Depending on who’s telling the story, postage prices may rise by a little or a lot, or may not, because the Postal Service will go broke otherwise, or it won’t. Any ratepayer would be confused and concerned by these rumors, perhaps even enough to wonder whether to keep using the mail at all.
Many things could happen, but what will happen isn’t yet known, and sorting out the complicated underlying facts requires a degree of legal background, but here goes.
In 1970, when the Postal Service replaced the Post Office Department, Congress washed its hands of setting postage rates. Thereafter, the Postal Service would propose prices that would be reviewed by the new Postal Rate Commission. The “cost of service” ratesetting model allowed the USPS to seek prices that recovered costs, and in a 10-month proceeding, the PRC litigated who would cover them through higher rates. Groups representing the classes of mail, or categories of mailers, argued to protect their members from the brunt of an increase – and nothing in the process incented the USPS to reduce costs.
In 2006, drafters of the Postal Accountability and Enhancement Act revised the ratesetting process. Reflecting mailers’ desire for postal cost control, they advanced a new system that capped postage increases at a level tied to the Consumer Price Index, thus, in theory, forcing the USPS to “live within its means.”
In a relatively last-minute addition to improve the bill’s “score” (budget impact), a provision was added to require the USPS to fully prefund future retiree health costs through 10 annual payments totaling $55.8 billion. Whether the feasibility of that financial burden was ever correlated with the ratesetting process contained in the same bill, and its objectives, is not known.
As enacted, the 2006 law also required that, 10 years after implementation, the PRC (now the Postal Regulatory Commission) would examine whether the new ratesetting process was achieving nine objectives set for it in the law, among them enabling financial stability for the USPS.
In 2016, the PRC began its required review and, a year later, issued a report that found the ratesetting process had failed to enable USPS financial stability; the agency was deeply in debt, having maxed out is borrowing authority and defaulted on several years’ prefunding payments. To remedy this, the commission proposed several changes to the ratesetting process, including allowing over-CPI rate increases that, theoretically, would generate the money needed to get the USPS into the black.
Needless to say, the whole mailing industry reacted very strongly against the idea, sending the PRC back to the drawing board. Last December, it issued a second proposal that differed from the first in some ways but still centered on over-CPI rate increases. Industry comments again showed widespread opposition.
Some of the comments sought to explain that the basic problem isn’t a defect in the ratesetting process that’s causing the Postal Service’s financial problems, but the overly aggressive prefunding requirement. The 2006 law that Congress produced failed to reconcile the payments it imposed on the USPS with the ability (or willingness) of ratepayers to bear that cost. (Of course, the 2008 recession and the accelerating diversion of messages to electronic media didn’t help, either.)
By 2020, most of the Postal Service’s annual losses can be traced to imposed costs, e.g., to prefund future retiree pension and health care costs, or accounting adjustments to recognize the workers’ comp liability, not to operations. (Operating losses, which are much less, result in part from the costs of an infrastructure that’s larger than needed to meet customer demand or handle shrinking mail volume.)
In the abstract, it’s possible to determine mathematically when significantly over-CPI rate hikes would yield enough revenue to cover costs and make the prefunding payments, but that scenario assumes ratepayers would comply and continue to mail at assumed levels. As many commenters pointed out, ratepayers likely would not tolerate such postage increases, meaning that over-CPI hikes would lead to less mail and less revenue, not more, and certainly not enable financial stability for the USPS.
What the PRC will do next is unknown, but it’s been encouraged to find a way to separate the ratesetting process’s effectiveness at supporting “normal” USPS operating costs from support for the outsized prefunding mandate. The root causes of the Postal Service’s current financial circumstances go beyond the ratesetting process, and cannot be remedied simply by raising rates.
Leo Raymond is Owner and Managing Director at Mailers Hub LLC.