United States Postal Service: Need for Reform Schooling

IT SEEMS that Mr. ZIP no longer has a spring in his step, and it's not surprising to see why. His boss, the United States Postal Service (USPS), suffered a $3.8 billion loss for fiscal year 2009 and, frankly, it could have been worse. Had the USPS not been granted a reprieve from funding $4 billion of its required annual payments for retiree health benefits, the situation would have been more grave.

That's little consolation to one of the nation's oldest institutions. Moving forward, things look even worse for the post office. The USPS is facing a possible loss of $7.8 billion in 2010, even after implementing cost-cutting initiatives that would slice away $3.8 billion.

"When you talk about losses at the $7.8 billion level, there's not one fix anywhere that is going to bring us back to profitability," states Joseph Corbett, CFO of the USPS.

Forget for a moment that the USPS endured a 12.7 percent loss in volume from 2008 to 2009. And never mind that the volume reduction is not just a reflection of the loss of advertising mail due to the Great Recession of 2008-2009 that handcuffed heavy mailers in the automotive and financial sectors; it continues a trend toward online bill paying and other business transactions through the Internet.

Postal Reform, Part II

OK, maybe forgetting it is a bit much to ask. However, there are major fundamental problems confronting the USPS, issues apart from the aforementioned external pressures that, in and of themselves, appear daunting. There is no one pill that the USPS can take to cure all of its ills, and despite the fact that a postal reform package was just passed in 2006, it's clear that another round of reform on a smaller scale may be just what the doctor ordered.

But it's never that simple when the U.S. government is involved. Corbett sees value in a second round of reform, or legislation that can provide flexibility to the USPS in areas including:

• Reducing delivery days by one to slice $3 billion in costs;

• Addressing the retiree healthcare funding issue without making it an albatross that puts the USPS at a competitive disadvantage;

• Allowing more flexibility to institute pricing changes; and

• Providing more autonomy regarding the network configuration of the USPS, which will underscore a commitment to customer service and efficiency.

Help could be on the way. In January, the USPS Office of Inspector General (OIG) released a study that shows the current system of funding the Civil Service Retirement System (CSRS) pension obligation is "inequitable" and, as a result, the USPS has overpaid the pension fund by $75 billion.

If the overcharge was used to prepay the USPS health benefits fund, the OIG estimates that all accrued healthcare liabilities would be met, and the need for the $5.5 billion annual payment would be eliminated. Moreover, the health benefits fund could then serve its intended purpose of making the annual payment for current retiree benefits ($2 billion in 2009, according to the OIG).

Corbett believes the report is fair, balanced and provides evidence that the USPS is at a disadvantage since it is funding legacy costs from current commercial revenue streams. If the organization is to effectively and fairly compete with FedEx and UPS, Corbett believes the civil service retirement funding schedule must be revisited.

"We have almost $8 billion a year in obligations for retiree health funding, which is well in excess of 10 percent of our revenues," he says. "That is higher than any commercial company in the country is required to pay. Other federal agencies don't pay any pre-funding. It puts us in a situation where we're not on a level playing field with our competitors or even other government agencies.

"We hope that there's a movement to change the law so that our funding is deferred and perhaps—as a result of some reallocation of the $75 billion in retirement funding—not just defer it, but eliminate it as a result of people realizing that we have funded far more than the fair portion of these payments going forward," Corbett adds.

Path to Fiscal Soundness

The USPS is looking high and low for ways it can cut costs and be fiscally viable, as well as improve its product and service model. The latter objective is perhaps the driving force behind the review of 3,000 stations and branches, an initiative that has whittled candidates for closure down to about 150.

Those outlets that are actually closed will be done so out of customer service considerations, according to Corbett, or because a branch in question is no longer necessary due to consolidation.

"We'll continue to look at the retail end, mostly with the focus of making sure that we have the appropriate lobby time and access to postal services and locations throughout the country," he says. "We need to do that to be efficient, regardless of what happens to some of the other bigger ticket items."

One of the big ticket items is the USPS reducing delivery from six days a week to five. Corbett estimates the postal service could save about $3 billion a year in costs as a result of the reduction, about 10 percent of the $30 billion it spends annually on delivery. Mail processing would still continue on this second non-delivery day, he notes, which accounts for the cost discrepancy of removing one-sixth of delivery days (17 percent) while saving 10 percent.

Regardless, such a move—in tandem with lifting the CSRS funding obligation—could bring Mr. ZIP and friends closer to the break-even point.

Extending Beyond Mail

Given the volume decline of more than 25 billion pieces of mail in 2009, there has been much speculation that the USPS needs to branch out into ancillary products and services to ensure its future as an ongoing concern. Corbett points to the addition of greeting cards at retail outlets. In fact, card sales have been robust enough to reduce the net loss of certain outlets that otherwise would suffer losses and see their status jeopardized.

Future ancillary offerings are not likely to fall far from the current USPS tree. Thus, it is doubtful Americans will ever see banking and insurance business—commonly transacted in foreign posts—ever coming to their neighborhood post offices. Corbett contends that it would be nearly impossible for the USPS to engage in such business given federal regulatory constraints.

"In the U.S., there's a fairly bright line drawn between the government and private business," he explains.

Corbett notes that while the USPS is considering all options that can augment the 235-year-old institution's bottom line, more focus is being placed on core offerings. Priority Mail is one such success story. With its change in pricing, backed by an aggressive advertising campaign, Priority Mail flat rate box revenue has had solid double-digit growth. Perhaps an improved overall marketing plan, and not an overhaul, might better serve the USPS going forward.

"If we're put on a level playing field with our competitors, like FedEx and UPS," he concludes, "with the same flexibility they enjoy and without the heavy burden of our employee retiree health benefit pre-funding, we could be as profitable, if not more so, than they are. It will take a multifaceted solution, and we're starting to see signs that it will happen." PI