USPS Finances:

Are we on the Road from Universal to Invisible?

By Alan M. Robinson

October 10, 2000

The Postal Service recently announced that it faces a $300 million loss this fiscal year.1 In discussing the potential loss, Postmaster General Henderson indicated that the loss was due to a decline in First Class cards and letters and a series of unexpected costs. The Postmaster General further stated that "a series of added costs have forced the agency to cut back spending to make ends meet."2 He noted four specific items that caused the Postal Service to fall into the red:

These reasons combined are nearly four times the switch of $400 million from the original projections of a $100 million surplus to the now expected $300 million loss. Fortunately, in the last accounting period, the Postal Service found ways to reduce its loses to $150 million.4

While the Postal Service describes the cost items as unexpected, the Postal Service knew of all of these cost increases by the second quarter of the fiscal year. In fact, the Postal Service knew the effect of the letter carrier arbitration at the beginning of the fiscal year. The revenue shortfall represents a small forecasting bias of 1.4% that over-estimated prospective revenue from commercial customers. The Postal Service could have projected this error much earlier in the year by comparing accounting period revenue budgets and actual revenue.

The financial difficulties that the Postal Service now faces should not surprise any postal stakeholder. While the Postal Service has shown profits for the past five years, the Postal Service has employed a number of one-time accounting and budgetary adjustments to maintain its profitability. These short-term actions have allowed the Postal Service to consistently post a positive net income, that prudent management with a longer-term focus would not have achieved. Recent research, cited in this article, indicates that reliance on short-term actions could hurt the long-term viability of the Postal Service, just as they have hurt companies such as Eastman Kodak, Unisys and Xerox. The cursory review of the Postal Service's finances that follows should help postal stakeholders better understand the Postal Service's precarious situation.

In fiscal year 1999, the Postal Service reported a net income of $363 million. However, a review of the Postal Service’s 1999 Annual Report and the Accounting Period financial report show that the positive net income could be tied to two actions of management.

First, the Postal Service used an accounting adjustment to reduce its workers compensation expenses by $131 million. The adjustment lowered the net discount rate used to estimate the current cost of workers compensation claims.5 This underlying analysis indicated that the relationship between medical inflation and the federal funds rate had fundamentally changed. The Postal Service completed the analysis following a period of rapidly declining medical inflation caused by the expansion of managed care. However, the trend of declining medical inflation reversed almost as soon as the Postal Service introduced the change.6 The trends in medical inflation as reported by Data Resources Inc (DRI), that are used by the USPS, and the Bureau of Labor Statistics are attached in Figure 1. Figure 1 also indicates that the DRI data consistently measures a lower inflation rate than the Bureau of Labor Statistics and could also have contributed to the problems with the Postal Service's analysis.

Evidence that the $131 million dollar workers compensation cost reduction was a one time only event comes from the rapid increase in workers compensation cost in fiscal year 2000. At the beginning of Fiscal Year 2000, the Postal Service increased workers compensation costs by 15% per accounting period indicating a reversal of the prior year's assumption about medical inflation. In addition, starting in Accounting Period 4, the Postal Service increased its workers compensation costs a second time. The second increase of $10 million per accounting period was sufficient to pay back most of the reduction in fiscal year 1999 workers compensation costs caused by the accounting change.7 8 Both the timing and amount of the second increase in workers compensation raises questions about the propriety of the accounting change and how the opinions of the Postal Service's outside auditor influenced the methodology that the Postal Service used to estimate workers compensation expenses.

The second action involved severe budget cuts in cash expenditure, and in particular supplies and services, in the final quarter of fiscal year 1999. Through Accounting Period 9, the Postal Service expenditures for supplies and services, the largest of the cash expenditure items, were nearly on budget.9 However, in the last quarter the Postal Service cut 34% or $653.1 million from its supplies and services budget. 10

The timing and intensity of the budget cuts indicated that either the Postal management had little advance warning of a major budgetary shortfall or significantly adjusted its priorities in the last quarter of fiscal year 1999. The size of the budget cut also indicated that postal management believed that the benefits of avoiding a financial loss exceeded the impact that cost cutting would have on all other management objectives. With the potential of sizable losses, the Postal Service faced the prospect of increasing its borrowing to directly cover operating expenses as cash reserves were not available to cover the expenditures. By only cutting cash expenditures, the Postal Service showed its inability to quickly adjust operating costs to reflect changes in projected revenues. In addition, by focussing on cash expenditures, the Postal Service raised questions how cash management influences spending decisions.

Without these two actions, the Postal Service would have ended fiscal year 1999 with a deficit of nearly $400 million dollars. Without a cash reserve, the Postal Service would have had to borrow the $400 million dollars to cover its losses.

Over the past 5 years, the Postal Service has changed its management of cash and its method of paying for its end of the year obligations. Since the end of fiscal year 1996, the Postal Service increased its short-term borrowings at year-end to cover the year-end obligations in accounts payable and payments on its retirement liability. Prior to that point, the Postal Service primarily used cash reserves generated during the year to pay for the end-of-year liabilities. Effectively, this change had the Postal Service paying for one year's obligations to creditors with short-term debt to be paid in the next year. Figure 2 illustrates the historical trends in the amount of cash accounts payable and short term debt held by the Postal Service during each accounting period and at the Fiscal Year end since the end of Fiscal Year 1995. Furthermore, this change appears to have the Postal Service using more and more of its borrowing to cover operating expenses.

The cash management change would not be problematic if the Postal Service was growing rapidly enough to cover costs passed on from the previous year. For example, if the Postal Service was a rapidly growing high tech firm, this strategy might work. In this case, the company would either have new products that would generate substantial net income in the subsequent years or substantial capital investment providing free cash in the year the loan was to be repaid. However, the Postal Service is not a high tech firm and faces very limited prospects for growth in revenue and capital investment.

The Postal Service's strategy fails when it faces adverse trends and is unable to pay off the short-term debt it generated to cover the prior year's end-of-year payments. Figure 3 displays the Postal Service's short-term debt. As the chart shows, in 1997, the Postal Service was able to pay off most of its short-term debt covering fiscal year 1996 expenses by accounting period 3, and the remainder by accounting period 10. In fiscal years 1998, the Postal Service paid off the debt covering prior year expenses by Accounting period 8.11 In Fiscal year 1999, the Postal Service fell $138 million short of paying off its short-term debt covering fiscal year 1998's end of the year obligations. The Postal Service stopped paying off its short-term debt during the cash crisis of the final quarter of fiscal year 1999. The Postal Service then actually increased its short-term debt by $97 million rather than continuing to pay down its short-term debt. Finally, in fiscal year 2000, the Postal Service has only paid off slightly more than half of the increase in short-term debt.

As the Postal Service looks toward the end of fiscal year 2000, the Postal Service can expect to hold approximately $1.3 billion dollars more in short-term debt than it had at the end of Fiscal Year 1999, unless it refines its existing short term debt. On top of the unpaid debt for Fiscal Year 1998 and 1999 obligations, the Postal Service faces substantial end of year payments to cover its accounts payables, payments on its pension liability, and an expected loss of $150 million. Just as in prior years, the Postal Service will have to borrow to cover these expenses. Based on the experience of the past two years, the Postal Service may have to borrow an additional $3.8 billion to cover the end of the year obligations assuming profitability comparable to what was generated in the prior two years.12 Figure 4 presents a rough forecast of the Postal Service's accounts payable, pension liability and debt for Fiscal Year 2000 based on the figures in Fiscal Year 2000 Accounting Period 12 and similar figures for the prior two years. In its Annual Report the Postal Service indicated that the borrowing could be even higher due to factors known at the beginning of the year. 13 With a loss of $150 million, the Postal Service will borrow nearly $4 billion to cover its entire end of the year obligations.

A recent statement at MTAC of Richard Strasser, acting chief financial officer at the Postal Service, indicated that the Postal Service Debt at the end of Fiscal Year 2000 would increase by $2.4 billion. This $1 billion more than estimated here.

The Postal Service has argued that the change in cash management policy has reduced its costs by allowing it to reduce debt and therefore interest expenses. However, the change in cash management policy has also had the effect of changing the mix of short term and long term debt. Figure 5 illustrates the portion of short-term debt to total debt. The last column represents the estimates projected for the end of Fiscal Year 2000 estimated in Figure 4. The above analysis linked the annual increase in short-term debt to payments on current obligations. This analysis suggests that by the end of this fiscal year, the Postal Service could face a situation where over 60 percent of all debt in the beginning of fiscal year 2001 covers payments on current obligations from fiscal years 1999 and 2000. The Postal Service now plans to borrow $1 billion more than projected here. If the Postal Service chooses to service this additional debt with long term financing, the proportion of short-term debt will be 54%.

At this point the Postal Service faces fiscal year 2001 with two handicaps. First, it must pay off fiscal year 2000's end-of-year obligations and operating loss. Second, it must pay off about half of fiscal year 1999's obligation. In order to cover this debt, the Postal Service will need to generate nearly $5 billion in cash to return to the financial position it was in at the end of fiscal year 1998. In addition, the Postal Service faces increased debt service that increases its difficulty in generating a positive return. These handicaps are increased by the Postal Service's decision to borrow $1 billion more than projected here.

As the Postal Service enters fiscal year 2001, the Postal Service faces major challenges to its financial well being. The key challenges include:

Rate Level Uncertainty. In developing a budget for the upcoming fiscal year, the Postal Service only knows rates for the first third of the fiscal year. After that, the rates, volumes, and revenues will depend upon the decision of the Postal Rate Commission. The Postal Rate Commission has the authority to and likely will recommend rates different from that proposed by the Postal Service. As such the Postal Service's budget cannot assume that the final rates will be as they proposed, unless they plan to adjust their plan once the Commission's decision is announced. A number of parties have argued for lower rates and revenue requirements that the Postal Rate Commission may accept. If the Postal Rate Commission's decision is in line with R97-1, the Postal Service can expect that the Commission will reduce the Postal Service's test-year revenue requirement. Based on the revenue requirement proposed by the Postal Service in R2000-1, and an assumption that rates will go into effect halfway though the year, a similar reduction to R97-1 would reduce the expected revenue in fiscal year 2001 by approximately $450 million. 14

Growing Fixed Expenses. In fiscal year 2000, the fastest growing expenses were those that are outside of operating management control. These costs include CSRS pension, retiree COLA's, workers compensation, retiree health benefit, and interest expenses. Overall these costs grew by 10.4% percent between 1999 and 2000. In its rate case filing, the Postal Service provides data that generates a 6.6% increase in these fixed expenses between fiscal year 2000 and fiscal year 2001. This translates to an increase of $354 million dollars in fixed costs. Figure 6 displays the historical and projected costs. The Postal Services projection for interest expenses in Fiscal Year 2001 ignores the interest on the additional debt required to cover the loss in fiscal year 2000. In addition, if the Postal Service underestimated medical inflation as it did in Fiscal Year 1999 or assumed that more of the new debt incurred at the end of Fiscal year 1999 had been paid by the end of fiscal year 2000, then the projected fixed costs would be underestimated.

Emery / Priority Mail Settlement. The Postal Service and Emery World Airline has had a dispute over the rates Emery should have received for service rendered from fiscal years 1999 through the remainder of the contract. A recent court decision was concluded mostly in Emery's favor. Value Line has reported that Emery has recorded disputed payments of $179 million as of July 2000.15 The Postal Service has already agreed to pay Emery $102 million of this amount As Emery will provide service for the foreseeable future, the total increased cost will be higher and could be $200 million or more.

Increasing Debt Service. The Postal Service now projects that it will need to hold $2.4 billion more debt than it did at the end of the last fiscal year. This will total $9.3 billion dollars in debt. The increase in debt service adversely affects both the Postal Service's future budgets and ability to finance capital improvements. Increasing debt increases debt-servicing costs that put pressure of the ability of the Postal Service to set positive net income goals without major cuts in other expenditures. The amount of current debt, that appears to cover prior year obligations, may reduce the amount of new debt the Postal Service can issue to cover future capital investments. If net income appears to weaken, the Postal Service could refinance its debt and extend the payment of existing short-term debt over an extended period.

Deferred Capital Expenditures. In fiscal year 2000, the Postal Service has reduced its capital expenditures from budget by $437 million through accounting period 12. Most of this reduction has come from three areas, 1) building construction and improvements, 2) vehicles, and 3) postal support equipment. The Postal Service cut the building budget by $166 million or 11%, the vehicle budget by $71.5 million or 32%, and the postal support equipment budget by $160 million or 34%. All of these cuts reflect delays of purchases that the Postal Service will make in future year and a slowdown of its capital investment plan. The cut in the postal support equipment budget may delay the implementation of the information platform as postal support equipment includes the capitalized equipment for this project. Besides delaying critical initiatives to increase the use of technology to manage the Postal Service's core business, the reductions in capital expenditures in combination with the increase in short term debt raise questions about the Postal Service's liquidity. Staying on its capital budget and borrowing the money to cover the capital expenditures, that the Postal Service did not make, would have resulted in the Postal Service adding nearly $1.7 billion in debt in Fiscal Year 2000. The decline in capital expenditures suggests that the Postal Service must make significant reductions in capital expenditures to remain within its means with its means determined by its ability of the Postal Service's business to generate cash from operations, obligations on debt generated in fiscal years 1999 and 2000, and prudent limits on capital borrowing given the prospects of current and future operating losses. Unless the Postal Service's net income improves in fiscal year 2001; the Postal Service faces the same dilemma in that year.

Declining Volumes and Revenue. Concerns about the possibility of declining Postal volumes and revenue are well documented. Analysts have cited numerous causes including electronic diversion, mailpiece consolidation, and a faster than expected expansion of drop shipping and work-sharing. These trends make forecasting postal revenues increasingly difficult. A review of accounting period revenue forecasts since 1998 suggests that the Postal Service's revenue budget consistently overestimates actual revenues. Unless the Postal Service has changed its forecasting methodology for fiscal year 2001, the Postal Service's revenue budget will overestimate commercial revenue by 1.4% and retail revenue by 0.8%. With no change in its revenue forecasting methodology, the Postal Service will likely report a revenue shortfall next year exceeding the $789 million dollar shortfall projected for fiscal year 2000. Figures 7 and 8 depict the forecasting error data since 1998.

The challenges listed above project a potential negative change in net income of at least $1.8 billion of which only $354 million will likely be included in the fiscal year 2001 budget. The Postal Service could face additional financial challenges if interest rates and inflation affecting cost-of-living increases, fuel prices, medical costs, or interest rates are greater than their budgetary assumptions.

The Postal Service has projected "breakthrough" productivity gains of about $544 million dollars in documents filed with the Postal Rate Case.16 This is less than a 1% reduction in postal costs. The Postal Service will require sixty-five percent of the "breakthrough" productivity just to cover the increase in fixed expenses. The cost of the Emery settlement could consume the rest. As such, the postal community should expert to hear Postal Service executives talking about falling more than $1 billion below budgetary net income projections next Spring or summer. Without a cash reserve, the Postal Service will need to cover all deficits with debt. The size of the potential revenue shortfall raises the possibility that, without careful management of its cash and debt, the Postal Service could bump up against its legal borrowing limits.17

In a recent study, Professor Gary Hamel of the Harvard Business School noted that companies that raised earnings at least five times faster than sales between 1993 and 1996 experienced a significant downturn within three years.18 As noted in the Business Week article:

Why the implosions? Basically it’s the triumph of short term thinking over planning for the long haul. The cost-cutting measures that may generate a quick earnings boost can make it difficult or impossible for companies to engage in the kind of radical innovation necessary for survival. Hamel calls it "corporate liposuction," and says there's such a thing as going too far: "Finally, you're down to the heart and lungs."19

The Postal Service also experienced a major turnaround in profitability during recent years, even though revenue and volumes grew slowly. The Postal Service's management actions that allowed it to show strong profitability were similar to the actions taken by the firms that Hamel studied. The Postal Service actions have included:

If Professor Hamel's analysis is correct, the Postal Service will experience a significant downturn in earnings in the near term. The Postal Service's difficulties could intensify if revenue trends continue to deteriorate. Postmaster General William Henderson appears to recognize the current challenge and limited number of options at his disposal. In his testimony before the Post Office Subcommittee, he stated that the Postal Service "can't live forever on cost cutting" and that the Postal Service "has to be in a business that grows."

The United States Postal Service's proposed strategic plan makes explicit for the first time that the Postal Service plans to shrink its business focus. Originally, Postal Service saw its mission as providing end-to-end service for all types of hard copy communication and parcels. Now the mission is limited to providing the link between households and the rest of the nation's hard-copy communication and parcel distribution networks. This direction the Postal Service has chosen runs contrary to all trends in logistics management.

Since deregulation of air, rail, and truck transportation markets in the late 1970's and 1980's, the leading carriers all expanded to provide end-to-end service to their customers. The expansion of single line service allowed the successful carriers to develop closer relationships with their customers. Carriers expanded their service offerings and single line networks in an effort to meet a greater proportion of their customer's transportation needs.

In the airline industry, the amount of inter-carrier transfers (interlining) declined as carriers expanded to provide service to markets where regulation precluded their entry. The airline industry accomplished this through route expansions and the use of code sharing relationships with commuter airline partners. Now the major national carriers provide the appearance of single line service even into the smallest markets. In some instances, for example US Airways, the commuter airlines providing service to the small markets are wholly owned subsidiaries of the name brand carrier. In other instances, Atlantic Coast Airways, the carriers are independent. Regardless of the ownership arrangement, the commuter carrier operates as an arm of its code-sharing partner, conducting all business with the flying public under the name of the major carrier's name.

In the trucking industry, elimination of entry restrictions allowed the larger national and regional carriers to rapidly expand. The expansions allowed carriers to eliminate interline service into areas where it did not have operating authority. Prior to deregulation, most rural areas were served by interline service because the rural areas could only be served by the smaller local and regional carriers. After deregulation single line service expanded in rural areas.

In the railroad industry, the desire to offer simplified single line service resulted in a rapid consolidation of carriers. In general, the consolidation has reduced costly and time-consuming transfers of cargo from one carrier to another and allowed carriers to expand the use of cost saving unit trains.

Concurrently with the expansion of single line service, carriers recognized customer demands by expanding beyond just providing the transportation part of the logistics service. Carriers, including UPS, FedEx, TNT, DHL, Ryder, and Schneider established third-party logistics operations that integrated their transportation assets with warehousing, fulfillment services, and logistics management information services. Today, third-party logistics is more than a $40 billion dollar industry.

In addition to being contrary to recent tends in logistics management, downsizing the postal vision entails significant management and marketing risks.

Risk 1: Losing contact with customers. As the carrier providing the final delivery link, the Postal Service becomes a subcontractor to consolidators who now become the mailer's partners. The Postal Service could lose the direct knowledge of how changes in the mailing community's needs affect the network of services they must provide. As a smaller portion of the mailer's distribution bill will come from the Postal Service, the Postal Service may feel less pressure to keep costs under control. The consolidators and not the Postal Service could become the entities seeking to "delight" the mailing community.

Risk 2: Increasing complexity. As letter and parcel delivery becomes a service that involves both a consolidator and the Postal Service, the service is a more complex than the single line service offered by its parcel and courier competitors. Increasing drop-shipments increases the activity around, and complexity of, the dock operations of carrier stations and sortation facilities near the final destination. The opportunities for delays and missed hand-offs between the long haul and the delivery portions of a transportation network are greater when no single management authority has responsibility for the entire process. The difficulties of integration are further complicated as information systems as well as the physical goods and document movements must be integrated. Furthermore, as the last mile for dozens of consolidators, the Postal Service will need to link into the information systems of each of its partners.

Risk 3: Cannibalizing existing Products. Recently, Airborne announced that LL Bean would be the first major customer of its Airborne at home partnership with the Postal Service. The press release indicated that LL Bean would use the new service to replace its use of the Postal Service's parcel post service. In this transaction, the Postal Service does not gain any new volume. However, both the revenue and resources required by the Postal Service to serve LL Bean decline.

Risk 4: Rightsizing the network. To the extent that Parcel Select and other work-sharing programs have shrunk the Postal Service's responsibilities, the Postal Service must adjust its network. For example, the LL Bean switch from Parcel Post to Airborne At Home should require a rethinking of the transportation, labor and other resources handling LL Bean's postal products. At a minimum, the Postal Service needs to re-evaluate the amount of transportation from LL Bean warehouses and labor in plants currently receiving LL Bean's parcel post volumes. The decline in productivity over the past five years, at a time of increasing work-sharing, suggests that the Postal Service has not been aggressive enough in reacting to the decline in work-content that work-sharing produces.

Risk 5: Increasing importance of fixed liabilities. As noted above, the fastest growing parts of the Postal Service's budget are payments on pension liabilities and retiree health benefit costs. These costs are unaffected by mail volume or the labor employed by the Postal Service today. Half of the cost saving gains from the breakthrough productivity proposed by the Postal Service is required to cover the increase in these fixed expenses. These rapidly growing costs will become an increasingly important proportion of product revenue if the unit revenue declines as the Postal Service's responsibility for mail and parcel distribution shrinks to being the "Gateway to the Household."

Risk 6: Durability of the economies of scale. The Postal Service's newest parcel initiatives assume that its partners cannot generate sufficient volumes to effectively set up their own delivery network. The Postal Service's assumption does not rely on a legal monopoly but on the economies of scale that its delivery network provides. However, unless the Postal Service aggressively manages its destination sortation and delivery costs, it is possible that its partners will increasingly identify portions of the network where the partners can deliver the parcels themselves or find other firms to do the final delivery for less. The Postal Service now faces competitors for the last mile including one that has trademarked the term "Last Mile Link." The last mile may be a competitive commodity and not a natural monopoly as some have argued.

The shrinking Postal corporate vision further raises concerns that Professor Hamel's research may apply to the Postal Service. By shrinking its vision, the Postal Service has all but conceded that it can no longer provide or manage sortation and /or transportation services for its commercial customers. Furthermore, as the "Gateway to the Household," the Postal Service appears to also have conceded to its competitors the delivery of non-monopoly products to business addresses. With this shrunken vision, the question now is whether the Postal Service is still a viable concern.

At the most recent PostCom Postal Policy and Operations conference, Deputy Postmaster General Nolan suggested that current postal management have the opportunity to write one of two books. The titles of the two books were The United States Postal Service: From Universal to Invisible or You’ve Still Got Mail. This cursory review indicates that the first book seems more likely to be published.

The problem with this outlook is that a disappearing Postal Service is not acceptable to most postal stakeholders. The Postal Service is the only entity that indiscriminately serves every address in the United States. The Postal Service employs nearly 900,000 people. A substantial number of firms now do and for the foreseeable future will depend upon a viable, cost-effective, postal network to distribute periodicals, correspondence, financial records, advertising and goods. At a minimum, a disappearing Postal Service will place substantial liabilities onto the backs of the American taxpayers. These include unemployment compensation, workers compensation, retiree health benefits, and pension liabilities. The pension liabilities alone exceed $30 billion dollars.

Fiscal Year 2001 and prospects beyond do not look promising. The review of the prospects for fiscal year 2001 indicates that net income could be $1.5 billion below projections presented in evidence in the current rate proceeding. This negative change in net income comes from small incremental decreases in revenue and increases in costs and not from a quick structural change due to electronic diversion. The Postal Service's financial prospects could worsen still if higher oil prices and interest rates slow the economy more than current expectations.

The impact of this vision of the Postal Service is serious for all stakeholders. Briefly, unless the Postal Service reverses current trends, the various types of stakeholders may expect the following.

Customers: Customers will face frequent increases in rates. Rates may increase beyond the rate of inflation in the near term to cover the increase in debt and rapidly rising fuel, medical, retirement and other fixed costs. Service quality could fall as the Postal Service looks to cut costs by increasing delivery time or decrease delivery frequency. The size of the potential loss in 2001 indicates that the Postal Service may need to file a new rate case shortly after the rates currently under review go into effect.

Employees: Employees can expect greater uncertainty. Pressure to reduce costs will put pressure on managers to cut labor costs. Incentives for early retirement may become a regular management tool to right size postal operations on a rolling basis. Future labor agreements are likely to become less generous if the Postal Service publicly and forthrightly recognizes its financial position. Concerns may increase regarding funding of the retirement benefits of current and future retirees.

Competitors: Competitors face a weakened Postal Service. The Postal Service's financial and political position may prevent it from investing in and revamping its network or information systems to the extent necessary for it to be reshape the network to meet the needs of hard-copy communication and parcel delivery in an Internet world. The advantage of competitors could be short lived. If the Postal Service becomes sufficiently weak, Congress may choose to act to protect Postal employees, retirees, and customers as it did in regards to Conrail and Chrysler.

Suppliers: Suppliers face a tenuous situation. If the Postal Service faces a cash crisis in the future, suppliers can expect that contracted services, supplies and capital expenditures will be delayed or curtailed. In fiscal year 2001, suppliers should be concerned that the potential losses and the Postal Service's beginning of the year debt load, could result in significant reduction in contracted services, supplies and capital expenditures from levels anticipated. Unless there is a change in the Postal Service's financial position, suppliers cannot expect to recover these lost sales without a corresponding reduction in future expenditures. Suppliers should also be concerned about the shift of the Postal Service's business focus to being the "gateway to the household." As such, the purchasing priorities should shift to focus on the needs that a last mile service will require

Business Partners: Business partners are those firms that consolidate mail that the Postal Service delivers on the "last mile." Business partners require an understanding that their relationship with the Postal Service will be stable. The current financial challenges of the Postal Service raises questions about the ability of the Postal Service to provide over the long haul "last-mile" service on a cost-effective basis. Business partners concerns would be greatest if the Postal Service begins raising rates more frequently to cover fixed interest, workers compensation and retirement costs and difficult to cut variable labor and transportation costs. In this situation, the business partners will need to carefully evaluate the investments they make in networks linked into the Postal Service and investigate alternative "last mile" delivery agents that can make their investments viable.

United States Postal Service: The Postal Service faces major challenges in finding the capital necessary to make the investments that it now believes are necessary. Currently, the Postal Service plans to borrow $2 billion for investments in fiscal year 2001. The potential of losses of $1.5 billion above current financial projections could cause the Postal Service to bump up against its legal borrowing limits. As the Postmaster General has noted, the Postal Service has few painless ways of cutting costs and could start affecting the sinews of the enterprise.

Congress: As the representative of the Postal Service's shareholders, Congress needs more information about the financial viability of the Postal Service. All of the Postal Service's liabilities ultimately fall upon the American taxpayer. The prospect of rapidly increasing rates and reduced service quality appears more real now than at any time since postal reform was conceived. The next Congress should expect to face even more interest in postal policy change than was generated by Congressman John McHugh and his proposals to reform postal law.

Postal Service stakeholders require a serious independent assessment of the Postal Service's physical plant, financial viability, and corporate strategy. The assessment should be similar in scope to the one that the United States Railway Association (USRA) completed on Conrail following its bankruptcy. Following that assessment, the USRA guided Conrail successfully out of bankruptcy and allowed it to return to private ownership. Hopefully, the assessment of the Postal Service will occur before a complete financial breakdown experienced by Conrail.

[1] http://www.washingtonpost.com/wp-srv/aponline/20000829/aponline173924_000.htm

[2] Ibid.

[3] Ibid.

[4] Melissa Campanelli, "Postal Official Denies Second Rate Increase is Imminent," dmnews.com, October 10, 2000, http://www.dmnews.com/articles/2000-10-09/10956.html

[5] United States Postal Service, Annual Report FY 1999, Note 2 to the Financial Statements,    http://www.framed.usps.com/history/anrpt99/

[6] United States Postal Service, Direct Testimony of William B Tayman, USPS T-9, Docket No. R2000-1, Exhibit USPS 9S, pages 2-4 and pages 6-8 and Bureau of Labor Statistics, series Medical Care, Series ID: CUUR0000SAM., http://146.142.4.24/cgi-bin/surveymost?cu

[7] United States Postal Service, Financial & Operating Statements, Accounting Period 4, PFY 2000, July 15-August 11, 2000, p.7. 

[8] Combined the two increases have raised workers compensation costs by over $200 million or 36.3% over fiscal year 1999 levels. United States Postal Service, Financial & Operating Statements, Accounting Period 12, PFY 2000, July 15-August 11, 2000, p.7.

[9] Through AP9, The Postal Service's budget for Supplies and Services was $16.4 million below the actual expenditures of $2, 574.3 million.  This is a variance of 0.6%.  United States Postal Service, Financial & Operating Statements, Accounting Period 9, PFY 1999, July 15-August 11, 2000, p.7.

[10] .  The Postal Service also reduced expenditures for other cash expenditure items, travel and relocation, printing, and training during this period, but not out of line with cuts from budget for the remainder of the year.  These items appear to provide the normal budget cushion that managers cut when senior management directs expense reductions.

[11] The Postal Service's short-term debt increased by  $97 million between accounting period 8 and 13 during the period when it was cutting cash expenses drastically.

[12] The Postal Service acknowledges the end of the year payments in its Annual Report.  "Normally, our debt balance at the end of the fiscal year represents our highest level debt for the year because we have payments of approximately $4 billion that come due. United States Postal Service 1999 Annual Report, Financial Section, Management Discussion and Analysis, Financing, http://www.framed.usps.com/history/anrpt99/fiancial/mda_financing.htm.

[13] United States Postal Service 1999 Annual Report, Financial Section, Management Discussion and Analysis, Financing, http://www.framed.usps.com/history/anrpt99/fiancial/mda_financing.htm.

[14] Direct Testimony of William P. Tayman on Behalf of United States Postal Service USPS-T-9, Docket No. R2000-1, p. 52.  The $900 million figure was calculated by multiplying the proposed Test Year Total Revenue Requirement of  $70,015,977,000 by 1.31%.

[15] Value Line Investment Survey, Value Line Publishing, Inc., New York, NY, 2000, p. 279.

[16] Kate Muth, ed., "Numbers not adding up for Industry in USPS Testimony, Business Mailers Review, August 21, 2000, p. 3.

[17] The Postal Service is limited to increasing its borrowing by $1 billion for operating expenses and $2 billion for capital expenditures. 

[18] Louis Lavelle, "Commentary: 'Corporate Liposuction' Can Have Nasty Side Effects," Business Week, July 17, 2000, p.74.

[19] Ibid.

See also:

Medical Inflation.xls and usps finances.xls