Stand and Deliver
t was not supposed to be like this. John Potter knew he would face challenges when he was sworn in as the 72nd postmaster general last June, but he thought they were manageable. He never dreamed that the mail system would come under attack. He never imagined attending a memorial service for two employees who fell victim to terrorism. Nor did he anticipate the economy spiraling out of control, further damaging his agency's already shaky financial footing.
Rather, June 4 was one of the happiest days of Potter's life. He stood outside Postal Service headquarters in Southwest Washington surrounded by family, friends and a horde of postal employees. "There was a lot of pride that day," the 23-year Postal Service veteran says. "It was the culmination of years of hard work. In addition to a lot of personal pride, I had my father there who spent 40 years in the Postal Service. I was honored by the fact that I was recognized by the board of governors as someone they thought could lead the Postal Service into the next century."
Potter was serving as the Postal Service's chief operating officer when he was promoted to postmaster general, so he was familiar with many of the challenges facing the agency. Mandated by law to operate on a break-even basis, the Postal Service had suffered two consecutive years in the red and was on track to finish 2001 with a loss. Growth in mail volume was stagnating, especially as the economy softened. Contentious contract negotiations were about to begin with the agency's unions. And, having raised postage rates twice in 2001, the Postal Service was preparing to propose another rate hike.
"I recognized that there was a need over the next couple of years to set the groundwork for the Postal Service of the next century," Potter says. "I felt at the time, given the numbers I was looking at, there was a three- to five-year horizon under which things would more or less operate as they had. I knew we would be challenged by the economy, but I didn't anticipate the free fall the economy took. It started in August and then, obviously after Sept. 11, it accelerated. And then I could never have anticipated that the Postal Service would be challenged by the events that followed in October."
The anthrax-tainted letters that dropped into the nation's mail system that month severely disrupted mail service in Washington and eventually caused the deaths of two postal employees, Joseph Curseen and Thomas Morris. Having worked closely with Washington-area postal workers to restructure the region's troubled postal system in the 1990s, the loss of the two employees was especially hard on Potter.
Looking back, Potter believes the Postal Service acted responsibly in the anthrax scare. As the crisis unfolded, critics chastised the agency for not shutting down postal facilities and testing for anthrax sooner. But as Potter-and union leaders-point out, they were following directions from a team of scientists at the Centers for Disease Control and Prevention.
"I wish we were a lot smarter," he says. "At the same time, I have a clear conscience, because I was making decisions based on the best information we had at the time. I wouldn't put myself in harm's way. I wouldn't put an employee in harm's way. Looking back on it, I don't know what I could have done differently. I don't see anything, given the knowledge we had at the time, that would have forced us to act differently."
As if the human tragedy were not enough, events since September have derailed efforts by postal officials to tackle organizational shortcomings. In fact, the aftermath of the attacks accentuated many problems. Between Sept. 11 and the end of the fiscal year on Sept. 30, mail volume dropped by 800 million pieces, costing the agency between $250 million and $300 million in revenue. The trend line continued into fiscal 2002. Through late December, mail volume was down 6.8 percent. Year-end projections showed that the Postal Service would lose $1.3 billion in fiscal 2002. But that estimate was made before the terrorist attacks. By the end of December, losses were already $400 million beyond estimates.
The drop in mail volume is largely the result of major mailers scaling back operations. Many direct marketers are waiting for the economy to show signs of life before boosting their volume again. They are also concerned about security, fearing another anthrax letter could further weaken confidence in the system, according to Robert McLean, executive director of the Arlington, Va.-based Mailers Council, the industry's largest trade association. At the same time, mailers are exploring other ways to reach consumers, including the Internet-despite the fact that the mail system is viewed as the most effective and cost-efficient means of direct advertising. Finally, mailers are awaiting the outcome of a proposed rate increase, averaging 8.7 percent, currently before the Postal Rate Commission. In early January, major mailers and the Postal Service agreed to a plan that calls for rates to rise in June, three months earlier than projected. The agency stands to gain about $1 billion from the early phase-in. The rate hike is expected to generate $4.2 billion overall. Both the Postal Rate Commission and the board of governors must approve the settlement.
Still, rising costs continue to tax the agency's bottom line. Wages, for example, keep going up. In late December, the 340,000-member American Postal Workers Union won a 4.4 percent raise over three years, retroactive to 2000. Although the raise was much less than the 13.5 percent the union sought, it will nonetheless have an impact. The Postal Service is either in collective bargaining or headed to arbitration with its other three unions, too. Retirement benefits will also pose major problems during the coming years. The Postal Service estimates that its retirement expenses will grow to $14 billion in 2010, up from $9.1 billion in 2001. Retiree health care costs are projected to climb from nearly $900 million to $2 billion during the same period.
To top it off, the agency will likely reach its $15 billion borrowing limit by the end of the year. That makes it virtually impossible to acquire new technologies or make needed capital investments, which are frozen for this fiscal year. The Postal Service Board of Governors is reluctant to ask Congress to raise the limit, but may not have any choice. While the Postal Service got some funds from Congress late last year to cover the cost of new security devices, it's likely that they'll need more. It's unclear how receptive Congress will be to giving the Postal Service additional funds with so many other competing homeland defense needs.
Even Congress' most engaged member on postal issues, Rep. John McHugh, R-N.Y., is reluctant to support additional appropriations. Robert Taub, McHugh's chief of staff, says Congress and the Postal Service first need to figure out ways to improve the agency's structural problems. "We shouldn't give taxpayer dollars to a sinking ship," he says.
"There is no end in sight," to the Postal Service's fiscal difficulties, Potter laments. "There is no obvious event that will bring back the volume or help the economy rebound. This situation brings out dynamics that we thought would happen later on in the decade."
Paying Attention
Even before Sept. 11 and the anthrax scare, there were serious concerns about the Postal Service's future. But few were listening. For six years, McHugh held hearing after hearing and pushed postal reform legislation, but couldn't get members of Congress to pay attention to the agency's problems. Congress last tackled postal reform in 1970, when it created the current quasi-public organization. Plagued by a bloated bureaucracy and hindered by a system of patronage, the act transformed the Postal Service into a self-sustaining entity funded solely by its sale of mailing services. Congress gave the new agency two clear mandates: maintain universal service and break even financially. The 30-year-old model, however, has limited the agency's ability to respond to an ever-changing and highly competitive market. The Postal Service's complex rate-setting process takes up to 18 months, for instance. The agency is limited in the kinds of new products it can offer, and the process for labor negotiations creates a hostile environment.
Nevertheless, the debate on reforming the Postal Service didn't rise above the level of McHugh's subcommittee until last summer. That's when the Postal Service was added to the General Accounting Office's "high-risk" list, which identifies agencies and programs vulnerable to fraud, waste, abuse and mismanagement. GAO chief David Walker told House and Senate committees last year that the agency "has no comprehensive plan to address its numerous financial, operational or human capital challenges."
Last year, Postal Service officials set up a task force with 11 of the nation's largest mail-focused companies that resulted in recommendations to improve the entire mail system. The group backed the development of technologies to make it easier to track mail, and called on policy-makers to give the Postal Service more freedom in setting rates. The task force also recommended that the agency explore new payment systems, such as accepting surety bonds or letters of credit from large mailers.
As the task force begins implementing some of its suggestions, the Postal Service is busy putting the finishing touches on a "transformation" report of its own. After adding the agency to the high-risk list, Walker recommended that postal officials develop their own plan for getting back on track. The idea was strongly endorsed by key members of Congress, including Senators Joseph Lieberman, D-Conn, and Fred Thompson, R-Tenn., chairman and ranking member, respectively, of the Senate Governmental Affairs Committee. The agency was due to deliver its final report in December, but was granted an extension until March as it confronted the anthrax crisis.
Transforming the System
The report is designed to force the Postal Service to look at a broad range of options for transforming itself and regaining financial stability. "Just raising rates is not the answer," says Teresa Anderson, assistant director of government business operations issues at GAO. "Without the recent incidents, the current rate case may have been sufficient to get them back on track. That's not so now. They really need to take this opportunity and provide some real leadership. What kind of organization do they want to be in the 21st century?"
Despite these lofty goals, expectations for the report are fairly low. It is more likely to focus on operational changes and moderate legislative reforms than serve as a bold blueprint for the future. Part of the problem is that Postal Service executives don't see any benefit in taking risks and raising controversial issues, says Robert Reisner, former vice president of the Postal Service for strategic planning.
Indeed, last summer the board backed away from a plan to study the idea of eliminating Saturday mail delivery after being lambasted by members of Congress. "It's hard for the Postal Service to get out on a limb and say, 'This is where we are going to be,' " says Deborah Willhite, the agency's senior vice president for government relations and public policy. "There is no sense in us getting out there with a vision if we are going to get slammed."
Political dynamics, says Willhite, necessitate that the agency come forward with a more pragmatic report, detailing how it will manage itself back to health and what legislative tweaks it needs to get there. Many of the Postal Service's ideas along these lines were laid out in a discussion draft of the transformation report released last October.
The top priority is gaining pricing flexibility. Currently, to raise rates, the agency must file a rate case with the Postal Rate Commission. Between preparation and litigation, this process can take nearly 18 months. Developing models projecting that far into the future is difficult for everyone involved in the mailing industry. Take the current rate case. The proposal the agency filed in September was based on the assumption that the economy would start to rebound. Postal officials thought the proposed hike would sustain them for the next two years. Now the picture has changed substantially, and it's even harder to tell what it will look like two years from now.
In the October outline of its transformation report, the Postal Service proposed a rate system built on price caps and tied to economic measures such as the Consumer Price Index. The agency would also like greater flexibility to adjust rates byproducts and classes of mail. The mailing industry would welcome a more common-sense approach to pricing, says Michael Critelli, CEO of Pitney Bowes. But he adds that the Postal Service must come forward with ideas on expanding partnerships and discounts to the mailing community. For instance, the Postal Service could come up with additional opportunities to give shippers discounts for pre-sorting their mail by ZIP code and transporting it to regional postal facilities. Critelli also suggests the Postal Service consider opening small post offices in such retail chains as Wal-Mart, allowing it to close and consolidate poor-performing post offices. Such a move would require congressional approval.
Postal Service insiders say the transformation report due in March will address some of those issues. It will also propose ways to streamline operations, perhaps by consolidating mail processing plants and expanding outsourcing arrangements. Yet even in these areas, the GAO's Anderson worries that the Postal Service will come up short. "We are encouraging them, for instance, to include long- and short-term capital spending in the report," she says. "But they need to come forward with detailed plans. Do they need to raise the debt limit? If so, how much money will they need and over how many years? Where will they spend it and how will they pay it back?"
Tough Issues
While the report will suggest some operational and legislative changes, postal insiders say it is unlikely to take a bold look at one of the most critical issues facing the agency-labor relations. "Pricing flexibility would be helpful. And productivity gains are nice, but all the savings get eaten up by higher and higher wages," says Murray Comarow, who headed President Johnson's Commission on Postal Organization, which formed the basis for the 1970 reform act. He points out that nearly 80 percent of the agency's expenses are labor-related. "Do you know what it was when I was executive director of the commission in 1968? About 80 percent. They have invested billions in automation and made productivity gains, but for some reason they cannot control or influence wages."
That's because mail is a service industry, says William Burrus, president of the American Postal Workers Union, the largest postal union. It takes a lot of human capital to deliver mail, especially when there are 1.6 million new addresses a year. Burrus acknowledges that labor relations could be improved, but says it is hardly the cause of all of the Postal Service's woes.
Under current law, the agency must enter into collective bargaining with each of its unions. Should those negotiations fail to result in a settlement, as they often do, a neutral arbitrator steps in. Many would like to see the system revisited, but given the unions' political clout, few expect radical reforms. McHugh's legislation never mentions the words collective bargaining or labor relations, largely because the political dynamics make the issue a sacred cow.
Regardless, the Mailers Council's McLean says the agency must address labor relations in a more fundamental way, by proposing ways to reduce the number of people and work hours in processing plants and to increase the amount of time spent by mail carriers on the street. Potter agrees the agency must address such issues. "The primary thing we want to look at is staffing and processing," he says. "We have an obligation to see how many people we have and how many work hours it takes to do a job. We are not going to walk away from collective bargaining, though."
Burrus, however, says his union has no interest in helping to develop such a staffing plan. "There is no reason to trust management," he says. "There is too much favoritism already. My union would not and cannot trust management."
Despite facing political and institutional obstacles, Potter says the Postal Service has the backbone to propose innovative ideas in a number of areas. But he says that policy-makers and other interested parties must be involved in the process, and they must decide just what they expect from the Postal Service. Today, the agency is committed to delivering mail to every address in the nation six days a week. That notion of universal service has been used to defend the retention of post offices in every community, even where they are not cost-effective.
Potter suggests that universal service can be more strictly defined, or at least modified. In such cities as New York and Washington, he says, six days of delivery makes sense. But can the same be said for rural locations? Some postal insiders say no, especially if it means retaining thousands of post offices that continually lose money. But before the Postal Service goes out on a limb and proposes a radical change in service, the American public must articulate its expectations, says Potter.
While outside stakeholders have repeatedly called on the Postal Service to articulate a bold vision of its future, most of the comments the agency received on the outline of its forthcoming report are more narrowly focused. A review by Government Executive of more than 60 comments found very little discussion of bold transformation.
GAO's Anderson agrees that stakeholders must be actively engaged, but suggests that the Postal Service should frame the debate instead of looking to outsiders. "Time is running out for them," she says. "They really need to use this framework and provide real leadership."