Blocked from using excess funds to cover costs, USPS can only watch as default deadline approaches

Blocked from using excess funds to cover costs, USPS can only watch as default deadline approaches

The U.S. Postal Service is hurting. In April, The American Independent reported that it’s teetering on the brink of financial insolvency, with no obvious solution in sight. Unless something changes quickly, within five months, the USPS will default on its largest single financial obligation, an action that could have a massive impact on the mail service. It’s now up to Congress to stop that from happening, but all signs point to nothing happening on Capitol Hill.

The USPS pegs projected losses over the next ten years at a colossal $238 billion, based on ongoing precipitous declines in first-class mail use. Both industry insiders and government officials, however, say that number is ludicrously inflated.

Ruth Goldway, chair of the Postal Regulatory Commission, an oversight agency that acts as a middleman between the Postal Service and the federal government at large, called it an “unsubstantiated figure with no basis in reality.”

Phil Dine, a spokesman for the National Association of Letter Carriers (NALC), which represents more than 90 percent of all letter carriers, tells The American Independent, “Nobody takes that seriously.” Both called the number a scare tactic that USPS management is using to jolt Congress to rush into reforms.

The numbers from the last several years seem to back up what Goldway and Dine say. Getting to $238 billion in losses by the start of the next decade would require the absolute worst annual loss the Postal Service has suffered in recent years to more than triple, then stay that high for the entire decade. Yet overall mail volume is actually increasing (though first-class mail is still far below pre-Internet-Revolution levels) as the country gradually claws its way out the recession, making such a scenario beyond unlikely.

Still, even if it’s not to the tune of $238 billion, there’s no denying that the Postal Service is in trouble. It ended 2010 with a net operating loss of $8.5 billion, marking the fourth straight year — and the worst of them yet — that the USPS has ended up in the red. But industry insiders say these grim numbers — the source of anti-labor grousing from the likes of Rep. Dennis Ross (R-Fla.) — leave out a crucial part of the complete picture, a piece that completely flips the narrative on the dire straits the Postal Service allegedly faces.

A retirement deal struck

The roots of the issue go back 40 years. In 1971, the federal government authorized a complete overhaul of the postal system. It replaced the nearly 200-year-old Post Office Department with the U.S. Postal Service, which has delivered the mail ever since. The main difference between the two, though the changeover may have been little noticed by the public, is that the Post Office Department was a Cabinet-level department of the federal government and, as such, was funded with federal money. The Postal Service is a federal agency in a much looser sense and operates entirely on revenue generated by consumer purchases.

At the time of the changeover, the new Postal Service struck a deal with the Office of Personnel Management (OPM), the federal agency that oversees all federal civil service programs (such as the old Post Office Department). For those postal workers who began their careers before 1971, the OPM would use federal funds to contribute to pension plans at a rate based on 1971-level earnings, without adjustments for inflation or post-‘71 pay raises. The USPS agreed to keep using the Civil Service Retirement System (CSRS), the pension system for all federal employees, for simplicity’s sake.

Over the next several decades, inflation rose and postal worker salaries grew, from an average of under $10,000 annually at the time of reorganization to over $50,000 today (PDF). As a result, the USPS has contributed an increasingly disproportionate part of pension costs to the CSRS each year since 1971.

‘Pre-funding the grandkids of people who haven’t been born yet’

By 2003, the Postal Service began lobbying Congress to do something to reform the system and reduce its pension obligation. Instead, in 2006, Congress passed the Postal Accountability and Enhancement Act, which, among other things, required the Postal Service to fund 75 years’ worth of retiree health benefits over ten years. Of this singular requirement, the NALC’s Phil Dine says, “It’s pre-funding the grandkids of people who haven’t been born yet. No other organization, public or private, has to do anything like that.”

And that, to bring it all full circle, is where the budget shortfalls come in, according to postal worker union representatives, as well as the Postal Service itself. Each year, September 30 (the end of the fiscal year) hits, and the Postal Service has to dump $5.5 billion into its Retiree Health Benefit Fund. Without that requirement, the Postal Service’s annual profits could have reached as high as $3.3 billion in recent years. Of course, the $8.5 billion loss last year still leaves $3 billion in red ink even after discounting the retiree fund money, but Jim Sauber, head economist and chief of staff for the NALC, contends that even that shortfall is simply the result of a “non-cash” adjustment to the USPS workers’ compensation fund, following tumbling interest rates.

The short end of the stick

Indeed, though the recession and the rise of online communication have put an undeniable damper on mail in general, Dine reports that the latest figures have the USPS making $226 million in net profit in the first quarter of this year — a trend that should continue, at least until September 30 comes around. Even when offset by the hit the Postal Service takes from that non-cash workers’ comp adjustment based on slashed interest rates, Dine says that the USPS would have made $837 million since 2007, were it not for the pre-funding requirement.

Still, despite the singularity of the requirement, the NALC argues that the Postal Service does have the money to remain afloat, if it were simply allowed to use it. Those disproportionate pension contributions? According to external audits performed by consultants from the Segal Company and the Hay Group, the Postal Service has put anywhere between $50 and $75 billion extra into the CSRS since 1971.

The USPS would like to use that money to cover its retirement obligations, but the Office of Personnel Management controls the funds, and recognizing the overage would mean making up the difference itself. “We’re happy to pay our fair share,” says the NALC Chief of Staff Sauber. “We just don’t want to get the short end of the stick, which is what we’ve gotten from OPM.”

Even the OPM concedes that it’s not unreasonable for the Postal Service to seek a re-evaluation of how pension contributions are tabulated. “[In 2003], the Postal Service proposed that the obligations for pre-1971 service be calculated on the basis of a simple years-of-service approach,” OPM planning director John O’Brien told the House Oversight Committee at a hearing last year. “Other than one technical flaw [a quibble over annuity growth], this is not an inconceivable approach. While it may be worthy of future consideration by the Congress, OPM believes that it is not possible based upon current legislation.”

Postal Service: Soon to be extinct?

That last detail is the sticking point in all this. Any change would require an act of Congress, a fact emphasized by unions, the Postal Service and the OPM alike. Unfortunately for the Postal Service, Congress is unlikely to act on this any time soon.

With a 2012 budget fight looming, any solution that would increase the federal deficit by shifting money from a federal pension system into a financially independent organization’s retirement accounts is not going to be popular.

As if to confirm this very notion, Rep. Stephen Lynch (D-Mass.) introduced a bill last month that would resolve this exact issue by transferring all surplus contributions into the USPS Retiree Health Benefit Fund. The American Postal Workers Union Thursday came out in support of the bill, and higher-ups at NLAC tell The American Independent that they’re happy with it as well, but it may not have the necessary support where it counts. The bill has just 35 co-sponsors in the House. It’s currently in the Republican-controlled House Oversight Committee, which has instead turned its attention to a new Postal Service labor contract that House Democrats, postal unions and USPS management have all called fair, but that committee Republicans have alleged is too labor-friendly and only underscores the value of private courier services like UPS and FedEx.

In a hearing last month, amid Republican claims that the contract is inflexible and promotes high labor costs, Rep. John Mica (R-Fla.) said, “The Postal Service has become a dinosaur that will soon be extinct […] and that’s why I use FedEx and UPS.” In fact, one of the Postal Service’s fast-growing sectors is what it calls “last-mile service,” in which it delivers packages door-to-door on behalf of UPS and FedEx, which don’t provide universal service.

Of the push to devalue postal unions and avoid releasing the pension funds, Sauber asks, “Should we really be crushing the Postal Service right now, at a time of 9 percent unemployment?” Congress has five months to decide its answer to that question. If the answer falls to Oversight Committee Republicans, America’s Postal Service may become all but unrecognizable in the near future.

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Kyle Daly

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