U.S. Postal Service: Another Looming Crisis

It's hard not to feel sorry for Patrick Donahoe. The Postmaster General of the U.S. Postal Service (USPS) had barely been on the job for two months when, in early March, he found himself addressing a subcommittee of the House of Representatives' Committee on Oversight and Government Reform. At issue: The USPS' ability to function as an ongoing concern.

It is one of many trials for Donahoe. Clearly, the honeymoon phase is over for the new guy. On Donahoe's current fight card:

• He must battle the perception that the USPS is seeking a bailout (some politicians are even under the false impression that Mr. ZIP is on the government dole; it receives no operative tax dollars).

• He is trying to coerce Congress to refund $75 billion in overpayments to the Civil Service Retirement System (CSRS) and $7 billion in over-funding to the Federal Employees Retirement System (FERS). Monocles everywhere will come crashing to the ground upon learning that the government is hesitant to refund the money.

• Donahoe must also fend off the perception that the Postal Service is over-bloated with excess costs, capacity and dead weight. That says nothing about the public perception that the mail is an archaic vehicle for the transmission of information.

• And most galling to those who sympathize with the USPS is the requirement to prefund retiree health benefits (RHB) to the tune of $5.5 billion per year, which they feel is as unfair as it is unprecedented, for no other entity, public or private, carries this burden. USPS also pays $2.2 billion per year for current retiree health benefits. The prefunding was borne out of the 2006 Postal Accountability and Enhancement Act (PAEA), which was intended to provide a modern business plan.

If anything, PAEA has turned out to be a recipe for disaster. In each of the four years prior to the law taking effect, the USPS reaped a net income. In his testimony, Donahoe noted that in fiscal 2007 and 2008, USPS would have showed positive cash flow with profits of $3.3 billion and $2.8 billion, respectively. Instead, the prepayment left it with losses of $5.1 billion and $2.8 billion in those respective years.

Potential Default Looms

The losses have caught up to USPS. It is projected to reach its statutory borrowing limit ($3 billion per year/$15 billion) by the end of its fiscal year in September. At that time, a $5.5 billion RHB bill and a $1.2 billion workers' compensation liability will come due. Mr. ZIP will fall about $2 billion to $3 billion shy. Thus, on Sept. 30 of this year, the Postal Service will default. What happens then is anyone's guess, as the post office's existence is constitutionally mandated. Mr. ZIP won't be collecting unemployment.

Fiscal relief for the USPS can come from any number of avenues, notes Lisbeth Lyons, vice president of government affairs for Printing Industries of America (PIA). The PIA is a member of the Coalition for a 21st Century Postal Service, which also testified before the subcommittee in March. Lyons is concerned that the "bailout" buzz word threatens to drown out the necessary, substantial conversations that need to take place.

"The overpayment issue is one we're going to (get behind)," Lyons says. "It has the potential to be more of a game changer in helping the Postal Service. Addressing and restoring what the USPS said it's overpaid to the Civil Service Retiree System would definitely allow the Postal Service to have a stronger business model."

Unfortunately, at the time this was written, there seemed to be a bit of a discrepancy as to the CSRS overfunding; even though the $75 billion figure was verified by independent auditors, the Office of Personnel Management (OPM) came up with a different calculation, she notes.

Since the USPS won't be able to make its $5.5 billion payment, and given that it's not legally allowed to go under, a two-year deferral on the payment is a possible—and the most likely—scenario, according to Lyons. This will give politicians more time to work on either 
sprucing up PAEA or coming up with a new solution altogether.

As we reported in the January issue, Sen. Tom Carper (D-DE) and Sen. Susan Collins (R-ME), among others, have introduced bills that would help right the ship. And, in late February, President Obama's budget proposal offered relief but, as is the MO for Congress, the issue will tick down to the final minutes before the end of the fiscal year, when the USPS will be tapped out of money and action will be needed.

Of the cost-cutting solutions proffered by the USPS, the idea of cutting back a day of delivery—while not in the immediate conversation—isn't universally deplored, as one might expect. A PIA membership survey last fall revealed that seven in 10 could live with one less day of mail delivery. What would bother them is if the USPS tried to assail a key proviso of the PAEA, the cap limiting rate increases to the Consumer Price Index (CPI). That's a deal-breaker.

The Coalition for a 21st Century Postal Service hasn't taken a position on five-day delivery. Financial services companies and the unions, on the whole, don't like it. Financial services companies don't want to mess with the billing cycles for transactional mail. Still, others have said they could make the adjustment, among them the Magazine Publishers Association.

Among the printers that haven't taken a position on the topic of five-day delivery is Quad/Graphics of Sussex, WI, one of the nation's largest mailers. All things being equal, no one wants to see a diminishing of service, notes Joe Schick, director of postal affairs for Quad.

No Saturday Delivery?

"If we were completely confident in the amount of annual savings to be realized, and that the loss of a day of service would not be detrimental to our customers' businesses and our ability to efficiently transport mail, it would be easier to accept and then support," Schick says. "But we still feel it should be the last thing the USPS should do after all other options have been explored."

Another highly visible figure in the direct mail printing space—IWCO Direct President and CEO Jim Andersen—takes a guarded approach to the issue of five-day mail. Like Schick and the Coalition, the chief executive of the Chanhassen, MN-based printer will be keeping his eyes peeled to the fine print of any such proposal.

"While the USPS has given assurances that it will maintain sufficient mail processing operations over weekends to avoid mail delays during the early part of the week, we continue to be skeptical about the USPS' ability to achieve that outcome," Andersen remarks.

"We look forward to the Postal Regulatory Commission's advisory opinion on this topic, which should provide more background on potential savings and impacts on postal operations."

Schick emphasizes that pension overfunding and the onerous retiree healthcare prepayment are the twin 800-lb. gorillas standing in the way of a self-sustaining, fiscally viable Postal Service. But right-sizing the USPS network through closures and consolidations is critical to its ability to control costs, he notes. For example, Schick points out that the USPS' current network was built to support the processing, distribution and delivery of 300 billion pieces, while current volume is barely more than half of that at 170 billion pieces.

USPS' Proactive Moves

For its part, the USPS has taken what it considers a proactive approach toward cleaning its house. More than 100,000 jobs have been reduced through attrition, early retirement packages, etc. And it is closing 2,000 facilities this year, which will result in a savings of roughly $500 million over the next two years.

Right-sizing, while not a cure-all, is a good place to start. "As we've heard from (Donahoe), he is focusing on the number of employees needed to efficiently manage and operate their network," Schick says. "Managing that process will continue to happen through attrition, a planned restructuring of field offices, a reduction in headquarters management and administrative staffing...and other offers for early retirement."

But, as most observers contend, in the final analysis, it will take more than bare bones cost-cutting to right the USPS' ship. Its bid for an exigent rate increase last year only underscored the need for more than a bandage approach to its wounds. In order for printers and mailers to get maximum value from the Postal Service, in an age when costs continue to spiral and at a time when alternative marketing routes garner more and more mind (and dollar) share, the entities need to view themselves as partners working toward the same end.

"The USPS will not be able to cost-cut its way to recovery," Andersen contends. "While it cannot take the focus off aligning operation costs with current revenue, the Postal Service needs to place equal focus on developing new products and services to attract new mail users and make mail even more valuable for those already using mail for their marketing communications.

"We are encouraged by the enthusiasm (USPS chief marketing officer) Paul Vogel has shown for this task, but there is still a significant amount of work left to do in building the USPS value proposition," he points out. PI