Thursday, August 2, 2012

Explaining the Post Office Default in 30 Seconds

In 2006, Congress passed the Postal Accountability Enhancement Act that mandates in the next 10 years the U.S. Postal Service has to be completely current on its retirement and health benefits for  the next 75 years. Normal practice is for companies to have to make a 10 percent payment towards their unfunded actuarial liability (UAL) each year for all current employees. This practice is called amortization and follows guidelines as according to Generally Accepted Accounting Practices (GAAP). The end effect is that most companies are about 80 percent current on their projected benefit obligations (PBO) for the next 30 years. 

In other words, the USPS is facing a short term fiscal crisis because they can not afford an overly burdening regulation on prepaying future pension and heath care costs. The crisis can be ended at any time by Congress by simply allowing them to follow GAAP just like everybody else.

The USPS is facing long term challenges as well (which I will get into in my next post), but they are not what caused them to default today. Service will continue like normal until the politicians figure out what to do.

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