Senate hearing focuses on financial condition of United States Postal Service

The financial travails of the United States Postal Service were on full display at a hearing hosted by the Senate Committee on Homeland Security and Governmental Affairs yesterday.

The hearing, entitled “U.S. Postal Service in Crisis: Proposals to Prevent a Postal Shutdown,” examined the current state of the Postal Service and recent proposals to improve its financial condition.

In early August, the USPS released its fiscal third quarter earnings release, which showed that it had a $3.1 billion net loss and mail volume fell to 39.8 billion pieces. The organization explained that the diversion of mail from paper to electronic communications saw total mail volume drop to 39.8 million pieces during the quarter.

On top of the slowdown in pieces mailed and declining earnings, the USPS recently said that without government assistance it will not be able to continue to meet a statutory 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premiums. The USPS has been unable to fund this obligation from operations and has used all of its retained earnings and drawn down from its $15 billion borrowing authority from the U.S. Treasury. And even with the requested increase, the USPS would not be able to meet this annual obligation in 2011 or subsequent years, according to the Postal Regulatory Commission.

USPS officials have stated that due to this situation it is running the risk of insolvency, coupled with a massive drop in mail volume and the fact that the bulk of its costs are fixed by laws, contracts, or regulations. And Stephen M. Kearney, USPS senior vice president, Customer Relations, said last year that the USPS’ operating flexibility is severely limited.

“This is a troubled business on the verge of bankruptcy,” said Senator Joe Lieberman (I-Conn.), head of the Senate HGSAC Committee in his opening remarks of the hearing. “Business lost to the Internet and America’s economic troubles have led to a 22 percent drop in mail handled by the USPS and a gross revenue decline of more than $10 billion over the last five years. If nothing is done the USPS will run out of money and forced to severely slash service and employees.”

The USPS, which still delivers 563 million of pieces of mail per day, is expected to have a deficit of roughly $8 billion this year for the second straight year.

In an effort to reduce its debt and improve its financial condition, the USPS has cut costs by $12 billion over the last four fiscal years and reduced its career workforce by 110,000 employees.

As of the end of the third fiscal quarter, the USPS had reduced work hours by 9.2 million hours or 3.1 percent compared to the same period a year ago, and during the first nine months of 2011, 2.8 percent fewer work hours were used compared to 2010. The third quarter also saw the voluntary retirement of more than 1,850 administrative employees as part of the current restructuring initiative, according to the USPS.

“The Postal Service is in a crisis today because it operates within a restrictive business model and has limited flexibility to respond to a changing marketplace,” said USPS Postmaster General Patrick Donahoe at the hearing. “We need the ability to operate more as a business does. This applies to the way we provide products and services, allocate resources, configure our retail, delivery and mail processing networks and manage our workforce.”

Donahoe added that based on current revenue and cost trends, the USPS must reduce its annual costs by $20 billion in 2015 to be profitable again. And he proposed a number of action items the USPS needs in the form of legislation to return to solvency, including:
-resolving the law requiring the Postal Service to make $5.5 billion annual payments to prefund retirement health benefits;
-returning $6.9 billion in Federal Employees Retirement System overpayments;
-granting the Postal Service the authority to determine delivery frequency;
-allowing the Postal Service to restructure its healthcare system to make it independent of federal programs;
-granting the Postal Service the authority to provide a defined contribution retirement plan for new hires, rather than today’s defined benefit plan; and
-streamlining the process for product development and pricing.

“My take is that between now and September 30, Congress will not be able to deal with the fundamental problems or not want to touch the issues for political reasons (layoffs, post office closings, and so on) and put off the issue as long as possible,” said Jerry Hempstead, president of Hempstead Consulting. “My guess as to what could happen is Congress raises the borrowing authority, and also postpones the due date of some of the bills. If I were congress I would say that the problem is not a lack of volume; the USPS delivers billions of pieces a year. The issue is they don’t charge enough for the pieces they handle, and Congress has tied their hands on how they can increase price, so I would make them raise prices.”