When is $600,000 more than $6,200,000?

When the $600,000 involves sex and "waste, fraud, and abuse" of Postal Service funds.

The $600,000 is the amount of money that the USPS - Inspector General has indicated that the Postal Service could save over the next two years if it improved training on travel expenses were introduced.   Overspending on travel and abuse of corporate credit cards is nothing new in either the private sector or public sector.   Reports similar to the one issued by the Inspector General probably have been written since at least the times of the Roman Legion.  Given that Postal Service currently spends $97 million on travel expenses annually, the impact of the Inspector General's findings suggest that better training on travel rules would reduce travel expenses by 0.32%.     Discovering that travel rules are complied with 99.68% of the time would suggest that employees are not doing all that bad of a job complying with travel spending rules and appropriate use of corporate credit cards.

The $600,000 in savings identified has received lead stories in nearly every paper covering the Postal Service and comments from both Senator Susan Collins and Senator Tom Carper.   It has generated some truly salacious headlines:

Washington Post:
Report: Postal workers expensed private travel and 'adult entertainment'

Business Insider:
Postal Workers Buy Porn, Plane Tickets While USPS Drowns In Debt

The $6.2 million is the cost of the fines that OSHA has imposed on the Postal Service.  Stories of individual fines as well as the fact that OSHA is now seeking enterprise relief has received coverage only by local newspapers and publications that cover OSHA actions.    These fines have received scant attention by either the national, Federal Government or postal press.   These fines have not generated statements from any member of Congress who are looking at changes in postal legislation.

Even though spending $6.2 million in OSHA fines is ten times more waste than the abuse of travel rules, the attention that policymakers place on it suggests that they believe that  the $6.2 million in OSHA fines are less than the $600,000 that would be saved by the Postal Service if no employee abused travel rules and corporate credit cards.  

The real reason for the failure of policymakers in elementary school arithmetic is that the travel abuse issue has an obvious fix and the OSHA fine problem only suggests that there is a more serious underlying problem that needs investigation.   Doing that investigation is critical particularly as it would likely identify significant capital spending, training, and non-capital equipment and supply needs that fall outside the financial capabilities of the Postal Service with or without relief from all of its retirement benefit accounting issues.   Until this and other similar investigations are completed, a significant portion of Congress will believe that all that is needed is to remove "waste, fraud and abuse" making fixing the retirement benefit accounting issues much more difficult.

Why Capital and Flexibility Matters

http://www.gwinnettdailypost.com/localnews/headlines/Post_office_gets_80K__in_penalties_112641144.htmlNews stories about service or safety failures seem to pop up nearly weekly.   Two stories today illustrate the need why the financial problem may be even greater than the Postal Service's inability to pay its bills at the end of the year.

• The Lima News reports of the problem the Postal Service is having in getting mail delivered on time in west central Ohio.  The story describes  mail arriving for delivery late from the processing plant in Toledo which caused carriers to be paid waiting for its its arrival and then forcing delivery well into the evening.   The story also describes a number of instances in which advertising mail is delivered well after the in-home date.   Most telling is this quote from a retired Lima letter carrier Michael Wright, “In Toledo, they don’t have room. It’s chaotic.”
  
  How could this be fixed?   One option would be to expand the plant in Toledo and its automation capabilities to handle the increased volume.   This would require capital expense that the Psotal Service does not have.  A second option would be a better early warning system that allows senior management at the Chief Operating Officer level to know when a plant is receiving more volume than it can handle so that appropriate changes in sort plans and distribution schemes are made so that mail is delivered on time.    A third option would be flexibility that would allow shifting mail from a plant that has back-ups to one that has more capacity on an ad-hoc basis or permanent basis.  There are three plants near Lima that could take some or all of the mail that Toledo (i.e. Columbus, Cincinnati or Fort Wayne) appears to have difficulty handling.  Finally, management needs greater flexibility for part-time and temporary employees to allow local managers to bring in extra staff on short notice during peak months, or days of the month.
  
  As the proportion of mail that is advertising increases, the importance of timely delivery increases.   Mail demand shifts from an "as soon as promised" delivery standard of First Class mail to a "specific in-home date" requirement of advertising, periodical, and parcel mail.  Having sufficient operating capacity for peak periods and flexibility to handle variable levels of volume requires both increased capital and flexibility in labor agreements and management thinking.
  
• Occupational Health and Safety News reported that the Postal Service faces $238,000 in fines for safety violations in Central Massachusetts Processing and Distribution Center in Shrewsbury, Mass.  Just five days earlier, The Gwinnett Daily Post reported that the Postal Service recieved $80,000 in fines for similar safety violations in the Dultuth Georgia facility.
  
  These are just the latest of a set of fines the Postal Service has received for electrical safety and training issues in facilities across the country.   Fixing the problems required requires cash to make necessary repairs, provide proper safety equipment, and provide proper training to ensure that all safety procedures are followed and safety equipment is used.   Again, the shortage of cash most likely causes the Postal Service from spending the funds that would be necessary to prevent these fines. 
  
  The OSHA safety fines raise another question, that is particularly important given how much of the mail is sorted on automated equipment all of which requires electrical power.   Could the problems that cause safety violations be the canary in the coal mine in regards to equipment downtime that could affect service quality and the competitiveness of the Postal Service as a means to handle financial transactions and deliver advertising?  

The OSHA Fines: A Canary in the Coal Mine

The financial problems of the Postal Service have so far had minimal impact on the service that mailers receive.   The Postal Service has generally met its service commitments at levels similar or better than what existed at the time of the passage of the Postal Accountability and Enhancement Act.  To the extent that the financial problems have affected operations, the impact has been hidden from view.

However recent actions by OSHA indicate that the financial challenges are beginning to impact the ability of the Postal Service to safely operate its facilities.   OSHA has found sufficient common violations exist that it issued a complaint to the Occupational Safety and Health Review Commission to order USPS to correct electrical violations at 350 facilities.  The complaint gives the Postal Service unwelcome notoriety as this is the first time that the Department of Labor has sought enterprise-wide relief as a remedy.  OSHA's action follows the Postal Service receiving fines for safety violations in multiple facilities from Boston to Kansas City.

Enterprise-wide worker safety is a serious issue that often only comes to light when there are more systemic problems that either suggest significant malfeasance or significant financial problems that prevents the enterprise from dealing with them.  In the case of the Postal Service, there is no evidence of malfeasance.  Malfeasance is a potential issue in the investigation of safety issues at the Big Branch mine in West Virginia.

The increase in safety violations at the Postal Service reflects the impact of the financial challenges that resulted in budget cuts and deferred capital spending.  These financial problems have generated issues of maintenance backlogs since at least 2007 when the GAO began reporting it.  OSHA's findings of safety issues expand the issue of maintenance and safety to include mail processing facilities as well. 

An increase in safety related issues often coincides with service related problems in transportation firms.   The recent problems with Metro trains in Washington, D.C. are good examples where deferred maintenance, upgrades and capital spending on infrastructure, information systems and new equipment have resulted in delays and a tragic accident.   Following the accident, Metro trains ran much slower for an extended period of time until the track where the accident occurred was deemed safe.  Also questions exist as to whether some of the older, less structurally sound cars should be removed from service which would increase crowding on the system and reduce train frequency.

Safety issues were also a serious issue for US railroads when they were facing significant financial problems in 1970's and 1980's.  Safety issues had a major impact on service as Conrail and other railroads slowed train speed in order to operate safely and even that did not prevent breakdowns that resulted in lengthy delays and complete denial of service to certain points on within the United States freight rail network.   Similar stories can be told in regards to a number of the commuter rail systems where budget constraints resulted in safety issues that forced slower and less frequent service.  
 
For the Postal Services, safety issues could affect the service if the safety issues reflect deterioration of basic systems (i.e. plumbing, ventilation, electrical) that require the facility to be closed.   Such problems have closed retail facilities but have yet to close any processing facility.   Even if the problem is less severe, it can have an impact on service.  For example, if the electrical system serving a significant number of pieces of automation equipment must be taken off line for repairs, then mail from that facility could be delayed as mail must be worked on equipment that is not affected.

Safety and maintenance issues raise additional questions in regards to the Postal Service's retail and mail processing strategy.   The expense of keeping a facility open is not just the operating costs involved.  All facilities require regular maintenance and upgrades to basic systems as well as installation of new generations of material handling and automation equipment.

As such, the costs associated with maintaining the existing retail network is not just the cost of the employees who work there and the regular facility operating costs. (i.e. heating costs, electricity, and rent and/or depreciation)  Measuring the true cost of maintaining the existing retail network must include the cost of items that are not incurred every year including regular upgrades in basic systems, painting and remodeling expenses of the retail counters, etc. If the Postal Service has been deferring these building expenses then any review of historical expenses would underestimate the costs of maintaining the existing retail network.

For mail processing facilities the problem is similar.   Cost models that evaluate the Postal Service's network and decisions to consolidate facilities need to look at the capital spending required to maintain existing facilities when then look at the potential costs and benefits of either consolidation into an existing facility or consolidating two or more older facilities into one newer facility.   Not including these costs misstates, and most likely underestimates the benefits of consolidation and may underestimate the benefits of consolidating processing from multiple older facilities into a better located new facility. Also similar to the issue with retail facilities, underfunding of maintenance expenses both understates the costs of keeping processing facilities open and may impact the potential capital spending needs in the future. 

The problems with deferred maintenance and safety issues suggest that the costs of maintaining the existing retail network and a processing network that is too large for the mail volume and mix that the Postal Service handles is probably greater than what the Postal Service currently measures.   Replacing them with retail and processing networks that make sense for the volume and mix of mail and parcels that the Postal Service handles would generate greater savings than now believed even if the remaining facilities required spending to cover deferred maintenance and capital needs.  Not fixing the retail model creates the possibility that the Postal Service could increasing provide more limited hours of service at existing retail locations and use the labor savings to cover the maintenance costs of the facilities.  Not fixing the mail processing model raise the possibility that maintenance problems could result in a significant service failure if a facility has to be taken down to repair the problem.   

The OSHA citations represent the canary in the coal mine in regards to the Postal Service's financial problems.   They illustrate the first instance of how the financial problems that forced deferred maintenance and capital spending affect key stakeholders of the Postal Service; in this case, its employees.  Given what has happened in other transportation companies, customers could expect that financial problems that resulted in deferred maintenance and capital spending to the service they see.  At this point maintenance issues have affected some retail customers and could affect more if increased maintenance costs require costs in operating costs and hours that retail facilities are open.    Commercial mailers should begin to wonder how soon it will be before the costs of maintaining an over-sized and mis-matched physical plant begins to affect the quality of service that they receive.