USPS Plunges Deeper Into Debt

These are scary times for the U.S. Postal Service — which makes them scary times for catalogers as well. Not only is a new rate case looming, but there’s the possibility of another postage increase as early as this summer.

Dire straits

Postmaster General William Henderson, who will leave office on May 31 after a three-year stint, said in his final National Postal Forum speech on March 26 in Orlando, FL, that the USPS will lose up to $3 billion in the fiscal year ending in September.

The agency blames some of the red ink on a 10%, or $200 million, rise in health benefit costs and fuel price hikes that led to $350 million in unanticipated costs during the first quarter alone. And as USPS chief financial officer Richard Strasser clarified in early April, the projected loss is based on the assumption that the economy will not dip into a recession. Although the agency blames the 1% first-quarter dip in mail volume on the slowing economy, Strasser admits that the USPS hasn’t projected how a recession would hurt its bottom line.

Meanwhile, the Postal Rate Commission (PRC) was at press time reviewing, for the third time, the postal rate case that yielded postage increases of up to 14% for catalogers in January. The PRC is trying to determine if USPS management is justified in demanding more revenue from the case. Although few believe that the PRC would change its views on the case, the USPS Board of Governors (BOG) has the right to increase rates to the levels it sought prior to the first PRC recommendation this past November. Should the BOG overrule the PRC, catalog and other rates could increase by this summer.

Then there’s the matter of the next rate case. The USPS has gone on record as saying it will launch another case this year, seeking a 10%-15% increase in rates overall. Even though Henderson said in his Postal Forum speech that he was looking to avoid filing the new rate case this summer, deputy postmaster John Nolan said in a keynote session the following day that “there’s no avoiding the fact that we’re going to have to raise rates.” Nolan couldn’t specify the timing of the next rate case, however. PRC vice chairman/acting chairman George Omas also said that the agency will definitely file a rate case this year.

The ongoing review

Regarding the PRC’s review of the rate case implemented in January, few observers expect the PRC to tinker with the case. “The question is what the governors will do when the PRC sends the rate case back with no significant changes,” says consultant Richard Barton, president of Arlington, VA-based legislative consulting firm Barton Consulting.

Instead, Barton believes that the governors will overrule the PRC and enforce the rates they’d sought in the agency’s initial filing last year. It’s not yet clear how much more of a financial strain that would be on catalogers.

But to override the PRC, all nine members of the BOG must vote in favor of it. Postal governor Tirso Del Junco voted against the majority that year, “and some are suggesting he’ll do the same this time,” says a source familiar with the rate case.

Del Junco is seeking an extension from President Bush of his term as a postal governor, the source points out, “and if the White House says it doesn’t want the BOG to override the PRC on this rate case, he’s likely to vote against overruling the PRC again.” Del Junco was unavailable for comment.

In the meantime, the USPS plans to remove $2.5 billion out of its cost base by 2003, according to USPS chief operating officer John Potter: “We’ll take 75,000 in work-years’ worth of labor out of the system” through attrition in administrative staff. For the USPS’s most recent monthly accounting period, covering Feb. 24-March 23, work hours were 2% less than during the same period last year, Strasser says.

And in an announcement that made front-page news, the USPS said it is exploring the possibility of eliminating Saturday delivery. Reducing the number of days a week that mail is delivered to five would save the agency up to $2 billion annually, Strasser says.

For the USPS to reduce delivery, Congress would have to pass legislation overriding the Postal Reorganization Act of 1970, which mandates delivery six days a week. At the same time, the agency’s announcement about cost-cutting efforts in the face of its rising losses turned the spotlight on the need for postal reform. On April 5, just days after the USPS dropped its bombshell, the House Government Reform Committee began developing a new reform bill.

Rep. John McHugh (R-NY) — who tried for six years to push through his own reform legislation — is charged with crafting the new bill. But the proposed legislation, sources say, will not allow the USPS to reduce service. Rather, it will grant the agency more flexibility to compete with private-sector firms. In short, it’s nearly identical to the legislation in which McHugh was unable to interest Congress in the past.

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