Is the Postal Service's Proposal Constitutional?

A comment to the post on the Postal Service's white paper and the job cuts and contract changes that it wants raised an interesting question.  Are they constitutional?

Here is the comment:

The Contract Clause appears in the United States Constitution, Article I, section 10, clause 1. It states: The Contract Clause prohibits states from enacting any law that retroactively impairs contract rights. The Contract Clause applies to legislation, but not the Judicial Branch. Only an unconstitutional congress would void an employees contract.

The Constitutional Reference is here:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

The constitutional reference refers to state contracts and does not refer to contracts signed by the Federal Government.   There was some discussion about the obligations of the Federal government to honor contracts during the debt ceiling debate so it is possible that the Federal Government has a similar obligation. 

I would appreciate if lawyers who read this blog would post a comment so that I can provide a reference to the limits of Congress's power to require modification to labor contracts that would have to change if the law passes. 

If there are limits to Congress's power to mandate a change in contracts, the changes the Postal Service wants may still occcur but they would occur only after employees vote to approve new contracts that make the changes.  Congress has to the power to shut the Postal Service down by not providing the funding needed for it to make payroll beyond the middle of 2012. This power is the equivalent of creditors threatening liquidation which works as rather intense incentive for union employees to renegotiate contracts to keep their jobs. This is what happened with YRC Corporation and has happened at some unionized firms in the postal industry.    

If Congress chooses to use this power than postal unions may have no choice but to negotiate new contracts that include the changes that the Postal Service wants.  Otherwise they face the prospect that they will have no compensation for weeks or months.  This would be the equivalent of a lockout that would end only when employees agree to make changes in their contracts.  It is unclear what the Postal Service could  deliver with only the employees that are not working under labor agreements. 

What is clear is that this process will be quite heated until it is resolved and as long as Congress is both the owner and creditor, postal employees are likely to face the greatest losses as the Postal Service works to find a path to survival.

Postal Service Cutting 228,000 Career Jobs; 185,000 in Total

The Postal Service proposal cuts nearly 228,000 career jobs between now and 2015, not the 120,000 included in many headlines.  This figure is even larger than what the Postal Service has included in its discussion paper as it reflects employment levels at the end of June.   The following table shows the actual changes from employment levels at the end of June with the 2015 employment levels based on the relevant paragraphs in the Postal Service's discussion paper. (Job reductions are in red and increases in black.)

The total number of jobs lost will nearly 185,000 the Postal Service wants to increase the number of non-career employees by over 50%.   Corporations announcing restructurings would have used the 185,000 figure in press releases and may have also included the 228,000 figure regarding career employees as well.  The Postal Service most likely used the smallest number in its press release to minimize the political blowback that the job cuts will create.

The larger numbers are also more relevant as attrition is uncertain.  The number of layoffs of RIF's could be higher or lower than the 120,000 depending on the pace of attrition.

Note:  the Postal Service refers to a cut in career employment of 220,000.  This figure may reflect a reduction from the number of career employees that it expects to employ on October 1, 2011 rather than the reduction from levels reported in the On Roles and Paid Employees Report for pay period #13.

The relevant paragraphs of the Postal Service's discussion paper are as follows:

Our most significant area of cost is in compensation and benefits, and one key driver of those costs is simply the sheer size of our workforce. Therefore, the Postal Service has to be able to reduce the size of our workforce if we are to have any hope of insuring that our costs are less than our revenue. Based on current revenue and cost trends, and assuming a move to 5-day delivery, the Postal Service can only afford a total workforce by 2015 of 425,000, which includes approximately 30% lower cost, more flexible, non-career employees.

Attrition and certain other measures will allow us to achieve a portion of the savings needed to match expenses with revenue by 2015. We estimate that attrition will only result in a staff reduction of approximately 100,000. However, in order for the Postal Service to reduce complement to meet projected volume degradation, we must eliminate roughly 220,000 career positions between now and 2015.

In order to eliminate the remaining 120,000 career positions by 2015, to restore the Postal Service to financial viability, it is imperative that we have the ability to reduce our workforce rapidly.  Unfortunately, the collective bargaining agreements between the Postal Service and our unionized employees contain layoff restrictions that make it impossible to reduce the size of our workforce by the amount required by 2015. As explained below, it is not likely that the Postal Service will be able to eliminate these layoff protections through collective bargaining, given the nature of collective bargaining and interest arbitration. Therefore, a legislative change is needed to eliminate the layoff protections in our collective bargaining agreements.

Postal Service Recognizes Political Reality

The legislative changes that the Washington Post reports that Postal Service is now proposing represents the Postal Service's reaction to political reality.   There are no legislative options that can pass Congress that prevent default with changes in the current payment of retiree obligations or an increase in the Postal Service's debt ceiling without significant cuts in labor costs.

The news reports indicate that the Postal Service wants to make four changes that affect its unionized workforce.

• Withdrawal from the federal benefits program for active employees;
• Withdrawal from the federal retirement benefit programs;
• Elimination of statutory layoff protections; and
• Changes in the proportion of part-time and non-career positions.

Changes Proposed Similar to Firms Facing Liquidation

The changes that the Postal Service proposed are not unlike changes in union contracts of private sector firms facing bankruptcy and possible liquidation.  In these cases,  banks providing loans required to fund continuing operations including payroll made changes in union contracts a condition for restructuring loan agreements and/or providing additional funding.  

Over the past few years, YRC Worldwide has made changes to its Teamster contracts on at least two occasions that are more severe than what the Postal Service has proposed in order to get financing to avoid bankruptcy.   YRC Worldwide  employees have experienced nearly a 40% reduction in employee counts, pay cuts of 15% from 2009 levels, reductions in benefits, and a freeze in pension benefits at current levels.   

The changes were made in contracts ratified by Teamster employees of YRC Worldwide on at least two occasions, with each contract resulting in more cuts in pay and benefits.  These changes were tough for Teamster leadership to sell to YRC employees but the prospect of losing a job in a recession created significant incentive to accept the cuts.  

The contracts that the Teamsters negotiated with YRC from what the Postal Service has proposed, as the Teamster contracts have resulted in a significant portion of the company now owned by Teamster employees.   Teamster employees now own 25% of YRC stock after the latest restructuring announced in July, 2011. 

Postal Unions Have Limited Political Options

Both the American Postal Workers Union and the National Letter Carriers Union have issued statements opposing these changes.   However, they have limited power to influence the legislative process given both the political makeup of Congress and the budget constraints.  If Congress was willing to pay chicken with entire economy over raising the debt ceiling, there should be no doubt in unionized Postal employees that Congress would find shutting down the Postal Service preferable to agreeing to a proposal that does not have significant reduction in employee compensation.

Postal Unions may not be powerless as it requires 60 Senators to pass any legislation.   While this may not prevent changes in compensation, benefits, and workrules that the Postal Service has proposed, it could make a difference in improving the terms that the Postal Service gets in increasing in debt ceiling and/or restructuring payments for retiree benefits.   Clearly, to the extent that the transition assistance provided to the Postal Service involves restructuring retiree obligations instead of adding debt to making payments on the current schedule, the restructuring both increases the probability that the restructuring will succeed and the proposed changes in compensation, benefits, and workrules may be the only ones that employees have to deal with in the next few years.

PRC Conducting Study to Allow More Flexible Costing And Pricing

On August 2, the Postal Regulatory Commission issued a Request for Proposal to produce a “Report on Peak Load Costs.” Peak load costs are traditionally thought of as additional costs that are born to cover higher demand than normal. For electric utilities that have multiple options for producing or purchasing power, the most profitable operating model involves using the lowest cost electricity first and as demand rises going to more and more expense options for producing power. For that reason, many utilities have developed models that show that costs of handling peaks in power demand are higher than the cost of handling base demand and often set tariffs that encourage electricity customers to use power when there is likely to be excess capacity of the lowest cost option for producing Power.

Traditionally, it is thought that Postal volume peaked in the fall and is at a low point in the summer month. Similarly, certain days of the week, and days of the month have more mail volume than other that relate to publishing, billing, and sales cycles. To the extent that labor, capital, and purchased transportation assets are less flexible than the variation in mail volume would result in times when there is excess capacity and other times when all asset are more than fully utilized and overtime costs are born or additional transportation is added. Recent changes in the American Postal Workers Union contract that increases flexibility through the use of both non-traditional full time schedules as well as the introduction Postal Support Employees to the mix of labor resources available increase the flexibility of the Postal Service to deal with variations in volume.

Study Suggests Commission Believes Existing Costing Models May No Longer Be Sufficient

In the first paragraph of the scope listed in its request, the Commission indicates that measuring the differences in costs between peak and slack periods will likely become a more important part of its regulatory role in the future and existing costing approaches can no longer meet these needs. (The underlined sentence reflects the traditional view of Peak Load issues.) More importantly from a rate regulation standpoint, the first paragraph of the scope suggests that the Long Run Marginal Cost Models may have less value in the future and a new costing approach that can deal with costs associated with a large number of specific customers or groups of customers whose cost differ from the long run marginal costs due to when and where mail that they want the Postal Service to deliver enters and exits the network.

“Under prior law (the Postal Reorganization Act, or PRA), the Commission’s analysis of cost behavior focused primarily on how product costs respond to changes in volume over a multi‐year rate cycle. This focus on long‐run volume variable costs reflected the Commission’s primary duty under the PRA, which was to recommend relatively infrequent changes to the Postal Service’s rate schedule. The current law (the Postal Accountability and Enhancement Act, or PAEA) places less emphasis on the Commission’s duty to evaluate periodic changes in the Postal Service’s rate schedule. The PAEA places more emphasis on the Commission’s duty to evaluate the costs and benefits of various proposals to adapt postal services to the fundamental changes that are occurring in the economic environment in which they are provided. These proposed adaptations include changing the frequency of delivery, offering seasonal discounts, using a short‐run marginal cost standard to evaluate periodic changes in rates, and downsizing the Postal Service’s processing and delivery networks. Common to all of these proposals is a need to estimate the costs of coping with short‐run fluctuations in workload (generally, workload that fluctuates more rapidly than labor resources can be adjusted) while adhering to preferential mail service standards and the staffing and scheduling constraints imposed by collective bargaining agreements.”

Scope Appears to Go Beyond Peak Load Cost Analysis

The second paragraph of the scope suggests that the costing issues that the Commission believes that it may have to address questions in the future may go beyond what is required to respond to proposals for experimental and discounted rates by the Postal Service. The paragraph begins by focusing on traditional peak load issues as they relate to mail processing, delivery and transportation costs.

• Mail Processing: “The Commission needs to be able to estimate the effect on mail processing labor costs of workload fluctuations within eight‐hour labor tours, by day of the week, and by season (as well as annually, if it is determined that labor resources take longer than a year to fully adjust to workload).
• Delivery: “The Commission needs to estimate the effect on city delivery carrier labor costs of workload fluctuations by day of the week and by season, and by year.”
• Transportation: [A costing model] “needs to be able to estimate the effect on purchased transportation costs of workload fluctuations by time of day, by day of the week, by season, and by year.

These costs should be modeled in such a way that the effect on costs volume variation, of relaxing preferential service standards, and of relaxing staffing and scheduling constraints, can be separately identified and estimated.”

Specific Tasks Have Could Have Significant Impact on Postal Policy and the Details of Postal Reform Legislation

The policy focus of the Postal Regulatory Commission’s costing model problem is further indicated by the focus of Task 2:

Contractor shall prepare, a proposed methodology, or methodologies, for analyzing peak load costs under the constraints applicable to the Postal Service such as labor union rules and product specific service standards. The methodologies should be able to answer the following questions:

1. How might changes in delivery frequency impact peak load and what are the costs associated with those changes? This question is designed to improve the Commission’s approach in providing information to Congress and other policymakers regarding how changes in delivery frequency could affect costs.
2. What savings will be gained from new labor flexibilities and when will they be achieved? This question recognizes that existing cost models provide little information about Postal Service costs in 2012 and beyond as it implements new work-rule flexibility in the APWU and other contracts yet to be signed.
3. Can operational inefficiency be quantified? The issue of inefficiency goes to the heart 0f the policy problem and implies a second question “how much can costs be cut before service changes are required?” So answering this question is important for the Commission is important so that Congress has an independent assessment of the limits of efficiency gains in under current operating constraints and if service level (i.e. delivery frequency and time between acceptance and delivery) or labor related restraints are changed. Due to the unpredictability of mail volumes, even an efficient operation may have slack labor, overtime costs, idle sortation equipment, and empty space on trucks under all scenarios and understanding potential efficiency goals will be needed for sound policymaking. The introduction of inefficiency is particularly interesting given the focus on “labor union rules.” It raises the possibility that a study of the impact of variances in volume by hour, day, week, month and season could be used to estimate the “efficiency” impact of relaxing specific union rules that affect management’s ability to match labor resources employed during each hour of work day to the amount of work required to meet customer service commitments.
4. How do unit costs change with seasonal fluctuations in volume? The seasonal fluctuation focus raises four particularly interesting policy questions.
1. Do prices need to be uniform over a year or can prices vary with a year?
2. How can prices under a price cap deal with seasonally adjusted prices especially when prices were uniform over the course of a year before?
3. Which products can be allowed to fluctuate from season to season, or for that matter month to month or even day to day which ones cannot?
4. As the mix of customers that use a particular product may change from season to season, are rates based on seasonal differences in costs the first step toward customer specific rates and therefore customer specific costs?Good examples of customers that only use mail in specific seasons are political campaigns. Political campaigns use the mail heavily the month before both primary and general elections. In highly contested election years, political campaigns and independent groups can generate a sufficiently significant increase in mail volumes that the Postal Service in its long range volume forecasts has to account for election years in their forecast models.

Implications of Study for Cost Differences Unrelated to Time or Calendar

The last of these four questions is particularly important given the implication that mail sent by customers that only use the Postal Service during specific times of a year could pay different rates than customers that use the Postal Service year round or during other time periods. If customer costs can be differentiated based on the time of the year that they send their mailings, what other factors could be used to distinguish customers whose mail has different levels of cost than other customers. For example,

• Do customers that send mail on a regular schedule impact operating costs differently than customers that do not?
• Do customers that can provide the Postal Service advance information about a mailing including both total volume and the number of pieces to be delivered by 5, 9, and 11 digit bar-codes as well as carrier routes affect costs differently than those customers that do not provide advance information?
• Could First Class bulk mail customers that can accept an additional day to deliver the mail than those bulk mail customers that do not? (Having such a service could allow the Postal Service to develop a service that competes with pre-sorters using slack machine time in originating sortation operations that are idle today.) 
• Should customers that use the Postal Service for either last mile delivery of parcels or first mile handling of returns pay different rates depending on the destination or origin respectively if the costs of handling those parcels differ in different parts of the country?
• Should drop shipment discounts be uniform nationwide if the cost of delivery differs between one region and another?

Implications of the Study for Existing Long-run Marginal Cost Measurement and Activity Based Costing

All of these examples, as well as the time based example identified by the Postal Regulatory Commission illustrate that developing modern cost-based postal rates may require accepting that the existing long-run marginal cost models used in ratemaking may have outlived their usefulness and a new approach and new data systems are required. A recent article by Jessica Lowrance and Gene Del Polito, “Rationalizing Postal Costing in the 21^st Century,” suggests that it is time to seriously look at a bottom-up, activities-based-costing approach for Postal Costing.

While the Lowrance and Del Polito paper makes the case to moving to a new costing system, it does not detail the regulatory and legal challenges of making this transition. The Commission, in requesting proposal to study how costs vary by time of day, week, month and season illustrates that it is interested in starting the process of making a transition toward customer based costs and prices. The limited scope of this project illustrates that a transition under current law and regulatory precedent will likely be cautious. If Congress believes that greater customer focused service and price flexibility is required to improve the Postal Service’s ability to serve its customers and speed its return to profitability, then it will need to assist the Postal Service and the Postal Regulatory Commission to replace the current cost model with one more suited for measuring customer based costs and setting customer based prices.

Post Offices Currently Under Review

As an article in Auction Bytes notes, the Postal Service now has two processes ongoing that are or will examine whether Post Offices should be closed.   The Retail Access Optimization (RAO) Initiative has a list of nearly 3653 postal retail facilities.  In addition, there are 728 additional postal retail facilities that are currently under review for closure under existing processes.  The following chart lists the 13 states with the largest number of closures from both processes.  The chart shows that a standard process of identifying postal retail facilities that may be closed was further along in many states than others.

The following chart shows the states that have 20% or more of the postal retail facilities currently under review under the current process and are not part of the Retail Access Optimization process.

Postal Reform and the Debt Ceiling Vote

Last night, the House of Representatives put off a vote on Speaker Boehner's bill to cut the deficit and raise the debt ceiling.   An examination of Republican members on the The Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy and the full Oversight and Government Reform committee shows that Republicans that will be crafting postal reform legislation are among the most conservative members of the House of Representative. 

The vote on the Speaker's bill was put off because the Speaker could not convince 216 Republicans to vote for his bill.  Six of the seven Republicans on The Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy, that will have the responsibility for reviewing Postal Service reform laws are among the 26 or 27 Republicans planning to vote no.  While only 11% of all Republicans plan to vote against the Speaker, 86% of Republican subcommittee members plan to vote that way.

The list compiled by Think Progress is below with members of the subcommittee highlighted in red.
Republicans Committed or Leaning to Vote No 

Committed
1. Todd Akin (R-MO) [The Hill]
2. Justin Amash (R-MI) [The Hill] 3. Michele Bachmann (R-MN) [ThinkProgress]
4. Paul Broun (R-GA) [Call to office]
5. Jason Chaffetz (R-UT) [The Hill] 6. Jeff Duncan (R-SC) [The State]
7. Jeff Flake (R-AZ) [Twitter]
8. Trent Franks (R-AZ) [National Journal]
9. Phil Gingrey (R-GA) [Twitter]
10. Louis Gohmert (R-TX) [National Review]
11. Trey Gowdy (R-SC) [NYT]
12. Tom Graves (R-GA) [Twitter]
13. Andy Harris (R-MD) [Baltimore Sun]
14. Tim Huelskamp (R-KS) [The Hill]
15. Steve King (R-IA) [The Hill]
16. Jim Jordan (R-OH) [The Hill] 17. Jeff Landry (R-LA) [National Review]
18. Connie Mack (R-FL) [Politico]
19. Mick Mulvaney (R-SC) [The Hill]
20. Ron Paul (R-TX) [Call to office]
21. Dennis Ross (R-FL) [National Review] 22. Steve Southerland (R-FL) [RCP]
23. Joe Walsh (R-IL) [MSNBC]
24. Joe Wilson (R-SC) [National Journal]
25. Tim Scott (R-SC) [Fox News, 4:20PM]
26. Tom McClintock (R-CA) [KBFK Radio]
Leaning
27. Michael Turner (R-OH)  (The Hill) who is leanning to vote no

Looking at the full committee, there are two members beyond those on the subcommittee committed or leaning towards a no vote. (No votes are highlighted in red on the list of members below.) Of the 23 Republicans on the full committee, 35% are either committed or leaningtowards a no vote.  This is more than three times the proportion of Republicans in the House planning to vote against the Speaker.

Oversight and Government Reform Committee
Chair: Darrell Issa (CA-49)
Justin Amash (MI-3
Anna Marie Burkle (NY-25)
Dan Burton (IN-5)
Jason Chaffetz (UT-3)
Scott DesJarlais (TN-4)
Paul Gosar (AZ-1)
Trey Gowdy (SC-4)
Frank Guinta (NH-1)
Blake Farenthold (TX-27)
Jim Jordan (OH-4)
Mike Kelly (PA-3)
Raul Labrador (ID-1)
James Lankford (OK-5)
Connie Mack (FL-14)
Pat Meehan (PA-7)
John Mica (FL-7)
Patrick McHenry (NC-10)
Todd Platts (PA-19)
Dennis Ross (FL-12)
Michael Turner (OH-3)
Tim Walberg (MI-7)
Joe Walsh (IL-8)

UPS Comments On Postal Service's Financial Troubles

During its 2nd Quarter, 2011, United Parcel executives responded to two questions about how proposed changes in operations at the Postal Service would affect UPS's business.  Here are the questions and answers from the transcript provided by Seeking Alpha.

Question on Ending Saturday Delivery

John Barnes - RBC Capital Markets, LLC

Okay, all right. That makes sense. And then lastly, given how public the postal service's problems have become and with all the rhetoric anywhere from getting rid of Saturday delivery to 15 years from now going to 3-day delivery, whatever it may end up being. Have you seen -- is that uncertainty around their service creating any further opportunities on the parcel side now? Or do you think that, that bears fruit 2 or 3 years from now?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I don't think it's a big issue in the short term. Most of the very deep integrated B2B business is not with the post office, and those are the ones where a long lead time would make a big difference in the supply chain. So they're focusing on finding their strengths and working on the last mile. We are collaborating with them and competing with them. Clearly, the post office have to make dramatic changes to improve their financials, but I don't see that as a big issue for day-to-day customers decisions.

Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee
Yes, John, I think the Saturday delivery is probably the most imminent issue right now for customers. And there are some looking for different solutions, so that could have a more immediate impact on us. If they do go eventually down the road from 5 days to 3 days, that changes the game pretty dramatically, but that's down the road.

Question on Closing Post Offices

Jeffrey Kauffman - Sterne Agee & Leach Inc.

I want to follow up on the question John asked with respect to the post office. There is an announcement just yesterday that the post office was going to close about 3,600 locations. On one hand, you compete with them on a number of services. On the other hand, you utilize parts of their delivery network. If the post office were to close 3,600 locations, is this a net opportunity for you? Would it be kind of a net push with some offset? How do you think about that?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I think anytime a competitor pulls back capacity and access, it's an opportunity. So clearly, we will look at the gaps that are there, and we've got a wonderful footprint with the UPS Store and offering consumers and small businesses good access. So we'll look for opportunities where it makes sense. As Scott mentioned, the more dramatic their network changes, then the more opportunity. At the same time, we'll look for collaboration alternatives as the post office looks to outsource some parts of their network, maybe where they're not best-in-class, so it's a balancing of competing and cooperating.

**************

These comments clearly show that operating changes that will come to improve the Postal Service's finances have business risks.  Finding ways to minimize these risks will be critical for the Postal Services survival