Postal Reform -- Congress Must Deliver

By Erik Cagle

Senior Editor

Postal reform is the rally cry for 2005 in the commercial printing industry. Though it seems the cries are strong only from a select group, as opposed to a unison shout from the industry collective.

In other words, a relatively small amount of people are making a big stink to Congress about the need for reform of the United States Postal Service (USPS), an entity that is still operating under guidelines set in 1971. Guidelines, mind you, established before the onslaught of private sector parcel delivery options and well before the invention of the Internet, both of which have consumed a hunk of USPS volume.

Let us suppose that you, the reader, are not among the masses rallying for postal reform. Ask yourself some basic questions:

Do you provide any mailing services for your customers?

If not, does what you produce still end up in the mail stream?

Commercial printers do not exist in a vacuum. Even if mailing is not your thing, a lack of meaningful postal reform could have dreadful consequences for your customers and suppliers.

Nearly Half Hits the Mail

The PIA/GATF estimates that roughly 45 percent of the dollar volume of printing ends up in the mail stream. That amounts to about $72 billion in annual printing shipments delivered through the USPS. Ronnie Davis, PIA/GATF chief economist, has factored a scenario where the proposed 5.4 percent postal increase could mean a reduction in mail-related printing shipments of half that amount, 2.7 percent, which would equal a $1.9 billion reduction in printing shipments over a 12-month period.

The 5.4 percent increase requested by the USPS to the Postal Rate Commission—which would likely take effect in 2006—could pale in comparison to future hikes. And the increase doesn't even reflect a rise in the cost of doing business.

OK, we'll back up for a second and relate the riveting tale of the civil service retirement system (CSRS) account. In 2003, the USPS learned that it was slated to overpay the retirement fund for its employees by a mere $80 billion. The U.S. government rectified the situation (sort of), but tacked a two-headed monster onto the so-called correction: the retirement fund overpayment amount was shifted into an escrow fund. Additionally, the postal service was mandated to pick up the portion of retirement annuities based on their employees' military service. The 5.4 percent increase request only addresses the pension escrow.

Without reform that addresses the escrow issue, future USPS increases could become an annual event, prompting major advertisers—the printers' customers—to look at cheaper, alternative mediums for delivering their message. And even if there is a hint of Chicken Little cynicism involved here, there are tangible ramifications if the USPS is not allowed to get its house in order.

"If things keep going on the way they are now, the current rate case is just the tip of the iceberg," notes Leo Raymond, director of postal affairs for the Mailing & Fulfillment Service Association (MFSA), one of about four dozen associations hammering away at Congress and the White House for needed reform relief. "Next year the USPS will have to go back to the Rate Commission and ask for another rate increase to raise more money to put into the 2007 escrow payment. Every year there is a new payment, and every year the payment goes up.

"At some point, this unbelievable escalation of rates is going to have an effect on mail volume," Raymond adds. "The USPS is going to be stuck in a situation where it will still be going to 142 million addresses six days a week and it's going to have significantly lower volumes of mail, less revenue, to pay for this. So (the USPS) will go into the proverbial death spiral with both feet."

At first blush, the issue of postal reform appears to be a good news/bad news situation. As of the second week of May, a quality bill had emerged from committee in the House of Representatives and another was close on the Senate front. Senator Susan Collins (R-ME), the chair of the Committee on Homeland Security and Governmental Affairs, as well as Representative Tom Davis (R-VA), whose Postal Accountability and Enhancement Act was passed out of the House Government Reform Committee, are spearheading a bipartisan reform campaign.

As for the support of the White House? That's another story altogether.

Some Sticking Points

The Bush Administration recognizes the need for reform, but is adamantly opposed to the provisions in both bills that would allow the USPS to use the money that was being overpaid into the CSRS toward keeping costs down, according to Raymond.

"The problem now becomes that the White House doesn't want anything that's going to cause the gallons of red ink to increase by another gallon," he says. "So it's opposing these provisions, as equally and firmly as the sponsors of the bill and the mailing industry, are favoring it. That's the stalemate. Until somebody blinks, it's not going to move."

If both Congressional chambers agree on a final bill and send it down Pennsylvania Avenue, where President Bush would presumably shoot it down due to budgetary concerns, the question then becomes: Would there be enough votes to overturn the veto? Would Congress take up the battle cry at a time when Social Security, the war in Iraq and other issues have a more predominant focus of attention? As Raymond aptly puts the question in a national perspective, "No one is going to call their Congressman in the middle of the night, upset about postal reform." And will the Congressional membership fully appreciate the consequences that may result if the USPS is not given a 21st century overhaul to remain viable and not lose a large measure of volume?

One thing's for sure. While the printing industry collective may not be mobilizing, a core of prominent, leading printing companies—as well as the PIA/GATF's resident government affairs guru, Ben Cooper—has spearheaded a campaign to push their Congressional leaders down the reform path.

Cooper, the executive vice president of public policy for the PIA/GATF, is the man behind the Coalition for a 21st Century Postal Service. The coalition cuts across a number of industry segments including the mailing and financial services industries, and boasts a star-studded cast of characters from virtually all of the printing industry heavyweights—RR Donnelley, Quebecor World, Banta, Vertis, Quad/Graphics and IWCO Direct, to name a few.

The quest for reform is not a new one, Cooper notes, but for about 10 years neither chamber was able to graduate a bill out of committee. The 2004 effort was the most successful, but time predictably ran out during the presidential election year.

It was the pension fund issue that ultimately sparked the reform engine, which itself warmed up following the fallout of 9/11, the Anthrax scare and technological advances that caused a marked drop in volume. And now, on the eve of viable reform, the toughest questions will need addressing.

"Congress and the White House know something has to be done legislatively to repeal that escrow requirement, but the White House is opposed to simply repealing the requirement—they want to know how that money will be used if the requirement is repealed. That's really where the fight comes in," Cooper says.

"The other half of the legislation is the reform part, and it's probably fair to say that absent the pressure with the escrow payments, the reform part would be very tough to get. But that's the way things happen. We have them traveling together."

It is easy to lose sight of the reform aspect in the big picture, but that's where Cooper's coalition comes into play. The Senate bill, at press time, contained more elements favorable to the printing/mailing industry, among them rate caps on increase levels.

Under reform conditions, the USPS could not increase rates at a level more than the consumer price index (CPI). That would give mailers cost certainty on increases, and theoretically hold the door open for possible rate rollbacks, which may be a more optimistic interpretation. Tying in rates to the CPI is the main thrust.

Keeping Costs Down

Another key ingredient, according to Cooper, lies in allowing an expanded use of work sharing, where printers would handle a degree of sorting and distribution chores for the USPS in exchange for reduced rates. This would give printers a bargaining chip toward keeping a robust level of customer product in the mail stream.

In an indirect manner, the issue of the treatment of small parcels could impact printers. Cooper notes that the UPS believes the USPS is subsidizing small parcels roughly in the 25 percent range. The private sector has been pushing legislation to require small parcel delivery to be treated as a competitive product, according to Cooper, much the same way as express mail. Reform here would increase the price of small parcels to consumers, which would level the playing field between the USPS and private companies.

Cooper points out that the postage charge on small parcels makes a significant contribution to the overhead of the USPS, in the $2.5 billion to $3 billion range. Should that market be adversely affected, the USPS' revenue loss would need to be made up somewhere.

Joe Schick, director of postal affairs for Sussex, WI-based Quad/Graphics, has been involved in letter writing campaigns and has personally visited Capitol Hill with other major printers in support of additional language that the coalition would like to see in the legislation. One thrust is to add protection for printers and mailers when the USPS makes changes to rules that could negatively impact business and add costs.

"Today we don't have a real way to go back through that process and come to some resolution with the postal service, other than to try to work with them," Schick says. "And if (the USPS) doesn't work with us, then we're kind of left to do what they decide in the long run."

Seeking Standards

Aside from the core issues, Schick and the coalition are concerned about topics relative to service standards. "If we're going to hold them to not being able to increase rates over a certain amount, we don't want them to skimp on service in order to make their numbers under the cap," he says. "We want to make sure mail delivery and overall commitments by the postal service are met regardless of their financial commitments."

IWCO Direct, of Chanhassen, MN, has long been a prominent player in the reform arena, led by President and CEO Jim Andersen. In April, the direct mail leader hosted a meeting of top state direct marketers that also included Senator Norm Coleman (R-MN) and Direct Marketing Association (DMA) President and CEO John A. Greco Jr. to discuss the pressing need to pass reform legislation in 2005.

"We must allow the postal service to operate like a business, focusing on quality, affordable services and working with its customers to develop new and innovative products," Andersen states.

To that end, Andersen sees six elements that are necessary for effective postal reform:

1) Address civil service retirement funding.

2) Enable greater pricing flexibility.

3) Enable flexibility in network management and organization.

4) Encourage more cost-effective delivery of postal services.

5) Provide incentives for the postal service to operate in an economically rational manner.

6) Strengthen regulatory oversight and transparency.

"Printers in the financial, publication, direct mail and commercial segments are directly impacted by postal rate increases," Andersen notes. "More than nine million jobs and $900 billion in commerce depend on the continued viability of the USPS. Every postal rate increase is met with declines in mailing volume. Smaller volumes mean fewer jobs. It's just that simple. This is too big a risk not to act promptly to avoid a truly punishing postage rate increase that amounts to a stamp tax. The jobs of our employees and the strength of our industry are at stake."

Mike Winn, director of postal affairs for Chicago-based RR Donnelley, also underscores the importance of safeguards against the USPS arbitrarily formulating rules that pass on costs to the print and mailing concerns. Meaningful reform is an urgent matter, he says, considering the large share postage plays in the overall cost equation.

"Right now, postal costs to our catalog customers, for example, are 50 percent of their total production costs," Winn says. "Any increase to that cost has a significant impact on the planning of our customers and, therefore, has an impact on print volumes. A small increase on 50 percent of your total cost is a lot of money, no matter how big or small you are.

"The time is right for reform. The House and Senate agree that something should pass; the White House, as well. It's just a matter of coming up with the details."

Reform should prompt the USPS to roll back its rate request from 5.4 percent to about 4 percent. It would also help dodge a potentially crippling double-digit increase for 2007 that could bring the printing and mailing industries to their knees.

One thing is certain. If you are reading this magazine, this almost certainly affects your business.