Postal Service Accountability

Article Published in The Hill

Congress is expected shortly to attempt to save the U.S. Postal Service from an impending financial meltdown.

The House Government Reform Committee has published a discussion draft. The legislation will be the most sweeping overhaul since the new USPS was formed in 1970. The result will affect every American who uses the mail.

Today, the Postal Service is in deep financial trouble. The organization is hemorrhaging money with long-term projections bordering on catastrophic. According to Treasury Secretary John Snow, over the past 30 years “the Postal Service has suffered real economic losses in excess of $101 billion.”

The public has little idea of how bad the situation really is – largely due to the murkiness of USPS accounting. Unless Postal executives and regulators have a clear picture of what is actually going on, the chances of effective reform are bleak and Postal Service costs will continue to spin out of control.

True postal reform will remain an impossible task until USPS accounting is straightened out, and a much higher level of transparency introduced – the kind of transparency private corporations are routinely required to provide.

As a government agency, the Postal Service is not required to break down its costs into standard accounting formats. In fact, USPS financials are deliberately obscure and utterly impenetrable. As a result, the public – not to mention the Postal Service itself – has only a foggy notion of what exactly are the basic costs of this $68 billion organization.

No one knows. With billions of dollars flowing willy-nilly through the Postal system, no one seems to even notice when USPS throws away money on all kinds of non-Postal activities – like sports sponsorships – that have precious little to do with delivering our mail.

Clueless as to which of its actual mail products are profitable and which aren’t, USPS stumbles blindly from one money-losing venture to another. But you can be sure Aunt Minnie – and other ratepayers – end up footing the tab.

Private companies try very hard to assess profitability and performance by allocating costs as closely as possible to specific products. In fact, private shipping companies strive to attribute 100 percent of their costs to products. But the Postal Service lumps a whopping 42 percent of its costs – over 25 billion dollars – into general overhead. In the words of Secretary Snow, this gigantic slush fund is the “elephant in the room.”

There is a rationale to this postal madness. Were the financials clear, USPS would be required to account for any specific product with the revenues from that product. But by dumping almost half its costs into a vague overhead category, the Service can subsidize its money-losing adventures with its first-class mail monopoly.

In effect, USPS marks up the price of its monopoly protected letter mail to subsidize its other businesses – such as package and periodical delivery – where it competes with private companies.

The result is that stamp buyers like Aunt Minnie pay over two thirds of the Postal Service’s overhead costs and end up subsidizing the Service’s non-core businesses.

In 2002, first-class and standard mail made 89 percent of overhead contributions, according to Michael Schuyler, senior economist at the Institute for Research on the Economics of Taxation. “Meanwhile, all other products and services furnished … just 11.0 percent of overhead contributions.”

By hiking rates on its captive monopoly consumers, USPS can charge below-market rates in its competitive businesses. If the Postal Service weren’t a government agency immune from anti-trust laws, this would be called predatory monopolistic behavior.

But this is still a flagrant abuse of the Postal Service’s first-class monopoly – which was granted by Congress so USPS could deliver letters everywhere for one reasonable price. The monopoly was never intended as a means to finance aggressive USPS expansion into the private sector.

“The government should not be exploiting the monopoly it created to hit first-class mail consumers with higher prices,” says Schuyler.

Most troublesome of all, the Postal Service is now pressuring Congress to give it even greater “pricing flexibility.” Currently, rate changes must be approved by an independent federal agency – the Postal Rate Commission. With its existing monopoly abuses and murky accounting, the last thing the Postal Service needs is less oversight.

The Postal Service has already announced its intention to raise stamp prices by at least four cents in 2006. Left to its own devices, USPS will use these additional revenues not simply to deliver the mail, but to continue its predatory expansion into the private sector. If the Postal Service is ever to be held accountable for such abuses, it must first be required to have transparent accounting.