Postal Reform Bill Didn't Face Reality

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When it comes to postal issues, I've never been a fan of United Parcel Service. During rate case proceedings it does all it can to increase postage rates for parcels. This raises product shipment rates for some of its best customers. It's certainly true that UPS was a strong lobbying force against the postal reform legislation recently defeated in the House Government Reform Committee.


But the reason the bill failed to get out of committee, in my opinion, was a lack of mailing industry support, and justifiably so. It would have done little to solve the serious problems facing the U.S. Postal Service.


David Walker, comptroller general of the General Accounting Office, has testified in Congress that the postal service's business model is broken. In its most basic form, the model said that rising labor costs would be balanced by rising mail volume. It now appears that Sept. 11, the anthrax scare, a weakening economy and, most ominous, an increasing movement to e-commerce have caused mail volume to fall.


The postal service is encountering the worst of all worlds: unit labor costs rising at a rate greater than inflation, mail volume in decline, modest - at best - increases in productivity and looming large increases in retiree payments for pension and health benefits.


The volume declines are of great concern. For the first three quarters of FY 2002 compared with FY 2001, Priority Mail is down 12.7 percent, Standard Mail is down 6 percent, Periodicals 4.1 percent, Package Services 3.3 percent and First-Class volume 1.7 percent.


It's particularly bad that Standard Mail and Priority Mail - two categories most sensitive to price, competition and the economy - are down the most. Standard Mail has served as the engine that has driven postal growth in the other mail categories. Its decline is a very bad omen.


On the labor front, the USPS seems to be achieving modest control over staffing. Compared with last year, career employees have been reduced by 20,400, or 2.6 percent. But recent labor settlements have moved many of the craft employees into a higher wage band structure. This has caused unit labor costs to increase at a rate greater than inflation.


This combination of declining mail volume, rising labor costs and looming large retiree payments makes it appear the USPS will face annual costs increasing at a rate greater than inflation. And unless Congress acts, the postal service soon will reach its borrowing limit. Therefore, even that unsavory option as a short-term solution is probably off the table.


Given the obvious problems, what was in the bill that failed to get out of committee? The major components were:


o The postal service will be limited to offering "postal services."


o The newly designated Postal Regulatory Commission would be required to design a new system of rate regulation for market-dominant products and competitive products within 24 months. Note: Market-dominant products account for about 85 percent of postal revenue.


o Whatever system the PRC develops must not raise the average rate increase for any market-dominant postal subclass by more than the annual increase in CPI unless the commission determines that the increase is "... reasonable, and equitable and necessary ..."


o Lets the USPS establish rates for competitive products after the PRC develops regulations for the competitive products.


o Permits market tests of two to three years in duration and $10 million to $50 million in annual revenue.


o Requires that at least four of the nine members of the Board of Governors have had management positions with public or private organizations employing at least 50,000 and one be a representative of the postal service's craft unions.


o Provides for non-USPS carriage of mail by a private carrier when the amount paid is at least six times the basic First-Class letter rate.


o Authorizes the USPS to establish a bonus program, with PRC approval, that allows total employee compensation to exceed federal salary cap guidelines.


o Leaves untouched the current collective bargaining process.


o Establishes a National Commission on the Future of the Postal Service. It would recommend ways to improve the "efficiency and long-term viability" of the USPS. The commission would report its findings within 30 months of the bill's enactment.


The bill appears well-crafted and would suit a postal service well, if the postal service were not in crisis. Recall Walker's remarks: the postal service's business model is broken. It appears that to the authors of the bill, the major problem facing the USPS is the long, laborious and contentious process the service has to go through to raise rates.


The bill's solution was to let the USPS raise rates with a minimal regulatory process, as long as the increase is less than CPI. Furthermore, it would establish a postal study commission and give it 2 1/2 years to report its findings. It seems the authors of the legislation do not think anything is broken.


It also seems clear that based on declining mail volumes and rising unit labor costs, postal rates will be increasing at a rate greater than inflation.


No one can speak for the mailing industry, but it is my impression that many, if not a majority, would agree with Walker that the business model is broken. Though the USPS is having some success in reducing its labor complement, much more is needed.


Real reform will require changes in the postal service's cost structure, not just a simplified rate increase process. The mailing industry needs to strongly voice its specific vision for a postal service of the future. UPS is not the problem, but to date it's one of the few voices being heard.


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