Steve Hutkins, a literature professor who teaches “place studies” at the Gallatin School of New York University. A few days ago, the Trump administration announced that one of its goals is to privatize the Postal Service. A private postal system, says the White House proposal, would deliver mail fewer days per week, shift to cluster boxes instead of door and curb delivery, adjust prices and negotiate wages and benefits without government interference, and “shrink its physical and personnel footprints,” i.e., close post offices, consolidate processing facilities, sell buildings, and shed jobs. According to Trump’s proposal, before privatization can happen, the Postal Service must show that it can be profitable, so it needs to cut costs on delivery, wages, benefits, and footprint sooner rather than later. That process is actually well underway, and it has been for decades. The following post was originally published in July 2011, but it seems as relevant as ever, so it’s reprinted here with a few minor edits to update some numbers.

Marketization is “the process that enables state-owned enterprises to act like market-oriented firms.” It is achieved by reducing government subsidies, deregulation, organizational restructuring, The post office thus came to be viewed in terms of a business model. Like a private corporation, it was expected to adopt the methods and values of the marketplace — cut costs, streamline operations, fight unions, don’t run in the red — rather than operating as a public service “to bind the nation together”and decentralization. It often paves the way for complete privatization.

It was the Postal Reorganization Act of 1970 that began the marketization of the postal system. It transformed the U.S. Post Office Department – a government agency and part of the Cabinet — into the independent U.S. Postal Service – a government-owned corporation that is self-supporting and receives no tax dollars.

The post office thus came to be viewed in terms of a business model. Like a private corporation, it was expected to adopt the methods and values of the marketplace — cut costs, streamline operations, fight unions, don’t run in the red — rather than operating as a public service “to bind the nation together.”

That’s why you keep hearing politicians and USPS leaders say “the Postal Service is a business,” and it needs to “optimize its infrastructure facilities” and “shed under-utilized assets.” And that’s why a few weeks ago Dennis Ross’s committee on postal infrastructure brought in a couple of corporate execs to explain how they run their businesses.

The Reorganization Act, it’s worth noting, was the product of a presidential commission in 1967-68, chaired by retired AT&T Chairman Frederick R. Kappel, who, in testimony before Congress, said, “If I could, I’d make it a private enterprise and I would create a private corporation to run the postal service and the country would be better off financially. But I can’t get from here to there.” It would be left to others to “get from here to there.”

Steps two, three and four after the leap

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An introduction to Save the Post Office and Steve Hutkins. I am not quite sure how I got to Steve; but, I do remember chatting with Mark Jamison who also wrote at Save the Post Office and posting his words up at Angry Bear (Asking the Wrong Questions: Reflections on Amazon, the Post Office, and the Greater Good earlier this year. Mark and I still exchange emails and I owe him a trip out to western North Carolina. Steve is the blog owner, a Prof. of Literature teaching “place studies” at the Gallatin School of New York University. Prof. Steve Hutkins has been writing about the Post Office for at least a decade and the attempts of government, UPS, Fedex, etc. to close it down or limit its operations.

“Save The Post Office” has been writing about the last 5 cent increase in First-Class mail earlier this year.

Back in January 2019, the Postal Service raised the price of a First-Class stamp from 50 to 55 cents. Postal watchdog Douglas Carlson filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit (aka the DC Circuit) challenging the Postal Regulatory Commission’s decision to approve this rate hike.

Carlson argued that in approving the rate hike on Forever stamps the Commission had failed to consider the statutory pricing factors and objectives in the Postal Accountability and Enhancement Act (PAEA) and the public comments questioning this increase. He also argued that the Commission did not reasonably explain its decision. Therefore, he claimed, the Commission’s decision was arbitrary and capricious.

Today the court issued a ruling granting Carlson’s petition and vacating the PRC’s approval of the rate increase on First Class postage. (The court’s opinion is here; the order vacating the PRC ruling is here.)

It’s not clear what will happen next. The PRC could file a petition for a hearing en banc, meaning that it will ask the entire DC Circuit to review the case, as opposed to the three-judge panel that issued today’s ruling. Apparently anticipating such a possibility, the DC Circuit today also issued an order “that the Clerk withhold issuance of the mandate herein until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc.”

If such a petition is not granted, the PRC could even appeal to the Supreme Court. (After the DC Circuit ruled against UPS on an unrelated case involving postal rates, UPS took both of those steps, to no avail.)

In the meantime, we don’t know what impacts today’s ruling will have on the rate hike, which has been in effect since January.

Under the PAEA, the Postal Service has the right to request its next inflation-based rate increase this fall, with an effective date in January 2020. How the next increase will interact with today’s court decision is also unclear.

Past the leap is the section of a court determination that reviews the main issues in the case:

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The author of this post which was published in April 2018 on Save The Post Office is Mark Jamison, a retired North Carolina Post Master. From time to time, I have featured both Marks and Steve’s post office advocacy on Angry Bear. Steve is a literature professor who teaches “place studies” at the Gallatin School of New York University. One of these days I will visit Mark in the mountains of North Carolina.

“If they can get you asking the wrong questions, they don’t have to worry about answers.” — Thomas Pynchon, Gravity’s Rainbow

I have not written or said much about postal issues for the last couple of years. After seven years of writing articles for Save the Post Office and other websites, as well as contributing numerous comments to the Postal Regulatory Commission, what more was there to say?

I spent thirty years of my working life at the Postal Service. I’ve put in countless hours reading USPS reports, OIG reports, GAO reports, and who knows how many pleadings before the PRC. I have written numerous articles about the general idea of the postal network as an essential public infrastructure, the arcane minutiae of postal costing and the actions of the PRC, and the machinations of a Congress that seemed more inclined to bloviate and posture than attempt to solve a serious problem affecting millions of Americans and thousands of communities, large and small, rural and urban.

I never stopped thinking about these issues, but what more was there to say? And why bother, really, when the politicians and managers that could actually make changes seemed inclined to let inertia and the status quo slowly erode the capabilities of the postal network while degrading hundreds of thousands of good middle-class jobs?

And then President Trump had one of those brain farts he periodically shovels out over Twitter.

Motivated by his dislike for Jeff Bezos — who has far more money than Mr. Trump will ever have or imagine having and who also owns the Washington Post, which tends to say things that are not particularly complimentary of Mr. Trump and his Alphonse-and-Gaston act as president — the president let forth a blast about how Amazon was ripping off the Postal Service.

It was obvious from his Tweets and subsequent comments Mr. Trump did not have a clue about postal policy, let alone any sort of command of the details. Then again, when the president speaks, people tend to listen. And, as the English poet William Cowper once observed, “A fool must now and then be right, by chance.” (Here in the mountains of North Carolina we might say that even a blind hog finds an acorn once in a while).

But was Mr. Trump right about Amazon? A good many folks in the media wanted to know, since if the president says it, it may not be true but it is certainly news.

As it happens, I had written a number of pieces here on STPO specifically about Amazon’s Negotiated Service Agreement with the Postal Service and about package costing and pricing methods in general. In 2013, I also filed a motion with the Postal Regulatory Commission seeking access to the non-public materials in the PRC docket approving Amazon’s NSA. Both the Postal Service and Amazon immediately filed comments opposing my request.

Not content with making an argument for why the NSA should remain secret, Amazon went on to disparage me personally by quoting my articles on Save the Post Office. Amazon observed that I had written that the “postal rate system has become a morass of embedded privilege,” business mailers “are doing fine,” and the Postal Service is a “wholly owned subsidiary of Mailers Inc.” I had also opined, noted Amazon, that PMG Donahoe lied in recent testimony to the Senate, and “Donahoe and the [Board of Governors] have demonstrated an unrestrained contempt for Congress, the rule of law, and most importantly, the American people.”

For what it’s worth, the PMG did give “misleading testimony, and later said he “misspoke.” Everything else I wrote about the rate system, the mailers, and the BOG was true, too. Not that this should have had anything to do with the PRC’s decision not to allow me to see the Amazon NSA it had approved

Anyway, Google being what it is, my pieces about Amazon and the post office showed up in searches, and a few intrepid or at least curious reporters contacted me with questions.

I should give those reporters credit for caring enough about their work to attempt a thorough job. While some of them just wanted a simple answer to, “Is Trump right or wrong?” a couple of these reporters really did want to understand the issues that were involved. Rather than go with a Citibank report that was seriously flawed both methodologically and factually (which just goes to show that highly paid financial analysts writing for elite firms are just as prone to self-delusion and tipping the scales towards their preferred narrative as the rest of us), there were at least a couple of outlets that made the effort to dig beyond the headlines.

The problem is that even the more thorough journalists were asking the wrong questions. Their questions were based on an ingrained narrative about the post office. And, as has become the case in much of our political dialogue, the narratives that prevail and the agendas that drive them originate not from a broad civic space balancing the interests of the American people but from relatively narrow interests. As discussed in a recent post here on STPO about postal retirement and benefit liabilities, it is these agendas that tend to drive the policy prescriptions.

In 2015 I wrote a piece titled “When Titans Collide: UPS petitions the PRC to change USPS costing methodologies.” The piece examined a year long attempt to gerrymander postal costing and pricing systems in ways that best served those in the mailing and package delivery industries. Some of the players have changed over the years as the mail mix has changed, but the goal remains the same – find a way to defenestrate the Postal Service.

The piece looked at the issues that were at the crux of Mr. Trump’s complaint – the Postal Service wasn’t charging enough and it was making “bad deals.” I looked in detail at some of the costing and pricing methods and tried to engage those specific arguments. But the heart of the matter was that the Postal Accountability and Enhancement Act, the 2006 law that in many ways governs the operation of the Postal Service, had set up an impossible and counterproductive environment that failed to recognize the value of the postal network as an essential national infrastructure.

PAEA had many aims but good policy wasn’t really the focus. After decades of trying to fit the Postal Service into a box it was ill-suited to occupy — that of simply another mailing business rather than an infrastructure — PAEA took a big step in the direction of privatization. By separating postal products into market-dominant and competitive categories and by creating a rate mechanism designed more to satisfy mailing interests than create and sustain a reliable and ongoing postal network, PAEA set up a system that would engage a lobbyist’s feeding frenzy. Other provisions of PAEA were designed to lead to the elimination of postal jobs by saddling the Postal Service with unwarranted and punitive liabilities for its retirees. Though the legislation was filled with all manner of technical provisions, it was largely ideological.

After examining all the arguments in the PRC docket on costs and prices, all the briefs and studies presented by the Postal Service, UPS, the PRC’s Public Representative, and various stakeholders, I came to the conclusion that we had lost the forest for the trees. We had lost sight of the big picture in the sense that the ideas of universal service and access became wholly secondary considerations. We were no longer discussing the broadly-based concerns of national infrastructure. Instead, we had waded into a swamp of special interests where every group of mailers sought the best and highest advantage.

I sent a link of the Titans piece to the journalists who called wanting to understand the current kerfuffle created by Mr. Trump’s comments. I suppose it’s immodest of me to include the response I got from one of the journalists, but I will because it makes a greater point. After reading the piece he e-mailed: “I think this is probably the most insightful and brilliant blog post that synthesizes a generation of (misguided) political thinking and explains how that altered the trajectory of the USPS.”

He said some other nice things, went on to thank me for spending an hour and a half on the phone with him, and then continued to call and email with more questions. But despite my efforts to get him to look at the big picture, he kept coming back to the issue of whether or not the Postal Service could and should be charging more for Amazon packages and if other mailers were also getting sweetheart deals.

So there we were, back to talking about the wrong questions.

What we should have been talking about is how to preserve an essential national infrastructure that connects every American while providing good solid middle-class jobs with salaries and benefits that sustain families and get spent in local communities, an infrastructure that provides affordable rates that benefit American consumers and businesses.

Instead we were arguing about whether charging more for packages would make the Postal Service more profitable and whether big companies like Amazon ought to be paying more, while neglecting to factor in that most increases in package prices would simply be passed on to consumers while allowing UPS and FedEx more freedom to raise prices.

At this point I thought that maybe I was missing something, so I went back and looked at a couple of PRC dockets and recent Annual Compliance Determinations, which review how well the Postal Service is fulfilling its general legal obligations. I also looked at a recent docket on costing methodologies, a subject UPS has repeatedly sought to litigate even though they have never made a credible case the methodologies currently in use aren’t reasonable. Most particularly I looked at RM2017-1, the PRC docket that reviewed the level of institutional contribution that competitive products had to make. This was the one area where I thought UPS had at least a reasonable point in its 2015 filings.

After reading a few hundred pages of legalese and lobbyist pleadings and maneuverings, I came to the conclusion maybe Macbeth had a point, this was all sound and fury signifying nothing. (Macbeth’s greater point is that it still ends in death.)

But Mr. Trump Tweeted.

Recalling Mr. Cowper’s admonishment that a fool could be right and still be a fool, I thought maybe we should look for some validity in his Tweet. Mr. Trump seemed to be making two points. First, the Postal Service was making bad deals, and second that Amazon was destroying retail across America. Let’s take the second one first: Is Amazon destroying local retail?

Maybe, perhaps probably, but that’s not a new phenomenon. Before there was Amazon there was Wal-Mart. In 2006 Tom Slee wrote a wonderful little book titled “No One Makes You Shop at Wal-Mart: The Surprising Deception of Individual Choice.” Slee uses game theory to demonstrate that the cumulative total of what appears to be a series of rational choices by individuals turns out to have a vastly negative aspect for local communities.

Actually, it’s not a new idea. Back in the 1930’s, Keynes made the same observation in describing what he called “The Paradox of Thrift.” Keynes noticed that in an economic downturn, individuals make the rational choice of spending less and saving more. If the economy is sour, it’s better to be conservative than a spendthrift. That makes a lot of sense for the individual, but when lots of individuals make that same perfectly rational decision, the end result is that consumer spending dries up, which makes the downturn even worse.

Slee’s updated version of Keynes’s insight is that people rationally value low prices. They also have preferences for nice communities, for vibrant downtowns, and a healthy local business sector. But in most cases those other preferences are somewhat indistinct or at least not entirely obvious.

What is obvious is that saving a few cents on a loaf of bread is a good thing. And while many of us valued wandering around the local grocery market and hardware store, talking to the local owner who probably knew a little bit about a lot of things, we also value the convenience of one-stop shopping. It’s just convenient to be able to look at that new drill in the same store where I’m doing my grocery shopping, and the fact the new drill costs a few dollars less doesn’t hurt.

So lots of folks make the perfectly rational decision to shop at the big box everything store because it’s convenient and cheaper. Oh maybe a few diehards make a conscious effort to give at least some business to local retailers, but margins are slim for local businesses, so the loss of a few customers makes a big difference. So one day we wake up and that vibrant local downtown suddenly has several vacant stores. And because Wal-Mart is big, it can exercise economies of scale like squeezing suppliers for lower prices. And as local retail businesses die so do jobs, which gives Wal-Mart more power in dictating wages.

One day we wake up and those cheap prices we rationally valued have cost us a lot of elements that we valued in our community. Things seem to tilt towards the lowest common denominator. The end result filters through all parts of the community. There’s been no end of reporting on how Wal-Mart instructed employees how to apply for food stamps or Medicaid or other benefits since they didn’t make enough to afford the basics. On balance local tax revenues may suffer. Perhaps the hardest things to measure are the damages to the quality of life and community cohesion.

Amazon is Wal-Mart writ large for the internet age. Amazon started out selling books, but now it calls itself “The Everything Store.” More importantly Amazon is much more than a retailer. It’s a logistics company. Jeff Bezos has simply used retail to generate the revenues to build a vast network of warehouses and backroom data support services. Amazon has a presence in nearly every sector of the economy.

It appears that we love it too, or at least the stock market which, unfortunately, seems to be the gauge by which we measure the success not only of the economy but of our communities and lives. The last I looked Amazon’s P/E ratio was nearly ten times higher than that of the average of the market generally. That means that investors value the company so much that the price of its stock is at historically high multiples of earnings.

Is Amazon killing American retail? Probably, but as Tom Slee might point out, no one makes you shop there.

That brings us to Mr. Trump’s other complaint, that the Postal Service is making terrible deals. Maybe but maybe not. If he’s basing that argument on the fact that the Postal Service is losing money, it’s important to remember that the Postal Service was designed to lose money. It is intentionally built to shovel funds back into the Federal budget, not through profits but from accounting trickery that saddles it with excess liabilities.

By all measures the package business that Mr. Trump focused on is adding to the bottom line with regularity. It’s also important to remember that the Postal Service has only about a 16% share of the package delivery market. It really isn’t in a position to dictate prices.

Much of the noise that followed Mr. Trump’s Tweets seemed to ignore the fact that forcing the Postal Service to charge more for packages would give its competitors, UPS and FedEx, an excuse to raise their prices. In the end, consumers would end up paying higher prices. Plus, forcing the Postal Service to charge more for packages would not only violate the basic market principles it has supposedly been designed to serve but also the structure of the free market itself.

We’re asking the wrong questions and it’s not because we’re stupid. We’re asking the wrong questions because those are the questions a large part of corporate America and the financial elites want us to ask. Mr. Trump got elected by sleight of hand – promising this and doing that – and that’s exactly what is happening with respect to the Postal Service.

So what are the right questions?

First of all, if competition is so important, why is 85% of the package delivery market controlled by two companies? Why aren’t the FTC and the Anti-Trust division of the Justice Department paying attention to this?

Do we value good jobs, local communities, and quality of life? Or do we value low prices more than anything else? If Amazon is too big and powerful, if it’s doing the same thing to local retail that Wal-Mart did a generation ago, then perhaps we should be asking ourselves what it is we really value.

Are we being given an honest accounting of the consequences of government policies? Why, given that 94% of the American public favored some form of protections for Net neutrality, did the FCC ruled in favor of monopoly providers? After a tax cut that was supposed to encourage more investment in the economy and higher wages for workers, why are we just seeing more stock buybacks? And are we going to have to pay for those tax cuts and avoid crippling deficits by cutting the wages and benefits of workers and further eviscerating the safety net?

Do we value the institutions that leveled the playing field and brought to millions of people the benefits of an economy that worked for the many and not merely the few? Do we value essential infrastructures like the postal network?

And finally, this. Are we content to play the duped mark in an oligarch’s confidence game? Are we going to watch valuable public assets and healthy public spaces and public participation in the economy get shuffled around in a game of three-card monte when the winner can only be the entitled elite?

(Mark Jamison is a retired postmaster. His articles on Save the Post Office can be found here, and the comments he’s filed with the Postal Regulatory Commission are listed here.)

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The author Steve Hutkins is a literature professor who teaches “place studies” at the Gallatin School of New York University. He has no affiliation with the U.S. Postal Service—he doesn’t work for it, nor does anyone in his family. Save The Post Office (his website) provides information about the post office closings and consolidations that are taking place, the historic post office buildings that are being sold off, the efforts people are taking to protect their post offices, and the things citizens can do to save their post office when it ends up on the closure list.

In October, the Washington Post ran a column by Lisa Rein entitled “Should the Postal Service be sold to save it?”

The article was about a recent paper by Elaine Kamarck published on the Brookings Institute’s website. Kamarck is the Founding Director of the Center for Effective Public Management at Brookings, as well as being a Senior Fellow in Brooking’s Governance Studies. Her paper is entitled “Delaying the inevitable: Political stalemate and the U.S. Postal Service.”

Kamarck’s thesis is that the Postal Service is going through a “crisis of obsolescence,” its financial losses are unsustainable, and “the political system is stuck and unable to do anything about it.” The thing to do now, concludes Kamarck, is split the Postal Service in two. One organization would fulfill the universal service obligation by delivering market-dominant mail. The other part would be privatized and take over competitive products (Priority Mail and package shipping); it would also be given the freedom to expand into new areas of business now prohibited for the Postal Service.

The article prompted several critical responses, including pieces by Dave Johnson in Crooks & Liars and Zaid Jilani in AlterNet. Rein also did a follow-up article in the WaPo — “Why sell off the Postal Service if it’s making money?” — in which she goes more deeply into the conflicting explanations for the Postal Service’s financial problems.

One of the main issues in the debate has been the Retiree Health Benefit Fund (RHBF). The critics of Kamarck’s paper (and Rein’s column about it) argue that were it not for the RHBF prefunding established in 2006 by the Postal Accountability and Enhancement Act (PAEA), the Postal Service would not have been posting huge losses. The core of the financial problem facing the Postal Service is the requirement to fully fund decades of future retiree health costs with ten annual payments of about $5.6 billion, an obligation imposed on no other business or government agency.

Kamarck anticipates this claim about the RHBF, and her paper tries to set it aside. In so doing, however, she makes an error that’s worth looking at in some detail.

The fly in the ointment

Kamarck’s paper addresses the argument about the prefunding as follows:

Many believe that the prefunding requirement for retiree health benefits accounts for all of the Postal Service’s financial problems. Although the prefunding requirement does account for a large share of net losses, retiree health benefits caused $22,417 million in expenses out of a total net loss of $5.5 billion in fiscal year 2014.

Kamarck is trying to make the case that prefunding the RHBF does not explain the Postal Service’s huge losses, which she thinks can only be explained by the declining mail volumes caused by the Internet. To make this point, she says that prefunding accounted for $22,417 million (or $22.4 billion) of the $5.5 billion loss in FY 2014.

This doesn’t make sense. She’s trying to show that the RHBF expense doesn’t account for such a large portion of the net loss, but according to her numbers, the expense was four times greater than the loss.

That’s not just illogical, it’s wrong. The RHBF expense in FY 2014 was not $22.4 billion. It was $5.7 billion, as stated in the USPS 10-K report. And the expense did not account for just a portion of the $5.5 billion net loss. It accounted for all of it. If it weren’t for prefunding, the Postal Service would have posted a profit in 2014.

I notified the Brookings Institute about the error in Kamarck’s paper on September 22, the day after the paper was posted on the Brookings website, but so far I’ve received no response, and the error still appears in the paper on their website. (run75441: This is not unusual for a source not to acknowledge an error and I have done it also with reports and studies. They just do not respond and the error goes forward as the truth even though challenged.)

Anyway, it seems like a pretty minor mistake, hardly worth noting, but it goes to the heart of Kamarck’s argument. She’s trying to refute the claim that prefunding explains the Postal Service’s financial problems, but the number she presents is wrong, and that’s all she has to say about the claim. If prefunding really is the cause for the Postal Service’s financial problems, the solution is obviously to fix the prefunding — not sell off and privatize the competitive products business, the one area that’s actually growing.

The Source of the Error

The error in Kamarck paper is derived from a misreading of a table in a financial analysis by the Postal Regulatory Commission, which is cited in footnote #8. On page 21 of the PRC report, there’s a table showing “Structure of Assets and Liabilities” for the Postal Service. [(You can see the table here.)

The table shows that as of September 30, 2014, there was a liability of “$22,417 million” for “retiree health benefits.” But this figure is not the expense for the retiree health benefit expense in FY 2014, as Kamarck says in her paper. Rather, as the PRC explains in the text following the table, “The Postal Service has not yet paid RHBF statutory prefunding obligations for FY 2011 through FY 2014, which total $22.4 billion and comprise 52.7 percent of current liabilities.”

In other words, the Postal Service did not pay $22.4 billion into the RHBF as required for 2011-2014 (it defaulted on these payments), so the total for these unpaid obligations appears as a liability for retiree health benefits in the table. The $22,417 million cited by Kamarck is the cumulative expense for four years, as of the end of FY 2014, not the expense for FY 2014 itself.

Kamarck is wrong on the larger point as well. Prefunding is clearly the primary cause of the Postal Service’s net losses, and to a significant extent.

The Impact of Prefunding

Kamarck acknowledges that the “prefunding requirement does account for a large share of net losses,” but she doesn’t say how large that share is.

The following table shows what’s happened since prefunding began. It shows each year’s net loss, as reported in the PRC financial analysis (p. 26), along with the prefunding payment for the year and what the profit or loss would have been without the prefunding.

The prefunding for 2007 includes $5.4 billion for the first annual RHBF payment and another $3 billion transferred into the fund from an escrow account, (An earlier version of this article neglected to include the escrow transfer, but it is included in the $5.1 billion net loss, as explained in the 10-K report for 2007.) The unusually large net loss in 2012 was due to the fact that the Postal Service was permitted by Congress to skip the RHBF payment in 2011, but then owed a double payment in 2012. The figures for FY 2015 are estimates based on the first eleven months of the year, as reported in the USPS financial report for August.

As the table shows, over the past nine years, the Postal Service has posted losses totaling about $56 billion. Almost $49 billion of it — 87 percent — was due to prefunding.

Over the past nine years, there were four years when the Postal Service would have posted a loss if it weren’t for prefunding — the years of the Great Recession and its aftermath. In the two years before the economy tanked, the Postal Service would have shown a profit if it weren’t for prefunding. In 2013 and 2014, with the economy improving and postal revenues stabilizing, the Postal Service would again have shown profits if it weren’t for prefunding.

The same will be true for FY 2015. As of September 1, 2015, eleven months into the fiscal year, the Postal Service had a net loss of $4.1 billion, including a RHBF expense of $5.2 billion. Depending on the size of the workers comp adjustment for September, the Postal Service will end the year with a net loss of something like $4.6 billion. But without the RHBF expense, it would show a profit of about $1 billion, about the same as last year.

Kamarck writes that “many believe that the prefunding requirement for retiree health benefits accounts for all of the Postal Service’s financial problems.” No one believes that prefunding accounts for all of the financial problems, but clearly it accounts for a huge part. This is not a matter of belief. It’s a fact.

The Origins of Prefunding

Congress should have fixed the prefunding problem back in 2009 or 2010, as soon as it became clear that the size of the payments was unmanageable in a recession. Unfortunately, privatization advocates in Congress (like Darrel Issa) wanted to use the crisis as justification for legislation designed to dismantle the Postal Service. Fortunately, there were others in Congress, Democrats and Republicans, who saw the value of having a vital public postal system. That’s why there’s been a political stalemate.

But Congress should never have imposed the prefunding payments to begin with. It’s worth recalling how that happened.

In 2002 the Office of Personnel Management (OPM) determined that the Postal Service was overpaying billions of dollars into one of its pension plans, but reducing the pension payments to the Treasury would have had a negative impact on the unified budget of the federal government — something that the Bush administration would not permit.

So when PAEA was winding its way through Congress, a deal was hatched between the bill’s creators and the Bush administration, specifically the Office of Management and Budget (OMB). Rather than paying for retiree health costs on a pay-as-you-go basis, as it had always done and probably could have continued to do, the Postal Service would begin setting aside funds for future retirees, decades in advance.

The idea for the fund may have come from Postmaster General John Potter, who in 2003 recommended to Congress that a different pension overpayment (involving postal workers who were vets) might be transferred to a new Retiree Health Benefit Fund. It was the next best thing to getting a refund on the overpayment, which Potter knew Congress would never approve. The Postal Service’s proposal to create such a fund is analyzed in more detail in this 2003 GAO report, which explains how the plan would be “scored,” i.e., how it would impact the federal budget.

Three years later, Congress created the RHBF to address a different pension overpayment problem. The overpayments were essentially shifted to the new fund, and they had to be as large as they were in order to offset the reduction in pension payments.

A 2009 committee report in the House of Representatives about PAEA explained it this way:

The payment schedule for the first 10 years was established primarily to make the PAEA budget neutral, responding to the concerns of the Office of Management and Budget at the time the PAEA was passed, rather than corresponding to actuarial requirements or financial conditions at the Postal Service.

There was no urgent need requiring ten years of huge RHBF payments. If Congress thought that it was a good idea to prefund retiree health costs, it could have spread out the liabilities on a 40-year amortization schedule, as Dan Blair, then the Acting Director of the OPM, had recommended in testimony to Congress in 2005. But Congress was using the new fund to solve the pension overpayment problem, and small RHBF payments wouldn’t have solved the problem.

USPS Inspector General David Williams tells the same story about the origin of the RHBF in a letter he wrote to the GAO about one of its reports expressing concern about postal liabilities.

“The Postal Service started prefunding its retiree health benefits as a result of the discovery that, due to external fund management misjudgments, it was on track to seriously overfund its pension obligations by $78 billion,” wrote Williams. “The aggressive payment schedule appears to have been set based on byzantine ‘budget scoring’ considerations rather than actuarial assumptions or an evaluation of the Postal service’s ability to make the payments.”

So that’s how the whole mess got started. Congress was trying to fix the pension problem, and it created a new problem in the process. but it was the Bush administration’s OMB that was ultimately responsible for the payment schedule. The Postal Service — and its workers and ratepayers — ended up with a huge burden, all so that PAEA would be “budget neutral.”

(There’s more about the origins of prefunding in this previous post.)

Fixing the problem

Congress and the Bush administration created the prefunding problem, and one day Congress will have to fix it. The latest bill proposed by Senator Tom Carper, one of those who helped craft PAEA, tries to do exactly that. It would eliminate the existing payment schedule, cancel any outstanding payments, reduce the prefunding goal to 80 percent of projected obligations, and amortize payments over 40 years.

Congress should have passed a bill five years ago saying just that and only that. Perhaps then we would not have had to endure the endless stream of news articles about billion dollar losses, bleeding red ink, defaults on payments, and the obsolescence of the postal system.

Perhaps then the Postal Service might not have found it necessary to increase rates, lower delivery standards, close post offices and plants, sell historic buildings, and make draconian cuts to its workforce. And perhaps we would not be hearing from the Brookings Institute about why it’s a good idea to privatize the Postal Service.

References:

(Photo credit: Brookings’ panel on “The Future of the United States Postal Service”)

How prefunding retiree health benefits impacts the Postal Service’s bottom line – and how Brookings got it wrong Steve Hutkins, Save The Post Office blog

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