Letter Barrier

hese are turbulent times for the U.S. Postal Service. Postmaster General William Henderson, a 29-year postal veteran, will leave the agency after his contract expires in May. The head of the Postal Rate Commission, which oversees Postal Service activities and sets rates, resigned in February. The agency's most vocal advocate on Capitol Hill plans to be little more than a casual observer on postal issues this Congress. As if that were not enough, the agency keeps delivering bad news: The growth in mail volume is slowing and could actually start declining in coming years. The agency lost money in fiscal 2000 and agency officials expect to see even more red dollar signs this fiscal year. Competition-in the form of the Internet, private-sector shippers and foreign postal services-is around every corner.

If you listen closely to Henderson as he discusses the agency's plight, you can hear the echoes of postmaster generals past. Sitting in his spacious office overlooking the National Mall in Washington, Henderson laments that he cannot control labor costs, set prices for postal products or introduce new products and services in a timely fashion. Close your eyes for a minute and you can almost hear the voice of former Postmaster General Larry O'Brien, whose term ran from 1965 to 1968.

In 1967, Oklahoma Rep. Tom Steed asked O'Brien a simple question at a hearing: "Is it fair to say that you have no control over your workload, you have no control over wages, and you have limited control over workplace conditions?" O'Brien responded: "I would have to generally agree with your premise-that's a staggering list of 'no control.' I don't know that it has ever been put that succinctly to me. If it had been, at an appropriate time, perhaps I wouldn't be sitting here." While the problems resulting from such an impractical system are slightly different now than they were in 1967, the consequences are no less severe. A presidential commission exploring postal reform reported to President Lyndon Johnson in 1968 that under the status quo, the agency could no longer meet the demands of a growing economy and expanding population. Today, the Postal Service faces an equally uncertain future. After years of positive growth, the agency, required by law to break even, lost $199 million in fiscal 2000 and could lose more than $2 billion this fiscal year.

"A key oversight question for the service, Congress and the American people is whether the service is heading for financial shortfalls that could, in the long run, hinder its ability to carry out its mission of providing affordable, universal postal services that bind the nation together," said Bernard Ungar, director of government business operations issues for the General Accounting Office, at a House subcommittee hearing in September. "Continuing challenges facing the service include improving productivity, controlling costs, enhancing revenues and improving labor-management relations."

Heavy Load

Since 1971, the Postal Service has been a self-supporting government corporation, financed by revenue from selling stamps and other mailing services. Today's U.S. Postal Service is a $65 billion-a-year operation that employs nearly 800,000 workers. It delivers more than 200 billion pieces of mail a year to 134 million delivery points. In 2000 alone, 1.7 million new addresses and 6.2 billion more pieces of mail were added to the mix.

Against this backdrop, the agency last year posted record gains in productivity. According to USPS Chief Financial Officer Richard Strasser, fiscal 2000 saw a decline of 6,200 work years and $1.6 billion in savings in productivity. Still, the agency lost $199 million. The trend continued into fiscal 2001; the agency already is behind its projections for the year. During the first quarter, net income was $246 million, or $142 million below plan. Revenue hit $15.4 billion, which is $159 million below plan. "We have serious concerns about business growth," Strasser told the Board of Governors at its Jan. 9 meeting. Three classes of mail, including First Class and Priority Mail, saw declines in revenue.

Part of the problem is that the growth in First Class mail volume is slowing. It's difficult to say why, but Strasser points to the economic slowdown as well as continued consolidation in the financial services sector. Banks and credit card companies account for the largest chunk of First Class mail. The smaller the number of banks, the smaller the First Class mail volume. While electronic bill payment has yet to catch fire, there is concern that it, too, will siphon off First Class mail. In fact, agency officials expect First Class mail volume to grow at an average annual rate of 1.3 percent through 2003, slightly slower than the 1.7 percent in the 1990s and much slower than the annual growth rate of 4 percent in the 1980s. Between 2004 and 2008, assuming a significant diversion to the Internet, agency brass estimate that First Class mail volume could actually drop 3.6 percent a year.

Rising Costs, Rates

Trying to shield itself from declining revenue can be difficult for the Postal Service. Nearly 75 percent of its costs are labor-related. Since the 1970 reorganization act established a system of binding arbitration, the agency has little control over wages. During the past year, each of the four largest postal employee unions went to arbitration after failing to reach negotiated settlements. A federal arbitrator in 1999 awarded members of the National Association of Letter Carriers a 3 percent pay hike, adding more than $300 million to annual labor costs. The raise puts letter carriers on a higher pay scale than mail clerks for the first time since 1907. Clerks, represented by the American Postal Workers Union, currently are in arbitration and most experts expect them to get a significant pay increase.

The agency also was hit with $750 million in unexpected costs when fuel prices spiked last summer and health care costs rose higher than anticipated. Unlike its private-sector competitors, Strasser says, the Postal Service cannot rapidly pass those costs on to consumers in the form of higher prices. That's because the rate-setting process is an ordeal that lasts many months. It starts with a determination by the Postal Service's Board of Governors that a rate hike is necessary. The Postal Rate Commission then has 10 months to review the situation and recommend new rates. During that time, interested parties have an opportunity to review and comment on the proposed increase. In truth, though, the process starts long before the board files a rate case. According to Strasser, it takes at least six months to prepare a rate hike recommendation, making the process a 16-month campaign. The most recent rate case was filed in January 2000 and ended in November, resulting in a 4.6 percent across-the-board hike in mail prices. New rates went into effect Jan. 7. The agency had sought a 6 percent increase.

Last year's rate case was unusually contentious. Postal Service officials and rate commission staff members argued over everything from how the agency incorporated fuel costs into its proposal to how much money is needed in a contingency fund to offset unexpected expenses.

Finger-pointing aside, the Board of Governors does not think the rate increase, which is expected to generate $2.5 billion, will forestall another year in the red. There is a belief that the agency could lose between $2 billion and $3 billion this year. As a defensive measure, the Postal Service on March 8 announced it would halt new construction, new leasing and expansion projects for the year. More than 800 projects will be affected. Savings will total $1 billion. The move meets a mandate by the Board of Governors that USPS cut its fiscal 2001 capital improvements budget from $3.6 billion to $2.6 billion.

Taking some of the projects off line will have an adverse effect on mail delivery, says Robert McLean, executive director of the Mailers Council, an Arlington, Va. trade group. "Some of these facilities are outdated and need to be replaced. When you take the projects out of the system, you don't get to bid on new sites and you end up losing the space. That makes it very hard to keep up with growing areas."

In other cost-cutting moves the agency announced March 27 a plan to cut 75,000 work years, reduce admininstrative costs by 25 percent and trim transportation costs by 10 percent. The Board of Governors also has directed USPS officials to seek another rate increase this year. A case will likely be filed by June seeking a 10 percent to 15 percent across-the-board hike.

"It's indefensible to think that rates would be going up that much," says McLean, especially at a time of significant cuts. McLean argues that USPS can do much more to improve productivity. Between 1991 and 1997, for instance, the Postal Service experienced 6 percent growth in productivity per employee, according to a March 2000 Mailers Council report. By comparison, performance improvements in the trucking industry were nearly twice as large.

Large mailer groups, hoping to stave off another rate hike, are assaulting Capitol Hill in a massive lobbying effort to get members of Congress engaged on the issue. "We don't think they'll need to raise rates at all if they do what they are suggesting in cutting costs," says James Cregan, executive vice president of the Magazine Publishers of America.

Labor Woes

Next to its financial woes, labor-management relations are the Postal Service's biggest problem. The agency is the second-largest government employer behind the Defense Depart- ment, and the second-largest civilian employer behind Wal-Mart. Four unions represent 700,000 Postal Service employees:

• American Postal Workers Unions: 344,000 window clerks, workers in processing and distribution plants and maintenance employees.
• National Association of Letter Carriers: 240,000 city letter carriers.
• National Rural Letter Carriers' Association: 55,000 rural carriers and 57,000 substitute carriers.
• National Postal Mail Handlers Union: 61,000 employees who process mail.

In addition, three management associations represent nearly 85,000 supervisors and postmasters. Labor and management rarely see eye-to-eye. Most postal observers say there is a high level of distrust between rank-and-file employees and their supervisors. The attitude is even worse when talking about headquarters. "A lot of field people don't understand the constraints that headquarters people are dealing with," says Strasser, who spent eight years in Northern Virginia. "At the same time, a lot of headquarters people don't understand the frustrations of people in the field."

In its August 2000 report, the Postal Service Commission on A Safe and Secure Workplace found two major sources of friction between labor and management: an enormous backlog of grievances and a compensation system that rewards managers, but not employees, based on performance. "A sea change in attitudes of all the parties-and an environment of trust-will be required to slash the number of grievances and reshape the compensation system. This will require a sustained effort," the commission noted.

That's easier said than done. The Postal Service has a backlog of more than 126,000 grievances, and spends an estimated $217 million a year trying to resolve them. In 1999, 6,300 grievances went through arbitration. "This level of grievance activity appears virtually un-matched in the public or private sectors," the workplace commission noted. In the auto industry, with 400,00 bargaining unit employees, only 11 grievances reached arbitration in 1998. The Postal Service also is responsible for 45 percent of all federal discrimination complaints, according to the Equal Employment Opportunity Commission.

The workplace commission found that in nearly every respect, employees have a negative attitude toward their managers. For instance, in response to the statement, "I have confidence in the fairness and honesty of management," only 37 percent of Postal Service employees responded favorably, compared to 60 percent in the national workforce. "It's an autocratic management style," says William Burrus, executive vice president of the American Postal Workers Union. "We keep hearing stories of abusive managers-threats, sexual and verbal assaults. There is unchecked authority."

These problems are not new to the Postal Service. In 1994 and again in 1997, GAO reviewed the agency's labor-management problems and found an unhealthy level of grievances."We still don't get the sense that labor and management are pulling in the same direction," says GAO's Teresa Anderson. "It's hard to see how the Postal Service is going to be able to work itself out of financial difficulties if they are not all working in the same direction."

The Postal Service is trying to resolve some of these problems. In 1994, the agency's then-vice president of human resources, Mary Elcano, implemented the Resolve Employment Disputes Reach Equitable Solutions, or REDRESS, program. The program allows an employee and manager to sit with an impartial mediator to find solutions to problems. The goal, says Elcano, now a partner at the Washington law firm Brown & Wood, is to avoid formal proceedings. More importantly, it's designed to encourage open communication.

While union chiefs oppose the concept-Burrus calls it a "joke" and a way to circumvent collective bargaining-a 1997 University of Indiana study suggests that REDRESS is successful.

Between 80 percent and 85 percent of REDRESS cases are closed before reaching formal arbitration. The study also found that 52 percent of employees and 69 percent of supervisors had a positive view of REDRESS. The program was honored in 1999 by the Office of Personnel Management and in 2000 by the American College of Civil Trial Mediators for its effectiveness in resolving workplace disputes.

But Patrick Donahoe, who headed the Postal Service's human resources office before being promoted to senior vice president of operations in February, knows there are many more challenges. Perhaps none is more pressing than succession planning. Like most federal agencies, USPS has an aging workforce. A large number of workers-including 70 percent of executives-will be eligible for retirement during the next five years.

To prevent a crisis, the agency has implemented several programs to recruit, train and retain employees. Still, GAO's Anderson questions whether the Postal Service has an effective plan. "I don't get the sense that there is a lot of focus on this area," she says. "Are the right incentives in place to keep and promote people? If not, they will be in a tough place."

An E-Business Future

The Postal Service always will be in the business of delivering paper mail. That is its legislative mandate. Increasingly, however, it is venturing into new markets. To combat financial shortfalls, says Henderson, the agency has to find new revenue sources. It's not enough to cut expenses.

Most notably, the agency is looking for ways to harness the Internet. It has formed a partnership with CheckFree, an Atlanta-based software company, to offer electronic bill payment. It also has teamed up with AT&T and IBM to develop NetPost.Certified, an electronic version of certified mail. Aimed at government agencies, NetPost allows users to send secure electronic files to one another using smartcards, digital certificates and digital signatures. The Social Security Administration and the Health Care Financing Administration are testing the program. It will cost agencies 50 cents to send a document, regardless of the size of the transmission. Revenue will be split among the Postal Service, AT&T, IBM and other vendors.

Critics charge the agency is overstepping its legislative bounds by entering into the e-commerce arena. Last November, the Computer & Communications Industry Association, a trade group representing such e-companies as Yahoo! and Intuit, lambasted the Postal Service for straying from its core mission. The group questions whether USPS is subsidizing e-commerce initiatives with funds from the agency's monopoly on First Class mail. By law, postal revenue streams are supposed to be clear and distinct. Each product must pay for itself. The agency is not allowed to use funds from First Class mail to subsidize any products that compete in the private sector.

Postal Service officials claim they are not using First Class to subsidize e-commerce projects. Rather, they say, resources allocated for e-commerce initiatives are kept in one overall account and are not allocated until managers can justify their use for specific projects. In some instances, the Postal Service doesn't even dip into the account. With the electronic bill paying initiative, for example, CheckFree already had built an infrastructure to handle the transactions. The Postal Service didn't have to pony up any money for the partnership. What it brings to the table is its reputation. Consumers have for years trusted the Postal Service to deliver hard copies of their bills, says Robert Krause, the Postal Service's vice president of electronic commerce. It's reasonable to think that they will continue to trust the Postal Service as mail shifts to the Internet. "We could argue that those are our customers and we should be there," adds Deputy Postmaster General John Nolan.

Postal Service officials project revenue on e-commerce initiatives will reach $104 million this fiscal year, according to data submitted to the rate commission. Projected expenses are $67.2 million, not including infrastructure and other costs. But GAO officials do not have much confidence in these numbers. In a September 2000 report (GAO/GGD-00-188), GAO concluded the data USPS provided was not "sufficiently complete and reliable to be used to assess" the financial performance of e-commerce initiatives. The report also noted inconsistencies between the data provided to the rate commission and to GAO auditors.

Postmaster Henderson downplays the importance of e-commerce initiatives to the Postal Service's future. "Most of the e-commerce initiatives we have gotten into today, while they do potentially generate revenue, they are there to help us understand the new economy better," he says. "E-bill pay is an example. We are not there to make tons of money off E-bill pay. We are there to understand the business because it threatens our core business." Of course, if E-bill pay does take off, USPS will have no choice but to move in that direction. Bills, statements and payments account for nearly half of First Class mail volume and generate $17 billion in revenue.

For now, though, investments in information technology are more important than e-commerce, says Henderson. The top priority is development of an information platform. This complex web of sorting machines, databases, servers and computers will give supervisors real-time data to track mail and worker productivity. It will cost nearly $2 billion over five years. Getting real-time data will help the mailing industry in its business planning, says Gene Del Polito, president of the Association for Postal Commerce. For example, currently the Postal Service has no way of tracking when L.L. Bean catalogs arrive at customers' homes. That makes it difficult for the retailer to know when to hire extra customer service representatives. Postal Service officials say the information platform will also help them become more efficient. The system will help managers better determine how many employees-and how long-it takes to perform certain tasks. Additionally, it will help managers determine where it is failing to meet customer expectations.

Setting Priorities

To ensure that the agency spends its dollars on the right projects, USPS executives have put a new investment review system in place. In the e-commerce area, for instance, the agency last spring created the E-Business Opportunity Board. It requires a more thorough look at new business opportunities than in the past, says Nolan. The board is akin to a group of venture capitalists or bankers. It seeks to fund projects that will meet customers' needs and have a high rate of return. "The whole idea is that just because you work in the Postal Service and have been allocated X dollars, doesn't mean you can go off and do anything, especially if it is an area of controversy," says Nolan. "It doesn't do any good to be right if you lose. We could be right today and then they change the laws. We can't afford a model where eight out of 10 things fail. We work in a fishbowl here."

That fishbowl, Nolan continues, sometimes keeps staff from coming up with creative, revenue-generating ideas. Each new delivery service idea has to gain approval from the Postal Rate Commission. GAO and the Postal Service's inspector general also constantly audit the agency. "People just say, 'No mas. I can't take one more audit.' It's frustrating. There is a place for those audits, but there is not a balance there," Nolan says. GAO's Anderson counters: "They are a federal agency. They owe the public accountability. They could make it easier if they were more forthcoming in providing information. You find you are sometimes pulling teeth to get some basic information. It would be easier if they were more proactive with information."

As it strives to find new sources of revenue, the Postal Service also is looking for ways to become more efficient. To do so, it plans to expand its use of business alliances. In its 2001 to 2005 strategic plan, the Postal Service states: "Alliances and partnerships will be an important part of the domestic package strategy. . . . The Postal Service has a real opportunity in the growing market trend for quicker, smaller shipments direct to customers." The goal is to link up with such companies as Emery Worldwide, Airborne Express and DHL Worldwide Express and have large-volume shipments dropped as far into the mail stream as possible. Through so-called "last-mile" arrangements, the companies agree to sort and distribute packages to regional post offices. USPS avoids processing costs and the companies are able to tout their alliance with the Postal Service's vast ground network to large-volume shippers of computers and home electronics.

Perhaps the most ambitious alliance to date is with FedEx Corp. Announced Jan. 11, the partnership allows the Postal Service to use FedEx's vast air transportation network and lets FedEx take advantage of the Postal Service's many retail outlets. Under the deal, the Postal Service will pay FedEx nearly $6.3 billion over seven years to fly Express and Priority Mail. The alliance could save the agency more than $1 billion. While the agency will continue to rent space on commercial airlines, it no longer needs to lease its own fleet of aging planes. "From an operational standpoint, this is an incredible deal for us," says the Postal Service's chief operating officer, Jack Potter. "We are now working with a company that has a vested interest in getting its product to locations on time. We know they are reliable and efficient." On the retail side, FedEx will put collection boxes at post offices nationwide. It's the first private-sector company to gain such a privilege. FedEx expects to deploy 10,000 boxes during the first 18 months of the contract. Depending on the total number of boxes deployed, the deal will generate between $126 million and $232 million in revenue for the Postal Service.

But USPS must tread carefully when it enters into these high-profile arrangements. When news of a possible alliance with FedEx first leaked last summer, high-ranking Republicans raised questions about antitrust issues. Now that the deal is final, congressional sources speculate that members will take a close look at the details. On Jan. 13, the Justice Department announced it would study the deal for potential antitrust violations. Emery Worldwide filed suit in late January arguing the deal violates contracting rules. "The retail arrangement is not exclusive," says Nolan, adding that it was open to any company. In fact, Airborne Express has made inquires about putting drop boxes at post offices, according to postal officials.

The Postal Service has run into other problems with its business alliances. In 1997, USPS hired Emery to operate 10 Priority Mail processing centers. The centers transported, sorted and distributed Priority Mail packages along the East Coast. Shortly after winning the 10-year contract, however, Emery wanted out and filed suit to end it. Emery argued in U.S. Claims Court that it was being underpaid and therefore the Postal Service was in breach of contract. Last November, the two sides reached an out-of-court settlement and agreed to sever ties. The Postal Service bought out the contract. The failed experiment could end up costing more than $300 million.

Reform call

The Postal Service is facing an uncertain future and voices from the past are echoing throughout the halls of Postal Service headquarters. Like the Kappel Commission 30 years ago, observers today argue that only legislative reform can save the agency from disaster. There is overwhelming sentiment that without such reform the agency can only nibble at its problems. "Without change to our regulatory framework, universal service will be difficult to maintain," the Board of Governors wrote in a March 2 letter to members of Congress, President Bush and top administration officials. "We foresee rapidly rising rates and reduced service if legislative reform is not enacted promptly."

But the governors' push for reform may be too late. For nearly five years, Rep. John McHugh, R-N.Y., former chairman of the now-defunct House Postal Service Subcommittee, tried to convince his peers that the Postal Service was facing a crisis. After several years of oversight hearings, he introduced a comprehensive reform bill, HR 22, in the 105th Congress. Among other things, the bill sought to create a new rate-setting scheme. The bill would have maintained the current system for setting rates for First Class mail, but would have given the Postal Service more discretion to set prices for competitive products, such as Express and Priority Mail. The bill also would have created a for-profit corporation through which the agency could create new competitive products. Further, USPS would have been able to test new products for a couple of years without Postal Rate Commission approval.

Few Postal Service officials supported McHugh's reform bill in a proactive manner. In fact, it wasn't until its December 2000 meeting that the Board of Governors adopted a resolution to push for legislative reform. By then it was too late. Congress had adjourned. Reform opponents, including UPS and other mailing groups, had lobbied to kill McHugh's bill before it could ever come to a vote before the House Government Reform Committee. A companion bill never materialized in the Senate. "I was concerned that the supportive statements were not made early," says McHugh. "It might have made some difference. The governors were not convinced that the crisis point had been reached, a position they have now since accepted."

McHugh doesn't plan to reintroduce HR 22 or a new bill like it in the 107th Congress. Postal observers also are worried that recent reorganization moves on the House Government Reform Committee will push postal issues even farther off the radar screen. That's because committee Chairman Dan Burton, R-Ind., in February eliminated the Postal Service subcommittee and folded its jurisdiction into the full committee. A handful of representatives, lead by Reps. Henry Waxman, D-Calif., and Danny Davis, R-Ill., formed a caucus to hold informational hearings on postal matters. The caucus, however, is not linked to any committee and has no formal oversight powers. On the Senate side, there's some suggestion that Mississippi Republican Thad Cochran will take renewed interest in the Postal Service from his position as chair of the Governmental Affairs Subcommittee on International Security, Proliferation and Federal Services.

The Bush administration has yet to chime in on postal issues. Nonetheless, McHugh hopes his colleagues will step up to the task this Congress. "Washington doesn't operate any differently today than it did yesterday or 100 years ago," he says. "The fact of the matter is, while all of these serious [postal] problems are upon us, it hasn't been seen or felt on the streets of America. The job of everyone who understands the issue is to bring forward the message of impending crisis. If pain is felt on the street through cost- saving measures and increased rates, that will get back to members of Congress."

Eating Away at First Class Mail

Bill statements and payments account for nearly 50 percent of First Class mail volume, generating about $17 billion in annual revenues. many USPS analysts believe that the growth of electronic bill payment presents one of the biggest threats to continued growth in First Class mail volume and revenue.

What's in First Class Mail

• 15% Payments
• 34% Bills & Statements
• 51% Other (non priority mail under 12 ounces, including general correspondence, holiday cards, postcards, letters)
  

Source: USPS Revenue, Pieces and Weight by Classes of Mail FY 1999; USPS Household Diary Study FY 1997