June 5, 2019

The USPS Form 10-Q for the period ending March 31, 2019 was submitted to the Postal Regulatory Commission on May 9.  One of the interesting things it documents is cash and cash equivalents of $8.1 billion on March 31.  This might have alarmed some because it’s down from $10.1 billion on September 30, 2018, and $11.4 billion a year before on March 31, 2018.  Oh no, some people said, USPS cash is declining at a rapid rate, down $3.3 billion in the past year!

In reality, USPS liquidity has improved in the past year. That’s because on March 31 this year USPS borrowing was at $11 billion, down from the maximum allowed $15 billion the previous March.  That leaves $4 billion more liquidity to add to the latest cash and cash equivalents, bringing available liquidity to $12.1 billion on March 31, 2019 versus the aforementioned $11.4 billion last March.  So, USPS liquidity is $700 million better than a year ago.

Why has the USPS reduced its borrowing from $15 billion to $11 billion?  It is good treasury management to minimize excess cash when you pay higher interest rates on borrowing than you earn on cash.  The Postal Service invests its cash at U.S. Treasury securities rates, and it borrows at Treasuries plus an eighth of a percent (0.0125%).  So, it makes sense for USPS to reduce debt as long as it knows that its borrowing authority will be there when needed.

But here is where it gets a little dicey.  As the Postal Service explains in its 10-Q, it has been borrowing under a note purchase agreement with the Federal Financing Bank, negotiated with excellent terms in 1999, and renewed annually.  Except recently, as it led the President’s Task Force, Treasury has been renewing the agreement for shorter time periods. The latest two-month renewal ends on June 30.  Here is the relevant 10-Q section:

In 1974, the Postal Service began issuing debt through individual debt agreements to the Federal Financing Bank (“FFB”), a government-owned corporation under the general supervision of the Secretary of the Treasury. The FFB holds all of the Postal Service’s debt. In 1999, the Postal Service entered into a Note Purchase Agreement (“NPA”) with the FFB to establish standardized procedures for the Postal Service to issue its debt. Under the NPA, the Postal Service can issue a series of notes with established terms and conditions by providing two days prior notice. Also under the NPA, the Postal Service can make borrowings against two annually-renewable revolving credit line facilities totaling up to $4.0 billion with interest rates determined by the U.S. Department of the Treasury each business day…

The NPA must be periodically amended by the FFB so that the Postal Service may continue to issue debt to the FFB pursuant to the standardized procedures and terms and conditions established by the NPA. Prior to September 28, 2018, the FFB’s standard practice was to provide the Postal Service with annual extensions for a full fiscal year. Since September 28, 2018, the FFB has provided amendments extending the agreement with the Postal Service for shorter two-to-three-month intervals. These amendments did not affect the terms of any of the Postal Service’s outstanding debt as of March 31, 2019, and September 30, 2018. On April 30, 2019, the FFB amended the NPA agreement by extending it until June 30, 2019. If the Postal Service is unable to extend the NPA beyond June 30, 2019, it has no assurance that it could obtain alternative debt financing after that date on comparable terms. However, the Postal Service believes that should the NPA not be renewed, the Postal Service would be able to maintain adequate liquidity through existing and new financing arrangements, as necessary and allowed by statute, to fund its operations for the foreseeable future.

Note that borrowing from the Treasury is not the only USPS option.  Title 39, Section 2006 explains that Treasury has the right of first refusal, but if it declines, the Postal Service may borrow elsewhere.  And the USPS can require the Treasury to borrow up to $2 billion:

39 U.S. Code § 2006: Relationship between the Treasury and the Postal Service

 (a) At least 15 days before selling any issue of obligations under section 2005 or 2011 of this title, the Postal Service shall advise the Secretary of the Treasury of the amount, proposed date of sale, maturities, terms and conditions, and expected maximum rates of interest of the proposed issue in appropriate detail and shall consult with him or his designee thereon. The Secretary may elect to purchase such obligations under such terms, including rates of interest, as he and the Postal Service may agree, but at a rate of yield no less than the prevailing yield on outstanding marketable Treasury securities of comparable maturity, as determined by the Secretary. If the Secretary does not purchase such obligations, the Postal Service may proceed to issue and sell them to a party or parties other than the Secretary upon notice to the Secretary and upon consultation as to the date of issuance, maximum rates of interest, and other terms and conditions.

(b) Subject to the conditions of subsection (a) of this section, the Postal Service may require the Secretary of the Treasury to purchase obligations of the Postal Service under section 2005 in such amounts as will not cause the holding by the Secretary of the Treasury resulting from such required purchases to exceed $2,000,000,000 at any one time. This subsection shall not be construed as limiting the authority of the Secretary to purchase obligations of the Postal Service under section 2005 in excess of such amount.

This is why the Postal Service said in its 10-Q that if the note is not renewed, and Treasury will not lend more than the required additional $2 billion, USPS is confident it could obtain necessary financing elsewhere.  It also has been Treasury policy, after the first and only USPS bonds were sold to the public in the 1970s, to require it to borrow only from the FFB.

In any case, if the Postal Service has any inkling that Treasury might not renew the note, and might want to cease lending to USPS, its leaders would have a fiduciary obligation to borrow the full $15 billion before it was cut off.  That’s because borrowing elsewhere would be much more costly, and the Postal Service is predicting a steady decline in its earnings.