Brookings paper on the Postal Service gets the facts wrong
Elaine Kamarck’s essay, “Delaying the Inevitable: Political Stalemate and the U.S. Postal Service,” grossly misstates the facts about the central cause of the Postal Service’s financial crisis, which is the statutory requirement to pre‐fund retiree health benefits. Current law, enacted in 2006, requires the Postal Service to pre‐fund these benefits over a 10‐year period at a cost of $5.5 billion per year. Kamarck writes (citing a Report by the Postal Regulatory Commission1) that retiree health benefits caused “$22,417 million in expenses out of a total net loss of $5.5 billion in fiscal year 2014.” Wrong. The $22.4 billion figure Kamarck cites represents the liability the Postal Service accrued over a 10‐year period due to its inability to make all the pre‐funding payments mandated by the 2006 law.
Kamarck misses what the Postal Regulatory Commission Report clearly shows: The $5.7 billion pre‐funding expense for 2014 exceeded the Postal Service’s $5.5 billion net loss for the year. For 2014 operations, the Postal Service had a positive net income of nearly $1.4 billion. (The Postal Service also had a positive net income based on operations in 2013 and in the first half of fiscal year 2015.)
Unfortunately, that’s not all she got wrong. For example, Kamarck pegs her analysis to the “dramatic decline in the volume of single piece first class mail,” citing a study by the USPS Office of Inspector General (OIG).2 But in doing so, she omits reference to the several important qualifiers in that OIG study. First, as the OIG study states, “The total volume decline figure hides significant differences in mail volume by geographical area. Differences in mail use such as these have important policy implications for the nation and for the Postal Service.”3 In some parts of the country, there has been little or no decline in the use of First Class Mail;4 and even in areas of high volume loss, significant volumes of First Class Mail remain.5
Furthermore, Kamarck asserts, without evidence, that “first class and standard mail volume is projected to continue its steep decline as Figure 7 illustrates.” Not when I look at it. Figure 7 illustrates, first, that Standard Mail volumes have stabilized and have begun to show modest increases. Standard Mail volumes have declined by only two percent from 1998 through 2013, as reported by the USPS Office of Inspector General.6
In addition, as the OIG report observed, First Class Mail volumes have begun to stabilize at substantial levels in those areas where the largest declines already have occurred. It remains to be seen how much First Class Mail volume will remain over the long run.
Of course, the rather dramatic decline in First Class Mail volume has significant implications for the long‐term financial viability of the U.S. Postal Service. But, here again, Kamarck omits salient facts. In 2014, despite volume losses for First Class Mail, revenue from First Class Mail increased 0.5 percent over the prior year, a $1.4 billion increase in revenue.7 Revenue from First Class Mail letters increased 1.5 percent in 2014. This increase in First Class Mail revenue shows the economic strength of First Class Mail. While large users of First Class Mail are quick to point out that volume is affected by rate increases, the fact remains that Consumer Price Index increases permitted under current law, combined with a temporary exigency increase, yielded a substantial net increase in First Class Mail revenue in 2014. Thus, price elasticities and rate policies for critical services must be considered as the mission and viability of the Postal Service is examined.
Because Kamarck recommends that the Postal Service spin off its parcel business, it is important to observe that her paper relies heavily, and repeatedly, on what she calls a “recent study” by Robert J. Shapiro. She neglects to mention that Shapiro’s study was financed by United Parcel Service (UPS), the private‐sector company that would benefit most if the Postal Service were split up. The Shapiro paper acknowledges that his research was funded by UPS.8 But UPS funding and sponsorship of the research should have been revealed to Kamarck’s readers too.9
Certainly, the effort to define universal service for the 21st Century will have to include a careful examination of the role, viability, value and likely future volume of First Class and Standard mail. There is a rich irony in Kamarck’s naïve suggestion that the competitive products portion of the Postal Service should be set free to “compete and innovate” along with other private‐sector companies. This would be like feeding a small fish to the very large predatory companies that dominate the parcel delivery markets.
Kamarck’s assertion that the Postal Service “is becoming a significant player in the growing market for parcel delivery,” is a rather shocking misstatement. UPS and FedEx so dominate the parcel delivery market that we should be concerned that they have no competition. UPS controls 52 percent of the parcel market and FedEx controls 30 percent; the Postal Service is a very distant third, with 15 percent of volume and 13 percent of revenue.10
And, of course, Postal Service volume is often destined for hard to reach places where UPS and FedEx will not go. Where they do go is where it is most profitable for them to go; there, they have an even larger share of the market. Rather than worrying about “unfair competition” with UPS and FedEx due to the postal subsidies, the U.S. government should be considering whether it is healthy for the parcel market in the United States to be a duopoly dominated by UPS and FedEx.11
There is a fundamental fallacy in Kamarck’s suggestion that the Postal Service’s universal delivery network should be maintained but separated from the rest of the Postal Service. The delivery service is the most expensive segment of Postal Service operations and the most difficult to make more efficient. This is not a criticism of the efficiency of letter carriers or of the delivery network, which are excellent. The Postal Service is consistently rated the federal agency that Americans most appreciate and respect. It delivers to every address in the United States, something no other delivery service is willing or able to do. It is a critical part of our national infrastructure.
This expensive infrastructure and the universal mail service it provides are being supported, as Kamarck and UPS observe, by giving the Postal Service exclusive access to mailboxes and a monopoly over letter mail. But Kamarck fails to appreciate the important supporting role played by the Postal Service’s mail processing network. Kamarck and others routinely dismiss the mail processing network as a financial burden that needs to be reduced as much as possible.
In fact, it is a profit center for the Postal Service. It delivers a very valuable service – sorting, processing, transporting, and preparing for delivery billions of pieces of mail on a daily basis – and then handing that mail over to the delivery arm of the Postal Service. The economic value of this activity has never been correctly analyzed and measured. It provides substantial economic support to the rest of the Postal Service. The fact that there is an implicit “profit” or benefit over and above the cost of mail processing has been recognized by private mail processing companies, including Pitney‐Bowes, which has made a determined effort to wrest away from the Postal Service as large a part of its mail processing business as it can.12 The USPS mail processing network should be preserved and used to support universal service.
Kamarck also misstates the history and significance of the destructive and ill-conceived retiree health benefits pre‐funding requirement.13 She attributes it to congressional concern that the Postal Service would be unable to pay its retiree health benefits obligations. But no, in fact, tthe idea for pre‐funding retiree health benefits emerged because, by 2004, the Postal Service had over‐funded its obligations to the Civil Service Retirement Fund. A repayment of the overfunding, or even a reduction in Postal Service contributions to that fund to redress the overfunding, would have scored as an expenditure of federal funds by removing funds from a Treasury account. Setting up a retiree health benefits fund in 2006 was a politically acceptable way of appearing to return the overpayments to the Postal Service without really returning them, and without creating an expenditure in the budget. The additional requirement of pre‐funding all retiree health benefits at a rate of $5.5 billion per year over a 10‐year period was an additional plus for the federal budget.
No doubt there were some who favored the pre‐funding requirement who sincerely wanted to protect the U.S. Treasury against unfunded liabilities for postal retirees’ health benefits. Others were more concerned about short‐term budget politics.
But some, including people at the Treasury Department, were determined to privatize the Postal Service, in keeping with conservative orthodoxy. They saw the unfunded liability for retiree health benefits as an anchor that would prevent private industry from sailing away with postal business. By imposing the pre‐funding schedule at a destructive pace, the 2006 legislation put the Postal Service on a course toward financial crisis, exorbitant debt, and degraded service – providing fodder for those who have long advocated postal privatization.
The Kamarck paper omits any reference to another important public policy issue raised by the unfunded liabilities for postal retiree health benefits. Those liabilities arise in large part because of an anomaly in the way Medicare and the Federal Employees Health Benefits Program (FEHBP) divide financial responsibility for retiree health benefits. In a system designed to apportion costs to the entity (agency) that should bear responsibility for those costs, postal retirees would enroll in Medicare, just as private‐sector retirees do, and Medicare would bear initial responsibility for health care costs of retirees, with only supplemental coverage (perhaps Medigap coverage) paying for costs not covered by Medicare. This is the way private‐sector health plans are coordinated with Medicare.
The federal government has never required this sort of apportionment of costs in the federal sector. Consequently, many federal and postal retirees are not enrolled in Medicare, and the FEHBP continues to bear a disproportionately large share of the costs of retiree health care. Because the FEHBP and Medicare are part of the federal budget; there has not been a political imperative to rationalize these financial relationships. But the Postal Service is not typically treated as part of the federal budget. The continuing excess cost of postal retiree health benefits is, therefore, one of several significant ways in which costs are being shifted from the federal government to the Postal Service.
Carefully written legislation would permit costs to be correctly apportioned between Medicare and FEHBP health plans covering postal retirees. This could be done without disrupting current plan enrollments for postal workers and retirees and without having to involve other federal agencies or their employees. If this were done, it would virtually eliminate the remaining unfunded liability for postal retiree health benefits without requiring the Postal Service to make the annual pre‐funding payments it has been unable to make. Importantly, it would neutralize the issue of unfunded retiree health benefits and provide a much clearer view of the path ahead for postal services.
Kamarck also uncritically cites the UPS‐funded Shapiro paper’s discussion of postal productivity compared to supposedly comparable private‐sector companies. There are no comparable private‐sector companies. The Postal Service must deliver to every address in the United States six days per week. The number of delivery addresses continues to grow, even while the number of pieces of mail per delivery has fallen. Both UPS and FedEx send their trucks to the high‐density delivery areas and drop off their deliveries for less dense areas at the post office for the Postal Service to complete.14
Similarly, Kamarck’s assertion that the Postal Service should be “managed by people with private sector experience,” is offensive and unfair. Would she prefer that postal managers be more like General Motors managers or more like AIG managers? In fact, postal managers have been managing with enormous dedication and energy the monumental challenge caused by the decline in First Class Mail volume. And they have done this while postal finances have been in a vice: Congress demanded $5.5 billion dollars per year (unnecessarily) to pre‐fund retiree health benefits, and imposed a rigid, class‐by‐class, CPI cap on rate increases. The CPI half of this vice has been unexpectedly challenging because of the Great Recession and the slow increase of the CPI. The Postal Service badly needs an infusion of capital to upgrade its delivery and transportation fleets and its information technology and management information systems. With better information, postal management would be better able to make necessary decisions and to act on them.
Although Kamarck is right that the “universal service” obligation of the Postal Service needs to be redefined for the 21st Century, she glosses over the fact that universal service will continue to be very expensive. Kamarck’s suggestion that the profitable parts of the Postal Service should be split off and privatized, leaving behind the most expensive part of universal service, would not be viable even if she had her facts right. It would deprive the Postal Service of vital financial and logistical support. Although Kamarck denies it, the fact is that the Postal Service is and can continue to be financially viable. It should not be dismembered, and certainly not at the behest of private‐sector companies waiting to devour its remains. We need to do what is best for the public interest.
The conclusion of the Kamarck paper that “the future should begin with a decision to break the organization into two separate entities,” does not follow from the analysis that precedes it. She is simply saying that, given all the problems she sees, the only way to save the Postal Service is to destroy it.
For reasons outlined above, that prescription is premature, dangerous, and irresponsible.
3. OIG Study at 5.
4. Id. at 6‐8, 10.
6. Declines in U.S. Postal Service Mail Volume Vary Widely across the United States (RARC Report No. RARC‐WP‐15‐010, at 4;
7. Financial Analysis of the United States Postal Service Financial Results and 10‐K Statement, Fiscal Year 2014 , by Postal Regulatory Commission (April 1, 2015).
9. The author of the UPS-funded research paper, who accepts responsibility for its “analysis and views,” is Robert Shapiro. After Mr. Shapiro appeared at a recent Brookings Institution Forum on the USPS, where he presented the research findings funded by UPS without any mention of the UPS funding, I called Ms. Kamarck to complain about that omission. She did not return my phone call. The Kamarck paper cites Mr. Shapiro’s study four times in 15 pages (at 1, Figure 5; 2 and 3, n. 14; 4 and 5, n. 19; and 13, n. 29).
10. The UPS and FedEx dominance of this market is somewhat understated by these percentages because they control a larger percentage of revenue. The Postal Service delivers smaller parcels, on average, and delivers to places where UPS and FedEx do not deliver. Compare this; with this.
11. For a discussion of the pricing control exercised by UPS and FedEx and its effect on the shipping industry, see “UPS and FedEx Dominate the Parcel Market but there are Opportunities for Regional and Niche Providers,” published by SupplyChain247 (March 23, 2013).
12. R.H. Lossin, citing a 2013 report was published by the National Academy of Public Administration, but sponsored and funded by Pitney-Bowes, observed in a recent article, “Why the Post Office Matters,” “Precisely because the postal service is quite profitable, a number of corporations would be happy to take responsibility for certain aspects of its operations.” Here.
13. Kamarck at 6.
14. In 2014, USPS delivered approximately 30 percent of FedEx ground packages, and also delivered a substantial percentage of UPS packages. See “For FedEx and UPS, a Cheaper Route: the Post Office”