It was sad when that great ship went down: The Postal Service heads for an iceberg
April 14, 2012
A hundred years ago this Sunday, the Titanic collided with an iceberg and sank in the icy waters of the North Atlantic, causing the deaths of over 1500 people. Researchers have recently announced a new theory on the cause: Unusual weather conditions produced a false horizon that hid the iceberg from view. In other words, a mirage.
Whatever the immediate cause, the disaster could have been avoided if the ship’s captain had listened to warnings and sailed more slowly in those dangerous waters. But he and his officers believed the great ship was "virtually unsinkable," and it was ultimately their own hubris that sunk the Titanic.
The leaders of the Postal Service are under the influence of their own form of hubris. They’re always right “because they said so," and they’ve convinced themselves that the only way to deal with declining mail volumes is by radically downsizing the workforce. They are even willing to cause self-inflicted damage by implementing plans they know will drive away billions of dollars of business.
The officers at the helm seem determined to sink the Postal Service. Their business plan will send the Postal Service into a downward spiral of falling revenues and deeper and deeper cuts. But it's full speed ahead, and nothing will steer them in another direction, even though it's clear they are heading straight toward an iceberg of their own creation.
Blame it on unusual weather conditions.
Bad directions from the GAO
It didn’t help matters this week that the GAO issued a new report (GAO-12-470) on the Network Rationalization plan to consolidate over two hundred mail processing plants. The GAO doesn’t make any new recommendations, but the title of the report says it all: “Mail Processing Network Exceeds What Is Needed for Declining Mail Volume.” And that's what all the headlines are repeating.
The report, though it makes a nod toward being balanced by including dissenting voices, is an obvious endorsement of the Postal Service’s consolidation plan. That’s why it's been warmly embraced by Congressman Darrell Issa, whose House bill would completely dismantle the Postal Service. “We cannot allow political interests to trump our responsibility to restore the Postal Service to solvency and protect the taxpayer from picking up the tab for surplus facilities,” said Issa in response to the report. Issa was probably also pleased to see that the GAO had some kind words to say about his proposal to create a BRAC-like Commission empowered to close post offices and processing plants without a lot of bureaucratic oversight or community input.
The GAO report doesn’t introduce new evidence that the processing network is too big, nor does it provide any analysis demonstrating that the Network Rationalization plan will actually help matters. The report basically just reviews the Postal Service’s plan, and then goes over some of the objections raised by postal unions and mailers, along with the Postal Service’s responses.
The authors of the GAO report do not seem to have spent much time studying what the Postal Regulatory Commission has learned about the Network Rationalization plan. The PRC's Advisory Opinion won't be completed until late summer, but if the GAO had looked at the testimony, interrogatories, and transcripts, the report would be a lot more useful. Instead, as we learn in a footnote on page 14 of the report, the GAO says, "Since PRC is examining USPS’s proposal and cost estimates for revising its delivery service standards, we did not assess the reliability of USPS’s database used for estimating the cost savings."
Much of the report is a rehash of previous GAO reports. For years now, the GAO has been arguing that the Postal Service needs to reduce costs by eliminating post offices, consolidating the processing network, and downsizing the workforce. These earlier reports (almost all of them written, by the way, by Phillip Herr) include “U.S. Postal Service: Actions Needed to Stave off Financial Insolvency” (GAO-11-926T; Sept. 6, 2011); “Action Needed to Facilitate Financial Viability” (GAO-10-624T; April 15, 2010); "Strategies and Options to Facilitate Progress toward Financial Viability" (GAO-10-455; April 2010); and “Network Rightsizing Needed to Help Keep USPS Financially Viable” (GAO-09-674T; May 20, 2009).
Herr's reports develop one theme — downsize or else — and the latest GAO report, though not by Herr himself, is no exception. Senators Tom Carper and Susan Collins, who requested the report, had to know what they’d get before they asked for it. As Carper said in response to the report, “it confirmed much of what we already knew.”
The Internet Mirage
The GAO’s argument on behalf of Network Rationalization spins the facts in numerous ways. The report begins, for example, with a chart showing how the Postal Service has been running multi-billion dollar deficits since 2007. It’s a familiar scare tactic, used countless times by the Postal Service and the GAO. As we’ve heard so often, the Postal Service has wracked up a $25 billion deficit since 2006 because first-class mail is dropping fast due to electronic communications.
You’d need to go to page 11 of the report to find the word “recession,” and it appears only once in the entire document. There we learn that “declining First-Class Mail volume is primarily attributed to the increasing number of electronic communications and transactions. The recent recession and other economic difficulties have further accelerated mail volume decline.”
It’s true that before the 2008, declines in first-class mail could be “primarily attributed” to the recession, but those declines were modest. From peak first-class volumes in 2001 to 2007, before the recession began, first-class mail volumes declined from 103.6 billion to 96.3 billion — a total drop of 7%, or just over 1% a year. From 2007 to 2011, first-class volumes declined from 96.3 billion to 73.5 billion — a drop of 23%, or about 6% a year.
In other words, first-class mail has declined by 30% over the past ten years. About 7% of that 30% happened in the six years before the recession, and the other 23% happened in the four years after the recession began.
The Postal Service and the GAO thus have it backwards. The Internet is not the “primary” cause of the volume drop; the recession is. Looking at the average annual declines of 6% since 2007, it’s likely that about 1% was caused by the Internet, and the other 5% by the recession.
That’s almost exactly what the Postal Service has told the Postal Regulatory Commission in its case for an exigent rate increase. In that context, the Postal Service argued that for fiscal years 2008 and 2009, the height of the recession, the economy was responsible for 67% to 97% of the losses, as well as a large part of the losses since then.
The reason the GAO and the Postal Service don’t like to mention the recession is simple. If you want to permanently dismantle the Postal Service, you need a permanent problem — like the Internet — and not a temporary, cyclical one like the recession. The GAO might have noted that were it not for prepayments to the retiree health care fund, the Postal Service has basically broken even for the past few years, despite the recession. But that wouldn't have helped with its case for consolidation.
First-class volumes, not falling fast enough
The GAO report has a chart projecting first-class mail volumes through 2020, and of course, it shows that volumes will continue to drop precipitously. It says that first-class mail volumes in 2020 will be 40 billion pieces, which represents an annual decline of about 5%.
The source for this chart is labeled as “GAO analysis of USPS data,” so it’s hard to know how they came up with the numbers or why they’ve decided that first-class mail will continue to decline at a rate comparable to the past four years. That represents a pretty pessimistic view of the economic recovery. The estimate is also worse than the one provided to the Postal Service by the Boston Consulting Group, which said 2020 first-class mail volumes would decline at about 3.5% a year.
But BCG was only looking at the effects of Internet diversion on mail volumes. Perhaps the GAO estimates take into consideration the volume losses that the Postal Service will inflict on itself by implementing service cutbacks.
It’s crazy when you think about it. The Postal Service is worried about declining first-class mail volumes, and what does it do? It comes up with a plan specifically targeted at reducing service standards for first-class mail — as well as raising first-class postage by 11% to fifty cents. It’s as if the Postal Service can’t wait to get out of the business of delivering first-class mail.
The GAO blows off the overpayments issue
As for the other main cause of the operating deficit, you’d have to go to page 21 of the GAO report to learn that some stakeholders believe the deficit is “artificial” and caused by the Postal Service’s congressionally mandated payments into the Retiree Health Benefits Fund, which average $5.6 billion per year.
That’s the view of the postal worker unions and many other stakeholders, but the GAO downplays this explanation. That’s because the GAO has decided that reducing payments to the fund is not a good idea. Deferring payments to the fund, says the GAO, will “increase the risk that USPS will not be able to make future payments as its core business declines. Therefore, we concluded that it is important for USPS to continue funding its retiree health benefit obligations — including prefunding these obligations — to the maximum extent that its finances permit.”
The GAO report does not mention the fact that the health care fund is already amply funded and no additional contributions are necessary. As USPS Inspector General David Williams wrote in a letter to Senator Bernie Sanders, there's $44 billion in the fund, and over the next 21 years, the interest will grow the fund to its estimated liability of $90 billion.
The GAO report also doesn’t mention, as Williams explained to Sanders, that the Postal Service is currently funded at 49% of its estimated liability, while the federal government does not prefund retiree health care at all, the military is funded at 35%, only 38% of Fortune 1000 companies prefund at all, and the median level for those companies is 37%.
There’s plenty of money in the Retiree Health Benefits Fund, and overpayments to the fund are largely responsible for the postal deficit.
The secret survey, still secret to the GAO
The argument of the GAO report — reducing the size of the processing network will help solve the Postal Service’s financial problem — does not delve into the details of the Network Rationalization plan. The GAO simply assumes that workforce reductions will save money. That might be true if the plan did not necessitate a change in service standards for first-class mail and periodicals.
But it’s entirely possible that slowing down the mail will drive away so much business that the plan will actually end up losing money. As the report acknowledges, “Employee associations have expressed concern that USPS’s proposed changes may result in even greater losses in mail volume and revenue, which would further harm USPS financially.”
The GAO counters that view by noting that the “USPS responded to these comments by acknowledging that its proposal would, to some degree, reduce the value of the mail to customers, but on balance is in the long-term interests of USPS to help maintain its viability for all customers into the future.”
As evidence for the Postal Service’s position, the GAO notes that the USPS estimated that its proposal would cause a volume decline of almost 2 percent and a revenue decline of about $1.3 billion, but overall it would save about $2 billion a year.
Apparently the GAO has not been reading the news lately. As widely reported in the media, including an article in CNN Money, the Postal Service stands to lose far more than $1.3 billion in revenues if it consolidates the processing network and slows down delivery of first-class mail and periodicals.
In the “secret survey” the Postal Service didn’t want anyone to see, a market research firm contracted by postal management revealed that slowing down the mail would cost the Postal Service not $1.3 billion a year, but over $5 billion. First-class mail volumes would drop by 10.3%, and first-class revenues, by nearly $2 billion — far worse than what we’ve seen over the past four years. Revenue losses like that would completely wipe out the savings from Network Rationalization.
The Postal Service tried to dismiss this report as “seriously flawed” because the concept statement used to initiate interviews with customers happened to mention other proposals under consideration, like closing post offices and eliminating Saturday delivery. That supposedly skewed the results, so the Postal Service threw away the study (which cost nearly a half million dollars) and commissioned a second one, which produced much more "reliable" results. But the Postal Service wrote the concept statement that turned out to be such a problem, and the company that did the research defended it as “very good research.”
Counting trips doesn't add up
The GAO report contains a table showing that the current processing network requires 1.5 billion trips between processing plants, and it says that 376 million of them (about 25%) are “excess capacity.” The report thus makes it seem as if the Postal Service is going to save a large amount of money by cutting down on transportation costs.
In the PRC’s Advisory Opinion inquiry into the Network Rationalization plan, however, the Postal Service’s methodology for calculating transportation costs has come under serious scrutiny, and the savings turn out to be largely illusory.
First of all, cutting down on the number of trips between plants doesn’t mean much when you consider that with fewer plants, the distance between facilities will increase. In terms of actual miles, the Postal Service estimates a reduction of 13.6%. That’s much less than the 25% reduction in the number of trips, but even that number has been contested. During cross-examination of the Postal Service’s witness on transportation, the attorney for the Mail Handlers Union noted the skewed way the Postal Service had run the numbers. Her calculations suggested the reduction in total miles would be more like 7% (testimony transcript, p. 1192).
Second, the longer distances between processing plants is being used by the Postal Service to justify shifting more transportation work from postal workers to private contractors (Martin testimony, p. 1164). The Postal Service already contracts out a lot of work to Highway Contract Routes (HCR). Under the Network Rationalization plan, another $56 million would be outsourced (Bradley testimony, p. 36). The Network Rationalization plan also calls for an additional $124 million in air transportation costs ((Bradley testimony, p. 29). Most of that would go to FedEx, the Postal Service’s largest supplier, with $1.5 billion of USPS business a year.
In other words, much of the savings associated with the new transportation system have nothing to do with the consolidations per se. They are simply the result of outsourcing more work away from postal employees.
Another problem with the transportation cost analysis is that the initial estimate of $270 million in savings was based on consolidating 252 plants. Only 223 were eventually approved, and only 40 facilities will be close completely. So the total cost savings for transportation is likely to be less than the original estimate, and the Postal Service has been asked to provide revised numbers to the PRC.
One final problem with the transportation aspect of the plan is that while the Postal Service may save some money, its customers are going to have pick up the tab. As the GAO report says, businesses may have fewer locations where mail can be entered, and they will “therefore need to transport it to locations different from those now in use.” Those locations will be further away and drive up costs for a lot of medium and small businesses.
That problem is true of the entire plan: As the GAO report observes, “Business mailers have commented that such a change in delivery service standards and postal facility locations could shift mail processing costs to them and reduce the value of mail for their businesses.”
All hands on deck: Standby for standby time
The cost savings from reconfiguring the transportation system don’t add up to much — $270 million a year at most. That’s only 10% of the total cost savings the Postal Service is projecting for the plan.
Nearly all of the savings from Network Rationalization come from cutting jobs — 35,000 of them, or one out of four positions in the mail processing system. As the GAO report notes, “Reducing work hours and the size and cost of its workforce will be key for USPS, since its workforce generates about 80 percent of its costs.”
Virtually all of those jobs will be career positions. The number of non-career jobs will actually increase because the Postal Service plans to take full advantage of a recent APWU agreement that allows it to increase its use of non-career employees from 5.9 percent to 20 percent. As with increased use of outsourcing, that’s another way to save costs that really has nothing to do with the benefits Network Rationalization per se.
The main source of savings will come from eliminating those 35,000 jobs. The GAO says that many of the reductions are expected to result from “attrition.” That’s just a postal euphemism. It really means that workers are going to be reassigned to new jobs that are a long distance from home, so they will be put in an untenable position — forced to choose between doing a long, expensive commute or selling the house and moving the family. The Postal Service hopes that many of them quit or take early retirement, even if they’re financially not ready for it.
Relocating workers to distant workplaces may not be enough to get them to leave the Service, however. There’s an article in the news this week about how the tough job market is causing a growing number of "super commuters."
If workers choose not to quit or retire, the Postal Service has another strategy. As the GAO report notes, if there’s no job available within the distance limit set by union contracts, one alternative is “putting postal employees on ‘standby,’ which occurs when workers are idled but paid their full salary because of reassignments and reorganization efforts.”
“Standby” is another euphemism in Postalspeak. It means putting workers in what management calls a “resource room” — a conference room, a break room, a cafeteria, maybe a 12-foot-by-8-foot storage closet — and paying them for just sitting there. Workers call it the “holding pen” or the “holding tank,” and while it may sound like fun to get paid for doing nothing, it’s just boring. Workers are not permitted to read anything but postal manuals, and they can't eat, drink, smoke, play cards, listen to music, or talk on the phone.
Standby time is meant to be a temporary way of dealing with low-work periods or other unplanned events such as equipment breakdowns. But the Network Rationalization plan will make standby time a much more common phenomenon. In a few months, we’re going to see a rash of articles like those that came out back in August, after the Washington Post’s Ed O’Keefe ran a story about “paying workers to do nothing.”
Eventually, seeing thousands of workers getting paid to sit around will increase pressure on Congress to give postal management the authority to remove the no-layoff clauses from union contracts. As the new GAO report puts it, those no-layoff clauses are one of the main “challenges” related to network consolidation. The GAO notes, with a touch of frustration in its tone, that arbitrators working on the impasse in union contract negotiations are not required to consider the “financial health” of the Postal Service, “and an unfavorable arbitration decision could have significant adverse consequences on its ability to meet future financial obligations.”
"They were the first to go"
The maiden voyage of the Titanic was a major event, and it attracted emigrants seeking a new life, middle-class tourists, and some of the wealthiest people in the world. But the classes didn’t mingle. As the famous folk song about the Titanic goes, “The rich had declared that they would not ride with the poor, So they put the poor below, They were the first to go.”
The highly paid officers in L’Enfant Plaza, the wealthy executives in the mail industry, and the postal politicians in Congress may think that it’s only postal workers and regular folks who will suffer the consequences of a degraded mail system. But we’re all in the same boat, and if the people at the top don't heed the warnings, we're all going down.