Postal Service Pushing the Envelope with Congress; Bailout Demands, Higher Prices and a March 1 DeadlineDecember 13, 2017
The U.S. Postal Service is gearing up to send taxpayers and postal customers a multi-billion dollar “payment due” notice. Congress should halt delivery.
The Postal Service’s push gained considerable steam on December 1. On that day, the Postal Regulatory Commission (PRC), which oversees the Postal Service, issued a report on the ratemaking system established by the 2006 Postal Accountability and Enhancement Act (PAEA), the primary law governing the Postal Service.
The PRC concluded the rate system has not achieved the necessary objectives under PAEA and proposed higher prices.
Under PAEA, the Postal Service has been able to raise prices for monopoly mail products, but only within the maximum amount of the annual Consumer Price Index. The PRC’s key recommendation is that the Postal Service be allowed to increase prices 2-3 percent above the CPI maximum for the next five years.
The Postal Service wanted price caps eliminated entirely. “We continue to believe that any price cap is unnecessary in the rapidly evolving postal marketplace, for which all of our customers have alternatives to using the mail,” said Postmaster General Brennan regarding the PRC decision .
Broader Financial Picture
The Postal Service, though, is seeking a great deal more than higher mail prices.
On November 14, the Postal Service announced a net loss of $2.7 billion for Fiscal Year 2017. While down from a $5.6 billion net loss in Fiscal Year 2016, this marked the 11th consecutive year the Postal Service lost money. Losses from 2007-17 come to $65.1 billion.
In Fiscal Year 2017, the Postal Service did not make any payments of the $6.9 billion due to the federal government for pension and health benefits for retirees. It has also defaulted on retiree health benefit payments of approximately $5.6 billion annually since Fiscal Year 2012.
In announcing its Fiscal Year 2017 financial performance, the Postal Service once again called federal assistance for its retiree healthcare obligations “urgent” while also calling for “legislative and regulatory reform.”
Need for a Turnaround Plan
Before Congress agrees to any subsidy to the Postal Service, to changes in PAEA, or even to accept the higher mail prices, it should demand a clear business turnaround plan from the Postal Service. Some initial near-term questions to be addressed include the following.
- With a well-established customer based and nearly 70 percent of its revenues from monopoly products, why is such a large price increase needed?
- What is the likelihood that higher prices will drive bulk mailers away from the Postal Service, given that the marginal price increase is very significant for them?
- Has the Postal Service studied this issue, as well as the broader impact of the elasticity of its costs on attracting, or driving away business? If not, why not?
- What is the Postal Service’s plan to “right-size” its business from a cost standpoint?
- In its Fiscal Year 2018 Integrated Financial Plan, the Postal Service says that it plans to increase compensation and benefits payments by $200 million annually. How can this be justified when mail volume is projected to drop by more than 4.5 billion pieces?
- Why have so many cost cutting efforts of recent years not been successful?
In its December 1 order on PAEA , the PRC is critical of the Postal Service numerous times for its efficiency and cost cutting efforts, which have slowed in recent years. In the PRC’s words:
“The Commission has repeatedly advised the Postal Service that it must ‘do a better job of quantifying the savings from its cost reduction initiatives.’ In the joint Periodicals Mail Study, the Commission noted the Postal Service’s ‘inability to capture efficiencies in flat mail processing’ and stated that ‘[s]ubstanial opportunities for increasing the efficiency of flat processing and transportation exist.’ The Commission further stated that “[o]ver the past decades the Postal Service has introduced many programs designed to capture some of these efficiencies,’ but that it was ‘unclear how successful these programs have been.’”
Regarding a Postal Service program to better align retail customer service, the PRC said, “The Commission found that the initiative was not likely to optimize the retail network and there was no effective mechanism to accurately identify cost savings”.
Concerning an efficiency initiative to level the volume of mail throughout the week the PRC was again critical. It said, “The Commission found that the plan needed further development and recommended, among other things, that the Postal Service perform a cost-benefit analysis at the national level and develop a plan for measuring cost reductions.”
There are also important questions as to whether the Postal Service is properly accounting for institutional costs on its product lines. The allocation for competitive products’ contribution to institutional costs is currently set by the PRC at 5.5 percent, and has not changed since 2007. Yet, competitive products have consistently grown and now account for nearly 30 percent of the Postal Service’s business.
By law, the product lines cannot cross subsidize one another. Thus, before Congress and the public agree to high first-class mail price increases, the PRC should conclude a docket currently in progress examining whether the 5.5% institutional cost allocation for competitive products is appropriate. It should be transparent, making public the financial information that forms the basis of this key regulatory decision, which has ramifications for the price of first-class mail and consumer postal costs.
As Congress and the public assess the future of the Postal Service, including potential revisions to PAEA, a bailout, and the stamp price hikes, it is important to demand clarity about the Postal Service’s operations. The Postal Service should provide an in-depth turnaround plan, with transparent financial information, as soon as possible.
Near term, those wishing to comment on the PRC’s 10-year review of PAEA and the related proposed stamp price increases can do by visiting: https://www.prc.gov/ . Comments are due by March 1, 2018.
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Paul Steidler is a Senior Fellow with the Consumer Postal Council which champions world-class postal services by promoting programs and policies that increase productivity, transparency and eliminate distortions and efficiencies caused by monopolies. He can be reached at firstname.lastname@example.org .