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

2. 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?

3. 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

4. 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

5. 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 - ??????

6. ?????? 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”

7. “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

8. 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

9. “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

10. Breakeven FY 2016 Prices

11. 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

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

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

14. Medicare Integration Matters: A Lot

15. A Pretty Balance Sheets Costs Real Money

16. 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.

17. Breakeven is More as/if Operating Income Degrades

18. 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.”

19. 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

20. 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.

21. The 10-Year Review has HUGE Price Implications

22. Questions?