WASHINGTON, DC – The U.S. Postal Service is bracing for a first-ever default on billions in payments due to the Treasury, adding to widening uncertainty about the mail agency’s solvency as first-class letters plummet and Congress deadlocks on ways to stem the red ink.
With cash running perilously low, two legally required payments for future postal retirees’ health benefits – $5.5 billion due Wednesday, and another $5.6 billion due in September – will be left unpaid, the mail agency said Monday. Postal officials said they also are studying whether they may need to delay other obligations. In the coming months, a $1.5 billion payment is due to the Labor Department for workers compensation, which for now it expects to make, as well as millions in interest payments to the Treasury.
The defaults won’t stir any kind of catastrophe in day-to-day mail service. Post offices will stay open, mail trucks will run, employees will get paid, current retirees will get health benefits.
But a growing chorus of analysts, labor unions and business customers are troubled by continuing losses that point to deeper, longer-term financial damage, as the mail agency finds it increasingly preoccupied with staving off immediate bankruptcy while Congress delays on a postal overhaul bill.
“I think for my generation it was a great asset – if you had a letter or package and you needed it to get up to the North Pole, you knew it would be delivered,” said Jim Husa, 87, of Lawrence, Mich., after stopping to mail letters recently at his local post office. Noting the mail agency’s financial woes, he added: “Times have changed, and we old-timers know that. FedEx and UPS and the Internet seem to be making the Postal Service obsolete.”
Banks are promoting electronic payments, citing in part the growing uncertainty of postal mail. The federal government will stop mailing paper checks starting next year for millions of people who receive Social Security and other benefits, paying via direct deposit or debit cards instead.
First-class mail volume, which has fallen 25 percent since 2006, is projected to drop another 30 percent by 2016.
Art Sackler, co-coordinator of the Coalition for a 21st Century Postal Service, a group representing the private-sector mailing industry, said the payment defaults couldn’t come at a worse time, as many major and mid-sized mailers are preparing their budgets for next year.
“The impact of the postal default may not be seen by the public, but it will be felt by the business community,” he said. “Mailers will be increasingly wary about the stability of the Postal Service. The logical and likely move would be to divert more mail out of the system.”
The Postal Service, an independent agency of government, does not receive taxpayer money for operations but it is subject to congressional control. It estimates that it is now losing $25 million a day, which includes projected savings it had expected to be accruing by now if Congress this spring had approved its five-year profitability plan. That plan would cut Saturday delivery, reduce low-volume postal facilities and end its obligation to pay more than $5 billion each year for future retiree health payments.
While the Senate passed a bill in April that provides an $11 billion cash infusion to help the mail agency avert a default, it also would delay many of the planned postal cuts for another year or two. The House remains stalled over a measure that allows for the aggressive cuts the Postal Service prefers; that’s unlikely to move forward this year, partly due to concerns among rural lawmakers over cutbacks in their communities.
The Postal Service originally sought to close low-revenue post offices in rural areas to save money but after public opposition agreed to keep 13,000 open with shorter operating hours. The Postal Service also is delaying the closing of many mail processing centers, originally set to begin this spring. The estimated annual savings of $2.1 billion won’t be realized until the full cuts are completed in late 2014.
The postal uncertainty offers opportunities for banks, which can save up to one-third of the cost of processing checks if payments are made electronically. JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc. (C) and Wells Fargo & Co. (WFC) have been urging electronic transactions.
“This could be a watershed event to motivate consumers and businesses to stop writing checks,” said Rodney Gardner, head of global receivables at Bank of America, who recently reviewed the topic at a conference with insurance companies.
The Postal Service, which releases third-quarter financial results next week, has projected a record $14.1 billion loss for the year. It expects to avoid bankruptcy in October only by defaulting on the two health prepayments, totaling $11.1 billion. It faces a cash crunch again next year.
Fredric Rolando, president of the National Association of Letter Carriers, notes that the onerous health payment for future retirees – something not required of any other government agency or private business – is to blame for much of the post office’s red ink. He faults Congress for mandating the payments in 2006, saying they force the post office every year into a “panic mode that absorbs energy and resources” rather than focusing on longer-term innovation.
“The word ‘default’ sounds ominous, but in reality this is a default on the part of Congress,” Rolando said.
In 2007 and 2008, the Postal Service initially had profits of roughly $3 billion but fell into the red after making the health payments. In more recent years, it has suffered annual losses of $2 billion to $5 billion even after factoring out the health payments; by 2016, the mail agency expects to lose $21.3 billion a year, of which $5.8 billion will be caused by that payment.
Peter Nesvold, a financial analyst with Jefferies and Co., says the post office’s financial future will depend on how Congress resolves its conflict over the mail agency’s core mission. While the Postal Service is a business expected to stay afloat, it also has a legal obligation to provide uniform first-class mail service even to sparsely populated, far-flung areas of the U.S., all for the same price of a 45-cent postage stamp. UPS and FedEx don’t deliver to those areas that are less profitable, contracting with the Postal Service to get the job done.
Last year, first-class mail contributed to 49 percent of the Postal Service’s total revenue; by 2016, that share will drop to 41 percent. The mail agency has been seeking to pick up the slack by promoting its fast-growing package business as a cheaper alternative to FedEx and UPS, as well as encouraging more use of “standard mail,” which are advertising circulars and catalogs often referred to as “junk mail.”
Linda Graham, a postmaster in Hope, Alaska, says she understands the Postal Service’s financial dilemma. Her rural postal branch may see its hours reduced from eight to four hours a day. “I feel that right now the post office is really grasping to try to make things work. I mean, they’re losing money,” she said.
Graham acknowledges her postal branch could probably get by if it were open just 6 hours a day, but believes that a bigger cut would be “suicide” for the town because of the role it plays as a community gathering place. “That’s a real concern. So I just tell people, write more letters, buy more stamps,” she said.