Postal Service posts a $5.2 gazillion loss, begs to be put out of its misery


Yesterday the Postal Service released its Form Q3, the financial report for the third quarter of the fiscal year.  The headlines wax poetic:

 “No more mail? US Postal Service begs Congress for help; warns it could go insolvent by next year” (NY Daily News)

"Postal Service unstoppable in rain, snow. But red ink?" (Christian Science Monitor)

“Postal Service reports $5.2 billion in 3rd quarter, poised to default again” (Fox)

“'Crisis of confidence' as USPS posts $5.2B quarterly loss” (FedNewsRadio).

The LA Times had the winner, though: “US Postal Service loses $2.4 million an hour in third quarter.”

Over the coming days, there will be more hyperbolic headlines about the losses and last week’s default on the health care payment, more hyperventilating about the House’s failure to pass a postal reform bill, and more lame editorials about why the Postal Service should be privatized.  No wonder it's impossible to have a thoughtful conversation about the plight of the Postal Service.

After you get past the headlines, most of the articles do acknowledge that a significant portion of the losses are the result of the retiree health care payments mandated by the 2006 Postal Accountability and Enhancement Act (PAEA).  They account for $3.1 billion of the third quarter’s 5.2 billion losses and over $9 billion of the $11.5 billion loss for the year-to-date. 

What the articles fail to mention, however, is that those payments actually represent two year’s worth of contributions to the retiree health care fund.  Since the Postal Service couldn’t make its $5.5 billion payment last year, the financial report is showing an ongoing obligation to make double payments this year. 

Excluding those payments, the Postal Service is heading for a $3 billion loss for the year.  But the double payments will make it look like the Postal Service lost over $14 billion in fiscal year 2012.  Thankfully, the headlines on that debacle won’t appear until the year-end financial report is released in mid-November — after the election.


Looking at the numbers

Here’s a summary of the current Form Q3 report, compared to the same time period for the previous two years (gathered from previous forms):

(Numbers in millions)
2010 YTD
2011 YTD
2012 YTD
Total mail volume
Operating revenue
Operating expenses
   Compensation and benefits
   Employer premium for retiree health
   RHBF payment
   Workers' compensation
Total operating expenses
Net loss
Operating expenses without RHBF
Net loss without payments to RHBF

As the table shows, there are two payments for retiree health care (they’re lumped together in the Form Q3).  The employer premium expense is for current employees and doesn’t have anything to do with the PAEA prepayments for future retirees. 

The RHBF payment — the Retiree Health Benefit Fund — represents the PAEA mandate to prefund health care for future retirees, 75 years down the road.  The Postal Service owes $5.5 billion for 2011 and $5.6 billion for 2012.  The figure of $9.15 billion represents the portion due for the first three quarters of the year.  It accounts for 80 percent of the net loss so far this year.

The net loss for the first three quarters of last year ($5.54 billion) includes $4.77 billion for the health care payment the Postal Service never made.  That same payment is also being included in its net loss for 2012, so the net loss numbers are not cumulative in this table.

While the Q3 report gives us a good idea of where things will stand at year’s end, the numbers can be misleading.  Last year at this time, for example, the Postal Service was looking at a $1.4 billion loss (not including the RHBF payment), but by year’s end the loss was nearly $5 billion due to large workers’ compensation payments.

Just to put things in perspective, here’s a table showing the last seven years (the numbers for 2012 are projected based on the first three quarters):

(in millions of $)
Operating revenue
Operating expenses
Profit / Loss
RHBF payments
Profit / loss without RHBF

As this table shows, almost $32 billion of the nearly $40 billion the Postal Service will have lost during 2007 through 2012 (the PAEA period) will be due to the RHBF mandate.  That’s over 80% of the deficit.

If Congress had spread the RHBF payments out over a forty-year period instead of ten (as many experts had recommended), the annual payments would have been about $1.4 billion, and the fund would still be well on its way toward accumulating enough to cover the liabilities of retirees over the next 75 years. 

The only reason Congress went for the ten-year schedule is that it needed a way to offset a reduction in payments to the Postal Service’s CSRS pension fund, which a 2002 OPM study showed to be seriously overfunded.  Otherwise, the PAEA would have increased the federal deficit by several billion a year.

If the Postal Service had paid $1.4 billion a year instead of $5.6 billion into the fund, the deficit at the end of FY 2012 would be something like $15 billion, not $39 billion.  There’s now a surplus in the FERS pension fund of more than $11 billion.  If Congress had used the forty-year schedule and simply returned the FERS money, the total deficit for 2006 through 2012 would be $4 billion — not bad considering we’ve just gone through the worst recession since the Great Depression.


The usual culprit

While the losses posted in the first three quarters are not nearly as bad as the headlines make them seem, the news isn’t particularly good either.  Volumes and revenues continue to fall. 

Total mail volume for the first nine months was down 4.8%.  First-Class revenues dropped 3.1%, and Standard Mail revenue, not including Standard Mail packages, declined 4.3%.  Together, volume for First-Class Mail and Standard Mail decreased 4.9%, and revenue decreased 3.5%.

On the other hand, revenue from Shipping Services plus Market Dominant packages increased nearly 10%, and that almost offset the losses.  Compared to last year, total revenues declined from $49.88 billion to 49.52 billion — a drop of only 0.7%. 

The Postal Service admits that revenues were “somewhat stronger than anticipated,” but that doesn’t prevent the Form Q3 report from focusing on the negatives.  And the refrain is simple: While the recession, its lingering effects, and the slow recovery can be blamed for some of the losses, the main culprit is — as always — the Internet.

The shift to electronic alternatives, says the report, “constitutes a fundamental and permanent change in mail use by households and businesses.”  That volume will never return, says the Postal Service, so there’s only one thing to do: reduce costs by downsizing the network.


A Crisis in Confidence

It’s obvious that individuals and businesses are using the Internet and email more than ever, but the speed with which they are shifting from the Postal Service to electronic alternatives, private shippers, and other modes of advertising and communication is being accelerated by two things: the Postal Service’s constant talk about cost-cutting measures and the bad media coverage that this talk engenders.

Rather than keeping everyone focused on the main causes of the problem — the economy, the retiree health care mandate, and the refusal of Congress to return billions of dollars in overpayments to the pension plans — the Postal Service reminds us at every opportunity that people aren’t using the mail like they used to so it’s inevitable that the network has to shrink and services must be reduced.  That approach just drives away more business.

A few days ago, the USPS OIG ran a blog post about the Postal Service.  It's entitled “Is the Brand Suffering?"  The OIG Blogger puts it this way:

“The Postal Service has built a strong brand name around service, trust, and security….  But a steady drumbeat of bad news over the past few years around its financial situation, potential cuts in service, and uncertainty over its retail and network downsizing plans has unsettled stakeholders.  The question many of them ask is whether the ongoing negative news coverage could be hurting the overall brand.”

“Hurting the brand” is a euphemism for driving away business.  The OIG is asking how hard the bad press is hitting the Postal Service.

The OIG continues: “Even the PMG noted earlier this year that the mailing industry is experiencing a ‘crisis in confidence.’  Lingering uncertainty about the Postal Service’s future could further erode confidence.  Further, competitors can use the turmoil to their advantage, touting their own services as easy and reliable in the face of uncertainty.”

The concerns expressed by the OIG blog are not merely hypothetical.  On July 19, eBay filed its 10-Q financial report, and it contains a passage that echoes the OIG's concerns.  EBay notes that its business is being hurt by service disruptions, service terminations, and the increasing ability of shippers to increase prices without competitive restraint. 

“In addition,” notes the report, “the U.S. Postal Service has announced that it is considering closing thousands of local post offices and ending Saturday mail delivery….  These closures could require certain sellers to utilize alternatives which could be more expensive or inconvenient, which could in turn decrease the velocity of trade on our site, thereby harming our business.”

Because of uncertainty about the Postal Service, many eBay businesses are looking for alternatives.  They may not like paying the higher prices of the private shippers, but you just can't count on the Postal Service the way you used to.

It’s impossible to put a dollar figure on how much harm the Postal Service has done to its own brand.  What portion of the losses it’s experiencing can be credited not to the recession or electronic diversion but to its plans to reduce services and all the bad financial numbers used to justify the cost-cutting measures? 

We’ll never know the answer to that, but you can be sure of one thing — the Postal Service won’t be discussing that question in its year-end financial report.


Constantly shifting plans

For the past three years, all we’ve heard about are plans to close facilities and cut services.  The plans themselves change constantly after they’re announced, which only contributes to a sense of uncertainty and the crisis in confidence.  Plus, they’re not really accomplishing much in the way of saving money.

First, there was the plan to close more than three thousand stations and branches (the 2009 SBOC).  During the months that the Postal Regulatory Commission examined the plan for an advisory opinion, the closing list changed constantly, until it was down to just 160 post offices.  In the end, about 140 post offices were closed, and the Postal Service never said anything about how much money it had saved.

Then there was the plan for five-day delivery.  Saturday delivery is one of the main things that distinguishes the Postal Service from its private competitors, and it also keeps the mail flowing quickly.  Combined with other initiatives — like the change in service standards for First Class mail — eliminating Saturday delivery could really slow things down.  The Postal Service’s cost savings for the plan were disputed by the PRC’s advisory opinion, and it's now hung up in Congress and probably won’t become a reality for at least a couple of years. 

Then came the request for an exigent rate increase.  In 2010 the Postal Service submitted a request to the PRC for a 5.6% percent increase, which would have brought in an extra $3.2 billion annually and probably put the Postal Service in the black for this year (excluding, of course, the RHBF payments).  But the request went back and forth with the PRC, the Postal Service reduced the request to 4% (about $2.3 billion a year), and finally, last August, the Postal Service decided not to pursue it at all, due largely to pressure from big mailers.  The mere thought of a rate increase strikes fear into the hearts of stakeholders.

Then there was the plan to close 3,700 post offices, most of them small rural offices (the 2011 RAOI).  For months last fall, the Postal Service held thousands of community meetings — and generated a lot of bad press and public protest.  By the end, the PRC said the plan to optimize the retail network wouldn’t optimize anything, and the Postal Service abandoned the plan and declared a moratorium on post office closings.

Next came the Network Rationalization plan to consolidate half the country’s mail processing plants.  As we learned through the advisory opinion process conducted by the PRC, many plants could be consolidated without affecting mail service, but the Postal Service came up with a plan that required changing service standards for First-Class mail and periodicals.  While the big mailers didn’t care much about post offices, they definitely didn’t like having their mail slowed down.  This plan also changed while the PRC was examining it, and the latest version has two phases.  The first phase contains consolidations that probably didn’t require a change in service standards to begin with.  The second phase may never happen.

Then came the big push to sell off historic post office buildings.  That plan has alienated a large number of people who’ve never given a moment’s thought to service standards or Saturday delivery.  But now an iconic center of their city is being taken away from them, sold to the highest bidder, to be converted into a real estate office, a clothing boutique, a film producer’s offices, or luxury condos.  The fire sale comes while real estate prices are at historic lows, and it's generating a lot of bad press.  A few weeks ago the National Trust declared historic post office buildings one of the year’s most endangered places — not the best PR for the Postal Service.

Then came POStPlan, an initiative to cut hours at 13,000 small rural post offices.  The plan has gotten mostly positive reviews so far because it looks better than closing them and because the postmasters’ associations promised not to criticize it.  But come September, there will be thousands of community meetings to discuss having the hours at your post office cut to six, four, or two hours a day.  Many communities are already upset that they’re losing their postmaster.  They’re not going to like having a USPS representative explain that they can choose between having their post office open a few hours a day or having it closed completely.  That’s a lot more bad press on the way.


Self-inflicted harm                                                                        

We can’t know how much damage the Postal Service has inflicted upon itself with these plans, but one can get some idea of the possibilities by looking at market research.  Last year at this time, the Postal Service conducted some quantitative market research about how customers would react to the change in service standards associated with the Network Rationalization plan.

The numbers were so bad the Postal Service hid the results and had the market research company re-do the survey.  The Postal Service says the phase-1 market research was rejected as “unreliable” because it inadvertently mentioned to participants other plans on the table — closing post offices and eliminating Saturday delivery — and that skewed the results.  But the survey gives one some idea of the magnitude of the revenue losses that cost-cutting initiatives can cause. 

The research showed that changing the service standards on First-Class mail and periodicals — along with the cumulative effects of the other plans — would lead to a total volume loss of 7.7% and a total revenue loss of 8% — over $5 billion a year.

Compare that to today’s quarterly report, which shows a total volume loss of 4.8% and a revenue loss of less than one percent for the year to date.

Reducing services can obviously have a very large impact on volumes and revenues.  Even talking about reducing services can have a big impact.  A significant portion of the deficit posted in the new quarterly report has probably been caused not by the economy or the Internet but by all the negative news about potential service cuts and closures. 

The Postal Service has barely saved anything so far — the post office closing plans got nowhere, five-day delivery is probably at least a couple of years away, the plant consolidations have barely begun even though the change in service standards has already been implemented, the request for an exigent rate increase was dropped, and POStPlan starts off by incurring an $80 million bill for incentive buy-outs — but the costs of all these plans in lost revenue are already being incurred.

Mailers depend on the reliability and low costs of the Postal Service.  They don’t want to hear about defaults, insolvency, facility closures, and service reductions.  They don’t want to hear about privatization and the years of turmoil such a huge transformation of the postal system would cause.  They want to feel that the Postal Service is moving in a positive direction.  They want a steady hand at the helm. 

Trimming costs and being efficient are fine, but downsizing away half the workforce, cutting hours at thousands of post offices, selling historic post offices, reducing service across the board, and all the other things on the Postal Service’s agenda are not the way to save the post office.  Cutbacks can have a far greater impact on volumes and revenues than the weak economy or the natural progression of electronic diversion.  They can kill the Postal Service.

(Image credit: Cartoon by domino.  By the way, the USPS is on Twitter.)