Former Office of Management & Budget Director Peter Orzag argued Tuesday that the U.S. Postal Service’s best hope for the future is as a private company. The one question that the former Obama administration official doesn’t answer, though, is who would want to take on such a thankless task now? Never mind that it that probably should have happened a decade or so ago.
As Orzag notes, privatization is no panacea, but “there is no longer any sound reason for it not to go private.” Actually, there are many. The Postal Service, which said Monday that it would skip a $5.5 billion payment due Wednesday to prefund retiree health care costs, would be losing money even it wasn’t stuck with such an onerous burden. After all, first-class mail volumes have been in decline since 2006, according to David Partenheimer, a USPS spokesman. In addition, the service owes about $13 billion to the U.S. Treasury.
Can you imagine any company that would be willing to take over a business with financial prospects that are this bleak — and that has a unionized work force that account for the bulk of its costs? What shareholders would want to own pieces of this company? I have trouble imaging that, too.
The USPS argues that because of flawed methodology, it overpaid its pension benefits by as much as $75 billion. No private owner would take control of the USPS without assurances from the U.S. Congress that it wouldn’t be on the hook for retiree health care costs. Maybe that would force Congress to create a health care trust fund similar to the one the automakers created a few years ago that helped them restore their financial footing.
Regardless, it seems unlikely that Congress would simply agree to absorb these costs on behalf of U.S. taxpayers.
“I don’t buy the pre-funding argument at all,” said James Gattuso of the Heritage Foundation, a conservative think tank, in an interview, adding that Congress mandated that the USPS shoulder these costs “to ensure that there was no taxpayer subsidy of the US Postal Service.”
Frederic Rolando, head of the National Association of Letter Carriers, rejects this reasoning, arguing in a statement that the burdens put on the USPS are too heavy, such as requiring it to fund retiree benefits 75 years in advance. He also dismisses the idea of cutting Saturday service as a cost-savings move, arguing that it will only drive away customers.
“Besides bringing the Postal Service to the financial precipice, pre-funding also has prevented the agency from doing what it has done for 200 years — adapt to an evolving society,” he said. “Instead, this artificial political crisis has focused management’s entire energy on a desperate attempt to pay bills that no one else has to pay.”
Even if Congress would wave a magic wand and make the pre-funding issue disappear, it wouldn’t address the fundamental problem, which is the Postal Service is too bloated and inefficient. Less than half of its 32,000 post offices turn a profit because their customer traffic has fallen. The USPS plans to reduce the number of mail processing centers by more than 50% by 2014.
Though Orzag argues that “many processing facilities and post offices sit on valuable real estate,” he does not offer any specifics to back up his claim, which seems inflated. Moreover, the USPS, which is one of the largest real estate owners in the U.S., already is pursuing that strategy. It has hired CB Richard Ellis Group (NYSE:CBG) to unload its surplus property, which includes 357 unused land parcels with a book value of $128 million. Unfortunately, the commercial real estate market these days is stagnant.
While selling assets does generate cash, it’s not a strategy for long-term growth. But the Post Office does have a role to fill. Believe it or not, e-commerce couldn’t function without it. Both FedEx (NYSE:FDX) and UPS (NYSE:UPS) depend heavily on the Post Office. Still, the gain it gets from packages isn’t enough to offset the declines in first-class mail.
Orzag is right that privatization is needed. Many other countries figured that out years ago. Members of the European Parliament voted in 2007 voted to liberalize the postal systems of 27 member countries by 2011. Israel and New Zealand have run privatized post offices for years.
But unless Congress sweetens the deal considerably, prying the Post Office away from government control will be very difficult. Meanwhile, another $5.6 billion pre-funding payment is due in September, which the USPS will probably miss as well.
Jonathan Berr does not own shares of the listed companies. Follow him on Twitter @jdberr.