Alliance Report–May 19, 2022

The new “improved” risky USPS business strategy

Two years into his tenure, Postmaster General Louis DeJoy has begun explaining his USPS business strategy directly to customers and mailing industry suppliers. The strategy has become quite clear and it is very simple. It carries significant risks too.

The main components of the USPS strategy are:

  • Obtain $107 billion in cost savings from Congress, $57 billion immediately, and $50 billion over ten years, from non-operational changes in retiree health insurance. (This is in addition to $10 billion from Congress for Covid costs.)
  • Capture large increases in revenue from Market Dominant mail customers with new rate authority granted by the Postal Regulatory Commission and the highest increases in the Consumer Price Index in about 40 years. On the FY 2020 base of MD revenue of $42.5 billion the 16% to 20% rate hikes so far under the new plan yield north of $7 billion a year. With compounding as frequently as twice a year, the $7 billion annual taking from the private sector will grow substantially. The 10-year plan estimate is $44 billion which might be conservative. USPS has not demonstrated the ability to use less than full monopoly rate authority.
  • Spend $40 billion over 10 years on a new truck fleet, operational capital improvements, and investments in the workforce.
  • Save $34 billion by optimizing the USPS transportation and processing network, improving retail, delivery, and administrative efficiency.
  • Improve revenue over 10 years by $24 billion from new package initiatives.

The bottom line of the USPS strategy is:

  • Take lots of extra money from the private sector customers in the declining monopoly mail sector that brings in about 58% of USPS revenue;
  • combine that money with relief from Congress/taxpayers;
  • reinvest the newfound wealth heavily in the package business to increase revenue, profit, and market share at the expense of private-sector competitors; and
  • promise captive mailers trickle-down rate relief if they can hang on long enough for USPS to achieve its package and cost control aspirations.

Risks inherent in the USPS strategy:

  • Mailers pull enough volume out of the system due to strategic, tipping point decisions driven by historic rate increases, to a degree not predicted by USPS price elasticity models.
  • USPS is not able to take enough market share from private sector competitors to bring sufficient package profitability to support our national postal system.
  • USPS does not reach its goals to optimize its network and take out enough costs due to the same types of opposition that defeated previous Postmasters General.
  • As the value of its monopoly diminishes, USPS finds that it cannot compete as a business with the substantial public and universal service costs that it must carry that private-sector competitors do not.
  • The American people decide that a monopoly government agency is no longer called for when basic mail service becomes unaffordable for many businesses, organizations, and households, and the service becomes dominated by packages that the private sector handles just as well.

On the positive side, the Postal Service leadership seems bound and determined to take the “operate like a business” to its conclusion. We should learn in the coming months whether this congressional mandate, first imposed in 1970 and reinforced in 2006, can work. The Postmaster General is promising major changes to the USPS network, to make it work efficiently for both packages and mail and to take out excessive amounts of waste and excess costs. Previous PMGs were stymied in this goal by political, union, and customer disagreements.

Ultimately, with all the support and encouragement that Congress has given USPS, if this run at a “self-funded, businesslike” agency sputters, a reassessment of the longer-term feasibility should ensue. We have advocated for some time an accurate valuation of the Universal Service Obligation that adds in the neighborhood of $5 billion in excess public service costs, and a return to public funding of said obligations. We find it hard to envision a “business” competing successfully against America’s nimble private sector providers as long as the agency carries the yoke of necessary but excessive public service costs.

 

USPS Governors are now a majority Biden-appointed

For the first time since the all-Trump appointed United States Postal Service Governors hired Louis DeJoy as Postmaster General of the United States of America, about two years ago, Biden-appointed Governors now hold the majority. The Governors are granted the authority by the Congress of the United States to select the Postmaster General by majority vote.

This happened on May 12 when the Senate confirmed by voice vote Executive Calendar #866 Derek Kan to be a Governor of the United States Postal Service for a term expiring December 8, 2028. The world’s greatest deliberative body also confirmed by voice vote Executive Calendar #867 Daniel Mark Tangherlini to be a Governor of the United States Postal Service for a term expiring December 8, 2027.

A set of USPS Governors appointed by one president was the exception rather than the rule; it probably never happened before except maybe at the beginning of the modern USPS in 1971. The mixture of appointees by more than one president is a return to normalcy.

The current set of USPS Governors:

Appointed by President Trump

 

 

 

 

 

Appointed by President Biden

 

 

 

 

 

  • Derek Kan (R) term expiring December 8, 2028

 

If President Biden chooses to appoint two more new Governors, and the Senate confirms them, in seven months we could be left with only two remaining Governors appointed by President Trump. More important, only two who selected Mr. DeJoy. (Otherwise, Governors Zollars and Moak could continue for another year, known as the holdover year.)

It bears watching whether any cracks appear in the iron-clad support Mr. DeJoy has enjoyed and relied upon from the Governors. He is a very confident, forceful personality which makes significant opposition by part-time Governors unlikely.

 

USPS 6-month finances

The finances of the Postal Service in the first half of FY 2022 (October 1, 2021- March 31, 2022) did not reflect the governmental relief conferred by the Postal Service Reform Act signed on April 6, but they did include the benefit of large rate increases on mail. Revenue from mail was up 6.8% even though volume was down 0.5%. This combination is likely to continue with full use of rate authority swelled by 40-year highs in CPI.

Package volume continued its downward trend: -7.6% for the quarter and -9.6% in the last three months. USPS attributes the package declines to the normalization of consumer spending after the e-commerce spike during the height of the pandemic. Rate hikes softened the blow to revenue a bit with volumes down: revenue -3.2% in the quarter and -5.3% in the latest three months.

Overall revenue was up 1.7% while operating expenses rose 7.8%, although USPS said that less than half of the cost spike was “controllable.” The $2.2 billion year-to-date loss was much worse than the same six months last year when USPS made $236 million. Of course, USPS makes the distinction of what is “controllable” by backing out workers’ compensation adjustments. In this case, the controllable approach reduces compensation expenses by $1.3 billion leading to a six-month loss of closer to $900 million.

A year into the Delivering for America Plan that targets packages as the hope for the future, and two years into Mr. DeJoy’s tenure, these results do not inspire confidence.

 

Petition for rulemaking on above-inflation rates

The Alliance of Nonprofit Mailers joined the Association for Postal Commerce in filing a Petition for Rulemaking at the Postal Regulatory Commission on April 11, shortly after president Biden signed the Postal Service Reform Act of 2022. We said:

“With the passage of the Postal Service Reform Act, the Postal Service is now well-positioned to continue to improve its financial position without saddling mailers with rate increases exceeding historically high levels of inflation. The Act eliminates the bulk of the Postal Service’s accumulated deficit, frees it from past obligations, and significantly reduces institutional costs going forward. Moreover, it remedies the conditions on which the Commission relied when finding the CPI-limited rate system did not achieve the objectives of PAEA. The Commission has a duty to revisit its regulations authorizing above-CPI rate increases in light of these changes and should immediately open a rulemaking docket to do so.”

On April 20, the USPS filed a Motion to Reject our Petition for Rulemaking. This, of course, is not at all surprising as the agency fought for years to obtain above-inflation pricing power, not by earning it as organizations in the private sector do, but by regulatory fiat based on pleadings of poverty and inability to control costs.

The Postal Service admitted a material improvement in its finances in a footnote on page 9: “The balance sheet as of that date (September 30, 2021)  showed current liabilities of $87.329 billion, compared to current assets of $25.908 billion. U.S. Postal Serv., FY2021 Form 10-K at 57. Even if the past-due RHB payments were eliminated from the current liabilities, the resulting amount ($30.354 billion) still exceeds the current assets.” What they left out is the resulting math: current liabilities now exceed current assets by a mere $4.4 billion. That is well within the additional savings granted by the PSRA of $50 billion over ten years.

The USPS closing argument was as milquetoast as they get:

“After extensive deliberation, the Commission established a new regulatory
system that was intended to allow the Postal Service to make progress towards
financial stability, in conjunction with continued efforts by the Postal Service to reducecosts and increase efficiency. Meaningful progress towards this goal is now being made, via use of the pricing authorities provided by the Commission and the Postal Service’s other efforts to reduce costs, increase efficiency, and raise revenue under the Delivering for America Plan. At the same time, the Postal Service is also now taking action pursuant to the Plan to address its many outstanding and long-deferred capital investment needs. The passage of the PSRA provides significant additional momentum to achieving the goal of a financially viable Postal Service but does not solve the Postal Service’s problems or call into question the appropriateness of the current system. Consistent with the principles laid out by the Commission in Order No. 5763, the
Commission should decline the petitions.”

 

The Alliance and PostCom filed a Response to the USPS Motion to Dismiss on April 27. In addition to debunking USPS’ false regulatory arguments, we reiterated the major improvements to USPS finances and the damage inuring unnecessarily to mailers:

 

“The Postal Service has been able to increase its cash and pay down debt even while operating under the CPI cap; it should continue to be able to do so if the above-CPI rate authorities are eliminated. The Postal Service has sufficient cash at its disposal to begin making the capital investments it claims it needs to increase efficiency and generate even further cost savings—even by generous estimates, these investments amount to $4 billion per year over 10 years, though the Postal Service has never detailed its precise capital needs or explained how these investments will result in cost savings. Regardless, with strong management and focus on cost reduction, combined with continued revenue growth from competitive products, the Postal Service should be able to continue to improve its financial position without charging captive customers rates that increase faster than the rate of inflation.

The proposed rule changes will clearly benefit the mailing community, which is already paying more for less after the Postal Service reduced its service standards for numerous products Eliminating the density authority, in particular, will bring stability and predictability back to postal rates, allowing mailers to better budget and plan campaigns, thus encouraging volume growth. With lower rates, nonprofit mailers will be able to dedicate more of their resources to program activities and less to fundraising appeals, generating a better return on investment from their limited prospecting dollars. Moreover, captive mailers will be protected from monopoly pricing practices, the types of which have already resulted in two rate increases significantly above already historically high inflation in a single year.

The PSRA, by eliminating a massive financial burden placed on the Postal Service, radically changes the factual premises underlying the above-CPI rate authorities created in Order No. 5763. Accordingly, the Commission must revise its rules to reflect this new reality.”

The PRC is deliberating its response to our petition. We will keep you posted.

 

PRC request for comments on service reporting

On April 26, the Postal Regulatory Commission issued an Advance Notice of Proposed Rulemaking to revise Periodic Reporting of Service Performance. The Alliance plans to submit comments on behalf of nonprofit mailers and would like your suggestions. Please email them to: alliance@nonprofitmailers.org no later than May 27.

Since the PRC set up rules on service performance reporting after the passage of the Postal Accountability and Enhancement Act of 2006, there have been some relevant changes. For example, “…service performance reporting for many products that had previously been measured using external methods began to use the Postal Service’s internal service performance measurement system.” And as we all know, “There have also been several significant changes to relevant service standards. Most recently, in FY 2021 the Postal Service modified its service standards for First-
Class Mail and end-to-end Periodicals. ”

Further, the Postal Service Reform Act of 2022 added more service reporting requirements, collectively referred to as a “dashboard.” The PRC has oversight of the dashboard:

“Specifically, the PSRA directs the Postal Service to develop and maintain a publicly available online “dashboard” that provides weekly service performance data for Market Dominant products. It also mandates that the Commission provide reporting requirements for this Postal Service dashboard as well as “recommendations for any modifications to the Postal Service’s measurement systems necessary to measure and publish the performance information” located on the dashboard. The PSRA also authorizes the Postal Service to provide certain nonpostal services to the public and other Governmental agencies and requires the Postal Service to periodically report the quality of service for these nonpostal services.”

The PRC invites us to provide comments and suggestions on USPS service reporting, especially in light of the new legal requirement for a weekly dashboard:

“Interested persons are invited to provide written comments to facilitate the
Commission’s examination of the service performance reporting requirements. The Commission seeks comments specifically on the usefulness and relevance of the potential new reporting requirements and the frequency of the Postal Service’s obligation to provide such corresponding data.”

The Alliance will consider the suggestions you email us by May 27 at alliance@nonprofitmailers.org, especially in terms of whether they would benefit the nonprofit mailing sector as a whole.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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