The unofficial motto of the U.S. Postal Service declares that it won’t be defeated by snow, rain, heat or gloom of night. Now, though, the organization faces a looming crisis that poses a far greater challenge to its survival than any natural phenomenon.
The danger is financial ruin, and the culprit is a law passed by Congress 12 years ago that seemed, to some at least, like a good idea at the time.
The 2006 Postal Accountability and Enhancement Act required the Postal Service to prefund retiree health benefits for an unprecedented period of 75 years, to the tune of $5.5bn for the first decade, and between $2bn and $3bn for the remainder of the period. Thanks to congressional action taken three years earlier, the agency had built up an annual surplus of around $3bn, arising from civil service pension overpayments. The idea was to devote that money to prefunding the health benefits of potential retirees so that taxpayers wouldn’t be stuck with paying for future shortfalls.
All well and good, until the Great Recession hit in 2007, sending the Postal Service (and many other businesses) into a financial tailspin. Cut to the end of the 2017 fiscal year, with the agency defaulting on more than $38bn in prefunded health benefits — more than half its revenue for the year.
The reasons for the Postal Service’s decline go beyond the nationwide economic crisis. The internet and mobile phones were major factors behind a plunge in the volume of lucrative first-class mail. (Apple introduced the iPhone just six months after enactment of the 2006 law.) But the financial burden of forward-paying health benefits at a rate not required of any other business, public or private, is the main reason for the agency’s perilous condition today, according to Art Sackler, manager of the Coalition for a 21st Century Postal Service.
The irony is that the Postal Service has been doing relatively well in recent years. Revenues were nearly $70bn in fiscal 2017. And while most of the money came from traditional domestic mail products, more than $19bn was generated by packages, a steadily growing source of income.
Moreover, since passage of the 2006 act, the agency has cut overall costs by more than $15bn. Combine that with new revenues from e-commerce activity and reasonably steady volumes, and it has managed to operate on roughly a break-even basis over the past 11 years, Sackler says.
Up until 2011, the Postal Service was able to make the mandated benefits payments in part by calling on its borrowing authority. But it’s been in default since 2012, by a total of around $50bn when pension obligations are factored in.
As a result, says Sackler, the agency isn’t far from the point of needing a taxpayer bailout — precisely the scenario that the 2006 was designed to head off.
Legislation is pending in both houses of Congress to address the crisis. The Postal Reform Act of 2018 proposes to shift approximately 20 percent of postal retirees from their dedicated health-benefits program into Medicare. (Under the Senate’s current version of the bill, the Postal Service would make a one-time payment of $10.8bn to Medicare, to be distributed over 10 years, with Medicare earning interest on the money in the meantime.) In the process, the agency’s annual $5.5bn obligation would be taken off its books.
Sackler says the additional cost to Medicare would be “a drop in the bucket” for that program, while placing the Postal Service back on a steadier financial footing. “There is no cost whatsoever to the taxpayer,” he says, “and the Postal Service gets stabilized for the next five to six years — enough time to consider long-term structural changes it may need for the foreseeable future.”
The plan isn’t likely to win unanimous support. Retirees shifted over to Medicare will have to pay for both kinds of benefits. To offset the additional cost, the Coalition for a 21st Century Postal Service proposes a rate increase of 2.15 percent if the bill passes. According to the Congressional Budget Office, that would raise about $8.5bn over 10 years. (But it’s a lot less than another pending proposal to jack up rates for business by 30 to 40 percent over the next five years.)
Chances for passage of the bill aren’t especially strong, given the midterm elections and the prospect of a lame-duck Congress. Depending on how the elections turn out, however, “it could be enough to get the bill over the hump,” says Sackler. “If not, we’re going to have to be back at it next year.”
Sackler’s group is gearing up for an even bigger battle, against advocates of privatizing the Postal Service. He points out that it delivers to 44m rural addresses, which can’t be efficiently served by a private-sector shipper without imposing a substantial rate increase. “Wholesale privatization,” he says, “would essentially make rural Americans second-class citizens.”
In the meantime, the coalition views the Postal Reform Act as a means of giving the agency “breathing room” to come up with longer-term reforms. “Everyone involved in the legislation has some skin in the game,” Sackler says. “We’re all giving something up in order to try and stabilize the Postal Service.”
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