My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

US Postal Service (and Absentee Ballots)

Updated: Nov 18, 2020

The United States Postal Service (“USPS”) has received a lot of press over the last several months due to the restructuring steps proposed by the Postmaster General of the United States, Louis DeJoy. Mr DeJoy is following in the distinguished footsteps of a number of former Postmaster Generals, starting with Benjamin Franklin in 1775. Mr DeJoy, one of the very few Postmaster Generals hired from outside of the USPS, wasted no time in recommending a series of steps to streamline the USPS when he assumed his new position in June 2020, but the fact that this occurred concurrently with an expected mass migration towards absentee voting in the US, necessary because of CV19, has been highly controversial. As a long-time Republican supporter and donor to the GOP, his recommendations regarding the USPS were highly inflammatory to an already deeply-divided Congress and certainly ruffled partisan feathers.

This is not the first time that that the Trump Administration has rebuked the USPS. Early in his Administration, President Trump – long an adversary of Jeff Bezos, founder and CEO of Amazon and owner of The Washington Post – blamed the lack of profitability of the USPS on the supposedly “sweetheart deal” provided to Amazon. In reality, this simply is not true. According to American Oversight (see Business Insider France), Amazon accounted for $3.9 billion of USPS revenues (5.5% of total USPS revenues) in FY2019, and $1.6 billion of badly needed profit (USPS had a loss of $8.8 billion in FY2019). The USPS delivered 1.54 billion packages for Amazon, accounting for 30% of Amazon’s total deliveries. As with the current discussion over mail-in ballots, it was the timing and context of those complaints that raised issues about other political objectives of this Administration, unfortunately distracting from the hard reality that the USPS most certainly does need to be reformed. In other words, As a result, I thought it would be interesting to take a look at the USPS and its operations today.

The USPS

There is a long history and plenty of information on the USPS, both on its own website and on Wikipedia. Rather than regurgitating the long but interesting history of the USPS, let me present some of the more salient facts that I thought you might find interesting, most of which came from the USPS’s FY2019 Annual Report to Congress.

  • The USPS is a federal agency (of the Executive Branch) with 496,934 permanent employees and around 630,000 employees in all.

  • Its universal mandate is to provide postal service to everyone in the US, serving “rural areas, communities, and small towns where Post Offices are not financially self-sustaining.” (p. 8 of FY2019 Annual Report to Congress).

  • The USPS handled 142.6 billion pieces of mail in FY2019 (y/e Sept 30th, 2019) and covers around 160 million delivery points throughout the US. It owns 204,274 mail delivery trucks and manages 31,322 branches and service points in the United States (and another 3,300 contracted points).

  • According to Pew Research Center, the USPS has the highest approval rating – 91% - of any US federal agency. As a comparison, the Federal Reserve has only a 69% approval rating.

  • Of its $71.3 billion of revenues in FY2019: $24.4 billion (34.3%) came from first-class letters, $22.8 billion (32%) came from shipping & packages; $16.4 billion (22.9%) came from direct marketing; and the balance ($7.7 billion, 10.9%) came from other things like international mail.

  • As far as trends, volumes of first-class mail have decreased 33.6% over the last decade. Both volumes of direct marketing materials and periodicals have also been gradually decreasing. Shipping & packages have been the bright spot for USPS, with this highly-profitable segment accounting for only 4.3% of volumes but 32% of revenues in FY2019. Importantly, the price of first class stamps can only be increased by the rate of inflation, whilst parcels and packages can be priced competitively by the USPS, leading to the very material difference in profitability of first-class post vs shipping & packages.

  • The USPS lost $8.8 billion in its FY2019. For the first three quarters of FY2020 (ended June 30, 2020), the USPS lost $7.5 billion, compared to a loss of $5.9 billion in the same period of FY2019. The USPS has not had a profit since 2006 (see next point which is relevant for this), and since then has made cumulative losses of $85.3 billion.

  • Unfunded retiree health benefits and unfunded pension obligations collectively amounted to $10.8 billion in operating expenses for FY2019, which pushed USPS to a loss. Expensing and accruing unfunded pension obligations is required by US GAAP, and all companies under US GAAP account for their unfunded pension plans accordingly. However, the accrual and expensing of unfunded retiree health benefits, which started in 2006 for USPS with the passage of the Postal Accountability and Enhancement Act (“PAEA” Act”), is unique to USPS. I understand that no other US federal agency and few US private sector companies account for retiree health benefits in this way, instead simply expensing the actual cost each year as it occurs (i.e. “pay as you go”). There is a complicated history as to why the PAEA Act of 2006 was put in place, but I will leave this for the reader to research if interested. Suffice it to say that USPS was forced to expense and set aside funding for future retiree healthcare costs for the period 2007-2016. This provision has pushed USPS into a net loss every year since it was adopted, and in fact, USPS stopped funding the pool in 2012 and has essentially been in default for these payments since then, obtaining a waiver from Congress each year. I prepared the table below to show that – aside from FY2019 –the USPS is normally profitable on a pro forma basis at the operating profit line before this highly unusual expense, and as you will see from the discussion further below, is also routinely cash flow positive.

  • An article in the Institute for Policy Studies – “How Congress Manufactured a Postal Crisis – And How to Fix It” (July 2019, updated February 2020) – contains a good summary of the issue, as well as suggestions as to how it might be fixed.

  • As mentioned already, in spite of bottom-line losses which have been significant and recurring since 2006, the USPS has been cash flow break-even to slightly positive each year meaning that – at least until the pandemic – the USPS was essentially self-funding, not relying on taxpayer money or any funding from the federal government. You can see this in the table below, covering the last three fiscal years and the interim nine month periods for FY2019 and FY2020.

  • Although USPS had negative net worth of $79 billion at June 30, 2020 (reflecting years of losses), it had cash on hand of $12.9 billion.

  • In spite of its bottom-line losses but operating cash flow break-even (more or less), the USPS obtained assistance during the pandemic due to a decline in first-class mail and advertising mail that was not sufficiently offset by increases in parcels and posts. On July 29th, 2020, the US Department of Treasury announced that it would make a $10 billion loan available to the USPS if needed pursuant to the CARES Act, necessary to avoid a liquidity crisis in 2Q2021 based on the current trajectory of the business. I believe that the concerns are indeed more related to USPS’s weak balance sheet causing a liquidity crisis rather than ongoing bottom-line losses.

  • ·It is important to mention that as an employer, the USPS employs one of the most diverse workforces of any company in the US, including disproportionate (compared to other employers) percentages of Blacks, Hispanics, women and veterans, for example.

  • Unlike some of the other postal systems I will mention briefly below, USPS is not involved in other services like international logistics or banking & insurance. The USPS has honoured its mandate completely as a federal agency and has not acquired other companies laterally in the US or abroad to expand its business or make it a more efficient operator with greater scale. The company has stuck strictly to its mission of ensuring that every person in the US can send and receive first-class letters six days per week.

I believe that the economics of the USPS are poor for several reasons even factoring in the bizarre accounting required under the PAEA Act of 2006. The mounting deterioration in the underlying business over time has been caused by a shift in business mix, worsened by a bloated cost structure, an overly broad mandate and the inflation cap on first class postage stamps. No presidential administration or Congress (political party aside) has been able to suggest and pass legislation to put USPS on a firmer footing. Mr DeJoy has suggested several things to improve the efficiency of the USPS. Although the timing of these recommendations, with a pending Presidential election in which postal votes will play a large role, might appear suspicious on the surface, I am not entirely convinced this is Mr DeJoy’s intention in spite of his obvious “ties” to the GOP. There are clearly some post-election steps that Mr DeJoy and the next administration, regardless of party, should take to improve the efficiency of USPS and bring it into the 21st century. Here are some ideas.

  • The USPS is required to deliver post to every person in the U.S., regardless of how much it costs to deliver the post and therefore irrespective of the economics of providing this service. For example, you can imagine the costs associated with delivering post remotely in very rural areas. The scope of USPS’s mandate should be revisited in this respect, putting things on the table like cost-pricing for the delivery and collection of post to the door of people located in very rural areas, or less frequent delivery of letter post to rural locations.

  • The USPS can only increase the cost of its stamps for letters in line with inflation, meaning that over time, the cost of stamps has not kept up with the costs of collecting, processing and delivering letters. The “cost” of this cap on prices for the USPS has been worsened by the steady decline in the posting of physical letters for many years with a less robust decrease in the cost base. To provide some context, the table to the

right compares the cost of sending a first-class letter in the US to the cost of sending a first-class letter in other countries:

  • The USPS should be allowed to adjust the cost of first class post as it does in its competitive business segments, like shipping & packages, which – in spite of the competition – are much more profitable businesses because the pricing aligns better with costs.

  • The well-documented structural trends following the advent and growth of email as a delivery mechanism have been reducing the need for and use of physical post for many years now, accelerating the shift in business mix of the USPS and all global postal services towards packages & parcels and away from letters.

  • The increasing use of electronic payments via direct transfers / debits has further reduced the need for vendors – especially utilities, cable companies, streaming companies, etc. – to rely on physical post to invoice customers and receive checks in the mail.

  • Some countries, as you will read below, have privatised all or portions of their postal services. This would be a difficult endeavour for the USPS. It would not be impossible but probably is too big of a step, and in any event is certainly not a good idea until the issues regarding its cost structure and profitability are cleaned up.

The USPS is undoubtedly bloated and needs to rationalise its business generally and narrow its focus, redirecting resources from shrinking legacy businesses and diverting investment to faster growing businesses that properly reflect where the opportunity is at the moment. These steps would enable the business to be stabilised, and then it could be reoriented towards a profitable – or at least break-even – business based on its current mandate. Mr DeJoy’s opening remarks to the USPS Board of Governors at the August 7th meeting provide an excellent overview of his ideas, as well as a rebuttal to claims of his partisan approach to reforming the USPS. There have been discussions for many years in fact about privatising the USPS in order to force the organisation to improve its efficiency, but now it not the time or place for this to be taken seriously.

How does the postal service work in other countries?

The postal services in some countries have been privatised and are listed, whilst others – similar to USPS – remain government-owned. However, even countries in which the postal services remain state-owned have been allowed, even encouraged, to broaden their horizons to invest in more competitive businesses with faster growth, e.g. international logistics. Let’s look at how a few of these other systems work, including the postal services in the U.K., France, Germany and Canada. All of these postal services face similar pressures to those facing the USPS, especially with respect to letter delivery and frequency / scope of deliveries. What steps have the postal services in other countries done to improve their profitability over time?

United Kingdom: The UK postal service, provided via Royal Mail, dates its roots back to the early 1500’s. The postal service in the U.K. is different than in the U.S. in that the business is essentially split into two parts: Royal Mail plc handles the collection from mail boxes, the transportation and the delivery of mail; and Post Office operates the local post office branch system throughout the UK.

Royal Mail plc (“Royal Mail”), a publicly-listed FTSE 250 company (RMG:L), handles the collection of post and parcels from mailboxes, as well as the delivery, processing and transportation of post and parcels (via “Parcelforce”) domestically and abroad. It also owns an international logistics business, General Logistics Systems (“GLS”), which operates in 40 countries and is focused on international post and parcels. Royal Mail has 48,500 vehicles and operates 37 mail centres, collecting and delivering mail six days/week from 11,200 points. Royal Mail, including GLS, has 160,000 employees in the UK and abroad. In 2011, Royal Mail was separated from Post Office Ltd (see next paragraph), which remains state-owned. Royal Mail was listed in 2013, and since then, the government has fully divested all of its shares in the company. Royal Mail is profitable and highly liquid. You can find the company’s latest financial results for the year ended March 29th 2020 here. (I only scanned the 104 page report but it is very thorough and informative, especially with respect to the effect of CV19 on its business.) As of October 16, 2020, Royal Mail had a market cap of around £2.4 billion ($3.2 billion equivalent). According to their 2019-20 Annual Report, Royal Mail earned £7.7 billion (71% of revenues) from letters (volumes down 8%) and parcels (volumes up 2%), and £3.2 billion (29% of revenues) from GLS, its global logistics business (volumes up 5% pro forma and operating profit up 17.5%).

Post Office, a government-owned limited company, has 11,500 branches throughout the UK, of which 11,200 are franchised or agency-run. The remaining 300 are owned and operated by Post Office itself. Via its branch network, Post Office provides stamps (on a commission basis via Royal Mail), banking services (e.g. loans, deposit accounts and mortgages), insurance, telephone & internet services, travel insurance, foreign currency, etc. Post Office views itself as a public function, with 99.7% of the UK population being located within 3 miles of a branch office. Just over one-third of the branches are open 7 days/week. The company is marginally profitable, generating £972 million in revenue and £60 million in trading profit in the fiscal year 2018/19, an improvement over the prior year. You can find the latest financial results here. The company, with the support of the government, has invested substantially in modernising its retail branch network over the last few years.

In conclusion, the UK has two entities which handle post, with Royal Mail handling all of the logistics of postal delivery in the UK, as well as international post via an international logistics business. Post Office is government-owned, and essentially operates and manages the post office branch system in the UK; it is also involved in several other businesses domestically, including insurance, banking and telephony.

France: All communications services, including post and telephone service, were handled under one public monopoly in France until January 1, 1991, when France Telecom (telephony) and Le Groupe La Poste (mail, “La Poste”) were split. Whilst France Telecom was eventually privatised, La Poste remains state-owned. La Poste has 215,219 employees, operates 17,100 retail outlets throughout the country, and is present in 44 countries. La Poste operates the retail branch network throughout France, but also operates the supporting post, packages & parcels logistics business, offers banking and insurance services (La Banque Postale), and owns an international express delivery & logistics business (Geopost), amongst other businesses. Competitors were allowed to enter the market in 2005. The company has seen its traditional postal services decline, similar to others, but has been growing successfully in banking and insurance, and in its international logistics and parcel delivery businesses. It has also expanded aggressively internationally and is developing a digital platform. Of its €26 billion in revenue in 2019, 70% was from France. Only 46.5% of revenues were from traditional post, with nearly 30% from parcel delivery and 22% from financial services.

Germany: Deutsche Post DHL AG (“Deutsche Post DHL”), the German postal service, was privatised in 1995 and became a fully independent publicly-traded company in 2000 via an IPO. The company is currently listed on the Frankfurt Stock Exchange and has a market capitalisation of €51.1 billion ($60.1 billion equivalent). It is currently a member of the STOXX 50. Shortly after being privatised, Deutsche Post began acquiring shares in international shipping and logistics company DHL International, fully acquiring the company in 2002. The company continued to make a series of acquisitions, mostly strategic and many international. The company employs 546,924 people, of which circa 150,000 are focused on domestic mail and parcel delivery (Deutsche Post), and circa 380,000 are spread around the world working for DHL Parcel and DHL Freight. The company’s domestic fleet (focused on domestic mail and parcels) consists of 60,841 vehicles and 27,000 bikes (48% electric), and there are 26,000 sales points throughout Germany (equivalent to branches for Royal Mail or the USPS). Deutsche Post DHL had revenues in 2019 of €63.3 billion, EBIT of €4.1 billion and generated €867 million of FCF. The company had €54.4 billion of assets and €13.5 billion of net debt as of June 30th 2020. Deutsche Post DHL is rated A3 by Moody’s and BBB+ by Fitch. Deutsche Post is of course suffering from similar trends as postal carriers in other countries, namely gradually declining letter post offset by growth in international freight and parcel business (which is arguably more cyclical).

Canada: Canada’s postal service is provided by Canada Post, a Crown Corporation officially named Canada Post Corporation (CPC). (Crown corporation means state-owned for Commonwealth countries.) Concurrent with the creation of CPC in 1981, legislation was passed by the Federal Parliament of Canada which guarantees postal service to all Canadians, no matter where they live. Canada Post provides traditional letter delivery services, parcel mail and direct marketing services, but is not involved in banking or insurance, or broader logistics, like other G7 peers. Canada Post delivered 7.9 billion pieces of mail in 2019, covering every household in Canada (16.5 million). The company employees nearly 68,000 people, operates 6,100 post offices throughout Canada and has a delivery fleet of over 13,000 vehicles. Similar to the USPS, Canada Post funds itself from its own revenues and receives no taxpayer money. The company generated C$8.9 billion in revenues in 2019 and had a loss of C$14 million. Revenues were about flat for 1H2020, but Canada Post lost C$386 million on the bottom line, significantly worse than in the 1H2019. The company had C$11.3 billion of assets as of mid-year 2020 and C$2.4 billion of unrestricted liquidity.

Postal Voting and Fraud (a quick diversion albeit certainly relevant)

President Trump has raised an issue about potential voter fraud related to mail-in ballots. For some context according to the U.S. Election Assistance Commission (“EAC”), nearly 25% of votes in the 2016 Presidential contest (circa 33 million votes of circa 140 million total votes cast) occurred via the postal system, either in the form of absentee ballots or mail-in ballots. 16 states had over 50% of votes in 2016 cast via mail-in post, absentee ballot or early vote (mostly postal also), of which three states – Colorado, Washington and Oregon – had over 90% of their votes cast via post prior to election day. The table below from the EAC shows the change in the percentage of voters in each two-year election cycle since 2004 that vote other than going to a voting machine, i.e. absentee (via post), by mail-in (post), or early (mainly post I suspect). This means that in 2016, two in five ballots were cast one of these three ways, prior to the actual election day.

A small percentage of postal votes have been rejected in the past, usually due to a lack of a signature or not arriving in time. In 2016, 1% of ballots that were submitted via mail were

rejected, and the table below from the US Election Assistance Committee (“EAC”) shows why.

You can find the full EAC report regarding the aftermath of the 2016 election here. According to NPR (see article here), nearly 62 million votes have already been cast for the upcoming presidential election, which is 15 million more votes than were cast at this time in 2016.

In case you are interested, postal voting for general elections in the UK has been allowed for many years, with the requirements being that an individual must be registered and must request a mail-in ballot. Should a voter wish, he or she could also go to a polling station on election day, just like in the US. I could not find any statistics on mail-in voting vs voting at polling stations, but I do not recall a word being mentioned about voter fraud via post ever in the UK, at least in the last 20 or so years that I have lived here.

We will undoubtedly see more votes cast early in this U.S. Presidential election than any ever before, with the trend accelerated by the ongoing pandemic, which raises risks of going to a polling station. With 62 million votes already having been cast, I also suspect that this will be the largest turnout in history for a Presidential election. Whilst postal voting might open the door for fraud, I believe that President Trump is wildly overstating the risk, certainly based on the results of prior elections and of postal voting, for example, in the U.K. The risk is more acute with respect to budget and personnel cuts at the USPS slowing down the delivery of postal ballots, which might mean a call is difficult to make definitively as usual as to the winner on the evening of the election, but it does not mean the vote will be “more fraudulent.”

Conclusion

President Trump has unfortunately put a lot of focus on the USPS for the wrong reasons, which is a shame because the USPS needs to be reformed and improved to better align with the world of today. His digressions in this respect, largely linked to personal or political assertions that are false, should be ignored although his general effort to force the USPS to reform is correct. Hopefully, Postmaster General DeJoy will have the support and cooperation of the next administration and the next Congress, regardless of which party is in power, to begin the necessary reforms to put the USPS on firmer footing.

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