U.S. Postal Service on the brink of insolvency
The latest issue of Businessweek brings us the dire situation facing the U.S. Postal Service (USPS). First a glimpse of the scope of the USPS from The U.S. Postal Service Nears Collapse.
The USPS is a wondrous American creation. Six days a week it delivers an average of 563 million pieces of mail—40 percent of the entire world's volume. For the price of a 44¢ stamp, you can mail a letter anywhere within the nation's borders. The service will carry it by pack mule to the Havasupai Indian reservation at the bottom of the Grand Canyon. Mailmen on snowmobiles take it to the wilds of Alaska. If your recipient can no longer be found, the USPS will return it at no extra charge. It may be the greatest bargain on earth.
It takes an enormous organization to carry out such a mission. The USPS has 571,566 full-time workers, making it the country's second-largest civilian employer after Wal-Mart Stores (WMT). It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks (SBUX), and McDonald's (MCD). Last year its revenues were $67 billion, and its expenses were even greater. Postal service executives proudly note that if it were a private company, it would be No. 29 on the Fortune 500.
How big are these problems?
The problems of the USPS are just as big. It relies on first-class mail to fund most of its operations, but first-class mail volume is steadily declining—in 2005 it fell below junk mail for the first time. This was a significant milestone. The USPS needs three pieces of junk mail to replace the profit of a vanished stamp-bearing letter.
During the real estate boom, a surge in junk mail papered over the unraveling of the postal service's longtime business plan. Banks flooded mailboxes with subprime mortgage offers and credit-card come-ons. Then came the recession. Total mail volume plunged 20 percent from 2006 to 2010.
Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx's (FDX) budget and 61 percent of United Parcel Service's (UPS) pay go to employee-related expenses. Perhaps it's not surprising that the postal service's two primary rivals are more nimble. According to SJ Consulting Group, the USPS has more than a 15 percent share of the American express and ground-shipping market. FedEx has 32 percent, UPS 53 percent.
The USPS has stayed afloat by borrowing $12 billion from the U.S. Treasury. This year it will reach its statutory debt limit. After that, insolvency looms.
On Mar. 2, Postmaster General Patrick R. Donahoe warned Congress that his agency would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue. "At the end of the year, we are out of cash," Donahoe said. He noted that the unusual requirement was enacted five years ago by Congress before mail started to disappear.
But the problems don't end there. Reuter's had a brief article following a May 17 Senate subcommittee hearing on postal affairs. Among those testifying was Phillip Herr, Director of Physical Infrastructure Issues with the Governmental Accountability Office.
The report focuses on the world's largest civilian fleet which is approaching its designed life span of 24 years and is accruing significant costs in unexpected maintenance.
Presenting the GAO's findings, Herr emphasized that the strategy to upgrade the fleet should be a part of a larger plan to make the mail carrier financially viable.
There are some solutions being floated. The Washington Post reports on one:
Donahoe pushed senators to quickly pass a bill reintroduced Tuesday by Sen. Thomas R. Carper (D-Del.) that would permit the USPS to use billions of dollars it has overpaid to federal worker pension funds to make the $5.4 billion payment.
The Postal Regulatory Commission and the Postal Service inspector general estimated that the USPS has overfunded the Civil Service Retirement System by $50 billion to $75 billion since the 1970s.
Carper’s bill also would allow the Postal Service to cancel Saturday mail delivery and save about $3 billion annually in operating costs, Donahoe said.
Republicans have some ideas in mind too, most include some form of privatization and larger cuts than the Democrats propose. And it is probably safe to assume any of their proposals will include as striking a blow to the big postal unions as possible.