US Postal Service 2015 Annual Report Download - page 47

2015 Report on Form 10-K United States Postal Service 45
Mail Migration to Alternatives
A significant factor contributing to Postal Service losses is the ongoing decline in the volume of First-Class Mail, which
generates a higher percentage contribution than other classes of mail. This decline is largely the result of changes in consumers’
and businesses’ use of mail resulting from the continuing migration to electronic communication and transactional alternatives,
which was exacerbated by the Great Recession. This is compounded by the increase in the number of delivery points, which,
when combined with the impact of the reduction in hard-copy mail volume, has resulted in a drop in the average number of
pieces delivered per delivery point per day from approximately 5.5 pieces in 2007 to 3.8 pieces in 2015, a reduction of
approximately 31%.
Expiration of Exigent Surcharge
In December 2013, the PRC ruled that the Postal Service could collect a 4.3% exigent surcharge on Market-Dominant services
beginning in January 2014, until such time as the exigent surcharge produces $3.2 billion in incremental revenue, or $2.8
billion in contribution, a figure that the PRC determined was lost due to the Great Recession’s suppression of mail volume.
As of September 30, 2015, the Postal Service had collected an estimated $3.5 billion in incremental revenue from the surcharge.
The Postal Service appealed the PRC’s decision to the U.S. Court of Appeals for the District of Columbia Circuit (the “Court”),
arguing that the PRC attributed to the Great Recession far too little lost mail volume and that the exigent surcharge should
remain in effect indefinitely. In June 2015, the Court ruled on the appeal and remanded the case back to the PRC for further
review, primarily related to the PRC’s methodology for calculating mail volume lost due to the Great Recession. Although
the Court largely upheld the PRC’s analytical framework, it vacated one key aspect of the methodology for calculating mail
volume lost due to the Great Recession and suggested the PRC reconsider another element of its methodology.
On July 29, 2015, the PRC announced that it has authorized the Postal Service to collect an additional $1.4 billion in revenue
through the existing exigent surcharge, which now may remain in effect until it produces $4.6 billion in incremental revenue.
Because of this extension, the exigent surcharge is expected to remain in place until approximately April 2016. The Postal
Service has appealed one aspect of the PRC’s July 2015 decision, but that will not impact the Postal Service’s ability to collect
the additional $1.4 billion in revenue authorized by the PRC. Absent a successful appeal, when the exigent surcharge expires,
the prices of most Market-Dominant services will decline, which will have an adverse impact on the Postal Service’s future
operating revenue and liquidity.
Business Model Challenges/Constraints
The Postal Service continues to incur significant losses, largely due to the Postal Accountability and Enhancement Act of
2006, Public Law 109-435 (“PAEA”)-mandated Postal Service Retiree Health Benefits Fund (“PSRHBF”) prefunding
requirement. Such a requirement to prefund retiree healthcare obligations is not imposed on most other federal entities or
private-sector businesses that offer retiree health benefits. As of September 30, 2015, the Postal Service has accrued $28.1
billion of prefunding payments that were due but not paid since 2012 due to insufficient liquidity. As of the date of this report,
the Postal Service has not incurred any penalties or negative consequences as a result of not making the PSRHBF prefunding
payments. In addition to the prefunding requirement, the Postal Service continues to pay and expense the employer share of
health insurance premiums for its retirees, which was $3.1 billion, $3.0 billion and $2.8 billion for the years ended September 30,
2015, 2014 and 2013, respectively.
With the exception of the exigent surcharge discussed above, Market-Dominant services, which account for approximately
76% of the Postal Service’s annual operating revenues, are subject to a price cap based on the CPI-U. While the vast majority
of revenues are constrained by the price cap, costs are not statutorily constrained. Contractual obligations granting cost-of-
living adjustments (“COLA”) and general wage increases, and increases in costs for mandatory federal benefits programs,
such as retiree health and retirement benefits, have continued to escalate, thereby increasing expenses. Increases in retirement
costs and retiree health benefits, excluding FERS supplemental liability payment, added approximately $600 million to 2015
annual expenses. Although 2016 is the final year of statutorily-fixed amounts of prefunding payments, the statute requires
that OPM perform an actuarial valuation no later than 2017 to determine if additional payments into the PSRHBF are required,
and if so, OPM must design an amortization schedule under which the Postal Service must fully fund any remaining liability
by 2056.
Postal Service Actions Taken to Improve Liquidity
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