Post Office $5.6 Billion Default Raises Urgency of Reforms

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Tuesday, 22 Oct 2013 11:13 AM

By Jennifer G. Hickey

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With Congress and the media focused on the government shutdown and how to avoid default on the national debt, little attention was directed toward the U.S. Postal Service which earlier this month defaulted on a required $5.6 billion payment for the healthcare of its future retirees.

The third default on the down-payment in just over a year underscores the necessity of much-needed reforms for the beleaguered Postal Service.

Rep. Darrell Issa of California told Newsmax that without "the freedom to realign its infrastructure and operations in line with the changing way Americans use mail, the agency will remain insolvent."

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"Prolonged insolvency of USPS will result in a massive taxpayer bailout and ongoing subsidy, or a sudden disruption in mail service, or both," the California Republican said.

Just days before the default, USPS Board of Governors Chairman Mickey Barnett announced an increase in the price of stamps beginning in 2014, which he said was the result of USPS' "precarious financial condition" and the "uncertain path toward enactment of postal reform legislation."

It is not a new message from the USPS leadership. Postmaster General Patrick Donahoe has been vocal about the need for Congress to implement legislative reforms, including elimination of the annual prefunding payments, and its need for greater autonomy to manage its healthcare system.

Appearing before the Senate, Donahoe said the Postal Service was "in the midst of a financial disaster" due to the burden of an "outdated and inflexible business model."

Absent any flexibility to govern its own affairs, the Postal Service – which expects to end fiscal year 2013 with a loss of about $6 billion – has warned lawmakers it anticipates a government bailout of $50 billion will be needed in 2017.

Action on postal reforms looks unlikely this year, and "even the small reforms being proposed by Congress will only buy them a year or two," says James Gattuso of the Heritage Foundation.

Gattuso tells Newsmax that attributing USPS's losses to the recession or faulty accounting are merely ignoring the real problem, which is that the market for traditional mail is diminishing.

In an October research report, Gattuso notes that first-class mail volume has already plummeted 30 percent since 2007, and it may drop another 40 percent over the next seven years.

In addition to a decline in standard mail as a result of increased email communications, more Americans are paying bills online.

A Household Diary Study found that bill payments by mail have declined almost 16 percent in the past two years, while a 2012 study by the consulting firm Fiserv reports that 75 percent of Americans pay at least one monthly bill electronically.

The USPS has "to bite the bullet and make serious changes that include closing post offices that do not cover their costs or even make a profit. They also need to be open to considering partnerships with local businesses, such as CVS, so people would still have access to postal services, but not necessarily at a dedicated post office building," says Robert D. Atkinson of the Information Technology and Innovation Foundation.

Atkinson suggests the USPS should immediately move to a five-day or three-day delivery schedule and to identify underutilized post offices and postal sorting facilities for closure.

In a June report examining whether the postal service could survive in a digital age, Atkinson pointed to the fact that more than 21 percent of FedEx deliveries are dropped off by a USPS postal carrier. This burden sharing is known as "last mile" delivery, in which a private sector company, such as FedEx, will manage the sorting and transportation of packages, but the final mile delivery is done by USPS.

Rather than proposing full privatization of the USPS, Atkinson suggests opening service up to competition and for the USPS to focus on its core competencies, such as package delivery.

"They deserve credit for making some budget cuts and for being upfront about their fiscal condition. One of the problems is that they have been hamstrung by a lack of congressional approval for reforms," Atkinson tells Newsmax.

In the House, Issa introduced legislation similar to a measure he sponsored in the previous Congress that would begin to phase out Saturday delivery of mail, while maintaining Saturday delivery of packages, which is one of the few areas of growth.

The bill would allow the Postal Service to forgo past due payments owed to prefund retiree healthcare benefits, would eliminate the ability of national and state political committees to use the non-profit mail rate, and permit the USPS to sell advertising space on vehicles and facilities. The bill also would allow state and local services, such as the sale of fishing licenses, at postal facilities.

Legislative action in this session is unlikely considering the other issues Congress has on its agenda, but Issa spokesman Ali Ahmad says "with the notable exception of labor unions, all key stakeholders are in contact and working on a solution to save the Postal Service and prevent a massive taxpayer-funded bailout."

"The unions carry a lot of political weight because they are one of the largest unions and they are out there making a lot of noise, whereas the taxpayers are largely unaware of the situation or the need for reform," says Gattuso, who adds that labor opposition is "somewhat ironic as no one is talking about forced layoffs or drastic renegotiations of union contracts."

"The status quo is not sustainable. While some argue that the USPS's losses are due to faulty accounting or a temporary downturn in the economy, that claim is wishful thinking. The market for traditional mail has been shrinking rapidly," Gattuso tells Newsmax.

Unions have criticized the reform efforts, contending that the bills do not do enough to ease the burden of prefunding retirees' health benefits.

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Neither Gattuso, nor Atkinson, see the USPS becoming extinct anytime soon. However, they say that, like newspapers and the publishing industry, a failure to adapt to an irrefutable trend toward digital and online communications will only exacerbate USPS's poor financial condition.

A Senate bill, co-sponsored by Delaware Democrat Tom Carper and Oklahoma Republican Tom Coburn, has moved closer toward the House measure, but even USPS' Donahoe has argued that committee's draft bill doesn't go far enough in granting the Postal Service greater control over its healthcare costs.

The Postal Service has proposed launching its own postal-specific healthcare plan – either within the broader Federal Employees Health Benefit Program or by negotiating directly with insurers.


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