Quick Reference to the U.S. Postal Service

March 2016

Introduction

The U.S. Postal Service is an independent federal agency that must deliver mail to all Americans according to a standardized pricing schedule. Despite a legally guaranteed monopoly on non-urgent mail and exclusive rights of access to Americans’ mailboxes, USPS has struggled financially since the mid-2000s.

Postal Service activities are predominantly financed through revenue from the sale of mail and postal services. Proceeds from borrowing, interest from investments, and limited appropriations from Congress for specific functions also provide additional revenue.

In the first quarter of 2016, USPS posted its first operating profit in five years. But the agency’s accounting practices are notoriously opaque to the public, obfuscating persistent financial and operational concerns that would  be considered highly problematic in other sectors. The quarterly profit is widely viewed as an anomalous product of an accounting change to workers’ compensation expenses tied to interest rates and a temporary “exigent” increase in rates provided by Congress as short-term fiscal relief.  Federal legislation passed in 2006 imposes a price cap tied to the Consumer Price Index for all classes of mail within the postal monopoly (but not for competitive products).

Table of Contents

• Finances
• The Changing Mail Mix
• Operations
• Quality of Service
• Financial Transparency
• Subsidies to the Postal Service
• International Mail
• USPS Organizational Chart

Finances

Postal Service Operating Revenue & Expenses (in millions of dollars)

USPS has not made a payment to prefund retiree health benefits in accordance with federal law since fiscal year 2011. These missed prefunding payments total $28.1 billion.

• The Postal Regulatory Commission granted USPS a 4.3% “exigent” price increase in 2014. Typically, the Postal Service cannot raise rates for market-dominant products beyond the rate of inflation.
  • The exigent rate was not to collect more than $2.8 billion. It was intended to expire in August 2015.
  • Following a USPS petition in the U.S. Court of Appeals for the D.C. Circuit, the PRC extended the exigent rate for another eight months. USPS has collected $4.347 billion overall in revenue thanks to this exigent rate increase.
  • Exigent surcharge pricing ended on April 10, 2016, despite appeals by USPS.
  • USPS estimates that expiration of the exigent rate will lead to $2 billion in losses each year.
• Total retirement-related liabilities were $404.7 billion, and total retirement-fund assets totaled $337.1 billion, as of September 30, 2015.
• In 2017, USPS must make approximately $11.3 billion in payments to fund health and pension benefits through CSRS and FERS. That’s $4.6 billion more than it paid in 2015.

Source: Unless noted otherwise, all facts in this section come from the USPS 2015 Form 10-K.

Source: GAO: “U.S. POSTAL SERVICE Financial Challenges Continue”

The Changing Mail Mix

• In 2014, First-Class Mail accounted for about 43% of USPS revenue and about 41% of total mail volume. In 2010, First-Class Mail accounted for 51% of USPS revenue and 46% of total mail volume.
  • In 2014, Standard Mail accounted for about 26% of USPS revenue and nearly 52% of total mail volume. In 2010, Standard Mail accounted for 26% of USPS revenue and 48% of total mail volume.
• Households received 123 billion pieces of mail and sent 11 billion in 2014. In 2010, U.S. households received 128 billion pieces of mail and sent 18 billion.
• In 2014, mail sent from household to household constituted less than 3 percent of total mail volume. Seventy-seven percent of mail was sent by non-households to households.
• Only 33% of all bills were paid by mail. The quantity of bills paid online increased from 25% in 2004 to 63% in 2014.
• Advertisements comprised 62% of all mail received by households in 2014.
• Direct mail was the only non-Internet-based form of advertising that experienced spending growth in 2014.

Source: Unless noted otherwise, all facts in this section come from The Household Diary Study Mail Use & Attitudes in FY 2014.

Operations

• In 2015, operating revenue was $68.8 billion. Operating expenses were $73.8 billion.
• 2 billion pieces of mail delivered in 2015.
• 492,000 career employees in 2015 — down from about 584,000 career employees in 2010 — and 130,000 non-career employees.
• 91% of career employees are covered by collective bargaining agreements. They are represented by four major labor unions: National Association of Letter Carriers, American Postal Workers Union, National Rural Letter Carriers Association, and National Postal Mail Handlers Union.
• There are approximately 32,000 USPS-managed post offices, stations and branches. USPS processing facilities will be consolidated in 2016 as part of an effort to improve network efficiency. This move has been planned since 2011.
• The USPS fleet consists of 215,000 vehicles. Expenses for maintenance of the aging fleet totaled nearly $1.1 billion in 2015.

Source: Unless noted otherwise, all facts in this section come from the USPS 2015 Form 10-K.

Quality of Service

Deteriorating Delivery Service for Letters?

In its 2015 Annual Compliance Determination, the Postal Regulatory Commission stated, “The Commission is particularly concerned with the recent dramatic decline of service performance for First-Class Single Piece Letters/Postcards with a 3-5 day service standard,” and concluded this service to be out of compliance.

Source: GAO: “U.S. POSTAL SERVICE Actions Needed to Make Delivery Performance Information More Complete, Useful, and Transparent”

Since 2012, USPS has undertaken various initiatives aimed to reducing costs associated with mail delivery and processing, including changing mail delivery and service standards. The overnight (one-day) service standard for single-piece First Class Mail was eliminated January 5, 2015. The scope of the two-day standard was reduced in 2012 and again in January 2015.

The Postal Service is not required to report — and does not report — specific delivery information for rural and non-rural areas.

Financial Transparency

The Postal Accountability and Enhancement Act of 2006 defined all Postal Service products and services as either “market-dominant” or “competitive.” It prohibited products and services from the market-dominant category from subsidizing those in the competitive category and directed the Postal Regulatory Commission to prevent such subsidies.

But only about half of all costs are assigned to specific offerings — the rest remain pooled as institutional overhead, opaque to the public. The law assigned the Postal Regulatory Commission responsibility to “prevent the subsidization of competitive products by market dominant products.”

Cost Coverage

The Postal Service calculates “cost coverage” figures that represent the percentage of costs attributed to a given product that are funded by that product. For example, a product with cost coverage of 100% breaks even — the revenue it takes in covers exactly the costs it imposes on the Postal Service. A product with cost coverage of 150% covers its costs — and then contributes an amount equal to 50% of its costs to the Postal Service’s bottom line, or its institutional overhead.  It can be argued reasonably that a product with higher cost coverage in effect subsidizes others with lower cost coverage.  For 2015, attributed cost coverage for first class mail, a market-dominant product, was 226 percent, and for Priority Mail, a competitive product) cost coverage was 126 percent.

Source: PRC Annual Compliance Determination Reports and FY 2015 Financial Analysis

Subsidies to the Postal Service

• USPS maintains a legally protected monopoly on access to consumers’ mailboxes and on the delivery of non-urgent mail. It is also exempt from vehicle registration requirements and does not have to pay parking tickets, local or state property taxes, or state fuel sales taxes.
• Other subsidies include the Postal Service’s ability to borrow from the U.S. Treasury at below-market rates and to pay corporate taxes on profits from its competitive products to a special Treasury fund controlled by the Postal Service itself.
• Economist Robert Shapiro estimates that USPS’s indirect subsidies — including exemption from state and local taxes, sales taxes, parking tickets, and tolls — are worth $2.18 billion per year.
• Shapiro estimates that the value of USPS’s monopoly on consumer mailboxes is worth $14.9 billion annually.

International Mail

• International mail practices are set by the Universal Postal Union, an agency of the United Nations established in 1948 and headquartered in Bern, Switzerland. The UPU is currently comprised of 192 member countries, which finance the Union collectively.
• The UPU controls the terminal dues system. Terminal dues were instituted to ensure that national posts in one country could compensate postal operators in other countries for delivering their international mail.
• The terminal dues system produces substantial market distortions in international mail and shipping markets, according to analyses published by the Postal Regulatory Commission.
• USPS has negotiated bilateral agreements with postal operators in seven countries. These agreements are not subject to UPU-instituted terminal dues and instead follow mutually agreed-upon rates. These negotiated rates are lower than standard terminal dues. So USPS incurs even greater losses thanks to these agreements.
  • One such bilateral agreement with China Post lost USPS approximately $39 million over the course of 2011 and 2012.
  • In 2014, USPS lost $74.8 million delivering inbound international mail, relative to that mail’s attributed costs, according to the Postal Regulatory Commission.

USPS Organizational Chart

Source:  USPS

For questions, please contact Don Soifer, soifer (at) lexingtoninstitute.org.