June 5, 2019
(Hint: It’s Not a Business)
The main financial problem for the Postal Service is that its costs are increasing faster than its revenues. Of course, costs outrunning revenues means business failure. Through April 2019, USPS operating costs are up 6 percent, while revenues have grown 1.7 percent. Allowed to continue, that is a formula for disaster. We will focus on four causes: increasing delivery points, employees, transportation, and compensation.
1.) Delivery Points
As America’s housing stock inevitably increases, so do the addresses that USPS delivers to. And because Congress requires, the Postal Service delivers to every US address six days a week. Its negotiated service agreement with Amazon further necessitates USPS to deliver packages seven days a week. So, it makes sense that more addresses drive postal costs higher. But do you ever hear fans of this cause put a number on it? It really is just assumed to be a substantial number.
The Alliance and several other associations quantified the impact of more delivery points in our comments filed with the Postal Regulatory Commission in its ten-year regulatory review. Here is what we found:
Growth in Delivery Points. The Postal Service is correct that (1) the number of delivery points grows each year and (2) this growth tends to increase the Postal Service’s costs. The Postal Service exaggerates the size of this effect, however, as the Postal Service’s own roll-forward calculations show. When the Postal Service rolls forward (extrapolates) its historical expenses to future periods in rate cases, the Postal Service is required to quantify the effect of the increasing number of delivery points, and may not just assert that the effect is large. The increase in the number of delivery points over time is the primary input to the non-volume workload effect used by the Postal Service in its roll forward model. Docket No. RM2013-11, USPS-R2010-4R/8, Input_12.xls, “Non-vol Wkld.” In Docket No. RM2013-11, the most recent case in which the Postal Service filed a roll forward analysis, this effect added just $75 million each year (or 0.1 percent) to Postal Service costs. Docket No. RM2013-11, USPS-R2010-4R/8, FY2013BR.CompSumRpt.BR-Final.xls and FY2014BR.CompSumRpt.BR-Final.xls. Thus, while the growth in delivery points indeed creates a small headwind against the Postal Service going forward, the effect is much less than the Postal Service now claims. Furthermore, because the non-volume workload effect does not account for the fact that new delivery points are generally lower-cost ones (i.e., centralized delivery points), the real non-volume workload effect is likely much smaller than even the roll forward analysis suggests.
We demonstrated that postal costs were rising by $75 million or 0.1 percent a year due to increasing delivery points. That, of course, pales in comparison to the 6 percent total cost increase so far this year.
2.) Employees (Total up 0.6 percent, Career up 1.1 percent through April 2019)
Normally, a declining business would be reducing its employees to both save cost and reflect the new reality. But the USPS workforce continues to grow. In April, it was up 3,633 or 0.57 percent to 637,979. The more expensive career employees were up an even greater 1.1 percent or 5,476 to 497,848, as lower-cost non-career employees declined by 1.3 percent to 140,131.
The usual reasons given for continued hiring are more delivery points and more packages. We addressed delivery points above. Packages continue to grow and be quite profitable. Competitive products revenue was up 7.3 percent through April.
The outpacing of non-career by career employees is likely related to labor agreements that enable temporary employees to convert to career, with full pensions and lifetime health insurance.
An interesting sidebar is that postal unions have large political action committees that give a lot to postal oversight committee members. The greater their numbers, the more money they have to give. And some unions have partnered with postal management on legislative initiatives.
The continuing growth of USPS employees is unsustainable in the face of declining volume and slow revenue growth.
3.) Transportation Cost (Up 6.5 percent through April 2019)
According to the USPS Office of Inspector General, transportation costs have been growing quite a bit more than one would expect with declining mail volume. Here is their summary:
What’s Driving Postal Transportation Costs?
Postal transportation costs have been steadily rising over the last 10 years despite an overall decline of mail volume. The OIG examined how much transportation costs should have been expected to increase over the 10-year period from fiscal years 2008 to 2017 as a result of: (1) changes in mail volume, encompassing both the decline in letters and flats and the increase in parcels; and (2) the general increase in transportation ‑related input costs across the country, including rising fuel costs and driver wages. By isolating the impact of these two factors, we were able to identify that 39 percent of the growth in transportation costs over the 10-year period increased beyond what was expected, and therefore warrants further explanation. Management noted additional factors that may account for some of the unexpected cost increase, such as a concerted effort to move more mail to ground transportation. A better understanding of what is driving these costs could help the Postal Service find ways to contain them in the future.
In addition, our analysis allowed us to identify the transportation components with the largest cost increase that cannot be explained solely by volume and transportation related input costs. These are the contracted highway transportation components designed to serve the Postal Service’s mail processing facilities.
Our [the OIG] analysis found the following:
■ The change in transported volume, including the change in the mail mix, likely accounts for 15 percent ($157 million) of the increase in transportation costs over the last 10 years.
■ The overall increase in transportation-related input costs, including fuel cost and rising trucker wages, likely accounts for another 46 percent ($490 million) of the cost increase over the last 10 years.
■ This means that 39 percent of the cost increase over the last 10 years, or $418 million, likely occurred for reasons other than the change in volume and input costs. This does not mean that the 39-percent increases are necessarily reasonable or unreasonable. It simply means that we cannot tell from this analysis. Additional studies may be warranted.
■ While these numbers represent the overall changes in transportation costs, the results varied widely by the type of transportation. In fact, some components had costs that either declined during the 10-year period or had a cost increase that was less than expected in response to the change in volume and input costs.
The OIG analysis makes clear that there are huge opportunities to reduce USPS transportation costs. Any successful business would be all over this opportunity before attempting actions that would endanger its future business, such as above-industry price increases.
4.) Compensation Cost (Up 7.2 percent through April 2019)
Of course, more employees and a higher ratio of career employees increase compensation cost. The largest driver of compensation costs, however, is the collective bargaining that USPS does with its unions. Recently, the National Rural Letter Carriers’ Association reached a tentative accord with USPS management. Here is their summary of the agreement:
TENTATIVE AGREEMENT 2018-2021
UNITED STATES POSTAL SERVICE
NATIONAL RURAL LETTER CARRIERS’ ASSOCIATION
It would be interesting and useful to perform a quantitative comparison between this agreement and those of other businesses and governmental entities. Certainly, anyone reading this can feel free to compare it to their employment situation.
Terms such as guaranteed raises plus cost of living allowances, covering 65 to 75 percent of health insurance premiums, and a pension plan appear to be much more generous than the average American receives. And seeing a multi-year agreement with such promises to employees at an organization that projects to run out of cash is a head-scratcher.
As it did three years ago, the NRLCA contract will be the model for the much larger one with the American Postal Workers Union. Within about 72 hours of the NRLCA agreement, the APWU announced it is ending mediation with USPS and going into arbitration. Said APWU, “The APWU team of your national officers, attorneys, staff members, and members-from-the-field have and are working hard to develop the case and supporting evidence to support our demands.”
It’s Groundhog Day all over again with postal collective bargaining since 1970. The problem is it’s not the 70s, 80s, or 90s any more.
Conclusion: A sustainable, successful business would not:
Ten-Year $125 Billion Gap-Closing Plan Coming Soon
The ten-year plan to be released by the Postal Service next month will not be a new “business plan” because USPS is not a business. Postmaster General Megan Brennan explained to Congressman Mark Meadows at a hearing recently: “We are finalizing a plan that addresses a $125 billion gap, Congressman. That’s not something you do overnight.” We would expect a uniquely Postal Service plan, as very few businesses are about to dig out of a gap that large.
When PMG Brennan suggested that the Committee pass “core provisions” of a limited bill that would give USPS “a runway” to improve its finances and “build consensus” on a longer-term plan, Rep. Meadows replied, “We are not going to do a part-time bailout.”