The Postal Service updates its five-year plan: A Labor Day Story

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It being Labor Day — a holiday created by the labor movement to honor the social and economic accomplishments of American workers — this may be a good time to recognize the achievements of the United States Postal Service.  In the span of just seven years, postal executives have managed to eliminate two hundred thousand good-paying, middle-class jobs — and they’re not done yet.  They plan to cut a hundred thousand more.

The story unfolds at postal headquarters in L’Enfant Plaza earlier this summer.  On Wednesday, June 5, 2013, at a meeting of the Mailers’ Technical Advisory Council (MTAC) — an inside group of postal officials, big mailers, and other stakeholders — the Postal Service gave a presentation updating its five-year business plan.  Though the plan itself has little to say about jobs, it’s largely about how the Postal Service is “right-sizing” away thousands of jobs with the aim of maintaining low postal rates and big profits for the corporations that make up the trillion-dollar mailing industry.

The new five-year plan is essentially the same as the plan released back in February 2012.  It shows how the Postal Service hopes to “return to profitability” by massive cost cutting to deal, so it is claimed, with continuing declines in mail volumes.  (The presentation slides are here, and the audio is here.)

The charts in the presentation paint a bleak picture — falling mail volumes, mounting deficits, and a growing gap between costs and revenues.  But that’s just part of the story.  Not wanting to scare the bejesus out of its big customers, postal officials also show what they have achieved to bring down costs —168,000 career jobs eliminated from 2006 to 2012 — and how they hope to continue reining in costs by cutting another 100,000 jobs over the next five years.

 

Revenue projections not looking too bad

In terms of revenues, the plan anticipates that the Postal Service will continue to generate about $65 billion a year for the next five years.  The revised plan paints a somewhat rosier picture than the original 2012 plan.  Instead of anticipating 2016 revenues of $62 billion as it did back in 2012, the Postal Service now projects revenues of $64.6 billion, almost the same as expected for 2013.

The improved picture is due to the fact that declines in First-Class mail are being offset by higher-than-expected increases in package revenues, now projected to rise by 40 percent from 2012 to 2017.  The downside is that the profit margin on First-Class is about 53 percent, while for packages it’s about 18 percent.  Packages may make up for the losses in gross revenue, but not in net.  Still, hearing that the serious revenue declines of the past several years have come to an end had to be good news to the MTAC members listening to the presentation.

The new plan also has something that wasn’t part of the 2012 plan.  It says the Postal Service is going to “create a multi-sensory experience” for consumers, featuring “mobile on mail that interacts with consumers,” mail with audio/visual features, and hardcopy to digital that connects consumers websites, social media, and purchase point.  Who knows what that’s all about, but it sounds good and is no doubt intended to show that the Postal Service wants to get hip and appeal to younger, tech-savvy customers.

With respect to cost cutting, the new five-year plan goes through the various parts of postal operations — mail processing, retail, and delivery — and shows where the savings will come from.  The Postal Service hopes to cut about $20 billion in costs — about $9 billion through changes in the healthcare system and $11 billion in operations.   The new five-year plan doesn’t talk jobs, but every billion dollar in cuts means about 10,000 jobs eliminated, so one can get some idea of where the losses will occur.  As with the original plan, the updated plan contains some dubious assumptions and raises questions about where in the world the Postal Service comes up with numbers.

 

Savings from plant consolidations

The 2012 five-year plan anticipated network savings of $4.1 billion in sortation and transportation, which seemed like a gross exaggeration at the time.  The new plan says mail-processing consolidations will save $3.4 billion in 2017.  The new number is $700 million lower, but it’s still hard to see where it comes from.

When the Postal Service submitted the Network Rationalization plan to the Postal Regulatory Commission for an advisory opinion last year, the cost savings kept getting revised downward, but the number was never that high.  It started at $3 billion, and eventually got trimmed to $2.1 billion, and that’s not counting the lost revenue the plan would cause.

The PRC identified so many unknown variables it was almost impossible to come up with a good estimate for cost savings, so the advisory opinion (p. 90) came up with a range —as high as $1.96 billion but as low as $45 million (not including lost revenue).  Rising costs for labor and declining mail volumes over the next few years could account for some of the difference, but $3.4 billion remains a very optimistic projection.  The plan says nothing about closing even more plants (which would hardly be possible anyway), so who knows where this number comes from?

In any case, cutting $3.4 billion from the processing network would require eliminating something on the order of 34,000 jobs.

 

Retail network savings

The 2012 plan said there would be $2 billion in retail savings, but it didn’t say how.  The new plan says the Postal Service will save $1.6 billion a year in its retail network.  Once again, there aren’t many details, but the plan says that almost two-thirds of the savings — $1 billion — will come simply from the “workload impact of reduced volumes.”  In other words, thousands of jobs will be eliminated because there’s less business going on at post offices.

The new plan says $600 million in savings will come from POStPlan, the plan to reduce hours at 13,000 post offices and replace their full-time postmasters with part-time workers earning about a third of their hourly wages.  When the Postal Service presented POStPlan to the PRC, it said it would save $500 million.  That number was probably already inflated by a hundred million or so; now the Postal Service says it will save $600 million.  It’s still in the same ballpark, but why the savings will increase is another unanswered question.

What’s interesting about the anticipated savings in the retail network is not the numbers but other aspects of the plan.  Aside from POStPlan, the five-year plan identifies two ways to save money.  The first is “transform customer experience in high traffic post offices by increasing the availability of self service.”  In other words, expect to see fewer windows in operation and more automated kiosks.

The second is ““enhance customer experience through expanded retail partnerships.”  In other words, the Postal Service will continue to encourage people not to go to the post office at all.  They can buy stamps online or at the bank, CVS, Costco, Office Depot, and the over 50,000 other alternate retail access points the Postal Service has established.

Nearly all of these access points do little more than sell books of stamps, but they are a way to wean people off going to the post office, and that’s the main aim.  The plan is clear about that.  It says that the goal is to increase the portion of retail revenues that come from alternate access from 40 percent to 60 percent.

The Postal Service is also busy setting up new Village Post Offices — those counters in convenience stores that pose as post offices, but really just sell stamps and flat-rate boxes. There are now over 300 of them, but it’s hard to see what purpose they serve.  VPOs make it possible to do a little postal business during hours that the post office is closed in towns impacted by POStPlan, but they bring in very little money, and it’s not new revenue — it’s just money that would have entered the system at the post office.  The Village Post Office remains what it always was — a PR tool to make it seem that the Postal Service is not abandoning small-town America.

Overall, the plan provides few details on the matter, but cutting $2 billion in the retail network means another 20,000 jobs eliminated.

 

Changes in modes of delivery

Much in the news of late is about changing how the mail is delivered.  Rather than delivering to the door or the curb, the Postal Service wants to switch customers to “centralized delivery,” i.e., cluster boxes.  The revised five-year plan does not indicate how many customers would be switched over, but the savings numbers suggest that it won’t be nearly as many as we’ve been led to believe.

The news media has been throwing around huge numbers.  A widely circulated article in CNN Money, for example, suggested that mass conversions could save $4.5 billion.  Numbers like that are based on an OIG report, which suggested savings of nearly $10 billion if everyone went to cluster boxes (a theoretical exercise more than an actual plan).

The 2012 five-year plan projected savings of $3 billion in delivery, without providing any details.  The revised five-year plan has dropped the number to $1.8 billion, about half of which includes lower costs associated with lower volumes.  Again, there aren’t many details, but the new number suggests that the Postal Service may not be looking at mass conversions at all.

The total savings, aside from what’s saved due to lower volumes, is $0.8 billion or $1 billion (the plan seems to provide contradictory numbers), which includes savings from both changing modes of delivery and Delivery Unit Optimization (DUO) — consolidating the facilities where letter carriers work out of.

Let’s say DUO operations save $100 million; that would mean changes in mode of delivery are anticipated to save something on the order of $700 to $900 million — nothing like the $4.5 billion reported in the media.

The five-year plans says there’s a savings of $65 per year for each delivery converted from curb to central and a savings of $190 per year for each delivery converted from door to central.  (Curb to central saves about $130.)  Figure a savings of $125 per point.  To save $800 million, maybe 6 million customers would experience a change in mode of delivery — 5 percent of the 125 million total delivery points.

In other words, despite the fact that changes in mode of delivery are featured in the postal reform legislation being considered in both the House and Senate, the Postal Service does not seem to be looking at mass conversions over the next few years.  As in years past, it will be mostly new residential developments and some businesses that see cluster box delivery.  Even if Congress gives the Postal Service permission to switch customers without their permission, it looks as though it will be status quo for most people, at least according to this new five-year plan.

However the Postal Service plans to get there, saving $1.8 billion in the delivery system would mean eliminating another 18,000 jobs.

 

Five-day delivery

The 2012 five-year plan projected a savings of $2.7 from completely ending Saturday delivery.  The new five-year plan says the Postal Service will save $1.9 billion by ending Saturday delivery for everything but packages.  Who knows where that new number comes from, but it suggests that the Postal Service anticipates spending hundreds of millions of dollars to deliver packages on Saturday.

When it originally presented its case for totally ending Saturday delivery to the PRC back in 2010, the Postal Service’s estimate was $3.3 billion in gross savings (less $0.2 billion lost revenue).  After studying the plan for a year, the PRC came up with $2.3 billion in gross savings (less $0.6 billion in lost revenue).

When the Postal Service announced in February of this year that it would be implementing five-day delivery without Congressional approval, it said the savings would be about $2 billion, roughly the estimate in the new five-year plan.

The Postal Service has never provided a breakdown on where the $2 billion would come from or how much delivering packages on Saturday would cost.  The PRC commissioned a study on the question, but it’s not clear if that study is still underway or if the Commission canceled it after the Postal Service eighty-sixed the plan when Congress raised objections.

Obviously, though, if the PRC thought the total plan would have a gross savings of $2.3 billion, it’s not likely that it would save the $1.9 billion while still maintaining package delivery on Saturday.  The Postal Service seems to be ignoring the results of the Commission’s advisory opinion, which it contested from the outset.

Anyway, the bottom line on five-day delivery aims at saving $1.9 billion — another 19,000 jobs lost.

 

Health Care Plans

The 2012 five-year plan projected a savings of $6.2 billion in health care costs.  The revised five-year plan has increased the estimated savings to $8.6 billion a year in 2016.  That breaks down as follows:

  • End RHBF prefunding: $5.8 billion
  • Postal Health Plan – Actives’ Premium Reductions: $0.4 billion
  • Postal Health Plan – RHB: Normal Cost vs. Retiree Premiums: $2.4 billion

There are no further details in the presentation, but this is all obviously based on the assumption that Congress will give the Postal Service permission to create its own health plan, which means ending the prepayments to the Retiree Health Benefit Fund (RHBF) and exiting the Federal Employee Health Benefit Plan (FEHBP).  (For more on all that, see Mark Jamison’s article analyzing the GAO report on the proposal.)

It may still be a long shot that Congress will even approve this aspect of the five-year plan.  Even Congressman Darrell Issa, who would probably support the plan, has serious reservations because it shifts costs to Medicare.

In order to reduce premiums for active employees and retirees, it will be necessary to reduce benefits, one way or another.  Employees will need to assume a larger share of the burden, either in higher premiums or higher deductibles, or perhaps by using more Medicare.  It’s not as if the Postal Service will be more efficient in managing its health care plan than the FEHBP has been.

 

The hidden agenda

The revised five-year plan purports to be a realistic approach to the inevitable decline in mail volumes.  It’s about reining in costs in an era when more and more people are using the mail less and less.  But there’s another agenda at work in the five-year plan — maintaining low rates for big mailers and continuing the transition toward privatization that’s been going on for four decades.

The 2012 five-year plan mentioned, albeit in the fine print, the possibility of an exigent rate increase (pending at the time before the PRC).  That would have brought in $2 or $3 billion more in revenues annually.  The new five-year plan doesn’t mention a rate increase at all.

That’s rather surprising since this presentation was made for the MTAC, and the exigent rate increase had to be on the mind of most of the mailers in the room.  It’s been all over the news, and the Affordable Mail Alliance (AMA) and others have been adamant in their opposition.  Even though it’s not in the presentation, the issue probably came up in the Q&A after the presentation.  Unfortunately, the audio recording of the presentation does not include the Q&A segment.

The five-year plan is based on the premise that mail volumes will continue to decline, which the Postal Service inevitably blames on diversion to the Internet.   The Postal Service does not seem interested in acknowledging that a large portion of future declines will be due to its own actions.  Eliminating Saturday delivery, slowing down First-Class mail and periodicals (a key element of the plant consolidation plan), reducing hours at 13,000 post offices, operating fewer retail windows, changing over to cluster boxes, and all the other cost-cutting moves have to drive away a lot of business.

How much is hard to say. The best estimate out there is probably a market research study done in 2011, when the Postal Service was planning the plant consolidations.  That study, long kept secret, may have inadvertently led customers to think that post office closures and five-day delivery were part of the mix, so it gives some sense of the cumulative impacts of these various service reductions.

The study showed that single-piece First Class mail volumes would go down over 10 percent and total volumes would decline by almost 8 percent.   If that study is accurate — and the company that did it maintains that it was “very good research” — a huge portion of the projected decline in mail volumes can be credited to the Postal Service’s own plans.  It’s not just about the Internet.

 

Honoring the American Postal Worker

The five-year plan also has a line for cost savings described as “workforce and non-personnel.”  Considering that nearly all the other savings are about workforce reductions, who knows where these other cuts will occur?  The plan says this savings will amount to another $2.6 billion.  Let’s assume about $1 billion involves further reductions in the workforce of some unspecified nature.  Here’s what the totals look like:

Area of operation
Cost savings
Positions cut
Processing network
$3.4 billion
34,000
Retail network
$2 billion
20,000
Modes of delivery
$1.8 billion
18,000
Five-day delivery
$1.9 billion
19,000
Other changes
$1 billion
10,000
Total
$10.1 billion
101,000

The table shows roughly where about $10 billion in cost cutting may occur and where those 100,000 more job losses might be.  The five-year plan shared with the MTAC didn’t spell things out like this, but you can’t cut costs without cutting jobs — and lots of them.

These drastic reductions in the workforce started over a decade ago.  In 1999, the total career workforce peaked at 798,000.  In 2012, there were 528,000 career workers.  Thanks to all the recent buyouts, the career workforce is now about 490,000.

Over the past fourteen years, then, over 300,000 career positions have been eliminated — almost 40 percent of the workforce.  If the Postal Service eliminates another hundred thousand career jobs, it will leave about 400,000 — half the career workforce of 1999.

This huge workforce reduction is partly a consequence of automation and, more recently, falling mail volumes, but there’s another explanation — worksharing and outsourcing.

Since 1976, the Postal Service has expanded the workshare system from one class of mail to the next, which has spawned a huge industry of companies that that consolidate, barcode, sort, transport, and prepare the mail for delivery.

According to a 2010 OIG report, worksharing has “rapidly grown to dominate the Postal Service’s business.”  As shown in a chart in this GAO report, when worksharing began in 1976, about 30 billion pieces were presorted (38 percent of total volume).  By 1990, that number had risen to over 100 billion pieces (70 percent).  In 2012, something like 130 billion pieces were presorted — over 80 percent of the mail.

All that worksharing has meant less work for postal workers.  The Postal Service now gives out workshare discounts that are the equivalent of over $15 billion a year in operating costs.  That represents something like 150,000 postal jobs.

Then there are all the jobs that have been outsourced to transport the mail and conduct other postal operations.  The 2012 financial statement shows $6.6 billion for “transportation” and $9.2 billion for “other expenses,” a total of nearly $16 billion.  About $12 billion of this money goes to outside suppliers for “goods, services, and facilities,” e.g., trucking the mail, paying for leased spaces, and so on.  Now the Postal Service is even talking about leasing vehicles.

The Postal Service says it needs to “right-size” itself because mail volumes are falling, but that’s largely an explanation for public consumption.  What’s actually happening is that the Postal Service is downsizing itself so that the private-sector mail industry can upsize.  Less work for the Postal Service means fewer postal workers, and that means more work — and bigger profits — for private corporations.

That may be beneficial for the big stakeholders in the mail industry, but it’s not good news for postal workers.  Their processing plants have been consolidated away, their post offices have been POStPlanned, and their ranks have been decimated by “attrition.”  The promise of a “soft landing” has often gone unfulfilled, and workers often find themselves transferred to new jobs that require long commutes or relocation, or they just have to think about quitting.  Now they have to worry about what postal management would like to do with their health care plans.

Postal workers deserve better.  It’s something to think about on Labor Day.

(Photo credits: Postal workers rallying in Portland, OR; West Palm Beach, FL; Shelby, MI; Syracuse, NY; Chicago, IL; New York, NYBirmingham, AL; Suitland, MD.

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