Tuesday, August 10, 2010

Would fixing the retiree health issue "solve" the liquidity problem?

A number of comments on my piece highlighting the problem of Postal Service liquidity suggested that fixing the retiree health issue would solve the liquidity problem.   This is easily evaluated by asking the following question. 

If one assumes that the Postal Service no longer had retiree health care payments, would its liquidity improve sufficiently to move it away from a range commonly found among firms that face bankruptcy in the private sector?

The following table answers this question.   It updates the liquidity measure contained in the previous post by eliminating retiree health care expenses as a current liability.

Removing the retiree health care expense improves the current ratio from 0.13 to 0.17.   It still is far below the ratios of firms that either went through bankruptcy proceedings or had the equivalent of a bankruptcy proceeding.

The current ratio is not the only way to measure liquidity.    Another way is to look at cash the Postal Service has already received for services not yet rendered and its available cash.   Given that the Postal Service is operating at a loss with retiree health expenses and break even without this expense, one can assume that the cost of providing the service in the future will equal or exceed the revenue already collected.   Here are the figures:

  • $4.909 billion -- Revenue collected for services to be rendered   
  • $1.014 billion -- Cash on hand
  • $3.894 billion -- Cash shortfall to be born by future Postal Service customers
The decline in mail volume, and in particular high-margin First Class mail, exacerbates the problem of not having sufficient cash to provide the services already paid for.   As time passes, the Postal Service will need either even greater cost cuts or rate increases to build up its cash reserves to the point that it has the cash to cover the costs of services that it has already promised to deliver.

The liquidity problem should be a concern to all stakeholders.    The future of viable self-sufficient means of delivering the 150 billion pieces of hard copy communications and parcels expected to be sent in 2020 depend on solving this problem.  


Anonymous said...


Anonymous said...

Alan, I've found your posts to be some of the most analytical and informative available. But I fail to understand the point of this post and your last. Despite all the rhetoric to the contrary, USPS is not a real business (else they would have declared bankruptcy long ago). In my opinion, you're comparing apples to oranges, which is of no value.

Drewk86 said...

You article fails to account for the $50 - $75 BILLION the USPS overpaid into the CSRS retirement fund. That money should be returned to the USPS which could then pay off the $12 billion debt AND fully fund the future retiree health benefits required by the PAEA.

Without the PAEA payment requirements the USPS would have shown a profit in three of the last four years.

Anonymous said...

Your analysis of liquidity smacks of the same financial figuring that the Postal Service uses to try and convince Congress it is financially worse off than it really is or will be. Revenue for services in the future I assume includes Philatelic collectibles that mostly will never be used for services. I agree with the commenter that The Postal Service is not a business but a public service and as such is/was mandated to have a break even point. Whats happened is management is trying to run it like a business ( management bonuses, contract violations that make numbers look good but cost millions when they lose at arbitration, OSHA fines of around $4 million dollars instead of safe working conditions, Postal headquarters that resembles a corporate board room with upteen Vice-Presidents and last but not least a Postmaster General retirement package worth over a million dollars. The retirement package is because they are not allowed to pay the Postmaster General more than his salary is, so thay take all his bonuses and bank them and pay accrued interest every year. So lets get the Postal Service back under Congress and the Postmaster General back to being a Cabinet position, so that Service may once again be said in the same breath as Postal.

Anonymous said...

and when the billions are credited back to the usps that it already overpaid..the 12 billion debt would be gone,pre-funding would be totally funded and the fund set up with the billions left could be used to pay as you go for retirees..the usps has not lost money and this will make it stronger

Anonymous said...

How does your comparisons work if Congress returned the 72+ billion the USPS has overpaid into the CSRS fund????

uncommon sense said...

Dear anonymous,
The USPS currently is not required to make any payments to the CSRS retirement fund. CSRS employees benefits are paid up and they are the cheapest career employees per hour for the USPS.
Now FERS employees are costing about an extra 20% above their salaries in payments to the FERS retirement system, matching TSP contributions, and Social Security.
So it would be much more cost efficient for the USPS to lay off the newer FERS employees without a contractual employment guarantee than to lose the low cost CSRS workforce.

uncommon sense said...

I believe that the current ratio as it is typically applied has a couple major flaws in measuring the liquidity situation of the postal service.

1) Access to additional liquidity at any private company that is in very poor financial straits is very limited and can quickly disappear if the banks and or market decide the risk is too great. Consequently they tend to draw down all of their credit lines and build up their cash to try and weather the storm. This increases the asset side of their current ratio equation. The USPS has access to a certain level of liquidity from the treasury by law on relatively short notice. This is not fickle, but borrowing it does incur interest charges. That is why the USPS tends to pay down this line of credit and not borrow all of it to hoard on its balance sheet as a private company would. The available amount was about $7.6 Billion as of 6/30. In order to create a “current ratio” that compares liquidity to that of a private company I think you should add this readily available cash to the asset side of the formula.

2) Short term borrowings are a danger and considered in the current ratio of companies because they are upcoming required payments. The USPS short term borrowings are from the treasury and have no risk of being required to be repaid in the short term. They have the guaranteed right to roll them over. The only thing short term about them is that they don’t have a long term interest rate and the rate on them can change. Thus they do not present the same pressure as a short term loan on a troubled private company. They are much more like the pressure of long term loans on a private company. So in order to create a “current ratio” that is comparable, for liquidity purposes, to a private company I think you should back this out of the liability side of the equation.

Making these 2 adjustments gives you a current ration of .71 (including retiree healthcare liabilities) or 1.02 (excluding them). Much better than the picture you paint but still not good at all.

Anonymous said...

Where do you people get your numbers from. According to Tom Kiley, senior adviser at the Econonomic Policy Institute, "The Postal Service's retiree health obligations are already 41 percent pre-funded, enough to cover all benefits through 2025". That link is here: http://www.novapcc.org/en/art/884/
I recently read (but I can't find the source off hand) that that amounts to a current balance of $35 billion dollars. However a January 8, 2009 letter from the post master general stated "The Postal Service Retiree Health Benefits Fund has a balance of $32 billion."
That link is here: http://www.usps.com/communications/newsroom/testimony/2009/pr09_pmg0128.htm?from=home_newsandannounce&page=PMGSenateTestimony
In addition, according to the Office of the Inspector General, The USPS has overpaid $75 billion dollars. That link is here: http://www.apwu.org/news/burrus/2010/update03-2010-100120-report.pdf
The Postal Regulatory Commission was ordered to recalculate this overpayment and on June 30, 2010 it released it's report stating that the Postal Service has been overcharged by anywhere from $50 billion to $55 billion-if not more-for Civil Service Retirement System pension costs related to work performed by the taxpayer-supported Post Office Department before it was replaced by the self-sufficient U.S. Postal Service in 1971. "Segal finds that the current allocation overstates USPS
responsibility for CSRS payments to former POD employees, and estimates assets currently
allocated for that purpose fall short of an equitable allocation by $50 to $55 billion." That link is here: http://www.prc.gov/%28S%282135bq45s1rtfo45gjhii4ec%29%29/prc-docs/home/whatsnew/CSRS%20transmittal%20ltr%20to%20Potter_1123.pdf
So if you add the smaller conservative amount of $50 billion dollars and the current balance in the retiree health benefit fund ($35 billion dollars) that gives you $85 billion in assets alone. I'd say we're in pretty good shape. Now it's just a matter of getting the government to do the right thing and refund the Postal Services money.