Public mandates, market pressures squeeze Postal Service

Landmark legislation passed in December 2006 got the U.S. Postal Service off GAO's high-risk list and gave the massive agency new flexibility. But 14 months later, the Postal Service is losing billions of dollars and, according to many observers, remains hampered by an unsustainable conflict between public mandates and private-sector pressure.

Postmaster General John Potter is expected to tell a Senate Homeland Security and Governmental Affairs subcommittee Wednesday that while the sweeping reform law creates "tremendous opportunities" the self-supporting agency faces a bleak short-term financial picture and a tough to-do list.

Many experts go further. In the face of competition from private carriers and e-mail, the Postal Service cannot keep providing universal service while hamstrung by limits on its control over prices and labor costs, said Murray Comarow, a senior fellow at the National Academy of Public Administration and longtime postal service observer.

"Unless something gives, they are going to be in bigger and bigger trouble," Comarow said. "I don't think there's any question that this bill will have to be amended some way if the Postal Service is to maintain its position in the American economy."

Including a one-time charge, the agency lost $5 billion in fiscal 2007. It expects to lose more than $1 billion this year. The losses result in part from the economic slowdown, Potter told a House panel last week. But the agency also faces an irreversible decline in first class mail volume, he said.

The Postal Service could add some revenue through rate increases. But under last year's legislation, rates for most business mailings are capped, leaving the agency to make up for lost business through cost-cutting. There the Postal Service has had some success, increasing productivity over the last decade while reducing its workforce through attrition by 100,000 to about 786,000.

The agency has said it is cutting costs through steps like installing new mail sorting machines and setting prices that reflect the cost of moving mail. But observers said the Postal Service cannot keep cutting without considering politically charged issues such as contracting out more mail delivery routes and consolidating postal operations.

"Most of the low-hanging fruit has been picked," said Robert Schrum of the conservative Lexington Institute, noting about 80 percent of the Postal Service's costs are labor-related.

The agency faces congressional resistance to its efforts to consolidate mail-processing centers. And Comarow said it has been regularly outpoliticked by its large and active unions, which benefit from the guarantee of binding arbitration if contract disputes go unresolved.

For example, Comarow observed that during negotiations last summer with the National Association of Letter Carriers, the Postal Service proposed outsourcing some new urban mail routes. But after bills opposing the outsourcing of any routes were introduced in the House and Senate, the agency capitulated, agreeing to a moratorium on outsourcing routes in major cities.

Still, changes to the Postal Reform Act could occur. Senate Homeland Security and Governmental Affairs Financial Management Subcommittee Chairman Thomas Carper, D-Del., has said he will use Wednesday's hearing to examine if more legislative changes are needed.

And in studies that could produce far-reaching proposals, GAO and the Postal Regulatory Commission are required to produce reports on whether Postal Service should maintain its universal delivery obligation and its monopoly over letter delivery.