Background
The U.S. Postal Service holds its cash in the Postal Service Fund with the Federal Reserve Bank of New York and, traditionally, has invested its excess cash in highly liquid, overnight investments (Overnight Treasuries) issued by the U.S. Department of Treasury (Treasury), where interest rate changes are more pronounced than in longer-term investments. Postal Service cash has grown from $2.3 billion in fiscal year (FY) 2013 to $19.6 billion at year-end FY 2022.
Additionally, the Postal Service can raise cash by issuing debt. From 1999 through 2019, when it expired, Postal Service borrowings were governed by a Note Purchase Agreement (NPA). The Postal Service is required to notify Treasury of its intent to issue debt and allow Treasury the first option to purchase.
What We Did
Our objective was to assess the Postal Service’s investment of its cash balances and identify opportunities to improve investment and borrowing strategies and to reduce interest rate risk.
What We Found
The Postal Service has an opportunity to improve its investment strategy to reduce interest rate risk. For time horizons consistent with the Delivering for America (DFA) plan, we found that diversifying its cash investment portfolio to invest in longer-term Treasuries would enable the Postal Service to meet operational requirements and maintain funds for DFA initiatives. Such a strategy would greatly reduce risk without sacrificing returns on its cash investments.
Additionally, the Postal Service’s borrowing strategy demonstrates a significant disparity between interest income and interest expense due to almost two years of nearly zero percent interest rates on investments. To reduce the gap, the Postal Service should optimize borrowing cost over its planning horizon. Historically the agreement with Treasury has provided the Postal Service with certainty on borrowing conditions, but it expired in 2019. Working with Treasury to re-establish such an agreement with set terms is integral to effective cash management.
Recommendations
We recommended management design a cash investment strategy that incorporates longer-term securities; work with Treasury to extend the investing authority and include investment securities beyond two years to accurately align with DFA initiatives; re-establish a Note Purchase Agreement with Treasury; incorporate a borrowing strategy to achieve DFA goals and reduce the gap between interest income and expense.