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Postal Rates Under Review – What Are the Issues?

As a business mailer, Exela Technologies celebrated the historic postal rate cut last year as the exigent rate hikes expired. That celebration will be short lived if the USPS has its way with Congress and the Postal Regulatory Commission (PRC).

It is looking more likely that they will gain success on both fronts, which could result in postage rate increases of 5-10% in the next year. Current legislation being reviewed by Congress will instantly increase postage rates by 2.15%. “Instantly” in this case means after the appropriate approvals are received and vetted with the regulatory agencies and the industry groups that impact such decisions, and not overnight.

More ominous for mailers is that the PRC is set to rule this fall on the current rate setting system. Its options include an “inflation plus system” (i.e. inflation plus a percentage like 1-2%) for annual price increases. This is different than the current system, which limits the annual increase options to the rate of inflation. This rate has been very low in recent years and beneficial to all mailers. This system expires in the fall and will be replaced by a system that will offer the USPS greater latitude to increase rates to relieve its financial burdens and generate greater revenues.

The USPS released its Q2 financial results in May and the news was not good. Their numbers reported that the rollback of the exigent rates cost them $474 million in revenue. The USPS reports that they cannot remain financially viable if these losses continue. A viable and financially stable postal service is essential to our country and our industry. The current legislation being reviewed is essential to the USPS’ financial stability, and its plans for service to our country and industry.

They believe that the only path forward depends on a combination of innovative and aggressive actions by USPS management, legislative relief through passage of current legislation being reviewed (H.R. 756) into law and a favorable ruling by the PRC when it reviews the 10-year old rate setting structure that has capped price increases to the rate of inflation alone. The mailing industry agrees that a viable USPS is essential but does not see larger price increases as the only option for assuring its viability.

The USPS suffers today from a model that limits its ability to generate revenue (operating revenue was $17.3 billion (down $474 million compared to the same period last year). Their First Class and Market Mail classes suffered losses of over $937 million over the previous quarter due largely to the exigent rates expiring and lower volumes. The volume decline gets at the root of the issues the industry believes must be addressed.

On the positive side, the USPS had growth in the Shipping and Packages businesses. The increase in revenue for these services over the same period last year was $486 million (11.5%). This is the future of the USPS and the reason why all of us depend on them remaining viable. The USPS also continued to refine operations and control its operating expenses, which resulted in a loss of $562 million in Q2. It seems strange to tout this number as good news but the losses during the same period last year were $2 billion, so improvements were made that reflect just how diligently the USPS is working to control its operating expenses.

Industry is also in favor of providing the USPS relief from the retirement funding they are mandated to make. They have defaulted on their payments into these funds for years. These obligations have long accounted for most their annual losses but the general public does not realize how onerous and ridiculous these requirements are. The retirement funds for the USPS are over funded. The USPS is required by law to make these overpayments. Every financial analyst agrees that the current funding requirements are largely for people who will never collect payments because they are not USPS employees or have not even been born! In short, there are funds available for people who will never work for the USPS.

This brings the issues right back to the PRC. Their ruling on the modified inflation-based price cap is crucial. The PRC is very sensitive to the delicate state of postal finances. One only has to look at the USPS’ limited ability to make capital improvements (such as replacing its fleet of vehicles) to know just how tenuous its position is. Industry fears that the PRC may not fully appreciate the role all mailers have played in helping the USPS control and often avoid costs for many years now. There isn’t anyone on the PRC who is lamenting the struggles that mailers face and the sacrifices we have made to partner with the USPS while absorbing costs they could not bear. Our partnership should not be rewarded with rate increases that will cause volume to leave the industry at an even greater rate. Increased rates will only “tighten the spiral” from a volume perspective.

In the last five years, rate hikes have been “small” because of the low inflation rates. They have often been less than 1% and that has undoubtedly affected the USPS. Inflation rates have been growing and may be somewhere in the 2-4% range soon and that would allow the USPS to have a larger rate increase with no changes to the current system. If the PRC adopts an “inflation plus” system our annual rate hikes could easily become 5% (plus or minus a percentage). Add in the mandated rate increases in the new postal reform legislation being considered and we could see increases in the 7% range, which would not serve mailers well at all.

In summary, we need to watch this issue closely. Our business depends on the mail. Increases in these costs affect us deeply and our customers are very sensitive to anything related to postage expense. Postal Affairs will continue to watch and report on developments as they unfold and are known. We live in “exciting times” and need to stay current on these issues for our business and our customers.   

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