Wednesday, March 30, 2011

Senator McCain's Postal Executive Pay Amendment Explained

In offering Amendment 252 to S. 493, the bill reauthorizing a number of Small Business Administration programs, Senator McCain proposes lower limits on compensation of postal employees.   The amendment removes a section from current law and appears to add a new section but does not identify a section number for the new language.

Senator McCain's amendment changes the limit on the salary paid to the Postmaster General from $276,840 to $230.700. It may affect compensation packages of other senior officers.  It ties the change to the Postal Service's payment of its obligations to the United States Treasury.   The restrictions do not exist if the obligations are to private sector lenders.  This would assume that the Postal Service can issue debt instruments to private sector lenders and private sector lenders would be willing to hold such debt.

The changes in this amendments create a consequence for the Postmaster General as long as the Postal Service has 1) not paid off its debt in full and 2) has unpaid obligations to the United States Treasuries for retiree benefits or workers compensation.   It is not clear if the language would remove these consequences if the Postal Service was current on its retiree health care and workers compensation payments but had yet to make its required payment. 

Legislative Language

Changes to U.S. Code Title 39 Section 3686 (as it now exists with proposed changes)

(a) In General.— The Postal Service may establish 1 or more programs to provide bonuses or other rewards to officers and employees of the Postal Service in senior executive or equivalent positions to achieve the objectives of this chapter.

(b) Limitation on Total Compensation.— (1) In general.— Under any such program, the Postal Service may award a bonus or other reward in excess of the limitation set forth in the last sentence of section 1003 (a), if such program has been approved under paragraph (2). Any such award or bonus may not cause the total compensation of such officer or employee to exceed the total annual compensation payable to the Vice President under section 104 of title 3 as of the end of the calendar year in which the bonus or award is paid.

(2) Approval process.— If the Postal Service wishes to have the authority, under any program described in subsection (a), to award bonuses or other rewards in excess of the limitation set forth in the last sentence of section 1003 (a)—

(A) the Postal Service shall make an appropriate request to the Board of Governors of the Postal Service in such form and manner as the Board requires; and

(B) the Board of Governors shall approve any such request if the Board certifies, for the annual appraisal period involved, that the performance appraisal system for affected officers and employees of the Postal Service (as designed and applied) makes meaningful distinctions based on relative performance.(3) Revocation authority.— If the Board of Governors of the Postal Service finds that a performance appraisal system previously approved under paragraph (2)(B) does not (as designed and applied) make meaningful distinctions based on relative performance, the Board may revoke or suspend the authority of the Postal Service to continue a program approved under paragraph (2) until such time as appropriate corrective measures have, in the judgment of the Board, been taken.

(c) Exceptions for Critical Positions.— Notwithstanding any other provision of law, the Board of Governors may allow up to 12 officers or employees of the Postal Service in critical senior executive or equivalent positions to receive total compensation in an amount not to exceed 120 percent of the total annual compensation payable to the Vice President under section 104 of title 3 as of the end of the calendar year in which such payment is received. For each exception made under this subsection, the Board shall provide written notification to the Director of the Office of Personnel Management and the Congress within 30 days after the payment is made setting forth the name of the officer or employee involved, the critical nature of his or her duties and responsibilities, and the basis for determining that such payment is warranted.

(d) (c) Information for Inclusion in Comprehensive Statement.— Included in its comprehensive statement under section 2401 (e) for any period shall be—

(1) the name of each person receiving a bonus or other payment during such period which would not have been allowable but for the provisions of subsection (b) or (c);

(2) the amount of the bonus or other payment; and

(3) the amount by which the limitation set forth in the last sentence of section 1003 (a) was exceeded as a result of such bonus or other payment.

(e) (d) Regulations.— The Board of Governors may prescribe regulations for the administration of this section.
New Law
(b) LIMITATION ON PAY --Notwithstanding any other provision of law, the total annual pay of the Postmaster General or any other officer or employee of the Postal Service may not exceed the total annual pay payable to the Vice President under section 104 of title 3, United States Code until the Postal Service has paid--
(1) any obligation and any borrowed money under section 2005 of title 39 of the United States Code, and
(2) any other debt owed to the united States Treasury

Senator McCain's Healthcare Premium Amendment Explained

In offering Amendment 251 ot S. 493, the bill reauthorizing a number of Small Business Administration programs, Senator McCain proposes to reduce the Postal Service's share of the the health insurance premium from  81%  to 72%  and reduce the Postal Service's share of the life insurance premium from 100% to 33%.   According to the Government Accountability Office this would have saved the Postal Service $619 million in FY 2009.   Given increases in health insurance premiums, this is likely significantly higher today.

This amemdment has different effects for the Postal Service's unionized and non-union employees.    The Postal Service could implement this provision nearly immediately for its non-union employees.  For unionized employees, it takes benefits off of the negotiating table.  It would likely require the Postal Service to amend the language in the recently negotiated APWU contract to comply with the provisions in this amendment.   For the Postal Service's other three unions, the amendment changes the dynamics of contract negotiations as it would force a reduction in total compensation before negotiations begin.

The legislative language is not clear in two respects.
  • First, it is unclear whether the certification that needs to be filed before fiscal year 2012 requires that the Potsal Service paid no more than 72% of the health care premiums and 33% of the life insurance premiums in all of fiscal year 2011 or whether those percentages must apply for all pay periods beginning in fiscal year 2012.  If the former applies, Postal Service could see a significant cut in take home pay for the rest of the fiscal year to bring their share of premiums up to the level that Senator McCain is proposing.  
  • Second, it is not clear if the Federal Govrnment can pay the Postal Service for the postage that it would want to use in fiscal year 2012.   This could end all mail generated by the government, as the Postal Service would be unlikely to accept mail from the Federal Government without postage applied.  Members of Congress could use campaign or political party accounts to pay for newsletters and letters to constituants.  
Legislative Language

(a) IN GENERAL.--If the Postmaster General does not submit a certification described under subsection (b) to Congress before fiscal year 2012 and each fiscal year thereafter--

(1) no sums may be appropiriated from the United State Treasury to the United States Postal Service with respect to that fiscal year; and

(2) notwithstnding section 2005(a) of title 39, United States Code, the United States Postal Service may not borrow any money under that section with respect to that fiscal year.

(b) CERTIFICATION.--A certificatin referred to under section (a) is a certification that, with respect to the applicable fiscal year, the contribution by the United States Postal Service for employees for--

(1) life insurance benefits shall not exceed the maximum contribution provided for under section 8708 of title 5 United States Code; and

(2) health insurance benefits shall not exceed the maximum contributin provided for under section 8906 of title 5, United States Code

The Future of the Document - White Pages

The Baltimore Sun reported today that the Maryland legislature will soon vote to end the requirement that Verizon deliver the White Pages in Maryland.   While Pages are an anachronysm as land line telephone numbers are available from many sources on line including .  More importantly, the value of a directory of land line phone numbers in print or on line is declining as more and more indivduals only have wireless phone numbers that are not listed.

The loss of the White Pages will hurt the paper manufacturers and directory printers as well as companies paid by Verizon to drop the directories at every Maryland address.   The loss will also be felt by every young child who is not quite tall enough to sit at the big people's table on Thanksgiving.

McCain Amendment on Rural Service Explained

Trying to understand legislative language is hard as often a bill may only change a few words or a sentence, leaving it up to the reader to understand what changes.  The paragraph below shows the changes that Senator John McCain wants to make to the section of the Tile 39 U.S.C. that describe public policy regarding rural post offices.  The changes are included in amendment No 250 to S.493 which reauthorizes a number of Small Business Administration programs.

Section 101

(b)The Postal Service shall provide a maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self-sustaining. No small post office shall be closed solely for operating at a deficit, it being It is the specific intent of the Congress that effective postal services be insured to residents of both urban and rural communities.

The changes to this paragraph give the Postal Service more flexibility in closing post offices.  Most importantly it allows the Postal Service to close a retail location if it is losing money.  The amendment removes any special protection that rural, Postal Service staffed, Post Offices may have in current law.

 It may also give the Postal Service more flexibility in providing delivery services as postal services may describe everything from the sale of postage to the delivery of a a mail or parcel.  It may also give the Postal Service some flexibility in defining service standards for rural communites.

Tuesday, March 29, 2011

Postal Employees Could Face Increased Contribution for Health Care Insurance

Postal News has reported that Senator John McCain has offered an amendment to Senate Bill 493 that would force the Postal Service to increase the share of the health insurance and life insurance premiums that employees pay.   The amemdment would set a floor on employee health insurance contribution equal to what Federal employees pay.  The amendment puts severe restrictions on Postal Service borrowing and payments to the Postal Service from the U.S. Treasury if it does not change how much employees contribute to their health and life insurance premium.  It is not clear if the amendment would prohibit the Treasury from paying for postage for mailings of Congress or executive departments.

Senate Bill 493 reauthorizes a number of popular Small Business Administartion programs.  These include the Small Business Innovation Research (SBIR), Small Business Technology Transfer (STTR) and  the Federal and State Technology Partnership (FAST) programs. 

According to Thomas, the legislative information service of the Library of Congress, the bill is currently on the Senate floor.   It is on the legislative agenda for today so it is possible that Senator McCain's ammendment will be considered by the Senate either today or shortly thereafter.

A Look Back in History - How a Postal Clerk Saved Lives

One of my favorite history books is Only Yesterday by Frederick Lewis Allen.    Only Yesterday is an informal history of the period from the end of World War I to the Great Crash in 1929.  As such, it combines a history of the culture of the time with politics and economics that gives life to a period that is only distant memory.  Fortunately, for web savvy readers, the University of Virginia has put the book on line for anyone to read for free.  (They also have a remarkable list of other books of American historical and literary significance that can be read for free.)

I was reminded about the book when I checked up on the background of Ryan L. Cole's who wrote an op-ed on the Postal Service in today's Washington Times. Mr. Cole was a former speechwriter in the George W. Bush administration at the U.S. Department of Health and Human Services. He has written a number of articles in conservative publications. One article he co-wrote caught my eye, Reassessing Warren Harding. Warren Harding and his successor Calvin Coolidge represent examples of Presidents whose public policy views most closely align with current Republicans and governed during the last period of limited government involvement in the economy, and active government involvement in the major social issue of the time, prohibition.

After reading his article on Warren Harding, I thought that maybe it was time for me to read Only Yesterday again.   Fortunately, I found it on the University of Virginia website and just got to the beginning of the second chapter when I found a beautiful passage that showed how the actions of a postal clerks may have saved many injuries and possibly deaths. The passage is in a chapter describing the factors that led to the Red Scare in the early 1920's, Mr. Allen describes the first incident that allowed politicians and industrialists to exploit the fear of Communism to suit their political and economic interests and led to major restrictions in immigrations of Jewish, Italian, Irish and other European ethnic "radicals."

The events of 1919 did much to feed this fear. On the 28th of April-while Wilson was negotiating the Peace Treaty at Paris, and homecoming troops were parading under Victory Arches-an infernal machine "big enough to blow out the entire side of the County-City Building" was found in Mayor Ole Hanson's mail at Seattle. Mayor Hanson had been stumping the country to arouse it to the Red Menace. The following afternoon a colored servant opened a package addressed to Senator Thomas R. Hardwick at his home in Atlanta, Georgia, and a bomb in the package blew off her hands. Senator Hardwick, as chairman of the Immigration Committee of the Senate, had proposed restricting immigration as a means of keeping out Bolshevism.

At two o'clock the next morning Charles Caplan, a clerk the parcel post division of the New York Post Office, was on his way home to Harlem when he read in a newspaper about the Hardwick bomb. The package was described news story as being about six inches long and three being done up in brown paper and, like the Hanson bomb, marked with the (false, of course) return address of Gimbel Brothers in New York. There was thing familiar to Mr. Caplan about this description. He thought he remembered having seen some packages like that. He racked his brain, and suddenly it all came back to him. He hurried back to the Post Office-and found, neatly laid away on a shelf where he had put them because of insufficient postage, sixteen little brown-paper packages with the Gimbel return address on them. They were addressed to Attorney-General Palmer, Postmaster-General Judge Landis of Chicago, Justice Holmes of the Supreme Court, Secretary of Labor Wilson, Commissioner of Immigration Caminetti, J. P. Morgan, John D. Rockefeller, and a number of other government officials and capitalists. The packages were examined by the police in a neighboring house, and found to contain bombs. Others had started on their way through the mails; the total number ultimately accounted for reached thirty-six. (None of the other packages were carelessly opened, it is hardly necessary to say; for the next few days people in high station were very circumspect about undoing brown-paper packages.) The list of intended recipients was strong evidence that the bombs had been sent by an alien radical.

I have no idea whether this crime was ever solved but I am sure the amateur and professional Postal historians who follow this blog will be kind enough to provide a comment to tell my readers if the case was solved.

Why Rural Post Offices Resonate

As part of research that I am currently doing, I ended up looking at the city page of Ash Flat, Arkansas. In describing the history of the town, one line stands out.

With increases in population and trade, Ash Flat became a town when a new post office was built in 1856.

If a town is born when a new post office is created, it is not surprising that a town mourns what looks like its approaching death when its post office closes.  

Logistics Does Not End At The Dock

Here is a video from Great Britain showing the logistics inside of National Health Service Hospital.   Obviously internal logistics, including inventory management create real opportunities for companies like DHL, FedEx, TNT and United Parcel Service that handle logistics to the dock door.  You can see by looking at shirt logos that thos is a DHL contract operations.   So it is possible for DHL to handle the logistics from manufacturer to patient.  

A Brilliant DHL Advertisement

Evert carrier is trying to promote their global reach and logistics capabilites.Anyone who has watched the NCAA tournament has seen UPS's campaign,  Here is a humorous take on this theme from DHL,

Saturday, March 26, 2011

Macroeconomics and the Mailing Industry

The mailing industry is an industry that depends on strong consumer demand.   Whether we are talking about transactions paid through the mail, advertising, or parcel delivery, mail volume will rise or fall depending on consumer demand.   The industry will likely prosper if consumer demand grows and will face even more challenges than it does now if consumer demand falls.  That is why the current debate regarding fiscal policy and the macroeconomic effects of that debate fiscal policy is so important to the industry. 

A recent article in the National Journal nicely summarizes the opposing viewpoints as expressed by the Joint Economic Committee Republicans and the Federal Reserve Chairman  Benjamin Bernanke and a number of economists including Chad Stone of The Center on Budget and Policy Priorities.  

When I first read the Joint Economic Committee Republican report, I was struck by one prescription that the National Journal summarizes as follows:   "The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages." Cutting the wages of college educated Americans did not seem like a good way to increase the demand for the products and services that are advertised or delivered by mail especially as the customers of the mailing industry are facing higher fuel and food costs to begin with.

As the National Journal article concludes, "Ultimately, the argument comes down to what policymakers see as the key problem in the economy. Is growth slow because businesses and consumers fear higher taxes or because businesses don’t have enough demand for their products to expand? Republicans are arguing the former, but many economists — and the bond market — believe the latter is closer to the truth. Moody’s bond-rating agency warned on Thursday that the U.K. is in danger of having its debt downgraded due to worries about slow growth resulting from consolidation."

This is not a debate that the mailing industry would normally get involved in.   However, it may be worth the time of industry firms to spend a little time thinking about a very complex economic issue to make sure that Congress chooses the economic approach that best aligns with the industry's interests.  It is my opinion that the industry would be better served by an economic approach supported by the bond market than one developed by politicians.

Self-sufficiency is a Long Way Away

The Postal Service released its monthly financials for February that showed an operating loss of $230.   For the year to date operating income was $18 million, meaning that February will be the last month that the Postal Service shows an operating profit this year.

While the February numbers look bad, they do not fully explain how difficult the Postal Service's financial situation really is.  For example:
  • Financial self-sufficiency would require that the Postal Service earn an operating profit of over $530 million per month.   ( i.e. an operating margin of 12%)    Only with an operating margin of this size would the Postal Service have the capital to invest in its infrastructure, cover the costs of downsizing, and cover its workers compensation expenses, pay its debt.  It is not clear if even an operating margin of that size would allow it to make the contribution for retiree healthcare obligations without cutting spending that would allow it to remain self self sufficent.
  • The Postal Service's incentives for early retirement that were announced on March 15th were pushed back into fiscal years 2012 and 2013.  A self-sufficient Postal Service would have offered the $20,000 lump sum incentive for early retirement as payment upon retirement, increasing the value of the incentive to employees and most likely incresing the number of employees taking advantage of early retirement.  The cash squeeze prevented the Postal Service from offering the incentive that would cut the layer of management that it wants to cut quickly.
  • Depreciation as an expense is decreasing over last year and plan.   Declining depreciation suggests that the Postal Service is not upgrading or replacing its physical assets.   Right now the Postal Service is falling behind both foreign postal operators and its customers in upgrading the information technology infrastructure, and using the most efficient mail and parcel sortation and material handling equipment.  The lack of capital also makes consolidating the processing network more difficult as the Postal Service is unable to adjust its network by replacing multiple  plants with one in a new location that could more efficiently and effectively provide the service customers demand.
  • Vehicle maintenance expenses are up 11.9% over plan and 13.7% over last year.  The Postal Service operates 215,000 delivery vehicles.  Without the cash to replace this fleet, vehicle maintenance expenses will continue to grow at double digit rates.
  • Fuel costs are growing much faster than inflation and the rates on products that require significant transportation expenses.  Besides fuel used by its delivery fleet, contract carriers that move mail by air and truck between facilities all have fuel surcharge provisions in contracts that raise Postal Service expenses as fuel prices rise.  Fuel increases of 1 cent raise Postal Service costs by $6.5 million.   Given current prices of gasoline and diesel fuel and expected trends through the summer driving season, the Postal Service will spend between $500 and $600 more on vehicle fuel costs this year than plan nearly wiping out all of the savings from the management restructuring announced this week. 
On April 5th, the House Oversight and Government Reform Committee will be looking at issues relating to the labor relations and employment law that governs the Postal Service.   These issues are important as compensation costs represent 72% of the Postal Service's total costs this year.  Cutting compensation costs will have some effect in lowering this percentage and requires looking at pay schedules, work hours, and the pay schedule that applies to the employee doing needed work, including whether the work is performed by a non-uinion or unionized employee.   To the extent that the APWU contract allows the Postal Service to reduce total compensation costs then it will help improve the Postal Service's bottom line and have some effect on reducing employee compensation's share of total costs.  

However, as the bullet points above show, many of the red flags associated with the long-term prospects of the Postal Service focus on the lack of capital spending.   The lack of cash has the effect of depressing non-compensation expenses artificially inflating the share of total costs related to compensation buth now but more importantly long term as they reduce the ability of the Postal Service to reduce the labor required to handle the mail it will be expected to deliver.

Friday, March 25, 2011

Why Mail Matters: L.L. Bean

On March 24th, L. L. Bean announced that it will offer free shipping on all shipments no matter how small.   L. L. Bean can afford to do this because many of its light weight shipments and delivered through the Postal Service either through a direct contract with the Postal Service or through a consolidator like FedEx's SmartPost or UPS SurePost

 L.L. Bean is not alone in offering free shipping.  Firms like use free shipping on specific items to shift customer demand toward certain items and away from others.  Landsend offers free shipping offers to e-mail subscirbers on a regular basis  Other firms require minimum purchases ranging from $25 for to $99 for Macy's.   The Postal Service is critical for these firms when they need to ship small or light-weight items as a means to control the total delived price to consumers.

L. L. Bean move is smart because web based consumers look at the not just the product price but the delivered price when purchasing.  By eliminating the shipping charge, customers know their full price up-front without having to look at their shopping cart or in some cases go through the process of filling out all shipping detail before getting the shipping charges.  

Thursday, March 24, 2011

Could Ford provide the next LLV for the USPS?

Norway Post has announced that it will puchase 40 Ford Electric Transit Vans.  With 28 kWh of power to call on, Transit Connect Electric has a top speed of 120 km/h (75 mph) and a range of up to 130 km (80 miles) on a full charge. 

Ford alreadysells the van in the U.S. and makes a right-hand drive version of the Transit Van for the British market where it holds a 25% market share.  So the Postal Service should have no problems finding a willing and able vendor for tens of thousand of vans.

Pitney Bowes Hires VP to Run Secure Digital Mail Business

Pitney Bowes announced yesterday that Chuck Cordray to the new position of president of the Volly™ secure digital delivery service. 

Cordray joins Pitney Bowes from Hearst Corporation, where he served as senior vice president and general manager of Hearst Magazines Digital Media. In this role, he was responsible for the strategic direction and operating management for Hearst’s digital activities, including advertising, editorial, online consumer marketing, partnerships and project management for 24 different websites, including 12 tied to Hearst magazine properties and 12 purely digital sites.

Cordray previously held executive leadership roles for several large consumer brands, including TV Guide Publishing Group, Primedia, Inc., and Meredith Corporation.

“Chuck Cordray knows the consumer digital space and has operated effectively there for years,” said Leslie Abi-Karam, executive vice president and president, mailing solutions management, Pitney Bowes. “He is well-positioned to lead our growing Volly team in the emerging market for secure digital delivery services, and guide the team toward our consumer launch in the second half of the year.”

The Volly™ secure digital delivery service, unveiled in January, is a new cloud-based digital mail communications platform that will empower consumers to receive, view, organize, and manage bills, statements, direct marketing, catalogs, coupons and other content from multiple providers using a single application. This opt-in, consumer-focused consolidation service also includes online bill pay.

“I am very excited to join Pitney Bowes to help shape the fantastic opportunity that Volly represents,” commented Cordray. “The company brings invaluable assets to this emerging market: unsurpassed security technology, deep relationships with mailers, and a 90-year commitment to helping companies manage their customer communications. That is a winning combination.”

When Will the Postal Service Reduce Staff?

The Postal Service has published a detailed schedule of dates that are important for employees whose jobs will be affected by the management restructuring.  Anyone who could be affected should print out, or bookmark this schedule and add the key dates to their smartphone calendar so they are sure act by the required deadlines if they plan to take advantage of early retirement or will need to find a new job within the Postal Service.

For those outside of the Postal Service, only those dates on which current Postal employees will leave employment matter.  These are the dates that the Postal Service begins experiencing cost savings from either early retirements or RIF's.  These dates are:

  • May 31, 2011 - effective retirement date for individuals taking VERA or retirement incentives
  • September 9, 2011 - last separation date for RIF although some will separate earlier
How much the Postal Service saves this year depends on how many of the 7,500 reductions in management employees take early retirement and how many are laid off in a RIF.  

The Postal Service will save 1/4 of a year's compensation from everyone who retires this fiscal year while the incentive will not show up on the income statement until fiscal years 2012 and 2013.  Savings for those who are RIF'ed is limited to one month of FY 2011 salary.  Some individuals who are RIF'ed may face separation before that date but it is not clear at this point how many.

RIF's have other costs associated with unemployment insurance and possibly severance payments.   I have read the civil service RIF rules but find them confusing so I am not sure how provision for separation payments would apply to Postal Service employees.  With a September 9th separation date, it is likely that most of the costs of a RIF would occur in FY 2012.

Why the April 5th Hearing is Important

The quotes from Congressmen Darrell Issa and Dennis Ross that have been quoted in the press have all come from  a press release of  the House Oversight and Government Reform Committee.    Most articles ignored the following quote "This hearing will establish an important baseline for Congress' upcoming work on the Postal Service's structure, fiscal health and self-governance," from Congressman Darrell Issa that better than anything so far lays out the issues that the committee will look at in regards to the Postal Service.  These are:
  • Postal Service's structure - this most likely focuses on the management structure as well as questions regarding the network of processing plants and retail outlets, the use of contractors, work sharing, civil service employment law and how it applies to the Postal Service, and labor relations issues including the current collective bargaining process
  • Postal Service's fiscal health - the focus here is clearly the prospects of the Postal Service being financially self-sufficient.   This will likely include the question, "Can the Postal Service be self-sufficient and pay the retiree benefit liability obligations currently required by law?"
  • Postal Service Self Governance - the focus here is the Postal Service's business model.   Here the committee will likely focus on the Board of Governors and senior management looking to see if the current structure gives the proper incentives to ensure financial self-sufficiency.   The focus on the business model will need to include returning to a government department model as well as corporatization and privatization models employed outside of the United States. 
The hearing on April 5th will be a full committee hearing.  As a full committee meeting, the review of the APWU contract will get broader coverage on the 24 hour news channels, other print and broadcast media, on talk-radio and the blogosphere.   This could raise the Postal Service up a notch or two on the national policy debate.   How that affects the ability of Congress to find a solution that solves the Postal Service's problems is anyone's guess.

In Praise of Quad Graphics

The challenge for companies selling print is that they need a non-print strategy to sell their companies capabilities.   This includes the use of blogs, Facebook LinkedIn, and Twitter. 

One old line print company is doing a  nice job in what appears to be their first step into the use of social media to promote their business.  I have recently added Quad Graphics to my Twitter feed (#QuadGraphics is their hashtag) and am glad I did.   It is an excelent source of links to news articles and forums that Quad Graphics is running on twitter.  I urge those who follow the mailing industry on Twitter to add this twitterer to their list that they follow and they will learn much

Wednesday, March 23, 2011

Why Didn't APWU Compensation Go Down?

Government Executive and Federal Times both reported today that the House Oversight and Government Reform Committee will be holding a hearing on April 5 on Postal Service pay.   It is clear from quotes attributed to Congressmen Darrell Issa and Dennis Ross that the Postal Service's witness is going to have a very unpleasant time. 

The Postal Service should expect a grilling from members of both parties in Congress.   Congress is the representative of the shareholder and the two largest creditors facing the prospect that their bills for over $5.5 billion will not be paid next fall and similar bills in future years may not be paid.  If the Postal Service takes actions that do not reduce the non-payment risk of those payments due next fall and ones due in future years than Congress is within its right to raise questions as to whether the current Board of Governors needs to be replaced and could even put the new Postmaster General and his management team at risk of replacement.  
The grilling that the Postal Service faces will likely ask one question repeatedly.  Why was the Postal Service willing to sign any contract that did not freeze or reduce the compensation of current APWU members if APWU members enjoy a significant wage premium?  

This will be the central question because testimony was presented by Michael Wachter in 2003 to the President's Commission that stated Postal Service employees enjoyed a 34.2% wage premium has been quoted by Representative Dennis Ross as the basis for his concern that the Postal Service was not tough enough in negotiating the APWU contract.  Dissapointment with the agreement was also expressed by Congressman Darrel Issa who stated "The union contract renewals are the best chance to find new savings. Unfortunately, this looks like a missed opportunity. The Postal Service must show Congress and the American people that it can pay its own way, because the numbers do not seem to add up."

These comments reflect real concern because it is not clear if the Postal Service will have the money to pay the wage increases to current employees in 2012 through the end of the contract.   However, it is not clear that going to arbitration would have produced a more favorable settlement for the Postal Service, even if it presented new testimony of Dr. Michael Wachter that continued to show a wage premium of a similar magnitude.  Having looked at the challenges of unionized firms facing the need to reduce compensation expenses in order to remain competitive found few firms that were able to do this outside of bankruptcy regardless of whether negotiations were conducted under the Railway Labor Act or the National Labor Relations Act.   Even firms without unions find it difficult to impose significant pay cuts on current employees, although it was not uncommon during the last recession for non-union firms to both increase the share of health care premiums paid by employees and eliminate the match to 401-K plans.   Many of these companies have restored these benefits as the recession ended. 
The House committee has two options in looking at the compensation question.  The easy way is to bash Postal Service management and grab headlines by focusing only on the wage premium issue.  A more constructive alternative would look at what would be required to bring compensation closer in line to market values.   To do that they need to look at the following questions:
  1. Update the Wachter study and include analyses that look at alternative alternative approaches to this question.  
  2. Update the Wachter study using the compensation of APWU members under various scenarios under which increasing proportions of APWU members are employed under the new compensation schedules, employee classifications and work rules.
  3. Examine the impact of the contract provisions that increase flexibility that allow the Postal Service to eliminate the cost of contracted services for work that an APWU member could do for 2 to 4 hours within a longer shift.  
  4. Similarly, what is the difference in cost between using an APWU member and the non-union employee that the Postal Service is planning to displace?
  5. Examine the options the Postal Service has to convince existing APWU members to retire.   A large share if not the majority of APWU members are at the highest pay step for the type of work that they do.   Replacing these employees that are earning the highest availalble salary with those who are new would significantly cut costs.   

    In particular, the committee needs to ask two questions here.  First, what proportion of APWU members, other postal unions, and management employees are eligible to retire now?  Second, what is the increase in the retirement rate if a VERA is introduced and for retirement incentives ranging between 5,000 and a half year's salary?  The answer to these questions would help illustrate the type of incentive necessary to increase the attrition rate to a level high enough to significantly cut compensation.
  6. Examine the arbitration process in order to determine the probability whether the Postal Service would have been generated a better result than what the Postal Service agreed to using either current law or changes suggested by Senator Susan Collins.  This examination should also determine whether alternative approaches allowed by the National Labor Relations Act or Railway Act could have produced a result that would have had frozen or reduced the compensation of APWU employees without the threat of barnkrutcy or liquidataion.
If the committee concludes after asking these questions that the APWU contract and similar negotiated contracts with other unions as well as contracts that arbitration would produce would still be unaffordable, then it must determine if the more drastic option only available to firms in bankruptcy should be pursued.   That would allow the Postal Service to break existing labor agreements and impose lower cost compensation schedules.  In doing so, the committee has to ask how much this option would disrupt the mail delivery system and the probability that the Postal Service will have a business that can generate the cash over the next thirty years to cover its payments on retirement liabilities.

The Importance of Regulation

Currently there is a major push by Congressman Darrell Issa to examine how government regulation affects economic activity.   There is no question that government regulation affects the cost of running a business.   However, those who believe that elimination of regulation is a good idea need look no further than the unregulated Japanese nuclear power industry, and poor regulation of oil drilling in the gulf, and the financial meltdown that caused the great recession.   In all three cases, the relaxation of regulation reflected the problem of dealing with rare but expensive risks.  

The importance of dealing with risk is recognized by many economists, most notably Richard Posner, a conservative economist and judge who recently wrote:

If the probability of loss is high, strenuous efforts will be made to avert it or mitigate its consequences. But if the probability is believed to be very low, the proper course to take will be difficult, both as a matter of sound policy and as a political matter (to which I return in the last paragraph of this comment), to determine and implement. The relevant cost is the catastrophic loss if it occurs discounted (multiplied) by the probability of its occurring. If that probability is believed to be very low, the expected cost may be reckoned to be low even if, should the loss occur, it would be catastrophic. And if the expected cost is low but the cost of prevention is high, then doing nothing to prevent the risk from materializing may be the optimal course of (in)action

The key here the "perception of risk."  The perception of risk is key as there are many factors that cause us to downplay or overplay the risk of an event.   For example, if preventing aheart attack requires a major change of diet that one does not want to make, no amount of prodding from a doctor or previous heart attacks, may cause the person to change.  Richard Posner goes on to explain the issue of risk perception for politicians

It would not be surprising, however, if as seems to be the case Japan failed to take cost-justified measures to minimize the damage from a 9.0 or greater earthquake. Politicians have limited time horizons. If the annual probability of some catastrophe is 1 percent, and a politician’s horizon is 5 years, he will be reluctant to support significant expenditures to reduce the likelihood or magnitude of the catastrophe, because to do so would involve supporting either higher taxes or a reallocation of government expenditures from services that provide immediate benefits to constituents. In principle, it is true, politicians would take a long view if their constituents did out of concern for their children and grandchildren. But considering how the elderly cling to their social benefits, paid for by the young including their own young, I doubt the strength of that factor, although I do not know enough about Japanese politics to venture a guess on whether politicians’ truncated policy horizons was indeed a factor in Japan’s surprising lack of preparations for responding promptly and effectively to the kind of disaster that has occurred.

The industries in the United States that face the greatest level of regulations, those in mining, construction, chemical, oil and gas, transportation of hazardous materials, and nuclear power, as well as the provision of health care, medical supplies, drugs and equipment. All are examples of industries that face the risk of rare but spectacular catastrophes.  

As the House Government Reform and Oversight Committee looks at government regulation, they need to look at the Japanese example of an unregulated market in an industry that has rare but catastrophic risks.  As Judge Richard Posner notes the U.S. and not Japan has an independent Nuclear Regulatory Industry.   Before condemming all regulations, it is worth looking at what happens when effective regulation does not exist. 

.  It is not enough to look at the cost to the firms involved of regulation but it is imporatant to determine if the regulations would argue impose costs that are less than the expenses associated with losses the regulations are designed to prevent.

Tuesday, March 22, 2011

Socialists Oppose USPS - APWU Contract

An Op-ed by Hector Cordon on the World Socialist website calls for rejection of the APWU-USPS contract.

This contract, along with the claim that postal workers must sacrifice due to the financial crisis of the postal service, must be overwhelmingly rejected. A rejection of the contract then requires that steps be taken to prevent a so-called “neutral” arbitrator from imposing this sell-out agreement against the will of the rank and file. No confidence can be placed in the APWU to carry out a fight to defend its membership. It is necessary to build rank-and-file committees completely independent of the APWU to undertake a defense of jobs, wages and working conditions on the basis of an independent political struggle for a socialist program.

Monday, March 21, 2011

Is Arbitration Better for the Postal Service?

Many of the readers of the blog have raised the questions as to whether the Postal Service would have been better served going to arbitration. In a comment to another post a reader provided a history of  previous contracts that were sent to arbitration,   The picture is not pretty.
  • 1978 -1981 James Healy rules in favor of unions on COLAs (no cap) and partially in favor of management on no lay-off clause, which is changed prospectively to cover only employees with a minimum of six years of service. Total increases of 31%
  • 1984-1987 Clark Kerr rules in favor of unions with penalty overtime over 10hrs, continuation of COLA. Total increases of 13%
  • 1990 – 1994 Richard Mittenthal rules in favor of Transitional Employees and Arbitrator Valtin decided the issue of health benefits which resulted in a 4% increase in employees’ share of healthcare cost. Total increases of 12%
  • 1994 – 1998 Jack Clarke imposed a four-year agreement with COLA Roll-in. Total increases of 6.25%
  • 2000 – 2003 Stephen Goldberg rules in favor of a 3 yr agreement. Total increases of 6.49%
These results are taken from a fact sheet, "A History of Postal Worker Salaries,"  that the APWU developed review the results of all contract settlements including those that were settled through negotiations and those that were settled in arbitration. 
The only paper on this topic "Labor Market Outcomes of Postal Reorganization" by D. Richard Froelke, the former manager of collective bargaining for the U.S. Postal Service was published in the book Mail @ the Millennium, edited by Edward Hudgins and published by the Cato Institute.  This paper provides more detail on labor negotiations through the year 2000.   Most importantly, this paper indicates that the problems in wage and benefit levels reflect the continuation of contract provisions and an understanding of pay compatibility that existed in the 1970's that has been nearly imposible to remove in either a negotiated or arbitrated settlement.   The list of arbitrated settlements above, which are described in more detail in the Mr. Froelke's article illustrates that eliminating wage premiums and restrictive work rules in arbitration did not occur even after the Postal Service began presenting significant evidence to an arbitrator regarding the need to control compensation costs.
Finally, it is worth noting that many who argued prior to passage of the Postal Accountability and Enhancement Act that steps were needed to constrain wages made recommendations that are not much different than contract provisions in the APWU contract.   For example, Michael Schuyler, Senior Economist at the Institute for Research in the Economics of Taxation made the following recommendations in the paper, "How to Bring Postal Compensation into Line With The Private Sector," a paper published in 2003.
  • Increase postal compensation at the rate of inflation until the postal pay premium is reduced or eliminated.
  • Increase postal pay more slowly than increases in an index of private sector labor costs to gradually reduce the postal pay premium. 
  • Restrain postal wages when the postal worker quit rate is very low or the number of qualified people seeking postal jobs is very high.
  • Vary postal wages by geographic region.
  • Increase the use of part-time and temporary employees who would receive market or above-market compensation but less of a pay premium than full-time career employees.
With the exception of varying pay by geographic region, the APWU contract goes further than the suggestions made by Mr. Schuyler as it imposes, for non-career and new full time employees, a pay schedule and a definition of a full-time job that most likely closely matches market compensation and work rules for the work that APWU members perform.  The cost of getting the market based compensation and workrules for new employees  is a limit on wage increases for current employees to increases that follow his suggestions.   If the Postal Service can increase the pace of retirement of current APWU members, then I am willing to bet he and others that have written about a pay premium would agree that the trade-off represents a reasonable deal for both sides.

Compensation Comparison Chart

Thanks to my readers I was able to create a chart comparing Postal Service compensation to compensation at FedEx Express and United Parcel Service.  As all readers know FedEx Express is non-union UPS is organized by the Teamsters and the Postal Service is organized by one of four craft unions.  The Postal Service compensation figures are from 2009 and were provided by the Postal Service to reporters prior to beginning of negotiations with APWU and NRLC.

The comparison's are a bit disingenuous for the APWU includes a number of maintenance crafts that are higher paid then the most employees that sort mail.  Therefore a fairer comparison would compare the average compensation of employees that sort mail or work at a retail counter with the wages paid UPS and FedEx inside workers.   

The comparisons illustrates why the compensation levels negotiated with the APWU for new employees and non-career positions have much lower wages.   It is clear that the new wage structure should bring APWU members that sort mail or work a retail counter to an average compensation level that will fall between what FedEx and UPS now pay.   If one assumes that UPS and FedEx employees see increases in compensation in the next few years, either due to contract provisions or increases reflecting improving business at both firms, then it is possible that by the end of the contract, APWU average compensation will likely be closer to what FedEx will pay its employees than what UPS will.

In many ways, Mailhandler union members face a worse comparison that APWU members.   Few of their employees are in maintenance and other positions that generate higher salaries.   Therefore, their average salary is likely further above market rates than APWU members.   Therefore, the contract that they will negotiate next fall will likely have all of the changes in work rules and pay schedules that the APWU just agreed to.  They may find it more difficult to negotiate any protections for current employees that the APWU did.

For members of the NALC and NRLC unions the comparison is a bit more complicated.   Their current compensation falls between UPS and FedEx compensation levels.   However, Postal Service is seeing its volumes decline while UPS and FedEx volumes are growing.  Also determining what is a fair wage for the delivery portion of the service depends on an estimate of the value of the delivery service alone and the division of revenue for all activities other than delivery and delivery.   Only after that is conducted would it be clear whether the compensation paid to Postal Service carriers is at, above, or below market rates. 

The difficulty of doing a comparison with compensation of the NRLC members most likely explained why the NRLC was not willing to continue to negotiate.  They most likely face a lower risk of an adverse ruling in arbitration than APWU members as the economic case of the Postal Service is much more complicated in that negotiation.

Comments and suggested additions to this table are requested.   They will be added to the table and posted when received.

Comparing Benefits to the Private Sector

Most of the comparisons made on health benefits compare what the Postal Service offers to what other Federal Employees receive.  There are two parts of this benefit.   First there are benefits that exist while a person is working for the Postal Service.  The second are benefits that accrued while the person works but are payable when they retire. 

A similar comparison needs to be made on retirement benefits.  While up until the signing of the APWU contract the retirement benefit structure of Postal Service and other federal government employees is the same, it is not clear if the hourly cost per employee is the same as the mix of employees in CSRS and FERS may differ and the contribution rates of Postal Service and Federal Government employees into retirement programs with an employer match may also differ

Postal employees like UPS's teamster employees have both pre- and post-retirement health benefits.   FedEx employees only have health benefits while they are working for FedEx.

United Parcel Service has a defined benefit pension plan for most of its Teamster employees.  (Those teamsters who participate in the Western States Teamster Pension plan have a hybrid between a defined contribution and defined benefit pension plan.)  FedEx offers a retirement plan that includes a defined contribution pension and a 401-K plan which had recently seen its corporate match restored.   The Postal Service retains its defined benefit pension for employees hired before 1975 and has a plan similar to what FedEx offers for employees hired since then.   The new APWU creates a new retirement plan for non-career employees which is a 401-K plan without an employer match.

As I noted in the post displaying the information from the Teamster Union comparing FedEx and UPS wages and compensation, no comparison has been made comparing these wages and benefits to what the Postal Service offers recently.   

One of the biggest complaints about Postal compensation being too high relates to the fact that its share of the health insurance costs is higher than what other Federal agencies pay.   The estimate of FedEx costs for health and pension costs of $3.33 gives a benchmark that can be used to compare costs that the Postal Service offers to employees hired since 1975 1984.  (Given that this is 36 27 years ago it must include most current employees.)   (Correction made 1/21/2011 12:40 p.m.)

Under the current APWU contract the Postal Service pays 81% of the total insurance cost.   With the figures supplied in the APWU PowerPoint, this works out to $517.80 per month average.  If one assumes that an APWU member is employed for 2080 hours in a year then the hourly cost of his health insurance is $2.99.  If this was reduced to the 72% of the insurance premium paid for federal workers, the hourly cost of health insurance would drop $0.33 per hour to $2.66.  The APWU contract reduces the hourly cost to $2.80 or $0.19 per hour by the end of the contract. (This assumes no health inflation, so it is possible that the cost per hour at the end of the contract will be higher even if the Postal Service's share is lower.)

The difference of a few pennies is small but significant.  Reducing health insurance costs by a cent per hour saves the Postal Service $12 million corporate wide annually.   The impact of a similar cut for just APWU members is likely around $4 million annually. 

What this exercise shows though is that while cutting the Postal Service's share of its health care insurance contribution will reduce costs, discussing this issue may have more merit in scoring political points than solving the severe financial problems of the Postal Service.   Even an immediate shift to federal employee levels of insurance contribution would not be enough to get compensation levels down to the point that the Postal Service can be self-sustaining.   It is time for those who focus on this issue to look at additional options, including many contained in the APWU contract to do the job.

Is the APWU Contract a Union Giveaway?

In an editorial today, the Pittsburgh Tribune - Review stated that the Postal Service's contract with the APWU does little more than "sustains the stagnant status quo."  The editorial reflects an understanding of the details of the contract that would come from doing no more research that reading the press releases issued by the Postal Service and the APWU when the contract was signed.    As this information primarily was designed to promote the contract to APWU members that must vote on the agreement, the Pittsburg Tribune's impression of the contract is understandable.

The Pittsburg Tribune-Review's editorial illustrates the problem that the Postal Service created because it did not recognize that it had to sell the contract to Congress, influential news media, and its customers.  The Postal Service needs the support of all three if the rest of its restructuring programs are to be approved.  For example, why would a member of Congress acquiesce to the closure of a local processing plant or accept 5-day delivery, or modify the payment terms on retiree obligations if they believed that the Postal Service did not do all it could to reduce its compensation costs and excess employees.

The truth is no one knows whether the contract is good for the short-term and long-term financial health of the Postal Service.  The analysis in the post, Is the APWU Contract Good for Shareholders and Creditors?, clearly shows that the contract will benefit the Postal Service financially if the proportion of APWU members that are working under the new definition of full time and new pay schedules grows quickly.   If turnover is only occurs at normal attrition rates, then the Pittsburgh Tribune-Review may be right, the contract may do no more than sustain the status quo.  If however, the Postal Service can offer sufficient incentives to get older APWU members to retire, and excess APWU members in plants and retail offices being closed or consolidated to retire or seek employment elsewhere, then the contract could reducing its operating costs.

The Postal Service needs to quickly adjust course and explain to the public in detail why the contract is good for them and what they will be doing to accelerate the proportion of APWU members working under the new contract rules.   On March 25th they will have an announcement announcing a limited number of cuts in non-union positions.    While this is a step in the right direction, the Postal Service's presentation will unlikely still its critics that the Postal Service is not moving fast enough to bring costs in line with revenue.     More information is needed soon or the Postal Service will soon find that it has lost control of its destiny.

Saturday, March 19, 2011

Comparable Wages

One of the challenges in trying to figure out whether the Postal Service has signed a financially responsible contract is that there are few good figures available regarding what are market wages for the work that APWU members do.    The Teamsters Union have recently posted in UPS Teamster Update a comparison of UPS and FedEx Express employee wages.   I have pulled out the two categories that are comparable to work that APWU members do.   The figures below only include health and welfare and pension benefits and do not inclde compensation costs for employment and unemployment taxes and workers compensation insurance.

The hourly rates are comparable to information that I have seen elsewhere.   They indicate the wages that efficient operators can offer.   The new contract should move average APWU wages within the range listed here once a significant portion of current APWU members retire.

The benefit costs here include both health care and pension benefits.  UPS has a very generous benefit package for most employees which includes a defined benefit pension and 0% employee contribution for health care benefits for full time employees.   Most part time UPS employees  likely have less generous benefits than the "average" benefit.   Turnover of part-time workers is high so many do not accrue pension benefits and their health care benefits are not as generous as those for full time employees.   UPS offers part-time employees a number of non-traditional benefits as well, most notably tuition assistance in the form of loans and grants.

The average hourly benefits listed in the chart for full time FedEx employees most likely underestimates the benefits full time employees receive.   At $3.33 per hour the benefit listed for full time worker would be the equivalent of a company contribution of $577.22 for health benefits every month.   This would appear to be the figure that FedEx pays as its contribution for single employees.  In addition to health care benefits FedEx offers its employees a defined contribution pension as well as a 401-K plan with a match.   The $3.33 figure appears too low to include the hourly cost of  retirement benefits. 

The wages and benefits listed above are paid by companies that profitably provide parcel delivery services. These companies are both known for the efficiency of their operations and their ability to deploy capital to most efficiently use the labor sorting parcels and transporting parcels between facilities.  These two carriers are also now facing rising demand for their services to the point that they are able to raise prices to both customers that pay list prices and those that negotiate rates at discounts to list rices.  

The Postal Service faces a different operating and competitive landscape.   It has significant production and transportation overcapacity and public notice processes that discourages the elimination of this overcapacity, declining volumes and revenue, limited capital to improve the efficiency of its network, regulatory constraints that prevent rational pricing and competitive constraints that prevent it from extending its product line to generate more revenue per item delivered.  These constraints make it difficult for the Postal Service to pay market rates of compensation that one must assume are within the ranges shown above.   The sooner these constraints are removed, the sooner APWU members can be assured that their compensation will fall within the ranges listed above, otherwise they can expect that compensation levels in future contracts will have their members fall behind wages paid in the private sector.

Friday, March 18, 2011

Are Tax Refunds a Bailout to Taxpayers?

Conservative thinkers are just beginning to start thinking about what to do with the Postal Service.   As those who read this blog know, this is a complicated problem and the solution will likely cause pain for all stakeholders and eliminate protections that many have from the status quo.  In a well reasoned article entitled, "Does the U.S, Treasury Owe $75 Billion to the Postal Service?" Michael Schuyler, a Senior Economist at the Institute for Research on the Economics of Taxation reviews the number one topic discussed among postal stakeholders, disputes over Postal Service obligations for retirement obligations.

Mr. Schuyler's conclusions are clear:
  • Notwithstanding these budget concerns, the Postal Service should be credited with the money if OPM mistakenly charged the Service more than the law allows. Providing the credit would then be very roughly analogous to the government sending a refund to a taxpayer who overpaid his or her taxes, issuing a check to a contractor for the agreed upon amount in a government contract, or paying restitution after losing a court case.
  • However, if OPM’s allocation methodology is consistent with the law, Congress should weigh the merits of the proposed transfer against efforts to rein in the federal budget deficit.
  • If Congress decides to approve a transfer but not for such a large amount, it should be aware that the budget cost would drop by an order of magnitude if the allocation formula were changed prospectively, not retroactively is clear.
Simply stated, Mr Schuyler states that if the law states that the Postal Service does not owe the money it should be refunded.   If the law states that the Postal Service owes the money, then it is a Congressional prerogative to change the law but the budget deficit requires that changes in law should be considered carefully.  If Congress determines that the law should be changed but due to the deficit changes cannot be made to fully cover the disputed overpayment then the focus should be elimination of prospective overpayments.

Complicating the politics of resolving this issue is the politics of changing the law.   Tad De Haven of the Cato Institute, has quoted Mr. Schuyler's paper to describe changes in law as a bailout of the Postal Service.   As bailout is a politically charged word, its introduction will likely make passage of any changes in law more difficult.  

The problem for Congress is that the choice is not so simple.  Opposing any changes in law introduces a new problem.   The upcoming default by the Postal Service of its payments of its "legal obligations."  
Mr. Schuyler lays out clearly the risk of a Postal Service default.  "A default would harm the Postal Service’s reputation, and there is a nontrivial risk it would reduce investors’ confidence in the United States, which would hurt American businesses and the U.S. government when they borrow in security markets."

Mr. Schuyler's only policy recommendation is to restructure the retiree health care obligations currently on the book.   If restructuring the retiree health care obligation is not sufficient to prevent default, his conclusion suggests that Congress is right now faced with a real dilemma.   Which is worse:  default on its obligations by the Postal Service or an increase in the federal deficit?  

Finally, Mr. Schuyler recognizes that regardless of what is done to get the Postal Service through next fall, the long-term challenge cannot be ignored.   Congress has to determine that if they want a self sufficient Postal Service that provides universal service and then can it be self sufficient under its current business model, under the current business model with full freedom to cut costs and eliminate facilities and services that create opposition in Congress.   If it cannot do so, then alternatives need to be considered.

Thursday, March 17, 2011

The Social Network: Version 1.0

A twitter writer that I follow, posted a photograph that says all you need to know about the current state of communications and where the Postal Service fits in.  Take a look and smile

Is the APWU Contract Good for Creditors and Shareholders?

Up till now all of the information about the new 4 1/2 year agreement between the American Postal Workers Union (APWU) and the Postal Service has come from the union.  With an agreement in hand, the union needs to sell its members that the contract is good for them so that rank and file members approve it.  The APWU has an aggressive effort to sell the contract to members which has included so far the APWU news bulletin on the contract, a PowerPoint presentation, a Web post answering questions, as well as the use of Facebook and Twitter.   Given the amount of information coming from the union, no one should be surprised that press reports in the Washington Post, Direct Marketing News, and most other news outlets focus on what employees got from the agreement and ignore the benefits that agreement provide the Postal Service.

If the Postal Service was a public company with shareholders and bondholders it would now be making an aggressive, and in most cases a public effort, trying to explain to them why this agreement is good for shareholders and bondholders.   This effort would include briefings with investment analysts and the business press.  It has not done that even though Congress effectively acts as the representative of the Postal Service's shareholder and its largest creditors, the Office of Personnel Management and the Department of Labor.  Congress's role as the representative of the creditor should be of particular interest as the Postal Service has already stated that it will default on these obligations.

The Postal Service's press release uses only 74 words to explain why the contract improves its financial situation.    Without a greater effort, the Postal Service leaves the impression that the contract was a giveaway to employees that will make necessary improvements in its cost structure.   Private sector stakeholders whose businesses and jobs depend on the long-term survival of the Postal Service should be concerned that this effort has not been made as their future may depend on Congressional actions to reform the Postal Service's business model and adjust the Postal Service's retirement obligations.

To fill in this vacuum, this rest of this post will review the public information on the Postal Service - APWU contract and identify how provisions in the contract will affect the Postal Service's cost structure.  

New Definition of Full Time Employee

All employees will operate under new rules defining what constitutes a full time schedule.  These new rules give the Postal Service a significant increase in flexibility in scheduling employees.  
  • New employees hired after signing of the current contract
    • Employees are only guaranteed 30 hours per week and can work as much as 48 hours per week
    • Shift on any day can be as few as 4 hours and as many as 12 hours.
    • Split shifts will exist only in Post Offices level 20 and below.
  •  Current employees:
    • Full time employment is defined as between 40 and 44 hours per week
    • Shifts can have as few as 6 hours and will could have as many as 12 hours;
    • a week must have at least 2 days off (a schedule with four 6 hour days and two 8 hour days would not be permitted)
    • Current full time regular employees can voluntarily agree to work under the new definition of "full time" that applies to new employees.
Conclusion:  The new contract gives the Postal Servicie more flexibility to match hours to actual work.   The speed at which it can have a workforce that works under the new definition of "full-time employment," will determine how much these changes save the Postal Service.

New Employee Classification

Non-Career Assistants replace casual and transitional employees.  This new class of employees will represent up to 20% of all APWU members not in the Maintenance and Motor Vehicle Crafts.  The new class of employees will represent 10% of Maintenance and Motor Vehicle Crafts.  These employees will have a different pay schedule and employment relationship with the Postal Service than current employees have.
  • Non-career Assistants are hired for only 360 day assignments.  (This is equivalent to a contract that last for only 51 of the 52 weeks in the year.)  It is unclear regarding what the Postal Service obligations are to rehire Non-career Assistants after the contract expires but it an employee is good it is unlikely and there is work it is unlikely that the USPS will refuse to renew the contract.
  • Additional pay steps were added for Non-career Assistants with lower starting salaries than what now exists.  On average, starting salaries for Non-career Assistants will be 15% below current starting salaries and it will take new employees between 6 and 8 steps to earn the current starting salaries.
    • 12.4% of all APWU members will be paid at the lowest rate when the contract starts.
  • Non-career Assistants have lower benefits that current full-time regular employees
    • Health care benefits require 1 year of employment
    • USPS will only pay 75% of the PWU Consumer Driven Plan premium for these employees.   (This is 11% below what the Postal Service will pay for full time regular employees)
    • Retirement benefits will be limited to a 401-K plan that does not have matching funds. (The retirement benefit should provide significant savings over FERS.  It is unclear from information provided what happens if these employees become full-time regular employees.)
  • Non career assistants will accrue leave.  However, it is unclear whether they will accrue leave at the same rate as current APWU members
  • Non career assistants will have a "full-time" job as described above
Conclusion: The difference in wage and benefit levels make Non-career Assistants significantly cheaper than current employees.  The sooner the Postal Service can maximize its use of Non-Career Assistants the faster it will be able to lower the costs of work performed by APWU members.

Wage Levels
  • Wage levels for current APWU members are frozen at current levels until November 17, 2012.
  • Wages of current casual and transitional employees who are hired as Non-carrier assistants will rise to fit equivalent levels on the Non-Carrier Assistant schedule.
  • All employees hired after the contract is signed starts at a lower rate than now exists.
  • All employees hired after the contract is signed have a lower top salary than current employees even after they become career employees.
  • New hires have to progress between 6 and 8 steps before they reach the current starting salary levels of APWU employees. Her are few examples:
    • Grade 3 - Starting salary drops from $16.74 to $12.34 per hour (-26%)
    • Grade 4 - Starting salary drops from $16.82 to $12.95 per hour (-23%)
    • Grade 5 - Starting salary drops from $18.65 to $15.91 per hour (-15%)
    • Grade 8 - Starting salary drops from $20.80 to $18.20 per hour (-12%)
  • Wage increases after that point will come on the following schedule
    • November 17, 2012 - 1% increase
    • March, 2013 - COLA increase based on COLA calculated for implementation in March 2012 and COLA calculated for March 2013
    • September 2013 - COLA increase based on COLA calculated for implementation in September 2012 and COLA calculated for September 2013
    • November 17, 2013 - 1.5% increase
    • March, 2014 - COLA increase based on COLA calculated for  implementation in March, 2014
    • March, 2014 - COLA increase based on COLA calculated for implementation in March, 2014
    • November 17, 2014 - 1.5% increase
    • March, 2015 - COLA increase based on COLA calculated for implementation in March, 2015
Conclusion:   Wage increases for current APWU members are back-loaded.   The increases will benefit the Postal Service if over the life of the contract, the proportion of employees that are working under the new wage schedule increases so that the average increase in compensation per employee will be less than the wage increases agreed upon.  Also, an increase in the number of employees operating under the new definition of "full-time" could on average reduce the number of hours paid per employee further reducing labor costs.

Update 3/17/2011 4:25pm :   A comment was made that may clarify a rather confusion explanation of who gets paid what.   The Non Career Assistants do not see step increases like career employees.  The saaries identified above are the steps for career employees.  Level 5 Non Career Assistants start at $13.74 per hour which is less than the starting salary for career employees listed above.

Non-traditional Jobs
The APWU- Postal Service contract shifts at least 9,000 jobs from contractors and EAS personnel to APWU members.  This provision of the contract includes a number of provisions that the APWU and the Postal Service agreed upon that increases opportunities for APWU members, creates opportunities for higher level APWU positions (called lead clerks), and increases flexibility in defining an employee's duties.
The major changes include:
  • A shift of jobs from Postmasters, supervisors, and other administrative and technical positions to APWU members.
    • Many of these jobs will be handled by employees working in a new "Lead Clerk" position.
  • The Postal Service will have greater flexibility in scheduling employees to perform facility maintenance
    • Maintenance employees will be assigned on an installation basis and not a facility basis.  This more than likely means that maintenance employees may work at more than one facility during a day or week.
    • Maintenance activities requiring less than 2 hours per day in a facility may be assigned to an APWU member who has other job responsibilities the rest of his day.
    • Some maintenance supervisory jobs will become APWU member jobs and will mostly be filled by a person in one of the new "Lead Clerk" positions.
Conclusion: All of the non-traditional jobs and changes to job descriptions relating to maintenance employees are likely based on suggestions made by the APWU as a method to increase its membership while at the same time reducing Postal Service Costs.   It is clear from the language of the public documents that the APWU will be actively looking at ways to structure work by APWU members so that work performed by union employees is cheaper than either contractors or non-union employees.   This could represent a radical change in how the Postal Service and APWU work together to manage operations.

Limits on Excessing

The APWU and the Postal Service have agreed to limit excessing outside of an installation or craft to r0 miles in most cases and no more than 50 miles in any case.   The contract information is unclear as to what happens if there are no jobs for an excessed employee within that area. The News Bulletin states that "the parties will jointly determine what steps will be taken."  The PowerPoint presentation mentions that there is a memorandum associated with this provision but it is not public.

Conclusion:   It is unclear what impact this will have on either employees that face excessing or the Postal Service.  A good example is consolidation of facilities that are more than 50 miles from the facility that will now be sorting the mail.   This will occur in West Virginia and in most consolidation efforts outside of metropolitan areas.   Most likely the sides decided to sign a contract on all issues that they can agree on and let this issue wait for further negotiations.

 Excessing employees create challenges especially if excess employees cannot be let go.   The only other alternative is a localized early retirement program that would only apply to geographic areas where there will be excess employees.


This review of the APWU - Postal Service contract indicates that the new contract will allow the Postal Service to significantly cut its costs over the life of the contract.   The amount it saves depends upon how quickly it can raise the proportion of APWU members that are Non-career Assistants, implement the changes in maintenance job descriptions that should cut maintenance contracting and shift jobs from supervisors, postmasters, and other non-union employees to APWU members.

The Postal Service needs to provide the hard numbers that must exist that show the cost savings that I believe exist to its creditor and shareholder representatives in Congress as well its customers.  In addition they need to show how quickly these savings will accrue including the difference in costs over the current contract from fiscal year 2011 through 2015.   Finally, they need to show how those cost savings could change if it offered a VERA or had the cash to offer retirement incentives on either a nationwide or local basis.

Sales Taxes and the Mailing Industry

The Wall Street Journal reported today that some of the nation's largest retailers are backing a coalition called the Alliance for Main Street Fairness to force e-commerce only retailers to collect sales taxes on their web-based sales just like they do on their sales at both brick-and-mortar outlets and over the Internet.  Companies that are part of the coalition include Wal-Mart, Target, Best Buy Co., Home Depot Inc. and Sears Holdings Corp.   These large retailers have expanded their web presence and are among the top twenty web-based retailers in the United States.  On the other side of this issue are on-line only companies like Amazon. com, NewEgg, and regional merchants that sell nationwide over the web.

The issue is being raised in states including California, Texas, and Illinois which all have significant challenges in trying to balance their budgets.  Illinois recently passed legislation expanding the criteria for requiring companies that sell products in the state to collect sales tax on web based sales and similar legislation is being considered in the other states. 

For decades the mailing industry through catalog merchants and more recently e-commerce retailers have thrived from business generated from the printing of catalogs and the delivery of parcels.   Customers were driven to catalog and e-commerce sales channels due to better selection, prices, and yes even the lure of not paying sales taxes.  Today, however, the mailing industry relies on the business of printing catalogs and delivering parcels from companies that both collect and do not collect sales taxes in all fifty states.   The mailing industry has seen growth in demand for its services from both firms that collect and do not collect sales tax.   Regardless as to how this political fight ends, this growth will continue as customers take advantage of the convenience, selection and prices that the on-line retail channel offers.

Tuesday, March 15, 2011

The APWU Contract and How the Process Compares

One of the problems the Postal Service will have in selling the contract with the American Postal Workers Union is the number of new members of Congress with limited understanding regarding the impact of differences in labor law between the law covering the Postal Service and either the National Labor Relations Act or the Railway Labor Act.   In addition many members of Congress will find it difficult to understand why the Postal Service did not take the approach that Wisconsin Governor Walker took with public employees, or President Reagan took with air traffic controllers.

The Postal Service did not have the option to decertify the union as President Regan did as members of the APWU never stopped working after the contract expired. Nor could the Postal Service unilaterally force cuts in compensation as it is not in a legal position that would allow it to break existing contracts and impose contract terms that it would prefer.  A good summary of the negotiation process has been provided by the Postal Service.

Better comparisons are recent negotiations between the Teamsters and both United Parcel Service and Yellow Roadway working under the Labor Relations Act and Conrail that had to renegotiate under the Railway Labor Act.   The following is a brief review of what happened in each of these three examples.

Over the past two decades, United Parcel Service has faced increased competition from FedEx with underfunded multiemployer pension plans sitting over its head. It took a strike in 1997 over the pension issue but eventually had to concede its demand for pension and other contract changes.  Its concessions came once UPS management recognized that the strike gave FedEx an opportunity to prove that FedEx Ground was a credible competitor to UPS Ground service and that the changed perspective would make maintaining marketshare more difficult than before the strike began.   UPS changed its approach to working with its union over the next decade which resulted in a contract in 2007 that allowed UPS to withdraw from the largest underfunded multiemployer plan and make important changes in work-rules and wages that made its operating costs competitive with that offered by FedEx even though FedEx provided service through non-union employees and contractors.
Yellow-Roadway has faced a combination of expanded competition of non-union competitors and a major decline in the nationwide transportation in less-than-truckload market that forced it to combine the operations of its two largest LTL subsidiaries and shutter others. It had also been near bankruptcy for most of the last five years. During this period it had to renegotiate terms of loans multiple times and its stock value plummited to near zero. Yellow Roadway renegotiated its Teamsters contract in 2008 under pressure from creditors However, the problem worsened for Yellow-Roadway when the recession hit and its continuing operations required a second round of compensation reductions with the alternative being liquidation of the business. A new round of cuts were negotiated and agreed upon in 2010 in an effort to save the company. During this period the company cut the number of Teamster employees from 40,000 to 25,000. Even these cuts may not be sufficient to prevent bankruptcy as on March 14, Yellow Roadway stated that it failed to meet a creditor milestone that would allow its creditors to demand full repayment of all loans due.

Conrail faced a different problem in its negotiations as the Railway Labor Act created an environment that forced it to maintain existing contract provisions until a new agreement could be signed. It could have declared bankruptcy which would have allowed it to impose new contracts as has occurred among passenger airlines, but at that time its creditors would have demanded liquidation and would not have supported continuing rail operations under any labor agreement. In addition, political opposition to liquidation was significant as liquidation would have had a significant impact on economic activity from St. Louis to Boston disrupting the ability of the automotive, electric utility and other industries that depended on rail freight service to conduct their business as well as the economies of cities in the from Boston to Washington DC that depended on Conrail operated commuter rail to transport employees to work. Conrail was then forced into a period of extended negotiation with its unions primarily over the elimination of workrules and positions that no longer made sense in a world of diesel locomotive engines. It took almost 8 years to get the changes needed to make Conrail profitable which eventually allowed it to be sold to the public in a public offering.

In all three cases, getting the changes neccessary for a company to survive only occurred once employees were convinced that they had no other options but concede.   For both UPS and Conrail, it took nearly a decade for the changes to be implemented once they were identified.   For Yellow-Roadway, it took less time but the final concession occurred only after multiple reductions in Yellow-Roadway's Teamster employees and the threat of liquidation and loss of all jobs hung over union members' heads.

The Postal Service is in a financial position similar to Yellow-Roadway and a competitive posistion that is closer to what faced both United Parcel Service and Conrail.   Finally, in terms of labor-management relationships, the agreement process has significant similarities to how the Teamsters worked together with UPS, and Yellow Roadway to convince members to accept and implement contract changes.

While its financial position puts it on the brink of default on its obligations to its creditors, creditors have not threatened liquidation like Yellow-Roadway creditors did. 

By eliminating liquidation as an option, the Postal Service is in a position similar to Conrail and must negotiate a contract without the ultimate threat over negotiators from its unions.   The Postal Service is in a better position than Conrail as the threat of binding arbitration, even under current rules forces a time limit to negotiations and existing contract terms.

The Postal Service's position is similar to United Parcel Service as the Postal Service would be hurt by any shut downs, or even slowdowns due to a work-to-rule environment just like United Parcel Service's competitive position was hurt by taking a hard line accepting a strike in 2007.  

The Postal Service's decision to come to negotiate an agreement rather than having one imposed by an arbitrator makes selling changes that would have been included in an imposed agreement easier as the APWU will act a willing partner in implementation, a position that it would not have taken as willingly if similar contract provisions were imposed.  As a partner in implementation, APWU is acting in a manner similar to the Teamster which worked closely with members to explain why changes were required and why changes were best in the long-term interest of employees at UPS and Yellow-Roadway as well as working with UPS and Yellow Roadway to design and implement changes.