by Eric Shierman
The true source of their financial woes comes from the fact the Postal Service’s retiree healthcare costs are compounding out of control at the same time letter volume is shrinking faster than the most pessimistic expectations would have predicted a decade ago.
Twelve years ago I was burning the midnight oil at my first job in finance at Morgan Stanley during the very peak of the dot.com bubble. I had access to some of the most respected market research available from the likes of Byron Wien, Mary Meeker and the rest, but as their analytical firepower was devoted to the impossible task of predicting which new online retailers would survive and which would not, the best advice I got came from one of Oregon’s greatest investors you might not have heard of: the late Harry Kendall, a former partner in the Portland insurance agency Jones Kendall Sauer (now merged with KDP).
While everyone was all gaga about the “new economy” Kendall pointed out to me how this phenomenon had repeated itself over his lifetime. Low interest rates had once again formed a go go bubble. Rather than participate in the fool’s game of trying to predict who will survive the inevitable bust, Kendall suggested I invest my client’s money in the smaller group of boring companies that quietly sold to both winners and losers. The most successful investors of the railroad boom did not invest in railroad companies; they invested in the firms that manufactured nails and dynamite. He suggested that parcel delivery companies like FedEx and UPS represented an underpriced play on the inevitable growth of ecommerce. Fortunately I heeded his advice on this and many other matters. Two nasty bear markets later, the S+P500 has been virtually flat for the decade, trading slightly below where it was twelve years ago while UPS trades about 20% higher and FedEx’s value has grown almost 150%.
With favorable trends like these in the shipping sector for more than a decade, why is the Post Office burning cash rather than raking it in like its private sector competitors? In addition to its monopoly right to touch our mailboxes, the Post Office is able to issue GSE like bonds at government-backed low interest rates and exercise broad powers of imminent domain. It pays no corporate income tax, is exempt from state sales taxes, is exempt from state and local property taxes, does not have to register or license its vehicles, and is even exempt from parking tickets. Yet it still managed to lose $5.1 billion last year. How is this possible? – seven words: public ownership of the means of production. As any former cadre of the Soviet Union would warn us, when the state owns an enterprise its management team will face competing goals beyond economic efficiency. Each Postmaster General over these past twelve years would nod his head. Their job has been to manage the unsustainable status quo while proposing reforms that get rejected by congress.
In Patrick Donahoe, Obama to his credit has appointed one of the most effective executives to lead the Post Office in recent memory. Donahoe’s dialogue with congress does not mince words: “I’m operating right now with a week’s worth of cash” he told lawmakers when introducing a package of reforms that involved closing a third of all branches, eliminating overnight delivery, eliminating Saturday service, and tapping into its pension fund. Meanwhile, the Association of Letter Carriers argues there is no crisis at all. If prices were raised, the federal government threw more business their way like managing veterans’ records, their employer was not required to proactively fund its members’ pensions, and the US Treasury wrote them a check for $140 billion, everything would be just fine.
These are business decisions. Enterprises only make the right call on such complex strategic moves when private profits are on the line. Neither the USPS management team nor their union counterparts are focusing their planning on the shareholders’ interests – the shareholder being the US Government. It is extremely difficult to operate six days a week, so management jumps at the chance to make their lives easier even if it might throw away one of their operation’s few competitive advantages. The union is eager to allow management to tap into its members’ pensions and retiree healthcare fund. Congress having been stung by the costs of letting Amtrak do just that, passed a law in 2006 to clarify the Post Office’s responsibility to prefund its pensions so that when it finally goes bankrupt the taxpayers are not stuck with this liability. Should the union not share a concern about the future funding of their members’ retirement? Perhaps they should be demanding even greater up-front contributions to prepare for the inevitable.
The union remains far more comfortable with its ability to make future congresses fund their members’ retirements regardless of the Post Office’s financial performance. Labor and management seek to divert as much money from the future as possible to keep the present spigot flowing. And flow it does. At 80%, the Post Office’s labor costs are in stark variance to UPS’ 53% and FedEx’s 32%. This has proven very expensive for the US taxpayer. Since 1971, the Postal Service has been required to fund its operations from the revenue of its own sales. Could we possibly set the bar any lower than that? With its huge monopoly position, the Post Office should have been paying large dividends of revenue to the US Treasury. The financial opportunity cost of this forgone cash flow has been enormous as the monopoly rents were diverted to its employees.
While in public discourse the Postal lobby milks the myth that the Post Office costs the US Treasury nothing, a close look at their behavior reveals they know how their future bread will be buttered. Our progressive friends held their own Tax day rally this week too. Several events were held throughout Tuesday, culminating in a big rally at the downtown Portland USPS hub. Progressives rallying for the Post Office on TAX day? – what do they need tax dollars for?
Their central message claims the US Treasury owes the Post Office $140 billion dollars for an alleged four decades of the Office of Personnel Management overcharging the Postal Service for pension contributions amongst a few other accusations of excessively high federal fiscal standards. This too-good-to-be-true assertion for the Postal lobby was created at a convenient moment by an internal study two years ago claiming the formula agreed to by congress in 1971 was improperly followed. If you really want to get into the weeds on the details, here is a thorough assessment by Michael Schuyler. After conducting an independent investigation, the Government Accountability Office has unequivocally confirmed the accuracy of the Office of Personnel Management’s formula for managing the Civil Service Retirement System, rejecting the Post Office’s frivolous attempts to conjure up the pretext of a bailout. Indeed it was not even close, both in matters of law and in the financial calculations. As the Postal lobby continues to organize an “America you owe us!” message that congressional Democrats are too happy to receive, the GAO has been an effective myth-buster, continuing to warn policymakers of the USPS’ acute financial death spiral.
Imagine if, under the tight budgetary restraints we find ourselves in, Obama were to actually write the Post Office that $140 billion dollar check; even this would merely delay the inevitable. As the GAO report makes clear:
Any change in the USPS’s share of responsibility for CSRS benefits would provide some temporary relief from the pressures USPS faces because of declining volume, revenue, and inflexible costs, but would not by itself address USPS’s long-term financial outlook. Such a transfer of CSRS funds would not be sufficient to repay all of USPS’s debt and address current and future operating deficits related to USPS’s inability to cut costs quickly enough to match declining mail volume and revenue.
That is to say, even after a bailout greater than the auto industry in the form of grants rather than loans, the Post Office will still face inevitable liquidation. The true source of their financial woes comes from the fact the Postal Service’s retiree healthcare costs are compounding out of control at the same time letter volume is shrinking faster than the most pessimistic expectations would have predicted a decade ago. The Postal lobby would have us believe this is just a temporary consequence of this past recession. Such magical thinking ignores the reality that the decade before the recession (1998-2008) the US economy and the US population had grown substantially, but letter volume dropped 30% in the same time period.
This has cascaded since 2008, and will NEVER recover EVER. The future of business correspondence through the mail is as rosy as the future of business marketing through the Yellow Pages. Regarding the value of snail mail personal correspondence, I have two old Marine buddies serving in Afghanistan right now that served with me on the USS Wasp in 1995 in the Adriatic Sea. They both recall how we enjoyed sending mail home for free when our ship was within striking range of the former Yugoslavian coast. Now I see their comments every day under my Facebook posts. I read their Tweets. One question I asked recently was if any of them had used the free mail service yet. Neither of them has! When the quantity demanded is zero at a price point of free, we know the demand curve has shifted dramatically.
Parcel delivery continues to grow in spades, and there lies the rub. The Post Office’s entire business model is wrapped around the exploitation of its monopoly of letter delivery to mailboxes, while its parcel delivery costs are higher than its private sector competitors. For the services that ecommerce requires, its prices are higher too. If you order a Macbook Pro, it’s not coming to you on a postal truck. Apple, like most shippers, wants a tracking number and insurance, all of which are built into UPS’ and FedEx’s price. Add these features to first class delivery and the private carriers are cheaper. With lower prices for the services businesses want, the private carriers offer lower damage rates and faster delivery. Only book sellers like Amazon.com remain serious customers of the Post Office exploiting the Media Mail discount whose parsimonious price will not fund the average $75,000 full-time dock worker’s compensation.
There are universal service aspects of the current Post Office, none of which are worth keeping. Ensuring the cheap shipping of junk mail solicitation to rural zip codes is not a worthy aim of public policy. There are people who choose to live in the middle of nowhere. They are used to traveling far to buy groceries, receive medical care, renew their driver’s license, and go on a date. That they will have to do the same for a postal service they rarely use is inconsequential.
Selling the Post Office is the lowest hanging of budgetary fruits. Because congress has at least prevented the Post Office from underfunding its retiree programs, the USPS actually has value. It does not have high tech sorting facilities, but wow does it have a lot of real estate. If the US Treasury only raised a dollar to make a valid contract on the sale it would be a windfall. This would divest the taxpaying public of yet another looming fiscal liability, while giving our economy assets that can be put to more productive use while allowing the national, state, and local governments the opportunity to tax these assets accordingly. The costs of NOT selling the Post Office are just astounding when you add it all up.
We would not want to sell a Postal Service that retains the mailbox touching monopoly. More money could be raised by licensing the ability to deliver to mailboxes the way radio spectrum is sold. The customer’s mailbox could remain a unique public infrastructure that if put in the productive hands of private companies that have mastered efficient parcel delivery, would help grow our ecommerce economy to new levels. This is such a no brainer, it is no wonder we are one of the last developed countries to do it. From Sweden to Germany, cashing in on the value of their postal services early on has helped them maintain a better fiscal position than their southern counterparts.
Selling the Post Office would be very easy to execute as well. In the spring of 2001, I saw Morgan Stanley save Lucent Technologies from certain bankruptcy as it quickly packaged up and sold its optical unit called Agere Systems, delivering in record time an IPO at $4.00 a share when few thought either company would survive another year. As a going concern Agere has been able to develop superior VOIP technology enabling the teleconferencing we have today. Either a Post Office IPO or private placement sale would be a much easier challenge. The opportunity to turn nonperforming assets into their most productive positive externalities looms large as a bonus beyond the budgetary reasons for the sale.
And thus as a wedge issue this should be a no brainer for the Romney campaign as well. Whether he likes it or not, Romney will have to defend his professional record. He will have to defend both venture capitalism and “vulture capitalism.” There are many times when an economy is better off with a company being liquidated than letting it squander its resources all the way to a dragged out bankruptcy. With an infusion of technology and a fraction of its present work force, the Post Office might be a turnaround opportunity to create the next Deutsche Post, or it might provide our economy more value auctioned off piece by piece. If Romney cannot make that case either way with his track record of success doing both, what can he do?
The Post Office presents a moment of truth for Oregon’s Greg Walden as well. There are twenty obvious closures coming to Oregon right away. From New Pine Creek to Helix, most of them are in Walden’s district. Will he stand up for reform or will he defend local stakeholders? Senator Gordon Smith failed this test, and the role of the Republican Party as representatives of rural America often compromises its commitment to limited government principals on spending issues since so many Republican districts are net consumers of public dollars, not net payers. If Republicans cannot deliver on free market reforms the Netherlands implemented years ago, how much further should we lower our expectations?