The Postal Service’s Fiscal Fiasco

Friday August 10th, 2012   •   Posted by Craig Eyermann at 2:20pm PDT   •  

It's Full of IOUs!The news for the fiscal future of the U.S. Postal Service is grim:

WASHINGTON (AP) � The nearly bankrupt U.S. Postal Service on Thursday reported losses of $57 million per day in the last quarter and warned it will miss another payment due to the U.S. Treasury, just one week after its first-ever default on a payment for future retiree health benefits.

From April to June, losses totaled $5.2 billion, up $2.1 billion from the same period last year.

The mail agency said it is being hurt significantly by mounting expenses for future retiree health benefits.

The Associated Press describes just how much those expenses for future retiree health benefits are costing the USPS:

Those expenses, mandated by Congress in 2006, made up $3.1 billion of the post office�s quarterly loss, while workers compensation tacked on another $1.1 billion in expenses. The agency�s operating loss was $1 billion, mostly due to declines in first-class mail.

Doing some back of the envelope math, the prepayment of $3.1 billion for the purpose of funding the health benefits of future Postal Service retirees accounts for almost 60% of the USPS’ reported quarterly loss. The remaining $2.1 billion of the loss for workers comp and for operating costs being too high for how much money it makes is equal to its previous year’s quarterly loss.

CNBC’s Lori Ann LaRocco explains more about the prefunding of retiree health benefits came about:

US Postal Service workers have a retiree health care benefit in addition to their pension. Before Congress passed the Postal Accountability and Enhancement Act of 2006, the USPS operated under a pay-as-you-go model for retiree health care funding. The new law requires the Postal Service to pre-fund its benefit obligations.

“The idea is that enough money is saved over the course of a career that the benefit is fully paid for by the time the worker retires.

Thanks to these prefunding payments, the Postal Service has greatly reduced its unfunded obligations for retiree health benefits. At the end of fiscal year 2010, these obligations were under $49 billion � a substantial sum, but much more manageable. If the Postal Service continues making its prefunding payments, its unfunded obligations for retiree health benefits will be around $33 billion by the end of the decade. And the postal service will be on course to pay these benefits over time,” a Congressional insider explained.

Without those prefunding payments, the future fiscal situation for the U.S. Postal Service would be even more dire, as Lori Ann LaRocco found when interviewing House Oversight Committee Chairman Darrell Issa:

LL: The Postal unions are urging Congress to allow the Postal Service to stop making these prefunding payments. What would happen?

Chairman Issa: The Postal Service’s unfunded liabilities will soar to around $100 billion by the end of the decade. This will reverse hard-won progress. The unfunded obligations will be 25% higher than they were before the Postal Service started its prefunding payments.

With declining revenue, this huge unfunded liability would be a burden that the Postal Service could not afford to bear.

That kind of “huge unfunded liability” is exactly the situation that led a number of cities in California to declare bankruptcy, as they could no longer pay the cost of actually providing extremely generous pensions and benefits to their retired public employees from their current revenue. They were all “pay-as-you-go”, up until they ran out of taxpayer dollars and couldn’t borrow any more.

We should note also that stopping the prefunding of future retiree health benefits for current postal employees would not keep the Post Office from both losing money in its operations and also failing to meet its other obligations to its employees, like paying for their workers compensation insurance. The Postal Service’s business model is broken, pure and simple, and needs to be reformed.

The kicker is that the USPS’ problem in prefunding the retirement benefits of its employees came about in the first place because it wasn’t meeting those obligations either before 2006, when the Congress mandated that it follow the same accounting practices it requires of all other businesses in the United States. If the Congress hadn’t acted to rectify the growing imbalance for the Postal Service, the U.S. government’s fiscal gap – the difference between how much it has promised to pay in the future and how much it will be likely to be able to pay, would be even larger than the just reported $11 trillion estimated by economists.

Meanwhile, if the Post Office isn’t reformed, the problem will most certainly burden U.S. taxpayers and negatively affect the nation’s fiscal situation for years into the future:

LL: If the postal service cannot pay, American taxpayers will be on the hook for those postal benefits correct?

Chairman Issa: That�s correct. Postal employees are federal employees. All federal pension and retirement benefits are paid from the U.S. Treasury. Since the Postal Service�s operating costs are collected from ratepayers, the Postal Service pays the U.S. Treasury for the costs of federal pension benefits postal workers are legally entitled to receive. Even if the Postal Service cannot or does not make these payments, postal workers are still entitled to pension benefits from the Federal government. So it�s ultimately taxpayers who get stuck with the bill if the Postal Service can�t pay the Treasury for the costs of pensions.

Featured Image:
Source: City of Seattle

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August 2012