AMERICAN.COM

Last week, I pointed out that the U.S. Postal Service is in danger of needing a taxpayer bailout. My post received a great deal of feedback in the comments section; unfortunately, many do not appreciate the nature or magnitude of the unfunded liabilities that the Postal Service has incurred since its inception, and where those unfunded future liabilities stand today. Unfunded liabilities are obligations that the Postal Service has incurred due to its operations, mostly in the form of retiree healthcare and pension liabilities.

Those interested in gaining a fuller understanding of this issue should see page 11 of the critical April 2010 GAO report entitled U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability.

Here’s the key passage from the report:

USPS also has large financial liabilities and obligations that totaled over $88 billion in fiscal year 2009. Over the last 2 fiscal years, total liabilities and obligations have increased by nearly $14 billion (see table 2). USPS debt to the U.S. Treasury, over this same period, increased by $6 billion and pension obligations changed by over $8 billion—from a $5.3 billion surplus to $2.8 billion in unfunded obligations. To put these liabilities and obligations into context, they increased from 100 percent of USPS revenues in fiscal year 2007 to 130 percent of revenues in fiscal year 2009.

My understanding is that the pension and healthcare liability has been paid down somewhat, mainly through the $5.5 billion pre-pay for retiree healthcare. However, the USPS is reaching its $15 billion limit of borrowing from the Treasury, so it has that liability as well.

There are only three ways that these massive unfunded liabilities can be addressed:

1.    Congress and the Postal Service will refuse to honor their promises to pay the pension and healthcare costs of these Federal workers as incurred by the USPS over time. This is highly unlikely.

2.    The Postal Service will begin to make sufficient profits to pre-pay those currently unfunded liabilities out of revenues paid by mailers. Mail volumes would have to increase significantly. This is doubtful under any scenario, but is made worse by the fact that Congress appears unwilling to allow the USPS to adjust to rapidly falling volumes by aggressively cutting costs. Instead of future profits, increased losses appear most likely as electronic diversion increases (as the GAO report and many other reports, including those of the USPS, point out).

3.    Rather than having mailers cover those costs through rates, volumes will continue to decline and the unfunded liabilities will inevitably be paid by taxpayers. There is no other term for this than a “taxpayer bailout.” Unless major policy changes are undertaken, and very soon, I view this as the most likely scenario. Rather than incur one immediate charge, Congress may simply require taxpayers to cover those unfunded liabilities over time. In total, however, the $50 billion is likely to be an underestimate since the USPS still has to repay its $15 billion in Treasury debt.

Surprisingly, these massive unfunded liabilities are ignored in some discussions of postal reform. I am thus very concerned that the most poorly organized and diffuse group—taxpayers—are the most likely to pay these costs.

As noted above, the $5.5 billion annual pre-pay has helped to reduce those unfunded liabilities through revenues paid by mailers rather than by taxpayers (which is fair), but the USPS has been allowed by Congress to defer those payments (if Congress had not, and the USPS failed to pay, then an agency of the U.S. government would technically be in default, which could affect the U.S. bond rating, so Congress just gives it permission to defer payments so it is not technically in default).

The USPS is thus already benefitting from a “soft bailout” where payments required in the 2006 PAEA by the USPS to taxpayers (i.e., the Treasury) are being deferred by Congress. It is unlikely that the government would allow a typical private firm to miss legally required payments to the Treasury (e.g. taxes) due to financial distress.

It was clear in 2006 that financial problems were ahead for the USPS due to electronic diversion of mail and that its unfunded liabilities had to be paid by mailers or they would be paid by taxpayers. Even with the PAEA, it appears that taxpayers are looking at a large bill to pay in the near future.

A recent Wall Street Journal story (“Postal Cuts are a Dead Letter in Congress,” March 1, 2012) says it all. The Postal Service is working hard to cut costs in light of collapsing mail volume, but members of Congress have pledged to “’draw on a number of tactical tolls’ to delay or dissuade the postal service, including public protests, withholding support for major postal-related legislation, and adding language to committee reports instructing the agency to study the matter further.”

As a result, a massive taxpayer bailout of the Postal Service is coming, but this time Congress can’t blame Wall Street. This bailout will be 100 percent Made in Washington.

The internet is, of course, biting hard into mail volume. The Postal Service’s most profitable class—first-class mail—is down over 25 percent since its peak in 2001, and the Service just incurred quarterly losses of over $3 billion. The Postal Service itself says it will lose over $18 billion annually by 2015 unless something changes.

The full reality is much worse. Unless Congress frees up the Postal Service—and fast—Postal Service paychecks will soon start bouncing like Super Balls. Postmaster General Patrick Donahoe announced that the Service will run out of cash by October. If gas prices continue to rise, it will be a lot sooner. Congress won’t risk delivery of Social Security checks right before an election, so it will crack open the old taxpayer checkbook. Taxpayers will be faced with a bill on the order of the $50 billion GM bailout, this time of a government-owned firm.

None of this was preordained. Postal services around the world have seen this coming for decades, and have adjusted by corporatization and privatization, and by giving postal managers the freedom to adjust to the new communications marketplace. They have allowed managers to make basic business decisions, such as how to run their delivery network.

The United States is unique in its antediluvian postal policy. Congress tells the postal managers to “run the USPS in a businesslike fashion,” and then blocks every decision they make. Congress won’t even let the Service cut Saturday delivery in the face of collapsing revenue, must less manage its sorting network.

Just as hope often triumphs over experience, Postal management keeps trying. It announced new plans to close or consolidate 223 mail processing plants that support some 35,000 jobs, and is seeking an increase in first-class postage to 50 cents in a bid to raise more revenue. But visionaries in the Senate, such as Bernie Sanders (I-Vermont), have called it a dead letter. Maurice Hinchey (D-New York) in the House said, “I’m going to do everything I can to block their efforts.” Such members of Congress are displaying anti-leadership by wringing every ounce out the Service they can and dumping as much of the cost as they can on taxpayers.

Rick Geddes is an associate professor at Cornell University and a visiting scholar at the American Enterprise Institute. Geddes authored the AEI working paper “Return to Sender: Reforms for the Failing Postal Service.”