What Does Postal Service Insolvency Mean?

Insolvent: 
(A) having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute; (B) being unable to pay debts as they become due; or (C) being insolvent within the meaning of federal bankruptcy law. [Universal Commercial Code § 1-201(b) (22)]

Yesterday, Deputy Postmaster General Ronald Stroman told the Federal Times that the Postal Service would be insolvent in August, 2012.  Based on the legal definition of insolvent, this means that in August, 2012 the Postal Service will stop paying its debts that it does not disputes it owes.

Even though the Postal Service stopped making payments on debts a few months ago when it did not make an $800 million FERS payment, it was not technically insolvent because the obligation was disputed.  The same will be true this fall in regard to theretiree healthcare liability payment. 

Those debts that the Postal Service does not dispute include interest and principle on loans, payments to OPM for employee benefits, employer share of tax payments, payroll, contractor payments, and utility bills to name a few.  In October, 2011, if any of the Federal Government payments due and not paid are not in dispute, then the Postal Service will be by definition insolvent then.

So what happens in August 2012?

According to Postal Service CFO Joseph Corbett's statement at MTAC on Wednesday, this does not mean the Postal Service will shut down.

USPS will not "shut down" in July or August, 2012 due to cash crunch because they'll have about $2 billion in cash from not paying CSRS or FERS, plus $2 billion from [cash carried over] from Quarter 3. USPS has a total $10 billion in government payments per year which will be paid after suppliers and employees, if at all, until legislation intervenes. Any shut-down is only theoretic. Will. Not. Happen.
[Reported in a tweet of @nonprofitpostal]

This is different from what nonprofitpostal tweeted that he said at the MTAC meeting in May when the Postal Service first stated that it would stop making payments on disputed obligations to OPM.

"assuming no legislation, and no worse news, the USPS starts shutting down July 2012 when it runs out of operating cash."

Since May, there has been worse news as the consensus about the prospects for the economy has worsened.  Recession appears close in Europe which could tip the U.S. economy into one as well.   The Postal Service, itself, admitted that its prospects are worse than it previously believed through the dramatic proposals to reshape the business announced in White Papers and at MTAC.

So how does the Postal Service keep from shutting down, which would happen if it stopped paying contractors or stopped making payroll? 

It stops paying the Federal Government. It is clear that the Postal Service will not make disputed payments for FERS and retiree health benefit obligations.  These total $6.3 billion.  What is not clear is what obligations constitute the remaining $3.7 billion represent.  Based on DPMG Stroman, it would appear that the Postal Service does not dispute these obligations and would fall into default when they are not paid.  The difference between August, 2012 and October 2012 reflect the difference between when the Postal Service will know it cannot pay its debts and when that actually happens.

So what does this all mean?

• The Postal Service does not believe the Federal Government would demand payments, stop paying benefits to postal employees and retirees, stop writing checks to employees due workers compensation payments. or require liqidation  of assets to cover debts.  The Federal Government is perceived to be different than all other creditors who would stop services if not paid.
• The longer Congress waits to take action the greater the Postal Service's undispuuted upaid obligations to the Federal Governmenment will become.  Also, the delay in fixing the problem that caused by waiting for recomendations of new overseers, as included in Representatives Issa and Ross's legislative proposal, would likely make the size of these unpaid obligations grow even more.