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.

Optimizing the Postal Service Network and 6-day Delivery

One of the benefits of the 6-day to 5-day proceeding is that it provides an enormous amount of data relevant for trying to understand the Postal Service's strategy to control costs.  A recent response by the Postal Service to an interrogatory by Douglas Carlson provides the first nationwide picture of the Postal Service's effort to consolidate sortation on Saturday among fewer facilities.

The Postal Service can consolidate sortation of collection mail that is collected on Saturday because it has at least 12 hours of time to transport the mail for sortation at a distant facility and get that mail back for final sortation at the destination facility.  The list of facilities that Douglas Carlson elicited from the Postal Service identifies 139 facilities that do not sort on Saturday.  A cursory look at the distance between facilities that sort mail only Monday through Friday and facilities that sort mail within that facility's territory on Saturday suggests that the Postal Service could be significantly more aggressive in consolidating sortation on its slowest day of the week.


The question as to how many facilities are needed to sort Saturday collection mail is determined by the time it takes to sort this mail, the available capacity in the canceling and originating sortation operations and the time it takes to transport the mail from one facility to another.  The Postal Service has shown that it can handle its service commitments by consolidating Saturday sortation at facilities more than 100 miles away from the facility that sorts the mail the other 5 days.  Examples include:

• Rapid City SD to Sioux Falls, SD - 348 miles
• Truth or Consequence, NM to Albuquerque, NM - 149 miles
• Green Bay, WI to Milwaukee, WI - 116 miles

If it is physically possible to consolidate sortation into a network that transports mail collected on Saturday 100 miles or more in South Dakota, New Mexico, and Wisconsin, then it should be possible to do the same in all other regions of the United States.  

Now this raises a second question is, "does it reduce cost of operations?"  Is the reduction of processing costs greater than the increase in transportation costs?  Given that the Postal Service can cost-justify consolidating operations from Rapid City to Sioux Falls and between Green Bay to Milwaukee, that I would expect that similar analysis in Pennsylvania might support consolidating all Saturday sortation in no more than three facilities in Pittsburgh, Harrisburg, and Philadelphia and it may even be possible to consolidate Saturday collection mail sortation in Pennsylvania in two facilities. Similar examples can be constructed in other states. 

What this means for the 6-day to 5-day proposal is that the Postal Service could most likely provide 6-day service using fewer facilities and at a lower cost than it does today.   Choosing to become more efficient has a major drawback for postal management; it creates more excess career employees.    Excessing these employees would have up-front costs in terms of retirement incentives and severance pay.   The Postal Service does not have the cash to cover these costs.  In addition to increasing immediate cash needs, excessing career employees create additional political headaches that the Postal Service does its best to avoid.

The possibility that facility consolidation could reduce the need to cut one day of delivery also creates a conundrum for postal labor.  Postal unions are all opponents of the 6-day to 5-day proposal, however, it is unlikely that their filings before the Postal Regulatory Commission will identify how the Postal Service could change its operations to reduce costs and union jobs if that was needed to keep 6-day delivery service.  In many ways, unions may find that 5-day delivery is preferable to consolidating the processing network as it minimizes the number of career jobs that are lost.

Of all stakeholders with an interest in the 6-day to 5-day proposal, clearly the Postal Service's customers have the most to lose by the less than aggressive strategy consolidating the operating network.   If 6-days of delivery are preferred by the postal market, it appears that the Postal Service did not act aggressively enough to reduce capacity and costs to keep 6-day delivery financially viable.   If the market is indifferent to 6-day or 5-day delivery, or if financial losses are so great that 6-day is unlikely to ever be financially viable, then customers still lose as the less than aggressive effort to consolidate facilities has resulted in higher costs that the Postal Service needs to recover through an exigent rate case it will file this summer.  

Congressional hearings are not a particularly good forum for analyzing the consolidation of the postal processing network and the impact of any consolidation strategy on postal costs and the rates that its customers pay.  Yet testimony from Michael Coughlin, and the Government Accountability Office indicted that such an analysis needs to be conducted by an independent entity.   It may be worthwhile for Congress to ask a government entity other than those that have previously provided testimony to the relevant committees to conduct such an analysis.  For example, the Department of Transportation and in particular the Volpe National Transportation System Center has the capability of managing such a study.  Such a study could help Congress evaluate all of the legislative changes that the Postal Service requests as well as whether GAO's proposal of a BRAC type commission is needed.

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.

Postal Policy: Now its Congress's Turn

Now that the Government Accountability Office report is out it is time for Congress to get down to the serious business of re-evaluating the current business model and regulatory framework.  Congress is starting this process with hearings in the House and Senate, this week and next. In preparing for these hearing, members on the relevant committees have a significant challenge preparing for the postal and other governmental witnesses.
Both hearings will focus on reports by the Postal Service, Government Accountability Office and the USPS Office of Inspector General.

• Federal Budget Treatment of the Postal Service by the USPS OIG
• The Postal Service’s Share of CSRS Pension Responsibility by the USPS OIG
• Final Management Advisory Report – Estimates of Postal Service Liability for Retiree Health Care Benefits by the USPS OIG
• 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
• The U.S. Postal Service’s Financial Condition: Overview and Issues for Congress by the Congressional Research Service

In addition to representatives of the entities that produced these reports, members of Congress will hear from the Office of Personnel Management and the Postal Regulatory Commission who have an interest in many of the suggested changes in law that the reports discuss.

The three reports by the USPS Office of Inspector General cover technical actuarial and accounting issues over which there is a dispute between the Postal Service and the Office of Personnel Management as well as a critique of Congressional budgetary actions relating to the Postal Service. The CRS, GAO and the Postal Service have recognized the importance of the resolving the CSRS accounting and retiree health care funding issues in their reports. The critique of Congressional budgetary actions provides some context as to how Congress and the Office of Management and Budget has historically viewed their responsibility for the Postal Service and how the Postal Service’s cycles of strong and weak financial performance can be used as part of the solution of meeting budget goals.

The Postal Service’s report provides an action plan for operating its business within the current business enterprise business model. The modifications requested are changes from current financial, operating, employment, and marketing efforts that Postal Service management and the Board of Governors are sufficient to return the Postal Service to financial stability.The Postal Service’s report does not address the overarching mail industry policy, corporate governance and regulatory framework issues in any detail. Nor does the Postal Service report provide a vision for the Postal Service’s role in the US economy in 2020 that is much different than what now exists with the exception that its impact will be much smaller.

The GAO’s report, like the one produced by the Postal Service, provides strategies necessary to improve Postal Service operating, and to a lesser extent revenue management, and highlights Congressional action necessary to allow those improvements to occur. The GAO report goes beyond previous reports in its examination of the Postal Service’s cost structure and the legal impediments that prevent it from adjusting its costs to match current and projected revenue. The GAO report, like the Postal Service report does not address in detail the mail industry policy, corporate governance and regulatory framework issues that affect the Postal Service’s ability to implement operating, and marketing plans to best meet the needs of mailers and parcel shippers.Neither does the GAO report provide Congress with information that would help it understand the role that the mailing industry, and the Postal Service as the core of that industry could have in the US economy in 2020 and beyond.

The Congressional Research Service (CRS)report focuses on a “number of ideas for incremental reforms have been put forth that would improve the USPS’s financial condition in the short term so that it might continue as a self-funding government agency, all of which would require Congress to amend current postal law.” The ideas that the CRS reviews are those previously presented by the Postal Service and the USPS OIG and include many included in the GAO report as well. The CRS notes the objections of the Office of Personnel Management to the changes in retiree benefit obligation calculation or funding schedules. CRS’s description of the report’s focus nicely summarizes the overall tenor of all of the reports that Congress will review in upcoming hearings.

Before developing their approach to questioning the witnesses, members of Congress have to first understand what the reports that the witnesses are presenting to them are and what they are not. The reports that Congress has before it present:

• Incremental reforms that proponents suggest would improve the Postal Service’s financial condition in the short term; and
• Incremental reforms that retain the current model of the Postal Service as a self-funding government agency

What Congress does not have before it is a framework for understanding the broader policy context within which these incremental reforms fit. As CRS notes, the incremental reforms in the various reports do not answer the question: “Is the USPS, as currently constituted, incapable of responding to a shifting, and possibly declining, market for its products and services?” It is this question that raises the fundamental questions about postal industry policy, governance of the Postal Service, and the regulatory framework that makes sense for the postal industry. If the answer to this question is yes, then the incremental reforms make little sense unless they are steps in the direction required to create an entity capable of responding to a shifting and possibly declining market for its products and services.

The following set of questions represent examples of the types of questions that Congress needs to ask witnesses in order to develop the framework within which incremental reforms make sense.   While some of the government entities can answer these questions, many of them go beyond the scope of the studies that they have just completed or their role in developing postal industry policy.
It may be time for Congress to begin the process of framing these questions so that GAO, CRS, the USPS OIG, the USPS or entities in the executive branch responsible for economic development, communications and transportation policy answer them.  After they are answered, Congress will be able to move forward on the incremental steps that the various reports suggest with an understanding of the broader policy context within the individual steps fit.

General Postal Industry Policy

1. What should the overall objective of postal industry policy over the next decade and beyond and where does the Postal Service fit into that objective?
2. Is that objective different from the objective of either the Postal Reorganization Act or the Postal Accountability and Enhancement Act both written when digital competition was less pervasive?
3. Is a self funding government enterprise, the best way to employ the postal market to generate economic growth and jobs in the United States or do other models provide greater opportunities to grow the US economy?
4. What impact do restrictions on entry of private sector entry into mail delivery and the Postal Service into non-postal products have on economic growth and jobs in the United States?
5. What benefits are generated by these restrictions and how do the benefits compare to the impact on economic growth and jobs?
6. What impact do current postal pricing law and the Postal Regulatory Commission’s interpretation of that law have on U.S. economic growth and jobs?  How would different postal pricing law affect or regulatory policy affect economic growth and jobs?
7. How does Postal Rate Commission regulatory responsibility affect economic growth and jobs and how does that compare to the benefits of regulation?

Postal Governance

1. Is the USPS, as currently constituted, incapable of responding to a shifting, and possibly declining, market for its products and services?
2. Is the USPS as currently constituted handicapped in responding to a shifting and possibly declining, market for its product and services?
3. How does the current governance structure as a government sponsored enterprise affect the Postal Service’s ability to manage the types of changes that the GAO, the CRS and the Postal Service describe?
4. How does the governance structure affect the speed at which the Postal Service reacts to changes in the postal market?
5. Does the current Postal Service board have sufficient experience in managing similar enterprises?
6. What would be required to ensure that it does?
7. How does the choice of a governance model (i.e. private sector vs. government enterprise) affect the choice of regulatory policy for the industry?

Financial Objectives

1. What is the financial measure that determines whether the Postal Service’s action plan or for that matter any action plan succeeds?
2. Is that financial measure sufficient to ensure that the Postal Service is self sufficient?
3. What is the financial measure that determines that a government enterprise is self-funding and is that the same measure that would determine if it is self sustaining?
4. Does self sustaining require only accounting break even or does it require a positive operating margin and rate of return?

The Postal Market

1. What is the fundamental role in the US Postal Service in the US communications and goods distribution infrastructure today?
2. By 2020, what proportion of mail will contain advertising whether in the form of direct mail, inserts in bills and statements or periodicals? How much greater is that from today?
3. How will the increased importance in revenue from advertising change the fundamental role of the Postal Service?
4. What impact does digital delivery of transaction documents, advertising, and personal communications have on the value of the Postal Service monopoly?
5. How should that impact be measured?
6. How does the existence of digital alternatives affect the price competitiveness of mail?
7. In particular, which industries using mail to distribute periodicals, send documents and correspondence, handle business transactions or advertise of customers are most sensitive to competition from electronic alternatives?
8. How does the proposal to eliminate a day of delivery affect individual vertical mail markets (i.e. personal correspondence, weekly newspapers, real estate advertising, supermarket advertising, utility bills and payments, etc.)?

Employee Costs

1. How do Postal Service wages and benefits compare with those offered by private sector firms in the postal industry such as FedEx, United Parcel Service, and Pitney Bowes?
2. What was the difference in the retirement rate of early retirement offers using voluntary early retirement authority and the incentives granted last fall?
3. How many months prior to normally planned retirement date do those that retire with an incentive retire and how much does that save the Postal Service?
4. What is the difference in net present value cost of offering an early retirement incentive to an employee as compared to retaining an employee whose position is excessed and paying them a salary above what their new position normally calls for?
5. How does attrition rate affect the decision to reduce network capacity?

Network Optimization

1. (For the GAO) How long have you presented recommendations that the Postal Service take effort to reduce its operating network?
2. What are the impediments in the Postal Service’s governance structure, labor agreements, cash flow, or culture that has prevented it from acting on network realignment faster?
3. How do attrition rates affect the decision to restructure the network?
4. How would the restructuring differ if the proportion of part-time employees increased?
5. How would the speed of the processing network optimization change if retirement incentives were readily available to handle the reduction in the need for employees?
6. What would be the upfront cost of using retirement incentives as part of a network restructuring?
7. What should the overall objectives of a postal network / retail network realignment commission be set?
8. Should a postal network / retail network realignment commission have the authority to make recommendations in regards to policy, governance, or regulatory impediments to the development of an efficient and effective network of processing and retail facilities?

Retail Access

1. What should the metric be for determining retail access to the services the USPS offers?
2. What proportion of users of retail customers of households and what proportion of users are non-households?
3. How often do households on average use a retail postal outlet? Does it vary by age, geography, or rural area?
4. What is the difference in access to retail services today in urban, suburban and rural parts of the United States?
5. How does access to USPS retail services compare to access to retail services of UPS and FedEx in urban, suburban and rural parts of the United States?
6. How have UPS and FedEx managed with primarily a contract/self-service model and are there differences in their retail customers that could affect the use of that model by the Postal Service?
7. What is the experience in other countries with their satisfaction with postal retail services before and after a switch to self-service and contract models?

Pricing

1. Is the issue of money losing products more an issue of cost levels or price levels?
2. What impact would only solving the problem with raising price have on the volumes handled and the ability of the Postal Service to meet its policy objectives?
3. GAO in its list of highlights for revenue generates suggests that the Postal Service revise pricing for market-dominant products, such as First-class Mail and Standard mail?
4. What revisions does the GAO suggest the Postal Service make?
5. How does current regulatory precedent and pricing objectives affect the ability to make the changes that GAO would suggest?
6. How do pricing objectives in the law and PRC precedent affect the ability of the Postal Service to implement the pricing flexibility that GAO and others suggest?

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. 

Negotiating Changes in Retiree Health Payments

This blog has repeatedly noted the impact of Congressional legislation on postal operations and its ability to be financially viable.   In the Conference Report accompanying HR 3288, an appropriations bill covering the Departments of Transportation, Housing and Urban Development and related agencies, Congress lays out specific instructions to the Postal Service, the Postal Regulatory Commission, Office of Personnel Management (OPM), the Office of Management and Budget (OMB), and the Government Accountability Office (GAO).   Two of these instructions are new and significant and are in bold below.

First, OMB, OPM and thethe Postal Service are directed to "develop a fiscally responsible legislative proposal, for consideration by the appropriate congressional committees, that would grant a limited measure of relief from the PAEA requirements to pre-fund retiree health benefits."  There is no time period identified for this negotiation but it makes sense that the results of the negotiations would be included in the President's next budget proposal.

Second, GAO is directed to update its previous studies on network restructuring.  GAO has 6 months to complete the study.   The request for this study, like Congress's request to the PRC, appears to be focussed more on the process and the impact on employees and communities than on the potential financial impact of network restructuring.


UNITED STATES POSTAL SERVICE PAYMENT TO THE POSTAL SERVICE FUND (pp. 935-937)

The conference agreement provides $118,328,000 for a payment to the Postal Service Fund, of which $89,328,000 is an advance appropriation for fiscal year 2011 to continue free mail for the blind and for overseas voting materials, and of which $29,000,000 is for the annual repayment of revenue foregone as required by law. These provisions are the same as proposed by both the House and the Senate.

The conference agreement includes provisions directing that mail for the blind and for overseas voting shall continue to be free and that six-day delivery and rural mail delivery shall continue at not less than the 1983 level. Further, it includes language prohibiting use of funds in this Act to charge a fee for providing information to child support enforcement programs or to consolidate or close small rural and other small post offices. All of these provisions were also contained in the House and Senate bills.

Closings of Postal Facilities.-Numerous concerns and criticisms have been brought to the attention of the conferees regarding Postal Service plans to close or otherwise consolidate various retail and mail handling facilities. The conferees believe that the Postal Regulatory Commission is an appropriate forum for evaluating these proposals and the attendant concerns and have urged that the Commission take appropriate action to do so in language included under that heading.

In addition, the conferees direct the Government Accountability Office to update its previous studies regarding Postal Service initiatives to realign its mail processing network, including proposed closures or consolidations of area mail processing facilities, and to report to the Committees on Appropriations and other appropriate congressional committees not later than 6 months after enactment of this Act. GAO’s study should address the criteria used in selecting facilities for closure or consolidation, whether those criteria are being applied reasonably and consistently in particular cases, the adequacy of efforts to communicate and consult with affected communities and stakeholders, and the quality of efforts to evaluate the results of closures and consolidations.

Financial Condition of the Postal Service.-The conferees are concerned about the financial condition of the Postal Service. In fiscal year 2009, the Postal Service posted a net loss of $3.8 billion that would have totaled $7.8 billion, had Congress not reduced the Postal Service’s retiree health benefits payment by $4 billion.  Significant declines in mail volume, exacerbated by the struggling economy, have contributed to the most recent Postal Service financial crisis.

The conferees applaud the Postal Service for its efforts to reduce costs. In fiscal year 2009, the Postal Service reduced its operating expenses by $6.1 billion. These cost-cutting efforts must continue in close coordination with stakeholders and with careful consideration of the effect proposed cuts may have on service and volume.

Despite cost-cutting efforts, the financial condition of the Postal Service remains dire. The conferees understand that the Postal Service has requested legislative relief from the requirement that the Postal Service pre-fund a significant portion of its future retiree health benefits through the end of fiscal year 2016. Congress reduced the fiscal year 2009 payment from $5.4 billion to $1.4 billion.
The Postal Service continues to seek a reduction or elimination of future mandated payments.

The conferees understand that both the Postal Service Inspector General (IG) and the Postal Regulatory Commission (PRC) have reviewed the payment stream under the Postal Accountability and Enhancement Act of 2006 (PAEA). The IG concluded that the current schedule would result in an overpayment to the retirement fund by the end of fiscal year 2016, and the PRC study concluded that the unfunded liability would not be as high as originally estimated.

Because some experts, including OPM, have expressed concerns about the assumptions made in the Postal Service IG and PRC reports, the conferees urge the Postal Service to coordinate with OPM and OMB to develop a fiscally responsible legislative proposal, for consideration by the appropriate congressional committees, that would grant a limited measure of relief from the PAEA requirements to pre-fund retiree health benefits. These proposals should consider: (1) whether the PAEA-mandated stream of future payments overfunds through fiscal year 2016 the anticipated liability of the Postal Service for future retiree health benefits, (2) whether modifications to the mandated payments could meet the unliquidated liability goals contained in the PAEA, and (3) whether a decrease in mandated payments will reduce the incentive of the Postal Service to continue to cut additional costs.


POSTAL REGULATORY COMMISSION SALARIES AND EXPENSES (INCLUDING TRANSFER OF FUNDS) pp. 923-924

The conference agreement provides $14,333,000 for the salaries and expenses of the Postal Regulatory Commission, as proposed by both the House and the Senate. It does not include language proposed by the House requiring any unobligated balances remaining at the end of fiscal years 2009 and 2010 to be transferred back to the Postal Service Fund.

Proposed Closings of Postal Facilities.-The conferees are aware of considerable public concerns about plans by the Postal Service to close or consolidate retail post offices and other mail facilities, and believe that the Postal Regulatory Commission has an important role to play in evaluating those concerns and fostering well-informed decision making. The conferees commend the Commission for undertaking its current investigation of the national service implications of the Postal Service ‘‘Station and Branch Optimization and Consolidation Initiative’’ and urge the Commission to initiate such other proceedings as appropriate to fully evaluate the effects of proposed closings and consolidations on service levels, costs, postal employees, and the affected communities. Among other issues, the Commission should examine whether Postal Service actions, including notification and appeal procedures, are in accord with applicable law.

The Postal Service, President Obama, and the Budget

In the next sixty days, President Obama will have two opportunities to lay out administration policy regarding the Postal Service.  These opportunities are the State of the Union address and the President's budget for FY2011.

Up to now, President Obama has mentioned the Postal Service only to illustrate the fact that private firms can compete with a public health care plan last summer.   His comments suggested that the financial problems of the Postal Service were serious enough to generate the attention of the White House.

Unless there is some economic miracle, the Postal Service will have a negative impact on the Federal budget and budget deficit for at least the next three years.   The financial challenges of the Postal Service was not recognized in last year's budget and the adjustment to the retiree health care payments were made in such a way that budget scoring was not required prior to passage.  This year, the need for adjustments to the retiree health plan payments before the end of at least the next two fiscal years is known prior to the writing of the budget.  Therefore, the budget should recognize this fact.

The Postal Service's need for an adjustment to its retiree health payments forces the Obama administration to find cost reductions in other programs in order to meet budgetary goals, and in particular begin the wind down of the stimulus related spending.  This shift in priorities from spending to stimulate the economy to reducing the deficit will likely be the theme of the President's budget and a major theme of the State of the Union Address.


The Postal Service's negative budgetary impact should force the Obama administration to enter the debate about the future of the Postal Service in the budget documents submitted to Congress, and possibly as a mention in the State of the Union address  In particular, the President's budget should recognize that the Postal Service is in serious trouble and lay out both how far the administration is willing to go to help the Postal Service deal with its immediate financial troubles and how the administration wants to approach the process of finding a new business model and regulatory framework for the Postal Service to ensure that the Postal Service becomes truly self sufficient.   Now is the time for stakeholders who would like to see Presidential leadership in setting a future for the Postal Service, postal customers, and postal employees to ensure that this happens.

Postal Service as Editorial Fodder

A recent editorial by the Washington Times and a columnist in the Los Angeles Times provide illustrations as to how ideological predilections and reporting on a deadline produce more heat and less light about how to solve the problems facing the Postal Service.   These commentaries reflect the seasonal interest in the Postal Service use it to ship packages and send correspondence that they rarely send in the other 11 months of the year.

Readers of this blog are more familiar with the problems that the Postal Service faces these writers.   They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.

Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is.   The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently.  FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels.   FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers.   More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.

So why does what is printed now in two newspapers matter to postal stakeholders?  They are important because they provide some hint as to what the debate over the future business models will look like.   Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress.  Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.

This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011.    Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.  

The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with.   This includes health care, financial industry reforms, and possibly even energy policy and global warning.  At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news  can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.

The Washington Times editorial uses the Postal Service to present a polemic against government provided services.   It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down.  In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.

The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.

The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.

Can this system be saved?

 The answer is yes. However, it cannot survive as it does now. It is also clear from other countries that a postal service can provide universal service, even places as remote as the Australian outback and the Arctic areas of Canada at a uniform price. Put another way, is it time we privatized the postal service?I think the answer here is yes as well but not in the manner that you are thinking. By 2020, The Postal Service and mail in general will primarily be a means of delivering advertising. (It is close to that now.) What should the US Government's responsibility for advertising delivery be? Personal Correspondence is less 4% of all mail volume and bill payments by check will likely disappear by around 2030. (There is already no check clearinghouse in Great Britain or Sweden.)

The question of privatization is often tied to the question of the monopoly.  A privatized Postal Service does not require eliminating the monopoly.   Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.

"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to www.postaljournal.com for links to all papers an links to presentations made on the topic at a recent conference in DC.

Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier.  UPS is a significant supplier.  Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.

If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS.   TNT has specifically indicated it is exiting the mail business outside of the Netherlands.

The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably  Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business. 

It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US.   Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service.  The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.

"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.

The percentage difference between local parcels and those shipped cross-country vary with weight.  The percentage does not exceed 100% until the parcel exceeds 17 pounds.  This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.

The Universal Service Obligation (USO) argument has been gone over many times.   The driver of the USO is commercial mailers, who must mail to every possible address.   The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate.   The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments.   Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts.  In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.

Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service. 

This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news.   The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests.   With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort.  Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.

The Courier, Express, and Postal Business and the Nobel Prize

The research that Oliver Williams completed that brought him the Nobel Prize in Economics highlight key issues in the transformation of the courier, express and postal (CEP) business over the past two decades. In its press release, the Nobel Committee stated that "Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets."

So what does that mean in plain English? More importantly, why am I writing about this award in a blog dedicated to the courier, express, and postal industry?

Simply, operators in this business have a choice as they try to provide service across a broad geographic area or across the range of transportation and communications needs of their customers within a firm rather than through contractual arrangements between regional or modal partners. With few exceptions, when faced with the choice of providing service with a partner through a contract or within the constructs of a corporate structure, operators in this business have chosen corporate structures. The expansions of Deutsche Post, FedEx, TNT, and United Parcel Service all followed this path.

These firms succeeded by out-competing national postal operators that had to offer international service through bi-lateral or multi-national contractual arrangements, many of which were negotiated through the Universal Postal Union. The key problem of these contractual arrangements were that the operator selling the international service could not truly tell the buyer how long it would take to get delivery because they could not control the end-to-end service. Nor could the originating operator offer a seamless track-and-trace service until many years after the global corporate operators had made them a requirement of international express and parcel delivery.

The choice of a corporate model reflects a choice on a less global scale as well. Efforts by La Poste (France) and Royal Mail to provide service throughout Europe illustrate attempts to create a corporate structure within the Europe for parcel delivery to replace the contractual service that involved each national postal operators. The Austrian Post has purchased a number of firms focused in Eastern Europe with a goal of creating a stronger regional delivery competitor. The recent decision to merge the post offices in Sweden and Denmark also illustrates the choice of a corporate rather than a contract model to provide service within the CEP markets that the two independent posts now operate. Finally, Purolator Courier, a Canada Post subsidiary, and Canada Post itself, have established a strong corporate presence to handle cross-border traffic. Purolator is using its presence in the cross-border market to begin a domestic United States service.

Now there are limits to the use of a corporate model in the CEP industry. Firms in the industry use both a corporate and contractual or franchise model to provide retail services. The cost of maintaining a stand-alone retail infrastructure that has different business challenges than the rest of the CEP business has driven many firms to switch from the corporate to the contract model for this part of the business.

The last area that may fall under the contract model is the pick-up and delivery services themselves. Here the question is whether it is better to manage the delivery process with employees or contractors. The local courier business has always used a contractor model reflecting the uncertainty of the traditional on-demand unscheduled delivery service that they offered. FedEx Ground has used that model since its founding as Roadway Package Express. The recent court cases, IRS rulings, and NLRB rulings illustrate the challenge of maintaining the delivery function as a contractual arrangement and still maintaining proper control over the delivery portion of the service. However, both FedEx and local couriers believe that the cost advantages of managing delivery with contract drivers rather than employees is worth creating the proper legal structures to both ensure a reasonable level of control while still maintaining the driver's contractor status.

The question of corporate vs. contract models will likely come up as Congress looks at potential business models for the Postal Service. The work of Oliver Williams suggests that use of contract model could work for the retail side of the business where a franchiser that does not live up to its end of the bargain could be replaced. His work also suggests that delivery contractors could work in those areas where control over the appearance and schedule of the deliverer was not an issue. This is precisely what the Postal Service does with box-route contractors that serve many rural areas.

More importantly, his work explains why breaking the Postal Service into regional franchises or separating the delivery from processing and collection processes make little sense. Once the separation occurred the various parts would still have to contract with each other to provide end-to-end service. There is no competitive market for large-scale sortation. The growth of UPS’s and FedEx’s use of Parcel Select suggests that the collection and sortation companies would still have to contract with a company running the existing delivery network. Mr. Williams research suggests that there would be significant coordination issues and contractual gamesmanship between the various parts of what is now a unified Postal Service. The experiences of Citi Mail in Sweden and TNT, DX and others in UK illustrate the preference of operators to offer end to end service and the coordination issues and contractual gamesmanship that exists in developing interline agreements when these firms have to contract with either a national postal operator or another independent operator. [One of the drivers behind mergers and territorial expansion of railroads and less-than-truckload trucking firms in the US was the failure of a regulated interline process to resolve contractual and service issues when one firm passedfreigt to the other]

Finally, his work suggests the mail business will see more consolidation and not less in the future. The current process in which multiple firms handle the process a taking a document from concept to delivery with each handoff handled via a contracted or regulated process, could soon involve fewer firms as the advantage of integrating more of these processes within a single firm becomes clear to firms on either ends of these processes merge.

Postal Service and the Federal Budget

More than anything else, the greatest political obstacle to a new business model for the Postal Service is the Federal budget deficit. Every legislative action to maintain postal services in light of current financial losses, and fund the transition that will create a new business model will have budgetary implications. Thee budgetary implications will likely become the primary arguments of postal competitors and other opponents of reform for delaying necessary changes that would make the Postal Service a viable and customer-focused provider of delivery and delivery related services.

Currently, the Postal Service is seeking relief from the demand of the Office of Personnel Management as included in the Postal Reorganization and Enhancement Act (PAEA) for accelerated funding of retiree benefit. The accelerated payments had a positive budget impact that smoothed the passage of the PAEA. However, the accelerated payment schedule reflected three misconceptions about the Postal Service that made the accelerated schedule seem reasonable.

• First, demand trends for mail were sufficiently strong to generate the revenue necessary to cover the payments. Congress, like many governmental and business executives at the time assumed the rosiest scenario for the Postal market and in particular demand for advertising mail and the mail revenue that it generated. When the recession hit and the revenue disappeared, the Postal Service lost its ability to meet the new payment terms.
  
  
• Second, the Postal Service was sufficiently capitalized to continually modernize its distribution and retail networks to reduce costs and improve service. The Postal Service had aggressively reduced its debt through the good fortune of strong demand for advertising mail, improved management of operating costs, and parsimonious spending on capital projects. Congress did not have an independent assessment of the true capital and cash needs of the Postal Service, particularly as they related to the legislation demand for improved cost management and network realignment.
  
  
• Third, cutting operating costs does not require significant one-time expenses if they are to be done quickly in ways that are transparent to customers. Both Congress and the Postal Service assumed that it had the time to reduce its workforce and streamline its network through the nearly costless method of employee attrition and minimal capital spending to move postal operations to locations that better fit today's mail distribution patterns. With no funds to reduce the workforce, the Postal Service is limited to those streamlining efforts that can be accommodated through moving employees to new jobs within the network that will not require payment of moving expenses.
  
  Unfortunately, markets can and did change more rapidly than either historical attrition rates or the slower attrition rates caused by the sagging stock market and economy. Accelerating reductions in the workforce, including supervisors and management at all levels, requires either early retirement incentives or severance pay. With an average hourly wage ranging from $25.70 for bargaining unit employees to $42.10 for headquarters employees, these incentives or severance payments can be a significant challenge for a Postal Service with limited or no cash reserves and the need to reduce its workforce faster than what attrition will allow.
  
  Similarly, limited cash reserves restricts both planning for and funding capital projects that can improve the placement of postal facilities in an effort to both reduce costs and improve service. While no company managing an operating network would replace an operating network with a new green-field one, all well capitalized transportation companies know that a continuously improving network requires having sufficient capital to fund moving operations over time as demand, technology and distribution patterns shift.
  

Right now, the increasing visibility of deficit politics affects the viability of proposals designed to enable the Postal Service to survive the next two years. In requesting that the GAO complete its report on potential business models in April, the Senate appears to acknowledge that more needs to be done. Given the political calender, dealing with the misconceptions of the PAEA and the financial reality of funding the needed transformation that each alternative business model suggested by GAO would require could put the impact that proposed alternatives will have on the deficit right in the middle of the 2010 political debate. If that happens, developing a long-term solution that the Postal Service continues to meet the needs of its customers will be far more politically charged than any previous efforts at postal reform.