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How Phantom Accounting Is Destroying the Post Office

The massive post office deficit that is driving management to commit institutional suicide is make-believe.

Every 6-year-old soon learns that there is real, and there is make-believe. The massive post office deficit that is driving management to commit institutional suicide by ending six-day delivery, closing half of the nation's 30,000 or so post offices and half its 500 mail-processing centers, and laying off more than 200,000 workers, is make-believe.

Here's why: In 1969, the federal government changed the way it did accounting. It began to use what is called a unified budget that includes trust funds such as Social Security previously considered off-budget because they were self-sustaining through dedicated revenue. At that time the post office was, as it had been since 1792, a department of the federal government like the Department of Energy or the Department of Agriculture. While generating most of its revenue from postage it also received significant congressional appropriations.

In 1970, Congress transformed the post office into the U.S. Postal Service (USPS). The new quasi-public agency was intended to put the postal office on a more business-like footing. The Postal Service was allowed to borrow to make needed capital investments and was given more flexibility in how it spent its money. In return, Congress required the USPS to become self-sufficient. The subsidy, at that time running about 15 percent of total revenues (close to $10 billion a year in 2012) was phased out over the next 15 years. After the mid-1980s the only taxpayer funds involved, amounting today to $100 million a year, subsidizes mail for the blind and official mail to overseas voters.

In keeping with the new philosophy that the Postal Service should be independent, Nixon's Office of Management and Budget administratively moved its finances off budget in 1974. In 1989 Congress did it by statute.

None of this made any difference, as exhaustively detailed by the USPS Inspector General in a 2009 report. The OMB and the Congressional Budget Office (CBO) continued to treat the Postal Service as part of the unified budget, the budget they use for "scoring" legislation to estimate its impact on the deficit.

And that's where the make-believe comes from.

In 2001, the Government Accountability Office (GAO) put the Postal Service on its list of "high-risk" programs because of rising financial pressures resulting from exploding demand from both the residential and commercial sectors. A year later the Office of Personnel Management (OPM) found the Postal Service had been significantly overpaying into its retirement fund. It seemed a simple matter to reduce future payments and tap into the existing surplus to pay for current expenses.

And that's when make believe began to have a tragic real-world impact.

In late 2002, the CBO announced that a change in the retirement contribution formula could increase unified budget deficits by as much as $41 billion, about $3.5 billion a year. If the overpayments were used to delay future rate increases, the CBO added, future government receipts would decline, adding to the unified budget deficit.

To overcome the budget scoring objections, Congress began what in retrospect we can see was little more than an exercise in rearranging the chairs on the Titanic. The final law allowed the Postal Service to use its overpayments to pay off its debt and delay increasing rates for three years. After that, any overpayments were to be collected in an escrow fund that would be unavailable to the post office until Congress determined how the funds would be used. And then came the quid pro quo. The Postal Service became responsible for paying postal workers for the time they spent in prior military service. Up until then, as one might expect, these obligations were paid by the U.S. Treasury. Assuming that obligation essentially eliminated any post office surplus during the 10-year scoring window.

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