Dinosaurs among us: The USPS

The long awaited GAO report on the financial viability of the US Postal Service was released earlier today. Ok, maybe you weren’t on the edge of your seat waiting for it. But you should have been.

A little background, for those of you who haven’t been following the story:

The Post Office reported to  Congress earlier this year that it is facing the prospect of losing $238 billion over the next ten years. This becomes problematic because, unlike most federal agencies, the USPS is required to balance its budget. Congress made this stipulation when it semi-privatized the service in 1970. I say semi-privatized because the same statute made the post-office a monopoly and guaranteed that Congress would subsidize any operating losses stemming from “mandated services” with money from the general revenue. In 1982, Congress went a step further when they declared that income received by the USPS (from selling stamps and metering packages, primarily) was not tax revenue – therefore, the money raised by the USPS by conducting its daily business was solely to be used by the USPS for the purposes of its operating costs. This effectively split the post office’s accounting from the rest of the federal budget; almost immediately, the Postal Service began running deficits. However, the early shortfalls were quickly made up by arbitrarily raising postage rates.

This brings us to the modern-day, when changing demographics, technologies and competition for the lucrative package business have altered the postal landscape. When the USPS reported in March that they were on the verge of needing a massive cash infusion just to stay afloat, Congress did what it does best: commission an independent report on the state of postal services finances, and tapped the Government Accounting Office for the project. The news is both sobering and not unexpected.

The USPS is, in fact, facing a $238 billion deficit over the next ten years. That puts the US taxpayer on the hook for $238 billion in postal subsidies over the next ten years, unless way are found to bring costs into line with revenues. So what to do?

The GAO report notes three specific areas where USPS costs are out of control and out of whack with their anticipated business: employment, operations and pricing structure.

Workforce

The GAO report notes that the USPS currently has 300,000 employees, far more than needed to efficiently deliver the mail. It recommends reducing the workforce through attrition and outsourcing. It also recommends restructuring contributions to retirement plans to match those of other federal agencies. The latter two points would need concessions from the postal workers union – don’t hold your breath, especially with Democrats in control of both Houses of Congress and the Presidency.

Operations

The USPS is currently over capacity, both in terms of facilities and delivery routes. They recommend a series of actions, including reducing mail delivery from 6 to 5 days, closing excess post offices, moving post offices to self-serve kiosks and leasing space in retail establishments, closing unneeded distribution centers, and instituting “cluster boxes.” (A cluster box is a centrally located box that houses the mail boxes for a neighborhood).  All of their recommendations would require union concession and the Congress to change current statutes.

Pricing

The GAO recommends that the USPS restructure it’s prices to better compete on products where it has to, and raise rates where it has a monopoly. The key here is getting Congress to agree to end preferential pricing for money-losing, but statutorily required, services (such as 2nd- and 3rd-class mail). Yes, in case you missed that last point – not only does your mailbox get stuffed with “junk” mail, but Congress has mandated that the postal service cannot charge a fair rate for it. And it’s one of the biggest money-losers for the USPS.

The GAO report points out that the USPS business model is a recipe for disaster and cannot sufficiently absorb the dual impact of lower revenues and higher costs. (See General Motors for an example of how this business model succeeds).

Mail volume declined 36 billion pieces over the last 3 fiscal years, 2007 through 2009, due to the economic downturn and changing use of the mail, with mail continuing to shift to electronic communications and payments. USPS lost nearly $12 billion over this period, despite achieving billions in cost savings, reducing capital investments, and raising rates. However, USPS had difficulty in eliminating costly excess capacity, and its revenue initiatives had limited results. To put these results into context, until recently, USPS’s business model benefited from growth in mail volume to help cover costs and enable it to be self-supporting. In each of the last 3 fiscal years, USPS borrowed the maximum $3 billion from the U.S. Treasury and incurred record financial losses. A looming cash shortfall led to congressional action at the end of fiscal year 2009 that deferred costs by reducing USPS’s mandated retiree health benefit payment. Looking forward, USPS projects continued mail volume decline and financial losses over the next decade.

So what factors are leading to the declining mail volume? Well, the biggest is probably the Internet. 10 years ago, you would have to sign up to receive this blog as a newsletter delivered by your friendly local postman. In the same way, more and more of us are paying our bills on-line. (Personally, I’m on check 298 on  4 year old checking account – and I started on check 200). Even junk mailers are cutting back – they’ve discovered spam, which is actually more effective than 3rd class delivery. Catalogs by mail are another item that has taken to the internet. In my youth, we anticipated the quadrennial mailing of the JC Penney, Montgomery Ward and Sears catalogs. Montgomery Ward has since gone out of business, but the other two stopped mailing catalogs this decade. Secondly, at the time of the 1970 law, the Postal Service did not have any real competition, other than from local couriers in urban settings. It was not until UPS won the right of common carriage in 1974 that any real competition opened. Next came Federal Express (FedEx). The two package shipping giants have decimated the USPS’ package delivery services by shipping freight cheaper, more efficiently and faster than the post office is able. So, that leaves first-class mail as the only profit center left to the USPS monopoly – and it’s in no way profitable. (When was the last time you mailed a letter?)

Is it time to fully privatize the USPS? Well, the GAO report makes pretty clear that to do so would doom it to bankruptcy faster than you can say “boo.” Is it time to off-load the services to a 3rd party, or group of third party common carriers? They wouldn’t want it – especially with the same Congressional restrictions that have in large part sunk the USPS. Is it time to just say “so long” to the idea of the Post Office?

Probably not. Many USPS defenders point to the Constitution – particularly Article 1, Section 8 – as mandating postal delivery. In fact, that clause only gives Congress the power to “Establish Post Offices and Post Roads.” It doesn’t mandate that a post office be created. However, the fact that Congress did establish the first national post office with the Postal Act of 1792 I think demonstrates that the Founders understood the importance of a postal service to the dissemination of information and the conduct of national commerce. However, given the current state of the Postal Service’s finances and the finances of the nation in general, something needs to be done – and quickly. Here are my recommendations.

1. Adopt most of the GAO report. The only section I have trouble with is their recommendation to reduce delivery to 5 days from 6. While those in urban areas have viable alternatives for weekend mail service, those in rural areas do not. (UPS and FedEx actually hire the USPS for rural package delivery, if it’s not a priority overnight package).
2. End the distinction between 1st-, 2nd and 3rd class mail. If you have a piece of paper you want delivered somewhere, pay full freight. Or deliver it yourself.
3. If the union won’t go along, Reaganize it. I’m referring to PATCO and the way President Reagan dealt with them when they struck in 1981. The same rule applies to the NALC and APWU. If they do not acquiesce in what are essentially reasonable demands by the USPS and GAO, they should all immediately be fired and replaced.

Harsh? Perhaps. The alternative is, however, for the post office to become another of those large, sucking  government agencies that robs the American taxpayer.