USPS updates long-term cost-cutting plan

While the fiscal difficulties of the United States Postal Service (USPS) still ongoing, as evidenced by its recent announcement that it had a $3.3 billion net loss for the fiscal first quarter and a $5.1 billion fiscal year 2011 loss, it has mentioned on several occasions in the last year that it wants to reduce annual costs by at least $20 billion by 2015.

This week the USPS publicly released updates to this plan, which include new financial projections and suggestions for legislative reforms, too.

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. USPS officials said these cost reduction goals are necessary, due to 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.

“The plan we have developed requires a combination of aggressive cost reduction, rethinking the way we manage our healthcare costs, and comprehensive legislation to reform the business model of the Postal Service,” said Postmaster General, Patrick Donahoe in a statement. “If provided the flexibility to quickly implement this plan, we can return to profitability and better serve the American public. If not, we risk becoming a significant burden to the American taxpayer.”

The USPS said that if there is no legislative reform that helps to enable operational changes the USPS could incur annual losses up to $18.2 billion by 2015 and accumulate total debt of $92 billion by 2016, which Donahoe said are unsustainable and entirely avoidable.

One of the primary objectives of the USPS’s cost-cutting measures is to eliminate its 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 premiums. 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 in 2011 or subsequent years, according to the Postal Regulatory Commission.

The USPS said it is proposing to provide employee health benefits independent of federal programs, which it said would save the USPS $7.1 billion annually.

Other proposed changes include 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 it also explained that it is 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. “Those are examples of things we can do on our own without a change in legislation.”

And part of the USPS plan, said the spokesman is to take aggressive actions to cut costs and grow revenue, which it can do now and have been doing. Changes that require legislative action include shifting to five days a week delivery and the USPS administering its own health benefits program. Without both of these things happening, the spokesman said the long-term cost reduction plan is not achievable, which is why the USPS is seeking comprehensive, long-term legislative help, rather than a short-term fix which would take it back to the drawing board in a sense.

As LM has reported, among the things the USPS has proposed to become solvent are consolidating its network in the form of facilities, processing equipment, vehicles, and staff, which it said would result in a savings of $2.1 billion and serve as a big chunk of its network optimization initiative that it projects to save up to $3 billion by 2015.

In February, the USPS said it completed its Area Mail Processing consolidation studies under which it would consider closing down 252 of its 487 mail processing facilities. But in December the USPS said that it has agreed to delay the closing or consolidation of any Post Office or mail processing facility until May 15, 2012. That decision was made in response to a request made by multiple U.S. senators. According to the USPS, 264 processing facilities were studied for possible consolidation and of the 264 processing facilities studied, 6 are on hold for further internal study, 35 will remain open for now and 223 will be consolidated — all or in part.

Jerry Hempstead, principal of Hempstead Consulting in Orlando, Fla., said that one way for the USPS to regain financial solvency would be for Congress to order the USPS and the Postal Regulatory Commission to do a one-time rate increase that would cover all current operating costs, which includes pre-retiree healthcare benefits, which could help it to break even and cover its obligations for servicing its debt.

This would eliminate the need to go to five day delivery or close offices, he explained.

“For First Class service items, the USPS is a monopoly,” said Hempstead. “How can a monopoly lose money? It is because Congress puts restraints on the USPS on what they can charge for postage and its large constituencies like Netflix and TimeWarner that use a lot of First Class mail don’t want their postage rates to go up. The USPS does not lack volume. It handles about 700 million pieces per day. It does not charge enough for the services it provides. If you look at the 50 largest industrialized countries in the world, the U.S. has the fifth lowest postal rates. The USPS charges $0.45 for a stamp and the U.S is the world’s largest country.”