Politically Direct Summer 2009: Fighting for the Future of Mail
July 28, 2009 — Since the inception of our nation, individuals and businesses have relied on the United States Postal Service as an affordable and stable means of communication for conducting business, corresponding with friends and family, paying bills, and receiving payments.
The Postal Service is part of the genetic structure of our nation, as evidenced in the appointment of our first Postmaster General, Benjamin Franklin, by the Continental Congress in 1775, and the establishment of the National Postal Museum within the Smithsonian Institute since 1990.
As citizens we are fairly tempted to take the USPS for granted and to forget what an important role it plays in the economic and social lives of every residence of this nation.
Many have assumed that, as a government agency, the Postal Service must be immune to the ups and downs of the economy. Unfortunately, that is not the case. The USPS relies on earned revenue rather than taxpayer support, and is therefore vulnerable to financial instability and its effects on business.
Undoubtedly, 2009 has seen exceptional economic difficulties across all segments of the US economy as more companies and organizations find themselves in financial distress, and families all around the United States feel the strain of a faltering economy. We should not then be surprised that the USPS is facing the same financial difficulties as other beleaguered organizations.
With the increased use and continual advancement of digital channels for communication, traditional mail volumes and budgets for advertising have decreased. The Postal Service has seen its volume drop from an all-time high of 212 billion pieces just a few years ago, to a projected 185 billion pieces this year.
Despite aggressive cost-containment efforts, in its most recent report, the Postal Service posted a $1.9 billion loss for the second quarter of 2009, bringing the loss to $2.3 billion at the halfway point through its fiscal year. Total mailings for the second quarter have dropped by 7.5 billion pieces, or 14.7 percent, compared with the same quarter a year ago.
These losses, which are projected to approach $6 billion for the 2009 fiscal year, have outpaced even the most dire estimates.
While the Postal Service has utilized loans from the Federal Financing Bank to temporarily adjust for budgetary shortfalls, this year’s rapidly decreasing volume, combined with prior debt, has the Postal Service edging closer to its $15 billion statutory credit limit.
Recognizing that stop-gap measures will not make up for an ever-declining mail volume, the Postal Service is looking at all available options to continue providing their services, while reducing operating overhead expenses and creating a more efficient and streamlined operation. To accomplish this formidable task, the Postal Service has been exploring all options for financial relief, including special pricing to take advantage of additional capacity during slower months, and even the possible elimination of a day of delivery service.
THE USPS SUMMER SALE
With the enactment in 2006 of the Postal Accountability and Enhancement Act (PAEA), the Postal Service was given the added ability to operate as a business, including the flexibility to propose special pricing events, which requires the approval of the Postal Regulatory Commission (PRC).
USPS Summer Sale Details
- The sale will run from July 1, 2009 through September 30, 2009.
- Mailers who mailed over 1 million Standard letters and/or flats from October 1, 2007 through March 31, 2008 are eligible to participate in the sale (about 3,250 mailers accounting for 75 percent of Standard Mail volume).
- Mailers will receive a rebate of 30 percent on any mail volume in that period which is over the past threshold.
- Mailers’ rebates will be adjusted if their October 2009 volume is less than their October 2008 mail volume, adjusted to their mailing trend.
Showing great creativity and ingenuity, the Postal Service exercised this new flexibility by introducing the Standard Mail Volume Incentive Pricing Program or “Summer Sale.” Taking advantage of the fact that summer months typically see lower volumes of mail moving through the Postal system, the Summer Sale offers rebates to mailers as an incentive to enter additional mailpieces into the system at a volume above the mailers’ prior-year threshold level. This plan creates the opportunity for reduced costs to mailers, while increasing volume—all with very little increase in cost to the Postal Service.
Recognizing the importance of such a program, the PRC quickly and unanimously endorsed the program, issuing their decision in a fairly speedy 35 days, rather than the 45 days allotted for approval of such programs. As mailers require significant lead time for mail campaigns, this expedited decision should enable even more mailers to join in the program than may otherwise have been able to participate.
DMA has long pushed for the introduction of volume-discount pricing, and has advocated seasonal pricing, such as the Summer Sale, and strongly encourages all eligible mailers to take full advantage of the special pricing.
Recognizing that the Summer Sale alone cannot fully offset the losses in volume, additional measures are being proposed, or are in the works, to stabilize the Postal Service’s finances. One such effort is legislation that would revise the payment schedule imposed by PAEA for funding retiree health benefits. A bill that contains the revised schedule (HR22), cutting the annual payment of $5.6 billion by roughly one-half for a period of three years, was approved by the House Postal Subcommittee on June 24.
DMA had advocated for a new payment schedule, and supported an earlier version of HR22, which would have given the Postal Service relief for a longer period. DMA noted during discussions of this fix that the PAEA-imposed requirement for pre-funding of retiree health cost was overly burdensome, and also pointed out that the Postal service is the only government agency required to pre-fund retiree health benefits.
The bill, which was introduced by Representatives John McHugh (R-NY) and Danny Davis (D-IL), currently has 337 co-sponsors, and was amended during markup to address the Congressional Budget Office’s (CBO) concerns about the impact on the Federal budget.
RETIREE HEALTH-CARE COSTS
In a recent self-initiated report, the independent Office of Inspector General at the Postal Service provided additional impetus to the effort to revise the annual payments. The report found that the average seven-percent healthcare cost inflation rate assumed in establishing the existing payment schedule results in an over-estimation of the Postal Service’s future retiree health care liabilities.
The Inspector General stated that the payment schedule currently required by PAEA could over-fund the health care liability by $5.6 billion by the end of fiscal year 2016, when the funding requirement in PAEA would be completed.
The research concludes that the Postal Service could pay an average of $3.3 billion less each year from fiscal years 2009 through 2016 to pre-fund retiree health benefits and achieve the same level of funding, resulting in interest savings from the reduced payments to the scale of $4.88 billion.
MAIL DELIVERY: FIVE OR SIX DAYS?
Although at one time it may have seemed unthinkable, one cost-cutting option that has come to the forefront is the reduction of the established six-day delivery system to five days. The cost-benefit tradeoffs of eliminating a day of delivery service have been questioned, however. A number of groups estimate varying degrees of financial relief from such a measure, and many, including DMA, have expressed concerns about the potential impact of this reduction in service.
Many variables surround such proposals, including which day of delivery would be dropped, and whether such a reduction in service would be year-round or limited to the slower months. It also calls into question whether the reduced delivery days would lead to a perceived deduction in the Postal Service’s overall value, and in turn to a further decline in mail volume.
Assuming no additional decline in volume, the Postal Service has projected savings as high as $3.5 billion per year. An alternative projection from the PRC, assuming cost and volume impact with the elimination of one day of service, casts the savings at $1.9 billion per year.
Regardless of the numbers and concerns, any change would require Congress to rescind the annual appropriations rider requiring the Postal Service to “provided (further), that six-day delivery and rural delivery of mail shall continue at not less than the 1983 level.”
The only true consensus is that the current path will not lead to financial stability and viability for the Postal Service. It is also likely that some combination of the solutions mentioned, as well as other cost-cutting efforts, will be required for the USPS to recover from the financial impact of a rapidly declining mail volume.
DMA supports the review of all aspects of USPS operations, and will continue to cooperate with the Postal Service to ensure a mutually-beneficial future for the USPS and the marketing community at large.
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