Saturday, August 27, 2011

PAEA, Retiree Health Benefits and Postal Finances

An error in the original wording of the post "How Bad is the Postal Service's Financial Condition?"   listed PAEA retiree healthcare payment as one of the undisputed obligations of the Postal Service that it will not have the cash to pay this fall.   The post has been corrected to state that the Postal Service will not have the cash to pay the non-PAEA retiree healthcare payment. 

PAEA adds an additional $5.6 billion obligation.  That obligation is on top of the $3.292 billion in undisputed obligations assoicated with non-PAEA retiree health benefit costs, workers compensation costs, and interest on Postal debt.  Clearly, the Postal Service will not be able to make its PAEA retiree benefit payment either.  In total, adding the PAEA obligation would appear to raise the Postal Service's unpaid bills to $8.9 billion.

The confusion that I caused regarding PAEA and non-PAEA retiree healthcare payments unfortunately reinforced a belief among many postal stakeholders that fixing PAEA alone would be enough to solve the Postal Service' financial problems.   The identification of uncontested obligations that the Postal Service cannot pay clearly shows that this is not the case.

The separation of PAEA obligations and the unpaid uncontested obligations also shows that the Postal Service's problems cannot be fixed only by raising the debt ceiling.   In order for the Postal Service to pay all of its obligations this year, its debt ceiling would have to rise by $9 billion and in all likelihood the debt ceiling would need to rise by billions for the next few years as well.   The debt only approach raises real questions about the ability of the Postal Service to pay back debt that could double from current levels fairly quickly.

The financial problems suggest that the solution to the Postal Service will likely include all five of the following elements:
  • Resolution of the retiree obligation dispute in the Postal Service's favor.  The Federal Government will have not choice but to take a cut in what the law now states that it is owed for retiree benefits. 
  • Increased access to debt - increased debt is needed to cover operating losses and undisputed obligations for workers compensation and retiree benefits payments set after resolution of retiree obligations dispute.
  • Cuts in operating costs - these cuts will require significant cuts in management and well as negotiations with the Postal Service unions on how the cuts in labor costs will be implemented. 

    The management cuts will likely focus on Area and District management.  Cuts large enough to reduce Area and District management to levels reccomended by the USPS-OIG are possible.

    The Postal Service's proposals on ending no-layoff clauses, eliminating limits on the use of part-time employees, and taking over all employee benefits are not far from what management facing liquidation from creditors would propose to its unionized employees in order to get the restructuring of financial obligations and increases in access to debt.  (The first two parts of a solution.)  Unions will likely be forced to negotiate significant changes in both recently signed, expired and soon to expire contracts as part of a legislative package.  Postal Unions have a real challenge working their members to ensure that the package of cuts are the least bad ones available.
  • Increases in postage rates - the Postal Service has ruled out contesting the exigent case  which eliminated the possibility of rates higher than CPI next year.   While mailers were pleased with this decision, the finances of the Postal Service are so dire that increases above inflation are likely necessary even if the Postal Service gets all that it might want in regard to retiree expenses, debt, and freedom to cut costs.  

    The focus of price increases will likely be on products that currently do not cover their attributable costs, products that have discounts due to their "social value" (i.e. non-profit mail and media mail) and on single-piece First Class mail.  Of these, adjusting First Class mail rates is most critical as it's e-communications based decline is adding millions if not billions of short-term transaction costs relating to network restructuring, retirement incentives and severance payments.  Without an increase in single-piece First Class rates, the products that remain in the mailstream  will need to cover these transistion costs which are unrelated to the production of the service that they will receive.
  • A study of Postal Service capital needs - The four other elements of this proposed solution do not ensure that the USPS can be financially viable once the immediate crisis is over.   The other four elements above may ensure only that the Postal Service breaks even within a few years.  It does not include room for investments in the network, information systems, vehicles, and employee training that will be needed to ensure that delivery needs of advertisers, parcel shippers, financial institutions, governments, and ordinary citizens in 2020.  

    Right now little is known about the capital needs of a Postal enterprise in a digital communications era.  Therefore any package will require an independent study of the capital needs of the Postal Service in order to both provide a full understanding of its current financial troubles and the development forward that ensures that the United States has a financially viable postal market.

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