Before Raising Rates, Postal Service Should Address Mismanagement

After years of soaring deficits, including $2.7 billion in losses in 2017, the U.S. Postal Service’s financial condition continues to worsen, and a recent proposal by federal regulators fails to address the root of the problem.

The Postal Regulatory Commission, which has oversight authority over the Postal Service, is considering authorizing substantial postal rate increases over the next five years in an attempt to bolster the Postal Service’s financial stability. Yet the PRC’s proposed remedy is misguided and premature. Before the commission contemplates increasing rates on the American people, it should examine the financial mismanagement that has brought the Postal Service to where it is today.

Since its founding in 1775, the Postal Service’s core responsibility has been to deliver letter mail, a mission for which Congress has granted it a monopoly. These so-called “market dominant” services are generally profitable, generating $2.16 in revenue for every dollar in attributable costs, according to a recent report.

In addition to the market dominant services it provides, the Postal Service offers a broad range of competitive services — such as issuing money orders, delivering food, and shipping packages — which are also offered by private entities.

These competitive services account for 30 percent of the Postal Service’s revenue, but federal law only requires them to cover 5.5 percent of the agency’s fixed and institutional costs — expenses like delivery infrastructure, administrative support, and building maintenance which cannot be attributed to a particular product or service. As a result, market dominant services shoulder a far greater share of these overhead costs. The inequity is so extreme that market dominant services pay 58 cents per dollar of revenue toward fixed and institutional costs, while competitive services pay only 8 cents per dollar of revenue.

This strongly suggests that the Postal Service may be using the profitability of its market dominant services to prop up competitive services which are struggling in the face of market rivalry from private companies.

But why, if the central mission of the Postal Service is to deliver letter mail, should it be carrying an additional cost burden for the benefit of non-essential competitive services? Surely the only possible justification for offering competitive services at all would be if those services were able to contribute an equal or larger share of overhead costs, so as to protect the financial stability of market dominant services. To allow competitive services to freeload off the profitability of market dominant services is to ignore clear congressional directives about what the Postal Service’s priorities ought to be.

This cost-shifting needs to stop. Either the Postal Service should demonstrate the profitability of its competitive services or they should be discontinued. If the Postal Service dropped its competitive services tomorrow, consumers would still have numerous options to purchase these services from rivals. UPS, FedEx, and DHL would still ship packages; Giant’s Peapod, Instacart, and Fresh Direct would still deliver food; and existing financial institutions would still provide money orders.

On the other hand, there are no substitutes for the letter delivery that the Postal Service provides, and it is irresponsible to jeopardize this core function in order to support competitive services that are not pulling their own weight.

The Postal Service cannot keep running multi-billion dollar annual deficits, which may ultimately require a taxpayer bailout, and ignore the financial mismanagement that has been allowed to fester for far too long. Americans deserve better.

Liam Sigaud writes for the American Consumer Institute, a nonprofit educational and research organization.

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