The Next Big Bailout: The US Postal Service

Tyler Durden's picture

Following the roughly two-year overdue rout of municipal securities, which somehow has caught market "professionals" by surprise, there are increasing calls that the Socialist States of America should bail out all the insolvent cities and states that back these securities post haste. Judging by the approach to risk (or lack thereof) so far by supreme chancellor Bernanke and his impotent fiscal policy determining brethren, this will certainly happen within the next 12 months. But the government may be smart to leave some money on the sidelines: another far more prominent bankruptcy is coming - that of the US Postal Service itself, which in tried and true fashion, continues to raise compensation even as net income plummets, and the organization can no longer be deemed to be long-term viable. John Lohman explains.

After guiding toward a loss of $6 to $7 billion for fiscal 2010, the Postal Service disappointed on Friday, November 12th  announcing an $8.5 billion loss (they apparently didn’t attend the Jack Welch University of ‘guide-down-and-beat-by-a-penny’) for the year ending September 30th.  This is on top of a loss of $3.8 billion in 2009 and $2.8 billion in 2008.

These losses have forced the USPS to borrow $3 billion in 2009 and $1.8 billion in 2010, bringing their current debt level to $12 billion.  Only one problem: a statutory limit that prohibits them from borrowing more than $3 billion in any given year, and not to exceed $15 billion total.  And on page 71 of the report, they are kind enough to point out that they have cash obligations this year of $6.7 billion.

“The Postal Service has two substantial cash payments scheduled for September and October 2011: the previously-noted $5.5 billion due to the PSRHBF on September 30, 2011; and approximately $1.2 billion due in October 2011 to the Department of Labor (DOL) for the Postal Service’s annual payment on its workers’ compensation liability.”

So, $12 billion in current debt + $6.7 billion in obligations + another year of guaranteed losses (as foretold in the report’s Outlook on pp. 58-59) - $1.2 billion in cash = welcome to the taxpayer funded USPS bailout of 2011.  The “self-sufficient” monopoly run by the federal government that doesn’t “rely on the taxpayer” will request that Congress increase its debt limits so that it can borrow another $10 billion from the taxpayer-funded U.S. Treasury (at what appears to be, based on current debt outstanding, a taxpayer-subsidized weighted interest cost of 1.4%).  And this from page 54 of the report, where K-Y is applied to the taxpayer in advance of said bailout:

“…Based on the cash balance at September 30, 2010, current borrowing capacity of $3 billion, and projections of cash available from operations, there will be insufficient cash available to fund these financial obligations absent regulatory adjustments to some, or all, of these obligations.

…Given these restrictions, it is unlikely that Postal Service efforts to positively impact cash flow, will be, either individually or in the aggregate, sufficient to offset a cash shortfall on September 30, 2011.”

And the outlook for operations in 2011 which obliterates any hope that K-Y will not be necessary:

“For 2011, we project revenue to be flat versus 2010….Total expenses for 2011, excluding retiree health benefits, are expected to increase, as planned cost reductions are outweighed by the impact of contractual wage and benefit increases and inflation”

As it relates to wage and benefit increases, the USPS is currently negotiating with two of their four unions: APWU (211,000 employees) and NRLCA (207,000 employees), so collectively 62% of their total labor force.  And as of a couple weeks ago, it appears the negotiations aren’t going terribly well.

A final note on compensation, which is a mere 80% of their total cost.  It’s difficult to say for certain what the average postal employee compensation is because they use temporary employees (the Cato Institute estimates $79,000).  But, from the Total Workhours table (p. 45) and Compensation and Benefits line from Operating Expenses (p. 44), average hourly compensation and benefits can be computed. 

And there you have it.  Look for what will be the first in a very long series of USPS bailouts sometime in early 2011.