The Myth of Independence

Since its inception, the Postal Service and its supporters have touted its existence as a self supporting entity. In practice, self-supporting has not meant independence.

The lack of independence reflects the Postal Service’s ties to the federal budget. Since the 1980’s Congress and the President have manipulated both the budget process, measurement of Postal Service liabilities for retiree benefits, and payment schedules for retiree benefits as means to reduce the deficit. Currently two issues have the biggest financial impact: 1) requiring the Postal Service to pay for retirement benefits of its employees that were accrued during military service; and 2) requiring the Postal Service to pay fund retiree health benefit at a rate that is faster than is required by private sector GAAP. In addition, Congress has used legislation to direct management regarding the shape of its operating network, its ability to adjust pay and benefits, and the quality of service offered.

All of these actions are well documented in a recent report of the USPS Office of Inspector General entitled, “Federal Budget Treatment of the Postal Service.” The report has a major failing for use in the upcoming postal policy debate. It does not quantify the impact of each of the budgetary and legislative actions on the Postal Service’s finances. The USPS OIG would serve the postal community well if it would provide a second report quantifying the impact of each of the Congressional and Executive actions that it documents.

The budgetary impact is most pernicious because Congress has caused the Postal Service to charge its customers higher rates, and hold investment spending and cash reserves below prudent levels. In essence, the actions of Congress and prior administrations have treated the Postal Service as a cash cow that could provide needed real or accounting contributions to the Federal Budget in order to meet specific deficit targets or as a condition for passing postal reform legislation.

Congress’s actions are nearly the equivalent of a board of directors leveraging a companies assets and raising dividends to drain corporate cash to the point that when more challenging economic times come the corporation is thrown into bankruptcy. In such situations, customers would generally be upset as service quality would drop and prices would rise to deal with the financial strain.

The Postal Service‘s connections to the federal budget is unique among national postal operators. Equally unique is the Postal Service’s dire financial position. Unfortunately, rectifying this problem and making the Postal Service truly “independent” will have an impact on the federal budget in the year that this occurs. Also there is no guarantee that if the Postal Service generates reasonable levels of cash reserves in the future, that Congress or the executive would attempt to raid those reserves to reduce the federal budget deficit.

Not being independent also means that the Postal Service cannot be self sufficient in a way that best serves the interests of its customers and employees. Self-sufficiency requires a specific level of return or operating margin in order for the Postal Service to have sufficient cash for investments, transition costs when restructuring operations, and covering losses during difficult economic times.For most of its existence, the Postal Service focused on a “budget-like” definition of self-supporting that required only that it break-even over-time on an accounting basis. As such it ran its finances within a three-year rate case cycle that on average generated no operating margin so that it had to use its borrowing capacity and limited cash reserves to deal with the losses that occurred within a cycle.

By not having a target return or operating margin, the Postal Service was financially ill prepared for necessary investments in automation, material handling, and backbone computing systems that were necessary to keep mail competitive. As such, these investments were spread out over an extended period of time that made getting the full benefits of modernization more difficult. The lack of investment capital also required the Postal Service to encourage mailers to make investments in automation equipment that the Postal Service could not.

The lack of independence has had two impacts on employees. First, by weakening the Postal Services ability to have necessary cash for investments, the Postal Service encouraged worksharing to sort mail that required equipment that it could not afford to buy. Second, pay may have been held down because slowing down the benefits of automation and material handling equipment resulted in lost “profits” that would likely have been shared by customers and employees.

With the Postal Service's current financial challenges likely to continue at least through fiscal year 2010, stakeholders are now beginning to discuss the possibility of new postal reform legislation. Making the Postal Service truly independent may provide stakeholders the only hope to ensure that the Postal Service has reasonable prospects for a stable future.