With Inflation Currently Near 3%, Mailers Face A Potential 2019 Rate Hike of 6% Under New PRC Plan
WASHINGTON, DC — As the industry awaits the Presidential Task Force on the Postal Service, there is one item that may get little play in the new report.
But it is the primary reason the USPS is in financial distress.
And it is not the reason given by some who use postal finances as the hammer to achieve their own policy goals.
The culprit? The inflation-cap written in the Postal Accountability and Enhancement Act (PAEA) of 2006 that tied postage rate hikes to the rate of inflation.
In 2005 when the law was finalized, inflation was running at 3.4%. But the last ten years have seen it averaging half that rate.
Back then no one knew inflation would fall to historic lows as the nation went through the Great Recession. If only the 2006 law had added the words “rate of inflation or 3%” the USPS would not be in the hole it is today.
The one group that does understand the problem is the Postal Regulatory Commission (PRC), which earlier in the year released its proposed changes to the rate-setting system. The PRC’s new system directly addresses the inflation-cap, giving the USPS 2% above inflation for the next five years.
Who would have guessed?
The architects of the law — including the current Chairman of the Postal Regulatory Commission Robert Taub and the new head of the Package Coalition John McHugh — had no way of knowing what the future held in terms of inflation. They did know that inflation was averaging close to 3% range over the previous five years.
But then the Great Recession hit. It slammed mail volumes. It forced the USPS to suspend retiree payments. And it crippled the bottom line. Year after year of losses forced the USPS to file for an emergency rate hike, which helped stabilize finances, only to have it expire.
“At the time the new system was created, Congress anticipated that the CPI price cap would enable the Postal Service to achieve sufficient revenues to cover all of its operating costs and statutory obligations while at the same time motivate the Postal Service to cut costs and become more efficient,” PRC Chairman Taub stated when unveiling the new rate system earlier in the year.
“The Commission finds that the system has not maintained the financial health of the Postal Service as intended by the 2006 Law,” Taub stated. “While the Postal Service has generally achieved short-term financial stability, both medium-term and long-term financial stability measures have not been achieved. For the medium-term measure, the total revenue was not sufficient to cover total costs.”
Postage Increases, Before The Law and After
In 2000, the price of a First-Class stamp was 33 cents. When the new law took effect in 2006, the price was 39 cents — a roughly 18.5% increase over six years.
By 2012, the price of a First-Class stamp was 45 cents — a roughly 15.15% increase over six years.
And in 2018, the price of a First-Class stamp was 50 cents — a roughly 11.15% increase over six years. But that percent increase does not account for the exigent roll back in 2016, when stamp prices went from 49 cents to 47 cents before returning to 49 cents in 2017. Taking that into account, the effective rate nears 10% for the last six years.
So, in the six years prior to the new postal law the USPS was able to raise postage rates 18%. Six years later, that drops to roughly 15% and then to 10% six years after that.
Bottomline: the 2006 postal law hamstrung the USPS’ ability to fund its operations. It choked off needed revenue and has helped to bring it to the present crisis.
What Postage Rates Should Look Like
What if the 3% minimum rule was in the 2006 law? What would the price of a First-Class stamp be today? Roughly 55 cents or 10% higher than the current 50 cents.
That translates into over $4.5 billion more in revenue for the USPS annually. Last year the USPS posted a net loss of $2.7 billion.
An Easy Fix Now Complicated
Were a 3% fix instituted early on, the USPS would not be in the mess it is today. Fixing the situation will mean getting rates up to where they would have been. And that will mean sizeable, annual postage rate hikes for the next five years.
The PRC’s new rate plan attempts to dial back the effects of the 2006 law by giving the USPS larger rate hikes. But it is a big hole that has to be filled and it will be on the backs of mailers. The new rate plan sets annual rates at 2% plus inflation, and adds an additional 1% if the USPS meets certain requirements.
With inflation currently near 3%, that would mean a potential 2019 rate hike of 6% if the PRC’s proposal is adopted.
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