The shifting sands of postal reform.

New rate structures, changing regulations, and an impending general rate increase challenge nonprofit mailers.

Nonprofit organizations are witnessing dramatic changes in postal matters that will affect fund-raising, membership development, and dissemination of information.

U.S. Postal Service--proposed regulations aimed at denying paid advertising in third-class nonprofit periodicals may signal a deathblow to many publications. In addition, USPS is expected to file this month for a general rate increase for all mailers that may raise third-class rates by 10-14 percent and impose rate increases of 30 percent or higher on nonprofit second-class publications by January 1995.

The basis for the new regulations that have been proposed is compromise legislation signed into law after a year of intense debate among USPS staff, lobbyists for commercial mailer interests, nonprofit mailers, and Capitol Hill. Intended to reform the method of funding preferred postal rates for nonprofit organizations, the law requires incremental postal rate increases of 2-3 percent on nonprofit second and third-class mail each year for the next six years. Certain types of nonprofit mailpieces that were previously allowed under the former law will no longer be eligible for the preferred postal rate.

While nonprofit organizations undoubtedly face many challenges under the new law, things could have been much worse. A proposal circulated by USPS to totally eliminate preferred rates for nonprofit mailers would have resulted in immediate postal rate increases of 40 percent, on average.

Aside from the general rate increase coming down the pike, the burning issue now is that USPS has elected to ignore congressional intent of the new legislation and instead propose regulations that would deny any advertising in nonprofit third-class publications, unless those ads are "substantially related" to the mission of the nonprofit organization. Congress sought only to ensure that commercial activities by nonprofit organizations--such as the sale of unrelated products by catalog--would no longer enjoy the preferred mailing rate. The proposed regulations also include other measures of concern to nonprofit mailers. As ASSOCIATION MANAGEMENT went to press, a final rule was scheduled to be published in mid-February that would most likely be implemented by the first week in March, but it was not known whether the rule would contain modifications made in response to concerns raised by nonprofit organizations.

Some perspective on postal reform

Before delving into the pressing regulatory issues, it helps to understand more about mail rates in general and more about the recent battles in Congress over nonprofit rates that have led to the present situation.

Simply put, all postal rates are made up of two cost components: the costs attributable to the mailpiece and the overhead or "institutional" costs assigned to the mailpiece by the Postal Rate Commission. So, attributable costs + assigned overhead costs = "full" rate.

For the last several years nonprofit mailers have been paying all of the attributable costs of the mailpiece. In other words, your rates = attributable costs. Congress, through a $500 million revenue forgone appropriation, had been reimbursing USPS for the assigned overhead costs.

For several years, Congress debated whether it should continue using federal funds to pay for revenue forgone. Some members of Congress believed there were uses for those funds with more voter appeal that preferred postal rates for nonprofit mailers. Yet, at the same time, Congress was leery of saddling the volunteer community with devastating postal rate increases--the scenario should revenue forgone be abruptly withdrawn.

In 1992, at the urging of Congress, the Alliance of Nonprofit Mailers, Washington, D.C., and other interested parties attempted to craft a legislative solution that would continue to provide a preferred postal rate at no cost to the federal treasury. Some large commercial mailing interests torpedoed that solution late in the 1992 session of Congress.

As a result, preferred rates were not funded by Congress--but were instead paid for out of USPS's general rate base. That temporary, one-year fix, was not well-received by the postmaster general, by commercial mailers, or by the nonprofit community, which had hoped for a permanent resolution.

The "Clay Compromise"

In 1993 the Alliance of Nonprofit Mailers renewed the attempt to find a permanent legislative solution to the problem of how to fund the $500 million in assigned overhead costs. (Congress will continue to fund free mail for the blind and handicapped and some overseas voter registration mail.) Representative William Clay (D-MO), House Post Office and Civil Service Committee chair, proposed legislation that would divide the $500 million in two parts--half to be paid by nonprofit organizations and half to be rolled into the general rate base for all mailers.

Furthermore, nonprofit mailers would be allowed six years to "step up" to the new rate represented by the increased overhead assignment. After a season of wrangling, the "Clay Compromise" was eventually included as part of a Senate appropriations bill, which was approved by Congress and signed into law by President Clinton on October 28, 1993 (Public Law 103-123). Here's what it called for:

* Increase nonprofit third-class rates 2-3 percent on November 21, 1993, and each subsequent October through 1998. For example, the base rate--which does not include any discounts for presorting or bar coding--for a third-class, letter-size mailing increased two tenths of 1 percent in November--from 11.1 cents to 11.3 cents.

Note: The upcoming general rate increase would actually increase the cumulative total of these increases because it would affect the equation used to compute the annual increases.

* Subject to the final drafts of USPS-proposed regulations, require the third-class nonprofit mail containing advertising for products and services not "substantially related" to the nonprofit organization's mission be mailed at commercial third-class rates.

* Increase nonprofit second-class mail 1 percent in November 1993 and 2 percent each subsequent October through 1998.

* As of November 1993, advertising matter in second-class nonprofit publications would pay full commercial rates when the advertising exceeds 10 percent of the content of an issue. Editorial matter would still travel at the nonprofit rate.

* Repeal the surcharge on rates for third-class nonprofit "flat" pieces--anything over letter size. Congress established a four-cent surcharge in fiscal year 1991-1992 to make up for a $180 million shortfall in revenue forgone. The surcharge, however, has not been repealed because once the Clay compromise reached the Senate, subsequent negotiations on the legislation stipulated that no postal rates could be reduced. To repeal the surcharge would be, in effect, a reduction.

This means that the base rate for a third-class nonprofit flat mailpiece remains artificially high: 16.4 cents versus 13 cents. It is possible, however, that this discrepancy will be corrected--meaning that the rate will be lowered--when USPS refigures postal rates in the context of presenting its rate case.

A dilemma for periodicals

To participate in the Clay Compromise, commercial mailers demanded new restrictions on what could be mailed at nonprofit postal rates. Most of these new restrictions are based upon the commercial advertising content in a nonprofit mailpiece. For second-class publications, any advertising matter comprising more than 10 percent of the content increases the postage for the publication. Third-class advertising will be treated differently, too.

The Clay Compromise intended that no new restrictions were to be imposed upon third-class periodical publications that rely upon space advertising to meet the costs of publication. The following describes what the Domestic Mail Manual, USPS's regulatory tome, considers to be a periodical publication:

* The publication must be published at a stated frequency with the intent to continue publication indefinitely.

* The primary purpose of the publication must be the transmission of information.

* A periodical may consist of original or reprinted articles on a single topic or variety of topics, listings, photographs, illustrations, graphs, a combination of advertising and nonadvertising matter, comic strips, legal notices, editorial matter, cartoons, or other subject matter.

* A periodical must also exhibit continuity from issue to issue. Continuity may be evidenced by serialization of articles or by successive issues carrying the same style, format, theme, or subject matter.

For those third-class mailings that do not meet the above criteria--catalogs, flyers, and so forth--the only advertising permitted at the nonprofit rate must be substantially related to the primary mission of the nonprofit organization.

As mentioned earlier, USPS did not interpret the Clay Compromise the way Congress intended. Senator Dennis DeConcini (D-AZ) testified on the floor of the Senate, October 21, 1993, that "this legislation does not restrict periodical publications, such as church newsletters, from carrying paid advertisements from other businesses. A church newsletter containing an ad for local business would still be eligible for the preferred nonprofit third-class rate."

Yet the USPS-proposed rule of December 10, 1993, states specifically that space advertising would not be allowed in nonprofit third-class periodical publications. Imagine if your local church bulletin or community-based newsletter was not allowed to sell space advertising to neighborhood businesses to help defray the costs of publication. The USPS interpretation instead would only allow third-class mailings to contain advertisements for nonprofit periodical publications published by nonprofit organizations.

Should the proposed postal regulations go forth, the Alliance of Nonprofit Mailers plans to pursue congressional approval for a clarifying amendment stipulating that space advertising can appear in nonprofit third-class periodical publications.

The relatedness test

Under the USPS proposal for third-class nonprofit mail containing advertising material, the sale of the advertised product or service must contribute importantly to the accomplishment of the purposes of the organization--that is, the mail must meet the substantially related test. Mail containing advertisements that don't meet this test would not qualify for nonprofit rates.

Unfortunately for nonprofit organizations, no definitive list exists to clarify what is eligible and what isn't. Your best bet is to get a reading from your tax attorney on whether an advertisement for a certain product or service meets the substantially related test. Testing must be done on a case-by-case basis to be able to recognize the uniqueness of each nonprofit organization's mission.

It's also possible that should these regulations go forth, classification and rate representatives at USPS regional and sectional centers might be able to determine if an advertised item qualifies for nonprofit rates. In fact, if a nonprofit organization can get a USPS official to sign off on a mailing, the organization should go ahead and get the sign-off. But keep in mind that officials qualified to make such a judgment might not always be available at every local post office.

This test would create confusion for nonprofit mailers and would be, for all practical purposes, nearly impossible to administer--reasons why the Alliance of Nonprofit Mailers will pressure Congress to eliminate it if the regulations are implemented.

What's eligible

USPS has provided some examples of advertisements for items that generally would be eligible to be mailed at third-class nonprofit rates in its proposed regulations. Associations with similar items should be in the clear. However, the examples are misleading because there's no way to be sure that a correct inference is being drawn; plus many other possible situations are not mentioned in the following list:

* courses given by a university that is a qualified nonprofit educational organization;

* religious tracts or articles sold by a qualified nonprofit religious organization;

* educational films shown by a qualified museum in the museum's auditorium; and

* performances by students in a qualified school for the performing arts where student participation in performances is an essential part of their training.

The following types of advertised items generally would not be eligible, according to USPS:

* activities that generate income on which the qualified organization could be required to pay unrelated business income tax;

* mugs and T-shirts sold at a university bookstore;

* any product or service advertised in the qualified organization's periodical publication that is not substantially related to the organization's purpose, regardless of the presence of advertisements that are related;

* any product or service not substantially related to the qualified organization's purpose included in a catalog that also offers items that are related; and

* general entertainment films shown by a qualified museum in the museum's auditorium.

In a move generally favorable to nonprofit mailers, USPS's proposed regulations have exempted some products from the substantially related test, making them eligible to be mailed at the third-class nonprofit rate:

* Items donated or contributed to the qualified organization.

* Periodical publications of a nonprofit organization that qualify as second-class mailings. (This provision is perplexing given that existing regulations already allow nonprofit organizations to mail second-class publications at third-class rates--for example, to prospective subscribers.)

* Low-cost articles--those that currently have a value of not more than $6.20. Cost is based on the item's actual value, represented value, or retail value, whichever is highest.

This definition, however, conflicts with the Internal Revenue Code, which defines a low-cost article in terms of its cost "to the organization which distributes such item (or on whose behalf such item is distributed)." According to the code, then, if it costs Association ABC $2 to produce an item, that item could still be mailed at nonprofit rates. That might not be the case under the USPS interpretation, however, because the value of that item might well exceed the $6.20 ceiling.

Enforcement issues and the impending rate case

As with most mailings, USPS will investigate noncompliance after the mailing has been entered, except in obvious cases. If the proposed regulations take effect, USPS plans to require an official of the qualifying organization to sign a certification statement claiming that the mailing qualifies for nonprofit third-class rates. Such a statement would hold the official and his or her organization liable for that judgment.

Yet no one knows exactly what this certification statement would look like. If anything about the proposed postal regulations could lead to an implementation delay, it is the absence of such a document, which makes it impossible for interested parties to raise what could be legitimate concerns.

In addition to these pressing regulatory issues, the anticipated filing by USPS of an Omnibus Postal Rate Case proceeding merits careful scrutiny.

USPS will submit a request to the Postal Rate Commission for a new structure of higher postal rates in response to inflation, higher operating costs, underfunding by Congress, and the elimination of the congressional appropriation for revenue forgone. Early wisdom suggests that USPS will request 10-14 percent increases for all third-class mail. This would represent a 32- or 33-cent first-class stamp.

The effect of the proposal looks to be much worse for second-class mailers. The Alliance of Nonprofit Mailers anticipates that USPS will propose rates of increase for second-class mailers that will be higher and rates for nonprofit second-class publications that will be higher still. Early ballpark figures place the USPS request to be 30 percent or higher for nonprofit second-class publications.

The Alliance of Nonprofit Mailers is the primary representative of nonprofit mailers in rate case proceedings before the Postal Rate Commission, which determines postal rates. These proceedings are a complicated affair involving testimony by many groups called "interveners" that seek to prove why their rates should be lower than those USPS is proposing. It generally takes about 10 months to process a rate case, so new rates are projected to take effect in January 1995.

As in years past, the litigation team of the Alliance of Nonprofit Mailers will press hard for a favorable rate structure for the members and friends of the coalition. Active intervention in the rate case of 1994 will decide rates that will affect nonprofit mailers for years to come.

Considering the tremendous lobbying efforts of the U.S. Postal Service and some commercial mailers, nonprofit organizations can be congratulated for retaining a preferred postal rate. However, the coming year presents great challenges.

While postal issues may not lead your action agenda, it's important to remain vigilant about intricate postal matters at USPS headquarters, on Capitol Hill, and before the Postal Rate Commission.

HIGHLIGHTS

* NONPROFIT SECOND- AND THIRD-CLASS MAIL will see increases of 2-3 percent each year for the next six years.

* THE U.S. POSTAL SERVICE (USPS) will soon propose a general rate increase.

* USPS-PROPOSED REGULATIONS defy the intent of Congress.

* CONGRESS IS NO LONGER SUBSIDIZING preferred mail rates for nonprofit organizations with the $500 million revenue forgone appropriation.

The Rate Structure

What's the difference between mailing first-class and mailing fourth-class? Here's a quick primer.

* First-class mail. Anything can be mailed first-class. This rate class costs more, but provides a higher level of service and forwarding privileges.

* Second-class and second-class nonprofit mail. This rate was built almost exclusively for publications. Nonprofit publications mail at a lower rate.

* Third-class mail. Large, bulk mailings--primarily direct mail advertising--for which mailers pay a lower cost but also receive a lower level of service.

* Third-class nonprofit mail. Donor solicitation and membership drives, some publications and newsletters, and catalogs.

* Fourth-class mail. Parcels.

Cutting Postage Costs

Nonprofit mail costs may well be in a state of flux, but you can take steps now to cut your costs. Among them:

* Determine whether you are taking full advantage of automation discounts for bulk mailings that apply when organizations use such measures as bar coding and presorting (either by ZIP code or carrier route). A wide variety of relatively low-cost software is now available that makes it possible to print out labels and envelopes in-house and save as much as 2-3 cents per mailpiece.

* Explore work-sharing discounts, such as drop shipping. Instead of paying USPS to mail its magazine from Washington, D.C., to a destination in California, for example, a nonprofit organization might be able to achieve considerable cost savings by contracting with a company to "drop ship" that mailing--by truck or plane--to California. Its mailing costs would then be based on a delivery unit rate, which is 20 cents per advertising pound lower than mailing to California (Zone 8).

* Depending on the size of your organization and its mail volume, consider contracting with a mail service that has the expertise to know which cost-cutting options would work best for your situation. Consult the "Buyers' Guide" in ASAE's Who's Who in Association Management, or ask your fellow association executives or your local Better Business Bureau for recommendations. The Alliance of Nonprofit Mailers also maintains a list.

* For additional ideas, see the April 1993 article in ASSOCIATION MANAGEMENT, "18 Ways to Reduce Your Mailing Expenses," by John Jay Daly, president, Daly Associates, Inc., Chevy Chase, Maryland.

Postal Resources

* The Alliance of Nonprofit Mailers, 2001 S. St. N.W., Suite 301, Washington, D.C.

* Extremely detailed rate charts developed by USPS can be requested from the alliance or USPS Headquarters, Rates and Classifications, 475 L'Enfant Plaza West S.W., Washington, D.C. 20260.

Neal Denton is executive director of the Alliance of Nonprofit Mailers, Washington, D.C.