The Direct Marketing Association and
The DMA Nonprofit Federation

Key Issues Regarding Postal Reform Legislation

The Postal Accountability and Enhancement Act (S. 662) currently before the Senate and its companion bill in the House of Representatives (H.R. 22) can be divided into two basic parts – one dealing with reform measures to update the Postal Service, with the second part impacting money and the Federal budget.

REFORM SECTION OF THE LEGISLATION

• Most importantly, the Senate Bill calls for a “hard cap” in terms of allowing the Postal Service to raise rates at or below the rate of inflation and is granted this authority largely on its own - effectively side-stepping the status quo with its long and laborious rate-making process, with numerous filings and legal proceeds before postal rates can be raised. Importantly, the “hard cap” in the Senate Bill is rather strong, unlike the companion House version of the legislation, whose cap could likely be broken by such events as the recent increase in gasoline prices.
  
  
• Worksharing Provisions – Both the House and Senate Bills have worksharing provisions allowing a reduction in rates for mailers, who in effect do part of the Postal Service’s work and push mail into the system later in the process – closer to the “last mile” before ultimate delivery.

FUNDING SECTION OF THE LEGISLATION

• Military Pension Costs – Under the 2003 legislation, the Postal Service is now required to pay the total retiree benefits for employees who have also served in the military. This is different from any other government entity, whose military portion of retiree benefits are paid by the US Treasury.
  • Worse still, the 2003 legislation also requires that the Postal Service must re-pay the US Treasury $10 billion covering the military portion of retiree pensions from the period 1971 (the year of the Postal Reorganization Act) to 2003, as well as $7 billion of accrued interest on the $10 (totaling $17 billion of retroactive liability). Additionally, the Postal Service will be paying $10 billion in the coming years to pay prospectively that portion of retiree benefits covering military service. In other words, the Postal Service is saddled with an aggregate liability of $27 billion - $17 billion in retroactive costs and $10 in prospective costs.
    
    
  • The Senate and House Bills incorporate the recommendation of President Bush’s Commission on the Postal Service, which in its 2003 report called for the transfer of military pension responsibility back to the US Treasury.
• Excess Funds Held in Escrow – The Postal Reorganization Act of 1971, which provided that the Postal Service be self-sustaining, included requirement for it to fund employee retirement. An actuarial-based formula underestimated both contributions and earnings; the result being a long-term funding stream that would have resulted in over-funding the retirement fund by approximately $70 billion. Adjustments to the pension formula were a key element in the 2003 legislation that required that beginning in Fiscal Year 2006 the Postal Service would be required to collect from mailers and place in an escrow account the difference between the amounts required under the old (over-funded) formula and the lower retirement funding amounts required by the new formula. These funds, some $3.2 billion in 2006 and larger amounts in future years, may not be used by the Postal Service – even to pre-fund the enormous $60 billion long-term postal retiree health care liability – without Congressional approval.
  • The Postal Service and ratepayers did receive some short-term relief from the 2003 legislation, since the higher payments required under the old formula had already been built into the rate/revenue base in earlier years and the Postal Service was able to utilize the difference to extend (stabilize) the rate cycle. However, absent passage of the current Postal Reform legislation, this relief will end with the required payment into the escrow account on September 30, 2006.
    
    
  • Under both the Senate and House Bills, the funds that otherwise would have gone into the escrow account would still be collected with approximately three-fourths of these dollars used to pay down the long-term retiree health care liability (these funds would be placed in the Postal Service Retiree Health Benefits Fund), with the other roughly one-fourth of these funds available to limit future postal rate increases (in other words, rate mitigation).
    
    
  • There are differences between the Senate and House Bills as to how fast each would pay down this long-term retiree health care liability. The Senate Bill would apply the pay down of the long-term retiree health care liability under a 40-year level payment plan (in effect, on a “mortgage type” basis). The House bill would pay down this liability with initially a smaller charge, growing each year thereafter.
    
    
  • As noted earlier, the Administration is opposed to having the US Treasury cover that portion of postal retiree costs attributed to military service. The Administration is also opposed to allowing even the rather modest approximately one quarter amount of the funds, which were to be held in escrow, used for rate mitigation.

• Under current law, the Postal Service is required to collect the $3.2 billion for the escrow account. Earlier this year, the Postal Service requested approval for a 5.4% across-the-board rate increase, with the new rates to be effective January, 2006. The Postmaster General has said that absent the escrow requirement, postal rates would not have to be increased until 2007.
  
  
• Under the Senate Bill, the Postal Service would be required to collect some $2.4 billion in additional revenues (roughly three-fourths of the escrow amount), which would have reduced the proposed 5.4% increase to approximately 4%.

THE BOTTOM LINE

• Without reforms on both money issues (military pay and the escrow), the amount of additional revenue required to be collected from mailers jumps to $5.9 billion and the required rate increase nearly doubles!
  
  
• Increases in postal rates can be viewed as at the top of a hierarchy that “cascades down” through various sectors of the economy. Take the case of a typical catalog company - higher postal rates will likely result in the company mailing fewer catalogs, thus less paper will be bought from paper companies, less printing work will be utilized, and so on. Of course, what this means is that the reduced volume of mail will equate to less revenue for the Postal Service, which in turn could trigger ever higher postal rates in an attempt to make up for lower mail volume – “a vicious circle.”

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