By rejecting the Postal Service’s position that its retirement obligations are overstated, the Government Accountability Office has forced the Postal Service to find an additional $5, 5 billion in cuts or $5.5 billion in revenue. As the Postal Service’s financial plan already includes cuts in service quality, post offices, and employee benefits as well as the layoffs of 120,000 employees, its only option is raising revenue.
Raising $5.5 billion will require Postal Service to increase rates sufficiently to increase total revenue by $5.5 billion. This is an 8.4% increase in revenue over current levels. Given that rate increases result in lower mail volumes, the total increase in rates would have to be higher and could possibly reach double digits. The average general rate increase could be lower if the Postal Service was able to eliminate or cut discounts for non-profit mailers and bypass mail in Alaska, and increase rates on products so that all products (i.e. subclasses of mail) generate at least a 10% margin over attributable costs.
The GAO Reports Throws a Wrench into the Postal Service’s Recovery Plan
The Postal Service’s recovery plan includes resolution of the retirement obligation issue in its favor. If changes to the retirement payment obligations are off the table, then the Postal Service’s financial plan underestimates losses by $5.5 billion each year. The Postal Service proposes a complete revamp of its retirement benefits as an alternative but that is particularly unpopular among its employees and is not included in any legislative proposal currently on the table
If there is no legislative action on the Postal Service’s proposal, then the full $5.5 billion in payments would have to come in the form of rate increases that generate $5.5 billion in revenue in 2012 above current rates plus the annual CPI increase. After 2012, the CPI rate increase would be applied to the higher rates set in 2012.
Issa-Ross Postal Reform Will Increase Pressure for Rate Increases After 2012
The Issa-Ross Postal Reform bill gives the Postal Service an additional $10 billion in borrowing authority as well as giving either the Postal Service or a control board significant freedom to cut costs. The $10 billion in extra borrowing capacity falls short by the end of 2012 if one assumes that a control board would follow a plan similar to what management now recommends and the Postal Service needs to hold $2.5 billion in borrowing capacity in reserve. The shortfall in 2012 through 2014 is as follows:
- 2012 – $0.9B
- 2013 – $2.4B
- 2014 – $2.9B
All of this would have to come through an above CPI rate increase.
The shortfall listed above is a minimum amount of revenue increases needed, as it assumes that the Postal Service will not pay off any of its debt before 2014, and it would not have any extraordinary costs associated with its downsizing initiatives or need to increase capital spending to upgrade its vehicle fleet, information systems, or replace existing plants to better optimize its network and serve its customers.
If one assumes the Postal Service’s capital needs for extraordinary expenses was equivalent to a 15 year amortization of debt held after payment of 2011 retirement obligations ($17.1 billion), the revenue increase needed above CPI increases would rise by $1.34 Billion and would be:
- 2012 – $2.24B
- 2013 – $3.74B
- 2014 – $4.24B
The following table provides the needed rate increases with and without repayment of debt to cover extraordinary costs.
(Revised Estimates are in the Post – Potential Rate Increases to run less than 6% above CPI over next 3 years)
Can Rate Increases Be Avoided?
There are only a limited number of options for avoiding major rate increases.
- Allow the Postal Service to manage all of its benefits for current employees and retirees and transfer assets in retiree accounts to be transferred to the Postal Service. (It is unclear if this can save annually $5.5 billion needed.)
- Cut employee compensation each year over the next three by the shortfall. The cut in employee compensation would be above and beyond what the Postal Service has already proposed. The cuts in compensation would be 25% larger than the rate increase percentages listed above as compensation represents 80% of total Postal Service costs. Therefore the cut in compensation of existing employees would be 21.4% above and beyond what the Postal Service has proposed by 2014.
- Increase service standards on First Class Mail to 2 to 4 days to eliminate more air transportation or allow for additional consolidation. Make the minimum service standard in rural areas 3 day delivery. Lengthening service standards further would only marginally cut into the rate increases.
As all of the alternatives to rate increases produce uncertain cost savings or could violate laws relating to cutting compensation of current federal employees, mailers should prepare for significant rate increases in 2012 and beyond and adjust their business strategies accordingly.