USPS cannot make mandated prefunding retiree health benefit payments

Not surprisingly, the United States Postal Service (USPS) announced this week it is unable to make $5.5 billion in mandated prefunding health retiree benefits to the Treasury, which is due today, as well as a $5.6 billion payment due on September 30.

These payments are part of a Congressionally-mandated 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premium, among others.  The USPS said last year that without government assistance it will not be able to continue to meet this obligation.

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 at the present time or in subsequent years, according to the Postal Regulatory Commission.

Despite this predicament, the USPS maintained things will remain business as usual.

“This action will have no material effect on the operations of the Postal Service,” USPS officials said in a statement. “We will fully fund our operations, including our obligation to provide universal postal services to the American people. We will continue to deliver the mail, pay our employees and suppliers and meet our other financial obligations. Postal Service retirees and employees will also continue to receive their health benefits. Our customers can be confident in the continued regular operations of the Postal Service.”

Much of the USPS’s fiscal difficulties stem from its projected declines in First Class Mail volumes, which have fallen precipitously in recent years and represent 44 percent of total USPS volume, due to the ongoing diversion of mail from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes. First Class mail volumes have decreased by 25 percent since 2006.

During the fiscal second quarter, the USPS incurred a net loss of $3.2, following a $3.3 billion fiscal first quarter loss and a $5.1 billion fiscal year 2012 loss. USPS officials said that despite ongoing management actions that have grown and improved efficiency, these sizable losses are expected to continue until key provisions of the USPS five-year business plan move forward. Previous losses in recent years include $8.5 billion for fiscal year 2010 and $3.8 billion for fiscal year 2009.

The objective of the five-year plan is to reduce annual costs by at least $20 billion by 2015. And along with its goal of $20 billion in annual reductions by 2015, the USPS would like to see annual savings rise to $22 billion by 2016. The plan’s goals include:
-eliminating the fund to pay future retiree health benefit premiums and is proposing to provide employee health benefits independent of federal programs, which it said would save the USPS $7.1 billion annually;
- moving from six days per week delivery to five days per week, which would result in an annual cost reduction of $2.7 billion; and
- pursuing the realignment of its mail processing, retail, and delivery operations, which would result in a savings of $8.1 billion annually and also seek other significant cost reductions to grow or retain revenues within its current business model.

Of the $20 billion in targeted savings within the next five years, the USPS said about $10 billion requires legislative action.

“Things like consolidating processing plants and streamlining our retail network, including post offices, and meeting our customers where they are already doing their shopping and where they work and live and offering retail products in existing stores and getting away from so much reliance on brick and mortar post offices is a goal,” said a USPS spokesman in an interview. “Those are examples of things we can do on our own without a change in legislation.”

A noted parcel analyst said that Congress needs to address the financial plight of the USPS.

“Without the over payments, USPS would be fairly close to break even,” said Doug Caldwell, VP EMEA, at AFMS. “[But] it is making some real inroads and improvements on the financial front.  You’ll notice that we are still seeing ads for Priority Mail, and that’s because Priority Mail continues to grow faster than the market-and it remains very profitable.”

What’s more, Caldwell pointed out that the USPS is now the fastest growing U.S. parcel carrier. In its fiscal second quarter, Parcel Select volumes were up 110 percent from 2.8 million packages a day last year, to a current total of nearly 6 million packages per day. 

He added that the USPS is also seeing healthy volume gains in international shipments, both inbound and outbound and remains the carrier of choice for lighter weight international B2C shipments, which continues to see increased traction.