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) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

67–366 PDF 2011

PUSHING THE ENVELOPE: THE LOOMING CRISIS

AT USPS

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

U.S. POSTAL SERVICE AND LABOR POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MARCH 2, 2011

Serial No. 112–9

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

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

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

POLICY

DENNIS A. ROSS, Florida, Chairman

JUSTIN AMASH, Michigan, Vice Chairman

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

TREY GOWDY, South Carolina

STEPHEN F. LYNCH, Massachusetts,

Ranking Minority Member

ELEANOR HOLMES NORTON, District of

Columbia

GERALD E. CONNOLLY, Virginia

DANNY K. DAVIS, Illinois

(III)

C O N T E N T S

Page

Hearing held on March 2, 2011 .............................................................................. 1

Statement of:

Donahoe, Patrick, postmaster general, U.S. Postal Service; Ruth Goldway,

chairman, Postal Regulatory Commission; and Phil Herr, Director,

Physical Infrastructure Issues, Government Accountability Office .......... 21

Donahoe, Patrick ....................................................................................... 21

Goldway, Ruth ........................................................................................... 40

Herr, Phil ................................................................................................... 51

Sampey, Jim, executive vice president and chief, operation officer,

Valpak; Arthor Sackler, coordinator, Coalition for a 21st Century Postal

Service, Sackler Policy Services, LLC; and Frederic Rolando, director

of legislative and political affairs, National Association of Letter Carriers (AFL–CIO) ............................................................................................ 85

Rolando, Frederic ...................................................................................... 126

Sackler, Arthor .......................................................................................... 112

Sampey, Jim .............................................................................................. 85

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

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

of Virginia, prepared statement of .............................................................. 16

Donahoe, Patrick, postmaster general, U.S. Postal Service, prepared

statement of ................................................................................................... 24

Goldway, Ruth, chairman, Postal Regulatory Commission:

Letter dated September 16, 2004 ............................................................. 76

Prepared statement of ............................................................................... 42

Herr, Phil, Director, Physical Infrastructure Issues, Government Accountability Office, prepared statement of ........................................................... 53

Issa, Hon. Darrell E., a Representative in Congress from the State of

California:

Prepared statement of ............................................................................... 12

Washington Times op-ed ........................................................................... 9

Rolando, Frederic, director of legislative and political affairs, National

Association of Letter Carriers (AFL–CIO), prepared statement of ........... 129

Ross, Hon. Dennis A., a Representative in Congress from the State of

Florida, prepared statement of .................................................................... 4

Sackler, Arthor, coordinator, Coalition for a 21st Century Postal Service,

Sackler Policy Services, LLC, prepared statement of ................................ 114

Sampey, Jim, executive vice president and chief, operation officer,

Valpak, prepared statement of .................................................................... 87

(1)

PUSHING THE ENVELOPE: THE LOOMING

CRISIS AT USPS

WEDNESDAY, MARCH 2, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL

SERVICE AND LABOR POLICY, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 1:33 p.m., in room

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

Present: Representatives Ross, Amash, Jordan, Chaffetz, Mack,

Walberg, Gowdy, Lynch, Norton, Connolly, and Davis.

Also present: Representatives Issa and Cummings.

Staff present: Ali Ahmad, deputy press secretary; Robert Borden,

general counsel; Molly Boyl, parliamentarian; Lawrence J. Brady,

staff director; Benjamin Stroud Cole, policy advisor and investigative analyst; Howard A. Denis, senior counsel; Gwen D’Luzansky,

assistant clerk; Adam P. Fromm, director of Member liaison and

floor operations; Linda Good, chief clerk; Ryan Little, manager of

floor operations; Justin LoFranco, press assistant; Jeffrey Post and

James Robertson, professional staff members; Laura L. Rush, deputy chief clerk; Peter Warren, policy director; Kevin Corbin, minority staff assistant; Jill Crissman and William Miles, minority professional staff members; Carla Hultberg, minority chief clerk; and

Mark Stephenson, minority senior policy advisor/legislative director.

Mr. ROSS. Good afternoon. I would like to welcome everybody to

the inaugural subcommittee meeting of the Federal Workforce, U.S.

Postal Service and Labor Policy.

I will ask the committee to come to order and, as we have done

in the Oversight Committee and its subcommittees, I will start by

reading our mission statement. We exist to secure two fundamental

principles: first, Americans have a right to know that the money

Washington takes from them is well spent; and second, Americans

deserve an efficient and effective government that works for them.

Our duty on the Oversight and Government Reform Committee is

to protect these. Our solemn responsibility is to hold government

responsible to taxpayers, because taxpayers have a right to know

what they get from their government. We will work tirelessly in

partnership with citizen watchdogs to deliver the facts to the

American people and bring genuine reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform

Committee.

2

I will start off. We will do opening statements from the chair,

from the ranking member, then the chair of the whole committee

and the ranking member of the whole committee I think may be

here. We may have to adjourn for votes in the middle. If we do,

I just ask for your patience. It will take about a half hour or so,

and then we will be back and continue on.

With that, I will start off with my opening statement.

We are here today to discuss the looming crisis at the U.S. Postal

Service. Today, the demand for traditional first class mail continues to decline. Postal Service deficits continue to rise, and competition and benefit costs continue to account for approximately 80 percent of the Postal Service’s operating expenses.

The Postal Service has said it will lack the necessary funds to

make a required payment to pre-fund its retiree health care benefits that is due at the end of September. The continued imbalance

between revenues and expenses means the taxpayers could ultimately be asked to bail out the Postal Service.

This hearing presents an opportunity for lawmakers to hear important testimony from the front lines of the postal industry on

how best to strengthen the Postal Service.

For many years the Postal Service has delivered mail 6 days a

week to virtually every home in America, including over 170 billion

pieces of mail in 2010 alone. But the Postal Service suffered from

an operating deficit of $81⁄2 billion in 2010 and projects further

losses into the future.

The ever-increasing reach of the Internet and digital media, and

the deep economic recession are the primary drivers of a rapid recent decline in mail volume. It is now clear that the need for work

force reductions and other cost-cutting measures must be the primary focus of the Postal Service, its labor unions, and this Congress in order to improve the financial stability of this venerable

institution.

Everyone that has a stake in the viability of the Postal Service

must work together to find solutions. Postmaster General Patrick

Donahoe recently outlined the Postal Service vision for a return to

profitability. I commend you, sir, on that report and your commitment to reducing costs by undertaking major organizational restructuring, reviewing how best to provide retail postal services

and implementing automation to improve delivery efficiency.

Today, the Postal Service is negotiating labor contracts with two

union groups representing postal employees. While some postal employee unions have cooperated on efforts to reduce the work force

through attrition and incentives for early retirement, those efforts

simply have not resulted in the changes necessary to maintain a

self-funding Postal Service. Realigning the postal work force by reexamining labor agreements must be part of the strategy to improve the Postal Service fiscal foundation.

Congress has an obligation to make statutory changes, if necessary, which will allow the Postal Service to address its own budget imbalance. We need to empower you. However, proposals for providing short-term fiscal relief, such as modifying retiree health benefits, pre-funding payments, or refunding so-called overpayments

over the Civil Service Retirement System and the Federal Employee Retirement System do not address the long-term systemic

3

problem and solvency issues that must be tackled in order to address the Postal Service will achieve long-term financial stability.

Without a thorough reform of all aspects of the Postal Service’s

business model, there could be little hope that it will return to profitability in the near- or long-term future. The looming fiscal crisis

of the Postal Service can no longer be ignored; we have kicked that

can far enough. I have the responsibility, no, we have the responsibility to change course and must consider all possible solutions.

I thank the witnesses for appearing here today and I look forward to their testimony.

I now would like to recognize the distinguished ranking member

from Massachusetts, Congressman Lynch, for his opening statement.

[The prepared statement of Hon. Dennis A. Ross follows:]

4

5

6

Mr. LYNCH. Thank you, Mr. Chairman. Let me begin by congratulating you, Chairman Ross, on your selection as the chairman

of this important subcommittee, and I want to thank you for holding today’s hearing, which shows your keen awareness of the critical state of affairs currently confronting the U.S. Postal Service.

While we have recently seen a moderate uptick in the economy

and there are some indicators that suggest that standard mail or

advertising mail is rebounding, our Nation’s most trusted and

prominent public institution continues to fall upon very difficult

times. It is no secret that as more Americans use the Internet and

email to conduct business and communicate, the less they use hard

copy mail.

Yet, even in light of declining mail volume, I am sure there are

scores of people that would agree with me that there is still great

value in the traditional mail system. The Postal Service generated

over $67 billion in annual revenue in fiscal year 2010 and employed roughly 58,000 workers in the delivery of 170.6 billion

pieces of mail to some 150 million residences, businesses, and post

boxes 6 days a week. Overall, the Postal Service is the cornerstone

of a trillion dollar industry and supports over 71⁄2 million private

sector American jobs, which highlights the vital role that the Postal

Service plays in our overall economy.

Given the extraordinary financial challenges the Postal Service

presently faces, it is absolutely necessary, and I agree, that we collectively, and by collectively I am referring to postal management,

workers, mailers, as well as the administration and this Congress,

come to the realization that there will have to be some difficult decisions made rather quickly in order to address the Postal Service’s

current financial situation.

However, before we tackle issues such as changing delivery frequency and cutting services, laying off hardworking Americans,

there are certainly some more palatable actions we should consider

first. For example, we need to revisit the Postal Service’s arbitrary

and fixed retiree health benefit payment schedule, which prevents

the organization from accounting for the dramatic shifts in demand

of work force size that it has experienced in recent years. Simply

requiring the Postal Service to tackle the obligations at such an aggressive pace is unheard of in the private sector and continues to

be a driving force behind the Postal Service’s dismal fiscal performance.

Additionally, questions continue to remain regarding both the

Postal Service’s actual Civil Service Retirement System and its

Federal Employee Retirement System obligations. For this reason,

I intend to reintroduce legislation in the coming days similar to

what I offered last Congress on these issues, as well as on a couple

of other substantive postal-related policy matters. However, in the

meantime, I expect the Postal Service to continue to use its existing authorities to lower expenditures, raise revenues, and put forth

fresh innovation in terms of both its competitive and its market

dominant products and services.

Further, the Government Accountability Office has recently competed work on a report that I had requested last Congress on the

modernization of foreign posts and lessons learned, which I hope

7

will also provide some useful information and novel ideas as we

work on the Postal Service’s long-term viability.

Mr. Chairman, I look forward to hearing from today’s witnesses

about their tangible and pragmatic suggestions or solutions for how

best to return the Postal Service to financial solvency. After 4 years

of operating deficits amounting to a cumulative loss in its 4 years

of $20 billion and a nearly tapped out borrowing authority, we can

no longer afford to kick this can down the road on this issue.

Again, I thank you for holding this hearing and I again congratulate you on your chairmanship, and I look forward to hearing from

our witnesses and I yield back the balance of my time.

Mr. ROSS. Thank you, Mr. Lynch, and I too look forward to working with you in this regard.

Now I would like to recognize the distinguished gentleman from

California, Chairman of the Oversight and Government Reform

Committee, Mr. Issa.

Mr. ISSA. Thank you, Chairman. Thank you for holding this important hearing.

Above all else, the Government Oversight and Reform Committee

is in fact the legacy committee of the Postal Committee. We take

that seriously, that it is a primary piece of legislative authority and

responsibility.

Since 1970, this committee has overseen an independent agency

responsible for its own balance sheet and profitability. There have

been good years and bad years in that time, but no decade has

been harder on the Post Office than the last decade. There has

been a 20 percent drop in postal volume over that period. The Post

Office has lost $20 billion, going from having a relatively handsome

surplus to being up against its borrowing limit.

We are here today to begin a process with the postmaster and

other stakeholders in finding a way to maintain certain prerequisites that this committee and the American people have

counted on for over 200 years. First of all, the delivery of mail to

every point in America. Second of all, the delivery of a level of service that Americans have come to expect. If at all possible, we want

that to include all categories of mail, all types, and all delivery

dates, meaning 6 days a week is a goal if we can achieve it.

We also have an obligation to the American people to deliver

value. The cost of mail is a cost to American commerce and to the

American people, so every time there is an increase in postal rates,

it is to the detriment of American efficiency and disposable income

to the American people.

Last, and most importantly, this committee is dedicated to sustainability. The Post Office is not an organization you can have 1

day, not have the next, and put back up again. It has been there

since our founding. It is a mandate of Congress, in my opinion,

since our founding, and it is memorialized in the Constitution. No

Congress has ever suggested that we don’t need a Post Office, and

this will not ever be one in this committee.

Postmaster general, I appreciate the fact that you have come in

and re-looked anew at your predecessor’s initial ideas, and I have

seen some innovative and, I think, very worthwhile suggestions you

have made, and some of them are tough. As we were talking before

we came out here, the good news is there are at least two post ofVerDate 11-MAY-2000 14:14 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67366.TXT KATIE PsN: KATIE
8

fices that need to be closed in every congressional district in America. Let’s hope there is not one or three in mine. [Laughter.]

I want to commend the Post Office legacy of finding ways to pare

down over 200,000 positions through attrition and buyouts. I might

note, though, that today there are examples the American people,

if aware of, would be surprised. There are over 15,000 postal workers 65 years old who are on disability and not expected to return,

and yet they are paid a full salary. That is an area that we expect

will be addressed during our negotiations.

It is an area in which we want to be fair to these long-working

and longstanding employees, but at the same time, if you can no

longer do the job and you are over 65, there is a reasonable expectation that your status will change and you will not be counted

among the active members of the postal system. I think this is particularly good in union negotiations because, in fact, what we want

are workers who can be productively put to work, and those who

cannot we want to be fair to in any transition, whether they are

over or under 65.

Mr. Chairman, I would ask unanimous consent that my Washington Times op-ed of last year be included in the record.

Mr. ROSS. No objection.

[The information referred to follows:]

9

10

11

Mr. ISSA. I thank you.

In closing, this is not easy. Most of government needs are growing; yours is not. Most of government has found new places in

order to find authority and services; your has not and has not been

offered the opportunity. This committee is willing to hear, though,

about new services that create a value for the American people, opportunities for the Post Office to have further authority to find

nexus in savings with other agencies or even the private sector. I

believe that we can be entrepreneurial on both sides of the aisle

for the betterment of the American people.

I look forward to your testimony. I appreciate all of you here testifying and the many stakeholders that are also in the audience

today.

Mr. Chairman, I yield back.

[The prepared statement of Hon. Darrell E. Issa follows:]

12

13

14

Mr. ROSS. Thank you, Mr. Chairman.

I would now like to recognize the gentlewoman from the District

of Columbia, Congresswoman Norton, for her opening statement.

Ms. NORTON. Thank you very much, Mr. Chairman. I will be

pleased to be working with you as a member of the committee, and

I am particularly pleased to welcome our new postmaster, Postmaster Donahoe.

Mr. Chairman, it was interesting to hear you, I know you read

this, the mission, and that mission applies most of the time, but

it was really interesting to hear you say that you wanted to make

sure that the money that comes from Washington is well spent.

Well, of course, the Post Office hasn’t gotten any money from

Washington for decades now, and won’t get any. Indeed, we told

the Post Office that it should run like a business, but the problem

is that they report right here to the Congress, and they have never

been given the kinds of latitude that a business indeed has, and

probably doesn’t feel that it could do what a business could do.

For example, let’s take something that under Chairman Lynch

we discussed over and over again, and that was whether or not to

reduce the 6-day week to a 5-day. Now, that would cause some

hardship in some parts of the country, of course. Of course, if it is

a private business, they have to take that into account and do what

they have to do. I know in large parts of the country people, according to the polls, no longer say that they need a 6-day delivery and

appear to be ready to give that up. We haven’t even discussed

whether or not, OK, at least for the parts of the country that are

willing, that don’t need it, which looks like most of the country,

why not at least then have a 5-day work week.

What is really frustrating to me as a member of this committee

is that the steps, even the baby steps, which wouldn’t solve the

problem, seem to be very difficult to take, and the case of the 6-

day work week is difficult to take for no reason except one reason,

and that is the Members of the Congress of the United States. No

business would have to bother with that.

I will be very interested in this testimony and what you expect

to be doing, Postmaster Donahoe, because this notion of a looming

crisis, which is what this hearing is called, is also an interesting

title. Ever since I have been on this committee, and I have been

here since I have been a Member of Congress, it has been a looming crisis. I am not sure what we are waiting for. If the Post Office

truly collapses, you will have people rushing to the floor to say let’s

pick up the Post Office one way or the other; I can’t go home and

tell people that there is going to be no postal delivery. I don’t know

whether excess payments to the trust funds, even if used for operational purposes, and we know that is very unlikely to occur, would

be anything but a stopgap measure. I have always felt that somehow one has to pull back altogether and redesign entirely what we

mean by Postal Service of the United States of America.

Thank you very much, Mr. Chairman.

Mr. ROSS. Thank you very much.

Congressman Connolly.

Mr. CONNOLLY. Thank you, Mr. Chairman. And I also want to

welcome you as chairman of the committee.

Mr. ROSS. Thank you.

15

Mr. CONNOLLY. I would ask at this point unanimous consent to

insert in the record my opening statement describing a new business model legislation I will be introducing in this Congress, an excerpt from the April 15, 2010 hearings we had last year, and a copy

of the testimony of the National Rural Letter Carriers Association.

Mr. ROSS. Well, without objection, it is so ordered.

[The prepared statement of Hon. Gerald E. Connolly follows:]

16

17

18

19

20

21

Mr. CONNOLLY. I thank the Chair.

Mr. ROSS. Also, Members will have 7 days from today to submit

opening statements and extraneous material for the record.

Now I would like to get into our hearing for today. We do have

two panels. For those of you who are following spring training, I

like to refer to it as a double header today. So, without further ado,

I would like to introduce our first panel.

To my immediate right is Mr. Patrick Donahoe, the postmaster

general and chief executive officer of the U.S. Postal Service. In the

middle is Ms. Ruth Goldway, the chairman of the Postal Regulatory Commission. Welcome. And Mr. Herr, to my left, is the Director of Physical Infrastructure Issues at the U.S. Government Accountability Office.

We have your written statements before us, but what I would

like to do first is to swear everyone in, and if I could ask you all

to rise and raise your right hands.

[Witnesses sworn.]

Mr. ROSS. Thank you.

Let the record reflect that all witnesses answered in the affirmative.

Please be seated.

In order to allow time for discussion and questions, please limit

your testimony to 5 minutes. As you know, your entire written testimony will be made part of the record.

Now I will recognize, first, Mr. Donahoe. Thank you for being

here.

STATEMENTS OF PATRICK DONAHOE, POSTMASTER GENERAL,

U.S. POSTAL SERVICE; RUTH GOLDWAY, CHAIRMAN, POSTAL

REGULATORY COMMISSION; AND PHIL HERR, DIRECTOR,

PHYSICAL INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF PATRICK DONAHOE

Mr. DONAHOE. Good afternoon, Mr. Chairman and members of

the subcommittee. I am honored to be testifying before you for the

first time as the postmaster general and chief executive office of

the U.S. Postal Service. I appreciate the opportunity to testify and

thank you for the invitation. Today I would like to discuss our financial challenges, steps we are taking to improve our competitive

position, and improvements to our business model that require

changes in the law. My view is that many of our challenges today

can be recast as opportunities to create a profitable and more market responsive Postal Service that competes for and wins customers, and that propels American commerce.

The Postal Service remains at the heart of a crucial segment of

our economy. If the Postal Service was a private sector company,

it would rank 29th in the Fortune 500. We provide the platform for

a mailing industry that pumps $1 trillion into the economy every

year and employs 71⁄2 million Americans. We are not taxpayer

funded; we generate our revenue through the sale of postage. And

so, if we are to be successful at our core function of delivering to

the American public, we must operate by having a strong business

model and effective business strategies.

22

For its part, the Postal Service is focused on managing what it controls. In 2010, we trimmed $3 billion in costs, on top of $6 billion in savings in 2009, and our plan this year is to take another

$2 billion out, further reducing work hours by 40 million. Our

achievements in the work force reduction have been accomplished

through attrition. We are unsurpassed in public and private sectors

in that manner. We have reduced our work force by almost 230,000

employees since the year 2000, and have dramatically increased

total productivity.

We have accomplished this all without sacrificing service. Performance levels are at the highest level ever, and those results lie

squarely with our dedicated, knowledgeable, and committed employees, and I could not be any more proud of them.

We are aligning every aspect of the Postal Service around four

key strategies: one, strengthening the business consumer channel;

two, improving the customer experience by making every transaction a positive transaction; three, competing for the package business; and, four, continuing to become leaner, faster, and smarter.

We are committed to ensuring that we will be successful in these

business strategies and that we will be able to serve the American

public better as a result.

While we are being very aggressive within the constraints of our

current business model, the fact is without some important changes

to the law that shape our business model, we cannot survive as a

self-financing entity. Mr. Chairman, the losses experienced by the

Postal Service last year alone are a staggering $81⁄2 billion. This

year we are projected to lose another $6.4 billion. Certainly, these

results reflect the migration to electronic communication and shifting customer habits. But upon closer examinations, our losses are

a result of an inflexible business model due to the laws that govern

the Postal Service.

The most serious challenge is to our unique obligation to prefund retiree health benefits. This pre-funding requirement, borne

by no other entity, public or private, places an incredible burden

on Postal Service. To understand the full effects, you just have to

look at the last few years before and after the enactment of the

Postal Accountability and Enhancement Act. In the 4-years before,

the PAEA, the Postal Service showed a positive net income every

year.

In the 4-years since, we have seen billion dollars in losses every

year. Even during the two worst years of the recession, 2007 and

2008, had it not been for the pre-funding requirement, the Postal

Service would have realized a net profit of $3.3 billion and $2.8 billion, respectively. The effects of the retiree health benefit pre-funding are profound. This trend continues into 2011. Our first quarter

results showed a loss of $329 million. Excluding retiree health benefits, pre-funding costs, and along with worker’s compensation adjustments, we would have a net income of $226 million.

In addition to the retiree health benefit obligations, overpayments into the Civil Service Retirement System and Federal Employee Retirement System have taken a significant toll on our finances. Restoring these funds to the Postal Service would obviously

benefit our financial position. This year, the Postal Service will

reach statutory debt limit. Liquidity concerns are looming because

23

of a $51⁄2 billion payment for retiree health benefits due on September 30th of this year. The Postal Service will not have the cash

available to make these payments. We need legislation this year to

address that fact.

I also encourage the subcommittee to provide greater flexibility

to the Postal Service regarding our proposed transition to a 5-day

delivery schedule, enabling greater latitude in the way that we provide access to postal products and services. Several bills were introduced in the 111th Congress that did just that. We would appreciate those efforts and are looking forward to working with each of

you in the 112th Congress.

I believe strongly that the path forward requires that we embrace fundamental change and that our employees, our labor

unions, management associations, the mailing industry, all of our

customers and business partners play a constructive role in shaping our future. I am committed to this approach.

The next few years will bring significant change, but I am confident that we will be able to look back and say that, working together, we took advantage of a challenging time to create a stronger organization and a stronger industry, developing a true 21st century Postal Service.

Thank you for your continued efforts on behalf of the Postal

Service. I look forward to working with each of you and will be

happy to answer your questions today. Thank you, Mr. Chairman.

[The prepared statement of Mr. Donahoe follows:]

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

Mr. ROSS. Thank you, Mr. Donahoe.

Ms. Goldway, you are recognized.

STATEMENT OF RUTH GOLDWAY

Ms. GOLDWAY. Thank you Chairman Ross and Ranking Member

Lynch and members of the subcommittee. Thank you for inviting

me to testify on the record of the PAEA and Postal Service finances. I look forward to your views and your leadership on postal

issues.

On the whole, we can say that the PAEA has been a positive

force for changing, keeping postage rates low and service at acceptable levels, while providing stakeholders with information and the

opportunity to participate in the process. The price cap serves as

a powerful incentive for the Postal Service to add efficiency and reduce costs, including $11 billion in the last 3 years.

At the same time, the requirement to measure service and report

the results publicly ensured that the Postal Service improved service quality. Seasonal pricing incentives for standard and first class

mail, five experimental product market tests, and the expanding

use of NSAs, 127 in 2010 and 56 to date in 2011, show that the

Service is taking advantage of the law’s pricing flexibilities.

Along with some others, I have been concerned that there are

some potentially irreconcilable legislative requirements in the law,

such as that all products must cover attributable costs, but no class

of mail can have rate increases greater than the CPI cap. But, to

date, the Commission has been able to justify reasonable exceptions and to encourage the Postal Service to address others.

In the recent exigency case, the Commission carefully reviewed

the Postal Service’s current financial predicament and found it to

be structural, related to the pre-funding of health benefit premiums

for future retirees. In the past 4 years, the Postal Service has paid

nearly $21 billion into the Retiree Health Benefit Fund, while incurring a cumulative net loss of $20 billion. Bottom line: without

the RHBF, the Postal Service would have broken even, despite the

impact of the recession and declining mail volume.

Of course, when the PAEA was enacted in 2006, the economy

was strong and the Postal Service had record profits. It was in this

climate that the Congress mandated the Postal Service to make an

ambitious fixed 10-year series of payments at about $51⁄2 billion.

But, in retrospect, the RHBF payments have brought the Postal

Service deep into debt and close to insolvency. Now, even with a

brightening economy and continued cost cutting, the Postal Service

cannot surmount its financial crisis without congressional action.

In 2009, at the request of Congress, our expert review of the

OPM’s computation of the RHBF liability found that a recalculation could lower the Postal Service’s liability by nearly $35 billion,

still meet the funding goals of the act, and allow the required annual payments to be lowered. This could significantly address the

Postal Service’s financial shortfall.

Last year, at the request of the Postal Service, we undertook expert actuarial studies to review whether the Postal Service CSRS

pension obligations had been properly calculated in relation to

wages of employees of the Post Office Department who later retired

from the Postal Service. We found that the Postal Service had been

41

overcharged by an estimated $50 to $55 billion. The surplus, which

came from postal revenues, not taxes, should be made available in

some fashion for the benefit of the postal ratepayers and customers, perhaps to fund the RHBF.

The Commission believes that given the Postal Service’s record

of cost cutting over the last decade, and recognizing the price cap

restrictions and competition from electronic alternatives, significant

cost cuttings will continue. The Commission will serve to guard

against any ill-considered cuts, because any reduction in service

could be viewed as an equivalent of a defacto rate increase.

Last year, the Commission issued its advisory opinion on Postal

Service’s proposals to shutter up to 3,200 stations and branches.

We affirmed the Postal Service’s authority to adjust its retail network, but we made several recommendations to ensure consistency

and enhance due process for every citizen.

Over the last year the Commission has conducted an extensive

review of another Postal Service proposal, that to go from 6- to 5-

day delivery. In my 13 years serving on the Commission, this has

been the most difficult and multifaceted issue I have been asked

to address. The Postal Service proposal to end Saturday delivery is

a serious effort to improve its bottom line, but cutting 17 percent

of service in order to save what the Postal Service estimates to be

$3 billion must be carefully considered within our obligation to hold

prices down, maintain service standards, and ensure efficient postal operations.

We are working overtime to resolve the complex and technical

policy aspects of this case, and expect to complete our opinion

shortly. We hope the opinion provides the Congress with the information you need to decide whether or not to lift the current 6-day

delivery directive.

The Commission is now conducting its first 5-year review of the

PAEA, required under Section 701 of the act, to provide recommendations to improve the effectiveness of current postal laws.

Certainly, the historic view that the postal system itself is of enduring value to the Nation still stands strong.

We look forward to working with Congress, the Postal Service,

and all who depend on the mail to chart a course that keeps the

mail affordable, efficient, and relevant for generations to come.

Thank you. That concludes my testimony. I would like to ask

that the statement I made with regard to the exigency rate case,

which further defines the finances of the Postal Service, be included in the record as well.

Mr. ROSS. Without objection, it is so ordered.

Ms. GOLDWAY. Thank you.

[The prepared statement of Ms. Goldway follows:]

42

43

44

45

46

47

48

49

50

51

Mr. ROSS. Thank you, Ms. Goldway.

Mr. Herr, you are recognized.

STATEMENT OF PHIL HERR

Mr. HERR. Thank you. Chairman Ross, Chairman Issa, Ranking

Member Lynch, and members of the committee, I am pleased to be

here today to participate in this hearing. Today I will discuss the

Postal Service’s financial condition and outlook, and the actions

needed to modernize and restructure it.

The Postal Service’s financial condition has declined significantly

since fiscal year 2006 and it remains on GAO’s high risk list. As

discussed, the challenges facing the Postal Service are linked to decreases in mail volumes as customers have shifted to electronic

communications and payment alternatives. More specifically, profitable first class mail has been declining relatively quickly.

While mail use has been declining, the Postal Service has large

fixed costs associated with delivering to 150 million addresses. It

also has a large physical network spanning over 500 mail processing facilities and more than 32,000 post offices. It has 670,000 employees, about 80 percent of whom work full-time. And compensation benefits, as you noted, comprise 80 percent of its costs. The

Postal Service expects to reach its $15 billion statutory debt limit

this year, while still facing a cash shortfall. Unfunded obligations

and liabilities, detailed in a table in my statement, for such things

as worker’s compensation and expenses in retiree health care are

now estimated to total $105 billion.

These figures strongly suggest the Postal Service’s financial condition has reached a tipping point, and key stakeholders need to

reach agreement on actions to address its structural problems. We

believe that action is needed in five areas.

First, realign service with customers’ changing use of the mail.

The Postal Service has sought to reduce delivery by 1 day and provide retail services outside of post offices. It estimates that dropping a day of delivery could reduce its costs by about $3 billion annually. This raises questions about what aspects of universal’s

Postal Service are appropriate given declines in mail use.

Second, postal operations, networks, and its work force need to

be realigned to reduce excess capacity. Key questions include: How

quickly can these networks be realigned? The pace of change has

simply been too slow. And should some post offices move to alternate locations to better serve customers and reduce costs?

Third, compensation and benefit costs need to be addressed.

Wages and benefits represent 80 percent of postal costs, about $60

billion in fiscal year 2010. Congress may wish to consider revisiting

the statutory framework for collective bargaining to ensure that

binding arbitration takes the Postal Service’s financial condition

into account. Other options include implementing a two-tier pay

system, outsourcing if it results in cost savings, or revising employees’ share of health and life insurance premiums.

Fourth, generating revenue through new or enhanced products

and services. The Postal Service has asked Congress to allow it to

diversity into non-postal areas and sought additional pricing flexibility. Questions about this include: Are there opportunities to introduce profitable new postal products and enhance existing ones?

52

Should it be allowed to enter non-postal areas to compete with private sector providers?

Finally, the funding structure for postal retiree health benefits needs to be addressed. The roughly $5 billion-plus payments

through 2016 are steep, and we believe that Congress should consider modifying them in a fiscally responsible manner. However, we

also believe the Postal Service should pre-fund these obligations to

the maximum extent its finances permit because thousands of individuals rely on and expect this benefit.

Making changes to the Postal Service will not be easy. In a recent report requested by Ranking Member Lynch, we discussed

how foreign posts have modernized their operations. Key aspects of

these changes included strategic outreach and coordination with

stakeholders about the nature, scope, and need for changes. An employee transition strategy was also crucial. Foreign posts experience suggests the Postal Service needs to clarify its modernization

plans, including over what period it will implement them, and explain improvements in customer service and cost savings it expects,

while ensuring that alternatives are available.

In conclusion, Mr. Chairman, modernizing and restructuring the

Postal Service so that it can be viable is imperative given its financial condition. This will not be easy and changes, some difficult, are

needed to ensure that postal services remain available.

I am pleased to answer any questions. Thank you.

[The prepared statement of Mr. Herr follows:]

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

Mr. ROSS. Thank you, Mr. Herr.

We will now move into the questions and I will recognize myself

for 5 minutes.

I want to jump right into what I think is really the heart of the

first issue that we are facing, and that is the PAEA and its aftermath today.

Ms. Goldway, I know you have acknowledged that the Commission is doing a study on that. Specifically, at the time the PAEA

was passed in 2006, we had certain assumptions that I think may

have been taken into consideration to go ad infinitum. For example, 800,000 employees at the time. Now we are down to 575,000.

A decline in first class mail.

My question, and I will go to Mr. Donahoe first, is with this prefunding of the pension benefit, are there not assumptions that

today may not exist, or have changed dramatically, that in and of

itself, if actuarially identified, could reduce the obligation of the

Postal Service that is being imposed by the PAEA?

Mr. DONAHOE. We believe so, Mr. Chairman. We think that if

you take a look at the intentions behind the law that was passed

in 2006, they were very good intentions. The expectation was that

the Postal Service, having a base volume of 213 billion pieces of

mail, along with no debt at the time, could carry that burden of the

health benefits going forward. It was a responsible idea. We still

think it is a responsible idea to account for our retiring health benefits going forward, but we think there are a number of things we

have to take into consideration.

No. 1, we have had a substantial drop in volume. That has to be

considered. No. 2, to your point, we have reduced headcount. I

think back in 2006, when the law was passed, it was based on the

assumption of 757,000 employees. Today we have about 570,000

employees, and we think that, moving forward, we will eventually

break into the 400,000 range. We know, going forward, we will not

have those same burdens, so we would ask that Congress take a

look, ask the GAO to examine what the actual liability is going forward.

We also think there are some solutions as far as how to fund

that. We think that the funds that are existing in the Civil Service

Retirement funds that we have overpaid, by our estimates, $75 billion, the Postal Regulatory Commission’s estimate is $55 billion,

could be used to make that payment.

If that is not available, we think that we can also look at some

other options. Our own IG has suggested that we take a look forward around the option of taking a private sector model or you

fund at 30 percent versus the 100 percent that we are required to

now. So there are many options on the table, and we would be

more than happy to explore any of those with you.

Mr. ROSS. Thank you.

Ms. Goldway, would you have any estimate based on new assumptions as to what the reduction could be or potentially be?

Ms. GOLDWAY. What we did in 2009, working with consultants,

the Mercer and the Hay Group, is to look at the OPM projections

and factor in lower levels of employees and to adjust the expectations of health care cost increases that the OPM had in their formula, and we estimated that in order to fund 100 percent of what

68

would be the health care retiree benefit problem, you could do it

with $35 billion less money than the OPM had estimated in 2006.

I would suspect that number might even be lower today than it

was in 2009 when we did it and that, therefore, the target for what

the Postal Service needs to pay into a health care retiree benefit

fund is lower and the annual payments that they make into it

could be adjusted downward and reduce their burden.

Mr. ROSS. Any idea how much?

Ms. GOLDWAY. Well, we have estimated about $2 billion a year.

Mr. ROSS. Reduction?

Ms. GOLDWAY. Reduction.

Mr. ROSS. OK.

Ms. GOLDWAY. So instead of $5 billion, it would be $2 billion. But

that was an estimate and, again, it would need the assistance of

OPM and perhaps GAO to clarify those numbers.

Mr. ROSS. Thank you.

Mr. Donahoe, of course, one side of the issue is the ongoing liability for the pre-funding. But the other side is a systemic change.

And what we have to do, and this is what I would ask your opinion

on, is how do we go about competing in the 21st century? How do

we go about now adapting to the digital age? And I think that if

we are able to do something and empower the Postal Service to

take care of the immediate need, but how does it go on from hereafter so that it is existing for another 235 years without any subsidies?

Mr. DONAHOE. Well, first of all, Mr. Chairman, we think that

there is a tremendous upside on the top line on our revenue in the

Postal Service and the entire industry. We think there is plenty of

growth available in the area of standard mail. Standard mail is the

most direct way to get in front of a customer’s eyes; better than the

Internet, better than TV, better than radio. So we know there is

growth there.

We also know there is growth in the package market, and we

have been exploring that. We have been working with a number of

new products. You have seen our flat rate products come out. We

have introduced a number of others coming forward. Matter of fact,

Ms. Goldway showed me, we brought along a copy of our free sample box they have just approved over at the Regulatory Commission. We think there is a ton of value in that. We think that this

is an opportunity on a monthly basis for people to get in to the

sample business in a very affordable way. So we know there is an

upside.

Now, on the first class mail, as you mentioned, it is declining,

but we think that by using NSAs contracts with many of our customers, we can actually slow down the pace of change with the

drop-off in first class.

Congressman Lynch mentioned some opportunities in digital,

and we are exploring that too. We have had some really good ideas

come back from an innovation summit, along with a number of

other ideas that we have been exploring with partners; digital to

hard copy, hard copy to digital, and even digital to digital. We

know that the Postal Service provides tremendous opportunities

and security in that entire market, and we think there is plenty

of opportunity for growth there too.

69

Mr. ROSS. Thank you, Mr. Donahoe. My time is up.

I now recognize the distinguished gentleman—are we going in for

a vote? Have they called us? If no objection, the ranking member,

Mr. Lynch, for questions.

Mr. LYNCH. Thank you, Mr. Chairman.

I want to thank the witnesses for your help.

Mr. Donahoe, let me push back on that a little bit. I know I have

spoken with Pitney Bowes and a number of other firms that operate in Europe as well, and they have some systems where you can

actually pull up on your laptop or on your iPad and actually click

on your mail before it is delivered, and you can click off the stuff

that you don’t want to have delivered and click on the stuff you

would like to have delivered. But that tells me that, with technology, there will be a further reduction in volume as people are

given that option. So I am not so sure I buy into the idea that we

are actually going to be able to increase volume.

But that much being said, let’s go back to where the chairman

was considering PAEA. What does it look like right now? And, Mr.

Herr, you might be able to jump; actually, Ms. Goldway as well. If

we are overfunding future retiree health benefits, what is the

measurement of that overpayment? Do we have a sense of that? I

know they are making you full fund it in advance, and no one else

is required to operate under that standard, but I am just wondering what the overpayment is in there right now.

Ms. GOLDWAY. Well, I don’t think there is—there is no overpayment in the health care retiree benefit fund at the moment; there

is about $42 billion——

Mr. LYNCH. But it is pre-funded. I mean if—what I am trying

to——

Ms. GOLDWAY. In the Civil Service Retirement Benefit Fund,

there is. In the Civil Service Retirement Fund——

Mr. LYNCH. No, no, I know that. I know that. OK, look, you have

ordinary health benefit plans——

Ms. GOLDWAY. Right.

Mr. LYNCH [continuing]. That are required to pay in annually.

They are not required to pre-fund, OK?

Ms. GOLDWAY. Right.

Mr. LYNCH. So if you compare the pre-funding requirement to a

‘‘normal’’ health care benefit requirement, what excess do we have

in there that if we were required to meet normal health care fund

obligations, what would be in there that would not be required

under a standard system?

Ms. GOLDWAY. I am not sure I understand, but I think what you

are talking about is that the Postal Service currently pays out of

its existing revenues the money it needs to pay for retirees’ health

care benefits, and that is about $21⁄2 billion a year. And there are

$42 billion in a fund. So one could either take some of that money

to pay the existing health care retiree benefit retirees’ funds or at

least take some income from that to help pay that off. I think that

is what you are referring to.

Mr. DONAHOE. Another way to look at it is potentially, Congressman, the estimate for the prepayment that was needed back in

2006 was $90 billion. Our IG has done a study looking at regular

businesses, private firms and what their requirements are to pay.

70

The average prepays is at about 30 percent. So their recommendation has been you would owe somewhere around $30 billion. We

have paid $42 billion to it already, so theoretically we are overfunded at that rate.

Mr. LYNCH. OK. That probably answers the question.

Mr. HERR. Mr. Lynch, if I may?

Mr. LYNCH. Yes, Mr. Herr, go ahead.

Mr. HERR. In my statement we actually report the data that the

Postal Service had in its annual financial report, and there is, as

was stated, there is about $42 billion in that fund. But the unfunded liability is $48.6 billion, as calculated by OPM using Postal

Service numbers, and as reported in the annual financial report.

Ms. GOLDWAY. And that is the part that our consultants thought

could be lowered.

Mr. LYNCH. And that is for all future employees who are not necessarily going to tap into the fund in 1 year, right?

Mr. HERR. Correct.

Ms. GOLDWAY. At some point.

Mr. LYNCH. Let me ask you this, then. I know you are running

out of money, Mr. Donahoe, this year. With the obligations you

have for the health benefit and other obligations, you have a workmen’s compensation payment for $1.3 billion, I think. When does

that happen and what do you do when you run out of money?

Mr. DONAHOE. Here is the thing. September 30th we finish the

fiscal year. I will owe the Federal Government $51⁄2 billion for the

pre-funding. In November I will owe another $1.3 billion for worker’s comp. At the end of the fiscal year I am out of cash.

Mr. LYNCH. You are also up against your debt limit.

Mr. DONAHOE. I am up against the debt limit, so there is no

breathing room. We will deliver mail. We will pay the employees

and deliver mail. We will make sure that we pay our suppliers.

They are providing contract transportation, etc. The thing we will

not do is be able to pay the Federal Government. That will have

to be negotiated. We will talk with the Board of Governors, come

back to the Treasury and figure out what we will have to do. That

is why it is so important that we address this.

Mr. LYNCH. OK. Thank you. My time has expired. I yield back.

Mr. ROSS. Thank you, Mr. Lynch.

The subcommittee will now stand in recess until probably 5 minutes after the last vote. I expect it will probably be about 30 minutes. Thank you.

[Recess.]

Mr. ROSS. Good afternoon. I will call the subcommittee back to

order and will recognize the gentleman from Florida, Mr. Mack, for

questions.

Mr. MACK. Thank you, Mr. Chairman. Before I begin, I want to

congratulate you for being the chair of this subcommittee and for

being here in Washington.

Mr. ROSS. Thank you.

Mr. MACK. For people who don’t know, we served in the legislature together in Florida, and he is a great friend and the committee

is lucky to have you as the chair, so thank you.

Mr. ROSS. Thank you.

71

Mr. MACK. Before we left, something kind of struck me. We keep

asking, well, how can we kind of help get the Postal Service in the

right direction, and part of me is thinking government just doesn’t

know how to run a business. So, first of all, the idea that the government is going to fix a business model I think has been proven

over and over and over again it can’t do it.

So I think what we are really talking about here is time. At some

point some drastic changes are going to have to be made to the

Postal Service. If this committee is going to—and no disrespect to

anybody on this committee, but the idea that somehow government

is going to fix this, I am not sure that government has a great

track record when it comes to business. So I just thought I would

put that out there.

The Office of the Inspector General recently released a study in

which it looked at shifting costs from ratepayers to taxpayers, and

I think the study was pretty clear about that may be a way that

it has to go to be solvent. Mr. Donahoe, are you ready to admit that

the only way to stay afloat is through a bailout by the taxpayers?

Mr. DONAHOE. Thank you, Congressman. First of all, I think I

would take umbrage with the fact that we can’t get our finances

together and right the ship in the Postal Service. We, as a government entity providing universal service to the American public,

have done a pretty good job especially over the last 10 years, from

a standpoint of cost improvement, service improvement. Granted,

we have some constraints around some of the revenue generation

that we see, but we also think we have a good plan going forward,

and with a little freedom and flexibility we think we can get there.

The major issue that we’ve got, again, is the issue with the prepayment of the retiree health benefits.

Mr. MACK. I understand.

Mr. DONAHOE. And I think there is an opportunity to resolve

that.

Now, I have to ask you a question On your statement, is that

from our IG or is that from a different IG? I am not 100 percent

sure.

Mr. MACK. It is a recent released study from the Office of Inspector General.

Mr. DONAHOE. That is probably the OPM. That is the OPM’s IG.

Mr. MACK. OK, you are right. But let me just ask you this.

Mr. DONAHOE. OK.

Mr. MACK. OK? Forget about the study.

Mr. DONAHOE. OK.

Mr. MACK. I mean, you have already admitted that there are big

problems, right?

Mr. DONAHOE. Absolutely.

Mr. MACK. So are you prepared to admit that you are going to

need a bailout to stay afloat?

Mr. DONAHOE. We will not need a bailout. Here is the way we

look at this. There are a couple solutions. No. 1, we have an overpayment into the retirement systems, whether the Civil Service

or——

Mr. MACK. OK, I only have a few minutes, so——

Mr. DONAHOE. OK.

Mr. MACK. So the answer is, you think, no.

72

Mr. DONAHOE. I think no.

Mr. MACK. Are there any modifications to a postal employee’s

pay or benefit schedule that would help insolvency?

Mr. DONAHOE. Absolutely. We are working with our unions right

now. We have a union contract discussion going on with the American Postal Workers Union Rural Carriers. We are having some

very good discussions about flexibility.

Mr. MACK. And what are they offering right now?

Mr. DONAHOE. We are talking about changes in flexibility and

compensation going forward.

Mr. MACK. Now, is there talk about coming down to the rest of

the Federal work force, the pay schedule and benefits?

Mr. DONAHOE. The only pay that the Postal Service has that is

in excess of the rest of the Federal Government is in terms of the

health care contribution. That is a very small portion of what we

pay our people. We are, through negotiations, working to come to

the same level. That is minimal. The big opportunities are

work——

Mr. MACK. Do you think that can be achieved? Do you think the

unions will agree to come to——

Mr. DONAHOE. Absolutely.

Mr. MACK [continuing]. The rest of the Federal work force?

Mr. DONAHOE. The unions are already coming to that level. We

have seen progress in the last contract. We have moved 1 percent

per year in the last contract, and what is being discussed right now

will get us to that level in the next 4 years.

Mr. MACK. In the next 4 years.

Mr. DONAHOE. Yes.

Mr. MACK. So of the rest of the Federal work force.

Mr. DONAHOE. That is a small——

Mr. MACK. The pay and the benefit?

Mr. DONAHOE. No, no, no, no. That is a small portion. That is

the compensation that we give our people in terms of health benefit

contribution. Our people pay, right now, about 81 percent toward

their—we pay 81 percent toward their health benefits.

Mr. MACK. I have 25 seconds, so let me just ask one more question.

Mr. DONAHOE. OK.

Mr. MACK. Do you believe the U.S. Postal Service is too big to

fail?

Mr. DONAHOE. We are too big to fail. We are an important part

of the American economy, important part of American society. We

will deliver 171 billion pieces of mail this year.

Mr. MACK. And you are going to do that without a bailout?

Mr. DONAHOE. We are not going to have a bailout. There is a solution to this. There are a number of things that we can do working with Congress to get a resolution, and it is not a bailout.

Mr. MACK. Thank you, Mr. Chairman.

Mr. DONAHOE. Thank you.

Mr. ROSS. Thank you, Mr. Mack.

I now recognize the gentlewoman from the District of Columbia,

Ms. Norton, for 5 minutes.

Ms. NORTON. Thank you very much, Mr. Chairman.

73

I want to thank you again, Mr. Postmaster, for the improvements

in delivery that you have personally made in this region some

years ago. I love that. You did something good then and look where

you are now.

Mr. DONAHOE. Thank you, ma’am.

Ms. NORTON. I would like to know where we are headed. We

have been talking about the Postal Service model for some time,

yet we have seen no alteration in the model, and many of us, I

think on both sides, can’t believe that this model is meant for all

time. If you look at the assumptions of the statute when the U.S.

Congress set up the Postal Service, essentially it was that you

would be a profit-making business, is that not true?

Mr. DONAHOE. At least to break even.

Ms. NORTON. So a profitable business at least.

Mr. DONAHOE. Yes, ma’am.

Ms. NORTON. On page 1 of your testimony you say ‘‘Our core

business will always be delivery. There is one customer need that

will not change and it is the very essence of what we do, day in

and day out.’’

Now, I must ask you if we make the kinds of assumptions that

we are making at this hearing, that perhaps you will pay, but not

overpay, into the trust fund; and you have calculated that to be 55

or 75 million, give or take however millions you want to. Let’s say

you pay or not overpay. Let’s assume that you are delivering mail

5 days a week.

Can you say to us this afternoon that this model, which requires

you to be a profitable enterprise, delivering the mail as you are delivering it now, is a model, the model in the statute is a model, the

model of a profitable enterprise, is a model we can expect to survive; that you will be a profitable enterprise under the assumptions

of the statute that you are now held to now? And remember I am

saying you would not overpay into the trust fund.

Mr. DONAHOE. Yes, ma’am. I think that we can be profitable. I

think that there are a number of things that have to happen. No.

1, the Postal Service has undertaken a number of issues, revenue

generation, cost reductions on our own that we feel responsible toward and will work toward that point. As I mentioned before, we

are also working with the unions going forward. We have very responsible leadership there; they understand what we have to do for

a strong Postal Service. So we will take care of what we need to

take care of.

The key for us is this: we are being required to prepay a health

benefit rate $51⁄2 billion. This year we will lose $6.4 billion.

Ms. NORTON. And that is why I say if we assume that is no

longer a problem——

Mr. DONAHOE. Yes.

Ms. NORTON [continuing]. Then we will be back to a profitable

enterprise under the assumptions of the statute in 1970.

Mr. DONAHOE. This year, if we were not required to make that

payment, we would break even, and that is with a volume loss——

Ms. NORTON. If you were required not to overpay.

Mr. DONAHOE. Right. And that is with a volume loss of 22 percent. So our people have done a great job taking substantial

cost——

74

Ms. NORTON. Well, that is very important to know, if you say

that but for this overpayment. Normally if you overpay something,

you are due a refund, so I am hearing you.

I would like to ask one more question, and I don’t want false

hopes here, but I noted on page 2 of your testimony something I

have not heard before in a very long time. I don’t think I have

heard it before, period. The first quarter showed a modest increase

of 11⁄2 percent. Is that because people quit writing their tax forms?

To what do you attribute an increase? In your testimony you say

that the Christmas season was not very good. Why is this first

quarter showing a modest increase in first class mail?

Mr. DONAHOE. Well, the increase is total volume, and we have

seen a 9.6 percent increase in standard mail, advertising mail; an

increase in our package business. But we have had a decrease of

5.9 percent in first class. First class pays the freight, and that is

why we have been asking, also, for the consideration before Congress to go from 6 to 5 days.

Ms. NORTON. And you think that, then, would have what effect?

Mr. DONAHOE. I will tell you this. If we can get a resolution

around the health benefits, if we can get a resolution around the

first payment—the President has made that recommendation in his

budget—if we can get a resolution around the 6 to 5 day—these are

things that are not in our control—I know that we can get this organization profitable and strong going into the future.

Ms. NORTON. We are marking that down, Mr. Postmaster.

Mr. DONAHOE. Yes, ma’am, you can. Thank you.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. ROSS. Thank you.

I would now like to recognize the gentleman from Michigan and

our subcommittee vice chairman, Mr. Amash, for 5 minutes.

Mr. AMASH. Thank you, Mr. Chair, and thank you to the panel

for being here.

Mr. Donahoe, I really enjoyed meeting you the other day and

chatting with you.

Mr. DONAHOE. Thank you.

Mr. AMASH. You just said, I think, that you guys would break

even if you didn’t have to make the pre-funding.

Mr. DONAHOE. This year, yes.

Mr. AMASH. But I think your own plans shows that you would

have an operating income loss.

Mr. DONAHOE. Our plan shows an operating income loss of about

$900 million, but we will continue to cut. We have a plan in place

right now where we are addressing administrative cost reductions,

$750 million. We will get some of that this year. We have some

other changes going. Our goal would be to make $100 million this

year if we were able to be forgiven from the prepayment plan this

year.

Mr. AMASH. OK. I have a copy of the letter from the Office of

Personnel Management to former Postmaster General John Potter.

It is from September 2004 and it rejects the claim that USPS has

overpaid the Civil Service Retirement System. OPM explains that

the Postal Service’s request for a return of $75 billion in overpayment to the CSRS is unfounded and should not be granted by the

Congress. Furthermore, the letter includes a statement from the

75

CSRS Board of Actuaries, in which it declares that OPM has appropriately and accurately determined the financial obligations for

the Postal Service.

Mr. Chair, I ask unanimous consent to submit this letter for the

record.

Mr. Donahoe, what is your response to the letter?

Mr. DONAHOE. Here is my response: we have differing opinions

here. Our IG in the Postal Service has estimated with external actuaries that we have overpaid $75 billion. The Postal Regulatory

Commission has looked at the same information and their outside

actuaries have estimated that we have paid somewhere between 50

and 55. So there is a meeting of the minds necessary to sit down

and get this resolved once and for all.

Mr. AMASH. So you do disagree with the letter.

Mr. DONAHOE. I disagree with the letter.

Ms. GOLDWAY. If I could add that the PAEA actually has a provision so that the Postal Service can ask us to review the OPM analysis, and the Postal Regulatory Commission did what we believe is

an objective analysis, bringing in a highly respected third-party expert to review the situation. So one could say you have the self-interest of the Postal Service and the self-interest of the Office of

Personnel Management, each one wanting to protect its funds, but

I want to assure you that the Postal Regulatory Commission had

no preconceptions, gave this study no prior directions, and we came

up with what we believe is a fair and objective assessment that

there is in fact a $50 billion overpayment there.

Mr. ROSS. And, without objection, the letter so referenced is entered into the record.

[The information referred to follows:]

76

77

78

79

80

Mr. AMASH. I have a question for Mr. Herr as well. In your testimony you recognize that a significant financial issue for the Postal

Service is the fact that 80 percent of its costs go toward employees’

salaries and benefits. Do you believe that the USPS should be able

to renegotiate collective bargaining agreements?

Mr. HERR. One area that we suggested the Congress reconsider

is whether contracts that go to binding arbitration, if there is an

impasse, that there be a consideration given to the Postal Service’s

ability to pay, given its financial situation. So that is an area that

we have highlighted in prior work and I highlighted again today

in my statement.

Mr. AMASH. And the President has suggested giving USPS some

breathing room. Will that actually make the problem worse by delaying it?

Mr. HERR. I would say that one of the things that we have been

on the record as saying the Postal Service needed some short-term

relief for this retiree health care benefit payment. We have been

saying that for 2 years; this would be a third year. I think this is

really the time, we are the statutory debt limit, to make some hard

decisions about what this organization is going to look like going

forward. The overall liabilities and obligations outlined in my statement are over $100 billion now, so it is time to take into consideration the changing use of the mail, what kind of footprint the Postal Service needs, and to really think about how that is all going

to be paid for, including retiree benefits, which employees are expecting too.

Mr. AMASH. Thank you all for your testimony. I yield back.

Mr. ROSS. Thank you.

The distinguished gentleman from Virginia, Mr. Connolly, you

are recognized for 5 minutes.

Mr. CONNOLLY. Thank you again, Mr. Chairman, and, again, congratulations on your elevation as chairman of the subcommittee.

And I thank my good friend and colleague, Mr. Lynch, for his leadership in the past on these issues and some very thoughtful and

groundbreaking hearings we have had in the past, this being another contribution. And welcome to the panelists.

Mr. Herr, let’s start with that last point, the issue of whether the

President brought some breathing room. I believe in his budget he

recommended, was it, $4 billion of relief?

Mr. HERR. That is my understanding, yes, sir.

Mr. CONNOLLY. And that $4 billion, is it not predicated on the

same assumption Ms. Goldway makes and, for that matter, the

postmaster general makes, that in fact there have been overpayments?

Mr. HERR. I think that is actually predicated on the fact that

there would be other efforts underway to restructure as well.

Mr. CONNOLLY. Right.

Mr. HERR. This would be a deferment, it is not a—my understanding of the proposal the President made——

Mr. CONNOLLY. I understand that, Mr. Herr, but is it not, by implication, a recognition that in fact this is an issue, that there have

been overpayments in the past?

Mr. HERR. I guess you would have to—I would have to look at

the fine print.

81

Mr. CONNOLLY. All right. Well, certainly the President, hopefully,

in his budget wasn’t trying to add to the postmaster’s woes fiscally.

He wasn’t trying to add to that debt.

Mr. HERR. Well——

Mr. CONNOLLY. He was trying to provide relief.

Mr. HERR. Right. It is a short-term relief——

Mr. CONNOLLY. Does the GAO have an opinion about this issue of whether there is $50 to $75 billion of overpayments?

Mr. HERR. We have not looked at——

Mr. CONNOLLY. You have not looked at it.

Mr. HERR. I can assure you we have read the reports, though.

Mr. CONNOLLY. You would agree, however, that if anywhere be- tween $50 and $75 billion were verified, that alone, amortized over

some period of time, could provide significant relief to what is currently a significant imbalance in the operational revenues of the

Postal Service?

Mr. HERR. Given the numbers that are being discussed, yes, that

would be a significant——

Mr. CONNOLLY. You would agree. OK, as the GAO, do you have

any plans to look at this?

Mr. HERR. If requested by Congress, we would certainly—both

today——

Mr. CONNOLLY. Well, Mr. Chairman, I would hope that this subcommittee would in fact make such a request. That is not a trivial

number. And if we are going to talk about dire futures for the Postal Service, surely we want to look into a $50 to $75 billion item

that could provide relief fairly quickly over an amortized basis. And

I know, Mr. Chairman, you share my concern about the options in

front of us, and I would urge the subcommittee to consider making

a formal request to GAO for just such a study.

Let me ask you another question, Mr. Herr, and maybe Ms.

Goldway or Mr. Postmaster General Donahoe, you as well. Between

1990 and 2007, did overall mail volume for the Postal Service go

up or down?

Ms. GOLDWAY. It went up.

Mr. CONNOLLY. It went up. At precisely the time the Internet

was coming in full play in the United States, is that correct?

Ms. GOLDWAY. Yes.

Mr. CONNOLLY. So the relationship between the Internet and

mail volume is not necessarily always inevitably a negative one.

Might one conclude that, given that statistic, Ms. Goldway?

Ms. GOLDWAY. Oh, I think—my theory is that human beings

have an insatiable appetite for communication and everything will

grow, but it grows in different stages, just like radio has

adjusted——

Mr. CONNOLLY. My time is limited, but——

Ms. GOLDWAY. Oh.

Mr. CONNOLLY. That is all right.

Ms. GOLDWAY. But I do think that——

Mr. CONNOLLY. But it went up?

Ms. GOLDWAY. It went up.

Mr. CONNOLLY. Did it go up last year? Did mail volume go up

or down last year?

Mr. DONAHOE. Mail volume went down.

82

Mr. CONNOLLY. It went down over the previous year?

Mr. DONAHOE. Yes. Slightly.

Mr. CONNOLLY. Slightly. When we look at—because you talked a

little bit, I think you made reference, Mr. Donahoe, to the impact

of the Internet on your business. But the Internet can also generate business, can it not? For example, if I order a book from

Amazon, not only is that business for the Postal Service, but it is

actually lucrative business for the Postal Service, is that not correct?

Mr. DONAHOE. Absolutely.

Mr. CONNOLLY. Ms. Goldway, because my time is limited, have

you had a chance to look at the draft legislation we have been

working on and do you, by and large, find that it is consistent with

many of the findings the Postal Regulatory Commission has

brought before this subcommittee over the years?

Ms. GOLDWAY. I certainly think that many of the suggestions

that have been discussed by other legislators to address the financial issues are included, and I am very pleased. In addition, there

are some specific items that you and I have addressed that we

think will really improve the revenues for the Postal Service in the

future and position it as a more modern agency with the rest of the

government. So I certainly appreciate your efforts there and I am

sure it will be a valuable contribution to the conversations for legislation.

Mr. CONNOLLY. We can only hope. And I am going to run out of

time; I have 20 seconds. But real quickly, don’t we have a problem,

on top of everything else, with the aging and costly vehicular fleet

of the Postal Service?

Mr. DONAHOE. I will take that one. Yes, we do. We have a fleet

of 185,000 delivery vehicles that are about 22 years old, on average.

Mr. CONNOLLY. Mr. Chairman, I have run out of time, but if I

had a lot of time we would talk about this issue, because I think

it is another burden they have to face. Thank you very much.

Mr. ROSS. Thank you. And just for the record, as part of that

conversation, we did invite the Office of Management and Budget

to attend here that I think could have addressed some of these

questions; they declined the invitation, but I think it would have

been healthy to have them here as well.

I would now like to recognize the distinguished gentleman from

Illinois, Mr. Davis, for 5 minutes.

Mr. DAVIS. Thank you very much, Mr. Chairman, and let me congratulate you on your elevation. As a matter of fact, we had a

young fellow here yesterday testifying, and he mentioned the colleges that he wanted to attend, and he railed off about 10, and all

of them were in Florida, so there must be something good about

Florida.

Mr. ROSS. Well, as an Auburn graduate, I have to take some difference with that.

Mr. DAVIS. Let me welcome the witnesses. It is a pleasure to see

you and to have you here with us, Mr. Donahoe.

Mr. DONAHOE. Thank you.

Mr. DAVIS. Ms. Goldway, Mr. Herr, it is good to see you again.

83

I have listened to the testimony and I have listened to the questioning, and, of course, I am not one of these individuals who believe that government cannot get it right. I don’t subscribe to that

school of thought. I think that government can in fact get it right.

And I guess as one of the persons who helped put together the

Postal Enhancement and Accountability Act, we thought we were

getting it right, or at least moving in the direction of getting it

right. We thought that we were providing the kind of flexibilities

that the Postal Service needed; we thought we were providing opportunities for new products and new approaches; and we thought

we were providing opportunity to make use of all the resources

that the Postal Service should have at its disposal.

You attempted a moment ago to talk about your vision in terms

of how we can get it right and how we can have the Postal Service

be self-sufficient; how we can make sure that we interact a certain

way with our stakeholders and our unions. Could you share that

direction for us again?

Mr. DONAHOE. Sure. Thank you very much. I do believe the Postal Service is and will be a very viable part of the American economy and American society. There are definitely changes going on,

but we do provide that kind of contact that people are looking for.

If you look at what we offer from a standpoint of the ability of a

person to get in front of a customer’s eyes, we are the most direct

way, the most direct; and there is plenty of opportunity there. You

talk about the Internet. There are oftentimes no way you will find

a Web site unless you get a postcard in the mail that says come

to my Web site; and we know we provide value there.

We know we provide value for small business in the package

shipping business. When they can go down to the local post office

and put three or four or five packages in at a flat rate of a fish

and chips with guaranteed delivery within 2 to 3 days, there is tremendous value there. And we know that people will continue to

mail packages. We know we have some very valuable partnerships;

UPS and FedEx. We deliver the last mile for a lot of their packages. This holiday season we delivered 16 percent more than we

did last year, so we know there is definitely opportunity in that

area.

We also realize that there are costs that we need to address. I

think, as I said before, we have very responsible leadership from

our unions. They understand this. They can hear the waterfall.

They understand that we have to make some changes. We are having very good discussions with the APWU. The Rural Carriers have

kept the contracts open, so we think there are some opportunities

to move in the right direction there.

With our management associations we have seen progress in a

lot of the changes we have made there. They have been very supportive in big changes that we have had to make within the administrative staff to reduce costs due to the mail volume drop.

Congressman, I am 100 percent positive that there is a ton of

value in the Postal Service. I think from a government perspective

the Postal Service is pretty proud of the fact that we do a good job.

Excellent service. We have taken more costs out of this organization than any private firm, and we know we can continue to do

that in the future. We need the aid of Congress on a couple issues.

84

Mr. DAVIS. Let me just ask you. I know that we have been talking about loss projections, and we hear $900 million. Have we ever

had any projections that were higher than that?

Mr. DONAHOE. Higher in terms of losses?

Mr. DAVIS. Yes.

Mr. DONAHOE. Oh yes, absolutely.

Mr. DAVIS. So that means that we are actually making some

progress.

Mr. DONAHOE. Sure. If we can get some resolution on a couple

of these fixed costs, we definitely can. And the other thing that is

important is with the uncertainty of all this discussion about year

after year the Postal Service loses money, that starts to make customers fearful of doing business with us. We need to get that behind us. We are the lynchpin of a $1 trillion industry. That needs

to be resolved.

Mr. DAVIS. Well, I was always told that wherever there was a

will, there was a way.

Mr. DONAHOE. That is right.

Mr. DAVIS. It seems to me that you have both the will and you

are searching for the way, and I think you are refreshing, and I

look forward to working with you.

Mr. DONAHOE. Thank you, sir.

Mr. ROSS. Thank you, Mr. Davis.

At this time I want to thank our panel for taking the time and

now take just a brief recess while we get ready for our second

panel. We are probably going to have another vote series a little

bit after 4, so hopefully we can accomplish all we need to accomplish before that vote series.

Again, thank you all for being here and we will let the clerk set

up for the next panel.

[Recess.]

Mr. ROSS. We will call the subcommittee back to order.

I now recognize our second panel. Mr. Sampey, seated to my left,

is the executive vice president and chief operating officer of Valpak;

Mr. Sackler is the coordinator of the Coalition for a 21st Century

Postal Service; and Mr. Frederick Rolando is the president of the

National Association of Letter Carriers.

Gentlemen, I will ask you to stand to be sworn in. Please raise

your right hands.

[Witnesses sworn.]

Mr. ROSS. Let the record reflect that all witnesses answered in

the affirmative.

Please be seated.

Again, in order to allow time for discussion and questions, please

limit your testimony to 5 minutes. Of course, your written testimony has been submitted and entered into the record.

With that, I will start with Mr. Sampey. You are recognized.

85

STATEMENTS OF JIM SAMPEY, EXECUTIVE VICE PRESIDENT

AND CHIEF, OPERATION OFFICER, VALPAK; ARTHOR

SACKLER, COORDINATOR, COALITION FOR A 21ST CENTURY

POSTAL SERVICE, SACKLER POLICY SERVICES, LLC; AND

FREDERIC ROLANDO, DIRECTOR OF LEGISLATIVE AND POLITICAL AFFAIRS, NATIONAL ASSOCIATION OF LETTER CARRIERS (AFL–CIO)

STATEMENT OF JIM SAMPEY

Mr. SAMPEY. Chairman Ross, Ranking Member Lynch, and members of the subcommittee, my name is Jim Sampey. I am the executive vice president and chief operating officer for Cox Target Media,

headquarters in Largo, FL. We own Valpak Direct Marketing Systems and we are one of the largest direct mail firms in North

America. Thank you for this opportunity to testify on what we

agree is a looming crisis for the USPS.

Valpak has been in the business for over 42 years. We pioneered

the concept of local cooperative direct mail in the United States.

Valpak is owned by Cox Enterprises, based in Atlanta, which is one

of the largest media conglomerates in the United States.

Valpak is a franchise organization, with locations in every State.

Valpak represents more than 2,000 direct and franchised employees. Each year we assist more than 54,000 small businesses, from

local mom and pops to large national companies. Today Valpak delivers savings and values to about 40 million households each

month, and each year our familiar blue envelope carries some 20

billion money-saving offers in 500 million envelopes.

Just 3 years ago we opened a $220 million facility in St. Petersburg, Florida to accommodate our growth for the future. Our company is also aggressively entering the digital space in the online

and mobile couponing business. This will allow us to reach new

customers with our products and continue to serve as a leader in

our industry. Our digital strategies will continue to complement

our mail volume.

The nature of our business means that we watch the USPS and

its issues very closely. We believe that the Post Office, under Jack

Potter and now Pat Donahoe, have done a remarkable job in

downsizing the Post Office to adjust for plummeting mail volumes,

while maintaining high service levels. If you were to set aside the

$51⁄2 billion artificial financial burden to prepay future retiring

health costs, which Congress imposed in the PAEA, the Post Office

actually had an operating profit of $601 million over the last 4

years. We believe the Post Office’s March 2, 2010 Action Plan: Envisioning America’s Future Postal Service, was well designed, and

except for its proposal to reduce the role of the Postal Regulatory

Commission, we support it in all respects.

It seems to us that the Post Office is constantly getting caught

up in the political machinations of Congress. It may not be popular

to tell Congress that the bill was ill conceived, but look at what the

PAEA did. It imposed a CPI-based cap on prices; it gave the Post

Office virtually no new powers to cut costs; and at the last minute

we were told that it was necessary to get the bill scored properly,

Congress needed to impose a $51⁄2 billion annual financial burden

86

to prepay future retiring health costs, a burden imposed on no

other agency or company.

Valpak, along with all mailers, urges Congress and the Commis- sion to address the financial issue by removing the $51⁄2 million artificial annual burdens on mailers to pre-fund the postal retirement

health benefits and require the Office of Personnel Management to

recalculate the CSRS and FERS obligations using overpayments

made by mailers toward these retirement expenses to help pay ordinary health benefit expenses.

On the cost-cutting items, we urge Congress and the Commission

to allow the USPS to move to 5 day delivery. By recent polls, at

least two-thirds of the people don’t care that much about Saturday

delivery, and it would allow the Post Office to save what should be

about $3 billion annually and, second, allow the Post Office to close

standalone money-losing post offices and replace them with retail

facilities in place with high foot traffic.

This is not to say that we support all the Postal Service does. We

are deeply frustrated with some of the pricing policies which have

allowed it to lose $5 billion over the last 4 years on underwater

products. As a prosperous company would not choose to offer products which lose money, and it is completely unacceptable that one

that is on the brink of insolvency would continue to do so.

Last, we do oppose the Post Office’s efforts to go into competition

with existing customers. One example of this is the recently passed

market test called Marketing Mail Made Easy. Easy for that to

say. This proposal has generated a lot of opposition from the mail

community. We don’t think that cannibalizing the mail that is already in the system is the right strategy for growth.

I look forward to answering any of your questions you may have.

Thank you.

[The prepared statement of Mr. Sampey follows:]

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

Mr. ROSS. Thank you, Mr. Sampey.

Mr. Sackler, you are recognized for 5 minutes.

STATEMENT OF ARTHOR SACKLER

Mr. SACKLER. Thank you, Mr. Chairman, and good afternoon to

you, to Ranking Member Lynch, and the members of the subcommittee.

The Coalition for a 21st Century Postal Service is pleased to

present our views on what we also agree is a looming crisis for

USPS. The Coalition’s 33 trade associations and companies represent a major swath of a nearly $1 trillion industry that employs

more than 71⁄2 million people. It runs the gamut of paper communications; from forestry and paper companies, printers and technology providers to companies which create every type of mail.

There is far more at stake in how the Postal Service fares than

the Postal Service itself: the future of an industry roughly 15 times

the size of postal revenues, the huge number of jobs it supports,

and the substantial impact that industry has on the economy. And

we believe postal insolvency, which could happen by the end of this

fiscal year without action, will have consequences not only for the

Postal Service, but quite possibly for the Nation.

Given the state of the industry and potential postal insolvency,

the Coalition believes it imperative for Congress this year to correct a core element of the financial imbalance, by eliminating a hidden tax assessed on postal ratepayers that was used to reduce the

deficit and effectively subsidize retirements of non-postal Federal

retirees, and repatriating that money over time to underwrite the

pre-funding of retiree health benefits required by Congress. The

$50 billion or more in overpayments to CSRS and the nearly $7 billion more to FERS constitute a vast hidden tax that would, if redirected, dramatically improve the position of the Service and, consequently, the industry and the public generally which it serves.

Some believe repatriating this money would constitute a bailout.

With great respect, we strongly disagree. While these overpayments were caused by a good faith actuarial misinterpretation,

they were nonetheless paid not by the American taxpayer, but by

postal ratepayers. As the postmaster general pointed out, USPS’s

money comes almost exclusively from user fees, postage, and 90

percent of that comes from businesses. Having collectively funded

the bulk of these overpayments, we believe the right outcome is to

use the money to benefit the Postal Service and thereby those who

depend upon it.

The alternative is insolvency. On September 30th, facing the

choice of paying $51⁄2 billion to pre-fund retirees’ health benefits or

paying its employees and keeping the lights on, as the postmaster

general put it before, they will sensibly opt for the latter. There

will be no legal or other consequences for the Postal Service or its

managers, but it will be in default of an obligation.

Questions about its reliability will arise for those who do business with it. And will overseas holders of U.S. securities treat this

as the first loose thread in unraveling the Nation’s financial ball

of yarn? What would that do to interest rates and yields for treasuries? After all, it remains the U.S. Postal Service. Insolvency must

be avoided.

113

And if it isn’t, the obligations won’t simply go away. To the extent that the financial shortfalls for USPS overtake it, those obligations will fall to Congress. Then there will be the need for an actual taxpayer-funded bailout.

In our written statement we offer other recommendations we believe would help the Service and the industry grapple with the

interrelated financial, structural, and innovative elements of this

looming crisis. These include addressing the high cost of compliance with mailing rules, giving the Postal Service more flexibility

to close facilities or offer certain non-postal products, more flexibility on negotiated service agreements, and more.

Without structural changes as well, financial transfers will only

kick the proverbial can down the road, as has been noted several

times during this hearing.

Mail remains an important communications channel. Even in its

current fragile state, the postal system remains pervasive and effective. Yet, despite these attributes, challenged by disruptive technology and retrenching resulting from the recession, our system is

struggling. Mailers and suppliers have undergone dramatic

changes the past 2 years, collectively enduring hundreds of thousands of layoffs, the shuttering of numerous businesses, and other

dislocations. The result has been unprecedented budgetary pressure on mailers to reduce their costs of distribution.

No one can force anyone to mail. Mailers have choices. Because

of the Internet, first class, the cash cow of the system, is effectively

no longer a monopoly and continues to sink like a stone. Each account going online is costing a dozen bills, a dozen payments, and

several promotional pieces each year. The decline in first class

threatens the system’s financial stability.

Similarly, when prices rise, there is more pressure on catalogers,

other advertisers, and periodicals to use alternatives, decrease the

weight and size of their mailing, otherwise reduce their mail exposure. Like first class mailers, they have choices via the Internet

and other marketing channels. The concomitant effect on suppliers

is just as significant. Less mail means less paper, printing, and

technology business.

Thank you, Mr. Chairman. We believe that all of this financial

pressure on mailers puts a premium on holding prices down while

maintaining service. The Coalition is prepared to work with you

and your colleagues to stave off a decline of the Postal Service. It

need not be inevitable. I would be happy to respond to any questions you may have.

[The prepared statement of Mr. Sackler follows:]

114

115

116

117

118

119

120

121

122

123

124

125

126

Mr. ROSS. Thank you, Mr. Sackler.

Mr. Rolando, you are recognized for 5 minutes.

STATEMENT OF FREDERIC ROLANDO

Mr. ROLANDO. Good afternoon, Chairman Ross. Congratulations

again on your chairmanship. And good afternoon, Ranking Member

Lynch. Welcome back from Afghanistan. And greetings to the other

members of the subcommittee.

I am pleased to be here today on behalf of the nearly 290,000

members of the National Association of Letter Carriers. We are

honored to be the public face of the U.S. Postal Service, an agency

mandated by the U.S. Constitution and one of America’s oldest,

proudest, and most essential institutions.

I have submitted a written statement, but in my few minutes

here I would like to leave you with five points to consider, some

of which counter the conventional wisdom.

It is worth nothing that the figures I will cite are from official

sources. We can all form our own opinions about public policy, but

we should start from shared facts.

First, the Postal Service remains a vital part of our society and

our economy; it provides the only truly universal delivery and communications network in the United States, serving every corner of

this country, from the most rural areas of Montana to every city

block of Manhattan, 6 days a week. For several years in a row the

public has named the Postal Service the most trusted Federal

agency in America, in large part because of its dedicated and professional work force.

The Postal Service is a vital infrastructure service that is not

only an essential element of the country’s financial payment system, but also a key facilitator of business and communications for

the 150 million homes and businesses it serves. According to a

2009 study by the Postal Service, the annual value of transactions

moving through the mail exceeds $30 trillion, underlining its importance to the health of our Nation’s economy.

Second, there is indeed a financial crisis at the Postal Service,

one we must address for the sake of the economy and the millions

of workers employed by the mailing industry. But it isn’t the crisis

you might think it is. Let me explain.

With the Nation still suffering from the worst recession since

The Great Depression, mail volume has fallen, a trend exacerbated

by Internet diversion. And yet the Postal Service has been running

an operational profit. You heard that correctly, postal and profit in

the same sentence.

In the most recent quarter alone, postal operations had a profit

of $226 million, taking in more than a quarter billion dollars over

operating expenses. That brings to $837 billion the net operational

profits over the past 4 years. And this has been achieved by increased productivity, labor-management partnership, fair and flexible work adjustments, and performance and quality that have lifted

customer satisfaction, all while maintaining the most affordable

postal rates in the world.

But while the Postal Service is operating more smartly than

ever, it faces a huge burden unrelated to its daily work. The 2006

congressional mandate to pre-fund future retiree health benefits for

127

the next 75 years, and to do so within 10 years, and obligation

faced by no public agency or private firm in America, imperils the

Postal Service. In the past 4 years, the Postal Service has made

$20.9 billion in pre-funding payments. It is that unique obligation

during a recession that has plunged the Postal Service into a financial crisis.

Point three, fortunately, there is a good solution. The Postal Service has a surplus of between $50 and $75 billion in its pension

funds, according to two independent audits, because of overpayments made since 1971. Congressional approval to let the Postal

Service make an internal transfer of its own money derived from

the sale of products and services would leave both the pension and

retiree funds in far better shape than virtually all such accounts

in this country.

Why? Because not only have daily Postal Service operations been

carried out efficiently, the agency has been highly responsible with

future obligations, all this, let me emphasize, without using any

taxpayer money for over a quarter century. We are simply asking

that the Postal Service be allowed to use its own money, as any responsible business would.

Bipartisan agreement is forming on this crucial reform. Senators

Tom Carper and Susan Collins have endorsed this solution and

drafted legislation to implement. I am happy to learn that Representative Connolly of this subcommittee has prepared a bill addressing this issue, one that builds on prior work by Ranking Member Lynch.

Chairman Ross, we hope you and your colleagues will embrace

this bipartisan consensus on pre-funding reform.

Fourth, while this proposal, backed by the Postal Service, has no

downside, that is not the case with some of the other USPS ideas.

Eliminating Saturday service, for example, would be disastrous. It

would save about 5 percent of the postal budget by sacrificing 17

percent of service; it would inconvenience millions of small business

owners who transact business on Saturdays and Americans who

need medicines on the weekend; it would add 80,000 postal employees to the jobless rolls; it would imperil the Postal Service’s future

by forcing customers to turn elsewhere. And as competitors fill the

vacuum, future revenue would decline. All this to save an amount

barely half the annual pre-funding payments. No business would

choose this option over an internal transfer of its own funds, and

neither should we.

Finally, the Postal Service has a bright future. The current challenges aren’t the first since Benjamin Franklin served as the first

postmaster general, nor will they be the last. As realists, we know

we must adapt to society’s evolving needs. The mail mix, for example, is shifting, with too little first class mail these days. As the

economy improves, we have to watch the mail flow and adapt as

needed. Even as we speak, the overall mail volume is rising for the

first time in 4 years.

We have lots of ideas on new services to offer the growing number of home-based businesses, on expanding our work with UPS

and FedEx as their most economical option for last mile delivery,

and on adding to what letter carriers already do to protect community and national security.

128

I would like to conclude by congratulating all the new members

of the subcommittee. We believe these are nonpartisan issues in

the tradition of bipartisan cooperation that has characterized this

subcommittee as worth nurturing. We look forward to working with

all of you on postal issues and to find bipartisan solutions to the

challenge before us. NELC has demonstrated repeatedly in recent

years that it is prepared to do its part to help preserve the longtime viability of the Postal Service by serving the American people

and helping the businesses that rely on universal service to grow

and prosper, and we remain every bit as committed to that goal

today.

Thank you.

[The prepared statement of Mr. Rolando follows:]

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

Mr. ROSS. Thank you, Mr. Rolando.

We have been called for votes. We have about 111⁄2 minutes to

go. Mr. Lynch and I have agreed that we are going to try to do 5

minutes each, and then we will recess and come back right afterwards and finish then. So those who need to go, go ahead and go.

I will start with a series of questions.

Mr. Rolando, one of the things that was pointed out in the GAO

report, Mr. Herr who was here in the first panel, indicated that,

USPS now has costly excess capacity. Is that something that you

can comment on? Are you aware of excess capacity, whether it be

in distribution or wherever?

Mr. ROLANDO. I don’t know what he was referring to, no.

Mr. ROSS. OK. With regard to also another recommendation the

GAO had in terms of collective bargaining and binding arbitration,

his recommendation was that the financial condition of the U.S.

Postal Service should be taken into consideration in the binding arbitration procedures. How do you feel about that?

Mr. ROLANDO. His wish is granted because the financial condition of the Postal Service has been considered in every arbitration

that we have had. The arbitrators are required to consider the arguments of both parties, and in every interest arbitration we have

had that issue has come up and been considered by the arbitrators.

Mr. ROSS. I appreciate that perspective.

To all three of you, you all recognize, I think, that the recession

has had an impact on mail. I mean, there was an increase in volume from 1990 to 2007, when we have seen a decrease. I will start

with you, Mr. Rolando. Do you think that the U.S. Postal Service

has done enough aggressively to cut costs? And, if not, what would

you recommend that they further do?

Mr. ROLANDO. I think they should continue what they are doing,

to work with the unions on win-win solutions. I know my union has

worked with them aggressively for the last few years on adjusting

routes to the change in volumes, which, by their own numbers, has

saved them over $1 billion, and I think we need to continue to work

together through negotiations and in between those negotiations on

these win-win solutions.

Mr. ROSS. Mr. Sackler.

Mr. SACKLER. Well, Mr. Chairman, the Postal Service and its employees have indeed cut a lot of costs out of the system, but by definition, looking at the situation that it is in, it hasn’t been enough.

We think that, to get to your previous question, our understanding

is that the system is overbuilt by almost a factor of two and that

there needs to be a drastic realignment and restructuring, closing

and consolidation of facilities, and for that there will need to be

some change in the law and there will have to be support from

Congress because——

Mr. ROSS. So you agree that there is excess capacity.

Mr. SACKLER. Yes, we do.

Mr. ROSS. OK.

And Mr. Sampey, with regard to costs.

Mr. SAMPEY. Yes, I would say that they have done a great job

between the unions and the administration in the Post Office. They

have done a fantastic job to manage the costs. And I think there

is more that they can do if some legislative activities are taken to

145

give them a little more room to work on the cost side of the house.

We are very supportive of the Postal Regulatory Commission, especially on the pricing side, to give some oversight, but I think the

management and the union have a lot of opportunities to take additional dollars out of the business if we give them a little bit of

latitude with legislative activities.

Mr. ROSS. Mr. Sackler, back to you. You touched on this in your

opening remarks, about if the Postal Service defaulted on its obligation to the Treasury. Could you expound on what impact you

think that would have? I mean, assuming we did nothing and they

couldn’t meet their obligation, they have exceeded their $15 billion

borrowing limit, or met it at least, what is the outcome?

Mr. SACKLER. As we understand it, there are no legal operational

or practical consequences for USPS or its managers. But the implications in terms of how people look at the Service and the fact that

whether or not it is functioning largely independently, it is still an

arm of the U.S. Government. And to have an arm of the U.S. Government default on an obligation, even if the actual impact is only

technical, you have to think, well, what are those who are holding

our bonds and have the future of our finances in their hands thinking? It is all a psychological game.

Mr. ROSS. It could affect our credit rating.

Mr. SACKLER. Exactly.

Mr. ROSS. OK.

Last, Mr. Sampey, you want to comment on that?

Mr. SAMPEY. Just one comment on that. I think Pat brought it

up in his statement. I think the industry confidence in the Post Office, and some of the challenges that they are having right now,

you know, there are a lot of folks out in the industry that are saying should we move to digital, should we move to something else,

for fear of where the Post Office is going to end up. I think whatever we do, we need to do it quickly. I think we need to move on

this as a cohesive group and work together and figure out how do

we get the confidence back. The Post Office has done a great job

and the quality of service has been fantastic.

Mr. ROSS. Thank you.

Mr. Lynch, you are recognized for 5 minutes.

Mr. LYNCH. Thank you, Mr. Chairman. I just want to make a

couple of clarifications. I know that my dear friend from Florida,

Mr. Mack, commented that government doesn’t have the ability to

help business make the necessary reforms.

I just want to remind the gentleman that the U.S. Postal Service

is a unique business; it was actually created by the U.S. Congress

and it is one of the few institutions that is explicitly provided for

in the U.S. Constitution. Government has done a pretty good job

over the past 236 years in guiding the Post Office in providing universal service 6 days a week and has done a pretty good job, as

some of the polling out there has indicated, that our postal employees are the most trusted public employees in the United States

today.

I would also like to point out with respect to the suggestion that

OPM is correct in their assertion that the overpayment does not

exist, for the benefit of the new Members especially, I just want to

146

sort of lay out the history here of OPM denying obligations and

what the results have been.

Going back to 2002, the Postal Service pension fund was found

to be overfunded by OPM by $78 billion, and we in Congress had

to go back in 2003 and tell OPM you have to straighten this out.

So there was an overpayment there of $78 billion.

Then in 2003 OPM attempted to make the Postal Service pick up

the responsibilities for military service pensions, obligations for

Postal Service employees. So if they are in the service, they wanted

the Post Office to pick up their pension credits that were due because of the military service, and we said that would not be right.

So Congress rejected that attempt.

In 2009 we found that OPM used an exaggerated 7 percent

health care appreciation inflation forecast instead of the 5 percent

that is the industry standard, and that resulted in an overpayment

of $13.2 by 2016. So we had to go back and we ordered OPM cut

that out, use the industry standard. So OPM then went back and

changed it.

Now the Postal Service has been overcharged by $75 billion for

its share of CSRS pensions for folks for their pension credits before

they became USPS employees. People have to understand that.

These are pension credits for folks before they went to work for the

Post Office, but they have been overcharged and the Post Office is

picking up the inflation for those costs.

So there is a whole history here of the OPM. And, look, anybody

can make a mistake, but in every single case OPM overcharged the

Post Office by tens of billions of dollars. So that is the record we

have here. Those are the facts, and there does seem to be a—oh,

and by the way, OPM wrote a rather gratuitous letter that they

thought, by God, the Post Office should have to pre-fund their

health care obligations 100 percent, pre-fund it by 100 percent. But

if you look at what OPM is doing, they pre-fund their obligations

at 40 percent. So you would think what is good for the goose is

good for the gander, but that is not the case.

So I just wanted to make those clarifications just for some of the

newer Members that are onboard here.

Mr. Rolando, in my remaining time, before I run up the Hill, I

want to ask with respect to going from 6-day delivery to 5-day delivery, that affects your membership, the letter carriers, and the

mail handlers dramatically. Is there any information that you

would like Congress to have before, or do you think the Post Office

should provide to Congress before we make that decision?

Mr. ROLANDO. Well, I think it is important that it not only affects my members, it affects thousands and thousands of businesses across America who have contacted the NALC directly have

responded to the NALC in terms of their objections to 5-day delivery and how it would affect them, and we——

Mr. LYNCH. I don’t mean to interrupt you, but, in fairness, I have

to tell you I heard loud and clear from the folks that have catalogs

and magazines that apparently they use Saturday as their delivery

day because they want folks to, on their day off, actually read the

product that they deliver. So you are right, it is not solely in your

interest. But go ahead.

147

Mr. ROLANDO. That was what I wanted to say, the effect on the

businesses, not to mention the public and the customers.

Mr. LYNCH. All right, thank you.

Mr. ROSS. We are going to recess to go take our votes, and we

will return after this first vote, and then we should be able to finish up. Thank you for your patience. We will be back.

[Recess.]

Mr. ROSS. I would like to call us back into order and I would now

like to recognize the gentlewoman from the District of Columbia,

Ms. Norton, for 5 minutes of questions.

Ms. NORTON. Thank you, particularly, Mr. Chairman, for rushing

back, because I know you have to go to the floor again. I wish I

did.

Let me say how helpful all of your testimony has been. You have

reinforced a lot of what the Postal Service itself has said. And I

want to say to you, Mr. Rolando, I have walked with my letter carrier. He is an indispensable party to the American people, far beyond delivering the mail. There are people who have nobody but a

letter carrier to speak to every day, particularly the elderly. They

greet him at the door even if they’ve got a walker. Thank you for

all you do. You are wonderful. Your letter carriers are the best.

I want to just straighten two things out for my own thinking,

certainly. I am well aware of what collective bargaining does for

those in trouble. There is nothing more valuable than to have the

cooperation of level-headed unions when you have to manage a

downsizing of any kind. Everybody ought to know that the reason

the Postal Service has been able to do what it does is because its

collective bargaining partners understand the business as well as

the business with whom they are dealing, so I congratulate you. I

know the sacrifices you have made. And you don’t see the postal

workers out here screaming and hollering because they believe fairness has been accorded because it has been bargained. So I agree

with your testimony; don’t tamper with collective bargaining. If you

really want to mess up this situation, just mess with collective bargaining.

Now, Saturday delivery. I read your testimony on Saturday delivery. I want to know is it subject to collective bargaining.

Mr. ROLANDO. Saturday delivery?

Ms. NORTON. Is that bargained over?

Mr. ROLANDO. No, it is not.

Ms. NORTON. Now, you make a pretty compelling case that there

would be very little savings. The thing that has made me interested in Saturday delivery is this overwhelming number of Americans, 75, 80 percent say, OK, if that is what you have to do, that

is what you can do. But you make a pretty compelling case not simply about inconvenience to people. I understand that; people, of

course, in hard times, have to take that. But loss of business, that

bothers me. What do you mean about the loss of business? Who

will get that business if Saturday delivery in those locations—and

let’s assume we had, in my hypothetical, no Saturday delivery in

just some locations, but some you did have it. In any case, where

would the business go to and what would that mean for future

business for the Postal Service?

148

Mr. ROLANDO. First, if I could, I would like to just comment on

the 75 to 80 percent that you just alluded to.

Ms. NORTON. Yes.

Mr. ROLANDO. You have to understand it really depends on what

you ask people as to how they are going to respond. If you ask people if they would rather have an increase in postal rates or lose a

day of delivery, you are going to get one set of answers. If you are

truthful with people and give them the real options, would you

rather the Postal Service be allowed to transfer their own money

from a surplus in their pension fund or lose a day of delivery, I

think you get a completely different answer.

Ms. NORTON. And, of course, Mr. Sampey’s testimony, and I

think the testimony of the first panel, was that it did not include

Saturday delivery; they just said if you dealt with these overpayments that you would have a profitable enterprise. So go ahead. So

that takes care of the question.

Now, what about the loss of business? Who would get the business?

Mr. ROLANDO. Well, there is always going to be a need for delivery on Saturday. We talked about prescription drugs and other

things that the American people are going to need. Somebody is

going to fill that vacuum.

Ms. NORTON. And you think that would have an effect on future

business for the Post Office or that would carry over into your

Monday through Friday business?

Mr. ROLANDO. Absolutely. It would affect the current business; it

would affect the growing part of the business, which is people shopping online and parcel delivery when people are home on Saturday.

It is just not a good idea where there are a lot of innovative things.

Ms. NORTON. Let me ask you one more question, then, because

you have made me understand that. We had some testimony here

about thousands of postal workers that are on worker’s compensation that could be on retirement. Would you clarify that? Why don’t

they just retire?

Mr. ROLANDO. I am not real sure what the gentleman was referring to, but I know there have been proposals with regard to worker’s compensation which we certainly are willing to look at. The important thing is that we don’t punish our employees who are injured on the job and that we treat them fairly.

Ms. NORTON. And there was some concern that these workers

had no intention of coming back to work. Now, I know the retirement age is 55, but somebody 55 these days better come back to

work if you possibly can.

Mr. ROLANDO. Sure.

Ms. NORTON. I wonder if the union will take a close look at that,

because it will not sound good to the American people if you are

carrying people who could then be carried on their earned retirement benefits.

Mr. ROLANDO. Again, it is all how it is characterized. That is why

I would have to take issue with the comment that was made. We

would have to look behind it, because we certainly want to look for

a way to treat these people and not punish them.

Ms. NORTON. Thank you very much.

Mr. ROSS. Thank you, Ms. Norton.

149

In light of no other Members here to inquire and us about ready

to go in for another vote here, we are going to adjourn. I want to

thank the gentlemen of our second panel and appreciate you all

being here, taking time out of your schedule. We have just

scratched the surface and look forward to working with you all on

this issue. Thank you all very much and have a good day.

[Whereupon, at 4:20 p.m., the subcommittee was adjourned.]

Æ