Postal employees did a yeoman’s job rallying to the unprecedented financial challenges, cutting costs by $2 billion, and eliminating more than 50 million work hours compared to the prior year, even though the delivery network grew by 1.2 million new homes and businesses. Employees made important progress in transitioning to a new business model established by the Postal Accountability and Enhancement Act (PAEA) and implementing long-term strategic initiatives to further automate mail processing and advance the ongoing transformation of the Postal Service. This performance is a credit to the focus, discipline, and flexibility of postal employees at all levels to conserve resources, improve business processes, and adjust operations to respond to rapidly changing demands.
Despite efforts that far exceeded targets for both work-hour reductions and cost savings, the Postal Service finished the year with a $2.8 billion loss. This includes $5.6 billion that we paid into the Postal Service Retirees Health Benefits Fund (PSRHBF), as required by the new postal law.
Based on past experience, we expect mail volumes to rebound at least modestly when economic conditions improve. Under current economic conditions, however, there remains significant risk of further declines in mail volume. Therefore, in view of the rapid, year-end business deterioration experienced in FY 2008 and forecasts for continued economic difficulty in 2009, we have prepared ever more aggressive strategies to lower costs, reduce the size of our workforce, and to adjust operations and resources. It will be difficult for the Postal Service to avoid further significant financial losses under current circumstances if present economic conditions persist or worsen. Extraordinary cost-saving efforts this year could not prevent a $2.8 billion loss and inflationary pressures will increase the challenge in fiscal year 2009.
As we look to 2009, the Postal Service is committed to doing its part to keep mailing prices at or below the rate of inflation and to fulfill its legislative mandate to operate as a business fully funded by the revenues it earns and not by tax subsides. To do so, the Postal Service must realize every efficiency available, particularly in realigning its infrastructure, and matching resources and staffing to demand. The support of all stakeholders will be needed to make these necessary changes.
In addition, it is time to reexamine the accelerated 10-year payment schedule mandated by the PAEA for funding retiree health benefits. The Postal Service continues to support the sound business goal of fully funding retiree health benefits. However, the sizeable accelerated yearly outlays required under the law are growing increasingly untenable in the current, unstable economic environment. In the last 18 months, we have contributed over $31 billion into the PSRHBF, either through direct payments or transfers from other over-funded obligations.
The average annual payment of $5.6 billion represents 7.5% of total operating revenues, and it exceeds the highest net income ever achieved by the Postal Service. In the best of times, the size of the payments would present a considerable financial challenge due to the rigorous payment schedule. Under current economic conditions — which were not foreseen last year, let alone when the PAEA was drafted and enacted — the current funding schedule all but guarantees that the Postal Service will record continued financial losses for the foreseeable future.
In congressional testimony last May, Inspector General David Williams suggested “indexing the payment to Postal Service revenue or economic factors, or extending the amortization period.” Whatever mechanism may be used, it is essential that we be given the financial flexibility needed to address the imminent challenges and to preserve the health and viability of the Postal Service, while also fulfilling our long-range obligations. It simply is not prudent to borrow today to fund a future obligation while incurring large financial losses. All of our current debt is a direct result of making these accelerated payments.
Postal employees can take pride and confidence in their achievements over the past year. Although we face unusually tough economic times, we also have faith in the resilience of the American economy and hope for improving conditions worldwide. We look forward to working with all stakeholders to ensure our mutual success and the quickest possible return to profitable growth and success.
H. Glen Walker
Chief Financial Officer and
Executive Vice President