The United States Postal Service is raising prices this weekend. The increases make good fiscal sense, even if they raise the hackles of the agency’s loyal customers.
On Sunday, the cost of a Forever postage stamp will jump from 60 cents to 63 cents. The USPS announced the increase in October; its oversight body, the Postal Regulatory Commission, signed off on the plan in November.
The increases come after a banner year for the USPS. The agency reported a record $56 billion in net income for fiscal 2022, which ended in September. Compare that to the combined net income of three USPS competitors—
United Parcel Service
(FDX—from the past 12 months: Roughly $27 billion.
So, why do stamp prices need to rise if profits are high? Congress, cash flow, and net income all play a role.
In 2006, Congress ordered the Post Office to prefund its healthcare spending by creating what amounts to a pension fund to pay future healthcare benefits. No other private business has a similar requirement; while private companies have expenses related to employee healthcare, most simply pay them as they come in.
The requirement resulted in years of losses for the USPS and drained the agency’s cash flow.
In fiscal 2007—the year after the healthcare funding directive—the Post Office reported a net loss of more than $5 billion, compared with income of $900 million generated in fiscal 2006. Expenses for retiree health benefits grew from less than $2 billion in 2006 to about $10 billion in 2007. The USPS used about $5 billion in cash in 2007, after generating roughly $1 billion in free cash flow in 2006.
But last year, lawmakers repealed the prefunding requirement. The elimination resulted in $57 billion non-cash gain to earnings. Before the change, the Post Office lost about $1 billion in fiscal 2022.
Consumers, or investors, looking at the Post Office should focus on cash flow. The 232-year-old agency didn’t generate free cash flow last year. Labor costs are rising and less first-class mail is being delivered.
In 2007, the Post Office generated about $75 billion in revenue, with roughly $38 billion coming from first-class mail and $23 billion from packages and services. In 2022, revenue was about $79 billion, with roughly $24 billion coming from first-class mail and $31 billion from packages and services.
The USPS has been working hard to re-structure its business, but it is still responsible for delivering a shrinking amount of mail to all addresses in America for the same price.
And the Post Office’s capital spending needs are growing. The agency plans to spend almost $10 billion by 2028 to deploy more than 66,000 electric vehicles: $3 billion will come from the Inflation Reduction Act and $7 billion comes from internal cash flow or borrowings. The annual spending on EVs amounts to $1.6 billion; capital spending has been averaging about $1.8 billion a year for the past few years.
Aside from capital spending needs, the USPS in October said the planned price hikes for first-class mail were intended “to offset the rise in inflation”—something every business, and consumer, is dealing with these days.
The 3-cent boost to stamp prices should generate an incremental $1.5 billion in revenue, all else being equal. The USPS delivered almost 50 billion pieces of first-class mail over the past 12 months.
Write to Al Root at email@example.com