- The Washington Times - Wednesday, September 8, 2010

Made popular by the “If it fits, it ships” slogan in television ads, the Priority Mail initiative is seen as a bright spot during otherwise tough economic times for the U.S. Postal Service, where multibillion-dollar deficits and declining mail volume have officials moving to cut a day of delivery.

But questions have surfaced about whether the campaign is as profitable as it seems.

Two recent reviews by the Postal Service’s office of inspector general have raised concerns about whether postal officials understated advertising costs to promote Priority Mail. The reduced ad expenses could make Priority Mail appear more successful in reports submitted to postal regulators and, in turn, to the public.

Although no money was lost, the inspector general views the cost reporting as important to ensure the Postal Service doesn’t gain an unfair advantage over competitors and that costs for other products don’t become overpriced.

The inspector general estimated in a recent audit that about $75 million in advertising costs involving Priority Mail and other competitive products were misstated from fiscal 2008 to fiscal 2010. Overall advertising costs for the Postal Service in fiscal 2009 totaled $104.2 million.

“The Postal Service did not accurately report advertising costs to the [Postal Regulatory Commission],” the audit concluded. “Specifically, the Postal Service understated priority mail advertising costs, which made the product appear to be more profitable.”

At issue is how the Postal Service split advertising expenses. For every dollar spent to promote Priority Mail, postal managers reported spending 70 cents on Priority Mail while reporting the other 30 cents as “institutional” advertising to promote the overall postal brand, records show.

But the inspector general found that the Postal Accountability and Enhancement Act of 2006 required managers to allocate all ad costs directly to the product, though not all postal executives agree. Postal officials declined to comment Tuesday, but stood by a written response submitted to the inspector general.

In the response, Joseph Corbett, chief financial officer for the Postal Service, and Joyce Carrier, manager of advertising and media planning, acknowledged “some misallocation of costs” but said nothing was afoot to conceal information.

“Again, the Postal Service does not disagree that there was some misallocation of costs, and certainly we want our products to be successful, but we had no motivation to falsely allocate costs to create the appearance of success,” Mr. Corbett and Ms. Carrier wrote.

In addition, the officials took issue with the conclusion that $75 million in costs were misstated, saying auditors arrived at the figure by tallying dollars twice: adding up the understated and overstated amounts.

Postal officials also said they had written to the chairman of the Postal Regulatory Commission, Ruth Y. Goldway, to apprise her of the inspector general’s finding, which included a revised calculation of Priority Mail’s costs. The officials also said new advertising cost reporting guidelines are expected by Sept. 30.

The advertising cost issue also surfaced earlier this summer when the inspector general released a report of contracting activities involving a former marketing chief. During its investigation, the inspector general found that the Postal Service’s media, planning and advertising unit “inappropriately attributed advertising expenses and erroneously reported other expenses to the Postal Service Finance Office.”

In a private interview with the inspector general’s office, Postmaster General John E. Potter told investigators that the ad issue is “ripe for debate around the company.”

“He said that the recent flat rate box television commercials have increased profits for other products and helped the postal brand,” investigators later wrote in a memo summarizing their Feb. 6 interview with Mr. Potter, which The Washington Times obtained through the Freedom of Information Act.

“Potter said advertising has ‘lifted all ships;’ specifically, standard mail, first class packages and parcel post profits have grown,” investigators wrote.

Mr. Potter also said the practice of splitting ad costs between the specific product being promoted and “institutional/brand” costs doesn’t violate the spirit of the postal law and does not break any rules, investigators added.

Robert Bernstock, former president of shipping and mailing services, said during his interview that he did not know about the media and advertising group’s accounting practices to split expenses between product and institutional budgets, but that he had meetings with Mr. Potter and Mr. Corbett about “attributing expenses to reflect the rise in the Postal Service’s brand.”

Greg Seraydarian, senior vice president and group management supervisor for the Postal Service, told investigators that a person whose name was redacted in documents provided to The Times instructed him in October 2008 to “utilize the ‘brand’ expense line when charging the Postal Service for advertising task orders.”

Records show he told investigators he was required to split the cost with the “brand” receiving 30 percent of the cost, regardless of the task order. He also said that in the Priority Mail campaign, he determined the split by reviewing the contents of initial television commercials.

“While watching the commercial, he looked for an identifiable icon that was not product-specific, such as the Postal Service vehicle, carrier, etc.,” investigators later wrote in a memo summarizing their interview with Mr. Seraydarian.

“Seraydarian advised the split was an estimate, not a ‘science,’ and the percentage could fluctuate.”

• Jim McElhatton can be reached at jmcelhatton@washingtontimes.com.

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