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THE POSTAL SERVICE IN CRISIS: A JOINT SENATEHOUSE HEARING ON PRINCIPLES FOR MEANINGFUL REFORM

JOINT HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

AND THE

COMMITTEE ON GOVERNMENTAL

AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 23, 2004

Serial No. 108–171

Printed for the use of the Committees on Government Reform and

Governmental Affairs

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

COMMITTEE ON GOVERNMENTAL AFFAIRS

SUSAN M. COLLINS, Maine, Chairman

TED STEVENS, Alaska

GEORGE V. VOINOVICH, Ohio

NORM COLEMAN, Minnesota

ARLEN SPECTER, Pennsylvania

ROBERT F. BENNETT, Utah

PETER G. FITZGERALD, Illinois

JOHN E. SUNUNU, New Hampshire

RICHARD C. SHELBY, Alabama

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

THOMAS R. CARPER, Deleware

MARK DAYTON, Minnesota

FRANK LAUTENBERG, New Jersey

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel

ANN C. FISHER, Deputy Staff Director

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel

SUSAN E. PROPPER, Minority Counsel

AMY B. NEWHOUSE, Chief Clerk

(V)

C O N T E N T S

Page

Hearing held on March 23, 2004 ............................................................................ 1

Statement of:

Fineman, David, chairman, Board of Governors, U.S. Postal Service ......... 47

Potter, John E., Postmaster General of the United States, U.S. Postal

Service ............................................................................................................ 62

Snow, John W., Secretary, U.S. Department of the Treasury, accompanied

by Brian C. Roseboro, Acting Under Secretary for Domestic Finance,

U.S. Department of the Treasury ................................................................ 24

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

Blackburn, Hon. Marsha, a Representative in Congress from the State

of Tennessee, prepared statement of ........................................................... 40

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 21

Clay, Hon. Wm. Lacy, a Representative in Congress from the State of

Missouri, prepared statement of .................................................................. 45

Collins, Hon. Susan, a Representative in Congress from the State of

Maine, prepared statement of ...................................................................... 9

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

of Maryland, prepared statement of ............................................................ 98

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia:

Letter dated February 23, 2004 ............................................................... 92

Prepared statement of ............................................................................... 4

Fineman, David, chairman, Board of Governors, U.S. Postal Service, prepared statement of ........................................................................................ 50

Harris, Hon. Katherine, a Representative in Congress from the State

of Florida, prepared statement of ................................................................ 94

Kanjorski, Hon. Paul E., a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 101

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 90

McHugh, Hon. John M., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 14

Potter, John E., Postmaster General of the United States, U.S. Postal

Service, prepared statement of .................................................................... 65

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland, prepared statement of .................................................. 36

Snow, John W., Secretary, U.S. Department of the Treasury, prepared

statement of ................................................................................................... 27

Van Hollen, Hon. Chris, a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 96

(1)

THE POSTAL SERVICE IN CRISIS: A JOINT

SENATE-HOUSE HEARING ON PRINCIPLES

FOR MEANINGFUL REFORM

TUESDAY, MARCH 23, 2004

HOUSE OF REPRESENTATIVES, COMMITTEE ON GOVERNMENT REFORM, JOINT WITH THE COMMITTEE ON GOVERNMENTAL AFFAIRS, U.S. SENATE,

Washington, DC.

The committees met, pursuant to notice, at 2:40 p.m., in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the Committee on Government Reform) presiding.

Present: Representatives Tom Davis of Virginia, Burton,

McHugh, Schrock, Duncan, Miller, Murphy, Turner, Carter,

Blackburn, Tiberi, Towns, Maloney, Cummings, Davis of Illinois,

Clay, Van Hollen, Ruppersberger and Norton.

Also present: Senators Collins and Carper.

Staff present for the Committee on Government Reform: Melissa

Wojciak, staff director; Keith Ausbrook, chief counsel; Ellen Brown,

legislative director and senior policy counsel; Jack Callender, counsel; Robert Borden, counsel/parliamentarian; Drew Crockett, deputy director of communications; Teresa Austin, chief clerk; Brien

Beattie, deputy clerk; Corinne Zaccagnini, chief information officer;

Althea Gregory, minority counsel; Denise Wilson, minority professional staff member; Earley Green, minority chief clerk; and Jean

Gosa, minority assistant clerk.

Chairman TOM DAVIS. The committee will come to order. I want

to begin by welcoming the Members of the Senate Governmental

Affairs Committee to our hearing room, and especially thank

Chairman Collins and Senator Carper for their tireless work on

this important issue.

This joint hearing caps off a series of six hearings conducted by

the Senate Governmental Affairs Committee and three hearings

conducted by this committee’s Special Panel on Postal Reform and

Oversight since the report of the President’s Commission on the

U.S. Postal Service was released last July. I think that one thing

we have learned from all of these hearings and from the work of

the President’s Commission is that the current legal framework

under which the post office operates is outdated and unsuited for

today’s economy. It’s putting the jobs of millions of Americans at

risk.

Let me explain. Under current law, the only response available

to the Postal Service that they have to declining volumes and revenues is to raise rates even further. As rates go up, even more volVerDate 11-MAY-2000 12:59 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 D:\DOCS\94999.TXT HGOVREF1 PsN: HGOVREF1
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ume leaves the system, contributing to what Comptroller General

David Walker has called a death spiral. First class mail volumes

have been in decline for several years, even as the number of addresses that the Postal Service serve increases.

I believe that without comprehensive postal reform this year, we

face a time in the near future when the Postal Service will no

longer be able to sustain itself with higher and higher rate increases. And many of the 9 million Americans whose jobs rely on

a stable, healthy postal system will be out of work.

The postal reform is not only a job issue, it’s a consumer issue.

Everyone gets mail, and everyone buys stamps. If we allow the

Postal Service to continue its death spiral, it will hit every American in the pocketbook.

Last year this committee and the Senate Governmental Affairs

Committee worked together along with the administration to solve

a potential overfunding of the Civil Service Retirement System by

postal taxpayers—ratepayers. That reform delayed the next rate

increase until 2006, providing much needed relief for the Postal

Services customers, but it left several unresolved issues which we

must deal with as the legislation moves forward.

First, the legislation transferred responsibility for funding the

military portion of retiree benefits to the Postal Service for CSRS.

I realize there are differences of opinion on whether that change

should be revisited or left in place, and I look forward to the witnesses’ perspectives on that.

Second, the legislation required the Postal Service to calculate,

collect and place into escrow the post-2005 savings caused by the

legislation. We wanted to get a clear sense of the Postal Service’s

plans for cost reduction and productivity-enhancing capital improvements before releasing all the savings. I believe that the Postal Service has fulfilled its requirements in this regard, and I think

it’s now time to release the escrow.

Let me take a moment to explain the budget effects in the CSRS

escrow because there seems to be a great deal of confusion about

it. When we took up the administration’s proposed Postal CSRS Reform Act last year, the bill, as it was written by the administration

and introduced with budget-neutral changes in the Senate as S.

380, it had a CBO-estimated cost of $17 billion between 2003 and

2008 and $42 billion between 2003 and 2013. In the House, H.R.

1169 as introduced placed the savings to ratepayers, which counts

as a cost in the unified budget, in escrow by requiring the Postal

Service to collect the savings from its customers beginning in 2006

and not spend it without prior congressional approval. This bill and

the bill which eventually was enacted had a CBO-estimated cost of

only $7.2 billion between 2003 and 2013. Compare that to the 42

billion cost without the escrow. All we did was put off, temporarily,

the majority of the budget hit from the Postal CSRS Reform Act

as proposed by the administration.

This year the chickens are coming home to roost. Sometime in

the late fall, shortly after the beginning of fiscal year 2005, the

Postal Service will be filing a rate increase to take effect at the beginning of fiscal year 2006. If we have not released the escrow, that

rate increase will likely include an extra 2-cent surcharge on the

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rate of a first class stamp as part of an extra 5.4 percent rate increase across the board solely to fund the escrow amount.

Releasing the escrow will be a crucial component of comprehensive postal reform legislation, but the administration, according to

Secretary Snow’s testimony today, says they are, ‘‘willing to work

toward a proposed modification of the Postal CSRS Funding Reform Act abolishing that escrow that will not increase the deficit.’’

Therefore, we expect the administration to find the necessary offsets to accomplish this goal so that the comprehensive postal reform legislation can move forward, and we won’t be faced with the

largest rate increase, really tax increase, in postal history.

If we are going to prevent a postal melt-down from happening,

this is the year. For the first time since the Nixon administration,

the White House has called for comprehensive postal reform. We

are very fortunate to have Treasury Secretary Snow here today to

present the administration’s case for postal reform. We also have

the guidance of the President’s Commission on the Postal Service,

which did an extraordinary job in a very short amount of time. We

can also build on the 9 years of hard work that Chairman McHugh

and Chairman Burton devoted to this issue.

And last but not least, our colleagues in the Senate who join us

today are as committed as we are to preventing the Postal Service

from melting down.

I look forward to working with everyone in this room as we move

toward comprehensive postal reform legislation. I want to thank all

of our witnesses for appearing before the committee, and I look forward to their testimony.

[The prepared statement of Chairman Tom Davis follows:]

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Chairman TOM DAVIS. I now call on my Senate counterpart, Senator Collins, for any opening statement.

Senator COLLINS. Thank you, Mr. Chairman.

I am very pleased to join Chairman Davis and my House colleagues in conducting a joint hearing on postal reform. For the Senate Committee on Governmental Affairs, this represents the seventh in a series of hearings that began last September. Our Senate

hearings have focused on the 35 legislative and administrative recommendations of the President’s Commission on the Postal Service,

recommendations that are designed to help this 225-year-old service remain viable over the long term.

So much depends upon the Postal Service’s continued viability.

The Postal Service itself has more than 730,000 employees. Less

well known is the fact that it is also the linchpin of a $900 billion

mailing industry that employs 9 million Americans in fields as diverse as direct mailing, printing, catalog production, paper manufacturing and financial services. The health of the Postal Service is

essential to thousands of companies and the millions that they employ.

At our first hearing last September, the committee heard from

Commission Cochair Jim Johnson. Commissioner Johnson made

the very important point that the Postal Service’s short-term fiscal

health will not last, and that Congress must not ignore the fundamental reality that the Postal Service as an institution is in serious jeopardy. At the committee’s second hearing, we heard from the

Postmaster General and Comptroller General David Walker. Mr.

Walker, of the General Accounting Office, warned us about the

Postal Service’s $92 billion in unfunded liabilities and other obligations as set forth in the Commission’s report. He pointed to a need

for fundamental reforms to minimize the risk of either a significant

taxpayer bailout or dramatic postal rate increases such as the

chairman has described.

In February, the committee heard from representatives of the

four largest postal unions, along with the postmaster and supervisor associations. Earlier this month at our fifth and sixth hearings, we heard from members of the mailing community and from

postal competitors. We focused not only on the work force and financial recommendations, but also heard testimony on the Postal

Service’s monopoly, mission, the rate-setting process and corporate

governance issues.

As a Senator representing a largely rural State whose citizens

depend heavily on the Postal Service, I appreciate and endorse the

Postal Commission’s strong endorsement of the basic features of

universal service, affordable rates, frequent delivery and convenient community access to retail postal services. It’s important to me

that the people of my State, whether they are living near our western or northern borders, or on islands, or in our many small rural

communities, have the same convenient access to postal services as

the people of our cities. We must save and strengthen this vital institution upon which so many Americans rely for communication

and for their jobs.

The Postal Service has reached a critical juncture. It’s time for

action, both by the Postal Service and by the Congress. Senator

Tom Carper and I have committed to work together with the other

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members of the Senate Governmental Affairs Committee to draft a

bipartisan postal reform bill. As this hearing is evidence of, we are

also working very closely with House leaders on postal reform, including Chairman Davis and Congressman McHugh. I am very

pleased to participate in this historic joint committee hearing

today. I think it shows how serious we are about accomplishing

this critical task this year.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Hon. Susan Collins follows:]

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Chairman TOM DAVIS. Gentleman from Illinois Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman. I

am pleased to join with you in convening the first joint House and

Senate hearing on the U.S. Postal Service. I would especially like

to applaud the hard work and dedication of Senators Susan Collins,

Joseph Lieberman, Ted Stevens, Daniel Akaka and Tom Carper,

leaders in the effort to reform and modernize the Postal Service.

I am proud to work with you in this effort and prouder still of the

momentum we have created, momentum which will surely lead to

successful efforts to rewrite the Postal Reorganization Act of 1970.

Today is an important date not just because of the historic nature of a joint hearing on the Postal Service, but because this

marks the end of hearings and signals the beginning of Members

and staff coming together to draft postal reform legislation. Thankfully we have a very solid foundation upon which to build, H.R.

4970, the Postal Accountability and Enhancement Act.

Since the introduction of H.R. 4970 in the last Congress, much

has taken place in the postal world. Beginning in the 108th Congress, we created a new postal panel. The Presidential Commission

on the Postal Service was created and issued a report containing

35 recommendations. Those recommendations were followed by the

administration’s issuance of five principles of comprehensive postal

legislation.

Beginning this year our postal panel held a series of hearings addressing various aspects of recommendations submitted by the

Presidential Commission and the administration’s principles for reform, and as the ranking member of the postal panel, I recently

convened the Chicago Advisory Postal Group in which a number of

postal-reliant businesses in the Chicago area attended. The message from this group and others was that postal reform must go

forward.

I was pleased to note that we agreed on many important issues.

Protection of universal service is a universally accepted principle.

We need and must protect universal service. The Postal Service

must have the flexibility to set rates and provide rate stability. The

Postal Service cannot and must not bear the military service payment obligation; and finally, that we need to get rid of the escrow

account.

As we continue to work together to craft responsible postal reform legislation, I would like to commend you, Chairman Davis and

Mr. McHugh, for taking the time to be engaged and provide direction and input into this valuable process. Your support and that of

the mailing community is critical if we are to be successful in passing postal reform legislation. I also want to commend Mr. Waxman,

who is the ranking member on our side, for the leadership he has

displayed throughout this process. And if we are to be successful

in passing this reform legislation, then that spirit of cooperation

must, and I am sure will, continue.

With that, I extend a warm welcome to our panelists and look

forward to the participation.

Chairman TOM DAVIS. Thank you very much.

Is Mr. McHugh here, chairman of our postal panel?

Mr. MCHUGH. Thank you very much, Mr. Chairman. I note you

and Senator Collins and, of course, Mr. Davis covered more than

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adequately the full range of issues. So what I would prefer to do,

with your forbearance, is to submit my written statement in its entirety for the record and just make a couple of comments.

First of all, I want to add my words of welcome to Senate colleagues, particularly to Senator Collins, who has done such a terrific job as she detailed to some extent in her opening statement

with respect to this issue. I admire her courage, her commitment

and her dedication to the issue. We don’t expect anything less from

an esteemed graduate of a great institution of higher learning like

St. Lawrence University in Canton, NY, which happens to be in my

district, and we are very proud of that fact. But she’s been a real

leader, as has Senator Carper. And I have had a chance to work

with Senator Carper as well for a number of years now, and we are

very appreciative of their concern and their efforts.

Chairman Davis mentioned 9 years. It dawned upon me that

there are individuals who actually murder people who are sentenced to less time. But it’s been an interesting journey, and I want

to thank former Chairman Burton for his role in my sentencing

and for allowing me to participate. And I make jest of it, but it has

been one of the more fascinating stories of my life. And I was

thrilled when the President, probably against a lot of political advisers’ better judgment, decided that this was important enough for

him to assign a President’s Commission to not just receive those reports and findings and put them on the shelf, but to followup with

the call of reform as he did in December. And I certainly want to

thank the administration for understanding, as has been stated

here, how important this so-called industry, if it is an industry, but

it is so massive, is to our economy; nearly 9 percent of the gross

domestic products of this Nation, and that’s incredible.

We can go through the details as to how the canary in the mine

shaft is not doing well. We have seen the signs. We have had the

cooperation from leaders on the Postal Service side like the Postmaster General, like chairman of the Board of Governors David

Fineman, like the Treasury, and others, so many others who have

detailed that. But suffice it to say that unlike our tendencies in

Washington to react only in times of crisis, this is an instance

when I don’t think we can afford to wait, because by the time the

crisis is upon us in its full-blown dimensions, our Nation, our economy will have suffered greatly.

So with the cooperation of leaders like the gentleman from Chicago, IL, Danny Davis, like the ranking member, Mr. Waxman, and

others, we have tried to take this down a bipartisan path, which

is what it should be, and all of their cooperation and understanding; and certainly Chairman Tom Davis for being gracious enough

to figure out a way in which I could still stay involved in this and

for taking the issue on full square has been a real demonstration

of how Congress can work effectively and on a bipartisan basis.

So I look forward and certainly welcome our panelists here today,

and I would just note for the record that today in Roll Call there

is a full-page ad taken out calling upon this Congress to enact reform now because it’s necessary. And although there is a lot of

great names and associations here, I would like to just name a couple of the smaller ones: The American Bankers Association; American Express; Capital One; FedEx Corp., someone who provides a

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lot of competition to the Postal Service; and an interest who understands the importance of the USPS to the Nation, International

Paper; Magazine Publishers of America; National Federation of

Independent Businesses; National Retail Federation; Time Warner,

and on and on and on.

Those folks who understand that the economy of this Nation and

the well-being and the way of life that the Postal Service has become for, as Senator Collins so accurately noted, well over two centuries is at risk if we fail to do the right thing, and that’s why I

am thrilled we are here for this historic meeting and look forward

to the testimony of the witnesses. And with that, I’d yield back and

thank the chairman.

[The prepared statement of Hon. John M. McHugh follows:]

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Chairman TOM DAVIS. Thank you very much.

Ms. Norton, followed by Mr. Burton.

Let me just note for the record Members will have 7 legislative

days in which they can submit any written statement, so you don’t

have to feel obligated, but we’ve had a lot of Members who have

put a lot of work into this, and I want to give them the opportunity

to make statements if they so desire.

Ms. Norton.

Ms. NORTON. Mr. Chairman, just let me briefly say that I think

you are doing a public service to the Nation, you and Chairwoman

Collins, in calling this hearing. In my judgment, this hearing may

already be too late. Reading about the Postal Service is like reading about a failing business or shall I say a failed business, and

that may be because it is not a business at all in the normal sense

of the word. It is some kind of unique hybrid that Congress kind

of pieced together, and we are paying the price for the kind of hybrid we put together. I mean, we act as though the Postal Service

does not have tough competitors in the private sector, like FedEx

and UPS. We act as though they don’t have to provide universal

service.

Yes, Ms. Collins will talk about the far reaches of Maine, because

if you try closing a post office up in some sparsely populated part

of Maine, they will be on her back saying, don’t close my post office. That’s the difference between the very successful private competitors and the Postal Service, and the Congress has acted as if

there is no difference. And the results are here in the figures we

see and in the prospects we have.

And what we see in some of these proposals, some of these proposals are indeed good, but some of these proposals read like what

every failed business does. It tries to take it out on consumers and

take it out on employees, and then, of course, you get completely

torn-up labor relations. You try that in the post office, and I think

it’s not a very pretty picture.

And yes, you close post offices left and right. Let me tell you

about my colleagues. They will all be calling Chairman Davis saying, not my post office.

I don’t know what the answer is, but I know we have blinked

this crisis, and we can’t blink it anymore. We need a more radical

vision than I see even in the proposals before us. The fact is that

there is no self-respecting nation in the world that does not provide

affordable postal service. We are coming to be that Nation, and we

have to wake up, smell something. I’m not sure it’s the coffee. And

I’m not sure what we’ve been smoking, but we are very late to try

to do something about the oldest Federal agency in the United

States.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Mr. Burton.

Mr. BURTON. Thank you, Mr. Chairman.

Mr. Chairman, I have been on the Post Office and Civil Service

Committee, I know I look a lot younger, but for 20 years, and—

don’t I look a lot younger? I thought I did. But anyhow, when I first

became a member of the committee, we didn’t have this kind of a

crisis, but with electronic messages being sent, with the faxes being

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sent, we’ve seen a deterioration of the revenues coming in to the

Postal Service, and they are really suffering on difficult times. And

we are looking at unfunded obligations now of about $90 billion.

And I’d like to have my whole statement submitted for the

record.

[The prepared statement of Hon. Dan Burton follows:]

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Chairman TOM DAVIS. Without objection.

Mr. BURTON. And something has to be done. You know, last year

Congressman McHugh and I and others worked very hard to get

a postal reform bill passed, and we ran into a few impediments, not

the least of which was members of the private sector in this country who want to take over a large part of the Postal Service’s business doing everything they could to stop postal reform.

We are at a point now, in my opinion, where we have to do something. We should have done it last year. We should have done it

before that. But it’s getting so bad now that I think that the Postal

Service is in danger of going belly up, or the taxpayers are going

to have to pay a huge amount of money to bail out the Postal Service. And so something has to be done.

I know there’s going to be a lot of political pressure, Mr. Chairman, from various entities in the private sector saying, you know,

we don’t want postal reform, and the main reason is because they

want to—they want more market share. And I understand it’s competition, they want to get more business, but we can’t let that be

the reason that we see the postal system in this country be altered

into a situation where it’s irreparably damaged and the American

people suffer. So we have to do something.

Congressman McHugh has done yeoman’s service on this, as you

know. I applaud you and Senator Collins and her colleagues in the

Senate for making this a top priority, and I really am happy that

the administration is making this one of their main objectives this

time. We have to do something. If we don’t, there’s going to be

major postal rate increases. The deficit in the Postal Service is

going to continue, and the Postal Service as we know it is going

to be in peril. Something has to be done, and I am glad, Mr. Chairman, you’re taking on this mantle of leadership right now along

with Senator Collins to make sure we get that job done.

Chairman TOM DAVIS. Thank you.

I’m glad to have you working with us, Chairman Burton. I think

if we’d been able to get assurances in moving this to the floor in

the last Congress, we would have gotten it out of committee. This

time I think we have that with the impetus from the administration if we can move it through the committee.

Secretary Snow has a limited period of time with us, so what I’d

like to do right now is swear all of the panel in, hear from Secretary Snow, have him take questions from each side briefly before

he has to go, and I understand that Mr. Roseboro will be here to

answer questions after we address the panel, and then we will go

on with opening statements and try to fit them in appropriately,

if there’s no objection to that.

Would the panel please rise with me as I swear you in.

[Witnesses sworn.]

Chairman TOM DAVIS. Mr. Secretary, thank you very much for

your service to the country, and thank you for taking the time to

be with us this afternoon.

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STATEMENT OF JOHN W. SNOW, SECRETARY, U.S. DEPARTMENT OF THE TREASURY, ACCOMPANIED BY BRIAN C.

ROSEBORO, ACTING UNDER SECRETARY FOR DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY

Secretary SNOW. Thank you very much, Chairman Davis, and

Chairman Collins and distinguished members of the panel. I am

delighted to have the opportunity to be with you today to address

this overdue subject and this critically important subject.

Let me say I thank you for your flexibility in accommodating me.

I wanted to be here, and appreciate your allowing me to come in

light of the fact that I may not be able to stay the whole time. But

as you said, Under Secretary Brian Roseboro, who is very knowledgeable on this subject, can speak well in my absence.

I am here because I want to underscore the Bush administration’s commitment to the objective of a strong, comprehensive postal reform. As you said, Congressman Burton, we can’t wait 20

years to get this done. We really need to get it done now. It’s widely acknowledged by everybody who looks at the question that the

business model of the Postal Service just doesn’t work anymore. It’s

not sustainable in light of all the technological changes and

changes in the marketplace and substitutes that have come along.

We need a new model.

The President recognized that and sought to help the debate by

establishing a commission, which—a bipartisan commission to look

into the question of what could be done to put the Postal Service

on a sound financial footing so it could operate well into the 21st

century and serve those important objectives that were mentioned

in your comments. That commission issued its report in July, and

it’s, as we think about it at the Treasury Department, the most important document on the Postal Service in 30 years. And I certainly

take my hat off to the members of that Commission, who did really

first-rate work in producing their recommendations.

I wouldn’t say that we endorse every 1 of the 35 recommendations, but we believe the report as a whole is a critical building

block for the reform effort. And, of course, the leadership of these

two committees is critical in making that happen.

We would suggest that comprehensive postal reform ought to be

what we are seeking, and it ought to be guided by five broad precepts or principles implementing best practices, and enhancing

transparency of operations, providing for greater operational flexibility, fostering greater accountability and ensuring self-financing.

And encompassed within these larger principles, there are three

specific issues of great interest to the administration and, I know,

to members of the committees, because I have spoken to some of

you about this.

The first is the appropriate allocation of the Civil Service Retirement System military costs, a second is meeting the break-even

mandate, and a third is making sure there’s accurate cost accounting.

Congress called on the Postal Service to achieve self-financing

when it passed the Postal Reorganization Act in 1970, and this

principle must be a cornerstone of any postal reform that’s pursued

today. In order to meet the self-financing mandate, we think that

the postal—that the pension cost for military service of Postal

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Service employees should be attributed to the Postal Service rather

than to the U.S. taxpayers. Congress demonstrated that it shared

this belief when it passed the Postal Service—Postal Civil Service

retirement legislation in 2003.

We would oppose any effort to shift the roughly $27 billion of

pension costs connected with military service back to the taxpayers.

This position, in our view, represents a fair and equitable allocation of those pension costs. It represents good government, good

practice, and is financially prudent.

With respect to another issue that I know is on the mind of many

of you, the act’s provision establishing the escrow account, it is important, I think, to start by noting that the administration never

advocated including that provision in the final bill. And I’d say that

we are prepared to work with you toward a modification of the

Postal CSRS Funding Reform Act, abolishing the escrow in a way

that will not have a serious adverse effected on the deficit, as long

as it’s part of a good overall postal reform bill. So we would look

forward to working with you on that.

Second, an accurate assessment of the Postal Service’s financial

performance must reflect all of its liabilities, not just some of them,

including any unfunded liabilities not currently reflected on the

balance sheet as well as all taxpayer-funded appropriations.

Finally, we suggest that comprehensive postal reform must require the Postal Service to present more accurate revenue and cost

allocations. Currently the Postal Service attributes 42 percent of its

total costs to general overhead, only allocating 58 percent of its

costs across product lines. That makes it tough to run the business

well if you can’t allocate your cost to the specific services for which

those costs are generated. And while we recognize that cost attribution can be complicated for any company, particularly a company

of the size and complexity of the Postal Service, we think that a

more accurate cost attribution is possible, and that by getting it,

we could get costs and prices and profitability into better alignment.

In our view, the Congress has a unique opportunity to take decisive action here, to craft a comprehensive postal reform bill that

can lead to a more successful operation of the Postal Service. We

continue to appreciate and endorse the effort and dedication of the

Postal Service employees, its management, the Board of Governors,

all of whom have made tremendous contributions to this organization, and Postmaster General in particular. I understand, and I

want to compliment the Postmaster General for this, that the Postal Service is implementing all 16 recommendations of the President’s Commission that don’t require prior congressional action.

That’s much to be commended.

Let me close by saying that the administration is anxious to

work with you to craft a reform bill framed in accordance with

these principles that I outlined. We recognize that it will require

shared sacrifice from everybody, from all the shareholders, but we

have an opportunity here to put in place something that will stand

the test of time in this enormously dynamic market.

So I regret that I won’t be able to be with you for the full length

of the hearing, but I do look forward to being part of the effort to

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bring about significant, far-reaching, comprehensive postal reform.

Thank you.

Chairman TOM DAVIS. Thank you, Mr. Secretary.

[The prepared statement of Secretary Snow follows:]

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Chairman TOM DAVIS. I know you need to leave in a couple of

minutes. I wonder if you could just try to stay for a couple of minutes and answer some questions, or if you can deflect them to Secretary Roseboro if you think that’s more appropriate. But I wanted

to recognize Senator Collins.

Senator COLLINS. Thank you, Mr. Chairman.

Secretary Snow, over the past several months that we have been

holding hearings, we have heard from many different parties expressing many different views. We’ve heard from the Postal Service

unions, the associations, the CEOs of major companies such as

Time, Inc., and RR Donnelly. We have heard from representatives

of the newspaper and direct marketing associations, and they have

very different views in some cases on what should be done. But

there were two issues that united every single witness who has testified before our committee at these six previous hearings, and that

is the two issues that they all have in common are a desire to see

the escrow account repealed and the return of the military pension

obligation to the Treasury Department.

This morning, or this afternoon, rather, you have praised and

justifiably so, the fine work of the President’s Commission, and as

you’re well aware, those recommendations were part of the Commission’s recommendations as well. So the administration’s is a

pretty lonely voice on those two issues.

I do recognize that the bill that the administration proposed to

correct the overfunding of the pension system did not include an

escrow account, because I introduced the administration’s bill. I

don’t understand why today you have said that removing the escrow account, which was not part of administration’s original bill,

must be done so in a deficit-neutral position. This is an overfunding that the OPM and OMB identified and which we have corrected. It doesn’t make sense to lock up that money and prevent

the Postal Service from using it.

That’s my first concern, and then if there’s time, I’d like to turn

to the military pension issue.

Secretary SNOW. Well, as I understand it, that’s roughly $3 billion in the escrow account today. And——

Senator COLLINS. Well, the escrow account grows in future years

if we don’t remedy this problem.

Secretary SNOW. I would agree. Right. Right. But that is money

that, as we keep score on the Federal deficit, goes into the plus column today. And if the moneys are allowed to flow out of the escrow

account, they would be charged against the deficit and add $3 billion to the deficit. That’s the basic issue we have with the escrow

account. And as I say, I’d be willing to work to find an offset for

the $3 billion, but we’d be much happier about the prospect of the

escrow account solution you want if there were an offset.

Senator COLLINS. Secretary Roseboro, did you want to add to

that?

Mr. ROSEBORO. Oh, yes. Just consistent with the Secretary’s remarks, anything that increases the budget deficit increases the

burden on taxpayers, and that is just fundamentally inconsistent

with the principle the President has laid down in terms of the Postal Service being self-financing, as well as the original principle of

postal reform from the early 1970’s of Postal Service being self-fiVerDate 11-MAY-2000 12:59 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 D:\DOCS\94999.TXT HGOVREF1 PsN: HGOVREF1
34

nancing. So as indicated, while we recognize the difficult accounting nature of dealing with this particular aspect, we would prefer

to focus on economic exposure and how that could be adversely effective on the taxpayer. But we will be more than willing and anxious to work with the committee to find some type of resolution to

the problem.

Senator COLLINS. Well, I’m eager to work with you to resolve this

issue, because I think it’s absolutely critical, but it really is not relevant to the break-even mandate of the Postal Service. This was

legislation that corrected an overfunding by the Postal Service to

the retirement system. So to say that we have corrected that, but

then we are locking up the money and not allowing it to be spent

to fund retiree health care benefits, pay down the debt to the

Treasury, or to remove the need for a dramatic increase in postal

rates, for example, just doesn’t make sense to me. It contradicts the

entire purpose of the legislation that we passed at the administration’s request last year.

Secretary SNOW. Senator, we don’t disagree in principle. We do

have that issue of a $3 billion hit to the accounts of the United

States, and, as I said, we’re prepared to work to try and find some

offsets for that. But in principle we’re not disagreeing with you.

Senator COLLINS. I see that I have 3 seconds left, so I will yield

back the balance of my time and hope that the military pension

issue will be addressed by others. Thank you, Mr. Chairman.

Chairman TOM DAVIS. Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Secretary. I’ll just

ask one question in terms of along the same lines. If we should

shift the military retirement cost to the ratepayers, and if we can’t

shift it to the taxpayers, then more than likely it gets shifted to

the ratepayers. Would that not put the Postal Service in the worst

shape in terms of perhaps negating the possibility of some business

that could be done that would not be done?

Secretary SNOW. Congressman, you raise a good point. How

would the $27 billion be amortized or dealt with? This is something

that Under Secretary Roseboro has looked at. In broad outline it

would have to come through greater efficiencies, perhaps some

phasing in of some pricing increases over time. But as we look at

the situation, there are considerable opportunities, and I think the

Postmaster General would agree, considerable opportunities for

further efficiencies within the organization itself that would absorb

some considerable part of those costs. But my learned colleague can

give you a better answer than I can on that, and I very much

apologize.

Chairman TOM DAVIS. Thank you. We know you’ve got to run,

and we appreciate very much. Thank you for your time.

And, Mr. Davis, I think what I want to do, if it’s OK with you,

is go on before we proceed; everybody’s sworn, see if any other

Members, want to make opening statements, and let’s move that

out of the way, and then we can get to the testimony of the rest

of the panel.

And, Mr. Roseboro, I’ll just have some cleanup work to do following that, some questions from some of the panel members.

OK. Mr. Ruppersberger.

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Mr. RUPPERSBERGER. Mr. Chairman. Thank you, Mr. Chairman

and Senator. It’s great to have you here and join together in this

bipartisan issue.

We’re here today to explore what legislative changes are necessary to ensure the U.S. Postal Service continues to serve the best

interests of the American public, but because the Postal Service is

a $900 billion industry, it employs more than 9 million people, we

can all agree our objective is to stabilize the Postal Service and secure its future.

As we consider options for reforming the U.S. Postal Service, it

is crucial to recognize our Nation’s shifting economic, commercial

and technological conditions. Hard-copy communications have been

affected by the use of fax machines and a variety of electronic communications including the Internet. The U.S. Postal Service faces

increased competition, as we know, from private delivery companies and also the challenges of operating during an economic

slump. Mail volume has declined during each of the fiscal years

2001, 2002, 2003, and the Service has lost $2.3 billion in the last

3 years.

The financial problems of the postal industry, however, must not

be imposed on the backs of the men and women who have made

the U.S. Postal Service the best postal service in the world. As our

national unemployment rate continues to decline, we must protect

the job security of postal employees, including the retirement,

health benefits and Workers’ Compensation.

In addition, we must consider the impact of the postal reform on

individuals and small businesses. Cutbacks on services, charges

and delivery, and post office closures could unfairly burden our

communities both rural, suburban and urban.

Last we must not overlook the U.S. Postal Service’s uncertain

funding for emergency preparedness. It has been more than 2 years

since our country was brutally attacked by the terrorists on September 11, 2003, and other issues involving anthrax. We live in an

era of uncertain threat levels and must ensure the U.S. Postal

Service has the resources to keep their employees, our families and

our communities safe.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Hon. C.A. Dutch Ruppersberger follows:]

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Chairman TOM DAVIS. Any other Members? Ms. Miller, you want

to make an opening statement?

Mrs. MILLER. Thank you, Mr. Chairman. I’ll be brief. I certainly

appreciate your commitment to reforming the postal system.

I’d like to thank my esteemed colleague from New York. I saw

Mr. McHugh; didn’t realize he had a 9-year sentence to postal reform here. So we’re looking forward to a successful conclusion of all

of that, and I certainly would like to extend my thanks to Senator

Collins for joining us today, and certainly her commitment as well

as the President’s. I am certain with all of us, we can get reform—

a reform initiative signed into law before the end of the year.

You know, the Postal Service is such an important element of our

society, as everybody has said here. It’s actually over 8 percent of

the Nation’s gross national product, which is a startling number,

and certainly individuals and businesses rely on it each and every

day. And for this reason, any consideration of reform certainly has

to be sensitive to the needs of consumers, both individuals and

businesses.

In addition, I think that the reform needs to be sensitive as well

to all of our postal workers, and I don’t think that can be stressed

enough. These are the people who make sure that your magazines

are arriving in your home or your apartment or what have you

every single day, that they show up every week. They make sure

your bills are paid on time. These are the people that really make

it work. And sometimes I think that we take our postal workers

and our service for granted there, but I certainly want to thank the

men and women who work every day to make it so reliable.

And I do think sometimes we have a tendency to want to say

that the Postal Service is a very large and inefficient government

bureaucracy, but I think when you think for 37 cents I can put

something in the mail in Macomb County, MI, where I live, and in

several days it’ll arrive anywhere in the continental United States,

I think that’s really remarkable.

So I think it’s important to note that the Postal Service is not

broken, but it needs to be improved. And I think the largest room

no matter what business you’re involved is certainly the room for

improvement.

So I want to thank all the witnesses who are testifying today. I

look forward to working with all of you.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Mrs. Blackburn.

Mrs. BLACKBURN. Thank you, Mr. Chairman. And thank you to

Senator Collins for coming to join us today.

I have a statement that I will give for the record, but just very

briefly to touch on a couple of things. I do want to thank our witnesses. And I want to thank the members of the Postal Service, the

employees of the Postal Service from my district who care deeply

about reform and have come to join us today.

We are all concerned with what we have seen happen with the

Postal Service’s financial health over the past decade and the deterioration that has taken place there, and I think as we have held

the hearings in the House and the Senate, there are three areas

where we have looked at that are in need of crucial reform.

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First, the Postal Service must develop a 21st century business

model. And the Service is operating in 2004 as it did in the 1970’s,

and we know that is very difficult for the Postal Service and for

the taxpayers.

Second, the Postal Service must have financial transparency.

And proper financial management enables executive officers to

make sound financial decisions, and it allows new reforms to take

hold, and that is something that is essential. And also, we think

that it is essential that an extensive independent audit must be

taken as soon as possible so the Postal Service can be held accountable for its operations, and the waste and inefficiencies can be identified and targeted for elimination.

And third, the Postal Service must contain its labor costs. Eighty

percent of its total expenses for last year were for labor, and this

stands in stark contrast to some of the commercial mailing enterprises which we have heard from during the course of our hearings.

Again, I want to thank the chairman for his leadership, and I

want to thank our witnesses for being here today, and we look forward to working with you and hearing your testimony.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you.

[The prepared statement of Hon. Marsha Blackburn follows:]

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Chairman TOM DAVIS. Senator Carper and then Mr. Clay.

Senator CARPER. To our colleagues here in the House of Representatives, to my Chairman Susan Collins, it’s great to see all of

you. To our witnesses, especially our General, thank you for being

here today. I remember walking in this building, gosh, how long

ago was it? 1965. 1965, when I was a freshman at Ohio State University, Navy ROTC, midshipman, and we were—spring break. I

didn’t have enough money to go to Florida for spring break, and I

ended up taking a free, all-expenses-paid trip to Quantico, VA.

To see if I wanted to grow up and be a Marine officer. I ended

up—I enjoyed the trip. I have great respect for the Marines and

still do. But I enjoyed the trip. I just wanted to have a chance to

maybe get out of Quantico one afternoon to come to Washington,

DC, and, lo and behold, I did.

And a bunch of my buddies and I got on a train in Quantico and

came on up here to D.C. They went up to Georgetown to get in to

trouble, and I came to Capitol Hill and ended up wandering into

this building, in spring break of 1965.

And there was a hearing going on. Everything else was shut

down around the Capitol. There was a hearing going on in this

building, I think on this floor, just down the hall. It was a Judiciary Committee hearing, and I think the chairman was a guy name

Emmanuel Celler, I think he was the chairman. And they were

having hearings on the Voting Rights Act of 1965. That was my introduction. I said, when I left, to my colleague, Ed Towns, with

whom I came here in Congress, I said, when I left that day to go

back to Quantico with my buddies, I said, did you guys have a good

time? They had a great time in Georgetown. They wanted to know

if I did too, and I said yep. But some day I would like to come back

and work in this town, and it is great to be back in this building

where we all started several decades ago.

Well, to my colleagues, especially to my old colleague Ed Towns,

it is an honor to be here. This postal reform issue has been one

that has been with us for a while, as you know, and I hope that

we can do work that is as good as that done by Ted Stevens almost

31⁄2 decades ago.

In fact, he did his work just shortly after I was here as a Navy

ROTC midshipman, and we want to be able to build on good work

that has been done by Congressman McHugh and those who helped

him shape his legislation.

As my colleagues are aware, this will likely be the final hearing

I think we are going to hold following the declarations from the

President’s Postal Commission. I think it is a good sign that we are

here, Democrats and Republicans, House and Senate, united in the

belief that we need to make some fundamental changes to the way

our Postal Service does business in the 21st century.

By all accounts the Postal Service has been a success since it was

created. I think even its detractors would admit that. It receives

virtually no taxpayer support, and it services hundreds of thousands of employees, to provide to nearly every American, nearly

every day, that service is second to none.

And more than 30 years after its birth, the Postal Service is a

key part of our Nation’s economy, delivering to more than 100 million addresses and supporting a massive mailing industry. And

44

even a casual observer, however, can see that the past few years

haven’t been easy ones for the Postal Service.

As we learned in our hearings in Governmental Affairs on the

other side of the Capitol, they have been difficult for private firms,

large and small, and for millions of mailing industry employees

who depend on stable postal rates. I am pleased that we have this

once in a generation opportunity, maybe once in a two generation

opportunity now to work in a bipartisan way to modernize the

Postal Service, to update its business model for the 21st century.

At the end of last year, as we all know, President Bush issued

a set of postal reform principles focused on those recommendations

from his Postal Commission aimed at improving transparency and

accountability at the Postal Service and giving management the increased flexibility that they need to streamline operations and seek

out new mail volumes.

And his principles touch on the main themes addressed in S.

1285 and in Congressman McHugh’s latest bill. I think it is safe

to say, my friends, that as I have said before, that we probably

have agreement on 90 percent of what ought to be in the new postal reform bill.

And now that our hearing work is just about complete, I look forward to sitting down with you, Madam Chairwoman, with our

friends here in the House, Congressman McHugh, and our other interested colleagues to put together a bill that is a worthy successor

to that hammered out 40 years ago by a junior Senator, Ted Stevens. Thank you.

Chairman TOM DAVIS. Thank you, Senator. Mr. Clay.

Mr. CLAY. Thank you for allowing me to claim my time. I appreciate that. It is an honor to participate in today’s hearing on developing principles for meaningful postal reform with our Senate colleagues. I would also like to extend thanks to today’s witnesses.

This historic meeting leaves no uncertainty about the willingness

of Congress to address the important issue of postal reform.

Postal reform has presented us with a unique opportunity to

craft legislation that would modernize our postal system to become

more customer friendly and efficient in the 21st century. Still,

there are many components of postal reform that have yet to be resolved, such as the Civil Service Retirement System, military obligation, and the fair and equitable treatment of postal workers, to

name a few.

The U.S. Postal Service is no ordinary business enterprise. It is

a government entity with no shareholders that provides a commercial service which operates under a break-even mandate and pays

no Federal, State or local taxes. It is truly unique.

Fundamental reform is sorely needed to bring the service into

the information age. We must examine further efforts to cut costs

while maintaining service and preserving universal delivery. I trust

that as a body we will take the time to resolve our differences on

the issue of postal reform. Simply put, we owe that commitment to

both the ratepayers and taxpayers.

And, Mr. Chairman, I look forward to hearing from today’s witnesses, and ask unanimous consent to enter my statement in to the

record.

[The prepared statement of Hon. Wm. Lacy Clay follows:]

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Chairman TOM DAVIS. Without objection, so ordered. Any other

Members wish to make opening statements at this point? Again we

have—I am sorry, Mr. Towns.

Mr. TOWNS. Mr. Chairman, let me thank you for holding this

joint hearing today on the very important issue of postal reform.

This has been a thorough and informative process, and I feel confident that both sides are well prepared to fashion a bill that will

put the Postal Service on firm ground for years to come.

The Postal Service is truly at a precipitous point, as it is quickly

heading down a path which is economically unsustainable. Each

year the Postal Service adds nearly 2 million new homes, businesses or other new delivery points. However, at the same time,

mail volume has been declining for 3 straight years. While some of

that decrease is due to the recent economic recession, a significant

portion of the decline is due to structural changes that are only

going to become more pronounced. Overall, the Postal Service has lost $2.3 billion, that is B as in

‘‘boy’’ in the last 3 years. We have bought some time by passing the

Civil Service Retirement System Funding Act. We saved more than

$6 billion for the last 2 years. But we cannot allow this breathing

room to deter us from making important but tough decisions. Our

constituents are depending on us as well as the Postal Service and

the mailing industry. Together this enterprise comprises a nearly $900 billion industry,

employing 9 million workers nationwide, and representing more

than 8 percent of the gross domestic product. So a failure to act

will have wide ranging consequences.

As I have said before, there is significant room for agreement on

a vast majority of issues, such as the escrow account and the military pension issues. In areas of limited disagreement, I strongly believe that a compromise can be forged that increases the efficiency

and effectiveness of the Postal Service, accommodates the needs of

the mailing industry, and at the same time protects our postal

workers.

I look forward to hearing from our witnesses today about their

views on what principles should guide our committees in writing a

final postal reform bill.

Thank you very much, Mr. Chairman, and I yield back the balance of my time, and I am glad to see that Senator Carper made

his way over. It shows you that this is an important issue.

Chairman TOM DAVIS. Thank you very much. Members will have

7 legislative days to put statements in. We will proceed to the

panel now. And I think, Mr. Fineman, we will start with you, and

then, Mr. Potter, to you. Mr. Roseboro, do you want to make any

remarks or are you just here to be the flycatcher for the Secretary?

Mr. ROSEBORO. It is a privilege to have the best job in the world

right now, sir. I will report back.

Chairman TOM DAVIS. Go ahead.

STATEMENT OF DAVID FINEMAN, CHAIRMAN, BOARD OF

GOVERNORS, U.S. POSTAL SERVICE

Mr. FINEMAN. Thank you, Chairman Davis. As most of you know,

I am the chairman of the Board of Governors of the U.S. Postal

Service, and I have served a sentence with Congressman McHugh.

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For the last 8 or 9 years we have been together. My term expires

on December 8th of this year. And this will, as I said to Congressman McHugh a little bit earlier, probably be the last time that I

have an opportunity to testify before the committee, because I look

forward to this committee going into the hard work to get a bill out

and probably won’t need too much more testimony.

I want to take this opportunity just to thank Congressman

Davis, Senator Collins, Senator Carper, Congressman Danny Davis

also, and the people who have worked so hard on this legislation.

Congressman McHugh and I were lonely voices, I think, about 8

years ago or so saying that we thought that there was going to be

a problem. And the last time I testified, Senator Carper, I said that

you and I both take the train. As you know, I come from Philadelphia. We both take that train coming in on that Northeast extension.

And the last time I said that there was a train wreck about

ready to happen. I thought that the train was probably in Baltimore and coming down to Union Station. And I guess it might be

at BWI now as it keeps going down. It is not ready to come into

Union Station, but it is pretty close.

As I listened to Secretary Snow’s remarks, I thought back upon

the 8 years or so that I have been on the board. And I think the

remarks about the pension and the funding of it reflect what is

such a tough job here, understanding what the Board does.

You know, at one point the legislation that you presently have

says that, well, we have to run this like a business. And we do try

our hardest to run this like a large business would be run. Many

of us have sat on public boards before.

But at the same time, you take an issue like the pension. I think

it is just a good example. Other businesses, you know, you don’t

fund what are your military obligations by the business itself. It

just doesn’t work that way. You want us to act like a business and

be independent; at the same time you say we have certain obligations. We understand the obligation of universal service.

But at the same time, if we are going to be self-sustaining, we

should be really self-sustaining. I am a lawyer by trade. The $3 billion was put into an escrow fund. That means, the way I practice

law, that it is sitting there just waiting for something to happen.

That something was that Congress wanted a report from us as to

how we were going to use that money. We gave that report.

Chairman Davis reported back to us, at least today, that they

were satisfied with what the report was that we gave. It seems to

me that the escrow then gets broken, similar to the way you do a

real estate deal. You put some money in escrow, the escrow gets

broken, and it goes to one of the parties. This is no different. You

asked us for something. We set it aside. It is obvious to us, and

obvious I think to this panel, that money should be given to us.

And while we talk about the escrow fund, we are coming to a

point in time where Congressman McHugh, the main issue that he

and I spoke about for the last 8 years was the ratemaking process.

And the ratemaking process is broken. It doesn’t work. I am a lawyer. And I was interested in 1965—I graduated from George Washington Law School in 1970, the same year that this act came into

existence.

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I kind of wish I knew about it. I have called it the Lawyers Welfare Act of 1970. You know, to a large degree that is what happens.

It churns litigation. It churns the ability to set rates. And there is

another process that can happen, you have all heard me talk about

it before. And you have all had proposals, and I think it will happen.

But you take this and the escrow fund, look at the position we

are in today. As the chairman of the Board, I have a fiduciary obligation to the American public, to the Postal Service, to the ratepayers. We are going to have to act on rates probably sometime in

November. If we don’t know whether or not this $3 billion is coming back into our coffers, we are going to have to do something.

I mean, it is not a threat, it is not a promise, it is just reality.

It is just the way the system works. The system shouldn’t work

this way. There should be another rate making process. And I

would hope that you would attack it.

Last thing I would like to comment upon, and I think I have the

right to do it as the chairman of the Board, is about governance

issues. I do want to thank the President for putting together this

Presidential Commission and the people over at Treasury who

worked so hard on that within a short period of time. I was amazed

that they could come out with their report within the short period

of time that they worked. However, the one issue where I do disagree with the President’s Commission deals with governance

issues. And the reason that I disagree is the manner in which the

directors are chosen, and as Congressman McHugh knows, I

couldn’t care less whether you call us Governors, directors or whatever. The manner in which they are chosen could cause a partisan

board to come into existence under the formula selected by the

Presidential Commission. My experience has been that these are

not Democratic nor Republican issues. It is reflected in the bipartisan nature of whom I am testifying before today. It is reflected in

the bipartisan nature of our Board.

Congressman Carper is a good friend of a Republican, Bob Rider

from Delaware, the former chairman of this Board, and he and I

were confirmed on the same day. There are no issues between us

that are Republican and Democrat, and I would hate to see this

Board formulated in a manner in which there could be either a Republican board or a Democratic board depending on who the President is, and I ask you very much to give that a little bit of your

attention.

And with that, I know that we—there are many of you here

today, and many of you might have questions. So I want to cut my

remarks short. And thank you again, thank Chairman Davis and

the two Senators, for calling this meeting. You know, as a kid from

Philadelphia in a row house, I kind of pinch myself a little bit that

I am in some ways helping to make history. So, Mr. Chairman,

thank you very much.

[The prepared statement of Mr. Fineman follows:]

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Chairman TOM DAVIS. Thank you. Thank you, General Potter,

thanks for being with us.

STATEMENT OF JOHN E. POTTER, POSTMASTER GENERAL OF

THE UNITED STATES, U.S. POSTAL SERVICE

Mr. POTTER. Good afternoon, Chairman Davis, Chairman Collins

and members of the committee. I am pleased to come before you

today as we continue to discuss the critical need for comprehensive

reform of the legislative framework governing the Postal Service.

I am especially grateful to Chairman Collins and Chairman

Davis for your active leadership on postal legislative reform and for

providing the opportunity for all stakeholders in the mailing community to voice their needs, preferences, and common commitment

to postal reform. And while I am at it, I want to thank everyone

on the committee. A lot of accolades have already been said, I want

to echo them.

Let me begin by saying first of all how proud I am of postal employees. All of the men and women who work for the Postal Service, they are doing a great job, and I am very proud of what they

are doing. We have seen service performance rise to record levels.

Customer satisfaction is at an all time high.

We have had an unprecedented 4 straight years of productivity

improvement. Our employees are delivering for America. And

speaking of delivering for America, the Postal Service is most

grateful to the administration and Congress for the Civil Service

retirement legislation passed last year. The legislation enabled us

to reduce our outstanding debt by one-third and will help us hold

rates stable until 2006. That legislation left two open issues to be

addressed this year; namely, the obligation for military benefits

and the escrow.

As we have previously testified, the Postal Service believes it

should not be responsible for funding Civil Service Retirement benefits earned by postal employees while they served in the military.

This $27 billion obligation includes a $7 billion reimbursement to

the Treasury for payments made to retirees since 1971, as well as

$10 billion interest on those payments.

There is also an additional $10 billion in cost to cover future benefits for existing employees’ military service. We disagree with the

shift in the obligation from the taxpayer to the ratepayer. The legislation also requires the Postal Service to create an escrow account

from savings resulting from the legislation.

The simple fact is that under present postage rates there will be

no funds available after 2005 to place in an escrow account. The

moneys needed for the escrow fund equate to a 5.4 percent rate increase. I don’t believe a rate increase is good for the recovering

economy or for the mailing industry or for the long-term future of

universal service as we know it today. Therefore, I strongly urge

the elimination of the escrow requirement.

Let me now turn to key priorities we believe should be addressed

in your deliberations on postal legislation. First and foremost, we

believe that we must have the flexibility to adjust rates to meet the

varying demands of customers. Mailers have long told us that

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ple of years. Annual increases could be more easily absorbed in

their business plans.

Conversely, the public prefers a uniform rate for a single piece

of first class mail that would change less frequently. The current

ratemaking system does not allow us to accommodate those varying

preferences. We recommend that a model that gives the Governors

of the Postal Service the authority to set prices with an after the

fact review process that addresses issues such as cost coverage,

consumer interest, and impact on competition would be beneficial.

In a related area of price caps, my concern is that given the volatility of today’s marketplace an imperfectly crafted price cap could

be harmful. To guard against that concern, we propose that the

price cap be constructed to recognize the many cost factors which

enter into the ratemaking process, many of which are beyond our

control.

Specifically, we propose that in addition to a metric for wage

growth, a realistic price cap would also account for delivering network expansion, fuel price volatility and, most importantly, legislatively mandated employee benefits.

Second, it is essential that we have flexibility to adjust our national infrastructure—our retail and processing networks—to meet

changing customer preferences and market conditions. Many postal

retail services are now conveniently available on line, in grocery

stores and in other private sector retail outlets and through the

mail. We should not be expected to retain all of our post offices

simply because they have always been there.

Likewise, sorting capability continues to be increasingly more efficient. This, combined with the potential loss of mail volume, requires an evolving processing network to minimize costs.

Third, it is essential that the Postal Service be given greater latitude to manage and control costs. Despite our success in reducing

costs over the past 4 years, the fact remains that a significant portion of our costs are imposed on us by legislation. For us to succeed, those costs must be addressed.

For example, Federal statute gives the Department of Transportation authority to set the rate we pay airlines for international

mail transportation. International mail is a highly competitive

area. We should be able to negotiate directly with airlines in the

same way we do in contracting for domestic air transportation

costs. It is more businesslike and provides us an opportunity to reduce costs which ultimately benefit the marketplace.

When you will look at postal expenses as a whole, employee benefits are the single largest cost category that today is beyond our

control. Benefits, such as retirement contributions, health benefits,

life insurance, retiree health benefits and workers compensation

are mandated by statute.

Collectively last year they amounted to more than $13 billion in

costs. We propose that a collective bargaining process which covers

almost 90 percent of our career work force be expanded to include

the negotiation of benefits in addition to wages, hours and conditions of employment. In short, everything should be on the table.

Finally, I would like to comment on a statement to the Committee on Governmental Affairs earlier this month by UPS Chairman

and CEO Mike Eskew. ‘‘The Postal Service’s mail monopoly allows

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it to subsidize competitive products and inappropriately compete

with the private sector.’’ His statement misses the mark on both

counts.

First, the Postal Service’s monopoly on letter mail does not subsidize competitive products. Cross-subsidization is against the law,

and in a nation of laws we are not in the business of breaking the

law.

Second, a principal duty of the independent Postal Rate Commission is to ensure that cross-subsidization doesn’t occur. During our

arduous ratemaking process, if there were cross-subsidization, one

or more of the rate intervenors would point that out to the PRC.

I would add that in 2003 our competitive products, Express Mail, Priority Mail and package services, earned $2.5 billion over and

above their direct costs. The funds were made from Express Mail,

Priority Mail and package services and they were used to finance

universal service. Terms like inappropriate competition are easy to

toss around, but they often ignore an important lesson of history.

At the turn of the century by law the Postal Service, the Post Office Department at the time, could not carry parcels weighing more

than 4 pounds. Only private express companies delivered larger

packages. But then more than half of the American public lived in

rural areas and received little or no parcel delivery from private

carriers. Those who did had to pay exorbitant rates for their service.

When the Parcel Post Act of 1912 was enacted, all of that

changed. For the first time in history all Americans, from those living in major urban centers to residents in remote rural areas, were

able to use the mail to receive the goods they needed at affordable

prices. Today the Postal Service continues to deliver to every address in the country without residential or rural surcharges that

are increasingly common by other companies.

In fact, recently the elected public officials of Pasco, WA pro- tested such surcharges of $1 for business delivery and $1.75 for

residential delivery.

Pasco has a metropolitan area of more than 150,000 people. The

lesson is clear. We have an opportunity and obligation to preserve

and protect universal mail service in this country, the right and

privilege of every American to receive reliable, efficient, affordable

mail service, regardless of where they live or do business.

I believe that this is the legacy we must preserve for our future

generations, a legacy that will be preserved only if we have the

courage, determination and vision to enact legislation that will

truly help us build a stronger Postal Service in the future.

Thank you, Chairman Collins, thank you, Chairman Davis, and

the rest of the committees for your interest in the Postal Service.

[The prepared statement of Mr. Potter follows:]

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Chairman TOM DAVIS. Thank you very much. Let me ask Mr.

Roseboro. I heard the Secretary’s testimony about the escrow

money and the deficit, but this really isn’t deficit money, this is

postal ratepayer’s money that they paid into the fund, right?

Mr. ROSEBORO. Yes, it is.

Chairman TOM DAVIS. Why would you use it for other—I mean,

I don’t think we ought to be under the illusion this money is going

to be paid for the Defense Department or the Education Department. These are postal dollars paid by ratepayers under a fund

that is akin to an enterprise fund.

And under State law in Virginia, if I had taken money from an

enterprise fund and used it or amassed it for anything else, I would

go to jail. But at the Federal level, we don’t have those rules. So

you can sit here and use this to, ‘‘mask a deficit when it is to

phoney baloney.’’ These are postal dollars that ought to ultimately

be used for the Post Office.

I am trying to understand for $3 billion this year, which is what

is in there now, why don’t we just call it what it is, and postal dollars, and release it?

Mr. ROSEBORO. You are absolutely correct from the perspective

that you would look at this $3 billion which would grow in terms

of the escrow structure. While I would say, however, I disagree that

it is attempting to mask any deterioration in the deficit.

What our concern is, from a budget scoring proposition, a budget

scoring proposition that was built into last year’s legislation, is that

it remain a strong preference that it remain budget neutral. And

to accomplish that from a budget scoring perspective, that is where

we think we need to aid the committee, aid the Congress in trying

to determine what makes sense, what, if anything, can work, and

we are willing to lend a hand.

Chairman TOM DAVIS. Well, isn’t it budget neutral simply because of the way that the scorers look at these things? They had

counted this money as basically general fund money. If you shift

it to the Post Office, then it shows up as a deficit on the general

fund side, and it is used for postal—am I understanding it correctly?

Mr. ROSEBORO. It is an accounting budget scoring issue, absolutely, sir.

Chairman TOM DAVIS. So the alternative, if you keep it neutral, is that ratepayers would have to pay an additional $3 to $4 billion

a year, not for any purpose that has anything to do with the Postal

Service or its employees, but basically to reduce the deficit. And the

alternative is that you raise postal rates, which has—you talk

about a tax increase, that is what postal rates are. You talk about

trying to get jobs in this country, that is a job killer in my opinion.

Now, what am I missing here?

Mr. ROSEBORO. We would look at it as that isn’t necessarily the

only alternative that could be structured, and again we would work

to explore other reasonable alternatives that do not have that outcome which you just outlined.

Chairman TOM DAVIS. I am just—I hear you. I really appreciate

the Secretary’s remarks about how he wants to look at finding offsets with this, and we have—I guess if we have to do that, that

is what we have to do. But it just seems so much cleaner and

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straighter and more honest to just say these are postal dollars, we

are going to release them and let the chips fall where they may on

the budget, because ultimately those are dollars that shouldn’t be

put in the same fund as taxpayer dollars. These are ratepayer dollars. The way the Postal Act is set up is so the Post Office could

pay for itself.

Now you are saying dollars that they generate, we are going to

take these dollars away and put them over here, so at least for accounting purposes these look like dollars that are raised from income tax.

Mr. ROSEBORO. Well, again, we think there may be other alternatives. Again in terms of exploring those options, in terms of those

dollars being directed toward other postal obligations, the frequently mentioned here unfunded obligations of substantial nature.

Chairman TOM DAVIS. Let me ask you. What would a 5.4 percent

across the board postal rate increase do to the economy?

Mr. ROSEBORO. We think that any increase would not be a good

thing. However, recognizing the reality of other options being available, other leverage to push in a structure, in a business, of 42 percent unallocated costs, that there could not be explored, could not

be found other cost saving measures, as we push for the Postal

Service to have flexibility with regard to technology, with regard to

work force issues where it has a great opportunity in the coming

years with regard to natural attrition, eligibility for retirement increasing.

We think it is not just a binary issue of raising rates or pushing

the expense onto the taxpayers, we think there are some other options that could be practically explored.

Chairman TOM DAVIS. I am encouraged by the fact that you want

to work with us and recognize the problem at the end of the day

if we just leave those dollars over there without finding some—and

we look—I like the straight up way of doing it, that is kind of—

but we look forward to working with you on that, and appreciate

your commitment.

Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.

Mr. Potter, Secretary Snow indicated that there were still efficiencies to be found in the Postal Service. Would you comment on

where some of those might be?

Mr. POTTER. Well, over the past 3 years we have worked very

hard to find productivity improvements throughout our system.

Some of the cost saving opportunities are in the supplies and services, the transportation that we procure, some of the services that

we buy such as leases on buildings.

In the past 3 years, we have managed to reduce our spending on

that by over $1 billion. In addition to that, we have taken out over

$1.7 billion worth of labor cost simply by managing our business

better. We have done an internal benchmarking program that has

our employees focused on productivity.

And our employees are stepping up to the plate. So I see productivity improvement opportunities in every operation that we have.

I think our employees are engaged in that, and the product is what

you see. You see a reduced work force that is taking on additional

work, and productivity that is growing.

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So I see opportunities in delivery. I see opportunities in mail

processing operations. I see opportunities in all of the supplies and

services that we buy, and we have a very broad program. As the

Secretary said, there are 16 areas that were recommended to us by

the President’s Commission, and we are exploring each and every

one of those opportunities.

Mr. DAVIS OF ILLINOIS. If we were to try to make up the $27 billion in military retirement costs, do you have any idea how long

that might take using these efficiencies?

Mr. POTTER. Being extremely aggressive, we are able to take about $1 billion cost out in a year without disrupting the service

to the American public, and service is the No. 1 goal in our organization. We don’t want to do anything dramatic that would cause us

to disrupt service. I think the horizon is decades in terms of getting at the $27 billion on top of what we have already planned to do because our plan

calls for $1 billion in savings over each of the next 3 years in order

to try and mitigate increases in postage.

Mr. DAVIS OF ILLINOIS. Mr. Roseboro, do you think that those are

the kinds of efficiencies that the Secretary had in mind?

Mr. ROSEBORO. Yes, sir. As was indicated, the Postal Service has

made a great start. There is still room for considerable improvement looking forward. With regard to your specific concern, Postmaster General Potter spoke to the Secretary before he left about

the $27 billion being shifted over to the Post Office.

If I may sort of put that into a context, which will hopefully help

make clearer our position on that, why we think that is reasonable.

First, we look at in the context of the legislation that was passed

last year, last April, a package of reform, a package of reform that

was quite unique in that the Postal Service was the beneficiary of

a dynamic analysis with regard to its pension funding, that effectively resulted in, even with the obligation as the legislation passed

last year required, for the Postal Service to pay the $27 billion in

military funding, it still received a net gain of $78 billion.

And even with that $27 billion, I would like to just note this has

also got lost, that there is still an obligation by the Treasury taxpayer to pay close to $21 billion of military obligations. So as a

package, it was fair, reasonable, as well as consistent with establishing the Postal Service system, consistent with the Federal Employees Retirement System [FERS], where that is a requirement to

pick up the military obligations by agencies, and the Postal Service

now has, correct me if I’m wrong, Postmaster Potter, over 500,000

of its employees are now under the FERS system.

So from our perspective, that was very important. But with regard to looking forward and in managing the $27 billion liability,

I would say actually the challenge is greater than that. There is

the additional $60 billion in unfunded health care liabilities, $7 billion in unfunded worker’s compensation liabilities, a little under $6

billion in unfunded pension liabilities still.

All of those we feel needs to be addressed, as practically speaking

made part of a rate case, recognizing the impracticality of looking

to do anything dramatic soon and cause any type of spike in rates.

We think we can work with the Postal Service through the Office

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zation plan over the long term, because these are long-term liabilities, to minimize any shock as well as also being able to gain some

of the cost savings opportunities that the Postal Service is now and

in the future will be pursuing.

Mr. DAVIS OF ILLINOIS. Thank you very much. It sounds like we

are saying no matter what we are able to do we are still going to

be woefully short and are going to have to come up with something

else.

Chairman TOM DAVIS. Thank you. Senator Collins.

Senator COLLINS. Thank you, Mr. Chairman.

Postmaster General, one of the troubling developments that you

have had to deal with is the decline in the volume of first class

mail in each of the last 3 years.

Can you tell the committee what your forecast is for the next

year or so as far as the volume of first class mail? Are you projecting further declines?

Mr. POTTER. We are projecting that next year, and we are working very hard to do this, we are projecting that volume basicaly will

be flat, although it may grow a little. And the reason we do, and

that is only in the next year, is because of the recovering economy

and the efforts that our employees have made to improve service

and to reach out to customers.

However, when you will look further, beyond that, the structural

change, the movement of what is a hard copy communication today,

it could be a bill or a payment that is done via the mail, we see

the structural change of that migrating to the Internet continuing.

And so in the short term, given the fact that the economy is rebounding, we are not as hard pressed as we might be in future

years. We are preparing ourselves for the future, and that is why

we are counting on postal reform to give us the flexibility to react

to what we anticipate will be some significant changes in our mail

mix.

Senator COLLINS. And if in fact you had to file for a 5.4 percent

increase in postal rates because reform was not forthcoming and

the escrow account remained in place, wouldn’t that likely drive

down the volume of mail still further and create what the GAO has

warned about, of this death spiral of increasing rates and then

plunging volume?

Mr. POTTER. Yes, it would. Each of our products is subject to

marketplace elasticities. The higher we raise rates the less mail we

have. People have alternatives for every one of the products that

we have.

Senator COLLINS. I want to turn now to one of the specific recommendations of the Commission. I believe that the Postal Service

has something in the neighborhood of $7.2 billion in liabilities for

worker’s compensation. Is that in the neighborhood?

Mr. POTTER. Yes, it is.

Senator COLLINS. Right now, as a result of reforms that were

passed in the 1970’s, it is my understanding that a postal employee

who is receiving worker’s compensation can remain on worker’s

compensation, assuming no return to work, forever, that there is

not a conversion to retirement at a certain age.

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And, in fact, I read one study that indicated the Postal Service

was paying worker’s comp benefits to an employee who was age

102.

Mr. POTTER. That is correct.

Senator COLLINS. Are you supporting the changes that the Commission recommended to have a conversion at some reasonable retirement age? Obviously our hope would be that we could get any

injured worker back to work and that we can avoid injuries in the

first place.

But for those workers who do receive worker’s comp, do you support, first of all, the conversion at a normal retirement age and,

second, the reinstatement of the 3-day waiting period?

Mr. POTTER. On both counts we do. We feel that it is reasonable

that at some point in time, and I’m not going to tell you what the

age is, in fact right now we would make money if it was 80 years

old, at some point in time people should be forced to retire. It is

unreasonable to pay those escalating costs. We estimate that on an

annual basis it costs us about $9,500 per employee who stays on

worker’s comp rolls versus them converting to a retirement pay at

some reasonable point. So that is a big cost to us.

In addition, the 3-day waiting period was converted in the past,

and as a result we saw a rise in claims. If I could, the Postal Service is working very hard on the worker’s comp area, and we believe

that it starts with injuries and illnesses of our employees, and we

have gone very aggressively on a safety campaign to make sure

that our employees don’t get harmed. Our injury-illness rate over

the last 3 years is down 28 percent.

And despite that, our worker’s compensation costs have grown.

We are also working hard to find other employment if people can’t

work in the Postal Service, find other employment for those people

on worker’s comp rolls. Today we have over 200 folks who don’t

work for the Postal Service but are on our worker’s comp program,

work for private sector employers, and we make up the difference

between what the private sector employer pays them and what

they would get on worker’s comp.

So we are very interested in this area, and I think that the

Treasury and the President’s Commission was right to point it out

as an opportunity, and we are working hard to fix it.

Senator COLLINS. Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you.

Senator Carper.

Senator CARPER. Thanks, Mr. Chairman. Since the tragedy of

September 11 and the anthrax attack, something has actually come

out of something awful, and I think that something good is improved performance within the Postal Service.

I think the saying ‘‘success has many fathers’’ has been offered.

In this case, success has many fathers and mothers, I might add,

and maybe one or two of the fathers are sitting at this table before

us and some are represented here in the audience of the hearing

room.

We have seen remarkably improved relations, working relations

between our labor unions which represent postal employees, the

Board, the Board of Governors and postal management. And I

would ask you, the fruits of those labors, those improved relations,

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aren’t something that we mandated. We didn’t pass a law that said

you got to do this. But you have done it.

And just take a moment and just talk about some of the positive

steps that have been taken to provide maybe better service at a

more reasonable cost. The General and also for Governor Fineman.

Mr. POTTER. I am very proud of the improved labor relations that

we have in the Postal Service. I think one of the keys to that is

we are focused on the customer, and we put the customer first, and

we as an organization have put that as our No. 1 priority. Service

is No. 1.

And we do things as efficiently as we possibly can. When you

talk about the success in the Postal Service, you talked about the

mothers and fathers of it over the last several years, I think there

are over 700,000 mothers and fathers of the success. It is each and

every employee who comes to work every day, dedicated to serving

their customers and who have focused—again, we are in tough

times. People recognize that we have to change, and we engaged,

long before the President’s Commission, we were engaged in the

business of trying to improve service to our customers because we

recognized we are in a competitive environment, looking at opportunities that we had based on the changing mail mix and changing

demographics, to improve the efficiency of the mail that we—of

moving the mail flow out of our system.

And I think it has just been an entire organization working together to make that happen. We have seen improvements in our

relationship with the unions. And I think that if there is a key to

success, is that we communicated, and we have stressed a need to

communicate up and down our organization on everything, and we

are trying to treat each and every individual in our work force as

we would want to be treated ourselves.

It is not to say that it is a perfect system. With over 700,000 people it can’t be perfect, but we are working hard to try and achieve

that.

Senator CARPER. Governor Fineman, before you respond, General

Potter mentioned communicate, better communications, and that

solves a lot of problems in many forums. We have had recommendations from the Commission that on the issue of collective

bargaining that we mandate through law that you collectively bargain benefits, not just wages but benefits as well.

And I don’t know, there is probably some in the House and some

in the Senate who are inclined to do that, some who are maybe reluctant. And I would ask for you to, maybe both, be thinking about

whether there might be an opportunity, as you communicate and

have this dialog between management, Governors and organized

labor, maybe an opportunity to dialog on the issue, rather than

mandate, us mandating benefits on the collective bargaining,

maybe you just voluntarily try that, and particularly before we step

in and legislate something.

Mr. POTTER. If I could, let me just tell you that dialog is taking

place and will continue.

Senator CARPER. Is there anything that we can do to push that

forward?

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Mr. FINEMAN. I would just say that I congratulate management.

When I came onto the Board, there was not the same tone that was

set between management and labor.

Senator CARPER. When did you come on the Board?

Mr. FINEMAN. 1995 or so. There was not the same tone. There

was this big backlog of grievances. And slowly, and I think through

the previous Postmaster General particularly, and Postmaster General Potter, there is a different tone that is set.

The tone is set that—we understand that at certain times we are

going to be adversarial, but at the same time we have to keep talking to each other.

In regard to your second question, I have said publicly before,

and in my written statement that I have submitted, that I am a

long believer in the collective bargaining system. And I would believe that—I would hope that this committee in drafting legislation

will not in any way usurp that collective bargaining system

through some other kind of system, some of which is recommended

by the Presidential Commission.

I think it has to say—and the reason the collective bargaining

works and the reason it is working today is exactly what you said,

Senator. It is the question, do you have open communication with

people to talk about what your problems are. And if you can have

a collective bargaining system in which you set wages, you are

going to be talking to each other. You set up a process to keep talking with each other.

Senator CARPER. Well, keep talking. Thanks very much.

Chairman TOM DAVIS. Thanks.

Mr. McHugh.

Mr. MCHUGH. Thank you, Mr. Chairman. To editorialize a bit,

Postmaster General Potter mentioned the testimony of UPS with

respect to the question of cross-subsidies. It is a very hotly contested issue, one of the very first I heard about some 9 years ago.

And we have tried to come to the resolution, I know that the

Postmaster General and others know this, but just for the record

come to a resolution that while the debate is interesting and important, it probably can’t be decided given today’s state of realities.

So what we have done in our bill, as you know, Mr. Chairman

and Senator Collins, is to try to create a circumstance where the

issue cannot happen in the future if it has happened in the past.

And we all heard the Postmaster General’s strong denials, which

I respect, and we do that by creating a regulatory body, now the

Postal Rate Commission, that is given all of the authority it would

need to have to make those determinations unquestionably, subpoena power on data, powers it does not now have.

So it certainly—we have suggested to UPS, for whatever faults

they may have in the bill, that is something that they should be

very, very supportive of.

I also want to associate myself with the comments of just about

everyone who has spoken so far with respect to the frustration regarding the escrow.

Senator Collins knows far better than anyone, as she noted, that

the interesting dilemma here is that the administration’s original

bill would actually be more costly to the budget than the ultimate

resolution.

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And it certainly—this is no fault of the Treasury Department. I

think it dramatically underscores the folly of budget scoring as it

currently is constructed. And to suggest, and again this isn’t Treasury’s fault, it is the way the game is played right now, to suggest

that a $3 billion hit on the Treasury is better than a 6 percent increase in postal rates to the overall economy and budget situation

of the United States of America is lunacy.

And I am just curious again, that this is no responsibility of

yours, Mr. Secretary Roseboro. But I am wondering, did the Treasury ever have a chance to determine what the overall impact of the

economy of the United States would be, or ultimately to the Treasury, if we had to do a 6 percent increase, 2-cent increase on first

class?

Mr. ROSEBORO. No specific analysis was done on that, sir. But

again, I think we can generalize and say it would not be good in

terms of the economy, without question. But second, again, I emphasize that we think that it is not a binary decision of raising

rates or take this course. We think there are some other options

that could be explored, and we are eagerly looking forward to working with you.

Mr. MCHUGH. I understand that. Again, you are playing by the

rules that were handed to you. That is not a direct criticism. Let’s

get to something that may be.

You had mentioned, and Secretary Snow mentioned the allocation of costs are over at 42 percent. Although it is not said directly

in the Secretary’s testimony, and although you didn’t say it directly, I am certainly getting the impression that somehow you feel

that is wrong, it ought to be higher.

And you may or may not be right. Maybe it should be 50. Maybe

it should be 55. But I am just curious, has the Treasury taken a

position that 42 percent is by definition too low, and if so, how did

you come to that conclusion?

Mr. ROSEBORO. No, sir, just the opposite. We feel 42 percent is

too high. We think from a business perspective an allocated cost

should run south of 10 percent as a generality.

Mr. MCHUGH. You are right. I misspoke. I spoke the other way

around. But the unallocated costs are too high.

Mr. ROSEBORO. Yes, sir. Absolutely.

Mr. MCHUGH. How, given—I could understand how, and Secretary Snow is certainly a very astute businessman, you could do

that in the private sector, but how do you make that determination

in the Postal Service? Has a study been done or some kind of data?

Mr. ROSEBORO. From a business perspective, there is no comparison for commercial enterprise not being able to allocate a higher

percentage of a cost along product lines. And we think that number

could be improved as the Postal Service works to improve systems,

whether technical on the MIS side through overall organization.

But——

Mr. MCHUGH. I don’t mean to interrupt you, but my time is running out. But there is no study, and by the way the Postal Service,

I think you would agree, hardly fits the traditional business model.

It is a totally different organization.

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But be that as it may, you feel—I am interested in how you feel,

and that—I am compassionate to your feelings, Mr. Secretary, but

that doesn’t mean that it is right or wrong.

What I think, and let me ask my final question, if I may indulge

the forbearance of the chairman and the other distinguished members, would I be correct in saying, and I would fully support this

if it is your view, that the Treasury position is we need to more

finely hone the allocation of those costs to ensure that it is distributed accurately. Would that be a fair statement?

Mr. ROSEBORO. Yes, sir.

Mr. MCHUGH. Without prejudging what it ought to be?

Mr. ROSEBORO. Yes, sir. Based on the principle of self-financing,

if there going to be adequate self-financing, if that is going to be

successful, it goes without saying that proper cost allocation is key

to setting appropriate rates.

Mr. MCHUGH. I thank you very much. I fully agree with that. I

am glad we were able to clear it up. Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you. Ms. Norton.

Ms. NORTON. There is kind of a fictional quality to this hearing,

if I may say so. For example, on the veterans benefits, weren’t

many of those benefits accrued before there was any Postal Service

as we know it?

You know, Mr. Roseboro, the notion of holding the Postal Service

accountable, with the administration not holding itself accountable,

is very interesting to me. So you are offloading veterans benefits,

which of course no private corporation would have to pay, but even

veteran benefits predating the 1970 formation of the Postal Service, and you think that is a fair way to go at postal reform?

Mr. ROSEBORO. Yes, Congresswoman. Again, in the context of the

postal legislation that was passed last year. And again it is very

important to look at this as the package and what the package attempted to do. One, it attempted to make the FERS pension funding in the postal equivalent, if you will, to the FERS system, which

requires this.

Additionally, again I will emphasize, the dynamic analysis given

to the Postal Service has never been done before, and again resulted in, even with the $27 billion obligation to the Postal Service

on the military funding, still leaving $21 billion for Treasury taxpayers, a net plus $78 billion. That is not done either in the private

sector.

So we think in terms of a package that was more than fair and

reflected in the legislation that was passed as a package, and we

think in terms of postal reform and moving forward to go back and

undo that particular cherry-pick aspect of it is a step backward in

postal reform.

Ms. NORTON. Just like you think the escrow is. In other words,

accountability all works against the Post Office and in your favor.

Let me—I served on, before I came to Congress I served on the

Board of three Fortune 500 companies. So when you look at your

list of recommendations, they read like the list that any corporation would have, not any corporation about to—that would be in

bankruptcy or be out of business if it were in the private sector.

For example, and this is the kind of criticism I have, and why

I can’t accept the administration’s recommendations with a straight

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face? I could if you said, for example, in implementing best practices, ensure that the Postal Service’s governing body is equipped

to meet the responsibilities and objectives of a private enterprise.

I take it you mean—of course that is left out—of its size and scope.

And it seems to me you should add right there, under best practice,

of its size and scope with the obligation to give universal service.

Instead you put universal service under accountability, because you

are going to make sure that the Postal Service, under the accountability section, has the appropriate oversight to protect consumer

welfare and universal mail service.

I just think, you know, you need to sit down with some people

in the private sector to figure out how to set your own goals in a

more realistic way, and I think you will find, Mr. Roseboro, over

here, that whatever was said last year or even this year, Members

here in the final context tend to regard ratepayers and taxpayers

as interchangeable.

And I have a hard time believing that some of what is proposed

here will pass the laugh test here in the Congress if it gets to the

floor. For example, just let me—to ask a question about some of the

doublespeak that I find in these recommendations.

On top of everything else, about the last thing the Postal Service

needs is a complete blow-up or explosion of its labor relations; they

are already bad enough. You apparently support collective bargaining, but would establish a three-member board appointed by the

President to set compensation. Well, the last time I heard, wages

were considered by most employees a central feature to compensation. Are you saying that the Postal Service should have a collective bargaining regimen like that of Federal workers who we do not

pretend are a part of the private sector?

Mr. ROSEBORO. Actually, referring to the 35 recommendations

from the Commission, as we indicated in the beginning, while we

the Commission did a great, admirable job in laying out some prescriptions to perform, we did not support all of the recommendations.

Ms. NORTON. Do you support that recommendation?

Mr. ROSEBORO. We support collective bargaining. We do not support a board to determine compensation.

Ms. NORTON. Do you support continuing bargaining for wages as

you do—as the Postal Service does today?

Mr. ROSEBORO. Absolutely.

Chairman TOM DAVIS. Thank you very much, Ms. Norton. Mr.

Clay.

Mr. CLAY. Thank you, Mr. Chairman. I appreciate it.

Mr. Potter, let me ask you about—the Postal Service requested

$350 million for emergency preparedness for fiscal year 2004,

which it did not receive, and $779 million for fiscal year 2005.

I understand the money would help you, the Postal Service, buy

and install systems to detect biological agents and poisons and new

ventilation and filtration systems in 282 mail handling centers nationwide.

If money is not appropriated for emergency preparedness, will

funding for this purpose have to be built into postal rates?

Mr. POTTER. Yes, it will.

Mr. CLAY. Are there any other options other than postal rates?

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Mr. POTTER. No. It is either an appropriation or a rate increase.

Mr. CLAY. So again we get back to a tax increase, as the chairman stated.

OK. The President’s Commission has recommended rescinding

existing regulations that require citizen input before closing plants

and small post offices. Rural and urban post offices deemed unprofitable would be closed and future services will be provided on anability-to-pay model.

Does this undermine the Service’s mission to provide service and

access to all communities at uniform rates?

Mr. POTTER. The issue of post offices is one that is very complex.

Right now, as you said, there is rules and a comment period. Certainly we would want to have the comment of communities as we

look to change our infrastructure. We are not proposing abandoning communities. We are proposing that we deliver services in a

different way. For example, we have some post offices in America

where people actually have to come and pick up their mail. We

might, alternatively, have those folks have their mail delivered

closer to their door to a rural mailbox. Those rural carriers are post

offices on wheels.

The issue of post offices is very complex. When I think of post

offices and post office closings, there are people who are trying to

intimate that we would have to close 20,000 of our 38,000 outlets.

That is not the case. On one end of the spectrum we have over

2,500 post offices that have less than 200 people living in the area

that they serve. We have over 4,500 that have less than 200 deliveries. Now, I certainly think that any good organization should

have the ability or the option of exploring how they can deliver

services to those communities. But the post office that we all think

about, that, you know, serves populations of several thousand people, they are not going to close. We need those facilities to provide

delivery services, post office box services, as well as counter services, and I don’t envision those closing in my lifetime. But there are

those issues out there where we should be able to explore how we

can better economically serve communities.

Mr. CLAY. You are absolutely right. It is about efficiency and

streamlining of the service. I appreciate your answer.

Mr. Roseboro, perhaps you can answer for Secretary Snow, who

stated that the recalculation of postal retirement costs provided the

Postal Service with a properly calculated enormous gain of $78 billion at the expense of other CSRS participants. We understood that

the Postal Service was on track to overfund its obligations by $78

billion.

Wouldn’t that suggest that the Postal Service was in essence

supporting the rest of the CSRS participants with its contributions?

Mr. ROSEBORO. The Postal Service was the only CSRS participant that received the benefit of this dynamic analysis. So, in that

sense, they benefited.

Mr. CLAY. OK. Well, then—OK, this takes me to the next question then. How can correcting a considerable overpayment be considered a gain for the Postal Service?

Mr. ROSEBORO. I wouldn’t characterize it as correcting an overpayment. Again, it was putting it on equal footing with the FERS,

the Federal employment retirees system pension setup. That was—

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would be a more accurate characterization. And doing that resulted

in the $78 billion gain for the Postal Service as well as the obligation to pay the $27 billion portion of the military pension cost.

Mr. CLAY. Well, isn’t it true that the $27.9 billion that represents

the military cost obligation that has been transferred from Treasury to the Postal Service, $17 billion of this amount is retroactive

to 1971 and has already been paid to retirees?

Mr. ROSEBORO. I understand that to be correct, yes.

Mr. CLAY. That is true.

Mr. ROSEBORO. Yes, sir.

Mr. CLAY. OK. Then when they set up in FERS in 1983 wasn’t

it applied prospectively to individual new hires employed after

1983?

Mr. ROSEBORO. I’m not sure, sir.

Mr. CLAY. You’re not sure about it? I believe it was.

Chairman TOM DAVIS. You can get back to us on that. Thank you

very much.

Mrs. Maloney.

Mrs. MALONEY. Thank you. I thank the chairman and woman of

the respective bodies for holding this important hearing, and I

thank all of the panelists for all of your hard work in these difficult

times, and I’m very pleased that a New Yorker is at the helm of

the postal department, Mr. Potter. We’re all very proud of your

hard work.

I, first of all, would like to be associated with the comments of

my colleague, Mr. Clay, on the need for the Federal Government

to fund adequately the Post Office’s need for preparedness and

Homeland Security concerns that have been piled on with the anthrax threat and, also, the comments of my colleague, Eleanor

Holmes Norton, that any reform not weaken collective bargaining

or jeopardize the health benefits of our hard-working employees.

I would like to ask Mr. Potter, we now have a freeze on postal

rates until 2006; and for the first time, according to GAO, the volume of postal mail has dropped; and some recommend that it may

continue to drop. My question is, do you believe that an extension

of the current rate freeze would benefit the U.S. Postal Service

after 2006?

Mr. POTTER. I believe that the longer we can hold rates stable,

the more opportunity we have to grow volume.

Mrs. MALONEY. Well, as you know, in 2006, we will be reviewing

the escrow account and how it should be used. What reforms have

you put in place to make services available so that the mail can

get out at a reasonable rate that benefits all of our residents and

all of our businesses?

In addition to representing actually the postal workers who were

in the anthrax scare in New York City, I also represent many magazines and publishers; and in the past several years, several have

gone out of business—Mademoiselle, Mode, Brill, Business Weekly,

a number of very significant magazines. The reason that they state

that they went out of business was the increased cost of postal

rates. This has the ramification of many workers losing their jobs

at a time when over 3 million private sector jobs have been lost in

our economy recently. This is very serious.

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So what steps are you taking to really run the Post Office more

like a business so that our workers are employed with their benefits and that the businesses can afford to employ people, pay taxes

and contribute their aspect to the American economy?

Mr. POTTER. First of all, we’re working very hard to improve

service; and we’ve done that in every measured category and nonmeasured category as we see complaints down. Customer satisfaction nationally is at an all-times high. Our cost—we have taken

$2.7 billion of cost out of our system in the last 2 years. When we

put the transformation plan together, we said that we would

achieve $5 billion of cost savings out of our bottom line. That’s

above and beyond the savings that we’ve had as a result of reduction in volume. So we are very focused on becoming more efficient.

Now, unfortunately, that’s meant that we have had fewer employees. So if you talk about unemployment, since I have been

Postmaster General—that’s less than 3 years—we’ve reduced our

career work force by almost 70,000 people; and I’m not proud of

that. I’m proud of the productive improvement, but I wish we had

volume so that we could keep everyone gainfully employed. Now

we’ve done that through attrition, and we’ve worked with our

unions and our management associations on that, but we are very,

very focused on improving service, reducing costs.

You speak of periodical mailers. We’ve in the last 3 years introduced automated flat sorters to handle periodical mails; and we’ve

seen our productivity of what we call flat mail—our oversized letters, catalogs, periodicals, magazines—we’ve seen our productivity

double. So we are very much concentrated and working closely with

those folks in the periodical industry to improve our productivity

and to do the best we can to flatten their rates out.

Mrs. MALONEY. Well, how can the Post Office better adapt to the

technological advances that have contributed to the decline in firstclass mail?

Mr. POTTER. Well, the best way we can do it is by employing

them. We have the most automated postal system in the world.

That has helped enable us to reduce our work force and improve

our productivity.

We’re also reaching out to customers over the Web. We recognize

that’s a place where people are doing business, and we’re working

very hard to reach people where they are. We believe that we need

to bring our services to the door of every American. After all, we’re

there every day. We want to bring our services to them at their

door, whether it’s stamps by mail or other issues. We’re focused on

growth, and we believe a combination of high levels of service, improved productivity and a focus on growing the business and being

customer friendly are the ingredients that will help us be successful in going forward.

Chairman TOM DAVIS. Thank you. Time’s up. The gentlelady’s

time has expired. Thank you very much. If you want to do any

followups, I’m sure if you submit them to the panel—be happy to.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

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Chairman TOM DAVIS. We have one more member, Mr. Duncan,

who has joined us. Recognize him for 5 minutes.

But before I do, I want to insert in the record a letter from Grover Norquist, Americans for Tax Reform, to John McHugh; and it

notes at the end—it says, ‘‘As Congress prepares to address postal

reform this year, it seems pension reform might be a good place to

start. I urge you to support transferring the military service pension obligation from the USPS back to the Treasury and to allow

the USPS to stop overfunding the Civil Service Retirement System.’’

Without objection, this will be placed in the record.

[The information referred to follows:]

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Chairman TOM DAVIS. Gentleman from Tennessee.

Mr. DUNCAN. Thank you, Mr. Chairman. I was here for a few

minutes earlier but then had to leave because of some appointments, and I apologize.

But I read this article that—an article that ran a few months ago

in the New York Daily News about the Office of the Inspector General of the Postal Service holding conferences where, at one conference in 2001, some staffers wrapped each other from head to toe

in toilet paper, aluminum foil, straws and pipe cleaners. At an annual conference in Washington in December 2003, 725 employees

went on a treasure hunt to seek clues from costumed actors playing

a wizard, magician, dragon, princess and mad scientist. At another

annual conference in 2002, employees built tents out of newspapers, hop-scotched across the ballroom on squares, learned scat

singing, all these ridiculous things.

They spent millions of dollars doing this. I could—one of the conferences was $1.2 million, one was $1.3 million, one was $1.1 million.

I’m assuming that this type of thing has been cut out or eliminated. But I would like for you to assure me on the record that it

has been eliminated and that we’re not having conferences of top

management at the Postal Service that are going in for these really—they talked about conferences where people—where the employees were asked to hiss like snakes, quack like ducks. I mean,

it’s just crazy; and they spent millions of dollars doing these things.

Mr. FINEMAN. Congressman, I want to assure you that is not occurring any longer. I want to assure you that when the Board of

Governors received complaints about things of this sort, and those

articles particularly, we took what were appropriate steps, referred

those complaints to the President’s Council on Integrity and Efficiency, who did their own investigation—separate investigation on

these matters. We were working very closely on the Senate side

with Senator Grassley, who had an interest in these matters.

The Inspector General, who was then in charge of these matters,

has since resigned; and a new Inspector General has been hired,

someone who comes with vast experience in the area. I can assure

you that office is being revamped and is now acting in an efficient

and appropriate fashion.

Mr. DUNCAN. All right. Thank you very much.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Let me again, Senator Collins, thank you very much for

cohosting this with me and Mr. Davis and other Members for being

present with us today.

I want to thank our witnesses for taking time from their busy

schedules to appear before us.

Committee stands adjourned.

[Whereupon, at 4:43 p.m., the joint committee hearing was adjourned.]

[The prepared statements of Hon. Katherine Harris, Hon. Chris

Van Hollen, Hon. Elijah E. Cummings, Hon. Paul E. Kanjorski,

and additional information submitted for the hearing record follow:]

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