Are 30,000 Enough?

Over the past several days, there has been some debate about what the 30,000 reduction in Postal Service employees really mean.   Both postalnews.com and the Washington Post have reported that 30,000 represents a combination of regular attrition and the reduction in 7,500 management positions that will be announced on March 25.

So how much will the reduction of 30,000 employees save the Postal Service?   The Postal Service's average monthly compensation cost is $6339.27 per employee.   (This works out to a salary of around $54,000 per year or $4,500 per month with the rest being the cost of employee benefits and employment taxes.)   If one assumes that retiring employees earn 15% above average then the savings per month per retiring employee is $7,290.16 per month.   Attrition then reduces the Postal Service's compensation by around $6.736 billion this year.

The March 25th announcement will just start the process of eliminating positions, so it is likely that the Postal Service will not see the full impact of the announcement until the end of June.   So the cuts in positions will cut the payroll for only three months this fiscal year.  The savings, using the same assumptions will be $306 million.

Combined the total savings is $7.042 billion.  However, even with this reduction in compensation the best the Postal Service can do is cover its operating expenses.    These cuts generate an insufficient profits and cash to cover the Postal Service's capital needs and other investments necessary to maintain universal service and transition to a leaner more efficient operation, let alone pay one dollar of the disputed retiree payments.

So let's ask a hypothetical question.   What is the total number of employees that the Postal Service can employ and still be a self-sufficient enterprise?   This question needs to be asked both with and without the retiree payments and with both current compensation levels and reduced compensation levels that would come through retirement incentives and the introduction of a two tiered wage structure. 

Assumptions

• The Postal Service does not pay any of the disputed retiree obligations.
• The average monthly compensation is $6339.27 (including all benefits and employment taxes)
• The Postal Service's revenue in 2011 will be near the plan level of $67.1 billion.
• The Postal Service needs an operating margin of 12% to be self-sufficient.
• Total costs need to be $59.1 billion.
• Cost reduction required above current plan $8 billion.
• 90% of the savings come from reduction in employees.

Result

If one assumes that salaries remain at current levels, the Postal Service must reduce its workforce by 94,648 employees to be self-sufficient.  That is close to 1/6 of the current workforce.  The number would be lower if the Postal Service is able to negotiate a two-tiered wage agreement with its unions but will still be a shockingly large number.

This little exercise should give stakeholders pause as it is clear that many things have to be put on the table to cut costs that Congress and other stakeholders are resistant to change.   These include:

1. Cut an additional 20 to 40 district offices and 1 to 2 Area offices - Cuts in management will like need to be at least twice what is announce on March 25.  The Postal Service cannot be too agressive in cutting out a layer of management.
2. Acceleration of plant consolidation - Members of Congress may object to the consolidations but they will proceed regardless of their efforts.   Future consolidations after those that will occur this year and next will likely start to require capital expenditures and the cash to finance them.
3. Modernization of the retail infrastructure - Mail services need to be accessible but the current method may be unaffordable.   A new model needs to be put into place quickly.
4. Restructuring of rural mail services - The Postal Service needs to look at the Australian model for providing service in the most rural parts of the United States.   It would require looking at rural service as a profit center that includes revenue and costs associated with retail and delivery and a major expansion of services that they are legally allowed to offer in a rural retail facility.   It may require doing what Australia Post has done and franchising to a local company to provide both the retail and delivery function.
5. Changes in civil service employment law -  Senator Susan Collins has already introduced legislation to change rules for workers compensation but more changes are needed in employment law as it affects the Postal Service.   If the Postal Service is going to implement the major operating changes required to reduce the number of employees to levels that the business can support, it needs streamlined rules to implement reductions in force and early retirement incentives. Current rules were not designed to handle the rapid reductions in employment counts that the Postal Service will need to be self-sufficient.  Without these changes, reducing the number of employees through any method other than attrition remains a difficult and expensive option to implement.
6. Five-day delivery - A switch to 5-day delivery is unlikely in the next few years.  However, unless the Postal Service can find a way to reduce its costs in other ways five-day delivery will likely need to be introduced by 2020 even if savings are well less than one billion dollars.
7. Rate increases - Rate increases above CPI have to be the last option but rate increases are probable even if the previous six changes are implemented.   In particular, single-piece First Class mail rates need to rise to cover the costs of reducing the number of employees to reflect the rapid decline in these employees and the future liabilities for their retiree expenses.  Rates for the Postal Service's largest mailers will also likely rise with some loss in volume

As the last oversight hearing showed, the Federal government is a creditor that holds a note (legislated retiree health-care obligation payments) that the Postal Service has stated it will not pay.   In the private sector, creditors faced with situation would be forced to put the enterprise that will default on its obligations into bankruptcy to see how it can be repaid either through liquidation or restructuring.   As the equivalent of the creditor committee, Congress needs to quickly figure out if there is a plan that can put the Postal Service on the road to self-sufficiency that would allow it to pay some or all of the retiree-obligations that are currently baked into the Federal budget.