Postal Service prepares for rate hike despite strong financial results

Expect to pay more for postage in 2006-and possibly 2007.

The Postal Service has begun the process to raise its 2006 rates. Last week, the Postal Board of Governors told agency managers to begin preparing to file a case for a rate increase with the Postal Rate Commission.

Some members of the mailing industry fear that next year's rate increase will be followed by another in 2007.

Postal Service CFO Richard Strasser said he expects the agency will earn $1 billion in net income this year and break even next year. Mail volume was strong in the first quarter, due in part to catalog mailings and direct marketing by financial services companies.

But unlike most postal rate increases, this one won't pay for operating expenses. Rather, the rate hike will cover $3.1 billion the Postal Service is required to put into escrow in 2006. If the Postal Service did not have this obligation, rates would stay at their current levels for at least another year, Strasser said.

Industry experts estimate that rates will need to rise 5.5 to 6 percent to cover the $3.1 billion. Thanks to strong first- and second-quarter financial results, this is lower than some forecasts, which predicted 2006 rate increases of 10 percent or more.

"But the speculation is that a year later, they might have to file another case to ask for further funds to pay for operating expenses," said Kate Muth, vice president of the Association for Postal Commerce.

Strasser said the Postal Service is moving toward more frequent, but smaller, rate increases, at least for commercial postage. In the past, the Postal Service has raised rates every three years. The agency operates on a break-even basis, and the idea behind the three-year system is to earn money the first year, break even the second and lose money the third. "It is a shock to the industry when they get one large rate increase every three years," Strasser said.

The escrow requirement was included in the 2003 Postal Civil Service Retirement System Funding Reform Act. The Postal Service had discovered that it was over-funding its pension obligations. It was allowed to use the first three years' savings for expenses and debt, but starting in 2006, the money is supposed to go into escrow until Congress approves a plan for the funds, which it has not yet done.

The escrow funds appear as an asset on the Treasury Department's balance sheet. In March, 2004, Treasury Secretary John Snow said the Bush administration would support releasing the funds only if it could be done in a deficit-neutral way. Members of the mailing industry call the rate hike to cover the escrow requirement a "stamp tax."

If Congress were able to pass a law releasing the funds, the rate increase could be avoided. But such a measure was part of a major Postal Service overhaul bill that did not pass last year.

"I believe that the House and Senate leaders who've been working on this the last seven years are going to continue working on this, and they should," said Neal Denton, executive director of the Alliance of Nonprofit Mailers. "But we've been working on postal reform over a dozen years. I don't think there's any such thing as speedy enactment of postal reform."