Trump’s Postal Task Force Can Solve USPS’s Financial Woes Through Initial Public Offering
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Commentary

Trump’s Postal Task Force Can Solve USPS’s Financial Woes Through Initial Public Offering

Opening up USPS to competition and capital investment through an IPO is a great way to save taxpayer money and encourage innovation.

In April, President Trump established a task force through executive order to study the United States Post Office’s (USPS’s) operations and finances and to submit administrative and legislative reforms. Suffering from a net loss of $2.7 billion in 2017 and $65.1 billion since 2007, Trump’s task force aims to bring USPS financial stability.

The task force, headed up by Treasury Secretary Steve Mnuchin, Office of Personnel Management Director Jeff Pon and Office of Management and Budget Director Mick Mulvaney, will examine the package delivery market, universal service obligation, as well as the USPS’s general business model, universal service obligation, workforce, costs, pricing, declining mail volumes, and its impact in rural areas.

The task force’s recommendations concerning focus areas outlined in the order may yield reform proposals that lead to some financial improvements. To ultimately address USPS’s sinking finances, however, the task force should consider the model other countries successfully have pursued with their postal systems: privatization.

Many countries, including Germany, Britain, the Netherlands, Japan, Belgium, and France, have either corporatized their postal systems or fully privatized them and all still sustain the universal service obligation. The results demonstrate that privatizing the postal service is not only possible, but can yield positive results.    

Germany’s Deutsche Post was partially privatized in 2000 through an initial public offering (IPO). Investors applied for eight times the amount of shares available, demonstrating great interest in the investment opportunity. Currently, 79.4% of shares are traded publicly

Deutsche Post’s privatization success can be largely attributed to strategic partnerships and acquisitions. Deutsche Post’s 2002 acquisition of DHL—the pioneer in global express shipping with 71,000 employees worldwide—gave it access to an international network. It also acquired UK Mail in 2016 and further expanded its European cross-border parcel network. Also, in 2016, it partnered with DFS Deutsche Flugsicherung, Deutsche Telekom and RWTH Aachen University to launch a joint project with drones.

The United Kingdom has also successfully privatized its postal system Royal Mail (RM), also through an IPO. RM has invested $1.5 billion pounds since its 2013 privatization, involving a huge IT upgrade, which was a well-needed addition due to years of underinvestment under public ownership.

Following the successful path of Deutsche Post’s expansion of the parcel business, RM is expanding its parcel business—General Logistics Systems (GLS)—which is not bound by UK wage or regulatory pressures imposed by government mandates that stifle growth. RM was able to offset an expected 3% decline in letter revenues with a 4% increase from packages and a 10% increase from international logistics.

Japan Post has successfully privatized its postal service by breaking it up into separate companies for mail delivery, post office operations, insurance, and banking. Japan Post Service (mail delivery), Japan Post Network (post office operations) merged into Japan Post Co., Ltd. and is operated by Japan Post Holding Co. (JP Holdings), which has the two subsidiaries, Japan Post Bank (JPB) and Japan Post Insurance.

But Japan’s mail service privatization is a slightly flawed model that’s attributed to their postal banking arm. JP Holdings was partially privatized in 2015 and the government of Japan retains 57% ownership of JP Holdings, which in turn holds 74% of JPB. But unlike the European models, JPB has a record of keeping credit flowing to otherwise insolvent borrowers by lending below-market-rate loans to these enterprises referred to as “zombie companies.

These “zombies” can produce unfair competition for profitable companies because zombies could shed workers, lose market share and overall create congestion that discourages companies from entering and investing into the market. Not only could this happen if USPS has a banking arm, but a USPS postal banking regime could be a conduit for our elected officials to syphon money off to their crony supporters.

While Trump’s effort to have a task force assess USPS could potentially result in the financially self-sustaining European privatization model, instead it appears to parallel with his desire to blame Amazon for USPS’s financial situation, based on a history of criticisms toward the retail giant. The criticisms come from those who claim that USPS should be charging more per parcel delivery, not just for Amazon but for all its clients.

Trump’s secondary claim that USPS is costing taxpayers money stems from it receiving generous subsidies from taxpayers in the form of tax breaks and below market loans, which gives it an unfair advantage over its competitors. Altogether, these subsidies—along with a government-granted monopoly to deliver first-class mail to business and residential mailboxes—are worth at least $18 billion per year.

Amazon is not the cause of USPS’s financial woes. While it’s true that USPS could be charging more per package it delivers for Amazon to increase its revenue, according to a 2017 Government Accountability Office (GAO) report, USPS’s deteriorating financial condition is due to two factors: declining mail volume and growing expenses.

Declining mail volume fell from a high of 103.7 billion pieces in 2001 to 58.7 billion pieces in 2017, a decline of 43%, due to electronic alternatives.

USPS experienced a $3.1 billion increase in expenses from 2015 to 2016, which surpassed its $2.6 billion increase in revenues. Compensation and benefits increased by $1.2 billion due to salary increases and work hour growth, which are partially due to growth in shipping and packages that are more labor-intensive. Compensation and benefits comprise nearly 80% of USPS’s expenses.

It’s safe to assume that the huge liability in compensation and benefits is from when USPS had higher mail volumes, which required more employees and they still have pension obligations to all those retired USPS employees that will be collecting for quite some time.

Royal Mail’s example serves a good model for USPS to follow for dealing with postal pensions and retiree health benefits. RM separated from the Post Office network, which today is Post Office Ltd and operates as a separate business that is held in the public sector. A prerequisite to RM privatization was the removal of the liability of the large pension fund deficit. In 2012, the government transferred the historic liabilities around £40 billon at the time from RM’s pensions scheme to a new public sector scheme (the RM Statutory Pension Scheme), administered by the government.

When the government retains the pension debt to manage they can adjust employee pension schemes and health benefits accordingly. For example, the Office of Personal Management (OPM) administers the pension and health insurance benefits for postal retirees through the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS).

Currently, the OMP manages the calculations for future CSRS and FERS liabilities and recommends regulatory measures for implementing pension plans. It currently uses federal employee-wide workforce demographic assumptions such as mortality rates, age of retirement, and economic factors including inflation, wages, and earnings from invested assets to calculate USPS’s share of pension liabilities.

Furthermore, the OPM calculates the value of USPS’s retiree health benefits liability the same way it does the pension liabilities for federal employees, which is based on actuarial assumptions

However, a 2017 USPS Office of Inspector General report concluded that OPM should use “Postal-Service-specific demographic assumptions” that offer a more accurate estimate of retirement liabilities because of material differences between federal workforce and USPS demographic and economic assumptions.

For example, federal employees receive higher wages based on merit and promotions during their careers, while bargaining USPS employees pay scales peak in 12 to 13 years. Under the Postal-Service-specific demographic assumptions, the report projected $10.2 billion in liability reductions between CSRS ($3.8), FERS ($4.1), and retiree health benefits ($2.3).

USPS has options for how they can recalculate their pensions for their remaining employees. A buyout is another option that would enable the government to quickly offload pension obligations.

Under a private USPS operator, any new hired employees would be placed under a defined contribution plan versus a defined benefit plan. Privatization can also include a transition team to help current employees transition into other similar professions, along with incentive packages.

Others argue USPS would nearly break even if it weren’t for the 2006 Postal Accountability and Enhancement Act, which includes a mandate to prefund retiree health care 10 years in advance at around $5.6 billion a year. However, as the GAO report states, “USPS would have still lost $10.6 billion during this [10 year] time period even without the annual prefunding requirement.”

The GAO report also states that USPS will remain unlikely to fully make the required retiree health and pension payments in the future due to expiration of a temporary 4.3% “exigent” rate surcharge that’s reducing annual revenue by $2 billion. The USPS also has no new major cost savings initiatives planned in the future. Perhaps the task force can discover cost saving measures, but privatizing USPS would be the best option to address USPS’s insolvency. 

Postal privatization can be done successfully without creating a new government-owned bank that can make loans to borrowers that private sector lenders would deem too great a credit risk. Indeed, allowing such a bank to operate would certainly lead to further financial ruin for USPS when the risky borrowers default on their loans. The task force should keep this in mind in its evaluation process of USPS.

Let’s hope the Trump’s task force will consider postal privatization in light of other countries’ success. Opening up USPS to competition and capital investment through an IPO is a great way to save taxpayer money and encourage innovation, which, if done correctly, could transform the nearly 250 year-old institution into a profitable company that has the potential to reap the benefits of operating successfully as a private entity. 

Nicholas DeSimone was a research intern at Reason Foundation.