January 2013

Coming sooner or later: An advisory opinion on modes of delivery

January 27, 2013

A couple of days ago, residents of Vermont — and apparently other states across the country as well — received a letter from the Postal Service requesting that they convert from mailboxes at the side of their door to a mailbox along the road.  The letter cites the advantages of curbline delivery — the postman doesn't have to deal with dogs, your mail is not exposed to rain or snow, and it's cheaper for the Postal Service — and it provides helpful information about what height to place the mailbox and how far from the road surface to locate the box. 

When the USPS Board of Governors announced two weeks ago that it intended to speed up cost-cutting measures in order to deal with the mounting deficit, there were no details about what those measures would be.  It now looks as though changing how the mail is delivered will be a key part of the stepped-up plan.  

If you've been getting your mail delivered to the door, expect a switch to curbside delivery.  If you already have curbside delivery, you could be converted to a cluster box unit located down the road.  The goal is eventually to get everyone on cluster boxes.

Because it knows customers won't like the changes, the Postal Service has not exactly embraced the conversion plan in the past.  But the proposal is part of legislation before the House (HR 2309), and it's described in detail in a USPS OIG report entitled “Modes of Delivery.” 

The OIG explains that in urban areas it costs $353 to deliver to the door (annually, per delivery point), while it costs only $224 to deliver to the curb, and $160 to a cluster box.  Moving everyone to cluster boxes could therefore save nearly $10 billion.  (There’s a post about the report and the whole topic here.)

Converting to easier modes of delivery might be safer and more convenient for letter carriers, but it won't be great for carriers overall.  Even if the Postal Service came up with a partial conversion plan aimed at only a portion of the OIG's total estimate — say $3 billion a year — that savings would come almost entirely from cutting jobs.  Figuring an average salary of $50,000 plus benefits, a savings of $3 billion would mean eliminating about 40,000 jobs.  There are about 250,000 rural and city letter carriers right now.  That means about one in six jobs would be lost.  (And you can add that to the job losses from eliminating Saturday delivery.)


Changing the rules for delivery

For years now, the Postal Service has been gradually shifting over to cluster box units in new residential developments, but it's not supposed to change delivery at existing addresses without the customer's permission.  According to the “agreement clause” in section 631.6 of the Postal Service’s Postal Operations Manual (POM), a customer's signature must be obtained before conversion from one mode of delivery to another.  That's why last week's letter from the Postal Service just requests that customers put up roadside mailboxes rather than requiring it.

There are circumstances, however, under which the Postal Service may make changes on its own, such as when the safety of carriers is a concern.  The Postal Service has been using the safety issue and other explanations in order to begin implementation of the delivery plan.  Over the past few months, there have been numerous news articles about changes in the mode of delivery in neighborhoods and communities across the country.  

Eventually, there will be so many such stories that it will become clear that the Postal Service is making a change in service on a nationwide scale.  At some point, the Postal Service will need to submit a request for an advisory opinion from the Postal Regulatory Commission.  As part of the request, the Postal Service will probably seek to revise the POM so that it can do conversions on an involuntary basis wherever and whenever it wants.

The Postal Service did the same thing in 2011 when it was closing post offices on a regular basis.  In the months before it presented its Retail Access Optimization Initiative — the plan to close 3,700 post offices — the Postal Service closed nearly two hundred offices, all the while claiming there was no plan and hence no need to request an advisory opinion.  Eventually, the number of closures reached a critical mass, and the Postal Service had no choice but to present a plan to the PRC for an opinion.

It's only a matter of time before the Postal Service presents a plan to the PRC about changing its policies regarding modes of delivery.  In the meantime, the conversions are happening on an ad-hoc basis, as if there were no nationwide plan in place. 


Threatening dogs in Fairway

In June, residents of a neighborhood in Reinhardt Estates, in Fairway, Kansas, saw their door-to-door mail delivery replaced with cluster boxes as a response to what the Postal service characterized as threatening behavior from area dogs. 

Residents objected, contending that the cluster box solution was too big of a step to take to deal with a situation posed by only a handful of homes.  It could have required the offending homeowners to get curbside boxes or required them to get their own PO boxes instead of forcing the entire neighborhood to use the cluster boxes.  

The previous letter carrier said that she had never had problems with dogs in Rinehardt, and the homeowners whose dogs were supposedly the problem offered several alternatives to avoid forcing their neighbors to switch to cluster boxes, like keeping their dogs inside, building a traditional fence, getting a PO box, or getting a curbside mailbox.  According to an elected official in town, the reply from the Postal Service was essentially, “Too late.”  

The Postal Service shares some lists: Closures, Suspensions, VPOs, CPUs, and Retail Channels

January 18, 2013

Yesterday the Postal Service provided the Postal Regulatory Commission with some lists and other material for the annual compliance report.  They include the post offices that were closed and suspended during fiscal year 2012 (October 1, 2011 to September 30, 2012), as well as information about retail revenue sources and Contract Postal Units (CPUs) and Village Post Offices (VPOs).

You can download the lists from the PRC website here.  To make access simpler, we’ve posted the lists on Google Docs, where you can see them in the original spreadsheet form but also as tables and maps.

Post Offices Closed in FY 2012
Post Offices Suspended during FY 2012
VPOs in operation as of 9/30/2012
CPUs and CPOs at end of FY 2012


Retail Revenue Channels

The Postal Service has provided a table that shows the sources for retail revenues.  Because the big mailers are not considered “retail," the retail revenues account for only a portion of the agency’s total revenues — about $17 billion out of $65 billion.  The big mailers take their mail to pre-sort companies or directly to USPS Bulk Mail Entry Units.  “Retail” therefore applies to the average customer — individuals, small businesses, etc.

The following table indicates the “channels” through which the Postal Service takes in its retail revenues.

FY2012 Revenue (in $ millions)
Share of Total Retail Revenue
Change from FY2011
Post Offices (WIR)
PC Postage
Stamps Only Sales by Retail Partners
Automated Postal Centers (kiosks)
Stamps by Mail/Phone/Fax
Contract Postal Units
Total Retail Revenue

The Postal Service likes to say that people aren’t using the traditional brick-and-mortar post office like they used to, but the traditional post office continues to be the main source of retail revenue.  As the table shows, while post office retail is down 3.6% since last year, post offices still account for over 60% of retail revenues

The only significant source of retail revenues aside from the post office is PC Postage, which refers to vendors and authorized providers who print their own shipping and postage labels, such as Click-N-Ship, PayPal Ship Now, eBay's Shipping Label, and Dymo Stamps.  Retail revenues from PC Postage have naturally increased along with the rise of e-commerce — and thanks to promotional efforts by the Postal Service.

Stamp sales by retail partners account for a mere 7 percent of retail revenues.  That’s despite the fact that there are about 32,000 post offices (not including contract units) and over 63,000 retail partners.  Plus, revenues from those partners are virtually flat since last year, with an insignificant increase of 0.2 percent — despite all the effort the Postal Service has put into its USPS Everywhere campaign. 

In fact, now when you go to the USPS “find locations” page, the default for “location types” is not post offices, but “post offices and approved postal providers.”  The Postal Service is doing everything it can to encourage customers to look for alternatives to its network of post offices.

It will be interesting to see how post offices revenues fare over the next couple of years as hours are reduced at 13,000 small rural post offices and larger urban offices are relocated to inconveniently located annexes.  


Killing the Post Office Softly: POStPlan implementation almost halfway done

January 15, 2013

The Postal Service has already held over 5,400 community meetings for POStPlan, and it has scheduled another 860 for the rest of January and the first week of February.  Within a few weeks, some 6,340 post offices will see their hours reduced to six, four, even two hours a day.  That’s nearly half of the 13,000 post offices on the list. 

The Postal Service began actual implementation of the reduced hours at over one thousand post offices on January 12.  It has scheduled implementation at another 2,250 offices during the rest of January and February: January 26 (944), February 9 (833), and February 23 (475).

The Postal Service has said on numerous occasions that it would implement POStPlan “gradually,” over a two-year period, and it will probably take that long to reduce hours at all 13,000 offices.  But the Postal Service is wasting no time on cutting the hours at the first half of the list.  

A spreadsheet with all the meetings held or scheduled so far is here, a table here, and a map here; the lists come from the USPS website, here.  The implementation list is on the USPS website here; a spreadsheet is here; a table, here; and map, here.

Some 3,100 of the meetings have been held (or will be) at the local post office itself, typically in the lobby.  Since almost all POStPlan offices are small rural post offices, that’s usually meant an uncomfortably crowded space and standing room only, making it difficult to have a meaningful discussion.

Not that it’s really mattered.  The meetings don’t mean much anyway.  Their ostensible purpose is to get feedback from customers about the options on the table — close the office or keep it open at reduced hours — and about their preferences with respect to what hours the office will be open after they’re reduced. 

But the options are meaningless.  Over 99.8 percent of time, the decision has been to keep the office open.  And while customers can use the survey to specify their preferences about the particular hours of operation, by the time the meeting is held (a few weeks after the survey), the Postal Service has already determined what the new hours will be.  

The meeting thus becomes simply an opportunity for the Postal Service spokesperson to explain how much money the agency is losing (always due to the Internet) and to make people thankful their post office is just having its hours reduced instead of closing completely. 

These 6,300 post offices are the first to have their hours reduced because they have a postmaster vacancy.  About 3,000 of them had a vacancy before POStPlan was even announced last year.  Another couple of thousand saw their postmaster retire when the Postal Service offered buyout incentives last summer.  The remainder developed a vacancy when the postmaster transferred to another office, usually to take a spot that opened when its postmaster retired. 

Things have been especially tough for those postmasters who decided to transfer.  They’ve had to sever ties with their communities, say good-bye to customers they've known for many years, and try to explain to them why this is happening.  Many will also need to relocate their families or else face a ridiculously long commute.  This is their reward for their dedication to the Postal Service.

There will be more postmaster vacancies developing as more POStPlan postmasters leave to take new, hopefully more secure positions.  At this point it appears that about 7,000, perhaps as many as 8,000, of the 13,000 POStPlan post offices will see their hours reduced before the winter ends. 

That leaves about 5,000 or 6,000 POStPlan offices where the postmaster is staying put.  They can remain in their jobs until September 2014, at which time they will be released from the Service, and their post offices will finally have their hours reduced.

All of this could change, however.  A few days ago, the USPS Board of Governors directed the Postmaster General to accelerate steps to cut costs and to revisit the five-year plan, presumably to add even more cuts.  Perhaps they’ll find a way to speed up implementation of POStPlan, or maybe they’ll change the criteria and reduce hours even more.  Or maybe they’ll abandon POStPlan and resume last year’s push to close post offices.

PRC Chairman Ruth Goldway has already expressed concern about the directive.  If the Postal Service moves too quickly, says Goldway, "there may be people who are without Post Office access at all."  That could mean that “the quality of service and the Postal Service's obligation to universal service will be damaged in some way.”

Many customers feel that this has already happened.  The news is filled with reports about POStPlan meetings where the public has expressed its anger and frustration toward the reduced hours and the likelihood that the reduction will eventually lead to closure.

In Greenwood, Virginia, for example, the POStPlan meeting was held a few days ago, and the community packed a local church to contest the plan.  Scott Peyton, Greenwood Citizens Council chairman, spoke for many people across the country when he told the Postal Service representative, “Our strong encouragement is to leave us alone.  Our post office operates efficiently, is part of our community, and makes a profit.” 

Peyton complained that the Postal Service wrote the survey for a pre-determined outcome, and he expressed concern that the reduced hours were only the beginning.  “I think it’s a killing-you-softly domino effect,” Peyton said. “They say that they aren’t going to close you, then they take measures that will affect you financially, and then they say that they are going to come back a few years later and review you.”  

“How in the world can our revenue increase if they’re reducing the hours that our window can perform retail sales?” Peyton asked.  “USPS has told us that they don’t have the luxury of looking down the road,” he added. “They’re cutting off their nose to spite their face.”

County Supervisor Ann H. Mallek also had a few words to share with the Postal Service representative.  “You’re making changes universally because it might be more convenient for you and might deliver a short-term success rate, but there’s long-term degradation of services,” said Mallek.  “We are trying to help people succeed and improve their economic prosperity, and we’re being sabotaged by this effort that you all are making to save your own skin….  You’re throwing under the bus this very profitable rural post office.”

Photo credits: Greenwood, VA meeting; Greenwood post office (Google streetviews)

At what price profit? The battle for the soul of the Postal Service

January 14, 2013


The new year has begun, and the country is still waiting for Congress to address the problems facing the Postal Service.  In the meantime, the Postmaster General blames the crisis on congressional inaction and the diversion of first class mail to the Internet.  His solution is to cut services to the public, eliminate jobs, and dismantle the infrastructure he is charged with preserving.  

On January 3, Postmaster General Donahoe released a statement entitled “Congressional Inaction Heightens Postal Service Financial Crisis; More Aggressive Cost Cutting and Revenue Generating Measures Will Be Considered.”   Bemoaning the fact that the 112th Congress failed to act, Mr. Donahoe suggests that “legislation could quickly restore the Postal Service to profitability and put the organization on a stable long term financial footing.”

Mr. Donahoe goes on to point out the Postal Service had to default on payments to the retiree health benefit fund (RHBF), and he repeats the unsupported canard that the Postal Service is losing $25 million per day.  That bit of sophistry overlooks the fact that most of the losses can be attributed to accounting gimmicks forced on the Postal Service by Congress. 

The Postmaster General and Board of Governors can't control what Congress does, but they have added to the Postal Service's financial problems by engaging in a direct campaign to undermine the viability of first class mail through extreme service cutbacks and a constant drumbeat of panic and doom.  In his Jan. 3 statement, Mr. Donahoe actually celebrates the loss of 60,000 postal jobs, the degradation of a large part of the postal network, and reductions in service to many communities throughout the nation.

In his book At Any Cost: Jack Welch, General Electric, and the Pursuit of Profit, Thomas F. O'Boyle paints a picture of a corporate executive so committed to the soulless pursuit of profit that he would do anything to improve the bottom line and push up the value of GE stock.  In his closing chapter, O'Boyle poses a simple question that we would do well to ask of the Postal Service: “Do businesses need a soul to succeed  — a sense of purpose beyond just making money?”


The narrow field of debate

The discussion over the future of the Postal Service has been carried on over a fairly narrow field.  Postmaster General Donahoe and the Postal Board of Governors argue that the fiscal difficulties of the Postal Service arise from the regulatory structure imposed by Congress.  If the Postal Service is liberated from the shackles of regulation, if it’s free to compete, then it can succeed.  While Mr. Donahoe acknowledges that the RHBF mandate is a significant impediment to the financial viability of the Postal Service, his argument is much broader, contending that the Postal Service must be freed from regulatory restraints like the universal service obligation.

Many in the mailing community, particularly the component of the industry that focuses on advertising, appear to agree with a great deal of what Mr. Donahoe says.  They see the potential for cheap mailing rates if the Postal Service could shed much of its responsibility to rural America.  They also see the abrogation of labor relationships as a potential boon to their interests.  The mailing industry holds a view that is essentially that of American industry in general over the past thirty years — reduce costs, liquidate or outsource labor, and maximize profit at the expense of all other considerations.

Most of those who disagree with Mr. Donahoe’s vision do so on what amounts to a very limited basis.  The unions and other employee organizations disagree with Mr. Donahoe’s tactical approaches to defining the Postal Service’s future, but they generally agree that the Postal Service must compete, that success will be achieved by accepting some of the regulatory strictures imposed on the Postal Service while loosening others, presumably maintaining those things which benefit labor while permitting behaviors that will enhance and increase revenues.

The politicians line up on the issue according to their ideological predispositions.  So, many of the Republican politicians advocate for a Postal Service that moves more towards a privatized, lightly regulated model, one that more closely follows the model of the last thirty years of seeing value only in terms of maximized profits.  Most of the Democrats appear interested in protecting their traditional constituencies in labor, but they also use the word “compete” as if competition, or what is often termed competition but is actually something much different, i.e. deregulation, will magically provide answers to all questions.

The unfortunate fact of the matter is that the discussions over the future of the Postal Service represent a concrete example of how stilted and narrow our economic discussions have become generally.  We have become so enamored over theories of efficient markets and the value of unbridled competition that we have excised broader views on what makes for both a healthy economy and, more important, a healthy society.


Murderous Reform: A Plan to Privatize Postal Profits at Public Expense

January 10, 2013


The National Academy of Public Administration has released a “Work-in-Progress” report entitled "Restructuring the U.S. Postal System: The Case for a Hybrid Public-Private Postal System."  The Academy is now embarking on a study of this proposal, which would privatize a large portion of the country's postal system.  

The Academy's study is billed as an “Independent Review of a Thought Leader Proposal to Reform the U.S. Postal Service.”  Unfortunately, no study conducted by a four-man panel chaired by David M. Walker, the former President and CEO of the libertarian Peter G. Peterson Foundation, can seriously claim either the independence or non-partisan objectivity that the Academy itself boasts.   

It has been my experience over the past 30 years that "hybrid public-private partnerships" are often little more than a sedative euphemism for the private sector taking the profits while the public bears the costs.  Such is the case with this "reform,” which will, as is so often claimed in such instances, "unleash the power of market forces" by transferring the USPS profit centers to the private sector while saddling the public with the cost for "the last mile."  Meanwhile, the public is already being stripped of its assets in broad daylight while the media sleeps.

The proposal is predictably one-dimensional — as befits men who seemingly have little or no sense of the public service mission for which the Post Office was created 238 years ago under the direction of Benjamin Franklin.  Its purpose, then as now, was democracy and equality, not efficiency or profit. Thus, the report omits much. 

Nowhere in the proposal is there any mention of unions, let alone of living wages, so one can only presume that a primary means of reducing costs will be to drive down the income of those postal employees who remain after the USPS is radically downsized and diminished as proposed.

The report also simplistically states that "the root cause of the postal crisis is the historic change in how we communicate," omitting other forces now undermining it such as Congress itself.  Nor does it mention the invaluable artistic, historic, social, environmental, and commercial function of many post offices currently being thrown onto the market with virtually no oversight.  It neglects to say that a commercial real estate firm (CBRE) chaired by Senator Dianne Feinstein's husband, Richard Blum, is profiting from the sale of properties paid for by taxpayers for well over a century. 

Finally, there is no serious discussion of alternatives characteristically described in such reports as “out of the box” for making the USPS solvent again, such as reviving the U.S. Postal Savings Bank and providing other public services currently available outside this country. That is because the self-proclaimed thought leaders who framed the report do not actually seek to save the Postal Service but to “reform” it virtually out of existence.

My studies of the New Deal have revealed an ethos of public service that seems entirely alien not only to the men who produced the Academy’s blueprint but to current postal management as well as to those in Congress who saddled the USPS with fiscal obligations seemingly designed to eliminate it as a competitor to private carriers, a goal long sought by those very carriers and by the libertarian think tanks they lavishly fund.

Several WPA-built structures here in California bear an inscription by the Roman poet Virgil: "THE NOBLEST MOTIVE IS THE PUBLIC GOOD."  The Academy’s preliminary report contains nothing noble or new.  Quite the contrary, it is yet more of the same demonstrably failed neoliberal experiment that has, over the past three decades, so disastrously despoiled the U.S. economy as it has demoralized our citizens.

Unleashing the power of market forces did not work so well in 1929 or in 2008, and it will not do so again as those very forces seek to finish off the public sector as a competitor once and for all. 

Dr. Gray Brechin is the author of Imperial San Francisco: Urban Power, Earthly Ruin. He is the founder and project scholar of the Living New Deal Project based at the U.C. Berkeley Department of Geography.  He works with others to stop the sale of the National Register-listed Berkeley Post Office. 

Photo Credits: David M. Walker; Dr. Gray Brechin (Steven Finacom)

Constructively closed: The emergency suspensions continue

January 8, 2013

The Postal Service continues to close post offices by emergency suspension over problems renegotiating leases.  Many of the problems are caused by the Postal Service.  A suspension is an easy way to close a post office — it avoids a lengthy discontinuance process and the possibility of an appeal to the Postal Regulatory Commission, and it makes it look like the closure is the landlord's fault.

In its annual compliance report to the PRC, issued just a couple of weeks ago, the Postal Service said it closed 237 post offices in fiscal year 2012.  Nearly all of those closing occurred in October and November of 2011, before the moratorium on closures began in December.  Since then, formal discontinuances have come to a virtual halt.  But the emergency suspensions continue.  The compliance report says that at the end of FY 2012 (September 30, 2012), there were 124 suspensions in effect. There have been several more suspensions since then.

Many of the suspensions have occurred because the Postal Service, or its real estate agent CBRE, put unacceptable demands on the landlord, like a large rent reduction (as much as 30 percent) or an early-termination clause.  So whenever a post office’s lease is coming to an end, it’s at risk for an emergency suspension.  During the first six months of 2013, nearly 1,900 post offices will have a lease expiring.  A list is here, a table here, and a map here

About 850 of these offices are on the POStPlan list and set to have their hours reduced.  While POStPlan has been advertised as the Postal Service’s plan to save post offices, that doesn’t mean it won’t suspend a POStPlan post office.  There have been numerous POStPlan offices closed by suspension over the past few months.

In its advisory opinion on POStPlan (August 2012), the PRC expressed concern that post offices would be suspended because of staffing issues and lease problems, but the Postal Service reassured the Commission that it “has no plan for using the lease negotiation process as a pretext to close Post Offices.” 

The Commission hasn't had much to say about suspensions since then.  In its annual report, issued just a few days ago, there’s a section on post office closings and appeals but no mention of “emergency suspensions."


The early-termination issue

Many of the post offices with leases expiring soon have already had a successful lease negotiation, but in most cases, the negotiations are ongoing.  The Postal Service has been cutting it close.  In years past, a lease was negotiated many months before it expired.  These days, the negotiations are often completed with just a few days left on the lease, sometimes even after an emergency suspension has been announced.

The Postal Service and the landlord may disagree over a number of issues, like the amount of the rent or responsibility for maintenance, but the issue that is causing many of the lease problems these days is the Postal Service’s insistence on adding an early-termination clause to the lease.   This clause permits the Postal Service to end a lease whenever it wants, and on relatively short notice too. 

Traditionally, the Postal Service would sign a five- or ten-year lease with an option for another five years.  The fact that the building would house a post office for a long time was one of the main reasons why investors got into the business of owning post offices in the first place.

Now the Postal Service wants to insert early-termination clauses in the leases, giving it the option to get out before the five years are up, sometimes with as little as 60 or 90 days notice.  These termination clauses have been the source of a lot of controversy, and the lessors have complained vociferously to the Postal Service and the PRC about them.

Because of all the complaints over the termination clause, the Association of U.S. Postal Lessors (AUSPL) got the Postal Service to agree to make the shortest termination clause 30 months.  In other words, the lease may not be terminated for the first two years, and after that the Postal Service needs to give 180 days notice. 

The termination clause makes it impossible for lessors to make long-term plans for their buildings.  They are put in an untenable position — accept the clause or lose a tenant — so it’s no surprise that lease negotiations have been breaking down. 

But that’s apparently fine with the Postal Service.  After all, if it had long-term plans to keep the post office open, why would it be insisting on the termination clause in the first place?  


Closed for a quarter in Climax

The post office in Climax, Georgia, was on the POStPlan list, set to be reduced to six hours a day, but on October 31, 2012, the Postal Service suspended operations due a problem negotiating a new lease.  The Postal Service should have looked around for another suitable location. There should have been several possibilities.  After all, the Postal Service cited lower average rents in Climax as justification for a big rent reduction.  But rather than finding another location, the Postal Service initiated a discontinuance feasibility study — the day after the suspension went into effect.

The case is currently being appealed to the PRC.  The Postal Service has filed a motion to dismiss the appeal on the grounds that the post office has not yet been discontinued — it’s just under emergency suspension and only being studied for a discontinuance — so an appeal is premature. 

The PRC’s Public Representative, who can usually be counted on to advocate on behalf of the community, has recommended that the case be dismissed for precisely that reason.  It’s almost inevitable that the PRC will dismiss the case, just as it has in previous cases where an appeal was filed while the post office was suspended but not yet discontinued. 

The Public Representative seems to think everything is fine in Climax. “Because the Postal Service has promptly initiated a discontinuance feasibility study,” writes the PR, “it does not appear that the Postal Service is keeping the citizens of Climax in limbo or abusing its suspension procedures.”  The folks in Climax and the landlord of the building probably have a different opinion on that subject.

In the materials submitted by the Postal Service, there’s a copy of the letter it sent to Climax customers.  The Postal Service explains that it wanted the landlord to drop the rent from its current $11.84/sq.ft. to $8.50/sq.ft., which it considered “fair market value,” with a 60-day termination clause.  The landlord offered to accept $8.75/sq.ft., with no termination clause, but the Postal Service rejected the offer.

The Climax post office was thus closed over a matter of 25 cents a square foot.  The landlord was willing to reduce the rent from $1,831 a month to $1,353 a month, but the Postal Service wanted $1,315 a month.  They were $39 a month apart when the deal collapsed.

How the Postal Service began prefunding retiree health care and fell into a deep hole

January 2, 2013

The Government Accountability Office (GAO) has just issued a new report (GAO-13-112) on the Postal Service’s retiree heath care fund.  It’s called “Status, Financial Outlook, and Alternative Approaches to Fund Retiree Health Benefits.”  

As the title suggests, the report is about the current condition of the Retiree Health Benefits Fund (RHBF), projections about the Postal Service's health care liability in the future, and the potential impacts of the various changes in the law being proposed by the House, Senate, and Administration.  What’s missing from the report is a little history.

Like most GAO reports on the Postal Service, this one is filled with dire predictions about the agency’s “ability to continue to fulfill its mission on a self-supporting basis.”  (In other words, a government bailout may be on the horizon.)  The GAO has issued a host of reports like this.  They use a lot of charts and graphs to dramatize how bad the Postal Service’s financial condition is (always “high risk”), and they recommend radical solutions, like downsizing the workforce, cutting services, and closing facilities.

The GAO report projects massive health care costs for future retirees.  It argues that any near-term reduction of payments into the RHBF will cause much larger payments in the long term.  It says that if the Postal Service is unable to cover its liability, someone else will get stuck with the bill.  Future postal customers (ratepayers) will face large rate increases, or the government (taxpayers) will have to step in with subsidies.  It’s also possible, says the GAO, that postal workers may come out at the short end: “The level of employee pay and benefits may not be sustainable and could be reduced.” 

“Therefore,” the GAO concludes, “we continue to believe it is important that USPS prefund its retiree health benefit liability to the maximum extent that its finances permit.”  

The GAO report is addressed to Congressman Darrel Issa.  That probably means Issa requested it, and from the look of things, the GAO has given Issa what he wanted — more ammunition with which to argue that the large retiree health care payments are necessary and inevitable.  The fact that those payments are driving the Postal Service deeper and deeper into the red gives Issa and his friends more justification for the anti-union and anti-government cutbacks they’ve been advocating.


Fixing one mistake with another

In preparing the report, the GAO shared a draft with the Postal Service and the USPS Office of Inspector General.  The comments of Inspector General David Williams are worth noting. 

One of Williams' main points is that it’s important to understand the historical context of how the prefunding obligation came about in the first place.  The Inspector General writes this in his letter to the GAO:

“The Postal Service started prefunding its retiree health benefits as a result of the discovery that, due to external fund management misjudgments, it was on track to seriously overfund its pension obligations by $78 billion.  This discovery was one of several fund management issues identified about the same time.  The decision to turn a mistake into a second prefunding obligation created its own problems.  A 10-year schedule of prefunding payments was structured toward a 100-percent funding goal.  The aggressive payment schedule appears to have been set based on byzantine ‘budget scoring’ considerations rather than actuarial assumptions or an evaluation of the Postal service’s ability to make the payments.”

In other words, the amount of the annual payments to the RHBF — around $5.5 billion — was not based on reasonable estimates of what needed to be put into the fund to cover the liability.  The amount was determined by budget scoring.

According to the way scoring works, even though the Postal Service is an independent agency with its own budget, aspects of its operations are included in the unified federal budget, which consolidates all revenues and expenses of the government.  Congress therefore estimates the effects of any legislation, proposed or enacted, on the federal budget.  The goal is legislation that is budget neutral.  

Those considerations, says Williams, determined the size of the annual payments to the RHBF, rather than an actuarial analysis of what they should have been.  In response to Williams' comments, the GAO added a bit more background to its report, but not enough to fully understand how the excessive health care mandate came about.  

Here’s the rest of the story.  It's pretty complicated, so there may be a few errors in what follows, but it's based on several government reports and a few news articles, listed here.  


From the “High Risk List” to “a much more positive picture”

In the late 1980s, Congress became concerned that the Postal Service would be unable to meet its pension liabilities, so it passed a series of laws to increase the agency’s payments.  In 1989, for example, Congress required the Postal Service to pay for cost-of-living adjustments for its annuitants retroactive to 1986.  The following year, Congress again increased the charges to the Postal Service for COLA payments by pushing back the applicable date to 1977.   In 1993, Congress required the Postal Service to pay $693 million for past interest which had accrued as a result of the unfunded liability for COLAs and health benefits.

Despite these and other increases in the pension payments, the GAO was concerned about the “rapidly deteriorating financial situation” of the Postal Service and its ability to cover its liabilities.  In April 2001, the GAO issued a report (GAO-01-598T) that focused on declining revenues, rising debt, management-labor relations problems, and increased competition (including electronic diversion to the Internet).  As a result of these concerns, the GAO put the Postal Service on its “High Risk List.”

In May 2002, Comptroller General David Walker testified to the Senate (GAO-02-694T) that the Postal Service had major liabilities and obligations estimated at close to $100 billion, including liabilities for pensions ($32 billion), workers’ compensation benefits ($6 billion), debt to the Treasury ($11 billion), and post-retirement health benefits ($49 billion).  That's the same David Walker who's CEO of the Peter G. Peterson Association and behind efforts to privatize the Postal Service.

At the request of Congress and the GAO, the Office of Personnel Management (OPM)
conducted a review of the Postal Service’s liability to the Civil Service Retirement System (CSRS).  Such a study had never been done before, and almost everyone expected the OPM to discover that the liability would be even greater than current estimates were showing. 

The actuaries went back into the books, and in November 2002, much to everyone’s surprise, the OPM discovered that “a review of USPS payments to the civil service retirement fund for pension obligations to employees on board before 1984 revealed a much more positive picture than previously believed.”

The OPM determined that rather than facing a huge pension liability, “contribution rates set in current law would ultimately result in an overfunding of the amount needed to cover CSRS benefit obligations attributable to USPS annuitants by $71.0 billion.”

The explanation for this surprising revelation was relatively simple: The pension fund was invested in Treasury bonds that were “earning interest at a higher rate than presumed in the statutory funding formula” (a static 5 percent).

The potential for overfunding was actually even more than $71 billion determined by the OPM.  When a November 2003 GAO report (GAO-03-448R) looked at the OPM calculations, it put the potential overfunding at $103 billion. 

The main difference between the OPM’s calculations and the GAO’s involved veterans working at the post office.   Under then-current law, the Treasury was responsible for retirement benefits based on prior military service of postal employees.  The OPM’s calculations had the obligation as belonging to the Postal Service.  The GAO said that if the obligation — estimated at almost $27 billion — were considered the Treasury's responsibility and therefore added to the CSRS overfunding, the total overfunding would top $100 billion.  (More on the military pension costs in a moment.)


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