Priority Mail: The Case for Postal Reform, Part 1

For Postmaster General Patrick Donahoe, one of the major disappointments of 2013 had to be the failure of Congress to pass postal reform legislation. Two bills were introduced in 2013: H.R. 2748, known as the Postal Reform Act of 2013, from the House Oversight and Government Reform Committee chaired by Rep. Darrell Issa, R-CA; and S. 1486 from the Homeland Security and Government Affairs Committee, chaired by Thomas Carper, D-MD with ranking member Tom Coburn R-OK.

At various points in 2013 (March, August, November, and December), the prospects for postal reform looked promising. But at the last minute in December, the Senate’s Homeland Security and Governmental Affairs Committee cancelled the scheduled markup citing “the busy floor schedule and remaining work on the bill”. Since the continuing financial viability of the United States Postal Service (USPS) is crucial to mailers, it is important to understand the issues driving the need for postal reform.

 

USPS in Review

What we now know as the USPS traces its history to the earliest days of the United States. The founders believed the free flow of information was essential to a healthy republic, so in 1775 the Continental Congress appointed Benjamin Franklin as the first Postmaster General. Franklin had previously served as Postmaster of Philadelphia (1737) and Joint Postmaster General of the colonies for the British Crown (1753-1774). While serving the Crown, he was credited with cutting the amount of time required for mail service between major cities in half. He did this by developing operational improvements, surveying and placing milestones on main roads, and establishing more direct routes between cities. He also instituted the first rate chart, basing postal rates on distance and weight, and standardizing them throughout the colonies.

The Post Office remained a government-funded department of the Executive Branch until 1970 when the Postal Reorganization Act was passed by Congress. The reorganization established the USPS as an independent government corporation, organized like a business yet subject to Congressional oversight. The act also shifted postage rate setting from Congress to nine USPS governors appointed by the president. The board of governors sets rates after considering recommendations of the Postal Regulatory Commission (PRC) which, in turn, hears a rate case—essentially, a justification for raising rates—from the USPS.

Since 1971 the USPS has been funded entirely by the sale of postage, products, and services. Contrary to what many believe, the USPS receives no tax dollars, though in recent years it borrowed $15 billion from the US Treasury. (This was to meet a Congressionally-mandated retiree funding requirement imposed as by the Postal Accountability and Enhancement Act of 2006.) The USPS is the largest postal system in the world, delivering nearly 40 percent of the entire world’s mail volume.

 

Universal Service

The USPS has an obligation for universal service—to provide the American public with trusted and affordable mail delivery. This universal service obligation (USO) has many facets: geographic scope, range of products, access to services and facilities, delivery frequency, affordable and uniform pricing, service quality, and mail security. Whereas competing delivery services like UPS and FedEx can exempt geographic areas for delivery, the USPS is required by statutes to deliver to all addresses in the US; currently 152 million residences, businesses, and post office boxes. The USPS operates almost 32,000 retail locations, and 10,000 of those provide 89 percent of USPS retail revenue.

To fund the USO, the USPS, Congress, and the president established the Private Express Statutes (PES), a group of laws that gives the USPS the exclusive right to carry letters for compensation, and the mailbox access rule, which states that the mailbox can only be used for receipt of postage-paid US mail placed in the box by USPS delivery personnel. Taken together, the USO, PES, and mailbox access rule comprise the USPS monopoly.

 

USPS Finance

In recent years, the USPS has been affected by two trends: growth in the American population that has increased the number of delivery points, and a downturn in revenue driven by year-over-year declines in mail volume.

As of July 2012, mail volume had dropped 17 percent overall compared to 2003, with first class mail, the most profitable for the USPS, dropping 23 percent in only five years. In that period, first class letter mail volume dropped by 52 percent. This trend will likely continue as technology drives a shift from paper-based communication and transactions to electronic alternatives. The drop in mail volume has meant a decline in USPS revenue from $74.9 billion in 2008 to $65.2 billion in 2012 (13 percent).

The number of mail delivery points has been growing at an annual rate of one to 1.5 percent, from 141.3 million in 2003 to 152.1 million in 2012. This continued growth raises postal network operating costs, and will continue to do so regardless of mail volume.

With its 32,000 retail facilities, fleet of 212,500 vehicles, and about 230 mail processing plants at the end of 2014 when consolidation is complete, the USPS has fixed costs that will stay the same or grow regardless of mail volume.

In fiscal 2013, the USPS lost $5 billion, the seventh consecutive year of losses, though this was a significant improvement over the record loss of nearly $16 billion in FY 2012. The FY 2012 loss included expenses of $11.1 billion to prefund retiree health benefits, accounting for 70 percent of the loss.

FY 2013’s improved performance was due to an eight percent growth in package revenue and a three percent increase in standard mail revenue. However, first class mail and periodicals both continued to decline. Other positive factors included taking in $66 billion in revenue, $1 billion more than revenue projections, and saving $1 billion through workforce reduction (cutting 12 million work hours and shedding 37,400 jobs).

 

The USPS Business Model

With annual increases in mail delivery points and the need to maintain its retail locations, vehicle fleet and mail processing plants, the USPS fixed cost of operation will remain relatively constant even as mail volume and revenue continues to drop. This means that despite a significant reduction in variable costs—decreasing its annual cost base by $16 billion and reducing the size of its career workforce by 202,000 employees since 2006—the USPS will experience an increase in operating costs.

USPS prices for products and services are highly regulated by law. The 2006 Postal Accountability and Enhancement Act divided USPS products into “market-dominant” (mailing services of first class mail, periodicals, standard mail, and individual customer package services) and “competitive” products, also known as shipping services (Express and Priority Mail, bulk parcel post, and bulk international mail). Historically, market-dominant products provide about 88 percent of USPS revenue, while shipping services provide about 12 percent of revenue.

This subdivision of products introduces a complicated pricing scheme. The price for postage of market-dominant mailing services cannot rise at a rate greater than the Consumer Price Index-All Urban Consumers (CPI-U), even if postal costs rise faster than the CPI-U. This means that almost 90 percent of USPS revenues have a ceiling. The prices of shipping services can be raised, but the price charged must cover the costs of handling that class of mail volume. This creates a pricing floor for shipping services, regardless of what competitors might be charging for comparable services.

Other requirements imposed by Congress on the USPS that affect financial performance include failing to reimburse by annual appropriation the difference between nonprofit and standard postage rates; allowing the cost of periodicals delivery to exceed revenue (in 2009, periodicals revenue was just 76 percent of costs); and continuing the provision of the 2006 Postal Accountability and Enhancement Act, requiring the USPS to pre-fund retiree health benefits 75 years into the future in just 10 years (2006-2016) at a cost of $5.5 billion per year.

 

Postal Reform

Without postal reform, it appears likely that in the future, Congress will need to provide appropriations to cover the revenue-expense gap in mail operations. Alternatively, Congress can give up some of its control over the USPS, allowing it to respond more rapidly and appropriately to changes in the marketplace. Congress will need to decide whether the USPS should operate like a business, with control over decisions such as changing prices and introducing new products, closing under-used facilities, and setting wages and benefits for employees, including retirement benefits.

Since the USPS does enjoy a monopoly as part of its obligation to provide universal service, it will need more oversight than a private sector business in order to protect the interests of the American people. But it is clear that the current business model of oversight by the PRC, the USPS Board of Governors, and Congress is unsustainable.

This discussion will conclude with Part 2 in the April issue of Quick Printing.

 

Nancy DeDiemar is a former chairman of NAQP and Printer of the Year. She is the co-publisher of Printips (MyPRINTResource.com/10206473), a newsletter subscription service for printers. Contact her at Nancy91762@gmail.com.

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