The Postal Task Force Cometh: What to Expect

SteveSlideshow, Story

On Friday of this week, the President’s Task Force on the Postal Service is expected to release its report.  Not much has been written about what it might say, but there are plenty of indications. In June, the Trump Administration released a document entitled “Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations.”

This Reform Plan, which was prepared primarily by the Office of Management and Budget, would restructure almost every element of the federal government, including the Postal Service. When it comes to the section on the Post Office, the Reform Plan is clear about the ultimate goal: “This proposal would restructure the United States Postal System to return it to a sustainable business model or prepare it for future conversion from a Government agency into a privately-held corporation.”

In other words, turn the Postal Service into a profit-making entity, then sell it. The Reform Plan states that “recommendations will include administrative and legislative reforms to the United States postal system that promote our Nation’s commerce and communication without shifting additional costs to taxpayers.”

It’s not clear what administrative reforms the Trump administration could make without going through Congress.  Given how the Postal Service has been structured by the 1971 Postal Reorganization Act (PRA) and the 2006 Postal Accountability and Enhancement Act (PAEA), it would be difficult if not impossible for the Trump Administration to simply issue an executive order or give out administrative directions that change things in any significant way.

It is unlikely, for example, that Trump could simply issue an executive order directing the Postal Service to increase parcel pricing, the way he has with tariffs. Conceivably, some major changes on postal pricing could be implemented by the USPS Board of Governors.  For example, the BOG could direct the Postal Service to change the way it determines the “appropriate share” of institutional costs covered by competitive products.  (See below.)

But there are currently no Presidentially-appointed Governors.  The only two members of the Board are the Postmaster General and Deputy PMG, and without a quorum, no significant decisions can be made on matters like pricing policy. If the Task Force ends up simply making recommendations for postal reform legislation, there’s probably not much to worry about.  Congress has been unable to pass legislation for the past several years, and there’s been little movement recently.

Now that the Trump administration has shown its hand by announcing privatization as its ultimate goal, getting anything passed is even less likely than before.  How many members of Congress will want to go on the record as a proponent of privatization? Some members, on the other hand, are happy to declare their opposition to the idea.

A few days ago a bipartisan group of senators tried (unsuccessfully) to get an amendment passed that would have “prohibited the use of appropriated funds from undermining universal postal services or moving forward with efforts to privatize the Postal Service.” With Democrats poised to make gains in Congress, legislation that further dismantles the postal infrastructure will be even further away come January.  In some states and districts, the prospect of privatization could even become an election issue in November. In the meantime, if Republicans are going to finally pass a bill, they’ll have to act fast.  Perhaps Trump will soon have audiences at his rallies chanting “privatize the post office.”  

Executive Order 13829

According to Trump’s Executive Order 13829, the Task Force is examining several issues:

  1. The expansion and pricing of the package delivery market and the USPS’s role in competitive markets;
  2. The decline in mail volume and its implications for USPS self-financing and the USPS monopoly over letter delivery and mailboxes;
  3. The definition of the “universal service obligation” in light of changes in technology, e‑commerce, marketing practices, and customer needs;
  4. The USPS role in the U.S. economy and in rural areas, communities, and small towns; and
  5. The state of the USPS business model, workforce, operations, costs, and pricing.

Together these topics cover almost every aspect of the postal system, and each one has far-reaching implications.

The reference to the definition of the “universal service obligation,” for example, is about the Postal Service’s obligation to ensure that all users of the mail — rural as well as urban — receive a minimum level of service, regardless of the cost to the Postal Service. Talk about redefining the USO is usually about making it easier to reduce service to rural areas, such as closing small post offices. After all, the thinking goes, who needs a post office anymore now that we have the Internet? (For more on the USO, see this OIG report.)

While the Task Force report will probably be wide-ranging in scope, the topic that is likely to get the most attention is pricing on parcels.  It’s the first item on the agenda, and it was probably the main impetus for the Task Force in the first place. So, how will the Task Force deal with the issues raised by Trump’s repeated claims that the Postal Service is undercharging Amazon by $1.50 a package?

A rate hike on parcels?

Given that a rate hike may be on the horizon, Amazon and several other companies and trade groups have formed a Package Coalition (packagecoalition.org) to fight back.  The group’s members include Pitney Bowes, Publishing Clearinghouse, Columbia Sportswear, QVC, and the National Retail Federation. The Coalition has begun its lobbying campaign by bringing on John McHugh as  chairman.

As a member of Congress (1993-2003) and chairman of the House Subcommittee on the Postal Service for six years, McHugh was a leader on postal reform.  His bill H.R. 3717, the Postal Reform Act of 1996, laid the groundwork for the PAEA.  McHugh says he’s already sent out emails to dozens of members of Congress in anticipation of the Task Force report.

The Task Force could recommend legislation that significantly changes the system McHugh helped devise, which bifurcated postal products into market-dominant and competitive. The Task Force might also make more modest recommendations for legislation that adopts one or more of the proposals UPS has been pushing with the PRC and court appeals.

These proposals would change the Postal Service’s costing methodologies in ways that would lead to higher prices on parcels without undoing PAEA. For example, the Task Force might recommend adopting the UPS proposal that the “appropriate share” for competitive products to contribute to institutional costs should reflect the share of total revenues brought in by those products. So, if competitive products generate 30 percent of total revenues (as they did in 2017), they should cover 30 percent of institutional costs — as opposed to the 24 percent they actually did contribute. In the Deutsche Bank report discussed in this previous post, the implications of such a scenario are worked out in detail, as seen in the following chart:

Source: Deutsche Banks, “Breaking Through the Noise on AMZN, USPS & FDX/UPS”

As the table shows, in 2017, competitive products contributed about $7.3 billion to total institutional costs of $31 billion (23.6 percent).  If the minimum contribution were raised to 30 percent, competitive products would need to contribute about $2 billion more. For some reason, the DB analysis suggests that the extra $2 billion would be spread evenly across the 5.1 billion parcels delivered in 2017.

The result is a 40 cent increase per package. Since the average cost for a parcel is $4, that’s a 10 percent increase. But for Ground, which averages $2.15, the increase would be about 19 percent. That’s probably not what would happen, though.  More likely, every competitive product would go up about 10 percent. The average price on a Ground parcel would go from $2.15 to about $2.37.

That’s a relatively small amount, but Amazon probably ships between one and 1.5 billion parcels through the Postal Service, so that’s $200 to $300 million in additional shipping costs. The impacts on other types of parcels would also be significant since they are priced much higher than the low-cost Ground rate.  The average revenue on a piece of Priority mail, for example, is $8.15 (for retail and commercial overall). A 10 percent increase would raise it to about $9.  A medium size Flat Rate Box costs $13.65; a 10 percent increase would come to $15.

Since Trump can’t simply mandate an increase on the prices Amazon pays, everyone who uses the Postal Service for parcels would experience an increase, either directly when they go to the post office or indirectly through higher prices on goods bought online.  What member of Congress wants to vote for that?

More extreme possibilities

Whatever happens, there’s almost no way that the Task Force will call for a price hike on parcels anything in the ballpark of the $1.50 Trump has been tweeting about.  But since it’s still a possibility, what might the effects be? Included among the source materials on the Package Coalition website is a “market scenario analysis” that shows the possible effects of various changes the Task Force might recommend.

This analysis was done by SLS Consulting, whose founder and president is Larry Buc.  Like McHugh, he is a highly respected figure in postal world.  He has worked for the Postal Service and the Postal Rate Commission, and he’s has served as a consultant to the private sector on postal prices, costs, and operations. In one scenario, SLS shows what would happen if the Postal Service actually raised prices on parcels by $1.50 to make up for the supposed undercharge Amazon is enjoying. According to SLS figures, such an increase would have these effects:

  • The average US household faces price increases for goods delivered by USPS, FedEx, and UPS of about $132 a year.
  • Less affluent households will bear smaller costs since they receive a smaller number of packages, but that cost will amount to a higher percentage of their income.
  • Collectively, the price increase will cost American households about $16.2 billion dollars annually, more than half of which will wind up benefiting the shareholders of UPS and FedEx.

SLS also examines what would happen if new legislation required the Postal Service to stop delivering packages altogether.  The average U.S. household would experience an increase cost for goods bought online of about $290 a year.  The collective impact on American households would be about $35 billion dollars annually — “all of which will wind up benefiting the shareholders of UPS and FedEx.” As the SLS and Deutsche Bank reports make clear, increasing parcel prices does much more than inflict pain on Amazon.  Everyone will suffer — everyone, that is, except UPS and FedEx.

Insolvency and unfunded liabilities

The Task Force report will inevitably include a discussion of what terrible shape the Postal Service is in financially, with emphasis on its unfunded pension and retiree health cost obligations.  The Reform Plan provides a preview: “USPS has lost over $65 billion since the last recession and recorded a $2.7 billion loss last fiscal year….  The existing in USPS’s retirement programs total more than $100 billion. USPS owes an additional $15 billion to Treasury’s Federal Financing Bank and has further liabilities to the Department of Labor’s Workers Compensation program.

According to the Postal Service’s own estimates, the Agency is insolvent, with liabilities exceeding assets by more than $120 billion. It’s unlikely that the Task Force report will provide a more balanced and nuanced description of the finances and liabilities.  It’s not going to explain that most of the losses are due to the pre-funding mandate that has unnecessarily required the Postal Service to pay over $5 billion a year into Postal Service Retiree Healthcare Benefit Fund (RHBF).

The Task Force will probably also ignore any reasonable solution to the unfunded liability issue, like re-amortizing the RHBF obligation (as called for by S.2629 – Postal Service Reform Act of 2018).  Instead, the Task Force will use the liabilities issue as justification for cutting costs. (Just an aside: If the OMB really wants to move toward postal privatization, here’s step one: universal health care.  That would eliminate the problem of the RHBF and almost the entire Postal Service deficit.  Most of the countries that have privatized the postal system also have universal health care.)

Shrinking the physical and personnel footprints

As the Reform Plan notes, “To reach profitability, most international postal operations have gone through significant restructuring, including shrinking their physical and personnel footprints.”  The Task Force will undoubtedly make recommendations for how the Postal Service can do some more shrinking of its own.

Some of these recommendations may echo elements in postal reform legislation advocated several years ago by Darrell Issa, as in his Postal Reform Act (H.R. 2309). These measures include creating a BRAC-like commission to mandate the mass closures of post offices and processing plants, requiring the Postal Service to convert to cluster box delivery (less costly than door and curb delivery), eliminating Saturday delivery (or even going to few deliveries per week, especially in rural areas), eliminating the no-layoff clause in union contracts, shrinking the size of the career workforce, and so on.

The OMB’s Reform Plan already indicates that this is where the Task Force is headed.  It notes the following: “A private postal operator that delivers mail fewer days per week and to more central locations (not door delivery) would operate at substantially lower costs. A private entity would also have greater ability to adjust product pricing in response to changes in demand or operating costs. Freeing USPS to more fully negotiate pay and benefits rather than prescribing participation in costly Federal personnel benefit programs, and allowing it to follow private sector practices in compensation and labor relations, could further reduce costs.”

The Postal Service has already done a lot of shrinking, and most of these ideas for further cost saving are very unpopular.  For example, when the Postal Service embarked upon plans to close thousands of post offices back in 2011, it caused so much controversy that members of Congress intervened and encouraged the Postal Service to ease off.  There have been but a handful of closings since 2014 (as discussed in this post). Converting to cluster boxes may be even more problematic.  When the Conservative party in Canada mandated mass conversions, there were protests across the country, and it became an issue in the 2015 election.  The Liberal party took power, and immediately ended the conversions. It’s easy to talk about shrinking the Postal Service, but doing it is something else entirely.

Paths to privatization

The Reform Plan imagines privatization along the lines of what’s happened with some foreign postal systems (including this week in Israel), but it doesn’t say much about how privatization might happen here.  It simply suggests that it might happen “through an initial public offering (IPO) or sale to another entity.”

Presumably the Task Force report will get more specific. Over the years, several ideas have been proposed for how to privatize the Postal Service.  Perhaps the Task Force will incorporate some of them. For example, Robert Shapiro has written two studies, both funded by UPS, one about how the Postal Service benefits financially from its monopoly through unacknowledged subsidies, and a second about how cross-subsidies lead to unfair competition with the private shippers.

Shapiro concludes his second study with this recommendation: “We conclude, along with the President’s Commission on the Postal Service and the Federal Trade Commission, that the best way to end these cross-subsidies and promote a more efficient and innovative marketplace is to separate the USPS’s two business lines [market-dominant and competitive] into separate entities that do not share facilities, equipment, workers and financial assets.”

Shapiro’s recommendation is developed in more detail in a paper for the Brookings Institute by Elaine Kamarck.  “That future should begin with a decision to break the organization into two separate entities,” concludes Kamark.  “One organization should be a public sector organization with the sole mission of delivering on the universal mandate – defined in a way that meets the reality of the information age. The other organization should be privatized so that it is out from under the laws and regulations that make innovation and flexibility all but impossible.”

There’s an excellent rebuttal of Shapiro’s papers in a report entitled, “Why the Postal Service Is Not Subsidizing Package Delivery” by Robert Atkinson of the Information Technology and Innovation Foundation.  This paper is among the source materials on the new Package Coalition website.  There’s more on the Brookings paper in this previous post, and a rebuttal by NALC president Fred Rolando here.

While Shapiro and Kamarck would essentially break up the Postal Service into a public entity that delivers letters and a private business that delivers parcels, there have been other proposals to break up the Postal Service in a different way. The National Academy of Public Administration, for example, prepared a study (done with funding from Pitney Bowes) proposing a “hybrid public-private partnership.”  The “upstream” operations of the postal system — retail post offices and mail processing — would be transferred to the private sector, while the Postal Service would continue delivering the last mile.  (This proposal is discussed in this previous post.)

The risks of disruption

While these dreams of privatization remain just that, the Task Force report will probably find ways to move the country further down the path of privatization through piecemeal steps — more outsourcing, worksharing, property disposals, downsizing, and corporatization.  In this way, the Postal Service can be prepared for the final step, full-blown privatization.

As we await the report of the Trump Task Force, it may be worth looking back to the last time we had a Presidential Commission report on the Postal Service. In July 2003, President George W. Bush’s Commission on the Postal Service issued a report entitled, “Embracing the Future Making the Tough Choices to Preserve Universal Mail Service.”  The Commission took a close look at privatization, and it concluded this:

“Privatization of a commercial entity the size of the Postal Service could seriously disrupt both mail service and the private postal marketplace. It is highly unlikely that the private sector, acting alone, could provide the universal mail services we have come to expect from the Postal Service. For the Postal Service itself, privatization would likely involve a decade or more of wrenching organizational changes that could undercut the stability and continuity that are the hallmark of public postal service. “Thus, the Commission believes that the preferred strategy is a more evolutionary approach, under which the Postal Service is maintained as a public entity, but refocused and reorganized to enhance its efficiency and adaptability in the face of an uncertain, and ultimately more competitive, future.”

(Photo: Office of Management and Budget Director Mick Mulvaney, Federal Times)