The true cost for restoring service standards and why the Postal Service can afford it

July 26, 2015

A couple of weeks ago, the Congressional Budget Office (CBO) announced that it would cost the Postal Service $1 billion to comply with an amendment requiring the Postal Service to revert to the service standards for First Class mail and periodicals that were in effect on July 1, 2012.  The amendment was proposed by Representative Chaka Fattah and approved by the House Committee on Appropriations as part of the financial services appropriations bill. 

The CBO's report generated headlines like "CBO: USPS can't afford House committee provision to reopen mail facilities" (Fierce Government) and "USPS Can’t Afford to Reopen Facilities and Add Employees Like Congress Wants" (Government Executive).

The Coalition for a 21st Century Postal Service (C21), which represents many of the stakeholders in the mailing industry, quickly weighed in to oppose the amendment.  In a letter to Senators Cochran and Mikulski, the chair and vice chair of the Senate's Committee on Appropriations, C21 wrote this:

“In order to restore July 1, 2012 service, the Postal Service would have no choice but to reopen a large number of facilities it has closed and/or sold in the past three years, reverse reconfigured transportation routes, and rehire, or extend the hours of existing, employees. The Congressional Budget Office concluded in a letter to Senator Tom Carper dated July 13 that the amendment would cost the Postal Service in excess of one billion dollars in the first year. (Postal Service estimates are closer to $2 billion in the first year, and $1.5 billion in each of the succeeding four.)”

Unfortunately, the CBO, C21, and the media reports all seem to have misunderstood the amendment, and they are obfuscating the main issue — how much would it actually cost the Postal Service to comply with the Fattah amendment?  

As discussed in this previous post, the amendment would restore the interim service standards that went into effect on July 1, 2012 and that remained in effect until January 5, 2015, when the final service standards began.  Going back to the interim standards would not necessitate reopening any of the 150 facilities closed in 2012 and 2013 or rehiring any of the thousands of employees who left the Postal Service during this time (mostly as a result of the 2012 buyout offers).   That would only be necessary if the amendment were about restoring the original service standards in effect before July 1, 2012. 

The amendment would simply require undoing what has happened since the beginning of the year, when the interim standards ended, and the cost would not be anything like $1 or $2 billion.  As the following discussion explains, the amendment would probably cost something like $50 million, and the Postal Service could easily afford it.


Costs, not savings

The CBO said it would cost $1 billion to comply with the amendment, but it’s not clear where the number came from.  Perhaps it includes the $865 million the Postal Service says it is saving from the phase-1 consolidations — which would be lost if phase 1 were undone — or perhaps it includes the $750 million the Postal Service anticipates saving if and when the phase-2 consolidations are completed. 

C21 is apparently referring to an older Postal Service estimate of $2.1 billion for how much both phases of the consolidation plan would save altogether.  The Postal Service subsequently downgraded the estimate for savings to $1.6 billion — $865 for phase 1 and $750 for phase 2.

None of these estimates about savings is relevant to the question of the Postal Service's ability to comply with the amendment.  

The phase-1 savings would not be impacted because the amendment doesn’t have any bearing on the phase-1 consolidations.  Whatever the Postal Service is saving from phase 1 will continue to be saved.

As for the phase-2 savings that would go unrealized if the consolidations don’t go forward, that’s a legitimate concern, but anticipated savings are a separate issue.  They are projections about what might happen, not the actual costs for restoring the interim standards.

The CBO told Senator Carper that the Postal Service would be unable to fully comply with the amendment because it doesn’t have $1 billion, and it could only come up with $300 million to improve service standards.

But $300 million is much more than would be necessary to comply with the amendment.  Since January 5, 2015, there have been operational changes within all processing plants and there has been some progress on the phase-2 consolidations themselves, but all of these changes could be reversed for very little cost.  Here's why.


Progress of the consolidations

Since the beginning of the year, not much progress has been made on phase 2 of the consolidation plan, as one can see by looking at the status updates the Postal Service posts on its website.   

To make this progress easier to visualize, we’ve combined the status report from December 19, 2014 (the last month when the interim standards were in effect) with the most recent report (July 17, 2015).  You can see this merged report here

In comparing the two status reports, here’s what one finds:

$1 billion to restore USPS service standards? Did the CBO get it wrong?

July 20, 2015

Last week the Congressional Budget Office (CBO) provided an estimate for how much it would cost the Postal Service to return to the service standards that were in effect on July 1, 2012. 

Going back to these standards for delivery times is one of the provisions in an amendment attached to the FY 2016 appropriations bill drafted by the House Appropriations Committee.  Senator Tom Carper asked the CBO to prepare an estimate for how much it would cost to comply with the amendment.

According to the CBO's letter to Senator Carper, "Based on preliminary information from the Postal Service, we expect that it would cost well over $1 billion in 2016 for USPS to attempt to fully comply with the amendment."  

The CBO says that going back to the earlier standards would probably not even be possible because the Postal Service doesn’t have that kind of money.  The most it could spend to improve delivery times next year is about $300 million. 

According to the CBO, in order to return to the earlier service standards, the Postal Service would need to add work hours, reopen facilities that have been closed or sold, and replace equipment it no longer owns. 

The CBO offers to provide Senator Carper with further details on the $1 billion price tag, but the letter itself does not explain how the number was arrived at.  

If you look at what’s happened over the past few months, the $1 billion doesn’t seem credible, and one wonders if the CBO has misunderstood what the amendment is all about.


Going back to the interim standards

Since 2012, service standards have been changed twice.  The first change went into effect on July 1, 2012. These standards, which were called the “interim” service standards because they were stage one of a two-stage plan, eliminated overnight delivery for about 20 percent of First Class mail.  The interim standards made the first phase of the plant consolidations possible.  About 150 plants were closed in 2012 and 2013, and thousands of jobs were eliminated.

The second change implemented the final version of the new service standards.  It went into effect on January. 5, 2015.  All overnight delivery came to an end, operations were modified in every plant across the country, and the way was paved to close the 82 plants on the phase-two list.  For various reasons, however, most of these 82 closings have been postponed until 2016.

The proposed amendment in the appropriations bill would return the Postal Service to the interim service standards that were effect from July 1, 2012 through January 4, 2015.  In other words, it would restore overnight delivery for local First Class mail and eliminate the extra day that’s been added to the rest of the mail.

The language in the proposed appropriations bill is very clear about this.  At one point, the bills states, “"Language is included [that] requires the Postal Service to maintain and comply with service standards for First Class Mail and periodicals effective on July 1, 2012.”

At another point, the bill reads, "The amendment requires the Postal Service to restore the service standards that were in place before it degraded mail delivery standards by virtually eliminating overnight delivery of First-Class mail on January 5th of this year.”

So why would it cost the Postal Service $1 billion next year to return to the service standards that were in effect at the beginning of 2015? 

Here’s what the CBO says:

In July of 2012 the Postal Service changed its delivery service standards and began one of the most comprehensive operational transformations in the agency’s history. Since then USPS has closed about 150 mail processing facilities, about one third of the 460 such facilities that it operated in 2012. The Postal Service has significantly reconfigured its mail delivery network, including modifying employee schedules and redesigning transportation systems. To attempt to comply with the amendment USPS would need to at least partly reverse those changes by adding work hours, reopening facilities that have been closed or sold, and replacing equipment it no longer owns.

That explanation is seriously problematic.  It suggests that most of the 150 phase-one consolidations that happened after the interim standards were implemented would need to be undone and a significant increase in work hours would be necessary.  But the amendment would only require undoing what has happened since January 5, 2015.  

The letter doesn't begin to explain how reversing these recent changes would add up to $1 billion, and there's little reason to think it would cost anything like that.  It might just cost a few million dollars.   

Next round in the exigent case: USPS seeks five-year extension of surcharge; the mailers say enough is enough

June 26, 2015

Today was the deadline for submitting initial comments to the Postal Regulatory Commission concerning the exigent rate increase after the case was remanded by the US Court of Appeals in its June 5th ruling.  Judging by the comments, this case is far from being settled.  The Postal Service is looking to extend the surcharge for almost five years, while the mailers want to see it end in August.

Comments were submitted the by the Postal Service, the PRC’s public representative, two postal workers unions, and several of the mailers.  (There's more about the court's ruling in this previous post, and the comments filed today can be found in PRC docket No. R2013-11(R).)

The main question on the table is how much additional revenue the Postal Service should be allowed to take in through an extension of the exigent surcharge.  Under the Commission’s previous order, the maximum was $2.8 billion in contribution (profit), or about $3.2 in gross revenues.  That limit will be reached in mid-August.

The Court of Appeals vacated a portion of the Commission’s order (the "count once" rule used by the Commission to determine the losses) and sent the matter back on remand.  As the comments filed on Friday indicate, there’s a wide divergence of opinion about how to interpret the court’s ruling — and that’s putting it mildly.

In its comments, the Postal Service offers three sets of calculations responding to the court's ruling.  According to the first set, the Postal Service says it is entitled to $1.2 billion more in contribution, which would extend the surcharge for about eight months.  That calculation is based on the premise that losses in one year carry over into the next until the "new normal" is reached, which the Commission said occurred at the beginning of FY 2010 for Standard mail and FY 2011 for First Class.

But that’s just the minimum. The Postal Service goes on to make a case that the "new normal" actually didn't occur until FY 2013.  Based on that idea, the losses due to the recession were 105.7 billion pieces of mail and $11.4 billion in contribution.  That translates into an additional contribution of $8.66 billion, which would extend the surcharge for almost five more years.

USPS releases May 2015 financial statement

June 24, 2015

The Postal Service has released its financial statement for May 2015.   There’s some good news and some not so good.

Compared to May 2014, volumes and revenues for First Class, Standard, and Periodicals are all down, generally about 5 percent.  For market-dominant mail overall, volumes and revenue are both down 5.2 percent.  

That represents a somewhat steeper decline than previous months during this fiscal year, but the Postal Service notes that there was one fewer retail day this May than last, which probably explains at least some of the drop. 

The good news is that Shipping and Package Services continue to climb.  Compared to last May, volume is up 15.8 percent and revenue is up 12.5 percent.

For year-to-date (the first eight months of FY 2015), volume is down 0.7 percent, and revenue is up 1.7 percent.

For the month of May, the Postal Service posted a small loss of $126 million in Controllable Operating Income (compared to a loss of $70 million last May). 

Overall, the Postal Service would continue to show a profit if it weren't for the $5.5 billion it's supposed to be paying to the Retiree Healthcare Benefit Fund (RHBF).  For the year-to-date, the Controllable Operating Income is $1.49 billion.  That’s up from the same period last year, when there was a profit of $1.28 billion.

Figuring in the RHBF expense ($3.8 billion so far this year) and a worker’s comp adjustment, plus some interest income and expense, the financial statement shows a net loss of $2.778 billion for the year-to-date.  That’s better than the same period last year, when the loss was 3.469 billion, but it will probably still be cited as further evidence that the Postal Service is in trouble.

The May financial statement can be found on the PRC website here.

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