USPS NEWS: THE STATUS, THE LEGISLATION, THE GRASSROOTS EFFORT…AND YOU

Ken Garner -Mailing & Fulfillment Service AssociationBen Cooper – Williams & Jensen

MULTIPLE FACTORS CONTRIBUTING TO THE PROBLEM AT USPS

USPS IS INCURRING UNSUSTAINABLE LOSSES

USPS’s financial losses are at unsustainable levels

Declines in revenue are being driven by lower First-Class Mail volumes (down 25% since peaking in 2006)

Reduced volumes are, in turn, reducing density and Contribution(1) across the USPS network

Note: Bolded figures after 2007 represent Net Profit / (Loss) after RHB Pre-Funding(1) Contribution is revenue less attributable cost as shown in the Cost & Revenue Analysis for fiscal year 2011 that was filed with the Postal Regulatory Commission (“PRC”)(2) In 2009, $4.0bn of RHB Pre-Funding was deferred and will be re-evaluated in 2017(3) In September 2011, Congress deferred the 2011 required RHB payment of $5.5bn until August 2012

RELATIVE REVENUE AND VOLUME BY MAIL TYPE

Source: Volume includes total mail only. Revenue includes mail and ancillary and special services revenue

CONTRIBUTION BY PRODUCT

First-Class Mail is the most significant contributor to profit; however, it is also experiencing declining revenue

Source: Public Year Cost and Analysis, FY 2011 - Contribution is revenue less attributable cost as defined by the PRC(1) Shipping includes Express Mail, Priority Mail, Parcel Select / Returns, Competitive International(2) Other includes Periodicals, Package Services, Special Services, and other miscellaneous products which make up Total All Mail and Services

COSTS MUST BE ADDRESSED TO ENSURE VIABILITY

Costs are projected to outpace revenues at an alarming rate

Labor costs, which are approximately 80% of total costs, create a fixed cost

structure which is not readily scalable in response to changes in volume and revenue

MAGNITUDE AND TIMING OF CASH FLOWS REQUIRES A NEAR-TERM RESPONSE

Note: Liquidity at end December 2011 $2.9bn(1) Total cash flows prior to any borrowings or principal repayments of debt(2) $38bn of RHB Pre-Funding before 2011 not reflected in chart(3) Represents $220mm of daily operating costs, times six day work week

EXECUTING IDENTIFIED INITIATIVES IS CORE TO ADDRESSING USPS’S FINANCIAL

CHALLENGESUSPS has identified over $20 billion of annual savings within the next five years, of which approximately $10 billion require legislative action

Each of the Strategic Initiatives is essential in order to restore the Postal Service to financial viability

(1) Annual savings amount includes projected savings resulting from the elimination of approximately $5.8bn in RHB Pre-Funding in 2016

STRATEGIC INITIATIVES

(1) Portion of savings requires legislative changes to achieve(2) Does not include impact of employee separation costs

POTENTIAL “SOFT LANDING” FOR EMPLOYEES

(1) Includes estimated Social Security and TSP impacts for FERS

INCOME STATEMENT

(1) Portion of these savings require legislative changes to achieve(2) Reflects the one-time costs of any collection of layoffs/RIF’s, VERA, and reassignments

STATUS OF INITIATIVES

• Healthcare

‒ USPS – provided employee health insurance: no progress; lack of union support

‒ RHB prefunding requirement: no progress; Congressional opposition

• Network

‒ Change in service standards: step 1 implemented 7/1/2012, step 2 in 2014

‒ Network realignment: under way; to be completed by spring 2014

‒ Retail services: new plan approved by PRC; implementation staring soon

‒ Saturday delivery: no progress; Congressional opposition

• Revenue Management

‒ Exigent rate case: USPS won’t implement unless forced by legislation

‒ Decoupling single-piece and commercial First-Class rates: no progress

‒ Marketing initiatives: modest success for EDDM, mobile barcode initiatives

‒ Customer access: continued expansion of USPS.com, Village POs

POSTAL REFORM 2012

• Senate approved S. 1789 on April 25

• House likely will vote during Lame Duck

WHY WE SHOULD CARE ABOUT POSTAL REFORM

• One third of US paper manufacture is produced for the mail

• Over one half of all print is created for mail distribution

• Digital equipment is used for personalized direct mail

• The USPS is the primary distributor of print in the US

• Collapse of USPS would significantly change the printing industry

SENATE BILL (S. 1789)

• Facility closing – delay process for two years

• Saturday service – delay decision for two yeas

• Return FERS overpayment with portion used for buyouts

• “Re-amortize” retiree medical pre-funding

• Reform federal workers’ comp

• Key – rejected proposals for rate increases

HOUSE PROCESS

• House has not focused on postal reform yet

• HR 2309 created problems for many members of the House which delayed the vote

• Unlikely to have any Democrats voting for the bill in current form

• Bill that passed committee will be altered in “manager’s amendment”

• House and Senate may try to find agreement before bill comes to a vote in the House

WHAT ARE THE HOUSE PROBLEMS AND CAN THEY BE FIXED?

• Perception of HR 2309 is that it would close rural post offices, end Saturday delivery and abolish union contracts

• Sponsors agreed to changes to address issues

‒ Limits closing of rural post offices to a small percentage per year

‒ Will allow an “up or down” vote on Saturday delivery‒ More onerous anti-labor provisions changed

• Postal labor union still oppose

• Most Democrats in House expected oppose

WHERE DOES IT END?

Option 1 – Reform Light

•Roughly along the Senate bill lines

•Will need to do it all again in two years

•Likely will not fix the problem

Option 2 – Kick the Can

•Transfer FERS Money

•Re-amortize REHB

•Slow facility closing and Saturday delivery decision

Option 3 – Do the Right Thing

TIMING

What If Nothing Happens?

•USPS will face a cash crisis some time in 2013

•Debt will continue to grow

•Confidence in delivery system may erode

•Solution no easier to find in 2013

•Fatigue on the part of legislators

•Exigency rate case?

WHAT DO WE EXPECT?

• During Lame Duck, House will likely agree to a bill that moves closer to Senate version

• Likely to “re-amortize” FERS

• Likely to slow decision to allow USPS to go to five day delivery

• Likely to reform Workers’ Comp

• May need to revisit legislation within the next four years

WHAT IS INDUSTRY’S RESPONSE?

• Organized into Coalition for a 21st Century Postal Service (40 associations and corporations) to coordinate lobbying efforts

• MFSA and related trade associations active grassroots –meetings with elected officials

• Letters, emails, phone calls to offices

• Providing technical and legal expertise to committee staff on key issues

• More than 300 meetings this Congress with DC offices

IS IT ENOUGH?

• No – Industry overall is complacent about the future of USPS

• Question – If USPS fails, who moves printed products to customers?

• Magazines, catalogs, advertising mail continue to depend on postal delivery with no option

“Congress will not let the USPS fail”

– Fiscal Cliff!

Ken Garner – President/CEO

Mailing & Fulfillment Service Association

(Association of Marketing Service Providers 1/1/13)

kgarner@mfsanet.org

703-836-9200

Ben Cooper – Principal

Williams & Jensen, PLLC

bycooper@wms-jen.com

202-659-8201