The U.S. Postal Service and the Trump Administration make for a pair of strange bedfellows, but they agree on this: without major Postal Reform action soon, the U.S. Postal Service could face a liquidity crisis.
This will not only disrupt the Postal Service’s operations but the U.S. economy. It will necessitate a large taxpayer bailout and force important reforms to be legislated under duress.
No one can say for certain when the crisis will occur. In fact, since 2009, the U.S. Government Accountability Office (GAO) has included the Postal Service in its High Risk List of agencies needing attention from Congress and the Executive Branch.
But this time it feels different, due to ominous recent financial announcements by the Postal Service and the U.S. Treasury’s December 4 Postal Service Task Force report. The Postal Service’s financial engineering techniques of juggling and postponing financial reckoning may soon no longer be doable.
Warning signs include the following:
- The Postal Service has a negative net worth of $62 billion.
- For 12 consecutive years the Postal Service has lost money, accruing cumulative net losses of $69.0 billion.
- Losses are accelerating despite the strong economy. In Fiscal Year 2019 the Postal Service is budgeted to lose $6.6 billion, up 69 percent from the $3.9 billion Fiscal Year 2018 loss.
- At the end of Fiscal Year 2018, the Postal Service’s total unfunded liabilities and debt were $139.6 billion.
- Borrowing capacity of $15 billion from the U.S. Treasury is nearly maxed out, and generally has been since September 2012. Recently, though, the Postal Service has been repaying some debt while drawing down its cash. It has even set a goal of reducing the Treasury debt to $11 billion by the end of Fiscal Year 2019.
Despite these losses and obligations, the Postal Service has avoided financial disaster by keeping a large amount of cash on hand. For Fiscal Year 2018, the Postal Service’s average daily liquidity balance was $11.3 billion. The Postal Service’s Fiscal Year 2019 Integrated Financial Plan aims to have $8.7 billion in unrestricted liquidity at the end of the fiscal year, a 23 percent reduction.
The retirement security of 500,000 postal workers has also been significantly threatened by the financial gamesmanship. As GAO reported in August, due to the Postal Service’s missed payments of $38.2 billion for retiree health benefits since Fiscal Year 2010, the fund for these assets is being drawn down and will be depleted by 2030. GAO also noted that although USPS had accumulated liquid assets of $10.5 billion at the end of Fiscal Year 2017, it did not make $6.9 billion in required payments for retiree health and pension benefits.
Near term challenges to maintaining liquidity include:
Potential for an economic recession. The Postal Service consistently says that its revenue and volume are closely linked to the strength of the U.S. economy. The 2008 Great Recession significantly impacted operations and another downturn could make this year’s projected $6.6 billion deficit seem small.
An outdated business model and absence of a turnaround plan. Even if the economy remains robust, the Postal Service still projects significant operating losses. In its annual Fiscal Year 2018 10-K, a legally required review of financial operations, the Postal Service says, “Absent legislative and regulatory change, the Postal Service projects continuing annual net losses in the future. As a result of these losses and its liquidity concerns, the Postal Service will not have sufficient liquidity to meet all of its existing legal obligations when due, to pay down its debt and to make the critical infrastructure investments that have been deferred in recent years.”
Debt renegotiation. The U.S. Treasury, the bank for the Postal Service, has changed the terms under which it will loan money to the USPS. For 21 years, it provided an annual agreement. For the period starting October 1, 2019, the Treasury decided to only provide funds for three months. With interest rates expected to rise, the situation could drive Postal Service interest costs significantly higher.
The Postal Service is also quite concerned about its short-term agreement with Treasury, as it seeks a full-year deal. In a September 28 8-K filing about the reduced loan term to three months the Postal Service said, “Reducing the duration of this Agreement from one year to 90 days introduces significant uncertainty as to how USPS might fund operations in an expeditious and established manner in the face of unpredictable revenue short-falls.”
There are signs of hope, despite legislative inaction. In response to a directive from the Postal Regulatory Commission, the Postal Service has proposed that incoming packages from other countries be categorized as “competitive products.” This would eliminate subsidies that certain foreign shippers, especially those in China, receive.
Today, it costs less to send a package that is 4.4 pounds or lighter from Beijing to New York than it does to send that same package anywhere within the United States. This single reform will raise hundreds of millions of dollars for the Postal Service and level the playing field for U.S. e-commerce companies and manufacturers of light weight products. While important details remain to be worked out, this is just one of many steps that need to be taken.
Many in Congress have seen postal reform as an unpleasant and politically challenging issue that can be deferred. Yet, financial crises can come about suddenly, as happened with Bear Stearns and Enron.
Without prompt action a liquidity crisis will mean mail and package disruptions, huge taxpayer bailout costs, and further lack of confidence in government.
Congress should act now to put forth comprehensive, bi-partisan legislation and commit to have it to the President’s desk by the summer of 2020. Otherwise, the costs and tasks will be much higher and more difficult, with the public justifiably angry and disappointed.
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