January 8, 2015
Happy New Year, everyone! As 2015 dawns we continue to wait for the US Court of Appeals to make public its ruling on the exigent rate case. What’s at stake? Well, the Postal Regulatory Commission (PRC) ruled a little over a year ago that the Postal Service (USPS) should be allowed to recover up to $3.2 billion in surcharge revenue above and beyond its usual Consumer Price Index (CPI) prices due to the impact of the latest recession. The USPS argued in its court appeal that the surcharge should be a permanent $1.8 billion a year, which if you discount to present value comes to $60 billion. So that’s a huge range of possible impacts–$3.2 to $60 billion—on customers’ bottom lines. That’s why the Alliance and most other groups of USPS customers also appealed to the court against the USPS request. And that’s why we keep waiting with bated breath for the court’s ruling which could come at any time.
The other thing that’s happening as we start the year is much repetition of the mantra that we must have new “postal reform” legislation. A common justification was repeated in an opinion piece in Roll Call yesterday: “Reform is critically needed since the agency continues to flirt with financial insolvency caused by a crippling obligation to prefund decades of retiree health care costs.” But neither half of that sentence is completely accurate. The USPS no longer flirts with financial insolvency as it booked a $1.4 billion operating profit in fiscal year 2014 and it has accumulated over $6 billion in cash. And it plans to more than double its capital investments in 2014 to $2 billion without reducing its cash position. It might even increase its cash because it made the projections before the cost of gasoline has dropped like a rock.
The second part of the oft-repeated sentence says the threat of insolvency was caused by the 2006 law that requires accelerated prefunding of retiree health benefit obligations. That might be correct if the USPS were actually making cash payments to pre-fund the obligations, which of course it is not. The ten year schedule to pre-fund retiree health benefits has become moot, because the payments are not being made and no one is enforcing them. And the “obligation” will be re-amortized over 40 years starting in 2017 under current law. If the USPS were a privately- owned company with no government monopoly, then a threat of accounting insolvency likely would result in true cash insolvency, but it is not. As a monopoly government agency, at the Postal Service cash is king, and it is looking fine now and is moving in the right direction.
Postal Service management has done a great job under Pat Donahoe’s leadership for the past four years. In most worlds, his tenure would be proclaimed as an amazing turnaround story. Yet when he gave his speech at the National Press Club earlier this week (available here), most news stories focused almost entirely on his apparent “blaming” of his customers and employees for being too short- sighted and narrowly focused on their own interests to allow the coveted postal reform legislation to pass.
Yet Pat Donahoe and his team accomplished much in recent years under current law in response to the downsizing of mail, as he noted: “We’ve been just as aggressive on the cost side of the equation. Since 2006, we reduced our cost base by almost $16 billion. We did that by consolidating 305 mail processing facilities. Our Post Plan optimized the window hours at 13,000 Post Offices. We eliminated 23,000 delivery routes, even as the number of delivery points rises every year. We’ve reduced the size of our workforce by 212,000 positions, relying on an orderly process of attrition and without resorting to layoffs. I think from any perspective, you have to say that it was the result of developing a strong, long-term strategy, ignoring the naysayers and following through.”
We believe that, in addition to strategy and follow-through, another major driver of all of the efficiency progress since 2006 has been the change that year in postal pricing regulation from cost of service to price cap. Following the trend in virtually all regulated monopoly industries, a price cap imposes strong business and financial discipline on a government monopoly, very similar to the type of discipline private sector companies experience with direct, unfettered competition and investor-shareholders. Simply put, beginning in 2006, the Postal Service received a stronger incentive to become more efficient and to innovate than it had ever had before.
It is a shame that so much focus on more postal reform legislation as an end in itself has blinded many to the fact that much progress has been and continues to be accomplished under the law we have right now. It is disappointing that it drives a very successful outgoing Postmaster General to be accused of blaming the very customers and employees who have stayed with him and helped him successfully navigate through this grave crisis.
Perhaps the best approach now would be to take a deep breath and allow the recent string of USPS successes to continue under existing law. Let new Postmaster General, and very successful Chief Operating Officer, Megan Brennan continue her and Pat’s deft, careful, and methodical handling of the necessary sizing down of our great postal network to better fit mail volume that we had in the 1980s on the way up. Perhaps we should borrow from the field of medicine and “first do no harm” when we consider more legislative changes as a necessary panacea.
At the very least, we no longer should simply take for granted that legislative “reform” is definitely and urgently needed now, and cannot wait. The burden of proof should be on those who advocate for new law, rather than simply accepting that what was initiated in the depths of a crisis holds true now that operating profits and cash are being generated at a healthy pace. We should even consider the possibility that the 2006 version of postal reform was not all bad, as opposed to those who focus so much on the ill-conceived retiree health benefits pre-funding component. We believe that the 2006 law did something remarkably well by implementing much-needed business-like financial discipline with the landmark change from cost of service to price cap regulation.
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