US Postal Service 2014 Annual Report Download - page 55

2014 Report on Form 10-K United States Postal Service 51
Although cash increased from last year’s balance, the increase is largely attributable to the temporary exigent price increase on
Market-Dominant services implemented in January 2014. The Postal Service does not have sufficient cash balances to meet all
of its existing legal obligations, make reductions in debt and make important investments in its infrastructure. The Postal
Service’s cash balance was not sufficient to pay the legally mandated PSRHBF payments that were due totaling $22.4 billion as
of September 30, 2014. As of the date of this report the Postal Service has incurred no penalties or negative consequences
resulting from its inability to make these payments.
Annual capital expenditures have declined from approximately $2.7 billion in 2007 to approximately $781 million in 2014 to
conserve cash. The present level of capital expenditures is not sustainable. The Postal Service’s delivery fleet includes
approximately 140,000 vehicles that are at least 20 years old and nearing the end of their useful life. Repair and maintenance
costs for these vehicles have risen significantly in recent years. Some facilities maintenance has been deferred in recent years to
save cash and the backlog needs to be addressed. Investments in package sorting and handling equipment are needed to fully
capitalize on business opportunities in the growing package delivery market and other letter sorting equipment must be updated.
Further, the existing level of cash could be insufficient to support operations in the event of another significant downturn in the
U.S. economy. Absent legislative change, current projections indicate that the Postal Service will continue to have a low level of
liquidity throughout the foreseeable future.
The Postal Service incurred a net loss of $5.5 billion for the year ended September 30, 2014. The loss included $5.7 billion of
expense accrued for the legally mandated PSRHBF prefunding payment for retiree health benefits. The requirement of P.L. 109-
435 to prefund retiree health benefit obligations, a requirement not imposed on other federal agencies or private sector
businesses, the ongoing decline in First-Class Mail volume caused by changes in consumers’ and businesses’ uses of mail
resulting from the Great Recession and the continuing migration toward electronic communication and transactional
alternatives, have been major factors contributing to Postal Service losses. Without structural change to the Postal Service’s
business model, it will continue to be negatively impacted by these factors and, absent legislative change, it anticipates
continuing losses for the foreseeable future.
In addition to the requirement to prefund $5.7 billion of retiree health benefits for 2014, the Postal Service continues to pay its
employer share of health insurance premiums for Postal Service’s retirees, which was $3.0 billion in 2014. In the past eight
fiscal years, since the enactment of the Congressionally-mandated prefunding, the Postal Service has incurred $51.7 billion of
net losses, including $43.3 billion of expenses for prefunding retiree health benefits. Through 2014, the Postal Service has paid
$20.9 billion of cash into the PSRHBF for prefunding, plus an additional $17.1 billion that was transferred in 2007 from the
then-overfunded Civil Service Retirement System (“CSRS”) fund.
Additionally, the Postal Service’s liquidity could be challenged if the temporary exigent rates expire. Diversion of hard copy
mail continues to reduce revenue and the effects of contractually-granted inflation based cost of living adjustments (“COLAs”)
and general wage increases exert constant pressure on expenses.
In the event that circumstances leave the Postal Service with insufficient cash, it would be required to implement contingency
plans to ensure that mail deliveries continue. These measures may require the Postal Service to prioritize payments to its
employees and suppliers ahead of some payments to the Federal Government, as has been done in the past.
Postal Service Actions Taken to Improve Liquidity
In 2013, the Postal Service implemented a realignment of its operations to further reduce costs and strengthen its finances.
These operational realignments included reductions in the number of mail processing operations, realignment of retail office
hours to match demand, reductions in the number of delivery routes and consolidations of delivery offices. In June 2014, the
Postal Service announced that a second phase of mail processing realignments would begin in January 2015, culminating in a
consolidation impacting up to 82 more processing operations. Additionally, the Postal Service continues to leverage employee
attrition, Voluntary Early Retirement (“VER”) and utilization of non-career employees to the maximum extent permitted by its
labor contracts. In July 2014, the Postal Service offered a VER to approximately 3,000 postmasters who were impacted by
reductions in retail hours at certain postal facilities which was accepted by 1,380 postmasters.
The Postal Service continues to pursue strategies within its control to increase operational efficiency and to improve liquidity.
In April 2014, the Postal Service revised certain service standards for Standard Mail as part of an efficiency improvement effort