Can Public Sector Deliver Post Office from Fiscal Ruin?

Issue Brief

The U.S. Postal Service just closed the books on its third consecutive annual loss. Postmaster General John Potter recently stated that USPS is “facing a significant gap going forward of $5 billion.” That follows losses of $5.3 billion in 2007 and $2.8 billion in 2008.

With its traditional mail business flagging because of a weak economy and the continued rise of electronic communications, postal executives have begun to look for new revenue sources. “We cannot just sell stamps,” Potter recently told Congress.

But allowing the Postal Service to expand into non-postal markets like financial services, logistics, or related sectors could fast become an expensive mistake. Given the agency’s past failures with non-postal products, it’s unlikely that postal management will be able to make money this time around. Further, by green-lighting an expansion into non-postal sectors, Congress risks subjecting ordinary consumers — who are captive to the Postal Service’s mail monopoly — to ever-worsening levels of service.

USPS’s dismal financial figures are unsurprising — it’s on track to deliver less mail than it has at any point in over a decade. More significantly, the agency’s revenue is down 8.4 percent.

To their credit, postal leaders have aggressively cut costs in an attempt to offset the fall in revenue. Officials trimmed spending by $6 billion in 2009 relative to the amount they’d planned to spend. Most of those cuts have been achieved by reducing labor expenses, which constitute 80 percent of the Postal Service’s budget. This year, USPS is on track to reduce the number of hours its employees work by 100 million.

The Postal Service is also reducing service for ordinary stamp-buying consumers even as it adheres to congressionally mandated service standards. The iconic blue mailboxes that dot neighborhoods throughout America have been disappearing at an alarming rate. Over the last decade, about 60,000 have been taken off the streets; over the last 20 years, some 200,000 have been removed. Those that remain often have fewer and earlier pickups. In addition, postal management would like to cut delivery from six days a week to five.

Unfortunately, there aren’t many easy opportunities for cost-cutting left. Collective bargaining agreements with postal unions forbid layoffs or furloughs. And congressional interference has prevented the Postal Service from streamlining its operations. Lawmakers howled in protest when they learned of plans to close 700 under-utilized post offices across the country earlier this year, and hearings over proposed closings continue in many states.

The Postal Service also faces a $50-billion liability for health benefits for future retirees. Postal managers have asked Congress for a reprieve from the multibillion-dollar annual payments earmarked for this fund. Lawmakers recently agreed to allow the agency to delay $4 billion of the $5.4 billion owed in the 2009 fiscal year. But that liability won’t go away — so punting is only a short-term fix.

Because of these crushing financial obligations, USPS is exploring new ways to generate revenue. The agency recently launched a “summer sale” that offered commercial mailers a 30-percent discount if they complied with certain rules. Postal analysts predicted that the sale could increase revenue by $70 million, and Postmaster General Potter recently revealed that the sale will likely meet those expectations. That’s not pocket change, but it only amounts to 0.1 percent of the agency’s total revenue.

A version of this sale will continue this fall, as the Postal Regulatory Commission just approved a 20-percent discount for big mailers that will run through December 31.

Postal leaders recognize that the heyday for letter mail has passed, hence the hope of expanding “into completely new product areas, beyond what is permitted under current law,” as Potter recently put it.

They’re taking inspiration from national posts in other countries, which have expanded into financial services, wireless telephony, and logistics, among other things.

Of course, the Postal Service’s infatuation with non-postal products is nothing new. During the 1990s, USPS launched no fewer than 19 new products. And as many postal observers — most notably Postal Regulatory Commission Chair Ruth Goldway — have noted, the Postal Service’s non-postal offerings have generally failed to generate revenue. In many cases, they’ve lost money.

A 1998 Government Accountability Office report reviewed non-postal offerings introduced by USPS during the mid-1990s. It found that more than a quarter had been discontinued by 1998. Of the 19 products reviewed, only one reported a profit. Total expenses for the 19 products from inception through the end of 1997 exceeded total revenues by nearly $85 million.

These failures are among the reasons why Congress forbade the Postal Service from expanding into non-postal services in the Postal Accountability and Enhancement Act of 2006.

Rather than returning to past patterns of failed new product ventures, USPS should leverage its status as a government agency to provide services for the one sector that is growing in the midst of the current recession — government.

The Postal Service maintains 37,000 post offices all over the country, with prominent locations and a valuable brand identity. That’s more outlets than McDonald’s, Starbucks, and Wal-Mart combined, as Mr. Potter has pointed out. The post office could serve as a one-stop-shop for every citizen’s government needs.

For instance, local and state governments could contract with the Postal Service to process vehicle registrations, driver’s license renewals, voter registration, or even payment of parking tickets. Many post offices already aid Americans in applying for passports and registering for the selective service; these offerings could be expanded. Or USPS could partner with the Social Security Administration to assist seniors with their benefits or provide people with Social Security cards.

In recent years, USPS has seen the amount of mail it delivers for the Internal Revenue Service decline substantially thanks to the growing popularity of electronic filing of tax returns. The Postal Service could perhaps replace some of that lost business by assisting tax authorities at the local, state, and federal levels with the processing of tax filings.

As long as the Postal Service remains government-owned, it should avoid competing in markets already well-served by the private sector. Not only has it proven uncompetitive in such sectors, but ordinary stamp-buying consumers could end up unfairly footing the bill for the agency’s entrepreneurial experiments.

The Postal Service will need to change course if it has any hope of avoiding an eventual fiscal meltdown. Continued cost-cutting — particularly through the closure of facilities and the curtailing of expensive fringe benefits for the postal workforce — must be at the core of postal management’s rescue plan.

But if postal leaders insist on exploring new revenue sources, who better to target than the fastest-growing segment of the economy — government.

Robert R. Schrum is a research fellow at the Lexington Institute.