A Timely Proposal for Postal Reform

Friday, January 30, 2004

Last summer, the President’s Commission on the Postal Service sent its recommendations for postal reform to President Bush. The report is a concise, thorough evaluation of the U.S. Postal Service. It is also timely. Demand for first-class mail delivery, the Postal Service’s core revenue source, has been declining rapidly as customers employ electronic alternatives. In 2002, first-class mail volume suffered the largest drop in 30 years, and single-piece first-class volume (customers mailing single letters) is dropping at an increasing rate. Online bill payment is having a particularly significant effect.

At the same time, the Postal Service’s liabilities are escalating. The commission estimates USPS debts and unfunded obligations to be around $90 billion. In 2001, the General Accounting Office placed the USPS on its list of “high-risk” institutions because of its fiscal problems, raising the possibility of a taxpayer bailout. The commission recommends many constructive reforms that will ensure the viability of postal services for a long time to come.

 

Monopoly Powers

The Postal Service has legal monopolies over both the delivery of letters and the use of the customer’s mailbox. The commission recommends that the Postal Service retain both of its monopolies, at least in the near term. However, it would put in place a procedure for regular review and possible elimination of the monopolies as technology evolves.

Specifically, the commission recommends that a new Postal Regulatory Board be given authority to revisit the postal monopoly law “when the evidence shows that suppression of competition is not necessary to the protection of universal service without undue risk to the taxpayer.” That crucial reform would allow the monopoly to be gradually contracted in steps as policymakers become confident that delivery service would continue in a competitive market. Such a reform implicitly recognizes the growing body of scholarship, as well as the experience in many other countries, suggesting that a legally enforced monopoly is not necessary to ensure universal delivery service. Moreover, the USPS can’t complain about such administrative review of its monopoly because it unilaterally “suspends” the delivery monopoly for certain types of mail, which allows companies such as FedEx and bicycle messengers to operate.

 

Ownership

Because it is concerned about the interruption of mail flows if the Postal Service were to offer shares, the commission believes that the Postal Service should not be privatized but should remain government owned. Similar to the 1968 Kappel Commission, the commission does not dispute the ultimate desirability of investor ownership but only questions the difficulty of making the transition to private ownership. The failure to advocate shareholder ownership creates some inconsistencies in the report. For example, the commission strives for increased managerial accountability, which it hopes to obtain by creating a “corporate-style” board of directors.

Without shareholders, that statement puts the cart before the horse. A corporate board of directors is appointed by shareholders to monitor managers on its behalf. Because there are no stockholders, it is unclear to whom the board should hold the managers accountable (taxpayers? employees? ratepayers?) or what performance measures it should use (mail volume? delivery speed? accounting returns?). Moreover, managerial control ultimately comes from stockholders themselves, often in the form of proxy fights, take-overs, or large block holders (such as pension and mutual funds) exerting pressure. The board structure is just one mechanism among many that helps a firm’s owners control its managers.

Similarly, the commission suggests that the new regulatory board “ensure that retained earnings are accumulated at an appropriate level, and consistent with the public interest.” Without explicit shareholders, a legitimate question is, retained by whom? Under government ownership, it is unclear who has a property right to the firm’s earnings.

There is, however, a practical reason to support the commission in its decision to retain government ownership. Ownership is perhaps the single most contentious issue surrounding postal reform, overshadowing even de-monopolization. It would be unfortunate if much-needed reform were impeded by arguments over ownership structure because many substantial improvements can be realized without that major change.

But because the commission recommends no explicit owners to monitor managers, the new Postal Regulatory Board must effectively serve as a substitute for shareholder monitoring, while controlling the monopoly powers. It is thus important that it be granted substantial new regulatory authority to restrain the Postal Service. Fortunately, the commission’s suggestions for a new Postal Regulatory Board would accomplish that.

 

Regulation

In addition to reviewing the delivery and mailbox monopolies, the commission suggests granting a variety of new and essential powers to the regulatory board. The first is authority to ensure the Postal Service’s financial transparency by compelling it to disgorge documents and improve its cost accounting. The Postal Rate Commission cannot currently subpoena information from the Postal Service, and the quality of accounting information it has released has been poor. It is difficult to discern its financial health or the degree to which it uses revenues from its monopolized activities to reduce prices in competitive activities. The commission also recommends subjecting the Postal Service to SEC disclosure requirements.

Second, the commission recommends that the board have authority to cap rates for monopolized products. It suggests that the ceiling increase at less than inflation, thus giving the USPS incentive to enhance productivity over time. Such a regulatory technique—a price cap—has been used successfully in other industries, although it is usually applied to privately owned firms.

Third, the commission recommends that the board keep the USPS focused on traditional services to prevent it from cross-subsidizing competitive products with revenues from monopolized products. This is a crucial mandate. In addition to monopoly power, the USPS does not pay taxes, has the right of eminent domain, does not pay a rate of return to investors, borrows at preferential rates from the U.S. Treasury, is not subject to antitrust law, has its own police force, does not pay parking tickets, and so on. Unless it is closely regulated, it can use those valuable privileges and immunities to unfairly and inefficiently compete with private firms in a range of activities.

Fourth, the commission recommends that the board be given authority to refine the USPS’s universal service obligation and review its service standards. Universal service has never been defined precisely and currently means different things in different regions. In some suburbs and rural areas, for example, the USPS does not deliver directly to the customer’s home but instead delivers to a cluster box. The elimination of Saturday delivery has been considered. It is important that a strong regulatory body continually review the details of universal service because that is the rationale for retaining the delivery monopoly.

 

Labor Relations

The commission also recommends granting the board power to enforce the postal pay comparability standard, which states that “it shall be the policy of the Postal Service to maintain compensation and benefits for all officers and employees on a standard of comparability to the compensation and benefits paid for comparable levels of work in the private sector of the economy.” Although that seems generous, especially given the job security associated with postal employment and that postal health and retirement benefits are part of the federal system, economists have routinely estimated that postal service wages exceed the standard by about 28 percent. Such a wage premium is consistent with the very low postal quit rate, as well as the massive backlog of job applicants.

The commission proposes that the standard be clarified to include the entire compensation package, rather than just wages. It suggests that the board independently determine whether the standard is met or not and recommends that the board’s determination constrain the negotiation and arbitration process. It suggests that the limitation apply immediately to new employees and gradually to existing employees.

In addition to the changes in defining and enforcing the comparability standard, the commission recommends other changes in labor relations. For example, it suggests decreases in the postal labor force, stating that “this is the critical issue when it comes to controlling the future costs and capabilities of the workforce. Far more than individual benefits, the size of the workforce determines the costs of the workforce.”

Because the USPS pays out about 76 percent of revenue to employees, reducing total costs must involve reducing labor costs. Fortunately, 47 percent of the postal labor force will be eligible for regular retirement by 2010. Thus, the USPS can reduce its labor force significantly through natural attrition if it simply limits hiring, a recommendation it should certainly follow.

 

Post Offices and Real Estate

The Postal Service’s physical network is massive, with about 38,000 retail postal outlets, 446 mail processing facilities, and 215,000 vehicles. A key aspect of reform is rationalizing the use of those assets in the face of declining mail volumes. For example, banks and grocery stores could offer basic window services, replacing some post offices. The commission recommends keeping only those post offices necessary to ensure universal service and selling the rest. Such sales would save the USPS a substantial sum, which could be passed on to ratepayers, without jeopardizing universal service.

Similarly, the USPS owns large mail sorting and distribution centers that are sometimes located in urban areas. Those could be exchanged for less-costly facilities. Underutilized processing facilities could be consolidated. The commission suggests a detailed review of processing facilities by a Postal Network Optimization Commission that would recommend consolidation of facilities, modeled on the successful military base closings commission. Congress would be required to vote on its recommendations in their entirety.

 

Summary

Because of the complexity of postal reform, this essay has omitted many important topics addressed by the commission. However, it illustrates that the commission’s recommendations are timely and substantial.

The commission’s ideas for reform of postal regulation are particularly helpful. The current powers of the Postal Rate Commission leave it too weak to control the USPS or even to ensure its financial transparency. The USPS is currently able to determine such crucial issues as the scope of its own monopoly, the size of its discounts to particular mailers, the amount of information it discloses, and even the quality of service it provides. There is no regular assessment of the need for the monopoly in ensuring universal service. The commission’s recommendations would go a long way toward making the Postal Service a more accountable, focused organization.

Postal reform is a large, challenging undertaking. Yet many industrialized countries have started serious postal reform, so there is a lot of international experience to guide us. The President’s Commission has produced an excellent set of recommendations for the United States. It is now time for President Bush and Congress to act.

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