USPS attributes Q1 loss to reform

The U.S. Postal Service reported a fiscal year 2007 first-quarter loss of $2.7 billion due to the accelerated funding of retiree health benefits mandated by the postal reform law signed in December. The law requires the USPS to substantially fund its share of these benefits by 2017.

Operationally, the USPS otherwise would have achieved a net income of $1.2 billion, in line with its first-quarter financial plan. For FY 2007, the new law mandates $5.4 billion to be placed in the new Postal Service Retiree Health Benefits Fund. Thus, the relief from this year’s $3.3 billion planned escrow account payment and the reduction of $1.5 billion in Civil Service Retirement System payments must be applied to the fund. The net result is a shortfall of $600 million for FY 2007.

“It’s important to put this into perspective,” H. Glen Walker, chief financial officer, said in a statement. “Although this will have a multibillion-dollar impact on our reported financial results, the additional cash required is approximately $600 million.”

Revenue for the first quarter (ending Dec. 31, 2006) was $19.7 billion, up 6.4 percent over the first quarter last year. This was driven by a 2.3 percent rise in mail volume. Standard mail volume grew 4.9 percent. First Class volume was virtually flat versus the first quarter of the previous year.

The new postal law eliminates the escrow account previously required under Public Law 108-18 and reduces USPS payments into the CSRS. The $3 billion that the USPS placed in the escrow account in FY 2006 is now designated to fund retiree health benefits.

Generally Accepted Accounting Principles dictate the $3 billion be reported as an expense in the quarter in which the law was enacted. The USPS FY 2007 budget has a net income of $1.7 billion. With the enactment of the law, GAAP require the $3.0 billion FY 2006 escrow be reported as an expense. There is also a required $5.4 billion payment into PSRHBF, as well as $1.5 billion of reduced CSRS payments.

The result is a total additional expense of $6.9 billion. Therefore, the projected net loss for the USPS in FY 2007 is $5.2 billion. The new law has ongoing financial implications for the USPS.

As compared with the escalating escrow requirements of Public Law 108-18, the new law has a flattened 10-year payment requirement into the PSRHBF that ranges from $5.4 billion to $5.8 billion annually.

The USPS is required to comply with Section 404 of the Sarbanes-Oxley Act beginning in 2010; significant costs are expected with this new requirement. Additional costs, such as separating products and services into market-dominant and competitive components, are yet to be determined.

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