Revisiting Postal Reform

I apologize for writing about postal reform again, but there have been many twists and reversals on the reform front, as well as many rumors spreading around Washington and the mailing community. I hope I can at least dispel some misinformation. ▪ First, many mailers and politicians believe that if a postal reform bill becomes law, there will not be a postal rate case (as we know it) filed in 2005 nor a significant postage increase taking effect in 2006. That belief is wrong. Yes, there will be a rate case in 2005, with new rates being implemented in early calendar-year 2006. The postal experts in Washington predict that the rate increase will be 7% — but that’s before any additions due to Civil Service Retirement System (CSRS) payments. Those payments could add 2.5 to 4.0 percentage points to the rate increase — and that’s if a reform bill is passed. If there is no legislative reform, the CSRS payments would add 5.5 percentage points to the rate increase.

If you forget everything else about this article, remember that there will be a significant postage increase in 2006 with or without postal reform.

Back to reform itself. Both the Senate Governmental Affairs Committee and the House Government Reform Committee have approved — unanimously — postal reform legislation. Those bills now await action on the floors of both houses of Congress. The bills are not identical, but both have a premise that U.S. Postal Service should have flexibility to set rates, with the rates for noncompetitive classes of mail at or below inflation.

The differences between the two bills, however, are important. A large group of mailers have joined to form the 21st Century Mailers Coalition. The group represents financial, publication, package, catalog, and advertising mailers along with many suppliers such as printers, paper companies, and envelop manufacturers, and of course associations such as the Direct Marketing Association. The coalition supports portions of the House bill and portions of the Senate bill — but has also proposed six changes to the bills.

CSRS payments

The Senate bill requires, in layman’s terms, a 40-year mortgage with annual payments that would be made to a postal retiree health benefit fund. In essence the overpayments made to CSRS during the past 32 years would be used to fund “underpayments” for retiree health benefits. The payments would trigger the 4.0 percentage-point increase in rates in 2006 that I mentioned above. The House bill also would use CSRS “savings” to fund retiree health benefits, but with a different formula. The House formula would have a lower initial payment that would balloon in future years. And the House would fund only half of the health benefit “underpayments.” The House formula would add 2.5 percentage points to the 2006 rate increase.

The coalition has proposed a compromise: Use the Senate formula, but cap the payment to that of the House first-year payment. This would extend the time period to fund the retiree health benefits but would not have such an adverse impact on 2006 postage rates and would avoid huge ballooning payments in future years that could spell fiscal disaster for the Postal Service.

At this point, the Bush administration opposes the compromise, saying it is not actuarially sound. We believe that the administration also finds the House provision to be actuarially unsound. The Senate is reviewing its provision to try to lessen its CSRS provisions’ impact on the 2006 rate hike.

Both the House and Senate bills shift liability for military service time of postal retirees’ retirement payments from USPS (the only agency in the federal government saddled with that liability, which means mailers are saddled with the liability) to the U.S. Treasury. Mailers fully agree. Military service obligations belong to the taxpayer and not to postal rate payers. Unfortunately, the Bush administration is adamantly opposed to the Senate and House provisions. At this time, it does not appear that the Senate and House Committees are changing their positions. Let us all hope that they remain adamant and withstand the administration’s pressure.

Indexed rates

The Senate and House versions of postal reform have an indexed rate system for noncompetitive (also known as market-dominant) classes of mail. The House version requires the Postal Regulatory Commission (PRC, which is the renamed and revamped Postal Rate Commission) to establish for each subclass of mail a rate system indexed to the Consumer Price Index (CPI). The Senate version allows the PRC to establish the federal index to which postal rate increases should be compared. The Senate bill does not specify to what the index should apply — USPS as a whole, classes of mail, subclasses, rate categories, or rate cells.

Both bills provide an escape clause granting the PRC authority to allow USPS to increase rates above the index. The House bill sets the escape bar at whenever, under honest and efficient management, the Postal Service needs more revenue. The Senate escape bar is higher, allowing above-index rate hikes whenever revenue is needed to cover “unexpected and extraordinary” events. The mailers coalition has offered another compromise — use the Senate language but have the index apply at the subclass level.

Some mailers — mostly catalogers — oppose the subclass-level requirement. They hope that a systemwide application of the index will allow the USPS to reduce the high markup burden they currently have by shifting some of the burden to other classes of mail. Since the Postal Service has proposed most of the interclass relationships in its rate filings, I am not certain that it would move in the direction those mailers desire.

The 21st Century Mailers Coalition is working with USPS employee groups to find a compromise that is acceptable to mailers and employees. As I write this, we have not yet found the compromise, but we are close. We believe that the USPS does not like the mailers’ compromise, however, and that its management wants more flexibility to avoid the index.

In essence, from the mailer point of view, the USPS wants flexibility to raise rates without Postal Regulatory Commission interference and without any constraints on the size of any increase. Mailers oppose the USPS on that point.

Parcel Post and discounts

Language in the House bill could be read to require that Parcel Post have a significant markup over costs imbedded in postal rates. The House bill would also move single-piece Parcel Post from the noncompetitive array of classes of mail to the competitive array. It is estimated that such a shift would force an increase in Parcel Post rates of 35%-50%. To mailers, the USPS, and postal employees that is unacceptable. The 21st Century Mailers Coalition supports the Senate version of the bill, which does not adversely affect Parcel Post. The House is trying to find a compromise on Parcel Post among mailers, the Postal Service, and USPS competitors.

The House bill contains language requiring that all worksharing discounts not exceed avoided costs. The Senate bill is silent in this area. Mailers oppose, and USPS employee groups support, the House bill language. The coalition is working with the employee groups to jointly support amendments to the Senate and House bills. This particular provision is a centerpiece in those discussions, which as I write this are progressing satisfactorily.

The Senate and House committees, led by their respective chairs (Sen. Susan Collins of Maine and Rep. Tom Davis from Virginia), are determined to get postal reform passed. Their determination gives us hope that postal reform will become a reality, which is why we are committed to continue working with them and the Postal Service’s other stakeholders to get this reform through Congress and on the president’s desk before the November elections.

My goal in working for reform is to have a united mailer and USPS employee front. But in the end mailers must fund the operations of the Postal Service. Reform will not change that. What reform can do is provide incentives for the Postal Service to reduce costs and grow revenue-bearing mail volume. That is what we are striving for, because we need a viable USPS in the future.

Based in Washington, Jerry Cerasale is senior vice president, government affairs, for the Direct Marketing Association.

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