When the U.S. Postal Service’s rate increase proposal—filed in April-- turned out to be a relatively benign 5.4%, many direct mailers sighed with relief, feeling they’d dodged a bullet. But there’s another round in the chamber, warns one expert in postal regulation. And when the USPS pulls the trigger on that next rate hike in 2006, that shot could pack quite a wallop for the mailing community.
While the current increase proposal seems moderate and fair, the circumstances that make it so have ominous implications for the next rate filing, which the USPS has already said will definitely occur next year, according to Gene Del Polito, president of the Association for Postal Commerce, a trade association of mail users.
The backstory to this rate proposal quandary dates to 2002, when the Office of Personnel Management found that the USPS was about to make an overpayment of more than $70 billion into a fund for the costs of retirement benefits relating to military service. Many retired postal workers are eligible for such military pensions. The DM industry and other parties lobbied successfully to get the U.S. Treasury to take over those costs. But instead of putting the $70 billion back in USPS’ coffers, and largely because of what Del Polito terms “a lack of trust” between some members of Congress and the USPS, legislators passed a bill that put that overpayment into an escrow account.
That law, P.L. 108-18, expired at the end of 2004, and Congress’ questions about the USPS’ ability to handle its money have long been answered, Del Polito says. But because the escrow provision was written into law, the USPS needs another law to get out from under the required payments. That new law has proven difficult to get through Congressional committees, and even more difficult to get signed by President Bush, because it has become tangled up with budget-deficit considerations. Two postal reform bills died in the last session of Congress, and similar bills are now at various stages of enactment in the House and Senate.
In the mean time, the USPS has begun making budget and rate projections that include those escrow payments, and has said that it faces a $3.1 billion shortfall as a result.
The current rate proposal, which upon approval will go into effect next year, is “a relatively non-controversial filing” says Del Polito. “The USPS has taken the extraordinary step” of telling its customers that it needs the 5.4% postal rate increase in 2006 to allow for a payment of $3.1 billion into an escrow account for “an activity that is no longer relevant”-- namely civil service retirement for military veterans, he says. “That’s the only reason they need the extra money. And the fairest way to raise that money is through an across-the-board rate increase.”
Those in the mailing community affected by the proposed rate increase have two choices, Del Polito says. They can either litigate it (“beat each others’ heads in” is his exact phrase), which would take ten months and unspecified expense and perhaps delay the increase until April 2006. Or they can settle the case, which might let the new rates go into effect in January 2006—about three months after the USPS makes its first large payment into the escrow account.
The USPS would prefer to settle, in order to shorten the time between its first escrow payment in October 2005 and the implementation of the higher rates. Settlement may also be the choice of the mailing community in this case, Del Polito says. After all, litigation is unlikely to do more than slow the enactment of the new rate. And it will undoubtedly not help with the whopping increase users can expect to see filed next year, to take effect in 2007.
Because the USPS streamlined this rate proposal in order to raise revenue ASAP, it left out many of the contentious issues that usually complicate rate filings. Those issues will inevitably come up in the 2006 filing. “That case will be very, very complicated,” Del Polito says. “All of the changes that the USPS wants to make will come into play-- changes in classification, mail make-up, addressing requirements.” So too will all the changes that mailers want to see, including deeper drop-ship discounts and new opportunities for work-sharing.
And if the USPS is still under requirement to pay into the escrow account when that next rate case is filed in 2006, it could propose a rate increase of as much as 8% to 10%. That’s on top of the 5.4% rate hike the USPS wants in 2006. In other words, direct mailers could face a 13% to 15% rate increase in the course of the next two years.
That is, if the escrow-payment issue is not resolved by counteracting legislation. There are currently two postal reform bills working through Congress that would remove these payment requirements. The one in the House has been reported out of committee and is ready to be introduced; that in the Senate has not yet gone through mark-up.
But Del Polito points to one over-riding interest that may prevent either of these bills from becoming law: the Bush administration. President Bush was able to stall two similar bills last year with a veto threat. And while he hasn’t vetoed any bills yet this year, his administration has signaled “concerns” that will need to be addressed if the two bills get to a conference and then find their way to the President’s desk.
The chief White House concern is that any bill be revenue-neutral. The postal escrow payments have already been projected as income into the multi-year federal budget; eliminating them will put that budget even further into deficit than currently projected. So the White House wants to see those erstwhile escrow payments applied instead to the USPS’ unfunded health liability for its retirees.
That could create the same problem the postal service faced with military pensions back in 2002: overpayment. “You really can’t project with any clarity what that liability actually is,” says Del Polito. “So if you kept on paying on it, you could easily run into a situation once again where you’ve overpaying on something. And the problem when you ask the USPS to overpay is that it gets its revenue from only one source: postal rates.” The USPS may thus be forced to raise rates at a time when its competitive stance is being undercut by alternative providers and alternative media, from FedEx to e-mail.
“That will precipitate the very crisis that postal reform was supposed to avoid,” he says.
In sum, the size of the next postal rate filing hinges very directly on a head-butting contest between the two ends of Pennsylvania Avenue, Del Polito says. The House and Senate committee leadership have both expressed their belief that the USPS shouldn’t be made to pay for the military pensions of retirees, or to pay mechanically into a health liability fund whose draw can’t be projected over the multi-year scope of a federal budget.
On the White House side, the Bush administration may decide that the bills being considered contain a lot of the reform proposals they want to see: limiting postal rate increases to the inflation rate, added transparency in financing and operations, service-related standards, flexibility in pricing competitive products, and so on. The bill that comes out of conference in the House and Senate will undoubtedly not be a perfect fit with the Bush postal reform goals, Del Polito admits. But he points out that the last sweeping reform of the USPS occurred in 1971. “You can’t expect to take a look at some agency’s legislative framework once every 35 years,” he says.
Who will blink first in this staring match, Congress or the Bush administration? It’s impossible to say for sure. “On the House side, the mark-up bill passed out of committee unanimously, and it should pass unanimously out of the Senate committee by June,” Del Polito says.
But passage through Congress is not assured, because fiscal hard-liners on either side of the aisle in either the House or the Senate could hang it up over budgetary impacts. It’s not easy to convince legislators that a bill that could impair revenues can still be good policy. “Explaining that requires you to catch their interest and hold it through a long, drawn-out explanation of how this situation came about, its impact on industry, what it will mean for tax dollars, and so on,” Del Polito says. “With most of them, as soon as you begin that conversation, their eyes glaze over.” Especially in the Senate, which likes to legislate by unanimous consent, one holdout lawmaker could derail approval of any bill.
Even if it gets passed by both bodies, a postal reform bill then has to hurdle the presidential obstacle. “It then becomes a matter of institutional prerogatives,” Del Polito says. “Does Congress prevail or the White House?” In light of all these possible barriers, he puts the odds at 30-70 that a postal reform bill will be signed this year.
That’s a shame for mailers, because the USPS has intimated that if it did get relief from the escrow payments, the actual 2006 rate increase could be even less than the 5.4% it asked for. On the other hand, Del Polito adds, the agency has made it “abundantly clear” that it would prefer no legislation at all to bills that don’t resolve the pension funding issues in its favor. He believes the USPS would prefer to keep paying into an escrow account for the three and a half years remaining in Bush’s tenure and then approach a new administration to release the money. That would be better than having to undo more legislation that sidesteps the question of who gets to direct the USPS’ revenue—or that makes the problem even worse with a new requirement.
Unfortunately, businesses that rely on the mails are going to be caught in this law-making crossfire. Del Polito says that now that the mass trade organizations have been heard from on the issue, small to mid-sized business owners need to mobilize and make their opinions known to their individual representatives, senators and the White House. They all need to hear from the people who will be most affected not only by this proposed rate case but by those to come in the near future.
“Right now it’s hearing from the little guy that will make a difference,” he says. “These small enterprises are best able to evoke the right kind of response from Congress and the administration. Tell them, ‘You’re going to take my business and endanger its viability for no good policy reason—so don’t do it!”
