The president’s wake-up call to the Postal Service
With his now famous tweets about Amazon, President Trump has kicked off a high-profile and much needed debate on U.S. Postal Service finances. It is well past time that the political system and the Postal Service got serious about the dire straits of the Postal Service’s basic operations.
Financial chaos is endemic to the Postal Service and poses great risks to taxpayers. With 11 consecutive years of losses, totaling $65 billion, there is no end in sight to the financial hemorrhaging.
Taxpayers are clearly the backstop to provide a potential bailout in the tens of billions of dollars for the mounting losses. The day of reckoning could be sooner rather than later.
Exhibit A for the losses, as the president would classify it, is Amazon getting a sweetheart deal for delivering packages.
By law, monopoly products, which are still 70 percent of the Postal Service’s business, cannot be used to subsidize competitive products such as packages. Yet, in its 2017 Form 10-K annual financial report, the Postal Service says that monopoly first-class mail is “our most profitable service category.”
Junk mail is similarly strong: “Marketing mail has generally proven to be a relatively resilient marketing channel, and its value to U.S. businesses remains strong due to better data and technology integration.”
This underscores the need to fix the parcel business – now. And a good place to start is by establishing a stand-alone packages unit, to better manage and gauge these costs.
Public information as to how Amazon’s pricing deal is computed is limited as only the Postal Service and the Postal Regulatory Commission have access to all data. However, what is known is that highly subjective criteria are used to determine what costs are for specific competitive products, such as Amazon shipments.
Using publicly available data, a comprehensive 2017 Citigroup analysts’ report found that the Postal Service’s average parcel rates would need to increase by approximately 50 percent to break even.
The report says, “We contend that USPS does not act as a rational price-setter in the parcel market. Remedying this could be key to the organization regaining operating solvency.” The report also found that parcel prices should increase by an average of $1.46 to more appropriately cover costs.
In addition to instituting rational pricing on competitive products here are three other major steps that the Postal Service needs to take to protect taxpayers.
- Develop a turnaround plan. When businesses have chronic losses, they present clear turnaround plans. Despite the 11 years of losses, the Postal Service has not done so.
- Institute basic financial metrics. A high priority of the Postal Service has been to push for higher rates on marketing mail. Yet, there have been no studies on what the impact of a price hike, which could take effect in 2019, will be. In the digital age and with cost margins already very tight, postal customers could walk away from the Postal Service and its revenues would sink, further exacerbating losses.
- Overhaul a retirement system that chronically underperforms and is structurally flawed. The Postal Service has three retirement plans with more than $350 billion in assets, which are only invested in low-interest, government bonds. Following a September Inspector General’s report, the Postal Service should encourage Congress to give it the option to invest funds in a more diversified and common-sense manner, as is done by private companies and state governments.
The president is right to warn taxpayers of their exposure to large liabilities from the Postal Service. Furthermore, while the Postal Service currently gets limited direct subsidies from Congress – approximately $35 million annually for free mail to the blind and overseas voting — much of its business is in government protected monopoly products.
Fixing the packages pricing and the other steps discussed above are necessary to stabilize the Postal Service. The sooner Postal Service management and Congress address these matters the higher the likelihood taxpayers will be protected from a huge bailout.
Paul Steidler is a Senior Fellow with the Lexington Institute, a public policy think tank based in Arlington, Va.