Amidst all the talk of bonuses, sweetheart mortgages and micro-management at Wednesday’s oversight hearing, there was precious little discussion of the facts behind the Postal Service’s obligation to “pre-fund” its retirees’ health benefits by depositing over $5 billion a year with the US Treasury- something no other agency or corporation is required to do.

This obligation didn’t arise out of an actual concern for those retirees- it was political expediency, pure and simple. In 2001 the Office of Personnel Management determined that the USPS had been improperly overcharged for Civil Service retirement benefits.

There wasn’t any dispute about the mistake- everyone freely admitted that the USPS had overpaid. Unfortunately, giving the money back (and not continuing the overcharging in the future) would mean increasing the national debt (on paper), as well as increasing future budget deficits (also strictly on paper).

So our representatives in Congress took the only course they thought reasonable: they scrambled to come up with an excuse to not only keep the money the Treasury already had, but to keep the gravy flowing! It took time to craft a rationale, so for a while we had an undefined escrow account into which the overcharge flowed. Then someone came up with the brilliant idea of using the continuing overcharge to “pre-fund” future postal retiree health benefits. How much should the USPS should set aside for the pre-funding? Amazingly enough, the amount turned out to be just about what the CSRS overcharge would have been.

So the Treasury would still get an extra $5 billion from the USPS’s customers, decreasing (on paper) the federal deficit by that amount!

So what’s wrong with this picture? The first problem is the voodoo accounting that allows the Treasury to count the USPS contribution as revenue. The funds the USPS contributes, regardless of whether they are overcharges for CSRS retirements, or “pre-funding” of retiree health benefits, are already totally committed to paying those charges. Counting those dollars as revenue to decrease the deficit is nothing but a shell game.

Secondly, and more importantly, the USPS no longer has $5 billion in spare change to contribute to the Treasury every year- consider what will actually happen if the USPS has to contribute the required $5 billion to the “trust fund”:

- The USPS will be required to pay the Treasury $5 billion.
- The USPS doesn’t have $5 billion, so it will have to borrow the funds.
- When the USPS needs to borrow money, it borrows it from the Treasury. So it will borrow $5 billion from the Treasury that it will then loan back to the Treasury for the “trust fund”!
- But wait- there’s more! As you may have heard, the Treasury has no money either!. The US Government is operating at a deficit, and will be for the foreseeable future. So if it needs another $5 billion to loan to the postal service, so that the postal service can loan it back to the Treasury, guess what? The Treasury will have to borrow another $5 billion from China!

Which shell is your (borrowed) $5 billion under?!

If the USPS makes the RHBTF payment, it will simply be converting $5 billion in presumed future USPS obligations to an immediate $5 billion debt to the Treasury. It will also take $5 billion of the total US debt off of the federal government’s books and charge it to the USPS. It will have done nothing to insure that future retiree health benefits are actually funded.

Charles Ponzi would have been proud of this scheme!

(Fun fact- when the GAO’s Phillip Herr was asked during Wednesday’s hearing whether he could think of any other companies that were required to pre-fund employee health benefits, he proudly pointed out that the GAO does it! He didn’t mention the fact that when the GAO needs funds to do something like that, it doesn’t actually have to come up with the cash- it just asks Congress to appropriate it…)

WASHINGTON, D.C. – On Wednesday, March 25, 2009, at 10:00 a.m. in room 2154 of the Rayburn House Office Building, the Subcommittee on Federal Workforce, Postal Service and the District of Columbia will hold a hearing entitled, “Restoring the Financial Stability of the U.S. Postal Service: What Needs to be Done?”

The Subcommittee will examine how the nationwide economic downturn, coupled with technological trends, has produced declining volumes and revenues for the United States Postal Service.

“With the Postal Service facing budget shortfalls the Subcommittee will consider a number of options to restore financial stability, and examine ways for the Postal Service to continue to operate without cutting services,” Chairman Stephen F. Lynch said.

The Postal Service’s recent decision to close six of its 80 district offices, eliminate positions across the country and offer another early retirement opportunity makes the Subcommittee’s hearing very timely.

The hearing aims to generate effective short and long term strategies to reduce costs and improve efficiency at the Postal Service. In addition, the Subcommittee will question the Board of Governors on Postal executives’ compensation packages.

“Given the ongoing financial losses at the Postal Service, there has been a considerable backlash among postal customers and current and former employees regarding the Postal executives’ compensation packages, including that of Postmaster General Potter. Members of Congress have been hearing from our constituents and we intend to look into this matter at the hearing and ascertain how those pay levels were determined and how to bring them in line with the current reality,” added Chairman Lynch.

Witnesses’ testimonies, the Chairman’s opening statement and a 10 a.m. live broadcast of the hearing can be found on the Subcommittee’s website, federalworkforce.oversight.house.gov

Figures released by the US Postal Service show that the organization spent $78.4 million on relocating employees in the fiscal year that ended September 30, 2008. Of that, almost half, or $37.9 million went to “Residence Purchase and/or Sale/Lease”. The USPS home purchase program for relocated employees has been a subject of controversy since it was revealed that the USPS had spent $1.2 million to purchase the home of a South Carolina postmaster who had taken a voluntary lateral transfer to a position in Texas.

Just under $15 million of the home purchase funds money went to Headquarters and Area staff, which account for less than four thousand of the postal service’s 632,000 career employees. A similar amount went to postmasters and supervisors, who make up a much larger share, about 54,000 employees, of the workforce. Employees of the Inspection Service and the Office of the Inspector General, about 3,900 total staff. got $3.4 million in home purchase benefits, down from almost $7 million the prior year. Home purchase benefits for clerks, carriers and mail handlers came to just over three hundred thousand dollars.

SANCHEZ: Here’s another story we think is fascinating, so we’ve decided to not only cover it, we’ve decided to have some of our special investigations unit folks look into this case. There’s a good possibility something like this might make you a little bit irritated. Maybe even a little bit mad. Let’s start with a picture. Look at this house. This is a house that’s worth $1.2 million. Somebody who worked at the postal office lived in this house. So they wanted to relocate this guy. And they decided the only way they could relocate him is to buy his house from him and then they’d try to sell it so he can move somewhere else. That’s an indoor swimming pool, by the way. Guess how much his house cost? $1.2 million that they are taking on. In this economy.

Abbie Boudreau is joining us now from the SIU unit. Wow. It’s a sweet deal for him. Who wouldn’t want in this economy for someone to give him market value for this home. Since no one seems to be able to get it. Can you do us a favor? Pretend you’re a realtor. Take us through this thing. What kind of house is this, by the way?

ABBIE BOUDREAU, CNN CORRESPONDENT: It is an absolutely gorgeous house.

SANCHEZ: Let’s go to the videotape.

BOUDREAU: It’s $1.2 million. Five acres.

SANCHEZ: Look at this. Look at that picture. What’s with the lake?

BOUDREAU: It’s a lake front property. This neighborhood is isn’t where people go for summer homes. But there you can see the indoor swimming pool.

SANCHEZ: I’ve got one of those. Not.

BOUDREAU: Of course, we all do. No, it’s an absolutely gorgeous house. It’s about 30 minutes away from Columbia, South Carolina. And like I said, it’s five acres. You know, it was originally on the market for $2.9 million. And then it was reappraised by the U.S. Postal Service for $1.2 million. That’s what they purchased it for.

SANCHEZ: This is the U.S. Postal Service. It gets a little complicated when we try to explain it. They don’t get your taxes but they are commissioned to sell stamps, which we all have to buy, and then they take that money and do what it is they want with it. In this case buying and trying to sell a $1.2 million house. Shouldn’t they have a limit on how much they’re going to buy from their employees to relocate them? Doesn’t that make sense?

BOUDREAU: Now they do, as of two weeks ago when we called and talked to them and they told us, oh, yes, we’re having …

SANCHEZ: Well done.

BOUDREAU: I can’t take credit for that. But I will tell you, it’s a coincidence.

SANCHEZ: What’s the cap now.

BOUDREAU: The cap now is $1 million.

SANCHEZ: Still kind of high.

BOUDREAU: Well, it is, yes. It’s pretty high. Considering the Food and Drug Administration is capped at $330,000. But can I also add a little bit of how this works?

SANCHEZ: Yes.

BOUDREAU: USPS has a contract with the Cartus Relocation. That’s a government contractor. That’s how it works. Cartus actually deals with the details to buy and sell.

SANCHEZ: It’s not that you couldn’t understand like that might not happen in the past. Sometimes stories are good because they’re timely. In this economy, in these times, with Wall Street as we’re looking at it right now, pretty much flat, down almost 300 yesterday. You look at this and you go, it doesn’t make sense.

BOUDREAU: Are they going to be able to resell the house at this point?

SANCHEZ: Good luck. For $1.2 million in this economy? Who’s going to buy it.

BOUDREAU: Well, it’s the most expensive home purchase in a two county area in that region. Also, the Postal Service said we try to come out even. When we buy a house, we want to resell it and we want to come out even. We know that’s not the case. On average they lose about $58,000 per house. And of course that adds up.

SANCHEZ: Let us know. You’re going to follow up on this?

BOUDREAU: Absolutely.

SANCHEZ: We’ll keep checking back with you. I bet you it might be awhile. Just a hunch. Abbie Boudreau, thanks for being with us.

February employment figures filed by the US Postal Service show career staffing levels are down 4.4% from a year ago. The decline of 29,960 was across the board, affecting all employee categories. The largest decline was in the clerk craft, down 6.7% for a loss of 13,405 jobs. The smaller mailhandler craft suffered a loss of 3,144 jobs, or 5.5%. There were 10,337 fewer career city carriers, a drop of 4.8%.

Job categories which had shown increases in earlier periods also showed declines in the current report, with Headquarters shedding 4.7% of its positions, or 135 jobs, and the Office of the Inspector General losing 12, or 1%. Non-career transitional carrier jobs were down by 222 positions, or 1.5%. Rural carriers showed the smallest decline, down 137 jobs or 0.2%.

The Postal Service yesterday confirmed that the decline in mail volumes and revenue accelerated in January. Total mail volume was down 16.3% for the month, compared with an 11.0% drop for the fiscal year to date. The sharpest decline came in Standard Mail, down 22.3% compared with January 2008. First Class mail was down 10.8%.

Because of last May’s rate increase, the 16.3% drop in volume produced a revenue drop of 11.8%. That’s still considerably higher than the 7.8% decline for the fiscal year to date. More worrisome is the fact that total expenses have barely dropped since last year- they were down just 1.1% in January, and year to date. Employee work hours declined by 8% compared with last year, but employee salaries and benefits payments dropped by less than a percentage point. Expenses for City Carrier salaries actually increased 1.5%, while “Other” salaries, which includes maintenance, administrative and support personnel, increased by 3.7%.

The filing also confirms that the USPS year to date operating defecit stood at $1.1 billion at the end of January, with eight months still to come in the 2009 fiscal year.

(The postal service cautions that the data in the reports is unaudited and preliminary. In particular, the statistical methods used for estimating revenue, pieces and weight are designed to be valid on a quarterly rather than monthly basis.)

USPS Preliminary Financial Information (January 2009)

In a filing with the Postal Regulatory Commission this week, the USPS announced a $751 million net loss for the month of January, almost double the $384 million lost in the first three months of the fiscal year which began October 1, 2008. That puts the estimated year to date loss at over $1.1 billion with eight months still to go in the fiscal year. It also announced that mail volume in January was down 16% from January 2008. That seems to indicate that the drop in volume is accelerating, as volume in the first three months was down 9.3%.

The text of the 8K report:

The U.S. Postal Service (USPS) previously announced a loss for the quarter ending December 31, 2008, in an 8K filed on February 9, 2009. USPS discloses that its unaudited January 2009 financial results were an estimated $5.80 billion in revenue and $6.55 billion in expenses, resulting in an estimated net loss of $751 million. This loss compares to a loss of $44 million in January 2008, which resulted from total revenue of $6.58 billion and total expenses of $6.62 billion. Mail volumes declined by over 16% in January 2009 from January 2008. The January results continue to illustrate that the downward pressure on the Postal Service business continues into 2009.

From USPS Newsbreak:

As the national economy continues to decline, the Postal Service finds that it must continue rightsizing its workforce. Today reductions in authorized staffing levels were announced for the nine Area offices. This move follows a similar reduction at Headquarters and Headquarters-related offices which was announced last fall.

With this action, complement at Area Offices has been reduced – some vacant positions have been eliminated, while other occupied positions are impacted. Starting this week, employees occupying impacted positions will be notified and given information and guidance.

Starting February 24, a series of job postings will be opened to place qualified employees in vacant positions. Area employees interested in competing for these vacancies, impacted or not, are urged to create a profile now by accessing http://ecareer.usps.gov on LiteBlue. Some additional positions will become vacant as a result of regular and voluntary retirements.

Additional information will be communicated as it becomes available. Details also will be posted on the Organization Change Management website starting the week of February 2nd and updated on an ongoing basis.

When the the original salary increase for USPS CEO Jack Potter was revealed in January, thanks to a Freedom of Information Act request by Linn’s Stamp News, the Postal Service responded to criticism of the pay hikes by issuing a list of salaries paid to CEO’s of similar organizations:

The Postal Service also noted that pay of some corporate executives who manage companies with fewer employees than the Postal Service earn far more than Potter will earn. Proctor & Gamble chief executive A.G. Lafley, for example, earns $29 million a year.

It also noted the pay of the executives of two private delivery firms: Frederick W. Smith, CEO of Federal Express earns $8.67 million and Michael L. Eskew of United Parcel Service earns $3.1 million.

The Postal Service also compared Potter’s pay with that of other postal chiefs.

Deutsche Post pays Klaus Zumwinkel $4 million. Peter Baker of Netherlands TNT earns $2.94 million, and the United Kingdom’s Royal Mail pays Adam Crozier $1.57 million. Australia Post pays CEO Graeme John$1.89 million; New Zealand Post pays CEO John Allen $733,000; Japan Post pays its president Norio Kitamura $246,737; and Canada Post pays CEO Moya Greene $483,876.

Potter’s pay trails that of three other government created organizations. Freddie Mac’s Richard Syron is earning $11.47 million, and Fannie Mae’s Daniel Mudd earns $7.59 million. The Tennessee Valley Authority pays CEO Tom Kilgore $1.6 million.

So it is true, as Postcom.org notes, that the PMG’s pay “Sounds not unlike the kind of compensation given to many post CEOs around the world.” The problem is that by rewarding the PMG with a massive bonus while asking all of the line supervisors, postmasters, managers, and executives to forgo their much smaller performance based increases, the USPS sends the message that the PMG is the only person in the organization who made a contribution this year.

At a time when postal supervisors and postmasters are being asked to forgo their performance based salary increases, the Postal Service paid its Chief Executive Officer, Jack Potter, a performance bonus of $135,041, and other compensation that more than tripled his $263,575 salary. The information on bonuses for the PMG and other officers is included in the USPS 10K Report, filed with the Postal Regulatory Commission on Wednesday. The information on the PMG’s compensation package was noted earlier today on postalmag.com.

Because the Postmaster General’s pay is capped at the $263,575 figure, additional bonus payments are “deferred” until after the PMG leaves office, at which point the money will be paid to him over a ten year period. With this year’s bonuses, the PMG’s accumulated deferred compensation balance now stands at $593,648. The USPS also pays interest at the generous rate of 5% on the deferred payment balance. The $857,459 annual earnings figure is based on actual compensation received, plus the increase in the value of Potter’s deferred compensation balance and pension.

In addition to the deferred compensation, when the PMG retires, he will also be the beneficiary of a supplemental retirement fund worth $1,350,318. This fund is above and beyond the CSRS pension the PMG will be entitled to. The 10K report says that the added benefit is

… payable to Mr. Potter for his employment as Postmaster General for his attainment of required performance objectives over the six-year period from June 2001 – June 2007 and was not based on his years of service to the Postal Service. Since 2007, the Board has not continued the USPS Pension Benefit and has frozen the amount of that benefit. Instead, since that time, Mr. Potter has been eligible for a performance incentive each year if he meets required performance objectives. The above amount of USPS Pension Benefit will be paid to Mr. Potter in monthly installments during his lifetime after he leaves postal employment, with a survivor annuity equal to 55% of the amount payable to Mr. Potter.

On top of all that, the PMG is also entitled to severance pay:

…the Postmaster General is entitled to a monthly severance payment, which when added to his CSRS benefits and Postal Service pension benefit, will equal 1/12th of his annual salary at the date of the termination of his Postal Service employment. This benefit would continue for one year after the Postmaster General leaves his employment with the Postal Service. Had he terminated his employment as of September 30, 2008, the annual value of this benefit would have been $71,732. No other named executive officer may receive severance payments.

The USPS would also provide outplacement assistance to the PMG for up to two years if requested, and continue paying the full cost of his FEHB health insurance coverage for one year after he leaves the USPS.

The full text of the 10K report is available at the Postal regulatory Commission web site. The executive compensation section is available here.