April 4, 2018

Alliance Replies for Nonprofits

On Friday, March 30, 2018, the Alliance of Nonprofit Mailers filed “reply comments” with the Postal Regulatory Commission on its proposed revamp of the Consumer Price Index (CPI) price cap on postage increases. We filed 87 pages of public comments, along with some additional ones under seal.

The non-public reply comments were in response to the U.S. Postal Service projections of its financial results under scenarios of a CPI cap and a CPI+2 cap. While USPS was not very forthcoming in its assumptions, we showed alternative scenarios that were very positive using reasonable assumptions.

In any case, all of our comments are intended to represent the interests and the needs of nonprofits to stay in the mail with postage increases that do not exceed their ability to fund them. Paying for postage is a critical determinant for nonprofits that strive to stay within limits of overhead costs that are monitored by external rating organizations. Exceeding 25 to 30 percent non-program expenses generally is detrimental to the rating and ability to raise funds going forward.

Also critically important is the growing portion of the cost of direct mail fundraising that is absorbed by postage alone. A recent survey of major nonprofits found USPS postage to make up 28 to 35 percent of the total cost of direct mail.

The ability of nonprofits to continue to use direct mail as their prime funding tool is finite. And surcharges proposed by the PRC over inflation add up to 5 percent a year. So, 2 percent CPI+5 leads to 7 percent annual increases, compounding to 40 percent over the minimum five years envisioned by the four Postal Regulatory Commissioners, Robert Taub (R), Tony Hammond (R), Nanci Langley (D), and Mark Acton (R).

Mail Volume Would Tank

Nonprofits numbering about 130 have banded together with the Alliance of Nonprofit Mailers to communicate the devastation the PRC proposal would wreak on the charity sector of the U.S., if implemented. They have written letters and are keeping a close watch on what the Commissioners do next.

Fortunately, the entire mailing community, for-profit and nonprofit, has responded in unison that the ill-advised proposal cannot stand. The not-so-hidden elephant in the room is that everyone who actually mails knows that increases like those proposed would lead to quick, massive reductions in mail volume. Many presented survey results and individual projections.

The good civil servants who inhabit the USPS, its labor unions, and the PRC, presented no evidence that the massive, unprecedented price increases would not be self-defeating. They were unable to show, nor did the regulator require a showing, that the price increases would be vastly counterproductive with loss of volume far exceeding the revenue benefit of price. One would think this would be a necessary requirement for an exercise like this that will affect very business, organization, and individual in the nation.

The idea that historical “elasticity” measures would show how much volumes will react to price increases 3.5 times the rate of inflation is absurd. The USPS elasticity data are based on many years in which average price increases tracked inflation, not inflation plus five. The old price elasticity data are virtually meaningless when a tipping point is reached. And that’s one of the nicer descriptions we have heard.

Seat of the Pants Won’t Work

The USPS and its unions had a very obvious “tell” that they know the elephant is in the room. When they advocated for authority to raise rates even more than the PRC proposal, they had “comforting” words for customers. They basically said, no worries. We would never abuse or misuse this freedom to set our monopoly prices wherever we want. The “market” would prevent us from making the mistake of setting prices too high.

We are not sure, or confidant, that career government agency employees have the knowledge, expertise, and data to price it right. Perhaps more important, their willingness to reassure us that they will follow the market means they know the risk of counterproductive price increases is very, very real.

Even if the current group of USPS leaders is as expert in predicting something the market reaction to outsized price increases as they believe, how can we be sure that their replacements will be too? It is pure folly to build a monopoly pricing regulatory system that depends on the continuous good judgement of whoever is running the agency.

Cap = Incentives

The purpose of the CPI price cap is to provide the incentives that are lacking in a monopoly government agency. Remove or mess with the cap and you destroy the purpose of monopoly regulation. And ultimately you destroy the agency that cannot operate “like a business” because it lacks the incentives of a capitalist, private sector business.