Sunday, November 7, 2010

Week 42: USPS Blues

In early August, I read a WSJ article headline that astounded me: Postal Service Reports $3.5 Billion Loss. Even more astounding was the article's revelation that this was a QUARTERLY and not an ANNUAL loss. In other words, at this run rate the postal service would lose $14 billion in one year. As a society I think we've lost sight of just how big that number is - what with the Federal Reserve printing hundreds of billions of dollars and Travis McCoy flippantly singing about how he wants to be a "billionaire, soooo friggin bad"... At this rate each American citizen (children included) would have to pay about $50 per year just to make up the USPS gap. How is this possible? What is going on here?

The most illuminating source for answers came, ironically, from a government agency - the Government Accountability Office. The US Postal Service's financial viability was discussed as part of the GAO's regular watchdog report, and in 2009 the USPS was put on its "high risk" list. This list "calls attention to agency and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, or mismanagement, or are most in need for broad reforms." The GAO cites the most obvious reason for the terrible financial figures at the USPS: "declining revenues." There is no question that mail volumes have dropped significantly, with both the advent and widespread acceptance and use of email and, frankly, the better reliability of services provided by FedEx, UPS and DHL.

But like any comprehensive financial evaluation, the revenues only tell part of the story. What about costs? As of 2009, the USPS employed 630,000 full-time employees and 94,000 temporary employees - almost 0.5% of all adult workers in the US! I hope I'm not the only one who thinks this is insane. To its credit, the USPS has gotten it down to about 584,000 by offering early retirement packages. Unfortunately, this only marginally reduces costs, as benefits are paid out for life (and early retirees by definition will be receiving these benefits for longer than "usual" retirees). The post office in 2009 operated 38,000 facilities, 37,000 of which were retail operations. The bi-weekly payroll of the postal service was $2 billion, or roughly $52B per year (here we go with the big B again). Hell, the post office has to pay about $5.5 billion annually just to fund its pension liabilities! Out of curiosity, I decided to look up FedEx's comparable statistics. For the last year FedEx paid slightly over $8B in "salaries and employee benefits" for its roughly 280,000 employees. This would suggest that FedEx's rough cost per employee of $28,571. As for the USPS? Over 2.5 times this number. Is it any surprise that FedEx reported net income for its last quarter of $380 million compared to the postal service's $3.5 billion loss? No. Of course not.

Before this becomes a diatribe, I will continue with my findings. After hearing all of these basics, I decided to listen to about an hour of the Congressional testimony given earlier this year by Postmaster General John Potter (who two weeks ago stepped down after nine years at the helm). If you've never taken the time to listen to Congressional hearings, it is imperative that you do. The almost laughable ignorance, hubris, and sheer idiocy from both sides of the political aisle never ceases to amaze me. They did not disappoint. The politicians said things like "we are meeting here to ensure the post office continues to thrive" (only in Washington is a $3.5B quarterly loss considered "thriving"), or "the decline of the postal service is through no fault of its own, given private competition", or my personal favorite, "given all the cuts to date, it is hard to believe there are more efficiencies that are possible at this point." You literally cannot make this stuff up. Another congressional member spoke conspiratorially about a "so called 'decline in volume'" (as if the downtrend was even remotely debatable), while many others focused on what I guess is the biggest political problem: the Postmaster General's pay of roughly $800,000 for the prior year. While I agree there are some screwed up things going on here - namely that "employee job satisfaction" is a key driver of the postmaster general's pay - this is the epitome of losing sight of the forest for the trees. The post office has a clear structural problem that will end up costing you and me billions of dollars, and the committee members want to spend their only five minutes of questioning focusing on a figure that does not move the needle.

The broad outlines of a "solution" according to the politicians and the postmaster general, revolved around a plan to switch from six delivery days per week to five delivery days per week. More specifically, mail would no longer be delivered on Saturdays. One relatively astute Congressman asked why they would not stop delivery on a different day, like Monday? The postmaster general responded something to the effect of "my employees and I like our weekends, too." Sounds like a good way to check off the "employee satisfaction" part of his bonus conversations, if you ask me. Apparently this move to five days would save north of $3B per year (ignoring, of course, the possibility that revenue declines because fewer people will use a service that operates only five days per week). The postmaster and politicians also heralded $2 billion of cuts that have already taken place.

Let's call a spade a spade: this whole discourse is disingenuous. We just saw the numbers - how does $2 billion (existing savings) + $3B (expected savings) even get close to the $14 billion run rate of losses per annum? Why won't the trends of increased labor costs and decreased volume continue? (Never mind the fact that the politicians rejected the strong recommendation of the USPS, and the cut to five days never happened.) The post office recently failed in its efforts to again raise stamp costs, from $0.44 to $0.46.

The operations are not fiscally sound, and they are not fiscally sustainable. The American people are not stupid - if they use the US Postal Service, they will continue to buy more and more forever stamps thereby mitigating or eliminating gains from stamp price increases. They cost the same as regular stamps, and will hold their value in perpetuity. Of course, like many other government led initiatives, the forever stamps program was intended to be temporary and is well on its way to becoming permanent. Witness the official USPS "Forever Stamp Fact Sheet" - this fact sheet, still on the USPS website, claims "there is only one Forever Stamp — it features an image of the Liberty Bell." Also on their website is a recent press release heralding the new "Holidays Forever" forever stamp, featuring not a liberty bell but a pine cone. Right. So what's the lesson here, besides the obvious tale of government inefficiencies and unintended consequences? It is, simply, that the Forever Stamp represents the greatest investment opportunity out there: it is a combination of the US Government's sterling credit rating AND a hedge against inflation! You get all the upside of holding a US treasury bond with none of the downside inflation risk. Now all we need for the bankrupt cycle to continue is for Wall Street to invent "Forever Stamp Futures"... Stay tuned.


  1. What Jayel thinks is;

    While there is an obvious decline in sending letters because of electronic communication, there is also an increase in larger packages due to online shopping.

    In congruence with this fact USPS has always offered me better shipping prices than Fed Ex or UPS when I send and receive packages. So why do people use UPS or FedEx so often? The only time I use them is when I have no choice.

    I have actually worked for both FedEx and UPS. At FedEx I made 11.50 an hour for 4 hour shifts loading trucks nonstop (it would have been physically impossible for me to work that hard for 8 hours). At UPS I helped a driver who literally sped from house to house and sprinted to every door for his entire shift. He expected me to do the same for 10 dollars an hour. No wonder their employment costs are so low. I obviously had no trouble getting either job. Once again, the reason for this is very clear. Yet, I bet that the CEO's for both make well over 800,000 dollars.

    Do I think we should we accept a government agency that isn't self sufficient? No, the USPS obviously needs to make changes so that they can sustain their costs with their profit. However to look upon USPS as inefficient government fluff may not be fair. It's nice to know that there are still some working class people out there who get lifetime benefits and can actually collect retirement. It is also a shame that they have to compete with private businesses whose employees get terrible benefits and terrible pay for back breaking jobs.

    I also wonder who benefits off the corporate profits that Fed Ex and UPS get for poorly treating their employees.

  2. I'm labeling this blog/post, this number forty two, as the top blog of the series, I like it. Just don't ask me to label the other ones in any order, I liked them all.

  3. nice man.. those congressional hearing quotes are straight out of the fountainhead.

  4. "So why do people use UPS or FedEx so often?"

    I use it because there have been multiple screw-ups from the USPS, and when there were screw-ups it was impossible to locate and re-deliver my package. This has literally never happened with UPS or FedEx.

    "Point re: wages."

    The simple fact is that there is an oversupply of manual labor. More supply = lower prices. Those forces aren't going away in our lifetimes. Billions of people globally have seen their countrymen work harder, longer hours for much less than $11.50 per hour and want in. That continues the cycle of lower wages. No politicians want to talk about this, because the truth is painful and the solutions are politically very challenging.

    "However to look upon USPS as inefficient government fluff may not be fair."

    I didn't say we should simply eliminate the post office... but there's no question that it is completely, ridiculously inefficient at this point.

    "It's nice to know that there are still some working class people out there who get lifetime benefits and can actually collect retirement. It is also a shame that they have to compete with private businesses whose employees get terrible benefits and terrible pay for back breaking jobs."

    That lifetime retirement is unsustainable. That's the entire point of the post. It is at the expense of taxes paid by people who work their asses off (like you at FedEx and UPS), and that is not fair. Too much has been promised to too many. In an ideal world, everyone would not work and have a wonderful life.

    "I also wonder who benefits off the corporate profits that Fed Ex and UPS get for poorly treating their employees."

    Nobody is forcing people to work for FedEx or UPS. My point was never to defend them, or their labor practices. My point was the US Postal Service is dangerously close to failing. As for who benefits from an efficiently run logistics and delivery company? Well, lots of people. The people who want a reliable, fast delivery would be the first and biggest category. And anyone who wants to benefit should open a brokerage account (very easy to do) and buy a few shares of stock.

  5. BaHAHAHAHAHAHA! The Post Office!

    I have actually written letters to the editor about the Post Office that date back some 20 years.

    Re: Pay. The Post Office pays premium Union Scale wages to do the same job Grocery Store Stock Clerks, Cashiers and Bank Tellers do for a fraction of the salary, in some cases for little more than minimum wage.

    Re: Innovation. Wayback in the wayback it was proposed the Post Office sell full price stamps for half price to the public. ( A 20 cent stamp would retail over the counter for 10 cents)

    How would they do this?

    Through advertisement license agreements.

    For example, McDonalds would pay for the right to print X number of stamps with their logo or brand around or integrated with the Government design.

    The full cost of operations would be underwritten, the public would be served,all would be well and the Republic would prosper.

    The idea was defeated because the usual assortment of Communists and Hippies publicly objected to the crass commercialization of a government operation!

    Re: Innovation, Part The Second.

    In the late 80's/ early 90's (before the WWW, Itunes, Ipods, Ipads nothing would have made more sense than to equip Post Offices with Public Terminals where people could type letters to be sent over telephone lines and printed at the destination to be delivered locally.

    In a government dedicated to "no boondoggle left behind" this was one boondoggle deemed too outrageous to countenance! Go figure!

    The increase in Productivity, the decrease in cost, the benefit to the entire public was just too much to contemplate.

    Compuserve actually offered exactly such a service in 1991(?). You could send your letter electronically to a local pod where it would be printed out and mailed (with guaranteed overnight receipt)

    Before this becomes a diatribe, let me stay on point.

    The Post Office is one of the few Government entities named in the US Constitution- as good communications are necessary to maintain
    the strength of the Republic.

    Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

    To establish Post Offices and post Roads;

    What another fine mess your Civil Servants have made!

    Over time they have fixed something that was not broken until it was ruined beyond repair!


  6. Very interesting, TJK. What great ideas those were... what a shame! Maybe it's time to reintroduce the crass commercialization idea?

  7. One other note re: the Post Office:

    After thirty five years at the same PO Box Address in a world where some people (I won't say who, but his initials are spelled Carioca) had upwards of two dozen different addresses in both the United States and overseas, my Post Office will close effective January 1,2011.

    Anyone who thinks they need to write me a letter better hurry up since I do not know how I will fix this.


  8. Ok...great great blog entry Steve. After reading I jumped on both USPS and FedEx sites to try and get an idea for volume related to each company's revenue/expenses to try to see what we're looking at on an average "per unit" basis. After about 10 minutes of searching, I found a great USPS report, but nothing from FedEx. No dice on the volume-related comparison.

    Interestingly enough, what I did find is that FedEx is reporting salaries and employee benefits at 40.2% of revenue for 3 months ended 8/31/10. While USPS didn't provide this exact statistic, their reported comp & benefits expense as a percent of operating revenue for 3 months ended 6/30/10 ended up being I know the time periods aren't exact but that's a ridiculous comparison! Speaks to your cost-related comments. Sure, revenues are declining, but the cost structure at USPS needs to flex accordingly, starting with labor it seems.

    All in all, between reading this entry and finding this article ( online a few minutes ago, I think I'm going to take a break from reality and watch some more Anchorman on TBS.

  9. What would Ron Burgundy do if he ran the USPS?

    Nice comparison, Bob. I think if you dug into quarterly earnings you could get some volume number for FedEx/UPS, but by I think the composition of their volume is very different (more packages, fewer letters) than USPS.

  10. Where do your federal tax dollars go? A great chart from the wsj:

  11. I live in Brazil, where bills cannot be paid by sending checks through the mail. People either go to banks or state lottery agencies or post offices and pay in cash, or, nowadays, pay by direct debit to their bank account. This is both more efficient and environmentally friendly, as checks, envelopes and stamps were all, once upon a time, trees. Not to mention that the postal service needs far fewer people to sort and distribute and deliver those antique and outmoded pieces of paper.
    I do not know what percentage of USPS revenue is from bill paying, but I'd guess it's significant, in which case if (when?) people in the US stop paying bills by mail, the revenue stream will decrease even further.
    To distinguish myself from other anonymous, my code name is Timbauba.

  12. Well, TJK...Can't decide whether to applaud or to cry (I guess that's because I'm a Libra). That the post office with your postal box of 35 years is closing could be a sign of progress (related to the cost-cutting our blogger seems to advocate?)or another nudge in the direction of moving from snail to digital. Either way, I'm sorry to learn of your loss...As to Carioca's past history, one is inclined to admire his flexibility and ability to adapt to so much change.

    And Timbauba: is the Brazilian postal system required to provide free services to hundreds of elected officials? And, if yes, how is this cost reflected on their financial statements? Franking privileges which allow members of congress to send mail through the post office merely in exchange for their signature (i.e., "free") is probably a good idea for many reasons; within the context of Billions it is probably an irrelevant expense component. My problem with it is that this is, apparently, another example of real costs -- small as they may be -- that are neither defined nor properly accounted for...the postal service is required to provide this service, the cost of the service is "absorbed," and decisions are made without full and transparent accounting of either cost or value.

    For those who may be interested in more details,the Congressional Research Service has prepared "Franking Privilege: historical Development and Options for Change" for "Members and Committees of Congress."

    Among other points, the study observes that
    "The franking privilege has carried an element of controversy throughout
    American history. During the 19th century, the privilege was commonly attacked as
    financially wasteful and subject to widespread abuse through its use for other than official business." Not to mention the advantage it provides incumbents...


  13. Steve - an revealing piece on a big $ sinkhole - I've got one of my own that I read in Fortune Magazine this morning. DEER COLLISIONS cost this country $4 Billion per year. The reason I bring this up is A) the number $4 billion makes the topics directly comparable and interesting to relate and B) I really want to know how many of the deer collisions involve USPS Trucks...What portion of the $14 billion annual USPS losses go to deer collisions? If all USPS trucks were required to have ultrasonic collision preventers would we be able to kill two budgetary deers with one USPS Truck so to speak?

  14. Timbauba - thanks for the international perspective... With many credit card companies pushing "Go Paperless" billing, I can only imagine that bill volume is already declining rapidly...

    David G - if you ever had the chance to drive in my Camry in college you would have been safe knowing that I had deer whistles on my car, provided by my worried grandparents. My biggest retort to the USPS comparison? US Postal workers only work 9am to 5pm, thereby putting them squarely in daylight hours and, by extension, out of the way of most deer...

  15. Carioca,

    Good analysis of the Franking Privilege.

    In the case of the Post Office closure, the powers-that-be have tried to close this particular location since the 1980's!

    The bugaboo was simple demand. All the boxes were taken and there was a waiting list to get the first available by a significant population of new customers.

    Rather than do the obvious...RAISE PRICES to sort out the most essential users from the idlers, the Post Office undertook a campaign to reduce service.

    It was about this time I received a 5.25 floppy (remember those?) with a fairly expensive program on it folded in half to fit my box as one of several examples of pure malignant service.

    I muddled through, as did most boxholders because the factor of use outweighed the factor of inconvenience.

    Over time apparently their campaign of attrition worked. There are several private Mailbox services within a half mile of this location and so the number of vacant USPS boxes at this location is over 60%(??)

    Even more surprising, the next closest location at a nearby shopping mall can absorb the hardy survivors like myself without any difficulty.

    So apparently the price of victory for USPS is to provide a painless transition from the detested location to the other facility for all the refugees.

    Too late of course. I have read predictions USPS will be completely shut down within a year if not sooner.

    And.... I will have to relocate once again.


  16. A bit late to the party here, but had some thoughts...

    I agree with the poster who saw the virtues of the USPS providing benefits to working class people. While I agree that the business model is in dire shape, that is far from uncommon for a government agency. Ultimately, I view the USPS as another form of stimulus: it provides a cheap, efficient, not-so-relevant service and provides good jobs for many middle and working class Americans. The money it loses is but a tiny fraction of the money spent by the Fed in the name of "liquidity" (which you mentioned), although this liquidity is primarily accessible only to banks and Fortune 500 companies...unless I'm missing something and working class Americans are participating in recent treasury repurchases or issuing low-yielding corporate bonds.

    I'm biased - my mom spent 35 years as a USPS employee, and has done every job from letter carrier to postmaster and higher levels of upper management. She's a lifetime pensioner and living well in her retirement, but providing those benefits was a sustainable proposition in the 1970s when she joined - a time when technology was worse and the economy was less interconnected. Commerce would've died if you couldn't send letters back then, and the USPS was the cheapest and fastest way to do it. Anecdotally, I hear the fax machine did more damage to the USPS than email, fedex, and UPS combined.

    At any rate, yes it loses money. But so does the rest of the government. In the meantime, the jobs the USPS provides are essential to the lives of hundreds of thousands of non-upper class Americans, and I wonder what the economic impact of shutting off this "stimulus" would be.


  17. Carioca adds:

    “We just can’t compete with the US Post Office…” I couldn’t believe my ears! First I went to FEDEX, then to UPS and both sent me to USPS…

    I was back home and was trying to send a small but very important Texas Instruments TI-89 graphing calculator to Spain. A few days earlier, someone had left it in my Budapest hotel room and now needed it for his forthcoming final exams in Barcelona – could I mail it urgently? FEDEX and UPS offered to send the calculator for $80+ but both suggested I try the post office which, they assured me, was bound to have a lower charge...”we just can’t compete with their price !” Sure enough, using the “USPS Supplied Priority Mail ‘if it fits, it ships’ International Small Flat Rate Box (maximum value for contents: $400)” my total cost was $13.45 ! In this global model of cooperation, at least two subsidies – by the US and the European taxpayer – made one low price possible...I'll let you know if the calculator reaches its destination before the intended recipient leaves town!

  18. Carioca's update:

    USPS delivered. The graphing calculator arrived in Barcelona -- presumably via Baltimore -- on December 3, seven calendar days days after it was mailed!

  19. Carioca updates:

    USPS delivered. The graphing calculator arrived in Barcelona -- presumably via Baltimore -- on December 3, seven days after it was mailed.