The United States Postal Service lost $5.2 billion in the third quarter of this year, bringing its year-to-date tally of red ink to $11.6 billion and prompting officials to worry that a misunderstanding of the reasons behind the Postal Service’s losses would cause large mailers to flee to other forms of advertising, communication and shipping.
“Our financial crisis is the result of an inflexible business model. It’s causing a crisis of confidence in the postal system,” Postmaster General Patrick Donahoe told the USPS Board of Governors Thursday. “We need legislation now that enables us to make the necessary changes in this model. When that’s complete, we’ll return to profitability.”
As the agency slogs through what are traditionally some of its slowest business months of the year, it’s doing everything it can to conserve cash so that it can pay employees and suppliers.
But acting Chief Financial Officer Steven Masse told reporters Thursday that the organization’s liquid assets are running perilously low. At the end of July, USPS had $2.5 billion left on its $15 billion credit line from the U.S. Treasury and only $500 million in usable cash.
USPS expects to fully exhaust its credit line with Treasury by the end of the year. It’s hoping increased cash flows from a busy election mailing season will get it through to the high-volume holiday mailing months.
Congress left town for its August recess last week without passing a postal reform bill — something the Postal Service says it desperately needs if it’s going to stop the trend of negative balance sheets quarter after quarter and return to profitability.
The agency’s primary short-term plan to save cash has been to default on contributions into accounts Congress ordered it to set aside several years ago to pre-fund the health care benefits of future retirees. USPS missed a $5.5 billion dollar payment last week and expects to skip another $5.6 billion contribution at the end of September. Additionally, USPS is considering a default on its upcoming required payment to the Federal Employee Retirement System.
Postal officials maintained Thursday that none of the missed payments would impact the day-to-day operations of the mail system and payments due to employees and suppliers would be first in line for the agency’s limited cash balances.
Thurgood Marshall, Jr., the chairman of the USPS Board of Governors, said the agency does not have the resources to handle checks to employees and vendors forever, but sought to ward off worries that that the Postal Service’s cash crunch will have any impact on mail delivery.
“That will never happen. I cannot stress this enough. The Postal Service will continue to deliver for the American people as we always do,” he said. “The Congress and the administration would never allow any theoretical disruption to occur. The Postal Service is far too important to the American economy for that to ever happen.”
Whether USPS makes its prepayments into the retiree health accounts or not, it’s still required to report them on its books. And the agency says out of its $5.2 billion third-quarter loss, more than $3.1 billion was the result of the requirement that it pre-pay for the prospective healthcare costs of employees who may one day retire, something the agency contends no other private or public- sector agency must do.
USPS argues there were other factors outside of its control, such as non-cash adjustments to its workers compensation fund, which has been tapped at an unusually high level because of low interest rates and because private-sector jobs that the Postal Service used to be able to place injured workers in have largely dried up. Consequently those injured workers remain on the agency’s workers compensation rolls. Absent those factors, the Postal Service argues it would have lost $1 billion for the quarter.
Postmaster General Patrick Donahoe said the agency needs to continue to cut costs, but its options are limited by previous requirements set by Congress.
“Hey, we will do everything we need to do, but we can only go so far. Congress needs to act responsibly and move on this legislation,” he said. “We’ve got a game plan for the next five years. We’ll make that happen. We’ve cut our workforce by one-third. But we need freedom for delivery flexibility, we need to eliminate the retiree healthcare pre-funding requirement, we need to get a refund for our overpayment in the [Federal Employee Retirement System]. This needs to be done quickly so that our customers are confident in the long-term prospects of this Postal Service.”
There were bright spots in the latest USPS financials: Revenues are relatively stable — down 0.7 percent from the previous year — and the shipping and package delivery business continues to grow, up 9 percent from a year earlier. The $3.3 billion in package revenue offset about three-quarters of the losses USPS suffered from the continuing decline in operating income from the nation’s dwindling use of first-class mail, which dipped another 4.4 percent during the quarter.
Facility, workforce cutbacks
Donahoe said the postal system also is saving money by closing some of its current 461 mail processing centers around the country. Forty-eight locations have been eliminated so far and 92 more are planned for next year. But USPS will press the pause button on the consolidations during the busy mailing season this fall.
“That’s our heaviest volume-mailing period of the year, so we want to make sure we’re available to deliver,” he said.
The Postal Service says those processing facility shutdowns haven’t had an impact on mail delivery times since the consolidations began a month ago and that delivery times are still meeting or exceeding their delivery targets.
Postal compensation costs have also declined through retirements and other forms of attrition. USPS reported 20 million fewer work hours in the agency through June of this year, compared to the same period last year.
“This is the result of more efficiency across the board,” Donahoe said. “It’s in our letter routes, it’s in our back-office operations, it’s in window service, it’s in postmaster functions. We used to have seven buildings in our headquarters facility. Everybody works out of one now. We managed attrition very carefully because we knew mail volumes would be dropping. We did not want to be sitting with thousands of employees with no place to go.”
USPS now has 540,000 career employees compared with 563,000 a year ago, and Donahoe said there are more reductions to come.
“We think the optimal number of people in the organization would be around 400,000,” he said. “That said, that optimal environment assumes a five-day delivery schedule. But there are a couple factors working in our favor. Right now there are about 165,000 people who are eligible for full retirement across all of our crafts. We’ve been very careful to manage our hiring, which puts us in good shape so that we don’t have to hire people behind people who have retired. You can end up with of soft landing as we get to this 400,000 headcount number.”
USPS made two separate retirement incentive offers to employees in the third quarter. The service offered 21,000 postmasters a $20,000 dollar buyout and 45,000 mail handlers were offered $15,000 buyouts. About 8,000 employees accepted, according to the Postal Service’s financial statement.
Donahoe said even if Congress eliminates the Postal Service’s obligation to pre- fund retiree health benefits, other steps are needed to prevent the continued loss of cash.
USPS wants permission to eliminate Saturday delivery, create its own health insurance system and receive a refund on overpayments it’s made into the federal pension systems.
Unless Congress solves the Postal Service’s persistent financial problems, confidence in the agency, particularly among large commercial mailers, will deteriorate, Donahoe said, because of the public’s misunderstanding of the reasons for the cash problems.
“People don’t understand it. We’ve spent a whole year trying to explain to people the whole concept behind the pre-funding issue for retirees. There’s still a lot of people that don’t understand that. When you have headlines that say ‘Postal Service loses money,’ ‘Postal Service loses billions,’ it creates a negative atmosphere. That’s why we need to get all these things resolved.”