Appendix Q - Enabling Strategies
The transformation of the Postal Service now underway necessarily involves a restructuring of functional activities that facilitate and enable the work of the organization. Financial management must be enhanced to improve financial reporting transparency and the ability of the Postal Service to finance capital improvements. Further development of the Information Platform and better use of technology are essential to support modernization in all areas. Securing the mail, the mission of the Postal Inspection Service, has never been more important. Regulatory reforms, likewise, must be pursued to support the Postal Service to respond to transformational imperatives.
This Appendix to the Transformation Plan contains additional explanation, detail, and examples of near-term strategies that enable the organization. This is not meant to be a comprehensive list of postal projects, but meant to outline those that will contribute to the success of postal transformation.
Strategies in this Appendix include:
• Enhance Financial Management;
- Debt Management
- Monthly Reporting
• Expand Usage of Supply Chain Management;
• Strategically Apply Technology; and
- Enhanced Security
- Upgraded Infrastructure
- Universal Computing Connectivity
• Ensure Safety and Security of the Mail, Customers, and Employees.
Overarching Objective
Reduce outstanding debt
By recovering prior year losses and maintaining a disciplined capital investment program, the Postal Service will endeavor to limit financial risks by reducing debt and remaining within the $15 billion debt limit.
The plan to remain within the $15 billion debt limit will be modified as necessary to ensure that the Postal Service preserves its ability to meet all of its cash obligations. The Postal Service will continue to adjust the amount of floating-rate and fixed-rate debt to manage interest expense and mitigate the risks posed by higher interest rates.
Background
Under current law the Postal Service may increase its outstanding borrowing by up to $3 billion annually, which includes a $2 billion increase for capital investments and a $1 billion increase for operating expenses. The Postal Service is subject, however, to a total debt limit of $15 billion, which has been in place since 1992, when it was raised from $12.5 billion. Prior to 1991, the debt limit had remained at $10 billion since postal reorganization. The law also requires the Postal Service to notify the Secretary of the Treasury at least fifteen days prior to offering debt obligations. The Secretary has a right of first refusal to purchase the Postal Service debt within the fifteen-day period or a commercially reasonable time period thereafter. Since 1974, the Postal Service has borrowed exclusively through the Treasury's Federal Financing Bank. In the past several years, the Postal Service and the Treasury have reached agreement on important issues related to borrowing. As a result, the Postal Service currently has the flexibility required to manage its debt.
Debt is a reflection of capital spending and overall financial performance. Over time, changes in debt are largely determined by the difference between cash flow from operations and capital cash outlays. Cash flow from operations is influenced by net income (or losses), and noncash expenses such as depreciation. Capital cash outlays are the funds invested in capital improvements such as facilities, automation equipment, and information technology. From 1997 through 2001, Postal Service capital cash outlays exceeded cash flow from operations by $5.2 billion. Consequently, debt increased by $5.4 billion-from $5.9 billion to $11.3 billion-during that time. Cash on hand at the end of fiscal year 2001 totaled approximately $1 billion, or less than one payroll.
The Postal Service has managed its mix of short- and long-term debt to lower its interest expense over time. As a result of this strategy and lower interest rates, annual interest expense on Postal Service debt remains lower than it was during much of the 1990s. Current interest expense is but one of the potential costs associated with debt. However, the fact is that Postal Service debt-the obligations that are subject to interest and principal payments-almost doubled between the ends of fiscal years 1997 and 2001, from $5.9 billion to $11.3 billion. While interest rates may or may not remain relatively low, a more important consideration is that the increase in debt, however necessary to preserve liquidity, has also increased financial risk by adding to the obligations of the Postal Service. In light of risks to mail volume growth, which create risks to cash flow, the Postal Service's capacity to service growing debt is limited.
The Postal Service has attempted to determine an appropriate debt level. The Postal Service has considered various means of evaluating its debt ceiling, including post-1992 revenue growth, asset growth, and inflation. Such analysis has major drawbacks, however, because it assumes that the debt ceiling of $15 billion was optimal when instituted in 1992; and the analysis does not assess the future risks facing the Postal Service. By remaining within its $15 billion debt limit, the Postal Service can limit the risks it carries into administrative and legislative transformation.
As mentioned earlier, the change in debt is largely determined by the difference between cash flow from operations and capital cash outlays. Since cash flow from operations is linked to net incomes (losses), stabilizing and reducing debt will require that the Postal Service recover its prior year losses and carefully plan its capital cash outlays so they do not exceed cash flow. As the past two fiscal years have demonstrated, the Postal Service cannot simultaneously generate net losses and reduce its borrowings.
As a final point, the consequences of running out of cash far exceed the costs of increasing debt. Therefore, the Postal Service will do what is necessary to keep from running out of cash, even if doing so means accepting a temporary increase in its statutory debt limit. Under such an outcome, the Postal Service would seek to reverse the temporary increase in debt, and resume its strategy of keeping its debt below $15 billion, while reducing outstanding debt.
By reducing outstanding debt, by remaining within its $15 billion debt limit, and by managing its interest expense, the Postal Service can limit the risks it carries into administrative and legislative transformation.
Metrics
Amount of debt and interest expense
Interdependencies
The Postal Service's ability to apply cash flow toward debt reduction requires both recovery of prior year losses and some limits on capital investments.
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