May 16, 2018

Four Horsemen of the Apocalypse, an 1887 painting by Viktor Vasnetsov. Depicted from left to right are Death, Famine, War, and Conquest. The Lamb is visible at the top.

A wise person in the nonprofit sector said recently, “The stakes were never higher.” This got our attention, so we looked at the main avenues in which the current postal “situation” might be resolved.  And we found four.  So, naturally, the biblical Four Horsemen of the Apocalypse came to mind.  Will one carry the day, be the victor?  Will they all work together, or at cross-purposes?  Will resolution of our great postal situation be addressed or deferred yet again?

Death: The PRC Regulatory Review

The Postal Regulatory Commissioners, Robert Taub, Tony Hammond, Nanci Langley, and Mark Acton, initiated a process to review the current regulation of USPS pricing in December 2016.  The 2006 postal law required a review upon its ten-year anniversary.

The PRC solicited comments from interested parties, due on March 20, 2017.  After over eight months of private deliberation, the Commissioners issued their two decisions on December 1, 2017.  They concluded that the current system is not adequately supporting the financial stability of USPS for the medium and long term. And they recommended a proposal to add several surcharges onto the current Consumer Price Index cap on postage rate increases.  The PRC invited and received comments on March 1, 2018 and reply comments on March 30, 2018.

Possible Death Spiral

We and the entire mailing community have said in so many words that the proposal by the Postal Regulatory Commission would kick off the death spiral of the postal system. It unfortunately tries to solve a complex set of problems with one blunt force instrument: massive rate increases for captive customers.

Many mailers would be hit with 7 percent annual increases, compounding to at least 40 percent over five years. The “lucky” ones would experience only 5 percent a year or 28 percent in five years.  Very little of the customer base would stay with mail at these cost increases.

It is unfortunate that the postal regulator feels limited to the single tool of rate increases and bound and determined to “fix” the USPS with it.  The issues the Postal Service faces are complex, long-term, multi-faceted, and often exaggerated.  The PRC made the mistake of focusing most of its analysis on one of nine objectives required by law: financial stability.  Then it proposed only one solution: rate increases.

The one-dimensional “solution” of throwing money at the problem would violate the most important aspect of price cap monopoly regulation by eliminating the business-like incentives the current system gives the regulated agency.  Indeed, postal productivity stopped growing after the PRC gave the Postal Service the exigent surcharge of 4.3 percent over the CPI in 2014-2016.  Negative productivity growth has continued as USPS management has set its number one goal to achieve “pricing freedom.”  One percent annual productivity growth over the last four years would have resulted in a surplus in FY 2017.

Reasons for Optimism with the PRC

While the PRC proposal would be devastating as is, there are reasons for optimism that it won’t happen.  In the meantime, nonprofit mailers who must budget now for 2019 are faced with the decision to plan major cuts in mailings with the possibility of 5 to 7 percent postal price increases.  Many already are reducing, as the recent reports of declining mail volume indicate.  So, there is hope to avoid the death spiral, but damage already is being done.

Dissention within the PRC

Three of the four Commissioners, Hammond, Langley, and Acton, expressed strong reservations about the proposal.  Hammond actually opposed it, for some of the same reasons we do. Langley and Acton saw its weaknesses and expressed hope that the comment period would lead to significant changes.  One wonders why the order was passed by the Commission if 75 percent of the Commissioners did not think it right.

In any case, we can have some hope that the proposal will change when the PRC announces a “final order.”  In Washington, however, compromise usually means splitting the baby.  That’s one reason why postal management and unions argued for extreme proposals beyond even the death spiral recommendations of the Commissioners.

Two more Comprehensive Reform Efforts

The reality of two more comprehensive efforts to reform our postal system, in Congress and the President’s Task Force, should convince the Commissioners to put their one-dimensional ideas at least on hold, if not to bed.  The Senate bill actually directs the Commissioners to take new legislation into account in its regulatory review, whether it passes before or after the PRC issues a “final order.”  Passage of the bill would greatly alter the landscape that the Commissioners are trying to smooth over.

The President’s Task Force is scheduled to work on its complete review of the USPS business model until mid-August; and then presumably the Administration will begin work on implementing the recommendations.  Does it make sense for the Commissioners to attempt to pre-empt the work of the executive branch on comprehensive reform of all aspects of our postal system with a controversial, massive set of rate increases?   Of course not.

Likely Court Challenges

The last line of defense against the death spiral horseman is the high likelihood that it will be challenged in the D.C. Circuit of the U.S. Court of Appeals.  The Postal Service has appealed virtually every ruling by the PRC that it has not liked in recent years.  And mailers are very likely to try to fend off their death knell through whatever means possible.  Unfortunately, the Postal Service could implement a PRC decision while the court is doing its work, which could last months or years. In the meantime, major volume declines could backfire and cripple our postal system.

Famine: USPS Management without a Board

Postal Service management in recent months and years has taken the position that it has done all it can in the face of declining mail volume and that it is waiting for outside help.  Many in the postal arena have stressed that the most expeditious and obvious way to bring new strategic direction to USPS would be for the President to appoint and the Senate to confirm a full set of nine Governors.  Postal management is starved for the input, leadership, and air cover that a Board of Governors would provide.

“Without a Board the USPS is without direction”

Former Chairman of the USPS Board of Governors S. David Fineman recently addressed the problem when he said: “There is no Board to supply needed policy. The result is that Postal Management becomes somewhat timid in making major policy decisions.”  Mr. Fineman went on to say: “Without a Board the USPS is without direction. Like most organizations, whether money making organizations or charitable organizations the Board sets policy, usually with recommendations of management and after thorough conversation and study.  Without a Board the USPS and its Management team becomes fearful to make any long term suggestions for change.  The Postal Community must apply political pressure to both the Administration and to the Senate to establish a full Board of Governors.”

USPS Admits to no Control over Major Costs

The USPS second quarter results reported on May 11 carry the same themes that all its financial reports have for some time.  Revenue was up (1.4%) but expenses grew by much more (5.7%).  The $656 million “controllable” loss was driven by three major expense increases:

• “$236 million increase in the controllable portion of the normal cost of retiree health benefits due to changes in actuarial assumptions”
• “$364 million increase in compensation expenses due to additional hours incurred to support the labor-intensive package business as well as contractual wage adjustments”
• “transportation expense grew by $155 million due to highway contract rate inflation as well as higher fuel costs.”

Clearly, these results are not “controllable” as USPS calls them. If they were, any rational organization would eliminate the excess.  Postal management says they cannot.

The reported net loss for the second quarter was twice as big, as it included costs deemed not “controllable.”  The net loss of $1.3 billion compared to a loss of $562 million in the same quarter last year.  The additional changes in not “controllable” costs were reported:

• “unfunded retirement and retiree health benefits grew by a combined $766 million due to changes in actuarial assumptions”
• “Workers’ compensation expense declined by $658 million compared to the same quarter last year, resulting primarily from changes in interest rates.”

Total revenue increased by $235 million, or 1.4 percent, to $17.5 billion.  This was the net result of package revenue increasing by $445 million, or 9.5 percent, and mail revenue declining by $209 million, or 1.2 percent.

The operative word in all this is “control.”  USPS revenue is growing at a reasonable rate of 1.4 percent.  But expenses are growing much faster: 5.7 percent in this quarter.  Successful businesses are able to control their costs at levels and rates of growth that result in net income.  USPS management admits, and continuously emphasizes, that it has no control over the elements of cost that are too high and growing too fast.

The U.S. Government Accountability Office verified this a little over a year ago:

• “Growing expenses: Key USPS expenses such as salary increases and work hours continue to grow, due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS’s expenses.”
• “No new major cost savings initiatives planned: USPS made efforts in recent years to right-size its operations, but has no current plans to initiate major new initiatives to achieve cost savings in its operations.” (Emphasis added.)

Lack of Leadership on Labor Costs

Without the leadership of a board that former Chairman Fineman talked about, fully addressing the elephant in the room of 80 percent labor costs is off the table, sacrosanct.  The only real time USPS mentioned this 80 percent cost in the second quarter announcement was: “$364 million increase in compensation expenses due to additional hours incurred to support the labor-intensive package business as well as contractual wage adjustments.”  Both of those drivers of labor cost, hours used and the cost of each hour, should be largely within the control of USPS management.

It is USPS management who negotiates in private with the postal unions to determine the labor costs paid by the agency.  The only time that this opaque process sees the light of day is when an agreement is not reached and it goes to an arbitrator. But here we see that arbitrators generally do not take the lead to fix the problem. They mostly mimic previous agreements and split differences.

The “Interest Arbitration and Award” dated July 8, 2016, for the agreement with the American Postal Workers Union, is a case in point.  The arbitrator, Stephen B. Goldberg, admitted that even though he knew USPS was in financial difficulty, and even though he was persuaded that the then-current compensation was well above comparable jobs, he would ignore these facts. Instead he would base the “award” on an earlier “voluntary agreement” that USPS management made with a smaller union.

Any business that tries to sustain itself with costs increasing at 5.7 percent had better be a very fast grower.  But in environment with 2.5 percent inflation and 1.4 percent USPS revenue growth, uncontrolled cost growth like that leads to a slow, painful death.  Much higher rates, the “solution” of postal management and unions, would only hasten the inevitable tragedy.

War: Postal Reform Bills in Congress

There are currently two postal bills in Congress.  The House version that was introduced by Jason Chaffetz and his oversight committee last year carried over to this year.  The Senate version was introduced on March 22 by Sen. Tom Carper (D-DE) who is the ranking member of the Senate oversight committee.  While not co-sponsored by the Republican Chairman, Ron Johnson (R-WI), one Republican and two Democratic Senators joined Carper.

Two Lightning Strikes

Any attempt at postal reform in Congress is legendary as a war between factions, usually ensuring that no law passes. Lightening has struck twice in modern history, with the Postal Reorganization Act of 1970 and the Postal Accountability and Enhancement Act of 2006.

The 1970 act followed wildcat postal strikes and gridlock in our postal system and was heavily influenced by the President’s Kappel Commission. The PRA changed the Postal Service from a cabinet agency rife with political influence to an independent establishment of the executive branch attempting to self-fund in a businesslike manner.

But USPS still was and is very much a federal government agency.  Pricing was based on cost of service and wages and benefits were required to equal to comparable private sector jobs.  The model worked well as mail volume grew the fastest it ever has during the 1970s, 80s, and 90s.  But lacking strong cost control incentives the PRA failed when volume slowed and then declined.

The 2006 PAEA upgraded pricing from the obsolete cost of service regulatory model to the state of the art price cap regime we have now.  Across all monopoly regulation, it had become very clear that regulated monopoly entities like USPS lack sufficient cost control incentives when they can simply mark-up their costs.  They need something external that simulates the incentives of private sector businesses that cannot raise prices willy-nilly as they have competition that will eat their lunch.

Thus, the CPI cap was a major step forward to make the USPS the businesslike self-funding success it was supposed to be.  The Postal Service initially embraced it and pledged to make it work.  Several years of productivity growth and removal of over $15 billion in costs followed.

USPS Turns Against the Price Cap

After the 2007-2009 recession, however, postal management abandoned any pretense of supporting the price cap regime and began a campaign, now in its eighth year, to get rid of the cap.

Postal management unveiled its strategy to obliterate the price cap with its release of Ensuring a Viable Postal Service for America: An Action Plan for the Future in March 2010.  The pricing strategy goal laid out in the report has been followed religiously since: “Ensure that prices of Market Dominant products can be based on the demand for each individual product and its costs, rather than capping prices for every class at the rate of inflation. In addition, pursue a moderate exigent price increase effective in 2011.”

The first stage of attacking the cap was to pursue an exigent surcharge based on the impact of the recession.  USPS assumed the surcharge would be permanent.  After a relentless effort, USPS finally got its 4.3 percent surcharge starting January 29, 2014 and lasting until April 10, 2016.  In this time the Postal Service enjoyed $4.634 billion of extra money from its customers.  But it lost the argument to make the surcharge permanent.

A not-so-funny thing happened on the way to the USPS getting a taste of life above the CPI cap: productivity, that had been growing with the cap, collapsed.  In the seven years before the surcharge, USPS Total Factor Productivity grew by 0.91 percent per year on average.  In the four years since the surcharge started, postal productivity has dropped an average of -0.08 percent per year.  The FY 2017 reported loss of $2.7 billion would have been a profit if productivity only continued its 1 percent annual growth rate.

Since the exigent surcharge was ruled temporary by the regulator and the court, USPS has been on a relentless campaign to eradicate the price cap.  With the urging of both postal management and postal unions working together, several bills have been introduced prior to the current versions.  They included various attempts at eviscerating the price cap: making the exigent surcharge permanent, changing the cap to CPI + 2 or CPI + 3, and making half of the surcharge come back, as the two current bills would require.

Even though postal management has repeatedly and consistently staked the USPS future on new postal reform legislation being passed, none has passed or come to a vote on the floor of the House or Senate.  USPS management has shifted a lot of its attention to the other external savior it hopes for: the PRC and its regulatory review.  But it continues to push for legislation that includes a 2.15 percent permanent across-the-board rate increase.

Conquest: The President’s Task Force

No one knows whether the Task Force set up a month ago by President Trump will succeed where so many others have failed.  Recently, however, the Board of Directors of the Alliance of Nonprofit Mailers announced its full-fledged support of the comprehensive effort.

Comprehensive Reform is Needed, Not Piecemeal

The President of the Alliance Board summed up the main difference between the Task Force and the other three horsemen: “We are very concerned that piecemeal efforts to reform our postal system will backfire and lead to a downward spiral in mail volume,” said Alliance of Nonprofit Mailers Board President Jim Asselmeyer. “In particular, the current proposal by the Postal Regulatory Commission would raise postage rates by 30 to 40 percent over the next five years, which would lead to a mass exodus from mail. Our Nation deserves the type of comprehensive reform being sought by the President’s Task Force.”

The Task Force, more so than any of the three other arenas, is seeking a comprehensive solution for a complex set of issues.  That is what is needed.  While some have branded the Task Force as politically motivated, as an attack on Jeff Bezos and Amazon, and as a devious privatization scheme, the Alliance is taking it at its word at the outset. While some might brand us as not skeptical or cynical enough, we so strongly believe that comprehensive solutions are needed that we wholeheartedly support the nascent effort.

The Task Force has been ordered by the President to take a serious, comprehensive look at the postal system and recommend meaningful, comprehensive reforms:

The Task Force shall conduct a thorough evaluation of the operations and finances of the USPS, including:

           (i)    the expansion and pricing of the package delivery market and the USPS’s role in competitive markets;

           (ii)   the decline in mail volume and its implications for USPS self-financing and the USPS monopoly over letter delivery and mailboxes;

           (iii)  the definition of the “universal service obligation” in light of changes in technology, e‑commerce, marketing practices, and customer needs;

           (iv)   the USPS role in the U.S. economy and in rural areas, communities, and small towns; and

           (v)    the state of the USPS business model, workforce, operations, costs, and pricing.

     Sec. 4.  Recommendations for Reform.  The Task Force shall develop recommendations for administrative and legislative reforms to the United States postal system.

(a)  Such recommendations shall promote our Nation’s commerce and communication without shifting additional costs to taxpayers.  The recommendations shall be developed in a manner that is consistent with the proposed plan to reorganize the executive branch as required by Executive Order 13781 of March 13, 2017.

(b)  Such recommendations shall also consider the views of the USPS workforce; commercial, non-profit, and residential users of the USPS services; and competitors in the marketplace.

The Alliance believes this is the type of approach that is called for.  We understand implementing the recommendations will not be easy.  But the most important changes are usually not easy or quick.  We agree with Jack Welch who said, “Change before you have to.”  And we think Albert Einstein was spot on when he said, “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.”

We demonstrated our flexibility in February 2013, when the Alliance publicly announced its support of the USPS decision to curtail Saturday delivery of mail.  And we are flexible and optimistic enough now to support and work with the President’s Task Force on the United States Postal System.