"From Cash Cow to Drained Cow"
"From Cash Cow to Drained Cow"
The 2006 law that indebted the USPS is even worse than you think.
At 4:35 a.m. on December 9, 2006, the 109th Congress adjourned "in a blaze of bickering," as the Miami Herald headline put it. But before cementing its place in history as one of the least productive legislative sessions in history, the Senate did manage to wedge through a bunch of bills which would soon get President George W. Bush's signature and become law. One of them, in the words of its sponsor Senator Susan Collins, "will ensure the continuation of universal postal service at an affordable rate." She went on to call it "great news."
But within a few years, it would be obvious to nearly everyone this law, called the Postal Accountability and Enhancement Act (PAEA), was killing the USPS. Today, there is virtually universal agreement among Democrats and Republicans alike that a key provision in that law, one that went virtually unmentioned at the time of its passage, was an historic oversight that saddled the USPS with tens of billions of unnecessary debt.
The PAEA's most important provision invented debt that, by any common or practical accounting method, the USPS didn't have. It then labeled this fabricated debt "unfunded liabilities," which makes it sound like the USPS had real debt it couldn't pay. So, the law forced the USPS to pay it, turning the made-up debt into money it actually owed. All of this was done under the guise of modernizing the post office for the 21st Century.
This little noticed rule in the PAEA was a classic case of the "starve the beast" small government ideology, in which withholding or removing funds from a public service makes it less effective, thereby justifying even further cuts. The PAEA made the USPS put billions of dollars a year into a low-interest yielding account managed by the federal government, essentially transferring wealth from the USPS—which is technically an independent agency—to the federal government. This wealth transfer simultaneously saddled the USPS with unnecessary debt making it harder for it to be an effective postal service and allowed republicans to say the USPS is a failing institution to spur additional cuts and reforms.
Although nearly everyone recognizes in retrospect this provision of the PAEA was bad for the post office, the rhetoric surrounding it in the years afterwards was hyper-partisan. And to some extent, it still is. Conservatives frame this provision as a good idea gone wrong because of the fiscal hit the USPS took during the Great Recession. Meanwhile, progressives believe it was intentional sabotage by the conservatives in their ultimate quest to privatize the post office.
But neither of those are the full story behind the PAEA. Instead, the more complete truth is the PAEA was a cover up. In fact, it wasn't the USPS that was in debt. It was the federal government that was in debt to the USPS. And the PAEA's entire purpose was to change that.
In November 2002, the Office of Personnel Management (OPM) discovered something that made "jaws drop" in the U.S. Treasury Department: the USPS had been quietly overpaying into its pension fund, which was held by the Treasury Department, for decades. Not by a little bit. But by a lot. In fact, the Treasury owed the USPS $71 billion (a subsequent USPS Inspector General investigation in 2010 found the overpayment to be $75 billion), roughly equivalent to an entire year of USPS revenue.
Because this is a newsletter and not an accounting textbook, I'm going to oversimplify here by quite a bit. There are reams of literature and decades of debates on this overpayment issue. Some studies have found the overpayment was less, others more. It actually turned out the USPS was potentially overpaying the pension fund in two different simultaneous ways, although OPM would later change its stance and argue USPS in fact wasn't overpaying its pension at all using logic many actuarial experts reject.
The pension issue stems from an incredibly mundane question: who is on the hook for the increased pension costs when USPS workers get raises? After USPS became an independent agency in 1971, USPS employees continued to be enrolled in government benefit programs, but the costs of those programs had to be split between the Treasury and the Feds, since prior to 1971 they were federal government workers and after 1971 they were USPS workers. Congress decided that, since it had no control over the raises workers got once USPS was its own thing, they shouldn't have to pay for the associated increased pension costs. Sounds fair enough, except the subsequent math used to calculate pension payments assumed no postal workers would ever have gotten raises had the post office remained a federal department. That obviously isn't how things work, skewed the books, and ended up putting far more of the pension bill on the USPS side of the ledger than the Treasury's.
As you can imagine, trying to calculate how much each side really owes is less a science than a combination of philosophy and art, resulting in many legitimate disagreements about how such things are calculated that I definitely won't get into here. For all the gloriously nerdy details, this Save the Post Office post is a great place to start.
But the upshot is, by any standard accounting practice or actuarial measure, the USPS way overpaid its pension fund. And, somehow, the Treasury and USPS had to settle the books.
And it had to be dealt with in a big way, because the Bush administration was running up a deficit even as it pretended to be fiscally conservative. It would require an act of Congress to lower the USPS's pension payments so the postal service could take advantage of the unexpected windfall. This, the Washington Post noted, "would result in the loss of a multibillion-dollar cash stream at a time when the White House and Congress face budget deficits." The Post quotes an anonymous Senate aide rhetorically asking "Do you need something to offset the change?"
In April 2003, five months after the pension windfall discovery, President Bush signed a law that appeared to fix this, but in reality punted it down the line by putting the USPS's pension payments into escrow to be dealt with later. The PAEA was when the punt landed.
At the same time this was all happening, a Presidential Commission on the future of the post office issued a wide-ranging report about the future of the USPS in the digital era. It reported, among other things, that the USPS had some $100 billion in financial liabilities, a massive and concerning number on its own. But the looming spectre of the internet and digitization threatened the post office's revenues, too, combining with its supposed debt to destroy the post office. Something would have to be done, both to "modernize" the post office and deal with that $100 billion in liabilities.
The largest chunk of that $100 billion number came in the form of some $48 billion for "Obligation for Retiree Health Care Benefits." That number came from a January 2003 letter from the Congressional Budget Office to Rep. Jim Nussle, which itself was about what would happen to the federal budget if Congress opened up the can of worms about how the USPS funds its pension and retirement programs. Among other things, the CBO study found lowering the USPS's pension payments could cost the federal budget "by as much as $10 billion to $15 billion over the 2003-2007 period and by as much as $36 billion to $41 billion over the 2003-2013 period."
By the time the punt landed, Congress had figured out a way to make sure that money would continue flowing from the USPS to the federal treasury. The law created the Retiree Health Benefits Fund (RHBF)—I'm sorry about all the acronyms, the USPS has so many of them it even has its own glossary—a new and separate fund under the Office of Personnel Management and therefore the federal government. And the USPS had to put a lot of money in this account. Some $5.5 billion per year, on average, for the next ten years. There it would sit and accrue low interest rates on US Treasury bonds, so the USPS could then tap the fund down the line to pay for the health care of its current and former employees.
While this may sound fiscally sound and perhaps even prudent, the problem is the debt is completely made up.
The logical flaw at the center of this budgetary chicanery is actually quite simple. Future health care costs, be it for employees or retirees, are just that: in the future. It's not money anyone owes anyone else any time soon. It's just a guess about what will happen. To put it right next to current expenses and revenues as if these are debts the USPS has is Einsteinian in bending the fabric of space-time. It is an accounting lie.
The analogy I often see presented—including in Save The Post Office's indispensable coverage over the years of the PAEA's impact on the USPS—is that of a mortgage. Imagine you took out a mortgage for $300,000 including interest over its 30-year life, working out that's $833 per month in payments (mortgages aren't that simple but for our purposes here it's fine). That does not mean you start budgeting your monthly finances as if you now owe $300,000. "Sorry honey, we can't afford to replace your car that keeps catching on fire," you would never say to your significant other, "because we have a $300,000 mortgage."
That's not how a mortgage works, because you're paying off the mortgage over 30 years, during which time you will earn an awful lot more money (hopefully) than you do every month. If you make, say, $65,000 a year, then $300,000 over 30 years is not that high of a debt burden, entirely manageable even if you encounter some short-term money woes. So, too, is $100 billion in USPS "debt" not that big a deal for an agency with annual revenues upwards of $70 billion and one that was actually making a profit in the early 2000s.
So not only is this not how mortgages work, It's also not how health care costs work. The proof of that is nobody else pays for health care costs like the Post Office now has to. Private companies and every level of government calculate health care costs on a pay-as-you-go basis, much like the family mortgage. You budget for what you owe every month/quarter/year, perhaps set aside a little extra for contingencies, and otherwise use money that keeps coming in to keep paying as you go.
The PAEA forced the USPS to be the exception to this generally accepted accounting practice. Rather than just continuing to pay its health care costs as it went like everybody else, the USPS now had to "prefund" its current and future retirees' health care to the tune of some $56.1 billion over 10 years. That's $56.1 billion it would no longer have to spend on investing in better equipment, fixing dilapidated post offices, paying more employees to do more work, or buying trucks that don't catch on fire, the exact kind of investments it would need to make to adapt to a rapidly changing business landscape, the problem the PAEA was supposedly trying to address.
As if this wasn't bad enough, something big happened afterwards, and I mean right afterwards. The ink on the PAEA was barely dry before the entire financial industry collapsed and the Great Recession hit, taking with it huge swaths of junk mail that pay the USPS's bills.
This reduction in mail volume was indeed nothing to sneeze at and did impact USPS's finances, just as virtually every business was hit hard by the recession. But the recession would largely be blamed for the USPS's financial problems for years to come, and to some extent still is today. But that's simply not accurate. All things considered, the USPS weathered the financial crisis pretty well compared to many other corporations. Except, of course, for one problem: the $5.5 billion it had to put aside every year for a completely made-up reason.
Source: Government Accountability Office. Note: this chart includes RHBF debt.
Starting in 2011, the USPS was in such dire financial straits it could no longer afford to put money into the RHBF without jeopardizing its main purpose of delivering mail. Either that or clever USPS lawyers discovered there is, in fact, no penalty for failing to put money into the RHBF. Either way, they stopped making payments. Overall, the USPS deposited $17.9 billion into the RHBF.
Even though the USPS cut and cut and cut to try and save money during these years, this was money the USPS couldn't spare. A pretty clear picture emerges after looking at the USPS's annual 10-K disclosure forms: the USPS would have been very close to profitability if not for these prefunding requirements and other less impactful financial chicanery from the PAEA.
Postal historian Philip Rubio, who has done far more extensive analysis of the numbers than me, concurs. "If you check the USPS figures for expenses v. revenue, and literature pertaining to same, since 2006, you will see a pattern: most years they finished in the black with a giant asterisk known as the RHBF prefunding mandate.*," he wrote via email. "Even 2007-2010 they covered the Great Recession and its aftermath, their surplus (some would call it profit) was $611M. Six of the nine years from 2010-2018 they also finished in the black each year. In 2006, the year the PAEA passed by a voice vote in Congress, they had almost a $1B surplus."
In other words, the USPS financial crisis is just as imaginary as its unfunded liabilities.
Today, Democrats in particular are quick to decry the PAEA with harsh words, calling it a "blunder" or "overly burdensome." But that's only true if you accept the premise the PAEA was a mistake. It wasn't. It's doing exactly what it was supposed to do. It's keeping the money flowing in the same direction it always has.
Over all, the PAEA was not a departure from how things used to be. It ensured things would continue as they had, with the USPS subsidizing the US government by billions of dollars every year. In 2012, former Postal Regulatory Commission chairman Ruth Goldway said "The Postal Service has been a kind of cash cow for the federal government for the last 40 years." Rubio, the postal historian, quipped that it is no longer the government's cash cow. Now, it's a drained cow.