Sizeable PQ 1 Loss Starts USPS Off on Wrong Foot

Excerpted from the February 18, 2019 edition of the Mailers Hub News.

As was observed late last year when the Postal Service reported its volume and revenue figures for October, the first month of fiscal 2019 and the month that benefitted from pre-election mailing activity, it needs more months like that. That assessment was reinforced earlier this month when the less impressive results for the other two months of the first quarter were added and reported on the agency’s PQ I/FY 2019 Form 10-Q.

Not a good bottom line

For the three-month period, the USPS reported a net loss of $1.537 billion, nearly three times the loss it experienced during the same period of the previous fiscal year. This result occurred despite a slight uptick in volume and revenue and relatively little change in its prefunding payments. The apparent causes, however, were a jump in its workers compensation liability and higher transportation costs, but particularly the growth in employee compensation expenses.

Volume and revenue

As noted, the significant additional volume related to the mid-term elections did wonders for October volume, especially for Standard (Marketing) Mail, but the black ink that resulted was drained away in November and December. First-Class Mail, which generated 34% of USPS revenue for the quarter, continued its long-term decline, producing 2.8% less volume and 1.2% less revenue that SPLY. Standard (Marketing) Mail, whose volume and revenue leaped over SPLY by 18.2% and 17.3%, respectively, in October, finished the quarter over ten points lower in each measure.

The usual bright spot was competitive products, but even those now are facing greater competition as other carriers find they have the density to deliver the “last mile” themselves, i.e., to areas previously off-loaded to the USPS.

The agency stated in its report that revenue from its competitive products grew by 8.7% for the quarter (compared to SPLY), but this masked month-over-month declines from October through December, the latter being a month during which the USPS should be seeing some of its best volume and revenue. In its comments, the agency acknowledged that, despite its “successful efforts to compete in shipping services … the rate of growth is slowing.”

Expenses

As noted above, the Postal Service’s expenses were as much – if not more – the source of its red ink for the quarter than was weak revenue, and expense growth was not in only its “uncontrollable” costs. Of course, the USPS still owes over $48 billion for past payments to “prefund” future health care ($33.9 billion) and retirement funds that it lacked the resources to make. The agency isn’t likely to have the money to pay that debt anytime soon, so missed payments in FY 2019 will contribute significantly toward its anticipated net loss for the year.

The USPS noted that excluding its payments for “prefunding” and retirement system amortization and adjustments to its workers compensation liability would reduce its quarterly loss by over 93% – from $1.537 billion to $103 million. (During PQ I, the valuation of the agency’s workers compensation liability – tied to discount rates – jumped $505 million.)

Given the nature of its business, the Postal Service is dependent on a wide variety of providers to move mail, whether by air or land, and the USPS bears their growing expenses (including higher driver and fuel costs). Transportation costs for PQ I were 9.7% higher than SPLY, including a jump in air transportation expense of over 12%.

Concluding as it often does with a comment about its financial situation, the USPS stated:

“Although our cash balances have increased since 2012, they remain insufficient to support an organization with approximately $74 billion in annual operating expenses, to make capital investments necessary for continuity of operations and to prepare for unexpected contingencies. This cash improvement would not have occurred but for the temporary exigent surcharge … and had the Postal Service not defaulted on the annual statutorily set PSRHBF prefunding payments from 2012 through 2016, and not paid the RHB normal cost, and RHB, CSRS and FERS amortization payments in 2017 and 2018. …
“We continue to face challenges from the ongoing migration of mail to electronic alternatives, and we are legally limited under current law in how we can price our products and streamline our legacy business model. We are further challenged by onerous payment requirements for legacy pension and PSRHBF obligations that, barring legislative reform, will continue indefinitely.
Our operations will require significant capital investment over the next few years to modernize and improve our processing and delivery infrastructure and update our delivery fleet in order to continue to meet our statutory obligation to provide prompt, reliable and efficient postal services to the nation. Furthermore, given our inability to raise cash through the issuance of additional debt beyond the $15.0 billion debt ceiling, we will not be likely to have sufficient cash balances to meet all of our existing legal obligations and make all of the critical investments in our infrastructure that are necessary for operational continuity and that have been deferred in recent years. …
“Although we continue to inform the Executive Branch, Congress, the PRC and other stakeholders of the immediate and long-term financial challenges we face, we have no assurances that our requests will result in meaningful reform in the foreseeable future.”

The Postal Service repeats that message regularly, as if to remind legislators that – aside from what USPS management can or could do – there are overriding circumstances that need to be reviewed and amended. Aside from what could be done to revise the current ratesetting process, schedule of payments for obligations, or authorized products and services, doing nothing – Congress’ favorite option – will only perpetuate an untenable status quo.


 

Excerpted from the February 18, 2019 edition of the Mailers Hub NewsFor the full issue and others, please visit the Mailers Hub News archives. 

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