The 10-Year Review: Price Implications Presented to NPPC May 10, 2016

10-Year Review: Process and Timing Starts – Late December 2016 PRC will ask for comments on whether the system is working If PRC finds it is not, will ask for comments on how to make it work PRC will issue Decision, probably outlining method USPS must use to ask for additional money. Q4? Q1 2017?

10-Year Review: Process and Timing Mailers and/or USPS will have 30 days to appeal PRC Decision USPS will file for price increase soon after PRC Decision PRC likely to issue Decision in that filing before Court review finished

The 10 Year Review Should Not Revisit the CPI Price Cap Mailers will argue “PAEA doesn’t allow it.” If the PRC decides to the contrary, the DC Circuit will likely have the final say. But even if PAEA does allow a CPI cap revisit, the system has worked well to balance the objectives, considering the factors. (2) predictabilty and stability in rates balances very well with … (5) adequate revenue…to maintain financial stability

But If the PRC Allows a Cap Review Resulting in a Price Increase, How Big Could that Price Increase Be? USPS View – How high can you count? Mailers View – Are there numbers less than zero? PRC View - ??????

?????? Further Expanded Predicting PRC decisions always adds a level of uncertainty Chairman Taub has said that the review allows a chance to “clean-up” the balance sheet and the off-balance sheet liabilities. And make sure operating income provides viability. Cost of service rate cases and the exigent case provide a historic precedent to operationalize a “clean-up”

“What Numbers to Use?” The Next Uncertainty Started with actuals for FY 2015 (Balance Sheet and Off-Balance Sheet) and Integrated Financial Plan (IFP) for Expenses and Revenues to calculate Operating Income Adjusted IFP Expenses and Revenues for actuals through February to estimate year end Operating Income Assumed default on 2016 RHBF prefunding per IFP

From Balance Sheet and Income Statement to Revenue Requirement RPYL Applied to Balance Sheet – 1/9 CSRS Deficit – Amortized RHBF Deficit – Amortized Net loss or gain from Operations Sum these 4 to get change in breakeven revenue Then “gross up” for price elasticity volume loss

“What Numbers to Use?” The Next Uncertainty Also assumed that current PAEA FY 2017 and 2018 changes on CSRS and RHBF deficits would apply in 2016… CSRS deficit amortized over 30 years RHBF deficit amortized over 40 years Defaulted RHBF payments moved off balance sheet

Breakeven FY 2016 Prices

A Digression on Fund Deficits Deficit = PV (Assets – Liabilities) Fund Assets and Liabilities Change Each Year Payins Payouts Assets earn interest Changes in future premiums/annuity

A Digression on Fund Deficits High Level View of RHBF Underlying Workpapers

A Digression on Fund Deficits Interest earned on assets way below decent return CSRS assets= $179.2 billion FERS assets = 107.6 billion RHBF assets = $50.3 billion Lost return on over $330 billion is subsidy to taxpayers Additional earnings vastly exceed amount necessary for breakeven

Medicare Integration Matters: A Lot

A Pretty Balance Sheets Costs Real Money

And is Totally Unnecessary “We expect to end the year with approximately $6.6 billion of unrestricted cash, essentially even with 2015….”(USPS from IFP) USPS needs enough cash to operate and invest…. But not enough so a hedge fund will buy them for the cash on the balance sheet.

Breakeven is More as/if Operating Income Degrades

Any Cleanup of On and Off Balance Sheet Should be Inclusive “The purchase price of Postal Service real estate is $27 billion, but the fair market value is far greater. The Postal Service owns real estate in premium locations. For example, the nearby National Postal Museum has a purchase price of $47 million, but a tax assessed value of $304 million.”

Any Cleanup of On and Off Balance Sheet Should be Inclusive “The current net book value (of real estate) totals only $13.2 billion. The fair market value has been estimated as high as $85 billion….” OIG FT-WP-15-003

Any Cleanup of On and Off Balance Sheet Should be Inclusive So if PRC decides a cleanup is necessary, it should net out property assets. That means there is no RPYL to amortize.

The 10-Year Review has HUGE Price Implications

Questions?