The U.S. Postal Service's plan for profitability

Posted at 12:57 PM, Aug 06, 2015

Email, e-commerce and even drones are modifying the way people conduct business and interact with out-of-towners.

And few industries feel the effects of the increasingly digital world more than the mail system.

The overall economy took a big downward turn right as the U.S. Postal Service committed billions and billions of dollars to pre-pay health benefits for future retirees since a law passed in 2006 mandating the Postal Service to do so.

Money problems could get worse if the office cannot keep stamp prices at the 49-cent level, the Washington Post reported recently.

Despite eight straight years of losses, however, officials with the Postal Service are optimistic that solutions are near.

People and businesses still rely on the Postal Service to annually deliver billions of pieces of mail from magazines to advertising to birthday cards.

So why have the losses mounted, and why are officials optimistic?

“Every year it comes up and every year they make it sound as if the Postal Service is losing money, the Postal Service is going away, that we’re a dinosaur,” said Daniel Toth, the national business agent for National Association of Letter Carriers Region 11. “Nothing could be further from the truth.”

The problem for USPS

For all of the concerns about a world transitioning to a paperless society, the Postal Service’s top financial issue has nothing to do with email and websites.

Instead, the biggest issue for the Postal Service is a Congress mandate to pay for health benefits well in advance. 

The Postal Service does not run on tax money, though the government does give a tiny fraction of the service’s revenues to pay for items the government uses such as military mail.

The cost to pay for future benefits is enormous and tends to be more than $5.5 billion annually. Congress passed the law in 2006 to entirely cover the cost for future benefits — what has become a $94 billion liability.

The Postal Service has put in nearly $51 billion for the benefits, but has missed payments as the economy receded.

“It’s just a position no organization should be in to be forced to default when there are actually solutions to that,” said Joe Corbett, the USPS chief financial officer. “But nonetheless, that’s the biggest driver for the losses that we’ve been incurring over the last few years.”

The Postal Service’s operating profit has grown when excluding items that are unrelated to operations such as the health-care benefit, according to the second-quarter financial report released in May.

But the losses attributed to the payment are large. Here are the net losses for the Postal Service since it made $900 million in net income in 2006:

Corbett, however, said there is a relatively simple fix to the pre-funding problem. If retirees could file through Medicare — which Postal Service employees pay into — the tab for the pre-funding health benefits could be eliminated.

Toth said he is on board with getting Medicare to cover costs.

What else impacts the balance sheet?

There are concerns outside of the health benefit payments. The need for standard mail is diminishing — not to the extent some might think — but falling nonetheless.

Here’s a look at how total mail volume has changed since 2006:

People still send billions of items through the Postal Service, but it’s a 27-percent drop compared to 2006.

The problem coincided with the start of the economic recession that cratered everything from oil demand to employment levels.

But as other businesses have returned to pre-recession levels, the Postal Service has had to temporarily jack up stamp prices to improve revenues and account for lost volume now taken over by social networking sessions, automated services and other digital conversations and transactions.

The Postal Service raised postage by 4.3 percent, and keeping those prices will be important, Corbett said.

“We really need to keep that as a permanent part of our rate base in order to return to profitability,” he said.

The Postal Service has had to borrow money — billions of dollars in recent years — in order to run.

The Postal Service does not have the same level of flexibility to cut costs as some other businesses. When the Postal Service recommended slashing rural locations and cutting days of service, Congress stepped in and refused to allow certain changes.

An option called for the end of Saturday mail, but Congress also nixed that idea. The Postal Service’s board of governors protested the decision in 2012.

"It is totally inappropriate in these economic times to keep unneeded facilities open. There is simply not enough mail in our system today," the Postal Service's board of governors said in a statement following the 2012 decision. "It is also inappropriate to delay the implementation of five-day delivery."

Still, the Postal Service is in the middle of a cost-savings program to save $1.2 billion per year.

But as the Postal Service took on new leadership, the idea of cutting services diminished. In fact, the Postal Service has added deliveries for Sunday as part of a partnership with Amazon, though the Postal Service continues to seek ways to become more efficient.

While not as profitable as first-class mail deliveries, package shipping has become an important part of the growth for the Postal Service.

The Postal Service has ongoing deals with companies such as FedEx and UPS as well.

The move with Amazon uses the Postal Service’s vast network of distribution routes with Amazon’s immense online retail presence and has resulted in double-digit growth for the Postal Service’s package business.

The deal has had some bugs, including some employees who say they have worked 7-day weeks to accommodate the demands of weekend service.

But Toth said he can make a phone call to help get workers more rest and that he hopes there will be more hiring as the Postal Service adjusts to the increased workload.

“We want our carriers to have a normal-type work week that may include five or six days of work,” he said. “We have to have some rest in there.”

The Postal Service is also looking at innovative ways to improve service through digital means. The Postal Service, for example, offers local businesses the opportunity to send advertisements to a specific carrier route without listing addresses.

“Most of our mailers believe that the mail is a significant part of their advertising campaign and without it, they would be much less successful,” Corbett said.

The Postal Bank concept

Need to make a deposit? Some people believe visiting your local post office could be the best way to do it.

The Postal Service has looked into providing different financial services. Creating a full-fledged bank is probably too big of a regulatory headache, but smaller transactions such as check cashing services and post office-to-post office money transfers could mean major money.

The U.S. Postal Service Office of Inspector General has put out two papers on the matter outlining how the services would work.

But the Postal Service also would need to want to take such a step. And so far, the Postal Service has not been interested in making such a move.

The Postal Service noted in a statement that the margins for such work are small and that though the revenue might seem like a big number, the actual profit would be much smaller.

“The Postal Service’s mission is to provide the American public with trusted, affordable, universal mail service,” the statement read. “Our core function is delivery, not banking. We are investing in innovations in the areas of our core function with expanded service like same day and Sunday delivery and will continue to do this.”

After a 5-year ramp up plan, such moves could make $1.1 billion in annual revenue, but revenue differs from profit and the Postal Service has been adamant that profits would be far smaller than the revenues.

Here’s how the revenues would break down, according to the U.S. Postal Service Office of Inspector General:

  • Check Cashing: $382M
  • Post Office-to-Post Office Money Transfers: $235M
  • International Money Transfers: $163M
  • Bill Pay: $122M
  • Paper Money Orders: $99M
  • ATMs: $94M
  • Gift Cards: $26M

The plan would leverage the trust built into the Postal Service and the number of locations throughout the nation to help people who spend high fees on alternative financial services.

Such services cost the average underserved household $2,412 per year — about 9.5 percent of the average underserved person’s income, according to the report.

But the Postal Service plans to focus on active businesses as opposed to expanding into an entirely new dynamic.

“We don’t think we can grow our way out of a situation like this by trying to get into banking,” Corbett said.