The U.S. Postal Service has defaulted on $5.6 billion in retiree health benefits, compounding its already tenuous financial position.
Postmaster General and Postal Service CEO Patrick Donahoe told a Senate committee on Sept. 19 that it would end up defaulting on this payment, which was due Sept. 30, because the agency needs comprehensive postal reform legislation.
The Postal Service is in poor financial health, with only $22 billion in assets and $62 billion in liabilities.
In his statement to the Senate committee, Donahoe said that the Postal Service has reached its statutory debt limit of $15 billion and that it held only 11 days’ worth of unrestricted cash to pay for daily operating expenses. He predicted that his agency would continue to have “dangerously low” levels of liquidity and said it would be unable to make the required $5.6 billion Retiree Health Benefits prefunding payment that was due by Sept. 30.
That amount is on top of a similar default the Postal Service made in 2012 of $11.1 billion.
The Postal Service is required to pre-fund retiree health benefits in the amount of $5.4 billion to $5.8 billion annually for 10 years ending in 2016. The payments were intended by Congress to fully fund retiree health benefits for 75 years. The Postal Service and its supporters have argued that the payments are dragging it toward insolvency, accounting for all but $9 billion of a $41 billion deficit.
“Our cash position will continue to worsen in October 2013, when the Postal Service is required to make its annual payment of approximately $1.4 billion to the Department of Labor for workers’ compensation expenses. By mid-October 2013, the Postal Service projects it will have a cash balance on hand of approximately five days of average daily expenses. For an organization the size of the Postal Service –which has revenues of $65 billion and a total workforce of approximately 490,000 career employees –that is a razor-thin margin,” Donahue told the lawmakers.
The Postal Service has seen seven consecutive quarters of net losses and has recorded losses in 16 of the last 18 quarters. The service continues to lose money because of significant declines in First-Class mail volumes.
“This financial condition, combined with continuing multibillion-dollar losses highlight the need for immediate legislative reform,” Donahue told the committee. “To be clear, the Postal Service does not have the authority or the tools to manage these massive obligations without comprehensive reform legislation.”
The Postal Service released its updated comprehensive Five-Year Business Plan in April, which included a proposal to eliminate $20 billion in annual costs in part by integrating its retirees with Medicare through a new USPS-sponsored health plan. It also proposed creating a defined contribution retirement plan for any employees hired in the future.