U.S. Postal Service: The Only Safe Bet is Projecting Big Bonus Payouts

Issue Brief

What is wrong with this picture? After losing $199 million in fiscal year 2000, the United States Postal Service expected, as recently as last September, a surplus of $150 million for fiscal year 2001. By November, that became a projection of a $480 million loss, and then in February, the Service upped its expected losses for the year to $2 to $3 billion. Last week, Chief Financial Officer Richard J. Strasser predicted a total year-end loss in the range of $1.6 billion to $2.4 billion.

Mind you, the fiscal year is nearly three-fourths over (due to accounting procedures the fourth quarter of the USPS fiscal year is four weeks longer than the other quarters). The Postal Service announced last week that they are running $422 million in the red through the end of the third quarter of the fiscal year. This means the Service is projecting a loss of $1.2 billion to $2 billion in just the fourth quarter. While the fourth fiscal quarter is notoriously slow and longer for the Service, those numbers seem suspiciously high.

Could these huge loss projections have been exaggerated to help press the case for Postal management’s version of postal reform? Or, could the outsized loss projections be used to make an eventual $800 million to $1 billion loss, for example, look like a feat of managerial success (“an amazing turnaround, down from an expected near $3 billion loss”)?

There also appears to be some funny business going on with management’s bonus program, knows as the Economic Value Added Variable Pay Program (EVA). The EVA Index used to determine eligibility for management bonuses historically included net income as a major component, while productivity (the Postal Service’s Total Factor Productivity, or TFP) was omitted. This year, with negative net income a certainty, but with TFP expected to be positive, the EVA Index reportedly will ignore net income in favor of TFP.

Last year, management received $280 million in these performance bonuses, suggesting that Postal management all must come from Lake Wobegon, where everyone is above average. With the formula changed to maximize the benefit from the Service’s cyclical up-tick in productivity-2% expected this year but up just 12% over the previous 30 years-this year should prove even better for management’s bottom line.

Charles Guy, Ph.D., is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. He is currently Adjunct Fellow at the Lexington Institute.