Yesterday the Postal Service released its preliminary financial report for April 2013. The line on controllable operating expenses shows that the Postal Service basically broke even for the month. It lost $1 million — less than 0.02 percent of April's revenues.
For the first seven months of fiscal year 2013, the Postal Service has lost $131 million (0.3 percent of total revenues), compared to about twice that loss during the same period last year. Total volumes are down 0.6%, but revenues are up 0.8% for the year to date.
That looks pretty good, but brace for the headlines. They’ll say the Postal Service lost $900 million in April and nearly $4 billion for the year so far. You’ll have to read deeper down in the news articles to learn that those numbers include the amount owed to the Retiree Health Benefits Fund (RHBF), which accounts for over 80 percent of the losses this year.
When reports like the April financial statement come out, the Postal Service, privatization advocates, and many members of Congress are quick to put the worst spin on the numbers. That’s usually because they want to justify an agenda — downsizing the unionized workforce, eliminating facilities, reducing services, and privatizing as much of the system as possible through outsourcing, workshare discounts, and selling off assets.
In order not to make things too complicated for the general public — most of whom think the post office runs on tax dollars — the Postal Service likes to keep things simple. So it sticks to repeating a few basic factoids: the agency is losing $25 million a day, it lost $16 billion last year, mail volumes are down 25 percent, and the taxpayer is headed for a bailout.
The numbers are supposed to be dramatic proof that people aren’t using the post office like they used to, and there are too many postal workers and too many postal facilities. The only solution is cut, cut, cut. As a closer look reveals, however, these numbers are misleading. Rather than clarifying the situation, they obscure it.
Losing $25 million a day
On April 18, 2013, the Postmaster General testified to Congress that his agency was losing $25 million a day. That number has been cited countless times over the past year, and a Google search produces hundreds of articles referring to it.
The first time the figure is mentioned in the media appears to be April 2012, in an article by Angela Keane for Bloomberg News. The Postmaster General was quoted then as saying, “Every day that ticks by, we lose $25 million. Every day. When you start in terms of months, you start to talk in terms of billions. So time is of the essence.”
The number was subsequently cited by Senator Tom Carper, in an August 2012 statement about the Postal Service’s announcement on POStPlan. The Postal Service “hemorrhages $25 million a day,” said the Senator.
Neither the PMG nor Senator Carper offered any explanation about how the number was calculated, but one can venture a guess. In April 2012, the PMG may have been looking at the Form 8-K financial report for the first half of the fiscal year. At that point, the Postal Service had lost $3.2 billion. Figuring a five-day business week, that's the equivalent of $24.6 million daily, which rounds off to the $25 million a day cited by the PMG.
The PMG used the number again when he testified to Congress in April 2013. During the first half of FY 2013, the Postal Service posted a total loss of $3.1 billion, which again comes to about $25 million a day.
The problem with constantly citing a loss of $25 million a day is that it includes $22 million a day for payments to the Retiree Health Benefit Fund (RHBF). If you exclude those payments, the losses for the first six months of both FY 2012 and FY 2013 were about $3 million a day.
The first half of the fiscal year brings in more revenue than the second half, but looking at the whole year still doesn’t show anything like a $25 million a day loss. In April the PMG told the National Press Club that he was expecting an operational loss of $1.7 billion this year. That would come to $6.5 million a day.
All of which is to say that the $25 million a day is a bogus number because it includes the $5.5 billion annual payment to the RHBF. Same goes for the $16 billion the Postal Service is said to have lost last year — over $11 billion was for the RHBF.
These payments account for nearly 80 percent of the daily losses and 80 percent of the cumulative deficit ($32 billion out of $40 billion). The payments are totally unnecessary, and they are artificially inflating the seriousness of the situation.
Facing a $58 billion bailout
In February 2013, the Postmaster General told the Senate Homeland Security Committee that taxpayers could be on the hook in 2017 for a bailout in excess of $45 billion. A few weeks later, the situation had for some reason worsened significantly. In April, the PMG told the National Press Club that the taxpayer could get stuck with a bailout in 2017 on the magnitude of $58 billion.
In neither case did the PMG explain where the numbers were coming from, and it’s hard to imagine why the estimate jumped from $45 to $58 billion in just a few weeks. Again, however, we can do some guesswork about how one might come up with a deficit number like that.
The Postal Service has reached its maximum borrowing capacity of $15 billion, which basically represents the accumulated losses (including RHBF payments) for 2007 through 2010.
The Postal Service owes $11 billion for two unmade payments to the RHBF (for 2011 and 2012). Over the next four years it’s supposed to make four more RHBF payments of about $5.7 billion each. That adds up to $34 billion in RHBF payments.
On top of that there are required payments for workers compensation that aren’t included in operational losses. These payments have been averaging $2.3 billion a year, so let’s figure $9 billion over the next four years.
That brings the total — for current debt, the RHBF funding, the workers comp adjustment — to $58 billion, exactly what the PMG told the Press Club. Perhaps he came up with the number using other calculations, but you get the idea.
Like the $25 million in daily losses, however, this number is misleading. The RHBF payments account for $34 billion of the $58 billion — about 60 percent. If Congress were to suspend the payments, the accumulated deficit in 2017 might be around $20 billion.
That’s a big number, of course, but it includes the losses from the recession, it comes from ten years of operations, and it wouldn’t even exist if the Postal Service hadn’t made $21 billion in payments to the RHBF during 2007-2010.
However big the deficit might be by 2017, taxpayers have little reason to fear that they’ll be looking at a bailout on the order of $58 billion. But frightening taxpayers is precisely what the numbers game is all about.
Volumes down by 25 percent
The Postal Service says that since 2007 total mail volume has fallen by 25 percent, First-class mail volume has declined by 28 percent, and revenue has dropped 13 percent.
Those aren’t good numbers, but they don’t tell the whole story. First of all, 2007 is a misleading base line from which to measure falling volumes and revenue. That was the year before the recession hit, so it’s no surprise that volumes and revenues have fallen since then. Most other sectors of the economy have experienced similar declines. The following charts show mail volumes and housing starts for the past decade or so:
Total Mail Volumes, 2000 – 2011
One could produce numerous charts just like these. Like the rest of the economy, the mail business went through a boom and bust, then a slow recovery. Single-piece first-class mail continues to decline, but parcel shipping and standard mail are up. During the first half of the fiscal year, parcel shipping was up 9.3 percent, standard mail was up 2.4 percent, and total revenues were up 0.7 percent ($121 million).
The Postal Service says that these increases are insufficient to make up the losses in First-class mail, the agency’s most profitable type of mail. But there are many ways to increase revenues to make up for the declines in First-class mail. For example, the PRC determined that nine Market Dominant products' prices failed to raise revenue sufficient to cover even their attributable costs, causing losses of $1.5 billion. Why not ask these mailers to cover the cost of delivering their mail? The Postal Service could also request an exigent rate increase, which would be worth $2 to $3 billion a year.
First-class mail volumes may continue to decline over the coming years, but that doesn’t mean the Postal Service is going broke or that it needs to be subjected to radical downsizing.
The bottom line
Here’s a table that summarizes the profits and losses from 2007 through 2012, the years during which the Postal Service has been required to pay into the RHBF and deal with the recession.
As the table shows, the Postal Service has basically broken even during this seven-year period, having lost just $34 million. The $41 billion deficit that has accumulated during this period is due entirely to expenses beyond the control of the Postal Service: $9 billion in cost of living adjustments and other expenses related to the long-term workers’ comp liability plus $32 billion in payments to the RHBF.
The past couple of years have shown significant losses aside from the RHBF payments, but it’s not fair to blame the Internet, as the Postal Service likes to do. The weak economy lingered into 2011, and it may still be taking a toll on mailers. Perhaps more important, much of the damage has been self-inflicted.
Time and again, the Postal Service has created uncertainty for mailers, and there’s nothing worse for business than uncertainty. Improvization may be good in jazz, but it doesn't work so well in the mail business.
In 2009 the Postal Service announced plans to close thousands of stations and branches, then backed off and closed about 150. It did the same thing in 2011 with its plan to close 3,700 post offices, most of them small rural offices. Instead of mass closures we got POStPlan, which hopes to save a half billion a year by replacing 10,000 career postmasters with part-time workers.
The Postal Service has been talking about ending Saturday delivery for years, and over the past few months it made two big announcements — one saying that it would go ahead with five-day delivery, another saying that it wouldn't.
In 2010, the Postal Service submitted a request for an exigent rate increase. In 2011, it withdrew the request, then later said it might be back on. At the moment it's off the table, at least for now.
Last year the the Postal Service said it was modifying its Network Rationalization plan and doing the consolidations in two phases. Earlier this year, it changed course and announced that over 50 consolidations scheduled for next year would take place soon.
It's not just the shift in plans that causes problems. The plant consolidations required a change in service standards on delivery times for First-class mail and periodicals. It was clear early in the planning that such a change would drive away a lot of business. How much is hard to say, but two marketing studies conducted in 2011 suggested a range of possibilities.
The first study (which the Postal Service kept secret) showed that First-class single-piece volumes would fall 10.3 percent in the first year of the new service standards, and periodicals would drop 19.7 percent. The second study came up with more palatable numbers — a 2.8 percent drop in First-class and a 2.1 percent drop for periodicals.
The actual numbers for the first half of FY 2013 are somewhere in between: First-class volumes are down 4.3 percent, and periodicals are down 4.8 percent. At least some portion of those declines must be due to the change in service standards.
It’s impossible to say how much each factor contributes to volume losses. The Internet, the economy, service reductions, uncertainty about the direction the Postal Service is heading, each plays a role. But blaming everything on the Internet is disingenuous, and repeating the “$25 million a day” meme doesn’t help matters.