Undeliverable

The television news reports began around Thanksgiving. Consumers, brace yourself, they said: The U.S. Postal Service is about to stick you with a 41-cent stamp.

What many of the reports don't say, though, is why the Postal Service might need to raise its rates by 10 percent or more in 2006. The reasons are far too complex for a 30-second TV spot. Just ask Rep. John McHugh, R-N.Y. He started working on legislation to modernize the Postal Service 10 years ago.

The agency is in a pickle. Mail volume is steadily decreasing because of electronic communications. At the same time, the number of addresses to which the Postal Service must deliver is growing by more than 1.5 million annually. Fuel costs also have hit the Postal Service hard. It has more than 200,000 vehicles that use 400 million gallons of gas each year.

The Postal Service's basic operations aren't funded by taxes, so to offset this loss of revenue and growth in expenses it must raise rates. But raising rates causes further decline in mail volume, which forces another rate increase. Advocates of modernization call this the "death spiral."

The goal of an overhaul is to enable the Postal Service to operate more efficiently by streamlining the rate-setting process, allowing the closure of unneeded post offices and granting management flexibilities that would help the organization compete with private-sector delivery companies.

Early in 2004, reform backers believed that the time finally had arrived. "There was a sense of optimism that we were really rolling here," says Robert Taub, a spokesperson for McHugh. Bills passed House and Senate committees unanimously. But neither of the bills made it to the floor before time ran out on the 108th Congress.

The first indication that the path to reform was going to be rockier than expected came in March, when Treasury Secretary John Snow announced his opposition to two key provisions that almost everyone else supported. The first involved an escrow account created when the Postal Service discovered several years ago that it was overfunding its pension obligations and could reduce payments by almost $3 billion annually. It was allowed to use the first three years' savings to pay expenses and reduce debt. After that, the money was to go into escrow until Congress approved a plan for the funds.

But the escrow funds appear as an asset on the Treasury Department's balance sheet, and Snow said the Bush administration would support releasing the funds only if it could be done in a deficit-neutral way. His remarks left legislators scratching their heads as to how to accomplish that goal.

The second stumbling block involved a dispute over who should pay for the portion of Postal Service pensions associated with employees' prior military service. The Bush administration pushed to have this $27 billion burden shifted from the general treasury to the Postal Service in 2003. No other federal agency is required to cover these costs.

Lawmakers and industry groups hope to break the stalemate with the Bush administration on the escrow and pension issues early in the year. A reform law would have to be passed by summer at the latest in order to influence the rate hike. Progress made last year could provide some momentum. "If the stars aligned right, I'm assuming it could be done fairly quickly," says Ralph Moden, the Postal Service's senior vice president for government relations.

Postal Service officials have said that regardless of what happens with reform, rates will need to go up in 2006. But the size of the increase depends on whether Congress acts. "If we have escrow relief, it's a single-digit rate increase," Moden says. If not, rates will rise at least 10 percent, hitting or exceeding the 41-cent mark cited on the TV news reports.