U.S. GOVERNMENT PRINTING OFFICE

67–996 CC WASHINGTON : 2001

OVERSIGHT HEARING OF THE U.S. POSTAL

SERVICE

HEARING

BEFORE THE

SUBCOMMITTEE ON THE POSTAL SERVICE

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 19, 2000

Serial No. 106–170

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

ROBERT A. BRIGGS, Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE POSTAL SERVICE

JOHN M. MCHUGH, New York, Chairman

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BENJAMIN A. GILMAN, New York

STEVEN C. LATOURETTE, Ohio

DAN MILLER, Florida

CHAKA FATTAH, Pennsylvania

MAJOR R. OWENS, New York

DANNY K. DAVIS, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

ROBERT TAUB, Staff Director

JANE HATCHERSON, Professional Staff Member

HEEA VAZIRANI-FALES, Counsel

MATTHEW BATT, Clerk

TONY HAYWOOD, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on September 19, 2000 ..................................................................... 1

Statement of:

Corcoran, Karla W., Inspector General, U.S. Postal Service, accompanied

by Colleen McAntee, Acting Assistant Inspector General for Audit ......... 29

Henderson, William J., Postmaster General and Chief Executive Officer,

U.S. Postal Service ........................................................................................ 22

Ungar, Bernard L., Director, Government Business Operations Issues,

accompanied by Teresa Anderson and Gerald Barnes, Assistant Directors, General Government Division, General Accounting Office ............... 66

Letters, statements, et cetera, submitted for the record by:

Corcoran, Karla W., Inspector General, U.S. Postal Service, prepared

statement of ................................................................................................... 31

Fattah, Hon. Chaka, a Representative in Congress from the State of

Pennsylvania:

Letter dated September 18, 2000 ............................................................. 102

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

Henderson, William J., Postmaster General and Chief Executive Officer,

U.S. Postal Service, prepared statement of ................................................ 23

LaTourette, Hon. Steven C., a Representative in Congress from the State

of Ohio, information concerning a court case ............................................. 124

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 99

Ungar, Bernard L., Director, Government Business Operations Issues:

Chart on mail volume ............................................................................... 67

Prepared statement of ............................................................................... 70

(1)

OVERSIGHT HEARING OF THE U.S. POSTAL

SERVICE

TUESDAY, SEPTEMBER 19, 2000

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE POSTAL SERVICE,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

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

2154, Rayburn House Office Building, Hon. John M. McHugh

(chairman of the subcommittee) presiding.

Present: Representatives McHugh, Sanford, LaTourette, Fattah,

Owens, and Davis.

Also present: Representatives Tierney and Biggert.

Staff present: Robert Taub, staff director; Heea Vazirani-Fales

and Loren Sciurba, counsels; Matthew Batt, clerk; Jane

Hatcherson, professional staff member; Robin Butler, office manager, Committee on Government Reform; Dana Johnson, deputy

chief of staff, personal staff; Abigail Hurowitz, communications assistant, personal staff; Tony Haywood, minority counsel; Denise

Wilson, minority professional staff member; and Earley Green, minority assistant clerk.

Mr. MCHUGH. I want to apologize at the outset. There are all

kinds of new electronic gimmicks up here, and fail-safe systems,

and I have not been cleared for flying this machine. So if there is

any breakdown, I apologize for that.

Let me welcome you all here. I don’t see a gavel, so I will call

the meeting to order.

Thank you so much for being here in such strong numbers. Certainly, as we all know, our witnesses today are not newcomers.

They have, to a person, all testified before this subcommittee on

previous occasions, and I want to thank them again for participating in this, our annual oversight hearing.

Of course, they include the Postmaster General, Bill Henderson;

the Inspector General of the U.S. Postal Service, Carla Corcoran;

and again, Mr. Bernard Ungar of the General Accounting Office. I

know I speak for all of the members of the subcommittee when I

express our appreciation to you all for your help and your cooperation over these past years. Certainly we are very interested in what

you are going to share with us today.

I would also like to state my appreciation to the Postmaster General, for most of you who have had the time to read his opening

statement, for the kind things he has to say about me in that presentation. I am not certain they are deserved, but they are greatly

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appreciated. I think he describes very well the road that we have

traveled these past 6 years in trying to modernize our postal laws.

It has been a road that has been filled with detours and potholes

and distractions. Indeed, to the detriment of many Americans, I

fear that postal reform may not in fact be enacted in the year 2000.

But we are fooling ourselves if we think that with the growing cost

pressures and shrinking revenue base of the Postal Service, that

this Congress can continue to delay addressing this most important

matter.

Sustained volume declines, coupled with early delivery cost increases, ensure that the postal laws will have to undergo, I think,

a major adjustment. My fear is that rather than undertaking reasonable and gradual changes, as we have attempted to accomplish,

we will instead find ourselves dealing with the worst crisis and be

left with choices of desperation in our duty to provide affordable

universal mail delivery that binds the Nation together.

Let’s not kid ourselves: The crisis is upon us. In the past year,

the Postal Service has encountered increasing financial difficulties

as mail volumes have grown more slowly than expected and as

postal costs have increased greatly and have been proven difficult

to restrain. With just days left in the fiscal year, the Postal Service

is facing its first money-losing performance since 1974. The Postmaster General stated last month that the service could be as

much as $300 million in the red when the books are tallied a few

days from now.

The testimony of the nonpartisan independent General Accounting Office I feel focuses like a laser on the key policy challenges

facing Congress and the American people. I would like to quote

from that report briefly, if I may.

the Postal Service faces an uncertain future. Can the Postal Service maintain and,

where necessary, improve on the quality of mail delivery service? Can the Service

continue to provide affordable postal rates? Can the Service remain self-supporting

through postal revenues? Can the Service continue in the long term to provide the

current level and scope of universal postal service?

The Postal Service is lumbering along under a 30-year-old legislative framework and it may not be able to overcome the problems

it faces. As the Inspector General will underscore, the Service faces

major management challenges in its attempts to grow revenues

and to compete in a rapidly changing market, maintain affordability, improve the workplace climate, and enhance productivity.

It is no surprise that the Postal Service is seeking innovative approaches to dealing with these challenges. About 2 weeks ago, the

Postal Service announced the possibility of a strengthening alliance

with Federal Express. Questions have and, I suspect, will continue

to a rise from this pronouncement and we will be interested in further explanation and evaluation from our witnesses on that topic

today.

There is plenty to be discussed in this oversight hearing. Both

the IG and the GAO are on the front lines as America’s postal

watchdogs, and they have proven to be valuable partners with the

Congress in reporting to us on a broad range of postal operations.

We look forward to their testimony today and our review of initiatives they have indicated to the Postal Service that they could undertake to improve its own performance.

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As both the IG and the GAO have found, the Postal Service requires significant attention to such areas as labor management relations, internal controls and revenue projections; and the subcommittee looks forward it hearing from them and from the Service

as to plans to develop innovative solutions to these long-standing

problems.

Furthermore, a troubling finding of the GAO is its negative assessment of the Postal Service’s efforts under the Government Performance and Results Act. The performance plans and reports that

are required under the act should allow Congress, postal managers

and the American public to easily determine how well the Postal

Service is improving its performance and achieving its goals. Unfortunately, it appears that the latest reports are not as clear and

understandable as they might be, and we look forward to discussing this important issue today.

Those are just a few of the topics that I suspect we will be venturing into. There may, in fact, probably will be others. Let me go

off script for a moment.

As I suspect the number of people here suggest, many of you are

aware that this will be our final oversight hearing in this Congress.

As I understand the rules, as I understand the vagaries of elections, it will probably be my last as chairman. I want to express

my deepest appreciation to all those who have been so helpful to

me.

Of course, Mr. Fattah here, the gentleman from Pennsylvania,

and his very active role in assisting us, along with our staffs, in

trying to undertake, I have to say, one of the more bipartisan efforts in committee in Congress, this very important challenge. It

has been a pleasure to all the subcommittee members on both

sides. I appreciate all of the help, all of the insights and hard work

that they have put together; to the Postmaster General, Bill Henderson and his successor, for putting up with me and my well-intended but nevertheless I suspect far too often misguided and misdirected efforts; and to the folks here at the panel.

I want to thank those of you in the audience, many of whom I

have gotten to know so very well over the past 6 years. I have said

repeatedly that I did not recognize the scope of what the Postal

Service means in America when Bill Clinger called me that first

day and asked me to take up this position. I am amazed at how

this network of sometimes very different organizations and interests works so well together, and even when there is disagreement,

the focus remains upon the critical nature of delivering our Nation’s mail to virtually every household in America.

It is a humbling experience, and I can only express in very inadequate words the admiration I have for the more than 800,000

postal workers in this Nation who deliver tens of millions of pieces

of mail each and every hour of each and every day to America. It

is something that most of us take for granted, because they have

done it so well for so long, but I would hope that would be an opinion and a perspective that in the future this subcommittee not

adopt, because it doesn’t just happen. It takes a lot of hard work

and a lot of cooperation, and we need to be productive players in

that.

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Last, and certainly not least, I want to express both my deepest

thanks and my highest admiration for the subcommittee staff

members, the folks who are seated here who really are remarkable

in their understanding and their dedication to this initiative. I understand that government employees, staff people, whether they be

here on the Hill or located in a bureaucracy, are often maligned,

and I think very unfairly so. But I have never in now nearly 30

years of public service been associated with a finer group of individuals.

I get into trouble if I start mentioning names, but I do want to

mention a few: Dan Blair, who was our first committee director,

who has now moved on to bigger and brighter things, he tells us,

over in the Senate. I am sure that that is true. Of course, Steve

Williams, who has moved on to better things. I saw Steve earlier

here today, who was so helpful in those early days.

We now have some folks who started with the subcommittee,

who have moved on, who may be in the room today: Ken John, who

went on to the GAO, Abby Hurowitz, who definitely took a demotion and came to work on my personal staff, but who remains such

a joy and a delight. We have Tom Sharkey, who was first a detailee

from GAO to the subcommittee and then from the IG to the subcommittee, and Loren Sciurba and Matthew Batt; and of course

Heea Vazirani-Fales, who has been with the subcommittee for so

many years, who brings a sense of focus to us; and Jane

Hatcherson and others who are here.

I save, in my humble opinion, the best for last. I really want to

thank the gentleman on my left, Robert Taub, who is now the director, and as my chief of staff is continuing to give me the opportunity to work with one of the brightest people I have met in my

life and one of the nicest guys I have met in my life.

These people, taken collectively, have given me invaluable insight and assistance at those times when I was too far off point— it was because I didn’t listen to them well enough; those times

when I came out looking fairly well, it is because I listened to them

very well. I want to thank them and all of you.

With that little trip of nostalgia, I would now be happy to yield

to the ranking member, the gentleman from Philadelphia, PA, for

any opening comments he might wish to make.

Mr. FATTAH. Thank you, Mr. Chairman.

Let me first indicate that I think that when the entire story is

written on postal reform, the gentleman from New York will have

been the impetus for reforming the Postal Service here in these

United States. Your work, even though you may not realize a result immediately, in the short-term future does set the context in

which this country will go forward in terms of trying to respond to

the set of uncertainties that exists in which the Postal Service has

to operate.

I want to commend you for your work. For those of us in the minority, we have never felt we were in the minority working with

you. We felt it was a partnership, and we want to thank you for

your leadership on these critical issues.

I do want to recognize many who are in the audience, but in particular, a Board of Governor member from my State of Pennsylvania, Ms. Daniels. I want to recognize her presence.

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I have a formal statement that I will enter into the record, but

it is obvious that the Postal Service has, as I think the Postmaster

General will lay out, a multiprong strategy to deal with the issues

that it confronts, cost containment and growing revenues and the

question of legislative reform. I don’t want to delay us from hearing

from the Postmaster General and from the other witnesses.

I will enter my statement for the record, and will be very interested to hear not just on the broader subjects that the Postmaster

General will outline, but also on an emerging new set of interests

and concerns relative to the FedEx discussions. And even though

there has been no formal material provided or, perhaps, even

agreed upon at the moment, this committee and its work will have

to be informed by those discussions as we go forward.

I would thank you, Mr. Chairman, and I will provide my formal

remarks for the record.

[The prepared statement of Hon. Chaka Fattah follows:]

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Mr. MCHUGH. I thank the gentleman for his kind comments and

the feelings are mutual.

We do have a request from two nonsubcommittee members, committee members who would like in; and the procedure we have followed in the past is to allow those folks, without objection, to have

an opportunity to pose questions after the subcommittee members

do. So we have Mr. Tierney from Massachusetts, and Mrs. Biggert

has also suggested that she would wish to drop by.

So I would ask that, as we have in the past, those two full committee members be extended that courtesy after the presentations

of our witnesses and the questioning by the regular members.

Without objection, so ordered.

With that, and all the niceties out of the way, let’s kick some

butt here. If you want to please rise, we will administer the oath.

[Witnesses sworn.]

Mr. MCHUGH. The record will show that all of the witnesses responded to the oath in the affirmative.

With that, as is our custom, I am happy to yield to the Postmaster General of the United States, Mr. William Henderson, for

his testimony. Thank you for being with us.

STATEMENT OF WILLIAM J. HENDERSON, POSTMASTER GENERAL AND CHIEF EXECUTIVE OFFICER, U.S. POSTAL SERVICE

Mr. HENDERSON. Thank you, Mr. Chairman. I won’t read my testimony to you. I will ask that it be introduced for the record.

But I would like to say that I appreciate your leadership. I think

you have started a dialog on reform. Whether it is concluded this

year or not, I think you will be credited with the vision that could

have saved the Postal Service if it doesn’t wait until a crisis occurs.

I agree with your assessment that these are troubling times. Affordability becomes more and more difficult as revenues soften, and

affordability is the cornerstone of the Postal Service. Growth, just

in this accounting period alone, which at the conclusion of the fiscal

year was flat—there is no growth over last year. We estimate that

we will miss the revenue plan by as much as $790 million under

plan in revenue this fiscal year.

We are having to adjust our plans for the next fiscal year because of this softening in growth.

So the problem exists today, and the solutions of raising prices

are just killing off the market. So we have to figure out something

else to do, and that something else, I believe, starts with postal reform.

So I appreciate your leadership in that and I look forward to

working with you as this Congress winds down.

[The prepared statement of Mr. Henderson follows:]

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Mr. MCHUGH. Thank you very much, Bill. I appreciate your brevity. That will give us more time for discussion afterwards.

We move to the Inspector General, Ms. Corcoran.

STATEMENT OF KARLA W. CORCORAN, INSPECTOR GENERAL,

U.S. POSTAL SERVICE, ACCOMPANIED BY COLLEEN

McANTEE, ACTING ASSISTANT INSPECTOR GENERAL FOR

AUDIT

Ms. CORCORAN. Good afternoon, Chairman McHugh and members of the subcommittee. I appreciate this opportunity to discuss

the accomplishments of the Office of Inspector General. Joining me

today is Colleen McAntee, the Acting Assistant Inspector General

for Audit. With your permission, I would like to submit my long

statement for the record.

Mr. MCHUGH. Long. It was complete. I read it.

Without objection, so ordered.

Ms. CORCORAN. The Postal Service is challenged now more than

ever to maintain its reputation for reliability. Although it faced

challenges this year, the Postal Service also had many notable

achievements, such as the Year 2000 Initiative. My office has identified over one quarter of a billion dollars in savings this year. In

addition, our investigations have yielded 26 arrests, 11 indictments, 3 convictions, approximately $10 million in recoveries, and

35 contractor suspensions and debarments.

My testimony today will highlight work we have done over the

past year to help the Postal Service meet what we believe to be its

major challenges. We have examined relocation benefits paid to

postal executives. Our first audit questioned whether the moves

were in the best interests of the Postal Service.

Our second review questioned why the amount of miscellaneous

expenses paid to executives was up to five times higher than those

paid by comparable private companies.

In both reviews we questioned whether these relocation payments were used to augment the statutory pay cap.

We reviewed the external first-class mail measurement system.

We found customers were not fully informed that on-time delivery

scores did not measure postal-wide performance.

We investigated a major telecommunications contractor. Our investigation resulted in the Postal Service recovering $12.2 million

in mischarges and avoiding up to $96 million in additional costs

over the remaining life of the contract. We also identified $36 million in questioned contract costs with the assistance of a contract

audit agency.

In a joint investigation, we found two postal managers were able

to defraud the Postal Service of $3.2 million.

We reviewed the budget formulation process and found that it

was difficult for the Postal Service to manage its program costs because accounting records only reflect expenses after they are paid

at the program level.

Now I would like to turn to the important issue of labor-management relations. We were pleased that the Califano study referenced

much of our work. We have continued the work that we discussed

with you last year concerning postal implementation of the violence

prevention and response programs by looking at the program in 26

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district offices. In the area of workplace safety, we issued our first

video report, which allowed postal management and the Governors

to see firsthand the conditions of the facility.

Enhancing whistleblower protections within the Postal Service

has been of interest to you, Mr. Chairman. The Postmaster General

recently agreed with me that the protections provided by the Whistleblower Protection Act should be adopted in the Postal Service as

a matter of policy.

In the area of technology, we salute the Postal Service’s efforts

to automate its processes. We believe this is a direction the Postal

Service needs to go in the 21st century. Our reviews have been directed toward assuring that postal management has accurate and

reliable information to base their decisions on technology investments. While the benefits of technology are enormous, proper computer security safeguards are extremely important.

In recent e-commerce testimony, we cautioned that the Postal

Service needs to address lessons learned from more traditional programs, such as contracting, which could also affect the e-commerce

area. We are working with the Postal Service to ensure that the

OIG has appropriate access to information while recognizing the

need for confidentiality.

As you know, our enabling legislation requires us to conduct

oversight of the Inspection Service. One of the initiatives successfully completed this year was the revised designation of functions

that generally provides that OIG will perform all audits and procurement fraud investigations within the Postal Service.

Now I would like to update the subcommittee on my office’s

progress.

We have worked to educate postal managers and other stakeholders about our mission and the importance of our independence

in carrying out that mission. Therefore, we reacted quickly when

changes were proposed by the General Accounting Office that challenged our independence. We voiced our concerns, and I am pleased

to report that the Comptroller General recently advised me our office would continue to be viewed as organizationally independent.

Mr. Chairman, we are extremely proud of the diverse talent,

skills and professional experience of our staff. Of the 660 individuals on board as of today, 50 percent are women and 48 percent

are minority.

Mr. Chairman and Mr. Fattah, I would like to thank you for your

support in establishing this office. I would also like to thank you

and the Governors for recognizing the continued benefits of our

work. The approval of our fiscal year 2001 budget will help increase our visibility to Postal Service stakeholders.

In closing, I would like to thank you for this opportunity to testify before the subcommittee. We will continue to assist the Postal

Service, the Governors, and Congress by providing accurate information to help you make important decisions.

This concludes my statement.

Mr. MCHUGH. Thank you very much, Mrs. Corcoran. We appreciate it and appreciate all your work as well.

[The prepared statement of Ms. Corcoran follows:]

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Mr. MCHUGH. Finally, and certainly not least, Mr. Bernard

Ungar, Director of Government Business Operations Issues for the

General Accounting Office.

Let me say a special thanks to you and to the GAO for being so

responsive to our many requests, issued by both sides here, to try

to assist us in understanding the issues and the challenges that

face the Postal Service. You have been a tremendously supportive

coplayer in this process, and we are deeply appreciative for that.

With that, Mr. Ungar, our attention is yours.

STATEMENT OF BERNARD L. UNGAR, DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES, ACCOMPANIED BY

TERESA ANDERSON AND GERALD BARNES, ASSISTANT DIRECTORS, GENERAL GOVERNMENT DIVISION, GENERAL ACCOUNTING OFFICE

Mr. UNGAR. Thank you, Mr. Chairman, for those kind words, and

members of the subcommittee. We are certainly appreciative of

being here today to assist the subcommittee in its oversight efforts

with respect to the Postal Service.

As the Inspector General and Postmaster General did, I too

would like to submit a formal statement for the record and summarize our statement.

Before I do that, I would like to mention I am accompanied by

Teresa Anderson and Gerald Barnes, Assistant Directors in our

General Government Division, who have worked on postal matters

for longer than I have, so they are quite in tune on those issues.

In brief, over the last 5 years, the Postal Service’s performance

has certainly had a number of quite positive aspects to it in terms

of profits that it had not heretofore made, delivery performance,

and high rankings of customer satisfaction. These are certainly

noteworthy achievements.

As the Postmaster General indicated, on the other hand, all the

news is not good. Mail volume and mail revenues have not grown

as much as expected and costs have increased more than expected.

This obviously has put the Postal Service into a very uncertain situation.

The Postal Service’s most recent strategic plan paints a more

pessimistic scenario in terms of the volume or expected volume

growth and revenue growth than the picture that it presented to

us last year and that we presented to the subcommittee last year.

While the future is certainly difficult to predict and it is very difficult to say what exactly is going to take place, that does not mean

that the Postal Service or the subcommittee should sit by and let

events take shape without aggressive and innovative interaction.

With that, I would like to show a graphic that we have distributed in advance that shows what the dilemma is with respect to

first class mail volume. If first class mail volume does not grow as

expected, or it grows less than expected or doesn’t grow at all, it

presents a real predicament for the Postal Service. I think this

graphic shows why.

[The information referred to follows:]

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Mr. UNGAR. Looking at first class mail volume, it constitutes 51

percent of the volume, 58 percent of the revenue, but contributes

two-thirds of the overhead costs. These overhead costs in the short

term generally do not vary with volume; over the long term they

could.

Thus, if first class volume goes down or doesn’t grow very much,

the Postal Service is going to have a difficult time trying to capture

the funds to cover the overhead, and over time is certainly going

to have to look at the price structure, look at service, or a combination thereof.

This certainly raises the question that H.R. 22 has addressed,

and other folks have addressed; and that is, what kind of organization does the Congress want the Postal Service to be in the future?

What kind of flexibility should it have, what kind of constraints

should it operate under, what kind of rules and regulations should

it be subject to? This is certainly a question with the Federal Express announcement that was made earlier. That is really what we

see as the key policy issue facing this Congress and probably the

next Congress and maybe the one after that.

In the oversight area, there are three issues that I would just

like to briefly summarize. They are closely related to the public policy issues.

The first issue has to do with the Postal Service’s progress in improving productivity and cutting costs, certainly a very important

area. Here, for example, we are encouraged by the growth in productivity that the Postal Service expected this last year, 2.2 percent. This is very positive encouragement considering it has not improved productivity in recent years; in fact, productivity declined in

a number of years before this year.

It is also encouraging that the Postal Service has embarked on

a series of cost-cutting initiatives, including breakthrough productivity. We think it is very important for the subcommittee to ask

the Postal Service about these particular measures—what are they,

when are they going to take place and what kind of progress is

being made?

The second area relates closely to an area that the Inspector

General mentioned as well, the human capital area. There are

three specific elements to that we would like to highlight.

One is the long-standing problem the Postal Service has faced in

the labor-management relations area. We are encouraged some

progress has been made, but there is still a long way to go in that

area.

There are a large number of grievances the Postal Service has

to deal with, as recently reported by the Violence Commission.

While these are certainly important to the work force, they also detract from the main mission of delivering the mail, and certainly

absorb a substantial amount of costs, which have been estimated

at over $200 million a year, to deal with.

The question here is, do the postal unions, the management associations, and the Postal Service itself share the same sense of urgency that labor relations have to be improved, have to be worked

on, so that the Postal Service and its stakeholders can get on with

the business of addressing the major challenges that the Service

faces?

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Also, the Postmaster General recently said that a very large percentage of the Postal Service’s executives are over the age of 50,

and succession planning is a very key ingredient in the future of

the Postal Service. It is going to be important for the subcommittee

to oversee the Service’s efforts to deal with this issue, as well as

assure that its diversity goals are achieved at the same time.

Finally, the last issue that I would like to briefly mention has to

do with the reliability and the credibility of the information—performance information—that the Postal Service has been reporting.

Today, we issued to you, to this subcommittee, our report on enhancements needed in the Postal Service’s Results Act efforts.

Here, as well as in the recent effort that we did for this subcommittee and the Senate Subcommittee on Electronic Commerce,

we were distressed to see that some of the information that the

Service had been reporting in terms of its financial performance

was unreliable and not credible, and some of the information that

had been reported on its overall performance in its 1999 performance report was, in our view, quite misleading.

We are pleased that the Postal Service has recognized that these

are areas that need to be improved and has promised prompt and

swift corrective action.

That concludes my summary, Mr. Chairman.

I would also like to, as others have done, thank you personally

and the rest of this subcommittee for the support that you have

shown for GAO, particularly in those years when we were going

through some fairly challenging budget reductions. We certainly

appreciate your support then and your continuing support.

[The prepared statement of Mr. Ungar follows:]

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Mr. MCHUGH. Our pleasure. Thank you.

As a lifelong New York Giant fan, I immensely enjoyed the performance last night at FedEx Field. But speaking of FedEx, Mr.

Postmaster General, it is no secret that your discussions with Federal Express have gained some attention. As I understand it, it was

not your intention to make any announcement at the time the

media came upon and reported your discussions, but nevertheless,

we have a new reality there where a lot of questions have been

raised.

In short, what can you tell us about that alliance as it is being

called?

Mr. HENDERSON. We, for the record, did not announce a strategic

alliance with Federal Express. The discussions were leaked to the

media and we decided, Fred and I, rather than to have no comment, that we would actually comment on what we were discussing.

The cornerstone of our discussion revolves around the use of Federal Express’s air transportation network, which is not something

new to the Postal Service. We today use Emery Air, a subsidiary

of CNF, so we are just in discussions with them talking about the

possibility of using their air transportation network, which is the

finest and most extensive in this country.

As a part of that discussion, we have had discussions with RPS,

which is now FedEx ground service, for several years, about the

possibility of using a drop-ship rate that exists in the current rate

structure for residential delivery of packages. We have continued

that discussion with FedEx ground service, and again, that is not

something new. It is something that has been ongoing.

The new part is that we did talk to Federal Express about the

possibility of selling retail in post offices, allowing post offices to

sell FedEx products, and also in the return business to pick up

FedEx products if those who use that merchandise want to return

it, with the exposure of e-commerce that we would use our residential America delivery network to return those to Federal Express.

These are all just topics that we are discussing. We have reached

no agreements yet. We would like to do this in the framework of

a strategic alliance. There is no exclusivity involved in this. Anyone

who wants to come to the table and talk is welcome to come to the

table. We are talking of a similar arrangement to what we have

with DHL.

Mr. MCHUGH. On the exclusivity question, you may be aware, for

example, that Judiciary Chairman Hyde has written the Justice

Department asking them to look at and report back on possible

antitrust concerns that evolve out of this proposal. I suspect that

is a little hard to do, having no details, but the concept and the

question itself, I think, is central to many of the concerns, understandably, that have been expressed.

Did you—let me back up. Obviously, I and others, I assume, like

Senator Daschle, who has endorsed H.R. 22, believe that the Postal

Service in its unique position is pretty well free of antitrust requirements. That is why we put in H.R. 22 provisions very specifically that would subject the Postal Service to antitrust requirements as they apply to the private sector.

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But, nevertheless, did you or anyone in the Postal Service discuss

antitrust or legality questions with the Justice Department prior to

entering the discussions, or did you intend to do that upon completion of the framework?

Mr. HENDERSON. We intended to go to the Justice Department

when we reached an agreement. And independent of that, our general counsel looked at the concept; even though there is no concrete

agreement, looked at the concept and concluded with the help of

independent counsel that there was no antitrust issue here.

Mr. MCHUGH. You do have strategic alliance guidelines that

frankly evolved out of, I believe, in part, the recognition that the

General thought the antitrust provisions do not apply, but there

had to be some framework and guidelines by which you could enter

these.

Was this agreement—and it is hard to say, because it is not complete, but are you putting it together in a way that is consistent

with those strategic alliance guidelines; or how are you approaching that?

Mr. HENDERSON. That is our proposal to Federal Express, that

we follow those guidelines, similar to the ones that were tested in

court earlier, a couple of years ago. But I don’t have a response

from Federal Express.

Mr. MCHUGH. I guess the answer was, you will, but you haven’t,

because you are not done?

Mr. HENDERSON. Right.

Mr. MCHUGH. OK. I am going to step out of normal course here,

because this is an issue that is of concern to other members. I

would yield to other members of the subcommittee at this time if

they have a question they would like to pose now. They can certainly pose it on their own time, but now, in this regard.

No members down here? However you want to do it. I don’t want

to get bad feelings on the last day.

Mr. FATTAH. Well, two things. This is housekeeping. I have an

opening statement from Congressman Tierney that I would like to

have placed in the record.

Mr. MCHUGH. Without objection, that will be entered in its entirety.

[The prepared statement of Mr. Tierney follows:]

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Mr. FATTAH. I would like to reference Chairman Hyde’s letter

and ask that it be entered into the record, because I think the

chairman’s letter indicated that it was his opinion that the Postal

Service would not be encumbered by antitrust laws, presently,

under its configuration. That is how I remember the letter, at least.

If we could agree it would be entered into the record—— Mr. MCHUGH. We agree on both points. I do think that was the

chairman’s position—however, he was asking for formal review— and it will be entered without objection into the record.

[The information referred to follows:]

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Mr. FATTAH. Now, the Postmaster General.

These discussions that you are having with Federal Express, you

say, do not have any exclusivity associated with them. You have

had discussions with others or are willing to entertain discussions

with others vis-a-vis what you see as the viability and the profitability of strategic alliances with entities that may have a capacity

similar to Federal Express, like UPS or others; is that correct?

Mr. HENDERSON. That is correct. Yes, we have had—off and on,

over the years, we have kept in contact with people like UPS and

Federal Express and have had informal discussions about a whole

range of topics. So, actually, I had started this conversation with

Federal Express some time ago, and it kind of lay dormant for a

while; and suddenly we were both interested in it, and we put

teams together.

But we are open to discuss with anybody. There is no exclusivity

here.

Mr. FATTAH. I think that is an important point. Also, I would

imagine it is difficult to have these kinds of discussions, however,

in the context of a congressional hearing.

Mr. HENDERSON. It is a little awkward.

Mr. FATTAH. But I think that you can understand the general

concern that has been raised when such an alliance between the

Postal Service and Federal Express is at least broached in the

media. It suggests to the people perhaps that there would be some

concern.

But I think that you should be taken at your word that the Postal Service is looking for partnerships among and between any number of different entities to the degree that it helps you meet your

goals.

So I want to yield at this time, Mr. Chairman, and revisit this

as we go forward.

Mr. MCHUGH. Mr. LaTourette.

Mr. LATOURETTE. Thank you, Mr. Chairman. I appreciate your

courtesy so we can talk about this issue all at one time. Something

I didn’t get to say at the beginning of the hearing is when we were

doing the Contract with America and we Republicans thought up

term limits for subcommittee chairmen and chairmen, it was a

good campaign issue, but in practice it hasn’t turned out to be so

good.

I would say that the reason I volunteered for this subcommittee

the last two Congresses has been your leadership, and although I

apologize to you for being a burr under your saddle from time to

time, I have done nothing but benefit from your guidance; and even

when chastised by you, I know it has been in a way to make me

a better Member of Congress, and I appreciate your kindness.

Thank you.

Mr. Postmaster General, I have some questions, too. I guess it

came as a little bit of a surprise to me. I understand, now that you

have described it, but I read about it in the newspapers, and I suppose other Members did. And the reason it came as a surprise is,

during our August recess the Postal Service in Cleveland was kind

enough to have us all in for a congressional briefing to tell us what

was going on with the Postal Service, and I don’t remember this

specifically being on the list.

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But as I heard you respond to the chairman, apparently not only

general counsel but an independent counsel has looked at the issue

of exclusivity. I understand that.

Let me ask you this: Does the information you have received

back from general counsel and the independent counsel spell out

what law, regulation or other authority exists for the Postal Service

to enter into such an agreement?

Mr. HENDERSON. I don’t know that off the top of my head, but

I will be glad to provide it to you.

Mr. LATOURETTE. If you could provide that for the subcommittee,

I would appreciate that.

Aside from exclusivity, I come to this a little bit as an old county

official, and not just exclusive contracts, but noncompetitively bid

contracts.

Are you of the opinion that the Postal Service, to enter into a

strategic alliance, does not have to come up with an idea; that is,

we want someone to do—we are going to take your stuff the last

mile and use your air service. Are you of the opinion they don’t

have to bid that service, you can enter into these discussions?

Mr. HENDERSON. The last mile, there is really no way to bid that.

We have a rate that anyone can use today to drop packages at a

post office, and we will deliver them the last mile, whether they are

FedEx or UPS or DHL. In fact, we do have DHL packages today.

Mr. LATOURETTE. To enter into such a strategic alliance, however, is there any belief that this has to be bid, that you have to

come up with a proposal and then bid, that this is the service or

the deal you want to enter into with somebody and have somebody

come back with the lowest and best price?

Or doesn’t that apply to the Postal Service?

Mr. HENDERSON. No, entering into a strategic alliance does not

have to be put out for open bid, no.

Mr. LATOURETTE. OK. And I understand that there are discussions, but can you sort of spell out for the subcommittee where you

think it is going to go from here? By that I mean, not are you going

to make a deal or not, but say you reach a deal. What review and

approval processes for this proposed strategic alliance is this deal

going to be subjected to before it is finalized, and everybody signs

off on it?

Mr. HENDERSON. Well, obviously it would come to the management committee of the Postal Service. I am not personally negotiating the arrangement with Fred Smith. Then, following that, I have

made a commitment I would take it to the board of Governors for

approval.

Mr. LATOURETTE. OK. And you mentioned Emery in your remarks as well. I am aware of not only the agreement that the Postal Service has with Emery, but also there apparently was a difficulty recently with negotiated amounts in terms of what Emery

thought it was going to undertake on behalf of the Postal Service,

and they thought they needed more money for—not only the regulation, but the volume that the Postal Service was providing. The

agreement was renegotiated; that it is the subject of litigation.

That is an accurate statement, right?

Mr. HENDERSON. The litigation has concluded. They filed a lawsuit. ‘‘they,’’ being Emery, filed a lawsuit to terminate the contract,

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and a judge ruled that they could not terminate the contract, and

we are back in negotiations with Emery. The crux of the issue with

Emery is the fact that we planned and budgeted on one rate, and

their costs were simply higher. And so we feel their costs are too

high, and we are going to mutually agree to a way to get out of

an arrangement with one another.

Mr. LATOURETTE. I had understood the judge had granted summary judgment and basically said that the Postal Service had until

a date certain, October 12, if I remember right, to come back and

comply with the agreement, found you out of compliance with the

agreement. I am wrong in that?

Mr. HENDERSON. Well, the subject of the lawsuit was to terminate the agreement. The judge said that Emery could not just terminate the agreement. He asked us to go back to an interim rate

which we used at one point when we felt that Emery really did

have some costs—that we wanted to have a win-win situation, we

didn’t want a win-lose situation. That is not the way you audit.

But we did an audit of Emery and we found some cost discrepancies; and we asked the IG to do a complete audit, and we told

Emery that as soon as that audit is completed that we will settle

whatever obligations we both have.

Mr. LATOURETTE. And the strategic alliance or the agreement

you have with Emery is smaller in scope than what is being discussed with FedEx, though; is that accurate?

Mr. HENDERSON. It is a different type of arrangement—parts of

it are similar. The air transportation piece is similar. There is no

plan to have FedEx do distribution as Emery does today. That is

contracted out. So it is just a different arrangement in its totality,

than Emery. But as I say, the cornerstone is air transportation for

both Emery and for Federal Express strategic alliances.

Mr. LATOURETTE. The last question I have, and again I thank

the chairman, if I understand your discussions with FedEx ground

and the sale of FedEx packages and the return of things ordered

over e-commerce through FedEx, are you contemplating that there

would be a FedEx box, delivery box, parcel drop-off box, located in

the lobby or somewhere within the physical confines of the U.S.

post offices in this country? Is that in the scope of your discussions?

Mr. HENDERSON. That is a subject they are discussing with us

that we haven’t agreed to.

Mr. LATOURETTE. I would be interested in your feeling about

that. I understand you have not agreed to it, but how do you feel

about that?

Mr. HENDERSON. Well, I would not want a box in the lobby to

be perceived by our employees as a complete threat, and it would

depend on how much money we can make off of something like

that. We are very open to having Federal Express or UPS or anybody else at our counters.

The devil is in the details. How much money can we make off

of it?

Mr. LATOURETTE. But, again, the advice you received from general counsel or independent counsel or from whomever you rely on

for legal advice is, you could reach a strategic alliance that would

allow FedEx, for payment, to put their positions in the lobbies of

post offices across the country, and no one else’s, unless there was

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a similar agreement in place, unless you reached a deal with somebody else to do the same thing.

Mr. HENDERSON. Right. If we don’t reach a deal, we won’t be able

to do it.

Yes, we feel we have the right to sell whatever we want to sell,

within reason. We are not selling packaged meat products and

things like that, but a strategic alliance is certainly something that

we would look at as another source for revenue. We are very much

interested in improving our revenue picture. That is an obligation

we have as management, and we think this is an interesting way

to do it.

Mr. LATOURETTE. Thank you very much.

Thank you, Mr. Chairman.

Mr. MCHUGH. I thank the gentleman. I didn’t know he was trying to be a burr under the saddle. I thought he was trying to help

me strive toward excellence. I appreciated his untiring efforts in

that regard.

Let me go back to revenues, because—I am sorry, Mr. Davis from

Illinois. I did not see any indication earlier.

My apology, sir. I am happy to yield to you.

Mr. DAVIS. Thank you very much, Mr. Chairman. I want to

thank you for yielding. I also want to share the compliments that

have been made relative to the manner in which you have conducted the affairs of the committee. I too feel like Ranking Member

Fattah, that you have made this side feel much less like a minority

and more of a partner, and we certainly appreciate that.

I also want to compliment you, Mr. Henderson, and your colleagues, on keeping the Postal Service in the black, moving ahead,

although there are changes in the business climate and certainly

changes in technology.

I appreciate the fact that we have the opportunity to discuss the

FedEx question right now. Obviously it is a great concern of mine,

as well as it is a great concern to some of its competitors. People

like United Parcel, who are constituents of mine, in a real way

have some serious concerns in terms of not knowing what the details are going to be and having some feeling that there might end

up being some disadvantage at which they are placed; and we certainly do not want to see that happen.

As I understand it, FedEx provides very specific delivery and

money back guarantees on both its air and its home delivery service. The Postal Service’s delivery and refund guarantees are much

more limited. How are these differences going to be resolved in the

context of shipments that originate in one place or on one network,

and then terminate on the other?

Have you gotten into any discussions, do you have ideas about

that?

Mr. HENDERSON. We are not commingling the products. We, at

this point, don’t have any cobranded products, so FedEx will operate the way it normally does, and we will likewise operate the way

we normally do.

Mr. DAVIS. Are you saying there would not be instances where

there would be joint movement, or where there would be movement

at one level part of the way and movement at the other level by

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a different entity, the Postal Service in one instance and FedEx in

another?

Mr. HENDERSON. FedEx, it is my understanding—and I don’t like

to answer questions for Federal Express; that is not really what I

do—but Federal Express does not intend to share their product,

transportation or delivery of overnight packages with us. That is

their core business; that is completely separate.

They have talked about using our drop-ship rate at the Destination Delivery Unit [DUI], which is open to anyone, and that discussion began before FedEx bought RPS. That has been ongoing for

a long time. The only thing that we would do in that instance

would be if it is their decision, we would be delivering the last mile,

so to speak, to the residents.

Other than that, the only relationship would be the air transportation of U.S. Postal Service products, much like Emery does today,

we would lease their planes for a per-pound rate. Just as a matter

of information, we do that with UPS today at Christmastime. We

will lease planes that are available.

I mean, that is how the deal works, and it would be constituted

under a strategic alliance like we did with DHL.

Mr. DAVIS. It is also my understanding that it is generally the

case that the Postal Service requires payment up front of postage

before it processes and delivers mail. Is that the general policy that

would be applied to FedEx shipments that are handed off to the

post office for final delivery?

I am saying the Postal Service, you generally pay first, and then

you get the service. Is that going to be the arrangement with

FedEx?

Mr. HENDERSON. Well, to the degree that we can, it would probably be some sort of electronic manifesting to tell us how much

money they owe us. We haven’t worked out the details yet.

But the DDU rate is available today, and right off the top of my

head, I am not sure how the customers actually reimburse us for

the postage. But it would be a similar guideline for Federal Express. We both have corporate accounts, so all the money isn’t paid

up front. You have a corporate account where the Postal Service— for example, on Express Mail, for which we can bill you for the

postage.

Mr. DAVIS. I have also been trying to figure out in my own mind

and determine how much difference there is between a strategic alliance and a contract.

Mr. HENDERSON. Well, a strategic alliance is a little broader. A

contract is a fiduciary document that agrees on price; a strategic

alliance, you continue to have discussions about where you can

have synergy, where you can build off of other folks—off your infrastructure. It is just a broader arrangement.

It is not like a vendor-supplier arrangement. It is a better way,

in my opinion, to do business, because you have an ongoing relationship. It is not just about money and service.

Mr. DAVIS. So you maintain that relationship. Does that ongoing

relationship in any way preclude—it is almost like being married,

I guess, in a way.

Mr. HENDERSON. A little like polygamy. More than one wife in

a marriage.

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Mr. DAVIS. I mean, but you are precluded from having that same

relationship with other entities?

Mr. HENDERSON. No, we are not precluding anyone. If you are

talking about UPS, we are happy to talk to UPS. The phone is silent, though.

Mr. DAVIS. So—— Mr. HENDERSON. I can’t get them to go out on a date, much less

marry them.

Mr. DAVIS. I am not really a promoter of polygamy, but I would

think in this instance that it certainly gives me a different level of

feeling and assurance that we are not talking about closing the

door, that we are talking about other approaches to doing business,

but letting the door remain open to competition and opportunity for

others to come in.

Mr. HENDERSON. That is correct.

Mr. DAVIS. Thank you very much.

I have got some other questions, Mr. Chairman, if we get to

them, fine. If not, I certainly want to submit those and ask that

we get written responses to them.

Mr. MCHUGH. Well, if they are as creative as in your last round,

we are looking forward to them.

Back to numbers, and as a personal closure remark or remark

of closure on this issue for the moment, obviously this is of great

interest to this subcommittee, and I think it is fair to say, through

many sectors of government and the private sector as to how this

is going to play out. We are looking forward to working with you

as it unfolds further.

Back to numbers: It was in this subcommittee room about a year

ago that we talked about potential revenue losses to the Postal

Service deriving from a variety of sources, not the least of which

was diversion of first class mail to the Internet. The figure that

was used as the extreme was $17 billion potential losses. Some

scoffed at that.

In my opinion, some folks who theretofore showed a great deal

of knowledge about the issue lost a lot of credibility in suggesting

that there was virtually no threat at all. I have never wanted to

be more wrong about a question in my life than the fears that I

have expressed repeatedly about the potential revenue losses to the

Postal Service that, sad to say, we see accruing already.

Mr. Ungar, in your written comments, you cited a couple of figures and examples. You talked about 880 million Social Security

checks, tax refunds and other payments normally sent by the

Treasury Department that in 1998, 68 percent of that total were

sent electronically rather than mailed, and the calculation is $180

million in lost first class mail revenue in that one segment alone.

You then go and discuss a figure supplied, as I understand it by

the American Bankers Association, where banks through a concerted effort, and understandably from their business practices perspective, had reduced their mail volume in 1999 by nearly 18 percent compared to just 2 years the previous, their 1996 levels.

My first question, because I didn’t see it and I would be interested, do you have a dollar figure for lost revenues that that 18

percent represents as compared to the $180 million on the Treasury mailings?

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Mr. UNGAR. No, Mr. Chairman, we do not have that.

Mr. MCHUGH. Mr. Henderson, are you familiar with that figure?

Would you have any idea?

Mr. HENDERSON. Would you repeat the question?

Mr. MCHUGH. Yes, sir. The American Bankers Association has

reported that in 1998, versus 1996, they had reduced their mailings

by first class by 18 percent. I was just curious, how much money

does that mean that you, the Postal Service, have lost because they

are no longer putting that 18 percent in the mail?

Mr. HENDERSON. They estimate—and I will make this more accurate if my memory is incorrect—about 1 percent of first class mail

has been marauded as a result of—I wouldn’t call that electronic

diversion, but it is changing the business model out there where

banks are consolidating.

There are 30 percent fewer banks today than there were in 1990

as a result of bank consolidations. So those two, combined, have

had a very slowing impact on the growth of first class mail. You

can see, as I said earlier, the growth right now is about 1.3 percent,

and it is flat in the last part of the year.

So there is an impact. It is hard to quantify, to reach in there,

because we don’t have any measure of that. We have a measure,

when I say that, of what bills and payments are doing other than

by sampling. We are doing the household diary this fall again,

where we measure households across the United States. We use

that for ratemaking information, and we will get an indication on

how much electronic diversion from that survey exists out there.

Mr. MCHUGH. Well, back to Mr. Ungar—I appreciate your comments—is there any reason to expect that that 18 percent by the

banks, or that 64—or 68 percent, I guess it was—that were electronically mailed, is the high watermark or is the low watermark?

It seems to me intuitively, banks are going to try to reduce that

figure more, that both from the perspective of the Treasury service

what they would like to see happen, as well as how more and more

of their recipients, customers, are going to want to have electronic

transfer, that that figure is going to grow.

This is the beginning, rather than the end. Is that a fair statement?

Mr. UNGAR. Yes, Mr. Chairman, I think it probably is a fair

statement.

As you are probably aware, there is legislation Federal Government-wide that requires Federal agencies to go more and more

electronic in the next several years. So that is certainly going to

have a large impact.

In the private sector, I am sure that cost-cutting and efficiency

are certainly things that many companies are interested in and

that they will certainly pursue; and with greater and greater use

of the Internet and more and more competitors out there, wanting

and encouraging people to do transactions electronically and pay

bills electronically, it is probably going to rise rather than fall.

Exactly where this is going to all end up is a little unclear, but

it certainly doesn’t appear to be the low mark.

Mr. MCHUGH. Last year I asked you, as I recall, you took the $17

billion figure at, relatively, face value, that that is what the Postal

Service suggested could be their ultimate, extreme revenue loss;

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and as I recall, you said, well, we didn’t verify that, but have no

reason to suspect that it is particularly out of line either.

Mr. UNGAR. One point of clarification. We didn’t directly deal with the $17 billion. We were addressing the potential or expected

decline in volume. I think it was the Postal Service or another organization that really entered into the picture the $17 billion. But

it was clear that mail volume was expected to go down and that

would translate into some revenue shortfall.

Mr. MCHUGH. You are right. I stand corrected. But it was a reasonable step from mail volume to revenues when you are dealing

with first class.

Bill, you spoke about, I believe the figure you stated was a $790

million loss from your fiscal plan for this year?

Mr. HENDERSON. Yes, that is correct.

Mr. MCHUGH. That puts you how much in the hole?

Mr. HENDERSON. Probably in the neighborhood of $100 to $200

million. That is very close on $65 billion in revenue—it could swing

either way, but we are pretty sure there is going to be a net loss

this year.

I will just give you some numbers. If $790 million is what we

missed our plan by in revenue, the growth is down to about 1.3

percent in first class mail.

On the expense side, the gasoline prices, which most surcharge

for—we couldn’t because we had this elongated rate process—that

is going to be about $350 million in surcharges or in higher gasoline prices. Workers’ Comp has gone up another couple of hundred

million dollars.

So we could have ended this year with over $1.5 billion in the

hole. Fortunately, we sensed that in time, and we have cut costs

over $1 billion. So getting down as low as a $100 million to $250

million loss was a Herculean effort that the Postal Service accomplished at all levels, especially in the field.

Mr. MCHUGH. Let’s talk about what the next step is.

All of us, certainly those people in my district, we measure trips

not in miles but by hours, and we hope very dearly that gasoline

prices will stabilize. So let’s—I don’t know if you can do this, but

for the moment let’s take it out of that equation.

You have other realities, it seems to me, that probably aren’t

going to go away in the short term. Mail volumes I expect will continue on their current trend, if not become more drastic, and other

costs where you have now squeezed quite a bit out.

How are you approaching your fiscal plan for next year? What

are you looking at and how do you plan to accommodate it?

Mr. HENDERSON. It is going to be very difficult to break even

next year, given the unanticipated costs we have and the softening

of the revenue. We haven’t included that and taken it to the Governors. We are trying to figure out a way through cost-cutting to

at least break even, but right now it is dim, from my perspective,

looking at all the cuts we have already made, the administrative

cuts that we plan, the productivity numbers.

We have the highest productivity this year that we have had in nearly a decade, and to have a $100 million loss or $200 million

loss with that kind of productivity tells you the kind of pressure

that the U.S. Postal Service is being placed under.

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Mr. MCHUGH. Mr. Ungar, can you give my friend, the Postmaster General, any reason for optimism, or do you pretty much

concur with the things he is seeing?

Mr. UNGAR. Mr. Chairman, I think we pretty much concur. I

think there are going to be additional pressures.

We know, for example, and certainly Mr. Henderson knows, that

negotiations are currently going on with three of the unions. It is

probably unlikely that wages will go down. We know that retirement costs are going up, health care costs are also going up. So it

doesn’t look too encouraging.

It is a positive note, though, that the Service has announced a

breakthrough productivity initiative and has recognized it really is

going to have to focus on cost-cutting and productivity in order to

assure that it can remain affordable and carry out its mission.

Mr. MCHUGH. Cost-cutting, productivity, do you agree that is

pretty much—I mean, there are rates.

Mr. HENDERSON. That is right. If we were a private business, you

can’t live forever off of cost-cutting, and that is how we have lived

in the last couple of years. At some point in time, I will be the first

to admit there is always opportunity for cost-cutting, but you have

to, in order to be viable, be in a business that grows.

As we have said earlier, we view ourselves as a wholly owned

government business. We are a business. We have a profit and loss

use just like a private company has, and we have a market worth

just like anybody else would, and that asset is going to dwindle, in

my opinion, unless we have some sort of substantive postal reform.

When I go to meet with foreign postal administrations, they are

dumbstruck over the fact that the United States, which is the leader in most every area in the world, for some reason is blind to the

requirement of postal reform. The Germans will go private in November, as an example. You talk about alliances, FedEx just announced an alliance with la Poste, the French postal service. Deutsche Poste is buying over 70 percent of DHL; and TPG, the Dutch,

they own TNT. So the whole world is changing, and we sit on a

30-year-old structure, and it makes it very difficult for us to operate in this environment.

Mr. MCHUGH. I commend you on this year’s—and I commend the

workers particularly—on this year’s productivity increases.

I have to wonder, given the structure of your business, how much

you can rely upon productivity increases to fill this gap? Even

under the most rosy of scenarios, technology and such, as rapidly

as it is changing, can only go so far. Rates become a point of diminishing return. If your rates go too high, then it affects very dramatically your volume, so it becomes actually a losing proposition.

Therefore, as you mentioned, I believe, in some comments you

were making a few weeks ago, there are other cost factors that go

to the heart of service, 6-day-a-week delivery, the question of, do

you keep a postal infrastructure that I think in an ideal world is

very beneficial, particularly in rural communities, where most communities enjoy a postal facility.

Are you looking at those kinds of questions yet as a way by

which to address your dilemma?

Mr. HENDERSON. Not yet. We are trying to maintain the obligation of what we define as universal service. That is, we go by your

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house every day, 6 days a week, whether you have one letter or you

have 50 letters, but ultimately, down the road, the issue of universal service and affordability—you know, we have talked about affordability, growth and reform, but the issue is affordability. I believe there will be serious discussion of postal reform based on

price increases, that people, customers, just will not want to tolerate the general price increase being X amount, and then there will

be a hue and cry for reform.

Unfortunately, that could have been avoided if we had had postal

reform earlier. But it has in the past, and it appears this country

now is going to require a crisis before we have serious action on

reform.

Mr. MCHUGH. Thank you. I appreciate the members bearing with

me.

Mr. Fattah.

Mr. FATTAH. I think that hopefully we will not need a major crisis before we move forward, and obviously the specter of a strategic

alliance, as it has been termed, between the Postal Service and

FedEx, I assume part of the nature of having such a discussion in

public in some ways suggests that you seek to entice others to be

more forthcoming and engaged in these discussions. Needless to

say, I think that the Congress is obviously grappling with where

we are in the sense that, on one hand, we want the Postal Service

to be an independent agency; on the other hand, we—at least

speaking for myself, and I think for the majority of the Members

of the U.S. Congress—fully intend that universal service be continued under all circumstances, irrespective of cost efficiencies associated there within the most rural areas of these lands. So there are

some stresses and strains as we go forward.

I think I heard you say, that cost containment is the first prong

of your strategy. You think you have reached a point of diminishing

returns relative to how much costs can be cut within the Postal

Service operation, even though, obviously, just in terms of from a

rationale basis, there is always something more you can cut. But

you are getting close to that point.

The other side of this is revenue growth. I would like to hear you

speak a little more about your view about how you grow revenues

within the context of e-business and all these other problems that

exist, since that is part of the challenge you are going to have to

meet.

Mr. HENDERSON. Yes. Let me correct something on the cost-cutting side.

I think there are plenty of costs that can be taken out of the

Postal Service; it just happens to be painful when you do it. But

I think there is a lot of money to be made in cost-cutting and productivity improvement.

In revenue, it is kind of a mixed image of what the future holds.

Last fiscal year, we lost substantial volumes to the Internet in advertising mail. The Internet became the darling of the business

world, and a lot of money was diverted from direct mail advertising

to Internet advertising. And it was not very successful, especially

during the fall mailing season. Last year, a lot of cataloguers used

the Internet without a catalog via direct mail, and the results were

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disastrous. So to some degree that mail has returned to the Postal

Service. We are seeing growth in direct mail.

We think there was opportunity prior to the Internet revolution

to continue to grow advertising mail in first class. Historically, it

had been—the fastest growing segment of first class mail had been

ad mail. So we see advertising as still having a strong future.

I don’t think it is ‘‘if,’’ but ‘‘when’’ bill payment and presentment

migrates to the electronic platform. The reason I say that, I think

the large billers—not necessarily the banks, but—I think the banks

are in here, but the large billers of America, the AT&Ts and American Expresses and Visa’s and companies like that, there is a real

financial advantage for them to go public. AT&T, it costs them

about $1.75 to send you a bill. That doesn’t include the postage you put on to return it. I think the estimate at AT&T was, $1 billion

could go to the bottom line if they could get all of the bills electronic.

The adoption of that is a whole other bag. There are varying

numbers of opinions. So depending on what happens with electronic bill payment and presentment, that will determine the fate

of first class mail, and it will have a huge financial impact on the

U.S. Postal Service.

Mr. FATTAH. You have in a tentative way moved into that sector,

right?

Mr. HENDERSON. That is correct.

Mr. FATTAH. At least in terms of billing, how is that coming, or

what could you tell the committee about that?

Mr. HENDERSON. Well, that is just a part of what you have to do

in today’s business model. You have to eat your young every once

in a while. We had e-bill payment and presentment.

Mr. FATTAH. From polygamy to cannibalism.

Mr. HENDERSON. It is a vicious world out there. We have about

15,000 customers now on electronic bill payment. I don’t have the

revenue figures off the top of my head. But all of the e-commerce

initiatives are probably, if you total them all up, somewhere in the

neighborhood of $10 million. So really no one is making a whole lot

of money out there on e-commerce today except for the people that

build the infrastructure.

Mr. FATTAH. And the last prong is legislative reform, on which

we have heard your views today. Let me yield back to the chairman.

Mr. MCHUGH. I thank the gentleman, the gentleman from Ohio’s

forbearance. I would like to yield to the vice chair of the committee,

the gentleman from South Carolina, Mr. Sanford, if he has any

questions at this time.

Mr. SANFORD. Let’s see here.

Mr. MCHUGH. You could say nice things about me.

Mr. SANFORD. That is exactly right.

Mr. LATOURETTE. I tried that. It didn’t work so good.

Mr. SANFORD. I will hop in for a minute. I thank the chairman

very much. I would say thanks because this may be one of the last

chances I will get simply to say thank you. It has been awfully, awfully impressive to see the way that the chairman has handled this

committee, and in particular, the way he has consistently pushed

toward making the Postal Service more competitive. I admire that,

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and I just wanted to publicly say that, since this will be one of the

last chances I get.

Mr. MCHUGH. Thank you, Mr. Sanford.

Mr. SANFORD. Just a couple of different thoughts.

I have been awfully impressed during a couple of different visits,

Bill, with your commitment to the Postal Service and to its employees in making a difference. The one thing, though, I would take exception with is—one of your comments just as I walked in, and I

apologize for being late, was, we are just a business wholly owned

by the U.S. Government. We are just a business.

I would actually, unfortunately, have to take great exception to

that. And what is interesting to me about that, if that was the

case, apparently before I got here we were asking a bunch of questions about this proposed FedEx, Bill, and I don’t think if you were

just a business, you would be answering those questions; you would

just be doing it.

Similarly in a business, I think about going out and dropping a

product line, you just drop the product line because it doesn’t make

sense and you move on. Your hands are tied; with universal service, you cannot drop unprofitable routes, though in a business

sense or a business model, you would certainly do that.

So I think you are somewhere between being just a business and

being something else. I don’t know what that something else is.

That is what puts a number of us in a real confusing spot, because

we have agreed very much with the chairman’s efforts to move to

making the Postal Service more competitive; and yet had an internal struggle, as a conservative, with how do you give this something else—businesslike responsibilities, businesslike freedoms— but recognize the fact that in essence it is something else? And it

does have some monopolistic powers and some advantages that nobody in the private business world has?

So I also wanted to touch on that theme, just because it has been

a very frustrating spot to be in as one who has been sort of gumming up the works of your very valid efforts, and your very valid

efforts to make this place more competitive.

On that front, I would say this: If you think about what happened in, let’s say, Norway or Germany or Australia or New Zealand and how they moved toward privatization, what was it that

they did differently, or have they just sort of merged public with

private? What was it that they did differently so they were able to

pull this off politically without private interests going wild?

Do you have any insight to help me understand that a little bit?

Mr. HENDERSON. Let me go back to the business part. I agree

with you that there is ambiguity in the nature of the definition of

the Postal Service. Even though we are forced to, within our own

regulatory environment, operate like a business, there are things

we don’t do, you are absolutely correct, because of our unique status. So I would agree with that assessment.

Most of the postal services that are going private have been

given broad pricing freedoms, they have reduced the size of their

monopolies, to eventually phase them out, and they have been allowed, prior to going public, to act just as you were describing earlier, as a business. But there have been unique circumstances to

each one.

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The Dutch post, for example, is a very small entity and it has

gobbled up outside businesses and it is just a part of the privatization of their government. The German post received an infusion of

money at the consolidation of East and West Germany in which

they had all the property, and I think they testified at one of the

hearings that they received all the property that the East Germans

had and they were able to use that cash to make acquisitions. They

are one of the largest logistics companies in the world today.

The New Zealand post moved because there was an economic crisis and they had to change all of government. Australia had a problem with labor that had to be solved, and in the course of that,

their post was liberalized.

So there are kind of unique reasons. And the private sector does

scream when that occurs. I can understand that; if I were in the

private sector, I wouldn’t want a $65 billion giant cut loose on my

market. That is perfectly reasonable to understand they will do

that.

I look at it through postal eyes and say, if we are not given some

freedom, then this Postal Service you enjoy today is going to be

damaged in the future.

It is a difficult position to be in, I understand that. I have talked

with UPS about that, and I have talked with Federal Express

about that, and they have grave concerns about what we would be

allowed to do. But I think all would agree that a healthy Postal

Service is in the best interests of the American public, and we

think you really need to take a close look at this.

Mr. SANFORD. I would say toward that end, I was looking at the

numbers here, which was first class mail accounts for 67 percent

of your contribution rate, and yet the rate of growth of that first

class mail is basically somewhere between 1.5 and 2.5 percent, yet

you look at cost structure going against you. It is a trap; unless you

change something, you have a math trap coming your way.

That brings me back to, if you don’t grow the revenue size—

Letterman has his Top 10 list. What would be your Top 10 list in

terms of expenses that you would look at; in a strictly hypothetical

sense, what would be the Top 10?

Mr. HENDERSON. We have already targeted that. One would be

administration, just the size of our infrastructure and overhead. A

second one is transportation; we have a $4 billion transportation

budget. We could take eventually—and I am not saying we are

going to do this, but we could take everything out of the air. We

could have only surface transportation in this country, which is a

lot cheaper than air transportation, which would impact the organization. Finally, we could close processing centers and consolidate

them.

We right now are guided by service requirements. In other

words, we, as all of you know, have very high scores on our externally measured first class mail service. We prided ourselves on that

and over the last few years, we have shown an 11-point improvement.

We are ranked the highest agency in government in public approval. We have 94 percent ratings. We are trying not to put any

of that in jeopardy. We don’t want to be viewed in a negative way.

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But somewhere down the road we are going to have to raise prices

or cut into the quick of the Postal Service, so to speak.

I will give you an example just one off the top of my head. If you

look at the financials of the Postal Service, our net income goes like

this. It looks like a hump; in the middle of the year—we make all

of our money by the middle of the year primarily because the infrastructure is full of volume. If there was some way to incentivize the

volume in the last half of the year to keep that infrastructure full,

you are looking at the difference between making $100 and making

$2 billion or $3 billion, which would be, I guess, very useful for

maintaining the Postal Service.

So it is not like you are just being cut loose in the private sector

to go take packages away from the package delivery companies. I

am talking about improving the pricing methodology for our own

products. Ad mail would be a great product to reduce the price on

in the last half of the year in order to stimulate the use of direct

mail by businesses around America, so that you could fill up your

tank, so to speak, and make some money.

We don’t get inefficient in the last part of the year. We just can’t

adjust the infrastructure enough to offset the decline in the growth

of volume.

Mr. SANFORD. Thank you.

Mr. FATTAH. Could I ask you one quick question? We have 40,000

post offices, right? How many letter carrier routes do we have?

Mr. HENDERSON. I am going to say 350,000 city carriers.

Mr. FATTAH. How many of those are profitable?

Mr. HENDERSON. I couldn’t give you that information off the top

of my head.

Mr. FATTAH. A percentage?

Mr. HENDERSON. I can tell you that of the 40,000 post offices, the

26,000 smallest post offices, it costs over $2 bucks to bring in $1.

That is just the math.

Mr. FATTAH. Essentially what we have is, we have urban post offices subsidizing rural post offices?

Mr. HENDERSON. To some degree, that is right.

Mr. SANFORD. Now you are getting personal.

Mr. FATTAH. I am not trying to be personal, I am just trying to

followup on some of the questions that were asked. Because, one

of the ways to get at some of this—since some part of what you are

doing is a public service, is to try to isolate what those costs really

are and to deal with them as a public good or a public service and

not have them hidden in the apparatus of the Postal Service.

So I would be—we will have some future discussions about this.

Thank you.

Mr. MCHUGH. Will the gentleman yield to me?

The ranking member raises an excellent point, and that has been

the point that we have been trying to illustrate for 6 years with

respect to this particular aspect.

Let me say to Mr. Sanford and Mr. LaTourette, I have no problem at all with your concerns. Both of you gentlemen have dealt

openly and honestly with me and with the subcommittee, and

where we have not been able to agree, that is life. But I do have

a concern about some members who are turning their backs on

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meeting this challenge because they either don’t recognize or refuse

to admit the very point that the ranking member just made.

If we allow this to continue, there are going to have to be some

extraordinarily painful decisions made, and they will particularly

affect rural areas. Because, you are right, if you look from a cost

and income perspective in general terms, urban areas are subsidizing those rural post offices.

Now, I happen to think that is perfectly acceptable, but you cannot enjoy that kind of cross-subsidy, if you will, you cannot expect

high cost, low volume, low revenue routes and deliveries, i.e., rural

areas, to experience the same kinds of services they enjoy today absent our doing something different. And I represent rural areas,

and it is invaluable both as a means of communication and as a

means of social and economic fabric in those communities, and I

don’t want to see them go away. But that is where we are headed,

and that is why the general issue of postal reform is so very important.

And we have spent 6 years probing it. The Postal Service does

too good a job to say, thanks, see you later. I don’t think our constituents, the American public, will allow us to do that. I pray to

God they will not. But as the Postmaster General said, and as Mr.

Sanford I think rightly underscores, there are legitimate concerns

expressed by the private sector that that reform should be attended

with changes that level that playing field that Mr. Henderson has

admitted time and time again is skewed in certain aspects to their

unfair benefit.

That is what it is about. That is just an editorialization.

With that, I would go to Mr. Davis.

Mr. DAVIS. Thank you very much, Mr. Chairman. I, too, as I listened to the discussion, have a great deal of concern about the generalized condition of the Service and the complexity of tough decisions that are going to have to be made if we are to keep the system alive, and especially if we are to continue to guarantee or even

provide some semblance of universal service.

I have a need to shift a bit in terms of something that is currently taking place and ongoing.

Mr. Postmaster, I have recently been made aware of, and I am

greatly concerned about, what appears to be a very controversial

procurement for the Postal Service’s direct marketing sales support

advertising contract. I have been told that an incumbent

DraftWorldwide, which is a constituent of mine, was prohibited

from participating in the final solicitation round of competition due

to their refusal to provide what their attorneys deemed to be confidential information that would put them in violation of their contractual relationship with other clients.

My question is, if that was the case, did they bring that to the

attention of the Service and did they provide any alternative way

of the Service getting that information?

Mr. HENDERSON. They didn’t bring it to the attention of the service during the process. They did later on. In fact, I talked to the

president of DraftWorldwide. The problem is they should have

raised that issue if it were a legitimate issue in the beginning.

There was a guideline that said, and the other responders to the

RFP provided this kind of information, that if you did have a conVerDate 11-MAY-2000 08:26 Jan 26, 2001 Jkt 000000 PO 00000 Frm 00122 Fmt 6633 Sfmt 6633 C:\DOCS\67996.TXT HGOVREF1 PsN: HGOVREF1
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fidentiality agreement that you could blank out any references to

the organization and you could submit it just as a case study without naming anyone. That specific question was in the guidelines.

They have then filed a complaint over the process, and we will

legitimately process that complaint. You have my assurances on

that. If there was any impropriety, we will correct it. But to my

knowledge, and I’ve had the general counsel look at this, the IG is

now looking at it I think maybe at your request. If there is, we will

get to the bottom of it.

Mr. DAVIS. Yes, we were so concerned about it that we actually

did, in fact, request a full IG investigation. It just sort of appeared

to me that even—and I guess all of the other entities did in fact

comply. But if you white out the name, I am not sure to what extent that that really guarantees still confidentiality. I’m saying, if

I’m talking about a person who might be running for President

whose father was President—I don’t have a name but—— Mr. MCHUGH. Adams.

Mr. DAVIS [continuing]. A person who is Vice President and currently running for President or something that wobbles like—it just

seems to me that I don’t know how confidential that might end up

being. I would really like to see if I could, and I don’t know if it

is possible, the responses from the others who were in fact in competition.

The other question that I’ve got, if a company has been determined the top of the line for 5 years and has been determined to

be No. 1 by the experts in the field, it seems to me that it would

be very difficult for them not to reach the point of being in the final

solicitation based upon their track record of performance, based

upon what they have consistently done. Do you have any response

to that?

Mr. HENDERSON. Well, it’s based on their proposal, the fact that

they were a contractor prior with Postal Service doesn’t necessarily

assure they are going to be a contractor in the future.

I happened to look at the scores, because you had raised this

issue with me, of the six individuals who were cross functional who

reviewed their package, and they were consistently low and in fact

were the lowest rated. So there was something wrong with that

submission. Whether it was they felt they had the contract because

they had done the business—but in advertising it really is about

new ideas and new thoughts and what you bring to the table in

brainstorming. So, absent some different information from the IG,

I just assumed that they took our business for granted and didn’t

do as good of a job as they might have on the submission, because

there was no one source of low grading. It was across the board.

I looked at the notes the folks used, and then I interviewed one

of them—I say interviewed. I had a conversation with one of them

in passing. I said, describe for me what happened here. And he

said it was a very poor submission. And you can’t overlook the hard

work of a new organization because one that you have existing took

you for granted. I think that is what happened. I know they’re

upset. But we do this every few years. We have our advertising

agencies up for renewal. We let other agencies have a shot at it.

Mr. DAVIS. Let me ask, I understand that the process suggests

that if there is a formal complaint—I understand that they have

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actually formalized a complaint—that this stops the action for the

moment. Has the contract now been let or is work being done?

Mr. HENDERSON. Yes, it is my understanding—let me go back to

the first point. When a formal complaint is filed, the process is not

stopped unless there is an obvious—unless everybody sees that

there’s a real problem. In this case, before the complaint was filed

we had the general counsel review the entire process. Actually, the

IG participated in the process as kind of a watchdog. So we would

not stop the process as a result of their complaint because we don’t

think there is anything to it. And we began negotiations with the

successful folks. I assume that they are either near conclusion or

are concluded and it has just not been pubically announced.

Mr. DAVIS. So you’re saying that that doesn’t automatically stop

the process. It stops it if you determine——

Mr. HENDERSON. If we found a complaint was legitimate, we

would rectify it. As I say, they complained to us informally first;

and since I know the players who are involved here I had it reviewed by our general counsel.

For example, they had a whistle-blower, so we interviewed that

person and promised no retribution of any type. And there was just

nothing there. And, as I said, I talked with one of the people who

interviewed—who was on that review team, and I looked at the

notes of everybody. And there’s no substance to what they’re saying. It would be inappropriate for us to hold up awarding a contract since we’re dark now really. We are out of a contract. We

need to advertise in this period.

Mr. DAVIS. So the contract is actually awarded? People are now

doing work?

Mr. HENDERSON. I think it’s been assigned. I’m not sure. Which

means it’s awarded but not publically announced. There has been

no public announcement on it yet.

Mr. MCHUGH. Does the gentleman yield?

Mr. DAVIS. Yes.

Mr. MCHUGH. I have a Postal Service news release here dated

September 11 entitled, Postal Service Announces New Ad Agency

Contracts, listing one, two, three, four, five, six, seven——

Mr. HENDERSON. That’s the minority based contracts. We had an

Asian, a black and a Hispanic company that we announced out at

the postal forum at the press conference, but that’s not the—— Mr. MCHUGH. That is not all total?

Mr. HENDERSON. That’s not what our discussion is about.

Mr. MCHUGH. Well, then I apologize. Some are listed clearly as

minorities; others are not. But if that’s what they are, that’s what

they are. I yield back.

Mr. DAVIS. Let me just—am I understanding that this news release is strictly for minority contracts?

Mr. HENDERSON. Let me read that news release before I say that.

I know we had a news conference. I apologize. I just did not attend

the news conference out at Anaheim in which we announced

Bravo—— Is this the news release? That one wasn’t released.

Mr. MCHUGH. This one?

Mr. HENDERSON. Yeah. That’s what they’re telling me. I don’t

know. I haven’t read it.

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We did not release this news release. This thing inadvertently

went to our Web page. We pulled it off after about 50 minutes. This

is not supposed to be in the public view. The contracts had not

been negotiated as of this point in time.

It’s amazing. You get information I haven’t seen.

Mr. DAVIS. Well, I guess that happens sometimes.

But let me—after the IG investigation, should the investigation

turn up a mis-step or something that might have occurred, even

unintentional or whatever, what happens then? I mean—— Ms. CORCORAN. We would send a report to the appropriate

party—probably in this case it would be the Vice President for Purchasing—with recommendations as to what should happen. It is

management who then takes whatever action is appropriate, based

on our recommendations. If they disagree with our recommendations, we would go back and we would talk to management and we

would raise it through the appropriate levels within Postal Service

if we thought it was serious enough.

Mr. DAVIS. So it’s possible that, even though an investigation

might turn up something, the process could take so long until much

of the action would have been completed? Is that sort of what I am

hearing? Kind of like an election, you know, when you question the

outcome. I have never known anybody to get put back in office even

though they—in the outcome they have turned up that a few votes

were lost here, there, whatever.

Ms. CORCORAN. We were called into this about a week or so ago

even before we had gotten the call from your office. Bill had actually talked to me and said that there were some issues. So we put

some people on it. We have dealt with various parts of it, and we’re

still looking at the systemic part. The systemic view of the overall

operation and what happens is something that would be a longer

type review.

You are correct that, in terms of an election, no one gets put back

in office. I mean, we might say that there has been something done

that was incorrect and we would make more systemic recommendations to Postal as to how they would decide that they needed to

deal with the issues. Your constituent could decide that they wanted to pursue it further through court using some of the information

that we had in our report—as evidence to support this claim but

that would not be a short thing.

Mr. DAVIS. So the only real possibility of serious redress would

seemingly be that the contracts not implemented or not be implemented without the assurance that everything was appropriate and

was done appropriately.

Ms. CORCORAN. Well, it is my understanding that they’re currently in an appeal process and that appeal process should identify

anything that might have been irregular within the entire process.

The Postal Service would have their own process for dealing with

that.

Mr. HENDERSON. As I say, we have looked at all their allegations, and there was nothing there. They’re dead wrong from our

perspective. We have a financial obligation when we sign these contracts with these other organizations to begin doing work with

them. So you’re almost damned if you do and damned if you don’t

kind of deal. We’re going to get sued one way or the other. We

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know that. We would like to be on the side of justice here instead

of on the other side.

Mr. DAVIS. So you’re saying that your preliminary findings suggest that there isn’t much, but the IG investigation goes more in

depth, and even with that there is an appeals process that is under

way. And if there is no resolution, ultimately, in all likelihood that

would become a case for our judicial system.

Ms. CORCORAN. I really think we’re talking about a number of

different issues here. The appeal process is one process, and it’s a

Postal Service process. And as we go about doing our various reviews, we’ll take a look at that overall appeals process; not just for

this particular job but, overall, does that appeal process work appropriately?

Then to meet the request that you have, we’re doing some additional work, and we will see what we can do there. We’ve also done

some work with what Postal Service had brought to our attention

2 weeks ago. We’ve given them some information, and told them

we didn’t see any issues on that.

So we’re continuing on several different directions. But the ultimate is that right now, I don’t think any of us are seeing something that’s going to bring any immediate relief based on what

we’re seeing.

Mr. DAVIS. Thank you very much.

Mr. Chairman, I understand Mr. Fattah has some questions that

he wanted to submit, written questions for the record that he

would like to get a response to.

Mr. MCHUGH. As our normal practice we will a have a number

of those to which we’ll append Mr. Fattah’s questions.

I would say as well Mr. Davis was very forthcoming in his association with this particular firm as a constituent organization of

his. To my knowledge, I have never heard of DraftWorldwide prior

to this issue. And admitting that a little knowledge is a dangerous

thing and I therefore am a very dangerous person in this regard,

we have their side of the story. But, in reviewing it, it does raise

some concerns, a logical question about a company who provided

this service for 5 years and is not even qualified to submit a bid.

We weren’t talking about awarding the bid but submitting it.

The other particular question that I had was relating to a phase

two pre-qualification that was never contemplated originally. And

having had a little experience in municipal contract negotiations,

you do that that buys you a lawsuit no matter which way you turn.

So I think it has some important ramifications, obviously, for

DraftWorldwide, but I think, as the Inspector General just pointed

out, to ensure that the contract process used across the Postal

Service universe is as appropriate as it can be. I know that the

Postmaster General shares that concern, and it was for that reason

that I signed that letter happily with Mr. Davis. And we’re looking

forward to your report, Miss Corcoran.

Mr. LaTourette.

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Mr. LATOURETTE. Thank you, Mr. Chairman. And if I could go

back for a minute I would like to ask unanimous consent to submit

for the record a copy of Judge Reginald Gibson’s decision of August

25th this year in the case of Emery Worldwide versus the United

States.

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

[The information referred to follows:]

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Mr. LATOURETTE. Mr. Postmaster, the questions that I was asking about that before, I guess the crux of my concern—and I had

a chance to read it while others were engaged in questions, and I

think I was right, and I would invite you maybe to take a look at

the opinion, too, but the question I have with the strategic alliances is, if Emery Worldwide had been successful, they not only

ask that you go back and pay them money that they said that you

negotiated and should have paid them, but they also wanted out

of the contract, and that for the moment has not been granted.

That’s not settled, according to the judge’s decision.

What sort of disruption by going outside of the Postal Service

and contracting with this type of alliance would that have caused

to the delivery of mail in this country if Emery had been successful

in court last month? And here’s the context in which I ask it. Because it’s my understanding, for instance, if FedEx has—its pilots

belong to a labor organization, which is certainly OK. But if you

entered into such a strategic alliance and the FedEx pilots have

difficulty, not with you but with FedEx, and decide to go on strike,

I’m wondering how you factor that into the strategic alliance discussions you have with these outside entities.

Mr. HENDERSON. That’s a liability that we have with everyone.

We fly mail on United Airlines, for example, and we have to have

contingency plans when that airline goes on strike. We have a contingency plan. You basically put priority mail on the surface, and

you truck it. To the degree that we could get space, which is very

limited on the commercial airlines, we would contract it, but you

just have alternate transportation arrangements.

Mr. LATOURETTE. During the time since I had a chance to ask

you a question as well, I talked to my chief of staff, and she’s a

lot smarter than I am, and she said that I was asking the exclusivity and competition in bidding question improperly, so let me put

it as clearly as she thinks it should be put. That is, let’s say you

enter an agreement with FedEx or anybody else on a strategic alliance along the lines of your discussions. Are you indicating that if

somebody else comes along and says I want that exact same deal,

too, that it’s your position that because it’s a moneymaking venture

or whatever the incentives are for the Postal Service that you

would enter into it with that other guy or gal as well or that the

first in sort of has a leg up and others would be excluded from having the exact same four-cornered deal?

Mr. HENDERSON. Well, the only part of the deal that you couldn’t

do would be to contract with an equal amount of air transportation.

But keep in mind when we put the Emery contract out for RFP,

the one in which Emery was successful, in the end there was only

one qualified bidder because of the size and scope of it, who was

one person in the whole country who was interested and one person who was qualified. So the answer to it is, yes, we’d be open to

discussions with anybody.

Mr. LATOURETTE. Mr. Chairman, what do you want to do about

votes?

Mr. MCHUGH. I don’t plan on voting. How about you?

I had contemplated adjourning the hearing. However, Mr. Davis

suggests that he has at least two more questions he wishes to pose.

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So I think perhaps we should vote and come back. It sounds as

though you have—— Mr. DAVIS. My questions can be in writing. They’re just two

issues.

Mr. LATOURETTE. I have two more that aren’t related to this

FedEx thing that I can submit in writing and have answered, and

that’s fine with me.

Mr. MCHUGH. If you’re comfortable with that.

Mr. LATOURETTE. I’m more than comfortable.

Mr. MCHUGH. Well, then, with that let me say we will have, as

we usually do but I really mean it this time, a wide variety of questions.

I apologize to Miss Corcoran. We really didn’t get to her. She

submitted very thorough, comprehensive testimony that made some

I think very important points that need to be pursued; and we will

submit those in writing and also to Mr. Ungar to such things as

the Government Performance Review Act and the suggestion of

some shortcomings that we very much want the Postmaster General and the USPS to address. They’re very important. That’s a

very important process. So you will, all of you, be receiving that;

and, as you’ve done so faithfully in the past, we’d appreciate your

cooperation.

With that, again, a closing word of truly my deepest appreciation

to all of you. It has been a hell of a ride; and, until we meet again,

keep those cards and letters coming out.

The meeting is adjourned.

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

[Additional information subcommitted for the hearing record follows:]

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