We believe that as of September 30, 2011, we will have a cash shortfall and will be unable to meet all of our financial obligations.
The Postal Service had net losses of $8,505 million, $3,794 million, and $2,806 million for the years ended September 30, 2010, 2009, and 2008, respectively, and also experienced negative cash flow from operations in 2010 and 2008. Operating cash flows would have been negative in 2009 as well had P.L. 111-68 not been enacted. To alleviate pressure on liquidity, in September 2009, P.L. 111-68, Making Appropriations for the Legislative Branch for the Fiscal Year-Ending September 30, 2010, and for Other Purposes, changed the $5.4 billion PSRHBF pre-funding payment scheduled for September 30, 2009 to $1.4 billion. P.L. 111-68 did not, however, address future payments into the PSRHBF and, accordingly, on September 30, 2010, the Postal Service made the scheduled pre-funding payment of $5.5 billion to the PSRHBF as no similar legislation was passed in 2010. The PSRHBF pre-funding payment scheduled for September 2011 is $5.5 billion. Even with a continuing economic recovery and stringent cost control efforts, we estimate that the Postal Service will not generate sufficient funds during 2011 to meet all of its projected financial obligations, including the requirement to make the $5.5 billion pre-funding payment to the PSRHBF on September 30, 2011.
By statute, the Postal Service is limited to an annual net increase in debt of $3 billion and total outstanding debt of $15 billion. The Postal Service projects that it will exhaust its borrowing capacity in 2011 and will experience a cash shortfall on September 30, 2011 if legislation similar to that passed in September 2009 is not passed to reduce, eliminate, or defer the PSRHBF pre-funding payment due on that date, or make other changes that would enable the Postal Service to have sufficient liquidity to meet all its obligations.
As previously reported, Postal Service losses for the past three years are primarily attributable to declines in mail volume that began in 2008, the statutory limitations on the Postal Service’s ability to reduce costs and increase revenue, and the statutory requirement to pre-fund retiree health benefits. The declines in mail volume are primarily a result of the economic recession that began in December 2007 and the long-term trend of hard copy correspondence and transactions migrating to electronic media. This migration to electronic media accelerated during the recession and is expected to continue.
Since peaking at 213 billion pieces in 2006, mail volume dropped 42 billion pieces, or 19.7%, to 171 billion pieces in 2010, including reductions of 9.5 billion pieces in 2008, 26.0 billion pieces in 2009, and 6.2 billion pieces in 2010. The resulting revenue in 2010 was $67,052 million, a $1,038 million, or 1.5%, decrease, from 2009 and almost $8 billion less than 2008. While we expect the rate of mail volume decline to stabilize as a result of a strengthening economy, forecasting in this uncertain economic environment is subject to significant uncertainties. Our operational plan for 2011 anticipates relatively flat mail volume versus 2010 levels. It is possible that mail volume, and therefore revenue, could decrease at a rate greater than this projection.
Personnel costs including compensation, retirement, and health expenses as well as workers’ compensation costs and retiree health benefits expenses represent approximately 80% of total operating costs. Although we have taken significant steps to decrease these costs in response to declining mail volume, many of these costs remain fixed and beyond our control. Contracts with our unions are fixed until times of renegotiation, retirement benefits are not determined by management but rather by the Federal government, and health care benefits costs, also mandated by contract, continue to rise well above the rate of inflation. In addition, our ability to adjust our workforce and network infrastructure is limited by both contractual and political obstacles.
The Postal Service has two substantial cash payments scheduled for September and October 2011: the previously-noted $5.5 billion due to the PSRHBF on September 30, 2011; and approximately $1.2 billion due in October 2011 to the DOL for the Postal Service’s annual payment on its workers’ compensation liability. Based on the cash balance at September 30, 2010, current borrowing capacity of $3 billion, and projections of cash available from operations, there will be insufficient cash available to fund these financial obligations absent regulatory adjustments to some, or all, of these obligations. The legal and/or regulatory consequences to the Postal Service if the PSRHBF or the workers’ compensation obligations cannot be fully funded are unknown.
To address its financial challenges, the Postal Service has substantially reduced work hours and other costs. As previously reported, work hours were reduced by 50 million in 2008, 115 million hours in 2009, and an additional 75 million work hours in 2010. The number of career employees was reduced by approximately 22,000 in 2008, 40,000 in 2009, and 39,000 in 2010 due primarily to normal retirement and attrition. The Postal Service is continuing its efforts to increase revenue and operational efficiencies and has halted new construction of facilities. However, the ability of the Postal Service to execute strategies to increase efficiency, reduce costs, and retain and grow revenue is constrained by contractual, statutory, and regulatory restrictions. Given these restrictions, it is unlikely that Postal Service efforts to positively impact cash flow, will be, either individually or in the aggregate, sufficient to offset a cash shortfall on September 30, 2011. Further, it should be noted that, absent significant changes, the $15 billion debt ceiling is projected to be reached in 2011. No assurance can be given that Postal Service efforts to secure legislative changes will be successful, or that Congress will enact restructuring legislation in time to impact 2011, or at all.
In addition to its cost reduction and revenue generation efforts, in July 2010, the Postal Service filed a request with the PRC seeking an exigent price increase. In its filing, the Postal Service estimated that implementation of this increase in January 2011 would generate $2 billion in additional 2011 revenue. This request for a price increase that exceeded the postal pricing cap tied to Consumer Price Index, was denied by the PRC on September 30, 2010. After reviewing the decision, on October 22, 2010, the Postal Service filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit seeking a review of the PRC’s interpretation of the law that governs how prices can be set under extraordinary and exceptional circumstances. The Postal Service believes that the PRC misread the statute and applied an incorrect standard in evaluating the request for an exigent price increase. No decision is likely in time to impact 2011.
Even if legislation is enacted to address shorter-term liquidity matters such as the PSRHBF pre-funding payment schedule, the Postal Service still faces longer-term financial stability concerns. To begin the process of addressing these issues, in March 2010 the Postal Service issued its action plan for the next decade, Ensuring a Viable Postal Service for America. In this plan, the Postal Service estimated that during the next decade, there could be cumulative financial losses of approximately $238 billion, absent significant operational and legislative changes.
The Postal Service further estimated that approximately $123 billion of the projected losses could be addressed and resolved by aggressive management actions within the existing statutory and regulatory structure, assuming cooperation of Postal Service stakeholders. To address the remaining projected deficit of at least $115 billion over the next decade, a balanced set of actions has been proposed. These actions will require additional legislation and the cooperation of a range of stakeholders, and include changes in the following areas: reduction of retiree health benefits funding; reassessment of CSRS obligation; delivery frequency; modernized access to postal services; workforce flexibility; pricing flexibility; expansion of products and services; and oversight.
One of the actions that the Postal Service has proposed to alleviate its longer-term financial challenges is the elimination of Saturday mail delivery to street addresses. The Postal Service filed a request for an advisory opinion with the PRC on March 30, 2010, requesting advice (required by 39 U.S.C., section 3661) as to whether the elimination of Saturday mail delivery to street addresses and other associated changes conform to the requirements of Title 39 of the United States Code. The PRC is expected to issue its advisory opinion before the end of the calendar year. Congressional action would then be required to reduce the number of legally-required delivery days. No immediate savings would occur from the ability to adjust the six-day delivery requirement. If the request is granted, it would be 6 to 12 months before the impact of the financial benefits would begin to be realized. This provides time for customer notifications and changes to internal systems and operations that would be required in order to achieve the expected cost savings. Thus, due to legal and practical constraints, it is unlikely that full savings from altering the delivery schedule could be achieved before 2012, at the earliest.
A related issue impacting the Postal Service’s financial viability is the legally-mandated funding of retirement benefits. On January 20, 2010, the Office of Inspector General (OIG) issued a report in which it evaluated the funding of the Postal Service’s CSRS responsibility, concluding that the Postal Service had overfunded its obligation by $75 billion. At the Postal Service’s request, the PRC initiated an independent actuarial review of this issue and issued a report on June 30, 2010, in which the independent actuary determined that, although the cost allocation methodology used in 1971 was appropriate at the time, modern actuarial and accounting guidance suggest an alternative allocation methodology would be more fair and equitable. If an updated allocation methodology were employed, the actuary estimates that the Postal Service may have overfunded the CSRS obligation by $50 billion to $55 billion. A similar issue is the projected overfunding of the Postal Service’s FERS obligation, as noted by the OIG in their August 16, 2010 report. Using the long-term economic assumptions of OPM’s Board of Actuaries, this overfunding is $6.9 billion as of September 30, 2009. The Office of Personnel Management (OPM) and the Postal Service are evaluating these studies, and the Postal Service is pursuing a legislative solution to address the actuarial valuation and funding issues.
Legislation which embodies the recommendations of the independent actuary retained by the PRC was approved by the House Subcommittee on Federal Workforce, Postal Service and the District of Columbia on July 21, 2010. The legislation does not, however, address the liquidity problem facing the Postal Service because it does not alter the statutorily mandated $5.5 billion pre-funding payment to pre-fund retiree health benefits due on September 30, 2011, or any payments due thereafter.
Additional legislation, S. 3831, the Postal Operations Sustainment and Transformation (POST) Act of 2010, was introduced in the Senate on September 23, 2010, to address many other concerns impacting the Postal Service’s financial viability. These are discussed in greater detail in the Legislative Update Section below. The proposed legislation has been referred to the Committee on Homeland Security and Government Affairs.
The Postal Service’s status as a self-supporting entity within the federal government presents unique requirements and restrictions, but also mitigates some of the financial risk that would otherwise be associated with a cash shortfall. Despite falling mail volume, the Postal Service is still widely recognized to provide an essential government service and there are a wide variety of potential legislative remedies that could resolve the short-term liquidity concern. Therefore, it is unlikely that, in the event of a cash shortfall, the federal government would cause or allow the Postal Service to cease operations.
The Postal Service continues to inform the Administration, Congress, the PRC, and other stakeholders of the immediate and longer-term financial issues it faces and the legislative changes that would help ensure the availability of sufficient liquidity on September 30, 2011, and beyond. There can be no assurance that the requested adjustments to the PSRHBF pre-funding payment schedule, or any other legislative changes, will be made by September 30, 2011, or at all.
