November 18, 2024

Issue 24/11

The leading voice for nonprofits on postal issues for over 44 years.

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The Alliance of Nonprofit Mailers is a 501 (c)(4) nonprofit organization established by nonprofits for nonprofits.

USPS’s $9.5 billion loss raises questions

The loss of $9.5 billion in FY 2024 that we reported to you last week raises several questions. USPS leadership made the point that only $1.8 billion of the loss was “controllable” by them. From this, they invited praise for improving the “controllable” loss and for staying with a 10-year plan that they believe is on the road to success. Does Postal Service leadership deserve credit for the results?

Promised versus actual financial results

First, we must compare the actual results with what the USPS leadership promised. The agency promised to break even in FY 2023 when it released the Delivering for America Plan over three years ago and revised the forecast to a loss of $4.5 billion at the beginning of FY 2023, but lost $6.5 billion. The Postal Service further promised a $1.7 billion profit in FY 2024 in the DFA Plan, revised it to a projected $6.3 billion loss in its annual plan, and just announced an actual loss of $9.5 billion.

All of these plans and results are presented according to generally accepted accounting principles (GAAP) that both USPS and private sector businesses are required to use. They include the ‘non-controllable” expenses that current management wants to forgive, even though they have been facing USPS for years.

“Non-controllable” costs are real costs that must be covered.

The “non-controllable” USPS expenses include changes in the present value amounts to best estimate future financial obligations for pensions and retiree health care benefits. They also include changes in the present valuation of workers’ compensation benefit obligations (caused mainly by interest rate fluctuations). The Postal Service has massive workers’ compensation exposure because of its over 600,000 workforce performing mainly manual labor subject to injuries.

USPS leadership might feel as though it cannot control the pension, healthcare, and injury obligations, but it still must cover them. Unless or until the U.S. Congress changes laws that require pensions, health care benefits, and workers’ compensation, these are real costs arrived at through actuarially sound methodologies shaped and enforced by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

USPS has known about the “non-controllable” costs for years. To say that the current plan is the best hatched for USPS and must be followed without question while suggesting that we ignore real costs makes no sense. A successful plan and business model for USPS must cover all costs incurred by the agency.

USPS assumptions when they say their plan is working

1. Assumption – Congress will grant more legislative relief by allowing USPS to invest its pensions and retiree health benefit funds in the stock and bond markets. Based on historical returns such a change would greatly increase the value of the funds over time and turn large deficits into surpluses. It seems unlikely that the U.S. Treasury would not stand in the way, however, as it finances about 20% of the U.S. public debt in non-marketable Treasury securities and would oppose a precedent for letting those funds move into the market.

2. Assumption – The USPS package business will grow and be very profitable. The agency is investing $40 billion in a new logistics network that is designed to handle both mail and packages. The emphasis, however, is on packages. The agency is adding more package sorting capacity and is using pricing to eliminate incentives for drop-shipping so that USPS will handle more end-to-end boxes and hopefully reap the rewards. Mail volume has been on the decline for almost 20 years while e-commerce has engendered a growing market for packages. So, in theory, packages seem like more of an opportunity. But private sector competitors are also growing and the market is experiencing over-capacity and price wars. USPS predicted a $2.1 billion increase (+6.6%) in package revenue in FY 2024 but got only $625 million (+2.0%).

3. Assumption – The Postal Service will continue to milk captive mailers with frequent, above-inflation rate increases. The USPS has been using all of the rate authority that the Postal Regulatory Commission grants it and unilaterally added semi-annual frequency to increase compounding. The PRC is currently reviewing the extra rate authority that it granted starting in 2021 before the package-centric DFA launched. In the regulatory review and during last week’s Board of Governors meeting, USPS asked the regulator to remove any constraints to its pricing of monopoly mail products. The Alliance is actively involved in trying to get the PRC to return to the Consumer Inflation Index cap on annual increases. We expect that the regulators understand that $16 billion in losses in the past two years under the USPS slash-and-burn pricing proves that giving the agency money at the grave expense of losing long-time customer business is damaging and not the solution.

4. Assumption – Continuing USPS cutbacks in service and investments in a new network will pay off. The jury is still out on whether new facilities, more package sorting equipment, streamlined logistics workflows, fewer truck trips, and service reductions will pay off in a meaningful way. No doubt many of these improvements are needed. Cutbacks in longstanding practices such as picking up mail from post offices each evening are things that private equity buyers of floundering businesses would target. But when 73% of total “controllable expenses” are employee compensation, do the changes underway address the elephant in the room? Much of the employee cost is nearly impossible to cut under current rules, especially delivering to every address six days a week and running thousands of post offices that do not cover their cost. USPS is touting the one cost it is reducing, transportation, but it comprises only about 12% of “controllable expenses.” To truly have a hope for success you would need to focus on the 73% item rather than the 12%.

5. Assumption – Congress will increase the USPS borrowing limit to $30 billion or more. The real crisis will happen when USPS comes close to running out of cash. Much of the recently announced losses are real but booked as non-cash. On October 31, 2024, the USPS held $15 billion in operating cash in the Postal Service Fund at the U.S. Treasury. The agency also has used all of its borrowing from the Federal Financing Bank at $15 billion. So net, the agency has no money. USPS has been asking Congress to raise its debt limit to at least $30 billion which it says is the current dollar equivalent to the 1991 $15 billion. Many private sector forecasters foresee a financial crisis within 2-3 years.

Our conclusion: the Delivering for America Plan is not going to magically solve the broken USPS business model.

The Senate is considering three new USPS Governors

Three Biden nominees for the USPS Board of Governors were questioned by the Senate Homeland Security and Governmental Affairs Committee on September 14. Val Butler Demings was nominated to replace Anton Hajjar, William Zollars was nominated to return, and Gordon Hartogensis was nominated to replace Roman Martinez. Previously nominated Marty Walsh who was to replace the departed Lee Moak withdrew from consideration for no obvious reason.

After the likely confirmation of the three nominees, the USPS will have 8 of its 9 Governor positions filled. The guiding principle of the Governors in their unwavering support of Postmaster General Louis DeJoy appears to be that no one has come up with a better alternative plan. Outgoing Governor Hajjar reiterated this point at his last Board of Governors meeting last week.

With the extreme complexity of both the Postal Service and its broken business model, the part-time Governors do not stand much of a chance to introduce significant change to the current trajectory of the USPS. They receive only $30,000 in annual compensation, rely on management for their information, have minimal staff, usually focus on other full-time employment, and drop in once a month for meetings.

USPS is raising competitive package rates moderately in January

Reflecting the over-capacity in the market, the slow current growth of USPS packages, and the price war between the major players FedEx and UPS, the Postal Service announced modest increases in the list prices for package delivery effective January 19, 2025. The increases will be about 3.2% for Priority Mail and Priority Mail Express, 3.9% for USPS Ground Advantage, and 9.2% for Parcel Select.

Larger customers will continue to receive lower negotiated rates than the list prices. USPS is continuing to push out work-shared drop-shipping of packages in partnership with the private sector through larger rate hikes for Parcel Select. The agency wants to more fully use its new network facilities and processing equipment by forcing more packages to travel the full length of its network. Whether customers trust the agency to be as reliable as the private sector companies that used to bring the packages close to the destination for final postal delivery remains to be seen.

Canadian postal workers on strike

Canada Post and the Canadian Union of Postal Workers (CUPW) are meeting with a special mediator for the first time on Monday to continue talks as they enter the fourth day of a national strike. The parties remain far apart. A strike at the same time of year in 2018 continued for five weeks before the government ordered employees back to work. USPS has not made any announcement regarding mail to Canada, leaving mailers to work to ensure their mail is not held for an extended period. Private delivery services continue to operate in Canada.

USPS OIG issues concerning report on internal mail theft

The USPS Office of Inspector General is responsible for investigating the theft of mail by USPS employees. Its recent report identified an increase in closed cases for internal mail theft from 1,216 in FY 2020 to 1,790 in FY 2023. The OIG report highlighted many instances of employees leaving personal clothing and bags on the workroom floor as well as a lack of camera coverage in processing plants.

The OIG made four recommendations and postal management agreed with one, partially agreed with two, and disagreed with one. The recommendation that management disagreed with was:

Recommendation #4

We recommend the Chief Postal Inspector

develop and implement a strategic, nationwide

plan that includes continuous monitoring of the

operational status of cameras and diagnosing

and addressing camera failures timely.

The OIG described management’s response as:

Regarding recommendation 4, management

stated it is not feasible, due to current policy, for

the Postal Inspection Service to address camera

failures timely and such a recommendation

surpasses the scope and responsibility of the

Postal Inspection Service.

We view management’s

disagreement with recommendation 4 as

unresolved and will work with management

during the audit resolution process.

The USPS proposed regional transportation optimization plan to leave First-Class Mail overnight in as many as 23,000 post offices continues to raise concerns about protecting that mail from both internal and external mail theft. The recently launched “Don’t Get Snowed” by Holiday Scams: The 2024 U.S. Postal Inspection Service Holiday Campaign warned us to never send cash in the mail. But people still do, including donations to nonprofits.