October 1, 2019
Focusing on the Wrong Dichotomies
There’s an elephant in the U.S. Postal Service policy room. We who follow USPS financial results have been focusing on two dichotomies that tell part of the story, but not the most important part as we look toward the future.
The two favorite dichotomies we have been following are:
These are useful as far as they go. The operating distinction is firmly rooted in accounting principles and helps bring focus to how well current operations are performing versus things like accrual of long-term obligations and adjustments based on exogenous factors. Controllable versus non-controllable is somewhat unique to the Postal Service and is meant to emphasize how much USPS management cannot control. But these measurements do not really give strategic guidance about the future of USPS.
The important distinction we should be measuring is:
An unfunded mandate is defined as “A requirement set forth by a governing agency that does not provide any type of funding to facilitate the requirement.” (Business Dictionary) The federal government is forcing USPS to lose money because of the growing cost of unfunded public service expenses that Congress mandates the Postal Service provide. The continuing growth of mandated costs is juxtaposed with the stagnation of volume and revenue from the business-like products offered by USPS that mailers are willing to pay for.
The two most prominent postal unfunded mandates are delivery to every address in the U.S. six days a week and keeping thousands of non-compensatory post offices open and operated by postal employees. Neither of these services is demanded by most of the mailers who pay the Postal Service, and neither is paid for by the main beneficiaries, the general public. Another public policy mandate that is very important to the nonprofit sector is the reduced rates that qualified nonprofit mailers receive on Marketing Mail and Periodicals.
We do not question the value and importance of postal mandates, but we do believe that they cry out for a reliable funding mechanism.
The False Positive of USPS Success in the 80s and 90s
For about 200 years prior to the 1970 Postal Reorganization Act, there was a mechanism for the federal government to fund the public service mandates it imposes on USPS. It did this through annual appropriations reflecting the value the American public receives in these services.
The 1970 PRA envisioned a business-like agency with strong monopoly powers granted by the government that would phase out public service federal funding and thenceforth rely totally on revenue from mailers. The phase-out of public service appropriations happened a decade later.
It couldn’t have happened at a better time for its supporters. In 1980, after almost 200 years of operation, our postal system reached 100 billion pieces of mail delivered annually. During the first two decades of testing the hypothesis of mailer-only funding, USPS mail volume doubled to 200 billion in 1999. In other words, the new experiment was tested under the most aberrational circumstances imaginable. With mail growing an average of 5 billion a year, mailer-funded USPS seemed to work like a champ.
What happened with USPS is what is known in statistical hypothesis testing as a Type I error, or a false positive. It looked like the business-like model was working very well. So, the model of a business-like USPS completely funded with mailers’ revenue must work very well, right? Not if most of the success was caused by unusual, aberrational volume growth caused by exogenous factors that will not repeat.
The apparent success of the PRA model in the 1980s and 1990s was caused by: unusually strong and consistent economic growth, the introduction of work-share pricing, the emergence of the private sector mailing industry, the boom in direct mail marketing and fundraising, extensive marketing of new financial products such as credit cards, and other factors.
It appears that the relatively brief false positive success of the mailer-funded model for paying for everything including non-compensatory public services (also known as the universal service obligation (USO)) has lulled the postal community into taking it for granted. For example, a recent report by the USPS Office of Inspector General called mailer-funding the “traditional source of revenue to fund the USO.” An important policy decision such as funding USPS public services should not be based on the “tradition” of two decades of success in a 200-year-old agency.
Accepting the incorrect premise that mailer-funding is both successful and traditional leads to the misguided inordinate focus on “pricing flexibility.” The thinking goes that if USPS could just raise rates as much as current management wishes, the mailer funding will cover all the growing public service unfunded mandates as far as the eye can see. Proponents of this point of view believe that the CPI price cap on postage is the main deficiency in the mailer-funded model.
The focus on raising rates is clearly a formula for disaster. Supply and demand do apply to postal products. Mailers have more alternatives than ever. The Postal Service has repeatedly said that its monopoly is not worth much anymore. And mailers themselves, both for-profit and nonprofit, exist in very competitive environments where they cannot raise their own costs or pricing faster than at most average inflation. For most mailers, postage has become a higher and higher portion of their cost of doing business. And the USPS is a network business that thrives on volume and volume growth. That’s the lesson from the 1980s and 1990s.
The elephant in the room is the growth of the public service part of what USPS does for no direct payment, while the business-like part that mailers are willing to pay for shrinks. Until the postal community decides to directly take on the funding of the public service mandates (aka USO), it will be lost in the woods. And if it avoids the elephant, it will seek solutions designed to salvage the briefly successful PRA mailers-fund-everything model, but likely doom itself to dig the hole we are in much deeper. Chipping around the edges with above-inflation pricing, slight reductions in the USO, and marginal new revenue initiatives will not solve the basic structural problem.
How Are We Doing?
The three-legged postal policy stool of USPS, Postal Regulatory Commission, and Congress is teetering. We believe a major reason is staying within the box of the 1970 PRA mailer-funds-all model.
The Postal Service Board of Governors is meeting this week for the first time with five presidentially appointed Governors. Their first order of business will be to approve the filing of the 2020 postage pricing increases. The Governors also will discuss whether the newest three agree with the “ten-year plan” that was prepared by the other two Governors and postal management. Earlier briefings and leaks of the draft plan indicate that it stays within the box and proposes incremental changes to get the 1970 model running again. (It recalls the quote attributed to Albert Einstein: “The definition of insanity is doing the same thing over and over again but expecting different results.”)
The Postal Regulatory Commission is widely expected to release a new proposal under its mandated review of USPS pricing regulation that started on the tenth anniversary of the Postal Accountability and Enhancement Act of 2006. The new proposal likely will be put out for comment by the end of this year, two years after the first.
The PRC probably also will stay in the 1970 box and propose surcharges that the USPS could charge on top of the CPI increases allowed by law. With three new Commissioners who were not in office for the first proposal, there might be new twists involving holding USPS more accountable for its service and efficiency goals. But in the end, the PRC will continue to test the limits to which USPS can get mailers to pay for the growing costs of mandated public services in an era of declining demand for mail.
The oversight committees in the House and Senate are not actively working on new postal reform bills. The Senate seems to be waiting for the House. And last we had a hearing, the House committee seemed to be waiting for the USPS ten-year plan.
One sign of hope was the remark by Republican Congressman Mark Meadows to Postmaster General Megan Brennan that the new ten-year plan, if necessary, should include the “s-word,” meaning subsidies, and should not include chipping away at public service mandates such as six-day delivery to every address. He said, about five-day delivery, “that dog won’t hunt.” Congressman Meadows is onto something. As a Member of Congress, he acknowledged that Congress should fund the public service mandates imposed on the Postal Service. When will others catch up?