Reform: It's not nirvana
The recent postal reform legislation passed at the 11th hour by Congress is not nirvana. It may not even work to lessen the size of future rate increases or stem the U.S. Postal Service's downward spiral of First Class mail. But let's get to the legislation and see what's inside it.
The law seemed to resolve in the postal service's favor two important financial obligations: the military pension issue and the escrow account status. As you recall, Congress in prior legislation had required the USPS to pay military pension obligations for postal employees accrued when they served in the military. Congress also had required the USPS to put funds into escrow to pay for future pension and retiree health benefits until an accounting would determine exactly how much was required. In 2006 the sum of these two payments was about $6 billion.
The reform legislation eliminates the military pension obligation and the escrow payments. In its place, the law establishes a new retiree health benefits fund, into which the USPS will pay about $5.5 billion a year. By 2016 future retiree health benefits will be almost fully funded. That's good news. However, the establishment of this fund means that ratepayers will see no benefit from the elimination of the escrow account and the military pension payments for 10 years.
The other big change involves ratemaking. The reform law established separate processes, one for market-dominant (monopoly) products and one for competitive products. Most USPS revenue comes from market-dominant products such as First Class, Standard Mail, Periodicals and several parcel categories. For these products the legislation lets the USPS raise postage rates annually, roughly across the board, as long as the increase is less than the Consumer Price Index.
For competitive products such as Priority Mail and bulk parcel post, the USPS can raise rates as it sees fit as long as these products cover their attributable costs and contribute to overhead coverage.
Several other items in the legislation should be noted. First, it gives the newly named Postal Regulatory Commission 18 months to establish, within the parameters noted above, a "modern system" for setting rates. As part of that modern system, the commission is to establish regulations/procedures under which the USPS could raise rates above the inflation cap due to extraordinary circumstances.
Second, and probably more important for ratepayers, the legislation lets the USPS file for one more rate increase under current law before the end of 2007. So the postal service could, and probably will, file for a rate increase in the latter half of 2007 uncapped by any CPI restraint.
One longstanding concern of the mailing community has been a lack of delivery service standards for all classes of mail and a lack of regular reporting on actual delivery service. The law requires the USPS, in consultation with the PRC, to establish a set of service standards for market-dominant products within 12 months. The USPS then must report on the performance related to its delivery service standards.
The USPS and PRC are required to produce many reports - perhaps more than 30. Some reports are ongoing, such as the service performance. Some are one-time events, such as a review of the non-postal services offered by the USPS. The PRC is to determine which, if any, of these services the USPS should be allowed to continue.
As perhaps you can surmise, the reform gives the new regulatory commission more power and control than the old rate commission had. Yet the legislation fails to enumerate any qualifications, be they education, training or experience, for nominees to the new PRC.
But the law does stipulate that USPS Board of Governors members should be selected based on their experience in public service, law or accounting or their "demonstrated ability" in managing organizations of substantial size. Indeed, four of the nine board seats seem reserved for governors who have managed organizations employing more than 50,000 people. A sarcastic view might suggest that "political ability" will help fill the other five seats.
Given the increased importance of the regulatory commissioners, it will be interesting to see whether the mailing industry gets involved in the selection process or their Senate confirmation hearings. To date the industry has taken a pass on testifying before the Senate on nominees to this increasingly important position.
The law also makes much-needed changes that increase maximum management compensation, including bonus opportunities, and encourages postal network redesign. But we won't know for a number of years whether the legislation accomplishes anything, because any issues regarding postal labor, which accounts for about 75 percent of postal expenses, were excluded from the law. The success of this law depends on the postal service's ability to control its total labor costs and how quickly First Class mail, accounting for about 54 percent of its revenue, declines. Unfortunately, this legislation gave the USPS no new ability to affect either.
I've often been asked why most of the mailing industry supported this legislation. My response has been that advertising mailers and magazine and parcel shippers, facing a string of double-digit rate increases, leaped at the chance of keeping rate increases to CPI. We'll have to wait awhile to see if their hope is rewarded.