May 7, 2012
As the debate over postal reform shifts to the House and the rhetoric heats up a few more degrees, this might be a good time to take a step back and look at a little history. In many ways, history is repeating itself, and a look back may give us some sense of where things are headed (or not).
In 1975, the country was just coming out of a recession caused by the 1973-74 stock market crash and OPEC’s decision to quadruple oil prices. As a result of the recession, mail volumes plummeted, and in 1974, the Postal Service incurred a $2.3 billion deficit (almost $10 billion in today’s dollars). There were concerns that the volume might never return.
To address the deficit problem, the Government Accountability Office (GAO) issued a report in June of 1975 entitled “$100 Million Could Be Saved Annually In Postal Operations in Rural America Without Affecting the Quality of Service.” The controversial report recommended closing 12,000 small post offices that were operating at a loss. (Adjusted for inflation, $100 million would come to about $400 million today.)
It wasn’t the first time rural post offices had come under assault. A few years earlier, when the Department of the Post Office was transformed into a corporate-type entity called the Postal Service, rural residents feared what would happen, and they persuaded the authors of the 1970 Postal Reorganization Act to include language in the bill that protected rural post offices. Hence this oft-quoted passage in Title 39 [section 101 (b)]:
“The Postal Service shall provide a maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self-sustaining. No small post office shall be closed solely for operating at a deficit, it being the specific intent of the Congress that effective postal services shall be insured to residents of both urban and rural communities.”
After the GAO issued its 1975 report, Congress began holding hearings about post office closings, and lawmakers on both sides of the aisle spoke up for the value of rural post offices. At the hearings, Republican House member Keith Sebelius of Kansas stated, “When a community loses its post office, it also loses its identity.” And Democrat Joe Evans of Tennessee told the House committee, “It is unconscionable to even consider the closing of these post offices.”
The protest against closing post offices fell on deaf ears at the Postal Service, however, and just a few weeks after the hearings, postal headquarters announced new guidelines making it easier to close small post offices. Claiming that rural carriers would provide better service than a post office, Postmaster General Benjamin Bailar (on the right) shut down 200 post offices in three months and put another 600 “under scrutiny.”
On February 28, 1976, 44 members of Congress sued the Postal Service. Three senators and 41 House members charged that the post office closings were illegal “and a massive assault on the country’s small post offices.”
A few hours after the suit was filed, U.S. District Court Judge John Lewis Smith issued a retraining order barring further rural shutdowns. In March, Smith ruled that communities needed at least 90 days notice of a closing.
The ruling gave Congress time to act, and in September it passed the Postal Reorganization Act Amendments of 1976 (H.R.8603; P.L. 94-421) by an overwhelming majority, 267 to 113. While Democrats voted 213 to 45 in favor and Republicans opposed it, 68 to 52, those 52 Republicans made the bill a bipartisan success and showed that it wasn’t just Democrats who cared about protecting post offices. In his official statement on signing the bill into law, President Gerald Ford said, “I am pleased by the responsible and effective bipartisan cooperation that was evident in the drafting and passage of this legislation.”
The bill put a moratorium on closing rural post offices until the following April, while a “blue ribbon commission” studied the broad range of problems confronting the Postal Service. The bill also put new restrictions on closing post offices, and it’s thanks to this legislation that the Postal Service must consider the effect of a closing on the community and employees as well as “whether the closing is consistent with the policy of the government that the Postal Service provide a maximum degree of effective postal service to rural areas.”
The PRA Amendments also gave communities the right to appeal a post office closing, a right that was quickly exercised. From September 1976 to the end of 1979, the Postal Service tried to close 90 post offices, and 24 communities filed an appeal with the Postal Rate Commission. In every case, the PRC ruled in favor of the community and remanded the closing decision back to the Postal Service for further consideration. Only 33 of the post offices eventually closed.
The parallels with current events are almost too obvious to mention. The GAO continues to push for post office closings, and just a couple of weeks ago, it issued another report to Congress advocating closures to help deal with the deficit. As in 1975, closing thousands of small post offices would yield only very minimal savings. Closing the 3,650 post offices in the Retail Access Optimization Initiative (RAOI), for example, would save $100 or $200 million (according to the PRC and Postal Service, respectively).
In 1975, the GAO said the closings would be justified “if the alternative mail service would be at least as good.” The new GAO report similarly endorses the Postal Service’s view that post offices can be replaced by “alternative access” to postal services — contract postal units, rural delivery, kiosks, and so on — even though the people served by post offices are not satisfied with these other options.
May 3, 2012
The Network Rationalization plan to consolidate some 260 mail processing plants may be running into problems. Not all the plants were approved for consolidation, so this week the Postal Service submitted revised estimates to the Postal Regulatory Commission (PRC).
The total cost saving estimate has dropped from about $2.1 billion to $1.6 billion. That’s about half of what the Postal Service originally told the media, and even that lower estimate is being challenged by the postal worker unions and other intervenors in the PRC’s Advisory Opinion process.
Also this week, the leaders of postal reform in the Senate sent a letter to Postmaster General Donahoe asking him to extend the moratorium on post office closings and plant consolidations, scheduled to end May 15, for as long as it takes for Congress to complete the legislative process. That could be weeks, even months. The Postal Service has already said that there would be no consolidations during the election and holidays, so if it doesn’t get started this summer, the consolidation plan might have to wait until the new year.
There’s also a new OIG report out this week that’s based on a focus-group study of users of First-Class mail. The report concludes that the volume of First-Class mail will continue to drop over the coming years, but most mailers believe the declines will be slow and steady — unless something dramatic happens — like reducing service standards. The report could fuel the argument that the Network Rationalization’s basic premise — relaxing service standards will make it possible to realize significant savings in operating costs — is fatally flawed because the potential for lost revenue is so great.
The revised cost savings
When the Postal Service initially presented its case for Network Rationalization, the list of potential consolidations included 264 facilities. In the end, 35 consolidations were not approved, and six studies are ongoing, leaving a total of 223 approved consolidations. (The updated list is here.)
Because the entire list wasn’t approved, the net savings of about two billion dollars turned out to be an overestimate. So the intervenors in the PRC’s Advisory Opinion process asked the Postal Service to provide revised testimony reflecting the lower numbers. This week the Postal Service did just that, and it looks like the net savings from consolidating the 223 facilities will be about $500 million less than initially projected.
The original estimate was determined by adding up the cost savings in various categories — maintenance, transportation, processing work hours, etc. — which came to $2.6 billion. Since relaxing service standards will drive away business, the Postal Service contracted a market research to help estimate how much, and the research showed a revenue loss of $1.3 billion, which translates into a net “contribution” loss of $500 million (losses adjusted to reflect the cost of processing lower volumes). So the total savings for the plan came to about $2.1 billion.
With the gross savings reduced by $500 million, the new gross savings number is $2.1 billion. Subtract the $500 million for the revenue losses, and we’re left with $1.6 billion in total savings.
That’s about half of what the Postal Service originally told the news media when it began talking about Network Consolidation last fall, and what it is still saying on the USPS website, which says, “Faced with a massive nationwide infrastructure that is no longer financially sustainable, the U.S. Postal Service has proposed sweeping changes designed to save the organization up to $3 billion a year by cutting its network of processing facilities by over half and adjusting service standards.”
Even the new lower savings estimate of $1.6 billion is sure to be contested by the participants in the Advisory Opinion process. As noted in an earlier blog post on the subject, the issue is not simply that fewer facilities were approved for consolidation but also that there are many other problems in how the cost savings and lost revenue were calculated. As we learned from the phase-1 market research that the Postal Service wanted to keep secret, it’s very possible the contribution losses could hit $2 billion, which means the plan might not save anything at all.
Here’s a table summarizing the new data. It shows a breakdown of how the Postal Service revised the cost savings estimate based on the lower number of approved consolidations, along with the impacts of potential revenue losses. The numbers come from witness Bradley’s original testimony and his revised testimony. A discussion of the two phases of the market research is here.
May 2, 2012
Yesterday, leaders of postal reform in the Senate sent a letter to Postmaster General Donahoe asking him to extend the moratorium on closing post offices and processing plants while Congress works on postal reform legislation. If the Postal Service says no, about 233 post offices could close almost immediately after the moratorium ends on May 15. A list of the post offices in jeopardy is here.
These post offices are not part of the Retail Access Optimization Initiative (RAOI), the list of 3,650 being studied for closure that was announced last July. They were instead reviewed for discontinuance on an “ad-hoc” basis, i.e., independently of any plan coming out of postal headquarters. Sometime during October to December 2011, these post offices received a Final Determination notice indicating they would close in 60 days. But the post offices didn’t reach that stage because the Postal Service put a suspension on closing post office during the holiday season (beginning November 19), and then it declared a moratorium on closings from December 15 to May 15.
Many of the communities that received one of these Final Determinations appealed the decision to the Postal Regulatory Commission (PRC), but nearly all of the appeals failed. During the moratorium, almost every appeal ended in a split decision — two commissioners voting to affirm the decision to close, and two commissioners voting to remand the decision back to the Postal Service for further consideration.
In all, about 127 post offices lost an appeal during the moratorium, and they, along with over a hundred others that didn’t file an appeal, make up the list of 233 now slated for closure.
In their letter to the Postmaster General, the architects of the Senate bill on postal reform (S.1789) — Senators Carper, Collins, Lieberman, and Brown — ask the Postal Service to extend the moratorium. That might give those 233 post offices a second chance. In the letter, the senators write the following:
“You have announced your intent to close hundreds of post offices and processing facilities beginning May 15th. However, as last week’s debate demonstrated, there is considerable concern in the Senate that this approach will unnecessarily degrade the infrastructure which is one of the Postal Service’s most important assets…. We believe an attempt to proceed with the planned closures — to ‘get in under the wire’ while legislation to the contrary is being considered — would be counterproductive and would violate the clear intent of the Senate. We therefore urge you to extend the current moratorium to delay the closure or consolidation of post offices and mail processing facilities that would be kept open were S. 1789 to be enacted into law, while we work together with our House colleagues to enact comprehensive postal legislation as quickly as possible.”
While the senators are focused on the possibility that the Postal Service will make announcements about the RAOI post offices, those 233 post offices are in more imminent danger, and they would be the immediate beneficiaries if the Postal Service were to declare an extension of the moratorium.
There’s some indication that the Postmaster General may be inclined to do just that — or at least to slow down on post office closings. In an interview on C-Span this week, the Postmaster General responded to a question about what was going to happen to the 3,700 post offices on the RAOI list. Mr. Donahoe said the following:
“From a post office standpoint, the word ‘closure’ is a word we’ve never used. We’ve said ‘evaluate’ — looking at consolidation, looking at serving them on a rural route, even changing the hours so that instead of having an eight-hour office, maybe you have a six-hour office.” The Postmaster General proceeded to say that he would not be announcing thousands of closings in May. Rather, the closings would be “incremental.”
The Postmaster General’s comment that the Postal Service has never used the word “closure” is obviously untrue. As the postal news blog was quick to point out, the Postal Service has been using the word “closure” over and over again — in press releases, the Annual Report, and countless other places and occasions.
April 29, 2012
While the week’s postal news was dominated by the Senate vote on postal reform, something else important was going on. Opponents of the Postal Service’s plan to consolidate the processing network submitted their rebuttal testimony to the Postal Regulatory Commission (PRC).
This testimony — along with that of two independent experts brought in by the Commission — paints a vivid picture of what’s wrong with the Postal Service’s Network Rationalization plan. The testimony presents a devastating indictment of the plan — its underlying assumptions, its modes of analysis, and its potentially disastrous effects. The testimony is not just critical, however. There are also many suggestions for how to improve the plan or how to replace it with alternatives that realize substantial cost savings without reducing the service standards for First Class mail and periodicals.
Although the PRC’s Advisory Opinion won’t be completed for several months, the rebuttal testimony provides a good preview of where things are headed. While the PRC is likely to confirm the view that there's some excess capacity in the network, it's hard to imagine that the Commission will come out with a ringing endorsement of the plan. There's just too much that's obviously wrong with it.
Midway in the Advisory Opinion process
The process officially began on December 5, 2011, when the Postal Service filed its Request for an Advisory Opinion on the Network Rationalization initiative — a plan to close or consolidate about 250 mail processing plants. The Postal Service submitted testimony from a dozen witnesses (a summary is here).
Behind the scenes, the process actually had begun months before. In August, the Postal Service was briefing industry insiders on the plan and saying it would submit a Request for an Advisory Opinion in September or October. For reasons that have never been made public, the Request was delayed for two months. There’s circumstantial evidence that the postponement was caused by a market research survey — conducted in August and completed in September — showing that the plan would cause significant volume and revenue losses. It took a few weeks to re-do the survey and come up with less damaging market research, and that may explain the delay.
Once the Request and USPS testimony were submitted, it was time for the discovery phase (which ended Feb. 24), during which intervenors in the process posed interrogatories to the Postal Service witnesses. These intervenors included the postal worker unions, newspaper and magazine associations, industry stakeholders like Valpak, Time Inc, Pitney Bowes, and the Greeting Card Association, as well as several other interested parties, including David Popkin, Douglas Carlson, and the cities of New Orleans and Pocatello, Idaho.
The questions sought clarifications and information, and they produced a mountain of additional testimony. Some of the interrogatories looked for evidence that would help justify the plan for those who favor it, but mostly they picked apart the Postal Service’s testimony and began to reveal the flaws in the plan.
Next came a period for oral cross-examination of the Postal Service witnesses (March 20-23). More questions were posed, and more weaknesses in the case for consolidations were exposed. But the Q&A format of the interrogatories and cross-examinations did not always make it clear what the questioners were driving at and how the opponents to Network Rationalization were building their cases.
Things got much clearer this week. April 23 was the deadline for filing rebuttal testimony challenging the Postal Service’s case, and some seventeen witnesses submitted testimony. Most of it is very critical of the plan, and the Postal Service has its work cut out if it wants to undermine, discredit, or otherwise challenge the evidence presented by these witnesses.
The PRC’s procedural schedule indicates that the Postal Service has until Tuesday of this week to submit supplemental testimony that revises earlier testimony by taking into consideration that not all 252 consolidations were approved.
Over the coming weeks, the Postal Service will have a chance to submit interrogatories to the rebuttal witnesses, and then in mid-June, these witnesses will be cross-examined in person as well. The process is expected to continue through most of July, and then the Commissioners will need some time to digest everything and prepare their Advisory Opinion. It might be done in August, but September is more likely.
The PRC is basically halfway through the process, and we can now see both the case for and the case against Network Rationalization. Here's a summary of the rebuttal testimony.