Postal Service prepares for default, but says business will continue as usual

The U.S. Postal Service is prepared to default Wednesday on the $5.5 billion in mandated retiree health benefit prefunding it owes to the U.S. Treasury, and will not make an additional payment of $5.6 billion in prefunding due Sept. 30, the agency announced Monday.

This was an outcome long feared by observers, including architects of the Senate’s postal reform bill and the Postal Regulatory Commission, who argue default would delay fixing the agency’s fiscal woes and erode confidence in its future.

Missing Wednesday’s deadline would mark the first time the Postal Service has defaulted on payments to Treasury. In prior years, Congress has stepped in to help the agency defer its prefunding payments, required by a 2006 congressional mandate. But a comprehensive postal reform package isn’t likely to come together before November’s lame duck session. The agency’s $5.5 billion due Aug. 1 was for a fiscal 2011 obligation originally due last September.

USPS officials said business would continue as usual despite the default.

“This action will have no material effect on the operations of the Postal Service,” USPS spokesman David Partenheimer said in the statement Monday. “We will fully fund our operations, including our obligation to provide universal postal services to the American people. We will continue to deliver the mail, pay our employees and suppliers, and meet our other financial obligations. Postal Service retirees and employees will also continue to receive their health benefits.”

  Postal Service officials and lawmakers had expected to reach an agreement and pass a comprehensive postal reform bill prior to this week’s default. The Senate passed a postal reform bill this spring that would restructure USPS’ retiree health care prefunding obligation.

House leadership decided not to vote on its version of the bill until later this year, but House sources say the legislation has enough support to pass. That bill, shepherded by Rep. Darrell Issa, R-Calif., and passed out of the House Oversight and Government Reform committee earlier this year, would require USPS to pay $1 billion of its fiscal 2011 prepayment obligations and make up the remainder in fiscal 2015 and 2016.

“Chairman Issa’s discussions with leadership have focused on ensuring the Postal Service does not default on its service obligations to customers,” Issa spokesman Ali Ahmad said, adding the agency likely would be in poor financial shape regardless of this week’s default.

But Postal Service reform leaders in the Senate have continued to blame the default on the House’s inaction.

Sen. Tom Carper, D-Del, a key architect of the Senate bill, has been “in regular contact with Postal Service officials and other stakeholders about the need for the House to pass postal reform legislation,” Carper spokeswoman Emily Spain said. In a statement, Carper said the default would “further [erode] confidence in [USPS’] future and in Congress’ ability to provide it with the reforms it needs to save itself.”

In addition to defaulting on the $11.1 billion total in payments due in fiscal 2012, the USPS inspector general on Monday released liquidity projections for the agency in fiscal 2012 and fiscal 2013, which found that it also is likely to default on the $5.6 billion due in fiscal 2013. In addition, the IG predicted a $100 million cash shortfall for the agency on Oct. 15, 2012; the Postal Service estimates a $1.2 billion cash shortfall by mid-October 2013.