′s, but the mind set has not changed. They deliver letters, they deliver packages, they sell stamps and other things related to those functions. The problem is that the times have changed. The number of pieces of snail mail I send in a month is usually zero. The number of pieces of mail in my box that are not junk mail is also usually zero. Looking at the issues facing the Postal Service the GAO found:

USPS’s business model is not viable due to USPS’s inability to reduce costs sufficiently in response to continuing mail volume and revenue declines. Mail volume declined 36 billion pieces (17 percent) over the last 3 fiscal years(2007 through 2009) with the recession accelerating shifts to electronic communications and payments. USPS lost nearly $12 billion over this period,despite achieving billions in cost savings by reducing its career workforce by over 84,000 employees, reducing capital investments, and raising rates.However, USPS had difficulty in eliminating costly excess capacity, and its revenue initiatives have had limited results. USPS also is nearing its $15 billion borrowing limit with the U.S. Treasury and has unfunded pension and retiree health obligations and other liabilities of about $90 billion. In 2009, Congress reduced USPS’s retiree health benefit payment by $4 billion to address a looming cash shortfall, but USPS still recorded a loss of $3.8 billion. Given its financial problems and outlook, USPS cannot support its current level of service and operations. USPS projects that volume will decline by about 27 billion pieces over the next decade, while revenues will stagnate; costs will rise; and, without major changes, cumulative losses could exceed $238 billion.

The Postal Service has been broken for a long time. Go to the committee web site and read about it. Use the tool at the site to find your own solution to the issue. Then don’t be silent – Contact your congressperson and senators.






3 Responses to “Giving the Post Office CPR”

  1. CEP_Observer says:

    I agree with you that the USPS is broken. I have just posted a new post on the current financial situation that shows how bad it really is.

    You have some factual errors that need to be corrected.
    1) The USPS has not been a significant player in parcel delivery in over 30 years. In 1980, UPS had a near monopoly and now FedEx and UPS combined control over 90% of the market.
    2) The USPS is the largest supplier to both FedEx and UPS as they are increasingly shifting the delivery of parcels that weigh under 5 pounds to households to the USPs for delivery. FedEx and UPS are also two of the top 10 suppliers to the USPS as well.
    3) the USPS’s finances are so bad that Issa’s bill won’t solve the problem and by adding billions of debt could make it worse. The USPS needs a restructuring of its retiree obligations as well as more debt to get through the crisis.
    4) The USPS is a business and should be run as one. No other post in the world is in as bad financial shape because they operate as a business under standard commercial law. This is true for those owned by the government and those that are private. The decision about 5-or 6 day delivery or service quality is driven what large volume advertisers, parcel shippers and senders of bills and correspondence want.
    5)Postage prices have to rise. The USPS even with 220,000 fewer full time jobs and slower service cannot do what it does at current prices. Single piece letters need to rise by between 5 and 10 cents. Other rates will need to rise by 1 or 2% above CPI

  2. Beregond says:

    Who is moving the packages behind the scenes doesn’t change the long lines at the local Post Office each December. As far as someone dropping off a package there, they have entrusted it to the USPS, and the USPS is responsible for delivery. How they get it there is not important to the customer as long as it gets there, intact and in a timely manner. While points 1 and 2 are interesting data I fail to see how they show any factual error on my part.

    If Issa’s bill will not be enough to solve the problem then point 3 is a valid complaint. However, given the number of Democrat senators and the extreme catering of the Obama administration to organized labor, I’m not sure even Issa’s bill will be able to pass. Given that the administration was willing to steal from bondholders in the auto bailout to benefit the unions I find it unlikely that any bill that forces and adjustment of pay and benefits will pass, or be signed if it is passed. (I expect that the ability of the independent watchdog to tear up labor agreements when doing restructuring if the USPS doesn’t pay its’ bills for more than 30 days to vanish from the final Issa bill too, if it gets that far.)

    As for point 4, I agree that the USPS should be operated like a business. The Issa bill does not mandate a cut to 5 days, it permits it. It also removes a number of regulatory restrictions that have prevented the USPS from acting like a business. Though the only one I specifically call out are the examples of not being able to close a post office for purely financial reasons,and the ability to alter the days of delivery, there are other regulatory relaxations as well. Removing the requirement to comply with the Davis-Bacon Act and the Service Contract Act would result in considerable long term savings, though I’ll admit they are part of a restructuring, not something that solves the problem facing the USPS at the end of this month.

    While my personal preference would be to restructure the Post Office and then cut it loose to operate as a business with few requirements outside of the normal commercial laws. (The largest exception would be requiring universal service, though not at a flat rate.)

    I don’t see how point 5 can be considered a factual error on my part, as I made no comment one way or the other about rates. I agree they need to rise, even if labor costs are restructured. In the long term the cost of fuel and other transportation costs are bound to rise, and even if a quarter of the post offices were shut they would need to be kept from freezing (burst pipes) and protected from vandals until they can be disposed of. Disposal is not likely to go very quickly in the current economy.

    Your post and your blog are interesting and you raise important points. However I think that at most you can accuse me of not including those points, not making factual errors, with the possible exception of point 3.

  3. [...] Cross posted from Beregond’s Bar. Tom Reynolds has been wandering around the online world in one form or another for over 25 years. He has worked in the transportation and data networking fields, and is currently does geeky things to keep streaming. You can find Tom on Twitter at @Beregond. Tom Reynolds View all posts by Tom Reynolds Toms website [...]

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