The U.S. Postal Service’s Financial Condition: A Primer
Released: 2014-12-30T00:00:00

Background

Independent Establishment of the Executive Branch

Since 1971, the U.S. Postal Service (USPS) has been a self-supporting, wholly governmental entity. Prior to that time, the federal government provided postal services via the U.S. Post Office Department (USPOD), a federal agency that received annual appropriations from Congress. Members of Congress were involved in many aspects of the USPOD's operations, including the selection of managers (e.g., postmasters) and the pricing of postal services.

In 1971, Congress enacted the Postal Reorganization Act (PRA; P.L. 91-375; 84 Stat. 725), which replaced USPOD with the USPS—an "independent establishment of the executive branch" (39 U.S.C. §201).

Non-Reliant on Appropriations

The PRA designed the USPS to be a marketized government agency, which is an agency that would cover 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 approximately $90 million per year, about 0.1% of the USPS's $65 billion operating revenue. 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.

Treasury Accounts

The Postal Service Fund, which the USPS uses for most of its financial transactions, is off-budget, and therefore not subject to the congressional controls of the Congressional Budget and Impoundment Control Act of 1974 ( P.L. 93-344 ; 88 Stat. 297; 2 U.S.C. §621).

The USPS also has two other accounts: the Postal Service Retiree Health Benefits Fund (RHBF), which is on-budget, and the Competitive Products Fund (CPF), which is off-budget. These accounts were established by the Postal Accountability and Enhancement Act of 2006 (PAEA). The RHBF is an account into which the USPS must deposit annual prepayments towards current employees' future retirement benefits. The CPF was established to hold the revenues derived from the sale of competitive products and services and any returns earned on the investment of these funds in U.S. Treasury securities.

Borrowing Authority

Unlike private companies, the USPS does not have the authority to borrow money from private lenders. Rather, the USPS may borrow money from the U.S. Treasury's Federal Financing Bank. Federal statute limits the USPS's debt increases to $3 billion per year, and the USPS's total debt to $15 billion.

The USPS's Financial Condition

A variety of approaches may be used to consider the financial condition of a firm. Here, the USPS's financial condition is examined by the metrics of profitability, revenues, expenses, and debt and liquidity.

The USPS issues both quarterly (10-Qs) and annual financial statements (10-Ks and annual reports). The data below were drawn exclusively from these USPS sources. The financial figures have not been adjusted to reflect inflation.

Profitability

Profitability here is defined as operating revenues less operating expenses . Operating revenues (hereinafter, revenues ) include funds received by the USPS for the provision of products and services. Operating expenses (hereinafter, expenses ) include all costs incurred by the USPS in the provision of products and services.

FY2014 Profitability

The USPS booked $5.4 billion in operational losses during FY2014. These losses were driven by a $5.7 billion charge for the RHBF.

Ten-Year Profitability Trend

Between FY2005 and FY2014, the USPS had two profitable years followed by eight unprofitable years ( Figure 1 ). The USPS's deficits during those eight years amount to $51.0 billion.

The USPS's losses began in FY2007, the same year the USPS began making payments into the RHBF. Between FY2006 and FY2007, the USPS's revenue rose $2.1 billion, from $72.7 billion to $74.8 billion. The agency's expenses increased $8.4 billion during this same period, from $71.7 billion to $80.1 billion. Of the $8.4 billion expense increase, nearly all of it resulted from the PAEA's RHBF funding requirements. In FY2007, the USPS had a $5.4 billion outlay to the RHBF, and an almost $3 billion one-time charge for transferring funds from a USPS escrow fund to the RHBF per P.L. 109-435 .

While RHBF payments have affected the USPS's profitability, the USPS would have run deficits from FY2009 through FY2012 even if the agency did not have to make RHBF payments ( Figure 2 ). If RHBF payments are excluded, the USPS would have run modest surpluses of $800 million in FY2013 and $300 million in FY2014. The non-RHBF deficits since FY2009 total $13.6 billion, an amount nearly equal to the USPS's total borrowing authority. As Figure 3 and Figure 4 below illustrate, these cumulative deficits were produced by a sharp drop in revenues that was only partially recovered in FY2013 and FY2014. (Expenses did not fall equivalently.)

Revenues

Pursuant to federal statute, the USPS earns revenues through the provision of postal products and services. The PAEA separated USPS products and services into two categories—"market-dominant" (or monopoly) and "competitive." Market-dominant products include those products and services that the USPS need not compete with the private sector to provide (e.g., first-class letters). Competitive products and services are those for which a competitive market exists (e.g., overnight parcel delivery).

The USPS may annually raise the rates of products in the market-dominant class by no more than the Consumer Price Index for All Urban Consumers (CPI-U). The USPS has greater freedom to price competitive products. In January 2014, the USPS raised rates by 1.7% on market-dominant products and services, and an average of 2.4% for competitive products. In addition, the Postal Regulatory Commission approved a 4.3% temporary surcharge on market-dominant products for a limited amount of time. This increase is currently being litigated in federal court following an appeal by the USPS, which believes the increase should not be limited for a specific amount of time. As a result, any rate increases for 2015 are being delayed until a decision is reached.

Of the USPS's $67.8 billion in revenues in FY2014, more than $47 billion (69%) came from the sale of first-class mail, standard mail, and periodicals, which are classified as market-dominant products and services.

FY2014 Revenues

USPS's revenues totaled $67.8 billion for FY2014. This amount is slightly higher ($500 million) than the USPS's revenues for FY2013 ($67.3 billion).

Ten-Year Revenue Trend

Between FY2005 and FY2008, the USPS's revenue grew in each consecutive year to a high of $74.9 billion. A rapid decrease in mail volume began shortly after the US economy had officially entered a deep recession, leading to four consecutive years of revenue decline between FY2009 and FY2012. Revenue then increased again in FY2013 and FY2014 ( Figure 3 ). The USPS's FY2014 operating revenue of $67.8 billion is $2.1 billion, or 3.0%, lower than its FY2005 revenues ($69.9 billion).

The USPS's revenues are derived almost entirely from postage paid for the delivery of mail. Hence, when mail volumes rise, the USPS's revenues tend to rise. Between FY2003 and FY2006, mail volume increased from 202.2 billion to 213.1 billion mail pieces. Since then, mail volume has dropped sharply—to 155.4 billion pieces in FY2014. Mail volume was 23.2% lower in FY2014 than in FY2003, and 27.1% below its FY2006 peak.

Additionally, during the past decade the "mail mix" has shifted. An increasing portion of the mail handled by the USPS is advertising mail, which yields low profits. Concurrently, the annual volume of first-class mail, which is highly profitable, has been dropping steadily, at least in part because mailers are shifting to electronic communications (e.g., online bill remittances and payment).

Expenses

FY2014 Expenses

The USPS's expenses totaled $73.2 billion for FY2014. This amount is $1.1 billion, or 1.5%, higher than the USPS's expenses for FY2013 ($72.1 billion).

Were the RHBF expenses removed from consideration, the USPS's FY2014 expenses would have been $950 million, or 1.3%, higher than FY2013 expenses ( Table 1 ). Despite this increase, USPS expenses (including the RHBF accrual) fell in the fourth quarter of FY2014 and were more than $300 million below the fourth quarter of FY2013.

Ten-Year Operating Expense Trend

The USPS's operating expenses have increased from $68.3 billion to $73.2 billion (9.4%) in the past 10 years.

Were the RHBF portion of the expenses removed, the USPS's annual expenses have decreased over the decade. Figure 4 shows that in the years prior to PAEA's establishment of the RHBF in 2007, expenses grew from $68.3 billion to $71.7 billion. Much of this increase was attributable to rising costs for compensation and benefits. After the enactment of the PAEA, the USPS's expenses (minus the RHBF, as indicated by the dotted line) declined from $74.7 billion in FY2007 to $67.5 billion in FY2014, a reduction of 9.6%.

Debt and Liquidity

The USPS reached its $15 billion debt cap in late FY2012 and continues to have no remaining borrowing authority through the end of FY2014. The USPS was debt-free in FY2005, then began increasing debt from FY2006 until the limit was reached in FY2012 ( Figure 5 ). Factors contributing to the USPS's growing debt include falling annual revenues from FY2008 through FY2012 and the agency's $17.9 billion in payments into the RHBF. Figure 3 above shows the USPS's revenues were $7.1 billion higher in FY2007 and FY2008 than in FY2014.

P ostal Service Fund balance: At the end of FY2014, the USPS had $4.9 billion in cash, which only provides enough cash to maintain operations for less than four weeks at current operating costs. This is an increase over the $2.3 billion in cash available at the end of FY2013. The USPS has stated that the increased cash balance is "largely attributable to the temporary exigent price increase on Market-Dominant services implemented in January of 2014." In addition, the agency's limited liquidity and lack of borrowing authority is constraining the USPS's ability to make capital and operational upgrades (e.g., replace its aging fleet of delivery vehicles) and would be insufficient in the event of another downturn to the U.S. economy.

C ompetitive Products Fund balance: The entire balance of the CPF was transferred to the Postal Service Fund to address liquidity concerns at the conclusion of FY2012. Since that time, the U.S. Treasury's "Monthly Statement of the Public Debt" has not included an entry for the CPF. This is indicative of the CPF not having a current balance. The status of the CPF was the subject of a 2013 Commission Information Request (CIR) from the Postal Regulatory Commission.

R etiree Health Benefits Fund balance: The RHBF had $48.8 billion as of November 2014. As currently calculated, the USPS's total RHBF obligation is approximately $97.7 billion. Federal law prohibits the USPS from drawing any funds from the RHBF before FY2017. The USPS's lack of borrowing authority has contributed to its self-reported "lack of liquidity." The USPS did not make its FY2011, FY2012, FY2013, or FY2014 RHBF benefit payments, leaving it $22.4 billion in default. The agency reports it does not anticipate having sufficient liquidity to make the remaining payments for FY2015 and FY2016.

The USPS is scheduled to report its year-end FY2015 financial results in November 2015.

Observations

Congress designed the USPS to be financially self-supporting. The agency's ability to remain financially self-sustaining over the long term is questionable. In FY2013, the USPS's revenues began to rise after falling for four consecutive years ( Figure 3 ). However, expenses have not fallen quickly enough to allow the Postal Service to meet its statutory prefunding commitments to the RHBF and place the agency on a more sustainable financial course ( Figure 5 ). Despite the revenue growth in FY2013 and FY2014, the USPS's annual revenue remained lower than its revenue 10 years earlier. Additionally, the revenue trend depicted in Figure 3 may indicate a long-term weakening of the demand for the USPS's current products and services.

The weak cash position of the USPS has led the agency to take a number of actions to address their financial position. These include changes to both operations and personnel.

In 2013, the Postal Service implemented a realignment of its operations to further reduce costs and strengthen its finances. These operational realignments included reductions in the number of mail processing operations, realignment of retail office hours to match demand, reductions in the number of delivery routes and consolidations of delivery offices. In June 2014, the Postal Service announced that a second phase of mail processing realignments would begin in January 2015, culminating in a consolidation impacting up to 82 more processing operations. Additionally, the Postal Service continues to leverage employee attrition, Voluntary Early Retirement (VER) and utilization of non-career employees to the maximum extent permitted by its labor contracts. In July 2014, the Postal Service offered a VER to approximately 3,000 postmasters who were impacted by reductions in retail hours at certain postal facilities which was accepted by 1,380 postmasters.

Despite these organizational actions and the increase in revenue for the USPS in FY2013, the Postal Service projects that legislative change will be necessary to improve liquidity moving forward. With no further borrowing authority the USPS could find itself with insufficient funds to continue operations, leading to a need for payment prioritization and the continued deferral of capital and infrastructure expenditures.

It goes beyond the scope of this report to assess which operational or policy changes could improve the USPS's financial condition sufficiently to enable it to continue as a self-funding government agency. The above financial data, however, suggest that for any reforms to be successful they would need to

contend with the USPS's short-term liquidity problem; be of sufficient magnitude to make appreciable changes to the USPS's annual operating revenue (currently $67 billion) or operating costs (currently $70+ billion); enable the USPS to sufficiently fund its retiree health benefits; help the USPS reduce its debt (currently $15 billion); and place the USPS on a long-term trajectory where the agency's revenues could be expected to meet or exceed expenses.