As the head of a “consumer-focused nonprofit educational and research organization”, you’d expect Steve Pociask would actually provide educational information rather than his same old scare tactics when it comes to the United States Postal Service’s fiscal situation. But yet again, we have to correct him and his persistence to misrepresent facts about the Postal Service.
About the only thing that Mr. Pociask gets right this time is the net loss of $2.7 billion for our FY 2017. But the reasoning behind the rest of his misstatements are not accurate. The Postal Service’s business model is broken and we are unable to generate sufficient revenue to pay all our expenses. We are a network organization with high fixed costs due to factors such as our Universal Service Obligation to deliver to more than 155 million delivery points up to six days a week, and the fact that we are required to participate in federal pension, health benefits, and worker’s compensation programs. We operate under a price-cap environment where our prices for approximately 70 percent of our annual revenue are capped at the level of the consumer price index increase in any given year. Declining mail volumes, unique retiree health benefits burdens, high fixed costs, and a price cap are causing large losses.
The Postal Service was forced to default on approximately $6.9 billion in payments to pre-fund pension and health benefits for postal retirees. These payments were due to the federal government on September 30. Making these payments in full or in part would have left us with insufficient cash on hand to ensure that we will be able to cover our current and anticipated operating costs, make necessary capital investments, and have adequate liquidity.
Despite the challenges facing the Postal Service, there are straightforward statutory and regulatory reforms that can be implemented which, when combined with continued innovation and aggressive management actions, will help to right the ship. Congress should enact H.R. 756, a bipartisan postal reform bill. The centerpiece of H.R. 756 is its requirement that postal retirees generally enroll in Medicare, which would ensure that the Postal Service’s retiree health benefits program aligns with private sector best practices. In this regard, it is a universal practice for businesses that still provide retiree health benefits to fully integrate with Medicare. Indeed, the Postal Service and its employees have paid more than $31 billion in Medicare taxes. While most postal annuitants enroll in Medicare, some annuitants do not, to the detriment of the Postal Service and those who do enroll. H.R. 756 simply requires that postal annuitants take advantage of the Medicare benefits that they have paid for.
Also critical to our solution is the 10-year review being conducted by our regulator, the Postal Regulatory Commission. The review is necessary because the current regulatory structure governing our ability to adjust prices of market-dominant products, which produce more than 70 percent of our revenue, is predicated on an austere price cap that does not take changes in Postal Service volumes and costs into account. As the past decade has clearly shown, this system is wholly unsuitable to ensuring the Postal Service’s continued ability to provide prompt and reliable universal services, and meet our other statutory obligations, in a self-sufficient manner. The Postal Service simply seeks a structure that gives us the ability to set prices at levels necessary to ensure our financial stability.
Equally important in order to return to financial stability is continued aggressive actions on our part to innovate and constantly improve operational efficiency. The Postal Service has reduced its cost base by approximately $13 billion over the past decade, and we continue to take actions to reduce costs and improve efficiency. We have been improving automation in our growing package business by investing in 40 new sorting machines strategically placed in our network, and we are also working on further automation in our delivery units where our last-mile package business continues double digit growth. At the same time, we continue to downward adjust mail processing capacity to match volume declines. In 2017 alone, we retired nearly 400 letter and flat mail sorting machines, a six percent reduction. And in the back half of the year, we reduced work hours by more than 2 million. However, while we continue to aggressively manage the business, cost pressures continue to mount, meaning these efforts alone are not sufficient to restore financial stability.
In addition, our competitive products provide customers with affordable shipping options throughout the Nation, and help provide essential support towards funding the infrastructure of the Postal Service. Last year, competitive products contributed $6 billion to covering these costs. Absent the critical revenue provided by our package business, senders of letters and other types of mail would have to bear the entire cost burden of this infrastructure. That is why senders of market-dominant mail have joined with the Postal Service in urging the Commission to reject attempts by a competitor to unfairly inhibit our ability to compete in the package marketplace. By law our competitive package products must cover their costs. Our independent regulator, the Postal Regulatory Commission, monitors this issue, through a robust costing system that is based on methodologies developed over decades of litigation. The Commission has concluded every year that products covered by the letter monopoly do not cross-subsidize the Postal Service’s competitive products. The reason we continue to attract e-commerce customers and grow our package delivery business is not because of unfair competition with private carriers, but because customers increasingly see the value of our predictable service, enhanced visibility, and competitive pricing.
But package growth cannot make up for the decline in the volume of letter mail, which generates a higher contribution than our shipping and package business. First-class mail, our most profitable service category, experienced a volume decline of 4.1 percent the past fiscal year, double the decline experienced in 2016. The Postal Service is committed to providing excellent service for our First Class Mail customers. We set robust service performance targets for First-Class Mail and have been steadily improving the service performance scores in recent years. Last year, we delivered 93.7 percent of First-Class within the service standards.
The Postal Service’s financial situation is serious but solvable. Continued innovation and aggressive management actions together with the passage of the provisions of H.R. 756 into law and a favorable outcome in the PRC’s 10-year review of the Postal Service’s pricing system will restore the organization to financial stability and allow us to continue to provide excellent service to the American public.