How Bad Is the Postal Service's Financial Position?

The Postal Service released its preliminary financial result for July, and as expected they were not good.  Combined with information provided in it 3rd quarter 10-Q, a fairly clear picture of the Postal Service's financial situation at the end of the year and beyond appears.

Measure of Financial Insolvency
The Postal Service is insolvent when it cannot pay its undisputed obligations.   In order to cover these obligations, the Postal Service needs to have sufficient net revenue and borrowing capability to pay undisputed obligations As of July 31, these were as follows:

Revenue Less Undisputed Obligations (Through July, 2011)

• Total Revenue:      $55.821 billion
• Total Costs:            $59.921 billion
• Operating Expenses $56.667 billion
• Net Interest Payments $0.123 billion
• Retiree Health Benefit Premium (non-PAEA) approx. $2.020 billion
• Workers Compensation Expense approx. $1.111 billion
• Solvency Focused Net Income (Loss): ($4.1 billion)  

With two more months to go in the fiscal year, the Postal Service's solvency focused net losses will increase by over $1.5 billion.  This will leave the Postal Service with around $5.6 billion in FY 2011 obligations that it will not have cash coming from postage revenue to cover. 

Ability to Borrow:
As of the end of June, 2011, total Postal Service debt is 12.692 billion.  This gives the Postal Service $2.308 billion in unused borrowing capacity.  This is less than the $5.6 billion in debt the Postal Service would need to add to cover non PAEA obligations.  

Extent of Insolvency
The Postal Service's insolvency at the end of fiscal year 2011 will be the difference between its undisputed obligations and its ability to pay.  Based on the estimates above, the Postal Service will have to default on $3.292 billion of its bills and interest payments.  As the Postal Service pays most of its bills within 30 days and payroll more frequently, it is clear that the Postal Service will not pay the following bills over the next 90 days:

• non-PAEA retiree health benefit payment
• Workers compensation liability premium
• Interest on debt

If losses are larger than projected in the last two months, the Postal Service may have to delay payments to Postal Service contractors until it has sufficient cash to cover its September bills and may have to pick and choose which contractors receive payment within 60 days and which ones may find even longer delays before their bills are paid.

Measure of Financial Viability

The Postal Service's financial problems go beyond insolvency.   In order to come up with cash to cover current bills, the Postal Service has been cutting nearly all investments designed to make the business relevant 5-10 years into the future.  These include investments in information technology, vehicles, facilities, retail modernization, and sortation equipment.   The continuing problems with OSHA violations also are symptomatic of the problems that deferred maintenance and training has on the physical plant and safe operation of postal facilities.  Finally, the Postal Service has to come up with cash to cover early retirement incentives and severance expenses if the Postal Service downsizes to meet the expected volumes of mail that the Postal Service will deliver in 5 and 10 years.

There is no information available as to the difference between the capital that is needed to ensure that the Postal Service remains a viable delivery entity for the next decade and what it is now spending or expects to have to spend in 2012 and beyond.  The cost of vehicles recently was estimated at $ 7 billion.  The Postal Service has estimates of the capital costs of information system and other capital programs that have been deferred.   The cost of severance and early retirement payments can be calculated.   If I were to guess, and this is only a guess, the Postal Service most likely needs $2 to 4 billion in cash for the next 5 years to cover its capital needs and the cost of transitioning to the volume reality of 2020. 

What Congress Needs to Do

Within two weeks, the Senate committee that oversee the Postal Service will hold ahearing on the future of the Postal Service.  This hearing will focus on the proposals that the Postal Service has made to transform its business strategy to one that would have ensure that revenue each year covers its undisputed obligations.   The numbers above suggest that this focus does not go far enough.

Congress needs to ask the Postal Service what its cash needs are so that the full extent of the Postal Service's financial problems are known.   Until that happens, no one will know whether any legislative solution or all of the legislative solutions introduced to date would be enough to ensure that the Postal Service continues to serve the American people in 2020.

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Update: 8/28/2011
Additional discussion regarding the framework of a legislative package that can be found in the Post:
PAEA, Retitee Health Benefits and Postal Finances.   This post was written as a response to confusion created by an error in the original version of this post that listed PAEA retiree health benefit payment as one of th undispusted obligations that he Postal Service will not pay instead of the non-PAEA obliation to cover year-to-year changes in the liability.  The recommendation includes five parts:

1. adjustments to the Postal Service's retiree beneifits liablity and payments;
2. increased acccess to debt to cover losses and capital spending needs to allow the Postal Service to handle the switch to a leaner organization;
3. changes to labor contracts in order to allow adjustments in the workforce to reflect the loss of First Class mail volume;
4. Increases in rates; and
5. A study of the capial needs of the Postal Service in order to fully frame its capital needs.