Making DifFicult Choices

in Response to

Shrinking Revenue

By Alan M. Robinson

December, 2001

Direct Communications Group

No longer does any postal observer question the financial difficulties the Postal Service faces. Where before only accountants could wade through the financials, now the simplest mail volume statistics tell the story of declining volumes. Furthermore, layman can see physical evidence of additional financial burdens of terrorist and criminal acts as postal employees spend time in health clinics instead of sorting or delivering mail.

The Postal Service's immediate challenge is a shortage of cash. The Postal Service's CFO Richard Strasser has the unenviable challenge of identifying how the Postal Service can generate an additional one to three billion dollars in cash between now and the beginning of the next fiscal year. This money is the estimated increase in operating losses due to rapid reduction in demand for postal services and increased operating costs necessary to ensure the safety of postal employees and recipients of mail. Additional cash may be necessary to cover the costs of destroyed postal property, criminal investigations and equipment necessary to sterilize mail.

The Postal Service first appealed to Congress to cover these costs. However, early reports indicate that the best the Postal Service can hope for is an appropriation to cover the costs directly relating to terrorist incidents, including the anthrax threat and direct costs of responding to the September 11 attacks. The costs of additional operating losses due to lower revenues will need to be recovered by other means.

George Omas, acting chair of the Postal Rate Commission, proposed that the Postal Service settle the rate case which would allow the Postal Service to implement higher rates faster. The impetus for a settlement would be the prospect that new economic data and more recent volume data would result in a need for even larger rate increases than the Postal Service originally proposed than if a full rate case is completed.

Press reports indicate that the Postal Service would like to increase rates a full 4 to 5 months ahead of when it could if the rate case is fully litigated. For mailers, this would add at between one and one and one-half billion dollars to their postage bill in 2002. The cost to mailers of not settling the case would need to be rate increases more than fifty percent larger than what the Postal Service proposed for mailers to agree to such an early implementation date. On the other hand, mailers have good reasons to be wary of an early settlement as delaying the rate increase implementation date is one of the few ways that mailers have to pressure the Postal Service into making substantive cuts in operating expenses commensurate with recent slowing volume trends.

Even with a rate case settlement, the Postal Service still may be short of the cash that it needs this fiscal year. This would leave the Postal Service with only two options. First, it can use all of expected borrowing authority to finance operating losses. The Postal Service was planning to use $1.6 billion of its borrowing authority to finance capital programs, but could use all $3.0 billion to cover capital investment and part of the operating deficit. This increase in debt can now be used to cover some of the projected operating losses and increased safety and security expenses.

Alternatively, the Postal Service could intensify its cost cutting efforts. In the current budget, the Postal Service still has some cash expenditures on the table but they will not be sufficient. Further cuts are harder as they require cutting planned capital investments and/or reducing the number of Postal employees. Each billion dollars the Postal Service needs to cut from operating costs requires reducing about 15,000 postal jobs. Delaying the cuts further into the fiscal year only increases the staff reductions to meet the same cost savings goal. The Postal Service had planned to reduce its workforce by 13,000 and has now more than doubled that amount through restructuring plant and delivery operations. Without a return to revenue growth, even larger workforce reductions will be required

Sadly, the Postal Service's expansion of its restructuring plans now should include the plants closed by anthrax contamination. Decontamination of these facilities will be costly. Keeping those plants closed could reduce plant-operating costs and headcount and any impact on mail service should be considered in the light that the Service is already making do without these plants.

Consolidating operations handling originating single piece mail from the Anthrax contaminated plants is logical. Single piece mail volumes are declining. Declining volumes increase the fixed costs of operations as machines are used for a shorter time each day. Consolidating originating mail handling would also reduce the cost of mail sanitation, as fewer locations would then need to handle unsanitized mail.

The Washington metropolitan area could easily absorb consolidation. Seven plants handled originating mail in this region prior to the closure of Brentwood. Six do now. New space has been rented only to handle mail destined to Brentwood and for sorting mail for specific carrier routes.

Closing Brentwood would be a traumatic decision. Some employees who just went through the shock of losing two co-workers would now face the prospect of losing their jobs. The political uproar could be substantial as the recession and declines in tourism already affect Maryland and the District of Columbia. Sadly, given the Postal Service's financial condition, such trauma is unavoidable. To ease the pain of staff reductions on Brentwood employees, the Postal Service should spread them among all Washington area employees. Furthermore if cash is available, the Postal Service should employ retirement incentives to encourage voluntary departures.

Brentwood is only one example of a facility that the Postal Service could make redundant. Its forced closure gave the Postal Service an opportunity to learn how to do more with less. With its potential losses growing every day, the Postal Service needs to learn this lesson quickly and implement consolidation programs before the money runs out.