US Postal Service 2011 Annual Report Download - page 35

2011 Report on Form 10-K United States Postal Service - 33 -
MAJOR FACTORS LEADING TO PROJECTED
CASH SHORTFALL
The Postal Service had net losses of $5,067 million,
$8,505 million, and $3,794 million for the years ended
September 30, 2011, 2010, and 2009, respectively. Cash
flow from operations for these years was $494 million in
2011 and $1,573 million in 2009. Cash used by operations
was $3,292 million in 2010. However, without the
enactment of P.L. 111-68 in 2009, which reduced the
required PSRHBF prefunding payment from $5.4 billion to
$1.4 billion, and P.L. 112-33 in 2011, which changed the
date the $5.5 billion prefunding payment is due, the last
time that we would have had positive cash flow from
operations would have been five years ago, in 2006.
Since 2006, we have made approximately $38 billion of
prefunding payments to the PSRHBF. The $38 billion is
comprised of $21 billion of cash from postal borrowings,
and operations, plus $17 billion transferred from an
overfunding of our CSRS account with OPM. In 2012, we
are required to make $11.1 billion of prefunding
payments: the $5.5 billion payment originally due by
September 30, 2011, but deferred until not later than
November 18, 2011, plus the previously scheduled $5.6
billion payment due by September 30, 2012. To date, no
changes have been made to the $33.9 billion prepayment
schedule for 2012 to 2016 required by P.L. 109-435.
As noted in previous filings, Postal Service losses for the
past three years are attributable to a combination of the
declines in mail volume that began in 2008, the statutory
and regulatory provisions that have the effect of limiting
our ability to reduce costs and increase revenue, and the
statutory requirement to prefund retiree health benefits.
The declines in mail volume are primarily a result of the
economic recession that began in December 2007 and
the protracted economic weakness that has followed,
along with the acceleration of a long-term trend of hard-
copy correspondence and transactions migrating to
electronic media. Revenue in 2011 was $65.7 billion, a
$1.3 billion, or 2.0%, decrease from 2010 and almost $2.4
billion less than 2009.
Since peaking at 213.1 billion pieces in 2006, mail volume
has dropped 45.2 billion pieces, or 21.2%, to 167.9 billion
pieces in 2011, including reductions of 26 billion pieces in
2009, 6 billion pieces in 2010, and 3 billion pieces in 2011.
The decline in First-Class Mail volume, by 25 billion
pieces or 25% during that five-year period, has had a
particularly significant negative impact on the bottom line.
To compensate for the loss of one piece of First-Class
Mail, Standard Mail must increase by three pieces.
The volume that was lost to electronic alternatives, which
was accelerated by the recession, is not expected to
return because the movement constitutes a fundamental
and permanent change in mail use by households and
businesses. Moreover, unlike a private-sector business,
the Postal Service is restricted by law from taking certain
steps, such as entering new lines of business, that might
generate enough revenue to make up for the loss of First-
Class Mail volume. In short, there currently is no foreseen
revenue growth solution to our financial problem.
Forecasting in the current economic environment is
subject to significant uncertainties. Our operational plan
for 2012 anticipates a reduction in mail volume of
approximately 8 billion pieces from 2011 levels with an
associated drop in revenue of approximately $2 billion.
Because of economic uncertainty and other currently
unknown issues, it is possible that mail volume, and
therefore revenue, could decrease at a rate greater than
or less than this projection.
Compensation and benefits expenses represent
approximately 65% to 71% of total operating expenses.
However, when workers’ compensation and retiree health
benefits, including the legally mandated prefunding of the
retiree health benefits, are added, total personnel
expenses increase to approximately 77% to 80%.
Although many significant steps have been taken to
decrease compensation and benefits expenses in
response to declining mail volume, many of these
expenses remain fixed and beyond our control due to our
participation in federal programs. Contracts with postal
unions are negotiated for a fixed period of time, usually
three to five years. They cannot be modified during the
contract period except by mutual consent. Retirement
benefits are not determined by management but rather by
the federal government, and healthcare benefit costs
mandated by law or contract continue to rise well above
the rate of inflation. In addition, our ability to adjust our
workforce and network infrastructure is limited by
contractual, statutory, regulatory and political obstacles.
FUTURE CASH DEMANDS
By statute, the Postal Service is limited to an annual net
increase in debt of $3 billion, and total outstanding debt of
$15 billion. As of September 30, 2011, total outstanding
debt is $13 billion, leaving $2 billion of borrowing capacity
for future needs.
As noted above, the total 2012 required prefunding
payment for retiree health benefits to the PSRHBF is
$11.1 billion: $5.5 billion due by November 18, 2011, and
$5.6 billion due by September 30, 2012. In addition, we
have a cash payment scheduled for October 2012 of
approximately $1.3 billion to the DOL for the Postal
Service’s annual payment on its workers’ compensation
liability.
On June 24, 2011, as a result of the critically low liquidity
level projected for the end of 2011 and all of 2012, we
suspended our employer’s contributions to OPM for the
defined benefit portion of the FERS funding requirement.
OPM has determined that the Postal Service had a FERS