The U.S. Postal Service will begin to default on its financial obligations just over four months from now unless Congress takes action to relieve it of its obligation to pre-fund retiree health care accounts, its leader told lawmakers Tuesday.
“Despite our aggressive cost cutting and revenue generating efforts, we are in serious financial predicaments today,” he said. “As things stand, we do not have the cash to make the $5.5 billion prepayment for future retiree health benefits due on September 30. And we may be forced to default on other payments. This could extend to operational expenses.”
USPS contends the prepayment for future retirees is a financial obligation that none of its competitors, nor any government agency, has to live with. The requirement came along with a 2006 postal reform bill that was passed when mail volume was at its peak.
Officials say the payments were also based on what was then a much larger employee base. USPS has cut its workforce by 113,000 since then. Donahoe said in written testimony to the subcommittee on federal financial management that not only can USPS not afford the future retiree health bill this year, but that without Congressional action, it’s inevitable that the organization will eventually default on payments to employees and suppliers as well.
After the hearing, he told reporters that was a last resort, and skipping the retiree health payment this year would provide at least some breathing room.
“The last thing we would do would be to negatively disrupt the delivery of mail, because it’s tremendously disruptive to American commerce,” he said. “There’s trillions of dollars that go through the mail. 52 percent of Americans still pay their bills through the mail versus online.”
The postal service also wants Congress to refund up to $75 billion it says it has overpaid into the Civil Service Retirement System (CSRS), and another $7 billion in overpayments into the Federal Employee Retirement System (FERS). It would use that money to finish off its retiree health benefit prepayments and pay down its accumulated debt.
But Donahoe said those were short term fixes. Longer term health for the postal service, he said, means more management flexibility, including the option to go from six-day to five-day delivery.
He said USPS is also working to cut more costs by removing excess capacity from the postal system, including the politically-sensitive subject of closing post offices themselves.
“In some small offices, we’re looking at consolidation because what we’re finding is that many of these offices don’t even have an hour’s worth of work in a day,” he said. “If it’s close to another office, a mile or so, we can consolidate. In other cases, many towns have three businesses: a general store, a gas station and a post office. What we’re looking for is to talk to the general store or the gas station to take a contract to provide postal services. There are many options, and we want to hear from people, but we have to move on these things.”
Sen. Tom Carper (D-Del.), the chairman of the subcommittee, has introduced legislation that would give the postal service what says it needs. It would allow USPS access to the excess FERS and CSRS funds it has paid so it can pay off its retiree health benefits once and for all.
Carper said it would also let USPS management run the organization with less Congressional interference.
“No business, facing the kind of challenges the postal service faces today, would survive very long if they were told how many retail outlets they should have or where they should be located, or if they were prevented from making operational changes or taking advantage of the resources they have at their disposal,” Carper said. “Yet that’s what Congress does to the postal service.”
Carper believes USPS needs to think of new ways to generate revenue, and his legislation would let it sell or provide non-postal products and services, as long as they’re in the public interest.
His legislation also would let USPS ship alcoholic beverages for the first time.
“We think it’s an excellent idea,” Donahoe said.”What the Postal Service brings is convenience in that whole industry. We’ve seen other posts—Australia Post for an example has done that—and that’s one of their biggest growth products.”
He said carriers would not deliver alcohol directly to a home, but would require an adult to pick the package up at a post office.
Several lawmakers expressed concerns about the five-day delivery idea, particularly members representing Hawaii and Alaska, where delivery times are longer, and residents, particularly in remote areas, are heavily reliant on mail.
And Sen. Claire McCaskill (D-Mo.) said USPS might be surrendering its biggest competitive advantage.
“If you were looking at this through the very cold lens of just a pure business model, you’re giving away the major advantage you have when you give away that sixth day,” she said. “What keeps us from going to four? If we go to five, aren’t we really talking about the beginning of a death spiral here?”
Donahoe doesn’t believe so.
He said Saturdays are easily the postal service’s lowest volume day, because commercial advertising customers don’t want their mailings to arrive on Saturday, when people are busy doing other things. Nonetheless, he said he was not particularly excited about eliminating Saturday delivery.
“We do not want to go to five day delivery,” he said. “Financially, we’re in a situation where we’ve got to take that as an option. It is tied directly to the loss of first class mail volume. America’s changing. People are paying bills online. Every time a bill’s paid online, that’s 18 cents (of profit) we can’t use to cover six-day delivery and a number of these small post offices.”
On the subject of small post office closures, lawmakers heard some pushback from labor organizations. Mark Strong, president of the National League of Postmasters, said USPS spends less than one percent of its overall budget on the smallest one-third of its post offices. He said the organization should find new ways to use its physical locations, rather than shutting them down and contracting out their services.
“Post offices are where the American flag flies in every community in this country,” Strong said. “To take those flags down and replace them with grocery stores or gas stations should be the last alternative. We should be putting more government services into those postal facilities.”
In addition to Carper’s bill, Sen. Susan Collins (R-Maine) has introduced a separate postal reform proposal that would order the Office of Personnel Management to recalculate USPS’s contributions to federal pension accounts to prevent future overpayments.
Donahoe said USPS supported that bill, but without the extra management flexibility the Postal Service is asking for, he said leaders will be back before Congress next year, facing another looming payment default.
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