Simply put, the ACR proceeding raises two questions relating to the law.
- Did the Postal Service's ACR filing show that it complies with the requirements of 39 U.S. Code to 1) provide prompt, reliable, and efficient services to patrons in all areas[39 U.S.C. § 101 (a)] ; and 2) "to assure adequate revenues, including retained earnings, to maintain financial stability?" [39 U.S.C. § 3622(b)(5)].
- If it did not, what actions can or should the Postal Regulatory Commission take?
The first question raises the question about both service quality and postal finances. As service quality in transportation firms often depends on both efficient operations and financial strength focusing on the financial issues raised by this question is sufficient for understanding the challenge facing the PRC.
During the public forum no party other than the Public Representative directly indicated that they understood that the Postal Service did not generate sufficient revenue in 2009 to maintain financial stability. Most parties requested that the PRC take the long view in looking at the question of financial stability. This focus hinted that most parties believe that the Postal Service's business plan did provide service at a sufficiently efficient level to ensure that current rate levels generated adequate revenues to cover operating and legislatively mandated costs and generate retained earnings sufficient to maintain financial stability.
This sentiment is consistent with the public statements of the Postal Service's CFO Joe Corbett who stated in an interview with the Federal Times, "We will need [some assistance from Congress] or we will have difficulty paying all of our obligations this year. And going into next year, we might not have enough cash to operate. ... We are dangerously close to running out of cash."
If the Postal Service is insolvent, as the Federal Times headline implies, then by definition the Postal Service is not sufficiently efficient and does not generate sufficient revenue to maintain financial stability. While the pension and retiree health care issues affect the question of financial stability the PRC is faced with the challenge of making a determination on this issue prior to any action by Congress. Furthermore, the Postal Service has numerous other operating and market challenges that threaten its financial stability that go beyond its retiree benefit issues.
Given the information available to the Commission, both on the record and in the public domain, it may have little choice but to come to the same conclusion that CFO Corbett and the Government Accountability Office have drawn, that it is not now a financially stable enterprise. This question then forces it to address the second question listed above.
What actions can or should the Postal Regulatory Commission take?
The Public Representative has presented a serious, but highly unpopular proposal to deal with the issue of financial stability. It proposed that the Commission order the Postal Service institute rate increases in 2010 and 2011 that would cumulatively raise rates between a 6.3% and 21.2%. The public representative noted that these increases would only return the Postal Service to break even. In a recent post, I noted that a more realistic proposal that included retained earnings could raise rates between 25% and 42.6%.
The prospect of such large rate increases, clearly have large mailers concerned and created a conundrum for the Commission. Large rate increases raise the possibility that large rate increases now would accelerate the diversion of mail to digital alternatives, worsening the prospects of financial stability in 2011 and beyond. (Further study is needed to understand how rates, convenience of recipients, or communication cost-effectiveness drive the switch to digital delivery.)
Commissioner Dan Blair, in his comments raised procedural concerns that the ACR review could turn into a mini rate case. His concerns reflect the intent of the PAEA to generally eliminate the traditional processes of setting postal rates.
So what options do he and other Commissioner's have if they join the consensus that the Postal Service is nearly insolvent? It is this question that inspired the title of this post, "walking the line between the law and disaster."
In my view, the Commission can walk this line if it focuses less on the obvious, the Postal Service's near insolvency. Instead, it should use the ACR Review to advance a framework for discussing the options available to make the Postal Service a financially stable enterprise. Then, the Commission would provide the Postal Service, postal stakeholders, and Congress a method to understand the financial impact of current law and how that law may need to change to create a financially stable enterprise. To that end, I would suggest that parties to the proceeding and the Commission focus on answering or at least asking the following questions.
- What financial goals indicate financial stability for the Postal Service? We know that a financially insolvent Postal Service cannot pay its bills. We know that accounting break-even does not produce financial stability under any financial management theory. We do not know what financial goals a financially stable Postal Service should have, if accounting break-even is no longer appropriate. Nearly all foreign posts have addressed this question first in examining reform of their postal policy. Postal policy in the United States has never addressed this question.
- What level of retained earnings is sufficient? Under the Postal Reorganization Act, accounting break-even was considered sufficient. The 3-year rate cycle, combined by actions of Congress resulted in the Postal Service having almost no retained earnings. In the near term, the Postal Service will soon need to end deferment of capital projects and maintenance, and improving operating efficiency will require capital expenditures to reduce the number of facilities and locate these facilities in locations that promote both cost efficiency and better service quality, transition costs to reduce the workforce at a rate at least equal to the impact of new technology and reduced mail volumes. All of these actions cost money and there is no information on how much it would or could cost or the level of earnings necessary to implement these plans.
- What impact do restrictions on capital have on postal efficiency and service quality? Currently capital spending is limited to what cash is available. The ability of any enterprise to rightsize its operations in the face of changing demand depends on the capital available to restructure its operations and provide incentives for excess employees to leave. Showing how capital constraints are linked to cost efficiency and service quality could provide Congress with a better understanding as to how serious the current situation truly is.