Representative Ross Indicates that Issa/Ross Bill will have no Change in Retiree Payments

In a tweet, Representative Dennis Ross hinted that the bill that Representative Darrell Issa and he will introduce tomorrow will not contain any change to the payment schedules for retiree obligations that are now contained in all other postal reform bills.

RepDennisRossDennis Ross

#USPS, this is why you prefund retiree benefits. http://t.co/wm1cnvI | "no one else does..." and this is where they are now.

If there are no changes in the payment schedules to reflect overpayment of either FERS or retiree healthcare benefits then the Issa/Ross bill will need to find quick reductions in Postal Service costs elsewhere.   There are few options but all will likely affect both compensation to postal employees and service to postal customers.

Representative Issa and Ross have given some hint to these changes in the hearings that they have held and in particular the titles of the hearings.  These hints have indicated that the bill likely include the following:

• Expedited reduction in service from 6-days per week to 5-days per week;
• Expedited public review process for the consolidation or closure of processing facilities;
• Expedited public review process for the closure of post offices and changes in the law to allow closure of post offices solely for operating at a deficit;
• Reductions in Postal Service compensation at least as great as proposed by Senator John McCain in amendments 251 and 252 to Senate Bill 493, the Small Business Reauthorization Bill.  Cuts will occur in:
• Executive pay
• Postal Service share of health care and life insurance benefits
• Reduction in retiree benefits for postal employees including the possible elimination of Postal contributions to FERS and the benefit that these contributions provide.  (A similar proposal was made for all government employees in the Senate.)
• Postal Service's ability to manage labor costs either through the labor negotiation process or in defining positions of employees currently represented by employee associations.

While these provisions will save the Postal Service money, it is unlikely that they will reduce Postal Service costs sufficiently and sufficiently quick to eliminatethe Postal Service's deficits and allow it to continue to make the retiree healthcare payments.   To do that, Representatives Ross and Issa may need to include a provision in their bill to institute a reduction in force (RIF) of around 10% of Postal Service employees to reduce payroll quickly to match income and possibly a provisions to reduce Postal salaries and/or benefits beyond those proposed by Senator McCain and others and that these cuts would include cuts in compensation to both employees that are and are not covered by labor agreements.    

A reduction of 10% of the Postal Service Workforce reflects the workforce cuts that Representative Issa, Ross and Chafitz introduced in HR 2114.   While that bill would reduce the the Federal workforce over 3-4 years, to get the cost savings required, the Postal Service would need to reduce its workforce almost immediately by 10% to get the cost savings needed to reduce costs to break-even levels.  It is unclear how far or how quickly cuts in salaries or benefits could be implemented to employees who are and are not covered by labor agreements.

Senator Carper's Bill: D.O.A

Senator Tom Carper introduced a new postal bill, the ‘‘Postal Operations Sustainment and Transformation Act of 2010’’ (The POST Act of 2010), to modify the Postal Service's business model on September 23rd.   The bill includes all of the legislative changes that the Postal Service requested as part of its action plan last March.  The strong support that Postmaster General Potter shows for the bill in the press release from Senator Carper's office confirms that this bill can be thought of as the "Postal Service's bill."

Unfortunately for Postmaster General Potter, Senator Carper's bill is effectively dead on arrival.  Why?

• The bill was introduced at the end of the legislative session.    With both the House and Senate going on recess to campaign, the consideration of the bill will not even begin until after the election.    The bill still will require mark-up in the Senate and then mark-up and passage by the House.   The clock will most likely run out before passage in one house of Congress, let alone two.
  
• The expected Republican gains in the Senate and House will make any lame-duck session particularly contentious and further reduce the chance that any major legislation will pass.   If Republicans gain control of one or more houses in Congress, it is in their interest to make the lame duck session as ineffective as possible forcing legislative actions to be put on hold until the next Congress.
  
• It is easier to stop legislation than to pass it.   The Post Act has a number of provisions that immediately generate opposition.
  
• Provisions in the legislation to fix the retiree benefit issues easily can be opposed in a Tweet describing the fix as a bailout of a failed federal agency.   This is exactly what Congressman Darrell Issa said in his op-ed in the Washington Times.  Given opposition to bailouts of private sector firms, Congress is unlikely to pass any legislation labeled as a "bailout" of a government entity in the press, in the blogosphere, on cable TV news or on talk radio.
  
• Provisions to allow the Postal Service to eliminate Saturday delivery will receive opposition from a majority of Congress. 
  
• Provisions to allow the Postal Service greater flexibility to cut rural post offices will face opposition from primarily the Republican and Blue Dog Democratic members of Congress that represent most of rural America.   While these members are opposed to bailouts, they are also opposed to cutting services to their constituents.
  
• Provisions allowing the Postal Service to expand into new services that use its physical, technological and human capital that are in the public interest will receive opposition from companies that fear competition from the Postal Service.
  
• Provisions calling for a change in labor arbitration decision criteria will have opposition from Postal unions and their supporters in Congress.

Finally, if this bill does not pass this Congress, it is even less likely to pass in its current form in the next.   Republicans will control the agenda on modifying the Postal Service's business model in the next Congress.    Representative Issa, who has already called the Carper bill a bailout, appears likely to chair the committee writing Postal reform legislation in the House.   His bill will likely require significant changes in the business model beyond what the Postal Service has proposed before accepting the need to fix the retiree benefits issues, let alone include any of the other proposals that Senator Carper has included in the Post Act.  When that occurs, all that may remain of the Post Act will be the legislation's title.

Smart Post - What Does its Success Suggest for Letter and Flat Mailers

In my previous post, I noted that FedEx volumes for Smart Post exceeded the Postal Service's measured volumes for Parcel Select.   This implied that FedEx Ground, UPS and other parcel consolidators used other postal products, most likely Standard Mail Parcels, to handle the parcels that they want delivered less than 1 pound.  The attention that Smart Post received from analysts raised some additional questions that suggest that there may be Postal Service revival strategies that are not the focus of the current discussions about future business models for the Postal Service.

So lets start with what we know about Smart Post and how the Postal Service handles it.

What We Know

1. The volume of parcels that FedEx Ground and United Parcel Service employ the Postal Service to delivery are growing faster than the United States parcel market is growing.
2. The volume of parcels that the Postal Service is handling for all customers is not growing as fast as the overall market.  
3. The Postal Service's volumes for its products that that FedEx Ground and UPS use is declining while their volume using these products are increasing.  This trend means that the Postal Service is becoming increasingly reliant on FedEx Ground and United Parcel Service to market its delivery services to shippers.
4. The growth in the use of the Postal Service by FedEx Ground is attributed to the improvements in delivery service quality that came when the National Distribution Center network restructuring was implemented.
5. The growth in the use of the Postal Service also came at a time that the Postal Service held rates for parcels under 1 pound constant (due to the rate cap) making the Postal Service's delivery service more competitive with FedEx Ground or United Parcel Service using their own resources to deliver light weight parcels.  It is unlikely that costs that FedEx Ground or UPS would have incurred using their own resources remained constant during this period. 
6. The network distribution center realignment has reduced the cost of handling bulk parcels.  See USPS-OIG (Management Advisory Report – Network Distribution Center Phase 1Activation (Report Number EN-MA-10-001)
7. The cost savings from the network distribution realignment would have been larger if management had taken actions to reduce excess employees months earlier than they had.  (See (Management Advisory Report – Network Distribution Center Phase 1Activation (Report Number EN-MA-10-001. p 12) 

What Are The Implications?

• A serious network realignment effort both cuts costs and improves service.
• Improvements in service and competitive prices increase use of the Postal Service's delivery service.
• The Postal Service could improve its competitive position in the delivery of printed advertising if it implemented a network realignment for its letter and flat mail streams that at least as aggressive as it just did for parcels.
• It may be time to rethink the current classification of some parcel services as market dominant products as most users of these products are buying delivery services from the Postal Service in a highly competitive market for the provision of services to deliver small parcels.

What is holding back the Postal Service?

1. Cost savings from network realignments require that plans to excess employees need to begin before it is known how many employees may be released.  The USPS-OIG report indicates that it takes between 4 and 11 months to complete the Article 12 provisions in its labor contracts.   So unless it begins the excessing process before a consolidation is approved, it will have excess employees in standby rooms for months waiting for the negotiated process to be completed. 
2. Currently network realignment including excessing unneeded employees takes as long as 18 months from the time a proposal is announced until all excess employees are reassigned.
3. Current facilities may not be the right size or in the right location to optimally restructure the network.  For example, consolidating carrier route sequencing in processing plants would reduce operating costs and increase the proportion of mail that the Postal Service handles that is route sequenced, as this consolidation reduces mailer transportation costs to the location where the sequencing occurs.
4. Capital does not exist to cover the costs of relocating or expanding facilities to meet the needs of a more streamlined network.   
5. Capital does not exist to cover the severance or early retirement incentive costs required to handle excess employees.
6. Political considerations make it difficult to consolidate facilities and just as importantly increase the time required to complete public hearings prior to announcing that a consolidation proposal will proceed.   The effort required to prepare and hold public hearings add to the cost burden. 

Network realignment should have been the Postal Service's first priority in its effort to cut costs as it is the one cost cutting move that actually improves the quality of service the Postal Service offers by streamlining the delivery process.  The combination of numerous actions of Congress that drained the Postal Service of needed cash, declining revenue due to electronic diversion and the recession, a nearly 18 month time frame from the time a proposal is proposed to the time all excess employees leave the payroll, the political minefield of reducing postal employment at any time and in particular during a recession put it on the back burner.

Instead the Postal Service is moving forward with actions that affect its core customers (mail that contains advertising, including advertising in magazines and accompanying bills and statements) the most: eliminating service on Saturdays and raising prices.   The impact of this strategy is clear.

• Valassis is expanding its use of alternative delivery networks in nearly every market where such services exist.
• Firms that provide alternative delivery in portions of markets are expanding the geographic reach to cover more households.  For example, Donnelley Distribution has just added Delaware County Pennsylvania to its coverage area and Power Direct is expanding into the Las Vegas market.  Both of these companies provide services that effectively compete on a price and service basis with the rates the Postal Service charges for saturation flats.
• The Economist is experimenting with home delivery using delivery services that provide newspaper or periodical delivery for other customers.  If the Economist's subscribers like the new method of delivery, it is likely that the Economist will continue to use alternative delivery. 
• Major media companies, in addition to expanding their use of alternative delivery for periodicals and saturation advertising, are discussing nationwide distribution deals with hand delivery companies to move items currently handled as First Class mail to alternative delivery using a combination of drop-shipping and same day delivery, a service that the Postal Service does not offer, to avoid violating the private express statutes.

What is the Context for 5-day Delivery?

One of the problems with the current regulatory and business model is that every action that is proposed to make the Postal Service financially viable is evaluated independently.   This allows those that object to one solution or another to oppose the solution under review and argue that something else should be done to restore the Postal Service's viability.

Right now the solution in the public eye is 5-day delivery.   The Postal Regulatory Commission has begun its review and Congress will soon follow with its own.  Each review appears to be completed independently of any other changes in the business model or regulatory framework that would be necessary to create a viable Postal Service.  

Furthermore, both the Postal Regulatory Commission and Congressional processes face the risk of becoming the equivalent of a city council budget hearing that has to determine how many hours fewer hours per week libraries or recreation centers will be open when budgets have to be cut.    When this occurs, patrons just have to learn to do with less service.  The proposal of Congressman Jason Chaffetz, R-Utah, to eliminate service on 12 days illustrates this "how much do we have to cut to balance the budget" mentality that legislative processes are designed to handle.

In his comments, Congressman Chaffetz provided a framework that makes sense.  "You have got to serve your customers, or somebody else will come in and do it for you."  This framework requires Congress to ask very different questions than they would as part of a budget process and it particular it forces them to look at the question of how many days the Postal Service delivers as part of a larger package of changes in the business model and regulatory framework.   


Right now Congressman Chaffetz and his colleagues in Congress should be starting hearings to ask these questions:

• Who are the Postal Service's customers today and who will they be in 2020 and beyond?
• What do customers need now and what will they need in 2020?
• How is the Postal Service's ability to meet customer needs affected by the current business model and regulatory framework?
• How do the Postal Service's business model and regulatory framework affect the competitiveness of its services with digital, mobile and other hard copy delivery alternatives?
• What is the macro-economic impact of the Postal Service's current business model and regulatory framework and how do they affect the economic recovery?

Once these questions are answered, Congress will be ready to discuss 5-day and all other possible actions with an understanding of the business implications of each proposed change and how they fit into a long-term Postal Service strategy of serving customers and U.S. postal policy centered on enhancing economic growth and employment.   Postal customers and employees cannot afford to have Congress do less.  

USPS: February Financial Results, Still Not Good Enough

In February, the Postal Service continued to show financial results that were significantly better than plan and slightly better than last year.   Its results reflect a more robust advertising environment that resulted in the first month of growth in Standard mail volume in revenue this year and a smaller decline in periodical revenue than volume that most likely indicated that periodicals in February had more advertising pages per issue than a year earlier.

The results for February continue to illustrate the risks going forward for the Postal Service.  The continuation of high single digit declines in First Class mail at a time that advertising is flat if not growing, suggests that the shift of transaction and correspondence mail to digital formats now occurs at a rate faster than what occurred before the recession. Excluding the holiday season, November and December, First Class mail volume has decline year-over-year at a 10.4% rate.   First Class revenue in the non-holiday months declined at a 7.8% rate   

While it is clear that the Postal Service's financial results are better than plan they are not sufficient to ensure its self sufficiency.  The following chart traces the monthly EBITDA ratio (earnings before interest, taxes, depreciation, and amortization divided by revenue) with and without the retiree health payment. The chart shows that removing the retiree health payment would result in the Postal Service earning a small operating profit every month this year.   The chart also shows that removing the retiree health payment is not sufficient to ensure postal self sufficiency as self sufficiency would require an annual EBITDA ratio of between 10% and 15%.  After five months the Postal Service's EBITDA ratio is 9.8% if you exclude the retiree health payments.  This ratio will decline between now and the end of the fiscal year as the Postal Service faces 6 to 8 more months of seasonally lower revenues and volumes that traditionally results in monthly financial returns that fall below the annual average. 

Financial self sufficiency requires the Postal Service to increase revenues by 5 to 6%, reduce costs by around 6% beyond what its current efforts produce, or some combination of the two in addition to the removal of the retiree health payments to become self sufficient.   More importantly, the Postal Service needs to find the fastest way to increase its EBITDA ratio in order to generate the cash necessary to cover the transition costs that creating a Postal Service that efficiency delivers universal service for mailers that mail only 150 billion pieces annually, most of which will be advertising.

Currently, the easiest option to make the changes necessary is for the Postal Service to raise rates.  The process to raise rates is known as is the time that would pass between the filing of the case and the implementation of higher rates. The Postal Service will file an exigent rate case asking for an increase of around 5% this summer, a rate increase that would be nearly sufficient to generate an EBITDA ratio excluding retiree health benefit payments to put the Postal Service close to a level of self sufficiency.  If the retiree payment issue is not resolved in the Postal Service's favor than double-digit rate increases would be required.   

If the retiree health care issue is not resolved by the time the Postal Regulatory Commission files its opinion on the exigent rate case, Postal Regulatory Commission precedent suggests that the PRC may have little choice but to recommend the double-digit rate increase necessary to cover the retiree health payments. The only caveat relates to the 5-day proposal, as the Postal Regulatory Commission could take into account savings from the 5-day delivery proposal in recommending rates.  However, I am not sure as to whether the 5-day delivery proceeding could be resolved before an exigent rate case is completed.

All other options require Congressional approval (e.g. 5-day delivery, and modifying the retiree health payments), freedom from Congressional interference (e.g. network optimization) and/or negotiations with unions (e.g. changes in work rules including increasing the proportion of part time employees, a process to manage employee dislocation during optimization including localized early retirement incentives and severance pay for layoffs when needed ).  In addition all of the significant cost savings options take more time from proposal to implementation than increasing rates and some will have transition costs to deal with employee dislocation.

The Postal Service will start the clock running on 5-day delivery within the next week.   It should see if it can start the clock on the other initiatives and negotiations sooner than now planned.  Otherwise, it will have no choice but raise rates repeatedly at a time that its customers increasingly find digital alternatives to be more convenient and cost effective.    

Understanding the Postal Regulatory Commission's Power.

In a number of previous posts, I indicated that the Annual Compliance Review had the potential to become a mini-rate case.  In her remarks before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee, Postal Regulatory Commission Chairman Ruth Goldway laid out a view of the Postal Regulatory Commission that more than reinforces that view.

Chairman Goldway, in response to a question from Senator Durbin, noted that the PRC's opinion on the Postal Service's 5-day delivery proposal was advisory.  The PRC could not stop the Postal Service from implementing a service change that it advised against.   However she indicated that the Commission had the power to compel the Postal Service to reinstate service if it finds as part of the annual compliance review that the change results in the Postal Service no longer providing the universal service required by the law.

Her exact quote was:

Every year we have to make a report on whether the Postal Service has complied with the law and that means whether it [the Postal Service] has met its obligation to provide an efficient and fair level of universal service.  So if they don't take our advice on this [the 5-day delivery proposal] and at the end of the year they entered into an activity that we deem is less than universal service, we can find them out of compliance and require them to start up some new activity again.   But we could not tell them at the time of our advisory opinion what to do.

The PRC will issue its review of the Postal Service's 2009 Annual Compliance Report in the next few weeks.   This quote suggests that the Commission will assert that it has the power to compel the Postal Service to change any aspect of its rates or service in order to comply with the law. 

The Public Representative and others presented testimony in the annual compliance proceeding stating that Postal Service rates put it out of compliance with the law.   Given Chairman Goldway's understanding of the Commission's powers, the possibility exists that the Commission could concur with these assessments and require the Postal Service to adjust its rates upward to comply with the law.  

Mailers and the Postal Service appear likely to find an outcome in the PRC's review of the Annual Compliance Report to their liking only if the Commission does not find that the testimony arguing non-compliance was convincing or identifies a way to defer its power to compel Postal Service action.

Earlier Posts on this topic:

• Rethinking the Value of Postal Regulatory Policy
• Regulating the USPS into Financial Stability
• Re-regulating the Postal Service

Postal Service in Triage

Anyone who has ever been in an emergency room has had to deal with a triage nurse.   The triage nurse's job is to conduct an initial assessment of every patient that comes for emergency treatment and prioritize the patients based on the severity of their illness or injury.

Triage gets complicated when there is second door for patients that come in ambulances.   These patients skip the triage nurse and may have their first assessment by the emergency room nurse or physician.  This second door may allow a patient who is less sick than one who is driven to the emergency room to see a physician faster, or at least be placed on a gurney in an emergency room corridor.

Further complications exist in the case of natural disasters, mass-casualty accidents, and suicide bombings all of which may overwhelm the capacity of the medical facilities available.   Then the choices become even more daunting.   Instead of just choosing which patient can wait to be treated, the triage process may have to decide who is too injured to try to save and for those that it can save what organ/limb must be sacrificed for expediency in order to save even more lives given the available resources.   Medical care in Haiti following the earthquake was like this as limited facilities, supplies and medical personnel forced some horrific decisions to amputate limbs that could have been saved in a medical environment that was not so stressed.

The decision by the Postal Service to eliminate one day of delivery is equivalent to a decision that a business in triage makes.  Given the substantial losses, even discounting the retiree issues, the Postal Service had no choice but to find a way to cut costs faster than its current cost cutting efforts had produced.  Specifically, it needed to find a way to cut costs by between $2 and 4 billion above and beyond existing efforts in order to survive.

In its business triage, the Postal Service faced the question, "How can it cut costs in order to save the business without harming the brand and relationships with customers?"  The decision to eliminate one day of delivery is equivalent to an amputation.   It may save the business but it will create new challenges for it going forward.  Decision-makers had confidence in this decision because posts in other countries had made similar changes and their brand and customer relationships survived intact.

In the next year the Postal Regulatory Commission will review whether the Postal Service made the correct decision in its triage process, in the equivalent of a pre-amputation second opinion.   The focus of the PRC will likely be checking to see whether the cost savings projected are realistic and evaluating the likelihood that the impact on customers will be a form of business gangrene or benign.

One of the biggest challenges facing the PRC will be putting the decision to eliminate 5-day a week delivery into context.  The Postal Service made the decision to develop a 5-day a week proposal as part of a business triage process in the fall of 2008 that also generated some additional efforts to cut costs.  These included:

• Preparing a proposal to offer a Voluntary Early Retirement Offering;
• Preparing a case to close post offices;  
• Completing preparations to complete plant consolidation studies;
• More intensive efforts in carrier route evaluations; and
• Preparing a proposal for 5-day delivery.

The Voluntary early retirement offer had minimal impact. From this the Postal Service learned that it could not reduce its workforce quickly cost free. Within a few months an offer with financial incentives was introduced.

The PRC's evaluation of post office closures is nearing its end and the list of post offices that will be closed has shrunk from more than 3,000 to less than 200.   The potential cost savings has most likely shrunk as well.  The failure of the Postal Service to eliminate all of the corporate offices that it wanted reflects both the need to continue to provide service in the communities affected and the lack of a ready strategy to replace corporate offices to be closed with contract or franchised offices in those communities.  

Plant consolidation study announcements were publicized in earnest from the spring till fall of 2009.   These consolidations were chosen based on the knowledge and experience of local management.   A national strategy to restructure the bulk mail network was begun and then expedited after the initial efforts both improved service and reduced costs.   Even without PRC review, plant consolidation proposals take a full year to complete the entire process meaning that efforts begun in 2009 could not begin producing savings for a full year.

Potential 5-day Delivery Implementation Schedules

A previous post, "Is 5-Day Delivery Inevitable?", laid out a potential schedule for when the Postal Service could implement a switch to 5-day delivery.   As the Postal Service's filing with the Postal Regulatory Commission is coming in the matter of weeks, this post takes a second look at likely implementation schedules for stakeholders to think about.   This post lists four potential schedules:

• a fast track schedule;
• a standard track;
• a slow track due to longer PRC review than the USPS anticipates;
• a slow track due to longer time to get Congressional action.

Fast Track Schedule - assumes a short PRC review and Congress acting either just before the 2010 election or in the lame duck session.

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• September 2010  - PRC issues report on the Postal Service's proposed changes
• October 2010 - November  2010 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• December 2010 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• May 2011 or June 2011 - Implementation of 5 day a week service.   

Standard Track Schedule - assumes an average time for the PRC review

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• November 2010  - PRC issues report on the Postal Service's proposed changes
  
• December 2010 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• December 2010 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• May 2011 or June 2011 - Implementation of 5 day a week service.   

Slow Track Schedule due to longer PRC review - assumes that the PRC review takes longer than the review of station and branch closings

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• March 2011  - PRC issues report on the Postal Service's proposed changes
  
• April 2011 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• Between April and September 2011 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• Between September 2011 or February 2012 - Implementation of 5 day a week service.   

Slow Track Schedule due to longer Congressional deliberations - assumes that Congress does not act before the end of any lame duck sessions in 2010.

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• December 2010  - PRC issues report on the Postal Service's proposed changes
  
• February 2011 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• Between March and September 2011 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• Between September 2011 or February 2012 - Implementation of 5 day a week service.