It seems that 2011 has been a year spent on the brink. Since January, Americans have faced the looming threat of a government shutdown, a national default, and now, the possibility of a collapse of the U.S. Postal Service. Last Tuesday, Postmaster General Patrick Donahoe warned Congress that the longtime service was on the verge of default. September 30 is the deadline for the agency to make a $5.5 billion payment into a fund to cover health care for future retirees. Without immediate assistance from Congress, Donahoe said, the USPS could default on its payment and be out of money by next year, forcing it to shut down all operations.
A bill currently in Congress would extend the payment deadline by three months, but the USPS is in need of rapid and drastic restructuring to remain financially viable in the future. While Congress and the Obama administration continue to hash out those plans, here are five things you need to know:
1. The USPS is not technically “broke” — yet.
Operationally speaking, the USPS nets profits every year. The financial problem it faces now comes from a 2006 Congressional mandate that requires the agency to “pre-pay” into a fund that covers health care costs for future retired employees. Under the mandate, the USPS is required to make an annual $5.5 billion payment over ten years, through 2016. These “prepayments” are largely responsible for the USPS’s financial losses over the past four years and the threat of shutdown that looms ahead – take the retirement fund out of the equation, and the postal service would have actually netted $1 billion in profits over this period.
This doesn’t mean, however, that the USPS’s financial situation is good. Revenue has been declining for years, and even if the agency manages to get past this year’s $5.5 billion payment, it would again face insolvency next year.
2. The postal service doesn’t rely on taxpayer funds.
Until 1971, mail delivery was handled by the Post Office Department, a Cabinet department in the federal government. Postal worker strikes prompted President Nixon to pass the Postal Reorganization Act in 1971, transforming it into the semi-independent agency we now know as the United States Postal Service. The USPS in its current form runs like a business, relies on postage for revenue and, for the most part, has not used taxpayer money since 1982, when postage stamps became “products” instead of forms of taxation. Taxpayer money is only used in some cases to pay for mailing voter materials to disabled and overseas Americans.
USPS spokespersons have been adamant in emphasizing that they are not requesting taxpayer funds from the federal government to make this year’s payment. Rather, they say, the USPS is asking Congress to authorize access to an estimated $7 billion that they overpaid into the future retiree pension fund in previous years.
3. Junk mail sustains the system.
Although the USPS does manage to turn a profit based on operations alone, it’s a widely known fact that mail volume has dipped over the past decade. As Americans by and large correspond and pay bills online, first-class mail and, as a result, postal revenue have gone into a decline. From 2006 to 2010, mail volume decreased by a hefty 20 percent.
But although the days of custom stationery, handwritten letters and scented envelopes may be long gone, the USPS has been increasingly reliant on junk mail — advertisements, catalogs and other unsolicited mailbox “gifts” — to keep the service afloat. BusinessWeek notes that revenue from junk mail increased by 7.1 percent in the last quarter of 2010 – although volume has not increased since. Donahoe has also expressed optimism that junk mail volume and revenue will increase as the economy improves. But the lower cost of direct mailings means that more junk mail is needed to circulate in the system to make up for the accelerating loss of first-class mail.
4. The proposed cuts are big.
In his testimony last week, Donahoe presented a number of measures that he argues would halt the USPS’s rapid financial decline, including the elimination of the annual pre-fund payment requirement, stopping Saturday mail delivery and terminating a “no-layoff” clause in a contract with unionized postal workers. According to Donahoe, cutting service down to five days a week instead of six, a proposal that has been kicked around for years, would save about $3 billion a year. Donahoe has also urged Congress to allow him to shut down standalone post offices, moving them into convenience stores and supermarkets instead.
Of course, these proposals have been met with resistance, not least by postal workers who stand to lose their jobs, as well as direct mailers, the creators of the junk mail that sustains the system, who argue that Saturday deliveries are crucial times for sending advertisements while recipients have their minds on weekend shopping. Senator Susan Collins (R-Maine) has also argued that ending Saturday delivery could drive mail-order pharmacies and other businesses away from the USPS, further accelerating its losses.
Other critics say that simply cutting services isn’t enough, and that the real solution is figuring out a way to reinvent the postal service to meet the needs of our wired world. But how?
5. Europe could be the model for USPS 2.0.
To see just how the USPS can transform itself, some analysts have turned to European countries to observe what can be done differently. In a May cover story for BusinessWeek, journalist Devin Leonard reported on the kinds of models that have emerged in Sweden, Germany and Finland. The Swedish service, Posten, and Germany’s Deutsche Post have minimized their participation in the national postal market, allowing them to work as smaller and more streamlined organizations. Posten runs only 12 percent of Sweden’s post offices, while Deutsche Post runs 2 percent of those in Germany – the rest are handled by other businesses. The U.S., in contrast, runs all of the post offices in the country.
It also seems that European postal systems have been experimenting with services for its Internet customers, as well. From BusinessWeek:
Many used their extra cash to create digital mail products that allow customers to send and receive letters from their computers. Itella, the Finnish postal service, keeps a digital archive of its users’ mail for seven years and helps them pay bills online securely. Swiss Post lets customers choose if they want their mail delivered at home in hard copy or scanned and sent to their preferred Internet-connected device. Customers can also tell Swiss Post if they would rather not receive items such as junk mail.
Sweden’s Posten has an app that lets customers turn digital photos on their mobile phones into postcards. It is unveiling a service that will allow cell-phone users to send letters without stamps. Posten will text them a numerical code that they can jot down on envelopes in place of a stamp for a yet-to-be-determined charge.
These European postal services, however, have the financial leeway to experiment with digital services that our USPS currently does not — and the jury is still out on whether those services are profitable. But if Congress is able to figure out a way soon to get the USPS back on its feet, it will open the doors for the postal service to catch up to the 21st-century society it serves.