Alliance Study Examines Drivers of USPS Cost Growth

June 10, 2019

An article in the Alliance of Nonprofit Mailers’ June 5 Alliance Report dug into the current trend of USPS costs outrunning USPS revenues. The report’s findings revealed that the
Postal Service may be doing things that an institution with financial challenges like those facing the USPS shouldn’t do.
The following extracts from the Alliance’s report are provided with their permission.
Four areas of concern
The Alliance found four areas where costs seem ripe for further examination:

• 1. Delivery Points
“… The Alliance and several other associations quantified the impact of more delivery points in our comments filed with the
Postal Regulatory Commission in its ten-year regulatory review.
“The Postal Service is correct that (1) the number of delivery
points grows each year and (2) this growth tends to increase the
Postal Service’s costs. The Postal Service exaggerates the size of
this effect, however, as the Postal Service’s own roll-forward calculations show. When the Postal Service rolls forward (extrapolates) its historical expenses to future periods in rate cases, the
Postal Service is required to quantify the effect of the increasing
number of delivery points, and may not just assert that the effect
is large. The increase in the number of delivery points over time
is the primary input to the non-volume workload effect used by
the Postal Service in its roll forward model. … In Docket No.
RM2013-11, the most recent case in which the Postal Service
filed a roll forward analysis, this effect added just $75 million
each year (or 0.1%) to Postal Service costs. … Thus, while the
growth in delivery points indeed creates a small headwind
against the Postal Service going forward, the effect is much less
than the Postal Service now claims. Furthermore, because the
non-volume workload effect does not account for the fact that
new delivery points are generally lower-cost ones (i.e., centralized delivery points), the real non-volume workload effect is likely
much smaller than even the roll forward analysis suggests. …

• 2. Employees
“Normally, a declining business would be reducing its employees
to both save cost and reflect the new reality. But the USPS workforce continues to grow. In April, it was up 3,633 or 0.57% to
637,979. The more expensive career employees were up an even
greater 1.1% or 5,476 to 497,848, as lower-cost non-career employees declined by 1.3% to 140,131.
“The usual reasons given for continued hiring are more delivery
points and more packages. We addressed delivery points above.
Packages continue to grow and be quite profitable. Competitive
products revenue was up 7.3% through April.
“The outpacing of non-career by career employees is likely related
to labor agreements that enable temporary employees to convert
to career, with full pensions and lifetime health insurance.
“An interesting sidebar is that postal unions have large political
action committees that give a lot to postal oversight committee
members. The greater their numbers, the more money they
have to give. And some unions have partnered with postal management on legislative initiatives.
“The continuing growth of USPS employees is unsustainable in
the face of declining volume and slow revenue growth.

• 3. Transportation Cost
“According to the USPS Office of Inspector General, transportation costs have been growing quite a bit more than one would
expect with declining mail volume.
‘Our [the OIG] analysis found the following:
• The change in transported volume, including the change in the
mail mix, likely accounts for 15% ($157 million) of the increase
in transportation costs over the last 10 years.
• The overall increase in transportation-related input costs, including fuel cost and rising trucker wages, likely accounts for another
46% ($490 million) of the cost increase over the last 10 years.
• This means that 39% of the cost increase over the last 10 years,
or $418 million, likely occurred for reasons other than the
change in volume and input costs. This does not mean that the
39% increases are necessarily reasonable or unreasonable. It
simply means that we cannot tell from this analysis. Additional
studies may be warranted.
• While these numbers represent the overall changes in transportation costs, the results varied widely by the type of transportation. In fact, some components had costs that either declined during the 10-year period or had a cost increase that
was less than expected in response to the change in volume
and input costs.’
“The OIG analysis makes clear that there are huge opportunities
to reduce USPS transportation costs. Any successful business
would be all over this opportunity before attempting actions that
would endanger its future business, such as above-industry price
increases.

• 4. Compensation Cost
“Of course, more employees and a higher ratio of career employees increase compensation cost. The largest driver of compensation costs, however, is the collective bargaining that USPS does
with its unions. Recently, the National Rural Letter Carriers’ Association reached a tentative accord with USPS management.
[See the related article on page 4.]
“It would be interesting and useful to perform a quantitative
comparison between this agreement and those of other businesses and governmental entities. Certainly, anyone reading this
can feel free to compare it to their employment situation.
“Terms such as guaranteed raises plus cost of living allowances,
covering 65-75% of health insurance premiums, and a pension
plan appear to be much more generous than the average American receives. And seeing a multi-year agreement with such
promises to employees at an organization that projects to run
out of cash is a head-scratcher.
“As it did three years ago, the NRLCA contract will be the model
for the much larger one with the American Postal Workers Union.
Within about 72 hours of the NRLCA agreement, the APWU announced it is ending mediation with USPS and going into arbitration. …”
“It’s Groundhog Day all over again with postal collective bargaining since 1970. The problem is it’s not the 70s, 80s, or 90s
any more.”

• Conclusion: A sustainable, successful business would not:
1.Repeatedly denigrate a growth element that really adds a small
fraction of cost and could drive more revenue: delivery points;
2.Keep adding to staff when its volume is falling and revenue is flat;
3.Allow transportation cost to grow much faster than revenue and
not be able to account for 39% of why it is growing;
4.Agree to extremely generous three-year labor contracts while
warning that it will run out of cash in five years or less.”
The Alliance’s report should be yet another sign to senior
USPS management that ratepayers are tiring of unrestrained
cost growth, especially in compensation and benefits, which
are the majority of total USPS costs. Hopefully, this will motivate changes in USPS policies and practices accordingly –
starting with a new approach to its labor agreements.