The future of the U.S. Postal Service.

• Author: Carbaugh, Robert

Structural, legal, and financial constraints have brought the U.S. Postal Service (USPS) to the brink of breakdown in the past decade. Faced by declining business brought about by the e-mail revolution and competition from private express companies, the Postal Service has repeatedly requested assistance from the federal government. This culminated in December 2006 with the passage of the Postal Accountability and Enhancement Act, which introduces modest revisions in the pricing and service policies of the Postal Service so as to make it a self-sustaining government corporation. But will it?

Although the new legislation addresses some of the problems of the Postal Service, more radical changes may be necessary in the future. One possibility is the complete privatization of the Postal Service including the removal of the legal monopoly that it has on the delivery of letter mail, so as to foster competition in the mail delivery. Because these remedies are currently too controversial for Congress to implement, their chances of being enacted in the near future are dim. Instead, what is emerging is a partial approach to privatization in which the Postal Service forms worksharing agreements with private-sector firms to take advantage of their efficiencies. Whether such partial privatization will significantly improve the efficiency of mail delivery remains to be seen. This article discusses the nature and operation of the Postal Service and assesses the merits of its possible reforms.

The U.S. Postal Service

According to critics, it's time to force the U.S. Postal Service to compete. They note that even with a statutory monopoly, the Postal Service can't make ends meet. For fiscal year 2006, the agency lost about $2 billion and these losses are likely to continue (U.S. Postal Service 2006). The President's Commission on the U.S. Postal Service forecasted that, even after assuming that postal rates continue to increase with inflation and considering the cost-saving measures currently in effect, the Postal Service will realize an annual deficit of $4.5 billion by 2012, increasing to a deficit of $8.5 billion by 2017 (President's Commission on the U.S. Postal Service 2003).

Also, the Postal Service has accumulated about $75 billion in unfunded liabilities, mostly money promised to employees in retirement and health benefits as the result of generous contract settlements. This is similar to General Motors, Ford Motor Company, and Chrysler, whose legacy costs have pushed them toward bankruptcy. The May 2007 rate hike for mailing a one-ounce letter, to 41 cents, was intended to generate additional revenues to fund these liabilities and the rising operating costs of the Postal Service.

To understand the financial difficulties of the Postal Service, we must first consider its structure and method of operation. The Postal Service is an independent agency of the federal government. According to its 2006 annual report, as the government's largest civilian employer, with a nationwide network that delivers more than 200 billion pieces of mail each year, the Postal Service is a vital part of the nation's communication network. To fulfill its mission, the Postal Service has a massive infrastructure that includes about 735,000 fulltime workers and 115,000 part-time workers. Also, the Postal Service's physical network is massive, with about 38,000 retail postal outlets, 446 mail processing facilities, and 215,000 vehicles. The Postal Service handles a wide variety of mail items ranging from correspondence to packages. Almost 90 percent of domestic mail is generated by businesses, with households accounting for the remaining 10 percent (U.S. Postal Service 2006).

Postage rates vary widely, depending on the mail's content, weight, size, destination, and how it is prepared and presented by mailers to the Postal Service. Mail is organized into groupings called classes. The four main classifications of mail consist of (1) First-Class Mail, which includes items such as business and personal correspondence, bills, payments, and advertisements; (2) Standard Mail, which is mainly advertising mail such as catalogs, coupons, and solicitations; (3) Periodicals, which include mailed newspapers and magazines; and (4) Package Service, which is mainly small packages. The authority to set postage rates is granted to the Postal Service's Board of Governors, which announces proposed rates. The federal Postal Bate Commission must review the proposal, but its approval is not required to implement a hike. Thus, the Postal Service is in a good position to pass higher costs along to taxpayers via its requests for additional revenue.

Although the Postal Service competes against private express firms in the delivery of packages and express mail, it has a legal monopoly over both the delivery of letters and the use of the customer's mailbox. The Postal Service maintains that this protection is necessary for it to provide its public service obligations, such as universal service and uniform rates.

Another characteristic of the Postal Service is its break-even mandate. Thus, when the Postal Service proposes changes to postage rates, it projects its revenue requirement for a particular period based on its total estimated costs plus a provision for contingencies, and then proposes rates that are estimated to raise sufficient revenues to meet its revenue requirement. This means that the Postal Service is supposed to be self-financing and receive no regular cash subsidy.

However, the current business model of the Postal Service, which relies on increasing mail volumes to mitigate postal rate increases and cover the Postal Service's rising costs, is at risk in today's environment of greater competition and communication alternatives. In spite of numerous rate increases and cost-cutting efforts, the Postal Service has incurred substantial deficits as its volumes have declined. Moreover, uncertainties such as the effects of a slowing economy, the extent of diversion to electronic alternatives, the rise of private express competitors such as Federal Express (FedEx) and United Parcel Service (UPS), and new mandates to enhance the safety and security of the mail have adversely affected postal finances and will likely continue to do so in the future.

Although some reforms have been made to improve the efficiency of the Postal Service (Schuyler 2007), they have not resolved the fundamental challenges that it faces. Instead, a stronger revision of the Postal Service's business model may be needed so as to inject additional market incentives into its culture. This might be attempted by complete privatization of the Postal Service, although political realities likely prevent this from occurring in the near future. Instead, the statutory monopoly granted to the Postal Service on the delivery of letter mail could be repealed in order for the Postal Service to compete against private companies that deliver letters. These proposals go beyond the wishes of the Postal Service, which prefers that reforms be minor and remain within its existing authority. In other countries, however, such reforms are already underway. For example, the European Union intends to privatize all of its national postal services by 2009. Also, private-sector couriers have been allowed to capture more than half the mail delivery business in India.

Universal Postal Service

As part of its public service mandate, the Postal Service is required to provide universal service to its customers. This means that it makes postal service available to the entire population of the United States, regardless of distance or one's ability to pay. This requirement is similar to obligations the federal government places on other regulated industries, including telecommunications, railroads, and electric power. The universal service obligation of the Postal Service suggests ubiquity of access to the mail either by delivery or other means, and reasonable access to collection and counter service. Universal service also means that rates are the same regardless of where you send your mail to or receive it from: Everyone in every part of the country gets the same type of mail service for the same price. Thus, a 41-cent stamp is all that is needed to mail a one-ounce letter from, say, Seattle to Boston or any other locale in the United States. Finally, universal service suggests uniform frequency of delivery: People living in cities and rural areas receive mail delivery six days a week.

The modern concept of the Postal Service's universal service obligation did not exist in the early days of the United States. Until the mid-1800s, the Postal Service was considered an intercity carrier that provided no collection or delivery of mail. Service was provided only to towns on post roads designated by Congress. Outlying villages and settlements were not included in the network. City delivery was not introduced until 1863, and then only in 45 cities.

The universality of mail delivery became a theme of the Postal Service with the introduction of "rural free delivery." This was the policy of providing free mail delivery to the homes of farmers out in the country so they wouldn't have to travel into town to get their mail and stamps. Prior to rural free delivery, the 30 million Americans who lived in rural areas had to travel to the nearest post office to send and receive mail, and often these post offices were miles away. Rural free delivery was thus a response to the notion that rural Americans were as entitled to having mail brought to their homes as were their city-dwelling counterparts. Although rural free delivery was introduced in the late 1800s, it was not realized until well into the 1900s. Rural free delivery meant that farmers did not have to live so near a post office and thus began a long and steady decline of rural postal offices throughout the 1900s.

Over time, the nature of universal service has changed. Multiple...