US Postal Service 2011 Annual Report Download - page 44

2011 Report on Form 10-K United States Postal Service - 42 -
is expected to remain flat and volume is expected to
decline.
Periodicals volume and revenue are also projected to
decrease in 2012, which represents the continuation of a
long-term trend.
Shipping Services are the bright spot in the 2012 outlook,
as volumes and revenues are expected to increase. This
entire group is influenced by competitors’ prices, which
often include fuel surcharges, and by our own advertising
and promotional initiatives. Unfortunately, Shipping
Services, by themselves, do not represent a sufficiently
large portion of our business to offset revenue declines in
other areas.
EXPENSE OUTLOOK
Total expenses for 2012, excluding retiree health benefits,
are expected to decrease by $900 million, as we prepare
to begin the most aggressive cost-reduction program in
the history of the Postal Service. The Network
Optimization initiative, when completed, is expected to
reduce the number of mail processing locations by nearly
250. As part of this initiative, we are proposing a
substantially nationwide relaxation of market-dominant
service standards, which requires that we request a
nonbinding advisory opinion from the PRC. We expect to
file a request for a nonbinding advisory opinion in
December 2011. We hope to begin consolidations of
facilities and transportation routes in spring 2012. This
initiative has the potential to reduce employee
complement by up to 35,000 positions. We are projecting
up to $3 billion in cost savings from this initiative, with the
majority of the savings occurring in 2013 and 2014.
In addition, we are studying 3,600 low-activity Post Offices
for possible closure or consolidation. Delivery-route
optimization initiatives, initiated in 2011, will continue in
2012. Overall, in 2012, we are projecting that we will use
over 50 million fewer work hours than in 2011.
A continuing challenge that must be overcome in order to
achieve these work-hour savings targets will be our ability
to reduce employee complement rapidly enough to fully
capture the savings opportunities generated by these
initiatives. Our contracts with our labor unions greatly
restrict our ability to use layoffs and reductions in force
(RIFs) to right-size our labor force. Because we lack the
ability to utilize the RIF provisions generally applicable to
the federal competitive service, and our layoff authority is
constrained by collective bargaining agreements, our
ability to reduce the workforce is largely limited to relying
on attrition, reassigning employees to other facilities and
crafts, and offering incentives to leave the organization.
The limitations on our labor flexibility adversely affect our
ability to immediately achieve cost savings and financial
solvency.
Two overriding issues affecting our financial projections
for 2012 and beyond are the retiree health benefits
prefunding payments and the FERS overfunding. Under
current law, we are required to contribute $11.1 billion to
the PSRHBF in 2012 to prefund retiree health benefits, a
funding obligation that is simply impossible for us to meet.
We have determined that the Postal Service would be
best able to meet its obligation to provide health benefits
to its retirees and fulfill the prefunding mandate of P.L.
109-435 by sponsoring a separate Postal Service health
plan in which retiree benefits would be fully integrated with
Medicare. We have requested that Congress grant us the
authority to establish such a long-term plan.
Likewise, the ability to immediately access our FERS
surplus, which has accumulated over many years, is an
essential underpinning to our short-term financial
solvency. We need a full refund of this overpayment to
ensure that we will have sufficient liquidity to fund
operations (excluding PSRHBF prefunding) beyond year-
end 2012.
Despite the fact that we have currently overfunded our
obligation to the FERS retirement program, in 2012 the
Postal Service will be required to increase the employer’s
share of contributions for employees under FERS to
11.9%. This will add approximately $50 million to 2012
compensation and benefit expenses.
In addition, we are currently negotiating new contracts
with the NALC and NPMHU because current agreements
expire on November 20, 2011. Contract negotiations with
the NRLCA have reached an impasse and have moved to
arbitration. Arbitration hearings are scheduled to begin
December 5, 2011. The financial impact of the new labor
contracts cannot be determined at this time.
We have also requested from Congress the authority to
determine the number of delivery days that are necessary
to fulfill our universal service mandate. Eliminating
Saturday delivery presents the opportunity to achieve an
additional $3 billion in annual savings, beginning the first
year after full implementation.
It should be noted that the outlook for non-cash expenses
for workers’ compensation cannot be predicted because
these changes are largely dependent on the level of
interest rates. A 1% increase or decrease in interest rates
could decrease or increase workers’ compensation
expense by over $1 billion.
In summary, economic, legislative, and regulatory
developments in 2012 will have a great impact on the
short- and long-term financial outlook for the Postal
Service. The net impact of these developments may
exceed those of the initiatives over which management
has complete control.