published Wednesday, September 12th, 2012

PersonalFinance: Postal Service between a rock and a hard place

Christopher A. Hopkins CFA

Neither snow, nor rain, nor heat, nor gloom of night have stayed the post office from the completion of its appointed rounds. Now however, two new obstacles present a formidable challenge to the service's financial viability: the Internet and Congress.

Thanks to tectonic shifts in communications and demanding oversight from Washington, the U.S. Postal Service stands on the verge of insolvency by October barring quick emergency aid from Congress.

The Internet has dramatically reduced the volume of mail handled over the past decade, thanks to email, electronic funds transfers and social media. Even the U.S. government itself has mandated elimination of most printed checks.

The adoption of electronic commerce and communication is responsible for a 25 percent decline in first-class mail volume since 2001. Although the USPS has initiated or increased other services in an effort to compensate, total revenue still is down 17 percent in constant dollars over the same period.

The downward trend in postal volume hardly seems likely to abate as advertising migrates increasingly to electronic formats, eating into junk mail volumes (which exceeded regular mail last year).

While the incursion of e-everything seems ineluctable, the other malady from which the post office suffers is correctable: Congressional mandates and oversight.

In 1971, the Postal Service was carved out of the executive branch and established as a separate agency with responsibility for its own financial accountability. Accordingly, the USPS receives no government funding and must support itself with revenue from services and postage sales. However, Congress retains authority to approve or veto critical business decisions, and imposes some exceptionally challenging mandates upon the USPS.

In particular, since 2006 the service is required by Congress to prepay heath care benefits for future retirees of the Postal Service over the next 75 years, and to do so over a 10-year period.

Each year through 2016, the post office must make a $5.5 billion payment to a health care trust fund. No other entity of the U.S. government nor any private enterprise is required to prepay future health care costs. While most other federal agencies and departments tally and disclose expected future liabilities, none is required to fund them in advance.

For the first time since the mandate was established in 2006, the Postal Service defaulted in August on its annual payment and is certain to miss the next one due in September.

The U.S. Postal Service has proposed a restructuring plan that seeks to make sensible changes including elimination of Saturday service, shuttering some costly rural offices and subcontracting some unprofitable retail operations. However, these prudent measures require Congressional approval, which has so far not been forthcoming.

After losing $11 billion through the first three quarters of fiscal 2012, there is little time to waste. The mission of the U.S. Postal Service to provide universal delivery service at a reasonable uniform rate still is feasible, but only if the agency is granted authority to take obvious and necessary steps to ensure its viability in a wired world.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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