Let's go postal!

One strawman that is often raised when arguing about the efficiency of government bureaucracies is the U.S. Post Office. The GAO just released their assessment of the Postal Service’s financial viability and proposed fixes to the system. Let’s take a look at some postal facts.

The USPS is not profitable. It hasn’t been profitable since 2007.

From 1971 to 2002 it was close to break even (see USPS Figure 1).  While mail volume peaked in 2006 (see USPS Figure 2), net income was crashing. The net income from 2003 to 2005 largely resulted from a 2003 law that reduced USPS pension benefit payments by about $9 billion over this period. By 2007, the USPS was bleeding like a stuck pig, loosing nearly $12 billion over the last three years. They also have nearly $15 billion in debt and has unfunded retiree benefits of about $90 billion. Their forecast shows $100’s of billions in losses through 2020 (see USPS Figure 6).

Here are some more fun postal facts:

• The USPS is a “for profit” business and has been allowed to retain earning since 2003. But still regulates products and pricing to some degree.

• The average address receives 4 to 5 pieces of mail per day, six days per week. The average cost of city delivery is $0.63 per day and rural delivery is $0.50 per day. Delivery to your door is the most expensive with an average cost per day of $1.13 while centralized boxes are $0.52 per day.

• First Class mail volume has declined 19% since its 2001 peak, and is projected to decline another 37% in the next decade. This business is highly profitable and generates over 70 percent of the revenues used to cover USPS overhead costs according to the GAO report. First Class postage ranges from $0.44 for the first ounce for a letter to $1.22 for the first ounce for a package.

• Standard Mail (advertising or “junk” mail) volume has fallen 20% since its 2007 peak, and is projected to remain roughly flat over the next decade. The GAO states that this is also profitable but that it takes 3.4 pieces of Standard Mail, on average, to equal the profit from the average piece of First-Class Mail. The first ounce of postage for Media Mail is priced at $0.15, about 1/3 the cost of First Class mail.

But wait? How can the GAO say the USPS is unprofitable in one breath and then that its two major businesses are “highly profitable” and “profitable?” Or that the “USPS’s business model is not viable due to its inability to reduce costs sufficiently in response to continuing declines in mail volume and revenue.” The answer to a large degree is in USPS retiree benefits and the accounting requirements for which have changed over time. In 2009, Congress had to take action to reduce the USPS’s legally mandated benefit payments to delay a cash flow crisis. Fixed costs, labor contracts (soon to expire), and semi-fixed costs all become variable when bankruptcy is inevitable. It’s time for the USPS to re-invent themselves and the services they provide.

I’d start with every other day delivery, Monday through Friday only, and doubling the rates on junk mail. Then I’d renegotiate all of the union contracts and eliminate pensions, as in most of the private sector. Lastly, I’d let the USPS look for more products and services to offer that leverage what they have.

[caption id="attachment_1473" align="alignleft" width="646" caption="USPS Annual Net Income (Loss), Fiscal Years 1971 through 2009"][/caption]

[caption id="attachment_1472" align="alignleft" width="446" caption="Actual and Projected Total Mail Volume, Fiscal Years 1971 through 2020"][/caption]

[caption id="attachment_1474" align="alignleft" width="638" caption="USPS Actual and Projected Net Income (Loss), Fiscal Years 2000 through 2020"][/caption]