Another bad Postal Service bailout plan.

Another bad Postal Service bailout plan.

Another bad Postal Service bailout plan.

Moneybox
Commentary about business and finance.
April 11 2003 6:58 PM

Mail Fraud

Here comes yet another shortsighted plan to bail out the Postal Service.

The House of Representatives this week approved legislation that allows the struggling U.S. Postal Service to pay less into a pension for its employees hired before 1984. In return, the Postal Service said it won't have to raise postage rates until 2006.

Sounds like a good bargain, right? The accounting maneuver won't affect worker benefits; USPS saves $2.9 billion this year and many times that in years to come; and that stack of 37-cent stamps you just bought will good for another few years.

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But the deal, which has been approved by the Senate and is supported by the White House, is primarily a boon to junk mailers and magazine companies. And it is bad news for the taxpayer. For while it appears to relieve the Postal Service of certain burdens, it adds to the burgeoning federal deficit. And the bargain ignores a larger problem with the Postal Service's retirement planning that will require either vast rate increases or a taxpayer bailout in years to come.

Thanks to e-mail and electronic bill payment, the volume of six of the 10 classes of mail fell last year. The volume of first-class mail—your American Express payment, a letter to Aunt Sarah—has fallen for two straight years. Meanwhile, credit-card solicitations, catalogs, and magazines are on the rise: The bulk corporate mailers account for more than two-thirds of USPS mail.

Faced with losses for the past three years, the Postal Service—since 1971 an independent federal corporation that is supposed to break even—has cut 3.6 percent of its massive workforce, re-engineered operations, and boosted prices. Rates have risen three times since the beginning of 2001, and USPS threatened another rate increase this year—rather than in 2004 or 2005—if it didn't get some relief.

Relief came in the form of an analysis by the Office of Personnel Management in November 2002. It found that the annual returns on funds that were theoretically invested for USPS workers in the Civil Service Retirement System, which covers mail carriers and staff hired before 1984, had been tallied at a too-conservative 5 percent rate. OPM's conclusion: Were it to continue paying in at current rates, the USPS would overfund the pensions owed to employees by $71 billion. It was therefore recommended that USPS cut its contributions to CSRS from $4.7 billion a year to about $1.8 billion in fiscal 2003, saving $2.9 billion. Similar savings would accrue in the following years.

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There are two potentially negative implications to this quick fix. The first concerns the weird role USPS plays in the federal numbers game. While USPS is an independent agency, its revenues and expenditures are, in effect, regarded as the government's. So if USPS simply cuts its contributions to CSRS, the government's revenues (which include those payments CSRS receives from USPS) will drop $2.9 billion, and its outlays (which include the payments USPS makes to CSRS—counting the money from the other direction) will fall by the same amount.

But if the Postal Services uses the savings to hold the line on rates, or to cover expenses, it will—perhaps perversely—hurt taxpayers. The Congressional Budget Office's base-line revenue projections assume that postage rates will rise by 3 cents to 40 cents per first-class stamp some time in Fiscal 2004 and that the Postal Service will use rate increases or spending reductions to continue its break-even efforts thereafter.

So if rates stay the same, instead of increasing as planned, that means lower than expected revenues for the government in coming years. And if USPS spends its pension savings on capital expenditures or investments in technology, that will raise government spending. The CBO concluded in a January 2003 report that the pension shifts "could increase deficits or reduce surpluses in the unified budget by as much as $10 billion to $15 billion over the 2003-2007 period and by as much as $36 billion to $41 billion over the 2003-2013 period."

The second shortcoming of the measure is that it ignores an even bigger USPS retirement-related headache: health-care costs.

USPS is responsible for employees' post-retirement health benefits. Here's the issue: USPS and other federal agencies fund pension obligations as they are earned by employees. Each year, they're supposed to kick in funds from their budgets that pay their future costs. But USPS, like other federal agencies, only pays for retiree health benefits when the employees actually retire. You don't have to be an actuary to realize that those costs will balloon in coming years, as more and more of USPS's 820,000 employees retire.

"If the Postal Service accounted for and funded both retiree pensions and health benefits as they were earned by its employees, its operating costs would be higher, and some combination of increased postal rates or cost savings would be required," the CBO said. And were it to confront those health costs honestly and start funding them now—something the Bush administration has urged federal agencies to do—USPS would find its operating expenses rising by nearly $5 billion annually. "Those costs are nearly twice the size of the annual reduction in pension payments that the Postal Service is seeking," CBO concluded.

In the short term, the deal to hold down rates will shift more costs onto the government. In the long term, it could set the stage for an expensive bailout of the health plan. The real beneficiaries of the legislation are those who rely on mail service most: big corporations. If USPS really had to raise revenues—if it wasn't able to arrange this $2.9 billion accounting trick—it would have to raise them on the bulk mailers who comprise the majority of its business. That's why lobbyists for the bulk mailers worked Congress hard on behalf of this bill and are delighted with the outcome. Taxpayers are giving a lovely gift to the Lands' Ends, Condé Nasts, and Capital Ones: They'll thank us by sending us more catalogs, magazines, and credit card solicitations that we don't really want.