… Tells Congress Financial Situation Serious, But Solvable
WASHINGTON, DC April 30, 2019 — U.S. Postmaster General Megan Brennan told the House Committee on Oversight and Reform the USPS’ finances are serious but solveable, despite its core First-Class Mail product declining by 41% since 2007.
“However, we do not have the financial resources to fulfill existing statutory obligations and invest in the Postal Service’s future. Overall, our financial situation is very serious, but solvable. The need to adopt urgent legislative and regulatory reforms is simply too important to delay,” the PMG said.
Here are excerpts from her statement to the committee (click for complete PDF of the PMG’s statement):
When I last came before this Committee in 2017, I described the serious, but solvable, challenges facing the Postal Service, and the urgent need for legislative and regulatory postal reform. Since that time, our financial condition has only worsened.
Total mail volume has dropped from 154 billion pieces in 2016 to 146 billion in 2018, a 5 percent decrease overall. First-Class Mail, our most profitable product, has fared much worse, dropping by 7.4 percent. Although our package business continues to grow, it has become increasingly competitive and the growth rate is half what it was, dropping from 13.7 percent in 2016 to 6.8 percent in 2018, compared to the prior year.
In 2018, we posted a net loss of $3.9 billion — the 12th consecutive annual net loss we have incurred. These losses are occurring despite aggressive Postal Service management actions to right-size our organization, amounting to $13.4 billion in annual savings.
These losses have forced us to default on legally-mandated retiree health benefits (RHB) prefunding payments since 2012 and additional pension prefunding payments due to the Office of Personnel Management (OPM) in 2017 and 2018.
The most significant point I can highlight today is the increasing need for urgent action. Had reform legislation been enacted two years ago, we estimate that we would have earned an additional $1 billion in revenue from a modest one-time price increase and saved between $5 billion and $6 billion in RHB costs.
Even in an increasingly digital world, the Postal Service remains an essential part of the bedrock infrastructure of the economy. The physical delivery of mail and packages to all of America’s homes and businesses is the core function of the Postal Service, and this fundamental need of the American people will continue to exist well into the future.
We are now in the 13th year since enactment of the Postal Accountability and Enhancement Act of 2006 (PAEA), making it more than a decade since the passage of any significant postal reform legislation. Since the enactment of the PAEA, we have experienced massive declines in mail volume brought on by the Great Recession of 2008 and the continued diversion of mail transactions to digital alternatives, even as delivery points have continued to grow. In 2007, the first year following the PAEA’s enactment, we delivered 212.2 billion pieces of mail; last year, we delivered 146.4 billion pieces — a 31 percent decline. At the same time, because of the nation’s growing population, the number of delivery points we serve has increased by 1.0 million per year, on average.
The 148 million delivery points we served in 2007 rose to 159 million in 2018, a 7.1 percent increase, while the average number of pieces of mail delivered has dropped from 4.7 to just 3.0 per delivery point each day. We are delivering fewer pieces of mail to more addresses each year, driving up the cost per delivery.
During that same time, we have responded to the challenges that confronted us, taking actions on both the expense side of our business and the revenue side. Our actions have resulted in cost savings of approximately $13.4 billion annually from 2007 through 2018.
The Postal Service continues to control costs and meet current and future customer needs and market trends, as permitted within statutory constraints. Leveraging available data and enhanced technology, we are improving our diagnostic and reporting tools. Recent judiciously targeted capital investment has allowed the organization to process our increasing package volume and mail more efficiently.
We continue to focus on anticipating customer needs and enhancing the value of mail and packages while remaining proactive, flexible and responsive to the marketplace as permitted within our statutory constraints. The affordable, universal package delivery service that we provide enables all Americans to participate fully in the e-commerce economy. In addition, packages provide revenue which is essential to our ability to meet our universal service obligation (USO) to the American people, particularly as First-Class Mail continues to decline.
The growth in our package business is particularly notable because of the increasing speed of market change since the PAEA was enacted. E‑commerce and online shipping were in their infancy in 2006, and today we are proud that the Postal Service makes more e-commerce deliveries than any other domestic delivery service. Our achievements in growing our package business and implementing innovations have enhanced the value of the mail to better serve our customers, including strong integration of digital initiatives with physical mail.
Though, as discussed above, the package business is increasingly competitive, and the rate of package volume growth continues to slow.
Our actions have been necessary, and we are prepared to do more — including making difficult operational decisions that may impact services — but we urgently need legislative and regulatory reform. Ultimately, the PAEA does not provide the Postal Service with sufficient flexibility to meet the financial challenges caused by declining mail volume. We have worked with Congress continually to address this lack of flexibility, and since the 112th Congress in 2011-2012, have seen no fewer than nine postal reform bills introduced without passage.
Despite the Postal Service’s many achievements, our efforts have not been enough — and cannot be enough — to restore the Postal Service to financial health, absent needed reforms.
POSTAL SERVICE FINANCIAL CONDITION
Our business was severely impacted by the Great Recession of 2008. First-Class Mail — our most profitable product — has declined by 41 percent since 2007 and is expected to continue to decline as a result of divergence to digital communications and the increase in online transactions. Likewise, Marketing Mail saw a substantial volume drop due to the same factors.
This decline in volume has eroded our financial stability, and reduced the available revenue to pay for the nationwide retail, processing, transportation and delivery network that we are required to maintain in order to provide universal service.
The consequence of this loss of mail volume, along with continued growth in the required number of delivery points, and the legally-mandated payments to fund RHB and pensions, has been 12 consecutive years of net losses.
In addition, as of Sept. 30, 2018, we reported outstanding debt to the Federal Financing Bank of $13.2 billion. In order to ensure that we had sufficient liquidity to fulfill our primary statutory mission of providing universal postal service, we were forced to default on $33.9 billion in mandated prefunding payments for RHB for the years 2012 through 2016.
Additionally, we did not make $6.9 billion in payments due to OPM in both 2017 and 2018 for normal costs and amortization of RHB, Civil Service Retirement System (CSRS), and Federal Employees Retirement System (FERS) unfunded liabilities. Without these defaults, the deferral of critical capital investments, and the aggressive management actions described above, we would not have been able to pay our employees, our suppliers, or deliver the mail.
Due to the factors outlined above, we do not have sufficient cash to meet all of our existing legal obligations, fully pay down our debt, and maintain a sufficient level of liquidity to ensure continuity of postal operations and meet our universal service obligation. Our liquidity remains insufficient to support an organization with more than $72 billion in annual expenses, and with liabilities that exceed assets by $124 billion, when all post-retirement obligations are included.
As shown above, the Postal Service’s RHB and pension funds are linked to the bulk of our liabilities. Even so, our retirement plans are already significantly better funded than those of most other entities in both the public and private sectors. In fact, the Postal Service’s percentage for CSRS pension funding is more than nine times the level of other civilian federal government entities and is higher than the average funding level for those few Fortune 1000 companies still offering traditional pension plans.
BUSINESS MODEL CHALLENGES
The PAEA imposed upon us a business model that does not provide sufficient flexibility to respond to ongoing volume declines in a manner that allows us to remain financially stable. Some of our most significant costs are fixed by law and are outside the Postal Service’s control. Further, our ability to earn revenue to pay for those costs is constrained by law. This fundamental imbalance is the root of our financial instability, and is primarily influenced by three key factors, which will be discussed in more detail below.
Universal Service Obligation: We are required to maintain an expansive retail, transportation, processing, and delivery network, so that we can serve nearly every address six days a week. The cost of the network continues to grow as the country adds approximately 1 million delivery addresses each year. Additionally, total mail volume has declined from 212 billion pieces in 2007 to 146 billion pieces last fiscal year, and projections are that mail volume will continue to decline. Simply put, we deliver less mail to more addresses every year.
Legally-mandated benefits costs: The Postal Service is also legally required to participate in U.S. government pension, health, and worker’s compensation programs. By law, from 2007 to 2016, we were required to fund RHB using an onerous and unaffordable prefunding payment schedule, which was unique to the Postal Service. Beginning in 2017, this was replaced by an equally unaffordable system of funding retiree health benefits normal costs and paying down the unfunded liability of the retiree health benefits fund.
Price cap: We operate under a statutory price cap that applies to the mail products that generated approximately 67 percent of total revenue in 2018. Reduced mail volume and the statutory price cap constraints mean there is less revenue to pay for our required and increasingly expensive network and other costs imposed upon us by law. The Postal Regulatory Commission (PRC) has agreed that the price-cap system has failed to achieve key statutory objectives. In today’s increasingly dynamic and competitive market — where there are alternatives and substitutes for nearly every product and service we offer — price-cap regulation is not necessary to incentivize efficiency, service quality or pricing restraint.
When I testified before this committee in 2017, there was pending reform legislation on the table, containing provisions that had broad support among stakeholders, including postal management, many in the mailing industry and the postal unions. Those provisions had the capability to resolve several long-term financial burdens on the organization, with the potential to generate significant savings. The provisions also reflected private sector best practices, consistent with our responsibilities to the public.
I now strongly urge this committee to revisit those provisions that are both impactful and have the support of a broad cross-section of postal stakeholders (or that are capable of gaining such support in the near term) as they will generate both cost savings and additional revenue. These include:
— Requiring full Medicare integration for parts A, B, and D for postal retiree health plans, or exploring other Medicare integration scenarios.
— Restoring half our exigent price increase for Market-Dominant products.
— Providing some additional product flexibility.
We urge Congress to consider these provisions in any postal reform legislation to be introduced. Combined with a favorable outcome of the PRC’s 10-year pricing review and continued aggressive management planning and actions, these provisions would improve our financial stability and ability to continue to meet the USO, and allow for further innovation, investment, and growth for the Postal Service and the mailing industry as a whole.
10-YEAR BUSINESS PLAN
We have outlined the business model challenges imposed on us by the PAEA consistently over time, and have identified the urgent need for legislative and regulatory reform. In addition to the urgently needed reforms identified above, the Postal Service, led by its Board of Governors, is developing a 10-Year Business Plan to address broader business and structural changes that need to be implemented.
We acknowledge that there is no easy solution to put the Postal Service on a financially sustainable path. We also recognize that reasonable differences of opinion will exist about what services the Postal Service should provide and about how those services should be funded. But ultimately, hard choices are required to ensure a financially stable Postal Service.
The key areas that our 10-Year Business Plan will address, and that any plan for national postal services needs to address, are: the USO definition, as discussed above; pricing and product flexibility; and affordable employee benefits.
As we continue to finalize the plan, we will keep Congress apprised and will engage stakeholders. We recognize that many points in our plan will likely require legislation that currently does not have consensus amongst stakeholders, and that we will need to build that consensus over time. While we do so, we believe it is important to move forward with legislation that includes those proposals that have already gained broad support and agreement among stakeholders.
America deserves a financially stable Postal Service that can continue to play this vital role in our economy and society. In a dynamic and increasingly digital, mobile- and device-driven world, the Postal Service has opportunities to enhance the way we enable commerce. However, we do not have the financial resources to fulfill existing statutory obligations and invest in the Postal Service’s future. Overall, our financial situation is very serious, but solvable. The need to adopt urgent legislative and regulatory reforms is simply too important to delay.
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