Which Way Is Up for Postal Revenues?

The past few weeks have seen a great deal of activity on the postal front. It began with a hearing before Rep. Dan Burton’s Committee on Government Reform.

In that hearing the General Accounting Office confirmed that the U.S. Postal Service was in trouble. Burton, R-IN, said he understood that reform legislation was necessary and assigned Rep. Danny Davis, D-IL, as the committee’s point person. The postal service said reforms must include rate-making flexibility based on market conditions and a change to the collective bargaining process that would eliminate binding arbitration.

Before the hearing, postal management had been predicting very publicly a loss this year of $2 billion to $3 billion. This will necessitate a rate increase filing in July, according to postal management. Their prediction is that the increase will be 10 percent to 15 percent.

Hearing the rate-increase prediction, Senate Majority Leader Trent Lott, House Majority Leader Dick Armey, House Majority Whip Tom DeLay and Burton have all written to the postal service, asking it to hold off on the rate increase.

The basic issue is: Can the USPS achieve a balance between rate increases and cost control? As part of controlling its costs, we have been told that postal management has made a commitment to the Board of Governors to reduce staffing by 75,000 over the next five years. Indeed, we have been told that the management team is committed to doing everything necessary to reduce costs. Clearly, to reduce costs the postal service must reduce the labor content of its expenses.

Therefore, it was most surprising to review the recent rate increase that the governors voted to implement effective July 1 as they unanimously overturned the Postal Rate Commission’s decision. To start, let’s take a look at the First-Class rates that are to be implemented.

The decision to keep the First-Class stamp at 34 cents obviously was intended to keep the public from getting its dander up, and it is hard to argue with that decision. However, it is clear that the rest of the increases will do nothing to encourage mailers to do more work sharing and therefore reduce that all-important USPS labor content. Even a cursory look seems to demonstrate that this new rate structure was developed without a great deal of thought. Indeed, the rates to be implemented for the Standard-A class also demonstrate the same across-the-board characteristic, apparently without any regard to desirable mailer reaction or USPS workload impact.

If the postal service is serious about the commitment to reducing its labor complement, then every action it takes needs to be looked at from the following standpoint: Does the action tend to decrease postal labor content? To the extent that rate changes do not encourage additional work sharing, they are a mistake. Therefore, for this latest increase, the largest increases should have been for the mail that is the most expensive to process and the least work-shared, and the smallest increase (or no increase) for the mail that is the least expensive to process and the most work-shared. Instead, the increases were across the board, treating all mail the same.

For example, I would suggest that if the rates below had been implemented, not only would revenues have increased, but labor costs would have been reduced as well:

I am not suggesting that these rates represent an optimum rate design, nor would they necessarily raise the needed revenues. But they would demonstrate a commitment to work sharing and reducing the USPS’ labor component of mail processing and delivery.

As noted earlier, there has been much discussion recently about delaying or reducing the rumored July rate increase filing. Much of that discussion has centered on pressure from congressional leadership for a rate-increase delay. This may well be the time for the postal service to push back against Congress and ask for some legislative assistance on the rate increase front. Specifically, there are two things Congress could do in the short term to reduce the USPS’ cash squeeze:

• Accelerate revenue-foregone payments. These are the payments from Congress to the USPS as part of the congressional elimination of the subsidy for nonprofit postage rates. These payments are being spread out at a rate of $29 million per year for 40 years.

• Reimburse the postal service for criminal investigations. It is estimated that the Postal Inspection Service spends well in excess of $100 million per year investigating various crimes, such as stock fraud and child pornography, that ultimately are prosecuted by the Justice Department. Postal service competitors such as FedEx and United Parcel Service do not have similar expenditures.

One could argue that the seeds of some of the problems the USPS is facing were sown by congressionally mandated payments of billions of dollars from the postal service to the U.S. Treasury for prepayment of future health and pension expenditures. It may well be the time, given the huge projected federal budget surpluses, for money to begin to flow back toward the postal service. Accelerating revenue-foregone payments and beginning reimbursements for criminal investigations would be a good place for the Congress to start to demonstrate its commitment to the health of the postal service.

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