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.