Collect on Delivery: $54 Billion in Unfunded Postal Retiree Health Benefits?

The U.S. Postal Service earned $68.9 billion in total revenue last year – -that’s the good news.  The less-good news, unfortunately, was that it reported $73.8 billion in operating expenses for the year.

But the really bad news is that it also had $54.8 billion in unfunded retiree health benefit liabilities, according to the Office of Personnel Management (pensions comprise a separate unfunded liability, at $24.1 billion).

As described in a new analysis by postal economics expert Michael Schuyler published by the Tax Foundation, the Postal Service has defaulted on every payment to its retirement health benefits fund since 2010, even when it had cash which it could have used to make partial payments.

While one might expect Postal Service management to seek to renegotiate the expensive benefits it offers its career employees, this is just one of many potential steps to control its own costs that remains blocked by Congress.  Schuyler observes that since its 1970 round of postal legislation, Postal Service executives have been prohibited by law from making any substantive changes that would result in a reduction to employees’ benefits, so “fundamental restructuring of fringe benefits is basically off the table in labor negotiations.”

The most recent major Congressional postal legislation, the Postal Accountability and Enhancement Act of 2006, specifically addressed the process by which the Postal Service funds its retiree health benefits.  It directed ten annual payments of $5.6 billion each, a dollar amount largely offset by funds the Service would save from pension payment requirements also as a result of the law.

Unfortunately, in the years immediately following that legislation’s passage, the bottom fell out on demand for its most profitable products, first-class letters, and  subsequently of the Postal Service’s overall business model.  The contribution schedule was set in a business climate of growing mail volume and increasing revenue.  A downhill spiral in first-class letter mail volume – long the agency’s cash cow – deeply imperiled its ability to make this front-loaded required contribution schedule.

As Schuyler points out, the Postal Service has defaulted on every payment to its retirement health benefits fund since 2010, even when it had cash it could have used to make partial payments.  If it had made all of those payments, the obligated benefits for current and former postal employees would now be close to fully funded, making whole their contractual promises from by postal management.

This requirement does not include liabilities that may be promised to future employees, and Schuyler rightly points out that there is a good deal of confusion on this point. In fact, on its federal Form 10-K filing for 2015, the Postal Service incorrectly asserted that the 2006 legislation required it to fund retiree health benefits promised to “current retirees and future Postal Service employees.”

So what implications does this hold for the future?  Schuyler highlights three possible scenarios:

First, legislation authored earlier this year by House of Representatives Oversight and Government Reform Chairman Jason Chaffetz, with support from the committee’s ranking Democrats, would mandate that postal retirees be automatically enrolled in Medicare to remain eligible for federal health care in retirement.

The proposal calls for the Postal Service to pay a decreasing portion of their Part B premium for four transition years.  Schuyler notes that approximately 9 percent of eligible postal retirees and dependents do not enroll in Medicare Part A (hospital insurance) and 27 percent do not participate in Medicare Part B (medical insurance).  The proposal, HR 5714, was passed by the committee in July with strong bipartisan support, and awaits action by the full House.

Second, postal retirees could potentially be simply denied benefits promised them over their careers, a scenario preferred by nobody.

The third scenario is hardly less bleak, however: if current trends hold or escalate, Congress may at some point see no alternative but forcing taxpayers to bail out the Postal Service’s unfunded retiree health care liability.  This sobering possibility serves to point out the perils in these treacherous waters, and perhaps to suggest that the heightened exposure for taxpayers means that  financial transparency for the Postal Service’s notoriously opaque expenses becomes more imperative now than ever in its past.

Postal Service management faces many difficult decisions moving forward under the new postal economics.  It has already begun planning to replace its aging fleet of 163,000 delivery trucks with new, larger, more-package-friendly vehicles, at an estimated cost of $4.5 billion.  Its officials also describe a need for new package-sorting infrastructure and technology, which reportedly could double that cost.

Postal executives describe forays into the intensely-competitive package delivery and e-commerce industries as their major growth opportunity, and have focused their new product development, and advertising budget, in this direction.  As this latest analysis discusses, they face an operating environment where demand for their historically most profitable product, first-class mail, is in steep decline, while its future health care costs for its retirees looms as a binding, and vast, unfunded liability.

“It would be nice,” Schuyler asserts, “if legacy costs could be wished away.”