What’s Going On With the Postal Service?

The United States Postal Service currently finds itself amidst intense political scrutiny and operational controversy. This has occurred for a number of reasons; some longstanding; others more recent. This alert highlights what is most relevant for any business that relies on the mail for invoicing, statement presentation, advertising, or fulfillment (especially e-commerce packages) – not to mention individuals who vote by mail or absentee ballot.

Even in today's digitally-driven world, the Postal Service remains an important part of the nation’s social and economic infrastructure, delivering an average of more than 455 million pieces daily to more than 159 million delivery points. Residents of broadband or retail “deserts” rely on the USPS for the delivery of information, goods and services. The USPS delivers a substantial share of the e-commerce fulfillment packages across the nation. The COVID-19 pandemic has only increased peoples’ reliance on the agency that still comes to your door six days a week. Small wonder that the Postal Service regularly ranks high in polls as among the most well-liked of federal agencies.

But the USPS does have problems. For years, the Postal Service has reported substantial annual losses in the billions of dollars. This is accurate as an accounting matter but paints an inaccurate operational picture. Due to a 2006 law, the Postal Service must prefund to the U.S. Treasury (out of current revenues) future retiree health benefits. In effect, this means that the USPS must fund, today, benefits for future postal retirees who may not yet have even been born. Few if any other government agencies or private businesses operate under a similar obligation.

The Postal Service made these required payments for several years but stopped in 2012 as declining mail volumes caused financial pressure. Consequently, the USPS is technically in default, and its annual nonpayment contributes significantly to its reported annual financial losses and to a whopping $71.5 billion net deficit on its balance sheet.

Operational results are a different story. In the years since the 2006 law, the Postal Service’s operational revenues have nearly equaled operational costs and, in several years, posted a slight operating net. However, it has suffered operating losses each year since FY2017.

Mail volume peaked in 2006 and has declined steadily since. The iPhone, improved broadband Internet connectivity both by wire and cell phone, and societal trends towards electronic bill presentation and payments, digital advertising, and less personal correspondence have all contributed to the decline. Last year, the USPS delivered 142.5 billion pieces of mail, a large drop from its peak of 213.1 billion pieces in 2006. The volume of its most profitable product -- First-Class letters – fell by nearly half between its peak of 103.66 billion pieces in 2001 to 55.6 billion last year and has fallen a further 9 percent this year.

One bright spot has been package deliveries. As e-commerce has soared, the Postal Service’s package volumes have grown. The USPS delivers packages both end-to-end and provides “last mile” delivery to residences for other carriers such as UPS. Today, it both competes with, and is a delivery partner for, UPS, FedEx, and Amazon’s Prime service. Indeed, COVID-19 has caused such an increase in package volumes that the USPS is actually doing better financially this year than it had expected, although it continues lose money. But the growth in package volume is still dwarfed by declines in letter and advertising mail.

Due to annual price increases, the Postal Service’s revenues have held fairly steady. However, it has struggled to control costs.

To its credit, the USPS has been making adjustments. In recent years, it attempted to rearrange its transportation network to better handle its current volume, it reduced the number of “blue boxes” around the nation, and it tried to close some post offices (despite objections from localities and their representatives in Congress). It has addressed its largest cost component by substantially reducing its employee count.

Meanwhile, needed reform legislation has stalled in Congress despite a broad general consensus among stakeholders about what needs to be done. Congress did include a provision in the CARES Act authorizing the USPS to obtain a $10 billion loan from the Treasury (after the Treasury Secretary, acting for the President, threatened a veto of broader relief). But Congress did not address important issues such as the prefunding requirement.

At the same time, the federal Postal Regulatory Commission, an agency that oversees the prices and products that the USPS offers, has been considering whether to modify the way that prices are set for mail subject to the Private Express Statutes. This is a complex review and the Commission has yet to adopt any changes.

The current Administration has been critical of the USPS. A 2018 review recommended steps to, among other things, reduce labor costs and outsource more functions. Despite some interest in right-wing think tanks in privatizing the USPS, there is almost no support in Congress to do so. The Administration has also urged a four-fold increase in package prices, possibly motivated by the President’s purported personal animosity towards the CEO of Amazon, but pricing is controlled by the USPS’s Board of Governors, and the Postal Regulatory Commission and no such sharp increases have occurred.

Enter Louis DeJoy. Mr. DeJoy was selected earlier this summer as Postmaster General by the USPS Governors. The first PMG in several decades not to come from inside the USPS, Mr. DeJoy has an extensive background in logistics, experience which could be very relevant for a PMG. On the other hand, his logistics company (XPO Logistics) has done substantial business with the Postal Service and he reportedly continues to hold a substantial ownership interest in that firm. This has raised concerns about whether he may have a conflict of interest (which he denies).

The elephant in the room is that Mr. DeJoy also is a significant Republican donor with ties to the current president. Such attributes are rare in PMGs, which traditionally have been non-political executives. Consequently, Mr. DeJoy’s actions are receiving far more scrutiny from Congress and the press than those of his recent predecessors.

Since taking office in June, Postmaster General DeJoy has made a number of changes. Some of these – such as removing blue collection boxes and retiring certain mail processing equipment for which there is not enough mail to operate efficiently – were consistent with trends before he took office. Others, such as reorganizing the executive structure, have been tried in the past, although with little success. And still others are new – and these have spawned most of the controversy.

First, Mr. DeJoy has sharply restricted overtime. That does reduce costs, which clearly helps the bottom line. However, because postal staffing is down due both to attrition and to absences related to COVID-19, overtime pay was 1/8 of labor costs in the most recent financial period. Thus, banning overtime in effect could reduce the postal labor force by one-eighth. That would almost ensure mail delays.

Second, Mr. DeJoy has ordered changes in certain delivery office operations. To some extent, the order merely directs postal employees to do the work the way the operations manual says it should be done. Unfortunately, these changes likely will result in a delay of at least one day for any mail that arrives at a delivery office overnight. That means local newspapers can expect delays, and any First-Class statement or advertising mail will be delivered at least a day later than has been the case in recent years, and any resulting backlogs of mail will delay other mail still more.

Third, some of the other changes, such as removing mail processing equipment, seem to be impairing service in at least some areas of the nation. Whether this effect is a temporary blip or a permanent slowing remains to be seen.

Then there is the matter of election mail. These various changes have created public worries that mail delivery will be slowed so much as to affect the delivery of absentee ballots. The President’s oft-repeated hostility to voting by mail has caused some to fear that he wants the USPS to hinder election mail. A letter sent by the USPS General Counsel in late July to election officials in more than 40 states warning that those state election laws were not compatible with the Postal Service’s service standards and that the USPS could not assure that ballots would be returned to the election offices on time to be counted in November have heightened those fears. At least six state attorneys general are considering filing an emergency lawsuit in response to those letters.

In response to public pressure, the Postal Service released on August 18 a carefully worded statement that certain operational changes will be suspended until after the election. It said nothing, however, about rescinding changes to equipment, boxes, and operational processes that have already occurred. Nor did it say whether the Postal Service would, in past years, give priority handling to mail marked as official election mail. Mr. DeJoy also agreed to testify before a Senate Committee on August 21 and a House Committee on August 24.

So what should mailers expect?

Controversy about service cutbacks and election mail will continue. Whether PMG DeJoy’s testimony before the Senate and House committees aggravates or dampens the furor, critics will surely continue to apply pressure.

Congress will consider – and may enact -- emergency legislation, but that it unlikely to address most of the long-term problems confronting the agency. First-Class Mailers should expect slightly slower delivery, particularly when they enter mail at a delivery facility overnight. This may already be occurring; Postal Service data suggests that First-Class Mail and advertising mail service performance dropped sharply in July in many parts of the nation.

Likewise, advertising mailers (ranging from national catalogs to local fast-food restaurants) and mailers of periodicals also can expect to see delays in delivery, at least after the election, and possibly before.

E-commerce and other shippers could see fewer effects, although the operational changes will affect them too. However, as the holidays approach, shippers must remain watchful. Note that the USPS recently announced a temporary price increase for most of its package prices charged to e-commerce and other commercial shippers that will remain in effect until after Christmas.

In contrast, the Postal Service typically announces price changes for First-Class Mail, periodicals, and advertising mail in October with an effective date in the following January, so stay tuned.

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If you would like further information, please contact William Baker at wbaker@potomaclaw.com.

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