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.

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.

Are 30,000 Enough?

Over the past several days, there has been some debate about what the 30,000 reduction in Postal Service employees really mean.   Both postalnews.com and the Washington Post have reported that 30,000 represents a combination of regular attrition and the reduction in 7,500 management positions that will be announced on March 25.

So how much will the reduction of 30,000 employees save the Postal Service?   The Postal Service's average monthly compensation cost is $6339.27 per employee.   (This works out to a salary of around $54,000 per year or $4,500 per month with the rest being the cost of employee benefits and employment taxes.)   If one assumes that retiring employees earn 15% above average then the savings per month per retiring employee is $7,290.16 per month.   Attrition then reduces the Postal Service's compensation by around $6.736 billion this year.

The March 25th announcement will just start the process of eliminating positions, so it is likely that the Postal Service will not see the full impact of the announcement until the end of June.   So the cuts in positions will cut the payroll for only three months this fiscal year.  The savings, using the same assumptions will be $306 million.

Combined the total savings is $7.042 billion.  However, even with this reduction in compensation the best the Postal Service can do is cover its operating expenses.    These cuts generate an insufficient profits and cash to cover the Postal Service's capital needs and other investments necessary to maintain universal service and transition to a leaner more efficient operation, let alone pay one dollar of the disputed retiree payments.

So let's ask a hypothetical question.   What is the total number of employees that the Postal Service can employ and still be a self-sufficient enterprise?   This question needs to be asked both with and without the retiree payments and with both current compensation levels and reduced compensation levels that would come through retirement incentives and the introduction of a two tiered wage structure. 

Assumptions

• The Postal Service does not pay any of the disputed retiree obligations.
• The average monthly compensation is $6339.27 (including all benefits and employment taxes)
• The Postal Service's revenue in 2011 will be near the plan level of $67.1 billion.
• The Postal Service needs an operating margin of 12% to be self-sufficient.
• Total costs need to be $59.1 billion.
• Cost reduction required above current plan $8 billion.
• 90% of the savings come from reduction in employees.

Result

If one assumes that salaries remain at current levels, the Postal Service must reduce its workforce by 94,648 employees to be self-sufficient.  That is close to 1/6 of the current workforce.  The number would be lower if the Postal Service is able to negotiate a two-tiered wage agreement with its unions but will still be a shockingly large number.

This little exercise should give stakeholders pause as it is clear that many things have to be put on the table to cut costs that Congress and other stakeholders are resistant to change.   These include:

1. Cut an additional 20 to 40 district offices and 1 to 2 Area offices - Cuts in management will like need to be at least twice what is announce on March 25.  The Postal Service cannot be too agressive in cutting out a layer of management.
2. Acceleration of plant consolidation - Members of Congress may object to the consolidations but they will proceed regardless of their efforts.   Future consolidations after those that will occur this year and next will likely start to require capital expenditures and the cash to finance them.
3. Modernization of the retail infrastructure - Mail services need to be accessible but the current method may be unaffordable.   A new model needs to be put into place quickly.
4. Restructuring of rural mail services - The Postal Service needs to look at the Australian model for providing service in the most rural parts of the United States.   It would require looking at rural service as a profit center that includes revenue and costs associated with retail and delivery and a major expansion of services that they are legally allowed to offer in a rural retail facility.   It may require doing what Australia Post has done and franchising to a local company to provide both the retail and delivery function.
5. Changes in civil service employment law -  Senator Susan Collins has already introduced legislation to change rules for workers compensation but more changes are needed in employment law as it affects the Postal Service.   If the Postal Service is going to implement the major operating changes required to reduce the number of employees to levels that the business can support, it needs streamlined rules to implement reductions in force and early retirement incentives. Current rules were not designed to handle the rapid reductions in employment counts that the Postal Service will need to be self-sufficient.  Without these changes, reducing the number of employees through any method other than attrition remains a difficult and expensive option to implement.
6. Five-day delivery - A switch to 5-day delivery is unlikely in the next few years.  However, unless the Postal Service can find a way to reduce its costs in other ways five-day delivery will likely need to be introduced by 2020 even if savings are well less than one billion dollars.
7. Rate increases - Rate increases above CPI have to be the last option but rate increases are probable even if the previous six changes are implemented.   In particular, single-piece First Class mail rates need to rise to cover the costs of reducing the number of employees to reflect the rapid decline in these employees and the future liabilities for their retiree expenses.  Rates for the Postal Service's largest mailers will also likely rise with some loss in volume

As the last oversight hearing showed, the Federal government is a creditor that holds a note (legislated retiree health-care obligation payments) that the Postal Service has stated it will not pay.   In the private sector, creditors faced with situation would be forced to put the enterprise that will default on its obligations into bankruptcy to see how it can be repaid either through liquidation or restructuring.   As the equivalent of the creditor committee, Congress needs to quickly figure out if there is a plan that can put the Postal Service on the road to self-sufficiency that would allow it to pay some or all of the retiree-obligations that are currently baked into the Federal budget.

Another Stumbling Block to Self-Sufficiency

In addition to declining volumes, the Postal Service now faxes another stumbling block to self sufficiency, rising fuel prices.   Increases in fuel prices used by the trucks, airplanes, cars, boats, and railroads that transport and deliver the mail have a nearly immediate impact on Postal Service operating costs.  Gasoline costs are up almost 28% since the beginning of fiscal year 2011 and diesel prices are up 29%. 

The impact affects the largest non-personnel line items, transportation costs. The Postal Service will spend around $6 billion in purchased transportation services and fuel for delivery vehicles this year.   Through December, Postal Service transportation costs are $106 million above plan during a period that diesel fuel prices were 4.8% above levels that existed at the time the financial plan was finalized and 23% below current levels.  If oil prices stay at current levels, the spike in oil prices could add between $475 and $720 million in transportation costs to these contained in the original budget.

The only option the Postal Service has to deal with rising fuel costs is to expedite cuts in its transportationprocessing and retail networks as well as the number of employees.  Streamlining the processing network will help efforts to reduce excess transportation capacity as a smaller network increases the probability that trucks betwwn plants run full.  The cutbacks in networks and management and union positions will have to be tougher if Postmaster General Pat Donahoe is to meet his goal of operating break-even this year,

The Postal Service is unique in its vulnerability to rising fuel prices among transportation companies as it alone has a rate structure that does not include a provision for a fuel surcharge.  Fuel surchases allow transportation companies to reduce the risk of fuel price volatility and allows them to provide more consistent service.  They also protect shareholders from some of the stock value fluctuations due to changing fuel prices.

By not having a fuel surcharge, especially on contracts used for last-mile delivery of parcels, the Postal Service creates the risk that its customers will opportunistically replace delivery by its own or contract transportation that must pass through higher fuel costs to customers with Postal Service delivery and a supplier willing to take lower margins or losses when fuel prices rise.   This is even more problematic in rural deliveries that are often significant distances from where carriers like UPS or FedEx drop parcels for Postal Service delivery and fuel costs have the largest impact. 

Good management would begin the process of eliminating this vulnerability as it applies to competitive products and examine how regulated products could be adjusted more frequently to reflect changes in fuel costs.  Congress as the shareholder of the Postal Service and the Postal Service's largest usecured creditors (the Office of Personnel Management and the Department of Labor) needs to look into this issue to see how not having fuel surcharges affects the risks to their investments,    Mailers will complain about more frequent changes in rates but the Postal Service can no longer bear all the risk of fluctuating fuel prices.

Update 3/9/2011 11:45 a.m.:  Since this post was first published, the Postal Regulatory Commission has posted the Postal Service's financial resulats for January 2011.   The results show that transportation cost were $44 million below plan in January.   This is good news and suggests aggressive reductions in the amount of transportation being purchased.   However, the reduction below plan would have been even larger if fuel prices were not higher in January than they were in October.  The even higher fuel prices today make holding transportation costs below plan more difficult today then it was in January.

Dueling Inspector Generals or Revenge of the Creditor

Yesterday the Office of Personnel Management - Office of Inspector General (OPM-OIG) published a  report, entitled "A Study of the Risks and Consequences of the USPS OIG's Proposals to Change USPS's Funding of Retiree Benefits," that is devastating for anyone who had hoped that the Postal Service's financial issues could be resolved through changes to retirement funding issues were dashed. 

The OPM-OIG took different positions on each of the three proposed changes it investigated.  The OPM-IG generally supported a change in law to deal with the FERS Surplus.   It punted on changes on the allocation of CSRS liabilities for POD/USPS employees and reaffirmed testimony OPM made last year that OPM will follow whatever direction Congress gives it on that matter.  It rejected all proposals to fund Postal retiree obligations at less than 100%.

The OPM-OIG report reflects one of the eight challenges facing the Postal Service that this blog noted some 18 months ago, "Minimizing Risks to the U.S. Treasury."   Its conclusions are similar to what the first report of the consultant to the creditor committee would say regarding a firm facing bankruptcy. The report would oppose any change in terms that increase the risk of less than payment in full and any changes in the terms of the obligations.

The OPM-OIG goes even further suggesting that the USPS is not viable.  “Of Greater Concern to us is the fact that during the course of our research, we did not find any viable projections indicating that the USPS could restore its operations to profitability”  Creditors of firms in this position often require placing the debtor into bankruptcy so that the creditor committee can then choose to invest capital into the business to turn it around or liquidate it.

The OPM-OIG does a major service regarding the Postal Service even as it dashes the hopes of many stakeholders by making the following points that should focus the policy debate.

• The Postal Service does not have a plan to become profitable that a creditor would find credible.
• The Postal Service needs operating capital under its current plan and would likely need operating capital under any plan that a creditor would find viable as a path to profitable operations.
• OPM, as a creditor, should not put its solvency or its obligations to other Federal employees at risk as a source of working capital for the Postal Service.
• Changing Postal Service retiree benefit payments would not fix the fundamental problems in the Postal Service's business.
• If the Postal Service stops making its retiree health-care payments, health care benefits for retirees of the Postal Service retirees are at risk.  It is not clear how soon they would be at risk or if just future or current retiree health benefits are at risk. (Italicized addition added at 9:30 am.) For more information see "Could Postal Employees Lose Retiree Health Benefits?"
• If the Postal Service needs Federal assistance, then that assistance should be examined and debated independently and not within the context of funding retirement obligations.  (In other words, the fix cannot come out of our budget.)

Who Represents the Administration on Postal Policy?

The Office of Management and Budget media office has provided the following response to my question regarding why OMB Director Jacob Lew is not testifying at the Postal Hearing this Wednesday.

"As a matter of policy, the OMB Director doesn't testify before subcommittees on issues not directly related to OMB’s appropriations." 


If this is standard policy for OMB then the Subcommittee may have posted the hearing schedule prior to knowing the protocol.  

The problem that the Committee faced in trying to pick a witness to present the Obama administration proposal for the Postal Service that is included in the 2012 budget is who represents the administration's position.  For most departments it is clear.   The Secretary or Administrator of the department of the department or agency gets the call to explain the proposed budgetary changes.   For the Postal Service, this is not so clear.  

It is not the place of either the Postmaster General or the Chairman of the Postal Regulatory Commission to present government policy for the postal market.  The adversarial relationship between the regulator and the regulated entity prevents either from doing more than present the perspective of their own organization on the proposal made in the Obama 2012 budget.   For example, it is clear that if the Postal Service could have submitted a budget proposal of its own choosing it would have removed the requirement that it maintain 6-day delivery.   What changes the Postal Regulatory Commission would have made is less certain.   There are also a fairly long list of postal policy issues that the Postal Regulatory Commission and the Postal Service would differ that affect postal finances and how they affect the budget which creates the appearance that there is no such thing as "government postal policy" in the United States.

Let's hope that the Committee can quickly find out who will represent the Obama administration on postal policy.   Until that happens, the 2012 budget proposal for the Postal Service risks becoming little more than a policy orphan.

Competing In Competitive Markets

TNT Post is the privately owned provider of universal mail service in the Netherland.  As such it operates under a corporate structure similar to investor-owned public utilities in the U.S.   From a competitive standpoint, TNT Post is similar to the land-line operations of Verizon, ATT, Quest, and numerous smaller firms that are dominant in their traditional market but face competition from telephone services offered by cable companies, wireless services, including sister wireless divisions, and voice over internet services like Skype and Vonage.  

Just like land line companies, TNT Post expects demand to decline.  Its just released annual report provides the following information on volume change in 2010 and in upcoming years.  As a consequence of the combined market trends [i.e., competition and electronic diversion], the addressed postal volume decline in 2010 was 9%. For 2011, Mail estimates the decline of its addressed postal volumes to be around 8% to 10%. In the years thereafter, Mail estimates its annual volume decline to be 6% on average. 

TNT does have options to grow its business that the United States Postal Service does not because it is in in the private sector and does not have legal restrictions from offering "non-postal" services.  The following figure illustrates TNT's strategy and a number of these options.  

Choosing to allow the U. S. Postal Service to expand its range of services is a significant policy question that requires Congressional action.  

The argument for allowing the Postal Service offering similar services come from the economic theory of the firm that describes the limits in both efficiency and service quality of contacting out parts of a manufacturing process or service to multiple firms.   The theory of the firm explains why with limited exceptions most movements of physical objects from rail cars to less-than-truckload freight to express letters are marketed and transported by a single firm and these firms have aggressively expanded into logistics and trade-finance services that customers often require in addition to the transportation.  It also explains why most posts operating in the G-20 offer services similar to what TNT Post, while at the same time many now or will soon compete with firms offering upstream (i.e. collection, sortation and transporation) and end-to end mail delievery services.

The argument against allowing the Postal Service, operating as a public entitiy, offering similar services are twofold.  First, allowing the Postal Servcie to offer these service would put it in direct competition with private sector and government provision of services are perceived to be required only if the private sector fails to provide the service.   Second, by allowing the Postal Service to compete with private sector firms, its delivery service would give it an unfair advantage over firms currently competing in the market.

Even if the Postal Service is privatized, there is an argument against allowing it to compete with the private sector.  This argument focuses on the competitive advantage of a private sector firm offering the delivery service has in the market over other competitors.   In many ways these arguments are similar to those favoring net-neutrality as well as concerns of competitors to NBC that were raised prior to the merger of NBC and Comcast.

In weighing these arguments, as well as arguments on the full range of postal policy issues, Congress needs to focus on the economic impact of the policy choice. 

• To the extent that mail is used to consummate transactions including the sending of bills and payments, what option allows those transactions to go smoothly at the lowest cost to the buyer and seller?
• To the extent that mail is used to advertise products and services, what option gives advertisers the most efficient advertising media possible which allows them to grow their business and create jobs?
• To the extent that the Postal Service is a critical part of a low-cost transportation network that allows e-commerce companies to grow, which option best ensures that the sender of parcels or receiver of returns will have cost-efficient delivery network that they need that will allow their businesses to grow and create jobs?

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.

Postal Policymaking: On the Front Burner

An article in James Fallows blog, written by John Tierney entitled "Postal Policymaking: A Political Laboratory" clearly puts postal policy on page 1 of the new Congress's agenda once it gets past dealing with the issues over which the last election was fought.  James Fallows, better than anyone else, lays out the core problem and the key part of the ultimate solution.  The following bullet points are highlights from his article.

• ... the real problem is that the Postal Service labors under the burden of accumulated obligations. Over our nation's history, the postal system has been used by Congress to fulfill a wide variety of social and political objectives beyond the delivery of letters and packages: frequent, speedy and consistent delivery; universally available letter-mail services at reasonable and uniform rates; support of a large and well-paid work force; continuation of an expensive rural network; maintenance of numerous collection and distribution points; etc. 

• The problem here isn't that nobody knows how to produce an efficient and cost-effective mail-delivery system.  That wouldn't be difficult -- at least, not if the Postal Service operated in a political vacuum. To operate the mail system in a more economically rational and sustainable way, postal executives would tailor services to economic demand.
  
• ...whenever the Postal Service has tried to save the whole system by cutting its nails (much less cutting off a limb), members of Congress, who ultimately control all postal policy, squeal like cats on a hot tin roof and prevent postal executives from acting. They're afraid of the electoral consequences of imposing sacrifice on their constituents and on well-organized postal workers. 

Mr. Tierney concludes his comments on the Postal Service by stating, "Postal service?  A relatively easy problem to fix."   I agree with him that the policy solution is relatively easy and would require that all stakeholders, the U.S. Treasury, mailers, employees, consumers whose current method of buying postal services may change will have to bare some sacrifices.

I further agree that the real problem is Congress itself and the difficulty that it has in making decisions that could negatively affect any constituent.   Mr. Tierney notes that compared to the federal deficit, the problem facing the Postal Service is small and the sacrifices born by postal stakeholders would be relatively modest.  (This is not to say that the loss of one's job is a modest sacrifice for the individual.)  As he states:

If members of Congress continue to be unable to bring themselves to allocate some pain to us on something that we ultimately can handle with a bit of Tylenol, how can they possibly make the really hard decisions that may require morphine?  A big part of the problem is that it's their pain that they're worried about, not ours.  Legislators are fixated on avoiding the hard decisions that might negatively affect their reelection chances.  We're never going to solve any of our acute enduring problems as long as we have a Congress full of wannabe legislative careerists.

Mr. Tierney suggests that the Postal Service could be the laboratory through which Congress gets its feet wet in solving the more serious fiscal issues that have landmines that hit an even larger number of constituents and affects them even more deeply. If true, then postal policy will move fairly quickly over the next six months and postal stakeholders should be prepared.

Note:  Mr. Tierney has a wonderful description of the failure of the PRA and PAEA in a footnote.   I present it in full below.

The sad thing about that is that in the early 1970s, Congress dealt with a postal crisis of that time by transforming the governing arrangements of the postal system with the objective of freeing it from political constraints so that it would be free to operate in a more "businesslike" fashion.  The Postal Reorganization Act of 1970 changed the postal service from the old cabinet-level Post Office Department into an "independent establishment" of the federal government -- not quite a government corporation, but very much like one.  But the "freeing from political constraints" part of the reform was all pretense; Congress insisted on maintaining ultimate control over all important decisions of postal policy. So the autonomy of postal executives still doesn't extend to important decisions about the scope and form of postal services.  Their hands are continually stayed by members of Congress who fear that the political costs to designing a more rational and sustainable system would be too great.

If UPS can do it why can't the USPS

In its conference call discussing its 2nd Quarter 2010 results,  UPS explained that the growth in its profitability this quarter reflected the fact that while volumes grew slightly, both labor hours and miles driven were down.    The decline in the use of labor and transportation assets reflected a more streamlined network than what existed a year earlier. The streamlining put downward pressure on the total work hours of its Teamster employees.

In addition to streamlining its network, the total complement and work hours of Teamster employees, UPS also made major strides in cutting layers of management by eliminating a significant portion of its district and regional management.   Elimination of middle management reflects the fact that UPS's standards based management approach and strong information technology platform allows fewer managers to manage more territory and employees effectively.

The Postal Service, even though it has reduced work hours and employees, has not been able to get ahead of the curve in streamlining either its facility or transportation network.  The Postal Service has not been as aggressive as financial conditions warrant in streamlining regional and area management.

Looking forward into 2011, the Postal Service expects that single piece First Class mail will decline by double digits from current levels and bulk First Class mail will decline by 6% further increasing over-capacity in its collection, mail preparation and origination sortation operations and may reduce demand for destination sortation capacity as well. 

No one knows how well the consolidation efforts now in the evaluation stage will work to reduce the over-capacity problem.  However, the public method projecting savings underestimate the benefits of plant consolidation because 1) they do not use volume forecasts which would identify the impact of declining First Class volumes on capacity needs; and 2) they do not use a net present value analysis that would show the impact over 2 to 5 years that would clearly show the value of early retirement incentives and some capital expenditures to speed the consolidation process and operating cost savings. 

In addition, consolidation efforts are limited due to three reasons:

1. the lack of capital that forces the Postal Service to use existing facilities that may not be ideally located for the most cost-efficient means of providing high quality service;
2. the lack of a employment plan that includes focused early retirement incentives and severance pay that would reduce head count more quickly than now occurs; and
3. full time job requirements which are increasingly difficult to justify given both declining originating volumes and the efficiency and service quality requirement that proportion of time that mail spends inside the walls of a processing plant decrease and the the time the mail spends in transit increases. 

 As both the shareholder and bondholder of the Postal Service, Congress needs to have a clearer understanding as to:

• the network that could optimally handle mail volume in 2020 while improving on or maintaining current service levels and how the constraints listed above prevent the Postal Service from having such a network;
• the additional costs that are imposed by the constraints identified above;
• the cost impact of not having such a network and the impact of those costs on postal prices and to a lesser extent on employee compensation; 
• the risks of not having such a network creates for the Postal Service's ability to pay its obligations to the treasury and be self-sufficient; and
• the impact of not having an efficient operating network on economic growth.

Additional Comments:

Retirement Liabilities:  I do recognize that the Postal Service has expenses for retiree benefit liabilities that no private sector company does in addition to having had its obligation for pension liabilities overstated.   However, even if these expenses were liabilities were removed from the balance sheet, the Postal Service would still face the challenge of dealing with flat or declining volumes total mail and declining First Class mail volumes which has created the need to adjust the sortation and transportation networks.     In order to be financially self-sufficient, the Postal Service has to move from behind the curve to ahead of the curve in its efforts to ensure that operating capacity fits the demand for mail.

Cuts in Management:   As one reader noted, the Postal Service has made some cuts in district and area management.   However,  UPS has made an even larger proportional cut in middle management than the Postal Service.   UPS made these cuts in order to deal with profitability challenges that exist due to competition from FedEx and slow growth in demand.   The Postal Service's profitability challenges are even greater which would suggest that further consolidation of area and district management may be warranted on top of its efforts to streamline its production operations.

Fixing the Retirement Liability Calculation

Congress has begun to move on the Postal Service's retiree obligation issues.   The House Committee on Oversight and Oversight and Government Reform will mark-up H.R. 5746, The United States Postal Service’s CSRS Obligation Modification Act of 2010 on Wednesday, July 21 at 1:30 p.m.

Given the limited number of legislative days involved, any action on retiree issues has to move at a pace far faster than what is common in Congress.  While passage in the house in an expedited fashion would appear possible, passage in the Senate in a timely fashion is less certain.   Senator Carper has indicated that he is preparing his own comprehensive reform bill which may go beyond the retiree benefit fix and would have to be reconciled with the House language.  In addition, objection by any one Senator can hold up passage.

To understand how fast this is moving, at least in terms of legislative speed  here are some relevant dates.

• January 20th, 2010 -- The USPS-IG report, The Postal Service’s Share of CSRS Pension Responsibility released.
• March 2, 2010 -- Request from the Postal Service made to Postal Regulatory Commission for actuarial report.
• June 30, 2010 -- Civil Service Retirement System Cost and Benefit Allocation Principles (Segal Report) is released by Postal Regulatory Commission
• July 16, 2010 -- Congressman Stephen Lynch on Friday introduced H.R. 5746, The United States Postal Service’s CSRS Obligation Modification Act of 2010.  The legislation follows the USPS-IG methodology.
• July 21, 2010 --  House Committee on Oversight and Oversight and Government Reform marks up H.R. 5746, The United States Postal Service’s CSRS Obligation Modification Act of 2010.  After mark-up, the agreed upon language is sent to the Committee on Rules to set the parameters of debate on the House floor.

National Envelope Company Bankruptcy

The Wall Street Journal reported that the National Envelope Company, the largest envelope manufacturer in the United States filed for bankruptcy today. The bankruptcy filing indicated that the company had between $100 and $500 million in both assets and liabilities.  The company is family owned.

National Envelope Company is unlikely to cease operations under bankruptcy.   The bankruptcy proceeding will allow it to renegotiate existing contracts with employees  and vendors, renegotiate terms of loans, and renegotiate or terminate real estate leases that could not be completed outside of bankruptcy. 

National Envelope Company's bankruptcy follows a nearly two year process during which it has been consolidating operations.   During this period it has closed facilities, ended production, or curtailed production in:

• Chino, CA,
• Union, NJ,
• Long Island City, NY, and
• Houston, TX

The Houston TX closure represented the last step in the consolidation of three facilities in Texas into a new facility near Dallas.

National Envelope bankruptcy most likely represents an orderly way for it to deal with the need to reduce capacity at a pace faster than just waiting for existing capital and real estate leases to expire would allow.   It also allows some more flexibility in adjusting its workforce, that currently numbers around 3,000 employees.  However, there is no information yet available that would indicate that renegotiating union agreements, which may be permissible under bankruptcy, is anticipated.

The financial challenges that caused National Envelope to close these four facilities and now file for bankruptcy reflect the decline in the demand for mail and therefore the envelopes that National Envelope Company produces.  National Envelope is not alone in requiring significant consolidation of capacity.  The recent merger of Quad Graphics with Quebecor World Color will likely result in consolidation of printing operations of these two companies that will likely include some plant closures.   If the supplier's of the envelopes see the speedy consolidation of existing production facilities as critical to their survival as financially viable enterprises, it would seem that the Postal Service cannot delay its consolidation efforts either.  

What National Envelope Corporation's bankruptcy says to postal stakeholders is that mail volume declines, particularly in single-piece first class mail and flat shaped mail across all classes, may not allow the Postal Service to use painless ways to reduce capacity.   The decline in mail volume, combined with improvements in mail automation, means that the number of employees that the Postal Service needs is declining at a rate faster than the rate of attrition.   Similarly, the number of plants that the Postal Service needs may be declining faster than the rate that real estate leases are expiring.

The Postal Service could even find itself in the position, like National Envelope Company found itself in Texas, that it needed a new facility in a different location to replace a group of existing facilities that are no longer optimally located to provide efficient and timely service.  In this case the capital investment in a new optimally located facility could reduce both operating and transportation costs and creates the possibility of improving service previously served by the facilities that are replaced.

Unfortunately, the Postal Service does not have the ability to go through a pre-packaged bankruptcy process like National Envelope Company is likely about to begin. Nor will it have the financing needed to handle the transition costs to a move quickly to a smaller and more efficient mail-processing network that National Envelope Company will have so that it can streamline its current production network during its bankruptcy proceeding. 

It may be worthwhile now for the Postal Service to lay out the capital and transition costs necessary to reduce operating costs and consolidate its processing and transportation network.   This information could be quite valuable in trying to develop a case for restructuring the retirement expenses that the USPS-OIG has indicated should be adjusted.

The problem of capital and transition costs is illustrated in recent statements from Postal Service officials to mailers regarding the automated flat sortation and how a key constraint to fully taking advantage of the technology is availability of funds.    While flat volumes are down significantly, a streamlined flats sortation network modeled after the NDC network could handle bulk flats efficiently with the ability to automate sortation to the finest level that the technology allows at a lower cost to periodicals, catalogs, and other bulk flat mailers.  Such a network would allow mailers to reduce transportation costs by drop-shipping flats to fewer facilities that specialize in sorting flats using automation and then the finely sorted flats would be transported directly to delivery units, or transported to downstream plants for cross-dock movements onto transportation to delivery units.   A full explanation of the capital and transaction spending needed to put such a network in place should be demanded by flat-shaped mailers.  

The current problem with flats is just the canary in the coal mine.  The next product that will face an equivalent challenge will be single-piece mail and.   Single piece mail is declining now at above 10% year-to-year, a rate faster than what was seen before the recession.  This is different from nearly all other postal products which have seen volumes stabilize at 2009 levels and it does not seem unreasonable to believe that demand could rise from that low level as advertising spending across all modes begins to increase in 2010 and 2011.   

The problem with single-piece mail is two-fold.  First, it is highly profitable and its loss reduces contribution to overhead that must be generated elsewhere.   Second, its decline is far faster than the rate of retirement of employees that process single piece mail.    Therefore, the Postal Service will face continuing excess capacity of employees, and especially employees working on shifts handling originating single-piece mail unless it plans to reduce its workforce to reflect the decline in demand in the mail that has the greatest processing requirements. Similarly excess capacity will exist in facilities and possibly equipment.   Now is the time to plan the network for single-piece volume in 2015 and beyond.  A network planned geared for this change would go far to convince stakeholders and Congress that the Postal Service is serious in its efforts to manage its business which will be needed to get the changes in retirement obligations and postal labor law that the Postal Service wants.

Saving The Public Enterprise Model - Who Pays?

Tomorrow, the House Oversight and Government Reform Committee will receive testimony on three reports detailing changes requiring congressional or regulatory action.  These reports are

• Ensuring a Viable Postal Service for the Postal Service: An Action Plan for the Future by the U.S. Postal Service
• U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability by the Government Accountability Office (GAO)
• The U.S. Postal Service’s Financial Condition: Overview and Issues for Congress by the Congressional Research Service (CRS)

All three reports present changes that are designed to allow the Postal Service to retain its status as a self funding government enterprise.    The changes identified in the reports are significant and reflect changes that the authors believe (or in the case of CRS the author reports) will allow the Postal Service to operate in the new competitive environment in the document and parcel delivery markets.

The recommendations contained in the reports divide easily into two categories: those that have budget impact and those that do not.   All of the changes to Civil Service Retirement System liability calculation, retiree health care liability calculation, and retiree health care liability payment schedule all affect the Federal budget.   All other proposed changes do not.

Both employee and customer groups have argued that current methods of handling retiree obligations represent the equivalent of a stamp tax.   The Postal Service has testified that following the thinking on these issues of the USPS OIG would eliminate the need to cut a delivery day and just dealing with the retiree health care liability payment schedule is needed to hold off more drastic rate increases, service cuts, and reductions in the number of employees.  However the retiree issues bump up against the impact on the budget which is now one of the hottest of hot buttons in Washington 

Identifying who bears the costs of the recommended changes that do not affect the budget is clear.   Employees will see both reductions in their numbers, and new employees will face lower pay levels and the probability that many new jobs will be part time.   Customers will see less service and higher prices as one delivery day is eliminated and prices for classes receiving preferential treatment in the rate setting process lose their protection and prices for all customers lose the protection of the price cap.

Identifying who gains from the recommended changes that do not affect the budget is less clear.  Consumer and business customers will gain from greater access to postal services from a modernized retail network.   Employees near retirement will gain from retirement incentives if the Postal Service and unions agree to implement GAO's recommendations.   The federal government could gain if it does not have to rework retirement issues and eliminates any prospect of subsidies for postal services.

The costs associated with the recommendations are exactly the costs that opponents of corporatization and privatization have noted in actively opposing a private sector business model for the Postal Service.  What these reports show is that retaining a government enterprise model does not save employees and customers from the costs they must bear during the adjustment to the new postal market.

If the public enterprise model does not protect employees and customers from adjustment to the new postal market, it may be time for opponents of privatization to take a second look.  Privatization only makes sense with a resolution of the retiree benefit issues close to the lines projected by the USPS OIG.  Then the Postal Service would have a clean balance sheet and manageable costs for retiree expenses that would allow for profit levels that would be attractive to private investors.  Privatization could deal with the budget issues as the loss of Postal Service retiree benefit payments would be replaced with cash from the sale of stock to private investors, taxes, and while still owned by the government dividends.

Until now, privatization has only been the solution of libertarians and conservative economists.  Many of these advocates also hold strong anti-labor views that make union members and their leaders highly resistant to taking privatization seriously. These economists often also have a minimal understanding of postal markets that make larger postal customers wary of the impact of privatization could have on their ability to meet their document or parcel delivery needs.

Now that the public enterprise model no longer offers postal employees and customers any protections from the impact that they believed would be caused by privatization, employees, their union leaders and customers should take a second look at privatization.

In particular, privatization offers four important advantages for employees over the government enterprise models.  First, privatization offers the one budget neutral option for resolving the retiree benefit issues in the Postal Service's favor.   Second, privatization offers the possibility of employee ownership and gain-sharing similar to what employees of Conrail received when the company reversed decades of decline and adapted to the new role of railroads in a transportation market dominated by trucks.  Third, privatization, offers a framework would allow streamlined market-based prices for customers choosing between print and digital delivery while still allowing regulatory protection of the most vulnerable customers of the Postal Service.  Fourth, privatization offers the only option for expanding postal revenue beyond the physical delivery of documents and parcels without running into the issue of a public enterprise competing with the private sector.

Fleshing out a privatization plan developed from a perspective of analysts with a greater understanding of the mail market and more favorable to the interests of employees and customers could give postal customers, employees and unions an option more favorable to their interests than the public enterprise model that Congress may try to save.

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: Known Knowns, Known Unknowns Unknown Unknowns

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. 

Donald Rumsfeld

After nearly a year of study, the Postal Service has presented its proposal for modifying its business model and regulatory framework.   The Postal Service's proposal reflects the gravity of the business challenges it faces now and will face in the remainder of the decade. The tone of the Postal Service's presentation also reflected the gravity of the challenge as it lacked both the sentimental imagery and boosterism that had the Postal Service and others previously used to justify minimizing changes from the status quo.

Anyone who has read the comments on the proposal written by editorial writers, or spoken by members of Congress, representatives of the labor unions and management associations and representatives of mailer trade associations will immediately see that there is no consensus yet on how to proceed on the Postal Service's proposal.

This creates a significant challenge if a solution is to be found for the Postal Service's current difficulties.   Donald Rumsfeld's silly sounding framework of known knowns, known unknowns and unknown unknowns may provide a way to develop a common knowledge base and language for parties to discuss possible solutions that will actually ensure the viability of the postal industry and create as secure a future as possible for current and future Postal Service employees.

Known Knowns

1. Total Postal Service mail volumes in 2020 will not be greater than volumes handled today.
2. The mix of mail handled in 2020 will include a higher proportion of advertising mail than is handled today.
3. The mix of mail handled in 2020 will include a lower proportion of single piece mail than is handled today. 
4. The revenue associated with projected volumes cannot support the Postal Service's payments on legislated long-term obligations and debt or the current operating model. 
5. Expanding revenue through diversification is not an option now for covering the revenue shortfall of  declining volumes.  
6. Privatization is off the table for now.  
7.  The Federal budget deficit and tight state and local budgets remove taxpayer subsidies as a solution.     
8. The Postal Service's proposal to change its business model and regulatory framework has diffuse benefits and specific costs.

Known Unknowns

1. The amount that actual volume and revenue will differ from the forecast.
2. The amount that economic activity and inflation will differ from statistics used in revenue and cost forecasts and how much they will differ from tend on a year-to-year and quarter-to-quarter basis from the long-run average.
3. The difference in the rate of penetration of high-speed digital and mobile technology from the current forecast.
4. When new communication technology just entering or not yet on the market will find wide acceptance as an alternative to existing print, digital, and mobile alternatives.
5. The time it will take for the Postal Regulatory Commission to review the 5-day delivery proposal.
6. How the Postal Regulatory Commission will rule on an exigent rate case that does not produce break-even results in a test year or changes precedent regarding rate relationships and relative mark-ups on classes and sub classes.
7. The outcome of negotiations between the Postal Service and its labor unions.
8. The time frame for any action required by Congress and whether there is time in this Congress to move legislation forward.

Unknown Unknowns

As these are unknown, none are listed.  


The lists of known knowns and known and unknowns are not exhaustive.   Comments are requested on others that should be added.    A latter post will detail some of the implications of these known knowns and known unknowns.

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.   

Rethinking The Value of Postal Regulatory Policy

I have never been much of a fan of old regulatory process of setting postal prices.   The contradictions among the competing objectives of pricing policy in the law created a zero sum game that resulted in mailers and the Postal Service spending millions to litigate prices that could be set in a much less constrained litigious environment. 

Currently, the Postal Regulatory Commission is in the middle of a proceeding to see whether what the Postal Service presented in its Annual Compliance Report puts it out of compliance with requirements in postal law in regards to financial stability and requirements in regards to pricing workshare discounts.

As stated in previous posts, I agree that postal stakeholders, and in particular Congress, the Office of Management and Budget, and the U.S. Treasury acting as shareholder and creditor, need to know whether the Postal Service has a business plan, working under existing law, that will ensure financial stability.  If such a plan does not exist, then those parties representing the shareholder and creditor interests in the Postal Service need to see a set of alternative plans with hard numbers that would produce financial stability under alternatives that require changes in existing law.

While the PRC, with its knowledge of postal data and operations can provide assistance in this effort, its forte is not evaluating business plans.  Its strength is examining in a legalistic manner whether a particular plan follows regulatory precedent in meeting the objectives of postal law.

The problem with the PRC's attempt to evaluate the Postal Service's business plans is seen in the language that the parties use to discuss the issues that the PRC's review of the Annual Compliance Review generates.    The first paragraph of the summary of the Comments of Time Warner on Issues raised in Commission Information Request No. 1 illustrates this point.

In these comments, we explain why Time Warner believes that § 3622(b)(5) does not, and cannot, raise  an issue of "compliance" within the meaning of § 3653(b).We review Time Warner's previous comments on the scope of § 3653(b) and the Commission's discussion of those comments, and we conclude that the Commission has as yet made no statement responsive to the two major points of our analysis: (1) that it is impossible to make a determination of Postal Service noncompliance with the "objectives" and "factors" of § 3622(b) and (c) because those factors and objectives are not addressed to the Postal Service but to the Commission, relating to the Commission's design of a new ratemaking system; and (2) that it is impossible to make a determination of Postal Service noncompliance with the "objectives" and "factors" of § 3622(b) and (c) because a set of nine mutually competing "objectives," "each of which [is required] to be applied in conjunction with the others" (§ 3622(b)) and fourteen mutually competing "factors," which are required only to be "take[n] into account" in designing the new system (§ 3622(c)) are not conceptually susceptible to a "determination of noncompliance" (unless all that is meant by "noncompliance" is that they are disregarded completely).

Remember, this language is the first paragraph of the summary of document presented in a proceeding designed to look at what is necessary to make the Postal Service a financially stable business. I cannot imagine anything being further from the language of business than what Time Warner's lawyers wrote in that paragraph and leads me to two questions. 

• How did we get here?
• How and when do we stop spending our time and resources in activities that do not ensure that mailers continue to use the Postal Service to advance economic activity?

Taking Advantage of Regulated Rates

The Globe and Mail today has an article that indicates that Canadian mailers are taking advantage of lower Postal Service rates to mail letters and parcels across Canada.

"For a small but growing number of this country's eBay vendors, the cheapest path across Canada lies through the heart of America.  Canadians are showing up in increasing numbers at U.S. Postal Service outlets with parcels and letters destined for other provinces – and, in at least one case, a neighbouring town."

Later in the article, it is clear why this is happening, the rates for the Postal Service's money-losing Media Mail service are so low, it is worth it for Canadians to drive to the United States to ship books, records, CD's and DVD's.   

“If I didn't ship through the States, I'd probably have to lay all my staff off for sure and just run the store, my wife and I,” said Gary Nerman, whose Nerman's Books and Collectibles in Winnipeg employs three people. “It would probably cut our sales down by 80 per cent, 90 per cent.”

Every week, Mr. Nerman drives an hour south to Pembina, N.D., usually with between 90 and 130 books to ship. The savings are dramatic. In the U.S., a special media rate allows him to ship, say, a Stephen King hardcover to Los Angeles for less than $3. From Canada, it would cost about $10. (It's also substantially cheaper and faster to ship to Europe or Australia, through the U.S.)

Canada Post operates under financial goals and pricing strategies approved by its Board of Directors.  These financial goals have generally prevented Canada Post from offering any service below costs.   I know of only one exception.  This was an unaddressed advertising mail service that was stopped over a decade ago after objections from newspapers and others that delivered unaddressed mail prompted an external review demanded by Parliament that clearly showed that prices were both below cost and a bad business decision.  Since then, Canada Post financial management has has more power to oversee prices proposed by marketing staff to ensure that business is profitable.

The financial returns of Canada Post since the unaddressed product was dropped have been positive.  Recent changes that employ more realistic financial objectives, will ensure that Canada Post remains profitable even as many mailers switch from print to digital delivery. 

The experience with the money losing unaddressed mail profit did not change the minimal price regulation in Canadian Postal Policy.   Canada Post announces price changes on an annual basis with an opportunity for public comment.   There is no regulatory body to check costs or whether prices meet objectives of postal-policy.  More importantly for a product like Media Mail, there is no pricing objective that favors mail based on content, so shipping a book in Canada is priced no different than shipping other parcels.

The volume of mail similar to what the Globe and Mail described is likely small.    But given the Postal Service's operating losses, how long can management, the Postal Regulatory Commission, and Congress allow these pricing aberrations to continue?

Could the Budget Kill Efforts to Save the Postal Service?

In the next few days, President Obama will deliver the State of the Union Address and reveal the 2011 budget.   White House spokesman have already announced that the budget will include a freeze in discretionary spending in fiscal years 2011 through 2014.    The spending freeze creates an additional barrier on top of the normal budget scoring process to efforts to find a solution to the Postal Service's financial problems.   

The budget scoring process put the retiree health care payment schedule in place in order for the Postal Accountability and Enhancement Act (PAEA) to pass.   The budget scoring process derailed the normal legislative process as a method to deal with the Postal Service's financial problems last year.   The relief that was granted was included in last-minute legislation that did not require budget scoring.

The relief that Congress granted last year did not solve the long term problems of the Postal Service.   Congress will soon see a report from the Government Accountability Office (GAO) on potential business models and regulatory frameworks that could offer long term solutions.   It is unclear whether the GAO's mandate will cover key financial questions regarding the Postal Service's true liabilities for CSRS pensions, retiree health care benefits, and workers compensation payments which affect the viability of all business modes that the GAO is likely to consider.


The Problem with the retiree health care liability was studied by both the USPS - Office of Inspector General (USPS-OIG), and the Postal Regulatory Commission (PRC) and both studies recommended lower payment schedules than the current schedule.   Choosing either the USPS-OIG or the PRC schedules would reduce the Postal Service's payment to Office of Personnel Management (OPM) and in the budget scoring process would require cost savings in non-postal programs or other payments from the Postal Service for the change to be budget neutral.

A new report from the USPS-OIG, The Postal Service's Share of CSRS Pension Responsibility, creates even more budgetary problems if the results are accepted.   This report indicates that the Postal Service has overpaid its liability by $58.7 billion more than previously estimated.   If this overpayment is transferred to cover the Postal Service's retiree health care liability, the Postal Service's obligation for retiree health care costs would be even smaller.   Again, the primary obstacle to accepting the USPS-OIG analysis is the Congressional budget scoring process.

Fixing retiree and other liabilities was critical in postal reform efforts outside the United States.   In these countries, legislatures realized that a viable national postal operator and universal service required that the postal operator not be burdened with retiree obligations at levels that would force layoffs or price increases. 

The Postal Service and nearly all stakeholders realize that the first step to solving the Postal Service's problems will involve recognizing that 1) retiree payments reflect actual obligations and 2) the payment schedule for this actual obligation should follow private sector standards for funding retiree obligations.  The National Association of Letter Carrier's Fact Sheet presents the arguments that stakeholders will make before Congress over the coming month. 

Given budget scoring, these arguments will fall on deaf ears unless stakeholders can find ways to replace the "funds" that fixing the pension and retiree health care obligations creates.   Failure in the effort to find a fix will force the Postal Service to raise rates substantially, make cuts in service beyond eliminating Saturday, and reduce the workforce faster than it has proposed to date.   

Is there a solution?  Is there a solution using a governmental business model?   My paper, Examination of Postal Business Models, tried to answer these questions in assessing potential business models and concluded that there is a solution and governmental business models did not offer one.   It is time for others looking at Postal business models, and in particular those stakeholders that want to retain a governmental model to explain how their model can solve the problem of Postal liabilities and get the changes that they envision passed by Congress. 

Congress and the Postal Service

The United States Postal Service is unique among publicly-owned postal operators in that no executive department has the "shareholder." responsibility for the enterprise.   By default, this responsibility has fallen on Congress.  Since the passage of the PRA, Congress has tended to downplay its shareholder role which has resulted in Congressional actions that undermine the competitiveness of the Postal Service and the value of the enterprise.

The problem with Congress reflects the inherent conflict between its interest in the Postal Service as shareholder and its institutional interest in reelection.   As such, the Postal Service has frequently become a tool to help balance the Federal Budget, with these actions constantly weakening the financial position of the Postal Service.   (See. USPS-OIG white paper, Federal Budget Treatment of the Postal Service)     Other actions reflect institutional interests in serving constituent groups that could be affected by postal business strategies, many times to the detriment of the enterprise.

The Postal Service has not helped its shareholder see these conflicts as its business strategy has been opaque to even many seasoned observers.   Its current strategy focusing on reducing costs by reducing retail locations and delivery days raise this question again.   As the observer, Rag Content notes:

The potential impact of changing operations is something the Postal Service seems to be doing without much thought to its customer base these days.  As it hides behind the line - matching resources to revenue, it continues to downsize its operations from closing post offices to reducing the remittance mail processing on Sundays in some locations to its AMP consolidation effort. The post office closing is the only docket open before the Postal Regulatory Commission at the moment, yet every change the Postal Service is making operationally affecting its ability to provide uniform service throughout the country.

A similar question is now being raised by shareholders by another troubled enterprise, General Electric.  General Electric, a diversified financial, manufacturing, and entertainment company, has gone through probably the worst year in the company's history.  The company had to take funds from TARP funds to shore up its financial unit and has sold nearly $10 billion in assets and slashed its dividend by two-thirds in order to improve its liquidity.

Now shareholders are looking for a clearer picture of how General Electric will earn a competitive return on investment dollars going forward.  A recent Bloomberg News story covering General Electrics upcoming December 15,2009 shareholders meeting illustrates how involved shareholders think about a company with an unclear business plan.

General Electric Co. Chief Executive Officer Jeffrey Immelt says a financial crisis like the one he faced this past year often demanded action first and explanations later. Later is now, investors say.

“People want them to do a better job explaining what the return hurdles are for the businesses going forward,” said Mark Demos, who helps manage $19.8 billion at Fifth Third Asset Management in Minneapolis. “GE has a mixed track record on putting capital to work over the past five years.”

The shareholder of the Postal Service needs to ask the same types of questions that the shareholders of General Electric are asking GE's management.

• What is your long-term strategy to ensure a commercially viable, and more importantly self sufficient enterprise?
• How do short-term cost cutting efforts affect that long-term strategy?
• What is the long-term business strategy that the changes identified in the Postal Service's business model paper support?
• Is that strategy financially viable and what risks could derail its viability?
• How much capital and cash is needed to execute that strategy?
• If existing capital and cash is not sufficient, what is your strategy to raise more capital?
• What are the risks to the shareholder and the existing holders of Postal Service debt and other unfunded obligations?
  

While these are questions that Congress, as shareholder should ask both now and on a regular basis in the future.   Given Congress's track record on taking their responsibility as shareholder as seriously as General Electric's shareholders do, it may make sense to explicitly give some other government entity that responsibility, especially if solving the current financial crisis will require the Postal Service, like General Electric to seek relief from either unfunded obligations or expansion of its borrowing capabilities.