Q&A: Postal Service CFO Joe Corbett
The Postal Service recorded losses in the billions over the last two fiscal years and started off fiscal 2014 with a multi-million dollar quarterly loss.
The agency has repeatedly asked Congress to step in and remodel its financially burdensome healthcare costs and allow the agency more flexibility for pricing its products.
The Senate Homeland Security and Governmental Affairs Committee passed a bill Feb. 6 that would do both of those things and allow the Postal Service to move to five day delivery if mail delivery volume falls below 140 billion pieces annually.
FierceGovernment recently spoke with USPS Chief Financial Officer Joe Corbett about the future of the Postal Service.
FGOV: There was a loss in the first quarter of fiscal 2014, but it was significantly less than the same time in, the same period last year. Was there a major difference in those two quarters that accounted for that? Was there something that happened in the first quarter of fiscal 2013 that made the losses greater? Or were there things that you put in place that made that loss in fiscal 2014 less substantial?
Corbett: It's really a combination of things but we were able to grow the package revenue by 14 percent and that was a huge help. That improved revenue by about $350 million, so clearly that was the biggest driver of improvement. The expenses were also down nominally about a $100 million in terms of operating expenses.
We took a million work hours out. We were also a lot more efficient in terms of our use of labor and our average rate came down so we were able to save over a $100 million from that adjustment alone. Moving packages is a lot more labor intensive than moving mail and so to be able to decline your expenses in a period where your packages grew 14 percent was a pretty impressive job the operating people did. I can say that because I have nothing to do with it. They do it and I record it.
FGOV: You're talking about moving packages in a time when people are buying a lot more online. I assume your package volume has gone up quite significantly in the last few years. I don't know if there's a need for more package handlers or processors and also keep costs down. You said you cut work hours but yet package revenue went up. How is that reconciled?
Corbett: Well, we also had a decline in overall mail volume, which is a lot less labor intensive than package business. If you process a hundred million pieces of mail it's literally a blip. You won't even see it in our numbers, it's so small. But if you gain or lose a hundred million packages it's pretty significant. But we're making a lot of big investments in our package business to keep up and actually make sure we can continue to capture market growth.
We're in the process of putting all new handheld scanners in the field. At the end of the day there'll be 250,000 or so of those. They'll enable various new applications for us in terms of package redirect, package pick up, notification and communication with our mail carriers so they can do real time type of work.
FGOV: Related to packages but just in general too, what does the future look like for the partnerships with private industries? Is that something USPS is looking at as way to try to return to profitability?
Corbett: We have a number of different partnerships today, some of which get more press than others, but we're in cooperation with FedEx and UPS. We deliver a ton of their packages last mile. So they will drop at a delivery unit and we'll take them to the actual residence because we're more efficient at doing it than they are. We have smaller vehicles and a labor force in place. And at the same time FedEx and UPS fly a lot of our mail, primarily Priority Mail, and that's a very large contract with each of those.
Now we have a number of other partnerships. For example, the Amazon relationship we've been developing over time.
We meet with them on all fronts and continue to grow that business. What we do with Amazon we do under negotiated service agreements. We'll actually go out and understand each of our customers. We have hundreds of negotiated service agreements. Many of them with large customers.
We obviously have partnerships on the retail side, lots of partnerships. Most recently we've been getting a bit of negative press from our partnerships with Staples, which is interesting because we're selling basic mail and package services in Staples when the incumbent was UPS. So we're actually getting business that they had in a number of Staples and, assuming that all works out, we would hope to expand to and knock off the competition in a few other places.
Typically the post office is open 8 a.m. to 5 p.m. The more hours you can be open on current sites the better. You're going to get more revenue than you otherwise wouldn't if you didn't do it.
FGOV: And are there other retailers like Staples and Office Depot that you're looking?
Corbett: We have over 75,000 alternative places where postage can, at a minimum, be bought outside of our retail post offices. Obviously you've probably seen them in CVS and Giant Foods and a number of other retailers like Costco so we have a lot of partners who also help us on the retail end of it.
FGOV: The Senate Homeland Security and Governmental Affairs Committee just passed their version of the postal bill and I know that a lot of the costs with the Postal Service come from the advance payments into into retiree health benefits. With the way that the Senate bill addresses healthcare, creating a new category for postal service workers, is that something that you or the postal service in general is supporting? I've heard the Postmaster General Patrick Donahoe in several hearings say that there needs to be some help from Congress. That you guys can't do this by yourselves.
Corbett: We think the bill is a great step forward. It doesn't have everything we want in it, but what bill would?
It's very helpful and in particular in the area you mentioned, retiree health benefits. We currently spend twenty cents out of every dollar on healthcare. It's unbelievable – a large portion of our expenditure, $13 billion a year and growing. And what the bill allows us to do is what every other self-funded organization in America that we're aware of does – to integrate Medicare with the medical plan for retirees once they reach retirement age.What this bill does is mandate that that occur in the Postal Service.
Now it's interesting because there are three parts to Medicare - A, B and D. Roughly 80 percent of our retirees already elect Medicare A and B. But there are 20 percent that for a whole variety of reasons don't. But that 20 percent is incredibly expensive when you figure we're paying medical on 100 percent of their medical costs as opposed to having Medicare pay 80 percent and then us paying the remaining twenty. And so, the bill will allow us to save between $7 billion and $8 billion a year over the next four years in terms of what we otherwise would have paid.
And we're the second largest contributor to Medicare. We put in $27 billion [since USPS began making Medicare contributions in 1983] and so we ought to be taking money back out of Medicare and not funding it without health plans.
FGOV: And what else would you like to see in a bill if you had your wish list of things that would help the Postal Service? What are the things you would like to see?
Corbett: You know they've addressed a lot of our issues in the bill and it's good because I think both parties don't want to continue to come back to this issue. The one thing that we could use more of is flexibility. It's still a very inflexible business model in terms of sources of revenue. It's very restrictive today in terms of our ability to price our products and services.
The bill that's crafted in the Senate allows for the continuation of our recent pricing increase and then CPI increases going forward. Normal self-funded commercial entities have the ability to change pricing as necessary if there's a downturn or an up-turn. It's a strategic asset or capability to be able to do that and we can't. It's very prescriptive as to how we do it. Not only is it limited by CPI but it's prescriptive to each class of mail. So if we had more flexibility there then we could be even more certain of our ability to continue to be financially solvent going forward, because we'd have a better way to react to the market.
FGOV: When this bill was being debated in the committee, one of the big points was the ability to adjust rates as you see fit and my understanding of what came out was that after two years you'll be able to create your own pricing system, but it's contingent on the Postal Regulatory Commission approving that. Do you think the Postal Regulatory Commission should have the final say over pricing? Or do you think the Postal Service needs to have its own independent say?
Corbett: Oh, I would much prefer to have the ability for our board to determine prices. Our board determines the cost and the whole structure of the business model and what it is we do and don't do. To have one element of the overall levers you can pull as a business out of your control just reduces your flexibility to react to market, to grow or to get yourself out of a hole.
FGOV: So being about to create a new pricing system on your own in a few years, do you think there's going to be a hindrance to doing what you guys really want to do because the PRC has the final say on that?
Corbett: I don't know. I really don't. I'm hoping we can work together. I don't know what the situation is going to be in two years, either. What sort of changes we would like to make.
FGOV: Or even who's on the PRC.
Corbett: Yeah, but also what the economy looks like, what the mail flows look like. So it's hard to say, but I would hope we could sit down collaboratively and work out a system that gives as much flexibility as possible to react to the market dynamics going forward.
FGOV: For people who maybe don't know the situation of the Postal Service, what makes it so unique and different from every other agency? What are the challenges that you guys face that other agencies don't? Outside of just the appropriations process?
Corbett: Well, we are one of the largest commercial entities in the world and every day, throughout the entire country, operating a commercial business. The biggest difference, as you mentioned, is there's no appropriations. Clearly that's the big difference. The other difference is in the governance. The history of the Postal Service is interesting and it's one of the things that attracted me to come here.
It's a long time ago, but back in 1971, the Postal Service was the Post Office Agency. After 1971, it turned into what we are today, a special entity in the executive branch. But effectively, it's like a government-held corporation.
We don't report to a cabinet official, so it's supposed to minimize the influence you might otherwise get, and maximize fiduciary responsibility to the actual running of the Postal system.
We have managers who are responsible for running post offices in a commercial way now, and they're hired by the organization and not appointed. And since that time, on-time delivery rates - in the late 60s, early 70s - was about 74 percent of the time. Today it's 98 in most cases and higher in some cases. And that just sort of proves the model. When you take out political influence and the bureaucracy and let the Postal Service run as a separate entity with a separate board, it's just more efficient.
FGOV: I want to talk a little bit about modified delivery schedules. In the Senate bill there is a period where you can review, after a few years, whether or not you want to go to a five day delivery schedule over a six day.
Corbett: The way it actually came out is that if our total mail volume falls below 140 billion pieces on a four quarter rolling average, that's a trigger. When that happens we're able to go to five day delivery of mail, from six day delivery of mail.
FGOV: Would that be something that would automatically happen, or something that you guys discuss whether you want it to happen?
Corbett: I believe we are allowed to, not mandated to. But it cannot occur before the fourth quarter of 2017. Our current estimate is that we would not hit 140 billion pieces until after that, but you just never know with an economic downturn what might happen.
FGOV: What are your thoughts on the reduction to a five day delivery schedule? If your mail drops below 140 billion pieces is that just sound economics to drop to a five day schedule?
Corbett: Oh, yeah, I think so. There have been lots of polls that have been done, but somewhere in the 75 to 80 percent of people polled are perfectly fine with five day delivery. It's actually overwhelmingly supported by the American public and the economics are fine.
FGOV: And there would still be full package delivery?
Corbett: Yes. By then I would hope we're at seven day delivery for packages. We do deliver seven days today, but only Express Mail or overnight product. But I think the future really is to deliver packages seven days a week. And then who do you want to deliver your package if you can buy it on Friday and it's going to get there Saturday or Sunday versus waiting a couple days for the other deliverers to let it sit on the shelf.
FGOV: Is there anything upcoming that you want to talk about?
Corbett: There has been a tremendous amount of efficiency achieved over the past five years. When you talk about going from six-day mail delivery to five-day - if you do the math - it's a 17 percent reduction. But since 2006, if we were to hit 140 billion pieces, that will be a 34 percent reduction in mail volume. So if you're taking out 17 percent of your delivery for a 34 percent reduction in mail volume, we're still arguably behind the curb in terms of that. But at any rate, through 2013, over last seven fiscal years, we've reduced our career workforce by 200,000 employees. There are few entities in the world that have that many employees. And, we've been able to reduce that while maintaining delivery standards.
FGOV: Is the Post Office under a hiring freeze currently?
Corbett: No, we don't have a hiring freeze. We have self-imposed hiring freezes across a number of categories, but they're not mandated by the government.
For a couple of years we've had 200,000 letter carriers. In 2012, with a lot of people retiring, we only replaced seven. We had to just be more efficient in terms of our use of employees.
FGOV: I wanted to go back to the public-private partnerships with regard to the ones with Staples and like you mentioned there's been a lot of press about that and the unions are worried about them not being manned by Postal employees. I was just wondering what your response is to that.
Corbett: Our goals are to be as ubiquitous as possible. Like I said we have 75,000 places where postage is sold and continues to be sold and it's done in a quality way.
Our concerns over everything we do is to make sure that we maintain a high quality and so we monitor that wherever we go. And that's a concern if you're using a non-Postal employee. Because our employees are good. I mean they are very, very diligent. Most of them have been working for us for a long time and they understand the business quite well. So they're a great asset.
If we're going to do the Staples deals and other deals we contractually require that they be up to our standards. So as long as their hiring practices are sound and we can expand to more places and knock off competition like UPS, I think the Postal Service, including all of our employees, are better off. We're growing the top line, we're taking business from a competitor and we're seen by more and more Americans every day when they go in.
FGOV: With the possibility of the Senate bill, especially with the health benefit payments and also the stuff that you have been doing with efficiency, do you have a goal to get back to profitability? Like how long this could take? Is there any projection?
Corbett: If the Senate bill passes as the committee approved it in its current state, we would return to profitability in five years and be able to maintain our debts at near zero level. Obviously that's assuming we have a continued robust economy. So all things considered we would actually be in pretty good shape.
FGOV: In five years?
Corbett: Cumulatively for the five years we would have a profit and also we'd be able to pay down our debt which is currently $15 billion.
FGOV: And I assume the payments that you're making , the future retiree healthcare, that seems to be the big burden.
Corbett: Well you have to consider all of our costs. It's one element that this bill fixes. But it's a collection of things that would get us to return to profitability and not just that. As I said before, it'll be between $7 billion and $8 billion less of an expense per year on retiree health benefits. $5.7 billion of that will come from this required pre funding. In addition to that there will be savings with the overall health plans as a result of the Medicare integration. And so that's the most helpful element by far.
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