U.S. Postal Service: A Requiem

The U.S. Postal Service (USPS) is facing a doomsday scenario – the unfortunate victim of rapidly changing technology and oppressively high operating costs.

Although the Senate recently extended the deadline for a $5.5 billion payment due to the federal government by the USPS to Nov. 18 from Sept. 30, the extra six weeks or so will not make much difference for the beleaguered and financially crippled postal service.

The USPS doesn’t have the money, is not likely to get the money from a federal government that has grown weary of further bailouts, and, more important, will probably run out of cash by next summer -- meaning it will have little or no hope in meeting its payroll.

Moreover, the $5.5 billion the USPS owes to its retirees’ health care benefits fund may be the least of its monumental problems.

Of greater worry to the federal government is the fact that since USPS is not mandated to fully fund its retirement-related costs, any default by the postal service would fall on the backs of taxpayers -- perhaps to the tune of tens of billions of dollars.

As a self-funded organization, the USPS has been forced to borrow from the federal government to cover its operating expenses in the face of plunging mail volume. Labor costs account for a huge 80 percent of its total operating costs.

However, there is a $15 billion limit to how much it can borrow from Washington, and this year the postal service will reach that limit.

The USPS is on its last legs -- the final salvo occurred in the middle of the last decade when increasing masses of people started sending correspondence by e-mail; became very comfortable and adept at sending bill payments online; and, most important, stopped sending first-class letters -- completely eschewing the old paper-envelope-stamp route, and costing the postal service billions of dollars in revenue every year.

Mail volume is plunging.

Between 2006 and 2010, mail volume in the U.S. dropped by 20 percent, from 213 billion pieces to 170 billion. Over that span, the USPS lost $20 billion.

After posting an $8.5 billion loss last fiscal year, the postal service is on a pace to go $10 billion in the hole in fiscal 2012.

All of these declines have created significant excess capacity in the postal system.

And these trends will only keep accelerating.

The Boston Consulting Group said in a study that mail volume in the U.S. will fall by another 15 percent by the year 2020, with first-class mail (the postal service’s main cash generator) plummeting by a whopping 35 percent. By that point (assuming the USPS is still in existence), the postal service will lose an astonishing $15 billion per year.

“The post office is past the tipping point,” warned Rick Geddes, associate professor in the Department of Policy Analysis and Management at Cornell University in Ithaca, N.Y., and an expert on the postal service.

“The trends it has endured -- falling mail volume, dropping revenues -- cannot be reversed. Plus, they’re fast running out of money.”

Geddes also said that since the problems of the USPS predated the global economic recession, not even a solid economic rebound would help its problems (and no one is predicting an economic recovery anytime soon, anyway).

He added that by extending the deadline for the USPS retiree fund payments, the government is merely prolonging the inevitable -- a massive default.

We are forced to face a new reality today, said Postmaster General Patrick Donahoe said in a statement.

First-class mail supports the organization and drives network requirements. With the dramatic decline in mail volume and the resulting excess capacity, maintaining a vast national infrastructure is no longer realistic.”

Postal bosses have proposed cutting more than 220,000 jobs (about one-third of its total workforce) to reduce costs.

But this, too, is unlikely to happen.

What makes the problems of the USPS even more intractable is the way the enterprise is structured: Since 1970, in the wake of a nationwide strike, the postal service was reorganized, and workers formed a union. Postal employees were given extraordinary job security in exchange for ceding their right to strike.

Under union contracts in existence, layoffs are prohibited (even though the USPS is technically facing a kind of bankruptcy).

The USPS has also proposed closing down 12,000 of its retail facilities (more than one-third of the total) by 2015. Again, such measures would be difficult to implement and would require congressional approvals.

The postal service is even forbidden from eliminating Saturday deliveries (a step that would save between $2 billion and $3 billion, according to estimates).

Donahoe also wants to get rid of costly government health and retirement plans and replace them with a low-cost plan funded directly by the USPS.

Our most significant area of cost is in compensation and benefits, and one key driver of those costs is simply the sheer size of our workforce,” the USPS said in a statement.

Based on current revenue and cost trends, and assuming a move to five-day delivery, the Postal Service can only afford a total workforce by 2015 of 425,000, which includes approximately 30 percent lower-cost, more flexible, noncareer employees.

Republican legislators, including Rep. Darrell Issa of California, have proposed bills to allow the government to restructure the USPS and thereby close facilities and cut jobs. However, it is unclear if such steps would receive support from the Democrats (especially given the likely vociferous opposition from the postal unions).

“The post office is facing some very serious problems,” Geddes said. “I sympathize with Donahoe -- he inherited a terrible scenario and there is little he can do to other either cut costs or to stop the drain in revenues.”

Unless a miracle occurs, the post office will go the way of the dinosaur.