The Postal Service Should Default on its Retiree Healthcare Obligation

The Postal Service is broke.   It has expenses far above revenue and has contract agreements and accounts payables far above its ability to pay.    Besides payroll its largest obligations are to the Federal government and transportation companies like FedEx.  It cannot afford to offer the services it is required to provide.  A recent report from the USPS Office of Inspector General states that the Postal Service is even less likely to be financially viable under the current operating model if volumes continue to decline.

In this financial state, the Postal Service must default in its obligations to the Federal Government and force Congress and the administration to choose between restructuring and liquidation.  Clearly, liquidation is not an option as the economic impact of ending mail service would be catastrophic and shifting mail delivery to the private sector would require a significant gap in time when no service would exist.

Default would force OMB and Congress to act and should force changes both at the Board of Governors (BOG) and senior management.  As such, the BOG and Postal management need to take an action that could cost them their jobs.

What would a restructuring look like?

• Introduction of a financial target requiring revenue greater than what is needed to ensure accounting break even as that target does not ensure financial self sufficiency.
  
• Immediate implementation of the Office of Inspector General's plan to cut area and district level employees.   Even if the plan is not perfect, there is not the money available to wait for a better plan.
  
• A new operating plan for handling bulk flats and sorting them to carrier route sequence order using a network of between 50 and 100 facilities.
  
• Streamlined review of network consolidation proposals under consideration.   The goal would be to implement consolidation proposals already announced in the second and third quarters of FY '11.  This cuts the normal time needed to implement consolidation efforts by six months or more.
  
• A second set of consolidations would be introduced for FY '12 by July of 2011.
  
• Increases in rates.   Rates would rise immediately on single piece mail to generate revenue to cover severance and other costs of reducing the workforce for this rapidly declining product and parcel services to both cover costs and/or match rate increases of UPS and FedEx.  Increases in rates for advertising focused mail would likely follow both the timing and size in increases in rates that other traditional advertising media charge as advertising rebounds with the pick-up in consumer spending that appears to be accelerating.
  
• Introduction of geographically based prices for drop shipped mail and parcels.   This will raise rates in low density areas and lower them in high density areas.  On average this will not affect rates and could expand mail use in areas that have lower delivery costs.
  
• All labor contracts would expire with the restructuring.    New contracts would show limited deference to work rules, compensation and other provisions in existing contracts.
  
• Consolidate retail services into fewer locations open for longer hours and self service locations by the end of FY 2012.

What would the Federal Government have to cover?

•  Most if not all of the retiree heath care costs.   Congress would have to accept modifications in the CSRS calculation and use the overpayment to pay off most of the retiree health care
  obligation and accept modifications in retiree health care calculations in order to reduce the remaining liability.
  
• The costs of early retirement incentives and severance payments to reduce the work force.
  
• All capital costs to rapidly expand self-service to retail using proven technology.  
  
• All capital and other transition costs associated with consolidation and closing facilities.

This is not a pretty picture.  Statements from members of Congress do not suggest that they are yet ready to give current management another year of relief from retiree health care payments, and forcing receivership of the Postal Service goes far beyond that step.  However, Postal management should eschew their self interest and default on the retiree health care payments to force Congress's hand. Then and only then, will Congress look for solutions that go beyond tweaking the status quo.


9/30/2010 - Two changes were made in this post from the original version to correct errors.   Accounts payable replaced accounts receivable in the first paragraph.  Both are bad but as the USPS collects revenue up front it has minimal accounts receivable.  It does have substantial accounts payable and other liabilities that need to be paid for which it does not have needed revenue.  The paragraph on geographically oriented rates would was changed to correct an error regarding rates to high density areas.   Rates there would go down not up.  Geographically oriented rates are used outside of the US by postal operators for providing only last mile services as a means to prevent cream skimming either in terms of creating a competing delivery service or exploiting anomalies in the rate structure as compared to the cost structure in ways that would cause the Post to handle substantial volumes below costs

Putting the Subcommittee Vote in Context

Most postal stakeholders are please that the House Subcommittee on the Federal Workforce, the Postal
Service and District of Columbia approved H.R. 5746, “the U.S. Postal Service CSRS Obligation Modification Act of 2010.”  However, anyone who listened to the arguments against the bill made by Congressman Jason Chaffetz (R-UT) would quickly see that this bill could quickly become part of the partisan fodder that infests nearly all legislation in Congress.

Even though the Democratic majorities in the full committee make it likely that the bill could reach the House floor, there are potential landmines in the legislative process that could still derail its passage.  These include:

•  The limited number of days in the legislative calendar.   It is difficult to get a new bill passed given what is already on the Congress's plate.   The bottleneck is tighter in the Senate than it is in the House but time is limited in both chambers. The legislative calendar becomes even a greater roadblock if the issue becomes a partisan hot button as opponents have many opportunities to delay action and cause the legislative clock to run out.
• The difficulty of getting any Republican support in the House or Senate for a bill that "increases" the budget deficit.    It is not hard to imagine those opposed to this bill calling it a "bailout for a failing government agency."   It is not clear what the upside is for Republicans supporting this bill before the election.
• Budget concerns among blue-dog Democrats that could make finding a House majority difficult if there is no Republican support.  The development of a budget focused caucus among moderate Democrats suggest that the budget impact of all legislation will increase in importance in the House for the remainder of this session.   There is no reason to suggest that the next Congress will be less budget-focused than the current one.
• The challenge of getting 60 votes in the Senate.  Passing any change in the retirement liability in the Senate will likely depend on what it takes to gain the vote of between one and  five Republicans depending upon whether there are any Democrats who object to the change.   While Senator Susan Collins will clearly be a major player, others whose votes could determine passage includes Senators Scott Brown (R-MA), Lisa Murkosky (R-AK), Olympia Snowe (R-ME),  and George Voinovich (R-OH).

So while the National Association of Postal Supervisors and other stakeholders can celebrate this first step, they still have a lot of work ahead of them if the legislative language contained in H.R. 5746 is to become law.