Postal Reform: Why, What and Will It Work?

With the Clinton impeachment trial in the Senate, House members are getting on with other business. To those of us who rely on the U.S. Postal Service, this may mean legislation to change the rules under which the USPS operates. In today's lexicon this is known as postal reform.

Thoughts for the need for postal reform have been around for a while, but were given a boost in 1994 by former postmaster general Marvin Runyon's remarks at the National Press Club. Loosely paraphrasing Runyon, he said he enjoyed being postmaster general but what bothered him was that he had little control over “people, products and prices.”

Enter Rep. John McHugh (R-NY), chairman of the subcommittee on the postal service. Over a number of years, McHugh has held hearings to understand what the postal service, its customers, its competitors and the Postal Rate Commission thought were issues that legislation was necessary to address.

From this viewer's perspective there are a number of significant realities facing the postal service and little in its arsenal to address them.

First, is the inexorable slowing in the use of First-Class mail. In the postal service's 1997 fiscal year, First-Class mail accounted for 52.2 percent of all mail. In FY98 it fell to 51.1 percent. Although its volume grew by 1.5 billion pieces in 1998, single-piece First-Class mail dropped from 54.2 billion to 53.8 billion. And single-piece First-Class mail is the largest single revenue item the USPS has, accounting for $21.6 billion.

Incredibly, 36 percent of total USPS income comes from this stream and it's shrinking in absolute terms. What can it do to replace this revenue? Is it realistic to think that expanding Internet shopping and resulting product shipment will provide the necessary revenue stream? Since parcel shipment accounts for less than $1 billion in FY98 postal revenue and United Parcel Service and Federal Express don't seem likely to just roll over, it seems unlikely.

A second issue facing the USPS is its work force. It's both a strength and a weakness. The largely unionized employee base is loyal and knowledgeable. However, unlike most large business organizations in the United States, the postal service seems unable to stem the growth in its labor force. This, in spite of billions being invested in technology to automate mail processing and delivery. Another issue is the poor working relationship that exists on the postal shop floor. That's, demonstrated by the high level of labor grievances that continue to grow unabated. How can the postal service expect to successfully address its external problems when it can't seem to deal with its internal problems?

A third issue is the long and laborious procedure that the USPS has to go through before the Postal Rate Commission to raise rates. The introduction of new products and services requiring PRC hearings is often equally difficult. How many companies could tolerate a process that takes nine months to raise rates and gives competitors a chance to force higher prices?

These issues seem a lot like Runyons “people, products and prices.”

Now let's take a look at H.R. 22, the legislation proposed by McHugh to address the issues, as he sees them, facing the postal service.

First, McHugh concluded that rate-making responsibility should not be shared between the USPS and the PRC. Understanding that all postal classes are not “created equal,” the legislation provides different rate making flexibility depending on whether a postal mail class is considered competitive or noncompetitive. For the noncompetitive classes, First Class and Standard A, for example, the postal service could raise rates annually as long as the increase was less than CPI minus a productivity factor. For the competitive classes, Express Mail, Priority Mail and Parcel Post, it would have fairly wide rate-making flexibility as long as the cost coverage from the competitive classes was at least that of the noncompetitive classes.

In addition, H.R. 22 provides the postal service the ability to enter into negotiated service agreements with customers. These NSAs permit individual mailers to negotiate special rates with the USPS based on that mailers ability to take over processing that the it would ordinarily perform. NSA's are not to be based on volume, are subject to PRC review and are to be available to all mailers who are willing to perform the same operations.

Second, McHugh concluded that the postal service needed more flexibility to develop and test new products. The legislation provides greater flexibility to introduce new postal products. In perhaps one of the more controversial aspects of H.R. 22, an effectively separate postal service is established, called a Private Law Corp. to offer “nonpostal” products. The money for this nonpostal postal service would come from the excessive (presumably) cost coverage on the competitive products.

Regarding people, specifically postal employees, the legislation is pretty mute. H.R. 22 provides the opportunity for significant management bonuses based on USPS performance. However, it doesn't raise the existing salary cap, so there is question as to the full motivational aspects and benefits of this piece of the bill.

However, to the myriad important and complex issues that exist between the postal service's unions and craft employees, the legislation only proposes a study commission to analyze the situation and make recommendations.

H.R. 22 has generated a tremendous amount of interest and concern among the USPS, mailers, postal competitors, and, I'm told, the House leadership.

Among mailers, interest has concentrated on the opportunities presented by the negotiated service agreements.

Among competitors, concern has centered on pricing constraints for competitive products. Indeed, there are some who believe that UPS and Fed Ex have had an inordinate impact on parts of the legislation, particularly those pieces dealing with international mail.

Both competitors and suppliers have studied provisions of the Private Law Corp. Financing for it and the definition of nonpostal products are not well understood. Serious questions exist as to how these provisions would be interpreted by the courts.

At long last, the postal service has publicly weighed in with its own set of proposed changes to H.R. 22. While several of its proposals appear to have merit, they all fall within the basic framework of the legislation.

In my view there are substantive issues associated with H.R. 22 and postal reform that aren't getting the attention they deserve.

Let's take a closer look at the pricing flexibility offered in the legislation. As you recall, the postal service will be allowed to increase rates annually in the noncompetitive mail classes as long as these increases are less than CPI minus a productivity offset. The legislation does provide limited flexibility in these rate changes, however, on balance the flexibility is minimal. For example, in First Class, assuming a CPI of 3 percent and a productivity reduction of 1 percent, the postal service will have the pricing flexibility of about one penny. Is it realistic to believe that the severe competitive pressures that it's facing to its primary revenue stream can be countered with this limited pricing flexibility?

How valuable are negotiated service agreements likely to be to the postal service? As noted earlier, mailers would perform services currently done by the USPS in exchange for a reduced rate. Alternatively, mailers could modify their processing schedules to better meet USPS needs, again for reduced rates. However, to benefit from these agreements the postal service will need to be able to reduce its costs at least as much as the rate relief it will provide. In order to achieve these cost reductions postal unions will need to cooperate. Will the unions consider these NSAs just another form of outsourcing? Recall that the labor agreement recently signed with the APWU places restrictions on additional outsourcing. If an agreement is signed with the NALC, it's likely to have similar restrictions. Therefore, is the Postal Service likely to enter into any NSAs without union assurances that savings will be realized?

So what needs to happen next?

In my view, McHugh and his staff have crafted a well-balanced piece of legislation. But will it do the job that's necessary? Is this the legislation that the postal service thinks will permit it to compete in the 21st century? If not, it should say so. If it is, a closer alliance is needed with mailers so the legislation will pass without more destructive input from competitors.

And lastly, unions need to become an active part of this legislative process. The legislation won't accomplish what's necessary if union leadership stays on the sidelines. Just as union leadership played an active role in resuscitating the automobile industry in the 1980s, so, too, postal union leaders need to play a role today.

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