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Postal Service Fix Requires Congress, Not Bankruptcy (1)

April 24, 2020, 10:16 AMUpdated: April 24, 2020, 5:08 PM

The U.S. Postal Service may functionally share more in common with private corporations than with government agencies: its revenue is from sales and not taxes, it can borrow money on its own, and it files financial statements with the Securities and Exchange Commission.

But its options for averting financial ruin amid the economic downturn caused by the coronavirus pandemic stand in stark contrast to the business world.

Distressed U.S. companies, and even cities, that are being crippled by the economic toll of the Covid-19 pandemic can look to the nation’s bankruptcy laws for protection while they reorganize and restructure liabilities. Senate Majority Leader Mitch McConnell (R-Ky.) this week suggested letting states use bankruptcy laws as well. But legal experts said the law is clear that the USPS remains too much of a federal government entity to be eligible for the same relief.

“The Postal Service serves this essential function and is set up as this not for profit enterprise,” said Buchalter PC attorney Valerie Bantner Peo. “As a question of bankruptcy law, I think it’s fairly cut and dry that they’re not eligible.”

The question is more than academic.

The pandemic and resulting loss of mail volume is expected to increase the Postal Service’s net operating loss by more than $22 billion over the next 18 months, “threatening our ability to operate,” Postmaster General Megan Brennan said earlier this month, though the USPS declined further comment.

Brennan told a House panel the service will run out of cash by Sept. 30 without additional aid, according to Rep. Gerry Connolly (D-Va.), chairman of the House Oversight and Reform Subcommittee on Government Operations. With about 630,000 mostly union-represented employees, more than at any U.S. private business, the Postal Service is at the center of the $1.4 trillion U.S. mailing industry and the roughly 7.5 million jobs it supports.

The latest and possibly most acute of the USPS’s financial crises over the years is emerging as the service is delivering 60 million stimulus checks during the pandemic and is the primary means of conducting the 2020 Census. A fully functional Postal Service would also be essential in a broader move to use mail-in ballots for the upcoming 2020 national elections.

Not Going Bankrupt

What separates the growing debts and duties of the Postal Service from those of companies, consumers, and municipal entities is that they are statutorily enforced and guaranteed by the federal government.

Although the USPS is a self-financed organization with the power to issue debt, Congress controls how much the Postal Service can borrow, demands current funding of future retirees’ health benefits—which has led to defaults on the required annual payments—and mandates service to all corners of the country.

Caught between those federal requirements draining its budget and a president who has opposed aid for the Postal Service in Covid-19 stimulus funding, the USPS remains where it has been through several brushes with insolvency.

“My sense is that the problems of the USPS result in part from statutory requirements that deprive it of the flexibility that private businesses have when facing unforeseen circumstances, as now,” said retired bankruptcy judge Steven W. Rhodes. “It seems to me that to the extent it’s losses are attributable to congressionally mandated expenses, Congress should write a check.”

Restructuring Scenarios

The U.S. Supreme Court previously considered whether the Postal Service is a public or private entity for purposes of antitrust liability in the case of USPS v. Flamingo Industries (USA) Ltd. In a unanimous 2004 ruling, the court determined that even though the Postal Service enjoys a “high degree of independence,” it “remains part of the government.”

Chicago-Kent College of Law professor Harold Krent, who argued against the government in Flamingo, said it’s up to Congress to plug the funding gap or reorganize USPS so that it “becomes a more limited, focused entity to ensure mail to citizens everywhere, but not compete with Amazon, the internet, FedEx, and more.”

Because it would be hard to distinguish the court’s characterization of the Postal Service in the Flamingo case for purposes of bankruptcy law, “I can see it needing separate legislation,” said Krent’s Chicago-Kent colleague, professor Adrian Walters.

Congress has taken action before to restructure the debts of distressed U.S. entities that couldn’t seek relief under the bankruptcy code. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law in 2016 to overhaul the insolvent territory’s liabilities and finances.

Any legislative measures designed to reorganize the USPS would have to resemble PROMESA, or some sort of hybrid between Chapters 9 and 11 of the bankruptcy code, said Bantner Peo of Buchalter.

These sorts of restructuring solutions may, however, run into the USPS’s universal service mandate—meaning it’s required to deliver to all U.S. addresses—and that its debts are backed by the federal government.

“I’m not sure that Congress can constitutionally set up a judicial process for debt relief for a government agency,” said Rhodes, who oversaw Detroit’s municipal bankruptcy in 2013.

‘Conversation for Another Day’

Now isn’t the time for Congress to consider an overhaul of the USPS, said Fredric Rolando, president of the National Association of Letter Carriers, which represents about 200,000 city and suburban letter carriers.

This is an emergency, and what’s needed is money for the Postal Service to maintain its operations so that stimulus checks, medical supplies, and mail-in ballots can reach their intended destinations, Rolando said.

House Democrats are looking to include in the next stimulus bill what the Postal Service said it needed during an April 9 briefing of the House Oversight Committee, an aide to Connolly said on Thursday. The USPS Board of Governors, all Trump appointees, is asking for a $25 billion emergency appropriations to offset coronavirus-related losses, a $25 billion grant to for projects to modernize the Postal Service, and access to $25 billion in unrestricted borrowing authority from the Treasury Department, the aide said.

The stimulus package signed by the president Friday doesn’t include funds for the service. A $2 trillion stimulus measure (Public Law 116-136) signed by Trump in late March included a $10 billion line of credit for the USPS, but Treasury approval is needed to access those funds. An administration official said in early April that the White House isn’t interested in providing no-strings-attached money to the Postal Service.

Trump on many occasions has said the Postal Service needs to increase its package delivery prices to improve its bottom line, and called for recommendations for restructuring the USPS in 2018 after accusing Amazon on Twitter of using the service as its “Delivery Boy.”

A task force delivered a report to Trump that December, but Congress hasn’t come close to passing substantive legislation to restructure the USPS in recent years. Amazon is led by Chief Executive Officer Jeff Bezos, who separately owns the Washington Post, which Trump regularly accuses of biased coverage.

The Washington Post reported Thursday that the Treasury Department is in preliminary negotiations to provide the USPS an emergency coronavirus loan and take control over “key operations.”

Trump said Friday he wouldn’t approve aid to the USPS unless it raises prices.

The Postal Service on April 20 began delivering stimulus checks, a process that will take about eight weeks to complete, Ronnie Stutts, president of the National Rural Letter Carriers Association, said on Thursday. It’s also delivering 81 million eligibility notices to people with direct deposit, said Stutts, whose union represents about 130,000 rural letter carriers.

“As soon as you start talking postal reform, that’s besides the point,” Rolando said. “That’s a conversation for another day.”

(Updates with reference to President Trump signing new stimulus into law and rejecting aid absent price increases. Earlier update corrected spelling of law firm name in fourth paragraph.)

To contact the reporters on this story: Alex Wolf in New York at awolf@bloomberglaw.com; Louis C. LaBrecque in Washington at llabrecque@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com; Bernie Kohn at bkohn@bloomberglaw.com