THE DEMISE OF THE POSTAL SERVICE?

by MURRAY COMAROW 2002

A new round of reforms is essential

The US Postal Service (USPS) is in serious trouble. The General Accounting Office has placed USPS on its “High-Risk” list, asserting that our postal organization may not be able to continue to provide universal service at reasonable rates. Congress insists that the Postal Service be run like a business, but the USPS organizing statute gives it little control over wages and prices. New postal reform legislation has been stalled for eight years.

Historically, the USPS has gone through a number of operating changes. Before the 1970 Postal Reorganization Act, which brought about a number of significant operating improvements, the USPS ran at a loss for 131 of its 160 years of operation. The postal service often ran a 20 percent deficit, while Congress appropriated funds to make up for the shortfall.

Helping the postal organization firm up its bottom line is in everyone’s interest. Even in today’s electronic era, businesses and individuals rely heavily on the USPS, sending 700 million pieces of mail each day. Businesses, in fact, account for 96 percent of the mail stream. The postal service is in dire need of a new round of reforms to allow it to run more like a business, with authority to set prices, close down unprofitable centers, and manage labor costs and disputes. The 450-page Transformation Plan presented by the postmaster general in April 2002 has accomplished a great deal in terms of cutting costs, but the structural dysfunctions remain unchanged.

LOOKING AT PREVIOUS REFORMS

This call for reform is not the first time the USPS has needed drastic changes. The President’s Commission on Postal Organization, formed in 1967 and headed by AT&T Chairman Frederick R. Kappel, recommended a number of reforms to make the postal service a viable entity. After a year’s study, the Commission’s principal finding was that the Post Office Department, as the organization was then known, was “not capable of meeting the demands of our growing economy and our expanding population.” The postal service should become a self-supporting government corporation, the commission urged, with postal rates set by a Board of Directors after due process hearings by a judicial panel. The organization also had to eliminate patronage, a change aimed at altering the fact that 33,000 postmaster jobs and some 30,000 rural carrier positions were politically arranged. The Commission recommended that labor-management impasses over contracts or pay be referred to the President, who “would be free to establish whatever ad hoc methods he chooses to resolve the matter.”

Implementing the 1970 Postal Reorganization Act did not come without a struggle, however. Postmaster General Winton R. Blount, the Nixon Administration’s point man on postal reform, had developed a reform legislative package that included pay increases. The unions regarded reform with horror—and the pay increases as inadequate.When Blount went forward, there was a furious union reaction. Letter Carriers Branch 36, which covered Manhattan and the Bronx, took a strike vote on St. Patrick’s Day, 1970, and walked out. Other unions followed. By March 21, one-third of the postal work force was on strike, the first major strike by federal workers since the founding of the United States. They shut down 671 post offices, including nine of the ten biggest. The impact was immediate and crushing; huge parts of the business sector ground to a halt. Administration lawyers got back-to-work court orders,which proved ineffective. Union leaders simply claimed that they had lost control of their members.

Blount demanded that troops be called out. Labor Secretary George P. Shultz strongly disagreed. Blount said he would resign if the President did not support him. Nixon declared a national emergency, and announced on March 23 that he would send the National Guard into New York City to move the mail. Within two days, the strike was over.

Some would argue that the strike pushed through the postal reforms. Others counter that the strike was only one factor among many. In any case, the impasse was broken by Charles Colson from the White House and James Rademacher, president of the National Association of Letter Carriers, who did an end run around Blount. They drafted new provisions that gave postal workers binding arbitration, plus two pay increases totaling 14 percent. Blount was furious, but accepted this as the price to be paid for reform.

The Postal Service has much to its credit. It is basically self-supporting. Prices have been relatively stable. In real dollars, the 37-cent stamp costs little more than the 8-cent stamp cost in 1968.

The 1970 statutory reform yielded impressive results, and the Postal Service has much to its credit. It is basically self-supporting, with generally good overall service. Prices have been relatively stable. In real dollars, the 37-cent stamp costs little more than the 8-cent stamp cost in 1968. Patronage is long gone, as the 1970 Postal Reorganization Act prohibits members of Congress and other public and party officials from intervening in any postal appointments or promotions.

USPS jobs are highly sought after and, once obtained, are held onto. Today’s postal clerks earn $52,000 a year, on average, including health and retirement benefits. The average wage package for letter carriers is $54,500. New postal employees receive, on average, a 28.4 percent wage increase over their old jobs. Employees represented by the four postal unions have nearly total job security, an extraordinary benefit package, and wages that have more than kept up with inflation.

LINGERING PROBLEMS

It’s been 32 years since postal reform, however, and the USPS still has its hands tied in a number of ways:

Labor constraints—Labor issues are at the heart of effective reform and create more tensions than any other issue. Binding arbitration has been a boon for postal unions and a disaster for postal customers. After billions of dollars invested in research and automation, 78 percent of postal costs still go to wages and benefits, of which 19 percent is benefits. The USPS’s closest competition, United Parcel Service (UPS) and FedEx, have much lower comparable labor costs. FedEx’s labor costs are 42 percent of its total costs; the UPS figure is 56 percent.

Inability to set postal rates—The 1970 Postal Reorganization Act took the responsibility for setting postal rates out of the hands of Congress by establishing the Postal Rate Commission. But the USPS normally takes about six months to prepare a rate case, followed by 10 months of hearings in which anywhere from 60 to 100 parties are represented by counsel, economists, accountants, and assorted experts; plus two more months to set up the procedures for the new rates. In the meantime, market conditions may have changed considerably.

A better option, as outlined in the original Kappel Commission proposal, would be to retain three judges to hear rate cases, with full due process procedures. This could compress the 10-month schedule considerably. Their initial decision would be reviewed by the postal governors, who would be authorized to approve, reject, or modify the proposed rate change by a two-thirds vote.

Heavy retirement burdens—The USPS currently is held responsible for retirement benefits that go back 30 years. In 1971, the Postal Service was stuck with a very generous Civil Service Retirement System (CSRS). In the 1980s, Congress decided that the Postal Service should fund the cost of living adjustments paid to CSRS retirees, and directed the Office of Personnel Management to bill the USPS for these costs back to 1971, plus retroactive interest. These payments are still ongoing—CSRS deferred liabilities in the 2001 fiscal year included $1.6 billion in interest.

However, on November 5, 2002, the USPS, supported by the Office of Personnel Management (OPM), the Office ofManagement and Budget, the US Treasury, and the General Accounting Office, announced that it had overpaid OPM for its retirement obligations for 30 years. Its deferred liability, thought to be $32 billion, is only $5 billion. Legislation will be required to deal with this matter, keeping in mind that postal customers, not the government, have been overcharged.While this discovery may ease the USPS’s financial situation, it does not obviate the fundamental flaws in the current statute.

Inability to control costs—The Postal Service, required by law to offer universal service and to break even, is having trouble meeting this mandate.Mail volume growth, which had averaged 4.5 percent in the 1980s and half that in the 1990s, is now nearly zero. The organization is plagued by costs over which it has no control. About 5,600 new delivery points are added every day, adding up to 1.7 million new delivery points a year. As the USPS has over 215,000 vehicles, a ten cent/gallon increase in gasoline prices comes to $55 million a year in added costs. Unlike its competitors, the USPS cannot raise its prices when faced with these new costs. And, when completely unexpected events arise, like the anthrax scare of late 2001, the organization has few reserves on which to fall back.

Inefficient cost centers—The USPS encounters a daunting statutory process and heavy political flak when it wants to close unprofitable post offices. To operate as a business, it should have more flexibility in dealing with the 16,000 post offices that lose money each year. Postal executives function within a system of constraints that make effective management impossible. If the nation’s best executives occupied every top postal position, they would find themselves at a loss to run an organization that has only marginal influence over how much it pays its people, how much it charges its customers, or whether it can make sensible service changes without political or union resistance.

All of these obstacles to efficient operations have left the USPS scrambling to freeze capital expenditures and cut staff. The organization now has about 850,000 workers, down over 33,000 from 1999. It also raised postal rates. On March 22, 2002, the Postal Rate Commission approved an increase in the price of a first-class stamp from 34 cents to 37 cents, plus increases for some other types of mail. If not carefully calibrated, rate increases further reduce volume and revenues, and exacerbate the fiscal shortfall. The USPS suggestion that five-day delivery might be instituted drew howls of protest from Congress and many mailers, as have efforts to remove some of the nation’s 323,000 collection boxes.

In April 2001, a coalition of marketers, mailing services, and postal unions was formed “to preserve the nation’s universal mail service.” The coalition opposes reducing service, closing post offices, diminishing collective bargaining rights, and increasing rates. They recommend eliminating the “break-even” requirement, improving “core products and services,” and increasing borrowing and rate-making authority within narrow limits. They also favor eliminating inefficiency and improving productivity. Few would disagree about these last two goals, though it’s hard to see how they can be achieved without implementing some of the tougher reforms the coalition did not address.

THE TRANSFORMATION PLAN

In April 2002, Board Chairman Robert F. Rider and Postmaster General John E. Potter released an extensive Transformation Plan designed to give the USPS greater operational flexibility. The Plan sets forth steps the USPS will take that do not require new legislation, as well as other steps that would require changes in the Postal Reorganization Act of 1970. In the first category, Potter announced an end to the four-year moratorium on closing smaller, inefficient post offices, and pledged to improve the dispute-resolution process and reduce the $300 million the USPS spends each year to resolve labor-management disagreements. The rate process, he said, would be modernized “under the existing regulatory framework.”

The Plan suggests many operational and marketing changes, including selling more stamps from vending machines or contract postal units than in post offices, where the cost for each transaction is much higher. The Plan would allow the USPS to set prices on monopoly mail within broad Postal Rate Commission and Board of Governors parameters. The postal service would be permitted to set prices on non-monopoly mail at its discretion, subject to anti-trust and fair competition laws. The Plan does not detail how the USPS and its employees are supposed to implement two separate cost-tracking systems for monopoly and non-monopoly services, however.

What’s at stake now is the future of the USPS, a treasured part of our culture.

Many of these initiatives seem sensible and promising, and the USPS deserves credit for the Plan’s professionalism and detailed analysis. Where the Plan falls short, however, is in tackling tough labor, pricing, and governance issues. The Transformation Plan proposes that legislation be enacted to eliminate binding arbitration and substitute mediation and the right to strike under the Railway Labor Act. It’s not clear why these federal workers are treated differently from all other federal employees, whose wages are set under congressional guidelines by government officials authorized by law to do just that. Non-postal federal employees have never had the right to engage in wage arbitration, or the right to strike. In the private sector, a strike is a test of economic strength between labor and management. Labor can withhold its work; management can close its plants or hire replacements. Can you imagine the USPS closing post offices to combat a strike?

The legislative proposals recommended by the USPS, if enacted by Congress, would eliminate arbitration, but grant postal employees the right to strike, with consequences that the Plan does not try to predict or evaluate. These proposals would grant the postal service pricing flexibility on non-monopoly products, possibly creating cost and definitional problems. And the Plan is silent on a number of key issues, including the question of what sort of governing board would be most appropriate for the USPS. One alternative it does not mention would be a board of three fulltime appointees, who would hire the postmaster general and perhaps other top executives. The Tennessee Valley Authority, a wholly owned government corporation, has functioned under this structure since 1933, with a three-member board of directors appointed by the President, subject to Senate approval.

Another alternative, perhaps, would mean asking Congress to look back 30 years to the last round of postal reforms, which were aimed at permitting the postal service to operate “efficiently and economically.” Meeting this objective requires the appointment of governors and postmasters general who know how to do this. The President might well look to an outside panel of highlevel advisors, much along the lines of the original Kappel Commission proposal: Six part-time governors would select a postmaster general, who would be chairman of the board. The seven would select two more top postal officials, who also would be governors. The ninemember board would make rate decisions after a due process hearing by judges, subject to appeal to the US Court of Appeals for the Federal Circuit.

The lethal combination of statutory constraints on wages and prices and competitive technology ultimately may reduce America’s postal service to a shell.What’s at stake now is the future of the USPS, a treasured part of our culture. The postal service also is essential to the American economy, and not just for the 850,000 postal jobs. The US mailing industry employs nine million workers and constitutes about eight percent of the US gross domestic product. If the USPS fails, can companies such as UPS and FedEx do the job? It’s worth considering that one week’s USPS volume equals one year’s UPS volume; two days’ Postal Service volume equals one year’s FedEx volume.

In the past, postmasters general and postal governors have been reluctant to propose drastic changes, fearing that such initiatives would be “dead on arrival” on Capitol Hill. But it’s now time for postal leaders to state clearly and publicly what changes must be made to the statute that handcuffs them. At a minimum, they should begin a public debate on what kind of postal service will meet the needs of the American people best, and the steps we need to take now to help the USPS develop into that organization. The legislative process has failed after eight years of effort. It is time for the President to appoint a high-level commission, whose members (and executive director) are not stakeholders in the postal arena.

Murray Comarow (CC ’92), a lawyer, is a director and senior fellow of the National Academy of Public Administration. He was executive director of President Johnson’s Commission on Postal Organization in 1967-1968 and executive director of President Nixon’s Advisory Council on Executive Organization in 1970-1971.

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'The Demise of the Postal Service'