Thursday, September 1, 2011

The New Postal Service: Initial Financial Picture

On Tuesday September 6, Postmaster General Pat Donahoe will present to Congress a vision of the "New Postal Service."   This vision reflects the Postal Service's current financial situation as driven by legal and regulatory constraints.  

At the end of the fiscal year  the old Postal Service will be insolvent.  It will not have enough cash and borrowing capacity to pay its bills including bills that were not changed by the PAEA.

To understand how bad the finances, I have developed a rough estimate of the Postal Service's cash position and bills at the end of Fiscal Year 2011.  Then given the Postal Service's borrowing capacity at the end of the year, I have calculated an estimate of the difference between the Postal Service's bills and its ability to pay.

The Postal Service's Cash Position on September 30, 2011

The following estimate is based on the cash flow statement in the 2011 Quarter 3 10-Q, and  the initial financial report on July 2011. 

Postal Service End of Year Bills

At the end of the year the Postal Service has three large bills from the the Department of Labor and the Office of Personnel Management.   As the chart shows, even without the $5.5 billion PAEA retiree health benefit payment the Postal Service still has $3.6 billion in obligations.   As the previous chart shows, the Postal Service will not have the cash to pay these bills so it will need to borrow to make its payment.

Postal Service Cash with New Debt

The following chart shows how much cash the Postal Service should have available at the end of the year if it used all of its legal borrowing authority. 

Insolvency Appears Inevitable

Even if the Postal Service maxes out its debt, it still will not be able to pay all of its bills.  The Postal Service will fall $1.239 billion short of paying its non-PAEA bills.   It will be $6.739 billion short if you add in the PAEA retiree health benefit payment. 

It does appear that it will have enough cash once it adds extra debt to make the workers compensation payment, so the Department of Labor should be able to make benefit payments.   It does not appear that the Postal Service will be able to make either its non-PAEA or PAEA payments for retiree health benefits.  While it could pay a portion of the non-PAEA obligation, doing so would put it in a dangerous position of having no cash on hand when recurring bills like payroll, payments to transportation contractors and electric utilities come due.

Impact on the Federal Budget

The Postal Service's financial problems affects the Federal budget because the budget assumes that the Postal Service will make payments.  In addition the budget also assumes that the Postal Service had made the $800 million in FERS payments that it has will not have paid starting at the end of June.

In total the impact of the Federal budget will be:
  • $7.537 billion if the Postal Service pays part of the non-PAEA retiree health payment
  • $8.736 billion if the Postal Service pays none of the non-PAEA retiree health payment
What is not clear is whether this affects the FY 2011 Federal budget that ends on September 30, 2011 or the FY 2012 Federal Budget that starts October 1, 2011.  It is also possible that some of the impact will by in FY 2011 and some in FY 2012.

The Postal Service's current financial prospects suggests that it will have at least a $5.5 billion impact on the Federal budget for a couple years past 2012.  The impact reflects the fact that it is hard to imagine a financial forecast developed under current legal and regulatory constraints that would allow the Postal Service to make the PAEA retiree health beneift payments for a couple of years.

Impact on the Postal Service in FY 2012

Starting October 1, 2011, the Postal Service will have a minimal amount of cash and unpaid obligations from FY 2011 hanging over its head and will face similar obligatins at the end of FY 2012.   The Postal Service also faces a prospect that the economy will remain sluggish and therefore postal revenue will be stagnant or worse.

The "New Postal Service," reflects both this horrendous cash position and no indication that Postal Service management believes that the Postal Service will not see legislative or regulatory help in a  timely fashion.   Cutting service quality commitments is the only move available to the Postal Service that current legislative and regulatory constraints cannot stop. 

At its hearing on September 6, the Senate Committee on Homeland Security and Governmental Affairs, will hear not only a description of the "New Postal Service," but also a request for legislation to adjust labor contracts and employee benefits that management believes are needed in addition to the service quality reductions to bring the Postal Service to break-even.

The Senate committee should focus on how the "New Postal Service" changes United States Postal policy and most importantly how it affects the economic role that the Postal Service currently plays.  Developing operating models of fewer processing plants, fewer full time employees and slower service is easy.   Determining if that is what is best for the United States economy is hard and is the responsibility of Congress and not the Postal Service. 

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