A Reality Check on Postal Service Finances

FILE This Dec. 5, 2011 file photo shows the United States Postal Service headquarters in Washington. The nearly bankrupt U.S.
FILE This Dec. 5, 2011 file photo shows the United States Postal Service headquarters in Washington. The nearly bankrupt U.S. Postal Service on Thursday reported losses of $57 million per day in the last quarter and warned it will miss another payment due to the U.S. Treasury, just one week after its first-ever default on a payment for future retiree health benefits. (AP Photo/Charles Dharapak, File)

For the third quarter of its 2012 fiscal year, the United States Postal Service reported a net loss of $5.2 billion and projected continuing large losses and "very low levels of cash" for the remainder of the fiscal year. With that came news that the Postal Service had failed to make a $5.5 billion dollar payment to the Treasury Department. An additional $5.6 billion payment was missed today.

This report and the missed payments fed the narrative of the Postal Service as a dying institution, hopelessly ill-equipped to adapt to the digital age, with the inevitable government bailout at taxpayer expense soon at hand.

Yet the Postal Service could have instead chosen to report that its operating revenue was stable and that its operating losses were smaller than forecast and improved from the same period last year. And they could have also pointed out that the decline in first-class mail volume and revenue was smaller than expected and that Shipping Services achieved dramatic record growth.

Why this disconnect?

There are many reasons, but by far the most important is that the Postal Service's losses are largely the product of a congressional mandate imposed on no other public or private enterprise in America. Since 2006, Congress has forced the Postal Service to make enormous annual contributions into a fund for future retiree health benefits, including the $5.5 billion and $5.6 billion mentioned above. In fact, since they began, these payments have accounted for more than 80 percent of the Postal Service's losses.

It is worth noting that the Postal Service's pension funds are overfunded and the retiree health care fund -- into which these payments are transferred -- currently contains almost $45 billion dollars, enough to pay retiree health costs for decades to come.

This congressional mandate is the cause of the "crisis" facing the Postal Service, and it has nothing to do with operations, decreasing mail volume, or the Internet.

That is not to say that the Postal Service has no problems. Clearly, it does. First-class mail, long the major revenue source for the Postal Service, is declining as people and businesses shift communications from paper to various electronic forms. If it is to survive, the Postal Service needs to undergo a major re-think of its business model and a major restructuring of its operations and costs.

The tragedy here is that this congressionally mandated "crisis" is being used to support, not a thoughtful restructuring, but a dismantling of the Postal Service's network -- the very thing around which the Postal Service could be rebuilt. The Postal Service's "shrink to survive" strategy -- eliminating routes, closing post offices, stopping Saturday service and slowing mail delivery -- will not work. It will only reduce mail use and mail volumes.

In the first ten months of this fiscal year, the Postal Service saw a 56 percent increase over the prior year in the volume of its Shipping Services, which includes Priority Mail, Express Mail, Parcel Select and certain other parcel products. The shippers who utilize Postal Service products do so precisely because of the breadth and depth of the postal network.

It is this last mile network -- reaching 150 million homes and businesses six days a week -- that is the Postal Service's greatest strength and that a national economy like ours must preserve. Even firms like FedEx and UPS rely upon it to complete their deliveries. No one has figured out a way to deliver packages over the Internet; with the continued explosive growth of e-commerce, this opportunity will only expand in the years ahead.

Lazard, on behalf of the National Association of Letter Carriers, has released two reports this year laying out our concerns about what is happening to the Postal Service and outlining the key elements of a comprehensive solution.

In these reports we point out, based on our extensive experience in restructuring large and complex enterprises, that the key to virtually every successful private-sector restructuring is shared sacrifice -- by customers, creditors, management, employees and all other stakeholders. Unfortunately, the Postal Service's current business plan is based on one-sided employee sacrifice that will not only lead to the loss of jobs and benefits but also will inevitably degrade the last-mile network.

Sacrifices will be required of the Postal Service, but hacking away at its core strength will not solve the problem. Instead, it would tear down a network that has taken more than two centuries to build. Americans should demand better.

Ron Bloom is a Vice-Chairman, U.S. Investment Banking, at Lazard. Lazard, whose professionals have been involved since 1990 in over 250 restructurings representing more than $1 trillion in debtor assets, currently serves as financial adviser to the National Association of Letter Carriers in connection with its dealings with the Postal Service.