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Envisioning America's Future Postal Service, National Star Route Mail Contractors Association Newsletter

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5.01.10

Appearing before a Congressional committee, the Postmaster General was asked the following question:

Would this be a fair summary – that at the present time, as manager of the [Postal Service], you have no control over your workload; over the rates or revenue; over the pay rates of the employees that you employ; you have very little control over the conditions of the service of these employees; you have virtually no control, by the nature of it, of your physical facilities; and you have only a limited control, at best, over the transportation facilities that you are compelled to use —all of which adds up to a staggering amount of ‘no control’ in terms of the duties you have to perform?

This question could have been asked yesterday, but it was actually posed in 1967 to then Postmaster General Lawrence O'Brien. Congress's concerns over the Post Office Department's lack of management control ultimately led to the creation of the U.S. Postal Service in 1971 under the Postal Reorganization Act.

While Congress sought to cure the problems described above, the cure was incremental only, and the problems remained dormant, ready to strike again when the time was right. As long as mail volume increased steadily, the Postal Service was able to successfully manage its operations and float all boats. Indeed, the Postal Reorganization Act put the Postal Service on a solid footing for the next 35 years. Today, with three consecutive years of declining mail volume and predictions of further long-term volume decline, this foundation is shaking.

The high water mark for mail volume was 2006, when the Postal Service processed 213 billion pieces. That was the same year Congress passed the Postal Accountability and Enhancement Act (PAEA), which gave the Postal Service slightly more flexible pricing authority but also required it to make multi-billion dollar payments to pre-fund future retiree health benefits. Soon after PAEA was enacted, mail volume plummeted -- down to 177 billion pieces in 2009. The Postal Service projects 2010 mail volume to decline by another 11 billion pieces. Similarly, postal revenue has declined, from a high point of $74.9 billion in 2008 to $68 billion in 2009. This year, the Postal Service projects a $7.8 billion deficit.

In the face of these depressing statistics, the Postal Service recently issued a new plan to address its future. The plan, entitled "Ensuring a Viable Postal Service for America," is available at ww.usps.com/strategicplanning/futurepostalservice.htm. Under its plan, the Postal Service intends to take action in four broad areas within its control that it predicts will reduce annual losses by $18 billion over the next 10 years:

Product and service actions. The Postal Service plans to expand products and services across targeted mail and package segments, expecting to increase profits in these areas by $2 billion through 2020. For example, the Postal Service intends to increase direct mail use among small and medium-sized businesses, and to increase volumes in both First-Class Mail and advertising mail through targeted promotions. The Postal Service will also seek to grow other retail services, such as passports and Post Office Box rentals.

Improving productivity. The Postal Service will continue to cut costs and seek to capture productivity savings. Planned actions include further streamlining plant operations, optimizing delivery routes, providing customer service through more cost-effective channels, and consolidating administrative functions. These targeted efficiency enhancements are projected to reduce costs by approximately $10 billion in 2020.

Workforce flexibility improvements. Continued attrition due to retirements will provide opportunities to establish a more flexible workforce that USPS hopes to better align with customer demand. More importantly, when the Postal Service's existing labor agreements expire, the Postal Service will seek concessions, more flexible work arrangements, and higher employee contributions to health care plan costs.

[Author's Note: Employee wages and benefits constitute the Postal Service's single greatest expense -- $53 billion, or 74%, of 2009's total operating expense. Despite the Postal Service's efforts to eliminate approximately 200 million workhours over a two year period, the Postal Service's total spending on employee compensation barely declined (less than 1 percent). The Postal Service desperately needs to be able to capture actual savings from reduced employee workhours. Over the next 10 years, over 300,000 employees -- more than half the current workforce -- will be eligible to retire. These individuals will be added to the 463,000 annuitants and survivors who currently participate in its retiree health benefits program. Indeed, the day is not far off when there will be more postal annuitants than current employees. Every other cost-cutting or revenue-producing effort is effectively insignificant unless USPS is able to reduce its employee compensation costs. A 10% reduction in USPS employee compensation costs would come close to eliminating USPS's projected deficit.]

Purchasing savings. The Postal Service believes it has additional opportunities to reduce resource costs. For example, the Postal Service intends to lower transportation costs by using fewer trips at fuller truck-load levels. The Postal Service also intends to negotiate more favorable contracts and improve vendor and process management.

Even if all of these efforts produced the intended cost savings, the Postal Service would still be underwater. Indeed, the Postal Service's consultants predict accumulated losses of $238 over the next 10 years if the Postal Service were to take no major changes and revenue were to continue to decline. Therefore, the viability of the Postal Service depends on actions taken by Congress or other parties in the following categories:

Prefunding retiree health benefits. Under the PAEA, the Postal Service must set aside $5.5 billion in 2010 to prefund future retiree health care benefits. That payment will be added to a fund that already amounts to more than $35 billion. While prefunding retiree benefits is fiscally prudent, other federal agencies and most private sector companies use a "pay-as-you-go" system, paying premiums as they are billed. The USPS Office of Inspector General has also determined that the amount USPS is required to pay to prefund retiree health costs is higher than necessary and will result in an over-funded plan. The Postal Service will therefore seek Congressional relief from this payment. Last year, Congress relieved USPS of $4 billion of the $5.4 payment that would otherwise have been due.

Delivery frequency. The Postal Service needs permission from Congress and the Postal Regulatory Commission to move to a 5-day per week delivery schedule. The Postal Service estimates that moving to a 5-day delivery schedule would result in annual savings of $3 billion. Other countries, like Canada, already operate on a five-day delivery schedule.

Access. The Postal Service has over 36,000 retail locations, at which it may only sell its own services and products, with some limited exceptions. With declining mail volumes, this under-utilized retail capacity is no longer tenable. Moreover, customers could be served more conveniently if postal services were offered at supermarkets, convenience stores, kiosks, Contract Postal Units, or other retail locations. Currently, it is next to impossible for the Postal Service to close a post office. Congressional action would be necessary to revise the post office closing rules to allow the Postal Service to close uneconomic post offices.

Workforce. The Postal Service needs more flexible work rules and practices. Approximately 87% of USPS employees are full-time employees, a much greater percentage than USPS's competitors and foreign posts. With changing customer demand, the Postal Service needs more flexibility in how it deploys its workforce. The Postal Service also needs to be freed from restrictions in its current labor agreements. These agreements limit the Postal Service's ability to hire contractors, who typically perform the same work at much lower cost.

Pricing, Products, and Oversight. The Postal Service still faces substantial restrictions and built-in delays in pricing authority and the products it can offer. Prices are tied to the CPI index, not to key drivers of postal inflation. The Postal Service also needs greater flexibility to price its products in accordance with the market value for them, as opposed to its cost to provide the service. The Postal Service recently announced that it intends to pursue a price increase for 2011 under the "exigent" circumstances provision in the PAEA.

Fundamental changes are in store for the Postal Service of the future, but it can and should be restored to a viable and healthy enterprise. Even in the worst-case scenario envisioned by the Postal Service's consultants, USPS would still be equivalent to a Fortune 50 company delivering 118 billion pieces of mail per year in 2020. The mail is still a fundamental and necessary tool involved in trillions of dollars of transactions (yes, trillions) annually.

Let's hope that 10 years from today, when the Postmaster General appears before Congress, the question posed at the beginning of this article will no longer ring as true as it still does today.

Our Postal Service Contracting practice information is available through the Postal Service Contracting page.

David P. Hendel
Husch Blackwell Sanders LLP
750 17th Street, N.W., Suite 1000
Washington, D.C. 20006

202.378.2356
fax: 202.378.2319
david.hendel huschblackwell.com