Why the US Postal Service is concerned with future liquidity

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In August 2010, the U.S. Postal Service announced its fiscal returns for the third quarter as well as its projections for the upcoming year. In its announcement, the Postal Service confessed that it was concerned with future liquidity because of its legal obligations to fund health care needs of its employees several years in advance, combined with losses due to declining mail. Indeed, in the last quarter, the postal service already lost $3.5 billion.



Officially, the USPS is a government independent agency rather than a government-owned corporation, with a board almost entirely filled by Presidential appointments. Nevertheless, in its regular operations it functions more or less as a corporation does, taking in payments for its mail services and attempting to break even by doing so. In this capacity the postal service employees more people than every other corporation in America except Wal-Mart. Nearly half of all mail in the world passes through a USPS facility. It holds a legal monopoly and a legal obligation (the so-called universal service obligation) on providing letter mail to mailboxes across the country, at fixed prices, for all American residents. This does not extend to all carriage or delivery of packages to individual or corporate recipients (as opposed to mailboxes), however, and private couriers do specialize in providing more rapid service.

Despite its size, however, the USPS has had difficulty making money. In its August quarterly report, it admitted to losses of $3.5 billion over the past three months, over and above revenue of $16 billion. The loss was not new: the USPS has only broken even in two quarters in the last four years. This is mostly due to the massive decline in postage following increases in digital communication. Overall mail levels fell 13% during the credit crisis, and continue to fall by 1.7% year-over-year. The USPS is now attempting to recoup some of the losses through stamp price increases and a proposal to eliminate Saturday service.

Technically, however, these losses are only contributing factors to what the USPS refers to as its liquidity problem. Liquidity refers to the ability of a corporation or agency (or individual, for that matter) to make debt payments with cash and other assets can be immediately used to make payments. When the USPS says it is concerned with future liquidity, what it means that it is concerned it will not have the cash on hand to make upcoming payments. In September, the USPS is due to put $5.5 billion into the future health benefits account for retired postal workers. This prefunding obligation is stipulated under American law and requires that the USPS make these annual payments through 2016.

The USPS can make the September payment, but according to chief financial officer Joseph Corbett, once it has done so, "we will not be able to pay all 2011 obligations." How it will make up for its cash shortage is uncertain; if losses continue at current rates, the stamp price increase will not be enough to erase more than a fraction of the losses.

Still, in accounting terms, liquidity is different than being bankrupt. On paper, the USPS is a considerably wealthy organization, with a massive pool of assets: offices, mail handling facilities, one of the largest vehicle fleets in the world, and so on. In practice, however, thanks to service obligations and political limitations, much of this pool of assets cannot actually be sold off to raise cash. This is why the USPS refers to a liquidity problem: it is far from broke financially, but it does not have assets which can be converted into cash fast enough to meet its upcoming obligations.

In the private sector, liquidity shortages can be major crises, especially for banks. A corporation which cannot find the cash to make loan payments, for instance, may default on its loans despite theoretically having more than enough assets to cover the shortage. If it defaults, its creditors may call in the rest of their loans - an amount high enough that the corporation will not be able to pay, and then collapses into bankruptcy. The USPS is a government agency and so cannot go bankrupt. However, if it falls short of cash to meet its payments, it may have to either receive a bailout or sell off offices or vehicles (or both), resulting in service cuts. In the current political environment, both a bailout and a liquidation of assets would probably be poorly received in Congress and by the public.