The U.S. Postal Service, an independent agency of government that does not receive taxpayers’ money for its day-to-day operations but is subject to congressional control, has been making headlines again because, on Sunday, the mail agency is set to take another step toward insolvency.
The Postal Service has announced that it will default on a $5.6 billion payment due Sept. 30, but it insists it's totally Congress' fault. This is the second time in two months that the agency will miss the deadline on a multibillion-dollar payment owed to the U.S. Treasury to fund health care costs for future retirees, bringing the total amount it owes up to $11.1 billion.
According to USPS, the primary source of its financial difficulties is a 2006 law -- the Postal Accountability and Enhancement Act -- that requires the Postal Service to pre-fund retiree health benefits 75 years into the future, and to do so in a 10-year period.
These payments -- not the Internet and not losses from postal operations -- are responsible for 80 percent of the Postal Service’s $25 billion of red ink since the law was implemented. No other government agency or private company bears this burden.
For the time being, mail will still show up in the mailbox. “We will continue to deliver the mail and pay our employees and suppliers,” the company said in a statement.
The Postal Service, unlike competitors FedEx Corp. (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS), is limited in how much it can cut services, facilities or jobs to respond to changing business conditions.
In the short term, the USPS will still be the company that will take your letter anywhere in the U.S. for just 44 cents. Longer term, however, this "crisis of confidence" over postal solvency could further damage growth.
Cash levels are expected to hit a low in October, when a $1.4 billion payment for workers' compensation comes due, before rising again due to increased volume from holiday and election mail, including ballots for early voting.
If Congress does nothing, come next spring, the Postal Service will truly start running out of cash. That means the agency may not have enough to pay mail carriers and subcontractors, which could mean drastic cuts to the mail delivery system.
The Postal Service has been seeking legislation that would allow it to eliminate Saturday mail delivery, close post offices, gain flexibility in setting prices and reduce its $5 billion annual payment for future retiree health benefits.
Congress, which is on recess until November, will have a full agenda of pressing fiscal issues when it returns, and some lawmakers have raised the possibility that postal legislation will get pushed over to the next Congress.
Why USPS Lags Its Global Peers
Other countries' postal systems are in better financial shape than the U.S. Postal Service because they can offer services beyond mail and package delivery, and their governments cover some employee health care costs and most retiree costs. In the U.S., the Postal Service is expected to be self-sufficient, but its ability to run like a business is restricted.
U.S. -- The U.S. Postal Service is an independent federal agency that is expected to make a profit. However, it's allowed to offer only limited nonmail services, including packaging, money orders and greeting cards. By law, the USPS is forbidden to widen its business model to include telephone, television, Internet and other services. Postal services in other countries have branched out to provide other services. For example, Siberian post offices sometimes sell groceries because there are no other grocery stores available.
The USPS was declared No. 1 for efficiency among the G-20, according to findings from England's Oxford Strategic Consulting, even as it delivered far more letters per employee -- 268,894 in 2010 -- than other services in the G-20. Japan Post, which came in second, delivered 103,149 letters per employee, and Australia Post, which placed third, delivered 166,776 letters.
But delivering letters is not the way of the future, and it obviously didn’t help with the mail agency’s financial status. The USPS’ net loss widened to $5.2 billion during the April- through-June period, compared with $3.1 billion for the same period in 2011. That was the 11th consecutive quarter of losses. The Washington-based service also warned it may lose $15 billion in the fiscal year that ends Sept. 30.
Japan -- Japan Post Holdings is fully owned by the government. Beyond postal services, it offers banking and insurance products and package delivery.
Japan Post Bank, now the largest publicly owned bank in the world, is also the largest holder of personal savings. Japan Post uses its excess credit purchasing power to buy government bonds, and it currently holds 20 percent of the nation’s national debt.
If the USPS is allowed to add commercial banking to its product line, it could also use its own bank-generated credit to help relieve its debt problems.
China - China Post Group is owned by the state. While the Postal Savings Bank of China was split from China Post in 2007 and established as a state-owned limited company, it continues to provide banking services at post offices.
The total revenue of China Post Group in 2010 (latest data available) reached 189.9 billion yuan ($29.79 billion). From 2006 to 2010, the corporation saw an average annual growth rate of 18.5 percent, with postal services, express delivery and financial services seeing growth of 13.1 percent, 19.2 percent and 21.9 percent, respectively.
The group is focusing on accelerating the development of postal services for the e-commerce sector, postal financial services and the reform of express delivery services.
Germany -- Deutsche Post AG (ETR: DPW) mostly delivers mail and also owns DHL, a global express shipping company. Earlier this month, the German government reduced its stake in Deutsche Post to 25.5 percent from 30.5 percent.
On Tuesday, the German logistics and mailing company said its express delivery unit, DHL will hike prices by an average of 4.9 percent starting from Jan. 1, 2013, to offset inflation and rising operating costs. The express division accounted for about 20 percent of Deutsche Post's annual revenue in 2011.
Deutsche Post raised its full-year forecast in August after reporting a €2.6 billion ($3.34 billion) second-quarter profit. The company is seeking to increase profit by as much as 45 percent by 2015 by trimming administrative costs and expanding the DHL express-service unit.
Britain -- The Royal Mail is fully owned by the British government, which plans to privatize it. The government aims to begin the privatization in the autumn of 2013. The Royal Mail provides banking and insurance services along with mail delivery and shipping.
The company posted a group operating profit of £211 million pounds ($340 million) in the year to March 25, compared with £39 million a year ago, as revenue grew 4 percent to £9.5 billion after two successive years of decline.
In April, the Royal Mail raised the price of first-class stamps by 14 pence to 60 pence, the biggest single rise in the 172-year history of the organization. Second-class prices were raised nearly 40 percent to 50 pence.