The Office of Inspector General asked George Mason University School of Public Policy (GMU) to look at the financial sustainability of the Postal Service at lower levels of mail volume.

Here are excerpts from the report:

Annual mail volume peaked in 2006 at 213 billion pieces. Since then, the number of mail pieces has declined substantially. Amid the background noise of the economic downturn, determining how much of this volume loss represents long-term electronic diversion is difficult, but Boston Consulting Group (BCG) projects that these declines will continue. BCG estimates mail volume will fall to 150 billion pieces over the next 10 years.1 Such a sustained volume decline is unprecedented.

The U.S. Postal Service has never operated in an environment of persistently declining mail volumes, and the last time annual mail volume was below 150 billion pieces was 1986. The critical question is whether today’s Postal Service can remain solvent at much lower volume levels.

The Postal Service is not currently profitable, although the financial picture is obscured by the amounts improperly taken by the Office of Personnel Management to fund benefit prepayments.2 The U.S. Postal Service Office of Inspector General (OIG) asked the George Mason University School of Public Policy (GMU) to examine the financial sustainability of the Postal Service under various volume scenarios. GMU’s work is described in the following paper Implications of Declining Volumes for the Financial Sustainability of the Postal Service.

The George Mason Model
The GMU research team created a flexible model that can do two critical things. First, it assesses the financial position of the Postal Service at any volume level. Second, it shows how applying different cost reduction alternatives can affect that financial assessment. For example, the researchers examined how alternatives such as optimizing the retail network, implementing 5-day delivery, and increasing productivity would reduce the gap between the Postal Service’s costs and revenues at various volume levels.3 Users of the model can also mix and match alternatives into “what if” scenarios.

The research team used the model to analyze how volume levels of 150, 125, 100, and 75 billion pieces per year would affect the Postal Service’s financial sustainability. They show that if mail volume declines and no other action is taken, price increases in excess of inflation will be necessary to avoid insolvency. The risk is that price increases will tip the Postal Service into a death spiral, where price increases drive out customers necessitating further price increases. But GMU’s evidence suggests that this threat may not be that severe. Modern economies can support higher price levels. Many posts in developed countries maintain profitable mail businesses while delivering fewer pieces and charging up to 86 percent more than the Postal Service. This is an encouraging sign, and the study finds that the Postal Service is financially sustainable down to volumes of 100 billion per year.

Options for Adapting to Volume Declines
We believe the model offers an objective framework to organize the debate about how to respond to the current crisis. The available solutions fall into three broad options:

1. Let the market dictate. Increase prices to the levels the market would bear to make the Postal Service break even as suggested by the GMU study. This option requires price increases above the levels allowed by the Postal Accountability and Enhancement Act.

2. Introduce substantial changes to the Postal Service’s cost and revenue structure. Allow the Postal Service to implement its 10-year action plan announced in March 2010, giving the Postal Service the flexibility to cut delivery days, pursue new products, optimize its network, and undertake other initiatives.

3. Aggressively correct CSRS and FERS overpayments. Reform the Postal Service’s prefunding of its health and pension obligations by returning the amounts the Postal Service has overpaid and by allowing it to adopt the same funding targets commonly used in the private sector — 80 percent for pensions
and 30 percent for retiree health care. This option can maintain the PAEA price cap.5

GMU’s analysis provides hope that the Postal Service can survive the anticipated volume declines as long it is allowed to act on the options available for financial
sustainability.

Full Report from USPS OIG: IMPLICATIONS OF DECLINING MAIL VOLUMES FOR THE FINANCIAL SUSTAINABILITY OF THE POSTAL SERVICE