Can nonprofit mailers hang on for 2+ more years with massive rate hikes while United States Postal Service (USPS) tries to get its costs under control and the regulator tries to start regulating? Postage hikes will continue until USPS cost control improves.
At the May 5 meeting of the United States Postal Service Board of Governors, Postmaster General Louis DeJoy warned (https://bit.ly/3N6FAS4) of continued rate increases for mailers. In his words:
* Concerning pricing — The nation, as well, as the Postal Service are experiencing significantly high rates of inflation in the cost of operations. While the impact of the Postal Reform Legislation is helpful — this is approximately a $50 billion offset against a projected $160 billion dollar 10 year projected loss…
* Therefore, from my perspective, the mailing industry needs to be prepared for continued use of our authority to raise prices on market dominant products at an uncomfortable rate until such time as we have accomplished our objective of projecting a trajectory that shows us becoming self-sustaining — as required by law…
* I believe we have been severely damaged by at least 10 years of a defective pricing model — which cannot be satisfied by one or two annual price increases — especially in this inflationary environment.
Nonprofits that use mail to help achieve missions already are experiencing record rate hikes in 2021 and 2022. With the July 2022 increases, the compound 18-month impact will be 16% to 20% on average, with some types of mail receiving even larger hikes. And, USPS is predicting at least another 3% to 5% in January 2023 if it stays with its plan to raise rates twice a year.
Is this happening because of the “defective pricing model” the PMG blames? Of course not.
I was the USPS vice president of pricing when the 2006 postal reform law was passed, creating the CPI-capped (consumer price index) rate regulations. We in the Postal Service were very optimistic about the new pricing model for many reasons. It gave us the freedom to do our pricing as long as the average increase for each class stayed within the cap. And packages could be priced with no cap at all, as long as each product covered its cost. The new law also allowed us to retain profits for future capital investments, fast-track new product tests, and negotiate pricing agreements with individual customers.
Unforeseen circumstances, principally, were the Great Recession and rapid digital substitution for mail. USPS also realized that it could not afford annual pre-payments of about $5.5 billion for retiree health benefits.
Fairly quickly, by early 2010, USPS leadership abandoned trying to make the new pricing model work. The agency turned to an all-out effort to discredit price cap regulation. It stopped trying to do market-dominant negotiated pricing agreements and introduced no significant new products through the streamlined process.
USPS shifted its focus to breaking the price cap on several fronts. It pushed the Postal Regulatory Commission (PRC) to approve an “exigent” surcharge that added 4.3% to CPI in 2014-16. Only the efforts of the Alliance of Nonprofit Mailers and others prevented the twin postal agencies from making the surcharge permanent. Postal management and unions lobbied Congress relentlessly to pass “reform” legislation that included add-ons to the CPI.
When the PRC in 2016 started its required 10-year review of rate regulation, USPS launched its mailer-funded resources in an all-out campaign to pressure the regulator to blow up the price cap. Because of strong countervailing evidence and argument put forth by the Alliance of Nonprofit Mailers and other commercial mailers, it took the postal agencies four years to implement a scheme to add on several questionable surcharges above inflation.
The most defective part of the USPS/PRC scheme is a “mail density” adder that rewards USPS with higher rates the year after mail volume declines. With mail volume down 10% in the pandemic 2020 fiscal year, the PRC rewarded USPS with an extra 4.6% in rate authority in FY’ 21. Only monopoly government agencies would see the wisdom in incentivizing volume declines and then following them with larger price increases.
Now USPS is repeating the false fact that staying within inflation, as many competitive businesses and nonprofit organizations routinely must do, is a “defective pricing model.”
USPS admits defective cost control
Postmaster General DeJoy recently stepped up his direct communication with mailers. He is being more open and honest about the years of gross inefficiency and waste that he must reverse to make USPS successful.
Honesty is a good thing. DeJoy doesn’t use the term, but USPS has a defective cost control model. Mailers have known this for years, and have provided hard evidence and superior analysis in regulatory filing after filing, not to mention countless meetings with postal management, its inspector general, its regulator, and Congress.
In the same speech about more “uncomfortable” price increases, DeJoy referred to the defective USPS cost control model: “That said, there is a lot left to do…and while we are working diligently to improve our operating model and cost structure — we still have a long way to go.” And: “While there is no question that we have some heavy lifting ahead of us, we are extremely confident that we can, and will, transform the Postal Service, and that we will be an affordable, reliable, and green service provider…”
DeJoy has hinted at major network changes that are needed to make USPS efficient and effective. For example, in a recent interview with “Government Executive” (https://bit.ly/39cRMlz): “He promised to boost efficiency and to design a network no longer aligned to the volume of the 1990s. In part, that will come from transporting mail and packages together, so postal trucks are always full. It will also result in fewer buildings with more letter carriers reporting to each one.”
In a recent meeting with mailers, DeJoy, who has been in office for two years, said it will take at least two more years to get a handle on USPS out-of-control costs.
In the upside-down government monopoly mindset, mailers must continue to pay the price of the increasingly inefficient USPS, now 16 years since mail volume peaked in 2006.
And, the PMG said in the “Government Executive” interview that he doesn’t care what his mailer customers think about the impact of large price hikes:
DeJoy took a similar attitude with his rate increases (https://bit.ly/3w1QuCN). Large-scale mailers and other stakeholders have said slower delivery at higher rates will further drive people and businesses away from the Postal Services, exacerbating the volume losses that have put the Postal Service in a financial bind.
The postmaster general said those critics are in denial. “I cannot compete with digital. I just can’t compete with it,” DeJoy said. “So I’m not going to try.”
Again, the DeJoy ethos comes through: Do not waste time worrying how things used to function, or how changes might ruffle feathers. Maintaining low prices to keep mail in the system for an extra year, he called “a distraction.” You want faster correspondence — “Email, if you need it there in a minute.”
Where is the regulator while all this is going on? The answer is … largely absent. The 2006 law converted the PRC from a rate commission to a regulatory commission. The PRC would no longer set postal prices but would instead check the USPS math and its compliance with law and regulations. The PRC would be more of a holistic regulator that covers all the important levers, including service and costs. But it has failed.
The Annual Compliance Determinations (https://bit.ly/3whsNVW) issued by the PRC are full of transparency about USPS missing its service targets and not controlling its costs enough for many products to cover costs. But you can also see right through any enforcement action by the regulator. It merely admonishes, urges improvements, and requires more studies and reports. Doing nothing to regulate costs and service, the PRC was left with allowing massive rate increases to help USPS clean up its books.
The new Postal Service Reform Act enables a more streamlined budget process for the PRC that the regulator hopes will enable it to increase its $17 million annual spending of mailers’ funds and grow its staff of 75. The PRC also recently announced a first-ever chief data officer and some data improvement initiatives that it thinks will give itself the capacity to be the more complete regulator envisioned by the 16-year-old law. But don’t expect a full-fledged regulator any time soon.
Taking “Run It Like A Business” To Its (il)logical Conclusion
The mailer-funded postal service model put in place in 1970 followed about 200 years of hybrid funding by the federal government and mailers. Now the “businesslike” model is being put to its perhaps ultimate test. The monopoly postal agency is taking advantage of excess pricing power granted by a weak regulator while it promises to solve the cost control issues that have bedeviled the agency for decades. The only sure thing is that mailers, and in our case many nonprofits, will continue to be harmed.
Stephen Kearney is executive director of the Alliance of Nonprofit Mailers in Washington, D.C. His email is [email protected]