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Postmaster Facing Choice of Flouting Laws to Stem Losses

May 3 (Bloomberg) -- U.S. Postmaster General Patrick Donahoe talks about the Postal Service's projected loss, challenges and the need for legislation in Congress to help the agency cut costs. He speaks on Bloomberg Television's "Conversations With Judy Woodruff." (Source: Bloomberg)

Postmaster General Patrick Donahoe may soon be forced to choose which laws to flout to keep the barely solvent U.S. Postal Service running.

A five-year restructuring “Plan to Profitability” delivered with the help of advisers at Evercore Partners Inc. (EVR), Boston Consulting Group Inc. and Accenture Plc has gathered dust for 15 months in the absence of action from Congress, which must approve changes in the service’s business model.

With the service on pace to almost run out of operating cash in October, Donahoe may have to decide whether to make unilateral changes without congressional consent, said Evercore’s George Ackert, lead adviser to the Postal Service on its turnaround plan.

“It will reach a crisis point and then the Postal Service will have to choose from various illegal alternatives,” Ackert said. “They’ll say it’s illegal to go from six delivery days to five, well it’s also illegal to not deliver the mail, so you’re talking about choosing amongst various bad outcomes.”

Those potential changes include ending Saturday mail delivery and closing post offices and sorting centers. Donahoe has already shown he’s willing to ignore a law. He hasn’t paid the cost of prefunding future retirees’ healthcare for the past two years, something required by federal law only of the Postal Service.

Photographer: Andrew Harrer/Bloomberg

U.S. Postal Service crates sit on the floor in Washington, D.C. Close

U.S. Postal Service crates sit on the floor in Washington, D.C.

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Photographer: Andrew Harrer/Bloomberg

U.S. Postal Service crates sit on the floor in Washington, D.C.

Tasked by Congress 40 years ago with becoming self-sufficient while overseen by lawmakers, a government-appointed board and a regulator, the Postal Service lost $15.9 billion last year and has exhausted its $15 billion borrowing limit.

Mounting Losses

It lost $1.9 billion in its fiscal second quarter as mail volume declined another 1.5 percent, Chief Financial Officer Joseph Corbett said today. Postal Service cash will fall to a low Oct. 15 of $1 billion, or 3 1/2 days of operating funds, Corbett said.

“When people hear $1 billion, they think everything’s rosy,” Corbett said today at a board meeting in Washington. “For an organization the size of the Postal Service, that clearly is not the case.”

Last month Donahoe warned that if the agency isn’t permitted to restructure this year a taxpayer bailout through 2017 would cost $58 billion. The agency is focused on changing prices and employee costs and doesn’t intend to break laws, Donahoe said in an interview today.

“At some point our financial liabilities become so large that they cannot be fixed without taking extreme action,” Donahoe said at the board meeting. “We don’t want to get to the point where extreme action is the only option.”

Photographer: Andrew Harrer/Bloomberg

A U.S. Postal Service (USPS) letter carrier prepares mail for delivery at the Brookland Post Office in Washington, D.C., on Thursday, May 9, 2013. Close

A U.S. Postal Service (USPS) letter carrier prepares mail for delivery at the Brookland... Read More

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Photographer: Andrew Harrer/Bloomberg

A U.S. Postal Service (USPS) letter carrier prepares mail for delivery at the Brookland Post Office in Washington, D.C., on Thursday, May 9, 2013.

Six-Day Mail

The mothballed restructuring plan calls for the Postal Service to end Saturday mail delivery, raise stamp prices to 50 cents, close and sell unprofitable post offices and excess processing facilities, cut 155,000 jobs by 2016 and leave the U.S. government health plan to create its own.

While lawmakers have pushed the service to return to profitability, they have stood in the way of each of those steps, worried about the political consequences of cuts that affect their constituents.

Donahoe tried this year to end six-day-a-week delivery to save about $2 billion a year -- until the Government Accountability Office said in March that the move was illegal. Lawmakers including Senate Majority Leader Harry Reid, a Nevada Democrat, complained, and the Postal Service’s own board quashed Donahoe’s plan April 10.

Can’t Refuse

The Postal Service couldn’t evade congressional oversight by refusing its annual government appropriation, which was $78 million last year, or less than 1 percent of its budget. That would also be illegal, according to Jeffrey Bucholtz, an external Postal Service lawyer who works at Washington firm King & Spalding LLP. His opinion was in a confidential memo obtained by the Federal Times, a publication for U.S. government workers.

The nine-member Postal Service board has four vacancies. Most of its directors have political rather than business experience.

“This is a $70 billion company, let’s give it a board that looks like it’s a $70 billion company,” said Ron Bloom, Lazard Ltd.’s vice chairman of U.S. investment banking, who represents the National Association of Letter Carriers union.

The consultants retained more than two years ago by the service and the letter carriers can’t begin negotiating changes until Congress allows them to take action. Such efforts ended in mid-2012, according to advisers to both management and labor.

The Postal Service paid advisers an undisclosed sum for their work on the restructuring plan, and continued paying some monthly retainers until about June 2012, when it became clear no congressional action was intended.

‘Stopped Working’

“Congress basically stopped working in June on the post office, and they’ve stayed stopped working,” Ackert said. “We finished our work on the business plan and had nothing to do -- you don’t hire an investment bank to get a law passed.”

The Postal Service is exaggerating the crisis to justify radical cuts, Lazard’s Bloom said. While acknowledging a need to restructure, he argues against shrinking the network. Instead, he proposes working directly with retailers to expand e-commerce delivery of packages that he says the Postal Service can handle cheaper than FedEx Corp. (FDX) and United Parcel Service Inc. (UPS)

Scrapping laws limiting first-class postage price increases to the core inflation rate, ending health-care prefunding and replacing the postal board with business professionals would immediately end losses and allow more entrepreneurial executives to reinvest in technology for growth, Bloom said.

Chapter 11

The Postal Service, with about 497,000 career workers, “provides employment and retiree benefits to an enormous number of people, through the operation of a business that just doesn’t work as currently constituted,” said Marc Puntus, who co-heads restructuring at Centerview Partners, and isn’t involved in this negotiation.

“In private industry, if required, you would file Chapter 11 to fix all that. However, Chapter 11 is not available when the entity is owned by the federal government.”

The Postal Service was self-sufficient until the U.S. recession coincided with the prefunding requirement and a consumer shift to electronic communications.

The unpaid health-care prefunding bill was $11.1 billion last year, dwarfing operating losses of $2.6 billion. Mail volume dropped 40 percent over the past five years. First-class mail, the category that includes letters, cards and bills, has led the plummet.

As cash runs low, Congress will be forced to either bail out the service with taxpayer money or raise borrowing limits if it won’t allow the fundamental changes, said Jim Millstein, founder of advisory firm Millstein & Co. and the U.S. Treasury’s former chief restructuring officer. He isn’t working on this project.

“When they’re literally unable to pay their debts as they come due -- unable to deliver the mail because they can’t pay wages, benefits, salaries, they can’t pay their suppliers or landlords -- that’s where the Postal Service is about to be,” Millstein said. “That will force Congress’s hand.”

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net

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