Unless the U.S. Postal Service comes up with a turnaround plan to stop hemorrhaging money soon, taxpayers and consumers likely will be hit with a bailout bill of well in excess of $50 billion.
The Postal Service recently announced its Fiscal Year 2017 finances (its fiscal years end September 30), and once again it revealed significant financial problems, including a $2.7 billion net loss. While down from a $5.6 billion net loss in Fiscal Year 2016, this marked the 11th consecutive year that the Postal Service lost money. Losses from fiscal years 2007-17 amount to $65.1 billion.
Left unchecked, things will not get better soon. In its public 2018 Integrated Financial Plan, the Postal Service projects a 2018 net loss of $5.2 billion. While volume is expected to decline by more than 4.5 billion pieces, compensation and benefits costs are projected to rise $200 million.
Michael Gelband’s Exodus Point launched in 2018 with $8.5 billion in assets. Expectations were high that the former Millennium Management executive would be able to take the skills he had learned at Izzy Englander’s hedge fund and replicate its performance, after a decade of running its fixed income business. The fund looks to be proving Read More
In Fiscal Year 2017, the Postal Service did not make any payments of the $6.9 billion due to the federal government for pension and health benefits for retirees. The Postal Service also defaulted on retiree health benefit payments of $5.6 billion annually since Fiscal Year 2012.
For taxpayers and postal consumers, it is very disturbing that there is not a clear solution from the Postal Service to turn this around. Instead, there are also growing calls from the Postal Service for taxpayers to assume tens of billions of dollars in unfunded retiree health care costs.
And, on December 1, the Postal Service cleared a key regulatory hurdle that would allow it to raise prices at twice the current rate of inflation for large product lines that not only have a clear monopoly but are unlikely to face any serious near-term competition.
Many believe such price hikes exceeding the Consumer Price Index are not permitted under the 2006 Postal Accountability and Enhancement Act, the major law now governing the Postal Service. Congress and the public have until March 1 to weigh in with public comments.
The Postal Service’s Strengths
With 2017 revenues of $69.6 billion, the Postal Service would be the 38th biggest company on the Fortune 500 list of U.S. public businesses.
Most of its business is in monopoly or near-monopoly products. As the Postal Service says in its Form 10-K report, “Market-Dominant products account for approximately 70 percent of our annual operating revenues.” This is approximately $48.7 billion annually.
The Postal Service also says in its 10-K that monopoly first-class mail is “our most profitable service category.” Another market dominant product, marketing mail, has a bright future as discussed in the 10-K, “Marketing mail has generally proven to be a relatively resilient marketing channel, and its value to U.S. businesses remains strong due to better data and technology integration.”
International mail, though, is a different story for the Postal Service because of “terminal dues.” This opaque and arcane mailing rate system is determined by an arm of the United Nations, the Universal Postal Union. It is especially favorable to China and its vast e-commerce companies, and it cost the Postal Service $135 million in Fiscal Year 2016.
The terminal dues system makes it less expensive for someone to mail an item under 4.4 pounds from China to the United States than it does to send to the same item within the United States. Congress is taking notice and it should be a topic of discussion in the broader China-U.S. business relationship.
Fixing Its Governance
The Postal Services’ challenges are within its own control, but only with a business turnaround plan. First, though, it needs to institute basic governance.
Federal law requires an 11-member board of governors, including nine independent governors, the Postmaster General and the Deputy Postmaster General. Currently, the only board members are the Postmaster General and Deputy Postmaster General. President Trump made three nominations of governors on October 30. The Senate is considering them, with votes expected by year’s end.
In the absence of a turnaround plan that is properly executed, Congress will face increasing pressure to bail out the Postal Service with taxpayer dollars, without any fundamental operational improvements likely to be made.
To protect taxpayers and consumers and to strengthen the postal system, it is essential that new governors be appointed and approved as soon as possible. All avenues should also be explored to implement promptly an effective business turnaround plan.