The coming postal service bailout

The beleaguered agency will hit its debt ceiling in September and could run out of cash if Congress doesn't provide some relief.

By MSN Money Partner Apr 7, 2011 10:50AM

Postal Service bailout
Image: Mailbox (© Corbis)The Fiscal Times on MSN MoneyBy Louis Peck, The Fiscal Times

 

The federal government isn’t the only entity in Washington about to hit the debt ceiling: So is the U.S. Postal Service, the independent agency created four decades ago to take over and streamline the task of mail delivery.

 

Facing a projected $6.4 billion loss this year, on top of a record shortfall in fiscal 2010, the Postal Service is expected to slam into the $15 billion statutory debt limit established by Congress by the end of the current fiscal year on Sept. 30. At that point, it could be faced with the choice of running out of cash or defaulting on its sizable pension obligations, including a required $5.5 billion annual payment to fund future retiree health costs. This has intensified efforts on Capitol Hill to scrutinize Postal Service management practices, as well as to find ways to provide potential short- and long-term relief to the beleaguered agency.

 

House Oversight and Government Reform Committee Chairman Darrell Issa, R-CA, convened a hearing this week to take aim at the Postal Service’s recent deal with the American Postal Workers Union, representing more than one-third of the agency’s 572,000 person work force. The deal, which still requires ratification by the union’s membership, calls for a two-year pay freeze followed by a 3.5 percent wage increase over three years. "Eighty percent of the Postal Service's operating expenses are workforce-related. Costs must be reduced to align them with falling mail volume and declining revenue projections,” Issa declared.

 

But others suggest the major culprit is not current Postal Service management -- which has reduced the size of the agency by 100,000 employees in the past two years -- but rather Congress itself. While demanding that the Postal Service find ways to achieve economic self-sufficiency, members of Congress often have hamstrung the Postal Service with a series of restrictions aimed at averting blowback from their political constituencies.

 

As the Postal Service adjusts to email, electronic bill paying and faxes replacing so-called snail mail, "it would be irresponsible for Congress, as it does now, to stand in the way and act like a 535-member board of directors," Sen. Thomas Carper, D-Del., said recently. "No real business could ever function under that type of governance and it's unrealistic to think that the Postal Service would be well served by that type of micromanagement."

 

Carper chairs the Senate subcommittee with jurisdiction over the Postal Service, and plans soon to reintroduce legislation to give the Postal Service management greater flexibility on issues ranging from closure of local post offices to the frequency of delivery to expanded offerings of products and services. Specifically:

  • Carper’s legislation would remove a deficit test for closing post offices. The 1970 law creating the Postal Service dictates: "No small post office shall be closed solely for operating at a deficit, it being the specific intent of the Congress that effective postal services be insured to residents of both urban and rural communities." While the Postal Service last week announced a streamlined process for post office closing, along with plans to review the viability of as many as 3,000 of the current 32,000 post offices in operation nationwide, advocates of Carper’s proposal say it remains difficult to shut down underutilized facilities -- save for cases such as the retirement of a local postmaster or the expiration of a building lease. Carper’s goal is to enable many small post offices to relocate to less costly locations, such as available space in retail outlets.
  • The legislation would clarify the Postal Service’s authority to eliminate Saturday delivery if it determines such a step is necessary. The Postal Service wants to do away with Saturday delivery, a move it contends would save more than $3 billion annually. But a 1983 rider attached to a congressional appropriations bill has been cited by opponents as barring changes to the current six-day delivery schedule -- despite a provision in a 2006 Postal Service reform statute intended to allow the Postal Service to alter delivery frequency through the federal regulatory process.
  • Carper’s proposal seeks to clear the way for the Postal Service to offer services in areas related to its core mission -- such as increased electronic mail options for businesses. Also contemplated are arrangements in which the Postal Service could contract with other governmental entities to offer services such as issuance of drivers and hunting licenses -- yielding revenue for the Postal Service and potential cost savings for cash-strapped state and local governments. Past efforts by the Postal Service to add revenue by branching out into other services have run into congressional opposition.

At the hearing, Postmaster General Patrick Donahoe called the agreement with the postal workers union "the best deal we could have struck under current law" and said it would save a "minimum" of $3.8 billion over the life of the contract.

Rep. Dennis Ross, R-Fla, who chairs the House subcommittee with jurisdiction over the Postal Service, agreed that legislative changes are needed to enable the agency to restructure itself, although he said he was "skeptical" of Donahoe’s savings estimate. "The bigger issue is really the longer-term changes we need to make to the Postal Service in terms of its viability," Ross said. "I hope we can empower you to do more." But Issa, who has blasted one major provision of Carper’s legislation as a "bailout" of the Postal Service, could be a stumbling block to any accord.

 

That provision would free up about $50 billion in past retiree pension payments for future use by the Postal Service. This stems from a long-running dispute, in which the Postal Service has argued formulas devised by the federal Office of Personnel Management have resulted in the agency being overcharged anywhere from $55 billion to $75 billion in payments to federal pension funds. Emily Spain, a spokeswoman for Sen. Carper, noted that two outside accounting firms -- Hay Group and Segal Group -- as well as the Postal Service’s Inspector General and the Postal Regulatory Commission -- "identified the pension obligations given to the Postal Service in 1970 as a mistake that is hamstringing the Postal Service financially today."

 

But the Congressional Budget Office has raised questions about whether freeing up that money could give the Postal Service less incentive to cut costs.

 

The only Congressional funding for the Postal Service is about $29 million, technically reimbursement for free mail services for the blind and overseas voters. That’s a small portion of the agency’s $67 billion annual revenue, most of it from postage fees. A rate increase scheduled for later this month, the sixth since 2002, keeps the basic first-class stamp at 44 cents but increases other rates.

 

First-class mail was projected to decline about 6 percent in the first quarter of fiscal 2011 compared with a year earlier, according to figures the Postal Service provided to the General Accounting Office. While the volume of less profitable standard mail is still growing, the Postal Service estimates that by 2020 the total volume of first-class and standard mail will have declined to where it was in 1986, nearly 35 years earlier.

 

Absent some type of long-term financial relief, or about $4.5 billion in shorter-term concessions in President Obama’s proposed fiscal 2012 budget, Postal Service officials warn they may have no choice but to default on some pension-related obligations in the coming months.

 

"The postmaster general has been very clear on this. He has said that we are going to pay salaries, we are going to pay our vendors -- we’re simply not going to pay the retiree health benefit prepayment," said Postal Service spokesman Gerald McKiernan, referring to the $5.5 billion annual requirement imposed by Congress four years ago. "What happens [then]? I don’t know. This is all unknown territory."

 

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