Most of the news about the Postal Service focuses on service changes that it wants to make to reduce its workforce. These include initiatives to: downsize the retail and mail processing networks, eliminate Saturday delivery, cut First Class Service standards, and intensify route optimization of city carriers. The impact of these changes on employees is clear and most employees understand that if these actions are implemented, the reduction in the workforce will happen relatively quickly.
Even with all of the proposed changes, the majority of people currently working at the Postal Service today will still be working there in 2015. Most probably plan to continue to work well past then, until their normal retirement. What these employees don’t know is whether the Postal Service will be in a position to continue to offer the pay and benefits they now receive at the same level, over the rest of their career.
Given this uncertainty, postal unions and management associations, need to look at what the Postal Service is doing to ensure its viability beyond 2015. To do this, they need to look at the Postal Service’s capital spending plans as well as its ability to raise the capital necessary to implement a capital spending program necessary for it to meet the needs of mailers in 2015 and beyond.
Why Capital Spending Matters Today
The Postal Service’s current business plan shifts the focus of its operations from providing overnight single-piece First Class Mail service to providing a level of service that meets the needs of most of its bulk mail customers. The shift in the Postal Service’s business focus significantly reduces the Postal Service’s need for capital. This reduction in capital needs probably played a role in the Postal Service’s decision to lengthen service standards.
Estimating the capital needs of the Postal Service with current service standards is somewhat speculative, but it would clearly be higher than it would be by lengthening the service standard. Without the shift, the Postal Service faced the question as to what to do with a large number of processing plants that were either too large, too small, or needed repair. In addition, an optimal network using current service standards might require facilities in different locations than they are now and, possibly, new facilities in new locations that would meet the needs of two or more existing plants. Finally, maintaining the existing service standards would require significantly more equipment and larger spending on capitalized software and information technology used to manage plants and the Postal Service’s transportation network.
Why Capital Spending Matters Tomorrow
As the post, Postal Service’s Future Beyond 2013 Cloudy Due to Severe Capital Constraints noted, the Postal Service has under-invested in capital spending, almost since the passage of the Postal Reorganization Act. The backlog in capital projects and, in particular, information systems, retail, and vehicle projects remain regardless even if service standards are lengthened.
Right now, financial projections for the Postal Service suggests that capital spending will remain at the current historically-low levels through at least fiscal year 2013 and, more likely, remain at these levels until 2015. If true, projects currently on the back-burner will remain on the back-burner until at least 2016.
Capital limitations increase the incentive to reduce services in the future. Eliminating Saturday delivery should allow the Postal Service to extend the life of its existing delivery fleet, as vehicles would be driven fewer miles each week. Furthermore, it would have some spare vehicles that could be used as replacements when vehicles are damaged beyond repair. When vehicles are eventually replaced, the number of vehicles that need to be purchased is reduced.
Capital limitations will have an impact on both costs and service quality in the future. The new Postal Service network uses only existing facilities. The restructuring requires that operations adjust to what the existing facilities can handle. The greatest impact is likely to be on the loading dock, as remaining facilities have to handle a broader geographic area. It is unclear if the Postal Service has the capital to expand loading docks where needed or introduce information technology systems to schedule loading and unloading on the dock.
An alternative to using the existing set of facilities in network redesign would involve starting with a green-field and identifying the cost-optimal locations for a processing network designed to meet a particular service standard and other constraints. This green-field network would continue to use many existing facilities, but would likely have a significant number of facilities located in towns that are more geographically optimal than where Postal Service processing plants are now located.
A well-capitalized Postal Service would have a plan to adjust its initial network after restructuring to move closer to the green-field solution. This would involve building new plants in locations that both reduce overall transportation costs, as well as improve the service offered to customers. The need to adjust the network closer to a green-field solution will likely occur in geographic regions facing population changes, either much faster or slower than the national average.
Conclusion
Capital availability is the poor stepchild of the postal reform discussion. Neither the House nor Senate postal reform bills specifically discuss the need for a well-capitalized Postal Service or define what that means. As neither the Government Accountability Office nor the United States Postal Service Inspector General have examined the capital needs of the Postal Service in a specific report, the absence of legislation addressing the capital needs of the Postal Service is understandable, but not forgivable.
Congress is not helped by postal stakeholders. Neither mailer nor labor stakeholders have had real interest to put the capital needs of the Postal Service on the table. Mailers understand that a properly capitalized Postal Service would have to charge higher rates than it now charges. Employee associations and labor unions understand that any focus on capital would either increase pressure on reducing compensation and benefits or changing work-rules to shift an even higher proportion of employees into part-time or non-traditional, full-time shifts.
Finally, focusing on the capital needs of the Postal Service makes finding a solution in today’s strained political environment even more difficult. In particular, knowing the real capital needs of the Postal Service would force Congress to write bills that allow the Postal Service to move beyond break-even, more quickly than any bill now on the table. A more rapid path to profitability would require the Federal Government to agree to a modification to the formula used to calculate the Postal Service’s retiree obligations, which would reduce the annual expense for these obligations.
Both the GAO and the Office of Personnel Management Inspector General have said that such a change was within the prerogative of Congress, which would be choosing between multiple opinions on what the appropriate accounting rule should be. This gets to the political nub. Any change in the formula would be called a “bailout” by opponents who would see political hay by opposing the change. Once the “bailout” word is used it is hard to imagine how the change could reach the floor of a Republican-led House of Representatives or get past a Senate filibuster.
