Facing a $7 Billion Shortfall, the U.S. Postal Service Proposes to Raise Rates

On Tuesday, the U.S. Postal Service announced that it has proposed a two-cent increase in the cost of first-class postage, which would push the price of a stamp to 46 cents. Other flat mailing services will also get rate hikes, but shipping prices, including Express Mail and Priority Mail, won't go up. The increase in stamp prices would be the first since May 2009.

The USPS's proposal needs to be approved by the Postal Regulatory Commission. If the PRC agrees, the increase will go into effect on Jan. 2, 2011. Although this hike may seem minor, it has representatives of many nonprofit groups up in arms. The organizations, which rely on cheap postage for bulk mailings, anticipate that the rate jump will come out of their bottom lines. These flat mail services, including the bulk mail most customers refer to as "junk mail" and often ends up in the trash, account for the bulk of the Postal Service's revenues.

And more revenue is what the USPS needs, as it faces a $7 billion shortfall in the next fiscal year. As revenues have plummeted over the past decade, the USPS has scurried to cut its costs. In that time, it has eliminated an estimated 1 million work hours and reduced costs by $1 billion per year since 2001. In its last fiscal year alone, it cut 40,000 workers, according to the Associated Press. The service anticipates that, if approved, the postage changes will raise $2.3 billion in the first nine months of 2011.

Caught in the Middle

The USPS's biggest problem is that it exists in a no-man's land between private business and government service. Like a private business, it's not officially funded by the federal government. Rather, it's expected to cover its own expenses, pay its own employees and fund its workers' benefits -- all from its postage revenues. While it can receive up to $15 billion in emergency loans from the federal government, the USPS doesn't get any regular funding.

But when it comes to decision-making, the USPS functions like a government entity. For example, Congress forced the service to pay $5.4 billion into its retirement fund, while private industries are allowed to habitually underfund their pension plans (as are federal agencies).

While irritating, the pension fund issue is not nearly as difficult as the postage problem. Under a 2006 law, the postal service can only increase postage prices by the rate of inflation. However, this rise -- which would be 0.9% for this year -- doesn't account for changing patterns of mail usage, reduced recessionary revenues or other issues that are threatening the USPS's bottom line. For example, the increased popularity of email, online bill paying and other services caused a 13% drop in mail volume between 2007 and 2009. At current rates, the postal service anticipates that mail volume will drop by a further 16% by 2020.

If the USPS wants to raise postage prices to represent its actual costs, it needs to go through a complex bureaucratic process. This is what it launched today.

The UPS Way

The postal services' recent moves -- including higher prices, post office closures and attempts to halt Saturday delivery -- give a hint at what a truly profitable USPS would look like. For an even better glimpse, delivery giant UPS (UPS) provides a pretty good model: It offers competitive prices and speedy delivery, and its drop-off spots are conveniently located in commercial centers and office supply stores.

But UPS's distribution centers tend to be in industrial areas and near airports, where land is cheap and sometimes difficult to access. In this way, UPS -- or any commercial mail company -- would make it easy to drop off packages, but harder to pick them up. Meanwhile, services that are profitable would go for a market rate, while less profitable ones -- like basic letter delivery -- would likely be either exorbitantly priced or discontinued.

The USPS has taken flack for its poor service and its post office closings. However, looking at the UPS model, it seems like service in a for-profit postal service would be questionable, to say the least. In my own experience, I've found that UPS doesn't leave packages at apartments that don't have doormen or in houses that don't have porches, which means millions of customers -- including yours truly -- either have to rearrange our schedules for drop-offs or have to go out of their way to visit inconvenient distribution centers. The USPS, by comparison, keeps packages at the local post office, which is much more convenient -- and more expensive.

A Civic Responsibility

In terms of expense, it's also worth noting that UPS's prices, while competitive with FedEx (FDX) are higher than those of the USPS. In fact, many of the postal service's options aren't profitable.The same goes for many post offices. However, this lack of profitability goes hand-in-hand with the postal service's responsibility. Unlike UPS or FedEx, the USPS is charged with offering a cheap delivery network to the enitre country, which means it has to maintain a presence in many areas that don't justify the expense.

It's also worth noting that the USPS also functions as a link to the federal government, a service for which it isn't paid. This, incidentally, might help explain the almost rabid devotion that many small towns have shown for their local post office.