USPS Issues a New Five-Year Plan for 2020-24

For quite a while we have anticipated a new plan by the Postal Service.  It was finally released this week without fanfare and covering five years rather than the ten previously promised.  The gradual bringing on board of five new Governors has delayed the release as they got up to speed and contributed to the plan, “Ready-Now ➔ Future-Ready.”

The new plan has many similarities to the approach of recent years.  It does reflect more actions USPS plans to take in addition to pleas to Congress and the Postal Regulatory Commission to redefine the playing field.

The Postal Service predicts running out of funds by as early as next year if it makes retirement pre-funding payments it hasn’t for several years, or by 2024 if it continues its practice of not making the payments.  Many in the mailing field have maintained that major reform is not likely until crisis is imminent.  Mailing customers have suffered from the uncertainty and the intermittent attempts at reform.

USPS discusses strategies it deems necessary to make the agency financially sustainable, as well as initiatives designed to achieve five goals:

• Goal 1: Deliver world-class services and customer experiences
• Goal 2: Equip, connect, engage, and empower employees to serve our customers
• Goal 3: Innovate faster to deliver value
• Goal 4: Invest in future platforms
• Goal 5: Pursue legislative and regulatory changes necessary to achieve financial sustainability

The plan is really designed to meet the minimum requirements of Section 2802 of the law governing the Postal Service, more so than to break new ground.

The Postal Service cites three main legal constraints that are preventing it from performing well.  These are symptoms of the incongruity of trying to perform like a competitive business and a necessary public service at the same time:

“The following statutory and regulatory constraints have limited our ability to respond to market forces:

ƒA Consumer Price Index-based price cap for mail products, representing 67 percent of revenues, results in prices that are insufficient to provide adequate revenue to pay for fixed universal service obligation costs and other legally mandated costs amid secular volume declines

ƒThe universal service obligation to maintain six-day-a-week mail delivery to all geographies and to keep unprofitable retail locations open results in a large proportion of costs being devoted to delivery and retail operations that deliver less mail to an ever-increasing number of delivery points

ƒFederally-mandated retiree and employee benefit programs result in high benefit costs that are growing faster than the rate of inflation.”

The index cap on price increases is standard regulatory practice for government-granted monopolies.  They go hand in hand.  No government monopoly can be left to its own devices in setting prices.  Also, from a business perspective, those with declining demand normally have little power to raise prices faster than inflation.

The universal public service obligations and employee benefits are mandated by Congress which has the power to change them.  The problem is that these obligations impose costs on USPS far beyond what rate-paying customers would be willing to pay and over and above what competitive businesses would take on.

USPS Plan Needs to Understand TANSTAAFL

While it has some refreshing new ideas, the five-year plan released by the U.S. Postal Service continues to grapple with the fact that “there ain’t no such thing as a free lunch.”  The 2020-24 plan confronts two major, deal-killing free lunch assumptions:

• 100% funding of large, growing public services can be covered by captive, declining rate-payers, and
• raising rates faster than inflation would generate enough free cash flow to offset resulting volume declines.

Free Lunch #1

Free lunch #1 was put in place with the 1970 Postal Reorganization Act and fully implemented by the 1980s when public service payments from the government stopped.  The idea that the American public can receive such a popular service as our public postal system paid for only by those who send mail through the system is very enticing.

It actually worked for a brief two decades.  But the 1980s and 1990s were not only a very small sample size within our 250-year postal system, they also were very unusual in their 100% growth in mail volume from 100 billion to 200 billion.  Before the 1980s, we had public service subsidies.  After the 1990s, we’ve had major losses.

Because Congress mandated mailer-only funding, postal leaders have been trying to make the impossible work for the last 20 years.  And they continue to assume they are in that box in the new five-year plan.

The plan document touches on the gross mismatch between the source of funding and required services with this:

“The most significant issue facing the Postal Service today is that our business model is unsustainable.  This is due to increasingly conflicting mandates to be self-funding, compete for customers, and meet universal service obligations under highly regulated and legislated constraints.  Resolving these conflicting mandates requires a national public policy discourse that hinges on a basic question for the American public: What would you like the Postal Service to become and how would you like to pay for it?”

The USPS plan illustrates the difficulty caused by its status as a government agency trying to operate like a business.  Can that really be achieved successfully in our capitalist system?  Yet that is what USPS sees as its mission as currently defined:

“Because the Postal Service is an independent entity of the executive branch, the Postal Service today operates like a large business, but with a public service mission.  Our mission and our role in America’s economy and society remain indispensable — but we can only continue to compete effectively and meet the high expectations of the public with an improved business model.”

Can we really have it both ways, and do we want it both ways?  In indispensable public service of our government competing effectively as a business?  One of the requirements for a successful business is that it produces and sells only products and services that add profit to its bottom line.  One of the indispensable roles of government is to perform functions not appropriate for the private sector.

Presuming USPS can self-fund to be both a popular, indispensable public agency and a profitable, growing business in one entity seems to be a bridge too far.  Most agencies and businesses have a hard enough time fulfilling those roles independently.

Assuming we can fully fund large, growing public service mandates, and deliver the mail, with revenue from only the mailers that pay for businesslike services is assuming a free lunch.

Free Lunch #2

Free lunch #2 is the longstanding assumption by postal leaders that a big part of the solution to being a successful public agency/business is the freedom to raise rates as much as they see fit. The rates we are talking about are those charged for the monopoly or market dominant mail delivery services, currently 67% of income.  The rest comes from competitive package services which do not fall under the CPI inflation cap.

From a public policy point of view, it makes no sense to allow a government monopoly to set its prices as its current managers see fit.  The risk and temptation to gouge captive customers who cannot go to any other vendor to deliver their mail is too great.

From a business perspective, without the price and demand signals from a truly competitive marketplace, the risk of overpricing and ruining the marketplace you have is very high.  Advocates of USPS pricing freedom actually illustrate the risk when they cite historical experience.

The modern history of USPS price increases has been roughly in line with inflation.  All price elasticity models are based on experience with inflationary increases.  The exigent surcharge of 2014-16 was temporary, allowing customers to know that prices would return to where they were before with normal inflationary increases after they helped USPS with extra funding.

The new USPS plan cites our 55 cent First Class Mail rate versus other countries as justification for rate hikes above inflation.  This overly simplistic analysis ignores the fact that rate increases relative to what mailers are paying now will be the main determinant of their decisions to reduce and leave the mail much more so than what people pay in other countries.

Advocates for jettisoning the predictable discipline of the CPI rate cap are betting the future of USPS on a free lunch.

Clear and Present Danger: PRC Surcharge Fix

The Postal Regulatory Commission review of the rate regulation system is a very near-term risk to mailers and the U.S. economy. The regulators seem to assume that rate increases are their only lever to help fix the USPS.   They recently proposed three layers of rate surcharges above inflation that could exceed the 28% to 40% cumulative five years increase they floated in 2017.

Such price hikes would drive away much of the customer base the USPS sorely needs to achieve the goals it lays out in its five-year plan.  Retention of existing customers must be a core principle in making USPS Ready-Now ➔ Future-Ready.