Backgrounder: Why the U.S. Postal Service Is In Trouble

[note: This backgrounder is for this article, on the coming consolidation of the Daytona Beach mail processing facility with Lake Mary’s, and its effects on Palm Coast mail service.]

Since 1971, the USPS has been a self-supporting government agency that covers its operating costs with revenues generated through the sales of postage and related products and services.

Although the USPS does receive an annual appropriation, the agency does not rely on appropriations. Its appropriation is about $100 million per year, about 0.13% of the USPS’s $75 billion operating budget. Congress provides this appropriation to compensate the USPS for the revenue it forgoes in providing, at congressional direction, free mailing privileges to blind persons and overseas voters.

The Postal Service Fund, which the USPS uses for most of its financial transactions, is offbudget, and therefore not subject to the congressional controls of the Congressional Budget and Impoundment Control Act of 1974. However, the Postal Service Retiree Health Benefits Fund (PSRHBF), which was established by the Postal Accountability and Enhancement Act of 2006, is on-budget. The USPS can and does borrow money from the U.S. Treasury via the Federal Financing Bank. Federal statute limits the USPS’s annual debt increases to $3 billion, and the USPS’s total debt to $15 billion.

Recently, the USPS has experienced significant financial challenges. After running modest profits from FY2004 through FY2006, the USPS lost $5.3 billion in FY2007 and $2.8 billion in FY2008. In May 2009, the USPS warned that it might experience a cash shortage at the end of September 2009. Two months later, the Government Accountability Office added the USPS’s financial condition “to the list of high-risk areas needing attention by the Congress and the executive branch.”

As the USPS’s finances have deteriorated, its ability to absorb operating losses has been diminished. Between FY2005 and FY2009, the USPS’s debt rose from $0 to $10.2 billion. In July 2009, the General Accounting Office added the USPS’s financial condition “to the list of high-risk areas needing attention by the Congress and the executive branch.”

Many media headlines have characterized the USPS’s recent deficits as the result of a drop in mail volume and attendant postage purchase revenue. This is not entirely accurate. Mail volumes slid from 213.1 billion mail pieces in fiscal year 2006 to 212.2 billion in 2007, and dropped to 202.7 billion in 2008. Despite the drop in mail pieces, the USPS’s revenues actually held steady during those years—$72.7 billion, $74.8 billion, and $74.9 billion—largely due to postage increases.

However, 2009 did bring both a drop in mail sent and postage purchased. Mail volume fell 12.4 percent, from 202.7 billion to 177.1 billion mail pieces, and operating revenues declined 9.1 percent, from $74.9 billion to $68.1 billion.

During this same period, the USPS has significantly increased operating costs. A great deal of the rise in costs is attributable in part to the Postal Accountability and enhancement Act (PAEA). The PAEA established the PSRHBF and requires the USPS to prefund its future retirees’ health benefits at a cost of approximately $5.6 billion per year for 10 years. (Any remainingobligation is to be amortized over the subsequent 40-year period.) In doing this, the PAEA moved the USPS from funding its retirees’ health care costs out-of-pocket annually to prefunding these obligations. In 2004, the GAO stated that the USPS’s unfunded retiree health benefits obligation was between $47 and $57 billion. Using the Office of Personnel Management’s (OPM’s) valuation, the USPS reported that the unfunded obligation was $51.9 billion as of the end of fiscal year 2009. (There is considerable disagreement as to the size of the USPS’s unfunded obligation.)

In August 2009, Postmaster General John Potter estimated that after borrowing $3 billion, the annual maximum permitted by law, the USPS might end FY2009 with a cash shortage of “up to $700 million.”13 By this he meant that the USPS would not have had enough cash to pay all its financial obligations as of September 30, 2009. This did not, though, mean that the USPS would have shut down. Had this cash shortage occurred, the Postmaster General said the USPS would have used the cash it did have to pay its employees and continue its operations as long as it could. But, the USPS would not have made the full $5.4 billion payment to the Postal Service Retiree Health Benefits Fund that was due on September 30.

On September 30, 2009, Congress enacted H.R. 2918, the Legislative Branch Appropriations Act of 2010. President Barack Obama signed the bill into law (P.L. 111-68) the next day. Section 164 of the law alleviated the USPS’s cash shortage by reducing the USPS’s statutorily required September 30, 2009, payment to the Postal Service Retiree Health Benefits Fund from $5.4 billion to $1.4 billion. (The USPS must repay the $4 billion deferred obligation after FY2016.) While Congress alleviated the USPS’s FY2009 cash shortage, it is unclear what the future holds for the USPS’s finances. Even with this assistance, the USPS had an FY2009 operating loss of $3.8 billion. As the USPS’s finances have deteriorated, its ability to absorb operating losses has been diminished. Between FY2005 and FY2009, the USPS’s debt rose from $0 to $10.2 billion. (The agency’s statutory debt limit is $15 billion.) The USPS has predicted operating deficits in FY2010, and its auditor has stated that there is “significant uncertainty” as to whether the USPS will have the cash required to make its FY2010 payment to its Retiree Health Benefits Fund.

A number of ideas for incremental reforms have been put forth that would improve the USPS’s financial condition in the short-term so that it might continue as a self-funding government agency, all of which would require Congress to amend current postal law. The ideas include (1) increasing the USPS’s revenues by altering postage rates and increasing its offering of nonpostal rates and services; and (2) reducing the USPS’s expenses by a number of means, such as recalculating the USPS’s retiree health care obligation and payments, closing postal facilities, and reducing mail delivery from six to five days.

The GAO has testified repeatedly that the USPS has not reduced its number of retail postal facilities and mail processing plants sufficiently: “Excess capacity has grown with unprecedented declines of mail volume, which are projected to continue through fiscal year 2010…. [A]s its mail volumes decline, [the] USPS does not have sufficient revenues to cover the growing costs of providing service to new residences and businesses while also maintaining its large network of retail and processing facilities.”

Source: Congressional Research Service.