Delivering the Future

Imagine a world where you can opt out of receiving junk mail and tell the post office whether you want your bills mailed to you in hard copy or sent to your smartphone. You can send a postcard from Buenos Aires to Boston in an instant.

There’s already an app for that. In Europe.

It’s doubtful that vision is possible in the next 20 years in the United States. To say the U.S. Postal Service is at an impasse is putting it mildly. It has reached both an existential and an economic breaking point. In its current fiscal state, the agency’s annual net losses will reach $21 billion by 2016. USPS has lost $25 billion during the last five fiscal years, and it’s just
$2 billion shy of  reaching its credit limit with the U.S. Treasury.

If the postmaster general and Congress cannot agree on how to restructure $5.5 billion in annual health benefit prepayments due in August, then USPS will default on its debt and taxpayers could end up footing the bill. 

USPS needs a lifeline and agency leaders know it. Privatized models have proved successful in most of the industrialized world, but the U.S. government has set up its own unique barriers to innovating in the Internet Age. Debts from health care prepayments and a boondoggle of government oversight threaten to stymie the mail service for years to come.

From There to Here

The 1970 Postal Reorganization Act marked the beginning of the USPS we know: a government agency that acts like a company independent of taxpayer funding, politically appointed executives and the partisan patronage that plagued the institution in the decades past. The postmaster general and other top management positions were subject to congressional approval prior to the Nixon-era law.

But as the Postal Service divorced itself from politics, it also took on layers of government oversight, complete with often-clashing regulatory bodies. They include Congress, an inspector general, the Postal Regulatory Commission, the U.S. Postal Service Board of Governors and the Government Accountability Office—more helicopter parents than any agency could handle.

Then there are the collective bargaining and labor union agreements unique to the Postal Service.
The American Postal Workers Union, which represents mainly mail clerks, mechanics and drivers, inked a contract set to expire in May 2015, but negotiations with the National Association of Letter Carriers and the National Postal Mail Handlers Union stalled early this year for the third time in three months.

Another big sticking point: congressionally mandated prefunding of retirement accounts. A 2006 postal reform law requires USPS to prefund health care benefits for future retirees, adding up to $5.5 billion in annual payments. In sum, labor costs eat up 80 percent of the agency’s annual budget, and USPS officials say the financial commitment is not sustainable if they hope to stay in business. 

This is one subject labor and management agree on. Union representatives are quick to point out USPS is profitable when prefunding isn’t factored into the equation. Phil Dine, spokesman for the National Association of Letter Carriers, which represents mostly urban mail carriers, isn’t fond of the Internet-is-killing-the-Postal-Service rhetoric that defines much of the conversation about the agency’s woes. 

USPS still brings in revenue delivering mail, despite mounting losses overall. Dine says although the Postal Service was $3.3 billion in the red for the first quarter of fiscal 2012, the agency still made $200 million on mail delivery.

“Why is the Postal Service being prefunded more than any other organization in America and being brought to the financial brink because of that?” Dine says. “That’s a different discussion and it’s got nothing to do with the mail.”

The Long Haul

Postmaster General Patrick Donahoe
has promised that if Congress can revise the law to help USPS rein in its pensions and prefunded health care costs, it can become profitable if there’s an upward arc in the overall economy. A bill that passed in the Senate in April is based largely on this premise. 

While the prefunding mandate is a significant hurdle for architects of the Postal Service’s future, the numbers don’t support Dine’s analysis—or the postmaster general’s optimism—for the long haul. In 2005, the price of first-class mail fell below the price of junk mail, and mail volume plunged 20 percent between 2006 and 2010. As the economy rebounded in 2010, junk revenue climbed. But it takes three pieces of junk mail to equal earnings from a 45-cent stamped letter, according to a 2011 Bloomberg Businessweek analysis. Overall mail volume and revenue are steadily declining. By USPS’ own estimates, volume will be halved by 2020.

The postmaster general’s five-year path to solvency includes switching to a five-day delivery schedule, modifying first-class and standard mail pricing to adjust for lower volume, downsizing the USPS workforce through attrition, and shuttering thousands of post offices and hundreds of distribution centers. It also seeks flexibility to leave the Federal Employees Health Benefits Program, believing that using an independent benefits provider could cut its operating costs. What USPS seeks falls somewhere between the Senate postal reform bill and the more conservative House bill. 

“The postmaster general’s five-year plan only takes us to 2016. What happens in 2017?” says John Callan, director of PostalVision 2020, a confab of experts, lawmakers and stakeholders who met in Washington in June to discuss the
agency’s future. Callan also is managing director at postal consulting firm Ursa Major Associates LLC.

Many postal observers suggest looking across the pond for answers. Nearly every industrial country, save for
Canada, Japan and the United States, is making its mail delivery service operate more like a business.

Going Mobile

The Swedish, the Dutch and the British
have franchised nearly all their post offices, according to James Campbell, a policy analyst who works on international postal issues. 

The Swiss postal service will scan mail and deliver it via the Web—a move that turns the Internet threat on its head. In Germany, a customer can leave town, have a package delivered to a lockbox at the train station, and then receive the code on his or her phone to unlock it. 

The Postal Service has taken steps to acknowledge the seismic shift toward electronic communication. The agency launched the 2012 Mobile Commerce and Personalization Promotion Program in May, which gives commercial mailers postage discounts on standard and first-class mail using a bar code that can be read or scanned by a mobile device. The service is similar to what some European postal carriers already offer to noncommercial mailers.

Postal officials are optimistic that integrating mobile technology into their operations can hike the value of direct mail and help merchants at the same time. Marketing mail returns $12.75 in revenue for every $1 businesses spend, according to the Direct Marketing Association. 

In other cost-saving moves, the General Services Administration is working with the Postal Regulatory Commission to help federal agencies better process snail mail. PRC estimates the Postal Service could save up to $100 million if agencies worked harder to presort their mail and up to $250 million if state agencies joined in.

But most conservative thinkers believe USPS can’t help its own piggy bank or fully innovate technologically without breaking up its monopoly on mail delivery. To others, including Donahoe, adopting some of the European models seems within reach, if only the agency could buy time.

Ending the Monopoly

R. Richard Geddes, a postal policy analyst at Cornell University, is among academics who believe USPS should be put on a course toward complete “de-monopolization, corporatization and privatization,” as he termed it in a 2011 paper. 

He contends that getting rid of the service’s requirement to make $5.5 billion in annual payments to the U.S. Treasury for retiree health care costs still doesn’t fully mitigate “diseconomies of scale” such as climbing unit costs and declining mail volume. USPS charges 45 cents for a first-class stamp, less than most other developed countries. 

Geddes prescribes cutting loose from congressional decrees and oversight panels and placing the beleaguered agency
into the hands of a corporate board of directors and senior managers who would act “as explicit fiduciaries of the firm’s owners: U.S. taxpayers.”

He writes: “There is enormous taxpayer value locked inside the Postal Service currently due to restraints on managerial decisions,” adding USPS’ real estate portfolio is estimated to be worth $27 billion. 

There are other obstacles that might make de-monopolization untenable in the United States. Taxpayers aren’t 100 percent off the hook for the Postal Service, for example. An oft-forgotten legislative quirk—a rider attached to a 1983 appropriations bill—includes some subsidies to ensure reduced postage rates for the blind and provides some delivery services for military members and government workers overseas. The rider also stipulates that the Postal Service must maintain six-day delivery without using public funds. Competitors—FedEx and UPS—charge at least six times the stamp price to maintain that level of service. In addition, the law stipulates that no other company can use a U.S. Mail box except the U.S. Postal Service. The House legislation would eliminate the rider, but whether that’s politically tenable remains an open question.

Other countries have succeeded where the United States cannot because they don’t have the same obstacles, proponents of de-monopolizing say. They don’t have USPS’ real estate portfolio or its prefunding mandates. Privatized European models have systemic advantages as well, they say.

“It’s amazing to me when people want to point to other countries,” says American Postal Workers Union President Cliff Guffey. “In Germany, all these other countries, what do they have? They have socialized medicine, they don’t pay insurance and yet they have 78-cent stamps. They have a train system going all through their country. We don’t. We have to put mail on flights, or do different things.”

But Campbell notes the path to de-monopolization hasn’t been easy for other countries. As in the United States, incumbent nationalized post offices have succeeded on economies of scale. So even when more competition was factored into the equation, official postal services survived due to brand recognition. 

Incumbent post offices still have 90 percent of the market in other countries, according to Campbell. It’s not easy to compete. De-monopolizing becomes a process, with regulators and legislators committing to it. “Everybody knows the post offices. Nobody knows Pete’s Post,” he says. “The incumbent post offices, these economies of scale, it’s cheaper for them to deliver one more letter than the guy starting.” 

To succeed as a new, independent post office, “you have to provide either a different niche service, or the [national] post office has to be terrifically inefficient,” says Campbell. As competition grows, the incumbent post office must keep up. 

“Over time the post offices in these countries have the ability and incentive to adapt—they’re out there being forced to compete. As the cushion goes down, they are going to have to get better and better,” he says.

Growing Pains

Despite all his analysis of postal service policies in foreign governments, Campbell still expresses skepticism: “Is it going to work?” he says.

Sweden’s attempts to marry postal services with emerging Yahoo- and Amazon-like Internet companies in the 1990s mostly fell flat, he says. But competition with nearby Norway helped. In Norway, customers who wanted to take a package to the post office had to get there before it closed at 5 p.m.

“Nobody likes that,” he says. “You can’t compete without going to these businesses that are open later.”

There’s a lesson in that, too. Most agree, regardless of the numbers of post office or facility closures, the future U.S. model must have the ability to multitask and accommodate customers by offering more flexible hours. This would mean a business model that partners with local storefronts rather than dealing with the legislative hurdles that accompany the corporate board-of-directors model that Geddes advocates.

“What’s wrong with Starbucks opening a little branch in a post office? Wouldn’t it be nice if, when you went in to do your business with the post office, you could get Starbucks, you could buy a Hallmark greeting card, you could even renew your license,” says Rep. Gerry Connolly, D-Va., sponsor of the Democratic version of the House postal reform bill. “Maybe you can pay your taxes because there’s also a satellite local government office there.” 

The model Connolly mentions is much like an expanded version of existing contract postal units, known as CPUs. USPS outlets in Wal-Marts already exist, but that’s been a point of contention with APWU officials. Guffey acknowledges that CPUs can help expand hours to benefit customers and boost revenue, but he says they also take jobs and parcel business away from the Postal Service. USPS conceded to end some of the work that had been contracted out from the APWU workforce in its most recent labor agreement. 

“I’d rather see what they call village post offices, because there are no alternative postal services,” Guffey says. “What I don’t like to see is [a contract unit] one mile away from a post office.”

In May, Donahoe and USPS Chief Operating Officer Megan Brennan unveiled a plan that aims to save rural post offices, presenting options for 13,000 sites targeted for closure, including hybrid part-time and full-time employees. About 9,000 would remain open for two to four hours a day; 4,000 could be cut back to a six-hour workday. Postmasters at reduced-hour locations would switch to part-time workers, with reduced or no benefits. The plan would allow flexible scheduling. One part-time worker could work a shift, say, from 4 p.m. to 7 p.m., to allow the post office to remain open for extended hours. 

Reconfiguring and tinkering with the number and type of post office locations, local businesses and work hours seems to be the most likely future—at least the not-too-distant one. Donahoe told Bloomberg Businessweek in 2011 that digital mail initiatives might not add as much value as some think, especially given that USPS already is at risk of defaulting on obligations to the Treasury. 

If time is money, then the Postal Service will need plenty of both if it hopes to be around in 2020. 

CORRECTION: The original version of this story attributed $3.3 billion in USPS losses to the wrong quarter. Those losses were for the first quarter of fiscal 2012.