Escrow, Escrow Everywhere and All the Revenue Did Shrink

The following is a perspective by PostCom Vice President Kate Muth.

A quick glance at the Postal Service’s 2006 budget and it appears the USPS will lose $1.8 billion in FY 2006. But that’s not quite right. The USPS will have a revenue deficiency of $1.8 billion, which is not the same as a net loss. In fact, the Postal Service actually projects a net income of $1.3 billion in FY 2006.

A net income and a revenue deficiency in the same year? How does that work? It is the unique situation of the escrow account. It’s difficult to characterize the USPS’ FY 2006 year-end estimates the same way as all other years. The difference in 2006 is that the escrow account takes effect – something that has never existed before. The escrow will show up as an asset on the Postal Service’s books but it is an operating expense for purposes of ratesetting, so is included in the revenue requirement in the current rate case, R20005-1. (Indeed, it is the entire revenue requirement in the rate case.) The 2003 law that created the escrow, PL 108-18, says the escrow is a Postal Service operating expense. So, for this purpose, it must be paid for by revenue, which, as we know, the USPS raises through postage and fees. But it won’t show up as an operating expense on the income statement.

The law requires that the Postal Service have enough cash on hand on Sept. 30, 2006, to pay the escrow, which is $3.1 billion. (The Postal Service won’t actually write a check to the government on Sept. 30, 2006, but needs to have the money established in the fund and it cannot spend any of that money until Congress passes a law and tells it how to spend it. The USPS can effectively keep it in an interest-bearing account though.) 

If you look at the Postal Service’s 2006 financing plan, you’ll see that the Postal Service intends to have enough cash for the escrow through a combination of net cash flow, borrowing and previous year’s cash:

            Net cash flow from operations                    $1.5 billion
            Cash from financing (borrowing)                 $1.0 billion
            Previous End of Year (2005) Est. Cash      $1.4 billion
            End of Year Cash Prior to Escrow             $3.9 billion
            Less Restricted Cash (Escrow)                  $3.1 billion
            End of Year Cash 9/30                              $0.8 billion

So, this is how the Postal Service can have both a net income in the same year that it will have a revenue deficiency, which is not the same as a net loss. It’s the escrow, stupid! Correct that: It’s the stupid escrow.