Right now the Postal Stakeholders, the Obama administration and Congress are focused on the here and now. Mailers are railing against an above inflation rate increase in January of 2013. Union members are demonstrating, trying to stop cutbacks in service that mean rapid reductions in jobs. The Obama administration proposes legislation that gets the Postal Service through the next two years without impacting the Federal Budget. Congress has written legislation that prevents any impact on the budget in the near term with the minimal amount of changes that could raise constituent ire prior to the 2012 election. No one is thinking long term. Unless someone starts, it is unclear if the Postal Service will have the capability to provide a level of universal service that meet the needs of Americans in 2015 and beyond.
Why do I believe that the long term prospects of the Postal Service are so dire? It is simple. The Postal Service has neither the cash nor the ability to raise capital to cover the investments that are needed to ensure that it can continue to provide the universal service that its customers will likely demand in the future as a self-sufficient entity.
Why is the Postal Service Capital Short?
The Postal Service like most government and quasi-governmental organizations (i.e. transit and commuter rail providers) has long short changed capital spending as a means to balance an operating budget. Under the Postal Reorganization Act, capital spending of the Postal Service usually rose and fell with the rate cycle with harsh cutbacks regularly occurring during the year that a rate case was litigated. The “break even” financial target did not include any consideration as to the need to build up cash for future investments, and instead based rates on covering the depreciation of projects that were already in place. In particular, this financial objective had its greatest impact in the ability of the Postal Service to integrate new communications, computer, and software into its operations. Because of this, the Postal Service for the past two decades consistently played catch up with other logistics enterprises in its use of technology resulting in the current need to play catch-up in the use of these technologies to:
- manage operating costs,
- meet the delivery commitments of its customers,
- price products to meet costs of individual customers,
- provide modern retail access options,
- offer a competitive track and trace capability; and
- offer state-of-the art web services.
The Postal Accountability Act, in many ways, made this problem worse. First, it did not change the financial objective. This omission prevented the Postal Service from including an allowance for an operating margin that would have allowed it to raise rates to a level that generated sufficient cash to create the cash reserves that are necessary to cover future capital needs as well as the impact of the economic cycle. Furthermore, the Postal Accountability Act put additional pressure on operating budgets and cash spending by imposing new cash payments to cover retiree obligations. These pressures moved the Postal Service from a boom and bust capital spending cycle to a perpetual bust in spending.
Capital Spending History
The following two charts illustrate how the Postal Service’s financial challenges have affected its commitment to a capital spending plan that would ensure a self-sufficient entity that can fund the transformation of the enterprise. It is important to no verification that the amounts show for the years prior to passage of PAEA and the first two years after were sufficient for the Postal Service to meet the challenges that it now faces.
The table on the right illustrates the trend in capital funding since 2008. Capital funding represents a multi-year commitment to fund capital projects. Capital funding levels can be artificially high if the approved level of capital funding does not change if the project’s timing is stretched and no new projects are added. Capital funding declines when projects are completed and no new project of a comparable size is approved to take its place.
This table illustrates that the Postal Service’s commitments have declined steadily since 2008. The Postal Service’s approved capital funding at beginning of fiscal year 2012 is less than half of what it was in 2008. No oversight entity including Congress, the United States Postal Service – Inspector General and the Government Accountability Office has conducted an independent analysis on what an appropriate level of capital funding should be.
The following chart illustrates the Postal Service’s capital commitments since 2001. The chart illustrates the boom and bust spending approach to capital spending prior to the PAEA and bust that has occurred since 2009. This chart is consistent with the Capital Funding table and indicates that maintaining a constant level of funding (assuming that such a level is sufficient) would require new capital commitments over $2 billion a year.
Data does not exist for likely capital commitments in FY 2013 and beyond. Projections of major losses in FY 2012 and possibly FY 2013 suggests there is no reason to expect that capital commitments will rise to levels that can meet the known capital needs of the Postal Service.
Capital Needs of the Postal Service
No oversight entity has conducted an independent analysis on what an appropriate level of capital funding. Neither is there an analysis as to the total cash and capital needs of the Postal Service are today. The Postal Service’s Strategic Financial Plan just says what they are planning to do. The projects and spending levels identified reflect what the Postal Service has to spend and not what is needed.
Review of reports of the Government Accountability Office and the Inspector General of the United States Postal Service, as well as statements of Postmaster General, generate a laundry list of unfunded capital projects, as well as a list of cash needs to cover restructuring costs and cover investments in projects that are expensed rather than capitalized. In the next few days, I will post a list from these reports.
My best guess is that an independent assessment of the cost of all of these projects would run close to $20 billion. The figure is this high as it represents significant pent-up demand for capital projects including replacing the vehicle fleet, upgrading operating and customer interface information systems, and modernizing the Postal Service’s retail network. The Postal Service does not have to spend this at once but projections of customer needs suggest that these projects need to be completed over the next three to five years.
In the next few weeks, both Evercore Partners for the Postal Service and Lazard for the National Association of Letter Carriers will present their proposals for restructuring the Postal Service to the public. These firms must include their plans the introduction of a more credible financial objective and a credible plan for raising the capital necessary to cover the costs of delayed and deferred projects. The future of the Postal Service, its customers and employees all depend on this.
