U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

80–598 PDF 2003

S. Hrg. 107–551

THE POSTAL SERVICE IN THE 21ST CENTURY:

THE USPS TRANSFORMATION PLAN

HEARING

BEFORE THE

INTERNATIONAL SECURITY, PROLIFERATION AND

FEDERAL SERVICES SUBCOMMITTEE

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 13, 2002

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

JOSEPH I. LIEBERMAN, Connecticut, Chairman

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

FRED THOMPSON, Tennessee

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

PETER G. FITZGERALD, ILLINOIS

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel

RICHARD A. HERTLING, Minority Staff Director

DARLA D. CASSELL, Chief Clerk

INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL SERVICES

SUBCOMMITTEE

DANIEL K. AKAKA, Hawaii, Chairman

CARL LEVIN, Michigan

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

THAD COCHRAN, Mississippi

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

ROBERT F. BENNETT, Utah

PETER G. FITZGERALD, Illinois

Nanci E. Langley, Deputy Staff Director

Dennis M. Ward, Minority Staff Director

Brian D. Rubens, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Akaka .................................................................................................. 1

Senator Cochran ............................................................................................... 6

Senator Carper ................................................................................................. 7

Senator Stevens ................................................................................................ 12

WITNESSES

MONDAY, MAY 13, 2002

Hon. John E. Potter, Postmaster General, U.S. Postal Service ........................... 3

Hon. David M. Walker, Comptroller General, General Accounting Office ......... 9

ALPHABETICAL LIST OF WITNESSES

Potter, Hon. John E.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 39

Walker, Hon. David M.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 46

APPENDIX

Questions for Postmaster General Potter from:

Senator Akaka .................................................................................................. 82

Senator Cochran ............................................................................................... 105

Senator Levin .................................................................................................... 109

Senator Carper ................................................................................................. 112

Questions for Mr. Walker from:

Senator Akaka .................................................................................................. 115

Senator Thompson ............................................................................................ 119

(1)

THE POSTAL SERVICE IN THE 21ST CENTURY:

THE USPS TRANSFORMATION PLAN

MONDAY, MAY 13, 2002

U.S. SENATE, INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES SUBCOMMITTEE, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Committee met, pursuant to notice, at 10:02 a.m., in room

SD–342, Dirksen Senate Office Building, Hon. Daniel K. Akaka,

Chairman of the Subcommittee, presiding.

Present: Senators Akaka, Dayton, Carper, Cochran, and Stevens.

OPENING STATEMENT OF SENATOR AKAKA

Senator AKAKA. Good morning. This hearing will come to order.

This morning, we have a very rare privilege of having two Generals with us and a full house. We are pleased to have with us

today John Potter, the Postmaster General, and David Walker,

Comptroller General. Both of you have contributed so much to

framing our discussion of how to strengthen the Postal Service and

safeguard its core mission: Providing universal mail service to all

Americans at affordable prices.

Mr. Potter, in the first 11 months of your tenure, the Postal

Service has faced events that no one could have foretold. Over the

past 10 days, the Service and its employees has once again found

themselves on the front lines, and I want to commend them for the

courage and determination they showed in response to this latest

attack.

All too often, we take them for granted, and I was so pleased

when the Senate unanimously adopted a resolution last November,

that Senator Boxer and I introduced, that commended Postal employees for their service and dedication. The events of the past 8

months have clearly demonstrated these men and women deserve

to be recognized for their courage in the face of substantial risk.

We are also honored to have with us today the Comptroller General, whose commitment to an effective and efficient government

has been underscored by his continued personal involvement with

oversight of the Postal Service—the work that we are doing. Mr.

Walker, I thank you and your staff for spotlighting the serious financial and operational challenges facing the Postal Service and

for your recommendation for transformation.

I sincerely believe that we have the right folks in the right place

at the right time to assist us with the task of securing the Postal

Service’s future. I also wish to thank those members of our audiVerDate 11-MAY-2000 08:49 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 80598.TXT SAFFAIRS PsN: SAFFAIRS
2

ence who worked with the Postal Service as it put together this

Transformation Plan. Your cooperation and partnership added exceptional value to what we are doing.

Last March, the leadership of this Subcommittee and the full

Committee asked the GAO to review the financial condition of the

Postal Service after learning that the Service faced a possible $3

billion deficit for fiscal year 2001. A month later, GAO placed the

Service’s transformation efforts on its high risk list, and in May,

at a joint Committee/Subcommittee hearing, we responded to Mr.

Walker’s recommendation for a Transformation Plan by asking the

Postal Service to provide us with its short-, mid-, and long-term vision. That Plan and the GAO report are the focus of today’s hearing.

I do not have to remind any of you that the operation of the Postal Service and the delivery of mail is critical to our Nation’s economy. It is the linchpin of a $900 billion mailing industry that employs nearly nine million workers and is 8 percent of gross domestic product.

This morning we will examine the consequences of ignoring the

challenges facing the Service, as laid out by the Plan and GAO’s

report. I believe both reports make a strong case for change and

both propose some tough options on tough issues, some of which

will be politically unpopular.

I am also aware that given the diverse nature of the mailing industry, it may be difficult to forge a true consensus, but I agree

with the Postmaster General that the only way to tackle the future

of the Postal Service is through working together.

I will not take any more time to discuss where we have been.

Rather, I would like to talk about the Transformation Plan. I appreciate the extent to which the Plan addresses many of the fundamental issues associated with Postal questions and operations,

rates and pricing, human resources, regulatory reform, and mail

safety. However, within these categories, there were details that

were not clearly defined, such as implementation time frames, how

proposed cost cutting goals and no rate increases until 2004 will

provide adequate funds for capital needs and debt reduction, and

how the Postal Service will deal with the long-term liabilities associated with pension plans and post-retirement health benefits while

ensuring the retirement security of its employees.

We need fuller explanations of the Service’s strategies to improve

labor-management relations and how it will enhance workforce culture. How will changes to procurement and contracting procedures

produce savings? And how will the Service fund mail safety and security programs beyond Congressional appropriations?

It is also fair to ask why existing flexibilities have been seldom

used, and what has changed that makes the Postal Service believe

it can now take advantage of the short-term options outlined in the

Plan? How do we balance the interests of those who use First-Class

Mail with the interests of commercial mailers as the Postal Service

seeks additional pricing flexibilities? How do we protect universal

service and make sure that the Postal Service’s core mission does

not erode?

Although we do not have the time to examine all of these issues

today, we will seek answers to these and other questions.

3

1The prepared statement of Postmaster General Potter appears in the Appendix on page 39.

Let me conclude by saying that should Congress agree with the

recommendation that the Postal Service become a commercial government enterprise, we must protect the institutional and fiduciary

interests of the Federal Government, the Congress, and the public.

We must consider how a government entity with commercial mandates would function and how we would ensure Congressional accountability and protect against the misuse of Federal funds and

authority.

Without strong guarantees of accountability and credible financial auditing to protect the public interest, a future generation of

lawmakers will be obligated to reconsider the very issues we will

discuss today.

I now yield to our first witness. I ask that you keep your oral

statements to 5 minutes. Be assured, however, that your written

testimonies will be made a part of the record. Again, I express my

gratitude for your presence this morning. Postmaster General,

please proceed.

TESTIMONY OF HON. JOHN E. POTTER,1 POSTMASTER

GENERAL, U.S. POSTAL SERVICE

Mr. POTTER. Good morning, Mr. Chairman. Thank you for the

opportunity to speak with you today about the transformation of

the U.S. Postal Service.

One year ago, the Congress asked the Postal Service to create a

comprehensive Transformation Plan that would chart its current

and future mission and the reforms that would be necessary to fulfill that mission. We delivered that plan to Congress 1 month ago.

In developing the Plan, the Postal Service Board of Governors

and Postal management reached out to our stakeholders, the mailing industry, Postal unions, our management associations, and individual consumers. We received their input and recommendations

on the future of the Postal Service. There was consensus among

this very diverse group that the Postal Service must change if it

expects to continue to provide universal service to all Americans.

Our Transformation Plan maintains our commitment to that core

value, that is, to provide access to postal service and daily delivery

for all Americans, regardless of where they live, where they work,

or their economic circumstances.

It was that national mandate to provide universal service that

led to the establishment of a network of post offices throughout the

original 13 colonies. Today, we preserve that commitment by providing a national communications network that connects 280 million people, 105 million households, and 13 million businesses

across America through some 38,000 post offices, stations, and

branches.

Throughout our 225-year history, the Postal Service has adapted

to meet the changing needs of our customers. The circumstances

we find ourselves in today necessitate a reevaluation of our operations and the business model which governs us. Today, we are experiencing extraordinary declines in mail volume and resulting

losses in revenues. Our projected volume decline for this year will

4

be more than six billion pieces of mail below last year. That is the

largest volume decline ever experienced in a single year.

Despite this decline, we are working to reduce our net loss below

our earlier projections. To achieve this, we will reduce the number

of career employees through attrition by 20,000 people this year. In

addition, we will cut over 60 million work hours compared to last

year, and we are postponing program expenditures and delaying

capital investments.

The net effect of these actions will reduce current year planned

expenses by $2 billion. Those savings, combined with the $1 billion

infusion of revenue from the early implementation of the rate case,

means our projected net loss for the year will be in the range of

$1.5 billion instead of what easily could have been a loss of $4.5

billion.

But these circumstances dictate that we must take a more comprehensive approach to address these issues in the future. That approach is presented in our Transformation Plan. The Plan identifies three parallel courses of action: First, initiatives to improve

service and efficiency under current legislation; second, moderate

regulatory and legislative change needed to better manage today;

and finally, comprehensive legislative reform which addresses complex issues, such as a definition of universal service. Let me take

a moment to discuss each.

Internally, we have to balance the need to grow volume with the

need for efficiency to assure affordable rates. In short, we must increase the value of our products. Value starts with service. Timely

delivery remains our No. 1 priority.

In addition, we have begun to leverage our experience with technology to enhance our products and services. For instance, we have

introduced the first intelligent mail product, called Confirm, that

enables mailers to track their letters or flats through each step of

the Postal Service distribution process. This tool gives mailers information to plan marketing strategies and sales based on more

predictable and reliable mail delivery.

The second element of value is price. By law, we are required to

set prices based on costs, which is why we have embarked on a 5-

year plan to reduce costs by $5 billion through 2006. Our plans include the use of technology to automate operations, facility and

transportation network changes, and establishment of a customerfocused, performance-driven culture.

I would add, Mr. Chairman, that we continue to work closely

with representatives from mailers’ organizations, citizens’ groups,

and our unions and management associations to solicit their input

and support for these initiatives.

Concurrent with this effort, we have focused on immediate, moderate regulatory and legislative changes. Our No. 1 priority is to

modify the rates process to be more compatible with the needs of

our customers and to provide management with the flexibility to

grow the business. We have joined with the Chairman of the Postal

Rate Commission, George Omas, to convene a joint summit of all

stakeholders in the mailing industry later this month. While this

effort may produce some positive results, a moderate change in legislation will assure that the will of the people, as determined by

5

its elected representatives, is carried out and that protection of universal service is assured.

To that end, the Transformation Plan calls for a comprehensive

legislative change to address the future needs of the Postal Service.

There are many complex public policy issues, such as the definition

of universal service and the Postal Service’s business model, which

require careful evaluation.

While there were many alternatives for consideration, the Transformation Plan lays out three possible scenarios for our future. We

have provided two scenarios that are at the far ends of the spectrum of alternatives available, putting the Postal Service back on

budget as a traditional government agency at one end, or creating

a privatized corporation at the other end.

In addition, we provided another scenario for converting the current business model to a Commercial Government Enterprise. This

third model, a Commercial Government Enterprise, would provide

the tools needed to ensure universal service for the American public and long-term financial stability. Essentially, the Postal Service

could become profit-driven, generate returns to finance capital

projects instead of increasing our debt load, introduce flexible pricing based on market demand, and develop better relationships with

our employees.

These and other long-term changes to transform the Postal Service can only come with legislative reforms. Every American and

every policy maker has a stake in Postal reform and transformation. The mailing industry of this country employs over nine

million Americans. It contributes $900 billion to the Nation’s economy, representing 8 percent of the gross domestic product. This national asset must be protected and preserved. We look to this Subcommittee, the Congress, and the administration to help and guide

us toward that goal.

Finally, I want to take this opportunity to thank the American

public for their support in helping us respond to the recent mailbox

bombing incidents in the Midwest. Residents in rural areas helped

by opening their mailboxes to minimize risk to our letter carriers

and themselves. Our employees deserve credit, too, for their courage and commitment to deliver the mail under difficult circumstances. Their actions brought new meaning to our commitment to provide universal delivery service to America.

I also want to acknowledge and thank the many local, State, and

Federal law enforcement authorities who worked to resolve the

mailbox bombing incidents. I especially want to thank Acting Chief

Inspector Jim Rowan for helping coordinate all our resources and

getting 150 Postal inspectors deployed throughout the Midwest to

help in the investigation.

In reviewing the news accounts of last weekend, I was reminded

that the American people place a high value on the daily delivery

of their mail. It is that value that underscores the importance of

universal service and the need to change the Postal Service. To

that end, my staff and I would be pleased to work with this Subcommittee in any way possible to advance the transformation of the

Postal Service.

Thank you, Mr. Chairman. I would be pleased to respond to any

questions or suggestions you might have.

6

Senator AKAKA. Thank you very much for your statement. We

certainly look forward to working together with you.

I would like to call on my friend for any statement he may have,

Senator Cochran.

OPENING STATEMENT OF SENATOR COCHRAN

Senator COCHRAN. Mr. Chairman, thank you very much. I am

pleased to join you this morning to hear the presentation by the

Postal Service, the Postmaster General specifically, of his Transformation Plan and his observations about the challenges that face

the Postal Service, and to welcome David Walker, Comptroller. We

appreciate very much your cooperation with our Subcommittee.

I know that many of us, particularly Postal Service employees,

long for the good old days when the worst thing that could happen

to you if you were a Postal employee was to be bitten by a dog.

[Laughter.]

But the fact is, in this current environment, you can be

anthraxed or pipe-bombed and confused with changing trends and

demands in the marketplace. We are in a very fast transition

phase, it seems to me, in terms of the business challenges that face

the Postal Service, and I use that term ‘‘business’’ because I can

remember when I used to talk about the fact that we have to realize that the Postal Service is really not a business. It is a service.

It is the U.S. Postal Service. It has a greater and larger responsibility to the people of this country.

So it is a unique challenge that the people who run the Postal

Service face. It is not just one or the other. It is a combination of

an entity that has to comply with the strict mandates of Federal

law. It is independent from government. Congress really is not supposed to run it and meddle in its business, but it tends to all the

time anyway. So there are a lot of anomalies when it comes to trying to figure out how to proceed to improve and fulfill the missions

and the challenges of the future that I think the Postmaster General has really articulated in his statement today very well.

Reducing costs is a priority. Improving the reliability of services,

that is a must, reaching out for advice from those who use the services out of the U.S. Postal Service, and realizing that we have to

embark upon some commercial realities, government enterprises.

The use of the phrase ‘‘commercial government enterprise’’ is interesting and challenging. I think we need to commit ourselves as a

Subcommittee to working with you and trying to figure out ways

to improve the basic underlying laws and restrictions that apply to

the Postal Service.

I am willing to commit to you my best efforts, and I am sure others of the Subcommittee and Congress will join me in that commitment today. Thank you.

Senator AKAKA. Thank you very much for your statement, Senator Cochran.

I would like to call on Senator Dayton for an opening statement.

Senator DAYTON. Thank you. Nothing at this time, Mr. Chairman. Thank you.

Senator AKAKA. Senator Carper, any statement.

7

OPENING STATEMENT OF SENATOR CARPER

Senator CARPER. Thank you, Mr. Chairman, and to the Postmaster General and to the Comptroller General, welcome, both of

you. We thank you for your presence here today. We thank you for

your good work, as well.

I grew up in Danville, Virginia, and had a newspaper route in

the mornings and in the afternoons. Later on, my stepson would

deliver newspapers in New Castle, Delaware. If you go back to

Danville, Virginia and New Castle, Delaware today, you do not

have kids delivering newspapers anymore. It is a sign of the times.

I think what your employees have been through in the last 6, 7,

or 8 months with respect to the anthrax, the chemicals in the mail,

and more recently the bombings in the Midwest, is a sign of the

times, as well, and not a very good sign of the times.

Postmaster General Potter, I would just ask that you convey to

your employees our continued thanks for their service to all of us

in what we know are challenging, challenging times.

I think the attacks I mention may have come at what is perhaps

the lowest point in the Postal Service’s 30-year history. Volume is

down. Revenues are down. Deficits are growing and fixed costs are

not going away. Some of the customers who left the Postal Service

because of safety concerns in recent months may come back as the

economy continues to recover. Others may never return and it is

possible that the Postal Service would have lost a good number of

them in any event.

As the Transformation Plan that you submitted points out, the

Internet is already eating into volume and will continue to do so

in coming years as younger generations who are more comfortable

with technology take advantage of innovations like electronic bill

pay. I just paid my bills this weekend. It was interesting to note,

and I thought about this in anticipation of today’s hearing, how

many of the bills we pay now through electronic billing that we

used to put stamps on the envelopes and pop them into the mail

on Monday mornings. Obviously, we are not the only family that

does that.

So what do we do? What do we want our Postal Service to look

like in the Internet age? These are questions we have to answer

or else the circumstances will answer them for all of us. As GAO

has pointed out, the Postal Service cannot simply continue to do

business the way it has been doing it and continue to survive and

prosper.

One thing that we do need to think, I believe, long and hard

about in Postal reform is whether to allow the Postal Service to become a ‘‘communication company,’’ as it has taken to calling itself

recently. The Postal Service is in the mailing business and should

stick to what it does best, I think, and that is delivering the mail.

Offering e-commerce services and selling greeting cards and stationery in the post office might be in some ways a little more exciting, maybe more challenging than delivering letters and packages,

but we need to ask ourselves, will it improve the Postal Service’s

bottom line and can it be done in a manner that is fair to the Postal Service’s private sector competitors?

Making smart management decisions aimed at increasing volume, raising revenue, cutting costs, and capitalizing on quick, effiVerDate 11-MAY-2000 08:49 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 80598.TXT SAFFAIRS PsN: SAFFAIRS
8

cient delivery of the mail will improve the bottom line, and that is

for sure.

A number of years ago, I went to business school and we did case

studies, as a lot of students in business schools do, and I told my

staff in anticipation of this meeting, Mr. Chairman, that if I were

the person responsible for running the Postal Service, and particularly with the business school bent, I would be trying to figure out

how to reinvent the company and probably how to turn it into a

communications company. Doing so, however, may not be fair to

the private sector companies with whom you compete for the nonmonopoly business, and doing so may not be fair to those of us who

pay for First-Class Mail and may be paying actually more than our

fair share of the costs in order to cover the non-First-Class Mail.

I believe, and we will get into this in Q&A, I believe that about

50 percent of your revenues come from First-Class Mail. Those revenues cover maybe 70 percent of your operating costs, your institutional costs. That is a point I want to come back to a bit later.

Mr. Chairman, I have a couple more things that are in my statement. I would ask unanimous consent that those comments be

added to the record, and again, we thank our witnesses and look

forward to just a real good dialog with you. Thank you.

[The prepared statement of Senator Carper follows:]

PREPARED OPENING STATEMENT OF SENATOR CARPER

Thank you, Mr. Chairman and thank you General Potter for being here today to

talk about the Transformation Plan the Postal Service submitted to Congress last

month. Let me also thank you for your service to our country during what has been

a difficult time for the Postal Service and postal employees across the country.

Through the threat of biological attack and, most recently, bombs in mailboxes,

you’ve all been vigilant in carrying out your mission—connecting America through

the mail. I think I speak for all of my colleagues on the Subcommittee today when

I say that your work is greatly appreciated.

Unfortunately, the attacks I mention have come at what has to be the lowest

point in the Postal Service’s 30-year history. Volume is down, revenue is poor, deficits are growing and fixed costs are not going away. Some of the customers who left

the Postal Service because of safety concerns in recent months may come back as

the economy continues to recover. Others may never return, and it is possible that

the Postal Service would have lost a good number of them anyway. As the Transformation Plan points out, the Internet is already eating into volume and will continue to do so in coming years as younger generations who are more comfortable

with technology take advantage of innovations like electronic bill pay.

So what do we do? What do we want the Postal Service to look like and do in

the age of the Internet? These are the questions we have to find the answer to, or

else circumstances will answer them for us. As GAO has pointed out, the Postal

Service simply cannot continue to do business the way it has been and hope to survive.

One thing I think we should not do in postal reform is to allow the Postal Service

to become a ‘‘Communications Company,’’ as it has taken to calling itself recently.

The Postal Service is in the mailing business and should stick to doing what it does

best—delivering the mail. Offering e-commerce services and selling greeting cards

and stationery in post offices might be more exciting than delivering letters and

packages but it will not improve the Postal Service’s bottom line. Making smart

management decisions aimed at increasing volume, raising revenue, cutting costs

and capitalizing on quick, efficient delivery of the mail will.

Congress has a role to play in digging the Postal Service out of the hole it finds

itself in. Our aim should be to allow the Postal Service to operate more like a business but in a way that is fair to its private sector competitors. First, we need to

reform the rate-making process to give the Postal Service the flexibility to offer volume and seasonal discounts that would increase volume and even to raise rates in

high volume seasons or in the event of an energy crisis. We need to remove the

break-even mandate and allow the Postal Service to retain earnings that could be

invested in new technologies or saved for a rainy day. We may also need to look

9

1The prepared statement of Mr. Walker appears in the Appendix on page 46.

into removing the constraints we place on the Postal Service every year during the

appropriations process that require them to maintain expensive facilities and small

post offices that they may need to carry out their mission.

Most of the heavy lifting in the short term, however, will have to come from the

Postal Service itself. I was pleased that the Transformation Plan took a step in the

right direction by putting forward some strong proposals aimed at cutting costs and

improving operational efficiency. One thing I’d like to learn from General Potter

today, however, is where exactly the $5 billion in savings the Plan says it will generate through 2006 will come from.

All that being said, the toughest decisions Congress and the Postal Service will

have to make in the coming months will be on what universal service should mean

next year, or even 10 or 20 years from now when the pace of electronic diversion

begins to quicken. Some easy answers would be to go to a shorter delivery week,

to cut back service in hard-to-reach rural areas or to weaken delivery standards. I

can’t profess to be an expert on postal issues but I truly believe that actions like

these, while they should be examined, may weaken the Postal Service instead of

strengthening it. Our overarching goal in postal reform should be to preserve as

much of the promise of universal service as possible, not to preserve the Postal Service at its current size and under its current construction at all costs. Cutting service

and raising rates to finance an inefficient Postal Service will only drive more customers away.

In closing, let me say that its time for all of us, both here in Congress and in

the mailing community, to get serious about the problems the Postal Service faces.

The postal economy is too large and the number of jobs that depend on the mail

is too high for us not to act. I congratulate the Chairman and Ranking Member on

this subcommittee, Senators Akaka and Cochran, and Senators Lieberman and

Thompson on the full Committee for doing their part in calling this hearing today

and in asking the Postal Service to prepare this Plan we have before us. I also urge

postal stakeholders—the unions, the mailers and the Postal Service’s private competitors—to recognize that, while they may not like some of what postal reform will

inevitably mean, compromises will have to be made. If we don’t work together now,

there may not be much left of the Postal Service to reform. Service should be our

focus, not any one group’s narrow interests. If we don’t keep this in mind, I think

we’ll all lose. The businesses and everyday Americans who depend on the mail, however, will lose the most.

Thank you again Mr. Chairman. I look forward to hearing from the witnesses.

Senator AKAKA. Your statement will be included in the record.

Now, I would like to ask the Comptroller General for your testimony.

TESTIMONY OF HON. DAVID M. WALKER,1 COMPTROLLER

GENERAL, GENERAL ACCOUNTING OFFICE

Mr. WALKER. Thank you, Mr. Chairman and Senators. I am

pleased to be here today to participate in this hearing on the financial condition of and transformation challenges facing the U.S.

Postal Service.

As you know, it was about a year ago that I appeared before this

Subcommittee and we talked about the challenges that the Postal

Service faced at that point in time. It was immediately after the

GAO put the Postal Service’s transformation effort on our high risk

list. As you know, our high risk designation normally generates

light, with light, you get heat, and with heat, you get action.

I am pleased to say that there has been a variety of actions

taken during the last year, the most recent being the Service’s promulgation of its proposed Transformation Plan, which I think is a

positive step. I think in many cases, the Transformation Plan exceeded the expectations of many parties. It represented a good faith

effort to be able to address the nature and extent of the problems

10

that the Postal Service faces and it also employed a three-step approach.

What can management do within the context of current law?

What type of incremental legislative reforms might be helpful to

the Postal Service to provide it with some additional flexibility, additional empowerment, and reduce some barriers, while at the

same point in time coupled with appropriate transparency and accountability mechanisms to go with that? And what needs to be

done on a long-term basis to deal with the fundamental transformation challenge that the Postal Service faces?

Its current business model does not work in the 21st Century.

Let me state that again. The Postal Service’s current business

model does not work in the 21st Century and will not work in the

21st Century. So there are fundamental questions that have to be

addressed.

At the same point in time, there are some key things that we

think need to be addressed that were not in the Transformation

Plan, a few key topics as well as an action plan, not only what

needs to be done, but how to do it. What are the mechanisms that

need to be done and what are the important milestones that can

help to gauge progress?

Mr. Chairman, you have been kind to include my entire statement in the record, let me hit a few of the highlights that I think

it is important to keep in mind.

Obviously, the catastrophic events of September 11 and the subsequent use of mail to transmit anthrax, as well as the most recent

pipe bombings, have changed the ballgame fundamentally. They

have served to decrease mail volume and they have served to increase the cost of the Postal Service, and only time will tell how

much of this decreased volume and how much of this increased cost

is long-term versus short-term in nature.

Despite additional cost cutting efforts in the first half of fiscal

year 2002, the Service’s revenues declined approximately twice as

fast as its expenses, in part because the Service has large fixed expenditures that are very difficult to change quickly.

Productivity increases continue to be difficult to achieve and sustain. As you know, recently, the Postal Service has been granted

a rate increase to be effective on July 1. That will, among other

things, end up increasing First-Class postage to 37 cents, an increase of three cents. I think while over a number of years, if you

look over several decades, the Postal Service rate increases for

First-Class Mail have equaled inflation. However, if you look since

January 1999, its rate increases have far outpaced inflation, and

if you look at what some of the underlying pressures that the Postal Service faces, that is likely to continue to be the case in the future unless the Postal Service is successful in achieving the fundamental transformation that we are calling for.

Cash flow difficulties continue. The Service’s debt is budgeted to

rise to $12.9 billion by the end of fiscal year 2002, up $1.6 billion

from the previous year, and only $2.1 billion below the statutory

cap of $15 billion. To conserve cash and to limit debt, the Service

has continued to freeze its capital spending for most facility

projects, resulting in a growing backlog, and that is just a timing

11

difference. Sooner or later, you are going to have to deal with it,

and sometimes delays conserve to exacerbate the problem.

The Service’s financial condition has deteriorated. Its liabilities

exceed its assets. It has a negative net worth. The Service’s major

liabilities and obligations are estimated at close to $100 billion,

which include liabilities for pensions, workers’ compensation, debt

to the Treasury, and certain other obligations for Postal retirement

health benefits.

While some of these amounts are reflected on the balance sheet

of the Postal Service, some of these amounts are not. For example,

$49 billion in unfunded retiree health benefits are not reflected on

the balance sheet. In addition, they are not adequately disclosed in

the notes. In addition, there is a $32 billion number that is reflected as a pension liability, but it is also reflected as a deferred

asset, therefore netting out to zero with regard to the Postal Services overall financial condition.

Mr. Chairman and Senators, I am very concerned about whether

or not the current accounting treatment for Postal retirement

health obligations and pension obligations fairly presents the economic reality associated with the Postal Service’s commitments

with regard to these programs. I have brought this to the attention

of Postmaster General Jack Potter as well as the Inspector General. We are trying to contact the external auditors, and I expect

this is an issue that we are going to be talking about over the next

several weeks. But the fact of the matter is that these are significant sums that, depending upon what the resolution is, could significantly change the net financial condition of the Postal Service

today as well as the factors that will impact future rate increases

and a variety of other factors looking forward.

The Service’s financial difficulties are not just a cyclical phenomenon that will fade as the economy recovers. Its basic business

model does not work. It is facing increasing competition, including

from the two things that are on my belt. Through my wireless email device, I get e-mail and can tap into the Internet, and through

my cell phone, I can make unlimited calls nationwide to be able to

keep in touch with parties, whether for business or personal reasons, rather than sending a letter, as was the case in the past.

Clearly, a range of stakeholders are looking for positive and constructive ways to work through the difficult Postal transformation

issues and the Postal Service’s Transformation Plan is a positive

first step. It is clear, however, that real transformation will require

tough choices, shared sacrifices, and that it is unrealistic to expect

that, given the complexity and the controversy associated with

these issues and the difficulty associated therewith, that there will

be a consensus on a plan forward, and, therefore, tough choices will

have to be made.

However, we believe that the Service’s worsening financial condition and outlook intensify the need for Congress to act on meaningful Postal reform and transformation legislation. We believe that

comprehensive legislative change will be needed to address certain

key unresolved transformation issues, some of which have not been

fully addressed by proposed legislation or the Service’s Transformation Plan.

12

Meanwhile, the Service’s growing financial problems call for continued close Congressional oversight of its financial condition,

progress, and meeting its Transformation Plan. We believe that it

is important that there be greater transparency on a quarterly

basis regarding to where the Postal Service stands with regard to

its financial results, where it stands with regard to its Transformation Plan along the lines of what you would expect from a $67

billion a year enterprise, one of the Nation’s leading employers, and

if it was a Fortune company, would be a Fortune 10 company.

The Congress’s strong support for the Service to develop the

Transformation Plan, and this Subcommittee’s in particular, has

helped to move the discussion forward. We look forward to working

with the Congress to try to deal with these very difficult issues.

Mr. Chairman, thank you again for the opportunity to appear. I

will be more than happy to answer any questions you or the other

Senators may have. Thank you.

Senator AKAKA. Thank you very much, Comptroller General, for

your candid statement.

I would like to ask my friend, Senator Stevens, for any statement

you may have.

OPENING STATEMENT OF SENATOR STEVENS

Senator STEVENS. You are very kind, Mr. Chairman. I am sorry

to be late. I do not have any questions. I am pleased to be able to

be here for this annual event. No State in the Union has more interest in the continued health of the U.S. Postal Service than my

State. Without any basic road system, the Postal Service delivers

our mail literally through hail, sleet, and snow, and we are pleased

to have an opportunity to work with the Postmaster General and

I appreciate Mr. Walker’s report. Thank you very much.

Senator AKAKA. Thank you very much, Senator Stevens.

Let me begin the first round of questions by asking the Postmaster General to detail the consequences if the short-term options

proposed in the Transformation Plan are not adopted. I would also

like to know what the consequence will be if the Service reaches

its statutory borrowing limit of $15 billion.

Mr. POTTER. Let me begin with the borrowing limit. Obviously,

it is my job and the job of everyone in the Postal Service to make

sure that we do not reach that borrowing limit. The Board of Governors of the Postal Service has been very clear in its direction to

Postal management that we are not to exceed that borrowing limit.

By law, we cannot, and we are not to seek relief from that because

that simply pushes the cost of providing today’s service on future

ratepayers.

I can assure you that we have no intention of hitting that borrowing limit this year. Our plans would result in us not approaching that borrowing limit next year, and it is our job to make sure

that we do not do that, not only in the near future, but in the long

term.

As regards what we are doing today, our short-term plans, obviously, there are many things that we built into the Transformation

Plan that we in the Postal Service can control, particularly when

it comes to efforts to improve the value of the mail, both from a

service standpoint as well as a cost standpoint. We are very proud

13

of the efforts of the men and women of the Postal Service, particularly this year, to reduce our costs.

We have had eight accounting periods thus far in our fiscal year.

The first accounting period, our total factor productivity was a negative 2.9 percent. That was the period right after September 11.

Then we had our accounting period five, which is just post–Christmas, where we had a negative 0.9 percent total factor productivity.

In every other accounting period, our total factor productivity has

been positive, and year-to-date, our total factor productivity is positive. It is 0.2 positive. Our labor productivity, output per work

hour, is up 1 percent.

So we are managing the business. Our employees understand the

challenge that faces the Postal Service. They are responding to that

challenge, and given the fact that we will lose some six billion

pieces of mail this year, I think our people, right on down to the

clerks, mail handlers, carriers, rural carriers, are doing their part

to make sure that the Postal Service remains efficient.

We do need help, and we are seeking short-term legislative help,

particularly in the area of pricing, because there we feel that there

are opportunities to grow the business and we are exploring those

with the Rate Commission. We think there are opportunities to improve the relationship between the Postal Service and our unions.

We spend some $300 million a year on dispute resolution. That certainly represents an opportunity where, working with our unions

and management associations, to address those costs to see whether or not we can bring them down.

So we are embarked on a very aggressive plan, what we can do

within the current legislation. Beyond the current legislation, we

are seeking help, but believe me, we are going to work as hard as

we can, regardless of what happens, to do our best. The more tools

that are available to Postal management, the greater our opportunity will be to succeed in the short run.

Senator AKAKA. Mr. Walker, last spring, the GAO placed the

Postal Service’s transformation efforts on your high risk list, as you

have stated. What should the Service do to move forward and make

progress on implementing the actions called for in its Transformation Plan, and would taking these actions remove the Postal

Service from the high risk list?

Mr. WALKER. First, Mr. Chairman, I think that Postmaster General Jack Potter and his management team, working with other

stakeholders, including the Board of Governors, are taking this seriously and they are trying to do what they can within the context

of current law to try to achieve cost reductions, to enhance productivity, while at the same point in time improving service.

I do, however, believe that they cannot do it alone. I believe that

legislative changes are in order. Specifically, some additional flexibility, additional transparency and accountability, and other issues

have to be addressed by elected officials, issues such as what is the

definition of universal postal service in the 21st Century?

Clearly, as Senator Stevens pointed out, there are areas of this

country that rely very heavily on the Postal Service, and whatever

that definition of universal postal service is, the Postal Service has

to meet it irrespective of the cost, irrespective of the geographic

proximity. But now, today, I would respectfully suggest, given the

14

advances in technology and alternative means of communication,

the definition should be fundamentally different than it was in the

1700’s when the Postal Service was created.

I also think that it is important that other key issues be addressed, as well, that are not in this transformation effort, and importantly, there is going to have to be a vehicle to achieve this type

of change. We have said before that we think that some type of

commission is likely to be necessary in order to be able to make

a package of recommendations that the Congress can consider as

a package, possibly for an up or down vote, because of the difficult

choices that are going to have to be made.

The infrastructure has to be rationalized. There is a difference

between points of service, which arguably should be more numerous than they are now, and bricks and mortar, which, hopefully,

you would want to minimize the amount of bricks and mortar, not

only for cost reasons, but for security and safety and various other

reasons.

In summary, I think that there are things that the Postal Service

can and should do within the context of current law, but I do not

think there is any question that legislation is going to be necessary

and that probably some sort of commission is going to be necessary

to address some of these more fundamental questions where there

are legislative constraints or other constraints that exist.

Senator AKAKA. Mr. Potter, as you know, our request for a

Transformation Plan was prompted by the need to have a more

complete and accurate picture of the Postal Service’s financial situation. One of our primary goals was to learn how the Postal Service

planned to reduce its outstanding debt, an issue that is of serious

concern to the Treasury Department, as well. Would you comment

on why the Plan did not provide specific details on how the Postal

Service will reduce its debt or offer benchmarks to judge the Postal

Service’s progress?

Mr. POTTER. Mr. Chairman, when we put together the Transformation Plan, it was during a very trying period for the Postal

Service. Earlier projections for this fiscal year called for the Postal

Service to have some 212 billion pieces of mail this year. Right

now, our best estimate is that we will come in somewhere around

200 billion pieces of mail.

Given the circumstances, it is very difficult to understand whether or not the changes, as the Comptroller General earlier said, that

we have seen, particularly at the beginning of this fiscal year, are

structural or whether they would rebound. So it was very difficult

for us to make any sort of accurate projections on where volume

was going to go long-term.

Suffice it to say, though, that there are serious challenges facing

the Postal Service. The diversion of First-Class Mail to electronic

medium is potentially as high as $18 billion. The timing of that diversion is in question, and certainly if we had gone back 5 years,

there are many people who would have expected that the diversion

would have happened at a much more rapid pace than it has over

this past 5 years.

So it was difficult in terms of being able to project into the future

what our volumes would be, and considering the circumstances

that we found ourselves in over the last 6 months with the threat

15

of anthrax, the great impact on the economy that we have seen,

and the recessionary period that we find ourselves in.

That is not to say that we are not working to develop better projections, and certainly there are limitations within the current legislation for us to reduce our debt load. We are taking actions that

we feel are possible in terms of improving productivity as well as

our efforts to increase our volumes. But we are very much limited

in terms of our ability under the current legislation to be much

more aggressive than we have been.

Senator AKAKA. Mr. Potter, I thank you for your response. As

you know, I believe the Service’s financial house must be in order

before the Postal Service is granted greater flexibilities and I want

to be as helpful as possible in this regard.

Mr. Walker’s testimony points to the need to focus on the transparency and accountability issues. I would, therefore, ask that before we hold our annual hearing to receive your report to the Senate this fall, we have a detailed step-by-step plan as to how the

Postal Service will reduce its debt and what further steps the Service will take to provide greater transparency of its finances. This

will increase our understanding, I believe, of Postal finances, and

I thank you for your responses.

Let me then move on to questions from Senator Cochran.

Senator COCHRAN. Mr. Chairman, thank you very much.

General Potter, you mentioned in your presentation of this

Transformation Plan the necessity to have a transition to a less

monopolistic and more competitive organization, but you also suggested in the long term some parts of the Postal monopoly are liable to remain. How important is this retention of the monopoly on

letter mail, and in order for the Postal Service to be transformed,

should this, too, be changed?

Mr. POTTER. One of the strengths of the Postal Service, the key

strength, is the universality of the service that we provide to all

Americans. Our ability to offer uniform rates, affordable rates, to

all Americans is contingent upon, in my opinion, having a monopoly, which we do today, for letter mail. Lack of a monopoly would

have competitors coming in and literally skimming the cream off

the top. They would serve big cities at a reasonable price but would

not serve rural communities, and certainly people in Alaska and remote parts of Hawaii would not have access to affordable services.

So, therefore, I believe it is very important that the Postal Service have a monopoly. Again, that is the will of the people, and it

is there in law today. I think there were a lot of very sound reasons

why a monopoly was created for that product, and I believe, looking

into the future, that those reasons for the establishment of a monopoly for letter mail are probably stronger today than they have

ever been in the past.

But I do feel, on the other hand, that the Postal Service does

need to look at its infrastructure. These are public policy decisions

for which we need guidance from the Congress, from the administration, from the Senate regarding where we go in the future, and

that is why in the Transformation Plan we look to those decisions

to be made in a legislative arena, not with the Postal Service making independent decisions, but with the will of the American public

16

to be the driving force behind the future of the Postal Service and

the definition of universal service.

Senator COCHRAN. In that connection, there is a statement in the

executive summary that universal service could be defined under

contract, a contract between the Postal Service and the government. Do you see any difference between the current universal

service obligation and the Postal Service’s performance of universal

service as a commercial government enterprise?

Mr. POTTER. It is very interesting. If you ask ten people what the

definition of universal service is, you tend to get 10 different answers, so we have to start with a clear definition of what that is.

In my mind, universal service is 6-days-a-week delivery to every

delivery address. It is a uniform rate across the country. And by

law today, it is the existing infrastructure of 38,000 post offices. It

is that infrastructure that we are talking about when we define

universal service.

Now, as we look to the future, there are within each of those

definitions opportunities to save money and keep rates affordable,

but also, in some cases, to make changes that would improve the

service offerings that people have.

I was pleased to find a GAO report from the 1970’s, as an example, that looked at post office closings. They said that in the evaluation of some of the post offices that were closed at that time, that

the level of service that was provided to those customers or those

post offices actually increased customers did not have to pick up

their mail at the post office, because we delivered mail to the door

of the customer. Rural carriers sell stamps. They are literally a

post office on wheels. So rather than forcing a customer to come to

the post office, we actually brought the post office to each of those

customers.

So, again, I think we have to look at those opportunities and

carefully evaluate how we provide service today to the American

public that is different than what might have been provided in

1970, and a change in the law is required. A redefinition, given today’s marketplace, of universal service, I think, would be beneficial

not only to the Postal Service but to the American public as well.

Senator COCHRAN. We are all aware of the anthrax challenge and

these other threats of terrorism and the realities of terrorism, and

you talk about the inevitability of increases in costs. How much of

the financial difficulty that the post office faces now can be attributed to the terrorism threats and the reality of the terrorism acts

that we experienced after September 11?

Mr. POTTER. I am very proud of the fact that the confidence that

the American public has in the mail has bounced back. We saw a

significant decline in people’s confidence in the safety of mail shortly after the anthrax incidents, but that confidence in the mail has

bounced back.

I believe that when one looks at the volume decline that the

Postal Service has experienced this year, you can point to two factors. The first factor is that, certainly, the incidents of September

11 had an impact. But if you look at us today, the recession is the

No. 1 issue affecting mail volume. One part of that recession is the

very weak advertising economy, because about 10 percent of First

Class-Mail is advertising mail. Our volume of First-Class Mail

17

dropped more than 2 percent initially after September 11. We are

back to same-period-last-year (SPLY) levels on First-Class Mail.

For advertising mail, though, we are still seeing a 3 percent decline

from SPLY. Certainly, there has been diversion to electronic medium over that time, but the bigger impacts have been the recession, the downturn in the economy, and particularly within the

economy, the tremendous impact on advertising.

Senator COCHRAN. Let me turn now to the Comptroller General.

Mr. Walker, it was your idea when you testified before our Subcommittee that a Transformation Plan ought to be developed, and

because of that, we sent a letter to Mr. Potter asking that he provide us with a Transformation Plan. Senators Akaka, Thompson,

and Lieberman joined me in making that request.

Do you see this as a plan that is responsive to the suggestions

that you made and responsive to the reasons that you had in mind

why a Transformation Plan ought to be formulated and presented?

Mr. WALKER. Senator Cochran, I think it is a positive first step.

As I mentioned before, I think it exceeded the expectations of many

parties as to what it was going to be. I do, however, think there

are some important items that are not in the Transformation Plan

that need to be addressed. For example, how we are going to go

about defining universal postal service in the 21st Century?

Second, what about the infrastructure? How is the infrastructure

going to be reviewed and rationalized?

Third, what about comparable wages? What are comparable

wages? What about labor flexibility? It is not only a matter of having the right number of people, but it is having the right number

of people with the right skills and knowledge in the right place to

get the job done, and sometimes that can be a problem.

There are issues like the governance structure. Does the governance structure of the Postal Service make sense now, given the fact

that it is, in effect, a Fortune 10 company, the second largest employer in the United States, and yet its governance structure is unusual, I think. For example, there is nobody at the Postal Service

at the management level that is appointed by the President and

confirmed by the Senate. The Postmaster General is appointed by

the Board of Governors, and so, therefore, what does that do to accountability with regard to the American people? Also, the composition of the governance structure, the board itself.

I think there needs to be a look at not only the debt service repayment, which has been mentioned here this morning, but also

the issue of the significant retirement obligations. Thirty-two billion dollars for pensions, $49 billion for post retirement health, $81

billion in total, far exceeds the amount that we are talking about

for the debt to the U.S. Government. So these are huge sums of

money. What is going to be done about these items?

Having an action plan for how are we going to take the good

ideas that are in the Plan, what is the vehicle, what is the mechanism, whether it be a commission or otherwise, to try to deal with

some of these issues that management cannot do on its own, that

it is going to need enabling legislation to be able to address.

Senator COCHRAN. Thank you very much, Mr. Chairman.

Senator AKAKA. Thank you very much, Senator Cochran. Senator

Dayton.

18

Senator DAYTON. Thank you, Mr. Chairman.

General Potter, I hope I can evidence my skepticism and yet still

be respectful of the enormity of the task that you have before you

and the entity that you are charged with guiding. I think Senator

Cochran said it well when he said at the outset that you are a service to this country and need to be recognized as such in a category

almost under yourself.

I have trouble with the word ‘‘transformation’’ in the context that

you use it because I do not know what it is that you could be transformed to or how you would be transformed given the liabilities

that you and the Comptroller General have outlined without going

through something that would be almost draconian in its measures.

If you were a business today and someone came in and was given

the chance to transform you, I could only imagine what it would

entail.

But it would seem to me it would be—I mean, $81 billion in unfunded health and pension liabilities and negative productivity over

the last decade, and 75 percent of your costs are in labor, as I recall, and your liabilities exceed your assets, certainly you are not

going to find many venture capital firms that are going to want to

take you on.

The measures that you would have to take to shed yourself of all

of those liabilities and impediments would be such, and given, as

you say, the constraints, social and the ones that you say Congress

imposes, but certainly as an agent for the American people and the

expectations established, I do not see how you would begin to be

able to undertake those kind of extreme measures. Even if you had

public license to do so, where would it get you?

Mr. POTTER. Well, your description of the enormity of the challenge is real. I am not going to sit here and deny that the challenge

is not significant. I think that one merely has to look at the numbers, and we could easily draw the conclusion that privatization

was not an option. We did not have stockholders, or people, or venture capitalists lining up with dollars in their pockets to buy into

this entity.

What we do have, though, is an ongoing concern that meets its

obligations. The obligations for health benefits and pensions is one

that we have had since 1970 in terms of our transition from a Federal agency to the U.S. Postal Service. By law, we are obligated to

provide to our employees Federal pension benefits and Federal

health benefits. They are non-negotiable. So you begin with some

very basic structural requirements of the Postal Service. By law,

we cannot eliminate a post office for economic reasons. So there are

constraints within your ability to manage.

In terms of long-term viability, transformation, I believe that the

path, given all the constraints, is to be a better Postal Service and

to begin to pay down, as best we can, those obligations. Certainly,

if we are not successful, the $100 billion burden falls to the Federal

Government.

Senator DAYTON. I guess it is my concept of that word that

causes me difficulty, because as you say, if we were to eliminate

all the legal constraints today and you just had to operate in the

real world, most of those constraints would still exist. I mean, you

cannot just shed pension and health obligations. You cannot shed

19

labor costs. You can negotiate and you can go through the disruptions that those kind of, as I say, literally draconian negotiations

would entail. You could start shedding areas where you thought it

was not advisable or profitable to serve, but you are what you are.

Rather than, at least in my mind, trying to transform yourself

into something that you, in a sense, do not want to be, because you

said you want to retain the monopoly as the essential element of

your operation, it seems to me that you would better serve the public purpose by just identifying how can you be the best at what it

is that you are essential to do, which is to deliver regular mail 6

days a week all over the country as efficiently and as cost effectively as possible. If it is not possible to do so within the parameters of the modern realm, those of us who still want to pay our

bills by stamp rather than by electronic device, then we are going

to have to make adjustments. But I do not see how you can do any

better by trying to get into some sort of transformation.

Comptroller General, yes?

Mr. WALKER. If I can, Senator Dayton, I think the word ‘‘transformation’’ may or may not be appropriate to use in this context.

If you talk about what is the Postal Service—and part of the definition is, what do you want the Postal Service to be? I mean, part

of the answer could be is it should focus more on core and so it

should try to do less, but focus on core and do that to the best of

its ability. That is part of the debate that I think is intended in

the transformation.

The other thing is that there are certain commitments and obligations that you have today that you cannot shed and you would

not want to shed. It would not be right to do that. On the other

hand, what you can do is to try to end up aggressively managing

as much as you can from this point going forward to the extent

that you have got the flexibility, the will, and the commitment to

do that. We cannot change the past, but I think what we can do,

hopefully, is try to see what can happen in order to minimize what

that ultimate potential put option would be on the taxpayers, because that is really what you are talking about. There is a put option here on the taxpayers.

Senator DAYTON. And I guess I am much more comfortable with

that parameter, Mr. Comptroller General. Where is the freedom

within the structural yoke and how can you improve the quality of

what it is that you exist to do? We have private enterprises who

can do overnight deliveries and send things all over the world and

the like. I mean, I do not know whether that is—I would be interested to know whether that aspect of your business is a profitable

one for you or not. But that is not why we need you to exist, unless

you can do it more efficiently or unless you can generate revenues

for other purposes. But we do need you to deliver the mail 6 days

a week all over the country, unless we determine as a society that

we would rather do it otherwise.

I just think that rather than transforming yourself, just, as you

say, improve the quality of what it is that you essentially are there

to do and tell us, how can we help you or how can we modify the

law that gives you a better ability to do that. I mean, 10 months

for the Postal Rate Commission to be deliberating over what your

rate should be and when it turns out to be what you proposed it

20

to be at the beginning, to me, is just absurd. There ought to be

ways in which we can help you move more expeditiously and efficiently and do a better job of what you do, and that, to me, would

be preferable to trying to figure out how you get yourself transformed into something that you are not going to be.

Mr. POTTER. I think what you just said is exactly what we attempted to do in the document. Transformation was not a Postal

term, it was a Senate term.

Senator DAYTON. Well, I was not here then. [Laughter.]

Mr. POTTER. We were requested to provide a Transformation

Plan, and we built a plan that gets at exactly what you just said.

It attempts to, within the constraints and with the understanding

that we are a service, to provide delivery of hard copy mail and

provide access to those services for all Americans. We attempted to

do that and build a plan that makes for a better Postal Service, one

which would even be better and more enhanced if we had some

freedoms within the statutory requirements to, again, make decisions about how we meet that obligation.

Senator DAYTON. We all want some form of transformation. I go

to the Senate gym and I want to be transformed into this different

figure from what I am. [Laughter.]

Senator Stevens, one day he reported his weight. I was avoiding

doing that. I did not want anybody even to look or to be able to

see the notations, and he gave me good advice. He said, ‘‘You just

have to set your mind to it and then do it.’’ Well, it involves, as

you know, little steps that I would prefer not to take, like eating

less and exercising more, but lo and behold, if I just sort of stick

with that—I will never be like Mike, but I can get a little bit farther down the road to looking a little more like Senator Carper

here. [Laughter.]

I think that realm of the great is the enemy of the good, just get

better.

Mr. POTTER. Right. Well, the Postal Service is committed to getting better. We welcomed the opportunity to build a Transformation Plan, but to build a plan that will make us better in the

future, better serve the American public, and fulfill our universal

service obligation.

I looked at other agencies, because it is a term that has been

used by other agencies in the Federal Government, and the difference between us and what other Federal agencies were asked to

do was that they were provided a direction. Transform yourself into

this. Well, no one has ever defined what the ‘‘this’’ is for the Postal

Service, and we attempted to do that with our Transformation

Plan.

Suffice it to say, there is more to be done. I do not disagree with

the Comptroller General. There is more to be done. We are going

to do our best to make it happen and to become a better Service

and more financially stable, well into the future.

Senator DAYTON. And there are a lot of ingredients here to do

that.

Mr. POTTER. Yes.

Senator DAYTON. Thank you, Mr. Chairman.

Mr. WALKER. Can I say, Mr. Chairman, for the record, I will assume responsibility for use of the term ‘‘transformation,’’ and the

21

reason I say that was because when we put the Postal Service on

our high risk list a year ago, we said Postal Service transformation.

We did so intentionally, because, obviously, the Postal Service does

a lot of things right, and so we did not want to say the Postal Service, as an entity, was high risk. That would not be fair to the dedicated men and women that comprise the Postal Service.

On the other hand, what we were really talking about is what

should the Postal Service do, which could be more or less than it

is doing now, but it is different than what it is doing now, and how

should the Postal Service do business? I would respectfully suggest

that no matter what you call it, transformation or whatever, those

are the key issues.

I would also respectfully suggest that the Postal Service in many

ways is a microcosm of the challenges that many other Federal

Government agencies face, and the Federal Government has to

change what it does and how it does business, too, and the only difference is with the Postal Service, you have got an income statement and a balance sheet. You touch virtually every American. It

is easier to identify with and associate with the Postal Service. As

a result maybe we start here first, but there is a lot more work to

do on this.

Senator AKAKA. Thank you very much for your question and responses.

Senator Carper, do you have any questions?

Senator CARPER. I sure do. Thank you.

Senator AKAKA. I also need to call on Senator Stevens.

Senator CARPER. Let us go to Senator Stevens first.

Senator AKAKA. Senator Stevens.

Senator STEVENS. Go right ahead.

Senator CARPER. Thank you. Senator Dayton was talking about

the gym, going to the gym and working out. We do have options,

whether you are Senators or those who are not, with respect to our

weight, our physical condition. We can eat more. We can eat less.

We can eat different kinds of foods. We can exercise. We can run.

We can go to the gym. There are all kinds of different things we

can do to enhance our physical health.

In some respects, we do not give that kind of freedom of flexibility to the Postal Service. In your transformation document, you

refer to some of those. I have heard the Comptroller General talk

about some of them, as well. I would like to focus on those initially,

if we could.

Let us talk about pricing—pricing the product that you sell. Just

explain to me, just crisply and succinctly, if you will, the process

for pricing your services, for raising the cost of First-Class Mail

and other kinds of service. Just run through that briefly for me,

Mr. Potter, if you will.

Mr. POTTER. It is about a 16-month process. It takes about 4

months for us to assemble the documentation necessary to file a

rate case. After that, at the Rate Commission, we go through a 10-

month process where we supply testimony; we supply witnesses.

There is an opportunity for rebuttal testimony on our part, but

there is also an opportunity for any intervenor to provide testimony

regarding our rates.

22

After a 10-month period of time, the Rate Commission recommends rates. It goes to the Board of Governors. The Board of

Governors has the option of approving the rates as recommended.

They can implement those rates under protest and send them back

to the Rate Commission for reevaluation.

And then assume that the Board of Governors adopts the rates

as recommended by the Rate Commission. Then we provide customers with a 2-month period, at a minimum, prior to implementation. That allows the more sophisticated customers an opportunity

to update their computer systems for the new rate structures, and

it gives us an opportunity to get stamps in place so that we can

implement the new rates.

All in all, it is approximately a 16-month procedure, and generally, again, because of the timing, you try to predict what your

revenue requirements are going to be, in many cases, 2 years-plus

out. Given the fact that, for argument’s sake, we are a $70 billion

industry, a 1 percent swing in terms of our projection, if it is a 3-

year projection, that is $210 billion, a $2 billion swing. So it is a

very difficult process.

Senator CARPER. How would you like to change that, and then

I am going to ask Mr. Walker to critique the proposed changes, if

you would.

Mr. POTTER. We have two different, very different, clientele that

we serve. One is major mailers, and the major mailers have told

us repeatedly for years that they would prefer to have much more

predictable rates. They would prefer, for example, that we have annual smaller rate increases versus what ends up today being a 2-

year-plus cycle, and they get hit with large increases.

So our desire would be to have phased rates for commercial mailers, and for John Q. Public, individual mailers, we would prefer to

have a rate cycle that might be on a 2-year or 3-year basis because

people do not like to go and buy a penny stamp, or in this case,

a three-cent stamp, to augment what they have, and we would look

to do that.

We would also like to have the ability to have market-based

rates for non-monopoly products. There are products that, because

they are cost-based, we simply do not price as high as we might

be able to if we were basing it on market-based rates.

And, last but not least, we would like to have the ability to negotiate prices with individual customers where the customers’ mail,

the contribution from that mail, what they contribute to overhead,

can be enhanced through an agreement. That agreement might

have that customer perform work that is beyond what is called for

in our current rate offering, whether that is pre-sort or discounts

or work share offerings. Where there is an opportunity for the Postal Service to benefit and the customer to benefit, we believe that

we should have the flexibility to work out those arrangements and

grow the business. As a result of making sure that the contribution

was maintained on increased volume, all rate payers would benefit.

Those are the main things that we are concerned about.

Senator CARPER. All right, thank you. Mr. Walker.

Mr. WALKER. My comment at the highest level would be that we

believe that there is conceptual merit to many of the changes that

the Postmaster General is suggesting. We do, however, believe that

23

you would have to couple it with additional flexibility. Because

right now, they basically have a one-size-fits-all approach, and one

would debate whether or not that makes sense, especially if it

takes an average of 16 months in order to make a rate increase

happen when new generations of technology happen every 18

months nowadays.

At the same point in time, if you are going to provide additional

flexibility, you have got to have adequate transparency and accountability mechanisms to understand what is being done and to

make sure that it makes economic sense and to make sure that

there are not unintended consequences happening with regard to

other parties.

One other thing that I would suggest is, in many ways, what we

are really talking about here is what is universal postal service?

What do you want to guarantee that everybody has a right to? For

example, that might be everybody has a guaranteed right to receive

postal delivery at their location X-number of days a week. That X

may not be six. That is something to be decided.

On the other hand, if you want more than that, you can get it.

It is your choice, but there is an economic cost associated with that.

In many ways, these concepts are concepts that we are going to

have to start coming to grips with in other areas where we have

big financial imbalances, like health care, where sometimes we try

to define a one-size-fits-all and where we have a huge financial imbalance, we are going to have to start talking about, well, what is

the minimum? What do you want to guarantee that everybody has?

And then are there other choices or options that you might be able

to make available to people if they want it and if they think they

need it, but there are some economics, whether it be on the—different forms of customers, if you will, I think, to be able to deal

with it.

Senator CARPER. Mr. Walker, earlier in your comments, I think

you said that the U.S. Postal Service model as it exists today is not

a working model, not a workable model for the 21st Century. My

recollection is Senator Stevens was present at the creation of the

model that has worked now for over three decades and deserves a

lot of credit for the leadership, time, and energy that he put into

its creation.

If this is not a workable model, if the current model is not workable in the 21st Century, what major changes do we need to make

so that it does become a workable model?

Mr. WALKER. Well, I think that——

Senator CARPER. You talked about some of them with respect to

pricing flexibility. What are some others?

Mr. WALKER. Right, and there are many outlined in my testimony, but I think the bottom line is that while what was done in

1970 under Senator Stevens’ leadership and others obviously made

sense at the time, the world is a fundamentally different place in

2002 than it was in 1970 in so many different ways. What is more

important is not what it is today or what it was in 1970, but how

rapidly it is changing and what forces are we experiencing today

and are we likely to experience looking forward. I think if you look

at all of those factors, the numbers just do not add up. It just will

not work.

24

And so I think you need to do a number of the things that the

Postmaster General has talked about within the context of current

law and you need to address the elements that I talked about that

are not in the Transformation Plan and we need to figure out what

is a mechanism, be it a commission or whatever else, to try to start

dealing with some of these difficult questions to make some recommendation to the elected officials who represent the American

public so that they can make informed judgments about what

makes sense looking forward.

Senator CARPER. General Potter, your thoughts with respect to

Mr. Walker’s assertion that the Postal Service as it exists today is

not a workable model in the 21st Century?

Mr. POTTER. Well, I believe that the challenges that face the

Postal Service require change, and I think we outlined a significant

amount of change that we can make internally today that certainly

should be available to the Postal Service, particularly in terms of

defining its infrastructure. We should have the most efficient infrastructure possible that serves the American public.

Regarding the long-term model, again, as I said earlier today, the

challenge to a monopoly product, First-Class Mail, and the risk

that we have in terms of diversion of that product make the business model that we have today, under the current definition of universal service, one that will not have the Postal Service sustain

itself long into the future. We do need to change to meet the challenges that face us.

Senator CARPER. Mr. Chairman, my time has expired. If there is

a second round, I would welcome the opportunity to ask a couple

more questions. Thank you.

Senator AKAKA. Thank you for your questions and the responses.

Senator Stevens.

Senator STEVENS. Thank you, Mr. Chairman.

It appears to me, or maybe I should say it sounds to me like

some people are suggesting more Congressional involvement in the

Postal Service. I hope that is not the case, because I remember too

well the time when we appointed the postmasters in every little

town in our States. If nothing else, we had one friend and 12 enemies because everyone wanted to be postmaster.

But from my point of view, it seems to me we are premature in

transitioning into the perfect model for this century because there

is a generational problem. I was told the other day that when the

baby boomers retire, that generation will be the first generation

that is really computer literate and we are going to go into a different mode, I think, in terms of mail and in terms of personal mail

sometime around 2015, according to the projection I saw.

But let me go back and ask this question. It is my memory that

a lot of this debt that we are talking about today really comes out

of the old Post Office Department. Has that debt ever been totally

eliminated? I think you are still carrying forward enormous debt,

are you not, from the Post Office Department?

Mr. POTTER. Well, we are carrying a liability for retirees, some

of whom worked under the old Post Office Department, so in that

regard, yes, we do have some liability that is carried over.

Senator STEVENS. Another difficulty I have with the Postal Service, looking at transformation or transition, whatever you want to

25

call it, is that in most of the rural areas, the package delivery services reach a certain point and then they drop them in the mail.

Most people do not understand that. These ubiquitous services are

in the urban areas. When they get to rural America, they just end

up mailing the packages. If there is to be a total universal service

delivery of packages, the Postal Service has to be maintained in the

rural areas more than in the urban areas, would you agree with

that?

Mr. POTTER. I would say that our ability even to provide affordable package services in rural areas is dependent upon a national

network of packages that provides the revenues necessary to maintain that network.

Senator STEVENS. And it is the revenue base from the short-distance delivery that gives you the ability to maintain the long-distance, out to Unalakleet and Chignik and up into the mountains

of Tennessee or Kentucky, is that not right?

Mr. POTTER. That is right. The short-term delivery, we make

money on that, and that helps us with the greater cost for some

of the more remote deliveries that we provide.

Senator STEVENS. And as we look at the First-Class Mail, one of

the significant differences in delivery of First-Class Mail is the protection for the U.S. Postal Service for the mailboxes, right?

Mr. POTTER. Right.

Senator STEVENS. None of these other businesses maintains the

security services you have to assure the privacy of mailboxes.

Mr. POTTER. Right. We have the Postal Inspection Service, some

2,000 people strong, that maintain the sanctity of the mailbox.

Only a mail carrier can place or has access to a mailbox around

America.

Senator STEVENS. And all you have to do is pick up a Sunday

paper to realize how much that means, because if it were not for

the privacy of that mailbox, all that stuff you get in your Sunday

paper would be in your mailbox every day.

Mr. POTTER. Well, that would not bother me. I would like the

revenue from that. [Laughter.]

Senator STEVENS. I question, really, the timeliness of really making decisions for a long-term future right now in terms of a transformation process. I still think we ought to be going for another interim period. The Postal Reform Act of 1970 really provided one interim period. It has lasted longer than we thought it would, really,

30 years, 32 years. It does seem to me we ought to have an interim

date in time and head for the time when more and more of the people involved are, in fact, using E-mail or digital mail and look at

what the system is going to be sometime between 2015 and 2020

and look out not much further than that, because I think technology is tumbling so fast now, we do not know what is going to

happen.

The only thing I do believe is that no matter what we do now,

if rural America is going to survive, it has to have the package delivery service. How much of your business really is associated with

packages now?

Mr. POTTER. It is probably on the order of about 6 to 7 percent

of our business in terms of revenue. It is much smaller in terms

of volume.

26

Senator STEVENS. How about in terms of cost?

Mr. POTTER. In terms of cost, it is about the same. But we are

the sole provider of package services to many addresses in America, and so it is vitally important to those communities that the

Postal Service maintain its presence in the package market.

Senator STEVENS. Precisely. And now we have the Social Security

Administration and the IRS making it easy to deal with them totally online. That affects your revenue base, does it not?

Mr. POTTER. It certainly does, and we have seen a dramatic decline in revenue right here in Washington, DC, as a result of the

Federal Government’s efforts to move mail transactions to electronic medium.

Senator STEVENS. Let me get really provincial, because I think

we are going to ask the Committee to mark up a bill here this

month that deals with what we call the bypass mail system of

Alaska. For your information, gentlemen, after the Airline Deregulation Act, we provided an essential air service concept for areas

that had received air service and guaranteed they would receive at

least 3-days-a-week service, and that was related to the mails, really, because mail was delivered in those small planes.

We then in Alaska found that one of the great problems was that

some of the planes were capable of carrying packages, large

amounts of packages, and some were not, so we devised what we

call a bypass mail system. It literally bypassed the Postal Service,

made up into pallets to the size of the carrier involved. That has

gotten into a very difficult situation now with too many small

planes and the cost has increased for the Postal Service. I understand the Postal Service expects to lose this year in excess of $100

million in Alaska——

Mr. POTTER. Yes.

Senator STEVENS [continuing]. And we are trying to counter that.

Are you aware of the bill that Congressman Young and I have introduced to try and fix this system so we will still maintain the bypass mail system and reduce the cost to the Postal Service?

Mr. POTTER. I am very aware of that legislation, and the Postal

Service supports the passage of that legislation. We think it is vital

to two things, one, providing a high level of service and, two, providing economic relief in the sense that it will lower our cost to provide that service. So we are very much in support of that legislation.

Senator STEVENS. It is controversial up my way because it would

prohibit further entry into that system as long as there were a sufficient number of planes available to you to handle the mail as it

exists now unless new carriers want to provide passenger service,

and it has become controversial, so the members will hear more

later, but I appreciate your comment on it.

My last comment would be this. If you look at the system now

in terms of cost effectiveness, would you rather have the Post Office Department or the USPS?

Mr. POTTER. I would much rather have the U.S. Postal Service.

I think we have done a phenomenal job in terms of moving the

mail effectively. As a matter of fact, I asked some people to go back

and look at our statistics. Today, we have the same number of people in the Postal Service as we had in 1991. But since 1991, the

27

number of possible deliveries we have, the number of households

and businesses that we serve, has gone up 15.4 million. So every

day, 6 days a week, we are at 15.4 million additional doors than

we were in 1991, and we have some 33 billion more pieces of mail.

So we have managed to grow as America has grown, and we

have done that, in my opinion, in an efficient way. I know Senator

Dayton referred to some data regarding productivity, and I think

we can have a debate about what model one might use to determine productivity. But the fact of the matter is the Postal Service

has met the demands of the American public in terms of new

households and the growing volume in our system, and we have

done that more efficiently and our people are doing an outstanding

job.

Senator STEVENS. One last question. Mr. Walker, are you suggesting more Congressional involvement in management of the

Postal Service?

Mr. WALKER. Senator, no, I am not suggesting that. What I am

suggesting is, just as you noted, in 1970, where there was a need

to go to a new model and that the Congress had a role to play in

order to enact legislation that would enable that to happen, that

we are now at the point today where in order for the Postal Service

to try to address a number of these challenges, there is going to

need to be legislation in order to position it for the future.

You are correct in saying that a lot of things about this country

are going to change in about 2015 because of the beginning of the

retirement of the baby boom generation and we need to recognize

that and we need to assess what changes need to be made in light

of that fact, not just with regard to the Postal Service, but our fiscal condition, among other things.

But I do think Congress is going to have to do something similar

to what it did in 1970. Namely, to step back and say, all right, this

is not working. What do we need to do going forward and what

type of legislation is necessary in order to enable the Postal Service

to do the best that it can for the next 10 or 20 years without micromanaging.

Senator STEVENS. But you said something about not having a

presidentially-appointed Postmaster. Do you think that is advisable?

Mr. WALKER. I think that you just need to think if from the

standpoint that the only persons that are directly accountable to

the Congress with regard to access issues and testimony historically have been presidential appointees or PASs. Fortunately, you

have not had a problem with Postmaster General Potter. He has

been kind to come up here any time you have asked him. I think

that is appropriate, given his role and responsibility.

But the only presidential appointees that you have with regard

to the Postal Service is the Board of Governors and they are all

part-time employees. I think you need to think about, given the

challenges that the Postal Service has, do you think that is adequate for accountability to the Congress and the public? That is

your call.

Senator STEVENS. My call would be the same as it was in

1970—— [Laughter.]

Mr. WALKER. And——

28

Senator STEVENS [continuing]. And that is to keep it as far away

from Congress as possible——

Mr. WALKER. I hear you. [Laughter.]

Senator STEVENS [continuing]. On a day-to-day basis and to get

professionals in the Postal Service and use the Board of Governors

as really overseers of those professionals and to assure the professional capability.

The Postmaster General is happy to come up here once in a

while because every once in a while, we do give him a little bit of

money.

Mr. POTTER. True, and we appreciate that. [Laughter.]

Senator STEVENS. We just went through that period, and without

it, they would not have survived. So I think that there is always

the connection of ultimately stepping in with Federal money. I

think we ought to step in with Federal money to try to slowly retire some of that debt, too. That is eventually going to be our burden. We would be better off to attack it on the basis of a few hundred million a year than to sometime have to swallow $8 or $9 billion, and I really think we should do that.

But I thank you very much for your comments. I personally believe that this system has evolved better than any of us dreamed

it could at the time, because the Post Office Department was a

mess and I do not think that the Postal Service is a mess now. So

we need to try to improve it, but Senator Hollings tells me, ‘‘Don’t

fix it if it ain’t broke,’’ and I do not think the Postal Service is broken.

Mr. WALKER. Senator, I would totally agree with you that you do

not want Congress involved in ongoing operations of the Postal

Service or, frankly, any other entity. I mean, the Congress should

not be micromanaging any enterprise, if you will. You do need professional management.

I do think you should look at the Board of Governors and make

sure that you are comfortable with how that is working. Clearly,

the Board of Governors, I would argue, if it is similar to a board

of directors, you are expecting those individuals to be very knowledgeable about the activities of an enterprise of this size and magnitude and scope and that they should be the ones, in many ways,

in the vanguard, talking about some of these difficult issues and

bringing them to the attention of the Congress and trying to make

sure that management is doing what it can, but to the extent that

it cannot and it needs legislation, they should be here talking about

that, as well. I think that is part of the governance structure.

Senator STEVENS. Thank you very much, Mr. Chairman.

Senator AKAKA. Thank you very much, Senator Stevens, for your

historical perspectives and solutions that you bring to the Subcommittee.

Let me begin the next round with a question for Mr. Potter. Mr.

Postmaster General, I was pleased that the Plan highlights the

longstanding human capital and labor issues facing the Service. According to the Plan, ‘‘Challenges in this area include workforce

planning and complementary adjustments within the constraints of

current labor agreements.’’ Would you explain why the Plan focused solely on the Railway Labor Act and whether other options

29

have been discussed now that you have met with the union representatives.

Mr. POTTER. We have begun a process of working with our union

leadership to address some of our concerns about the collective bargaining process and the dispute resolution processes that we have.

I am very happy with the nature of those interactions. I think that

management has built trust with our unions and management associations, and that trust, believe it or not, started with the anthrax incident. I mean, we have been working right along together

for a number of years, but I think that crisis solidified our relationship, because early on, we brought the leadership, the union leadership, and management association leadership, together to discuss

what was going on with anthrax. We made them part of our dayto-day management meetings regarding that topic.

We followed that same model with the recent mailbox pipe

bombs, brought them in early, communicated to everybody. In my

mind, the key to the future is communication.

What we are attempting to do with our discussion of the Railway

Labor Act is to highlight the problems that we have with the current arbitration model. That model, that collective bargaining process model that we have today, has both parties come to a table and

state public positions that are very much apart. Management

might say that the employees deserve no raise. The employees

could say, give us 10 percent per year. And then, from a public

standpoint, we retain those positions because of the fact that, ultimately, we might end up in front of an arbitrator. So neither party

wants to state publicly as to what their positions are.

In the meantime, in the back room, we manage to narrow those

differences, and then, if we are lucky and if things work out, we

reach agreements. Recently, we just reached an agreement with

the National Association of Letter Carriers on a 5-year deal. We

have had successful negotiations. But if we do not reach a negotiated agreement, we go to optional fact finding, where again the

parties go back to stating diametrically opposed positions to posture themselves for arbitration. We might narrow the difference in

fact finding or optional mediation, and then we move into arbitration, where again, publicly, we have significant differences, just to

narrow them again and then have an arbitrator make a decision.

Well, our proposal, and what we think the benefits of the Railway Labor Act would be, is that it would have us use a mediator

to narrow our differences and push the parties toward settlement.

Both parties would not have the easy out that they do today with

an arbitrator.

Now, we have also had discussions with the unions about a process called med-arb, where after negotiations, if they are not successful, we move into mediation that would then carry through into

arbitration. So if the positions are narrowed, the arbitrator’s decision would be on a narrow range of topics as opposed to a very

broad range of topics.

We are going to continue to have discussions with our unions on

this matter. Our goal would be to reach agreement with them, and

should we reach agreement, then that would very much change our

position regarding what ultimately would need to be legislated.

30

So we are working every track we can. Short-term, we are trying

to work with the parties that might be impacted by the changes

that would affect them throughout the Transformation Plan. We

are working again with you and the Congress on some short-term,

less complex legislation that would give us a few tools, and then

long-term, on the more complex legislative reform that we think

would enhance the Postal Service’s ability to provide for its universal service obligation.

Senator AKAKA. Do you have any further comments, Comptroller

General?

Mr. WALKER. Yes, I do, Mr. Chairman. I think there is merit to

the idea of trying to narrow the number of issues that might go for

binding arbitration. Obviously, to the extent the parties can agree

through the normal collective bargaining process, that is desirable,

but mediation, the possible use of mediation before you get to the

point of arbitration, I think is something that should be given serious consideration.

There are some important issues here that have to be focused on

that in my opinion have not been focused on adequately in the past

under the current system. First, what is competitive compensation?

On what basis are you trying to determine what comparable wages

are, and by the way, you just cannot go by wages. You have got

to consider total benefits, including pension benefits, retiree health

benefits, and a variety of other benefits. On what basis is there an

attempt to try to understand what is competitive compensation and

how is that cranked into the process right now. I do not think it

is adequate right now.

Second, what about labor flexibility? To what extent is there a

need to try to create some additional flexibility with regard to utilization of the existing employees?

Third, what about management? On the other side, what about

management compensation arrangements? On what basis should

management be paid bonuses and what type of productivity increases should be rewarded? Do they really increase capacity where

it is needed? Do they really decrease cost?

So I think there are a number of issues that have to be focused

on here that I think the current system has not allowed it to be

focused on adequately and some changes may be appropriate.

Senator AKAKA. Mr. Potter.

Mr. POTTER. If I could just add to that, regarding comparability

to the private sector in terms of wages, comparability is an issue

that has been the subject of many arbitrations over our 32-year

history. Today, that is defined through arbitral history as opposed

to being defined more narrowly by the legislation that guides us.

So that is a term that obviously is subject to interpretation, and

today, the interpretation is that of the third-party arbitrator that

guides the outcome of our negotiations/arbitration.

Senator AKAKA. Mr. Walker, do you have any comments on the

appropriateness of the Railway Labor Act for the Postal Service

Act?

Mr. WALKER. Well, as I mentioned, Mr. Chairman, I think that

the current process has resulted in some challenges, most notably

in the area of comparable wages. I mean, in effect, the arbitrator

31

is trying to decide that without having some type of real foundation

or definition as to what should be looked at.

Before I became Comptroller General, among other things, other

than being a CPA, I ran the global practice for a major firm in the

human capital area and I dealt with executive compensation strategies and pension and health care. These are issues that are not

novel concepts, and yet it does not seem to me that they have been

adequately addressed, and you are talking about significant sums

of money. Seventy-plus percent of the cost of the Postal Service

deals with people costs.

So I think that there are some issues that have to be looked at

under the current act, including whether or not some definitional

guidance ought to be provided in a few areas.

Senator AKAKA. Mr. Potter, the Transformation Plan suggests

that the Postal Service, in finding new ways to reduce costs, may

want to have more control over the investment of its retirement

fund assets. Does the Service want to establish a new single employer plan covering Postal workers, and if so, would it want to

take over CSRS or FERS? Who would make the investment decisions and who would bear the risk?

Mr. POTTER. Today, our banker is the Treasury, and what we

would propose is that the monies that are collected from our employees in terms of their contributions to retirement be put to

work. So, the risk would be borne by us, that is, the Federal Government, but we think that there are vehicles there that would enable those funds to be put to work to help contribute to the costs

of providing those benefits.

Senator AKAKA. Thank you. I will yield to Senator Cochran.

Senator COCHRAN. Mr. Chairman, just a couple more questions.

On the issue of debt reduction, Senator Stevens made a point

that I thought we need to think about some. You have come to the

realization that there are only two ways that you can generate revenue to apply to debt reduction, cut costs or raise revenues, or a

combination of both. Then there is the option that Senator Stevens

suggested and that is direct appropriation by Congress to apply to

debt reduction. What is your reaction to that? I will ask the Comptroller General first, and then the Postmaster General.

Mr. WALKER. Obviously, there are a variety of parties that would

like for the Federal Government to assume directly certain existing

obligations, whether it be debt service or whether it be unfunded

pension or health liabilities. When Congress created the Postal

Service, the idea was it was supposed to be a self-sustaining entity.

I mean, these types of obligations normally would have to be borne

by an employer and they would be expected to be able to cover

them in their cost.

But, obviously, the Postal Service is a hybrid entity. I mean, it

is, on one hand, a commercial enterprise, on the other hand, part

of the social fabric of our Nation, and it is also part of the U.S.

Government. So I think that is something that, frankly, only elected officials can decide. I would not want to have a recommendation

on that.

Let me just put it this way. Senator Stevens mentioned that a

lot of things are going to change in this country starting in about

2015, and I agree with that. One of the things that the long-range

32

budget simulations that GAO has done shows is that we are going

to have serious fiscal problems starting at about that point in time

due to known demographic trends and rising health care costs. So

even if the Federal Government was to decide that it wanted to assume part of these obligations, it has got its own problem in figuring out how it is going to be able to deliver on its promises, given

some of the simulations that GAO has done. So I think we need

to be thinking about making sure that the U.S. Government can

deliver on its promises, too.

Senator COCHRAN. Mr. Potter.

Mr. POTTER. The health benefit and pension liabilities that we

are discussing have been built up over a 32-year history of the

Postal Service. The Postal Service has in its annual reports provided information on both of those matters. In fact, from a transparency standpoint, every 4 weeks, we publish our financial and

operating statements. So it is not a surprise to me, and I do not

think it should be a surprise to anyone, that those obligations have

grown over the years.

Certainly, one option that is available to the Congress is to help

fund that. Now, we have not asked for that help, but when funding

that obligation, there are two alternatives, or three alternatives. It

is borne by the ratepayer, Congress helps, and/or we find ways of

becoming more efficient or redefining our obligations within statutory requirements that will allow us to generate the funds necessary to pay down that obligation. I think that all three need to

be considered.

Senator COCHRAN. One thing about deficit reduction is that there

is nothing in the Transformation Plan that looks like a deficit reduction plan. Did we miss something, or is there a proposal by the

Service for debt reduction or revitalization of your capital program?

Mr. POTTER. Obviously, there is a process today to pay down our debt, the some $12 billion that we may have by the end of this fiscal year. It is built into the rate process. It is prior year loss recovery.

Today, there is no vehicle to consider the health benefit liabilities

or the retirement obligations as part of the rate-setting process. So

the vehicles that are available to us today are basically to cut our

costs, and we have a narrow window where that cost cutting can

be used to pay down. First, we pay down our debt, and then we

would be able to address those liabilities. So today, there is no

mechanism that I am aware of beyond paying down our debt, the

$12 billion that we referred to, to deal with those long-term liabilities, and that is certainly an issue that we have to wrestle with.

I do not disagree that there is a need to address that problem.

Senator COCHRAN. This weekend when I was home, one of my

constituents came up to me at a commencement exercise where I

was speaking, a graduation class at a college, and said, ‘‘Be careful

what you approve that is being recommended for transforming the

Postal Service,’’ and I got the impression this person was a local

Postal manager, maybe a postmaster, although I did not really

have an opportunity to explore the details of what the concerns

were.

Now that I am here today and I look at some of the suggestions,

one is that there be performance-based compensation, and I

33

thought, whoops, maybe that is it. Maybe that is what I was running into there on the ground, that they have heard about this.

Should Postal managers be held accountable in some way for the

declines in the financial or service performance of the Postal Service?

Mr. POTTER. I do not believe that they should, but I do think that

they should have incentives and be held accountable for improving

the Postal Service and for the level of efficiency that their operations have, for the level of service that they provide to the American public, and for the way they treat employees. And certainly,

there is a need for accountability.

There is a need to have a performance, customer-focused culture,

and we are moving ahead to change that culture and to make sure

that people understand what is expected of them and that we hold

them to those expectations, making sure, though, that we provide

them the tools to be successful. You can create expectations, but if

you do not provide people the mechanism and the tools to achieve

those expectations, then it is not a fair system. What we are talking about is building a fair system that recognizes and rewards

people’s successes.

Senator COCHRAN. Mr. Walker.

Mr. WALKER. Senator, I would say that any type of enterprise,

whether you are in the government, the private sector, the not-forprofit sector, needs to have a system that provides incentives for

people to do the right thing, adequate transparency to provide reasonable assurance the right thing is done, and appropriate accountability to make sure that the right thing is done.

In that regard, in looking at compensation arrangements, typically, most state-of-the-art enterprises are focusing on a balanced

scorecard model where you end up saying, I want to see what type

of results or positive outcomes have been achieved based upon predetermined measures at the beginning of the year. I want to know

what your customers think of you and I want to know what your

employees think of you. It is a combination of those three things

that end up giving you a better picture to properly be able to recognize and reward people that need to be and to deal with people who

have to be dealt with.

Senator COCHRAN. Thank you very much. Thank you, Mr. Chairman.

Senator AKAKA. Thank you very much, Senator Cochran. Senator

Carper.

Senator CARPER. Thank you, Mr. Chairman.

Earlier in my first round of questioning, I was trying to explore

with both of you some things that we might be doing differently as

a Congress in order to help you right the financial ship of state of

the Postal Service. We talked about pricing flexibility, and I appreciate the comments of both of you in that regard.

Earlier in your testimony, Mr. Potter, I think you spoke of productivity and I think you looked back through the first 6 or 7

months of this fiscal year and indicated that productivity, while it

dipped a bit in the earlier part of the year, was, year-to-date, up

by a small margin. I do not follow very closely productivity for our

economy as a whole, but I think if you look at productivity in the

most recent quarter, productivity was up by about 8 percent, and

34

I think that is an aberration, but it is certainly strong performance.

I think productivity in the fourth quarter of calendar year 2001

was up somewhere between 2 and 3 percent, which is probably a

little closer to the mark.

The point I am getting to is productivity at the Postal Service,

long before you became Postmaster General, has tended to lag that

of the rest of the economy. I am sure a lot of trees have been killed

printing reports on why the productivity is not better in the Postal

Service. I just ask you today, what can we do as a legislative body

with the President to enable you to capture some real gains in productivity? It is pretty clear that that is one of the things that has

to be done. What do we need to do? What do we need to do to enable you and your employees to be more productive?

Mr. POTTER. I think the one thing that stands out in my mind

is to provide us the ability to change our infrastructure. I think

when Senator Cochran talked about talking to a constituent back

home, it could have been anybody. I think that when you think

about change, people tend to resist change. Certainly, we have

opportunities——

Senator CARPER. Certainly never in the Senate. [Laughter.]

Mr. POTTER. We have the opportunity to reconfigure our networks, our networks of processing plants, our network of post offices, stations, and branches; to reconfigure those buildings that we

have, those processing operations that we have that we can become

more efficient, so that we can drive service levels even higher than

they are today. But there is a resistance and a reluctance on the

part of people to support that change.

When I look at where we are today, and the one thing that I

think we can do to really impact the bottom line in the short term,

it is the changes that are necessary in our infrastructure that will

allow us to reduce the nodes on our network. With fewer nodes to

serve, there is less transportation and greater convenience to customers. There are a lot of major customers that bring mail to us.

There is a lot of opportunity there, in my mind. And that is the

one area that I think we need to embark on, and embark on rather

quickly, if we are to be successful.

Senator CARPER. In the Carper family, for the most part, the

husband does the grocery shopping, and I was out grocery shopping

this weekend and I noticed in one part of the supermarket, this

regular old supermarket, they have the bread and the deli and the

butcher shop and all, and in one part of the supermarket, they had

a bank and a couple people actually working there over the weekend in the bank.

I used to be a Congressman for about 10 years and then I was

Governor for 8 years and I have been here for about the last year

and half with these fellows, and I have never had anybody come

to me in Delaware and say, boy, we would like for you to close our

post office. I am still waiting for the first person. [Laughter.]

I have a lot of people who say, we would like to see a new one

built, or we sure would like to see you intercede and not have a

post office closed in our community. I have never had anybody

come and say, close our post office. What is it going to take to get

people to say, I was not crazy about closing that post office, but by

golly, we can go down to the supermarket and get better service—

35

much better service, more extended hours than we ever could in

the old regime.

Mr. POTTER. I think it is a function of knowledge. If one thinks

about the network of post offices that we have today and we had

some 28,000 or 29,000 post offices in 1970, we pretty much have

that same network of post offices. In addition to that, we have stations and branches in our larger cities.

Since that time, though, people’s access to postal services has

changed dramatically because most people now buy stamps in supermarkets. That supermarket that you were in with the bank, if

you had gone to the checkout counter and said, ‘‘Can I have a book

of stamps?’’ you would have been provided a book of stamps for a

fee. That access did not exist 32 years ago. So we have stamps on

consignment at over 40,000 locations throughout America, in supermarkets and the like. We have 4,400 contract post office units. We

have stamps by mail. That is a very convenient way to access postal services, stamps on line. You can now buy postage over the

Internet.

So I think that there is a need to reevaluate on everybody’s part

what services they can access, how much more convenient the Postal Service has made things, and how much more convenient things

could become if the Postal Service had certain latitudes when it

comes to brick and mortar.

I was in Evansville, Indiana, not too long ago, and I went down

to the downtown area to this beautiful post office building, a really

nice historic building. Unfortunately, that whole area was surrounded by businesses that had been shuttered because Wal–Mart

moved to a strip mall on the outskirts of town and with it went

all the businesses. So the convenience that the people in that location had in terms of accessing the postal services as a part of doing

their normal day-to-day business was lost because they were out at

the strip mall in the new business center, retail business center,

and the Postal Service was in a downtown location in the old business center. Now, it is great for us to be there. We are ready for

the revival of the downtown area 20 to 50 years from now, but I

do not think that that is a good business model.

Senator CARPER. Mr. Walker.

Mr. WALKER. Senator, I think this is critically important. There

is a difference between points of service, which I would assert we

ought to have a lot more of, and we do have a lot more of than we

did in 1970. It could be at a grocery store, it could be at a bank.

There are a lot of different places you can have where you have

points of service other than the traditional post office, if you will,

online, etc.

We have got to maximize points of service in an economical fashion. We ought to minimize bricks and mortar. We have too much

bricks and mortar. To the extent that we have bricks and mortar,

we ought to maximize utilization of that bricks and mortar from an

economic standpoint.

The fact is, in the current situation, the one that Postmaster

General Potter just mentioned, what happens is that the post office

ends up opening up a new facility where the new business is, to

the extent that it has got the capital to be able to do that, but it

does not do anything about the facility that use to be viable and

36

is no longer viable because it cannot close post offices based upon

economic performance. What happens, then, is that you end up

driving your cost up, you end up driving your productivity down,

and then you have got asset recovery values that are hanging out

there, as well, and these are on a huge scale.

So I think it is something that is critically important and that

Congress will have to end up authorizing in order for something to

be done in this area, because right now, they are constrained. They

just cannot do it.

Senator CARPER. Let me change gears and return to something

I mentioned during my first round. It is the idea of using the revenue from first class service, over which the Postal Service has a

monopoly, to cover expenses for services that are competitive. I

said, General Potter, my recollection is about half your volume is

First-Class Mail, but my understanding is that First-Class Mail

covers about two-thirds of the Postal Service’s institutional costs.

If that is wrong, please correct me.

Over in the House, I met with a fellow named Congressman

McHugh, who has been working on these issues for a long time,

and I like to say that in the Congress, you have to be really good

at deferring gratification. He must be very good at deferring gratification because he has been working and working at this for a long

time. I am not sure I am that good.

But I understand that he has drafted some legislation that would

separate competitive and non-competitive products so that each of

the competitive products would pay for its share of institutional

costs. Do I have that right? I would be interested in your comments

and those of Mr. Walker, please.

Mr. POTTER. There is a misperception that there is cross-subsidization of products, and I think that is where we are headed.

Right now, it is illegal for the Postal Service to cross-subsidize one

product with another. The Postal Rate Commission is charged with

assuring that we obey the law in terms of our rate setting. Now,

there are opportunities for us to take advantage and customers to

take advantage of our economies of scale and scope when it comes

to other products.

The legislation that you are referring to would, again, not allow

cross-subsidization—it is not allowed today—but it would give the

Postal Service more freedom on the competitive side in terms of

pricing flexibility. It does not—today. The premise that those products do not pay their share of costs is not accurate. So I would have

concerns with the premise on which you base that question.

Mr. WALKER. I have not seen the latest piece of legislation, so let

me just say that I think that some additional degree of flexibility,

pricing flexibility, as I mentioned before, I think makes sense, coupled with additional transparency and accountability.

Second, I think that part of it is, how do you define what cost

is? As I mentioned in my opening statement, right now, we have

got significant retiree health obligations, we have got significant

pension obligations. How are they being accounted for? What about

existing infrastructure costs? How are they being accounted for and

how are those costs being allocated in determining what the appropriate rates are? I think there are some real issues there that involve lots of money.

37

Senator CARPER. Mr. Chairman, my time is expired. If there is

another round, I would be pleased to ask another question or two.

Senator COCHRAN. We are out of rounds. [Laughter.]

Senator CARPER. I thought we might be. Can I just mention one

last quick point?

Senator AKAKA. Go ahead.

Senator CARPER. This sort of relates to productivity, but the

issue is workplace safety. I understand there is a fair amount of

Workers’ Compensation costs that are borne by the Postal Service.

I think we have actually talked a little bit about this before. I know

I have talked with the Chairman of the Board of Governors about

it. Workplace safety, how are you proposing in the transformation

document to enhance workplace safety and just try to reduce the

very substantial costs that you have there?

Mr. POTTER. Let me make a couple of points. The Postal Service

has about half of the Workers’ Compensation claims that the Federal Government has, but we have about one-third of the costs of

that program. We manage safety very aggressively. As you are

probably aware, we came under OSHA guidelines for private companies recently. We are working very hard, and we are having

some good success at bringing our accident rates down.

This year, Workers’ Compensation is a particular problem because our accident rates are down, yet our Workers’ Compensation

costs this year are going to be some $500 million greater than

planned. Much of that is driven by some actuarial changes, as well

as the rising costs of health care and costs of the procedures that

we have for those people who are on OWCP.

The key, in my mind, the first step when it comes to Workers’

Compensation, is to have a safe work environment. That is our No.

1 priority when it comes to addressing Workers’ Compensation

costs today and into the future. We are making some good progress

regarding the safety record in the Postal Service.

Mr. WALKER. Just very quickly, Senator, we at GAO believe that

there are some issues with regard to Workers’ Compensation that

need to be looked at, and if GAO can be of any assistance in trying

to do any analysis here, we would be happy to do that.

Senator CARPER. Mr. Chairman, thank you for giving me a little

extra time here.

Senator AKAKA. Thank you for your questions.

Senator CARPER. Thank you, and to our witnesses, thank you for

being here.

Senator AKAKA. I have many more questions to ask you. However, as tempted as we are to continue, we must call this hearing

to an end. But let me ask a follow-up question to Senator Carper’s,

since you raised it, Mr. Walker, and this is to Mr. Potter and Mr.

Walker. Do you believe a base closing commission would be helpful

to deal with facility closing and consolidations?

Senator COCHRAN. Like the military has.

Mr. POTTER. Well, I think an effort to address the infrastructure

of the Postal Service is necessary. I believe that with the Postal

Service in a position to outline the opportunities and make a business case for why we should change the current infrastructure, and

while we would prefer to have a change in the legislation that

would give us some more freedoms, certainly anything that moves

38

in the direction of looking at this situation and, again, providing

guidance to the Postal Service, would be welcome.

Senator AKAKA. Mr. Walker.

Mr. WALKER. I think given the real political realities, you are

going to need to consider something like a Base Realignment and

Closure Process or BRAC. Obviously, you would expect that Postal

management would come forward and make recommendations. Obviously, you would expect that other stakeholders, the employees,

customers, and a variety of others would come forward and make

their case. But in the end, nobody likes to close anything and

change is difficult. So, therefore, I think from a practical standpoint, in order to be able to look at this in a comprehensive fashion

rather than a piecemeal fashion, you are going to need to consider

something like that, I think, in order to make it a reality.

Senator AKAKA. I thank you very much, Postmaster General and

Comptroller General, for being with us today. Your testimonies and

responses to our questions have been valuable to our review of the

U.S. Postal Service.

This hearing will not be the last that we will hold on a plan, I

am sure. It was, however, as you mentioned, a good first step towards a Transformation Plan.

I want to commend the Postmaster General and the Chairman

of the Postal Rate Commission for taking the next step, which is

convening an open summit on May 28 to discuss potential changes

to the omnibus rate making process.

Senator Cochran, do you have anything else to add?

Senator COCHRAN. Nothing further, Mr. Chairman. Thank you.

Senator AKAKA. I want to thank everyone for joining us today.

All that you have done will be helpful to our cause. Thank you very

much.

This heating stands adjourned.

[Whereupon, at 12:15 p.m., the Subcommittee was adjourned.]

(39)

A P P E N D I X

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

Æ