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73–392 PDF 2002

S. Hrg. 107–70

THE FINANCIAL OUTLOOK OF THE U.S. POSTAL

SERVICE

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 15, 2001

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

HANNAH S. SISTARE, Staff Director and Counsel

DAN G. BLAIR, Senior Counsel

ANN C. FISHER, Professional Staff Member,

Subcommittee on International Security, Proliferation, and Federal Services

JOYCE A. RECHTSCHAFFEN, Democratic Staff Director and Counsel

SUSAN E. PROPPER, Democratic Counsel

YVONNE SANCHEZ, Democratic GAO Detailee

NANCI E. LANGLEY, Democratic Deputy Staff Director,

Subcommittee on International Security, Proliferation, and Federal Services

DARLA D. CASSELL, Chief Clerk

(III)

C O N T E N T S

Page

Opening statements:

Senator Thompson ............................................................................................ 1

Senator Carper ................................................................................................. 2

Senator Cochran ............................................................................................... 3

Senator Stevens ................................................................................................ 4

Senator Collins ................................................................................................. 5

Senator Carnahan ............................................................................................ 9

Prepared statements:

Senator Akaka .................................................................................................. 7

Senator Cleland ................................................................................................ 8

WITNESSES

TUESDAY, MAY 15, 2001

Hon. David M. Walker, Comptroller General, U.S. General Accounting Office . 11

Hon. William J. Henderson, Postmaster General, U.S. Postal Service ............... 13

Hon. Robert F. Rider, Chairman, Board of Governors, U.S. Postal Service ....... 14

Hon. George A. Omas, Vice Chairman, Postal Rate Commission ....................... 16

ALPHABETICAL LIST OF WITNESSES

Henderson, Hon. William J.:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 77

Omas, Hon. George A.:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 88

Rider, Hon. Robert F.:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 83

Walker, Hon. David M.:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 48

APPENDIX

Senator Byron L. Dorgan, a U.S. Senator from the State of North Dakota,

prepared statement .............................................................................................. 47

Responses from Postmaster General Henderson to questions asked during

the hearing ........................................................................................................... 108

Karla W. Corcoran, Inspector General, U.S. Postal Service, prepared statement ...................................................................................................................... 118

Ruth Y. Goldway, Commissioner, Postal Rate Commission, prepared statement ...................................................................................................................... 137

Thomas Schatz, President, Council for Citizens Against Government Waste,

letter dated May 9, 2001, sent to Chairman Thompson ................................... 141

‘‘Future Directions in Postal Reform,’’ edited by Michael A. Crew, Center

for Research in Regulated Industries, Graduate School of Management,

Rutgers University, and Paul R. Kleindorfer, Risk Management and Decision Process Center, The Wharton School, University of Pennsylvania .......... 142

Post-hearing questions and responses from:

Comptroller General Walker ........................................................................... 146

Postmaster General Henderson ....................................................................... 149

Mr. Rider ........................................................................................................... 178

Mr. Omas with attached letter ........................................................................ 193

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THE FINANCIAL OUTLOOK OF THE U.S.

POSTAL SERVICE

TUESDAY, MAY 15, 2001

U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Committee met, pursuant to notice, at 10 a.m., in room SD– 342, Dirksen Senate Office Building, Hon. Fred Thompson, Chairman of the Committee, presiding.

Present: Senators Thompson, Carper, Cochran, Stevens, Collins,

and Carnahan.

OPENING STATEMENT OF SENATOR THOMPSON

Chairman THOMPSON. Let’s come to order, please. I want to welcome everyone to the Committee on Governmental Affairs this

morning, our hearing on the financial outlook of the U.S. Postal

Service, along with Senator Cochran and his Subcommittee, who

have done so much fine work in this area. We are here this morning because of our increasing concern over the financial condition

of the Postal Service. The Committee welcomes our witnesses,

Comptroller General David Walker, Postmaster General William

Henderson, Postal Service Board of Governors Chairman Robert

Rider, and Postal Rate Commission Vice Chairman George Omas.

I hope our assembled panel can shed some light on the course the

postal finances have taken over the past year.

While we will discuss many aspects of this problem in hopes of

achieving a better understanding of the reason for the current situation, certain things seem to be clear. The Postal Service framework, established by Congress in 1970, appears to be near a breaking point. We established a system whereby the Postal Service

would have the characteristics of a Federal agency and the characteristics of a business enterprise. On the one hand, we require that

the Postal Service provide universal service to every home and

business in America. We give them little control over the rates they

charge and their labor cost. We require that they leave unprofitable

post offices open. We leave them open to the swings in the economy, along with fluctuations in transportation and fuel cost. Finally, we require them to break even.

On the other hand, we provide the Postal Service with an absolute monopoly on the delivery of letter mail. We provide that they

do not have to pay taxes or be subject to antitrust laws, the way

that businesses are. This system worked for several years. However, circumstances changed. Two trends developed that changed

the face of the Postal Service. First was a technological revolution,

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which is in the process of changing the way in which people communicate with each other. That technology is rapidly finding business applications in all aspects of society.

The second change was that the Postal Service eventually and

inevitably began to take on the characteristics of most Federal

agencies. It continued to grow without a focused strategic plan. It

developed serious financial management problems, including wildly

fluctuating projections of cost and income. It is unable to utilize

technology to increase its efficiency and productivity even after

spending billions of dollars. It wastes tremendous sums of money

due to mismanagement. A combination of these factors results in

the difficulties that we see before us, as laid out by the GAO—billions of dollars in deficits in the coming years and an inability to

deliver the services we want and costs that are sustainable.

Clearly, the Postal Service must address its productivity and its

management issues. An 11 percent growth in productivity over the

course of 30 years is not good, to say the least. Reports by the Postal Service Inspector General of $1.4 billion in waste and mismanagement fuel further cynicism about agency operations. Just as

clear, however, is the recognition that Congress must revisit the

30-year-old statutory framework under which the Service now operates. As we proceed, we must ask ourselves some pointed questions.

We, in Congress, must ask what services we want the Postal

Service to provide and what price we are willing to pay for them,

and do we really expect the Postal Service to hold costs at a reasonable level when we are mandating so many things that make

that impossible. The Postal Service must ask itself if it really expects reform that gives it more discretion when it has not demonstrated the ability to make financial projections, hold down costs,

or increase productivity. Stakeholders should ask themselves, even

though they may be more comfortable under the current situation,

where will they be if the Postal Service falls apart?

I approach this issue with no preconceived notion as to the precise measures that should be taken. There is a lot that we need to

understand about the nature of this problem. However, it is my belief that nothing should be left off the table, including the future

of the postal monopoly itself.

Senator Carper.

OPENING STATEMENT OF SENATOR CARPER

Senator CARPER. Mr. Chairman, thank you very much. To our

witnesses today, welcome. It is nice to see some of you again. One

of you looks really familiar. Mr. Rider, where are you from?

Mr. RIDER. Rehoboth Beach, Delaware, sir.

Senator CARPER. A lot of people who work over in this part of

the country are going to be heading for your hometown in about

2 weeks, when Memorial Day weekend is upon us. We look forward

to seeing some of you this summer, and as they make their way

to Rehoboth Beach, they can go through Bridgeville, where I believe your business is, for the Apple-Scrapple Festival later this

year. That is a great combination, as I am sure you can tell everybody. I understand your testimony focuses on that very thing. We

are really pleased to see you here—you and I used to be the same

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thing. We use to be governors together, and now you are chairman

of the governors, and I am just a former Governor, but we are delighted that you are with us.

To our other witnesses today, Mr. Henderson, I understand you

are going to be stepping down as Postmaster General after several

years of Service, and I just want to say publicly, thank you for your

work and your leadership of the men and women who are part of

the Postal Service.

Mr. Walker, we look forward to being with you here today. Your

people are doing great work, and we are looking forward to your

comments.

Just a couple of quick comments. I really look forward to your

comments and to the give and take that we have here today. Mr.

Rider and I had a chance to chat on the phone not too long ago

about a couple of things, and as you look for ways to raise revenues

and to hold down your cost, I would again urge you to focus on

workplace safety. The cost that I think we discussed on the phone

was about $1.5 billion, and some of that is hard to control. Some

of that is more easily controlled. We talked a bit about the good

work that has taken place at Alcoa, under the leadership of the fellow who is now our Secretary of the Treasury. We talked a bit

about, closer to home, the work that goes on at the duPont Company, where my wife works, and a lot of other Delawareans work,

as well, and stay focused on workplace safety to help to drive down

their cost.

I understand that is a focal point, but as you look for Mr. Henderson’s successor, I sure hope that you will keep in mind it would

be great to have a leader who understands how much money actually could be saved, is being saved, and could be saved. The other

thing I would say is my hope is, as we go through our testimony

today, we will have the opportunity to find out some ways that you

are raising revenues, would like to raise revenues, and ways that

you are raising productivity and would like to raise productivity,

some ways you are trying to hold down your costs and would like

to further hold down your costs.

What I am looking for are ideas where we can be a partner,

where we can help to assist you in those efforts and ultimately provide better service to the folks that we represent. Again, I am glad

that you are here and we look forward to this give and take. This

is an important hearing for everybody in every State, and we thank

you for joining us today, especially Mr. Rider, who I think may

have been in Hawaii visiting his daughter, and it was good of you

to come back here. We have offered you some great weather, so you

should not be complaining, my friend. But we thank you for making this trip and we apologize for disrupting your plans with your

family.

Chairman THOMPSON. We are holding our hearing today in conjunction with Senator Cochran’s Subcommittee, so I will call on

Senator Cochran next for any comments.

OPENING STATEMENT OF SENATOR COCHRAN

Senator COCHRAN. Mr. Chairman, it is a pleasure to join you this

morning in convening this hearing. We think it is an important

and timely hearing. There are all kinds of suggestions even being

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made in advertisements in the Washington Post this morning about

what the Postal Service needs to do to get its house in order financially, and to turn a profit rather than a deficit, and therefore obviate the need for a postal rate increase. It would be good to hear

the witnesses’ reaction to that suggestion.

I think the underlying message is that the Postal Service has too

many people and it can solve all its problems by cutting down the

number of employees it has. That will be an interesting thing for

you to respond to, as well.

Mr. Omas, it is a pleasure to recognize you, specifically. What

State are you from?

Mr. OMAS. Mississippi.

Senator COCHRAN. I just wanted to be sure I remembered that

right. Who was your dormitory manager when you were at Guess

Hall, at the University of Mississippi?

Mr. OMAS. I think his name was Thad Cochran. [Laughter.]

Senator COCHRAN. It is good that you remembered all that, as

well, and we look forward to visiting with you further on these

issues.

Thank you, Mr. Chairman.

Chairman THOMPSON. All right.

Mr. Henderson, where did you used to be a postmaster?

Mr. HENDERSON. Memphis, Tennessee. [Laughter.]

Chairman THOMPSON. Beg your pardon?

Mr. HENDERSON. Memphis, Tennessee.

Chairman THOMPSON. That’s what I thought you said. [Laughter.]

Chairman THOMPSON. While we are at it, Senator Stevens?

Senator STEVENS. Mr. Henderson, what State have you spent

more time in, in the last 5 years?

Mr. HENDERSON. Alaska. [Laughter.]

OPENING STATEMENT OF SENATOR STEVENS

Senator STEVENS. Mr. Chairman, I am delighted that you are

having this hearing. I have three going on this morning, but I did

want to come and participate here, particularly to thank again the

Postmaster General for his service. I have worked with all the gentlemen at the table, but Postmaster General Henderson has come

to Alaska quite often to try and see what we can do to solve the

problems of postal delivery and the deficit that they run up there,

which is a matter of necessity, and that is one of the reasons I am

here.

We have no roads. There is only one main road in Alaska. Seventy-five percent of our transportation of goods is by air, and that

is primarily by parcel post. The system that the Constitution guaranteed for maintenance of post offices and post roads has real

meeting in my State, and Postmaster General Henderson, you have

recognized that and we appreciate that. Beyond that, I came because I listened to the statement of the Chairman and I have great

respect for him, but I hope he would keep in mind that it is 30

years ago now that I tried to get the Post Office to be involved in

something that we now call E-mail. This Committee decided that

was not proper. That was a system that was going to grow in the

private sector, and it was probably a good decision, because it has

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grown very well. But it competes highly with the Postal Service,

and I do not think that the monopoly and the printed word is one

thing. I do not think the Post Office has a monopoly anymore in

terms of mail.

But that is a generational thing, and I would hope you keep that

in mind. It is an urban thing. The capability of my people to go on

the Internet is not yours, because we automatically changed long

distance rules. Intrastate calls in Alaska are long-distance calls.

Our competition here is with the printed word and the generational

concept that I mention to you is in an aging population, and our

population is aging. The majority of those people who are aging are

not computer capable, and they are still dependent upon this postal

system.

I am going to oppose any radical change in the Postal Service

until we are assured that the access is not limited to the younger

generations, in terms of capability to communicate. Just think of

it. All of you can think about it. The mail you primarily get, the

personal letters you primarily get today, if you are computer-capable, are from your relatives that are my age. Now, I happen to be

fortunate and communicate with my children by E-mail. But not

many people do that, and I think we have to keep in mind this

postal system must be maintained to deliver the printed word, so

long as a substantial portion of the population is dependent upon

that service.

I know that there are losses out there. I know that there are

things that can be changed. But every year we look at a deficit in

the Postal Service revenue for our State, and you all know it is

there, and I know it is there, but the difference is if you want to

eliminate it, then give us about $3 billion a year to build roads, and

remove the opposition in the environmental community to building

those roads.

That is the same in other areas of the country, particularly the

rural areas of the country, that do not have access to the Internet,

at least equal access to the Internet. On another Committee, we

are working on this concept, Mr. Chairman, of equal access to the

Internet, and I believe the day will come when the printed word,

as far as personal communication, will be gone. But until that day

comes, the Postal Service will be our way of complying with the

Constitution; and I hope we all keep that in mind as we look at

this.

Mr. Walker, I am interested in your report, and I am not criticizing the report, but I think some of the things that are analyzed

as being losses are expenses of being involved in a business that

is not bottom-line cost effective. So I hope we can keep that in

mind. Again, I welcome you all and I thank you for the courtesy,

because I have to go to another meeting. Thank you very much

Chairman THOMPSON. Thank you very much.

Senator Collins.

OPENING STATEMENT OF SENATOR COLLINS

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

Gentlemen, which State would you most like to spend August in?

[Laughter.]

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After Senator Stevens leaves, I can get a unanimous answer of

Maine from each of you.

Mr. Chairman, I have a lengthy statement which I would like to

submit for the record in the interest of time.

Chairman THOMPSON. It will be made a part of the record.

Senator COLLINS. I just want to say that I am troubled by how

quickly the financial picture of the Postal Service has darkened. It

was only in February 2000 that the Postal Service still had a net

income of $1 billion, and yet now we are seeing projections of very

significant losses, and I am further troubled that the first response

to those losses is to seek higher rates, to look at eliminating Saturday delivery, and to look again at closing small post offices, which,

in many parts of my State, are absolutely critical and are truly the

heart of a community.

So I look forward to exploring these issues with our witnesses

today. The Postal Service in Maine, as in Alaska, is absolutely critical. We need to maintain the universal service requirement, and

I am very concerned about the financial stakes that we now face.

So, Mr. Chairman, I would put my statement in the record, and I

look forward to hearing from our witnesses.

[The prepared statement of Senator Collins follows:]

OPENING PREPARED STATEMENT OF SENATOR SUSAN M. COLLINS

Thank you, Mr. Chairman.

The U.S. Postal Service has origins that predate the birth of the United States

itself. In 1775, the Continental Congress appointed Benjamin Franklin as the first

Postmaster General. The value of a national postal service was so apparent to our

nation’s founders that the power to establish post offices and roads comprises one

of only 18 clauses of legislative authority explicitly granted to Congress in our Constitution.

This is not to say, Mr. Chairman, that the Postal Service has not changed with

the times. Under congressional statute, it expanded service via navigable waterways

in 1823 and the railroads in 1838. Airmail followed as early as 1918. The Postal

Service apparently even experimented with an even more spectacular form of delivery—‘‘missile mail’’—in 1959. Though missile-borne cross-country mail proved rather less successful than other forms, the episode certainly demonstrated the Postal

Services’ willingness to try new innovations.

Another, far more successful Postal Service innovation occurred in 1863: the institution of universal postage rates without regard to distance. This system would

eventually allow all Americans to reach out to one another easily and effectively,

regardless of where they lived or how far the mail had to travel. For a short journey

or a long one, the Postal Service would charge a single, affordable rate. Even in the

middle of a terribly destructive and divisive civil war, the Postal Service recognized

that we were one nation and took important steps to help bring that nation together

as one. Combining this single-rate service with its near-universal penetration of the

American countryside, the Postal Service helped knit together the nation we know

today.

Since 1971, the Postal Service has been organized as a separate entity, albeit one

different than any other government agency. As such, it receives no general fund

revenues. Instead, it relies upon sound business practices and a watchful Board of

Governors to ensure that it carries out its mandate to deliver the people’s mail in

a convenient, efficient and uniform manner.

Still, much has changed in the three decades since we established the modern

United States Postal Service. The advent of new technologies has proven to be a

special challenge to the fulfillment of the Postal Service’s traditional role. Recently,

a confluence of factors ranging from high gas prices to the advent of E-mail and

electronic bill payments have caused some to question whether the Postal Service

can continue to do ‘‘business as usual.’’

From September of last year through this February, the Postal Service lost $260

million. Today, the Service estimates it may lose between $1.6 billion and $2.4 billion for this year, and perhaps even more in 2002. These trends, therefore, call into

7

question the Postal Service’s ability to continue to provide its current level of services at uniform prices and reasonable rates. Alarmingly, the Postal Service has accumulated so much debt that it is now approaching its statutory borrowing limit of

$15 billion.

Many Postal Service stakeholders have told Congress that the Service needs

changes in the law to allow it to be more efficient in its pricing, labor relations, and

financing operations. GAO recently testified that the USPS had increased its efficiency by only 11 percent over the past three decades—during a time in which the

productivity of the private sector has been exploding.

To cope with these its tremendous problems, the Postal Service is considering a

reduction of core services—including the closing of smaller postal facilities and the

elimination of Saturday mail delivery. At the same time, however, it continues to

carry on non-core services, such as E-commerce operations, that we are told lose

substantial sums of money.

According to a 1998 GAO study, for example, the Postal Service had instituted

19 outside business ventures since 1991. During the first three quarters in 1998,

only four were reported to be profitable. GAO found in their 1998 report that, during the seven year period it reviewed, the Postal Service lost approximately $85 million on such things as coffee mugs, ties, and phone cards. Because the Postal Service

has not released current information showing whether these non-core services are

actually profitable, this is a contradiction that needs to be explored further, Mr.

Chairman. When most businesses lose revenue, providing less service for higher

prices and forsaking core services for money-losing side ventures is usually not their

response.

I am especially concerned about the impact of closing post offices in smaller communities. It would be unfortunate indeed if the Postal Service’s failure to meet today’s challenges results in its abandonment of aspects of the core service that made

the service indispensable to so many Americans, especially in rural areas. We cannot allow this to occur.

I have no doubt that the Postal Service may need some reforms. The world has

changed significantly since 1971. Other nations are also carrying out interesting

postal experiments that bear watching. Ours is a large nation, and what works in

one country may not work here. Nevertheless, we must be open to the idea that

things can be done better than they are today—and aware that we can learn from

the experiences of other nations to provide the best postal service for the American

people.

I agree with our outgoing Postmaster General when he says that ‘‘a seriously

weakening postal system would find it more and more difficult to carry the full load

of universal service.’’ It is for that reason that this hearing is so important. A weakening postal system must concern us all. In the end, we all want the same thing:

the best postal delivery system for all Americans that we can possibly have.

I look forward to the testimony of the witnesses and thank you for calling this

important hearing today, Mr. Chairman.

Chairman THOMPSON. Thank you very much. I understand that

Senator Akaka has been delayed and wishes to have his statement

made a part of the record. Senator Cleland has also submitted a

statement for the record.

[The prepared statements of Senators Akaka and Cleland follow:]

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

Given the Postal Service’s projected $2–$3 billion deficit this year, it is crucial

that Congress examine the actions of the Service which affect each and every American. I hope this hearing will assure Hawaii’s consumers and businesses that Congress is taking their concerns seriously.

Last week’s decision by the Postal Board of Governors to modify the 2000 rate

increase has ignited a new round of debate. Some believe raising rates may put the

Postal Service in a death spiral. What we do know is that rate increases alone will

not fix the serious cash flow and debt problems facing the Postal Service. A good

indicator of the seriousness of the situation is that the Postal Service has been reported to be preparing for yet another rate increase filing this summer. I am interested in learning from the Board whether this report is true and learning from management exactly how the Service plans to make up its possible $2–$3 billion projected loss.

The U.S. mail is a basic and fundamental public service. Hawaii’s postal patrons

and those of other states are entitled to reliable and efficient mail service at a fair

8

and reasonable cost. With a dedicated workforce of over 800,000 employees, it is the

largest federal civilian employer and operates more postal facilities than the number

of McDonalds, Wal-Marts, Blockbuster Videos and Starbucks, combined. This infrastructure fuels the private mailing industry that generates $155 billion nationwide

annually and employs 6.2 million people.

It is essential that an organization the size of the Postal Service be governed by

short and long-term financial goals that support its core mission—providing universal mail service to all Americans at affordable prices.

Because the Service has appropriately sounded the alarm over declining volume

and decreasing revenue, I am pleased to have the Comptroller General with us. By

placing the Postal Service on the list of high-risk federal programs, Mr. Walker has

spotlighted the serious financial and operational problems facing the Service.

The Postal Service has received a lot of attention in the last several months after

announcing a freeze on new construction projects, studying the elimination of Saturday mail deliveries, and raising rates. While I support reviewing all options and believe it is prudent, I want to make it clear that before Congress grants the Postal

Service greater flexibility, we should understand why the Service is facing a $2–$3

billion projected loss, and what can be done differently.

I wish to invite my colleagues to join the newly formed Congressional Postal Caucus, on which I serve as the vice chairman. Congress should shoulder some of the

responsibilities. I am confident that by offering a forum to educate and brief members of Congress on postal matters and concerns, we will be better prepared to work

with all stakeholders in finding solutions to our common concerns. I look forward

to reviewing the testimony presented at this hearing.

PREPARED STATEMENT OF SENATOR MAX CLELAND

Thank you Mr. Chairman for giving me the opportunity to speak at today’s hearing and address the Postmaster General, Mr. William Henderson, the Vice Chairman of the Postal Rate Commission, Mr. George Omas, the Chairman of the Board

of Governors, Mr. Robert Rider and the Comptroller General of the United States

General Accounting Office, Mr. David Walker. As you know, the United States Postal Service (USPS) was established by the Postal Reorganization Act of 1970. This

act chartered the USPS to perform as a business enterprise, with the freedom to

provide ‘‘non-postal services,’’ ensuring that USPS could provide universal service

reliably, efficiently and as inexpensively as possible for years to come. Furthermore,

the USPS was mandated to operate on a self-supporting, break-even basis, with particular emphasis on restraining postal rate increases and providing ‘‘honest, efficient, and economical management.’’ The Postal Service is an amazing organization. Its Universal Service program

binds the country together by providing inexpensive and reliable First Class mail

delivery for every American and every business. The USPS stops at approximately

134 million addresses six days a week and delivers approximately 670 million pieces

of mail every day. The Postal Service generates approximately $64 billion in revenue, ranking it 8th in the United States in the Fortune 500 Global listing. In addition, the Postal Service employs approximately 800,000 individuals giving it the nation’s second largest payroll, and USPS operates approximately 38,000 postal facilities. Managing any organization this size can be a very difficult challenge, but it

was done profitably for much of the latter half of the 1990’s.

In 1997 the Postal Service turned a $1.2 billion profit, and had been profitable

for the years 1995–1999. But in 2000, the Service showed a net loss of $199 million.

The Service originally predicted a deficit for 2001 of approximately $500 million.

Early in 2001 that projected loss was revised to between $2 to $3 billion, and with

a new rise in rates effective July 1, 2001, the loss is expected to be between $1.6

and $2.4 billion. The Service has gone from profitability to billion dollar losses in

less than two years. In order to cut costs and pay its bills the Postal Service has

frozen all existing capital construction projects, it is studying the feasibility of eliminating Saturday delivery, the Board of Governors voted to modify the most recent

rate decision by raising certain rates, and the Service expects to save $3 to $4 billion by 2005 through its ‘‘breakthrough productivity’’ plan. I applaud several of the

efforts of the Postal Service in attempting to meet this challenge, however, I am concerned about the need to promptly eliminate waste and how these cost cutting

measures will affect postal consumers.

The Inspector General found approximately $1.4 billion in waste, fraud and mismanagement within the Postal Service. I am aware that eliminating such waste will

not alone keep the Postal Service out of debt. However, I would like assurances that

USPS is addressing the problems that the Inspector General identified, and I would

9

like to know specifically what USPS is doing to address these issues. Successful attention to these matters could appreciably increase the credibility of the Service in

the eyes of the public and could help USPS meet its financial crisis without decreasing service to postal consumers.

I have heard from many communities across Georgia that they are experiencing

service problems at their existing Post Offices. The lines are too long, there is not

enough parking or the Post Office is not big enough to handle the volume of mail

going through its facility. Georgia has experienced one of the largest growth rates

in the country and many existing facilities are being squeezed in their effort to provide prompt, efficient and reliable service. I have been informed by USPS that

projects in Buena Vista, Butler, Columbus-Beallwood, Cotton, Darien, Gray, Guyton,

Hawkinsville, Kathleen, Lyons, Macon-Downtown, Marble Hill, Marshallville,

McCaysville, Monroe, Monticello, Pine Mountain, Pooler, Pulaski, Roberta, Rupert,

Sharpsburg and Townsend will be affected by the freeze. I am very concerned about

what the freeze in capital construction projects will mean to these growing communities in Georgia and how long it will last. Furthermore, USPS is studying the feasibility of eliminating Saturday delivery in order to cut costs. While eliminating such

delivery may decrease transportation and labor costs, the amount of mail will not

decrease and mail delivery will either be delayed or carriers will be paid overtime

in order to deliver the mail efficiently in five days instead of six. I would like assurances from the Postal Service that efforts will be made to eliminate waste and increase productivity before any services are cut.

Once again, I would like to thank the Chairman and the participants in this hearing for allowing me to speak to you about my concerns. I will review the report for

this hearing when it is released and I look forward to working with you in the future on these and other important issues.

Senator CARPER. If we could do that, we would be grateful, sir.

Chairman THOMPSON. Without objection. Senator Carnahan.

OPENING STATEMENT OF SENATOR CARNAHAN

Senator CARNAHAN. Thank you, Mr. Chairman. I would feel remiss if I did not ask you gentlemen which State you would go to,

to watch Mark McGwire hit a home run, eat the best barbecue, and

enjoy the best country western music?

Chairman THOMPSON. Now, wait a minute. [Laughter.]

We will discuss this later. [Laughter.]

Senator CARNAHAN. Thank you, Mr. Chairman. I would like to

thank each of the witnesses for being here today. I can remember,

as a young girl growing up, the excitement I felt when the postman

would arrive with our mail everyday. He might bring us messages

from as far away as New York or Los Angeles. He would deliver

a letter to any of my relatives, even those who lived in the rural

areas. It is an idea as old as the country itself, a National Postal

Service, efficient and convenient—connecting every American to

every other American. It is a part of our collective experience, but

increasingly this idea is in danger.

At the recent House Government Reform Committee hearing, Mr.

Walker, you testified that the Postal Service is at growing risk of

not being able to continue providing universal postal service, vital

to the national economy, while maintaining reasonable rates and

remaining self-supporting through postal revenue. I am deeply

troubled by the current estimates of the U.S. Postal Service’s financial situation. I am particularly concerned at the prospect that the

Postal Service may reach its $15 billion debt ceiling in just 2 years.

I believe that, overall, the Postal Service does an excellent job in

delivering the mail. Postal workers in Missouri and all over the

country are dedicated and hard-working, but when Americans see

postal rates rise twice in 6 months and hear that Saturday service

may be eliminated, the Postal Service’s reputation is badly underVerDate 11-MAY-2000 09:12 Mar 13, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6601 73392.TXT SAFFAIRS PsN: SAFFAIRS
10

mined. Before we eliminate services, we should ask if the Postal

Service can be run more efficiently. Before we raise rates, we

should think about the impact on our families and businesses. This

situation is serious and warrants attention, both by the management of the Postal Service and by Congress, which is why we are

here today.

I believe there are three fundamental principles the U.S. Postal

Service must abide by. It must provide universal service to the

public. It must offer reasonable rates, and it must be self-supporting. If the Postal Service doesn’t live up to these three principles, then it’s failing its mission and failing the American people.

The first principle is that postal delivery is a public service and

must be available to all. People depend on it. From those operating

small businesses to seniors living in rural areas, who receive lifesustaining medication through the mail.

The second principles in ensuring reasonable rates. This is important on many levels, from the individual consumer who mails a

few items a week, to the large company, whose livelihood depends

on shipping its products to its customers. The Postal Service is an

integral part of our Nation’s economy. Any changes in postal rates,

no matter how small, have ripple effects across Missouri and every

State in the Nation. While sometimes rate increases are warranted,

they should be carefully considered and evaluated with discretion.

The third principle is that the Postal Service must be self-supporting. The Postal Service is a business. There are certain budget

realities and constraints that come with that. I sympathize that

rising fuel costs make delivery more expensive. This is an issue

that businesses and families across the country are struggling

with, but fuel costs are not the only factor. We need to look at both

the long-term and short-term. I look forward to hearing each of the

witnesses’ testimony on how costs can be reduced without displacing workers or eliminating services.

There are two points that I would like to leave the panelists

today. First, such drastic changes in financial projections in such

a short amount of time are unacceptable. Our families have to balance their checkbooks and pay their bills, and they expect the same

from our government agencies. This service is too important for the

books not to be kept in top order. I am eager to learn what steps

the Postal Service can take to prevent this from happening again.

Second, 6-day mail delivery service must be maintained. This

service is essential for Missourians, particularly those in rural

areas. It is also important for thousands of small businesses struggling to make it on a very small profit margin. That is why I am

supporting Senator Harkin’s Senate resolution regarding the need

to preserve 6-day mail delivery. The resolution opposes the elimination of Saturday home and business delivery. It calls on the

Postal Service to take all the necessary steps to assure that these

services are not reduced.

Just last week, the Postal Rate Commission approved yet another rate increase. If we cut services while raising rates, we’re

asking our citizens to pay more for less. We owe them better than

that. While I will not be able to stay for the entire hearing, as I

have a prior commitment for this same time period. I look forward

11

1The prepared statement of Mr. Walker appears in the Appendix on page 48.

to reviewing each of the witnesses’ testimony and learning from

your expertise.

Thank you, Mr. Chairman.

Chairman THOMPSON. Thank you very much. Mr. Walker.

TESTIMONY OF HON. DAVID M. WALKER,1 COMPTROLLER

GENERAL, U.S. GENERAL ACCOUNTING OFFICE

Mr. WALKER. Thank you, Mr. Chairman. I have a full statement

which, with your permission, I would live to have inserted into the

record and I will move now to summarize.

Chairman THOMPSON. It will be made a part of the record, without objection.

Mr. WALKER. Thank you, Mr. Chairman. I am pleased to be here

today to participate in this joint hearing on the financial outlook

and transformational challenges of the U.S. Postal Service. Overall,

the Service faces major challenges that collectively call for a structural transformation if it is to remain viable in the 21st Century.

A structural transformation of the Service is called for because the

Service faces major financial, operational and human capital challenges.

It is a growing risk of not being able to continue providing universal postal service, vital to the national economy, at reasonable

rates, while remaining self-supporting from postal revenues, the

three criteria that Senator Carnahan articulated. Accordingly, in

April 2001, GAO placed the Service’s transformational efforts and

its long-term outlook on our high-risk list. This inclusion on our

high-risk list will focus needed attention on the dilemmas facing

the Service before the situation escalates into a crisis where the options for action may be more limited and costly.

The key factors that contributed to our decision to place the

Service’s transformational efforts and its long-term outlook on our

high-risk list included the following: The Service’s financial outlook

has deteriorated significantly. Its borrowing is increasing, and the

Service’s debt is approaching the $15 billion statutory limit without

having a specified debt reduction plan in place. In addition, the

large number of retirements expected over the next several years

will place even more pressure on the Service’s expenses and its

need for cash.

The Service recently deferred capital investments to conserve

cash, thus delaying certain needed infrastructure improvements.

These deferrals appear likely to continue in the current environment. In March 2001, the Postal Service Board of Governors wrote

to the President and the Congress, asking for a comprehensive review of postal laws, and noting that the threat was serious and significant with regard to whether or not the Postal Service would be

able to continue to achieve its mission in future years.

Potential losses in First-Class mail volume over the next decade

could create large financial deficits, leading to a situation where

universal postal service could ultimately be threatened, prices

would likely increase at a much faster rate, and other options

would need to be explored. The Service is subject to several statutory and other restrictions that serve to limit its transformational

12

efforts; the binding arbitration requirement, the rates-setting process and the facility closure restrictions being examples of these restrictions.

The Service has also had periodic conflicts with some of its key

stakeholders, including the postal unions and the Postal Rate Commission. We have noted longstanding labor-management relations

problems that have hindered improvement efforts, including three

labor agreements that cover over half of the Postal Service’s workforce, that expired in November 2000, and will now evidently be resolved through binding arbitration. In addition, the Postal Service

and the Postal Rate Commission have had long-standing disagreements concerning pricing decisions.

Finally, two key leadership positions need to be filled regarding

postal operations and rate setting; namely, a successor to Postmaster General Henderson and a successor to the chair of the Postal Rate Commission. Although the Service has announced some

steps to address its growing challenges, it does not have a comprehensive plan to address the numerous financial, operational or

human capital challenges that we have noted.

In April 2001, we recommended that the Postal Service provide

quarterly reporting on its financial and operating results and projections, in order to enhance transparency and improve accountability in connection with these matters. In addition, we also recommended that the Postal Service develop a transformation plan

in conjunction with Congress and other key stakeholders that

would address the major challenges facing the Service. Postal Service officials told us that they generally agree with our recommendations, and in that regard I recently met with Deputy Postmaster

General Nolan, and we discussed ways in which the Service could

move to begin to address our recommendations.

We appreciate the difficulty of this task, given the long-standing

nature of the structural problems and major differences in stakeholder views, many of which are outlined in my statement. As I

mentioned, we at GAO have already started to reach out to some

of the affected stakeholders, to try to obtain an understanding as

to their current positions. Some of that is outlined in my statement, and I think you will note that there are some significant differences of opinion in that regard.

But the sense of urgency in connection with the Postal Service

is growing. The basic statutory framework that governs the Postal

Service has not changed since 1970, despite the fact that there

have been significant developments in technology and a much more

competitive marketplace that provide alternative forms of communication and delivery choices to both businesses and consumers,

and these are likely to continue to escalate in the future.

The Service’s ability to provide universal postal service at reasonable rates will be increasingly threatened unless changes are made,

both within the constructure of current law, as well as through relooking at the legal and regulatory framework that governs the

Service.

I thank you, Mr. Chairman. I would be more than happy to answer any questions at your pleasure.

Chairman THOMPSON. Thank you very much. Mr. Henderson.

13

1The prepared statement of Mr. Henderson appears in the Appendix on page 77.

TESTIMONY OF HON. WILLIAM J. HENDERSON,1 POSTMASTER

GENERAL, U.S. POSTAL SERVICE

Mr. HENDERSON. Thank you, Mr. Chairman. First, I want to

thank the Senate for its cooperation. I have 17 days left after 30

years of public service in the Postal Service, and I have enjoyed it

very much. It has been an interesting job, from being postmaster

of Memphis, Tennessee for several years, to postmaster of Greensboro, postmaster of Stockton, California, and running plants all

across America. It has been very interesting.

Let me say a couple of things, and I will submit my statement

for the record. First of all, we agree with the General Accounting

Office on their assessment of the Postal Service and of the Postal

Service’s future. There is no disagreement there, and it is something we have had extensive discussions on. Second, and let me try

to put the future of the Postal Service in kind of precise terms.

What do you do when your revenues decline and your labor costs

are controlled by an independent arbitrator?

If you look at the structure of the expenses, you have 14 Presidentially-appointed individuals. That is the Board of Governors and

the Postal Rate Commission, whose primary job it is, is to ensure

affordable prices for the American public, 14 Presidential appointees, constructed in 1970 by the Postal Reorganization Act. In

effect, when you look back 30 years, and you look at what controls

the price of postage—it has been the cost per hour, which has been

determined by an independent arbitrator; and that fact is something that needs to be changed.

I am not opposing collective bargaining, and no one in the Postal

Service is; but the fact that when we constructed—the United

States constructed—the Congress constructed the PRA, one of the

most important aspects of that construction was how do you control

postage rates? How do you do that? Do you set it up with administrative law judges? How do you do that? The major mandate, the

major obligation, of nine Presidentially-appointed Governors and

five Presidentially-appointed Postal Rate Commissioners, is to set

the rate of postage, and, in effect, causally, that rate is set by an

independent arbitrator, and that is something that creates a problem for the Postal Service.

You put that in the context of now what do you do when your

revenues—that is, the demand for postage—goes down? You have

whatever it be, mergers and acquisitions, Internet as opposed to

standard A, competitors as opposed to packages—how do you respond to that? It is very difficult for the Postal Service to respond

to a lessening of demand. For example, your letter carrier delivers,

on the average, about $1.75 postage to every household in America

today. That is to break even. So what happens when you get 20

percent less postage? You do not stop delivering mail. You do not

do those sorts of things. You do not go from overnight to 2- or 3-

day service. You simply absorb that cost.

What happens when the price of fuel—how long has the price of

fuel been going up now? A year-and-a-half? I bought a Dodge Durango 3 years ago, and I filled it up with regular gas at 99 cents

a gallon. Today, that is almost $2 a gallon. For every penny in gasVerDate 11-MAY-2000 09:12 Mar 13, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 73392.TXT SAFFAIRS PsN: SAFFAIRS
14

1The prepared statement of Mr. Rider appears in the Appendix on page 83.

oline, it costs the Postal Service $5 million. It does not have the

ability to put a surcharge, like our competitors have, or like the

airlines have, or even now, I went into a hotel—I stayed in a hotel

the other day; had a surcharge on my room for energy cost. The

Postal Service does not have that ability. It accumulates those costs

and then dumps them at a point when it changes prices.

Those are antiquated ways of dealing with the future, I would

urge you to look at that in the coming days, to look at the statutory

construction of the Postal Service, because it is my belief that it is

very important to America to have universal service, to have affordable rates, to have an access system. We talk about the digital

divide. One of the things that we are doing with Senator Stevens

in Alaska is providing access vehicles, small devices in lobbies and

certain places, testing them, so that Alaskans who cannot afford to

buy computers or cannot afford to buy access modems, can go to

their post office and cross that digital divide without having a barrier of $1,500 or $1,000 for an Internet device, and I think that is

very important.

So I think the Postal Service is relevant today. It has a strong

ubiquity all across America, and it needs to be reexamined in light

of its statutory construction. Thank you, Mr. Chairman. I would be

happy, at the appropriate time, to answer any questions.

Chairman THOMPSON. Thank you very much. Mr. Rider.

TESTIMONY OF HON. ROBERT F. RIDER,1 CHAIRMAN, BOARD

OF GOVERNORS, U.S. POSTAL SERVICE

Mr. RIDER. Good morning, Mr. Chairman and Members of the

Committee. I am Bob Rider. I am Chairman of the Postal Service

Board of Governors. I appreciate very much this opportunity to discuss the challenging universal mail service and the necessity for

legislative reform. However, before I start, I would like to publicly

recognize the 30 years of service given to the U.S. public by our

Postmaster General, Bill Henderson.

Bill, as you are all well aware, is retiring on May 31, and we all

want to wish you well.

Mr. HENDERSON. Thank you.

Mr. RIDER. The mission entrusted to the Postal Service by Congress is to provide universal mail service to every address in all

communities and neighborhoods throughout the United States at

affordable prices. This mission of inclusion and facilitation for the

Nation’s business and personal life is as fresh and relevant today

as in the country’s beginning. The American people have always

enjoyed among the lowest rates and best service in the world.

Throughout its history, the Postal Service has grown with the Nation. We still add over 30,000 new addresses each week to the distribution and delivery network, while keeping average price increases below the rate of inflation.

This is the equivalent of a brand new city of Chicago every year.

We have had only two rate filings since 1995, both times just a

penny on First-Class rate. We have done this by restraining cost

and improving productivity, as service networks expand to handle

the Nation’s growth. In recent months, several forces have comVerDate 11-MAY-2000 09:12 Mar 13, 2002 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 73392.TXT SAFFAIRS PsN: SAFFAIRS
15

bined to upset the balance between revenue and cost for this year.

Postal revenue growth has slowed with a weak economy, accounting for an expected shortfall between $500 million and $1.5 million.

The Postal Rate Commission recommended rates lower than

those the Postal Service had proposed and our financial plan had

assumed, increasing our net loss by $100 million. Other costs, such

as fuel, have grown due to rising prices, adding about $150 million

in this fiscal year. Taking these factors in combination, we currently believe the fiscal year 2001 net loss could exceed $2 billion.

The law provides us a limited opportunity to deal with this shortfall. As finances have suffered, the board has attacked the problem

with the tools that we have available to us. Earlier this month, the

Governors reluctantly decided we must exercise our authority on

the record of the most recent rate case, to modify postage rates to

adjust a shortfall of about $1 billion, through a rate adjustment

averaging 1.6 percent. We took this action to protect the financial

integrity of the universal mail system.

Because the adjustment comes so late in the fiscal year, this move yields only about $200 million in a shortfall in the remainder

of this fiscal year. In recent years, the Postal Service has had good

success with programs for managing work hours and other controllable cost elements. Last year’s productivity improvement of 2.5

percent was the best since 1993. In current circumstances, however, extraordinarily and, unfortunately, painful additional measures are essential. First, we have eliminated $1 billion from the

capital commitment budget for this fiscal year in order to conserve

the cash to pay our bills, and to reduce future commitments to

match cash flow.

Next, we have directed management to prepare another rate filing, to get the Postal Service back on a pay-as-you-go footing, maintain financial viability and achieve breakeven, as the law mandates. Also, we have directed management to take a fresh look at

all operating expenses, to realize additional savings. A number of

these actions are now in place, among these are a hiring freeze at

headquarters. Management has eliminated over 1,100 headquarters and headquarters-related positions since the beginning of

this fiscal year, along with 20 percent, or 232 of the positions in

our area offices.

These reductions are continuing at headquarters, area and district offices. Also, a nationwide freeze in the hiring of processing

and distribution clerks. So far, we have over 7,000 fewer career

clerks on the rolls than at the end of last fiscal year; also, a series

of comprehensive area mail processing studies, which identify opportunities to consolidate operations and to reduce expenses. Many

of the delayed capital projects are badly needed. Their postponement will make it difficult to meet the needs of our customers and

our employees. The board’s responsibilities, nevertheless, require

us to make sure that financial resources are on hand to pay bills

when they come due.

Every 2 weeks, these bills include one of the Nation’s largest

payrolls, providing the livelihood of more than 800,000 postal families. In the years ahead, cost-cutting and rate increases within our

current statutory framework are not sufficient for the Postal Service to keep pace with today’s market dynamics. More businesslike

16

1The prepared statement of Mr. Omas appears in the Appendix on page 88.

2The prepared statement of Ms. Goldway appears in the Appendix on page 137.

management is required to maintain the financial integrity of the

Postal Service and the foundation for universal mail service. The

outdated statutory framework both contributes to current financial

problems and severely limits what can be done about them.

The Postal Service has limited authority over its prices, services,

wages and other management levers in the postal system. The

cumbersome history of the recent rate case, which took almost 2

years to complete, from preparation to finish, spending periods of

both economic boom and economic slowdown, illustrates part of our

problem. None of the private firms whose services compete with or

substitute for the mail go to every household every day. The Postal

Service delivers to 136 million addresses 6 days a week. To break

even, we need an average of about $1.75 to $2.00 in postage for

each delivery point every day. Three-quarters of all households do

not receive that much mail each day.

If universal service does not remain economically viable, many

Americans will not get the level of service or the affordable prices

they are accustomed to receive. The most advanced nations around

the world are rapidly modernizing and reorienting their postal systems. The Postal Service delivers 40 percent of the world’s mail,

but America lags far behind in postal reform. The overseas posts

are reorganizing to protect their universal service and keep their

rates affordable. Many now come over here to compete for some of

our mail. Without vigorous postal reform in the United States, this

country faces increasing pressure on the economic foundation for

universal service at affordable prices.

The American people should not have to face this result. The

United States should continue to have the best, most modern postal structures and services in the world. We pledge that the Postal

Service will do all that we can, both to manage the current challenge and to contribute to the success of a comprehensive postal reform measure.

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

questions at the appropriate time.

Chairman THOMPSON. Thank you very much. Mr. Omas.

TESTIMONY OF HON. GEORGE A. OMAS,1 VICE CHAIRMAN,

POSTAL RATE COMMISSION

Mr. OMAS. Thank you, Mr. Chairman. My name is George Omas.

With me today are my fellow commissioners, Danny Covington,

Ruth Goldway,2 and Trey LeBlanc. As you know, and has already

been mentioned, the position of Chairman of the Postal Rate Commission is currently vacant. I was elected vice chairman by my colleagues and have been performing the administrative functions of

the chairman since February.

Mr. Chairman, at this point, I would like to request the Committee accept my written testimony that I submitted in advance of

this morning.

Chairman THOMPSON. It will be made a part of the record.

Mr. OMAS. I would like to focus my statement this morning on

responding to a specific question; the letter inviting me to testify

17

here today asked whether I concurred with the Postal Service’s pro- jection of a $2 billion to $3 billion deficit. The short answer to that

is that I cannot evaluate that estimate. The Postal Service has not

provided any systematic explanation of its multi-billion dollar projections. The imprecision of its forecasts makes it impossible to

evaluate their reliability.

The Postal Service may have detailed analyses that justify these

forecasts, but such analysis have not be made available to the public or to the Postal Rate Commission. The Commission’s primary

function is to respond to the Service’s requests for rate and classification decisions. The Postal Service provides detailed supporting

cost data when it asks the Commission to recommend rates. However, after the Commission provides its recommendation, the Commission does not have ready access to data that would enable it to

know what portion of the Postal Service’s rate case cost projections

were mis-estimated.

From the limited data available to the Commission, it appears

that the major causes of the current losses are costs that are substantially higher than the Service projected just a few months ago.

Some of those who think that drastic legislative action is necessary,

think that projected deficits may have resulted from a decline in

volume caused by growth of electronic communication, but mail volumes are not declining. It also has been suggested that the mix of

mail has changed and that the Service is now delivering less-expensive mail. But from the data currently available to the Commission, it appears that the major cause of operating losses are costs

that are higher than the Postal Service expected.

The Commission has examined the Postal Service’s limited preliminary cost reports for the first half of fiscal year 2001. We have

annualized these results for the first six accounting periods of 2001

data and compared those figures with the revised annual projections estimated for fiscal year 2001 at the end of the most recent

case. This comparison is quite revealing. Comparing seven important cost elements, the Commission finds that if current cost patterns continue, the Postal Service is likely to incur $1.8 billion

more in cost in 2000 than it had estimated to the Commission in

July 2000.

My written testimony, on page 14, includes a table that shows

the seven cost elements and how inaccurate the Postal Service cost

projections may have been. To me, this result undermines many of

the arguments suggesting that radical reform of price-setting mechanism is necessary. Mr. Chairman, skyrocketing costs are not the

result of volume losses to electronic mail. Skyrocketing costs are

not the result of mailers doing more work sharing or switching to

less-expensive postal products. Skyrocketing costs, again, are not

the result of a failure to rapidly bring new products to the market.

I thank you, Mr. Chairman. I would be pleased to answer any

questions.

Chairman THOMPSON. Thank you very much. Well, you have

touched on a lot of things that we need to get into today, but I

would like to try to lay a little groundwork. Most of our conversation, when we talk to you gentlemen, has to do with rate increases.

We demand that you do not increase rates, nor cut any services,

and I am sure we will go through all of that.

18

But what I am interested in, is about our particular State—our

neck of the woods—I want to make sure nothing has changed

there. We have got to protect ourselves, protect our constituents— but even that is really the tip of the iceberg. I think what today

can do is provide us a useful forum for discussing the reasons for

these cost increases. It can help us get underneath some of the

causes of what is going on with the Postal Service, fundamentally,

and what we need to do about it.

It seems to me at the outset that, clearly, Congress is going to

have to recognize that we cannot continue to demand the same

kind and quality of services that we have always demanded. We

cannot make such demands while putting requirements on the

Postal Service that drive up costs and mandate losing operations,

such as post offices and things of that nature, which are desirable,

but just not cost-effective. We have got to revisit these issues.

On the one hand, there are certain things that you have no control over like requirements we put on the Postal Service. On the

other hand, there are also certain things that you do have control

over. And as far as labor and other groups that are interested— competitors, customers and so forth—we all have our interests. We

are all going to have to come to the table and do something different, because it is quite obvious, if you know the GAO and read

the reports, and know Mr. Walker, you know that he is not given

to hyperbole. I read between the lines. It is obvious that the ox is

in the ditch, big-time.

Mr. Walker, just for a minute, let’s project out as to what we are

dealing with here and what we are looking at. What do we know?

Well, first of all, we know that there have been two rate increases

already this year. The estimates of where they are have wildly fluctuated, from a surplus at the beginning of last year to estimates

of a $2 to $3 billion deficit in February of this year. Now, they are

talking about somewhere in the neighborhood of a $2 billion deficit,

even after the rate increases, somewhere between $1.6 billion and

$2.4 billion for 2001; is that correct, basically?

Mr. WALKER. That’s correct, Mr. Chairman.

Chairman THOMPSON. This assumes more optimistic economic

forecasts, otherwise the numbers would be worse. It also assumes

meeting certain aggressive revenue growth and cost reduction objectives; doesn’t it?

Mr. WALKER. It does make certain assumptions.

Chairman THOMPSON. Objectives that have never been met before; have they?

Mr. WALKER. Not consistently.

Chairman THOMPSON. So I think the $2.4 billion possibility is

probably low, if you look historically. We have two rate increases.

It looks like we are probably going to have another one in July,

right, Mr. Henderson? Is that the way it is looking?

Mr. HENDERSON. Actually, it depends on what the economy does,

and, as you were talking about, where the losses end up. I think

July is probably a bit early, based on current information, but certainly it is looking at another rate increase in the near-term.

Chairman THOMPSON. The near-term would certainly be sometime later this year?

Mr. HENDERSON. That is correct.

19

Chairman THOMPSON. The speculation has been in the 10 to 15

percent range. Is that reasonable?

Mr. HENDERSON. Based on the existing economy, that is in the

range of what it looks like, although we do have a committee that

is looking to some alternatives to that type of a rate increase, to

try to minimize the impact on the customer. That is being headed

up by the Deputy Postmaster General, John Nolan.

Chairman THOMPSON. So, again, getting back to the groundwork.

That will be three rate increases in 1 year, a multi-billion-dollar

deficit. No real feeling as to what effect that is going to have on

business. Some of your postal business, of course, is very cost sensitive, and when your rates go up, your business goes down in some

of these areas. Is that not correct?

Mr. HENDERSON. That is correct.

Chairman THOMPSON. So we will have to figure that in, too,

which will again exacerbate the problem. As I say, this is based on,

to me—these are my words—kind of rosy estimates in terms of revenue growth and cost reduction objectives. So that is where we are.

Looking out into the future, Mr. Walker, correct me if my analysis

is wrong here. But it is not really an analysis, it is really a rendition of the factors that we are going to have to deal with. One

is that in all probability we are going to see a decrease in FirstClass mail. First-Class mail is about two-thirds your revenue, is it

not, Mr. Henderson?

Mr. HENDERSON. Right.

Chairman THOMPSON. We will probably see a decrease in FirstClass mail. Your labor situation is not going to get any better, is

it, Mr. Henderson?

Mr. HENDERSON. No.

Chairman THOMPSON. And certainly not in the near-term. The

thing that jumped out at me, too, along those lines, Mr. Walker,

is the retirement cost that you do not hear a lot of talk about. You

say in your report, ‘‘The Service has mounting debt and many billions of dollars in liability for future retirement and worker’s compensation expenses. These liabilities have increased in part because the Service was statutorily mandated to assume responsibility for funding all cost of living adjustments and health benefits

for its retirees since July 1, 1971. For the remainder of this decade,

these liabilities will continue to have an increasing impact on the

Service’s future cash flows, placing the Service under growing financial pressure.’’ We talk a lot about the fact that many government workers, almost half, are going to be eligible to retire in 5 years. It is certainly

true with regard to the Postal Service. You are going to have a

high rate of potential retirement in the near-term, and that is

going to have a major impact. You are already up to some high

numbers, in terms of retirement benefits, which are projected to

reach $14 billion in fiscal year 2010. So these retirement payments

are going to have a major impact, in addition to everything else

that we are talking about. It is going to be an additional load on

the back of the Postal Service; is it not, Mr. Walker? What is the

significance of that?

Mr. WALKER. There will be a significant cash flow drain associated with being able to make the payments for these retirement

20

benefits. There is about a $30 billion liability that the Service has

right now, I believe, attributable to unfunded past service-related

cost for CSRS. The $14 billion, I believe you referred to, Mr. Chairman, is the Service’s anticipated future annual retirement cost in

fiscal year 2010, which also includes employees that are under

FERS and the Federal Thrift Savings Plan, as well.

Mr. HENDERSON. Mr. Chairman, if I could add to that, there is

a talent drain, too. The executive ranks of the Postal Service, which

account for about the top 1,000 executives, 71 percent of those are

over the age of 50. There are only nine executives in the Postal

Service under the age of 40—no, seven. I take that back—seven executives under the age of 40. So not only is it a financial trade, you

are going to have a huge brain drain here.

Chairman THOMPSON. Mr. Walker has been telling us and trying

to explain to us for some time now that this is a government-wide

problem. We have reduced our workforce with no strategic plan.

We have a requirement for more and more qualified people, highlyqualified people, especially in the technical branches. We have been

reducing our workforce with no plan toward what the government

needs to do. I am sure that this is true in the Postal Service, as

well as everywhere else.

So, again the factors we are going to continue to see are probably

rate increases, if we go on the current pattern. That has got to affect the bottom line in these areas that are cost sensitive. Some

people are going to quit using the Postal Service because of the

price. We are going to see a decline in First-Class mail continue.

You are going to see continuing labor problems. Your labor situation is built-in, and the retirement part of all of that is going to

be increasingly onerous. Your productivity, while you are trying,

has been a real failure of the Postal Service. I mean, it does not

look like to me like you are going to increase our productivity

enough to make any measurable difference.

While you have increased productivity 11 percent since 1970,

your productivity has actually declined in 5 of the last 7 years. This

occurred even though the Postal Service has spent billions of dollars in automation and technology trying to improve productivity.

With regard to the Postal Service’s efforts to have other businesses

to generate alternative streams of income, such as e-commerce and

things of that nature, you budgeted $230 million. You wound up

making $2 million for fiscal year 2001. There does not seem to be

any Lone Ranger coming over the horizon to save that day, in

terms of making money in these new ventures.

There is no plan, as I understand, Mr. Walker, with regard to

these financial problems that the Postal Service has. Either with

regard to the finances, or the costs, or the projections, or the

human capital part of the equation, there is no plan, is that correct?

Mr. WALKER. There is not a comprehensive, integrated plan that

would include transformational proposals, as well. No, there is not.

Chairman THOMPSON. We are losing our Postmaster General and

we are losing the Chairman of the Rate Commission. Other than

that, everything is all right. [Laughter.]

21

So the idea that we can spend all of our time on these details

and not recognize that we have got serious underlying problems is

really keeping our head in the sand.

Mr. Walker.

Mr. WALKER. If I may, Mr. Chairman, I think the bottom line is

the status quo is not sustainable. We must recognize that there are

a variety of structural problems that need to be addressed. The answer is not merely to increase rates or merely pursue incrementalism, to do a little bit more here, a little bit more there. We

need to engage in a fundamental reexamination and transformation debate in connection with the Postal Service. Quite

frankly, we need to be able to put on the table things that historically have not been put on the table. For example, what is the definition of universal postal service? Right now, the definition might

be 6 days a week everywhere.

Clearly, whatever that definition is has to be met in rural Maine,

rural Alaska, and other remote areas, irrespective of the cost. That

is essential, because it is part of the fundamental definition. But

what is the appropriate definition of universal postal service, given

changes in technology, given alternative forms of communication

that exist today?

Chairman THOMPSON. And what are we willing to pay for it?

Mr. WALKER. And what are we willing to pay for it, and should

one size fit all? For example, in many areas such as health care,

you have a basic guarantee and you have options. If you want more

than the basic, you can get it, but the question is at what price?

So what we need to do is rather than looking back—yes, we need

to learn from the past—but the status quo is unsustainable. We

need to basically engage in a fundamental examination and we

need to look forward, in light of not just today, but the changes

that we know are coming tomorrow, some of which you mentioned;

the fact that more and more bills are being transmitted and paid

electronically. Other countries have already seen this.

A lot of that involves First-Class postage, the 34-cent postage,

the transmittal of payments. First-Class postage covers about 70

percent of the Postal Service’s overhead costs. So there are fundamental issues here that we have got to deal with, and we are not

going to be able to deal with then through incrementalism. We are

going to have to put some proposals on the table, with pros and

cons, that you have to look at as a package, because if we look at

each element by itself, it can easily be torn down; but then again,

we have to keep in mind, the status quo is unsustainable.

It is like Social Security and Medicare; the status quo is

unsustainable. Ultimately, we have to do something.

Chairman THOMPSON. You have touched on something very important about government, and that is the fact that there are some

areas where that is true, and the status quo is unsustainable. The

question is not whether or not it is unsustainable, because it clearly is. The question is whether or not it has to get a lot worse before

it gets any better. Whether or not the whole thing has to collapse

and we have got to have a massive infusion of appropriated funds

up here overnight someday. It is going to be a surprise to everyone.

Or whether or not we can go about doing something before then.

22

We are going to be here for awhile, but I do not want to take

all the time this morning. So I am going to wait till my next turn

for some other questions.

Senator Carper.

Senator CARPER. Thank you, Mr. Chairman. Hockey great Wayne

Gretzky was once asked, ‘‘Why are you such a good hockey player,’’ and he replied, as some of you have heard, ‘‘I go where the puck

will be, not where the puck is.’’ We have talked today about what your business was like 30

years ago, Mr. Henderson, when you joined up, and 20 years ago,

10 years ago, today, the environment in which you compete. Let’s

talk about what it is going to be like a few years down the line.

I turned to the Chairman during, I think, Mr. Rider’s comments,

and I said, ‘‘You know, it would be interesting if we had a futurist

here, who actually thought about these kinds of issues and could

look down the road and take us with him or her.’’ Let me just ask each of you to put on your futurists hats for a

minute, a minute apiece, and we will start over here with Mr.

Omas. But I am just going to ask you, put on your hat as a futurist. Where are we going to be 10 years from now? What is the environment that the Postal Service is going to be competing in 10

years from now?

Mr. OMAS. Well, I think that one of the places the Postal Service

should look is at its core business, that is, of delivering mail. Many

of the new markets, whether it be in electronic mail or whatever,

have not really—as we all know—turned any revenue for them. In

fact, it has cost the Postal Service a great deal of money. As one

GAO report said a couple of years ago, I think they lost over $88

million on several endeavors like T-shirts. I think that in the future the Postal Service should look at—it has a tremendous ability

to deliver—they have the household—they have the structure, and

I think they should look at that core business and expand on developing other products or whatever to be delivered by the Postal

Service.

Senator CARPER. Thank you. Mr. Rider, what will be the competitive environment 10 years from now for the Postal Service?

Mr. RIDER. Well, looking back, Senator, we have not done such

a bad job. In 1971, when the Postal Reorganization Act was passed,

postage was 8 cents. It has gone up 325 percent since then, but the

CPI has gone up 343 percent. In the last 10 years, postage went

up 36 percent and the CPI went up 37 percent. In the last 5 years,

postage went up 6 percent—— Senator CARPER. Excuse me. This is all well and good. I appreciate your setting the record straight. These are important things

to get straight, but that is not what I am asking. What I am asking

is where are we going to be 10 years from now? What will the competitive environment be like 10 years from now?

Mr. RIDER. We are mandated to give universal service, and I

think it is very important, as the Senator from Alaska has stated.

We need to give universal service, but we have got to have the tools

to work with, in order to provide that, and those tools have to come

through reform.

Senator CARPER. You have answered two questions, neither of

which I have asked. [Laughter.]

23

And those are good answers, but unfortunately not the question

I am asking. Just think about it for a minute.

Mr. RIDER. What is it in the future?

Senator CARPER. Ten years from now, what do you think it is

going to be like out here—to compete with? Are we going to have

more E-mail, more fax machines?

Mr. RIDER. You will be ordering stuff over the Internet just like

that, but you cannot deliver it over the Internet. It is going to have

to come from point A to point B to get to your house. That is where

we should come in.

Senator CARPER. Mr. Henderson, 10 years from now, you will

have your feet up somewhere.

Mr. HENDERSON. That is right. I will be looking at a partiallyprivatized Postal Service. I think that the Congress, over the next

decade, will privatize the Postal Service and make it an independent organization. I think a monopoly will be gradually reduced

and open to competition. The reason I say that is not because of

any insight into the U.S. Postal Service, but insight into the Postal

Service’s world. If you look at the Deutsche Post, which has testified before Congress, they are on the open market. I think that is

going to happen, and I think there is a lot of resistance to it today.

It is kind of like speaking about the devil, but eventually that is

going to happen and this Congress is going to do that.

Senator CARPER. Thank you. Mr. Walker.

Mr. WALKER. I think evolving technologies will continue to have

an adverse effect on the traditional services provided by the Postal

Service. I think competition will increase, and I think because of

that, the Postal Service needs to step back and say what is core?

What are the core products and services that need to be provided?

What is universal service? To what extent should non-core services

be provided, and, if they are going to be provided, based upon what

market analysis? What competitive advantage does the Postal

Service have to be able to do that, verses private sector entities?

In many cases, I think there will be more public-private partnerships. I think, as Postmaster General Henderson mentioned,

whether or not the Postal Service will ever be privatized or partially privatized is obviously a major issue, and I am not going to

comment on whether it should be or not. That is not my job. But

I will tell you we have to look overseas and find out what other

countries are doing. We are a much larger country. We are much

more geographically dispersed, and we have different wants and

needs than other countries do, but we can learn from what some

other countries have done in this area.

Chairman THOMPSON. Excuse me, but their postal services are

now over here, competing with us in some instances, isn’t that correct?

Mr. WALKER. That is right, for international bulk mail, and presumably they could try to expand that, to compete in other areas

where they could skim.

Senator CARPER. If you would turn to your employees, the folks

who are out there sorting mail today, the people that are out there

delivering mail today, and say to them, ‘‘Help us solve this dilemma,’’ any kind of idea what kind of recommendations they

24

would make, the people actually close to it, do it every day? What

kind of recommendations would they make?

Mr. HENDERSON. I think they would say put pay-for-performance

in, which is an issue; incentivize both revenue and cost-reduction

efforts.

Senator CARPER. Have you had the opportunity to experiment

with that at all?

Mr. HENDERSON. We have in management, but not with the

unions. We are pursuing that right now with the unions, in collective bargaining.

Senator CARPER. Is there any interest on the other side, on the

labor side?

Mr. HENDERSON. There is a discussion. I would not call it an interest. There is a discussion. I would say that they would say have

more self-management, cut back supervision because everybody is

an adult. They would say take out the monotonous tasks, capitalize

it—when I say capitalize it, I mean automate it, the monotonous

tasks, because people really want to—they want to be involved in

their work. They want to contribute. The average postal worker is

a very dedicated, educated individual. So they want to contribute.

It is the system where they do not contribute.

It is the fact that you stack mail on a sorter, and that is what

you do. That is a job we ought to eliminate. They would say reengineer some of that work. It is much like the automobile industry

where you are putting a lug on a wheel. You want to eliminate that

job, because that is not something that a human being wants to do

all day long. They would give you that kind of feedback. But they

are very dedicated to service.

My father was a railway mail clerk for 38 years, and service was

just—if you missed a pouch at a post office on a train, he would

go nuts. They would try to stop the train, and I think you have

that attitude, especially amongst letter carriers and rural carriers

in America. That is why you have mail service at the high levels

that it is today, measured by Price Waterhouse. It is because of a

lot of dedication.

Senator CARPER. Let me ask, and I am not sure who to direct

this question to, and this will be my last one, Mr. Chairman, and

then I will pass it on. In terms of initiatives that have been

launched by the Postal Service in the last several years, where you

have attempted to be more entrepreneurial, can you cite for me

some examples where you think you have been pretty successful,

maybe an example or two where you think you could be if we

would allow you to be?

Mr. HENDERSON. I think the area where we could be, if you

would allow us to be entrepreneurial, is in negotiated rates with

customers who provide efficiencies in mail preparation that we

could pass on. Right now, it is essentially one-rate-fits-all, and, I

mean, you have all been in business at some level or another. You

know that if you do not control your pricing or do not have the ability to control your pricing on a near-term basis, you are very limited in what you can deal with, and I think that is a fundamental

problem with the Postal Service.

The other thing in being entrepreneurial is speed-to-market is

very important. I have been in business prior to the Postal Service.

25

If you do not have speed-to-market, you are not going to be entrepreneurial, and we have no ability to really have speed-to-market.

We have to go through a public hearing, and if we are going to sell

a very entrepreneurial service and you have to have a public hearing, somebody is going to beat you to the market. So the limit of

pricing and speed-to-market are two inhibitors that are just obvious to anybody who has run a business.

Senator CARPER. Mr. Rider.

Mr. RIDER. I was just going to say that freedom in pricing does

not necessarily mean the freedom to raise rates. It means the freedom to reduce them during periods of low-volume. We have periods

during the year when our volume is just normally low. We have periods when the volume is high. If we had the freedom of pricing

flexibility, we could encourage people to mail during that off-season

and raise the rates during the heavy season, to help even out that

mail flow.

Senator CARPER. Mr. Omas.

Mr. OMAS. Senator Carper, I think that the statute, Title 39, as

it now stands, allows for flexibility. There is nothing in the law

that says that they cannot innovate. Because it is a monopoly, before the Service can negotiate a contract, it should be brought out

in the public so that competitors—to see what effect it will have on

the stakeholders that do the mailing. As far as—we have done a

number of expedited cases in the last couple of years that, in essence, are a form of negotiated service contracts. We did the ridealong and things like this that specifically hit a market.

So there is flexibility now, except that the law requires that it

be brought to the public’s attention before these services are negotiated.

Senator CARPER. Thank you. Mr. Walker, the last word?

Mr. WALKER. One of the problems, Senator Carper, is if you look

at the cost structure of the Postal Service, a very high percentage

of their costs are fixed costs, rather than variable costs, which

means that they have very little ability to be able to adapt quickly

to changes in revenue streams, and that is one of the things that

is going to have to be looked at. They have a significant fixed cost

structure, and it goes beyond just the issue of infrastructure,

which, quite frankly, is not just a Postal Service issue. It is a government-wide issue, in light of technological changes that have occurred over the years, but it is also in the area of labor cost, as

well.

I know, for example—at least it is my understanding—correct,

me if I am wrong, Mr. Henderson, that they have, for example, a

policy whereby when people are hired in, they are on probation for

2 years. So theoretically they can do something with regard to

headcount with regard to those individuals, but for people that

have more than 2 years, they have very limited flexibility. The

problem is the last thing in the world you want to do, in light of

the retirement eligibility rates that the Postmaster General mentioned earlier, is to say if you have just been here for 2 years, you

are going to be the first one to go. That compounds your problem,

and so one of the things that has to be looked at are some of these

structural issues and how they can gain more flexibility over some

of these.

26

Senator CARPER. Well, Mr. Chairman, I find this whole issue just

fascinating. I do not know who on this Committee is interested in

leading the charge, if it is you or Mr. Cochran over there or others,

but I want to sign up to be a part of the solution and to work with

folks here at the table, the people who will be taking your seats,

and those who represent the employees of the Postal Service. This

is an important issue and it is one that I look forward to joining

you.

Chairman THOMPSON. Thank you very much. I now call on the

Subcommittee on International Security, Proliferation and Federal

Service’s Chairman, Senator Cochran.

Senator COCHRAN. That is quite a title. It is hard to live up to

all that.

Mr. Rider, you mentioned the time it took to respond to the last

rate increase request. It seemed like a long period of time to me.

One question that I have is whether or not we should impose a

statutory limitation of time within which a request for a rate increase must either be denied or approved.

Mr. RIDER. Well, that would certainly help, but with the regulations as they are today, it takes us 6 months or more to prepare

for a rate case. With the Postal Rate Commission, it usually takes

them——

Mr. OMAS. The statutes allow 10 months.

Mr. RIDER. Ten months.

Senator COCHRAN. So there is a limitation.

Mr. OMAS. There is a limitation.

Senator COCHRAN. Should it be shorter? Is that justified? Why

does it take so long?

Mr. OMAS. The problem is that when the Postal Service submits

their rate recommendation or a rate case, it is the first time that

we have ever seen the figures, and by the time those figures are

published and you get them out to the stakeholders and those who

are in the mailing community have a stake in what the rates will

be, they must then present a case, and then that takes about 3

months, and then the Postal Service rebuts their case. So the thing

we get from the stakeholders and the community all the time is

there is not enough time.

Actually, at the end of the 3 months for the stakeholders and approximately 3 months for the Postal Service to review the case, we

at the Commission have about 6 weeks actually to put together and

to analyze the public record to make our decision.

Senator COCHRAN. Let me ask a question on another subject. We

have had an interest in the new businesses that the Postal Service

has gotten into, and Mr. Henderson and Mr. Walker will realize

that we have had a couple of hearings. We have had two GAO reports on this subject, specifically dealing with the e-commerce activity of the Postal Service. One question that I have is how much

revenue is the Service counting on from its new products and services, such as e-commerce? Is the Service on track to achieve this

target? I should ask Mr. Henderson.

Mr. HENDERSON. It is minuscule. The Postal Service is a $65 billion organization. It is not going to reinvent itself into another $65

billion organization. If you look at what the Internet does—I will

tell you in a nutshell what the strategy is. The biggest strategy the

27

Postal Service has for the Internet, and it is what large businesses

across America are doing, is using the Internet to take friction out

of itself. In other words, take personnel. Do it on a Web site instead of going to a personnel system. Take purchasing, do it electronically instead of talking to a purchasing agent. It has nothing

to do with selling a business. It has everything to do with cost-cutting.

The second thing that the Postal Service is doing with the Internet is creating an information platform that allows customers to

watch their mail, and that adds value. Whether or not we charge

for that insight or not is yet to be determined. It develops an activity-based accounting system, and it allows managers to have better

information about things that are going on in the Postal Service so

they can make better decisions. Those are the two biggest initiatives of the new technology age, and it is not really about selling

services. There has been a lot of hype. We have experimented with

some of that.

We have eBill Pay, for example, the largest electronic bill payment site. The major use of that is to see what the trends are, because we have $17 billion of our $65 billion in bill payments and

presentment. We think that is going to go away. The GAO has

talked about that, about the potential for that, and we learn from

that site. We learn about consumer habits and what drives them

in one direction or the other, and it has been misconstrued in the

media. We are not trying to reinvent ourselves into some e-commerce organization. We use e-commerce constructively, but we are,

at our core business, a mail delivery system, and that is what we

will be in the future.

Senator COCHRAN. The GAO report indicated some actions that

could be taken by the Postal Service to eliminate some inconsistencies with its estimates of cost and revenues with respect to ecommerce activity. Has there been any action taken by the Postal

Service to respond to those suggestions?

Mr. HENDERSON. We agreed with all those suggestions. Actually,

we worked very closely with GAO. They were very helpful in looking at our fledgling e-commerce business. We made some mistakes

in the beginning, when we launched it, and they were very helpful

in suggesting procedures to be put in place, and we have implemented those procedures, and I am almost positive that Mr. Walker will have a follow-up review of the Postal Service in those areas,

and we are prepared for that.

Senator COCHRAN. Is there ever any decision made to abandon

a service or a product if it fails to meet its revenue?

Mr. HENDERSON. Yes, under the e-commerce areas, we will—the

Board of Governors has put very strict mandates on us to have a

lifecycle of the products. We have a learning curve, and then we

make some decisions on whether or not to stay in it or get out of

it. So, yes, there are some strict guidelines on management.

Senator COCHRAN. Are these decisions made by the Board of Governors or made by you? Who makes those decisions?

Mr. HENDERSON. Well, they are made by management in most

instances, as a result of the board requiring certain restrictions on

us. We agree to stay in a business so long or get out of it. If it does

not have a net income opportunity or it does not have a learning

28

1 Responses from Postmaster General Henderson appears in the Appendix on page 108.

situation, in which we are learning a lot about our core business,

then we are going to get out of that sort of thing.

Senator COCHRAN. Have any products of this kind, or services,

been canceled?

Mr. HENDERSON. Yes, in fact, I will provide a list of all the products and services we have, and those that have been canceled and

those that have positive net incomes.

Senator COCHRAN. That would be good to have for the record.

Thank you very much.1

One other sort of macro question: Both Mr. Walker and Mr. Henderson talked about the statutory framework, and the fact that

there has not been change to this framework since the Postal Service was created in 1970. What changes should be made, based on

your knowledge of what is happening and the evolution of technology, demand, and cost? Mr. Walker, do you have in your reports

to the Committee any specific suggestions for statutory framework

changes?

Mr. WALKER. We have not gotten to the point, Senator, where we

outlined specific recommendations. Frankly, we have recommended, however, a process that needs to be followed in order to

come up with that. My view is, if you look at the statutory framework, there are several problems. One problem is it is cost-based.

It is cost-based from the standpoint of determining what revenues

are. One key question is how do you define cost? Second, if it is

cost-based, how do you define labor cost. Obviously, I am a strong

believer in collective bargaining, as I am sure you and others are.

Basically, what has happened over time is it has been cost-based,

without enough market-based principles. There is binding arbitration, which I understand might have been done as a trade-off back

in 1970, in order to avoid the possibility of a strike. Obviously,

needless to say, Postal Service workers are dedicated professionals

and they are essential to our economy. There is no question about

it.

But there are other important elements, as well. There are issues

with regard to inability to close facilities in some circumstances,

even in urban areas where there can be clear and compelling cases

they are not needed, and therefore they do not really affect the

ability to reach remote areas and to meet any reasonable definition

of universal service, even under the current definition of universal

service.

So I think there are a number of things; and candidly, Senator,

I think what has to happen is there has to be a set of proposals

come up, a package that comes up to the Congress, that deals with

these major problems, with various pros and cons, so that you can

engage in a debate about what needs to be done, and to look at it

as a package, rather than individual elements, and as compared to

the status quo, because everything is relative, and I think that is

what we think has to happen here.

Senator COCHRAN. One other statement that you made to the

Committee in your prepared statement was the need for a comprehensive plan. I think that was your phrase. Is this the same

29

thing as a strategic plan? Somebody else mentioned a strategic

plan. Is that the same thing?

Mr. WALKER. I think it is more than that, Mr. Chairman. The

issue is that clearly there is a lot of opportunity to help make

progress in the existing law by focusing on people, process, and

technology, to reduce cost and increase productivity. There is clearly opportunity to do that, but that is only going to delay the day

of reckoning before the Postal Service has to deal with the underlying structural problems. Clearly, you need a strategic plan as to

where you are going and how you are going to get there, but I

think the transformational plan also embodies, not just actions

that could be taken within the context of current law, but also possibly what type of legislative changes might be necessary.

A strategic plan typically is what enterprises are going to do

within the context of current law, and we need to come up with

specific options, pros and cons, with regard to how do you deal with

some of the underlying structural problems associated with the

Service. I think, frankly, the board has a major responsibility for

leadership in that regard. I mean, they need to be involved in strategic planning. They need to be involved in succession planning,

and I think they need to help facilitate this public dialogue and debate, because we are on a path that is not a positive path.

Senator COCHRAN. Is the GAO capable or are you qualified as an

agency to help develop this comprehensive plan?

Mr. WALKER. Well, candidly, I believe, Mr. Chairman, it would

be better if the plan was developed by management or in consultation with stakeholders or by an independent business-oriented authority. We would be happy to review that and comment on it, but

I do not know that it is appropriate for the GAO to come up with,

‘‘the plan.’’ We can clearly contribute to it. My personal view is that

it should not be a single plan. It should be various options, and

there may be more than one alternative that could be looked at,

with various pros and cons that then could be discussed and debated.

I think the idea that you are going to come up with one plan that

you are going to get a consensus on just does not exist. So, in the

end, we are going to end up having to come up with what is the

best of available options.

Senator COCHRAN. What is your reaction to that, Mr. Henderson?

Mr. HENDERSON. I agree with it.

Senator COCHRAN. How about you, Mr. Rider?

Mr. RIDER. I agree with it, and we are working on it.

Senator COCHRAN. You are working on a comprehensive plan?

Mr. HENDERSON. Yes.

Senator COCHRAN. When can we expect to hear about it, and

what the details may be, and will it require congressional action

to implement?

Mr. HENDERSON. Yes. In fact, we can provide you with a copy of

our initial efforts. We will provide that for the record. It is signed

by the chairman.

Senator COCHRAN. So it has been completed? You have completed

a comprehensive plan and you are ready to submit it to the Congress; is that it?

Mr. HENDERSON. Preliminary efforts on statutory reform.

30

Senator COCHRAN. I see.

Mr. RIDER. That is one part.

Senator COCHRAN. Who is doing the other part?

Mr. RIDER. We are working on the other part, too.

Senator COCHRAN. This is beginning to sound George Orwellian

here, Kafkaesque.

Mr. RIDER. The legislative reform package we have done, it

will——

Senator COCHRAN. All right. We will talk about it some more. I

am using up too much time.

Mr. Chairman, thank you.

Chairman THOMPSON. Thank you very much. Senator Collins.

Senator COLLINS. Thank you, Mr. Chairman.

Mr. Henderson, I want to talk with you about an area of avoidable cost. Before I do so, I do want to thank you for your many

years of service to the Postal Service and your country, and before

I launch into this issue, which concerns me greatly, I want to make

clear that I do not think, in any way, that you condone the issue

I am about to discuss. As you may know, the Postal Service in

southern Maine has been sued at least five times since 1998 for

sexual harassment of female employees, producing jury awards and

settlements that have exceeded $2.6 million.

Those are just the settlements that we know about. In three of

the cases, the settlement amounts were not disclosed publicly. So,

undoubtedly, the cost is even higher. Obviously, the vast majority

of postal employees in Maine and elsewhere do not participate in

sexual harassment. They do not condone or tolerate it in any way.

But clearly there is a serious pattern and problem when you have

five cases in that short of a time, that produce awards totaling

more than $2.6 million. That is an area of avoidable cost.

It also, obviously, more fundamentally concerns me because it

harms the employees of the Postal Service, who have been subjected to absolutely unacceptable sexual harassment. What is the

Postal Service doing to prevent these kind of cases in the future,

which obviously have an adverse impact on morale, are unfair to

the employees, and cost the Postal Service real money to settle?

Mr. HENDERSON. Well, first of all, let me say we have a zero tolerance for sexual harassment. I have actually fired four or five people in my career for sexual harassment. I was an investigator 25

years ago in those instances. These cases crop up, and they are terrible, and we do not like this, but when you have 800,000-plus employees, you have these situations exist. It takes an incredible

amount of communications and training to tell people, to show people, what the work place should be and what the standard is, and

we constantly have this.

I actually go through the training myself. We have a requirement

that all of our managers go through sexual harassment training. In

the case of Maine, we have had to put special teams in there, sensitivity teams. We are in the process of reviewing whether or not disciplinary action should be taken against individuals. It is a day-in

and day-out issue in any large organization in America, and we are

very vigilant about it. We are very apologetic when it occurs, and

where we find culprits, we take very swift and decisive action with

regard to that.

31

1 Responses from Postmaster General Henderson appears in the Appendix on page 108.

Senator COLLINS. What concerns me is there appears to be a disturbing pattern here when you have five essential successful

cases—five cases settled for millions of dollars in a period of 3

years. That is just not acceptable.

Mr. HENDERSON. No, I agree with that. I absolutely agree with

that.

Senator COLLINS. Do you know how much the Postal Service is

spending nationwide to settle sexual harassment cases?

Mr. HENDERSON. Yes, we track all of those settlements. I will be

happy to provide that for the record. I do not happen to know off

the top of my head what it is, but we do track all of our settlements, both in-court and out-of-court settlements, with regard to

complainants.1

Senator COLLINS. Obviously, as an employer, the Postal Service

would not want to, in any way, tolerate sexual harassment, but

there is a monetary implication here when you are paying out millions of dollars to settle cases that never should have occurred in

the first place. So this is something that I think deserves more attention by senior managers at the Postal Service, because no employees should be subjected to sexual harassment. Also, at a time

when you are facing such financial constraints, you should not

have to be paying out this kind of money every year to settle cases

that should never be occurring in any work environment.

Mr. HENDERSON. I actually agree with that. I think there is a

greater moral principle than there is a financial principle.

Senator COLLINS. I agree. I wanted to link it to the purpose of

this hearing, but it is of great concern to me.

Mr. Rider, it is my understanding, and I think you referred to

this, that the Postal Service in March wrote to the President and

the Congress, asking for a comprehensive review of postal laws.

The letter that you sent was provided to me first by the President

of L.L. Bean, probably Maine’s best-known company and a company whose future depends on an efficient Postal Service. The

President of L.L. Bean wrote to me and not only provided me with

the letter that the Board of Governors had sent to the President,

but also suggested that perhaps it would be helpful to have some

sort of Presidential Commission created to look at the operation of

the Postal Service and provide specific recommendations. Could

you give me your reaction to that recommendation by L.L. Bean?

Mr. RIDER. Yes, we would certainly agree to that—any way that

we can get the job done. The danger in doing that would be the

time that it would take to organize a Commission and bring them

up to speed and get it done. We have sent a reform package, as

I mentioned earlier, to the House, and that will be provided to you

right away, and that is what we had in the way of reform. We are

also working on our strategic planning committee, to get a strategic

plan to go along with the reform.

Senator COLLINS. But do you think that an independent look by

an outside Presidential Commission would be helpful?

Mr. RIDER. That would be fine.

Senator COLLINS. Thank you.

32

Mr. Walker, I want to follow up on the issue that the Chairman

raised about productivity in the Postal Service. GAO has testified

that, at a time when we have seen unprecedented technological advancement and really an explosion in private-sector productivity

that has helped keep inflation down and prices down, that the

Postal Service has increased its productivity by only 11 percent

over the past 3 decades; and, indeed, the Chairman noted that during one period—I think it was between 1993 through 1999—that

productivity actually declined in the Postal Service, which is contrary to the experience of many large private organizations.

It is my understanding that the GAO is studying whether or not

the Postal Service’s breakthrough productivity plan will produce

the kinds of cost savings, which I think are in the neighborhood of

$3 to $4 billion over the next 5 years, that the Postal Service is

projecting. Do you have any preliminary findings or any assessment of whether that plan is a realistic one that could help break

this disturbing trend?

Mr. WALKER. We do not have the preliminary findings yet, Senator Collins. I will tell you, as you pointed out, that while the Postal Service has had a near record year this past year in productivity

increases, about 2.5 percent, it has been a roller coaster. Since

1970—it is only an 11 percent increase since 1970. There are a variety of reasons for that. In some cases, as we pointed out in prior

reports, we have noticed that there has not been enough focus on

the design of this technology and the implementation of these technologies in a universal manner throughout the Postal Service.

There are other issues that we have raised, as well, including the

incentives associated with it, down to the level of people who are

actually doing the work. We will be looking at this area, and I will

be happy to provide back to you and the Committee our findings,

but it is too early to have preliminary conclusions yet.

Senator COLLINS. Thank you. I look forward to receiving those

results. Thank you, Mr. Chairman.

Chairman THOMPSON. Thank you very much. Gentlemen, primarily Mr. Henderson, Mr. Rider, and Mr. Omas, I want to talk

a bit about your rate case procedure and the facts leading to these

last, most recent rate increases. I want to discuss how they came

about, because there is clearly a disagreement or difference of

views between the Postal Service and the Rate Commission on this.

I think most people would probably be surprised to know exactly

how it works. That is, that the Postal Service goes before the Rate

Commission and presents a requested rate increase. Then, if the

Postal Service does not get what it wants, it can come back to them

again. If it still does not get what it wants, it can come back to the

Rate Commission a third time. Finally, if it still does not get what

it wants, the Postal Service, by unanimous vote, can do what it

wants to do anyway, right?

Mr. HENDERSON. That is right.

Chairman THOMPSON. So that is one thing that might bear a little discussion—whether or not that is what happened here in this

particular case. Within that framework, what happened in this latest instance was that, in January of last year, you filed your case

with the Commission. You asked for a 6 percent increase, including

a $1.7 million contingency amount; is that correct?

33

Mr. HENDERSON. That is right.

Chairman THOMPSON. At that time, you were projecting a sur- plus of $500 million for fiscal year 2001. As has been pointed out,

the Commission has 10 months to consider this. I can only imagine

how laborious this process is. I have read a little bit about it. There

have got to be huge law firms doing nothing in this town except

handling rate cases. It reminds me of the old transportation cases,

back when that was regulated. As I understand, there are over 70

parties to the procedure—everybody has got a dog in the fight. Everybody has witnesses. Two-ton trucks pull up with documents. I

mean, literately, right? You go through that for 10 months. So you

went through that, and in November, you, Mr. Omas, and the Commission, decided against a 6 percent increases. You decided instead

on a 4.6 percent increase, and instead of a $1.7 billion contingency

amount, you decided on a $700 million contingency amount. Is that

correct?

Mr. OMAS. That is correct, $1 billion contingency is what we actually gave them. They asked for $1.7 billion and——

Chairman THOMPSON. You cut it by $700 billion.

Mr. OMAS. Yes, sir.

Chairman THOMPSON. That is right. The Governors agreed to

allow the recommended rates to be implemented, but to do so

under protest. So, they implemented the new rates and then the

Postal Service came back to the Commission and requested that

the full revenue request be restored. Is that correct?

Mr. OMAS. That is correct.

Chairman THOMPSON. Here is where we have an issue, at least

one or two. As I understand it, your position is, the Postal Service

did not give you any material that would indicate to you the need

for what it was asking for.

Mr. OMAS. That is correct.

Chairman THOMPSON. At the time you first turned the Postal

Service down, it is your position that the evidence before you did

not justify that kind of increase.

Mr. OMAS. That is correct.

Chairman THOMPSON. You turned them down, then they came

back to you again and did not supplement the record with additional information; is that correct?

Mr. OMAS. That is correct.

Chairman THOMPSON. To justify the increase——

Mr. OMAS. And we had offered them the opportunity to reopen

the case, and they declined to reopen the case.

Chairman THOMPSON. Let’s stop right there before we continue

on our little chronology. Let’s ask Mr. Henderson and/or Mr. Rider

to comment up to this point, as to whether or not that is true.

Mr. HENDERSON. Well, we obviously do not agree or we would

not be in the controversy right here. I will give this to you, for the

record, as the testimony on what the current situation was in the

Postal Service.

Chairman THOMPSON. Let me ask you some specific questions.

Then you can comment however you want to, but break it down a

little bit. Do you disagree that you were projecting at that point,

in January 2000, a $500 million dollar surplus?

Mr. HENDERSON. No—you are correct.

34

1 Responses from Postmaster General Henderson appears in the Appendix on page 108.

Chairman THOMPSON. And you supplied information to the Commission, and with those projections, they turned you down. When

you came back to them again, did you supplement the record or did

you open up the proceedings, as was your right? Did you supplement the record with any additional figures or numbers or projections?

Mr. HENDERSON. We did not reopen the record, but we gave sufficient testimony, in our opinion, to have an accurate view of what

the economy was doing at the time. I will say that in the year 2000

we began to see shortfalls in revenues, which we reported to the

Commission, of about $240 million. We then were forced—we reduced, using good business judgment, our revenue forecast in 2001

by $630 million, and then we were hit with fuel inflation on the

order of magnitude of—in the case of $300 million, and we had an

unexpected cost of living adjustment, because fuel drives our COLA

cost, of about $430 million.

Chairman THOMPSON. As I recall, your transportation costs constitute about 10 percent of your costs, is that correct?

Mr. HENDERSON. That is right.

Chairman THOMPSON. And fuel is a part of that?

Mr. HENDERSON. Every penny, as I testified earlier, costs the Postal Service $5 million, every penny of gasoline.

Chairman THOMPSON. So what percentage of your overall costs

does fuel constitute? We know it is less than 10 percent.

Mr. HENDERSON. It is a major driver in our transportation costs,

and transportation, as you said, runs about 10 percent of our costs.

Chairman THOMPSON. Do we know how much of that 10 percent

is fuel?

Mr. HENDERSON. Yes, I can provide that for the record. I do not

know it off the top of my head.1

Chairman THOMPSON. You understand that you are mentioning

some facts here that would indicate that some circumstances were

in the process of changing. Mr. Omas’ position, as I understand it,

is that you did not lay out sufficient facts to him at that time to

justify a reconsideration. Is that what you are saying?

Mr. OMAS. Mr. Chairman, in July 2000, just prior to the last of

the hearings of the case, we asked the Postal Service to give us updated, accurate figures for 1999, cost and revenue analysis for fiscal year 1999, which they did. At that time, we adjusted their original request by approximately $587 million, somewhere along in

there, which included the ECI, which is the employment index. In

the case, we usually did ECI minus one. In this instance, we gave

them a full ECI. We took into consideration fuel costs, and we took

into consideration the recently concluded labor contract negotiations, which they had brought up, that they would be going in

there. So, the total package that we gave them—— Chairman THOMPSON. Also productivity fluctuations, too——

Mr. OMAS. Yes, and we added that to the case. That was in the

decision we issued in November.

Chairman THOMPSON. You understand what Mr. Henderson is

saying is that, after November, some circumstances changed. As I

understand what he is saying, they brought oral testimony to your

35

attention. You are saying they did not open up the record and supply it. What’s the gap here? Where are we missing each other on

this?

Mr. OMAS. There was no oral testimony, Mr. Chairman. They

submitted to us a request, on remand, that we restore the contingency, which we had cut, and several other things. There were a

total of about $1 billion, which they eventually restored. On the

first remand, we offered them the opportunity to open up the case

and we would try to expedite it. They declined to take that. They

did a second request, and in the second request, they again declined to open up the case.

Chairman THOMPSON. Between that request and the second request, they came out with some revised projections, projecting a

$2–$3 billion deficit for 2001. I think that was February of this

year.

Mr. OMAS. That is right.

Chairman THOMPSON. Then they came back after that. They

came back to the Commission again to ask for reconsideration.

Mr. OMAS. But they never presented new data. As far as we are

concerned, as I said in my opening statement and in my full statement, we have no analyses of where they are losing the money exactly, and we must—we are charged with following the evidentiary

record, and we had no record established as to what the new shortfalls, the loss of $2–$3 billion, were coming from.

Chairman THOMPSON. Mr. Henderson, do you take issue with

any of that?

Mr. HENDERSON. I, frankly, do not know. When I say that, I say

that from—I am not in the lawyering process in the Rate Commission. I do know that what was going on was obvious, and our appeal stated quite clearly what was happening in the Postal Service.

These were not projections. This is what was actually happening.

I mean, our revenues just went south, and we were saying to the

Postal Rate Commission, ‘‘Look, we need more money. Your revenue projections are not accurate.’’

Chairman THOMPSON. See, the problem that a lot of us have is

that these are very formal proceedings. Testimony is taken under

oath, and you go through them every 2, 3, or 4 years. You go to

all this trouble and all this expense, and take all this time in 10

months. You cannot, just in the middle of it or at the end of it,

start sending stuff over the transom. If you have got stuff like this

that is relevant and that is clear, you open up the proceedings. You

make that a part of the record, because the Commission can only

make their decision based on what is in the formal record.

Mr. HENDERSON. I agree with you, but I think if you were to examine the formal record, you would see that these things occurred

before the record had closed. In other words, in our opinion, the

sufficient evidence was on the record to justify the revenue requirement. I do not mean to say these things happened after the record

closed.

Chairman THOMPSON. But you will agree that there was no formal opening up of the record or live witnesses presented with this

new information?

Mr. HENDERSON. Yes, we did not feel that we needed it, and we

did not want to start the process over again, so that the 10-month

36

period would re-click. We needed the money. As it is, the Governors

went through the statutory process that allows them to implement

the rate case after two submissions and denials by the Rate Commission.

Chairman THOMPSON. What happened and the reasons why you

did it are two different things. I am just trying to get, first of all,

at what happened. It would seem to me that having been turned

down twice and with all these things happening, that you would

dot the i’s and cross the t’s necessary to get this before the people.

One might think you were not comfortable with your own projections. We talk about economic downturns and so forth. We know

that, at the last quarter of last year, that we were growing at 1

percent. And at the first quarter of this year, we are growing at

2 percent. So it is hardly a recession, but you had your cost fluctuations, labor costs and fuel, and all of that in the record as of July

of last year.

The issue is, when you were projecting a surplus, what circumstances changed so dramatically, so that you were, the next

day, as it were, projecting huge deficits? I do not know why. There

is obviously more here than meets the eye, and I am not smart

enough to figure it out. It does not make a whole lot of sense to

me.

Senator Cochran.

Senator COCHRAN. Mr. Chairman, you mentioned and one of the witnesses did, as well, the statutory borrowing limit of $15 billion,

and that this might pose a problem in the near future. The borrowing up to the end of fiscal year 2000 has amounted to $9.3 billion. My question is, when do you think, Mr. Walker or Mr. Henderson or both, the Service is likely to reach its borrowing limit?

Mr. WALKER. My understanding is without an additional rate increase, above and beyond the one that has recently been approved

by the Board of Governors, it would be in 2003.

Senator COCHRAN. Mr. Henderson, is that your estimate, as well?

Mr. HENDERSON. I think, yes, 2002, September 2002 or 2003.

Yes, we will have a problem. Yes.

Senator COCHRAN. What is the practical consequence of that? If

you reach that limit, what happens? Does Congress have to raise

the limit or do we have to excuse—— Mr. HENDERSON. No, you have to raise the limit.

Senator COCHRAN. We have to raise the limit.

Mr. HENDERSON. If you look at the limit, $10 billion was set in

1970. We are in the year 2001, and it has only been raised to $15

billion. You say what do we do with the capital? What does that

mean? We either raise capital through net income or we borrow it.

We use capital to substitute for labor, that is to mechanize the

Postal Service and to upgrade its infrastructure. So, it would put

handcuffs on both the infrastructure upgrades and on the further

mechanization or automation of the Postal Service.

Senator COCHRAN. Does the Board of Governors come into play

here? Do you have a role to play in connection with the statutory

borrowing limit?

Mr. RIDER. I believe they did. That was before my time.

Mr. HENDERSON. They approve, they being the Board of Governors, approves every capital expenditure of $10 million or over.

37

They have a role in spending the money. They have no role in setting the limit. That is purely the purview of Congress. That is a

statutory——

Senator COCHRAN. And the board has to approve the borrowing?

Mr. HENDERSON. That is right, $10 million and over. That is correct.

Senator COCHRAN. Does the board have a position on whether or

not this limitation ought to be changed?

Mr. RIDER. I am confused. The limit of $10 million we have is

on projects we approve, capital projects we approve. Everything

over $10 million, the board approves. Less than that, we do not. So,

we have control over the capital expenditures that are being made.

Mr. HENDERSON. That is not a statutory limit. That is something

they approve by bylaws.

Senator COCHRAN. We are mixing up two things.

Mr. RIDER. The $15 billion is set by Congress, as I understand

it.

Senator COCHRAN. Mr. Walker.

Mr. WALKER. Mr. Chairman, the $15 billion limit on borrowing,

the statutory limit, is an action-forcing event. That is going to

occur sometime between 2002 and 2003, depending upon what actual experience is versus projected experience. That means, among

other things, that we have some time to be able to come up with

a set of comprehensive proposals. Obviously, one of the things that

needs to be looked at is, part of that set of comprehensive proposals, is whether and to what extent that limit should be raised.

But, at some point in time, as Postmaster General Henderson said,

something has got to give.

When you end up coming up and you have negative cash flows,

you can cut back your capital spending only so far. Some of that

is only a timing difference. Some of that hurts your productivity

improvement efforts. But, hopefully, what can happen is, if we can

have a comprehensive set of plans or proposals that will consider

what is to be done structurally before you hit this wall, because

that is basically what the limit is. It is a wall that is going to require congressional action.

Mr. HENDERSON. That is right.

Mr. RIDER. Let me also indicate that the board does not favor

raising the debt ceiling.

Senator COCHRAN. That was my question. That is what I was

wondering.

Mr. RIDER. We do not favor raising. We would like not to do that,

because if we raise the debt ceiling, we are raising our interest

cost. That is just digging our hole a little deeper.

Senator COCHRAN. But if you do not raise the ceiling, what happens?

Mr. RIDER. We hope that we are going to be able to get reform

and be able to operate within those constraints.

Senator COCHRAN. So you think it would be something that

would put pressure on the Congress, to enact statutory reforms

that are needed; is that correct?

Mr. RIDER. It is not a matter of putting pressure on. It is a matter of trying to get the job done so that we can stay in business.

38

Senator COCHRAN. Either that or the Postal Service can change

the way it is managing its business, in order to keep the costs from

increasing. Is that the other answer?

Mr. RIDER. Yes, that is, sir.

Senator COCHRAN. But why hasn’t that been done?

Mr. RIDER. We are working on that now, sir.

Senator COCHRAN. One of the suggestions is that the costs of operating the business are out of control. I have heard that from critics who have come to see me, to say that it is time for the Postal

Service to change the way it operates, so that it does not permit

these costs to run out of control. Do you share that view, Mr.

Rider?

Mr. RIDER. No response.

Senator COCHRAN. Can cost be cut further without statutory reforms or new authorities by Congress?

Mr. RIDER. We are in the process of cutting those costs just as

much as we can, but 76 percent of our cost is labor—76 percent of

our total cost is in labor. With that, we have to have the mailmen

deliver to every house every day. We cannot cut back on that end.

We are cutting back on headquarters and right on down to that.

There is a point beyond which we can cut and still provide universal service and good service. Our customer satisfaction is quite

high. It is in the 90 percent—93 precent——

Mr. HENDERSON. Right.

Mr. RIDER [continuing]. Percent customer satisfaction. In the

capital business, part of the capital that we spend is for machinery

which has a good ROI. Part of it is for facilities, and that gives us

no ROI whatsoever. With adding on the volume of deliveries and

the business that we are doing, it requires some of these antiquated facilities to be expanded, and we do not get an ROI for that.

Mr. WALKER. Mr. Chairman, if I may?

Senator COCHRAN. Mr. Walker.

Mr. WALKER. There is unquestionably an opportunity to be able

to further cut costs and enhance productivity; however, without underlying structural reforms, you are not going to solve the problem.

You are not going to solve the problem, because even if you end up

spending more money on, for example, capital improvements, to enhance technology, to further automate a number of activities that

might be able to be automated, in order to achieve the savings on

that, you have got to do something with the labor costs. Under the

current structure, it is difficult to do that. You also have to look

at the infrastructure costs associated with the Postal Service. Ultimately, something has got to be done with that. We are not going

to change evolving technologies. We are not going to change the

competitive climate. The day of reckoning is going to come, and the

question is when do we want to deal with it.

Mr. HENDERSON. I would add—I would agree with everything

that Mr. Walker said, and just point out that last year we had the

best productivity we have had in almost a decade, and we lost $199

million, primarily due to softening demand. This year, we have better-than-planned productivity, and we have costs under our plan,

and we are losing money because of softening demand for postal

products, in other words, our revenues, and we are not even being

hit by the Internet today. As I said earlier, $17 billion of our $65

39

billion are bill payment and presentment. We all know it is not if,

but when, that is going to go electronic. AT&T, for example, spends

$1.75 or somewhere in that neighborhood, to send you a bill. If they

could take that out of their cost structure, they could save $1 billion on the bottom line. Somebody is going to figure out how to do

that. It is not going to happen tomorrow, it is not going to happen

maybe 3 years from now, but it is going to happen. And, when it

happens, you are going to have this same phenomenon of how does

the Postal Service—as the Chairman mentioned, continue to do

what is mandated under universal service, which is regularly

scheduled mail delivery in urban and rural areas, 6 days a week

across America, and opening post offices, keeping post offices

opened—this is not a matter of good and evil, where it is not costeffective? I will give you a classic example of that. Cape Cod has

7 townships, 53 post offices. President Kennedy had a great hand

in that.

Chairman THOMPSON. Is that Massachusetts? Several of them

ought to be closed.

Mr. HENDERSON. I will not go any further.

Senator COCHRAN. Thank you, Mr. Chairman.

Chairman THOMPSON. Thank you very much. Mr. Henderson,

you talk about softening demand, but how much more is demand

going to soften as these rates continue to increase?

Mr. HENDERSON. It is a problem. I agree with you.

Chairman THOMPSON. It is a Catch–22, isn’t it?

Mr. HENDERSON. That is exactly right. It really represents what

your opening statement said. It is a Catch–22.

Chairman THOMPSON. Let’s get back to that for a minute. Mr.

Walker, sitting here listening to this and listening to you, we have

had this conversation before with regard to other governmental

agencies. It seems to me that we have the same problems here that

we have in most all governmental agencies—financial management

problems, projections, trying to determine where you are, information technology problems, inability to use technology to help themselves, capital management problems, same kinds of difficulty in

changing the culture. What we have done here is tried to combine

a Federal agency entity with a private entity. To put them all together and give them characteristics of both.

It worked for a while and now it is not working anymore. Factors

such as the technological revolution that is going on and because

the bigger it gets, the more it begins to behave like other governmental entities. The Postal Service has 900,000 employees and we

cannot seem to do very much about it. Obviously, part of that is

because of the mandates. If we are going to keep all these post offices opened, somebody has got to be in them, and therein lies your

employee situation to a great extent. Aren’t these just the kind of

characteristics that should not surprise us at all? The question is,

in some sense, why haven’t these problems happened sooner than

they have?

Mr. WALKER. The Postal Service is a major and important case

study in the two questions, as you know, Mr. Chairman, that I

have raised before; and that is, now is the time that we need to

ask what the government should do and how should the government do business in the 21st Century. We have to move beyond

40

incrementalism. Minor changes here, minor changes there—we

have to recognize it is a new ballgame and we need to fundamentally re-examine some issues, not just with regard to the Postal

Service, which is why we are here today, and it is very pressing

and is very important, but in a whole range of areas, as well, because many of the challenges they face are shared by other entities.

The Postal Service is supposed to achieve a specifically-defined mission and they are supposed to be self-supporting. So, it is more visible with them and it is more universal with them, because every

American can identify with the Postal Service.

Chairman THOMPSON. Mr. Henderson, you were very candid in

your statement awhile ago about how you saw the future. You saw

a total or partially privatized Post Office. I said in my opening

statement that everything ought to be on the table, including the

question of the postal monopoly. What makes sense in the kind of

world that we live in? You and I both know that if that were to

come about, it is certainly going to have to get—well, that is not

going to come about in short order, if ever. And whether it should

or not is what we are going to be discussing here.

Mr. Rider, what would be your ideas, and Mr. Omas, also, what

would be your ideas about something that might right the ship. Or,

less than that, something that might be more politically doable

than going in that direction? Is it worth the effort or should we just

wait until we can revolutionize it before we do anything? I know

that you have had certain reform ideas. Congress ought to do something about your labor situation. You ought to be able to raise rates

whenever you want to, essentially, is the way I read it. Are those

the only proposals that you have that might be done, that might

be doable, less than privatization?

Mr. HENDERSON. Well, let me comment, because you raised the

issue of privatization and monopoly. You cannot talk about monopoly without talking about universal service. Universal service is an

obligation we have, and it is an obligation to go into areas of rural

Tennessee and rural Mississippi, where we do not make any

money. There are 40,000 post offices. The 26,000 smallest ones, it

costs over $2 to take in a dollar. So, there is an infrastructure in

place that is called universal service, that is there, and it is protected by a monopoly, and the two cannot—you cannot break one

without breaking the other one.

You also have an issue of affordable rates. It costs the same

amount of money to send a First-Class letter from Dresden, Tennessee, to Memphis, as it does to Anchorage, Alaska. That is something people accept as a fundamental right of living in America. So

those are at the core of the U.S. Postal Service, and I agree with

you, we are not going to break those tomorrow. You are not going

to break them for a long time, and I think we all recognize that

because of the impact on America.

As to the changes that can be made, yes, I think you can get

price freedom, but as the chairman of the board pointed out, it is

not just to raise prices, it is to lower prices. We make all our

money—the Postal Service has a business cycle. It begins in September. Halfway through the year, we make all the money we are

going to make. The last half of the year, we lose money. It is purely

a function of volume. The first half of the year is robust. The Postal

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Service is very efficient with that robust volume. Last half of the

year, the volume goes away, and the Postal Service scrambles. It

is impossible to say you are going to have 800,000 people in the

first half of the year and 500,000 at the last half of the year. It

does not work. There is a trade-off. Pricing freedoms—to change

that business cycle in the last half of the year just like a retail

store does. At the end of their business cycle, what do they do?

They put their clothes on sale. That sounds strange, but we could

incentivize mailers in that fashion. We could incentivize large mailers. Senator Collins talked about my good friend, Leon Gorman at

L.L. Bean. If he gave us packages for Japan—well, Japan is a bad

example. If he gave us packages for the United States in a certain

fashion, we could give him certain discounts, having more freedoms. It is not just a matter—do not think of it as a model of just

increasing prices, it is being able to adjust your prices.

In the final analysis, unless you change the accountability of the

labor conflict solution at the Postal Service—I am talking about the

wage increases—unless that has a different criteria, where the

voice of the customer is heard, you are not changing anything. We

can incentivize some growth, maybe. I actually question in my own

mind how much we can incentivize. If you look back 30 years, mail

volume growth has mirrored GDP. The correlation is almost a plusone. So, if you do not get control over the work-hour cost—— Chairman THOMPSON. When you say have the customer have a

bigger input in that, what are you talking about?

Mr. HENDERSON. Well, today, the customer has no input in it. It

is an arbitrator who makes an independent decision, and he makes

a decision without regard to what that impact will be on the price

of postage. And if you look back 30 years, you see that the cost per

hour and the revenue per piece, which is postage, correlate. In effect, you have an arbitrator driving postage rates.

Chairman THOMPSON. I have read where management-negotiated

contracts were not much different than the ones that

arbitrators—— Mr. HENDERSON. In the 1970’s, that was true. In the 1970’s,

there was a belief that the postal workers were underpaid. I

participated in the 1973, 1975, 1978, 1981, and 1984 negotiations,

not as a principal, but as a person there. There was a belief in the

1970’s that postal workers were underpaid, and they did put in

provisions that were in the private sector at that time. In the

1980’s, most of those provisions were taken out of the private sector, like cost-of-living allowances, for example. Some took

strikes—— Chairman THOMPSON. Do all postal workers have COLAs?

Mr. HENDERSON. Yes, all craftworkers have COLAs, not management. Arbitrators have a tendency not to take out provisions that

have been agreed to, and have been in there for long periods of

time.

Chairman THOMPSON. What do you think, philosophically, as you

go along? You are talking about things that might make you more

competitive and Congress might be able to help you out in that regard. But, philosophically, what do you think, as you see these

businesses around you who are beginning to provide some of the

same services you are? They say they can do it, that they can comVerDate 11-MAY-2000 09:12 Mar 13, 2002 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 73392.TXT SAFFAIRS PsN: SAFFAIRS
42

pete with one another and hold down prices, and maybe they can.

What do you think about that? Should we shut them out? Should

government be doing something that private enterprise can do?

Should we carve certain portions of it out? In every other aspect

of government, we are outsourcing an awful lot. What are your

thoughts about that?

Mr. HENDERSON. I think that is actually the key question of the

future of the Postal Service, and that is, what is the role of this

quasi-government agency in the future, and should it compete

where the private sector competes? I think the answer to that lies

in the answer to another question, and that is, is a healthy Postal

Service important to America? If the answer to the question is yes,

then you do take steps to allow it to compete. If the answer to that

is no, that a healthy Postal Service is not necessarily important,

and you want to shrink it down—and there is a sale, there are two

philosophical camps—then you do not do that and you just say size

down. My own view is that a healthy Postal Service is very important to America and will be for a long time to come, and that the

Congress ought to act in unison and make reforms that allow the

Postal Service to be more competitive. But, you can choose a different ideology. That is legitimate.

Chairman THOMPSON. Mr. Rider, what are your thoughts on all

of this in terms of what we can feasibly do?

Mr. RIDER. I agree, and I was just thinking on our labor situation. We are not allowed labor differentials in areas. Some of our

postal workers in cities like New York, or Los Angeles, California,

for example, are paid the same as those in Dresden, Tennessee,

which is not right.

Chairman THOMPSON. I understand that your position is, or that

there has been testimony to the fact, that there is a 23 percent

wage premium, in terms of the private sector, that the postal employees have. Is that correct?

Mr. RIDER. I have not seen that figure. Have you?

Mr. HENDERSON. Well, we will provide that economic information, but I will say that we are not saying that postal workers are

overpaid. We do not talk like that about our employees. Our employees do a very fine job every day and earn their money. We will

let the economists fight over that.

Chairman THOMPSON. I agree. I used to be one of them. One of

the multifaceted jobs I have had. When I dropped out of college 1

year to work a couple of different jobs, to save a little money, one

of them where I worked was the Post Office in Lawrenceburg, Tennessee.

Mr. HENDERSON. Oh, really?

Chairman THOMPSON. Yes, I think the wage was about a dollarand-a-quarter then, as I recall, but it was better than anybody else

was making. Mr. Rider, do you have anything further?

Mr. Omas, do you have any thoughts?

Mr. OMAS. Well, Mr. Chairman, that is a bit of a difficult question. I think there may be certain areas in the Postal Service that

could be privatized to make it more efficient, and I think all of that

needs to be looked at in the overall—where the Postal Service is

going to go and what we want the Postal Service to look like. But

I go back to what I said earlier, to Senator Carper, is I think the

43

Postal Service’s main business is its core business, and that is the

delivery of mail. They have the network. They have the ability and

there are companies now who are doing a great deal of work-sharing, which I think saves money for the Postal Service. We think it

does. They bring their mail down to sectional center facilities for

drop-shipping. In other words, they take a lot of work out of processing the mail. So maybe encouraging that is something the Postal

Service should look at expanding.

Chairman THOMPSON. Senator Cochran.

Senator COCHRAN. One final question. There is a requirement in

the statute that you have to break even, not that you have to make

a profit. It is still the Postal Service, not the Postal Business, in

the statute. Should either one of these concepts be changed in the

comprehensive reform that we undertake?

Mr. HENDERSON. That is an interesting question. I really do not

have an answer to that question today. I will say it is much easier

to manage a business for profit than it is to break even. You say

how does that make a difference? Well, in 1997, in July, we were

given the authority to raise rates, and because we were making so

much money at that time, we decided to postpone that decision of

implementing that rate increase until January. If we would have

been operating for a profit, we would have put those rates in in

July, and just increase our profit. Because we were making so

much money, we decided to postpone it for a year.

So, it does have an impact on you. I think, from a public policy

point of view, for our customers, it is probably a good notion to

have a not-for-profit Postal Service. From a management point of

view, I would much rather manage an organization that runs for

profit than one that does not run for profit. It is much easier.

Mr. RIDER. May I add that we do need to have some way—if we

are going to be breakeven, we have to have some way of raising

capital to take care of our capital needs, both facilities and machinery. If we are just in a breakeven situation, the only thing we can

do there is fund it out of depreciation, and depreciation does not

take care of even replacement today.

Senator COCHRAN. Mr. Walker, do you have any observations

about that issue?

Mr. WALKER. I think it is one of the issues that has to be looked

at as part of comprehensive reform. In my view, in sitting here and

listening today, to me, there were several things that were evident

right off. First, there is a need for additional transparency and accountability with regard to the Postal Service’s financial and operating results and projections. There is a need for enhanced communication and coordination between the board, management, the

unions and the Postal Rate Commission on these issues. There is

a need to try and consider additional contingencies, with regard to

variances that could exist with regard to either the revenue side

or the cost side in order to minimize the frequency of postal rate

increases. There is a need to continue to push, to try to improve

productivity and minimize cost and minimize rate increases, but

there is also a need to get on with the effort to develop a comprehensive transformation plan, because, in the end, we are not

going to be able to change the trends that are impacting the Postal

Service; the technology, the competition. In the end, there is going

44

to have to be much more comprehensive change to deal with the

underlying structural problems.

Senator COCHRAN. Thank you, Mr. Chairman.

Chairman THOMPSON. I think that pretty well says it all. That

is probably a good place to end right there. I think what you have

laid out for us is a job for Congress and a job for the Postal Service.

Clearly, we have laid some requirements on the Postal Service that

are important. Universal service is important and it is going to remain so, regardless of what it costs, probably. Mr. Rider talks

about the need to raise capital. The direction we are going in, you

are going to be raising it right up here, before the Appropriations

Committee.

I might just ask Mr. Walker, what is the significance—if they are

about to reach their debt limit of $15 billion—if we continue anywhere near where we are going right now? I think the picture is

probably a little worse than what we are laying out because of

these assumptions that are not going to pan out, but let’s say next

year, or the year after that, we reach the debt limit, what is the

significance of that? Obviously, they will have to start paying expenses in cash. I mean, in terms of retirement payments and all

of that, that is a significant landmark; isn’t it? Congress could, obviously, come in and throw a few billion dollars into the pot, but,

short of that——

Mr. WALKER. You could take some fairly dramatic and, some

would argue, Draconian actions. You could freeze all capital spending. You could end up engaging in massive layoffs for people who

you have the ability to lay off. I do not think any of these are desirable. You could end up taking some short-term actions that might

end up dealing with the problem in the short-term, but it could exacerbate your long-term challenge. We have a window of opportunity here, because one of the issues that the Congress is going

to have to deal with—it is going to have to deal with this debt limit

issue, the way things are going right now. So one of the things we

hopefully will do is to be able to take a look at this window of opportunity, do what you can in the context of current law, and come

up with a more fundamental transformation plan, including any

necessary restructuring, before you hit that limit.

Chairman THOMPSON. And, as a part of that, and because it

needs to be done, and because it can help the bottom line, and because it gives us the political ability to get something more done,

the Postal Service is going to have to do something better. In terms

of productivity, in terms of managing its costs, in terms of financial

management and things of that nature the Postal Service must do

better. I think it is not to lay blame on anyone, it is just a matter

of fact.

I hate to leave on that note, as a matter of fact, especially with

Mr. Henderson. You have given a lot of good public service to your

country over the years, and I want you to know we appreciate it.

As I say, this is probably not the best way to go out, unless you

have another hearing or two you are going to have to go to on the

other side.

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1The prepared statement of Ms. Corcoran appears in the Appendix on page 118.

Mr. HENDERSON. I enjoy the hearings. I would like to enter into

the record the statement of Karla Corcoran, Inspector General.1

Chairman THOMPSON. You are in a position now, and will be, to

have a perspective to look back on all this. To really give some candid advice to us, as to some things that we can do and maybe as

to what your successor can do, some of the things you have done

and some of the things you wish you had done. Thank you for your

service, and, gentlemen, thank all of you as we proceed to try to

make progress in this area.

The record will remain open for a week after the close of the

hearing. If there is nothing further, we are adjourned.

[Whereupon, at 12:26 p.m., the Committee was adjourned.]

(47)

A P P E N D I X

PREPARED STATEMENT OF SENATOR BYRON L. DORGAN, A U.S. SENATOR

FROM THE STATE OF NORTH DAKOTA

Mr. Chairman and Members of the Committee:

I thank you for the opportunity to share my views with you. As you know, the

Postal Service recently announced that it will be facing a projected deficit in the

range of $2 to $3 billion during fiscal year 2001.

A number of options have been proposed to help the Postal Service become more

financially stable. Construction projects, affecting more than 800 postal facilities,

were put on hold earlier this year. Also, last week the Postal Service announced yet

another set of rate increases in an effort to curtail the projected deficit. In April,

the Board of Governors called for a study of one of these proposals, namely, to cut

delivery by the Postal Service to five days a week. This is particularly troubling to

me because of the negative impact this would have on rural areas.

I understand the many challenges facing the Postal Service. Not only are some

costs rising—such as fuel prices for delivery vehicles—but other methods of communicating and doing business have caused a decrease in the volume of First-Class

mail. Many people are using the Internet to pay their bills, to go shopping, and to

contact their friends and family.

However, not all Americans have enjoyed the benefits of these technological advances. People in rural areas, like much of North Dakota, are hampered by limited

access to these technologies. These people depend heavily on the Postal Service.

It seems to me that eliminating Saturday mail service affects rural areas disproportionately. To those in rural areas, Saturday mail service gives people one

more day to receive mail, conduct business, order and receive prescription drugs,

send bill payments, and read the news from local and national newspapers. Furthermore, while those in urban areas have easy access to other delivery services, such

as the United Parcel Service (UPS) or Fed Ex, it is often not convenient for those

in rural areas to use these services or they may not be offered at all. Doing away

with Saturday delivery from the Postal Service is just another way that rural America would be left behind.

It’s also important to remember that taking away Saturday delivery won’t take

away the mail that is now being delivered on Saturday. Instead, mail carriers would

be forced to deliver a larger volume of mail each day. Anytime we have a national

holiday, the mail backs up, creating delays and higher workloads for carriers. Carriers may be forced to work overtime, just to keep up with the steady stream of

mail.

The idea to reduce mail delivery to five days a week is not a new one. Back in

the early 1980’s, there were substantial reforms relating to the Postal Service, and

at that time, some suggested that delivery service be reduced to five days a week.

Federal subsidies for the Postal Service were greatly reduced in the budget, and

Members of Congress were looking for ways to cut costs. But five day service was

a bad idea then, and it’s a bad idea now.

In response to those proposals, language was inserted into the Treasury/Postal

Appropriations bill, requiring the Postal Service to maintain service at 1983 levels.

As the Ranking Member of the Senate Subcommittee on Treasury/Postal Appropriations, I intend to work with my colleagues to ensure that this language is retained.

Limiting mail delivery to five days a week would be detrimental to rural communities which must already overcome the obstacle of isolation. I will work to prevent

this misguided proposal to cut delivery service from becoming reality. I commend

this Committee for holding this hearing and I look forward to working with you on

this important issue.

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