11 Things You Should Know About The US Postal Service before It Goes Bankrupt

The cover story of this week's issue of Bloomberg Businessweek examines the United States Postal Service as it hurtles toward insolvency at an alarming rate.

Facing a projected $6.4 billion loss this year, the Postal Service is expected to hit its own debt ceiling by the end of this fiscal year on Sept. 30.

The federal government will then have to choose between letting the agency default on its massive pension obligations or bailing it out to the tune of more than $50 billion.

The Businessweek article, written by Devin Leonard, looks at the drivers behind the agency's financial woes, including its cushy relationship with postal workers unions and its flailing efforts to stem its customers' migration to the Internet.

At the end, the article asks whether the U.S. will be able to follow in Europe's footsteps and reinvent its postal monopoly to regain relevance and profitability.

If it cannot, Leonard concludes, the postal service is at serious risk of collapse.

The Postal Service is nearly $15 billion in debt. It has stayed afloat by borrowing $12 billion from the U.S. Treasury.

Image: Courtesy of United States Postal Service

The USPS will reach its statutory debt limit this year. After that, bankruptcy looms.
The agency has lost $20 billion since 2007.

The USPS delivers 40% of the world's mail. But total mail volume dropped 20 percent from 2006 to 2010.

Image: Courtesy of United States Postal Service

The amount of mail sent through the Post Office dropped from 213 billion in 2006 to 170 billion in 2010. In a best-case scenario, mail volume is expected to drop to 150 billion by 2020. The worst-case projection is 118 billion.
The USPS relies on first-class mail to fund most of its operations, but volume has been steadily declining, falling below junk mail for the first time in 2005. Three pieces of junk mail must be sent to replace the profit of a first-class letter.
The Postmaster General has proposed cutting weekly Saturday deliveries to save an estimated $3 billion annually.

The USPS is the second-largest civilian employer in the U.S. after Wal-Mart.

Image: USPS

The Postal Service employs 571,566 full-time postal workers.
The U.S. Postmaster General has proposed reducing the payroll by 20% over five years through attrition, as union contracts prohibit layoffs.

The USPS has the world's largest network of post offices with 31,871 outposts.

Image: Courtesy of aaroads.com

That's more domestic retail outlets than Wal-Mart, Starbucks and McDonald's combined.
Eighty percent of U.S. Post Offices lose money.
To cut costs, the agency has proposed a plan to close 2,000 post offices and moving some operations to convenience stores and supermarkets. Federal law forbids closing post offices for solely economic reasons.

Eighty percent of the Postal Service's annual budget goes toward employee salaries and benefits.

Image: Courtesy of United States Postal Service

By contrast, 61% of the United Parcel Service's budget goes to employee-related expenses. FedEx spends 43% of its annual budget on personnel costs.
Bureau of Labor Statistics data indicate the average hourly compensation for postal union members is $41 versus $28 for the private sector.
"Perhaps it's not surprising that the postal service's two primary rivals are more nimble," Leonard writes. "According to SJ Consulting Group, the USPS has more than a 15 percent share of the American express and ground-shipping market. FedEx has 32 percent, UPS 53 percent."

Despite the agency's economic woes, the 250,000-member American Postal Workers Union negotiated a cushy labor deal with the USPS in March.

Image: AP

The four-and-a-half-year agreement extends the no-layoff provision and provides a 3.5% raise over the period of the contract, as well as seven uncapped cost-of-living increases. A USPS spokeswoman told Businessweek the agency agreed to the terms because it feared an arbitrator might be even more deferential to the union.
In general, postal service employees enjoy more expensive benefits than most public-sector workers. USPS covers 79% of its employees' health benefits, compared to the 72% typical for most federal workers.

In March, Postmaster General Patrick Donahoe warned that the USPS would default on $5.5 billion in future retiree healthcare costs unless Congress comes to the rescue.

The USPS and its unions want Congress to relieve the agency of its requirement to build a healthcare trust fund for future retirees.
Junk mailers, greeting card manufacturers and magazine publishers are on their side. Democrats are also sympathetic: President Obama inserted a proposal in his 2012 budget to absolve the USPS of $4 billion of its retiree health-care liabilities in 2011, which would help the agency pull through another year.
Even more alarming is a bill co-sponsored by Senators Tom Carper of Delaware and Susan Collins of Maine, would give the agency a $50 billion to $75 billion life raft by having the federal government underwrite pension obligations for retired postal workers.
House Republicans oppose anything that looks like a bailout. They are pushing for the USPS to make deeper budget cuts, including closing post offices.

The U.S. Government Accountability Office found that the U.S. needs to close post offices and start moving the USPS into the digital age.

The 40-page report was written by Phillip Herr, the GAO's director of physical infrastructure issues, in February. Herr studied postal services in other developed countries and found that they had saved their ailing systems by giving up their postal monopolies, shutting down brick-and-mortar offices (despite intense opposition), and developing products for wired customers.
Herr acknowledges some foreign digital services are in early stages, but they are in demand, and in some cases the digital technology reduces delivery costs.

Germany's Deutsche Post, for example, is now a private company and runs just 2% of the country's post offices.

Deutsche Post, which owns DHL, now competes with FedEx and UPS. More than half of its workforce - and about half of its profits - come from outside of Germany.

Sweden's Posten is developing a service that will text mobile customers a numerical code they can write on envelopes in place of a stamp.

Image: Wikimedia Commons

Posten also has an app that lets customers turn digital photos into postcards.
The company can afford to develop new products. In 2009 Posten merged with Post Danmark, the Danish postal service, creating PostNord, a company with $6.2 billion in net sales and $320 million in EBITDA. In 2010 EBITDA rose by 43 percent, to $490 million.

By contrast, the USPS appears to still be in denial.

Image: Courtesy of pccapitalist

"I really believe that the USPS is going to get to a point where, regardless of what it does with the prefunding [of retiree health care], it is going to implode," R. Richard Geddes, an associate professor of policy analysis and management at Cornell University, told Businessweek. "It is either going to default on those obligations to its retirees or we are going to have to give it a direct bailout from the United States taxpayers."