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Final Report of the President’s Commission
on the United States Postal Service
Chapter 1: Adapting to a New World: Universal Mail Service at Risk
For more than 225 years, the national post office has bound the country together and advanced commerce by enabling the exchange of goods, ideas and information. From the humble beginnings of 30 post offices spread across the American colonies, today’s Postal Service has roughly $67 billion in annual revenues, [1] making it the 11th largest enterprise by revenue [2] in the nation and the hub of a thriving domestic mailing industry. Without question, the Postal Service has made an extraordinary contribution to the economic health and unity of the nation. But tough choices are required now in order to overcome significant challenges to the institution’s continued ability to ensure universal mail service at affordable rates. Like some private-sector delivery services, the Postal Service today is suffering from weak mail volumes and rising labor and infrastructure-related costs. In the third quarter of 2003, the Postal Service had a revenue shortfall of nearly half of a billion dollars. [3] In addition to these pressures, significant debt loads, network inefficiencies and rigid statutes governing the institution’s management are preventing the Postal Service from adequately adapting to the fundamental market and technology changes underway, placing at risk its ability to deliver the nation’s mail at affordable rates. While many of these trends are exacerbated by a weak economy and other cyclical factors, the most significant threat is not. To the contrary, it appears that the nation is at the beginning of a long-term decline in First-Class Mail volumes as more and more Americans take greater advantage of cheaper electronic communications alternatives. In this new environment, unless Postal Service operating expenses can be reduced correspondingly, it is questionable whether affordable universal mail service via a self-financing public institution is sustainable. Fortunately, the Commission and many others, including the Postal Service itself, have identified dozens of organizational and policy changes which can ensure continued high-quality and efficient delivery of the nation’s mail at affordable rates. Taken together, they will produce nothing short of a funda-mental transformation of the United States Postal Service. Postal Service Has Begun the Reform Process The Bush Administration, the United States Congress, and the Postal Service are to be commended for recognizing the need for and beginning the process of fundamental change. In its 2002 Transformation Plan, the Postal Service calls for the evolution of the institution into a “Commercial Government Enterprise,” a more agile government entity that maintains its universal service duties, but also enjoys greater flexibility to operate in a more businesslike manner. This Plan was produced at the request of the United States Senate, which grew concerned about the Postal Service’s long-term ability to fulfill its universal service obligation in the wake of a report by the U.S. General Accounting Office (“GAO”) placing the Postal Service on its “high-risk list.” [4] GAO’s April 2001 report was, in turn, developed as a result of extensive hearings in the U.S. House of Representatives on the need for postal modernization. The Transformation Plan recognizes that revisiting the core elements of the institution—from the postal monopoly, to governance and regulatory structures, to workforce and infrastructure costs—is essential to the Postal Service’s continued ability to deliver universal postal service. The Plan also appropriately identifies the core institutional challenge: “a modern, self-sufficient postal system…requires new flexibility to adjust networks and services to modern conditions and to minimize entrenched governmental rules and expectations that carry with them costs and inefficiencies.” Since the Transformantion Plan’s release in April of 2002, the Postal Service’s substantial workforce has been reduced by more than 40,000 career positions. By the end of September 2003, the Postal Service expects to have captured $2.5 billion of the $5 billion in annual cost savings it aims to attain by 2006. Despite this laudable progress, overall growth in operating expenses outpaced growth in operating revenues in fiscal years 2000 to 2002. [5] So while these efforts are a critical down payment on the enhanced productivity and fiscal discipline necessary, the Postal Service requires reform on a far grander scale. Presidential Commission Tasked with Accelerating the Transformation In recent years, Congress has debated several proposals to make a modern, self-sufficient Postal Service a reality. But given the inevitable political pressures sur-rounding an agency with such a strong local presence and large employee base, no comprehensive legislation reforming the Postal Service’s business model has been enacted since 1970. To overcome these hurdles and restore the Postal Service to a solid, stable footing, President Bush appointed this Commission to craft a vision “to ensure the efficient operation of the United States Postal Service while minimizing the financial exposure of the American taxpayers.” [6] The Executive Order’s comprehensive mandate instructs the Commission to explore the key questions that will determine the Postal Service’s role in the 21st century, including:
The Case for Change A number of trends are driving the need for such a sweeping exploration of the Postal Service’s role and operations in the 21 st century. Chief among them is the fact that the rising cost of operating the Postal Service is on a collision course with declining mail volumes. The rates of growth for First-Class Mail and Standard Mail, the twin engines of Postal Service cash flow that together generate more than 75% of all postal revenues, [7] have been in long-term decline since the 1980s. [8] Looking ahead, electronic diversion of First-Class Mail threatens to accelerate this decline significantly. At the same time, a cumbersome regulatory and rate-setting model, the entrenched cost of an aging infrastructure and inflexible work arrangements make difficult the ambitious overhaul of the Postal Service that is needed today. There are three ways the Postal Service can adapt to declining mail volumes: by 1) aggressively reducing costs, 2) expanding revenues, or 3) undertaking a combination of both strategies. While some potential exists to increase revenues, particularly in the area of Intelligent Mail (see Chapter 7), a significant portion of the Postal Service’s fiscal stabilization must come from reduced costs through the modernization of every element of its operations, service delivery and asset management. This reality is magnified by the Postal Service’s sizable debts and ongoing obligations. Despite numerous rate increases and efforts to reduce costs through attrition-led downsizing and investment in automation, the expense of the Postal Service’s legacy networks and large employee base are expected to outpace the growth in its operating revenue. This trend threatens to increase the debt load being carried by the Postal Service and provides no cushion to address a retiree health benefit obligation of approximately $48 billion, an unfunded workers’ compensation liability of approximately $6.5 billion, an un-funded pension liability of $5.8 billion, and more than $7 billion owed the U.S. Tr easury. Each of these factors presents an enormous challenge to the Postal Service. Together, they add up to a pressing need for an ambitious modernization (see Exhibit 1-1).
While it is true that the Postal Service anticipates ending Fiscal Year 2003 with a significant surplus, this outcome is primarily the result of the most recent rate increase and the effect of legislation, passed in April 2003, lowering the Postal Service’s annual pension contribution to the Civil Service Retirement System. Neither of these developments, however, is adequate to address the long-term outlook of the Postal Service. According to independent, in-depth financial analyses performed for the Commission, even factoring in these developments, the Postal Service is projected to run significant deficits within five years, adding to its already destabilizing debt load. Fundamental change is the only option that will deliver a high-quality, financially stable Postal Service. While the Postal Service is not in crisis today, it is under extraordinary pressure to perform at a higher level. Rapidly changing economic, business and technological realities are rendering its legacy business model and structure counterproductive to the Postal Service’s ability to perform its most vital function: ensuring the universal availability of reliable, affordable postal services. The institution today needs broader flexibility to adjust to increasingly dynamic markets and to pursue new strategies to bring revenues and expenditures into balance without sacrificing quality of service and the ability to meet the nation's evolving postal needs. In short, the Postal Service needs a new business model for the modern world and the changing postal needs of the nation.
Challenge #1: Electronic Diversion of Mail Changes Everything In 2002, the volume of First-Class Mail (single-piece letters and bulk mail)—which accounts for more than half of all Postal Service revenues—declined for the first time in more than a quarter century. [9] The next most lucrative category of mail—Standard Mail—has experienced only anemic revenue growth in recent years. [10] Detailed projections produced for this Commission indicate that these trends likely mark the beginning of a permanent shift of key correspondence to electronic format. This trend alters the most basic assumptions of the Postal Service business model. It poses a significant financial risk to ratepayers and taxpayers alike, should the Postal Service prove unable to adapt to a sustained period of declining or stagnant mail volumes. While the Commission, of course, cannot predict the pace or scope of this decline, any discussion of the future of the Postal Service must take into account its potential implications. Exhibit 1-3.
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. [11] Customers are drawn to the convenience of online bill payment. With many Americans growing more comfortable performing secure financial transactions online, over the last five years, businesses and consumers have steadily transitioned to electronic payments. Today, 1 in 4 consumers pay at least some bills online. Interestingly, consumers are more reluctant when it comes to electronic bill presentment, with nearly half of those queried stating firmly that they are “not at all” comfortable with receiving electronic bill statements. [12] Nevertheless, over the next eight years, as much as 20% of bill payment and some presentment could occur electronically rather than through the mail. [13] This poses a significant threat to Postal Service revenue since more than half of all First-Class Mail is composed of communications from businesses and other organizations to house-holds, primarily the invoices and payments now shifting online. [14]
While electronic correspondence undoubtedly enhances convenience and offers new cost-saving options for individual consumers and businesses alike, its rising popularity calls basic assumptions underlying the Postal Service’s current business model into question and, with it, the Postal Service’s continued ability to meet the nation’s postal needs while minimizing the cost to ratepayers and the risk to taxpayers. For these reasons, the GAO notes that the Postal Service’s financial challenges “are not a cyclical phenomenon that will fade as the economy recovers.” [20] The risk posed by electronic substitution over the long term is undeniable. The Postal Service could lose a major fraction of financial transactions, correspondence and heavy advertising pieces. It would be foolhardy to bet the future of the Postal Service on a slow introduction of electronic alternatives. Instead, the Postal Service must adapt both its size and way of doing business to the nation’s changing postal habits and to take advantage of the significant opportunities that exist today to improve productivity, enhance service and dramatically reduce the excessive costs and inefficiencies throughout the postal network. Challenge #2: Postal Law Predates the Internet As apparent as the electronic diversion trend may be in the daily communications habits of most Americans, it is nowhere reflected in the current legislation governing the operations of the Postal Service. Why? Because the laws on the books have not been substantially changed since before the Internet—the most powerful global communications tool ever invented—existed. With electronic diversion and other trends likely to alter permanently the ways the nation communicates, the commercial environment for the Postal Service in the next several decades will likely be radically different from that premised in the Postal Reorganization Act of 1970 (“the 1970 Act”). Further complicating matters, with the benefit of three decades of hindsight, it is also clear that this legislation includes obvious flaws that ill serve the nation and its mail service today. The 1970 Act, for example, assumes perpetuation of a voluminous and archaic postal monopoly law that dates back to 1845 and is all but inscrutable in the modern context. As a result, there exists no clear boundary between the end of the postal monopoly and the beginning of the competitive postal marketplace. While the 1970 Act charged the Postal Service with operating in an independent, businesslike manner, it created a Board of Governors almost entirely made up of political appointees and with no requirement that they have the level of business acumen a private corporation with $67 billion in revenues would insist upon to ensure proper oversight and accountability. The 1970 Act granted the Postal Service broad authority to engage in more entrepreneurial activities. With the advent of the Internet and the blurring of the lines of what constitutes “mail,” this led to some dubious new business ventures for the Postal Service that most Americans would consider far afield of its basic function—delivering the mail to everyone. These efforts had a potentially market-distorting effect, since the Postal Service entered into competitive markets with the backing of its monopoly and its access to borrowed funds through the U.S. Treasury. The 1970 Act also created an independent postal regulatory entity, but narrowly focused it on oversight of ratemaking and classifications through a process that embodies the worst of public-sector pacing and bureaucracy. This process, taking as many as 18 months to navigate, has hampered the Postal Service’s ability to adjust its revenues to changing market circumstances in a timely manner and to engage in innovative partnerships with customers that could help control costs and stabilize mail volumes. While the 1970 Act appropriately upholds the nation’s commitment to universal service, it created no mechanism for an external review and refinement of the various components of that obligation. As the postal needs of the nation change, this omission leaves unanswered many important questions, chief among them: Does the universal service obligation require that the Postal Service itself carry out the core postal services expected by every American and business? Or does it merely ensure that essential postal services are available to everyone, perhaps in partnership with the private sector? Constructively answering these questions and freeing the Postal Service from the most severe public-sector requirements hindering its business operations are essential to the continued health of the institution and quality of its service to the nation. Challenge #3: Entrenched Inefficiency and Resistance to Modernization As the Postal Service struggles under a dated law, it faces rising pressure to answer successfully a fundamental question: How can it maintain high-quality universal postal services when its primary revenue streams are in retreat? The solution clearly lies with focusing the Postal Service on its core value to the nation—delivering the mail—and recognizing that, as demand for that service contracts, perhaps the Postal Service should contract, as well. By any account, that is a tall order, requiring significant cultural, oragnizational, regulatory and philosophical change. While opportunities for significant cost reductions through automation, standardization, procurement reform and a host of other initiatives are rela-tively obvious, there is intense pressure whenever the sensitive issues of closing a post office, consolidating distribution centers, or reducing the size of the workforce are raised. The result, too often, is stalemate. In the past decade alone, Congress has debated the entire gamut of postal issues, such as pricing flexibility, binding arbitration with labor, revisiting the Postal Service’s monopoly, and altering the number of post offices across the country. Yet despite the need for fundamental change, no comprehensive reform legislation has been enacted in the past three decades. If current economic and market trends continue and the Postal Service does not reach higher levels of efficiency, it will be unable to meet its “break-even” mandate, potentially shifting substantial obligations to the taxpayer. Making up these potential losses by increasing revenue from other categories of mail is highly unlikely. As a result, stabilizing the Postal Service’s financial situation requires significant cost reductions. Fortunately, in this arena, the Postal Service has ample opportunity—if given the appropriate flexibility and support. With the rapid growth of the nation’s postal needs over the last century, the Postal Service has developed a vast network of local offices, processing and distribution facilities, Bulk Mail Centers, and related transportation systems. This network includes some 300,000 collection boxes, almost 38,000 retail postal outlets, 446 mail processing facilities (Exhibit 5-1), along with one of the world’s largest transportation networks, featuring some 215,000 vehicles and more than $5 billion in annual contracts for highway, air, rail and water transport. Few, if any, believe that if the Postal Service were established today, such a sprawling logistics network would be necessary to deliver the nation’s mail. The GAO has noted that the number and location of postal facilities is based on “operating strategies that are now outdated, as the [Postal] Service has moved from a manually oriented processing and delivery environment to a highly automated environment.” [21] The facilities it does have are not designed or put to use in the most efficient manner. As a result, productivity varies from facility to facility, due to either lack of use or lack of efficient processes (Exhibits 1-4, 1-5, and 1-6). With significant liabilities and a bleak outlook for its traditional core revenue stream, the Postal Service can ill afford its legacy network. Productivity Varies Greatly by Facility
Fortunately, the Postal Service recognizes the hindrances posed by its legacy network and has undertaken an important network rationalization effort (see Chapter 5) to bring its processing and distribution system into the 21st century. The Commission applauds this effort. It is the Commission’s view that, with aggressive business strategies, much of the Postal Service’s legacy network could be retired. Many facilities could be consolidated or closed. Those that remain could be standardized, modernized and given a common footprint. Opportunities also abound to engage the private sector more fully in the delivery of universal service. But many of these critical advances cannot occur unless interested parties from Congress to customers, private-sector partners to postal competitors, recognize the opportunity and the necessity to realign and redeploy the nation’s Postal Service with the most sophisticated technology, the most experienced and capable leadership, the most skilled workforce, and the most aggressive productivity and cost-saving strategies it can muster. Without these efficiencies, even if rates remain “affordable,” ratepayers aren’t getting what they deserve: the most capable, efficient, high-quality network at the lowest cost. If the public interest lies with achieving an ambitious, nationwide public service at reasonable cost, rather than merely perpetuating the status quo means of delivering that service, then the Postal Service must have the nation’s support in aggressively adopting private-sector productivity and cost-saving strategies and applying them to the public mission of delivering the mail. Conclusion: Toward A New Business Model The Postal Service faces a defining moment: It can continue to carry out its universal service obligation via a costly and outmoded infrastructure, at extraordinary and perhaps unsustainable expense, or it can embrace new technologies, partners and private-sector strategies to ensure a bright future for the nation’s mail. Without a new approach, universal service is in peril. But by making the tough choices and embracing new strategies, ample opportunities exist for the Postal Service to enhance its service to the nation and simultaneously reduce the cost of that service. It is evident to this Commission that the nation and its postal needs have been fundamentally transformed. What is not yet clear is the Postal Service’s place in this new environment. How the institution is permitted to address the formidable and diverse challenges before it will determine its future role and the fate of its most valuable contribution to the nation—uniting the American people and economy through the mail. A successful modernization, however, must begin more fundamentally. As an essential starting point to the successful realignment of such a vast and vital national network, the Postal Service must clearly identify its forward-looking purpose and core value to the nation. It must carefully weigh the transforming technological and economic changes that have swept the globe in the 30 years since it was last overhauled and answer three critical questions: Who are we? What do we do? And, how can we do it better? Endnotes 11.
United States Postal Service, Annual Report 2002, p. 22.
Forward • Executive
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