Thursday, March 25, 2010

USPS: February Financial Results, Still Not Good Enough

In February, the Postal Service continued to show financial results that were significantly better than plan and slightly better than last year.   Its results reflect a more robust advertising environment that resulted in the first month of growth in Standard mail volume in revenue this year and a smaller decline in periodical revenue than volume that most likely indicated that periodicals in February had more advertising pages per issue than a year earlier.

The results for February continue to illustrate the risks going forward for the Postal Service.  The continuation of high single digit declines in First Class mail at a time that advertising is flat if not growing, suggests that the shift of transaction and correspondence mail to digital formats now occurs at a rate faster than what occurred before the recession. Excluding the holiday season, November and December, First Class mail volume has decline year-over-year at a 10.4% rate.   First Class revenue in the non-holiday months declined at a 7.8% rate   

While it is clear that the Postal Service's financial results are better than plan they are not sufficient to ensure its self sufficiency.  The following chart traces the monthly EBITDA ratio (earnings before interest, taxes, depreciation, and amortization divided by revenue) with and without the retiree health payment. The chart shows that removing the retiree health payment would result in the Postal Service earning a small operating profit every month this year.   The chart also shows that removing the retiree health payment is not sufficient to ensure postal self sufficiency as self sufficiency would require an annual EBITDA ratio of between 10% and 15%.  After five months the Postal Service's EBITDA ratio is 9.8% if you exclude the retiree health payments.  This ratio will decline between now and the end of the fiscal year as the Postal Service faces 6 to 8 more months of seasonally lower revenues and volumes that traditionally results in monthly financial returns that fall below the annual average. 

Financial self sufficiency requires the Postal Service to increase revenues by 5 to 6%, reduce costs by around 6% beyond what its current efforts produce, or some combination of the two in addition to the removal of the retiree health payments to become self sufficient.   More importantly, the Postal Service needs to find the fastest way to increase its EBITDA ratio in order to generate the cash necessary to cover the transition costs that creating a Postal Service that efficiency delivers universal service for mailers that mail only 150 billion pieces annually, most of which will be advertising.

Currently, the easiest option to make the changes necessary is for the Postal Service to raise rates.  The process to raise rates is known as is the time that would pass between the filing of the case and the implementation of higher rates. The Postal Service will file an exigent rate case asking for an increase of around 5% this summer, a rate increase that would be nearly sufficient to generate an EBITDA ratio excluding retiree health benefit payments to put the Postal Service close to a level of self sufficiency.  If the retiree payment issue is not resolved in the Postal Service's favor than double-digit rate increases would be required.   

If the retiree health care issue is not resolved by the time the Postal Regulatory Commission files its opinion on the exigent rate case, Postal Regulatory Commission precedent suggests that the PRC may have little choice but to recommend the double-digit rate increase necessary to cover the retiree health payments. The only caveat relates to the 5-day proposal, as the Postal Regulatory Commission could take into account savings from the 5-day delivery proposal in recommending rates.  However, I am not sure as to whether the 5-day delivery proceeding could be resolved before an exigent rate case is completed.

All other options require Congressional approval (e.g. 5-day delivery, and modifying the retiree health payments), freedom from Congressional interference (e.g. network optimization) and/or negotiations with unions (e.g. changes in work rules including increasing the proportion of part time employees, a process to manage employee dislocation during optimization including localized early retirement incentives and severance pay for layoffs when needed ).  In addition all of the significant cost savings options take more time from proposal to implementation than increasing rates and some will have transition costs to deal with employee dislocation.

The Postal Service will start the clock running on 5-day delivery within the next week.   It should see if it can start the clock on the other initiatives and negotiations sooner than now planned.  Otherwise, it will have no choice but raise rates repeatedly at a time that its customers increasingly find digital alternatives to be more convenient and cost effective.    


Postmarc said...

If Congress credits the USPS with the $75 BILLION DOLLARS that they overcharged for Civil Service retirement costs, there would be no need for 5-day delivery, exigent rate cases, post office closings or any other drastic measures.

The Office of the Inspector General (OIG) and The Hay Group study was released in January 2010, but the shocking results about the $75 BILLION DOLLAR overcharge have been strangely absent from media reports that like to portray the USPS as in a death spiral.

From the OIG website

January 20, 2010
New OIG Study Estimates USPS Has Been Overcharged for the CSRS Pension Fund by $75 Billion

A study just released by the U.S. Postal Service’s Office of Inspector General (OIG) shows that the current system of funding the Postal Service’s Civil Service Retirement System pension responsibility is inequitable and has resulted in the Postal Service overpaying $75 billion to the pension fund.

The OIG estimates that if the overcharge was used to prepay the Postal Service’s health benefits fund, it would fully meet all of the Postal Service’s accrued retiree health care liabilities and eliminate the need for the required annual payments of more than $5 billion. Also, the health benefits fund could immediately start meeting its intended purpose -- paying the annual payment for current retirees, which was $2 billion in 2009.

This marks the third time the Postal Service has been overcharged. In 2002 it was determined the Postal Service would overfund CSRS by $78 billion. Legislation in 2003 corrected this overfunding. Then it was determined the Postal Service was overcharged $27 billion for CSRS military service credits. In 2006 these funds were returned to the Postal Service by Congress, and the surplus was used to fund retiree health care liabilities.

This study, The Postal Service’s Share of CSRS Pension Responsibility, undertaken in conjunction with the Hay Group, is the third paper sponsored by the OIG that delves into the financial entanglements between the Postal Service and the federal government -- generally at the expense of the Postal Service. The latest study describes the inequitable allocation of CSRS costs between the federal government and the Postal Service. The other two reports focus on the Postal Service’s congressionally-mandated retiree health care prefunding payments (Estimates of Postal Service Liability for Retiree Health Care Benefits), and the Postal Service’s interaction with the federal budget (Federal Budget Treatment of the Postal Service).

Anonymous said...


how does this compare to the "projections" that were in the recent report on reinventing the postal service. I believe its been narrowly reported that year to date numbers are better than assumed in those reports....

Alan Robinson said...

My measures of financial performance are based on actual results. The projections would have been much worse. I have done the calculations but they are not relevant.