reading our mission statement we exist to secure two fundamental principles first americans have a right to know that the money washington takes from them is well spent and second americans deserve an efficient and effective government that works for  our duty on the oversight and government reform committee is to protect these our solemn responsibility is to hold government responsible to taxpayers because taxpayers have a right to know what they get from their government we will work tirelessly in partnership with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy this is the mission of the oversight and government reform committee i will start off we will do opening statements from the chair from the ranking member then the chair of the whole committee and the ranking member of the whole committee i think may be here we may have to adjourn for votes in the middle if we do i just ask for your patience it will take about a half hour or so and then we will be back and continue on with that i will start off with my opening statement we are here today to discuss the looming crisis at the united states postal service today the demand for traditional first class mail continues to decline postal service deficits continue to rise and competition and benefit costs continue to account for approximately eighty percent of the postal service's operating expenses the postal service has said it will lack the necessary funds to make a required payment to pre fund its retiree health care benefits that is due at the end of september the continued imbalance between revenues and expenses means the taxpayers could ultimately be asked to bail out the postal service this hearing presents an opportunity for lawmakers to hear important testimony from the front lines of the postal industry on how best to strengthen the postal service for many years the postal service has delivered mail six days a week to virtually every home in america including over one hundred and seventy billion pieces of deep economic recession are the primary drivers of a rapid recent decline in mail volume it is now clear that the need for workforce reductions and other cost cutting measures must be the primary focus of the postal service its labor unions and this congress in order to improve the financial stability of this venerable institution everyone that has a stake in the viability of the postal service must work together to find solutions postmaster general patrick donahoe recently outlined the postal service vision for a return to profitability i commend you sir on that report and your commitment to reducing costs by undertaking major organizational restructuring reviewing how best to provide retail postal services and implementing automation to improve delivery efficiency today the postal service is negotiating labor contracts with two union groups representing postal employees while some postal employee unions have cooperated on efforts to reduce the workforce through attrition and incentives for early retirement those efforts simply have not resulted in the changes necessary to maintain a self funding postal service realigning the postal workforce by reexamining labor agreements must be part of the strategy to improve the postal service fiscal foundation congress has an obligation to make statutory changes if necessary which will allow the postal service to address its own budget imbalance we need to empower you however proposals for providing short term fiscal relief such as modifying retiree health benefits pre funding payments or refunding so called overpayments over the civil service retirement system and the federal employee retirement system do not address the long term systemic problem and solve issues that must be tackled in order to address the postal service will achieve long term financial stability without a thorough reform of all aspects of the postal service's business model there could be little hope that it will return to profitability in the near or long term future the looming fiscal crisis of the postal service can no longer be ignored we have kicked that can far enough i have the responsibility no we have the responsibility to change course  must consider all possible solutions i thank the witnesses for appearing here today and i look forward to their testimony i now would like to recognize the distinguished ranking member from massachusetts congressman lynch for his opening statement  thank you mister chairman let me begin by congratulating you chairman ross on your selection as the chairman of this important subcommittee and i want to thank you for holding today's hearing which shows your keen awareness of the critical state of affairs currently confronting the united states postal service while we have recently seen a moderate uptick in the economy and there are some indicators that suggest that standard mail or advertising mail is rebounding our nation's most trusted and prominent public institution continues to fall  am sure there are scores of people that would agree with me that there is still great value in the traditional mail system the postal service generated over sixty seven dollars billion in annual revenue in fiscal year two thousand and ten and employed roughly fifty eight week overall the postal service is the cornerstone of a trillion dollar industry and supports over seven point five million private sector american jobs which highlights the vital role that the postal service plays in our overall economy given the extraordinary financial challenges the postal service presently faces it is absolutely necessary and i agree that we collectively and by collectively i am referring to postal management workers mailers as well as the administration and this congress come to the realization that there will have to be some difficult decisions made rather quickly in order to address the postal service's current financial situation however before we tackle issues such as changing delivery frequency and cutting services laying off hardworking americans there are certainly some more palatable actions we should consider first for example we need to revisit the postal service's arbitrary and fixed retiree health benefit payment schedule which prevents the organization from accounting for the dramatic shifts in demand of workfor it has experienced in recent years simply requiring the postal service to tackle the obligations at such an aggressive pace is unheard of in the private sector and continues to be a driving force behind the postal service's dismal fiscal performance additionally questions continue to remain regarding both the postal service's actual civil service retirement system and its federal employee retirement system obligations for this reason i intend to reintroduce legislation in the coming days similar to what i offered last congress on these issues as well as on a couple of other substantive postal related policy matters however in the meantime i expect the postal service to continue to use its existing authorities to lower expenditures raise revenues and put forth fresh innovation in terms of both its competitive and its market dominant products and services further the government accountability office has recently competed work on a report that i had requested last congress on the modernization of foreign posts and lessons learned which i hope will also provide some useful information and novel ideas as we work on the postal service's long term viability mister chairman i look forward to hearing from today's witnesses about their tangible and pragmatic suggestions  solutions for how best to return the postal service to financial solvency after four years of operating deficits amounting to a cumulative loss in its four years of twenty dollars billion and a nearly tapped out borrowing authority we can no longer afford to kick above all else the government oversight and reform committee is in fact the legacy committee of the postal committee we take that seriously that it is a primary piece of legislative authority and responsibility since and seventy this committee has overseen an independent agency responsible for its own balance sheet and profitability there have been good years and bad years in that time but no decade has been harder on the post  office than the last decade there has been a twenty percent drop in postal volume over that period the post office has lost twenty dollars billion going from having a relatively handsome surplus to being up against its borrowing limit we are here today to begin a process with the postmaster and other stakeholders in finding a way to maintain certain prerequisites that this committee and the american people have counted on for over two hundred years first of all the delivery of mail to every point in america second of all the delivery of a level of service that americans have come to expect if at all possible we want that to include all categories of mail all types and all delivery dates meaning six days a week is a goal if we can achieve it we also have an obligation to the american people to deliver value the cost of mail is a cost to american commerce and to the american people so every time there is an increase in postal rates it is to the detriment of american efficiency and disposable income to the american people last most importantly this committee is dedicated to sustainability the post office is not an organization you can have one day not have the next and put back up again it has been there since our founding it is a mandate of  congress in my opinion since our founding and it is memorialized in the constitution no congress has ever suggested that we don't need a post office and this will not ever be one in this committee general i appreciate the fact that you have come in and re looked anew at your predecessor's initial ideas and i have seen some innovative and i think very worthwhile suggestions you have made and some of them are tough as we were talking before we came out here the good news is there are at least two post offices that need to be closed in every congressional district in america let's hope there is not one or three in min i want to commend the post office legacy of finding ways to pare down over two hundred thousand positions through attrition and buyouts i might note though that today there are examples the american people if aware of would be surprised there are over fifteen thousand postal workers sixty five years old who are on disability and not expected to return and yet they are paid a full salary that is an area that we expect will be addressed during our negotiations it is an area in which we want to be fair to these long working and longstanding employees but at the same time if you can no longer do the job and you are over sixty five there is a reasonable expectation that your status will change and you will not be counted among the active members of the postal system i think this is particularly good in union negotiations because in fact what we want are workers who can be productively put i thank you in closing this is not easy most of government needs are growing yours is not most of government has found new places in order to find authority and services your has not and has not been offered the opportunity this committee is willing to hear though about new services that create a value for the american people opportunities for the post office to have further authority to find nexus  savings with other agencies or even the private sector i believe that we can be entrepreneurial on both sides of the aisle for the betterment of the american people i look forward to your testimony i appreciate all  be pleased to be working with you as a member of the committee and i am particularly pleased to welcome our new postmaster postmaster donahoe mister chairman it was interesting to hear you i know you read this the  and that mission applies most of the time but it was really interesting to hear you say that you wanted to make sure that the money that comes from washington is well spent well of course the post office hasn't gotten any money from washington for decades given the kinds of latitude that a business indeed has and probably doesn't feel that it could do what a business could do for example let's take something that  over again and that was whether or not to reduce the six day week to a five day now that would cause some hardship in some parts of the country of course of course if it is a private business they have to take that into account and do what they have to do i know in large parts of the country people according to the polls no longer say that they need a six day delivery and appear to be ready to give that up we haven't even discussed whether or not okay at least for the parts of the country that are willing that don't need it which looks like most of the country why not at least then have a five day work week what is really frustrating to me as a member of this committee is that the steps even the baby steps which wouldn't solve the problem seem to be very difficult to take and the case of the six day work week is difficult to take for no reason except one reason and that is the members of the congress of the united states no business would have to bother with that i will be very interested in this testimony and  what you expect to be doing postmaster donahoe because this notion of a looming crisis which is what this hearing is called is also an interesting title ever since i have been on this committee and i have been here since i have been a member of congress it has been a looming crisis i am not sure what we are waiting for if the post office truly collapses you will have people rushing to the floor to say let's pick up the post office one way or the other i can't go home and tell people that there is going to be no postal delivery i don't know whether excess payments to the trust funds even if used for operational purposes and we know that that is  unlikely to occur would be anything but a stopgap measure i have always felt that somehow one has to pull back altogether and redesign entirely what we mean by postal service of the united states of america thank you very much new business model legislation i will be introducing in this congress an excerpt from the april th two thousand and ten hearings we had last year and a copy of the testimony of the national rural letter carriers association mister ross well without objection it is so double header today so without further ado i would like to introduce our first panel to my immediate right is mister patrick donahoe the postmaster general and chief executive officer of the united states postal service in the middle is ms ruth goldway the chairman of the postal regulatory commission welcome and mister herr to my left is the director of physical infrastructure issues at the u s government accountability office we have your written statements before us but what i would like to do first is to swear everyone in and if i could ask you all to rise and raise your right hand do you solemnly swear or affirm that the testimony you are about to give to this committee will be the truth the whole truth and nothing but the truth  reflect that all witnesses answered in the affirmative please be seated in order to allow time for discussion and questions please limit your testimony to five minutes as you know your entire written testimony will be made part of the record now i will i appreciate the opportunity to testify and thank you for the invitation today i would like to discuss our financial challenges steps we are taking to improve our competitive position and improvements to our business model that require changes in the law my view is that many of our challenges t can be recast as opportunities to create a profitable and more market responsive postal service that competes for and wins customers and that propels american commerce the postal service remains at the heart of a crucial segment of our economy if the postal service was a private sector company it would rank th in the fortune five hundred we provide the platform for a mailing industry that pumps one dollar trillion into the economy every year and employs seven five million americans we are not taxpayer funded we generate our revenue through the sale of postage and so if we are to be successful at our core function of delivering to the american public we must operate by having a strong business model and effective business strategies reduced our workforce by almost two hundred and thirty thousand employees since the year two thousand and have dramatically increased total productivity we have accomplished this all without sacrificing service performance levels are at the highest level ever and those  results lie squarely with our dedicated knowledgeable and committed employees and i could not be any more proud of them we are aligning every aspect of the postal service around four key strategies one strengthening the business consumer channel two improving the customer experience by making every transaction a positive transaction three competing for the package business and four continuing to become leaner faster and smarter we are committed to ensuring that we will be successful in these business strategies and that we will be able to serve the american public better as a result while we are being very aggressive within the constraints of our current business model the fact is without some important changes to the law that shape our business model we cannot survive as migration to electronic communication and shifting customer habits but upon closer examinations our losses are a result of an inflexible business model due to the laws that govern the postal service the most serious challenge is to our unique obligation to pre fund retiree health benefits this pre funding requirement borne by no other entity public or private places an incredible burden on postal service to understand the full effects you just have to look at the last few years before and after the enactment of the postal accountability and enhancement act in the four years before the paea the postal service showed a positive net income every year in the four years since we have seen billion dollars in losses every year even during the two worst years of the recession two thousand and seven and two thousand and eight had it not been for the pre funding requirement the postal service would have realized a net profit of three dollars thirty cents billion and two dollars eighty cents billion respectively the effects of the retiree health benefit pre funding are profound this trend continues into two thousand and eleven our first quarter results showed a loss of three hundred and twenty nine dollars million excluding retiree health benefits pre funding costs and along with worker's compensation adjustments we would have a net income of two hundred and twenty six dollars million in addition to the retiree health benefit obligations overpayments into the civil service retirement system and federal employee retirement system have taken a significant toll on our finances september th of this year the postal service will not have the cash available to make these payments we need legislation this year to address that fact i also encourage the subcommittee to provide greater flexibility to the postal service regarding our proposed forward to working with each of you in the th congress i believe strongly that the path forward requires that we embrace fundamental change and that our employees our labor unions management associations the mailing industry all of our customers and business partners play a constructive role in shaping our future i am committed to this approach the next few years will bring significant change but i am confident that we will be able to look back and say that working together we took advantage of a challenging time to create a stronger organization and a stronger industry developing a true st century postal service thank you for your continued efforts on behalf of the postal service i look forward to working with each of you and will be happy to answer your questions today  leadership on postal issues on the whole we can say that the paea has been a positive force for changing keeping postage rates low and service at acceptable levels while providing stakeholders with information and the opportunity to participate in the process the price cap serves as a powerful incentive for the postal service to add efficiency and reduce costs including eleven dollars billion in the last three years at the same time the requirement to measure service and report the results publicly ensured that the postal service improved service quality seasonal pricing incentives for standard and first class mail five experimental product market tests and the expanding use of nsas one hundred and twenty seven in two thousand and ten and fifty six to date in two thousand and eleven show that the service is taking advantage of the law's pricing flexibilities along with some others i have been concerned that there are some potentially irreconcilable legislative requirements in the law such as that all products must cover attributable costs but no class of mail can have rate increases greater than the cpi cap but to date the commission has been able to justify reasonable exceptions and to encourage the postal service to address others in the recent exigency case the commission carefully reviewed the postal service's current financial predicament and found it to be structural related to the pre funding of health benefit premiums for future retirees in the past four years the postal service has paid nearly twenty one dollars  retiree health benefit fund while incurring a cumulative net loss of twenty dollars billion bottom line without the rhbf the postal service would have broken even despite the impact of the recession and declining mail volume of course when the paea was enacted in two thousand and six the economy was strong and the postal service had record profits it was in this climate that the congress mandated the postal service to make an ambitious fixed ten year series of payments at about five  but in retrospect the rhbf payments have brought the postal service deep into debt and close to insolvency now even with a brightening economy and continued cost cutting the postal service cannot surmount its financial crisis without congressional action in two thousand and nine at the request of congress our expert review of the opm's computation of the rhbf liability found that a recalculation could lower the postal service's liability by nearly thirty five billion still meet the funding goals of the act and allow the required annual payments to be lowered this could significantly address the postal service's financial shortfall last year at the request of the postal service we undertook expert actuarial studies to review whether the postal service csrs pension obligations had been properly calculated in relation to wages of employees of the post office department who later retired from the postal service we found that the postal service had been overcharged by an estimated fifty to fifty five dollars billion the surplus which came from postal revenues not taxes should be made available in some fashion for the benefit of the postal ratepayers and customers perhaps to fund the rhbf the commission believes that given the postal service's record of cost cutting over the last decade and recognizing the price cap restrictions and competition from electronic alternatives significant cost cuttings will continue the commission will serve to guard against any ill considered cuts because any reduction in service could be viewed as an equivalent of a defacto rate increase last year the commission issued its advisory opinion on postal service's proposals to shutter up to three thousand two hundred stations and branches affirmed the postal service's authority to adjust its retail network but we made several recommendations to ensure consistency and enhance due process for every citizen over the last year the commission has conducted an extensive review of another postal proposal that to go from six to five day delivery in my thirteen years serving on the commission this has been the most difficult and multifaceted issue i have been asked to address the postal service proposal to end saturday delivery is a serious effort to improve its bottom line but cutting seventeen percent of service in order to save what the postal service estimates to be three dollars billion must be carefully considered within our obligation to hold prices down maintain service standards and ensure efficient postal operations we are working overtime to resolve the complex and technical policy aspects of this case and expect to complete our opinion shortly we hope the opinion provides the congress with the information you need to decide whether or not to lift the current six day delivery directive the commission is now conducting its first five year review of the paea required under section seven  one of the act to provide recommendations to improve the effectiveness of current postal laws certainly the historic view that the postal system itself is of enduring value to the nation still stands strong we look forward to working with congress the postal service and all who depend on the mail to chart a course that keeps the mail affordable efficient and relevant for generations to come thank you that concludes my testimony i would like to ask that the chairman issa ranking member lynch and members of the committee i am pleased to be here today to participate in this hearing today i will discuss the postal service's financial condition and outlook and the actions needed to modernize and restructure it the postal service's financial condition has declined significantly since fiscal year two thousand and six and it remains on gao's high risk list as discussed the challenges facing the postal service are linked to decreases in mail volumes as customers have shifted to electronic communications and payment alternatives more specifically profitable first class mail has been declining relatively quickly while mail use has been declining the postal service has large fixed costs associated with delivering to one hundred and fifty million addresses it also has a large physical network spanning over five hundred mail processing facilities and more than thirty two zero post offices it has six hundred and seventy thousand employees about eighty percent of whom work full time and compensation benefits as you noted comprise eighty percent of its costs the postal service expects to reach its fifteen dollars billion statutory debt limit this year while still facing a cash shortfall unfunded obligations and liabilities detailed in a table in my statement for such things as worker's compensation and expenses in retiree health care are now estimated to total one hundred and five dollars billion these figures strongly suggest the postal service's financial condition has reached a tipping point and key stakeholders need to reach agreement on actions to address its structural problems we believe that action is needed in five areas first realign service with customers changing use of the mail the postal service has sought to reduce delivery by one day and provide retail services outside of post offices it estimates that dropping a day of delivery could reduce its costs by about three dollars billion annually this raises questions about what aspects of universals postal service are appropriate given declines in mail use second postal operations networks and its workforce need to be realigned to reduce excess capacity key questions include how quickly can these networks be realigned the pace of change has simply been too slow and should some post offices move to alternat e locations to better serve customers and reduce costs third compensation and benefit costs need to be addressed wages and benefits represent eighty percent of postal costs about sixty dollars billion in fiscal year two thousand  congress may wish to consider revisiting the statutory framework for collective bargaining to ensure that binding arbitration takes the postal service's financial condition into account other options include implementing a two tier pay system outsourcing if it results in cost savings or revising employees share of health and life insurance premiums fourth generating revenue through new or enhanced products and services the postal service has asked congress to allow it to diversity into non postal areas and s additional pricing flexibility questions about this include are there opportunities to introduce profitable new postal products and enhance existing ones should it be allowed to enter non postal areas to compete with private sector providers finally the funding structure for postal retiree health benefits needs to be addressed the roughly five dollars billion plus payments through two thousand and sixteen are steep and we believe that congress should consider modifying them in a fiscally responsible manner however we also believe the postal service should pre fund these obligations to the maximum extent its finances permit because thousands of individuals rely on and expect this benefit making changes to the postal service will not be easy in a recent report  requested by ranking member lynch we discussed how foreign posts have modernized their operations key aspects of these changes included strategic outreach and coordination with stakeholders about the nature scope and need for changes an  transition strategy was also crucial foreign posts experience suggests the postal service needs to clarify its modernization plans including over what period it will implement them and explain improvements in customer service and cost savings it expects while ensuring that alternatives are available in conclusion mister chairman modernizing and restructuring the postal service so that it can be viable is imperative given its financial condition this will not be easy and changes some difficult are needed to ensure that postal services remain available i am pleased to answer any questions thank you mister ross thank you mister herr we will now move into the questions and i will recognize myself for five minutes i want to jump right into what i think is really the heart of the first issue that we are facing and that is the consideration to go ad infinitum for example eight hundred thousand employees at the time now we are down to five hundred and seventy five thousand a decline in first class mail my question and i will go to mister donahoe first is with this pre funding of  the pension benefit are there not assumptions that today may not exist or have changed dramatically that in and of itself if actuarially identified could reduce the obligation of the postal service that is being imposed by the paea mister donahoe we believe so mister chairman we think that if you take a look at the intentions behind the law that was passed in two thousand and six they were very good intentions the expectation was that the postal service  having a base volume of two hundred and thirteen billion pieces of mail along with no debt at the time could carry that burden of the health benefits going forward it was a responsible idea we still think it is a responsible idea  to account for our retiring health benefits going forward but we think there are a number of things we have to take into consideration number one we have had a substantial drop in volume that has to be considered number two to your point we have reduced headcount i think back in two thousand  six when the law was passed it was based on the assumption of seven hundred and fifty seven thousand employees today we have about five hundred and seventy thousand employees and we think that moving forward we will eventually break into the four hundred thousand range we know going forward we will not have those same burdens so we would ask that congress take a look ask the gao to examine what the actual liability is going forward we also think there are some solutions as far as how to fund that we think that the funds that are existing in the civil service retirement funds that we have overpaid by our estimates seventy five dollars billion the postal regulatory commission's estimate is fifty five dollars billion could be used to make that payment if that is not available we think that we can also look at some other options our own ig has suggested that we take a look forward around the option of taking a private sector model or you fund at thirty percent versus the one hundred percent that we are  nine working with consultants the mercer and the hay group is to look at the opm projections and factor in lower levels of employees and to adjust the expectations of health care cost increases that the opm had in their formula and we estimated that in order to fund one hundred percent of what would be the health care retiree benefit problem you could do it with thirty five  money than the opm had estimated in two thousand and six i would suspect that that number might even be lower today than it was in two thousand and nine when we did it and that therefore the target for what the postal service needs ongoing liability for the pre funding but the other side is a systemic change and what we have to do and this is what i would ask your opinion on is how do we go about competing in the st century how do we go about now adapting to the digital age and i think that  are able to do something and empower the postal service to take care of the immediate need but how does it go on from hereafter so that it is existing for another two hundred and thirty five years without any subsidies mister donahoe well first of all mister chairman we think that there is a tremendous upside on the top line on our revenue in the postal service and the entire industry we think there is plenty of growth available in the area of standard mail standard mail is the most direct way to get in front of a customer's eyes better than the internet better than tv better than radio so we know there is growth there we al know there is growth in the package market and we have been exploring that we have been working with a number of new products you have seen our flat rate products come out we have introduced a number of others coming forward matter of fact ms goldway showed me we brought along a copy of our free sample box they have just approved over at the regulatory commission we think there is a ton of value in that we think that this is an opportunity on a monthly basis for people to get in to the sample business in a very affordable way so we know there is an upside now on the first class ma as you mentioned it is declining but we think that by using nsas contracts with many of our customers we can actually slow down the pace of change with the drop off in first class congressman lynch mentioned some opportunities in digital and we are exploring that too we have had some really good ideas come back from an innovation summit along with a number of other ideas that we have been exploring with partners digital to hard copy hard copy to digital and even digital to digital we know that the postal is that the postal service currently pays out of its existing revenues the money it needs to pay for retirees health care benefits and that is about two dollars fifty cents billion a year and there are forty two billion in a fund so one could either take some of that money to pay the existing health care retiree benefit retirees funds or at least take some income from that to help pay that