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71–078 PDF 2011

POSTAL INFRASTRUCTURE: HOW MUCH CAN WE

AFFORD?

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

U.S. POSTAL SERVICE AND LABOR POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

JUNE 15, 2011

Serial No. 112–65

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL SERVICE AND LABOR

POLICY

DENNIS A. ROSS, Florida, Chairman

JUSTIN AMASH, Michigan, Vice Chairman

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

TREY GOWDY, South Carolina

STEPHEN F. LYNCH, Massachusetts,

Ranking Minority Member

ELEANOR HOLMES NORTON, District of

Columbia

GERALD E. CONNOLLY, Virginia

DANNY K. DAVIS, Illinois

(III)

C O N T E N T S

Page

Hearing held on June 15, 2011 ............................................................................... 1

Statement of:

Williams, David, vice president, Network Operations Management, U.S.

Postal Service, accompanied by Dean Granholm, vice president, Delivery and Post Office Operations, U.S. Postal Service; and Phillip Herr,

Director, Physical Infrastructure Issues, U.S. Government Accountability Office .................................................................................................. 13

Herr, Phillip ............................................................................................... 25

Williams, David ......................................................................................... 13

Winn, Michael, president, Greylock Associates, LLC; Joe Hete, president

and CEO, ATSG, Inc.; and Cliff Guffey, president, American Postal

Workers Union, AFL–CIO ............................................................................ 50

Guffey, Cliff ................................................................................................ 62

Hete, Joe .................................................................................................... 55

Winn, Michael ............................................................................................ 50

Letters, statements, etc., submitted for the record by:

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 84

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 81

Guffey, Cliff, president, American Postal Workers Union, AFL–CIO, prepared statement of ........................................................................................ 64

Herr, Phillip, Director, Physical Infrastructure Issues, U.S. Government

Accountability Office, prepared statement of ............................................. 27

Hete, Joe, president and CEO, ATSG, Inc., prepared statement of ............. 58

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts:

Prepared statement of ............................................................................... 6

Prepared statements of Hon. Judy Chu and Hon. Adam B. Schiff ....... 8

Williams, David, vice president, Network Operations Management, U.S.

Postal Service, prepared statement of ......................................................... 15

Winn, Michael, president, Greylock Associates, LLC, prepared statement

of ..................................................................................................................... 53

(1)

POSTAL INFRASTRUCTURE: HOW MUCH CAN

WE AFFORD?

WEDNESDAY, JUNE 15, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL

SERVICE AND LABOR POLICY,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:24 p.m., in room

2154, Rayburn House Office Building, Hon. Dennis A. Ross (chairman of the subcommittee) presiding.

Present: Representatives Ross, Amash, Lynch, Connolly, and

Davis.

Also present: Representative Napolitano.

Staff present: Robert Borden, general counsel; Adam Bordes, senior policy analyst; Molly Boyl, parliamentarian; Drew Colliatie,

staff assistant; Howard A. Denis, senior counsel; Ronald Allen and

Kevin Corbin, minority staff assistants; and William Miles, minority professional staff member.

Mr. ROSS. Good afternoon. I will now call the Subcommittee on

the Federal Workforce, U.S. Postal Service and Labor Policy to

order.

And before we begin, as is customary with the full committee and

our subcommittees, I will read the Oversight Committee 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, effective

government that works for them.

Our duty on the Oversight and Government Reform Committee

is to protect these rights. Our solemn responsibility is to hold government accountable 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 believe that there is a unanimous consent request for Representative Napolitano to participate in the hearing. Without objection, so ordered.

We have votes that may start in about an hour, so we are going

to try to wrap this up as best we can.

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With that, I will yield 5 minutes to myself for my opening statement.

Today’s hearing marks the fourth this year held by this committee to hear testimony relating to the fiscal standing of the U.S.

Postal Service. Unfortunately, today’s Postal Service is on a pathway toward insolvency and the current postal infrastructure is

bloated.

In fiscal year 2010, the Postal Service operated approximately

32,000 postal facilities and 528 mail processing facilities. Unfortunately, 59.2 million fewer customers visited post offices in 2010,

continuing a 3-year trend in declining customer visits. Moreover,

annual mail volume, predominantly first-class mail, has declined

by more than 42 billion pieces since fiscal year 2006. This year,

first-class mail has fallen by an astonishing rate of nearly 7 percent. The handwriting is on the wall. We either make the necessary

systemic changes to the postal infrastructure or we continue to

watch it become more outdated and accelerate the demise of the

Postal Service.

When the Postal Service was confronted with the advent of universal home delivery at the beginning of the 20th century, it made

adjustments. From 1901 to 1970, the Postal Service closed more

than 30,000 retail facilities from its peak of 76,945, because universal home delivery demanded changes to their business model.

The Postal Service must acknowledge the economic realities it faces today. The fact is that the Postal Service operated at an $8.5

billion loss in 2010 and is projected to lose $8.3 billion this year

and another $8.5 billion next year.

Today, postal customers are finding it more convenient to purchase postal services away from the traditional brick-and-mortar

facilities. Revenue from postal alternatives such as Click N’ Ship,

PC Postage, and USPS.com continue to grow. Unfortunately, the

Postal Service has not responded to these challenges with the same

vigor that it has done so in the past. For example, despite the

trend of postal customers utilizing alternative locations to purchase

stamps and mail packages, the Postal Service has closed only 6,000

retail facilities since 1971.

According to a Postal Service estimate, retail service cost the

USPS an estimated $4.2 billion in fiscal year 2010. With the continuing growth of alternative postal services and the decline in

mail volume, the Postal Service can realize tremendous savings by

right-sizing retail service locations and consolidating mail processing facilities, while still improving customer access to postal

services.

I have to applaud Postmaster General Donahoe’s vision to return

the Postal Service to profitability. The Postmaster General has

begun to reduce costs by consolidating facilities and implementing

other cost-saving measures. Unfortunately, cost-cutting is not occurring fast enough to keep pace with the Postal Service’s decline

in revenue. Given the decline, the Postal Service will need to reduce its annual expenses by more than $10 billion just to break

even in 2020.

Regrettably, labor costs continue to constitute 80 percent of Postal Service expenses, despite the elimination of 230,000 workers

over the last decade. More troubling is the fact that the new conVerDate 17-JUN-2003 11:30 Dec 23, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\71078.TXT KATIE PsN: KATIE
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tract negotiated with the American Postal Worker Union expands

layoff protections for workers, guarantees wage and COLA increases, and in-sources at least 4,000 positions.

As we all know, the Postal Service has announced its intention

to default on a $5.5 billion retiree health benefit pre-funding payment due to the Treasury on September 30, 2011. However, even

missing the large payment will not be enough to stave off further

insolvency as the USPS now projects to fall short on a mandatory

workers compensation payment due on October 15, 2011. Therefore, to save the Postal Service, the time to act is now. As Mr.

Herr’s testimony states, status quo for the Postal Service is no

longer sustainable, and reform is urgently needed to ensure postal

services are available to all Americans. The Postal infrastructure

is antiquated and must be transformed to accommodate 21st century customer service preferences.

I do thank the witnesses that will be appearing today on both

panels, and I look forward to their testimony.

I would like to recognize the distinguished gentleman from Massachusetts and the ranking member, Mr. Lynch, for his opening

statement.

Mr. LYNCH. Thank you, Mr. Chairman.

First of all, I want to thank our witnesses for coming before the

committee to help us with our work.

Today’s hearing will examine the current state of our postal infrastructure, including the range of retail and mail processing networks operated by the U.S. Postal Service. In light of the worsening financial challenges faced by the Postal Service, coupled with

the steady decreasing mail volume, we will be focusing our attention in this hearing on the Postal Service’s efforts to generate significant cost savings through network consolidation.

As we all know, the Postal Service has reached a financial breaking point. Last month, we received word from the Postal Service

that the agency had compiled its second quarterly report for fiscal

year 2011. Regrettably, the results were once again deeply troubling. In addition to what the chairman has noted, the Postal Service ended the second quarter with a net loss of $2.2 billion, as compared to a net loss of $1.6 billion during the same reporting period

for fiscal year 2010. This compares with the $1.9 billion and $770

million losses in the second quarter of 2009 and 2008 respectively.

So it is clear that, despite prior cost-cutting efforts, the situation

continues to worsen.

In addition, the Postal Service continues to see decreases in total

mail volume, which dropped from 42.3 billion to 41 billion pieces.

Mailing services revenue also declined by $568 million, and total

operating revenue also fell by $500 million. As a result, the Postal

Service projects that it will have reached its statutory debt limit

of $15 billion by the end of this fiscal year.

Were it not for all the other crises we have in this country and

the problem with the national debt limit, I think this would be a

major, major issue. But it is being overlooked I think by some because of all the other priorities that we are concerned with.

Moreover, absent legislative changes, the Postal Service expects

that it will be forced to default on its mandatory payment to the

4

Federal Government, including a $5.5 billion retiree health benefit

fund payment due on September 30th of this year.

Against this extraordinary financial backdrop, the Postal Service

has undertaken action to review its extensive network of retail and

mail processing facilities and begin to consolidate its operational

infrastructure. Notably, this consolidation initiative falls in line

with the advisory recommendations issued in July 2009 by the

Government Accountability Office, which conducted a comprehensive audit of the Postal Service’s financial condition and determined that the Postal Service should consider network realignment

due to its costly excess capacity.

There should be no remaining doubt that the Postal Service’s financial situation will require us to make some very difficult

choices, including consolidating excess postal infrastructure. However, in doing so, we must be sure to exercise due diligence so as

to make certain that any effort to realign the Postal Service retail

and mail processing infrastructure does not compromise customer

service or delivery standards or cause unnecessary impacts on our

dedicated, hardworking postal employees and retirees.

The potential realignment of more than 500 mail processing

plants merits particular oversight, given their critical connection to

universal service and the central role they play as hubs of economic

and employment activity. To this end, I strongly urge the Postal

Service to adopt a network realignment process that is fair, it is

transparent, and it is accountable, and allows for all of the stakeholders, including Members of Congress and the communities that

are affected, to have input into the process.

As is the case with most businesses, communication is critical. So

I feel strongly that the Postal Service must be held accountable in

terms of making sure communities are fully informed and involved

at every juncture of consolidation study, notwithstanding whether

it is the closing of a small postal branch in a rural area that has

three staffers or relocating a large-scale processing and distribution

center in an urban area that employs hundreds of workers.

In addition, we need to look at other reasonable steps that the

Postal Service may take to improve its long-term financial viability.

In particular, while the Postal Service has already undertaken a

series of revenue-generating and marketing initiatives, we must

continue to examine the feasibility of the Postal Service plans to

diversify its retail portfolio to include the sale of some nonconventional items as well as expand its marketing strategies and digital

platform.

Most notably, we can immediately address the significant overpayment by the Postal Service of both its Civil Service Retirement

System and the Federal Employees Retirement System liabilities

through legislative action. For example, immediately repaying the

Postal Service the near $7 billion owed them for their overpayment

of their Federal Employee Retirement System obligations will at

least place the Postal Service on a better financial footing for this

fiscal year, thereby affording us additional time to examine other

important alternatives and reforms for the long term.

In order to address this matter, I have introduced legislation,

H.R. 1351, to rectify these overpayments and allow the Postal ServVerDate 17-JUN-2003 11:30 Dec 23, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\71078.TXT KATIE PsN: KATIE
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ice to use the resulting surplus to cover various on-budget obligations which will help to improve its current liquidity position.

Mr. Chairman, I look forward to our witnesses’ testimony this

afternoon and hope that we will all be able to work in a bipartisan

manner to get our trusted government institution back on the right

track.

I want to thank you for yielding the time.

I also want to thank you for the unanimous consent agreement

that you announced to allow Ms. Grace Napolitano of California to

weigh in, in contravention of the rules of the committee.

I also ask you to please consider a unanimous consent request to

enter into the record the statements of Representative Judy Chu

of California and Representative Adam Schiff of California, which

I will present for entry into the record.

Mr. ROSS. Without objection, they are entered into the record.

And thank you.

[The prepared statements of Hon. Stephen F. Lynch, Hon. Judy

Chu, and Hon. Adam B. Schiff follow:]

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Mr. LYNCH. Thank you, and I yield back.

Mr. ROSS. Thank you, Mr. Lynch.

The Members may have 7 days to submit opening statements

and extraneous materials for the record.

At this point, I would like now to introduce our first panel.

Mr. David E. Williams is vice president of Network Operations

Management for the U.S. Postal Service; Mr. Dean Granholm is

vice president, Delivery and Post Office Operations, for the U.S.

Postal Service; and Mr. Phillip Herr is a Director on the Physical

Infrastructure Issues team at the U.S. Government Accountability

Office.

Pursuant to committee rules, all witnesses must be sworn. So if

you would please stand and raise your right hands.

[Witnesses sworn.]

Mr. LYNCH. Thank you.

Let the record reflect that all of the witnesses answered in the

affirmative.

We will now allow each panel member to have 5 minutes to

present their opening testimony. Please also note that your written

testimony has already been entered into the record here.

With that, I will I will recognize Mr. Williams for 5 minutes.

STATEMENTS OF DAVID WILLIAMS, VICE PRESIDENT, NETWORK OPERATIONS MANAGEMENT, U.S. POSTAL SERVICE,

ACCOMPANIED BY DEAN GRANHOLM, VICE PRESIDENT, DELIVERY AND POST OFFICE OPERATIONS, U.S. POSTAL SERVICE; AND PHILLIP HERR, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY

OFFICE

STATEMENT OF DAVID WILLIAMS

Mr. WILLIAMS. Good afternoon, Mr. Chairman, Ranking Member

Lynch, and members of the subcommittee.

My name is Dave Williams, and I serve as the vice president of

Network Operations for the Postal Service. I am responsible for the

management of a national network of 512 mail processing facilities,

as well as coordination of automation initiatives.

I am accompanied today by Dean Granholm, vice president of Delivery and Post Office Operations. Mr. Granholm is responsible for

all aspects of mail delivery, as well as operations at nearly 32,000

post offices, stations, and branches.

The Postal Service is the cornerstone of a vital industry which

impacts every community in America. This year, we will process

and deliver over 168 billion pieces of mail. The mailing industry

pumps over $1 trillion into the economy every year and employs

over seven million Americans. Over 90 percent of mail-related jobs

are in private companies of all sizes, like mailing and fulfillment

services, envelope manufacturers, printers, consolidators, to name

a few. The success of these firms depend on a healthy and thriving

Postal Service.

Today, however, the Postal Service is poised on the brink of a financial crisis, and we need your help to get back on the path of

profitability. The Postal Service does not relish being in this position. A little over 5 years ago, in 2005, our debt stood at zero. HowVerDate 17-JUN-2003 11:30 Dec 23, 2011 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\71078.TXT KATIE PsN: KATIE
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ever, at the end of this fiscal year, we will reach our $15 billion

statutory debt limit, and we will not have the cash to make a $5.5

billion retiree health benefit pre-funding payment due September

30th. This payment, mandated by the Postal Act of 2006, is one of

the primary drivers of our precarious financial situation.

The focus of this hearing is the Postal Service’s mail processing

and retail infrastructure and our efforts to right-size our overall

network. The decline of first-class mail and the increased use of

electronic means of communication is something the Postal Service

predicted and planned for. We have been closing all types of postal

facilities on a continual basis since the early 1970’s, when we became the self-supporting U.S. Postal Service. Using area mail processing studies and other consolidation activities, we have reduced

a sprawling network that once consisted of over 2,000 facilities.

Today, our primary outgoing mail processing facilities number less

than 300.

We are taking a similar approach to reducing the size of our retail infrastructure, which currently consists of roughly 32,000 postal-operated retail locations.

Right-sizing our network is one of many strategies the Postal

Service has employed to cut costs and improve efficiency. In the

past 4 years, the Postal Service has cut costs by $12 billion, including a reduction of career employment of 110,000.

Our achievements notwithstanding, a gap still exists between

revenue and costs mainly because of a series of events outside our

control.

There are three critical areas which need to be addressed this

year. They are resolving the retiree health benefit pre-funding requirement, finding a solution to the overfunding of FERS and

CSRS pension benefits, and giving the Postal Service authority to

adjust delivery frequency.

There are a number of bills already introduced in both Chambers

which address some or all of these issues. We appreciate the hard

work and interest of the subcommittee, especially those Members

who have proposed legislation or plan to introduce bills in the coming weeks.

The Postal Service knows how to cut costs, streamline our excess

retail and processing network, and make the necessary changes to

bring our organization further into the 21st century. But we cannot

do it alone.

Absent congressional action this year, the Postal Service will face

a liquidity crisis. The Postmaster General’s stated goal is to reduce

our work force to 400,000 employees and cut costs to $60 billion annually as quickly as possible. How quickly we reach this goal depends largely on the enactment of legislation that will free the

Postal Service to pursue even greater levels of efficiency and cost

savings. Working together, we can continue the evolution of the

Nation’s postal system into a more stable and viable organization.

We look forward to working with all of you.

Thank you again, Mr. Chairman, and we will be happy to answer

your questions.

[The prepared statement of Mr. Williams follows:]

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Mr. ROSS. Thank you, Mr. Williams.

Mr. Granholm, you are recognized.

You are here for technical response. Thank you very much.

Mr. Herr, you are recognized for 5 minutes for an opening statement.

STATEMENT OF PHILLIP HERR

Mr. HERR. Thank you.

Chairman Ross, Ranking Member Lynch, and members of the

subcommittee, I am pleased to participate in this hearing.

There is broad agreement that the Postal Service is in a serious

financial crisis, linked in part to the 20 percent decline in mail volume since 2006 and its difficulty aligning revenue with costs.

Today, I will first discuss the urgent need to right-size postal operations and networks, followed by GAO’s analysis of changes needed

to facilitate progress in restructuring.

A few key financial facts make clear why action is needed. As

discussed today, the Postal Service has experienced a cumulative

net loss of nearly $20 billion over the last 5 fiscal years. By September 30th, it projects it will reach its $15 billion borrowing limit

and also not make its mandated retiree health payment to the Federal Government. For this reason, the Postal Service’s financial

condition and outlook is on GAO’s 2011 list of high-risk programs

and agencies.

I will discuss three areas where realignment is needed.

While there are 32,500 postal retail facilities, how customers purchase postal products has changed. In fiscal year 2010, about onethird of postal retail revenue came from purchases made outside of

post offices, a figure estimated to reach 60 percent by 2020.

Over the past 10 years, visits to post offices have declined by 21

percent, and revenue from sales at post offices has dropped by 16

percent, but the number of post offices has remained relatively unchanged. Statutory requirements prohibit closing small post offices

solely for operating at a deficit. Yet 80 percent, about 26,000 postal

retail facilities, do not cover their costs. This is simply

unaffordable.

Postal officials say the time required to close facilities has hindered realignment efforts. The current process can take 270 days

once the decision to pursue an individual closure has been reached.

Foreign posts we reviewed address stakeholder resistance

through regular outreach. When modernizing its retail network,

one European postal operator launched a national campaign to

proactively inform customers about how and where they could access postal services in alternate locations.

Turning to the processing network of 500 facilities used to sort

mail, which has also not been significantly adjusted in response to

recent mail volume declines. To its credit, the Postal Service reports it is evaluating 90 proposals to consolidate processing operations.

Excess mail processing capacity remains for several reasons. Single-piece first-class mail has dropped by about 23 billion pieces over

the past decade, leaving less mail to be processed end to end

through the network. In 2009, a senior postal official testified beVerDate 17-JUN-2003 11:30 Dec 23, 2011 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\71078.TXT KATIE PsN: KATIE
26

fore this subcommittee that there was 50 percent excess capacity

in first-class mail processing operations at that time.

Increased automation enables faster and more efficient sorting,

and 83 percent of standard mail now bypasses most of the processing network through a process called drop shipping.

Turning to mail delivery, there are ongoing efforts to improve

what is the Postal Service’s most costly activity, involving delivery

to about 150 million points 6 days a week, employing 310,00 carriers. Key efforts to improve delivery operations include realigning

city routes and introducing new systems to sort large mail pieces.

Congress and the Postal Service urgently need to reach agreement on how to accelerate progress on network restructuring, particularly since many processes for closing facilities have not

changed since the 1970’s.

Some key topics to consider include: What aspects of universal

service are appropriate in light of fundamental changes in the use

of mail? Should delivery standards be modified? How can access to

retail services be enhanced while maximizing savings? What statutory or regulatory changes are needed as a catalyst for networkwide restructuring while assuring appropriate oversight and accountability? What role should Congress, the Board of Governors,

and the PRC have in modernizing and realigning postal operations?

How and when should the Postal Service get public input and provide notice about decisions to close facilities?

Additional considerations that could facilitate restructuring include revising legal requirements to facilitate shifting the focus

from individual closures to network-wide restructuring similar to

the BRAC approach used by DOD. Improving outreach and transparency through strategic communication with key groups is also

important and simplifying rules, terms, and requirements so that

they are easily understood.

In closing, right-sizing the Postal Service will require congressional support and senior postal leadership, because past attempts

at even modest restructuring have faced formidable resistance.

Going forward, stakeholders, the unions, management associations,

the mailing industry, and political leaders need to recognize that

a major realignment of postal networks is imperative for the Postal

Service to be financially viable in the 21st century. The status quo

is no longer sustainable if the Postal Service is to be self-supporting.

This concludes my prepared statement, and I am pleased to answer questions.

[The prepared statement of Mr. Herr follows:]

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Mr. ROSS. Thank you, Mr. Herr.

I will now recognize myself for 5 minutes for questions.

And I do want to recognize also and agree with the ranking

member, Mr. Lynch, that if it weren’t for other crises that are

going on right now in addition to the debt ceiling crisis, this would

be the major crisis and most likely will be the major crisis as time

progresses. Because where we are today as a country with the U.S.

Postal Service is, after 230 years, it is still one of the most wellestablished, best infrastructures, going to 150 million homes a day.

But we also know—and I want to address this to Mr. Williams—

that there are issues out there that we must confront. And I want

to hit this one head on with regard to the overfunding issue, which

is an issue. I recognize that. There is no question that that is something we have to address. But even assuming we address it to the

satisfaction of everybody involved, it still doesn’t solve the future

problems that the U.S. Postal Service will have, will it?

Mr. WILLIAMS. No, it will not.

Mr. ROSS. In fact, we have to make some systemic changes.

Mr. WILLIAMS. We do.

Mr. ROSS. As you pointed out, reduce the work force to at least

400,000. We have to consolidate certain processing centers.

Let me ask you this. What options does the Postal Service have

to create a modern processing network? I toured one facility. There

was still a lot of labor-intensive involvement there. Where I tour

a facility in the private sector where the labor involvement is not

near what is done in the U.S. Postal Service. Do you have any suggestions?

Mr. WILLIAMS. The Postal Service operates one of the most technology advanced systems in the world. We have a tremendous infrastructure in place that provides our ability to be very, very efficient in processing mail in our network facilities. But what I would

like to add is our financial situation is such at a critical point right

now that having capital programs to even further enhance our infrastructure, we simply can’t afford.

Mr. ROSS. I agree with you. You have to have the business plan

on one side, and then you have to have the capital investment in

order to implement that business plan. I think that is where these

crossroads are going to have a severe train wreck if we are not

careful over the next couple of months.

With regard to drop ship, it seems to be that private carriers are

doing more drop shipping, which is becoming more economically

feasible. For example, I toured a facility where they would drop

ship to an SFC, I think is what it is.

Mr. WILLIAMS. SCF?

Mr. ROSS. SCF. Thank you.

Is that something that we ought to look at in terms of

transitioning the private sector to providing that as a cost-saving

service to the Postal Service?

Mr. WILLIAMS. Our drop ship program, our work share program

has been one of the cornerstones in our ability to shrink our infrastructure. Because mail gets dropped further into our network, and

it bypasses many of the processing steps. So, yes, work sharing,

pre-sorting, drop shipping volumes deeper into our network allows

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us to further contract our infrastructure, our operational footprint,

and allows us to be a lot more efficient.

Mr. ROSS. Mr. Herr, you talked about the retail facilities and, in

fact, some of the processing facilities, but I want to talk about the

retail facilities. Because we have to agree that the Postal Service

is a business.

Mr. HERR. That is correct.

Mr. ROSS. And it operates on the revenues gained by the rate

payers, the people that buy the service and do that and so forth.

So if we are going to assess it based on it being a business, then

we have to look at the facilities that are out there that provide the

service. And if they are not providing the service at a rate that is

at least profitable or break even, then we should get rid of them.

Mr. HERR. We need to take a hard look.

Mr. ROSS. Not necessarily get rid of them, but wouldn’t it be in

the best interests of not only the consumers but also the U.S. Postal Service to look at partnering with established retail outlets?

Mr. HERR. Yes, it would. That is what we found in our review

of foreign posts. That is exactly what we have seen other industrialized countries doing.

Mr. ROSS. In fact, you wouldn’t have the investment of the bricks

and mortar. You would have probably better hours, because it

would be utilizing the hours of the retail establishment. Let’s say

it was a 7–11 or a Starbucks or whatever—a grocery store, maybe.

You could provide the services there. But it would still provide the

consumer that which they are desiring from the U.S. Postal Service, and that is the day-to-day contact that they want to have.

Mr. HERR. Right. That is certainly one alternative to do that.

Mr. ROSS. Let me ask you, at the rate the Postal Service is going

now, how many years do you think it would take to eliminate the

redundant retail facilities?

Mr. HERR. Given the rate of change over the past 10 years, I

don’t—at the rate over the last 10 years, they have closed about a

thousand facilities, more or less. And mainly that has only been

where there has been an opportunity, say a vacancy. If they continue at that rate, it won’t get done nearly in time, given the gravity of the financial situation we are discussing today.

Mr. ROSS. So we need—as a Congress, we need to empower the

Postmaster General to be able to make those decisions based on

economic factors in order to reduce the size or the obligations of the

Postal Service to stay in those.

Mr. HERR. I believe so.

Mr. ROSS. Okay. I see my time is up; and I will now recognize

the ranking member, Mr. Lynch, for 5 minutes.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. Herr, you are a frequent flyer to this committee.

Mr. HERR. It feels like it.

Mr. LYNCH. And a pretty bright guy, in my opinion.

I think we have 38,000 post offices in the United States today.

How many do you think we really need?

Mr. HERR. You know, actually, we have a job that we are just

getting under way now taking a look at the postal network. I have

heard different figures. I think one of the things that I would hope

that comes out of that review that we are doing now is a better

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sense of what the core might look like and then how that might

be complemented by alternate retail facilities.

But in terms of venturing a guess, I don’t have a figure. Mr.

Granholm has probably thought about this to some degree in his

capacity working with postal retail.

Mr. LYNCH. All right. Mr. Granholm, you want to take a look at

that?

Mr. GRANHOLM. It is a difficult question. We need to build a

model that reviews our infrastructure not only today but in 10

years.

Mr. LYNCH. Yeah.

Mr. GRANHOLM. When our alternate access grows to the 60 percent level, it definitely puts a huge strain during that period of

time——

Mr. LYNCH. Alternate access. What do you mean?

Mr. GRANHOLM. That means where we sell our products in grocery stores, in contract stations. Online definitely is a huge growth

area for our alternate access. We currently have over 63,000 retail

locations that are not our traditional brick and mortar. Those will

continue to grow.

Mr. LYNCH. Yeah, but just to push back on that, a lot of the stuff

we closed was stuff that you expanded. You expanded to airports

and malls and places like that. Those are the places we closed. Nobody was using them.

Mr. GRANHOLM. You are absolutely right. And we need to close

more.

Mr. LYNCH. I don’t want to burn my time on this one question.

Here is the problem. Mail volume keeps dropping. And from

what I see in Europe and these online services, where you can actually go online and click your mail, if you don’t want it delivered,

you can just click on it. So I don’t know, what term do they use?

They don’t use junk mail. But what is the term they use?

Mr. GRANHOLM. Electronic mail, hybrid mail.

Mr. LYNCH. No. No. No. Stuff that just—advertisements that

come in the mail.

Mr. GRANHOLM. Bulk business mail.

Mr. LYNCH. Right. If you don’t want that delivered, you can just

click on it. And a lot of that stuff is going to get clicked on. So, as

that comes online, less and less and less mail is going to get delivered. And, you know, I talked to the Postmaster General last week,

and volume dropped off a cliff again——

Mr. GRANHOLM. Yep.

Mr. LYNCH [continuing]. In this last quarter. And we haven’t

seen that happen since the economy went in the toilet around—you

know, 2008 we saw a big drop. And you know, I know we are not

talking about—we are not supposed to talk about a double dip, but,

you know, if you just take mail volume as an indicator of economic

activity, it looks pretty bad. It looks pretty bad. So we got to figure

out a way to get this ship back on course.

And change is painful. People hate change. I understand that.

But if we don’t get ahold of this thing and straighten it out, you

know, then it is going to further damage the system; and we are

going to continue this downward spiral. So we have to make a

good, hard look at this.

45

Look, I come from a postal family. My mom was a postal clerk

of 30 years. I have told people before these hearings, I probably

have 17 people in my family—my cousins, in-laws, everybody—who

worked for the Post Office. And you know, a lot of them are retirees. I worry about their benefits going away and what they worked

for and what they were promised.

So we’ve got to get serious about this. And if there are postal facilities—you know, I was an ironworker for 18 years; and all I did

for 18 years, just about, was build bridges and high rises. And

every time we built a high rise, whether I was in New York or Boston or Chicago, we would stick a post office in the bottom floor.

And, you know, the volume of mail would justify the location of

that post office.

But we would pay top dollar for that location, and we are paying

top dollar now. In every major city in America, we are paying topdollar, class-A office space for a post office to be located there. And

there is a high rise across the street; and we are paying that rent,

too.

So what I am saying is, okay, let’s look at some of these urban

areas where you have facilities across the street from each other

that are both paying enormous rent, and let’s close one of them and

make them walk their mail across the street to the next one. We

could save a lot of money that way.

You know, the plain fact of the matter is that this labor-intensive

activity that we see at the post office, we call that work. That is

work. And it takes work to sort the mail, and it takes work to deliver the mail. Until we come up with a robot letter carrier, we are

going to have to pay these folks to go out and deliver the mail. And

we are adding a million addresses a year. So there is more and

more work as people are moving to the suburbs, and we are still

servicing those groups. So, you know, getting rid of people is not

going to maintain the quality of service.

I know I am way over my time, and you are being extremely gracious. I will save the rest for the rest of the hearing.

But we have to really look at the expense side of this thing. We

are spending a lot of money on facilities that we are underutilizing,

and I think that is one of the areas that we are neglecting to address.

Thank you. I yield back.

Mr. ROSS. Thank the ranking member.

I now recognize the gentleman from Michigan, Mr. Amash, for 5

minutes.

Mr. AMASH. Thank you, Mr. Chairman, and thank you to our

panel.

Mr. Williams, with mail volume declining significantly over the

past several years, why does the Postal Service continue to maintain significant excess mail capacity?

Mr. WILLIAMS. The Postal Service has been very aggressive in

eliminating excess capacity. And we define capacity in a couple of

ways. We have capacity with staffing, we have capacity with machines, and we have capacity with facilities. And over the last 4 or

5 years we have been dealing with that capacity. We have pulled

out thousands of machines out of our mail processing network. We

have pulled out—over the last 4 years, one out of every three work

46

hours in our mail processing operations have been extracted from

the system.

So we are looking at every opportunity. Because of our dire financial situation, we have been looking at every opportunity to cut

costs and to take out capacity, staffing, machines, and now we are

in a position right now where we haven’t been, in my career, we

have been dealing with more area mail processing and other mail

processing consolidations than we ever have that I know of in the

past. We are up to 138 consolidation opportunities right now on the

mail processing side. So we are being very aggressive with cost cutting.

Mr. AMASH. You mentioned staffing. If the Postal Service has reduced its number of employees by 230,000 since 2001, then why

does labor still make up 80 percent of the cost?

Mr. WILLIAMS. Our entire operational footprint is continuing to

shrink. So we are shrinking not only our labor costs, we are shrinking the facilities, we are shrinking overhead. We have pulled out

this year alone, year to date, about 2 million square feet of space

out of our operations. So as we continue to contract the entire operating costs of the Postal Service, we are doing it not only on the

labor side but also on the other components of costs outside of

labor.

Mr. AMASH. Now—and you want Congress to get involved. Why

should Congress be involved here? Isn’t it more important for the

Postal Service to address its business model and make some

changes internally?

Mr. WILLIAMS. We are doing everything that we can do, but we

need help from Congress. We need to address the retiree health

benefit pre-funding, we need to address the overfunding of CSRS

and FERS pension, and we need the ability to determine the delivery frequency for the Postal Service that will allow us to continue

to shrink our infrastructure.

Mr. AMASH. Isn’t it just kicking the can down the road?

Mr. WILLIAMS. No. We believe with our plan that we put in place

on March 2nd, our comprehensive plan, our initiatives around cost

cutting that we have control over, we believe that if we get the retiree health benefit, if we get the overfunding issues around FERS

and CSRS and have the ability to determine the delivery frequency, we believe that that will address the issues and improve

the viability of the Postal Service.

Mr. AMASH. If workers compensation costs are ignored, are the

Postal Service costs up this year? Is that correct?

Mr. WILLIAMS. If the workers compensation are ignored—I don’t

understand the question.

Mr. AMASH. If you ignore the payment, the adjusted payment for

the year. I am sorry.

Mr. WILLIAMS. I don’t have that information. I would be happy

to respond for the record.

[The information referred to follows:]

[NOTE.—The information referred to was not provided to the subcommittee.]

Mr. AMASH. Okay. Mr. Herr, I have a few seconds here still, is

the Postal Service moving fast enough to right-size its work force?

47

Mr. HERR. Given the gap between the revenues and the expenses, not—in our judgment they are not.

Mr. AMASH. And what fundamental weaknesses in their business

model would you say they have?

Mr. HERR. Right now, the profitable mail, first-class mail is dropping, as acknowledged earlier today in the hearing by Mr. Lynch

and Mr. Ross. It is dropping considerably, with no end in sight.

And what I think ultimately what will be left will be the standard

mail, which doesn’t bring in that much revenue.

Mr. AMASH. Would you attribute the Postal Service’s problems to

Congress or to—or should the Postal Service take more responsibility here, in your opinion?

Mr. HERR. Well, I think the Postal Service needs to articulate

what its vision would look like. One area we talked a little bit

about earlier would be on the retail side. The Postal Service laid

out with a vision for what 5-day delivery, what potential savings

would come with that. I think an alternate study relative to what

might happen with the retail network would be a nice complement

to that to give Congress a sense of what potential cost savings

there might be.

Mr. AMASH. Thank you. Thanks to both of you.

Mr. ROSS. Thank you.

The gentleman from Illinois, Mr. Davis, is recognized for 5 minutes.

Mr. DAVIS. Thank you very much, Mr. Chairman; and let me

thank the witnesses for being here.

Mr. Williams, according to some of your post-implementation reviews, what is the largest areas of savings usually generated from

processing and consolidations?

Mr. WILLIAMS. The largest savings component typically in an

area mail processing study, and validated in our post-implementation review, are, typically, labor costs.

Mr. DAVIS. And in considering a move to 5-day delivery, has the

Postal Service evaluated what impact such a move would have on

processing and distribution centers? And, without Saturday mail, I

would assume that these facilities would experience increased

workload on Monday or possibly Tuesday if a holiday fell on a Monday.

Mr. WILLIAMS. The Postal Service has a very robust modeling

process where we model every single plant across the network. And

in that modeling process, which is where we identify candidates for

consolidation opportunities based on matching demand with excess

capacity and determining which facilities are candidates for closure, in that process we have included the scenario of 5-day delivery and the impact that added volume into Monday’s processing

into that scenario. So we have included the 5-day delivery scenario

in our modeling, and we have completed that effort last year.

Mr. DAVIS. Mr. Williams and Mr. Herr, can I ask you, in light

of recent increases in the price of fuel, transportation obviously

continues to be a key cost driver in the postal system. So as the

Postal Service moves to downsize or right-size the number of mail

processing facilities in the network, is it logical to assume that

these trucks are going to have to travel further in terms of their

routes and the mail that they will deliver?

48

Mr. WILLIAMS. I will take that first.

As we shrink the infrastructure of mail processing and have

fewer network buildings in our network, what we are actually seeing is the opportunity to consolidate not only workload into a building but to consolidate mail onto our trucks and our vehicles. So we

are able to build bigger loads and actually have fewer trucks. In

fact, year to date through March, we have taken out, compared to

prior year March, we have taken out approximately 56 million

miles out of our network. So consolidating facilities, having fewer

nodes in our network is actually driving bigger loads for transportation and therefore allowing us to have less miles and less consumption in terms of transportation.

Mr. DAVIS. Would the cost of fuel, as it continues to fluctuate—

but I guess it goes up more than it goes down, unfortunately—but

would the cost of fuel negate perhaps some of those savings or——

Mr. WILLIAMS. The cost of fuel, all things being equal, as long as

we are taking miles out of the system and taking consumption out

of the system, all things being equal, we are saving.

If we had those miles still in the system, those 56 million miles

that we pulled out year over year in March would have just exacerbated our fuel spend, because prices continue to rise. And, from our

standpoint, it is taking consumption out, taking miles out, and balancing this whole demand equation with capacity. And that includes staffing, includes facility footprint, and it includes transportation.

Mr. DAVIS. What would either one of you say to those individuals

who continue to suggest that there might be some additional costcutting, cost-saving opportunities for the system?

Mr. WILLIAMS. We are in a serious financial situation. We have

to act with speed. We have to make good, sound business decisions;

and we are looking at every opportunity to cut costs. There will be

further cost-cutting initiatives down the road. We can’t afford not

to question every cost in our system and look for opportunities to

reduce costs and to reduce our operating footprint to make sure

that we are matching our capacity with the changing customer behavior that we are seeing with our volume declines.

Mr. DAVIS. Thank you very much.

Thank you, Mr. Chairman. I yield back.

Mr. ROSS. Thank you.

The chair now recognizes the gentlelady from California, Mrs.

Napolitano, for 5 minutes.

Mrs. NAPOLITANO. Thank you, Mr. Chairman; and thank you for

allowing me to sit on the dais.

I have a ton of questions, plus a lot of information to submit for

the record, and I have been listening with great interest.

We have in my area a distribution center that is scheduled—I

am sure you already have been briefed—for transition over to another area, which is roughly 30 miles away in one of the most

heavily trafficked areas of southeast L.A. County, from Industry to

Santa Ana, California.

We started working since January 2009, and according to what

I am reading from the staff report is that by law you have to notify

the area that you will be closing. There was no notification—or at

least none that I found out. I found out from the employees who

49

called my office to give us the information, and so we started delving into.

Since then, I have asked for verbally, in writing, you name it, to

try to get information from any of the postal authorities, local,

Washington; and I have been given what I would call the runaround. The report that was given to me is blank. The second report I received, it is—they called it redacted, which is blacked out.

So, essentially, we can’t make any comparison.

You say this is information that is proprietary. Well, how are we

to be able to understand what you are trying to do and how you

are trying to do it?

Now, the report indicates there is 26 employees that will be either transferred or manned up, moving along in their retirement,

whatever. Yet there is no real way for me to understand what is

going to happen. There is no plan B. What happens if Santa Ana

can’t afford them, cannot accept that amount of traffic? Now, understanding that in December you moved some of it to Industry,

Christmas mail, because Santa Ana couldn’t handle it. So that tells

me there is an issue.

I have asked for capacity. What is the capacity of one versus the

other? The footprint. I can’t get any information from you guys. It

is proprietary. Why can’t we get some information so that I can tell

my cities?

And, by the way, I have letters and city council resolutions in the

packet telling you and this committee of their opposition without

information. So I am very frustrated by all this.

And then when I hear—and, by the way, into the record I am introducing a Postal Reporter News Blog on significant degradations

in service, Lima consolidation. And they state very openly, report

delayed, lost, damaged bills, payments, packages, and medicine.

Now, in my corridor I have the city of Industry, which is 95 percent industrial. These are people that ship in and out that are constantly doing package mailing or mail; and we are saying, sorry,

guys, you don’t matter. This industrial area, which is one of the

hubs of the L.A. County, it doesn’t matter. We are sending it to

Santa Ana, which is mostly residential—well, not residential, it has

a mixture of everything.

So there has been no way for me to be able to gauge what is

being based on. When you talk about the junk mail, are you studying, are you increasing those rates? Because two-thirds of my mail

at home is junk. Who is paying for that? Is it being at the expense

of regular mail or other services?

Are you studying anything that is going to tell us are you retiring people? Are you allowing them to retire? And you say that you

have done some review to be able to make up for that loss in USPS

income. There is a million questions that I have.

And I would like to, Mr. Chairman, introduce into the record several files that I have on this. And I would like to just show off for

you guys’ edification, this is what I received. Thank you very much.

Isn’t that nice? Blanks. Black. So, to me, it is not the way you treat

a request from Members of Congress.

Thank you, Mr. Chair.

Mr. ROSS. Without objection, so entered into the record.

[The information referred to follows:]

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[NOTE.—The information referred to was not provided to the subcommittee.]

Mr. ROSS. Thank you. That being the last of our panelists, I want

to thank—or our questions, I want to thank the panelists for being

here. We are going to take just a brief break—just seconds, minutes—break to get our next panel going and hopefully have a

chance to get done before they call us for votes.

Thank you all very much for being here.

[Recess.]

Mr. ROSS. We will reconvene.

I appreciate everybody’s patience here. I want to again thank the

second panel for their patience as well and thank you for being

here.

I will introduce our second panel.

We have Mr. Michael Winn, who is president of Greylock Associates; Mr. Hete, who is president and CEO of Air Transport Services

Group; and Mr. Cliff Guffey is president of the American Postal

Workers Union.

As you all know, know pursuant to committee rules we swear in

our witnesses. I ask you to please stand and raise your right

hands.

[Witnesses sworn.]

Mr. LYNCH. Thank you.

And let the record reflect that all witnesses answered in the affirmative.

Please be seated. I am going to now recognize each of you for 5

minutes for your opening statements, and please note that your

written opening has been entered into the record.

With that, I will recognize Mr. Winn for 5 minutes.

STATEMENTS OF MICHAEL WINN, PRESIDENT, GREYLOCK ASSOCIATES, LLC; JOE HETE, PRESIDENT AND CEO, ATSG, INC.;

AND CLIFF GUFFEY, PRESIDENT, AMERICAN POSTAL WORKERS UNION, AFL–CIO

STATEMENT OF MICHAEL WINN

Mr. WINN. Thank you, Mr. Chairman; and thank you to the entire subcommittee for allowing me to testify today.

First, may I introduce RR Donnelley. RR Donnelley is a Fortune

250 company and is the largest printer in North America. We employ nearly 35,000 people across 45 States. Printing is one of the

largest domestic manufacturing industries; and RR Donnelley has

production facilities in 26 States, coast to coast, border to border.

Anybody have a Verizon wireless phone? We print the statements and put them in the mail for you. And magazines such as

The Economist, very timely, very critical with delivery of content

to their customers. And do you receive an Ikea catalogue or brochure? We have been recognized as an award-winning provider for

Ikea. And what about Williams Sonoma from California? We

produce many of their catalogues and promotional material and

perform mailing and logistic services for them. And then, for the

U.S. Government, we are proud to have printed 160 million firstclass mail pieces for the 2010 census, as well as about 40 million

Medicare & You booklets.

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RR Donnelley doesn’t just print material and deliver it back to

our customers. We print material and deliver it for our customers,

collaborating with the U.S. Postal Service, deploying a sophisticated logistics network nationwide. The health and viability of the

Postal Service is critical to our business.

And may I introduce myself? I was an employee of RR Donnelley

for over 35 years. Currently, I am retired. That is open to interpretation. But I still represent RR Donnelley on postal matters in

Washington. My positions over my career have ranged from introducing new technologies and managing operations, running some of

the largest plants in the RR Donnelley network.

I was invited to testify today because of my experience with facility and capacity management; and that is what this testimony is

all about, facility and capacity management to meet the demands

of customers. That reflects the need to manage equipment, buildings, locations, and employees.

In the private sector, we answer to stockholders, stakeholders,

our communities, and employees. They all examine what we are

doing, executing our responsibilities as caretakers of the organization. There is very little room for forgiveness.

In my career, there were many difficult decisions. Laying off

groups of people, shutting down pieces of equipment, and closing

plants, all of which affected people’s lives, customers, and communities.

Please let me relate just one story about this responsibility of

management.

In 1976, I began my career with RR Donnelley as an engineer

in a plant located in Old Saybrook, Connecticut. The plant was

started in 1960 to serve customers in the Northeast part of the

United States. Many great people taught me the trade and helped

me become a member of management.

In 2003, I was responsible for the operation of three plants, two

in Lancaster, Pennsylvania, and the Old Saybrook plant. It became

painfully obvious that I needed to shrink capacity to meet the demand of my customers and to serve them in the best way possible.

Customers would benefit from the closure of Old Saybrook and the

combination of operations into Lancaster.

I closed Old Saybrook. There were 484 employees in the plant,

and all were retrained, relocated to other positions within RR

Donnelley or other employers. The plant was closed and sold. All

of the equipment was relocated or sold. All of the community obligations were met, including things like our commitment to the

United Way. There were three employees that helped start the

plant up in 1960 that were relocated as a result of this closure.

Painful? Yeah, you bet. But it was absolutely necessary to meet

my responsibilities and obligations to shareholders, customers, and

stakeholders of RR Donnelley. That is what responsible management does in the private sector.

Why do I tell this story and how does it relate to the U.S. Postal

Service? Well, the USPS has the same issues that I faced, capacity

management of processing and management of employees. That all

means expense to the USPS’ operation and all that needs to be absorbed by someone. Usually, that is the rate payer. That is why

they are all seeking alternate ways of delivering their message to

52

the customer. Electronic substitution and alternate delivery will

not go away and may be sought by more of the USPS’ customers

if rates go up.

As a Nation, we need a strong and viable postal delivery service.

That means the USPS management must step up to the responsibility of managing capacity of processing and the retail system to

manage demand. There is no need for 30,000 or more retail stores.

By the way, that is more than McDonald’s has worldwide. There

is no need for 400 processing facilities. The demand was for 206 billion mail pieces in 2006. Now it is down to 167 billion. Projections

are for 150 billion in 2020.

The USPS has many strong advantages to help it compete. They

are masters at delivering the last mile. They should concentrate on

that. Outsource the retail operations to supermarkets and other existing establishments to save employees and facility expense. Reduce the number, size, and complex nature of the processing network. Make the USPS user friendly and control the costs. That is

what we do in the private sector.

[The prepared statement of Mr. Winn follows:]

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54

55

Mr. ROSS. Thank you, Mr. Winn.

Mr. Hete, you are recognized for 5 minutes.

STATEMENT OF JOE HETE

Mr. HETE. Good afternoon, Chairman Ross and members of the

committee. I appreciate the opportunity to testify today and assist

with identifying real solutions for the U.S. Postal Service. This

hearing is a vital step toward averting the looming business liquidity crisis as the USPS is on the brink of insolvency due to continued losses in both mail volume and revenue.

My name is Joe Hete, and I am Chief Executive Officer for Air

Transport Services Group, which is the parent company of ABX Air

and four other wholly owned subsidiaries. It was only 2 short years

ago that I testified before the Transportation and Infrastructure

Committee about the devastating impact of DHL opting to pull out

of the domestic market and its potential impact on our company,

its employees, and our community.

ABX Air, headquartered in Wilmington, Ohio, was part of a For- tune 1,000 organization, with annual revenues exceeding $1.6 billion, with over 12,000 employees. On May 28, 2008, ABX Air was

notified by DHL that it currently was in negotiations with UPS to

take over DHL’s air uplift for DHL Express U.S. domestic and

international shipments within North America. This news devastated the company and community.

On November 10th, with still no UPS deal and many people uncertain what was next, DHL again would make an announcement

that would accelerate the decline of what was ABX Air’s business

model. It announced it would pull out of the domestic market completely, effective January 30, 2009. All 15 hub locations across the

United States would be closed, and ABX Air would be forced to

make a quick business model transition, including a mass reduction in force. What was ABX Air declined to just under 1,000 employees.

While the USPS is not exactly in a similar situation, there are

many parallels between the business challenges and threats of its

current business environment and the last 36 months for ABX Air

and its sister companies.

The USPS is an iconic institution that the American people have

grown to trust and respect when it comes to service and reliability.

In its own right, it would be considered the first social network.

Regrettably, the USPS has seen its market share decrease over

a long period of time, and volume has continued on a sharp decline.

Several factors are outside the control of USPS and are driving

the decline, specifically technology that is continually evolving. In

fiscal year 2010, 170.6 billion pieces of mail were delivered, a drop

of 6 billion pieces from the previous year. It is estimated that volume will continue to decline at the rate of 7 percent every year.

Not unlike ABX Air, the USPS is now forced into an unfortunate

position that will demand that it restructure its business model to

ensure its long-term viability. The USPS has offered solutions that

include an exigent rate increase of 5.6 percent, which was denied

by the Postal Regulatory Commission; reduced mail delivery from

6 days to 5 days per week; to refund overpayments to the Civil

Service Retirement fund of $5.5 billion to pre-fund retiree health

56

benefits and $1.2 billion to Federal Government workers’ compensation insurance fund; and flexibility to close postal and sorting

locations that are underutilized.

While helpful, these solutions do not address one major factor

that has a potential to significantly contribute to the long-term financial stability, which is to restructure its labor costs to match its

current level of operations.

Beginning immediately after the May 2008, announcement, ABX

Air began to explore plans for restructuring its work force based on

what it then believed to be the go-forward plan for support for

DHL. It engaged its employees, being transparent on what the

changes in the business model would mean for all those involved.

ABX Air was able to make changes to much of its work force, free

from the encumbrances of an employee base predominantly represented by a union.

Wages were reduced, pension plans were frozen and replaced

with defined contribution plans, and paid time off was reduced. It

was a sobering experience when it appeared all 12,000 ABX Air

jobs would be eliminated because of DHL’s announcement. However, ABX Air’s flexible work force relationships allowed us to go

back to our customers and offer solutions to retain parts of their

business.

USPS has made attempts to restructure its work force to match

diminishing mail volumes. Using attrition and early retirement

buyout options as its primary attempt to right-size its organization,

a 16 percent reduction in upper-level management, and minimal

closings of underutilized post offices and operations, it has yet to

achieve the efficiencies it needs to survive.

The USPS’ inability to reduce its work force to match its operational needs due to legacy union contracts and no-layoff clauses

restricts its potential to continue to be the most trusted government agency. It has a reputation that has been earned over hundreds of years of hard work and reliable service. Unmistakably, the

USPS business model needs to change.

ATSG developed a comprehensive business strategy that segmented specific functions from ABX Air and created sister companies to align its work force and core lines of business with current

market needs.

Through these initiatives, we are able to position our company

for job growth; and we are growing. By identifying our strengths,

we developed business lines that offered us the strongest chances

of success. That success resulted in a 25 percent job growth. We

succeeded. We are the anchor for redevelopment and growth in our

community.

USPS needs the authority to redevelop and implement its business strategy. The USPS has offered solutions. However, none of

these solutions fix the cost and productivity constraints that are

imposed by the union contracts. The USPS is hindered in acting in

the best interest of its ‘‘shareholders,’’ every American household

that receives mail.

Though the USPS does not use taxpayer funding, it is here today

because it is in financial distress. The current union contracts are

cost prohibitive and contribute to the severe financial losses. This

should not go unaddressed.

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We had a union contract with our pilots, but the financial viability of our company won out over perpetuating noncompetitive labor

agreements.

Restructuring is required when what you have been doing is no

longer a viable plan, and for the USPS it will take many forms. We

need to give them every opportunity to achieve their core business

objective.

There are dire consequences that have been identified by the

USPS as its teeters on insolvency, and one is that in fiscal year

2012 the USPS may not be able to make its payroll.

I have watched the USPS from afar, and they mirror many of our

struggles over the last few years. However, unlike the USPS, we

had a nimble work force that we could maneuver to build a better

business model after a devastating loss of business. When the industry thought we were going to fail, our stock price was at its lowest price of 12 cents per share. Stakeholder confidence was at an

all-time low, and our employees were down but not broken. Today,

we are a thriving and growing company, and our stock has increased more than 50-fold.

I look forward to working with you to address these issues and

find solutions that will keep the Postal Service as a viable part of

our economy.

I will be happy to answer any questions you might have.

[The prepared statement of Mr. Hete follows:]

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Mr. ROSS. Thank you.

Mr. Guffey, you are recognized for 5 minutes.

STATEMENT OF CLIFF GUFFEY

Mr. GUFFEY. Good afternoon, Mr. Chairman and members of the

committee. I am Cliff Guffey, president of the American Postal

Workers Union. I am here today to address the modification of the

retail and mail processing networks of the Postal Service in response to diminishing mail volume.

First, I want to respond to the title of this hearing, Postal infrastructure: How can we afford it? ‘‘We’’ in this question is postal customers, not taxpayers. After the passage of the Postal Reorganization Act of 1970, the Postal Service progressively phased out its reliance on Federal appropriations. Beginning in the 1980’s, in a series of omnibus budget resolutions aimed at balancing the Federal

budget, many billions of dollars in costs were shifted from the Federal Government to postal rate payers. Today, the Postal Service

receives no subsidy from the Federal Government, only compensation for services rendered.

If the Postal Service is to act in a businesslike manner, as its

critics have often implored it to do, it should be permitted to

change and charge businesslike rates as other national posts are

permitted to do.

I do not say this lightly. We see the mailing community as customers and Postal Service supporters not as adversaries. We know

that the suggestion that rates should be permitted to increase more

than inflation is not welcome to them, particularly in difficult financial times. We are not presuming to set postage rates. We are

saying that, on a rate-by-rate basis, the Postal Service needs to

have the flexibility to increase rates in order to find a way to cover

its costs.

This has been and continues to be a time of rapid change in the

Postal Service. Between 1999 and 2010, the postal work force has

been reduced by 458 million work hours. This is the equivalent of

removing 259,000 full-time employees from the employment rolls.

People represented by the APW made up 67 percent of that total

reduction. That is the equivalent of eliminating 174,000 full-time

jobs in APW bargaining units.

Postal workers have been directly affected by these changes. Normal attrition among bargaining unit employees has reduced the

complement of bargaining unit employees as fast as the need for

workers has been reduced by facility closures and consolidations

and by other steps taken to increase efficiency. This will continue

to be the case for the foreseeable future. Approximately 37 percent

of the workers in the APW bargaining units will be eligible for retirement by 2014.

The APW has actively resisted some consolidations of mail processing operations where we have reason to question the accuracy

of the Postal Service’s projected cost savings and service impacts.

In many cases, we have found that cost savings have been overestimated and the actual potential cost savings cannot justify the adverse service impacts of the changes under consideration.

An example of these problems was recently documented by the

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tion of operations from Lima, Ohio, to Toledo, Ohio. After the usual

AMP study, management consolidated mail processing operations

from Lima to Toledo in 2010. The OIG found that postal customers

in Lima experienced ‘‘significant degradation in service, and management did not project these degradations in the AMP proposal.’’

After these service problems arose, management addressed them in

part by increasing employees in Toledo and by implementing two

additional Lima hub facilities. But at the time of the OIG report

on this AMP, the problems had not been solved.

Similar points need to be considered concerning the closing or

consolidation of retail operations. The APWU has been a vocal critical of the Postal Service’s plan to close or consolidate some of its

retail operations. As we showed in proceedings before the Postal

Regulatory Commission, these closures adversely affect individual

postal customers who are least able to afford alternative services

and small businesses that continue to rely heavily on the Postal

Service. In many cases, postal customers, both individuals and

small businesses, community leaders, and elected representatives

have strongly opposed post office closures because of the negative

impacts they have on affected communities.

We strongly urge postal policymakers to think creatively about

how the Postal Service should be adapting its retail services to

meet society’s current needs. Senator Carper has introduced legislation that would permit the Postal Service to partner with other

government agencies at the Federal, State, and local levels to more

efficiently deliver government services and to provide sufficient economic justification to maintain a postal presence in rural or economically disadvantaged communities.

We strongly support these ideas and observe that the time to

pursue them actively is now. It would be tragic to dismantle the

postal retail infrastructure and lose an opportunity to maintain it

and improve the delivery of government services.

In closing, I want to particularly emphasize the importance of

maintaining a postal presence in small communities. The Post Office provides a unique public service that is still necessary for

many people. Being from Oklahoma, which has many small towns

and rural Post Offices, I can tell you from firsthand experience that

the post office is the focal point of many small communities. It is

where the flag flies. It is where the government can provide support for the community.

In all that we do during this time of change and economic challenge, consideration must be given to the availability of postal services and other necessary services that may be offered through the

Postal Service.

I would be happy to answer any questions.

[The prepared statement of Mr. Guffey follows:]

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Mr. ROSS. Thank you, Mr. Guffey.

They have called us for votes. Hopefully, we can get this done in

time. With that, I recognize myself for 5 minutes for questions.

Mr. Winn, your testimony is very poignant in the sense that I

think it tries to finely show how significant the Postal Service is

to so many walks of life and to this economy. I am reminded that

because of RR Donnelley’s need for the Postal Service and its infrastructure to deliver its product of a trucker who has all these products to deliver or ship by way of his truck but then has the interstate system closed off and can’t accomplish that.

But I also see from what you have done that you have made

changes over the years to adapt to market trends and to adapt to

technology. My question to you is: What would you recommend that

the U.S. Postal Service do to try to adapt as well?

Mr. WINN. With considerable respect to Mr. Williams, who testified before me and who is a wonderful associate at the Postal Service, the AMP process that he spoke about, the mail processing consolidation and elimination of facilities, is extremely cumbersome.

Where I closed a plant in Connecticut, it was done in 10 months.

Everything was done. The plant was closed, people were retrained

and relocated, and the equipment was all moved, and all the customers were moved.

I would say that the best thing we could do for the Postal Service

and for Mr. Williams would be to help him shorten the AMP process. Make it less, quite frankly, less than the painful process it is

today.

Mr. ROSS. Thank you.

Mr. Hete, you have great testimony as well. You have adapted

to a major client removing itself from the market, and yet you

adapted significantly well, in fact, keeping the jobs you did and reestablishing yourself in the market. Are you satisfied with what

the Postal Service is doing to realign its processing and retail networks at this point?

Mr. HETE. We do some current work with the Postal Service. We

operate through their STC facilities for them in Memphis, Dallas,

and Indianapolis; and we are involved in a pilot project for consolidating and deconsolidating truckloads. So they are doing some of

the right things. I think it is the speed at which they do it.

The one piece, as I touched on in my testimony that doesn’t seem

to get much attention, is the cost of the labor that it takes to provide the services of the U.S. Postal Service. If you compare the

Postal Service wage and benefit packages to those of the private

sector, for years, we were a subsidiary of Airborne Inc. before we

sold to DHL. We did all the sorting for Airborne and DHL both,

and the wage and benefit differentials between the private sector

and the Postal Service are significant. It is as much as 50 percent

higher on the wage piece than what we are paying in the private

sector.

Mr. ROSS. Mr. Guffey, I think there are some things you and I

agree on, and I think it is good common ground. For example, in

your testimony when you talk about how it is not the taxpayers,

it is the customers, it is the rate payers that are more affected by

this, I think you and I will agree that for years the U.S. Postal

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ness, and I admire that, and I think that it is a business and can

operate and should operate well into the future on its own with the

rates that it takes in.

The second thing I think I agree with you, you stated in an article on January 24, 2011, that USPS can only remain relevant and

resolve its financial difficulties if it improves and expands its service. I think service is important. I assume you are suggesting service to the customers need to be improved?

Mr. GUFFEY. Correct.

Mr. ROSS. If that service also includes the closing of Post Offices

or retail facilities or mail processing centers because of a lack of

capacity, would you not agree that is something that ought to be

done?

Mr. GUFFEY. There are opportunities and places where the Postal

Services, post offices should be closed.

As I said, I am from rural Oklahoma. Many towns used to have

4,000 or 5,000 people. Now they may be down to 400 or 500 people.

Those services should be transferred over to something like a community post office.

But in our contract this time in the larger cities, we have given

reduced prices and also provided 20 percent of the work force without legacy costs to the Postal Service so that they could keep offices

open longer without paying overtime so that the community could

come when it is relevant to the community. In other words, many

post offices in this country close at 5 p.m. Well, that is when the

businesses empty and people need to come and use the services,

and so we provided them without overtime an opportunity to keep

the post offices open so they would be more relevant to the business community.

Mr. ROSS. And you are open to innovation.

One of the things that I would draw your attention to and those

of the U.S. Postal Service, as my time runs out here, is that 20-

some years ago I read a book called ‘‘In Search of Excellence’’ by

Thomas Peters and Robert Waterman. It talked about Fortune 500

companies who were successful because of certain things they did.

They had eight themes. One of those was close to the customer;

learning from people served by the business; autonomy and entrepreneurship; fostering innovation; nurturing champions; simple

form; lean staff; some of the best companies have minimal HQ

staff.

I just offer that as I close here. My time is up. I hope that those

not only with the APWU but also the U.S. Postal Service have a

chance to look at it.

With that, I yield to the ranking member, Mr. Lynch, for 5 minutes.

Mr. LYNCH. Thank you, Mr. Chairman. We have 17 votes scheduled, and I want my colleagues to get a chance to ask questions.

First of all, Mr. Winn, thank you for your attendance here.

Mr. Hete, thank you as well for your involvement.

President Guffey, in the previous panel there was a group that—

well, there were some witnesses talking about reducing the frequency of delivery. They are talking about 5-day delivery. I have

some concerns that the projections of savings, as in other cases,

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aren’t quite what they—well, I think they are overstated, going to

5-day delivery.

Now, I understand this affects the letter carriers more than it affects your folks, because post offices will still be open on Saturday,

but they won’t deliver on Saturday. But I am just concerned that

taking the Postal Service delivery out of the picture for Saturdays—and that is how it appears it will be implemented. There will

be no mail delivery on Saturday or Sunday. I am just concerned

that would cause customers to look at the situation of mailing

something on Thursday and saying, well, should I call FedEx or,

you know, UPS instead of the Post Office since I know it is not

going to be delivered Saturday or Sunday, and I might to have to

wait until Monday to have a certain piece of mail delivered.

I am worried that it takes the Post Office out of that space and

will not only not save money but by driving mail volume to your

competitors on the weekends it will actually accelerate the decline

in mail volume handled by the Postal Service.

You are a pretty smart guy. You know this business pretty well.

Am I reading this wrong?

Mr. GUFFEY. I dislike any opportunity that is taken to reduce the

service to the American public. I would hope that, if this does come

about, that the Postal Service will reinstate its ability to deliver

special deliveries so that medicines and necessary packages and

parcels and priority mail and that type of thing will be delivered

on Saturday.

But, again, I would not like to see any service deteriorate, but

the necessities of the company will probably be taken into consideration in the overall bills that are passed—or ultimate bills that are

passed in Congress.

Mr. LYNCH. The other thing, President Guffey, I know that you

just concluded negotiations on a labor contract. I have seen over

the years the willingness of the labor unions at the Postal Service

to bring in technology, to create efficiencies there, and I know that

the contract that you agreed to was a pretty tough contract to bring

back to your members. The increases are modest.

Mr. GUFFEY. We froze wages for 3 years.

Mr. LYNCH. Yes. Why don’t you talk about that, about what your

contract negotiations involved? I know your co-witnesses have

talked about the need to reduce labor costs, and I thought it was

a pretty tough contract and one that recognized the realities of the

situation.

Mr. GUFFEY. Well, we realize that we are no longer in an 8–to–

5 world, because we work 24 hours a day. But the shifts no longer

can be necessarily 8 straight hours. So we gave the Postal Service

the ability to post positions that are—it could be four 10’s, various

configurations on different days, different hours, and we gave them

the ability to have a lower-wage work force to come in and to supplement.

We recognize that in the long term the Postal Service is going

to look a lot different over the next 15–20 years. We could not

project what it would look like 35 years ago when I came to work

for the Postal Service what it looks like now. And our membership

cannot project what it will look like 25 years from now.

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The tragedies and mistakes that have been made—the Post Office tried to enter the electronic communications world many years

ago, and Congress kind of barred that from happening. But I read

in the papers now where they are saying why don’t they change

their business model to do this or that, and they basically were prevented from doing some of that. But I think electronic communications is the future. Whether or not the Postal Service will have a

piece of that, we don’t know.

Mr. LYNCH. I yield back.

Mr. ROSS. Thank you.

The gentleman from Illinois, Mr. Davis, is recognized.

Mr. DAVIS. Thank you very much.

Mr. Hete, in your testimony you make the suggestion that the

Postal Service should restructure its labor costs to match its current level of operations. You are aware that the recently negotiated

contract between the Postal Service and the postal workers union

contains a number of new work force and labor flexibilities for

management to use. Do you think any of these changes are the

kind that you are talking about in your testimony?

Mr. HETE. Well, certainly any flexibility you get with the work

force, as Mr. Guffey testified to. They have changes where they can

vary shifts according to demand flows, etc., are all going to be helpful. The question always is whether what you have done is enough

to bring the entity to solvency.

I mean, in the private sector the difficulty is, if you are not making money, you are not going to be in business very long, and you

don’t have anybody else to look to. Banks are not going to lend you

money if you are not making a profit. Then it is at what point do

you need to tweak the labor costs in terms of either increased efficiency, lower benefits, or more contributions by employees for benefits.

I am not familiar enough with the details, but I do know that

in comparison to the private sector postal costs are significantly

greater.

Mr. DAVIS. All of us are aware of the fact that the Postal Service

is the only government entity required to pre-fund its retiree

health benefits at an accelerated rate over a truncated 10-year period. To date, the Postal Service has set aside over $40 billion in

their retiree health benefits account to meet this mandate and are

required to deposit an additional $5.5 billion by the end of September. Given its current financial situation, do you think it might

be reasonable that they not have to meet that requirement?

Mr. HETE. You are asking me that question?

Mr. DAVIS. Yes.

Mr. HETE. Yes, in the private sector for retiree health benefits,

as a general rule, you do not have to pre-fund those. It is kind of

a pay-as-you-go system. But, again, that doesn’t change the systemic cost structure. That is more or less a one-time give-back.

Mr. DAVIS. I guess my last question would be, would either one

of you be prepared for the Postal Service to raise its debt limit? Do

you see that as any kind of possibility that would be beneficial to

the operation of the postal system?

Mr. GUFFEY. I do not.

Mr. HETE. I would agree.

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Mr. WINN. I would agree.

Mr. DAVIS. Thank you, very much, Mr. Chairman. I think we can

still make the vote.

Mr. ROSS. Thank you, Mr. Davis, for your brevity.

I want the thank the panel as well for being here and taking the

time out of your schedule.

With that, this subcommittee stands adjourned. Thank you.

[Whereupon, at 3:50 p.m., the subcommittee was adjourned.]

[The prepared statements of Hon. Elijah E. Cummings and Hon.

Gerald E. Connolly, and additional information submitted for the

hearing record follow:]

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