My issue last week about the U.S. Postal Service’s monopoly and universal service obligation turned out to be unexpectedly timely; the Postmaster General gave an interview about the Post Office’s budget problems just a few days later. The interview was published in USA Today on July 20 and was followed by a mini flurry of news coverage. The stories have focused on three of the Postmaster General’s assertions: in 15 years, delivery may be cut back to three days a week; the Post Office is “looking at” eliminating Saturday delivery; and the organization can’t make a $5.5 billion payment due at the end of September.
To me, the first point is simply personal speculation and the second is hardly news (Saturday delivery has been threatened with extinction for years). However, the third point, that the Post Office will be unable to pay a $5.5 billion bill due in two months, clearly requires action. As it turns out, the action required to fix that situation will be pretty easy, given the nature of the payment.
The $5.5 billion payment is actually a prepayment that covers 100% of the Post Office’s retirees’ health care liability. The federal government requires full prepayment of these liabilities by the USPS, something that is not required of any other federal entity. Furthermore, the amount of the payments was set—also by the federal government—back in 2006, and has not been adjusted. But mail volume has declined 20% in the intervening five years, and headcount at the USPS has been greatly reduced and continues to fall. So now, the Post Office’s retirement funds—which are managed by the U.S. Office of Personnel Management—have an estimated surplus of $50 billion to $80 billion.
The solution would seem to be easy enough: Give the surplus back to the USPS, and rewrite the laws to require smaller payments in the future.
Of course, anything requiring rewriting laws is never that easy.
Several bills have been introduced in Congress that would give the surplus back, but according to a July 21 New York Times article, there are actually a gauntlet of impediments to passing any of them. The first issue, of course, is getting Congress to focus on anything but the debt crisis right now. Hopefully that will be only a temporary issue. A more substantial hurdle is that, in addition to giving the surplus back, which will stave off a crisis for the short-term, any bill will have to address the longer-term situation as well. That likely means allowing the USPS to eliminate Saturday services and close branches, and those proposals ruffle a few feathers. Like a few of my readers, some people in Congress think it’s important to their rural constituents to maintain Saturday delivery, and others would like branch closings to be decided by a commission like the military base-closing panel.
Finally, there’s the political issue. Democratic Representative Stephen F. Lynch of Massachusetts told the New York Times that:
“Because the retirement fund surpluses are now in the hands of the federal government, returning the money to the Postal Service would be listed as new government spending. And that would upset the budget-focused House majority. ‘They don’t want it to show on the books,’ Mr. Lynch said. ‘That’s where the resistance comes.’”
I’m beginning to pity the Post Office. Imagine being tasked with running a profitable corporation, but not being allowed to decide what services you provide or how best to save for your employees’ retirement. As savvy business people, several of my readers had interesting perspectives on this situation. Some of the best responses I received to last week’s email are below:
“As a 35-year CEO, I applaud the attention you brought to the USPS. I think it is important that we be reminded that this is NOT a business in a traditional way (even though they receive no public dollars and must show a positive bottom line). It is a service we all receive the benefits of whether we are aware of it or not. We support the Postal Service and use it extensively for most mail including ‘legal’ mail. We rarely have had a complaint which is far more than we can claim from FedEx.”
—JMR, Fairmont, West Virginia
“Your question today, ‘Should the USPS have to compete with private delivery companies?’ is a classic question. Proponents of free enterprise will undoubtedly respond with a rousing ‘Yes!’ while most of the more liberal members of our society would respond in the negative. The question comes down to ‘Should one segment of the population be forced to subsidize equal services for another?’ As you state, there are fair arguments on both sides of the issue, but let me bring to your attention a personal example. Let me state that I believe it is my duty to help those who can’t help themselves; but, just because I can afford to buy an occasional steak, doesn’t mean I have to buy steak for everyone.
“In New York State, there is a rent stabilization law that was put into effect, initially for a ‘short’ period of time, but which has now become the ‘law of the land.’ This law restricts the amount of rent a Landlord may charge a Tenant. In spite of the fact that the government has assumed the responsibility of providing affordable housing for its citizens, it does not own enough dwellings to fulfill this self-imposed mandate. So, it enforces a law that compels private property owners to keep apartment rents well below what free market rates would demand. It literally has placed the burden of support of one group of citizens on the backs of another group. A similar law, if enacted, would be to require a supermarket to have two prices for its products depending on who was the purchaser. Is that just? Again, it depends on what side of the fence you sit.
“Unfortunately, we have become an entitlement-oriented society. So, the residents of that out-of-the-way community in Idaho demand to get the same service a resident of downtown Chicago gets, and at the same price, but not at the same cost to the USPS. Isn’t that the same as demanding to see a movie at a non-existent theater (because your town doesn’t have a movie house), just because the residents of a large city can? Perhaps I am beginning to sound too conservative, but my immigrant father came to this country and earned his success by working hard for what he got. However, in today’s society, the prevailing argument is ‘Just because you had to work for it, doesn’t mean I can’t have it too.’ Does this sound like the beginning of the end?”
—J. Tutunjian, Glen Cove, New York
“I think this parallels the case in the telecommunications industry. The landline companies are the carriers of last resort. They are forced to charge their customers a score of charges mandated by the FCC. Their competitors are not forced to charge these fees (Time Warner, COX for example) or be the carrier of last resort. The government uses the landline companies as their tax collectors. The landline company’s competitors can pick and choose who they want to serve thus lowering their costs. Government interference always disrupts the free market place. Government does not always level the playing field.”
—W. McKenna
“More often than not, people live in rural area out of necessity. Your dollars go further in a rural area. Property and taxes are less expensive. If you could lose the ‘rich deserve to be treated as special’ attitude, you might grow to understand that the government is there to serve all the people; not to give better service to those with more money. That’s why privatization of essential services does not serve the public well. It only looks at the bottom line as to making a profit. Its first consideration is not service to the public. The preamble to the constitution declares in part that government is to ‘provide for the common welfare.’”
—B. Kennimer
“The proponents of killing the USPS monopoly do not present a convincing argument to me. In a perfect world, they might be correct, but, government does have a responsibility in society. The same principles are in play in the debate over the mandates in heath care and even in the accepted mandate for auto insurance. Just as the health insurance companies will price their products out of the reach of those who need health care, private carriers will cheery pick mail delivery routes for their highest profits, leaving those in rural or poor areas with no alternatives. Government can regulate and ensure equal treatment. I remember when the fax machine was first introduced and the USPS tried to enforce their monopoly by imposing the requirement that all faxes had to be delivered to local post offices and delivered by the USPS. Yes, government can stifle! But Lehman Brothers is also testimony as to how private industry can overreach. I am for privatization of anything that can be privatized as long as the weakest in our society can be protected from exploitation. Public schools should be supported to ensure that those who can’t afford private schools can get an education. Those of us who are fortunate enough to rise to the top have a responsibility to aid in leveling the playing field. I’m willing to leave behind those who will not try, but I am willing to give some portion of my wealth to those institutions (yes, even government institutions) that will hold out the hand of support for those who are trying to better themselves but don’t have available those resources I had. These issues are always a matter of compromise and balance. America is losing its ability to analyze and process data. As a nation, we are losing the ability to think. Single issues drive the election cycle and there are many who will exploit ignorance. My vote is to streamline the USPS as much as possible and then fund it.”
—D. Bushman, Harleysville, Pennsylvania
“This is a subject about which I have information not available to most. That is, I worked in a post office while in college. However, the more important info is available easily, just by talking to old folks. When I was young, during WWII, we had twice daily deliveries; mail could be expected to reach its destination the same day if mailed in the morning and the distance was not too great. My Dad depended on the US Post Office for speedy service for his business. Yet, people complained. Instead of taking pride in a government entity, which was sterling in quality and low in price, people bitched and moaned. Now what we have is much worse. There are many places in the world, which would make you realize how great we have it. Yet the conservatives cried and insisted government could not do the job as well as a privatized entity. Nixon foolishly made the USPS a semi-business, but still with government responsibilities and political interference. The result has been a steady decline in the quality of service. I know the knee-jerk conservative minds will not accept such realities, but they are fact. Cost has gone up, service has been progressively worse. We were extremely fortunate to have the excellent, fast, reliable, service of the USPS. Greed and stupidity destroyed it, long before the advent of wireless. I have great admiration for the job still done by the USPS, as well as Big Brown and FedEx. We benefit from all of them. ... As to my work experience, the regulars were dedicated, honest, hardworking and not well paid for what they did. They were a cut above most of the people I later worked with in industry. Doing a terrific job for everyone is not cheap. The privatized route is not smart now and will only get worse under the present unrealistic attitudes. To put it another way, we are shooting ourselves in the foot.”
—G. Ritter, Racine, Wisconsin
“Yes, I agree [that people should bear the full costs of living where they choose to live]. But when these Laws were put into effect, we needed People to leave our Cities and Settle in the Rest of the country. Now? Not so much and thus the Laws should be changed.”
—DKP
The publisher of our newsletters (and my father), Timothy Lutts, also shared his thoughts; he wrote:
“Opening up first-class mail to competitive delivery services would not only provide higher-value service for most Americans—though not those in remote Idaho—it would also usher in an era of innovation the likes of which is unimaginable to most of us today. Twenty years ago, most Americans who wanted to rent a movie had to drive to a store, wasting time and gasoline. Today, most watch over the Internet, streaming from Netflix and other providers! I have no doubt that innovators would find ways to push mail down that same digital ‘pipe’ and deliver it at the other end in any form desired, if only the government would get out of the way and let the free market function. Until this happens, the problems faced by the USPS will only grow as paper mail volume shrinks; before you know it, they’ll be stopping Saturday mail delivery. And prices will keep rising, to pay for the pensions and medical care of the service’s half-million employees!”
Thank you to everyone who took the time to respond!
If the Post Office’s monopoly were to be removed, as some of my readers think it should be, two companies would stand to benefit enormously: UPS and FedEx. And one happened to be recommended in the latest Dick Davis Investment Digest! Here’s the write up, from Mark Johnson, editor of The Investment Reporter:
“FedEx Corp.'s (NYSE: FDX) earnings recovered in fiscal 2011. It expects to earn even more next year. The shares remain a buy for gains and rising dividends. In the year to May 31, FedEx made $1.55 billion, or $4.90 a share, excluding one-time items. This was up by over 30% from $1.18 billion, or $3.76 a share, a year earlier. ... Despite the jump in last year’s earnings, FedEx earned far less than its peak earnings of $6.68 a share in fiscal 2008. Then again, the company could set a new record high this year. In fiscal 2012, it expects to earn from $6.35 to $6.85 a share. Last year, FedEx’s revenue jumped by 13.2%, to $39.3 billion. U.S. package volumes inched up by just 1.7%, to an average of 2,684,000 a day. But the international business did better. Average daily package volumes jumped by 9.8%, to 923,000. Similarly, FedEx’s average daily pounds of freight moved in the U.S. grew by 2.8%, to 7,340,000. Average daily pounds of freight moved in the international division rose by 17.3%, to 4,419,000. ... FedEx has resumed raising its dividend after paying the same 44 cents a share in fiscal 2009 and 2010. Last year, FedEx raised its dividend to 48 cents. It has just raised its dividend by 8.3%, to 52 cents a share. The company can afford to reward you. That’s because FedEx’s cash exceeds its debt. Also, its cash flow exceeds its investment and dividend payments.”
Wishing you success in your investing and beyond,
Chloe Lutts
