Postal Service Board of Governors Playing Game of Chicken with Postal Rate Commission

Issue Brief

When someone forces a game of chicken-say, by driving directly towards an approaching car-it is often innocent bystanders who get hurt. The United States Postal Service (USPS) Board of Governors seems to be forcing a game of chicken with the Postal Rate Commission, and the American people and American businesses stand to suffer the consequences: higher rates and higher taxes may result.

The rate case that won’t go away

The Postal Service filed the rate case that led to January’s rate increase back in the fall of 1999. Based on 1998 cost data, the rate request was designed to allow the Service to break even in fiscal year 2001, while providing the Service with a contingency fund, as permitted by the federal law that governs the Postal Service. However, by the fall of FY 2000, the Postal Service recognized it had made forecasting errors to the tune of $1.4 billion. During the case review in 2000, 1999 cost data became available, and at the Rate Commission’s urging, the Postal Service submitted revised assumptions using the more recent, 1999 data.

Curiously, however, the Postal Service revised only some of the assumptions it provided to the Rate Commission to justify its requested rate increase. For example, while it revised upward its projected labor costs, in order to reflect recent losses in labor arbitrations, the Service declined to make changes to the mail volume forecast or the level of the revenue requirement. Whatever the purpose of this, the effect was to keep the Rate Commission in the dark about the severity of the Postal Service’s deteriorating financial condition.

Attention soon focused on the contingency portion of the rate request, which amounted to 60 percent of the additional revenue requested. Not only was this much larger than the historical average for the contingency-34% of additional revenue-but also it was harder to justify in this case, since the Postal Service had revised its numbers to include the more recent, and thus more accurate, 1999 data. This should have reduced the uncertainty, and it undercut the call for such a large contingency.

The Commission responded by reducing the contingency by $800 million. The Board of Governors implemented the rate increase in January, but requested the Commission reconsider its reduction in the contingency allowance. Again, the Postal Service declined to supplement its request with new evidence of the Service’s perilous financial condition.

On February 9, the Rate Commission sustained its original determination, but noted public statements by the Board of Governors concerning the Postal Service’s deteriorating finances, and invited the Board to offer new evidence. The Postal Service has declined again to do so.

Why the persistent refusal to alert the Commission?

The Board’s steadfast refusal to supplement its case to document its increasingly dire financial straits is quite puzzling. There are several possible explanations. The Board maintains that it has exclusive authority to determine the level of contingency funds needed. They are not required, in their view, to persuade the Commission on this point. But this is a bold reading of the Postal Reorganization Act. It is tantamount to providing the Board of Governors with unchecked “taxing” authority over the American people. After all, the Postal Service possesses a legal monopoly on mail delivery. It is not easy for consumers to respond to postage rate increases by refusing to send mail.

It is also plausible that the Board decided it was time to bring its financial crisis to a head to maximize its chances of securing favorable reform legislation from Congress. The USPS has sought postal reform, on its terms, for years, and hemorrhaging billions of dollars has certainly caught the attention of Congress and the media. Perhaps more likely, the Service may have decided to keep quiet about its unusually poor financial projections either with the hope that conditions might improve, or simply to avoid close scrutiny of management’s inability to forecast its business with any accuracy.

The game of chicken continues. In just the last few weeks, the Postal Service has announced a freeze of 800 construction projects around the country-nicely dispersed throughout hundreds of Congressional districts-and followed that with its headline-grabbing review of whether Saturday mail delivery should be abolished to save money.

And still pending from the Board of Governors are two big rate-related decisions. On March 5, the Board again sent back to the Commission, for a third time, the full rate request that the Commission had reduced as part of the January rate increase. Again the request included no new evidence. The Commission on April 10th reaffirmed its prior position to maintain its original decision. The PRC again cited the fact that the USPS offered no new evidence. The Board has the power unilaterally to raise rates by a unanimous vote. Media reports indicate the Board plans to do so.

On top of that, the Postmaster General confirmed in late March that the Board might seek an additional rate increase as early as June of 10% to 15%. This increase would dwarf the average 4.6% rate increase that took effect in January.

Conclusion

But this game of chicken might be backfiring on them. As the GAO Comptroller General reported to Congress last week, the USPS is fast approaching its legislative debt limit of $15 billion. The Service, which has no plan in place to reduce its debt, could hit the limit by the end of FY 2002. Lawmakers may not like the prospect of facing a Postal Service bailout, paid for by reducing other government spending or by increasing taxes. At the same Congressional Hearing on April 4, lawmakers from both parties made it clear that the mere suggestion of curtailing Saturday mail delivery reflected poorly upon Postal Service management.

If the Board of Governors is not careful, Congress will reform the Postal Service, but by demanding more, not less, accountability; by demanding real cuts in costs; and by reigning in the Service’s forays into ancillary businesses, forcing the Service to return to its core mission of delivering the mail.

Charles Guy, Ph.D. is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. He is currently Adjunct Fellow at the Lexington Institute.