2010-03-07 Analysis: Postal rescue plan faces impossible odds

Federal Times Article By Gregg Carlstrom | Last Updated: March 7, 2010

The U.S. Postal Service is officially in a panic.

Two outside consultants delivered reports to the agency last month forecasting an alarming scenario: Over the next decade, mail volume will plummet between 15 percent and 34 percent — and the agency will hemorrhage almost a quarter-trillion dollars.

In response, postal leaders last week pleaded with stakeholders — unions, Congress and customers — to support drastic reforms: a sharp rate hike next year; the end of Saturday delivery; widespread post office closures; changes to the Postal Service's formula for financing health care benefits for retirees; and deep staffing cuts.

But few of those measures now appear likely to win approval — leaving the Postal Service with no clear fallback plan for closing its mammoth deficits. Mailers railed against the prospect of sharp mailing hikes; lawmakers dismissed the idea of shuttering post offices or shortening the delivery week; and unions balked at staffing cuts and even questioned the severity of the Postal Service's predicament.

"The assertion that the Postal Service must initiate major changes in its business plan to survive a grave crisis is false," said William Burrus, president of the American Postal Workers Union, the largest union of postal employees.

Postal officials, though, say these are the only viable options for curing the fundamental ills plaguing its business. They've ruled out other options — such as reducing the speed of mail services or eliminating home delivery to cut carrier costs — as counterproductive, since they're likely to drive down mail volumes.

"These are serious problems we now face," Postmaster General John Potter said at a mailing industry forum in Washington last week. "We need to pursue all of these options in order to maintain our viability for the remainder of the 21st century."

Potter estimates the agency can close roughly half of its $238 billion 10-year deficit through internal measures, such as raising prices and improving productivity, which don't require legislative approval. To close the other half, the agency wants Congress to approve three other reforms — all of which face steep challenges.

Retiree health care

The Postal Service will ask Congress this year — as it did last year — to reduce its annual payments into a fund earmarked for future retiree health benefits, a change which could save the Postal Service up to $5 billion annually. These payments are legally required — nevertheless, getting Congress' approval to reduce them shouldn't be controversial: A recent report from the Postal Service's inspector general concluded that the agency is on pace to overpay billions into the trust fund between now and 2016.

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The report concluded that the Postal Service could pay, on average, $4 billion less each year between now and 2016 — and still fully fund its retiree health benefits. The Postal Service currently pays about $5.4 billion per year into the fund.

Another IG report, released in January, found that the Postal Service has overpaid $75 billion into its pension fund for Civil Service Retirement System retirees. That overpayment would be enough to fully fund the Postal Service's retiree health benefit obligations indefinitely — so the IG recommended Congress allow the Postal Service to use the pension overpayment for health care. Unions have endorsed that idea as a solution to the Postal Service's long-term financial woes.

"I don't believe that weakening our commitment of six-day service will enhance the long-term position of the Postal Service," said Fred Rolando, the president of the National Association of Letter Carriers, which represents city carriers. "If Congress takes action [on the pension plan], the Postal Service will have the financial breathing room it needs to develop a more successful plan."

Staffers on Capitol Hill won't say whether Congress will approve the change — though two congressional analysts who follow the Postal Service say it's unlikely, considering Congress' busy schedule and the shortened election-year legislative calendar.

And that move, which postal officials endorse, would only save $75 billion over the next 10 years; that leaves another $40 billion in deficits.

Fewer post offices, fewer deliveries

Later this month, the Postal Service plans to formally ask its regulator, the Postal Regulatory Commission (PRC), to approve a switch to five-day mail delivery. Potter estimated that the switch would save $3 billion annually.

Analysts say they're not sure how the Postal Service calculated that figure. It's significantly higher than what the PRC has projected: Last year, the PRC estimated that moving to a five-day schedule would save $2 billion but also decrease mail volume by about 2 percent.

Potter first proposed five-day delivery during a congressional hearing last year, and the idea has won virtually no support on Capitol Hill. Lawmakers say they're waiting to see the Postal Service's full analysis before making any final decisions, but there's little enthusiasm for the idea.

"There are very few details about this proposal," said Jenny Thalheimer, a spokeswoman for the House Oversight and Government Reform Committee. "We understand that the Postal Service must bring down its costs over time. But we must also keep in mind that mail delivery is an important public service."

Potter also suggested a new way to cut costs: He said Congress should grant the Postal Service the authority to close post offices for economic reasons, something it's not allowed to do under current law. Potter wouldn't offer any specific numbers, but he suggested the Postal Service wants to close a substantial number of post offices, and focus on building business through alternate retail outlets — stamps sold at supermarkets, for example — and the Internet.

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"In an ideal world, that's what we'd like our retail outlet to be — a computer," Potter said. "That, I believe, is the future. Being locked into brick-and-mortar is not a healthy situation."

But this proposal, too, will face steep opposition from legislators, who typically support only those post office closures that happen in other peoples' districts. Unions, too, say there's no need for widespread post office closures — which would shrink the postal workforce.

‘There is no Plan B'

Few of these ideas are popular, but postal officials, including the Senate-confirmed Board of Governors, say the Postal Service doesn't have any alternative.

"We're well aware that the political process will have to weigh in on our changes," said Louis Giuliano, chairman of the board. "Many of these proposals can only be implemented with legislative change ... and it is absolutely critical that [those changes] be made in a timely manner."

Some analysts have suggested privatizing the Postal Service, a route that some European post offices have followed in recent years. But a report from McKinsey & Co., one of the two consulting firms that studied the Postal Service, said privatization is an unlikely option because of the Postal Service's perilous financial situation.

"Investors require a clear path to profitability before acquisition. ... It's very difficult to go into an [initial public offering] with a business that is losing money and on the decline," said Thomas Dohrmann, a principal at McKinsey. "And the government will have to maintain an explicit, or at least implicit, support for the Postal Service."

Postal managers have also speculated in the past about opening new lines of business, like banking; post offices in some European countries double as financial institutions, with banking services provided either by commercial banks, which pay rent, or by the post itself. But Potter said consultants ruled out that idea, too, because the Postal Service would need billions in working capital to finance those new product lines — money it probably cannot raise, considering its current debt levels.

"We can't exercise that option, at least not in the short term," Potter said.

Potter also said many post offices simply don't have enough customer traffic to support banks or retail operations. The average post office sees fewer than 600 customers per week, one-10th the business of a typical pharmacy, and just 3 percent of a supermarket's weekly traffic

Despite cutting 40,000 career employees, getting a $4 billion break on retiree health benefit payments, and taking other cost containment measures, the Postal Service reported a net loss of $3.8 billion for its 2009 fiscal year. The bleak report, issued November 16, showed $1 billion more red ink than a year earlier.

The report also cited total mail volume of 177.1 billion pieces, compared to 202.7 billion pieces in 2008, a 12.7 percent decline. In making the announcement, the Service said its projections for FY 2010 are based on continuing six‑day delivery. “There is no way to sugarcoat it; it was a horrible year,” NALC President Fred Rolando said. “The housing collapse and meltdown on Wall Street hit the most mail‑intensive

sectors of the economy, and the deep recession that followed

may have accelerated the drive by many mailers to seek

electronic substitutes for mail.”

The Postal Service’s chief financial officer, Joseph Corbett, agreed:

“Our 2009 fiscal year proved to be one of the most challenging in the

history of the Postal Service. The deep economic recession, and to a

lesser extent the ongoing migration of mail to electronic alternatives,

significantly affected all mail products, creating a large imbalance between revenues and costs.”

Corbett noted that the Service reduced work hours by 115 million, or the equivalent of 65,000 full‑time

employees. The Service reduced overtime and pared transportation costs and virtually every other

expense.

Independent auditor Ernst & Young cautioned that “there is significant uncertainty” whether the Postal

Service will have enough cash on hand to make all of its payments in the year ahead, including the $5.5

billion retiree health benefits payment due on the last day of FY 2010. That is the next installment due

to pre‑fund future retiree health insurance costs. The 2009 payment was reduced by $4 billion, thanks to

passage of legislation vigorously endorsed by the NALC.

With further revenue losses and mail volume declines expected, Postmaster General John E. Potter

said that USPS will continue to move aggressively to meet the challenges posed by the recession.

“We realize our customers are facing the same economic challenges,” Potter said, noting the Service

will not raise prices for First‑Class and Standard Mail and its other market‑dominant products in 2010.

Looking ahead, the statement said, “The 2010 plan, which estimates a revenue decline of $2.2 billion,

a net loss of $7.8 billion, cost reductions of more than $3.5 billion and a reduction in mail volume of 11

billion pieces for the year, is based on the assumption that there will be no change in the number of

delivery days per week, and no change in the current retiree health benefits payment schedule.”

Potter said, however, that the Postal Service faces “a sobering reality” of the same financial problems

in 2010 and every year in the near future as volume contracts and the Postal Service struggles with the

costs of an ever‑expanding delivery network.

President Rolando said the Postal Service’s year‑end report underscored the need to enact a long‑term

fix to the retiree pre‑funding obligation.

“We appreciate the short‑term relief provided by H.R. 22, but Congress must order the

Office of Personnel Management to review the pre‑funding provisions of the law to both more

accurately measure the true cost of future benefits, which it now grossly exaggerated, and

provide for a more reasonable and sustainable schedule for pre‑funding,” he said.

Rolando expressed hope that the economy will begin to turn around in 2010, but cautioned letter

carriers that a full recovery will take time: “We will have our work cut out for us in the years ahead to

restore the Postal Service and protect our long‑term job security. We will have to fight for legislative

reforms and make the right decisions at the bargaining table.”

Fredric V. Rolando is the president of the National Association of Letter Carriers, a union that represents more than 200,000 city letter carriers employed by the U.S. Postal Service.

On Compliance with National Agreement

Let me make the following clear to one and all, including Postal Service management at headquarters and in the field, and all letter carriers, at every level in the union and in every post office: No one, at any level, has any authority to amend or violate the national contract, period.

I continue to receive calls from branch officers who inform me that local managers have approached them and attempted to secure agreements to violate the national contract.  These same managers have the audacity to suggest that I am cooperating with the Postal Service and that they should, too!  The plain fact is that I encourage cooperation with the Postal Service because I realize the current financial crisis requires cooperation, where appropriate.

If any manager approaches you with a suggestion for creative cooperation, advise them to send their ideas to USPS headquarters, which will then make the determination whether to present such ideas to us. Some of the ideas floating around now are not grounded in common sense. For example, the idea of prohibiting all carriers from working their nonscheduled day off, and then requiring non-ODL carriers to work overtime is a clear violation of the contract – one we will stop through the grievance procedure, and one that will cost the USPS dearly in the end. We must be mindful of the critical difference between contract amendment/contract violation on the one hand, and creative, positive cooperation on the other.