Last Wednesday, August 1, the U.S. Postal Service defaulted on a $5.5 billion dollar payment for future retiree health benefits. They predict in their Quarter II Financial Report that they will also not be able to pay the required $5.6 billion in prefunding payment for retiree health benefits due by September 30, 2012. The Postal Service is also required to pay approximately $1.3 billion to the Department of Labor for workers’ compensation, in addition to normal operating expenses.

On top of all this, the Postal Service’s Integrated Financial Plan for 2012 anticipates a reduction in mail revenues of about $1.7 billion compared to 2011. In the first quarter of 2012 (QII FY 2012), the Postal Service took in $16.227 billion in gross revenue in three months, ending in March. Its operating expenses, including wages, transportation, retiree health benefits and other employee benefits, totaled $19.364 billion. This results in a shortfall of $3.137 billion for operations in the first three months of 2012 alone.

In the first quarter 2012, the retiree health benefits paid were $3.712 billion. The Postal Service is legally required since 2006 under the Postal Accountability and Enhancement Act to pay all future benefits to employees in an upfront payment system. So pension funds and retirement benefits must be paid for current employees in order to prevent delinquencies and accrue interest. The prefunding schedule is spread out over 10 years, with the total commitment of $33.9 billion originally due by 2016. Several actions have been taken by Congress to push back the due dates of payments, with the most recent one being the Consolidated Appropriations Act (2012) changing the due date of the $5.5 billion originally due September 30, 2011 to August 1, 2012. Congress did not act to push the date back further, resulting in the default.

The U.S. Postal Service cannot control most of its benefits requirements. Employee Health, RHB pre-funding, FERS, Workers Compensation, Social Security and the Thrift Savings Plan are all controlled by statue, determined by Congress. In 2011, 78.7% of all costs were personnel related. Of these, 38.5% went to benefits, compared to 52.3% going toward wages. Put another way, over one third of Postal Service employees’ compensation came in the form of benefits (healthcare, retirement, etc.) determined by Congress.

The Postal Service came out with a plan called the Plan to Profitability last February in order to reduce their deficit and cut costs. However, many of the actions proposed require Congressional action to be implemented. The plan identifies $20 billion of annual savings within the next 5 years, which would more than cover the current shortfalls. One of these would be the establishment of a U.S.P.S.-administered healthcare program, projected to save $7 billion per year. This would also eliminate the prefunding requirement. Currently, employee healthcare plans are administered by Federal Employees Health Benefits Program, managed by the Office of Personnel Management.

Another proposed change, which would also require legislative approval, would be increasing single-piece first class stamps to $0.50. The Postal Service has also proposed eliminating Saturday deliveries, reducing overnight deliveries and changing Standard (Bulk) Mail pricing, all of which require legislative action.

Additional Resources

Reuters Senators Blast House Leaders over U.S. Postal Service Default: http://in.reuters.com/article/2012/08/01/usa-postal-default-idINL2E8J1AIR20120801

Fortune 1973 What the Postal Service Can’t Deliver: http://features.blogs.fortune.cnn.com/2012/08/05/postal-service/

United States Postal Service Quarterly Financial Report Quarter II 2012: http://about.usps.com/who-we-are/financials/financial-conditions-results-reports/fy2012-q2.pdf

The New York Times As Default Looms, Postal Service Sees Deeper Woes: http://www.nytimes.com/2012/08/01/us/politics/postal-service-default-may-be-followed-by-deeper-woes.html?_r=1&smid=tw-nytimes&seid=auto

USPS Plan to Profitability: http://about.usps.com/news/national-releases/2012/pr12_0217profitability.pdf

Postal Accountability and Enhancement Act (2006): http://www.prc.gov/PRC-DOCS/UploadedDocuments/PL109-435PAEA.pdf