December 4, 2019
The $514 million increase to $71.1 billion in the agency’s operating revenue is somewhat impressive, given all the gloomy news about the Postal Service. An increase of $1.3 billion in the package segment offset losses in the mail monopoly part that continued its long, slow decline in volume. Moderate rate increases combined with volume growth in shipping yielded about three-quarters of a percent revenue increase. But overall volume was down 3.8 billion pieces (which equates to 2.6 percent) to 142.57 billion.
The modest increase in revenue would not be a big problem if operating costs were not growing so much. USPS reported operating costs of $79.9 billion, up $5.4 billion or 7.3 percent. A $5.4 billion increase in cost versus growth of $514 million in revenue is a big problem. It appears on first blush to be a 10X problem.
The Postal Service reported a “controllable” loss of $3.4 billion. Here USPS is departing from the generally accepted accounting principles (GAAP) they carefully hold to in their official financial statements. It gives a sense of the loss of control when $5.4 billion of the total loss is “uncontrollable.”
$3.4 billion of the cost increase was caused by the accountants adjusting the discount rate for the USPS workers’ compensation obligation. When interest rates drop, as they have secularly for some time, future obligations that are “discounted” to their present value go up in estimated cost. And USPS accounting books the increase in estimated cost for the period in question.
The three main adjustments USPS makes to get from reported loss to controllable loss are non-cash charges for workers’ compensation, retiree health benefits, and pensions. USPS definition: “Controllable loss is defined as net loss adjusted for items outside of management’s control and non-recurring items.” The perceived need to report this is driven by a government agency acting with heavy Congressional input and oversight, but reporting with GAAP and Securities and Exchange Commission (SEC) reports as though it were a private sector business.
There are some costs within the self-defined control of management that are escalating faster than overall volume. There is always room for more efficiency and cost control. The amount USPS pays contractors to transport its mail between facilities rose by $323 million to $8.184 billion. The Postal Service reported that “Compensation and benefits expenses increased by $994 million due to contractual wage increases.”
What continues to be clear is that the Postal Service cannot fund its required costs with its limited revenue/funding stream. Perhaps something has been lost in the repeated talk of controllable vs. non-controllable, broken business model, and Universal Service Obligation. It really is simpler than it’s been made out to be.
Public service costs mandated by Congress have approached being fully funded by mailer postage during only the high growth years of the 1980s and 1990s. Mail volume doubled from 100 to 200 billion in those two decades. For the 200 years before that, Congress appropriated funds for the mandated public services. And since then, three Postmasters General have struggled to make an unworkable mailer-funded model work in the face of rising public service costs and falling mailer-paid volume.
The reporting of “controllable” costs is management-centric. A more customer-centric reporting might stimulate Congressional action. Divide costs between those incurred by Congressional mandate and those caused by the services that customers actually are willing to pay for. Then a healthy debate could occur about how the public should fund the “free” services it gets from its postal agency.