While focus has been applied to the effect of technology on hard copy mail and the residual effect on the volume to be delivered by the Postal Service in future years, few have concentrated on the impact of the internet and other means of communications on postal rates. Mail services that are unaffordable will guarantee the demise of the Postal Service so assuming that my analysis is correct that there is a base of hard copy communications sufficient to require a universal system, focus must be applied to the structure of postal rates; who pays and how much?
Postal rates have evolved from early times when rates were determined by individual piece cost of service to the issuance of universal government postage in 1847. This first stamp cost five cents which was unilaterally determined with excess costs of service subsidized by the government.
For over 200 years, the annual subsidies were appropriated by Congress supplementing revenue collected, but effective in 1981, as required by the Reform Act of 1970, such subsidies were discontinued and the USPS became a totally separate and independent entity, financed exclusively from revenue generated from sales and services.
This elimination of annual appropriations ushered in a new financial model to finance the largest corporation in the country (since surpassed by Wal-Mart) with responsibility to make door to door delivery, six (6) days a week to every address in the country. This door to door mail service has been used by the Direct Mailing industry that exists solely as a user of mails. They recognized that with the elimination of a government subsidy, rates would be adjusted to reflect cost and embarked on a campaign to change the regulations to ensure that costs would not be spread proportionally among all users. The large mailers found allies in conservative legislators and after many failed attempts they influenced the drafting of reform legislation, passed in 2006, ensuring that postage rates would be applied unevenly between individual users and corporate mailers. And to preserve this unequal payment, the legislation tied all postage rate increases to increases in the Consumer Price Index (CPI) guaranteeing that Standard rates could not be adjusted to reflect actual cost.
This effort will be recorded among the darkest periods of union activity in postal history when all of the postal unions, with the exception of APWU, joined with the large mailers in passage of the 2006 PAEA which required the payment of future health care liability in annual amounts and on a schedule that has been instrumental in the destruction of the financial stability of the Postal Service. These unions drank the “kool aid” of annual expedited rate adjustments tied to inflation and a promised relaxation of restrictions on the use of the postal network.
In concert with their temporary allies representing the interest of the Direct Mail industry, the coalition succeeded in passing legislation that has contributed to current conditions. Let history record that but for the reform partnership responsible for the PAEA, the economic recession and technological substitution alone would not have put postal finances in such a precarious position.
Upon the elimination of the government subsidy for postal services, the 1970 model to finance the Postal Service was that postage rates were set with the objective that rates would equal cost “over time.” The application of the 1970 standard by the Postal Service was the establishment of a three year rate cycle during which the USPS would generate a profit in year one, break even in year two and experience a loss in year three. The result was that expenses would equal revenue over time with the flexibility to respond to unexpected circumstances. The recent severe recession would have qualified for rate adjustments prior to passage of the PAEA.
From 1971 to 2006, this cycle resulted in postage adjustments equal to inflation over that period but the Direct Mail industry and cooperating unions were unhappy with the large increasers associated with the three year cycle. They testified in Congressional hearings that smaller and more predictable increases were more compatible with their business plan and succeeded in including in the 2006 legislation the annual rate adjustments. In addition to the suffocating restriction limiting rate increases to the CPI, the coalition of large mailers and postal unions succeeded in applying the restriction to individual classes of mail. This application of the CPI restriction to each class of mail limits the authority of the Postal Service to adjust specific rates based on costs and expenses. A specific class that is set improperly cannot be increased beyond the annual CPI adjustment.
This distortion of the rate schedule is magnified by the logic that exists with postal decision makers who believe that “rates drive volume.” Despite clear evidence to the contrary, they cling to the belief that the next discount will lead to additional volume. The record is clear that the decision to mail or not to mail is not directly associated with postage costs. For the single piece mailer, costs that are less than one half the price of a pack of chewing gum or a bottle of water do not influence the decision to mail and bulk mailers have costs that exceed postage to consider including: paper; ink; envelopes; computer programs, and other associated costs. A connection between rates and volume is non-existent in those circumstances that rate adjustments do not exceed CPI. But despite the clear evidence, postal decision makers cling to the belief that volume can be influenced through rate manipulation. Rate discounts, NSAs and special seasonal mailing programs have not resulted in volume increases equal to revenue losses, nevertheless they keep trying.
Current mail volume is Exhibit 1 in debunking the theory that rates dictate volume. At a time that US postal rates are the lowest in the world and after factoring in rate discounts that are the highest in the history of the United States Postal Service, volume has declined by 30%. One would think that the Postal Service would abandon this mistaken connection but the relationship between large mailers and postal officials is unhealthy and contributes to the continuation of this nonsequitur. The large mailers receive special privileges of access, private briefings and the opportunity to influence decisions.
When discussions of future mail services ensue, these very mailers whose rates are subsidized threaten privatization as the cure for the USPS’ precarious financial position, despite the fact that the US postal rates are the lowest in the world including those countries that have privatized postal services, debunking the theory that lasse fair economic principles will generate increased efficiencies and lower costs The United States postal system delivers 40% of all mail deliveries in the world with efficiencies and dedicated employees not equaled among civilized societies, and the costs of service has not been a factor in the recent decline of volume. But this restriction on rate adjustments and the efforts to influence volume through rate adjustments serves to handicap an essential service for our society.
APWU was successful in achieving an amendment to the PAEA that was submitted by Senator Lieberman to restrict discounts to the postal cost avoided but despite this legal restriction, the Postal Rate Commission has ruled that a minimum of seven discounts presently exceed postal costs, but correction is curtailed by the restrictions limiting adjustments to the CPI. If the examined discount exceeds the postal avoided cost in the amount of 10% and the CPI increase is in the amount of 4%, the immediate adjustment is limited to 4% and even that adjustment may be challenged on the basis that it will present a hardship on the beneficiary of the inflated discount.
This abuse of the revenue distribution will be tested in the implementation of the recently ratified APWU contract that postal management has testified on the record that it will reduce postal cost in the amount of $3.8 billion over the life of the agreement. By law, this reduction in postal cost must result in a corresponding reduction in rate discounts but this exposes the danger in a union’s objective of saving money for the Postal Service, if the union cannot dictate its use. The Postal Service has refused to adjust rates consistent with current labor costs so there is no reason to believe that an additional $3.8 billion will generate a change in behavior. The persistent rationale that rates drive volume will result in the $3.8 billion in employees’ costs being transferred to reduced postage for large mailers and if volume is not increased, the basic financial problem will not be addressed.
Reduced postage through the rate classification system was intended to increase volume through the introduction of mail that was not time sensitive. Second and Third class mail, since converted to Standard mail was designed to fill the gaps of the postal system required to process, transport and deliver First Class Mail. The Standard class was established at a time when mail was processed by hand and transported by ground and computers had yet to be invented. At the time there were periods within the processing and transportation cycle that First Class volume was not sufficient or consistently received to employ the number of employees required to provide consistent and universal service. Standard mail was intended to fill the gaps. The classification of Standard Mail is an anomaly in most postal systems that limit mail of certain dimensions to a single class and it has run its course in the United States.
Conversion to automation and air transportation have eliminated the distinction between First Class and Standard Mail but the contribution to institutional cost is a ratio of 3 to 1 with first class mail equaling three pieces of Standard Mail. Both are pieces of paper of similar dimension and weight that require duplicate use of postal resources. The Optical Character Readers, the trucks, airplanes and the letter carriers involved in the processing, transporting and delivery of mail do not make a distinction between Standard and First Class Mail. They consume the same space and weight and the same effort is required in their transmission. There is no longer justification for the wide disparity in their cost.
Any long term review of future postal services must begin with a visit to this rate setting manipulation; however, the field of political influence is not level because single piece First Class postage is that applied to individual users who have no political lobby on their behalf and with the CPI restrictions are guaranteed to have postage rates at a fixed level. This distorted division of postal costs has burdened the single user with the obligation to disproportionally fund the postal system. As technology impacts volume generated from these single piece users who are more directly impacted by technological options, the subsidy generated to be used by direct mail should be reduced and a restructuring will be necessary for survival.
The question over the long term is not if hard copy mail will continue to exist long term sufficient to require a universal system but the division of cost and those who support the privatization of mail services have a dilemma. Mail will continue to exist as a means of communications and no private commercial entity will assume the responsibility of universal delivery at universal cost. Private sector fees for service would drastically reduce volume and for confirmation, ask UPS or Fed Ex if they will deliver a commercial ad at postal rates.
Direct mail cannot exist without a Postal Service and advertising by mail is one of the pillars of the capitalistic economic system.
The Postal Service needs advertising as a segment of its volume and advertising needs the Postal Service to transmit commercial messages to the people. There are no volunteers to deliver mail in Idaho and Alaska.
The use of hard copy mail will continue far into the future and universal service at uniform rates can only be provided by a government monopoly. It is expected that political forces will continue to engage in the battle to design the perfect conveyor of mail services but the United States Postal Service has a proven track record and it will prevail with adjustments.
Veronica, I guess I will take your advice and go cut the Grass.
source: Burrus Journal