January 2, 2019
The Postal Service is increasing its rates on Sunday, January 27. The Postal Regulatory Commission approved the increases. The average increase for each class of mail is around 2.5 percent:
USPS Price Increase Percentages for January 27, 2019
But there are two important outliers for nonprofit mailers.
First Class Mail
The Postal Service surprised everyone with a 5 cent, 10 percent increase in the single piece First Class Mail prices. This affects all nonprofits that use stamps or business reply mail. Nonprofits that use First Class postage on response envelopes or outbound letters will have to make tough choices about their postage spending going forward. For example, Disabled American Veterans budgeted for a 2 percent increase in First Class in 2019, based on past increases. The surprise increase will raise their First Class Mail postage cost by $1 million in 2019, an expense that would be difficult for DAV to overcome without negatively affecting the free services it provides to our nation’s veterans and their families.
We will have to keep an eye on the impact on First Class mail volume in 2019, especially because it is the Postal Service’s most profitable product. USPS has been bemoaning the recent declines in First Class Mail as something they have little control over. But they will own the impacts of the unusual, untested 2019 price changes. By the way, the USPS justification that 5 cent increments simplify things is absurd. No one buys single stamps anymore, and very few people use currency. We expect that much of the American public could not tell you what the current stamp rate is.
To achieve an average increase of 2.486 percent, USPS offset elsewhere in First Class, mainly benefiting mailers of additional ounces and presorted bills and statements, primarily financial institutions and insurance companies (green=below inflation; red=above inflation):
SINGLE PIECE Pre 1/27/19 Effective 1/27/19
Stamp Price 1 Oz. $0.50 $0.55 +10.0%
Single Piece Additional Ounce $0.21 $0.15 -28.6%
Meter & Custom Postage 1 Oz. $0.47 $0.50 +6.4%
Single-Piece Flats 1 Oz. $1.00 $1.00 —
Single-Piece Cards $0.35 $0.35 —
PRESORT MAIL Pre 1/27/19 Effective 1/27/19
Mixed AADC Automation Letters $0.424 $0.428 +0.94%
AADC Automation Letters $0.408 $0.412 +0.98%
5-Digit Automation Letters $0.378 $0.383 +1.32%
Mixed ADC Automation Flats $0.705 $0.727 +3.12%
3-Digit Automation Flats $0.593 $0.605 +2.02%
5-Digit Automation Flats $0.474 $0.486 +2.53%
Marketing Mail
The second anomaly is not really a surprise because it’s part of a multi-year “the beatings will continue until morale improves.” Mailers who have the audacity to have worked closely with the Postal Service and the mailing industry to make their Marketing Mail letters as “efficient” as possible by using work-sharing and drop-shipping are now being punished by annual rate increases at twice the rate of the CPI. The mailing industry also is re-thinking the long-term value of the public-private partnership that started in the late 70s, as margins are being squeezed and the best partners are being whip-sawed.
The “efficient” Marketing Mail debacle likely is due to questionable estimates by USPS of the “pass-through” of their internal cost savings to business partners in the form of discounts. If an organization has idle machinery and under-utilized employees, its calculated marginal cost of taking on more volume can be very low. (And the savings from avoiding that volume are also calculated as very low.) That’s why airlines and cruise companies offer great fares for empty seats or staterooms as the departure approaches. They cannot right-size their capacity in the short run.
In the USPS case, drop-ship pass-throughs are based on the marginal cost of using available resources within its four walls. If resources are already paid for and are idle or under-used, the marginal cost of taking on more volume is almost nothing, like empty seats on a plane. But in this case, rather than optimizing its use of resources, USPS reduces the discounts it is willing to pay to private sector partners and mailers for being “efficient.”
Time will tell the impact of the large rate increases for single-piece First Class mail and drop-shipped Marketing Mail letters. Both are essential components in nonprofit membership and fundraising.
The last official action by the Postal Regulatory Commission on its ten-year review of the system for regulating postal pricing was on December 1, 2017, when it issued proposed revisions to the current system. The review has been underway since December 6, 2016, for over two years. The PRC was legally mandated to start the review on the ten-year anniversary of the passage of the Postal Accountability and Enhancement Act, but it has no required deadline to finish.
In addition to having no deadline, there are several reasons for the length of the proceedings. First, postal pricing is a complex process that affects many stakeholders, including postal management and unions, who want freedom to raise prices as much as they want, and postal mailers who believe they need the protection of a price cap because they have no other provider of hard-copy delivery that they rely on. Second, the ten, now 12-year, experience with the CPI price cap has been colored by major factors other than price: a large recession and financial meltdown, accelerated diversion of communications to new technologies, and the boom in e-commerce package delivery. All these headwinds and tailwinds make it complicated to sort out how one lever, pricing, should be changed or not. Third, the proposal put out by the PRC was publicly questioned by three of the four Commissioners. Only Chairman Taub voiced full support of the proposal. Commissioner Hammond actively opposed it, and Commissioners Langley and Acton admitted its need for healthy revisions. And fourth, the PRC received resoundingly negative comments on the proposal from stakeholders.
The fifth and final factor is the Task Force established by the President. Although never said by the PRC, we have surmised that the Commissioners would wait until the report of the Task Force was issued to take a further step in the rate review. That would make sense because the mandate of the Task Force was to consider all of the levers that are available to improve the USPS, while the PRC has been looking at only one lever—pricing.
The Task Force Report was released on December 4, 2018. It did take a comprehensive look at our nation’s postal system, and made recommendations across the board. The Task Force specifically noted the limitations on current PRC regulatory oversight and recommended that it be enhanced beyond the focus on price: “The Task Force recommends strengthening the regulatory oversight role of the PRC, providing them with expanded controls, imposing increased accountability on the USPS.” As the report makes clear, there is a need for a comprehensive examination of the role of the Postal Service in the U.S. economy. The report also emphasizes that “standalone proposals…will be insufficient.”
The Alliance of Nonprofit Mailers joined other members of the American Mail Alliance in a statement on December 19, 2018 that urged the PRC to stay away from piecemeal uses of the pricing lever:
“While individual members of this coalition will have specific areas of focus, it is our collective recommendation that the PRC should not issue any proposal until Congress is able to hold hearings and all constituencies have an opportunity to weigh in on the Task Force report. It is our great hope that we use this rare opportunity for collaborative, achievable, comprehensive, and sustainable postal reform to ensure that the US postal system can continue to serve our citizens well into the future.”
No doubt the Postal Service unions and management will continue to pressure the Commissioners to give them the type of unbridled pricing authority they have been seeking since 2010. Rate-payers will continue to urge a longer-term, more comprehensive solution, especially as USPS has enjoyed a resurgence with six years of operating profits.
As we mentioned above, the Task Force Report, United States Postal Service: A Sustainable Path Forward, was released on December 4. We reported Ten Things that Concern Us About the Task Force Report in the Alliance Report on December 11. We appreciate all of the positive feedback we have received about that analysis. We also provided recently to our members and sponsors an equal number of positive aspects of the Task Force Report:
Ten Positive Results from the Task Force
The fact that most stakeholders have heard before all of the recommendations of the Task Force indicates that many have mulled over the issues for a long time. The problem is not a lack of ideas. The issue is more a matter of implementation. And that is where Congress comes in. Many of the Task Force recommendations either require Congressional action, or would be better formed with Congressional involvement.
We continue to believe that Number One in our list of ten concerns is the most important at this stage:
With the Democratic takeover of the House, Rep. Elijah Cummings (D-MD) will be heading the oversight committee responsible for USPS. But true to its name, the House Committee on Oversight and Government Reform has dual roles. Even though Cummings is very interested in postal matters, he and his colleagues also are very committed to extensive oversight of the Republican administration. We will be monitoring the degree to which the oversight committee can get into postal reform in the coming year. We also will continue to urge the PRC and the USPS Board of Governors to not dabble in piecemeal changes that put the currently-profitable USPS business model out of balance and threaten mail volume.
The Federal Register Notice made in August, when many mailers think it’s safe to take a vacation, was clearly an unnecessary self-inflicted wound by the USPS marketing arm. Folks whose main job, and biggest need, is to grow volume should never alienate and spread fear among a large swath of their most loyal customers. Yet that’s what they did.
In an attempt to try to explain or understand an obvious major mistake, and in the absence of an explanation by USPS management, the mailing community has spun up theories. Our vote for the most plausible is that the real target was commercial mailers who are fulfilling paid orders for merchandise inside marketing mail flats.
Fulfillment mailers use Marketing Mail because the major postage savings outweigh the occasional cost to replace lost items that tend not to be of high value. Postal finance professionals saw an opportunity to increase revenue. Postal operators saw the chance to reduce flats that do not process well on their equipment, because mailers push the envelope to the edge of every spec in the mail characteristic rules. Postal lawyers advised the most broad, transparent, fair, public process, in order to narrow the targets down to the truly intended victims. That way, the chances of a successful challenge by shippers would be minimized.
In the process of minimizing one type of risk in pursuit of “easy” revenue and cost-savings, USPS figuratively carpet-bombed all of its mailers who send low-value merchandise for reasons other than avoiding shipping costs. These include many nonprofits that mail front-end and back-end premiums to encourage membership and donations, something specifically authorized in federal law.
As we have reported, the next step is a “Task Team” formed within the Postmaster General’s Mailers Technical Advisory Committee (PMG-MTAC). We are happy to report that three of our nominees will be on the TT representing the interests and legal rights of the entire nonprofit sector. They are:
The TT will meet this Friday and throughout January, with the ambitious goal of completing its review all of the comments received by USPS on the Federal Register Notice by early February. The TT recommendations should include whether to remove any types of mailers or mail from the contemplation of new content restrictions on Marketing Mail.
The office of the Governors of USPS assured us that any proposals that move forward would have to be approved by the Governors and would take into account our concerns and comments.
We have advised nonprofits to not yet alter their 2019 or 2020 mailing budgets in response to this threat. We continue to have confidence that our voices will be heard. And of course, we will continue to keep our members and sponsors posted. We want to reiterate our sincere thanks to everyone who sent in comments which are critical components of the process.
We have said for some time that have a set of independent Governors of the Postal Service is critically important for the current and future USPS. We are thankful that the Postal Service made it through a period of 18 months with no Governors and a stretch before that with only one or two.
Management has done a remarkable job of keeping things together and booking a remarkable string of six consecutive years with operating profits, totaling $3.8 billion over fiscal years 2013-2018. USPS fiscal year-end 2018 net debt was only $3 billion ($13 B debt minus $10 B cash) versus net debt of $10 billion ($15 B debt minus $5 B cash) in 2014. That amounts to a $7 billion improvement in financial condition in four years with little or no board oversight.
Yet an organization as large, important, and in a state of flux as USPS will do much better with strategic advice, oversight, and air-cover provided by a fully- constituted Board of Governors. Thankfully two came on board late last year and two more were nominated by the President. The nominees will have to go through the process again this year with the new Congress.
Something very important to watch in 2019 is the pace at which Governors are nominated and confirmed by the Senate. This is especially true with the PRC Ten-Year Review and the Task Force Report hanging out there. To consider and implement reforms of the magnitude contemplated without a fully-constituted board is difficult to imagine.
In future issues of the Alliance Report, we will consider five more major elements to track in 2019: