On July 31, the President’s Commission on the Postal Service issued its recommendations for postal reform to President Bush. The report is a thoughtful, concise, yet thorough evaluation of the U.S. Postal Service (USPS). The report was also produced expeditiously; the executive order requesting it was issued in December 2002.

It could not be more timely. Demand for first-class mail delivery, the core revenue source for the USPS, is declining rapidly as customers substitute into electronic alternatives. That trend is not the result of short-term fluctuations. In 2002, first-class volumes suffered the largest drop in thirty years, and single-piece first-class volume (customers mailing single letters) is falling at an accelerating rate.

Online bill payment is having a particularly important effect. The report states that, “As Americans become increasingly comfortable doing more complex correspondence online, the subcategory of First-Class Mail now most vulnerable to erosion is bill payment. Businesses have a strong incentive to encourage this trend: processing a digital payment over the Internet costs between one-third and one-half less than a check sent through the mail” (p. 7).

Meanwhile, the Postal Service’s liabilities are skyrocketing. 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 financial problems. A massive taxpayer bailout lurks on the horizon.

The time for incremental change has passed, and the commission recommends a series of substantial, clear-eyed reforms that will ensure the viability of postal services for a long time to come. The recommendations are sensitive to the desire to preserve mail service to all addresses at affordable rates, and to the needs of postal employees in this shifting industry.

Monopoly Powers

The USPS enjoys monopolies over both the delivery of letters and the use of the customer’s mailbox. Although “the Commission readily acknowledges that a monopoly is often an inherently inefficient device with a natural propensity for stagnation and mediocrity (p. 25),” it recommends that the Postal Service retain both of its monopolies, at least in the near-term. However, the commission suggests a mechanism for regular review of the monopolies as technology evolves.

The commission recommends that a new Postal Regulatory Board (PRB) 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 (p. 65).” That crucial reform would allow the monopoly to be reviewed periodically and gradually contracted in measured steps as customers became confident that service would continue. Such a reform is important because it implicitly recognizes the growing body of scholarship, as well as the experience in other countries, suggesting that a legally enforced monopoly is not necessary to ensure universal delivery service.

The delivery monopoly in the United States is not now defined precisely, and the commission notes that existing arrangements, mainly via “suspensions” of the monopoly, give the Postal Service itself discretion over the scope of its own monopoly, thus allowing the monopolist to bind its own competitors, or not. Relying on an approach used in many other developed countries (including the EU), the commission recommends the U.S. delivery monopoly be clarified to cover (p. 23):

Any hard copy communication that is to be conveyed and delivered to a specific address in the United States indicated by the sender, provided its weight is less than 12 ounces and the delivery price is less than the basic stamp price times six.

Under that definition, competitors could deliver an item weighing less than twelve ounces provided that they charged at least six times the basic stamp price. The weight limit is about the same as that used in the European Union, but the price limit gives the Postal Service a larger monopoly scope than the EU. The recommendation would carve out a clearly defined zone of “reserved service” for the USPS and should be adopted as a matter of sound postal policy. It would also facilitate measured reduction of the monopoly (by reducing the multiple) over time.

The recommendation that the PRB review the monopoly would place decision-making power in the hands of impartial experts who work on postal issues continuously. Such administrative review of the monopoly’s scope should be inoffensive, since the Postal Service itself has adopted “administrative suspensions” of the monopoly, such as for “extremely urgent” matter.

The commission also recommends that the mailbox monopoly be reviewed by the PRB. Such review is necessary, since there do not appear to be economic justifications for a mailbox monopoly, and no other countries observe one. As long as customers consent to competitors’ use of their mailbox, that monopoly should be relaxed.

Ownership

The commission “believes that the Postal Service should remain an independent entity within the executive branch of the Federal government with a unique charter to operate as a self-sustaining commercial enterprise (p. ix).” That is, it should not be privatized, but should remain government-owned. The commission is concerned about the interruption of mail flows if the Postal Service were to offer shares, stating that, “Privatization of a commercial entity the size of the Postal Service could seriously disrupt both mail service and the private postal marketplace (p. ix).”

Similar to the 1968 Kappel Commission, this commission does not dispute the ultimate desirability of investor ownership here, but only questions the difficulty of transitioning to that new state: “Most importantly, while the end result of privatization could be a dynamic and efficient private postal sector, the privatization process could undercut the stability and continuity that are the hallmark of a public service (p. 18).”

A useful debate could be had on whether or not the long-term benefits of public (investor) ownership would ultimately outweigh the short-term transition costs. For the report, however, the failure to advocate shareholder ownership creates some inconsistencies. For example, the commission strives for increased managerial accountability, which it hopes to obtain by revamping the postal board: “Managerial accountability comes from a corporate-style Board of Directors tasked with holding Postal Service officers accountable for performance (p. 53).”

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. Moreover, managerial control ultimately comes from stockholders themselves, often in the form of proxy fights, takeovers, 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 PRB “ensure that retained earnings are accumulated at an appropriate level, and consistent with the public interest (p. 56).” 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. The commission recognizes that all U.S. citizens are currently owners of the USPS and, ideally, all citizen-owners would receive their share of the proceeds. But the cost of carrying out such a disbursement may well exceed its value, and such diffuse ownership would result in very limited incentives to monitor managers. Without explicit owners, it is likely that an internal group that exerts its control effectively, such as labor or management, will capture retained earnings.

There is, however, a more pragmatic reason to support the commission in its decision to retain government ownership. Ownership is the single most contentious issue surrounding postal reform, overshadowing even de-monopolization. It would be unfortunate if much-needed reform were impeded by argument over ownership structure, since many positive 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, as well as control the monopoly powers. It is thus all the more important that it be granted substantial new regulatory authority to control the Postal Service. Fortunately, the commission’s suggestions for a new Postal Regulatory Board would accomplish that.

Regulation

In addition to the authority to review the delivery and mailbox monopolies, the commission suggests granting a variety of powers to the new PRB. It states, “Rather than a narrow focus on rate setting and mail classifications, this new regulatory entity would:

• ensure the financial transparency of the Postal Service;
• establish rate ceilings for Postal Service non-competitive products and pre-approve rate increases that exceed the rate ceilings;
• ensure the Postal Service remains focused on traditional products and services;
• ensure that competitive products are not cross-subsidized by revenues from non-competitive products;
• guarantee that the Postal Service is meeting its universal service obligation and refine, as necessary, the specific elements of that obligation;
• review proposed changes to service standards when such changes are expected to have a substantial and negative national impact;
• review the postal monopoly for its public benefit and, if circumstances warrant, narrow it over time;
• review worksharing discounts, negotiated service agreements, and other noncompetitive rates for undue or unreasonable discrimination; and
• ensure that the Postal Service upholds its statutory obligation to compensate its employees at a level comparable to the private sector (p. 53).”

To the extent that the USPS would retain its monopoly power, remain in competitive activities (such as overnight and package delivery), remain government-owned, and retain its wide variety of special privileges and immunities, that broad set of regulatory powers is crucial.

Several powers should be considered in detail. First, financial transparency is a major focus of the report. The USPS is not currently subject to SEC disclosure requirements, nor can the Postal Rate Commission subpoena information from it. The quality of accounting information released by the Postal Service has been poor. It is therefore difficult to accurately gauge the financial health of the USPS.

It is also hard to know to what degree the Postal Service uses revenues from its monopolized activities to reduce prices in competitive activities, so financial transparency is also necessary for effective regulation. The commission recommends that the USPS be subject to all applicable SEC disclosure requirements, be subject to PRB subpoena power, and improve significantly its cost accounting. Those are key reforms that should be adopted.

Second, the commission suggests that the PRB have authority to establish rate ceilings for monopolized products, and that the ceiling increase at a rate lower 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. It is unclear how a cap will perform under these arrangements.

One cause for concern is the suggestion that the PRB preapprove rate increases that exceed rate ceilings: “Only Postal Service requests for rates in excess of established rate ceilings (for example, in the case of a precipitous decline in mail volumes), as well as rates for new products and services, should be subject to a similar expedited advance review (p. 61).” The laudable intention is to speed up the rate review process and thereby give the USPS more commercial flexibility.

However, it is almost certain that a significant decline in mail volumes will occur, since such concerns helped precipitate the report. So expedited advance review would seem to simply give the USPS ability to raise rates more easily to cover its costs, thus defeating the goal of enhancing the Postal Service’s incentives for cost containment. The commission has noted this as a serious defect in the status quo: “One inherent flaw in the current process, as it applies to the Postal Service, is the common knowledge among all parties that ratepayers can be asked to make up any deficit (p. 123).” What can the PRB do when the Postal Service states that it must have higher rates to make payroll, as it did in the 1994 rate case?

Short of privatization to enhance cost-containment incentives, it is difficult to envision a good solution to this knotty problem. One option is to simply not grant the PRB authority to entertain rate requests in excess of an established rate ceiling, forcing the USPS to go before Congress to obtain those rates or to receive a direct subsidy, thus raising its costs of obtaining revenues outside the cap. Although that may appear to be a return to the pre-1970 world in which Congress regulated rates directly, the prevailing presumption today is that the USPS has a responsibility to cover its own costs.

Third, the commission recommends that the PRB keep the USPS focused on traditional products and services and prevent it from cross-subsidizing competitive products with revenues from monopolized products. These are crucial, closely related powers. 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 privileges and immunities to unfairly and inefficiently compete with private sector firms in a range of activities.

For example, to raise added revenue, the USPS has recently ventured into selling art. There is clearly no market failure rationale for the USPS to intervene in the art market. These new PRB powers, combined with financial transparency, would allow it to not only refocus the USPS on its core mission of delivering letters, but also prevent it from inefficiently cross-subsidizing competitive activities. 

Fourth, the commission recommends that the PRB be given authority to refine the USPS 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 may deposit mail at 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, since that is the rationale for retaining the delivery monopoly. Additionally, these reforms would make it clear that decisions regarding service quality remain with the regulator instead of the Postal Service itself, as has been the case in the past.

Fifth, the commission recommends granting the PRB power to review worksharing discounts and negotiated service agreements. The USPS retains a variety of special privileges, as mentioned above. Without oversight, it may use those privileges to benefit particular parties through internally negotiated agreements. Such agreements should certainly be subject to rigorous regulatory review.

Labor Relations

The commission also recommends granting the PRB power to enforce the postal pay comparability standard, which states: “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 given 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. That is consistent with the very low rate of quitting and the large backlog of job applicants at the USPS. The current system of collective bargaining with binding arbitration appears unable to produce a result consistent with the act’s comparability standard. To the extent that compliance with the standard is desired, some additional mechanism must be introduced.

The commission recommends that the standard be clarified to include the entire compensation package (rather than just wages). It suggests that the PRB independently determine if the standard is met or not, and recommends that the board’s determination constrain the negotiation and arbitration process. It suggests the limitation apply immediately to new employees, and gradually to existing employees (p. 122). These substantial powers are necessary to bring postal pay in line with the comparability standard, which most commentators believe is a necessary part of postal organization.

In addition to the change in definition and enforcement of the comparability standard, the commission recommends several other changes in labor relations. First, it notes that significant decreases in the postal labor force are needed, 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 (p. 107).”

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. The USPS can significantly reduce its labor force through natural attrition if it simply limits hiring, as the commission suggests. That is a recommendation it should certainly follow.

As the commission notes, the Postal Reorganization Act of 1970 is a law at war with itself, since it seeks pay comparability with the private sector, but treats postal workers as government workers for the purposes of health and retirement benefits. The commission suggests including those benefits in the bargaining process.

It also recommends that the collective bargaining process be revised. The current process is unwieldy, resulting in few negotiated agreements, but instead often requiring arbitration. It results in significant discord between labor and management. The commission suggests using a mediation-arbitration approach, whereby a mutually agreed upon mediator attempts to bring the parties into agreement. If that does not happen, the mediator would become part of the arbitration panel, and the parties would focus only on the remaining areas of disagreement. The commission recommends placing a limit on the arbitration phase of sixty days. These are solid suggestions that are likely to streamline the negotiation process and improve the currently discordant labor-management relations.

Uniform Rates

The commission makes it clear that rate uniformity should no longer be an explicit goal of the USPS. It recommends that the new mission of the USPS be “to provide high-quality, essential postal services to all persons and communities by the most cost-effective and efficient means possible at affordable and, where appropriate, uniform rates (p. xi).” That mission emphasizes universal service, efficiency, and affordability, but de-emphasizes rate uniformity. This suggests a key insight: universal service does not imply a uniform rate. Indeed, the maintenance of universal service is consistent with a variety of rate structures. Uniform rates and universal service have often become confused in discussions of postal reform.

There is no sound public policy reason for retaining uniform rates. If costs differ significantly across regions, then a uniform rate implies a subsidy to high-cost regions. If subsidies to certain regions are socially desirable, they can certainly be achieved much more cheaply than though legally enforced monopoly in letter delivery. If, as some research suggests, costs do not differ significantly, then there is no need to enforce rate uniformity, since that would result from competition. There is no need to enforce a uniform rate in either case, and the report implicitly recognizes that. Universal service could be maintained while all service remained affordable, but perhaps not at uniform rates.

Post Offices and Real Estate

The Postal Service’s 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. Many are underutilized and not necessary to ensure universal service.

For example, locations consumers frequent for other reasons, such as banks and grocery stores, could offer basic window services, replacing some post offices. The commission thus recommends a rationalization of post offices, keeping only those that are necessary to ensure universal service. Specifically, it states:

When the Postal Service determines that a “low-activity” post office is no longer necessary for the fulfillment of its universal service obligation, the Postal Service should make every effort to maximize the proceeds from the sale of that facility. If the Postal Service determines that there is no adequate market demand for the purchase of a “low-activity” post office, the Postal Service should be encouraged to work with state and local governments, as well as not-for-profit organizations, to determine the means of disposition most beneficial to the local community (p. 103).

Such sales would likely 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. There are also many underutilized processing facilities that 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 military base closings commission. Congress would be required to vote on its recommendations in their entirety. In the absence of private ownership, which would give the USPS the incentive to undertake such asset reallocation on its own (assuming it were allowed to do so), this is a necessary step. It would help overcome political pressure to keep certain underused facilities open.

Efforts at rationalizing USPS’ real estate portfolio are hampered by our currently limited knowledge of the true value of postal property. It is carried at book value for accounting purposes, which greatly understates its market value. The commission therefore wisely suggests that the USPS conduct an independent, outside appraisal of the value of all real estate.

Summary

Because of the inherent complexity of postal reform, this overview has omitted many important topics addressed by the commission. However, this discussion illustrates that the commission’s recommendations are sweeping and substantial.

The commission’s suggestions for regulatory reform are particularly useful. The current powers of the Postal Rate Commission are far too weak to control the USPS, or to ensure its financial transparency. The USPS is currently able to effectively 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 review of the necessity of the monopoly in ensuring universal service. The recommendations in this area would go a long way toward making the USPS a more accountable, focused organization.

The report, however, leaves some key questions unanswered. For example, what would happen to the Postal Service’s array of special privileges and immunities, such as tax and antitrust exemption? One must assume they would be retained, although other countries, such as New Zealand, have retained government ownership but made their posts taxable and subject to antitrust enforcement.

Postal reform is a large, complex 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.

Rick Geddes is an assistant professor in the Department of Policy Analysis and Management at Cornell University and the author of Saving the Mail: How to Solve the Problems of the U.S. Postal Service (AEI Press, 2003). He is a research fellow at the Hoover Institution and an adjunct scholar at AEI.