Closing the USPS' Income Gap

The Public Representative performed a service for postal stakeholders in their estimates of the required rate increases to return the Postal Service to break even by 2011 under various estimates of the Postal Service’s retiree obligations. These estimates represent the worst case scenarios for mailers as they assume that the return to break even could only come from increases in rates.

Unfortunately for mailers, the Public Representatives estimates of rate increases are not enough to return the Postal Service to self sufficiency. Simply put, the break even goal for 2011, a goal that guided rate cases under the Postal Reorganization Act, is not sufficient to ensure a financially viable Postal Service. A more realistic goal would include these two parameters:

• A target for cash flow that is sufficient to fund capital expenditures, working capital, transition costs of a shrinking network and workforce and potential dividends and taxes or payments in lieu of taxes.
• An EBITDA (earnings before interest, taxes, depreciation and amortization) and an interest expense ratio such that a government guarantee would not be required to raise capital in the debt markets, even if private capital is not employed.The Postal Service may need an EBITDA of between 10% and 15% in order to generate the targeted levels of cash flow.

These targets are independent of the business model employed. They reflect goals that are necessary for both governmental and corporate business models. As such stakeholders that believe that one type of business model or another will prevent job cuts, require fewer closures and relocations of postal plants, preserve the current model of providing retail service, or prevent near-term rate increases above the current rate cap constraints will likely be disappointed if their business model choice is selected by Congress.

So what would really happen to postage rates if the Public Representative used more realistic financial targets? Using the Office of Inspector General recommendations for financial relief, postage rates might need to rise at least 25% without more aggressive actions on restructuring the operating network or modernizing the retail model. Without relief, postage rates might need to rise by 40% or more. (Both of these estimates do not account for the impact of price increases on mail volume.) Not a pretty picture and one that no postal stakeholder believes would ensure a viable postal enterprise as vibrant as it is today.