**[Testimony]{.smallcaps}**![](media/image1.png){width="0.9090277777777778in"
height="1.4145833333333333in"}

**[before the]{.smallcaps}**

**[President's Commission\
on the\
United States Postal Service]{.smallcaps}**

**[February 12, 2003]{.smallcaps}**

## Executive Summary

The Mailers Council is the largest group of mailers and mailing
associations in the nation. Our members need a healthy Postal Service;
however, its long-term finances are decidedly unhealthy. We believe the
Postal Service cannot survive another decade as it is currently
chartered because of mounting long-term debts, competitive challenges it
faces from the outside and structural limitations that handicap
management from within.

As the commission members consider ways of addressing the Postal
Service's problems, we believe the following six recommendations would
help revitalize this institution that we consider a vital business
partner:

1.  Continue universal service

2.  Improve productivity

3.  Enhance mailer options

4.  Enhance postal compensation

5.  Improve financial transparency

6.  Invest in technology

As electronic commerce grows, we know that mail volume will decline in
some categories. Before more Americans begin paying and receiving bills
online, it is imperative that this commission and the Congress consider
how to restructure the Postal Service and how to expand the options
available to postal managers so they can ensure the survival of this
vital agency.

**[Testimony of]{.smallcaps}**

**[Robert E. McLean]{.smallcaps}**

**[On behalf of the]{.smallcaps}**

**[Mailers Council]{.smallcaps}**

## Background: American Businesses Need a Postal Service

The Mailers Council is the largest group of mailers and mailing
associations in the nation. We represent for-profit and nonprofit
mailers (large and small) that use the United States Postal Service to
deliver correspondence, publications, parcels, greeting cards,
advertising and payments. Collectively the Council accounts for as much
as 70% of the nation\'s mail volume.

The Mailers Council believes that the Postal Service can be operated
more efficiently, supports efforts aimed at containing postal costs, and
has the ultimate objective of lower postal rates without compromising
service.

For some time now the Mailers Council has supported the concept of a
presidential commission to review the future of the Postal Service.
Therefore, we were very pleased when this group was assembled by
President George W. Bush and given the challenge of determining whether
this vitally important government institution can survive, and if not,
how it should change to continue its service to the nation.

Let me first state that our members need a healthy Postal Service;
however, its long-term finances are decidedly unhealthy. We believe the
Postal Service cannot survive another decade as it is currently
chartered because of mounting long-term debts, competitive challenges it
faces from the outside and structural limitations that handicap
management from within.

This institution is a vital business partner for all of our members---an
irreplaceable one for many. The Postal Service makes it possible for
businesses to market their products and services and to get them
delivered. America\'s printed word depends on a uniform nationwide
delivery system. In many areas of the country the Postal Service is our
only delivery option and the only reasonable means of marketing a
product or service. For many companies and government agencies, despite
the growing availability of electronic communication, delivery of
documents by the Postal Service remains a legal requirement. Without a
national postal system, American commerce and government will be harmed
irreparably, and many Americans will be left underserved or without the
services that only a federal postal system mandated to offer universal
service can deliver.

How did we get to this point in postal history? There are many reasons,
as we will explain. But one significant trend that existed even before
1971, when the former Post Office Department became the United States
Postal Service, involves our changing methods of communication. The
Postal Service still connects many individuals with businesses, but
individuals depend less on the mail than was the case in 1971. Over the
last three decades, personal correspondence, already in decline, has
become even more rare. Today, letter mail from one individual to another
makes up a very small portion of the mail the Postal Service delivers.
Most of the Postal Service's volume---at least 94%---is connected in
some way to a business transaction.

As for the greeting cards, invoices, payments, magazines, newspapers and
parcels the Postal Service delivered in 1971, competition has taken away
some of that volume, and electronic transactions threaten to take away
even more. Since Congress approved the last major postal reorganization,
private carriers have taken away much of the overnight and parcel
business. Now the personal computer and the Internet have evolved and
threaten First-Class mail, which provides roughly half of all postal
revenues.

Today electronic bill presentment and payment represent more of a
potential threat than an actual one. Although millions of Americans own
a home computer, three-quarters of the nation continues to pay bills
offline. Predictions that individuals would quickly adopt electronic
bill payment have proved overly optimistic, but the trend will
undoubtedly continue. As more Americans decide that electronic commerce
is easier, safer and inexpensive, mail volume will decline and that
volume will be lost---permanently.

Whenever mail volume declines, or when the cost of delivering the mail
exceeds revenues received, the Postal Service must raise its rates or
reduce its size. PMG Jack Potter has worked hard to reduce the size of
the organization in the last year, but that task is difficult and his
options are limited, given statutory and contractual constraints. Since
March of 2000, the Postal Service has raised rates three times---during
a recession. The highest rate increases have hit the Postal Service's
competitive products most severely. Even with these rate increases the
Postal Service has experienced three consecutive years of operating
losses. Such pricing practices would be suicidal for most businesses, so
it is hardly surprising that these increases have helped reduce mail
volume.

We know from experience that a double-digit increase will devastate
volume in the months immediately following the new rate implementation.
In the past, mail volume would, eventually, begin to increase a few
months after postage went up, and annual growth in most mail classes
would occur. Such has not been the case following recent increases. The
Postal Service is literally pricing itself out of business.

To give you an appreciation of what a postage increase costs business
mailers, let us remind you that for business mailers, the groups that
pay the overwhelming majority of postage in this country, a postage
increase is never "just" a penny. Postage can be one of the largest, if
not the largest expense for a mailer, so postal increases can be the
single biggest cost increase in a given year. A one-penny increase in a
First-Class stamp costs most Americans only a few dollars more a year.
But for a business that mails invoices, magazines, newsletters,
newspapers or advertisements, a typical postage increase translates into
thousands or millions of dollars in added expenses.

When the Postal Service raises the price of postage, most businesses
immediately reduce the number of items mailed; they rarely respond by
increasing the size of their postal budget. Postage is, for most
mailers, a fixed expense. So with every postage increase, mail volumes
decline even further, creating the need for yet another rate increase
and the cycle begins again---a trend often called the Postal Service's
death spiral.

## Recommendations

As electronic commerce grows, we know that mail volume will decline in
some categories. Before more Americans begin paying and receiving bills
online, it is imperative that this commission and the Congress consider
how to restructure the Postal Service and how to expand the options
available to postal managers so they can ensure the survival of this
vital agency.

As in any groups as large and diverse as the Mailers Council, agreement
on how to fix such complex problems as those we have described is
difficult. Recently, however, our members met to identify the issues on
which there is consensus. We offer the commission members these six key
points in the hope they will help enhance your understanding of a very
large and complex organization and the essential services it delivers.

### Continue Universal Service

The Mailers Council believes that the Postal Service must continue
offering universal service to every household in the country, and must
maintain the existing monopoly on the mailbox. We firmly believe that
the Postal Service will survive only if it maintains these policies.

Universal service is more than good public policy, one that dates to the
1700s. It ensures that Americans in every state and community are linked
to each other. The value of the network that comes from that linkage
highlights an essential reason for keeping postage affordable: Universal
service is a good business strategy.

Whether the Postal Service delivers one letter or a dozen to a home or
business, most of the institutional costs remain unchanged. And in
recent years those institutional costs have grown because of rising
wages and fuel costs, and because the Postal Service has had to deliver
to anywhere from 1.5 to 1.7 million new addresses every year. Those
additional deliveries---whether the carrier has one letter or a
dozen---require the construction of expensive new facilities and the
hiring of more employees and the purchase of more vehicles and fuel.

To manage these added, mandatory costs and at the same time keep postage
affordable, the Postal Service must attract and retain as many different
types of mailers as possible. Today there are essentially two groups of
customers: those who must use the Postal Service and those that choose
to use the Postal Service.

Some businesses use the Postal Service because it is an affordable
marketing channel, one of several from which they can choose. However,
if the cost of marketing goods or delivering them by mail becomes
unreasonable, or if alternative channels (and here, the new threat
clearly is the Internet) become more reasonable and can reach most of
the population, then some mailers will leave the postal system
completely. Losing those customers means the Postal Service must serve a
growing number of delivery points while delivering fewer pieces of mail.
And those that remain in the postal system will be facing higher and
higher rates. Such a scenario represents an impossible task for postal
management, and would quickly lead to the Postal Service's demise,
leaving taxpayers to cope with over \$100 billion in liabilities and
obligations.

### Improve Productivity

A key reason why the Postal Service has recently managed to constrain
its losses despite several rate increases and volume declines has been
the consistent attention postal management has given to productivity.
This attention has not always been the case.

The Postal Service historically has experienced periods when cutting
costs is its single greatest management concern, and others when
improving service is its primary objective. When revenue is up, some
managers often lose their focus on cost containment; when revenue is
down, managers give insufficient attention to maintaining or improving
service. For example, in FY 1999, after two years of dramatic profits,
managers failed to recognize and respond to excessive spending as mail
volume failed to reach predicted levels. The response was a belated
cost-cutting program that affected service and that was detrimental to
employee morale.

After extensively studying postal productivity, we have concluded that
finding ways to improve postal productivity is the most significant
challenge facing the Postal Service and all postal customers. If labor
cost increases were zero, increases in productivity could be zero, and
rate stability would be achieved. However, because postal labor costs
are constantly increasing, the Postal Service must improve its labor
productivity to achieve postage rate stability. If labor costs increase
while labor productivity declines, the Postal Service will never achieve
rate stability.

To highlight our concerns about postal productivity, we published a
comprehensive study of the issue in March 2000. Acknowledging that the
Postal Service is unlike any other government agency or private sector
organization, we stated our belief that comparing postal operations to
similar industries could help determine whether the Postal Service has
been reasonably successful in improving its productivity. And by
highlighting our concerns, we believed the Postal Service could achieve
greater productivity growth, thereby reducing the frequency and size of
postage rate increases.

The study showed that for most of its history the Postal Service has
failed to improve productivity. From the 1991 recession to 2000, the
Postal Service's Total Factor Productivity (TFP) compared unfavorably
with all business productivity measures generated by the Bureau of Labor
Statistics. In fact, as our study showed, the Postal Service's
productivity growth record since 1971, when Congress implemented the
Postal Reorganization Act, was inconsistent.

For the next year we issued a Quarterly Report Card on Postal Service
Productivity. The Report Cards graded the Postal Service on its ability
to enhance its overall financial performance by improving its
productivity. Each Report Card graded the Postal Service's productivity
relative to its own performance in previous quarters, and to
productivity trends in the private sector. Our objective was to use the
Report Cards to focus on productivity as a way to highlight negative
trends as early as possible, and to praise significant improvements.

Today, almost a year since our last quarterly report card was published,
we offer an update on our 2000 review of postal productivity, which is
appended to our testimony. As the study shows, the Postal Service has
been unable keep up with private sector productivity gains because of
four primary impediments:

1.  The Postal service's historical financial burden increases the
    hurdle that productivity improvements must overcome to have an
    impact on financial returns.

2.  The quasi-governmental business model both increases costs and
    reduces incentives for productivity improvement.

3.  The Postal Service's aversion to labor reorganization has slowed
    network restructuring and other programs that would be necessary to
    seriously reduce the postal workforce.

4.  The Postal Service's size makes implementing productivity
    improvement programs more difficult.

Even with these impediments, the Postal Service could still act to
improve productivity. As we explain in the report, we recommend that the
Postal Service shrink its network, optimize processing plants,
capitalize on route realignment, streamline transportation management,
prepare a real capital budget and develop a long-range human resources
plan.

### Enhance Mailer Options

A key to keeping postage prices down is achieving the goal of the lowest
combined cost for processing and delivering mail. One tool the Postal
Service and mailers have used to achieve that goal since 1971 is
technology (which we address in more detail later in this testimony).
Without the machinery found in mail processing plants today we might
well see a workforce nearly twice as big as the current complement of
nearly 800,000 employees.

Postal costs are also more reasonable today because since 1971 the
Postal Service offers reduced postage when mailers do much of the
sortation and transportation work that otherwise would be performed by
the Postal Service. These worksharing discounts are available to mailers
who send as few as several hundred or as many as several million pieces
of mail. Worksharing allows mailers to bypass some parts of the postal
system and keeps them in the system by helping cut their postage costs.
The work mailers perform saves the Postal Service more than the reduced
postage rates mailers receive. Mailers that pay less must follow
complex, strict rules, spend hours of their time and invest millions of
dollars of their money preparing mail before they qualify for reduced
postage.

We believe the Postal Service should explore ways of expanding
worksharing and pursuing additional private sector partnerships. As mail
volume inevitably declines, the Postal Service will need to adjust the
size of its workforce and its mail processing and delivery network.
Coping with declining mail volumes would be easier if the Postal Service
partners with its customers and suppliers in ways that would allow all
of them to respond faster to changing mail volume and population trends.

As mentioned previously, the Postal Service expects to deliver mail to
1.7 million new addresses this year. So, in some parts of the country
there is less postal work than there was in 1971; in other places there
is far more. These and other changes will create a need for greater
flexibility in the Postal Service's management plans. Allowing customers
additional worksharing opportunities and partnering with private sector
organizations would give the Postal Service that much-needed
flexibility.

### Enhance Postal Compensation

If postal managers and their employees succeed in improving
productivity, can we reward their efforts, and in a manner similar to
methods used in the private sector? Regrettably, the current postal pay
system offers few opportunities for rewarding success. In fact, for many
craft employees, existing rewards are counterproductive. For example,
letter carriers who finish their routes early are rewarded with more
work---helping those carriers who fail to finish their assigned
deliveries during their shifts.

In 1996 the Postal Service consulted with its three management
associations, which then agreed to adopt the first postal pay for
performance program: Economic Value Added. EVA, initially a success
among the managers, supervisors and postmasters who participated in the
program, was cancelled last year. The four postal unions were offered
the same program, but instead chose to continue receiving guaranteed
increases in salaries augmented by cost of living allowances.

The fact that EVA never involved both employees and management may be
one of the primary reasons for its failure. The program symbolizes the
incentive problem the Postal Service faces. Longevity and seniority are
rewarded, more than initiative, creativity and exemplary effort.

Incentive pay is not the only compensation problem hampering
productivity gains. The others emanate from the statutory limit on the
postmaster general's salary, which has created a growing problem of pay
compression among all management positions, and a shrinking differential
in pay and benefits between the highest paid craft employees (letter
carriers, clerks and mail handlers) and first-line supervisors. Revising
this statutory limit is an important issue for the commission to
consider because the problems we describe are harming the Postal
Service's ability to attract and retain the type of talented leaders it
will need to cope with the challenges this agency faces.

Most postal management positions are listed on the Executive and
Administrative Schedule (EAS); higher-level management positions are
covered by the Postal Career Executive Schedule (PCES). The pay of the
postmaster general is restricted to the maximum rate on the Executive
Schedule level I, under section 5312 of title 5, which today is
\$171,900. All PCES and EAS managers, therefore, make somewhere between
the postmaster general's salary and that of the highest paying craft
position. Congress has increased Executive Level I pay modestly since
implementation of the Postal Reorganization Act in 1971, while craft
employee salaries have increased to a greater degree. As a result, we
have seen the differential between management and craft shrink
dramatically over the past three decades.

This lack of pay differential makes it especially difficult to recruit
first-line supervisors. But pay levels in general for mid-level and some
higher-level management positions also make it difficult to convince
young, talented managers to move their families from lower cost of
living cities to higher cost of living ones, most notably to postal
headquarters in the Washington, DC area. Ask any vice president at
Postal Service headquarters about this problem, and you'll hear stories
about talented career postal employees who turned down the opportunity
for promotion because they could not accept what amounts to a
substantial pay cut they would endure as a result of the higher cost of
housing and other essentials in the nation's capital.

A related problem is the fact that pay for EAS and PCES managers,
including highly-skilled technical positions, is below comparable
positions in the private sector (and in foreign postal administrations).
As a result in recent years, employees ranging from vehicle and
equipment repair personnel to senior managers have left the Postal
Service for private sector positions that pay significantly more in base
salary and that include benefits unavailable to employees of any federal
agency. Some managers have left as soon as they were retirement
eligible, while others left before that date. As this pay gap increases,
retention problems will increase; recruitment of talented managers from
the private sector will become impossible.

As for the highest management positions in the Postal Service, we have
seen many individuals in the last 32 years come from the private sector
to accept the position of postmaster general or deputy postmaster
general out of a sense of duty to the nation. Such dedication to public
service is rare, and as noted, talented candidates may leave rather than
wait to be considered for one of the top two postal positions.

The solution is to separate the Postal Service from the Executive
Schedule. We recommend either lifting the limit on postal pay and
leaving compensation issues to the Board of Governors, or setting the
PMG's salary ceiling at a level more appropriate for the manager of an
organization with almost 800,000 employees and 27,000 post offices, and
index that amount for inflation. As important as the increase in base
compensation, we believe the Board of Governors must tie additional
compensation to increases in postal productivity---as is often the case
in the private sector.

### Improve Financial Transparency

Our members hold varying opinions on specific ways to improve the
rate-setting process, and they will present them separately in their own
testimony before the commission. But our members are universal in their
recommendation that the Postal Service must adopt recommendations by the
General Accounting Office (GAO) to improve its financial transparency
and measurability.

There are three reasons for improving financial transparency. First,
such data would greatly support a less onerous and expensive rate
process. Many of our members participate in the existing lengthy and
expensive rate-setting process. Costs for hiring experienced attorneys
and economists who specialize in postal affairs can range from a quarter
of a million dollars to over \$1 million. Those costs are high in part
because it is often time-consuming and difficult to obtain essential
information and data, and ensure that the Postal Service has fairly
determined how and where it will increase the price of postage.

Second, better information would ensure that postage rates reflect
actual processing costs. More detailed information will help us better
understand the Postal Service's costing methodology, and that will help
mailers and the Postal Rate Commission better understand how to divide
the institutional costs among the many subclasses of mail.

A third reason to improve financial transparency is to ensure that all
postal stakeholders clearly understand the Postal Service's long-term
financial obligations. GAO investigations have revealed pension
overpayments as well as stunningly high retiree health care
obligations---information that previously received less attention than
these sky-high numbers deserve. GAO has repeatedly suggested the Postal
Service change the way it reports liabilities and obligations. We
concur.

On January 30 GAO issued its most recent report on postal finances
(GAO-03-118, p. 30). In it GAO summarizes its concerns about postal
financial reporting as follows:

> Given the vital role of the nation's postal system and the importance
> of its financial viability, it is imperative that the Service, its
> stakeholders, and the public have adequate information available to
> them to understand the Service's changing financial situation and
> assess its progress toward meeting its performance goals and future
> plans. The Service has made some improvements in its financial
> information since 2001; however, we continue to have concerns about
> the transparency of its financial and performance information.
> Although the Service has traditionally provided detailed financial
> data to stakeholders throughout the fiscal year, its periodic
> financial reports have not clearly explained changes in its financial
> condition and outlook or results of operations, and they have not
> always been readily available to the public. Further, we believe that
> the Service should reassess its accounting treatment and disclosure of
> some of its long-term obligations, including its pension and
> postretirement health obligations. The Service has also made mixed
> progress in implementing our recommendations relating to improved
> reporting on its new products and services and enhanced performance
> plans and reports. Improved transparency is necessary to reflect
> economic reality and to enhance accountability and decision-making for
> the Service.

Because the Postal Service is the hub of a \$900 billion mailing
industry and a vital part of the nation's communications network, and
considering its current and long-term financial difficulties, better
information is essential for Congress, Postal Rate Commission members
and mailers.

### Invest in Technology

As noted previously, investments in technology have done much to enhance
the Postal Service's operational efficiency. Mail sorting equipment that
three decades ago might require a crew of more than a dozen today needs
only a pair of technicians---and the equipment handles many more pieces
a minute than was possible in the 1970s.

More recently, however, postal management has decided to cut almost all
investments in technology to reduce spending and avoid more frequent and
higher rate increases than we have experienced in recent years. As a
short-term solution to postal financial problems this strategy is
defensible; however, without additional technology-related investments
we will see continuing increases in the postal workforce, and that will
lead to higher postage rates.

PMG Jack Potter, in the first hearing before this commission, stated
that processing of letter mail has been greatly enhanced because of
advances in the equipment and systems used for that purpose. We have
seen some improvement in the processing of larger pieces, the so-called
"flats," in the past decade, but we believe as PMG Potter does that
additional progress is possible.

Similarly, letter carriers continue to spend as much as half of their
eight-hour tour sorting mail. The application of advanced technologies
to the delivery function could substantially improve efficiency by
increasing carriers' street time. The result would be the need to hire
fewer letter carriers in high-growth neighborhoods.

Unfortunately, with the accumulated debt postal management now faces,
little money for technology investments is available. A reorganized
Postal Service must be able to invest a reasonable amount of capital
into research and development so that we can experience the type of
productivity gains seen in the private sector logistics industry in the
last 30 years.