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Source:  http://www.fiercegovernment.com/story/qa-postal-service-cfo-joe-corbett/2014-02-20

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: Oh it's really a combination of things but, you know, we were able to, on the quarter versus the same quarter last year, to grow the package revenue by 14 percent and that was a huge help. And that improved revenue by about $350 million and so clearly that was the biggest driver between improvement in the quarter versus last quarter. The expenses also were down nominally about a hundred million dollars in terms of operating expenses.

We took a million work hours out. We also were 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 hundred million dollars from that adjustment alone. When everything is all netted it out, 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 fourteen percent was quite frankly 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, so 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, we're making a lot of bit investments in our package business to keep up and actually to 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 and they'll enable various new applications for us in terms of package redirect, package pick up, notification, communication with our mail carriers so they can do real time type of work as well as just real time delivery scans when they deliver the package to the overall business or residence.

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: I'm not sure what sort of, I mean I have a number, lots of different partnerships today, some which get more press than others, but I mean when you look, we're in cooperation with FedEx and UPS. We deliver a ton of their packages last mile and so they will drop, typically at a delivery unit which is where our delivery vehicles load the mail and the packages and go out, and we'll take them to the actual residence because frankly we're more efficient at doing it than they are. We have smaller vehicles and 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 also with each of those. And so you have partnerships like that.

Now we have a number of other partnerships, for example, the Amazon relationship we've been developing over time, in fact, I'm actually heading out to Amazon on Friday.

We meet with them on all fronts and continue to grow that business and we have a lot of other relationships like that. What we do with Amazon we do under negotiated service agreements, effectively just a service agreement with a fancy name. And so we're not just a "hey, give us your packages and here's the rack rate and here's what we'll do for you," we'll actually go out, understand each of our customers and we have hundreds of negotiated service agreements. Many of them with large customers.

We obviously have partnerships on the retail side, lots of partnerships, but most recently unfortunately getting a bit of negative press from our partnerships with Staples. Which is kind of interesting because, you know we're selling basic mail and package services in Staples and in fact 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 to 5 roughly. The more hours you can be open on current sites, and if you're replacing a competitor there, all the much better. You're going to get more revenue than you otherwise would if you didn't do it. So we've got a number of them. We have a few Staples, we have Office Depot we have relationships with also.

FGOV: And are there other retailers like Staples and Office Depot that you're looking?

Corbett: I can't come up with any right now. I mean 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, etc. Costco, other places, 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 benfits. 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 frankly in America that we're aware of – and we are self-funded, we don't get taxpayer money – and that is to integrate Medicare with the medical plan for retirees once they reach retirement age. Or Medicare eligibility age. What this bill does is mandate that that occur in the Postal Service.  

Now it's interesting because roughly the percentages are rough, but there are three parts to Medicare, A, B and D.

Under Medicare A and B, roughly 80 percent of our retirees already elect it. So it clearly would be a good election, but they 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 one 100 percent of their medical costs roughly as opposed to having Medicare pay e80 percent and then us paying the remaining twenty. And so, the bill will allow us to save between $7 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 frankly and it was 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. Where can we operate and where can't we operate? It's very restrictive today. And also in terms of our ability to price our products and services.

The bill that's crafted in the Senate that allows for the continuation of our recent pricing increase referred to as the exigent price increase.

And then CPI increases going forward. Normal self-funded commercial entities have the ability to change pricing as necessary. You know, if there's a downturn or an up-turn or if you want to decrease volumes or increase, etc. 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 and so it's, if we had more flexibility there then we could be even more certain to 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 it determines the cost and the whole structure of the business model and what it is we do and don't do and to have one element, one very important element of the overall levers you can pull as a business out of your control – again just reduces your flexibility to react to market, to grow or to get yourself out of a hole, etc, etc.

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 don't know. I really don't. I mean 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, who are sitting in the seats individually, but also what the economy looks like, what the mail flows look like and volumes, etc. 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, I mean it's just, we are one of the largest commercial entities in the world and every day, throughout the entire country operating a commercial business. And the biggest difference as you mentioned is there's no appropriations, I mean clearly that's the big difference. The other difference that we're different 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 though, but back in 1971 the Postal Service was the Post Office Agency. Essentially after 1971 it turned into what we are today, a special entity in the administrative branch, but effectively it's like a government held corporation.

The board is presidentially appointed, Senate approved but once, but they're not tied to any term for independence reasons and so therefore they have seven year terms and their job frankly is to work with management to run the organization.

We don't report to a cabinet official or something like that, so it's supposed to minimize the influence you might otherwise get and maximize fiduciary responsibility to the actual running of the Postal system. At that time in 1971, I believe we had over 44,000 post office in the country and they were appointed positions to run as a post master. It's no longer the case.

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 mail 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 took out sort of he political influence and the bureaucracy and let the Postal Service run as a separate entity with a separate board it's just more efficient. And more focuses on making the right investments for the overall Postal Service to improve things.

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, that's a trigger and on a four quarter rolling average. 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 billon 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, you know?

FGOV: And there would still be full package delivery?

Corbett: Yeah. 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. And I would hope that by that time we're delivering seven days a week on packages. Today it's six plus we do have some Sundays, as you know, for certain customers. But I think the future really is to deliver seven days a week. And then where are you, who do you want to delivery your package if you can deliver it on, if you 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: This is a bit dated, but the concepts don't change that much and the one thing that you'll see in here is just a tremendous amount of efficiency that's been achieved over the past five years. And you have to do that when you talk about six to five day, you know going from six day mail delivery going to five day, that's, if you do the percentage, it's math – you know I'm a finance guy – it's 17 percent reduction, okay? But since 2006, if we hit 140 billion pieces, that will be a 34 percent reduction in mail volume. So you're taking 17 percent of your delivery out for a 34 percent reduction in mail volume, so we're still arguably behind the curb in terms of that. But at any rate, some of the reduction in terms, through 2013 over last seven fiscal years we've took out, we've reduced our career workforce by 200,000 employees. Most, there are few entities in the world that have that many employees and we've been able to reduce that while maintaining delivery standards, etc

FGOV: And what are the dates on that?

Corbett: Since 2006. Yeah, and it's across all areas of the business. The one area that we have not been able to reduce as much is obviously is delivery because there's a certain amount of hours and people that need to go with a defined geography and delivering six days a week. So really the only way to get at how many hours we use in that activity is to take out a day or some portion of our overall deliveries. And those reductions have come with no layoffs. I mean we're not looking to lay off people. We have for good and bad, we have a relatively mature workforce and people reaching retirement age and so we've been able to through hiring freezes, etc, be able to manage the complement down to the level of activity we need for the volume of mail and packages.

FGOV: Is the Post Office under a hiring freeze currently?

Corbett: No, we don't have a hiring freeze. Well, we have self-imposed hiring freezes. Across a number of categories, but there not mandated by the government.

For a couple of years we've had 200,000 letter carriers. In 2012 we hired seven. It was like an extreme case and you were in Bismarck or something, well, not Bismarck, most people know where that is. In a town you wouldn't know where you had to get someone there quickly but if you think about that, out of 200,000 people and it's just amazing that we were able to keep the lid on it, the lid on hiring that long. Across the entire organization we reduced by 200,000 employees in that period of time. It just so happens that with letter carriers we have approximately 200,000 letter carriers across the country. And what I was pointing out was that in 2012 when you're talking about with a lot of people retiring and we only replaced seven. We had to just be more efficient in terms of our use of employees, redo routes in terms of you had 33 houses, now you have 36 or 39 and try to get as efficient as possible in terms of our mail delivery.

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: Well, it's, our goals are to be as ubiquitous as possible and 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. I mean we do have quality standards.

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, they know, most of them have been working for us for a long time and they understand the business quite well, etc. So they're a great asset.

If we're going to do the Staples deals and other deals we essentially, contractually require that they be up to our standards. So as long as they are and their hiring practices are sound if we can expand to more places and knock off the competition like UPS I think the Postal Service, frankly including all of our employees, union and non-union are better off. Because 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: Oh yeah, if the Senate bill passes as the committee approved in its current state, we would return to profitability and be able to over five years, maintain our debts at near zero level. And so, I mean obviously that's assuming we have a continued robust economy, not a loss, but the economy, one it's predicted that a 2.5 percent GDP growth and investment dollars continue to flow. So all things considered we would actually be in pretty good shape.

FGOV: In five years?

Corbett: During that period too. 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, it's, 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.  And it's not just as I said before, we'll be between $7 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 saving with the overall health plans as a result of the Medicare integration, etc. And so that's the most helpful element by far.

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