PRINCIPLES THAT ARE KEY TO MEANINGFUL POSTAL REFORM

Editor's Note: The following is a paper offered by postal commentator Gene Del Polito pertaining to the current discussions and debate over postal reform. What the author has set forth below is NOT meant to be a new postal reform bill. Rather, it's meant to be simply a straight-forward statement of principles that should serve as the basis for any future postal measure. An appropriate use of this paper would be to take these principles and determine whether any legislative proposal addresses these points. In addition, it would be helpful to make sure there are no provisions in any legislative proposal that would vitiate these key, core reform ideas.

The idea that the advent of new electronic communication technologies would have a remarkable effect on the viability of the business model that underlaid the U.S. Postal Service (USPS) is not a recent one. In fact, American postal legislative reform has been a topic of discussion from as far back as 1993. The precipitating event at that time was a postal conference sponsored by the Brookings Institution where papers were given on the trends facing the Postal Service with the development and ubiquity of such things as email and computer bulletin board systems as alternative vehicles for communication and commerce. In late January 1995 speech before the National Press Club, then Postmaster General Marvin Runyon issued the first "official" call for a change to the postal legislative and regulatory framework.

A key element that had always been a part of the postal reform discussion was the fear that the Postal Service's viability as a self-supporting entity was going to be undermined. Significant future declines in mail volume and revenue were going to weaken the USPS' ability to live with a large, fixed overhead, and a raft of unfunded retirement-related obligations were going to swamp the Postal Service amidst a sea of red ink.

The Postal Service is not alone in facing these sorts of challenges, but it seems uniquely incapable of adapting and surviving in an increasingly competitive marketplace. In large part, this is so because the legislative framework that governs the Postal Service imbues it with incentives much more typical of a protected government bureaucracy than of a competitive private sector enterprise. Unlike competitive businesses, the Postal Service is not driven by the imperatives of reducing costs and maximizing gains. Indeed, by law, the Postal Service is prohibited from making a profit, and the law clearly directs it to raise prices whenever costs exceeded income.

By now, it should be clear, that if any bill is to succeed in its goal to effect true postal reform, it must adhere to some core, key priniciples which are clearly articulated and are not undercut by other provisions offered in the same measure. Here, then, are a few of those key principles that should be a part of any postal reform measure.

REDIRECTING THE INCENTIVES. Any true postal reform must begin with a restructuring of the legislative and regulatory underpinning in a manner that instills cost-minimizing and profit-maximizing incentives to avoid the need for taxpayer subsidies. Such incentives should indicate that if you operate profitably, the Postal Service keeps what it earns, and that if it fails to do so, it must live with the undesirable consequences.

A FUNCTION OF GOVERNMENT. The President's Commission on the Postal Service and (thus far) Congress itself have reaffirmed the proposition that the U.S. Postal Service should remain an agency of the federal government rather than being transformed into a a government-owned or privately-owned stock corporation. The Commission, the Administration, and the Congress have resolved to maintain the Postal Service as governmental, infrastructural service.

Indeed, the Postal Service is now, and is likely to remain for some time, a key part of the nation's economic infrastructure to facilitate the transaction of communication and commerce. Today, more than 90% of all mail can be described as "business transactional mail," which means that a properly designed postal system should serve to facilitate, rather than impede, the transaction of commerce.

Those who have studied the nation's continuing need for a postal system have concluded that the Postal Service should be required to operate on a self-sustaining basis without the benefit of congressional appropriations from the Treasury for the ordinary purposes of its operations.

A PUBLIC SERVICE IN A COMPETITIVE MARKETPLACE. While public policy makers have consistently affirmed that the Postal Service should retain its current statutory monopoly over the carriage of most mail and its privileged access to the letter-box, it has been recognized that the Postal Service somehow must function within an increasingly competitive marketplace. Indeed, there are a number of substitutes for postal services that are available today to those seeking to communicate or transact business. So, despite its statutory monopoly, the USPS must be structured in a manner that would enable it to thrive, let alone survive, in the face of marketplace competition.

FUNCTIONING IN A COMPETITIVE MARKETPLACE. If our intent is to create a postal service that can function within a competitive environment, then we must be sure to embue such a service with the necessary characteristics and incentives that would make success possible. To successfully satisfy the nation's continuing need for a mail delivery service without federal subsidies, it would be necessary to make sure that the postal service is positioned to operate in as economically rational a manner as possible given the market in which it must function.

The market in which the USPS would be expected to exist would be a competitive one. In such markets, successful enterprises strive to minimize their costs and to maximize their gains. Without such incentives, it would be irrational to expect such an enterprise to operate on a profit-making basis.

OPERATE AT A PROFIT. Consequently, one of the first changes that would have to be made to current postal law would be to elinate the provision that prohibits the Postal Service from operating on a profit-making basis, i.e, the "break-even" constraint. To survive in a competitive marketplace, the USPS should be empowered to operate on a profit-making basis. It should be allowed to retain whatever earnings are in excess of costs and to use those excess earnings in whatever manner it deemed appropriate or necessary.In addition, the USPS should be directed to operate in the most cost-efficient manner possible without unnecessarily compromising the primary purposes for which the service was created.

BOARD OF DIRECTORS. To ensure the proper oversight and review of the Postal Service's management and performance, the USPS' chief executive officer should be made subordinate to a board of nine directors consisting of individuals nominated by the President and approved by the Senate. Such individuals should be selected largely for their demonstrated experience and expertise in managing large public- or private-sector enterprises.

POSTAL SERVICES REVIEW BOARD. The Postal Service also should be subject to an independent Postal Services Review Board consisting of at least three persons similarly nominated by the President and approved by the Senate. Such persons should be selected largely for their demonstrated experience and expertise in the area of utility regulation or the audit and review of large governmental agencies and institutions. This board should be charged with the responsibility to review and audit all reports required by law or regulation, and to issue regular reports on its reviews to the Speaker and Ranking Minority Leader of the House and the Majority and Minority Leaders of the Senate.

APPOINTMENT, REVIEW, AND COMPENSATION OF CHIEF EXECUTIVE OFFICER. One of the current key responsibilities of the present Board of Governors is the hiring and firing of the Postal Service's chief executive officer. Regardless of the name by which any future board may be known, it will be essential to make sure that the authority for employing the chief executive officer is assigned to a properly designated board, whose members would serve as the governing directors of the enterprise. Among their responsibilities should be the authority and responsibility for setting the terms of the CEOs compensation, including his (or her) salary, bonuses, benefits, and any other sources and forms of compensation.

This board should be directed to ensure that the key criteria of the CEOs compensation should be based on performance-related criteria that are central to the primary mission and role of the Postal Service as the provider of a key economic infrastructural service. The Board would be responsible for assessing the PMG's performance (on at least an annual basis) in accordance with mutually determined, measurable, performance-based goals and objectives.

To ensure a proper restructuring of incentives that direct the behavior of all who are charged with the Postal Service's day-to-day operation, current statutory limits on postal executive compensation should be removed.

The Board of Directors should empower the Postmaster General to serve as the organization's chief executive officer with day-to-day responsibility for the Postal Service's organization and performance. A key part of that delegation of responsibility would be to empower the PMG to determine the compensation provided to his senior executive staff (including salaries, bonuses, benefits, and any other sources and forms of compensation). The PMG should be directed specifically by the Board to ensure that all such compensation be based on performance-related criteria that are central to the primary mission and role of the Postal Service as the provider of a key economic infrastructural service, and that the PMG would be responsible for assessing his staff's performance in accordance with measurable, performance-based goals and objectives. Furthermore, the PMG should be empowered to derive his subordinates' compensation without additionally-imposed constraints.

NETWORK MANAGEMENT AND ORGANIZATION. If the PMG and postal management are to be held accountable for the Postal Service's performance, then the PMG and his management team should be given the fullest possible flexibility in determining the operational needs and network design of the Postal Service without regard for politics. If the PMG and management were granted such discretion, however, it should be granted with the commensurate responsibility: to propose and notify publicly and sufficiently in advance any changes that are contemplated for: (1) the opening, closing, or consolidating of postal facilities, (2) employee dislocations, and (3) operational changes affecting the manner by which customers access postal services.

To ensure the preservation of the public interest, postal management should be required to explain in sufficient detail the rationale for proposing or making such changes, including the costs versus benefits, the impact such changes will have on the provision of postal services rendered to the public, the effect of such changes on postal employees and postal employment, the alternatives already considered by management and the reasons why such alternatives were not deemed preferable.

Congress could be reserved the right to disapprove such proposed changes by way of a House and Senate majority-approved joint congressional resolution passed within 30 days of the Postal Service's publication of any proposed changed. To ensure that Congress does not needlessly interfere in management's prerogatives to make necessary changes to the postal network with reasonable dispatch, any congressional expression of disapproval would apply to all changes proposed at any one time and not to proposals selectively.

SERVICE PERFORMANCE CRITERIA AND ACCOUNTABILITY. There is always, of course, a danger that some might seek profits at the expense of service quality. To ensure against such a likelihood, management should be directed to establish and publish standards of service that would apply to every class, subclass, or category of mail service. These standards should be designed to reflect service performance levels that can be realistically and reliably expected and obtained.

To ensure that such standards are met or improved upon, management should be directed by its governing Board to develop whatever tools are needed to facilitate a measurement of the Postal Service's performance against such standards. The Board also should direct the Postal Service to ensure that reports of performance by made at least on a monthly basis and in a manner and form that facilitates a full appreciation of the standards, the measurements used, and the report of their performance.

In addition, the Postal Service should be required to report its service performance measurements in a timely and regular fashion to an independent postal services review board.

FINANCIAL MANAGEMENT AND ACCOUNTABILITY. As one of the nation's largest public enterprises, it is essential that all financial aspects of Postal Service's operation be subject to sufficient oversight and review. In addition to those reports that are deemed necessary for an independent external audit, the Postal Service also should be required to issue monthly financial reports prepared in a manner that permits full disclosure and review of all aspects of the Postal Service's management and operation. These reports should be made on a monthly basis to the Postal Service's Board of Directors and the independent Postal Services Review Board. In addition, the Postal Services Review Board would be required to report to Congress at least annually on its review of all Postal Service financial and service performance reports and information. For the purposes of those reports made to the Postal Services Review Board, the Board itself will determine the manner and form in which such reports shall be made.

POSTAL SERVICES. To ensure the greatest possible responsiveness to the nation's changing postal needs, the Postal Service itself should be granted (with few exceptions) maximum flexibility over the structure and pricing of all postal products and services, which shall be organized at least initially into classes, subclasses, and other subordinate categories or services. At the same time, the Postal Service should be directed to ensure that it continues to provide services that are sufficient to satisfy the nation's continuing postal needs. The general proposition that mail, as a part of the nation's communications and commercial infrastructure, should facilitate, not impeded, communication and commerce should be paramount.

Since postal policy makers already have determined that the USPS will remain an agency of government that operates for the public's benefit and will continue to enjoy a statutory monopoly over considerable mail, there is no reason to conclude that a distinction needs to be made between such divisions of mail services that in the past have been referred to as "competitive" or "noncompetitive." The manner by which postal rates shall be established, maintained, and changed shall apply to all services the USPS offers.

To help ensure the continued provision of essential mail services, the Postal Service should be empowered to change the rates charged for all such services no more than once per annum. Changes can be made to apply to any service or category provided such changes do not exceed the cumulative rate of inflation since the last rate change. For the purposes of postal ratesetting, inflation shall be determined by the Consumer Price Index for Urban areas (CPI-U).

 

[It's important to note the absence of any provision for a "productivity improvement offset." In this instant, a productivity improvement factor is not warranted. First, unlike other industries, the postal system is more labor- than technology-intensive. There will be no great, unforeseen gains in productivity coming form technology. Furthermore, diminishing the extent of the Postal Service's rate making flexibility to make room for a productivity offset reduces the incentives of those who operate the Postal Service to function in a more business-like manner.]

The Postal Service shall be required to set rates at a level that is at least sufficient to recover all costs directly associated with the provision of any service. In addition, all postal services should be priced in a manner that is sufficient to permit the recovery of all costs associated with the operation of the Postal service.

The Postal Service may initiate new postal services whenever necessary provided that the price for such services is at least sufficient to recover all costs directly associated with the provision of any service and some amount that is sufficient to permit the recovery of a portion of the aggregate costs associated with the operation of the Postal service.

EXIGENCIES. Throughout modern postal history, the U.S. Postal Service has demonstrated that it can operate quite sufficiently within inflationary bounds. Consequently, once granted new freedoms to adjust rates, introduce new services, and adjust the postal network, it is reasonable to expect that the USPS will be able to operate without taxpayer support for the foreseeable future.

There may be times, however, when either for unforeseen reasons (including management failures), the Postal Service may not be able to generate enough revenue to sustain itself solely on the basis of its ability to adjust rates within inflationary bounds. Under such circumstances, any new law should provide some extraordinary method of ensuring postal fiscal stability. One such method would be to require the Postal Service to file with the Postal Services Review Board a statement of its inability to satisfy the nation's postal needs without an extraordinary influx of new revenue. Such statement should by certified by the Board of Directors and should specify the amount of new revenue deemed necessary to continue to meet the nation's postal needs.

Once the Review Board receives the Directors' statement and revenue need certification, the review panel will initiate a rate proceeding in a form and manner consistent with current procedures to provide the maximum possible public input. The Postal Services Review Board then will be solely responsible for determining the prices that will go into effect for all mail services. These prices then will remain in effect until the Postal Service can certify once again its ability to adjust rates and operate within inflationary bounds.

POSTAL LABOR. Those who have been entitled to organize to represent the interests of postal employees in dealings with postal management should continue to enjoy those rights in accordance with current postal and labor law. This includes the right to bargain collectively and the right to arbitration if parties fail to reach an agreement. Any new law should direct all parties to collective bargaining and binding arbitration to take full note of the conditions pertaining to future projections of mail volumes and revenues in a changing postal and economic environment.

CURRENT AND FUTURE POSTAL LIABILITIES. What has not been addressed here are the issues that underlay the present foundations of the USPS' finances, particularly the obligations it will have to pay to satisfy its responsibilities toward its present and future retirees. Here, however, are a few matters worth contemplating.

 

*    If one of the purposes of postal reform is to ensure a sound financial future for the Postal Service, then postal policy makers should avoid the temptation to use the Postal Service's ability to raise revenue as a cash cow.

 

*    The nature and extent of the USPS' retiree-related obligations should remain unchanged. Obligations that were (prior to P.L. 108-18) that were the Treasury's should remain the Treasury's. Obligations that were the Postal Service's should remain the Postal Service's--albeit with the understanding that future mail users should not be excessively burdened with obligations that are incurred today.

 

*    Shifting new costs from a novel treatment of long-standing federal practices will only worsen the USPS' financial outlook and its ability to maintain a viable universal mail delivery system.

This paper is intended to set forth what we are convinced are the fundamental principles that should animate reform. The problem with prior legislative efforts is that while they approach each of these goals, there has been a very poor fit between the specifics of the legislation and the principles. Comprehensive reform of a major American institution is not easy but the temptation to be overly general and overly prescrptive must be avoided.