Note: This Post Has Been Updated as of 5/7/2012
Welcome to another edition of ”What’s the Deal?,” the blog that keeps going no matter rain, nor sleet, nor snow, nor (fill in precipitation noun).
Disclaimer: There will be an inordinate amount of Seinfeld references/jokes in this week’s blog (much more than the usual 3-4).
In this week’s blog, we’ll discuss the recent legislation concerning the U.S. Postal Service and the apparent “inevitability” of the government service’s demise. We’ll also take a look at the history of the postal service and look at similar government services from around the world so we can answer the questions: Do we need this service? And if we do, how do we keep it?
In this recent political climate of needing to fight and scrape for every federal dollar, it is surprising that the United States Postal Service (USPS) has been spared huge cuts (so far). For many years we have heard much speculation about the future of the service: debates over its necessity, arguments that the service was defunct, that the service was inefficient, slow to adapt, and that its employees were all mentally unstable (For the record, postal workers are less at risk of being killed on the job than the average U.S. worker).
The Postmaster General, Patrick Donahue, has given Congress until May 15th to make a decision/plan to get the USPS’s finances straight, or he will begin cutting hundreds of postal facilities. So in this week’s Senate Bill, health benefit payments were restructured, retirement benefit prepayments were lowered, more revenue sources were explored (like delivering alcohol), spending provisions for conferences were limited, and Saturday delivery was not cut (but provisions for cutting Saturday service were explored). The aim of the Senate bill was to be less harsh on the USPS and focused on not having to close offices or services.
The bill goes to the House, where lawmakers have a different way of addressing the Post Office in their bill. The House bill establishes a separate committee, the Commission on Postal Reorganization (CPR), designed to implement savings from USPS through closing of offices, consolidation of activities, but with harsher restrictions, such as prohibiting appeal of an office closure and a not allowing a judicial review.
Both measures of legislation are directed at overcoming the large budget deficit that the USPS has accumulated over the last 2 decades. There are several arguments in response to the Congressional activism that show that the USPS is actually a very profitable company if certain burdenesome regulations were lifted and if the recession hadn’t slowed down business services.
More Like the USDS (United States Deficit Service)
The Post Office still handles 500 Million pieces of mail every day, 6 days a week, to 150 Million addresses. It is without a doubt, still a successful business that handles an incredible workload. How did the Postal Service come to face such threats as closure and serious restructuring?
First is the fairly obvious reality that an old-school paper/parcel delivery service faces: In a world where most communication has gone digital, there is a decreased market for their service. This is the same reality that print newspapers and magazines have had to confront. As Sen. John McCain called it, “a dying part of the American economy.”
Second, the Great Recession has reduced the amount of business the USPS handles. This may not be the primary driver of reduced revenue, but it absolutely should be recognized as a significant factor in addressing its finances.
Third, is the employee/collective bargaining situation. Employee benefits and poor financial management have contributed to problems controlling costs. Some examples of Postal employee benefits are:
- Annual Leave (15+ yrs of service = 26 paid days off/yr)
- Sick Leave (Ft employees can accrue 13 days/yr with no limits)
- Retirement (Federal Employee Retirement system): Postal agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions, postal agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life. A postal worker’s own contributions are also tax-defferable.
- Health Insurance (Excellent coverage that is covered mostly by the Post Office)
- Flexible Spending Accounts (cash assistance to help purchase medication, etc.)
- Life Insurance (Basic coverage is covered fully by the Postal Service)
These benefits along with a competitive compensation and job security are often cited as major reasons why the Post Office has been borrowing to perform basic operations. There is some merit to this, as the USPS employs nearly 700,000 people (546,000 career employees). With such a large workforce and playing the pivotal role in the global mailing industry, the Post Office also has a large and powerful organized labor group to protect these employees and their benefits. The forced pre-payment of retirement benefits from Congressional Legislation plays an alarming role in the financial burden on the USPS.
Fourth, and most importantly, the Post Office’s organizational structure as a government entity operating as a business, may be the largest contributor to its stagnancy in revenue, which is why the aforementioned legislation seeks to address it. Reorganization of the USPS and strict government regulations have made it difficult for the Post Office to remain profitable.
To see how the Post Office has reached this point, we’ll take a quick look at the history of the service and perhaps gain a grasp of the situation and maybe even a few answers for our previous questions.
From Ol’ Ben to a 24/7 Post Office
Importantly, the postal service had existed for decades in America before Benjamin Franklin became the first postmaster general. From 1673, formal mail service had been conducted; first between colonies, and then eventually centralized by the British government in 1707. Franklin was even appointed Postmaster General for the colonies between 1753 and 1775 (unsurprisingly, he was dismissed for actions sympathetic to colonial independence).
Once the Postal Service was intercolonial, it was funded by subscription and revenue was put back into improving service (a practice continued today). Ironically, the Crown’s service provided key communication lines that spurred and influenced revolutionary activity (funny how communication plays a role in revolutions). The 2nd Continental Congress (after the battles of Lexington and Concord) created a colonial postal service that would become the USPS with Ben Franklin as the first postmaster general from 1775 – 76 (he already had that on his resume). The Articles of Confederation established and regulated post offices and exacted postage on the service to pay for it (the A of C was unable to tax anything else). The U.S. Constitution continued the Post Office (article I sec. 8) and the Act of May 8, 1794 extended the Postal Service indefinitely.
As the overall territory in the United States grew, the Postal Service played a large role in the development of new settlements. From the Louisiana Purchase, to the gains of the Mexican War, the United States expanded its territory from sea to sea, and needed communication routes to connect people, government, and commerce. The Postal Service filled this role brilliantly, but it often came with difficult financing options:
As the country grew, people in new states and territories petitioned Congress for even more post routes, regardless of their cost or profitability. The Post Office Department, and thus the federal government, had to decide whether to subsidize routes that promoted settlement but did not generate enough revenue to pay for themselves or to operate in the black. The Department struggled with this issue. With congressional support and keeping fiscal responsibility firmly in mind, the Department ultimately made decisions in the 19th century that reflected public service as its highest aim. It funded post routes that supported national development and instituted services to benefit all residents of the country.
These decisions changed pricing of postage to depend on weight, and not on distance. The first postage stamps were issued in 1847 and worked to fund the service, “They… have made a new and remunerative business for the Department.” This was vital in ensuring that mail could reach any corner of the country. With the country’s geographic expansion came the problem of transportation. The Post Office, however, was able to cut its transportation costs by 17% while its route distances rose by 20%! It was able to do this by awarding contracts to the lowest bidder who could provide the “due celerity, certainty, and security of such transportation.” These contractors used stagecoach, horseback, steamboat, and rail (as they became available) to transport the mail. Interestingly, in the 19th Century, the Postmaster General ordered to keep Sunday delivery service since eliminating service on the Sabbath would delay the mail too much.
The initiation of free city and rural delivery (city first) connected letter carriers to individual addresses instead of just post offices. This worked to connect urban and rural America (which was mostly rural at the start of the 20th Cent.), but having an increased number of letter carriers, the Post Office reduced the number of post offices in service to save money.
Looking towards new business services, the Post Office petitioned to begin delivering heavier packages in 1904 which paved the way for general parcel service. The Parcel Post service was enacted in 1912 and was an immediate success (in part because of the expanse of catalog-home sales like Sears, Roebuck Co.). With very low rates, the Postal Service was actually able to out compete private parcel express carriers, forcing the hand of Congress to bail out one company, the Railway Express Agency and limit the package size of the Parcel Post, thereby limiting their business success.
The Post Office responded to a previous communications change in the middle of the 20th Century with a vast reorganization and a new coding system (ZIP codes). Communications through the mail changed from vastly social to business, rising to 80% business mail in 1963. Business mail involved credit card transactions, bills, magazines, advertising, bank deposits, and Social Security checks. To account for this massive inflow of material and offset growing costs, the Post Office began a new sorting system that assigned specific locations with their own code, the ZIP (zoning improvement plan) code. This involved integrating new mechanized sorting techniques to increase efficiency.
Efficiency rose through automation til the peak of Post Office use in 2006 where the USPS delivered 32% more mail with 9% fewer employees than 1988. Finally, the Post Office became an online service in 2002 when it launched its “Click-and-Ship” service. Since then, usps.com has been a way for customers to do business outside of the 9-5 hours of the physical post office, a much needed change for USPS to operate in a 24/7, connected world.
So clearly, the Post Office has had several obstacles in funding, technology, and competition to overcome. In several instances, the Post Office has been able to be:
- Innovative to improve their service
- Focused on improving service and communication in a sustainable manner
- A major player in facilitating the growth of the U.S. and in pioneering new technologies (one of the first to test out airplane delivery service)
Much of the recent financial troubles of the Post Office can be attributed to it’s unique but difficult position of having to operate as a business (ie. balance its books w/o taxpayer $), yet operate under the constraints of being a governmental organization.
We saw this exemplified in the 1950s when Congress restrained the Postal Service’s competitive edge in parcel delivery. More recently, Congress has intervened in the Postal Service’s secure hold on online bill paying in 2000 (from objection of the internet industry) and Congressional insistence that USPS not compete directly with UPS and FedEx, even when these delivery giants had encroached on USPS’s territory. (Note: I am not necessarily against Congress doing this since USPS is still a pseudo-Governmental entity, and allowing the USPS to have monopolies on these services would reduce free market competition).
US Post Office Reorganization
A few key pieces of legislation have given the Post Office its present organization; a set up that is seen as part of the financial problem.
The Post Office Reorganization Act of 1970 transformed the Post Office Department into the United States Postal Service as an independent establishment of the Executive Branch. While the mission of the Service remained the same, the authority no longer lied with Congress but with the USPS Board of Governors (a kind of Board of Directors) and a Post Office Exec. Management. The USPS could also issue bonds to fund services, direct collective bargaining between management and unions, and set rates via a new postal commission. These changes were intended to make sure that the USPS actually had some measure of control of their workload, pricing, transportation and facilities.
Importantly, the Reorganization Act gave more power to unionized workers, as the terms and limits of employment were done through collective bargaining. Compensation would remain on pace with the private sector and retirement benefits would continue to be in line with Civil Service benefits. The creation of the Office of the Inspector General made sure that there were continuous efforts looking for savings and areas for improved efficiency.
The Postal Act of 2006 significantly changed the way USPS was organized: It also initiated the Postal Regulatory Commission, a Congressional watchdog that submits reports to Congress and the President on how the Post Office is progressing in modernizing its business to accommodate the 2006 Act (a network plan). Keep in mind, 2006 was the year the amount of mail/packages/services peaked for USPS, yet this legislation was implemented in view of falling mail usage and rising costs. The network plans aimed to increase accountability, improve efficiency standards, and explore alternative revenue streams. In addition, this legislation implemented the pre-payment of retirement benefits for Postal employees. So basically, the ’06 Act tried to create measures to hold the Post Office accountable for not meeting revenue and service standards.
So that leads us to the legislative overhaul/reduction plans of the present, where we have yet to solve a seemingly unshakeable issue of running a successful business under the watchful and sometimes burdensome Government hand.
But USPS is not the only Government run postal service that has been in trouble….
What Have Other Countries Done?
In Great Britain, Royal Mail is, like the USPS, a state owned company. Interestingly, its ownership is scheduled to change in the near future. The Postal Services Act of 2011 enabled the Government to privatize Royal Mail up to 90% of shares, with the remaining 10% owned by Postal employees. These shares are expected to be issued in 2013- 2014. So, Great Britain is seeking a wholly business approach to the Postal Service and to lose much of the constraints of operating as a government institution.
Across the Channel, France has a similar situation with its state owned Postal Service (La Poste) in that it is planning on privatization in accordance with the EU in the near future (though this has been postponed because of the financial crisis). In addition, La Poste is a full fledged bank offering loans and savings accounts. Further commercial activity with a broader range of activities is also planned.
Down Under, the Australian Post has a similar set up, as a state owned corporation, but is actually operating in the black. The Aussies have found a way to do this by increasing the capacity of the business to expand into other ventures while keeping the mandatory letter-carrying service of delivering across the country @ the same rate. Australian Post recognized that the real killer is not email and losing personal social communication (only 5% of Aussie Post service) but in fact was the threat of losing business operations. The Australian government has allowed AuPo to compete in air courier service and financial agency services (among other flexible provisions).
Do these examples provide any insight to the troubles of the USPS?
From all angles, the organization of the Post Office’s is unsustainable, and a need for cutbacks (gradual or small) or large organizational change seems inescapable. But, most Americans and Congress, believe that the Post Office should remain, as is written in the Constitution, a part of government (though semi-autonomous). There are some proponents of privatizing the Post Office, like our European friends are planning to do, but they are the minority. The argument now is over how harshly to cut back on the USPS.
But I think we can use some key points from our Postal Service’s history as well as some pragmatic logic to come up with some answers to our questions from the intro:
- Q: Do we need this service? A: I most undoubtedly think we do. Though its financing may be a wreck because of its status and the recession, the USPS is still by far the most important mail and parcel delivery entity in the world. It certainly still handles a huge amount of mail in the U.S. (167.9 Billion pieces of mail processed in 2011) that we cannot consider this service defunct. Further, as many have argued, Post Offices remain a central component to rural and small communities across the country. Without reliable fiber-optic networks in range (yet), Post Offices remain a vital communications line from rural to more populous areas.
- Q: How do we keep it? A: This is of course, the central argument being “debated” in Congress.
- First, I would look to specific instances in which the Postal Service has been successful, such as pursuing new technologies and new avenues in commercial activity. These ideas though, are dependent on the Fed being able to loosen the reins around USPS’s range into the free market. Some reform has come, such as the Postal Reorg. Act in 1970, but a chance to gain greater access to markets (without tipping the balance) would surely loosen the purse strings. We could of course look to privitization, like the Brits and the Euro Zone, but I think that would make the USPS a competitive loser. Though its quasi-government, part-business status can constrain USPS, it also is uniquely helpful. USPS has the backings of the Fed, and can use these to its advantage such as pursuing new technologies faster and integrating them more quickly (while having a financial backfall).
- Second, either the Postal Employee’s Union, or the USPS Board of Governors will have to blink on benefits. If the alternative is closure of offices or service days, than perhaps the staring match will come to an end sooner than we think. If Postal Employees want to remain competitively paid with (arguably) very good benefits, then the Union as a whole will have to come to terms with fewer members. Conversely, the Board of Governors and Exec Management should stop hiring so many part-time and non-career employees. This short term savings is creating rifts with the Union, who are growing ever more steadfast in keeping their reducing membership with benefits.
- Third, the USPS will have to transform itself if it is to avoid John McCain’s prediction of a “dying part of the American economy”. As mentioned in the first bullet, the organization of the USPS has much to do with its ability to transform its services to new technology and communications, and the Post Office must be willing to adapt or add new services, which the Post Office has a proven record of doing.
Well, there is of course plenty more to discuss on this topic, but I think this lays some of the brushstrokes on the political canvas (I tried to be non-partisan!)
Until next time, here’s one more Seinfeld/mail reference to send you off:
Your Faithful Historian,
Eric G. Prileson
Sources and Further Reads:
the History of the United States Postal Service, An American History
“Royal Mail to deliver IPO in 2013″. Finiancial Times. 25 March 2012.