The relationship of USPS lease costs and lessor location

August 17, 2015

Earlier this month Dakotafire Media published a couple of very good articles about the ownership arrangements for post offices.  It’s an important issue, since about three-fourths of the country’s post offices operate in spaces leased by the Postal Service.  

As noted in a recent OIG report, the Postal Service leases more than 23,000 buildings — about 79 million square feet of interior space — and pays more than $800 million annually in rent.  According to the OIG, there are many cases where the Postal Service is paying more than fair market value.

The second of the Dakotafire articles looks at this same issue and comes to a similar conclusion — post offices often rent for more than comparable commercial property in the community.

The first Dakotafire article examines a related question — the relationship between lease costs and where the owner of the building is located.  Focusing on several hundred post offices in North and South Dakota, the Dakotafire analysis revealed a correlation between the rental rate and lessor location.  Generally speaking, if the lessor lived near the post office, the Postal Service paid a lower rent.  If the lessor lived relatively far away, the Postal Service paid more.

That’s a significant finding, and if it were true on a nationwide basis, it would be a good argument for encouraging the Postal Service to lease locally when possible.  As it turns out, however, what’s true for leases in the Dakotas doesn’t seem to be true for the country as a whole. 

Nationwide, lease rates with local lessors are not much different than the rates for more distant lessors.  In fact, in terms of average cost per square foot, the Postal Service pays in-state lessors more than it pays out-of-state lessors.


Issues with absentee owners

The Dakotafire articles don't just focus on lease costs to the Postal Service.  They make a broader case for why communities are often better off when the owner of the building lives near the post office. 

Maintenance, for example, is a key factor.  Local landlords are usually more familiar with repair contractors and have an easier time keeping the post office in good shape.  That’s important because many post offices close every year for emergency suspensions due to issues like mold and other unsafe building conditions. 

As Dakotafire suggests, local lessors may also be more invested in keeping the post office open because they know first-hand how important the post office is to the community as a social hub.  If there’s a problem with the building, they are often quick to address it.

These are very good points and hard to argue with.  But if one is looking strictly at the lease-cost issue, one finds that for the country as a whole, there’s not a consistent correlation between lease rates and the lessor’s location.  And on average, the Postal Service pays a higher rate per square foot to lessors located in the same state as the post office than it does to out-of-state lessors.

The following analysis uses the USPS Leased Facilities Reports (just as Dakotafire did).  We compared lease rates for in-state lessors with out-of-state lessors.  That, it should be noted, is a little different from the more nuanced approach employed by Dakotafire, which used the actual distance between the post office and lessor’s address.  But for the picture nationwide, the broader brush strokes paint a pretty clear picture.  Here’s what it looks like.

OIG recommends halt to Phase II Network Rationalization until USPS service performance improves

August 14, 2015

The USPS Office of Inspector General has just issued a management alert about the timeliness of mail processing after the changes in service standards went into effect on January 5, 2015. 

The OIG says that the changes were expected to affect about 14 billion pieces of total mail volume, and up to 16 percent of First-Class Mail.  As discussed in this previous post, the amount of mail that is being impacted by the change in standards may be far greater than that.

The OIG’ shows that since the first of the year, the Postal Service has not been meeting even the more relaxed standards.  The problems are so significant that further changes in operations and consolidations should be put on hold until service performance stabilizes at a satisfactory level.

The OIG's recommendation is essentially the same as the view expressed by PRC Commissioner Ruth Goldway back on January 13, 2015 — a week after the service standards were changed — in an op-ed piece for The Hill.  

"At a time when the Postal Service is proudly promoting its Sunday delivery and same day package delivery offerings in major cities," wrote Goldway, "it should not be impairing service in other parts of the country.  The Nation depends on a Postal Service that provides as consistent a level of service and pricing as possible to all Americans."

"Before proceeding with these changes," continued Goldway, "the Postal Service should – at the very least – offer well-supported projections of the impacts on operational efficiency and solid estimates of financial savings before hastily embarking on this new round of cuts and closures."  

The Postal Service proceeded with the changes anyway, and, as anticipated, delays have occurred across the country.  

The fact that service performance has been declining has already been well documented, as discussed in this previous post on this website and in other news articles (like this piece by Lisa Rein for the Washington Post).  

But the OIG's new report should make the point more forcefully, and the Postal Service may find it difficult to proceed with the consolidations until performance improves.

As the OIG writes about the past few months, “Mail was not being processed timely throughout the country.  We found in the first 6 months of 2015 delayed processing increased by about 494 million mailpieces (a 48 percent increase), as compared to the same period last year (SPLY).”

To illustrate the extent of the delays, the OIG provides the following chart.  The blue bars show how much mail was delayed this year, while the red bars show the delays during the same period last year (SPLY).  (Click on the chart for a larger view.)

The OIG goes on to note the two main explanations for the delays: bad weather and the changes in operations that took place in January when the new service standards were implemented.

The OIG proceeds to break down the situation for two-day mail and for 3-5 day mail.  In both cases, performance has declined significantly.  

The OIG found the External First-Class Measurement (EXFC) scores declined by as much as 6.71 percent for 2-day service right after the service standard revisions as compared to the SPLY. 

Scores were much worse for 3-5 day mail.  They declined by as much as 38.60 percent for 3-day service as compared to the SPLY.

These declines are illustrated in the following charts.  (Click for larger view.)

It should be noted that service performance has been improving over the past quarter.  But as the OIG observes, “service is not where it was during the SPLY, as the network still needs to stabilize.”

As a result of its findings, the OIG has recommended to the Postal Service that it mitigate the delays and assign appropriate staffing to ensure timely delivery of the mail. 

Most significantly, the OIG also recommends that the Postal Service “establish criteria for determining if the network has stabilized and ensure the criteria are met prior to resuming the Phase II consolidations or conducting any other optimization efforts.”

The Postal Service responded to a draft of the OIG’s report and said that management did not agree that the consolidation activities should be put on hold.

In response, the OIG said that it nonetheless “continues to believe that no further significant national network or operational changes should take place prior to establishing criteria and stabilizing the network.

The OIG’s report can be found here.  The latest service performance reports can be found on the PRC website here.  We’ve uploaded them to Google Docs here.   Previous performance reports are archived on the PRC website here.

(Photo credit: USPS mail processing plant in Paducah, KY, closed earlier this year)

Get it while you can: The PRC to rule on exigent rate case - How long will the surcharge go on?

July 29, 2015

UPDATE: A few hours after this post was published, the Postal Regulatory Commission released its order on the exigent increase.   As predicted in the post, the Commission determined that the Postal Service was entitled to another $1.191 billion in additional contribution as an exigent rate adjustment, which translates to $1.396 billion in revenue.   That means the surcharge will be extended by about eight months — from early-to-mid August, when it was scheduled to end, to sometime in April 2016.  (Read more about today's order at the end of the post.)

* * * * * * * 

Any day now, the Postal Regulatory Commission is expected to issue an order regarding the exigent rate increase.  Judging by the comments that have been filed by the Postal Service and the mailers, the Commission is likely to rule that the 4.3 percent exigent surcharge will be extended by several months, perhaps longer.

The Commission will be responding to a June 5th ruling by the DC District Court of Appeals remanding the Commission’s 2013 order on the increase.  According to the court, there was one element in the order that was “arbitrary and capricious” — the way the Commission had counted up the losses due to the recession.

The court ruled that Commission should not have counted each year’s losses only once.  Instead, the losses should carry over to the following year, and again to the next year, until the “new normal” of lower volumes is reached.  At that point, the Postal Service should have been able to adjust to conditions, and the exigent circumstances could no longer be said to exist.

For the past few weeks, the Commission, along with the Postal Service and the mailers and other stakeholders, has been looking at the same question that has been on the table since the beginning, back in 2010, when the Postal Service first requested an exigent increase: How much volume and revenue did the Postal Service actually lose due to the recession?  Only this revenue could be made up through the exigent surcharge.

The Commission’s original order said that the Postal Service had lost about $3.2 billion in revenue, or about $2.8 billion in contribution (profit), due to the recession.  It therefore granted a 4.3 percent surcharge until this amount was achieved.  The surcharge went into effect in January 2014, and it is set to expire soon, in early to mid August. 

The Commission could not officially act on the court’s ruling until it had issued its mandate, which happened on Monday of this week (July 27).  With the expiration of the surcharge just days away, the Commission will undoubtedly act quickly.


Consumer relations

In response to the court’s ruling, the Postal Service and the big mailers submitted initial comments and reply comments debating how much additional contribution the Postal Service should be allowed to take in and how much longer the surcharge should remain in effect.   The estimates were widely divergent.

Initially, the Postal Service described three scenarios, ranging from $1.2 billion to $8.7 billion in additional contribution.  The mailers put forward two estimates, one for $600 million and another for just $60 million.  In response to comments from the mailers, the Postal Service put forth at least three more scenarios.  Other commenters offered additional opinions on how to count the losses, but without presenting calculations for a total.

Given how far apart the mailers and the Postal Service are in their estimates, it’s not surprising that the rhetoric in the comments sometimes gets a little testy.  For example, the Postal Service refers to some of the mailers’ arguments and assertions as “baseless,” a “shell game,” “perverse,” and so on. 

In response, the Greeting Card Association and National Postal Policy Council made this remark in a footnote to their comments:

“Finally, while it is not part of the issue before the Commission in this remand proceeding, it should be observed that the tone and some of the wording of the Postal Service’s motion does not promote healthy customer relations or further the kind of productive cooperation which helps both it and the mailing public.”


The estimates

Here’s a quick summary of the methodologies that have been put forward for implementing the court’s ruling.  The comments filed on the remand case can be found in PRC docket R2013-11 R, here.


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:

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