In a First, the PRC Releases a Special Report on USPS Finances
USPS's biggest assets are not for sale.
If the U.S. Postal Service were truly a free-market player in American business, it would most likely be in bankruptcy court about now, according to a detailed analysis of the Post Office's 2013 financial results released today by the Postal Regulatory Commission (PRC). For the first time, the Commission released its report separately from, and in advance of, its Annual Compliance Determination assessing postal rates and services.
“In response to the many concerns and questions regarding the financial position of the United States Postal Service, my colleagues and I have determined that our analysis…should be published separately to provide greater clarity, transparency, and accountability,” wrote PRC Chairman Ruth Goldway in an introductory letter to the report. “Without ready access to capital, the Service is constrained in its ability to invest in new products, technology, and operating systems that are necessary for its future success.”
Also for the first time, PRC accountants applied detailed financial analysis ratios to USPS balance sheets and used them to obtain an “Altman Z-Score,” a measure that financial analysts apply to publicly held companies to determine their probabilities of filing for bankruptcy. A Z-Score of 1.1 or less signals Chapter 11 for private businesses. The Postal Service registered a minus-5.0.
“This is the first time we've taken a hard look at the balance sheet. Most people look only at income statements, but a balance sheet is forever. It's a snapshot of a point in time that tells where the Postal Service is,” says Kevin Harle, manager of financial and service performance reporting at the PRC. “What assets do they have to pay liabilities? How do they finance their future? How can the Postal Service continue to operate efficiently?”
The answers to those questions are, “Not many,” “Ask Congress,” and “Who knows?” Take the ratio in which the USPS generated its lowest Z-Score, a minus-2.6 in retained earnings to assets. Just a few days ago at the National Postal Forum (NPF), Postmaster General Patrick Donohoe lamented that the Post Office had but 10 days of operating cash on hand. As for assets: Aside from the $334 billion in its retirement funds, whose contents are non-negotiable, the agency's biggest asset is its $17 billion in buildings and property, most of which are essential to continuing operations.
“If the Postal Service were a private company and had stockholder equity, its stock value would not be in the best of shape,” Harle says. “If you look back over the last 15 or 20 years, a lot of private companies took a hard look at what they owed in pensions and worked out new contracts with unions to get those liabilities off their balance sheets. The Postal Service can't do this.”
This doesn't mean that the Postal Service is likely to go away anytime soon, or at all. For starters, it's not a private business, but a government-run monopoly, and applying Wall Street–style debt ratios and financial scores to its results was an exercise performed by PRC in an attempt to measure USPS against commonly accepted criteria. Such ratios are only meritorious when compared against the ratios of like businesses, and there is no business in America quite like the Post Office.
Calculating the ratios did, however, affix a number to the most troubling situation the Postal Service finds itself in: its short-term obligation to pay about $5.6 billion a year into its retiree healthcare benefits [RHB] fund at a time when its business model is being sorely tested by changing market forces. The PRC's debt ratio analysis showed that the Postal Service's share of short-term liabilities in 2013 was 60%, an increase of 4% from the start of the fiscal year. The actual debt ratio was 2.8, as compared to a historic 10-year average value for the Post Office of 1.3—a far healthier number.
That 2.8 ratio is the number underlying Donohoe's other lament at NPF, that what the Postal Service needs most is a reform bill, and the sooner the better. Could passage of the Postal Reform Acts proposed in both the House and the Senate immediately lift the USPS's Z-Score into the positive range?
“Yes,” Harle says, “but it depends on how they would structure these liabilities. If they were to end the current payment schedule [into RHB] at 2010 and say the Postal Service didn't have to worry about '12, '13, or '14, that wipes $16.7 billion in liabilities off their books.”
But with mid-term elections due to consume large chunks of legislators' calendars in 2014, the best the Postal Service may be able to expect from them is a Standard Mail bonanza of campaign mailings. If nothing happens by June, postal reform will likely have to wait for the 114th Congress.