Is it Cheaper to Offer Early Retirement?

In a recent article in Sioux City Journal on the moving of mail processing from Sioux City, IA to Sioux Falls, SD, Jim Price, Sioux City Postal Workers Union Local 186 officer contends that, "Employees who would drive from Sioux City to Sioux Falls and back would include that drive-time as part of their work day."   The map below shows the shortest route from Google maps between Sioux City, IA and Sioux Falls.  The distance is 87.9 miles with most of the miles on Interstate Highway 29.   



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If Mr. Price is correct, the Postal Service will be paying employees that commute to Sioux Falls for 3 hours of driving time daily.  This makes little sense for the Postal Service or the employee.   [I urge readers of this blog to add a comment referencing Postal or employee contract documents that describe the basis for Mr. Price's comments.]  

If true, the Postal Service would be well served to offer employees in Sioux City and Sioux Falls early retirement.  This saves the Postal Service money in two ways.  First, early retirement would save the Postal Service $506 per week associated with pay for commuting costs.   Second, if a new employee is needed to fill a position that the newly retired employee would take, his/her compensation would be lower than the salary of the retired employee.   If the compensation difference between an employee at the top of the pay is $10 per hour, the Postal Service would save $400 per week to switch by replacing a retiree with a new hire.  

In total, offering early retirement would save the Postal Service around $900 per week.   In other words, the Postal Service would break even by offering a $15,000 incentive if the employee would retire 17 weeks (3 months) earlier than they might otherwise.   The savings would be larger if no new employee needs to be employed.  

This simple calculation suggests that any time a consolidation of plants would involve paying for any commuting time between two locations, early retirement incentives of $15,000 to employees at the consolidated plant community would be well worth it.   Given how quickly the Postal Service covers the cost of the retirement incentive, the Postal Service might even find it worthwhile to pay the incentives in one payment unless the employee prefers two payments for tax purposes.  

The savings from early retirement identified here raises two more interesting questions.  Could offering early retirement incentives in selected cities to APWU members and either not replacing these employees, or replacing them with lower-paid new hires reduce the Postal Service's expenses in fiscal year 2012?  Does the Postal Service have the cash needed to offer these incentives?

When Will the Postal Service Reduce Staff?

The Postal Service has published a detailed schedule of dates that are important for employees whose jobs will be affected by the management restructuring.  Anyone who could be affected should print out, or bookmark this schedule and add the key dates to their smartphone calendar so they are sure act by the required deadlines if they plan to take advantage of early retirement or will need to find a new job within the Postal Service.

For those outside of the Postal Service, only those dates on which current Postal employees will leave employment matter.  These are the dates that the Postal Service begins experiencing cost savings from either early retirements or RIF's.  These dates are:

• May 31, 2011 - effective retirement date for individuals taking VERA or retirement incentives
• September 9, 2011 - last separation date for RIF although some will separate earlier

How much the Postal Service saves this year depends on how many of the 7,500 reductions in management employees take early retirement and how many are laid off in a RIF.  

The Postal Service will save 1/4 of a year's compensation from everyone who retires this fiscal year while the incentive will not show up on the income statement until fiscal years 2012 and 2013.  Savings for those who are RIF'ed is limited to one month of FY 2011 salary.  Some individuals who are RIF'ed may face separation before that date but it is not clear at this point how many.

RIF's have other costs associated with unemployment insurance and possibly severance payments.   I have read the civil service RIF rules but find them confusing so I am not sure how provision for separation payments would apply to Postal Service employees.  With a September 9th separation date, it is likely that most of the costs of a RIF would occur in FY 2012.

Is the APWU Contract Good for Creditors and Shareholders?

Up till now all of the information about the new 4 1/2 year agreement between the American Postal Workers Union (APWU) and the Postal Service has come from the union.  With an agreement in hand, the union needs to sell its members that the contract is good for them so that rank and file members approve it.  The APWU has an aggressive effort to sell the contract to members which has included so far the APWU news bulletin on the contract, a PowerPoint presentation, a Web post answering questions, as well as the use of Facebook and Twitter.   Given the amount of information coming from the union, no one should be surprised that press reports in the Washington Post, Direct Marketing News, and most other news outlets focus on what employees got from the agreement and ignore the benefits that agreement provide the Postal Service.

If the Postal Service was a public company with shareholders and bondholders it would now be making an aggressive, and in most cases a public effort, trying to explain to them why this agreement is good for shareholders and bondholders.   This effort would include briefings with investment analysts and the business press.  It has not done that even though Congress effectively acts as the representative of the Postal Service's shareholder and its largest creditors, the Office of Personnel Management and the Department of Labor.  Congress's role as the representative of the creditor should be of particular interest as the Postal Service has already stated that it will default on these obligations.

The Postal Service's press release uses only 74 words to explain why the contract improves its financial situation.    Without a greater effort, the Postal Service leaves the impression that the contract was a giveaway to employees that will make necessary improvements in its cost structure.   Private sector stakeholders whose businesses and jobs depend on the long-term survival of the Postal Service should be concerned that this effort has not been made as their future may depend on Congressional actions to reform the Postal Service's business model and adjust the Postal Service's retirement obligations.

To fill in this vacuum, this rest of this post will review the public information on the Postal Service - APWU contract and identify how provisions in the contract will affect the Postal Service's cost structure.  

New Definition of Full Time Employee

All employees will operate under new rules defining what constitutes a full time schedule.  These new rules give the Postal Service a significant increase in flexibility in scheduling employees.  

• New employees hired after signing of the current contract
• Employees are only guaranteed 30 hours per week and can work as much as 48 hours per week
• Shift on any day can be as few as 4 hours and as many as 12 hours.
• Split shifts will exist only in Post Offices level 20 and below.
•  Current employees:
• Full time employment is defined as between 40 and 44 hours per week
• Shifts can have as few as 6 hours and will could have as many as 12 hours;
• a week must have at least 2 days off (a schedule with four 6 hour days and two 8 hour days would not be permitted)
• Current full time regular employees can voluntarily agree to work under the new definition of "full time" that applies to new employees.

Conclusion:  The new contract gives the Postal Servicie more flexibility to match hours to actual work.   The speed at which it can have a workforce that works under the new definition of "full-time employment," will determine how much these changes save the Postal Service.

New Employee Classification

Non-Career Assistants replace casual and transitional employees.  This new class of employees will represent up to 20% of all APWU members not in the Maintenance and Motor Vehicle Crafts.  The new class of employees will represent 10% of Maintenance and Motor Vehicle Crafts.  These employees will have a different pay schedule and employment relationship with the Postal Service than current employees have.

• Non-career Assistants are hired for only 360 day assignments.  (This is equivalent to a contract that last for only 51 of the 52 weeks in the year.)  It is unclear regarding what the Postal Service obligations are to rehire Non-career Assistants after the contract expires but it an employee is good it is unlikely and there is work it is unlikely that the USPS will refuse to renew the contract.
• Additional pay steps were added for Non-career Assistants with lower starting salaries than what now exists.  On average, starting salaries for Non-career Assistants will be 15% below current starting salaries and it will take new employees between 6 and 8 steps to earn the current starting salaries.
• 12.4% of all APWU members will be paid at the lowest rate when the contract starts.
• Non-career Assistants have lower benefits that current full-time regular employees
• Health care benefits require 1 year of employment
• USPS will only pay 75% of the PWU Consumer Driven Plan premium for these employees.   (This is 11% below what the Postal Service will pay for full time regular employees)
• Retirement benefits will be limited to a 401-K plan that does not have matching funds. (The retirement benefit should provide significant savings over FERS.  It is unclear from information provided what happens if these employees become full-time regular employees.)
• Non career assistants will accrue leave.  However, it is unclear whether they will accrue leave at the same rate as current APWU members
• Non career assistants will have a "full-time" job as described above

Conclusion: The difference in wage and benefit levels make Non-career Assistants significantly cheaper than current employees.  The sooner the Postal Service can maximize its use of Non-Career Assistants the faster it will be able to lower the costs of work performed by APWU members.

Wage Levels

• Wage levels for current APWU members are frozen at current levels until November 17, 2012.
• Wages of current casual and transitional employees who are hired as Non-carrier assistants will rise to fit equivalent levels on the Non-Carrier Assistant schedule.
• All employees hired after the contract is signed starts at a lower rate than now exists.
• All employees hired after the contract is signed have a lower top salary than current employees even after they become career employees.
• New hires have to progress between 6 and 8 steps before they reach the current starting salary levels of APWU employees. Her are few examples:
• Grade 3 - Starting salary drops from $16.74 to $12.34 per hour (-26%)
• Grade 4 - Starting salary drops from $16.82 to $12.95 per hour (-23%)
• Grade 5 - Starting salary drops from $18.65 to $15.91 per hour (-15%)
• Grade 8 - Starting salary drops from $20.80 to $18.20 per hour (-12%)
• Wage increases after that point will come on the following schedule
• November 17, 2012 - 1% increase
• March, 2013 - COLA increase based on COLA calculated for implementation in March 2012 and COLA calculated for March 2013
• September 2013 - COLA increase based on COLA calculated for implementation in September 2012 and COLA calculated for September 2013
• November 17, 2013 - 1.5% increase
• March, 2014 - COLA increase based on COLA calculated for  implementation in March, 2014
• March, 2014 - COLA increase based on COLA calculated for implementation in March, 2014
• November 17, 2014 - 1.5% increase
• March, 2015 - COLA increase based on COLA calculated for implementation in March, 2015

Conclusion:   Wage increases for current APWU members are back-loaded.   The increases will benefit the Postal Service if over the life of the contract, the proportion of employees that are working under the new wage schedule increases so that the average increase in compensation per employee will be less than the wage increases agreed upon.  Also, an increase in the number of employees operating under the new definition of "full-time" could on average reduce the number of hours paid per employee further reducing labor costs.

Update 3/17/2011 4:25pm :   A comment was made that may clarify a rather confusion explanation of who gets paid what.   The Non Career Assistants do not see step increases like career employees.  The saaries identified above are the steps for career employees.  Level 5 Non Career Assistants start at $13.74 per hour which is less than the starting salary for career employees listed above.

Non-traditional Jobs

The APWU- Postal Service contract shifts at least 9,000 jobs from contractors and EAS personnel to APWU members.  This provision of the contract includes a number of provisions that the APWU and the Postal Service agreed upon that increases opportunities for APWU members, creates opportunities for higher level APWU positions (called lead clerks), and increases flexibility in defining an employee's duties.

The major changes include:

• A shift of jobs from Postmasters, supervisors, and other administrative and technical positions to APWU members.
• Many of these jobs will be handled by employees working in a new "Lead Clerk" position.
• The Postal Service will have greater flexibility in scheduling employees to perform facility maintenance
• Maintenance employees will be assigned on an installation basis and not a facility basis.  This more than likely means that maintenance employees may work at more than one facility during a day or week.
• Maintenance activities requiring less than 2 hours per day in a facility may be assigned to an APWU member who has other job responsibilities the rest of his day.
• Some maintenance supervisory jobs will become APWU member jobs and will mostly be filled by a person in one of the new "Lead Clerk" positions.

Conclusion: All of the non-traditional jobs and changes to job descriptions relating to maintenance employees are likely based on suggestions made by the APWU as a method to increase its membership while at the same time reducing Postal Service Costs.   It is clear from the language of the public documents that the APWU will be actively looking at ways to structure work by APWU members so that work performed by union employees is cheaper than either contractors or non-union employees.   This could represent a radical change in how the Postal Service and APWU work together to manage operations.

Limits on Excessing

The APWU and the Postal Service have agreed to limit excessing outside of an installation or craft to r0 miles in most cases and no more than 50 miles in any case.   The contract information is unclear as to what happens if there are no jobs for an excessed employee within that area. The News Bulletin states that "the parties will jointly determine what steps will be taken."  The PowerPoint presentation mentions that there is a memorandum associated with this provision but it is not public.

Conclusion:   It is unclear what impact this will have on either employees that face excessing or the Postal Service.  A good example is consolidation of facilities that are more than 50 miles from the facility that will now be sorting the mail.   This will occur in West Virginia and in most consolidation efforts outside of metropolitan areas.   Most likely the sides decided to sign a contract on all issues that they can agree on and let this issue wait for further negotiations.

 Excessing employees create challenges especially if excess employees cannot be let go.   The only other alternative is a localized early retirement program that would only apply to geographic areas where there will be excess employees.

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This review of the APWU - Postal Service contract indicates that the new contract will allow the Postal Service to significantly cut its costs over the life of the contract.   The amount it saves depends upon how quickly it can raise the proportion of APWU members that are Non-career Assistants, implement the changes in maintenance job descriptions that should cut maintenance contracting and shift jobs from supervisors, postmasters, and other non-union employees to APWU members.

The Postal Service needs to provide the hard numbers that must exist that show the cost savings that I believe exist to its creditor and shareholder representatives in Congress as well its customers.  In addition they need to show how quickly these savings will accrue including the difference in costs over the current contract from fiscal year 2011 through 2015.   Finally, they need to show how those cost savings could change if it offered a VERA or had the cash to offer retirement incentives on either a nationwide or local basis.

Are 30,000 Enough?

Over the past several days, there has been some debate about what the 30,000 reduction in Postal Service employees really mean.   Both postalnews.com and the Washington Post have reported that 30,000 represents a combination of regular attrition and the reduction in 7,500 management positions that will be announced on March 25.

So how much will the reduction of 30,000 employees save the Postal Service?   The Postal Service's average monthly compensation cost is $6339.27 per employee.   (This works out to a salary of around $54,000 per year or $4,500 per month with the rest being the cost of employee benefits and employment taxes.)   If one assumes that retiring employees earn 15% above average then the savings per month per retiring employee is $7,290.16 per month.   Attrition then reduces the Postal Service's compensation by around $6.736 billion this year.

The March 25th announcement will just start the process of eliminating positions, so it is likely that the Postal Service will not see the full impact of the announcement until the end of June.   So the cuts in positions will cut the payroll for only three months this fiscal year.  The savings, using the same assumptions will be $306 million.

Combined the total savings is $7.042 billion.  However, even with this reduction in compensation the best the Postal Service can do is cover its operating expenses.    These cuts generate an insufficient profits and cash to cover the Postal Service's capital needs and other investments necessary to maintain universal service and transition to a leaner more efficient operation, let alone pay one dollar of the disputed retiree payments.

So let's ask a hypothetical question.   What is the total number of employees that the Postal Service can employ and still be a self-sufficient enterprise?   This question needs to be asked both with and without the retiree payments and with both current compensation levels and reduced compensation levels that would come through retirement incentives and the introduction of a two tiered wage structure. 

Assumptions

• The Postal Service does not pay any of the disputed retiree obligations.
• The average monthly compensation is $6339.27 (including all benefits and employment taxes)
• The Postal Service's revenue in 2011 will be near the plan level of $67.1 billion.
• The Postal Service needs an operating margin of 12% to be self-sufficient.
• Total costs need to be $59.1 billion.
• Cost reduction required above current plan $8 billion.
• 90% of the savings come from reduction in employees.

Result

If one assumes that salaries remain at current levels, the Postal Service must reduce its workforce by 94,648 employees to be self-sufficient.  That is close to 1/6 of the current workforce.  The number would be lower if the Postal Service is able to negotiate a two-tiered wage agreement with its unions but will still be a shockingly large number.

This little exercise should give stakeholders pause as it is clear that many things have to be put on the table to cut costs that Congress and other stakeholders are resistant to change.   These include:

1. Cut an additional 20 to 40 district offices and 1 to 2 Area offices - Cuts in management will like need to be at least twice what is announce on March 25.  The Postal Service cannot be too agressive in cutting out a layer of management.
2. Acceleration of plant consolidation - Members of Congress may object to the consolidations but they will proceed regardless of their efforts.   Future consolidations after those that will occur this year and next will likely start to require capital expenditures and the cash to finance them.
3. Modernization of the retail infrastructure - Mail services need to be accessible but the current method may be unaffordable.   A new model needs to be put into place quickly.
4. Restructuring of rural mail services - The Postal Service needs to look at the Australian model for providing service in the most rural parts of the United States.   It would require looking at rural service as a profit center that includes revenue and costs associated with retail and delivery and a major expansion of services that they are legally allowed to offer in a rural retail facility.   It may require doing what Australia Post has done and franchising to a local company to provide both the retail and delivery function.
5. Changes in civil service employment law -  Senator Susan Collins has already introduced legislation to change rules for workers compensation but more changes are needed in employment law as it affects the Postal Service.   If the Postal Service is going to implement the major operating changes required to reduce the number of employees to levels that the business can support, it needs streamlined rules to implement reductions in force and early retirement incentives. Current rules were not designed to handle the rapid reductions in employment counts that the Postal Service will need to be self-sufficient.  Without these changes, reducing the number of employees through any method other than attrition remains a difficult and expensive option to implement.
6. Five-day delivery - A switch to 5-day delivery is unlikely in the next few years.  However, unless the Postal Service can find a way to reduce its costs in other ways five-day delivery will likely need to be introduced by 2020 even if savings are well less than one billion dollars.
7. Rate increases - Rate increases above CPI have to be the last option but rate increases are probable even if the previous six changes are implemented.   In particular, single-piece First Class mail rates need to rise to cover the costs of reducing the number of employees to reflect the rapid decline in these employees and the future liabilities for their retiree expenses.  Rates for the Postal Service's largest mailers will also likely rise with some loss in volume

As the last oversight hearing showed, the Federal government is a creditor that holds a note (legislated retiree health-care obligation payments) that the Postal Service has stated it will not pay.   In the private sector, creditors faced with situation would be forced to put the enterprise that will default on its obligations into bankruptcy to see how it can be repaid either through liquidation or restructuring.   As the equivalent of the creditor committee, Congress needs to quickly figure out if there is a plan that can put the Postal Service on the road to self-sufficiency that would allow it to pay some or all of the retiree-obligations that are currently baked into the Federal budget.

Should Voluntary Early Retirement Become the New Normal?

The Postal Reporter News Blog reported that the Postal Service is quietly announcing the introduction of a voluntary early retirement program in selected cities.  Voluntary early retirement programs allow employees to retire early but do not offer them a financial incentive to do so.  This program requires eligible employees to decide between now and May 21, 2010 with their retirement date occurring in June 2010.

Voluntary early retirement is the least expense method that the Postal Service has to convince excess employees to leave voluntarily and the least attractive method for employees who might consider retiring.    Because of the minimal cost of voluntary early retirement programs, it would make sense for the Postal Service to offer these programs every Spring prior to slower summer mailing season when demand for employees are lower and many of its processing consolidation actions take place.  

Early retirement can have significant financial penalties in the form of reduced pension and/or social security payments which is why incentives are often needed to get significant number of employees to retiree early.   However, even if the program only convinces employees thinking about retirement to retire 6-months or a year earlier, it will have the effect of reducing employment costs by moving normal attrition up by a few months. 

If Postal Reporter News is correct, the Postal Service's decision to offer voluntary early retirement only in selected cities, suggests that the program may exist to give employees that work in offices that are losing processing operations to other facilities or experiencing significant declines in volume the option to retire rather than accept reassignment at a facility that would require a long commute.   As there are no incentives, this year's voluntary early retirement program will likely only attract employees that are at or very close to normal retirement age or those eligible employees who use the next few months to find another private-sector job to supplement their CSRS or FERS retirement income. 

In cities where processing operations are being consolidated or declining volumes have created stand-by employees, the Postal Service should have within its workforce management arsenal the ability to offer incentives to employees only in those cities, as well as those cities where the processing operation is moving to.   Transferring employees to new facilities is not cost free as there are additional training costs to deal with each employee bumped by a transfer.  These costs, added to the wages that do not have to be paid, create a justification for the Postal Service to offer some early retirement incentive, although it is not clear if its additional costs are above or below the $15,000 that it offered last year to encourage retirement.   Postal unions may want to consider doing the analysis to figure out what the benefit is to the Postal Service of convincing someone to retire early.   The union should use this information to negotiate an addendum to their existing contracts to include a streamlined process for offering early retirement with incentives based on a value that makes financial sense for the Postal Service.  This would give employees some protection from reduced retirement benefits that voluntary early retirement does not offer and give the Postal Service an early retirement program that more closely meets its needs than the voluntary one that it now plans to use.  

Even without incentives, postal employees who are eligible for voluntary early retirement should take the time to see if early retirement from the Postal Service makes sense for them.  Potential early retirees could use the retirement income calculators available on the U.S. Geological Survey website to determine what their income would be after retirement. [The actual numbers should come from the Postal Service.]   This new program is coming at a time when most economists expect to see significant increases in available private-sector jobs which should make a job search now a lot easier than when the last voluntary early retirement program was offered.   With two months to look for a new job, postal employees eligible for the voluntary employment program have sufficient time to find new employment if they take an aggressive approach to seeking a new job.

Early retirees from the Postal Service have an advantage in seeking new employment as compared to non-retirees as their retiree health care and other benefits allow them to choose among a broader range of employment opportunities that include jobs that do not traditionally offer those benefits.   In addition, employees seeking to shift careers have a base income to cover expenses during while they are taking classes or getting necessary licenses (i.e. real estate, insurance, investment sales, etc.) as well as the health insurance that many changing careers do not have. 

Early retirees should not think that they are too old for school as demand for a number of professions that require two years or less of training is substantial.   Even in the current recession, individuals with two years of post-high school education had relatively low unemployment rates even as those with a high school education or less had trouble finding any work at all. 

Employees that learn that they are eligible for voluntary early retirement and want to consider looking for new jobs while they are considering the offer will find that the following books by Donald Asher would be helpful in finding a new job in the shortest amount of time.

The Overnight Resume, 3rd edition  - A new book that includes good advice for writing a resume for a career change including how to write a resume that is submitted and read electronically.

The Overnight Resume, 2004 edition - This is the older edition that can be bought on Amazon for less than $5 including delivery charge and is an absolute bargain.

The Overnight Job Change Strategy - While this book was written  17 years ago, the approach is still sound.   It explains clearly why personal contacts is the best way to find a private sector job.  IF you add e-mail to telephone contacts and substitute careerbuilder.com, monster.com and craigslist.org for want-adsthen the ideas are up to date.  At under $5 used on Amazon including shipping, it is a bargain.  (Used books are often library copies.)

The Foolproof Job Search Workbook -  This book is 15 years old but covers Donald Asher's approach to finding jobs.   Again add e-mail and substitute careerbuilder.com, monster.com and craigslist.org for want-ads and it the approach is up to date. At under $5 used on Amazon including shipping, it is a bargain. (Used books are often library copies.)

How to Get Any Job -  written for college students and those under 30 (read without mortgages and children) who are looking for a job or a career change.  Provides some insight into the impact of the web on job-seeking and explains why the web makes job searching harder not easier as it make it too easy for job seekers to apply.  Asher's approach here is similar to what he explains in his earlier books but with a focus on younger job-seekers.   It is worth reading to identify what has changed since his prior books were published.

Cracking the Hidden Job Market - this book will not be published until the fall of 2010 but is worth pre-ordering if you are considering a job change in the next year.  His current presentations to college students and alumni-associations summarizes the key points that will be included in this book.   It follows  the same approach used in his older books, The Overnight Job Change Strategy and The Foolproof Job Search Workbook but reflects the changes in technology since the mid 1990's and how they affect the process required to get an interview.