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Business Costs & Regulation

Postal Service Faces Major Changes

In the works: Fewer post offices. Five-day deliveries in some areas. An OK to mail booze. And, yes, more rate hikes.

What to do with the U.S. Postal Service? It’s drowning in red ink, with a deficit that ballooned to nearly $8 billion for the fiscal year just ended last month. Operating costs are up and mail volume is in free fall in the face of electronic and other delivery options. Soon it may not be able to make payroll.

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Short term, Congress will help out USPS by acknowledging that the Postal Service has overpaid its employee pension plan by $50 billion since it became a quasi-public agency in 1971. The overpayment is rooted in actuarial calculations from the early 1970s of the pension plan’s obligations through the middle of the 21st century.

The federal Office of Personnel Management this month verified the excess funds but said it couldn’t shift the money to other uses without congressional approval. Congress will give a thumbs-up, but not until early next year. Talk of any action during the lame-duck session after the Nov. 2 elections is just that -- talk.

Once freed up, the funds will be used for retirees, namely to meet USPS’ obligation to fully finance retirees’ health insurance to the tune of $5.5 billion a year -- a huge millstone, given declining revenues. The relief will give USPS much needed breathing room. But the quick fix is just a temporary lifeline.

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Long term, major changes are in the works. In a year or so, Congress will give USPS the leeway to remake its business model to fit the new realities. “It needs to downsize total infrastructure by about half, since facilities can handle about 300 billion pieces of mail a year, but volume is trending down to 150 billion,” says Anthony Conway, executive director of the Alliance of Nonprofit Mailers and a former Postal Service executive.

The number of post offices will be cut from around 36,000 branches now, which is more than the total of McDonald’s, Starbucks and Walmart stores in the U.S. Expect a few thousand outlets and their federally owned land to be sold to local developers. Shuttered branches will be replaced by postal counters and kiosks in neighborhood supermarkets, pharmacies, shopping malls and other retail centers. About 270 gigantic mail handling facilities also face consolidation.

But plans to form an independent commission to decide closings won’t fly. Members of Congress grumble that they have little clout with a similar panel that decides military base closings, says Gene Del Polito, president of the Association for Postal Commerce, a trade group. So lawmakers will make sure they have a bigger role in overseeing USPS’ plans to shut facilities.

Five-day-a-week pickups and deliveries are on tap in sparsely populated areas by mid-decade or so. Big cities and surrounding suburbs will retain six-day service.

Negotiations with postal unions will shave overall costs, too. Trimming salaries and benefits and increasing the use of part-time workers could allow the Postal Service to cut annual operating costs by about $500 million. Other modifications: Mailing wine, beer and spirits after Congress lifts the current ban on doing so. Plus allowing businesses to advertise and place vending machines in post offices.

Still, additional rate hikes are certain in coming years, further pushing mailers into the arms of competitors and contributing to the downward spiral in mail volume. Though mailers dodged a January 2011 hike of 5% to 6%, a substantial rate increase is likely late next year.

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