The synergy of losses: How much will downsizing really save?

January 31, 2012

Imagine it’s Wednesday and you want to mail something, and you’re used to seeing that mail delivered the next day.  But things have changed.  You can’t get to the post office until Thursday because yours has closed and the nearest one is too far away to make the trip today.  The next-day mail now takes two days because 250 mail processing plants have closed, so your mail won’t be delivered until Saturday.  But now there’s no delivery on Saturday, so your mail won’t be delivered until Monday (if it’s a holiday, make that Tuesday).

Scenarios like that one will cost the Postal Service some serious money.  A lot of mail is time-sensitive — bill payments, periodicals, advertisements about sales — so longer delivery times can cause big problems and drive away business.  Individuals, organizations, and corporations will be more inclined to use the Internet, or advertise in other venues, or have a private company deliver their periodicals.  Customers will simply take their business elsewhere, and that means lost revenue for the Postal Service.

The Postal Service has presented three plans for downsizing to address falling mail volumes and declining revenues: eliminating Saturday delivery, closing post offices, and consolidating mail processing plants.  It has prepared detailed reports on each plan for the Postal Regulatory Commission (PRC) for Advisory Opinions, and the PRC has issued its own reports on the first two plans and it's working on the third right now.   There's plenty of material to look at if you're wondering whether or not these plans might succeed in balancing the books of the Postal Service.  (Of course, re-amortizing payments to pre-fund healthcare benefits for future retirees would solve the problem with much less pain, but that’s another story.)

Each plan looks as if it could save some money. The cost savings from cutting jobs and downsizing the infrastructure are greater than the revenue losses each plan might cause.  But that’s looking at the plans in isolation.  The problem is synergy.  What happens when all three plans are implemented?

Normally, synergy is seen as a positive phenomenon: it refers, for example, to when people work together and produce a result greater than the sum of their individual efforts.  But synergy can also be negative, like when several economic problems interact with each other and cause a recession.      

If all three plans the Postal Service is pushing were implemented, the danger is that this negative synergy would kick in, and the total revenue loss would be greater than the sum of the revenue losses incurred by the plans considered in isolation.  The synergy effect could be so great, in fact, that the cumulative revenue loss would exceed the cost savings.  Implemented together, the three plans could actually lose money and increase the postal deficit.  Then what?  More cuts, and more revenue declines?  The Postal Service could soon find itself in a downward spiral that’s impossible to stop. 

In the Advisory Opinion process for the Network Rationalization plan to consolidate 250 processing plants, the issue of cumulative effects has come up on several occasions.  The Postal Service asked a market research firm to do a study about customer’s attitudes toward the various plans, and the study revealed that customers were very concerned about the change in delivery standards coupled with eliminating Saturday delivery and closing post offices. 

Several witnesses in the case have also been asked about cumulative effects, and how revenue losses might be impacted if all three plans were implemented.  The Postal Service has apparently not sponsored any quantitative research on the synergistic effect of implementing all three plans, so it’s hard to say exactly what those revenue losses might add up to.  But we can look at the numbers for each plan and get an idea of what could happen.


Eliminating Saturday delivery

In its case for eliminating Saturday delivery, the Postal Service contracted the services of Opinion Research Corporation (ORC), one of the oldest and most respected marketing research firms in the United States.  (You may have seen the name lately, since ORC partners with CNN to do election polling.)  The goal was to develop estimates of how much revenue might be lost if there were no mail delivery on Saturday.

Rebecca Elmore-Yalch, Senior Vice President at ORC, testified before the PRC about her firm’s research.  In her testimony she explained that ORC did two “parallel phases of research” — one qualitative and one quantitative.  The qualitative research, conducted September 1 to 24, 2009, involved “drawing out participants’ attitudes, feelings, beliefs, experiences, and reactions” through focus groups and in-depth interviews with a variety of mailers, big and small.  The quantitative research, completed in October 2009, developed forecasts of how the proposed changes would impact the volume of various types of USPS products.  

Using ORC’s estimates of lost revenue, combined with its own estimates of cost-savings, the Postal Service estimated it would save $3.1 billion by eliminating Saturday delivery.  As explained in its Advisory Opinion, the PRC questioned the numbers, did its own calculations, and concluded the savings would be more like $1.7 billion. 

Part of the discrepancy had to do with interpreting ORC’s market research.  The Postal Service estimated that it might lose $0.2 billion net revenue, but the PRC, looking at the same research, gave the numbers a different interpretation and said net losses would be more like $0.6 billion.  In its response to the Advisory Opinion, the Postal Service stuck by its original estimates.  

Contract post offices, closing faster than they open

January 29, 2012

Contract post offices look like a cheap and easy way for the Postal Service to outsource its retail postal business.  Just put the post office in a private business or community center, and don't worry about paying rent or postal employees.  There's still a post office in town, the Postal Service has met its universal service obligation, and a lot of money has been saved.  

But contract post offices are not the panacea that postal management, big mailers, and advocates of privatization would like to think they are.  They have many problems, and their numbers just keep declining.  During fiscal year 2011, the Postal Service opened 144 contract postal units, but it closed 259 of them.

News of these additional openings and closings was revealed in materials submitted by the Postal Service to the Postal Regulatory Commission (PRC) for its annual compliance report.  The document can be found on the PRC website (download the pdf here), and a list of the offices that have opened and closed is here.

A contract post office is an “approved postal provider” that’s operated by a private business or community and not staffed by USPS workers.  There are basically two types — a contract postal unit (CPU) and a community post office (CPO) — and then there's the closely related “village post office” (VPO). 

According to the 2009 Postal Employees Guide to Contract Postal Units, a CPU is “a supplier-owned or supplier-leased site operated by the supplier under contract to the Postal Service to provide postal services to the public at postal prices.”  A CPO is similar — it's a contract postal unit in which a small rural community, rather than a local business, assumes the responsibilities of providing postal services. 

Neither type of contract unit offers the full range of products and services available at a regular post office, but for many communities, it’s better to have a CPU or CPO than no post office at all.  You can get a sense of just how much people can value a CPO in this great story on Going Postal about one that closed earlier this month in Alplaus, New York, and here's another about a closing announced just a couple of days ago.

The Village Post Office was the “concept” unveiled last summer along with plans to closing 3,652 post offices under the Retail Access Optimization Initiative (RAOI).  Though the VPO just sells stamps and flat-rate boxes, it was supposed to mitigate the loss of a post office for thousands of small towns across America.  However, at this point, only about eight VPOs have been opened, and the Postmaster General, having discovered that many small towns don’t have a suitable place to locate a VPO, has backed off the new concept.

News of so many contracted units closing in 2011 is somewhat surprising, given that the Postal Service has been so intent on shifting from government post offices to "alternative retail outlets" like CPUs.  After all, they cost very little to operate — basically just the wages for the USPS personnel responsible for overseeing the contract unit from an official USPS "host" post office.  

Contract units also appeal to the big mailers, which see them as a money-saving alternative to post offices, and money saved means lower postal rates.  In its brief to the PRC on the RAOI Advisory Opinion, the direct mail company Val-Pak argued that contract units were a valuable “method of outsourcing the provision of retail services” because they reduce costs and “improve service to customers.”   

But contract units have a number of problems, and their number has been steadily declining for a long time.  In 1970, there were 7,241, and in 2010, there were 3,694.  After the openings and closings in 2011, there are 3,519 contract units remaining.  That represents a total decline of over 50%, and an average of about 90 closings a year.  

Congressman Hinchey calls for a moratorium on the closing studies

January 28, 2012

New York Congressman Maurice Hinchey has written a letter to Postmaster General Patrick Donahoe asking him “to place a moratorium on the USPS's current discontinuance studies until the USPS resolves the numerous problems the PRC identified in the RAIO. “  Hinchey is circulating the letter in Congress, looking for others to sign on with him.

The letter calls attention to the “serious flaws” identified by the Postal Regulatory Commission (PRC) in its Advisory Opinion on the Retail Access Optimization Initiative (RAOI).  The letter cites (1) inadequate financial data on all the post offices in the plan, “which makes it impossible to accurately calculate cost savings from proposed closures”; (2) inaccurate representations of revenue (various kinds of non-stamp-sale revenue were not included in the Postal Service’s calculations); (3) using geographical rather than driving distance as a criterion for putting post offices on the closing list; and (4) using criteria that disproportionately target rural post offices, a violation of 39 U.S.C. 101(b). 

The Postal Service has not yet issued a formal reply to the Advisory Opinion, and it has apparently conveyed its intention to proceed with the closings to Ruth Goldway, Chairman of the PRC.  At a meeting of the PRC on January 5th, the Chairman made some introductory remarks about the status of the closings, intended to make sure everyone understood that the moratorium did not mean the discontinuance studies had stopped.  As the Postal Service said when it announced the moratorium, the studies are ongoing — only the final closing of the doors is postponed until May 15.

Goldway also said that the Postal Service would be holding a second community meeting for most of the post offices still under study (about 3,300 of the original list of 3,652).  A second round of meetings is not required, so they are apparently intended to help rectify some of the problems the PRC had identified.  Goldway also said that we could expect to hear announcements of “mass closures” when the moratorium ends. 

Hinchey’s letter asks the Postmaster General to put a moratorium not just on the closings but on the studies themselves.  That would prevent the "mass closures" Goldway referred to.  It would also give Congress more time to address postal reform.

Just yesterday, Fredric V. Rolando, President of the National Association of Letter Carriers (NALC), announced that due to pressure from the unions, the Senate would delay a vote on S. 1789, which had been expected soon.  That's the bill introduced by Joe Lieberman (I-CT), along with Susan Collins (R-ME), Tom Carper (D-DE) and Scott Brown (R-MA).  It has some decent features, but a lot of problems.   

There's a passage on “service standards” that would restrict post office closings by ensuring that certain criteria are considered, like geography and demographics, but that would not prevent thousands of post offices from closing.  The bill  would return $11.4 billion in overpayments to the Federal Employees Retirement System (FERS), but not the $50 billion to $75 billion in overpayments to the Civil Service Retirement System (CSRS).  It would re-amortize payments to pre-fund healthcare benefits for future retirees over a 40-year period instead of 10, but still cause excessive payments.  It would also permit a shift to five-day delivery in two years, reduce workman’s comp for employees of retirement age, change contract negotiations to favor management, and move toward an exit of the federal health benefit program (FEHBP). 

The bill is still a lot better than the one likely to come out of the Republican-controlled House, which will probably be some version of H.R. 2309, the Postal Reform Act introduced by California Darrell Issa.  That bill is intended to dismantle the Postal Service and it's nothing but bad news for postal workers, post offices, and the country's postal system.  

The best of the bills are H.R. 3591 and  S.1853, introduced in the House by Oregon Democrat Peter DeFazio, co-sponsored by Hinchey and fellow New Yorker Louise Slaughter (D), and introduced in the the Senate by Vermont Independent Bernie Sanders.   These bills would “recalculate and restore retirement annuity obligations of the United States Postal Service, eliminate the requirement that the United States Postal Service pre-fund the Postal Service Retiree Health Benefits Fund, place restrictions on the closure of postal facilities, create incentives for innovation for the United States Postal Service, to maintain levels of postal service, and for other purposes.”

If the DeFazio-Sanders bill were to reach President Obama’s desk, all would be well with the Postal Service.  But that’s not going to happen.  If the House and Senate can agree on legislation — and that’s a big “if” — it will more likely be some compromise between the Issa and Lieberman bills.  It’s hard to imagine how that kind of postal "reform" will make supporters of the post office and postal workers happy.

Invisible Hands: The Businessmen’s Campaign to Dismantle the Post Office

January 24, 2012

The leaders of the Postal Service have made no secret of their plans for reforming the postal system.  They have issued white papers, given speeches, presented “optimization” programs, and appeared before Congressional committees.  The plans are clear: eliminate the layoff protections in union contracts; cut the career workforce by nearly half while tripling the number of non-career workers; reduce service standards for first-class mail; do away with Saturday delivery; give management control of workers’ benefit plans; consolidate away over 250 processing plants; and close 15,000 post offices.

What we don’t see very often are the players making this all happen.  We assume the Postmaster General is making the decisions, but he is merely the front man.  Behind him are the USPS Board of Governors, the mail industry stakeholders, and the corporate class as a whole.   These businessmen (and women) prefer to keep a low profile, so we rarely hear from them in public.  They leave it their surrogates — journalists and academics, politicians and pundits — to speak for them.  But it’s the businessmen who fund the think tanks, endow universities, make campaign contributions, pay lobbyists, and run the news media.  Yet for the most part, they are not to be seen.

In her excellent book Invisible Hands: The Businessmen’s Crusade Against the New Deal, historian Kim Phillips-Fein paints a very revealing picture of how the corporate class operates.  Her theme is the way conservative businessmen worked behind the scenes to undo the New Deal.  Believing all would be right if government stayed out of the economy and left everything, in Adam’s Smith famous expression, to the “invisible hand” of the market, these businessmen have spent decades working to weaken unions, eliminate social welfare programs, minimize government regulation of their companies, and diminish public services.

While the U.S. Postal Service is obviously not a product of the New Deal, that same conservative agenda is behind the attack on the Postal Service we’re witnessing today.   Cutting the workforce, closing post offices and plants, and moving toward privatization through outsourcing and divestiture of assets — these are all part of an effort to shape the postal system in ways that serve the interests of an elite business class rather than the good of the country as a whole.  The free-market ideology and greed for profits that drove efforts to undo the New Deal are basically what’s driving the “postal reform” movement today.  

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