Testimony of The Honorable Dan G. Blair, Chairman

On Behalf of the Postal Regulatory Commission

Before the U.S. Senate Committee on Homeland Security and Governmental Affairs

Subcommittee on Federal Financial Management, Government Information, Federal Services,

and International Security

August 6, 2009

Chairman Carper, Ranking Member McCain, and members of the Subcommittee, thank 

you for the opportunity to testify on the financial crisis facing the United States Postal Service. 

In my testimony at the Subcommittee’s January hearing on the impact of the recession 

on the Postal Service, I discussed how the Postal Service was in a precarious financial position 

that was likely to worsen. I wish I could tell you that the situation has improved. However, since 

that time the monthly reports received by the Commission from the Postal Service have not only 

confirmed a continuation of the financial difficulties, they reflect an accelerating decline in mail 

volume that greatly exceeds even prior conservative forecasts. As a result, despite extensive 

cost cutting efforts by the Postal Service that are expected to save about $6 billion this year, the 

Postal Service warns it may run out of cash and will not be able to make all of its year end 

payments, absent Congressional action. 

Declining Mail Volume

As an overall indicator of the size and acceleration of this downward trend, the Postal 

Service entered the year with the expectation that total mail volume would fall this year by about 

8.2 billion pieces, as forecast in its Integrated Financial Plan for FY 2009. This expectation was 

an improvement on the 9.5 billion piece loss of FY 2008, which at the time, represented the 

biggest yearly mail piece decline since the Great Depression. 

The Postal Service now predicts that mail volume will fall by roughly 28 billion pieces this 

year, 300-percent higher than initially projected. Future assumptions about economic recovery 

are important factors in determining the steps needed to get the Postal Service back on track. 

While structural changes in the communications industry and electronic diversion of bills, 

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payments and statements continue to impact Postal fortunes, the current recession has 

compounded the losses and placed the Postal Service in dire financial circumstances. 

First-Class and Standard Mail account for more than 94 percent of mail volume and nearly 

80 percent of revenue. Between 2000 and 2008, First-Class Mail, showing effects of electronic 

diversion, declined an average of 1.2 percent a year, while standard mail increased by an average 

1.6 percent. In May (June and Quarter 3 figures scheduled for release August 5), standard 

volumes fell by nearly 24% and First-Class volumes by 16.4 percent compared to the prior year. 

Every class of mail is down significantly, with the declines accelerating each quarter. Based on 

available numbers, we project Postal Service revenue to be down about $6 billion through the end 

of the third quarter. 

Commission Activities

The Postal Service is responding to this crisis with a range of actions to stimulate 

demand for the mail, to lower costs and to position itself better with the mailing industry. The 

Commission’s new rules enable the Postal Service to use its flexibility as envisioned by the 

Postal Accountability and Enhancement Act (PAEA). 

The Commission has reviewed and found to be compliant with the law two major 

innovations: the Postal Service’s first experimental product under the PAEA – Collaborative 

Logistics – and the Postal Service’s first sale of standard mail. The Collaborative Logistics 

product is designed to allow the Postal Service to increase revenue by selling less-thantruckload (LTL) space on mail transport trucks that currently are operating below capacity. The 

LTL market is very competitive; however, the Postal Service has an established national 

network and low cost of entry into the market. The Commission also approved a “Summer 

Sale” from July through September, whereby larger mailers can earn discounts on Standard 

mail volumes that exceed historic norms, which would allow the Postal Service to earn 

incremental revenue and take advantage of excess capacity created by the economic downturn. 

Through the end of July, the Commission also has reviewed and approved nearly 50 

competitive contracts submitted by the Postal Service for Priority, Express and International Mail 

products, roughly double the number of such contracts in FY 2008. 

In view of declining demand for postal products driven by current economic conditions, 

the Postal Service is focusing heavily on cost control efforts to deal with its deteriorating 

financial situation. The Postal Service has set a goal of reducing costs this year by 

approximately $6 billion, by cutting expenses, reducing administrative overhead, removing mail 

collection boxes, consolidating delivery routes, adjusting its mail processing and retail networks, 

and downsizing its workforce. Since 1999, the Postal Service has reduced its career workforce 

by more than 160,000 positions. This year, the Postal Service is on track to eliminate an 

additional 100 million workhours. 

The Commission is exercising its oversight authority to ensure that savings are not 

achieved at the expense of service. Currently, the Commission is reviewing, as Docket N2009-

1, a proposed process for evaluating whether to close or consolidate stations and branches 

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nationwide in major urban and suburban locations. The law requires the Postal Service to seek 

an advisory opinion from the Commission whenever it proposes to make changes in its 

operations that could have a substantial effect on service nationwide. The Commission 

previously examined a Postal Service plan in 2006 to adjust its mail processing network under 

Docket N2006-1. During that review process, the Postal Service’s plan received public scrutiny, 

details of the plan were fleshed out, and a number of process improvements were 

recommended. 

The N2009-1 docket is now in the preliminary discovery phase. The Postal Service 

recently submitted to the Commission an initial list of 677 station and branch offices that have 

been identified as candidates for discontinuance studies. Over the coming weeks, the 

Commission and interested parties will examine the processes, issues and facts of the Postal 

Service Initiative. Initial questions to be answered include: Are there guidelines to ensure that 

all evaluations are conducted using consistently applied standards? What are the procedures 

for soliciting input from customers, residents, employees and other stakeholders? And, how will 

stakeholders be notified in event of a decision to close a station or branch? 

Due to the nature of the station and branch initiative, the Commission may consider 

holding field hearings outside of Washington DC. As with the N2006-1 docket, the Commission 

expects that greater public review and comment will make the process more transparent and 

ensure appropriate safeguards to service. In the event that a retail office is closed as a result of 

this Initiative, the Postal Service would be required to provide appropriate public notice and the 

Commission would have jurisdiction to review customer appeals under its post office closing 

rules. 

Retiree Health Benefit Fund Liability

Despite its many actions to increase revenue and cut costs, the Postal Service may run 

out of cash by the end of next month, which marks the end of fiscal year 2009. They will have 

used all of their available life lines – about $1.4 billion cash on hand from 2008, $6 billion in cost 

cuts and $3 billion borrowed, the legal limit – and they may be unable to pay all of their year-end 

obligations. 

Consequently, the Postal Service is seeking legislative relief through an adjustment to its 

retiree health benefit payments. This Committee, through its recent approval of S.1507, the 

Postal Service Retiree Health and Benefit Fund Reform Act, has taken a step towards 

alleviating – at least for the short term – the Postal Service’s financial crisis, while maintaining 

the long term solvency of the fund. 

At the request of the House Subcommittee on Federal Workforce, Postal Service and 

District of Columbia, the Commission recently examined the underlying assumptions and 

methodologies used by the Office of Personnel Management (OPM) and the Postal Service 

Inspector General (OIG) to determine the Postal Service’s unfunded liability for its Retiree 

Health Benefit Fund. Copies of the report were provided to members of this Subcommittee and 

are available online at www.prc.gov. Hopefully, our analysis will prove helpful in informing the 

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debate should this Committee consider long-term measures to address funding for the Retiree 

Health Benefit Fund. 

In brief, the Commission found that the different purposes of the two valuations led to 

differing, though reasonable, assumptions and results. OPM, essentially, took a current 

snapshot of the Postal Service workforce and rolled it forward to establish the liability, which 

was reported on the Postal Service’s 2008 financial statements. OIG made its calculations 

incorporating expected Postal workforce declines through 2016, essentially creating a snapshot 

of a much smaller Postal family in 2016, and a smaller liability. The two valuations also 

assumed different future rates of medical inflation. 

The Commission developed an alternate calculation utilizing current industry and 

government best practices. This produced a long-term liability that could result in lower 

payments than current law requires. The following chart depicts the three calculations. 

Future Pricing 

Looking ahead to FY 2010, the Postal Service expects continued, though moderating, 

declines in mail volume. This would have significant ramifications for postal revenues. Under 

the PAEA, the Postal Service has the ability to raise new revenue through general rate 

increases, subject to a CPI-based price cap on its market dominant products and to a price floor 

and market constraints for its competitive products. Following Commission review, the Postal 

Service exercised its flexibility and implemented general price increases for its competitive 

products in January and for its market dominant products in May. These increases helped 

offset some of the revenue lost to declining volume. 

Due to recent low inflation in the overall economy, it appears that the Postal Service may 

have little to no room next year to raise prices for its market dominant products, which account 

for 90 percent of revenue. To raise prices above the cap, the Postal Service would have to file 

with the Commission a so-called “exigent” rate case and they would have to demonstrate 

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“extraordinary or exceptional circumstances” to justify exceeding the rate cap imposed by the 

PAEA. 

Prior to 2007, the former Postal Rate Commission reviewed Postal Service forecasting 

assumptions and methodology as part of its rate analysis. In the new streamlined rate setting 

processes established by the PAEA, this has not been necessary. Even if the Postal Service 

does not file an exigent rate case, it may be beneficial for the Postal Service to share its volume 

forecasting model with the Commission as a general practice. 

Five-day Delivery

The Postal Service has also requested that Congress lift restrictions currently contained 

in annual appropriations language that prohibit the Postal Service from reducing mail delivery 

from six days a week. In a study issued last summer, the Postal Service stated that a one-day 

reduction could save as much as $3.5 billion a year. The Commission, in its study of universal 

service released in December 2008, found the savings to be closer to $1.9 billion. Utilizing data 

for FY 2008, we now estimate savings of about $2.2 billion. In both cases, the amount of 

savings is reduced because of anticipated modest declines in mail volume as a result of the 

service reduction. The Postal Service has stated that it is currently conducting a new, 

comprehensive study of this issue. 

Future of Universal Service

Whether it is 5-day delivery, collection box removal or the closure of facilities, the Postal 

Service appears intent on reducing its costs by reducing its footprint. These changes bring into 

question long-held concepts of how the Postal Service fits into the framework of American 

society. The Commission is well aware from its proceedings of the impact that the Postal 

Service has on our nation’s charities, educational institutions, political processes and the overall 

flow of information. It was not long ago that the Postal Service demonstrated its ability to be a 

binding force for the Nation, when it allowed residents of New Orleans to elect a Mayor even 

though they themselves had been dislocated from the city by Hurricane Katrina. 

The Postal Service continues to be an economic pillar for the nation and the world’s 

largest postal system, accounting for about 45 percent of global mail volume. The Postal 

Service is highly regarded by the American people. In a recent Gallup Poll, ninety-five percent 

of those polled indicated that it was personally important to them that the Postal Service 

continue to stay in business. 

The Postal Service is at a very uncertain moment in its history. It is contending with 

historic mail losses driven by an exceptionally difficult economic environment. There is no 

question, however, that the increased transparency, accountability and flexibility provided by the 

PAEA have been beneficial. Within the current law, there remains considerable room for 

innovation. Postal products continue to be shaped by historic class differences, largely in place 

since the 1920’s, that may not make sense today. Potentially new markets could be developed 

around hybrid products that combine characteristics between classes – for example, a standard 

mail product with guaranteed date of delivery. 

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The American public continues to demand effective, reliable and affordable nationwide 

postal service. Nevertheless, the Postal Service’s ability to continue to be self-sustaining is in 

question. The model of the past four decades – that mail volume growth would be sufficient to 

support an expanding delivery network, fully fund Postal Service operations and maintain 

universal service at existing levels – may need to be reexamined. 

Chairman Carper, this concludes my written statement. I appreciate the invitation to 

testify and welcome the opportunity to answer any questions that you or members of the 

Subcommittee may have.