Why the Postal Service Is Fixable

An unjustified pre-funding of health care costs is the biggest burden

   
Why the Postal Service Is Fixable

The U.S. Postal Service (USPS) isn’t exactly profitable, but it also isn’t the financial basket case many think it is.

During the second quarter, the USPS had an operating loss of $486 million on a 13% gain in revenues from shipping and packages. That gain, fueled by the growth in e-commerce, wasn’t enough to overcome the decline in first-class mail. The quarter before that was even better, with the USPS earning $200 million on an operating basis.

These figures aren’t great, but they aren’t nearly as bad as the multibillion dollar losses that are being used to justify plans to shutter 229 mail processing centers as part of a strategy for the USPS to save $1.1 billion by 2014.

The difference between those numbers lies in the fact that the U.S. Congress has required the USPS to prefund its retiree’s health care for 75 years, assuring the well being of people who have not even been born yet. Before the mandate, which applies only to the Post Office, kicked in during 2007, the USPS regularly made money. Now, with an additional $5.5 billion in costs, that’s impossible.

To make matters worse, the U.S. Treasury has overcharged the USPS by some $75 billion for liabilities because they relate to services performed before the USPS was created in 1971.

“It’s not something that’s dead,” Jerry Cerasale, the Direct Marketing Association’s senior vice president of government affairs, said of the USPS in an interview. “It’s something that needs to be fixed.”

Another problem is that the USPS is required to build up retiree health care funding over 10 years, using funding estimates that the Center for Economic Policy and Research says are unrealistic.

“Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years,” according to the CEPR.

The need to address the USPS’s issues is imperative for several reasons. First, the service supports the $1 trillion mailing industry, which employs more than 8 million. It’s also an important part of the Internet economy. Private mailers such as FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) are growing increasingly reliant on the USPS to deliver products ordered from e-tailers on the Web.

While addressing the retiree health problem is important, the USPS’s problems go beyond the mandate, which members of Congress are trying to fix. Mail volumes are down 20% from their 2006 peak, resulting in what the USPS Office of Inspector General (OIG) estimates as 67 million square feet of excess facility space, which other government agencies could probably use.

“The Postal Service currently provides a small number of non-postal government services, such as accepting passport applications, offering Selective Service registration forms, and renting excess space to other government agencies,” according to an OIG report issued early this year. “Providing government services in Postal Service locations could save much needed resources, expand public access to government, and provide revenue to the Postal Service. “

The USPS disputes the OIG’s figures on excess space and that it has surplus labor that could be shared with other government agencies, but it seemed open to the idea. Though working more closely with other federal agencies wouldn’t solve the USPS’s financial woes, it certainly would help. The USPS should also consider branching out into businesses such as banking, services that European postal agencies provide but have been rejected in the U.S. as being impractical.

Indeed, the USPS seems to have too much of everything, according to Sean Kennedy of the conservative Lexington Institute. “The Postal Service has too many people, offices, and processing plants for the business it projects to do in the months and years to come, “ he wrote in the Daily Caller. “USPS needs to right size its network to meet demand and to reduce its labor costs. Over 100,000 of USPS’s 550,000 employees could retire tomorrow with full pensions. Labor costs, currently 80% of USPS expenses, could be cut without layoffs or dislocations. “

Figuring out how to do that is the tricky part. Take Saturday mail delivery. Though eliminating it may seem like a no-brainer, experts are divided on the issue. Some argue that the $3 billion or so in savings associated with the plan may be dwarfed by the hassles it creates and costs it generates.

Said Cerasale: “Reducing postal services should not be the first thing that you do but the last thing you do.”

Follow Jonathan Berr on Twitter@jdberr.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/why-the-postal-service-is-fixable/.

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