Summary of Postal Reform Legislation and Impact on Magazine Publisher

On December 20, 2006, President Bush signed into law Public Law No. 109-435, the Postal Accountability and Enhancement Act.  This law was passed by both Houses of Congress on December 9 as H.R. 6407.  H.R. 6407 was substantially similar to S. 622, Senator Susan Collins longstanding postal reform bill, which was strongly supported by the MPA and others in the mailing community.  P.L. 109-435 includes the following key components of the legislation supported by MPA over the past decade:

• The law returns responsibility for funding the military pensions of postal employees to the U.S. Treasury where it belongs;

• The escrow account established by the Postal Civil Service Reform Act of 2003 and into which the Postal Service deposited about $3 billion in FY 2006 (and would have had to deposit even larger amounts in subsequent years) is eliminated;

• The majority of the funds freed up by both of these changes will go into a newly established Retiree Health Fund account to pay down the Postal Services large unfunded obligation for future retiree health benefit costs, which will put the Postal Service on much firmer financial footing;

• The current ratemaking system is replaced by a price cap system under which the annual rate increase for each market-dominant class, including Periodicals and Standard Mail, cannot exceed the increase in the CPI except in extraordinary or exceptional circumstances; and

• The Postal Service will be required to establish, and monitor performance against, quantifiable service standards for each of the market dominant products, including periodicals.  Until now, the Postal Service has only measured service performance for First-Class Mail.

From here, the action moves to the beefed-up Postal Regulatory Commission (PRC) formerly known as the Postal Rate Commission.  Over the next 18 months, the PRC will be establishing numerous rules and regulations to implement the new systems envisioned by the Act, especially the new price cap ratemaking system.  The PRC will also be working with the Postal Service to establish service standards for each class of mail.

While the PRC is establishing the modern ratemaking system, postal rates will continue to be set according to the current rate case method.  This means that publishers should still plan on the Postal Service raising postal rates this May.  The PRC will be issuing its recommended rates in early March. 

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The discussion below summarizes a number of the key provisions affecting magazine publishers, lays out key milestones over the next 18 months, and identifies issues that we will be monitoring closely as the PRC establishes the rules implementing this milestone legislation.

An MPA delegation witnessed the signing. From left: Tom Ryder, The Reader's Digest Association, Inc.; Ed Lewis, Essence Communications Inc.; Nina Link, MPA; John Griffin, National Geographic Society; and Cathie Black, Hearst Magazines.

Major Provisions for Magazine Publishers

The Escrowed Funds and Military Retirement Costs

P.L. 109-435 lifts two significant financial burdens from the Postal Service, thus establishing a more sound financial foundation for the Postal Service.  It eliminates the requirement that the Postal Service place more than $3 billion per year (and, in some years, much more than $3 billion) in savings from the Postal Civil Service Reform Act of 2003 into an escrow account.  These funds were not available to the Postal Service to use for any purpose and could not have been released to the Service without Congressional action.  The law also returns responsibility for the military pensions of postal employees back to the U.S. Treasury, consistent with the treatment of military pensions for all Federal employees.

Over the next ten years, the funds made available by these changes will generally be used to begin paying down the Postal Services significant unfunded obligation for future retiree health benefit costs.  While this does not leave much savings for near-term rate mitigation, paying down the Postal Services unfunded retiree health benefit obligation (which currently exceeds $50 billion) without the funds made available by P. L. 109-435 would have required huge postal rate increases.  Reducing in the near term, and ultimately eliminating, the unfunded health benefit obligation will help ensure the future viability of the Postal Service and provide it with a much firmer financial foundation.

Modern System for Regulating Rates

Cap on rate increases for market dominant classes

Within 18 months, or by June 20, 2008, the PRC must establish a modern system for changes in rates, both for market dominant and competitive products.  The main classes of mail used by magazine publishers including Periodicals, Standard Mail, and First-Class Mail will be in the market dominant category (unless there are significant changes in the availability of competitive alternatives to the Postal Service).  While P.L. 109-435 leaves it to the PRC to establish the implementing rules of the new ratemaking system, the Act is clear that the system must include a hard cap on postal rate increases for market dominant products tied to annual changes in the consumer price index (CPI). 

The average rate increase for each class cannot exceed increases in the CPI except in extraordinary or exceptional circumstances.  If the Postal Service appeals to the PRC to allow it to raise postage rates by more than the rate of growth in the CPI, the PRC must hold a public hearing and, based on the evidence received, determine first whether the circumstances at hand are in fact extraordinary or exceptional and second, whether an increase above the price cap is necessary to maintain and continue the current kind and quality of postal services.  

Flexibility for rate changes within a class

Within a class, the law provides the Postal Service with flexibility to change the magnitude of worksharing discounts and establish new discounts to promote efficiency or to recognize cost differences as long as the average increase in the class does not exceed the rate of growth in the CPI.  In establishing the ratemaking system and parameters for making changes to individual rate elements within a class, the law lays out objectives and factors for the PRC to take into account.  The factors include the educational, cultural, scientific, and informational (ECSI) value of a class or product (the longstanding ECSI factor that protects periodicals); the objectives include maintaining a just and reasonable rate and classification schedule.

Banking provision

If the Postal Service doesnt raise rates as much as the CPI in a year, it is allowed to bank the unused increases for a class for up to 5 years.  It can use the banked increase within those five years as long as the increase for the class in any year is not more than 2 percentage points greater than the cap in that year would allow. 

Limits on worksharing discounts

Worksharing discounts are not generally allowed to exceed the cost savings to the Postal Service from the worksharing activity.  There are exceptions, including for classes with ECSI value, i.e., Periodicals.

Pricing of competitive products

The Postal Service will also be provided with greater flexibility in the pricing of competitive products, such as Priority Mail, Express, Mail, Bulk Parcel Post, and Bulk International Mail.  The only financial requirements for the competitive products are that each product covers its costs and that the products collectively cover an appropriate share of overhead (institutional) costs.

Review of ratemaking system

After ten years, the PRC will review the ratemaking system for market dominant products to see if the objectives in the law are being met.  If not, the PRC may change the system after providing public notice and allowing interested parties to comment on the proposed changes.

Allowance for one last rate case under the old ratemaking system

Within 12 months, the Postal Service may file one last case under the old rate case system.  This could create a heavy workload for the PRC, who would be overseeing a rate case under the old rules while engaged in an extensive rulemaking to design rules for the new system.

Service Standards for Market-Dominant Products

By the end of 2007, P.L. 109-435 requires the Postal Service in consultation with the PRC to establish a set of service standards for market-dominant products to enhance the value of postal services, to preserve regular and effective access to postal services, to reasonably assure delivery reliability, speed, and frequency, and to provide a system of objective performance measurements for each market-dominant product.  By mid-2008, the Postal Service in consultation with the PRC must submit a plan to Congress for meeting these standards.  The plan must include performance goals, a discussion of the required changes to the network, and a description of the Postal Services long-term vision for rationalizing its infrastructure and workforce.

Study of Periodicals Rates

While there is no statutory deadline, the Postal Service in conjunction with the PRC is also required to study and provide a report to the President and the Congress on Periodicals rates.  The report must cover the quality, accuracy, and completeness of information used by the USPS in determining direct and indirect postal costs attributable to periodicals, and any opportunities that might exist for improving efficiencies in the collection, handling, transportation, or delivery of periodicals, including any pricing incentives for mailers that might be appropriate.

Key Dates

Areas of Uncertainty

This list of issues is not intended to be comprehensive; however these are some of the key issues that MPA will be working on during the next 18 months:

• Will the Postal Service file a last rate case?  If so, it may overlap implementation of the new ratemaking system.  How would a conflict between the two systems be resolved if rate increases in the final rate case are to be implemented after June 20, 2008?

• With the exception of the banking provision described above, the new law does not allow rate increases for a class to exceed inflation.  At the same time, one of the factors the PRC is to take into account is the requirement that each class of mail or type of service bear the direct and indirect postal costs attributable to each class or type of mail service.  Without violating the cap, how will the PRC take this into account if a full CPI increase leads to rates that still fall below attributable costs?

• The Acts definition of attributable costs specifies that such costs be causally related to a class through economic costing principles.  On the other hand, the PRC and the Treasury Department are to develop accounting practices and procedures to ensure that competitive products are not subsidized by market dominant products.   How will potential conflicts between these methods be resolved?

• Will the PRC place limits on the magnitude of rate changes that the Postal Service can implement within a class i.e., how much the rate for an individual subclass or rate element can go up relative to the overall average increase for the class?