Keep the Postal Service Running During Transition to Postal ReformThe following is a postal perspective by Advo governmental affairs senior vice president Vincent Giuliano. The views expressed are the author's and do not necessarily reflect the official views or policy of the Association for Postal Commerce. It should be noted, however, that Mr. Giuliano also serves as an officer and member of the Association of Postal Commerce Board of Directors.
The economic boom of the 1990's is clearly over and growth in the U.S. has slowed markedly. In response, the White House, Federal Reserve and the Congress have taken significant measures to stimulate economic growth through lower interest rates and tax cuts, all in an attempt to create a better business environment.
At the same time the United States Postal Service is moving in the opposite direction by responding to financial difficulties by raising rates. However, the Postal Service can be kept viable without another destructive rate hike if the Postal Service's revenue need is redefined to include only the current costs of delivering current mail. The Postal Service makes other payments which should be suspended, deferred, or restructured in order to keep the Postal Service viable which reform is being considered, enacted and implemented.
If business as usual is allowed to continue over the next several weeks, the Postal Service will close out its books for the fiscal year at the end of September with a deficit that could be as large as $2 billion. The USPS is using debt to cover its current liabilities and is approaching its debt limit. Volume growth has slowed due to electronic diversion and the general economic slowdown. According to postal officials, mail mix changes further weakened USPS revenue growth. The Postal Service's response to this situation is to seek price increases. It has already raised rates on two occasions this year with the second hike imposed over the strong objections of the Postal Rate Commission, the government agency responsible for recommending postal rates. Even now, the Postal Service is preparing to ask for yet another large rate increase.
The decision of the USPS Board of Governors to overturn the recommended decision of the independent Postal Rate Commission could lead to insurmountable problems that the USPS has already acknowledged may threaten Saturday delivery, small town post offices, and even the concept of universal service. Higher prices have made the Postal Service less competitive and have driven business out of the Postal Service. This has left the Postal Service starved for revenue, which has created the momentum for another rate increase. This is the beginning of a fiscal death spiral, because another price hike would only drive even more volume and revenue out of the Service.
Long term, the Postal Service must be reformed. As the Comptroller General stated in his recent testimony before Congress, "the time has come to take a comprehensive look at the governance structure, management practices, labor policies and statutory framework relating to the postal services. Simply raising postal rates is not the answer; we must deal with a range of structural challenges. The postal service challenge is too big to ignore."
Reform of the Postal Service will be a multi-year process. The Postal Service, the Congress, and the Administration should act to ensure that the Postal Service remains capable of carrying out its mission while reform is considered, enacted and implemented.
Pursuing yet another price hike would do harm to the U.S. economy and the USPS itself. Now is clearly NOT the time for the USPS to propose a system-wide average revenue increase of 10% that would take more than $7 billion out of an industry that otherwise would be stimulating the economy and a significant driver for strong growth. According to Deputy Postmaster General John Nolan, "Mail-related private sector businesses generated $155 billion in annual revenue last year and employed 6.2 million people."
The Postal Service's immediate financial problems, while significant, are manageable in the short term. The Postal Service generated more than $64 billion in operating revenue in FY2000 and posted positive income from operations (operating income minus operating expense) of more than $1.6 billion. Although the Postal Service projects a deficit for this fiscal year, it's own Financial & Operating Statements show that its Operating Revenue more than covers Operating Expense. The "deficit" occurs because the Service is required to pay the Treasury for deferred pension obligations plus significant interest. Just the interest on these "deferred" obligations cost the Service more than $1.5 billion in FY 2000. The Postal Service has been able to pay these obligations in the past because volume (revenue) was growing fast enough to pay the bills. Now, with these additional costs growing faster than revenue, and with the Postal Service nearing its debt limit, these costs are pushing the Postal Service into insolvency.
Even without a rate increase, the Postal Service would be able to meet its operating cash flow needs by using all current revenue to cover operating costs, even while maintaining high service levels, including universal service and six day delivery by taking some or all of the following steps:
1) Gaining relief from payments related to the USPS's deferred pension obligation;
2) Aggressively reducing costs by curtailing or eliminating non-essential programs or activities;
3) Basing estimated labor cost increases on postal management's collective bargaining proposals;
4) Selling carefully selected assets to pay down debt and reduce interest expenses;
5) Using borrowing to fund any gap in operating expenses;
6) Refinancing current debt; and
7) Suspending prior year loss reduction
For the short run, the Postal Service should respond to the crisis like any debtor who is still generating enough revenue to keep operations going: it should seek temporary relief from its debt payments. Specifically and immediately, the Administration and Congress need to work with the Postal Service on a short-term basis to temporarily suspend, defer or restructure some of its payments for underfunded pension liabilities and other costs it faces under current law. While current revenues (customers) should be expected to cover the cost of delivering today's mail, increased costs from another rate case will drive more business out of the system causing a downward spiral from which the Service may be unable to recover. The Postal Service can continue to pay its current bills as they come due without dramatic rate increases.
If the treatment of the pension liability remains unchanged, the Postal Service will be making a large payment to the Treasury when it goes to close out its books at the end of the fiscal year in September. This payment will no doubt trigger efforts for another rate increase. Reduction of this payment, perhaps in the interim to the levels required by the Federal Employee's Retirement System (FERS), would allow the Service to carry on in the short term and maintain volume levels. In addition to addressing the pension liability issue, the implementation of our other recommendations to use current revenue to cover current operating costs will allow the Postal Service to maintain high service levels (including universal service and 6 days-per-week delivery) and can keep the USPS running while Postal Reform is deliberated.