U.S. Postal Service to reduce workforce by 10,000 in 2015

[Psephos]

51. Sure. :)

Mail volume is currently dropping about 10% per year, and is down more than a third since its peak in 2006. There are about 30,000 post offices. Each has fixed costs that don't change very much regardless of how much mail (i.e., revenue) they process. So, fixed costs are not dropping nearly as fast as revenue, which means you have about 30,000 loss centers, and each will lose even more next year.

The trend will either continue or worsen. Why? Because first-class customers (that's you and me) now communicate by text or email, receive and pay our bills over the net, use Amazon Prime or ShopRunner for deliveries that used to go parcel post, and in general, prefer instant gratification (electronic) vs. delayed gratification (paper) in all our communications.

When fixed costs remain high while revenues plunge, you have the recipe for bankruptcy.

USPS is losing something like $25 million a day. USPS has about 600,000 active employees, making it one of the largest employers (second, I believe - ahead of companies like McDonalds, IBM, GE, Kroger, Yum Brands, etc.). USPS employees have very good benefits and pensions, including a pretty generous retiree medical benefit. Because of the large number of employees past and present, pension funding puts serious pressure on the bottom line. That's fine if the revenue stream is expanding, but a future disaster when it's falling. Pensions and benefits that were negotiated decades ago when no one was able to see the future of the business must still be paid, along with newer ones added to the obligation - but the pot of money to fund them is drying up. What good is a contractual promise if there's no money to back it up?

It's fashionable on this board to say the USPS's legal obligation to fund its pensions based on their Net Present Value is a political dirty trick, but I see it differently. First of all, the legislation was bipartisan, and passed during a lame-duck Congress after Democrats had already won control of both chambers for the coming session. Before the Postal Accountability and Enhancement Act of 2006 passed (in December), the Post Office was on a pay-as-you-go system. With rising liabilities and falling revenues, this was nothing more than a Ponzi scheme.

Henry Waxman was a co-sponsor of the bill. That speaks volumes.

Somehow there was an actual moment of clarity in Congress that the Post Office would default on its pension obligations if it didn't follow the accounting rules private companies are required to observe. They're called GAAP (Generally Accepted Accounting Principles), and one of the most fundamental is that if a company makes a contractual promise for a future expenditure (i.e., pension), that future promise has a discounted current cost to be applied against the current balance sheet. This NPV must appear as a liability, and be funded now (at a lesser amount, to reflect that the reserve will earn interest).

If a private company fails to do this, then it's liable for criminal sanction. When the government does it, you get California or Illinois, where there is no way they're going be able to pay the hundreds of billions they've promised their future retirees, or Detroit, which has already defaulted on its pensioners. In other words, Cal/Ill/Det SPENT the money they should have set aside for future obligations to pay CURRENT bills. Crack addicts use the same economic principle.

So, the USPS has the same problem the Big Three had in Detroit. The Big Three once ruled the industry, but more agile, efficient, and technologically superior competitors appeared, and took away market share. Think about the crap cars Detroit was pushing in the 80s and 90s, versus their Japanese competition. (Until the 2009 bailout of GM, it was *very* fashionable to bash Detroit cars here on this board, btw.) The Japanese cars were technologically superior, better-made, and unburdened by obsolete business models. The Big Three kept hemorrhaging market share, but their fixed costs remained almost static, due to their huge pension and benefit obligations. Less and less money could be invested in updating their product, improving their plants and R&D, and being more efficient, because more and more had to go into writing checks each month.

It's called overcapacity. When the Big Three had 80% market share, the formula worked. Their factories were churning. But when their market share was cut in half, with the same overburden of fixed costs remaining, it was only a matter of time before catastrophe. This is simple actuarial science, once you look at in economic rather than political terms.

In short, the USPS has overcapacity, high fixed costs, and an increasingly obsolete product it must sell at an ever-increasing price.

There are a number of good proposals about what a future Post Office should offer, and how it can adapt to this forever-changed technological business space. I saw a number of good, politically-neutral sources for ideas...so look around. Maybe we'll discuss some them in another post.

A pleasure meeting you, kristopher.