Restructuring the U.S. Postal Service.

• Author: Carbaugh, Robert

From 1775 when Benjamin Franklin was appointed as the first postmaster general of the United States, the agency known as the U.S. Postal Service (USPS) has grown to become an institution that delivers about half of the world's mail in rain, snow, and the dark of night. Employing about 656,000 workers and 260,000 vehicles and operating about 38,000 facilities nationwide, the USPS is the second-largest civilian employer in the United States, after Wal-Mart. If the USPS was a private sector company, it would rank 28th in the 2009 Fortune 500 (U.S. Postal Service 2010).

The USPS is obligated to provide a uniform price and quality to all Americans, irrespective of geography. Although the USPS is often mistaken for a government-owned corporation such as Amtrack, it is an independent branch of the federal government; it is controlled by a board of governors and a postmaster general and it is regulated by the Postal Regulatory Commission. The USPS is structured to operate like a business, financing its operations through the sale of postal products and receiving no direct taxpayer subsidies.

The USPS is proud of its efficiency gains. For example, 10 years ago it took 70 employees one hour to sort 35,000 letters. Today in an hour, only two employees process an identical volume of mail. Though the number of addresses in the nation has increased by nearly 18 million in the past decade, the number of employees who handle the increased delivery load has decreased by more than 200,000 (Potter 2010a).

Also, the USPS appreciates its high levels of national on-time performance (e.g., 96 percent for first-class mail) and a 94 percent customer satisfaction score. It also reminds Americans that its services are a global bargain. For example, a 2010 first-class letter mailed in the United States costs 44 cents. The same letter mailed in other countries would cost (in equivalent prices in U.S. dollars) 47 cents in Canada, 64 cents in Great Britain, 77 cents in Germany, 83 cents in Japan, and $1.25 in Norway.

However, the USPS is currently at a tipping point due to the combined effects of a large recent decline in volume and revenue that is projected to extend into the future, as well as increases in operating costs. Although the USPS has enacted an array of revenue-generating and cost-cutting activities, these measures likely are not sufficient to eliminate the gap between revenue and costs. Will the business model of the USPS crumble, resulting in its operations again being supported by taxpayer subsidies as they were at one point?

This article, which is an extension of Carbaugh (2007), discusses the economic problems of the USPS and possible changes in its structure that would help keep it solvent. It concludes that, given the state of technology, privatization probably is the only long-term solution for the USPS.

Nature and Operation of the Postal Service

Prior to 1971, the government provided postal services through its U.S. Post Office Department, an agency that received annual appropriations and heavy subsidies from Congress. Members of Congress influenced many aspects of the Post Office Department's service operations such as pricing of postal products and selection of managers.

In 1971 Congress replaced the U.S. Post Office Department with a new agency, the U.S. Postal Service. Since that time, the USPS has been an independent agency of the executive branch and it operates as a commercial entity, relying on the sale of postage, mail products, and services for revenue. The USPS is required by law to cover its costs, and it has not received taxpayer subsidies since the early 1980s. However, it does receive an annual appropriation from Congress of about $100 million (or 0.1 percent of its $75 billion operating budget) as compensation for the revenue it forgoes in providing, through congressional mandate, free mailing privileges for the blind as well as absentee-ballot mailing for overseas military personnel. The USPS can and sometimes does borrow funds from the U.S. Treasury, subject to a limitation of $3 billion per year and a total debt ceiling of $15 billion. Thus, the 1971 legislation resulted in USPS's operating more like a business than a subsidized government agency.

The mission of the USPS is to provide the American public with trusted universal postal service at affordable prices. Universal service includes uniform prices, quality of service, access to services, and six-day delivery to every part of the country. To assure financial support for these obligations, Congress granted the USPS a statutory monopoly on the delivery of letters (first-class mail). It also restricted mailbox access to USPS mail. The U.S. Supreme Court has confirmed this privilege by ruling that it is illegal in the United States for anyone other than the employees and agents of the USPS to deliver mail pieces to letter boxes marked "U.S. Mail." The USPS maintains that eliminating or reducing its monopoly status would have a devastating effect on its ability to provide the affordable universal service that the country values so highly (U.S. Postal Service 2008b).

Although the USPS has a monopoly on the delivery of letters, FedEx and United Parcel Service (UPS) directly compete with USPS express mail and package delivery services, as they make nationwide deliveries of "urgent" letters and packages. Due to the USPS monopoly, however, these services are not allowed to deliver "non-urgent" letters and may not use U.S. Mail boxes at residential and commercial destinations. Also, they deliver packages which are larger and heavier than those the USPS will accept. Moreover, the USPS competes with a variety of electronic alternatives for sending correspondence. While the USPS may have a statutory monopoly, the reality is that there are alternatives for every piece of mail it handles.

The Financial Problems of the U.S. Postal Service

Although the USPS is structured to operate like a self-financing business, this model recently has not worked well. The rise of e-mail and online bill-paying, competition from private delivery companies like FedEx and UPS, and the recession of 2007-09 have hit the USPS hard. In March 2010, former postmaster general John Potter acknowledged that his agency's efforts to keep pace have fallen short and that technology has made obsolete many aspects of the USPS business model (Potter 2010b).

The numbers reflect Potter's view. After realizing modest profits during fiscal years 2004-05, the USPS lost $0.9 billion in 2006, $5.3 billion in 2007, $2.8 billion in 2008, $3.8 billion in 2009, and $8.5 billion in 2010. From fiscal year 2006 to 2009, its debt increased from $2.1 billion to $10.2 billion. This resulted in the U.S. Government Accountability Office's placing the USPS on its "high risk" fist in 2009 (U.S. GAO 2009a). Simply put, the financial problems of the USPS are not going away as future trends suggest stagnant-to-declining revenue and stable-to-increasing expenses: a fundamental change has occurred in the business outlook of the USPS.

Stagnant or Declining Revenue

In fiscal year 2009, the revenue of the USPS totaled $68 billion. About 88 percent of this revenue was generated by market-dominant products including first-class mail, Standard Mail, and other products. First-class mail (correspondence, bills, payments, statements, and advertising) generated 52 percent of the revenue and it is the most profitable segment for the Postal Service. Standard Mail (bulk advertising and direct-mail solicitations) generated 25 percent of the revenue. Other market-dominant products (periodicals, parcel post, library mail, and bound printed matter) generated 11 percent of the revenue. The remaining 12 percent of USPS revenue came from competitive products, including Express Mail, Priority Mail, bulk parcel post, and bulk international mail (U.S. GAO 2009b).

However, the revenue of the USPS has been stagnant or declining in recent years. During fiscal years 2008-09, for example, revenue declined from $75 billion to $68 billion. Although postage rate increases helped support the total revenue of the USPS, they were more than offset by reductions in mail volume, which resulted in decreases in total revenue.

As mail volume declined by 35 billion pieces (about 17 percent) from fiscal year 2007 to fiscal year 2009, the financial position of the USPS deteriorated. The decline in volume stemmed from reductions in the use of the highly profitable first-class mail and also Standard Mail. Total mail volume in fiscal year 2010 decreased to about 167 billion pieces, the lowest level since fiscal year 1992. By fiscal year 2020, the USPS estimates, at best, further volume decreases of about 10 percent, to about 150 billion pieces, the lowest level since 1986 (U.S. GAO 2010).

The demand for mail delivered by the USPS has been decreasing as consumers and businesses shift to electronic communication and payment alternatives: in economic jargon, the demand for mail has become more price elastic. For example, Americans are increasingly filing tax returns electronically and electing to receive refunds electronically, rather than resorting to direct mail. Also, the decline in mail volume accelerated with the recession of 2007-09, especially among users in the financial and advertising sectors: to cut costs, many companies have shifted from direct-mail advertisements to online advertising.

In the past, mail volume generally rebounded after recessions. However, the forecasts of the Postal Service and private consulting companies such as Boston Consulting Group (Boston Consulting Group 2010) and McKinsey & Company (McKinsey & Company 2010) imply that much of the recent decrease in volume will remain the case. Both first-class mail and Standard Mail face growing competition from electronic alternatives, increasing...