USPS to default on $5.5bn bill, as audit confirms lack of cash
The US Postal Service confirmed today that barring last minute action by Congress, it will default on a $5.5bn payment to the federal government due on Wednesday (1 August). And, the struggling Postal Service said it will also decline to pay $5.6bn due on 30 September.
The payments are required as part of its long-running obligation to pre-fund decades of future healthcare liabilities for retirees. The obligation was put in place by Congress in 2006 when USPS was making record profits.
Now, however, with mail revenues falling, the obligation itself has been blamed for much of the current loss-making status of the Postal Service, which is $13bn in debt and forecast to make a $14bn loss this year.
Making its confirmation of the intention to default, USPS issued a statement insisting it still had the money to pay staff and suppliers.
“This action will have no material effect on the operations of the Postal Service,” it said in a statement to the media. “We will continue to deliver the mail, pay our employees and suppliers, and meet our other financial obligations.
“Postal Service retirees and employees will also continue to receive their health benefit. Our customers can be confident in the continued regular operations of the Postal Service,” added USPS.
USPS said it was continuing its cost-cutting programme, which is set to see 48 mail processing plants closed this summer, and a further 92 in the New Year, while thousands of rural post offices will have operational hours cut.
With a $15bn limit to its government borrowing powers, the Postal Service is also considering suspending employers’ contributions to its Federal Employment Retirement System (FERS) pension fund, as it did briefly this time last year. The fund does have an $11.4bn surplus at present, but America’s laws do not allow USPS to access its overpayments.
Action from Congress to rescue USPS, on which 8m US jobs rely, has bogged down in political skirmishes ahead of this year’s Presidential election. Scheduled for a debate in the House of Representatives this month, postal reform is nowhere to be seen in the schedule this week, the last week before the summer recess on Capitol Hill.
Running out of cash
“This default couldn’t come at a worse time”
Last week the USPS Inspector General David Williams wrote to Postmaster General Patrick Donahoe to reveal the results of an audit that showed USPS would have a $100m shortfall of cash this October.
This shortfall is the amount of cash USPS would need to continue above and beyond its ability to borrow more funds.
It is likely that the Postal Service will be able to get past the October low point in its financial year, with the subsequent months bringing the festive season surge of revenues.
But, the Inspector General said without urgent action, October 2013 should see the Postal Service saddled with a cash shortfall of $1.3bn.
And, if the US economy gets progressively worse, the situation for the struggling Postal Service could become even more untenable.
“Projected cash flows, revenues, and expenses can be significantly impacted by the external economic environment, such as unanticipated changes in the Consumer Price Index, the cost of fuel, and consumer demand,” warned the Inspector General.
“Additionally, revenues and expenses can also be impacted by the global political and financial environments. All these factors could significantly change the future actual results for the projections presented.”
Commenting on the Inspector General’s findings, USPS chief financial officer and executive vice president Stephen J Masse warned that USPS could end up defaulting on $16.7bn of retiree health benefit payments in the rest of this year and in early 2013.
“We continue to closely monitor our liquidity and overall financial position, and management continues its work to preserve cash and mitigate the risk of a cash shortfall,” stated Masse, adding that no decisions had yet been made whether to withhold employers’ contributions to the FERS fund.
“Perfect storm”
Major USPS customers said today that while the impact of the USPS defaulting on its $5.5bn payment may not be seen by the public this week, a major loss of confidence in USPS could all add up to more businesses deciding to change strategies to take more mail out of the system.
Art Sackler, co-ordinator of the mailers’ lobby group Coalition for a 21st Century Postal Service, said today: “This default couldn’t come at a worse time, as many major and mid-sized mailers are preparing their budgets for next year.
“With Congress delaying action on a Postal Bill, mailers will be increasingly wary about the stability of the Postal Service and will likely divert more mail out of the system. It would be the perfect storm of negatives for the Postal Service.”
