Hat in Hand, U.S. Postal Service Goes to Congress

USPS CEO Patrick Donahoe testified Tuesday that without Congressional approval to change rules on benefits funding, the Postal Service will soon be insolvent.

(September 6, 2011) – A beleaguered United States Postal Service (USPS) is asking Congress to loosen benefits-funding rules in order to save itself from a potential bankruptcy.

In a Senate hearing Tuesday, Postmaster General and USPS CEO Patrick Donahoe laid out his version of the dire straits the Postal Service faces. “We are at a critical juncture,” he said in his testimony before the Homeland Security and Governmental Affairs Committee. “Action from Congress is sorely needed by the close of this fiscal year.” He predicts the USPS will lose somewhere near $10 billion next year alone, which would, among other things, mean it could not commit capital to its employee health-benefit fund.

Donahoe is asking Congress to allow him to break existing union contracts and reduce its workforce by up to 220,000 workers by 2015, as well as allow the USPS to skip payments for future retiree benefits. The financial pressure is exacerbated by contracts with USPS’ two largest unions expiring in November.

While Congress considers acting, they have President Barack Obama’s previous proposals to consider as well. In a February budget, Obama proposed delaying a large portion of a $5.5 billion payment – mandated by Congress – in order to keep the USPS afloat.

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To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

(September 6, 2011) – American corporate pension plans face a larger deficit than they did during the 2008 financial crisis, Credit Suisse is asserting in a report obtained by the Financial Times.

The 326 companies within the S&P 500 that have defined benefit pension plans face a total of $388 billion in pension deficits, according to an analysis from the bulge-bracket bank – a number equal to a 77% funding ratio on average. This compares with a $326 billion deficit and 79% funding levels at the end of 2008. This bleak picture is likely the result of low interest rates – which directly influence corporate pension liability calculation under the Pension Protection Act of 2006 – and meager equity markets. “If you think about the typical corporate pension plan, they are continuing to take two big bets: they are betting on interest rates and they are betting on the equity market – and they hope that both go up,” David Zion, head of accounting research for Credit Suisse, told the FT.

Credit Suisse estimates in its report that each 25 basis-point decline in interest rates increases pension liabilities at S&P 500 companies by upwards of $45 billion. With interest rates at all-time lows – having dropped 50 basis points this year – pensions have been caught in a perfect storm of falling assets and rising liabilities.

As a result of these dynamics – as well as an aging populace – many companies have frozen future accruals or prohibited new members from entering into existing defined benefit pension schemes. Many others have abandoned them altogether.

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Similar issues exist in the public plan space as well, although the problem is not rising liabilities due to interest rates (public plans do not base liability calculations on interest rates, but on an assumed rate-of-return). Instead, the problem in this sector has been declining assets and, as many argue, oversized benefits and a failure on the part of governments to follow through on promises to contribute into public-sector employee pensions. One solution that has been suggested is similar to that in the corporate world: shift from defined benefit to defined contribution plans.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>