RESTRUCTURING THE U.S. POSTAL SERVICE.

• Author: Edwards, Chris

The U.S. Postal Service (USPS) is a large business enterprise operated by the federal government. It has more than 600,000 employees and more than $70 billion in annual revenues. Revenues are supposed to cover the postal service's costs, but mail volume is plunging, and the USPS has been losing billions of dollars a year for more than a decade.

The USPS has a legal monopoly over letters and mailboxes. That policy is an anomaly because the federal government's general economic stance is to encourage open competition in markets, yet the USPS monopoly prevents entrepreneurs from entering postal markets and trying to improve quality and reduce costs for consumers.

While mail volumes have fallen, the USPS has expanded its package business. But it makes no sense for a privileged federal entity to take business from private, taxpaying companies in the package industry. Postal and package markets are evolving rapidly, and the goal of federal policy should be to create a level playing field open for competition and innovation.

Europe is facing the same challenge of declining mail volume, and it has focused on opening postal markets and privatizing postal providers. The U.S. Congress should follow suit by privatizing the USPS and opening postal markets to competition. These reforms would give the USPS the flexibility it needs to cut costs and diversify, while providing equal treatment to businesses across postal and package markets.

USPS's Predicament

Congress has given the USPS monopoly power over the delivery of first-class mail and access to mailboxes, the latter of which is a unique protection among the world's postal systems.

The USPS also enjoys a range of other benefits (GAO 2017a: 19):

* It can borrow up to $15 billion from the U.S. Treasury at low interest rates.

* It is exempt from state and local sales, income, and property taxes; parking tickets; vehicle fees; and other charges.

* It pays federal corporate income taxes on its earnings from competitive products, but those taxes are circulated back to the USPS. (1)

* It is not bound by local zoning laws, is immune from a range of civil actions, and has the power of eminent domain.

* It has government regulatory power, which it can use to impede competitors.

On the other hand, Congress ties the hands of the USPS in many ways that prevent it from operating like a private enterprise. Congress restricts the USPS's pricing flexibility, requires it to provide expansive employee benefits, imposes collective bargaining, and prevents it from cutting costs in various ways, such as by reducing delivery frequency and closing low-volume post offices.

The USPS's financial challenges stem from its high cost structure and falling mail volumes, driven by the rise of email, Facebook, Evite, Internet bill paying, and online advertising. First-class mail volume in particular has shrunk by 45 percent since 2001 (USPS 2019). This has been a considerable blow to the USPS since first-class mail is its most profitable product (GAO 2017a).

Table 1 shows data from USPS annual reports in 2009 and 2018 (USPS 2009, 2018b). The data indicate:

* Mail demand is falling and package demand is rising.

* Management has cut costs by reducing worker count. But Congress has resisted USPS efforts to close post offices, even though the number of USPS retail customers has plunged.

* Marketing mail--which is "junk mail" to most people--has become the largest type of mail by volume.

* More than three-quarters of USPS costs are for employee compensation. About four-fifths of the USPS labor force is unionized.

* Expenses are substantially higher than revenues.

* Assets are falling and liabilities are soaring.

The USPS has lost $69 billion since 2007 and will likely continue losing money unless there are major reforms (U.S. Treasury 2018: 2). Without restructuring, the USPS is expected to lose tens of billions of dollars over the next decade. Congress should make incremental reforms to reduce costs, such as allowing low-volume post offices to close, reducing labor expenses, ending collective bargaining, narrowing the requirements included within the USPS Universal Service Obligation (USO), and eliminating cross-subsidies. At the same time, Congress should prepare for longer-term changes by studying European experiences with postal service reform and readying the USPS for privatization and increased competition.

Incremental Reforms

The USPS is bleeding red ink and the company's finances will likely get worse. The Trump administration is correct that the "USPS's current model is unsustainable" (Executive Office of the President 2018: 69). To its credit, the USPS has taken steps on its own to reduce costs, including reducing employment, consolidating mail facilities, and reducing post office hours. But more needs to be done by the USPS and Congress. The following are some steps that policymakers should take to improve efficiencies and help stem losses in the near term.

Close Post Office Locations

The USPS operates more than 31,000 post offices. (2) A USPS estimate from a few years ago found that the bottom 4,500 locations average just 4.4 customer visits a day (USPS 2012). These low-volume locations should be closed. When private businesses have falling demand for their products, they save costs by cutting lower-value activities. Congress should allow the USPS to do the same.

Cut Labor Costs

Labor costs account for more than three-quarters of USPS costs. By some measures, USPS labor compensation is higher, on average, than it is for private-sector workers in comparable organizations (Shapiro 2015a: 14). A U.S. Treasury analysis for 2017 found that employee costs at the USPS averaged $85,800--higher than UPS's $76,200 and FedEx's $53,900 (U.S. Treasury 2018: 14).

The USPS has $110 billion in unfunded liabilities for retiree pension and health benefits, and its workforce is accruing more retirement benefits every year (U.S. Treasury 2018: 58). A 2006 law requires the USPS to begin paying down its health care liabilities, but the company has been defaulting on those payments. (3) The USPS has also not made all of its required payments for employee pension costs in recent years.

There is debate about whether the USPS should prefund its health care costs or whether these obligations should be moved to Medicare, which would shift the burden to taxpayers. Another equally important issue is that the USPS will need to cut retirement benefits going forward. For decades, the private sector has been moving away from defined-benefit pension plans, and very few private employers...