Seeking Equilibrium

The concept of balance is present in many philosophies, operations, and financial considerations, and requires that competing factors and forces be in equilibrium for balance to be achieved.

The analogy can be applied to the Postal Service which, financially, has been off balance for many years. The agency was debt-free at the end of fiscal 2005, i.e. until the Postal Accountability and Enhancement Act took effect in 2006.

After that, an imbalance developed largely from an excessive demand to pre-fund retiree health costs for decades into the future. Under the price cap pricing regime also implemented in 2006, there was no way that the USPS could generate the necessary revenue from the contemporary mail volume. As we all know now, that situation worsened because of the 2008 recession and the burgeoning use of electronic communications which has siphoned off traditional mail volume.

To correct this long-term situation, the USPS has to restore financial balance. PMG Louis DeJoy is determined to do that which, in principle, is reasonable; it’s how he plans to do it that’s put him at odds with those he wants to pay for it.

Balance

Obviously, financial equilibrium requires matching costs and revenues. The approach DeJoy is taking, however, is much like that of his predecessors – whose judgment he so often criticizes – i.e., looking to revenue increases as the only corrective input to restore equilibrium.

One concept behind the 2006 reform law was that capping USPS revenues would drive the agency to reduce costs – to live within its means – but that was never effectively embraced by the USPS. While there were various initiatives – such as reducing service commitments, consolidating facilities, trimming retail operations, and increasing automated mail processing – none ultimately yielded the desired results because the common element – the cost of labor – was never tackled squarely.

The expensive gorilla in the room

Historically, the Postal Service, like the Post Office Department, is seen as having a secondary social purpose – the provision of steady good-paying jobs; the 1970 law also established that the USPS would be unionized. Over the following decades, during which mail volume and revenue grew steadily, postal officials fell into a habit of granting benefits to the postal workforce that, over time, became increasingly out of step with the changing economic environment.

Even in the most recent round of labor contracts, the USPS again agreed to not only more raises and upgrades to positions, but to continued semi-annual cost-of-living adjustments and protection against layoff. Moreover, likely because of union opposition, there are neither performance standards nor incentive programs for craft workers.

Meanwhile, mail volume and retail activity have decreased, delivery points have increased, and more employees have been added to the rolls. All of these factors continue the veer that began decades ago as the cost side of the equation grows faster than revenues.

DeJoy economics

DeJoy’s answer to the imbalance is simple: raise revenue.

Likely schooled by some of his Inner Circle who dislike the 2006 reform law’s price cap regime, he’s adopted the argument that the limitation is unfair, and that ratepayers have been spared liability for the costs they cause the USPS to experience. Like every other concept in his head, that one is de facto correct, and any conflicting facts are dismissed.

Here’s something else for him to dismiss: fulfilling customer expectations does not automatically generate unavoidable and uncontrollable costs to be underwritten by postage.

Instead of tackling costs, DeJoy is doing the same thing that his predecessors did – failing to control labor costs and inefficiency, and instead blaming ratepayers for not paying enough. Under his argument, the costs of providing service – at any level – are inescapable if he’s to provide what he’s claiming to be the service customers want.

What do customers want?

Not that anyone would expect DeJoy or his Inner Circle to concur, but the USPS is in no position to speak for its customers or what they want. Though many at USPS HQ have experience in their respective business aspects of the USPS, few have any first-hand knowledge of the business of those customers that produce most of the agency’s revenue and have to manage the challenging realities of that side of the mail.

“Service” for retail customers may mean convenient access to a post office, regular delivery, and reliable mail service. Unfortunately, those customers don’t generate enough revenue to cover the costs of those services, nor – if those are “public services” expected of the USPS by Congress – are the associated costs offset in any way by public funding. So, for that segment, DeJoy is right – those customers are getting a lot more than they pay for.

On the other hand, “service” for business customers is different. They expect what they send to move quickly to addressees – at a pace faster than what the USPS likes to say they want – and at a price commensurate with that service. (The USPS also uses its own definition of what a “good price” is.) Smaller business customers may need retail access, but those that generate the most mail (and revenue) do not, funneling their presorted, automation-compatible, destination entered mail through high-volume commercial mail producers directly into the postal processing stream. So, for that segment, DeJoy is wrong – those customers are paying more than their share of postal costs, and are getting weary of being expected to kick in even more.

Commercial ratepayers are not who’s agreeing to higher labor costs, imposing an unachievable prefunding goal, or advocating for six-day delivery, so DeJoy is looking at the wrong parties when saying someone needs to pay more.

The threshold

What DeJoy also is overlooking is that regardless of which “customer” is expecting what types or levels of service, none of them is implicitly handing him and USPS management a blank check to cover the costs they run up.

As one of the few (if not the only) senior executives with hands-on business experience, DeJoy should understand that customers have a finite tolerance for service degradations and/or price increases, beyond which they will go elsewhere. On that point, he may have been misled by his insular Inner Circle to believe that, as their monopoly provider, his customers have no alternatives. Wrong; they do.

The USPS monopoly is over specific types of hard-copy messages, not over all hard copy messages or over monopoly messages not in hard copy form. Virtually every sender of market-dominant mail has a non-hard-copy alternative to reach recipients; the only question isn’t if, but when that sender’s service and rate tolerance will be reached.

Implicitly, DeJoy equates what customers want with both the scope of and the need for whatever resources his agency puts against that demand, e.g., if customers want retail access that means they’re OK with any assigned resources and their associated costs. Wrong on that, too.

Therefore, if DeJoy will accept one small suggestion, he should stop telling commercial ratepayers that they’re not paying enough for what they want. What those customers really want is for him to start looking at getting costs under control. Ratepayers are tired of dealing with an agency unwilling or unable to control its labor costs, and too ready to demand more revenue as an alternative.

Getting through the Inner Circle

Undoubtedly, his Inner Circle will again plaster over any perspectives differing from his as just more industry whining.

He’ll be kept focused on the rate cap as the source of all USPS financial woes. His opinions will be channeled to consider maximized semi-annual price increases as the only way to overcome accumulated debt – regardless of its sources (like $1 billion spent on a fleet of 100 flats sequencing machines that never yielded anticipated savings).

And, of course, his Brain Trust will never allow the notion that runaway labor costs should be throttled: poking the union  bear will cause problems with politicians and inspire work slowdowns and a bloom of petty grievances.

Maybe DeJoy and his Inner Circle are smarter than the rest of us and understand something we don’t; maybe they think postal labor is a great bargain. More likely, they just prefer to ignore labor costs and inefficiency because it’s easier to go to the revenue well twice a year than tackle the unions. 

Despite all the effervescent press releases coming from DeJoy’s spinmeisters, the message ratepayers get every time a new labor contract is signed or a new price increase is announced is that he wants to take the easy path to financial equilibrium – getting more money from ratepayers rather than do the hard work of reducing labor costs.