The spin doctors examine Post Office financials for Q1: “The patient is a goner”

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This week the Postal Service released its financial report on the first quarter of fiscal year 2012 (Form 10-Q).  As you might have expected, it’s all bad news — that is, according to the Postal Service, the mainstream media, and Congressional postal experts.  The spin doctors tell us the patient is in critical condition and radical surgery is necessary.  Let them amputate a few limbs and remove some organs, and they’ll get the patient back on its foot in no time.

The truth of the matter is that the Postal Service actually ran a profit during the first quarter.  If the economy continues to improve, the prognosis will be just fine, and the Post Office will soon be on the road to recovery.  But the spin doctors have a different story to tell.

 

The Spin

“More red ink at post office: Quarterly loss of $3.3B as agency struggles to avoid bankruptcy,” proclaims the Washington Post.

“Postal Service Loss Widens to $3.3 Billion,” says the Wall Street Journal.

“U.S. Postal Service Loses $3.3 Billion, Warns of Cash Drain,” announces Bloomberg News.

“The longer the Postal Service remains in a weak position, the more damage can be done to our business,” says Chief Financial Officer Joe Corbett.  “We need to change and get back to a point where we’re financially stable so that our customers and our suppliers have faith in us.”

“The U.S. Postal Service ended the first three months of its 2012 fiscal year (Oct. 1 – Dec. 31, 2011) with a net loss of $3.3 billion,” states the USPS press release.  “Management expects large losses to continue until the Postal Service has implemented its network re-design and down-sizing and has restructured its healthcare program.”

“While the situation facing the Postal Service is dire,” says Senator Tom Carper, “it is not hopeless. That is why we need to pass this bipartisan and comprehensive bill as soon as possible.  It is my hope that Congress and the Administration can come together on this plan in order to save the Postal Service before it’s too late.”

With postal management, the media, and legislators like Carper all telling us that the Postal Service is hemorrhaging money and about to fall into a coma, it’s no wonder people are ready for whatever solutions our leaders can come up with.

But the fact of the matter is that it’s all just spin.  The only thing endangering the Post Office right now is postal management and Congress.

The Facts

Take a look at this table that’s included in the Form 8-K that came out with the new financial report.

The table compares the first quarter financials for Fiscal Year 2012 with the same time period in 2011.  Let’s take it line by line.

The first line shows that revenues declined only a small amount — $0.2 billion ($200 million) — or about 1.1 percent.  That’s actually better than the declines from fiscal year 2009 to 2010 (1.5 %), and from 2010 to 2011 (2%).  The revenue decline is hardly worth a short news item, and certainly not the headlines we’re seeing.   (Turns out revenues and volumes turned out much better than predicted.  For an excellent analysis, see ths post by Alan Robinson at Courier Express & Postal Observer.)

The next line in the table shows a decline in operating expenses of $100 million.  The Postal Service typically claims that its lower operating costs are thanks to the downsizing it’s already doing, but lower volumes always mean lower costs.  (In its case for closing processing plants, the Postal Service says slower service standards will push business away and cause revenues to drop by $1.3 billion, but that number is reduced to $0.5 billion because less mail means lower costs too.  See Whiteman’s testimony, p. 7.)

The next line in the table shows an “Operating Income” of $0.2 billion.  That means the Postal Service actually made a profit during the first quarter of $200 million.  It made a profit last year too, of slightly more, $300 million, although it’s hard to remember hearing anything about it.

The next line is for Retiree Health Care Benefits.  Back in 2006, the last time it tried to save the post office, Congress wanted to make sure that there would be plenty of money to pay for the health care of retired postal workers.  The Postal Accountability and Enhancement Act (PAEA) therefore required the Postal Service to pay about $5.6 billion a year over a ten-year period, 2007 through 2016, into a fund to cover retiree health care — for the next 75 years.  That remedy has practically killed the patient.

As the table shows, the Postal Service is saying that it owes $3.1 billion to the fund for the first quarter.  (It didn’t actually make the payment in the first quarter — it’s just including the payment as an expense in anticipation of making it later.)  Figured over a twelve-month schedule of payments, the amount should have been about half that, but as the footnote in the table explains, the Postal Service is planning on making double payments to make up for the fact that it was excused from making the payments last year.  Why the table also shows a payment of $1.4 billion in the first quarter of 2011 isn’t clear, since no payments were made last year.  (Click on the table to read the footnote.)

The key point about the health care payments is that everyone knows they are excessive and unnecessary, but Congress is dragging its feet on changing the law because the postal politicians have other agendas.  Last week the USPS Inspector General, David C. Williams, responded to a request from Senator Bernie Sanders — one of the few legislators in Congress who is speaking the truth about the post office — for an explanation about those payments.  The Inspector General said that the fund is in better shape than comparable funds in any other government agency or private-sector business.

“Prefunding retiree healthcare is rare in the public and private sectors,” wrote the Inspector General.  “We have been unable to locate any organization, either public or private, that has anything similar to the Postal Service’s required level of prefunding of retiree health benefits.  The Postal Service is currently funded at 49% of its estimated current liability.  The federal government does not prefund its retiree health benefits at all, and the military is funded at a 35% level.  Only 38 percent of Fortune 1000 companies who offer retiree health care benefits prefund the expense at all, and the median funding level for those organizations is 37 percent.”

Why the Postal Service would be required to fund its retiree health care fund more than any other business or government agency is beyond comprehension.  Right now there is $44 billion in the fund, probably enough to stop all the payments and just let the interest do the work of building up the fund.  The payments of the past few years could have been much, much smaller, and the entire “crisis” would have been averted.

One last point about the retiree health care fund.  Even though there’s plenty of money in the fund, the premiums for current retirees continue to be paid on a “pay as you go” model like the rest of the federal government.  An additional $630 million was paid out for those retirees during the first quarter, and that amount is included in the regular operating expenses, which brings the bottom line down even further.

Back to the table: The next line is for workman’s compensation.  These numbers are impossible for anyone but an accountant to understand, but every year in the annual USPS financial report there are similar adjustments involving the impact of discount rate changes for worker’s compensation liability, and they don’t seem to be a matter of significant dispute.  The net adjustment for workers’ comp is about $400 million, on top of the $3.1 billion for the health care prepayments.

The bottom line of the table shows that net losses for the first quarter of 2012 were $3.3 billion.  That’s what the headlines are all about.  But these losses are obviously being caused almost entirely by the health care pre-payments.  Otherwise, there would have been a profit of $200 million.

The National Association of Letter Carriers (NALC) has noted this simple fact, and it was reported on postal web sites like Postal News.  The Washington Post buries the $200 million profit in the middle of the article and surrounds it with so much bad news you can barely find it.  Bloomberg notes the $200 million profit but writes that USPS CFO “Corbett said he doesn’t see that happening again unless it can make cuts it wants to make.”  The Wall Street Journal doesn’t mention it at all.

 

More spin

The Washington Post article on the report spins the story this way: “Teetering on the brink of bankruptcy, the U.S. Postal Service’s quarterly loss ballooned to $3.3 billion amid declining mail volume and the soaring costs of health benefits for future retirees.  From October through December 2011, losses were $3 billion more than the same period a year ago, even though that quarter is typically the strongest due to increased holiday shipping.  The mail agency said that at this rate, it will run out of money by October.”

The Post makes it sound as if health benefits for retirees are soaring the same way everyone else’s health care costs are going up.  But rising health care costs have nothing to do with why the benefit payment for 2012 is bigger than in 2011.  As noted above, it’s about an anomaly in the payment schedule, not the cost of health care.

That line about the losses being huge “even though” the quarter is typically strongest is also bogus.  The Postal Service did a booming business in holiday shipping — up 7% over last year — and it helped make up for losses in other kinds of mail.  The quarter was actually very strong.

Reuters exaggerates the losses in an equally misleading way.  Its article begins, “The U.S. Postal Service’s losses shot up to $3.3 billion in the last three months of 2011, a tenfold jump from the same period a year before, as its customer base eroded with the growth of email and online billing.”

Reuters doesn’t explain that the “tenfold jump” — $3.3. billion in 2012 compared to $0.3 billion in 2011 — was due mostly to the fact that the Postal Service made a double payment to the health care fund.

The Wall Street Journal article is just as disingenuous.  It begins, “The U.S. Postal Service’s fiscal-first-quarter loss widened to $3.3 billion as the migration of more customers to email led to a drop in first-class-mail revenue.”

The email excuse has been the Postal Service’s mantra throughout this so-called crisis.  “Technology continues to have a major impact on how our customers use the mail,” Postmaster General Donahoe said in a press release that came out with the 10-Q report.  “While some of the decline is attributable to economic weakness since 2007,” says the press release, “the more significant factor is the continuing transition to electronic alternatives.”

 

Back to the facts

Here’s another table with the financials since 2007 (the numbers come from the Form 10-K reports, available here).

$ in  Billions
2007
2008
2009
2010
2011
2007-
2011
2012
Q1
Revenue
74.8
74.9
68.1
67.1
65.7
350.6
17.7
Operating costs
80.1
77.7
71.8
75.4
70.6
375.7
20.6
Profit / (Loss)
-5.3
-2.8
-3.7
-8.4
-4.9
-25.2
-2.9
Health care payments
5.4
5.6
1.4
5.5
0.0
17.9
3.1
Adjusted profit/ Losses
0.1
2.8
-2.3
-2.9
-4.9
-7.3
0.2

As the table shows, the Postal Service has lost $25.2 billion over the period 2007 through 2011.  The table also shows that the big revenue drop occurred in 2009.  The recession began in December 2007 and took a sharp downward turn in September 2008, just as FY 2009 was beginning.

The Postmaster General, the media, and everyone else can talk all they want about technology, email, and online bill payment being the cause of the $25 billion deficit, but the real cause of the revenue declines is the recession, and the Postal Service knows it.  In its case to the Postal Regulatory Commission for why it should be granted permission to raise postage beyond the rate of inflation — an exigent rate increase — the Postal Service has argued that the revenue losses are due to the recession to the tune of somewhere between 67% and 97%.

In order to put a dollar figure on the losses due to the recession, the Postal Service asked the PRC to consider this scenario (p. 34 ff).  Imagine if mail volumes and revenues had continued pretty much as they were before the recession started, back when total revenues were about $75 billion a year.  If mail volumes for 2009, 2010, and 2011 had continued at that level instead of dropping to about $67 billion, the Postal Service would have brought in over $23 billion more than it did.  Adjusted to actual net losses, that comes to nearly $6 billion for 2008 – 2011 (Initial Remand, p. 46).  Most, perhaps nearly all, of the lost revenue, argued the Postal Service, can be attributed to the recession or to diversion to the Internet caused by the recession.

We’ll never know, but it’s possible that mail revenues would have peaked in 2006-2007 and started to decline even if the recession hadn’t happened.  But at what rate would they have declined?  Certainly nothing like the 9 percent drop from 2008 to 2009.  More likely, we would have seen a gradual decline of one or two percent, which would have led to a gross revenue decline since 2008 of about $2 – $4 billion, and a net loss of $0.5 to $1 billion — far less than the $6 billion lost due to the recession.

In addition to the prefunding of retiree health care and the impacts of the recession, there’s a third cause for the Postal Service’s financial dilemma — over funding of the pension plans.  Williams’ letter to Sanders puts the pension fund surplus in these terms:  “The Postal Service is currently over 100 percent funded in its pension funds,” writes the Inspector General.  “The federal government is funded at a much lower 42 percent level, and the military is funded at 27%.  The average Fortune 1000 pension plan is funded at 80%, and only 6 percent of the Fortune 1000 companies have pension plans that are 100 percent funded.”

A year ago, when the deficit was $20 billion, Williams told Congress that nearly 90% of the service’s $20 billion loss over the past four years was caused by “wrongful overcharges” to health care plan and the two pension plans.  Now the deficit is $25 billion, and as the table above shows, nearly $18 billion of that was caused by the prepayments to the retiree health care fund; some additional amount was caused by the overpayments to the pension funds.  Add another $6 billion in net losses from the recession, and you have a pretty good idea where the $25 billion in the deficit comes from.  The Internet has very little to do with it — maybe a billion of the $25 billion — and “excess capacity” isn’t the problem either.

The retiree health care fund and the two pension plans represent what Williams calls a “war chest of over $326 billion to address future liabilities, prefunding combined pension and retiree health care obligations at 91%.  This is an astonishingly high figure for a company with such a large employee base.”

Imagine you’re a postal worker who has paid into these funds for years, and now you’re told that despite how “astonishingly” over-funded they are, the Postal Service needs to cut the workforce by a couple of hundred thousand employees, and you’re out of a job.  Imagine you’re a mailer who has helped build up these funds with the postal rates you pay, and you’re told that the Postal Service needs to reduce delivery standards, which will cost your business money.  Imagine you’re an average citizen and you’re told that despite these huge surpluses, they have to close your post office, which costs next to nothing to operate.  This makes no sense.

If postal management had stayed focused on the true causes of the deficit and worked with Congress to come up with a simple solution — like eliminating the prepayments to the retiree health fund and transferring some surplus money from the pension plans to repay the $13 billion that’s been borrowed from the Treasury — we wouldn’t find ourselves up against the wall.  But instead, the leaders of the Postal Service and the “postal experts” in Congress, with the help of the mainstream media, have used this manufactured crisis to justify an agenda that has nothing to do with the deficit.

Closing thousands of post offices, consolidating hundreds of plants, putting tens of thousands of postal employees out of work, gutting union contracts, giving postal management control over the pension funds, and all the other things management says it must do if the Postal Service is to “act like a business” — these measures are not about saving the post office, and they never were.

(Image credits: Spin doctor by BART; Zippy cartoon by Bill Griffith)

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