Commentary–

Postal Consumers: Be Wary Of New ‘Transformation Plan’

By Don Soifer

With a January 8 stamp price hike just ahead, the US Postal Service (USPS) has issued its latest “Strategic Transformation Plan.” This blueprint for the future, according to Postmaster General John Potter’s introduction, “will continue to reduce costs by improving efficiency in all ... operational and business processes.”

That sounds like great news for both customers and taxpayers. But is it?

For customers, who are barred by law from taking their letter business anywhere but the government-protected Postal Service monopoly, it teases that “transformation” could stave off further rate increases by finally getting serious about bringing costs under control. This holds promise too for taxpayers, who had best be wary lest dwindling mail volume without adequate cost controls set the stage for an expensive bailout.

Unfortunately, it turns out that after the 87 pages of transformation, the plan does not really offer much in the way of recognizable change. In fact, it largely ignores the Postal Service’s two most urgent problems: $75 billion in unfunded liabilities — mostly in benefits promised to future retirees — and skyrocketing labor expenses. Fully 80 percent of the Postal Service’s operating expenses go toward compensation and benefits.

The USPS has made some important progress cutting costs under Potter’s tenure. Between 2001 and 2004, the postal workforce was reduced by 9.4 percent — mostly by attrition and retirement.

But as noted by economist Rick Geddes, author of Saving the Mail, the volume of first-class mail, the Postal Service’s bread-and-butter product, declined by about 5.5 percent over that same period. If it seems to you that your mailman is bringing you fewer personal letters and greeting cards, you are probably right: Personal cards and letters now account for just 3 percent of this total. When you consider that first class generates more than half of the service’s revenue, this raises concerns about the future financial picture. But it is the Postal Service’s business plan in light of this changing environment that should be the real concern for consumers.

Postal management has tried to turn to advertising mail to make up the difference, offering “worksharing” discounts to bulk mailers to boost volume. But, as Geddes observes, the value of these discounts to the Postal Service bottom line is unclear.

What is clear is that lowering costs, not just raising stamp prices, must be a major part of the service’s future plans. This new transformation plan offers no hint as to whether the savings can be used to offset the bill for unfunded liabilities. In fact, it makes no mention of these enormous financial obligations — or how to reduce them.

Another piece of seemingly-good news from the Transformation Plan does not stand up to close scrutiny. The plan says that ‘productivity growth has been steady and strong.’

Productivity measures units of output (such as the number of letters sorted or delivered), that are obtained per unit of input (such as hours of labor). According to postal management, productivity has increased steadily since 2002, most recently growing by 1.4 percent for the first three quarters of 2005 over the same period a year earlier.

These productivity advances, while commendable, mask a problem. A steady increase in the cost of labor (80 percent of Postal Service expenditures) has eaten away most of the financial benefit from the higher productivity, according to Michael Schuyler with the Institute for Research on the Economics of Taxation.

The numbers bear out his observation. The Government Accountability Office noted that over the past five years, Postal Service compensation and benefit costs increased by billions of dollars, despite a decrease of some 80,000 career employees.

The Transformation Plan identifies the need to “reduce costs” as one of four strategic goals. Yet it declines to address how it will rein in labor costs. It gives only a vague assurance that “opportunities to keep wages and benefits in line with the private sector will be reviewed.”

However the Postal Service’s newfound savings are being used, they haven’t done anything to halt stamp price increases. It has already indicated that it will request further increases in the near future.

Meanwhile, Postal Service management is pressuring Congress for freedom to abandon its proposed cap on future increases. If that happens, the sky’s the limit on postal rates, and the losers are sure to be the Post Office’s monopoly consumers.

The new Transformation Plan pays lip service to the right ideas: Cutting costs and improving productivity. Unfortunately, it does not tell us if the Postal Service can deliver real change.

(Don Soifer is Executive Director of the Arlington, VA-based Consumer Postal Council.)