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WHERE HAVE ALL THE LETTERS GONE? THE

MAILING INDUSTRY AND ITS FUTURE

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

U.S. POSTAL SERVICE AND LABOR POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MAY 12, 2011

Serial No. 112–53

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

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

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

POLICY

DENNIS A. ROSS, Florida, Chairman

JUSTIN AMASH, Michigan, Vice Chairman

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

TREY GOWDY, South Carolina

STEPHEN F. LYNCH, Massachusetts,

Ranking Minority Member

ELEANOR HOLMES NORTON, District of

Columbia

GERALD E. CONNOLLY, Virginia

DANNY K. DAVIS, Illinois

(III)

C O N T E N T S

Page

Hearing held on May 12, 2011 ............................................................................... 1

Statement of:

Riebe, Dave, president of logistics and distribution, Quad/Graphics; Jerry

Cerasale, senior vice president, government affairs, Direct Marketing

Association; Rob Melton, vice president of specialty paper, Domtar;

and Todd Haycock, director, postal services, 3i Infotech, North America 4

Cerasale, Jerry .......................................................................................... 15

Haycock, Todd ............................................................................................ 31

Melton, Rob ................................................................................................ 24

Riebe, Dave ................................................................................................ 4

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

Amash, Hon. Justin, a Representative in Congress from the State of

Michigan, prepared statement of ................................................................. 50

Cerasale, Jerry, senior vice president, government affairs, Direct Marketing Association, prepared statement of .................................................. 17

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

of Virginia, prepared statement of .............................................................. 51

Haycock, Todd, director, postal services, 3i Infotech, North America, prepared statement of ........................................................................................ 33

Melton, Rob, vice president of specialty paper, Domtar, prepared statement of ........................................................................................................... 26

Riebe, Dave, president of logistics and distribution, Quad/Graphics, prepared statement of ........................................................................................ 6

(1)

WHERE HAVE ALL THE LETTERS GONE? THE

MAILING INDUSTRY AND ITS FUTURE

THURSDAY, MAY 12, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, U.S. POSTAL

SERVICE AND LABOR POLICY,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:36 a.m., in room

2247, Rayburn House Office Building, Hon. Dennis Ross (chairman

of the subcommittee) presiding.

Present: Representatives Ross, Amash, Jordan, Walberg, Lynch,

and Connolly.

Staff present: Gwen D’Luzansky, assistant clerk; Justin

LoFranco, press assistant; Jeffrey Post, professional staff member;

Peter Warren, policy director; Kenneth John, detailee; Kevin

Corbin, minority staff assistant; and Mark Stephenson, minority

senior policy advisor/legislative director.

Mr. ROSS. Good morning and welcome. I would like to call the

Subcommittee on the Federal Workforce, U.S. Postal Service and

Labor Policy to order.

Today our hearing is entitled Where Have All the Letters Gone?

The Mailing Industry and Its Future.

I will begin by reading our mission statement, as we do in the

full committee and subcommittees of the Oversight Committee.

We exist to secure two fundamental principles: first, Americans

have a right to know that the money Washington takes from them

is well spent and, second, Americans deserve an efficient, effective

government that works for them. Our duty on the Oversight and

Government Reform Committee is to protect these rights.

Our solemn responsibility is to hold government accountable to

taxpayers, because taxpayers have a right to know what they get

from their government. We will work tirelessly in partnership with

citizen watchdogs to deliver the facts to the American people and

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

I will now start with my opening statement and then recognize

the ranking member for his.

The demand for profitable first class mail continues to decline

due to deep economic recession and the ever-increasing reach of the

Internet and new digital media. Today’s hearing presents an opportunity for lawmakers to hear important testimony from the mailing

industry which has been left reeling in recent years by these develVerDate 17-JUN-2003 13:28 Nov 09, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\70526.TXT KATIE PsN: KATIE
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opments. It is an industry whose very survival depends on a strong

and profitable U.S. Postal Service.

The economic scope of the mailing industry and its impact on the

U.S. economy cannot be overstated. According to industry sources,

the mailing industry represents over 6 percent of the Nation’s jobs

and over 7 percent of the Nation’s GDP. The industry touches virtually every private and public sector of the economy, accounting

for approximately 8.7 million jobs and generating $1.1 trillion in

economic activity in 2009, according to a 2010 jobs report sponsored

by the Envelope Manufacturers Association Foundation.

Unfortunately, these numbers are down from recent years. As

the recession and electronic diversion have eaten away at the mail

volume, the printing, publishing, and paper industries were especially hit hard, each losing 10 percent or more of their employees

from 2008 to 2009. Japs-Olson, a direct mail printing company, had

to lay off nearly 300 employees between 2006 and 2010, 30 percent

of its work force. The U.S. Postal work force declined only 15 percent during the same period, even as mail volume fell by 20 percent.

Even as the use of Internet and new media increases, direct mail

remains an effective tool for communicating with consumers at all

levels. Combining direct mail with the Internet has proven to be

more effective than using either in isolation. As a result, businesses

across America, large and small, are increasingly working mailbased advertising into their marketing campaigns. When mailers

pay postage, that postage should be used to manage the Postal

Service.

Unfortunately, the Postal Service has been unable to adapt itself

quickly to a world where electronic communication is rapidly replacing physical mail. This failure of adaptation has left the Postal

Service with severe excess capacity and burdensome labor costs,

and put it on a trajectory that will lead to fiscal insolvency by October 2011.

The looming fiscal crisis of the Postal Service can no longer be

ignored. Congress must work with businesses, unions and Postal

Service itself to reform the Postal Service’s business model and

achieve long-term sustainability. In short, together we must all

work together and right-size the postal system for the 21st century.

However, before we can discuss the details of reform, I believe

it is important to make sure that we understand the challenges

that the mailing industry has faced and continues to face today.

That is why we are here today.

With that in mind, I thank the witnesses for appearing and I

look forward to their testimony.

I now recognize the distinguished Member from Massachusetts,

the ranking member, Mr. Lynch, for his opening statement.

Mr. LYNCH. Thank you, Mr. Chairman. I appreciate the courtesy.

I also want to thank our witnesses for their testimony.

Today the subcommittee will examine recent developments in the

mailing industry and, in particular, the economic and business

challenges faced by large volume mailers, supply companies, and

mail houses. Given that the Postal Service has just released its second quarterly financial report for fiscal year 2011, and the news is

not good, it is my hope that this hearing will also provide us with

3

an opportunity to further discuss the immediate steps that we can

take in order to restore the Postal Service to financial solvency for

the benefit of the entire postal community and for the country.

This week, the Postal Service reported that despite significant

cost reductions and revenue-generating efforts, it ended the second

quarter of fiscal year 2011 with a net loss of $2.2 billion. That compares with a net loss of $1.6 billion during the same reporting period last year. So, in addition, the Postal Service witness continued

decreases in total mail volume, which dropped from 42.3 billion

pieces to 41 billion pieces, a drop in mailing service revenues which

declined by $568 million, and a loss in total operating revenue

which fell by $500 million.

Accordingly, the Postal Service projects that it will have reached the statutory debt limit of $15 billion by the end of the current fiscal year and, absent legislative change, the Postal Service will be

forced to default on its mandatory payments to the Federal Government, including a $51⁄2 billion retiree health benefit fund payment

that is due on September 30th of this year.

It is against this extraordinary financial backdrop that we must

examine recent trends in the mailing industry. After all, the Postal

Service is an industry cornerstone and its financial recovery is vital

to addressing many of the challenges faced by other postal stakeholders, including mailers, print companies, paper businesses, and

general corporations across the United States. For the sake of the

Postal Service’s long-term financial viability, I understand that we

must give due attention to various modernization and restructuring

proposals in order to ensure that the Postal Service is able to transition and grow in the digital age.

When it comes to addressing the Postal Service’s current financial situation, I believe we have reached the breaking point, and we

can no longer kick the can down the road. Importantly, there are

certain actions that we can take in the short-term that will point

the Postal Service down the right financial path. For example, we

can revisit the legally mandated requirement that the Postal Service prefund 75 years of future retiree health benefits with annual

payments of $51⁄2 billion. Such a requirement is unheard of in the

private sector and is not faced by any other public enterprise.

In addition, we can work to reduce the Postal Service’s pension

costs by addressing the significant overpayment of both its civil

service retirement system and Federal employee retirement system

liabilities. To this end, I have introduced legislation, H.R. 1351,

that will rectify the billions of dollars in overpayments that the

Postal Service has made into its civil service retirement system account. Moreover, this legislation would allow the Postal Service to

use its Federal employees retirement system surplus to cover the

projected cash shortfall that will result when its next retiree health

benefits payment comes due in the fall.

Mr. Chairman, I look forward to our witnesses’ perspectives on

these issues, as well as the significant challenges that are being

faced by the mailing industry generally. I thank you for holding today’s hearing and I yield back the balance of my time.

Mr. ROSS. Thank you, Mr. Lynch.

Members have 7 days to submit opening statements and extraneous material for the record.

4

We will now welcome our panel of witnesses. Mr. Dave Riebe is

president of logistics and distribution for Quad/Graphics; Mr. Jerry

Cerasale is senior vice president, government affairs, for the Direct

Marketing Association; Mr. Rob Melton is vice president of specialty paper for Domtar; and Mr. Todd Haycock is director, postal

services, for Infotech, North America.

I welcome you all. Pursuant to our committee rules, all witnesses

must be sworn in, so if you would please stand and raise your right

hands.

[Witnesses sworn.]

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

Thank you and please be seated. What we are going to do is ask

that you give a brief, less than 5 minute, summary of your written

testimony that has been presented to the committee, and after that

we will go into questions. Now I will recognize Mr. Riebe for his

opening statement.

STATEMENTS OF DAVE RIEBE, PRESIDENT OF LOGISTICS AND

DISTRIBUTION, QUAD/GRAPHICS; JERRY CERASALE, SENIOR

VICE PRESIDENT, GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION; ROB MELTON, VICE PRESIDENT OF

SPECIALTY PAPER, DOMTAR; AND TODD HAYCOCK, DIRECTOR, POSTAL SERVICES, 3I INFOTECH, NORTH AMERICA

STATEMENT OF DAVE RIEBE

Mr. RIEBE. Mr. Chairman and members of the subcommittee,

thank you for providing me with this opportunity to testify on behalf of Quad/Graphics. My name is Dave Riebe and I am president

of logistics services for Quad/Graphics, the largest printer and mail

order of magazines and catalogs in the United States. We also

print and mail many other types of products.

The majority of Quad/Graphics’ 142 facilities are located in the

United States. On an annual basis, we partner with the Postal

Service to process 16 billion pieces of mail that account for $4 billion in postage.

Economic activity and advertising spending are key drivers of the

demand for printing. The global economic recession has caused a

falloff in printing since 2007. Along with postage increases and alternative marketing technologies, many printing companies have

failed and the industry is undergoing consolidation over capacity.

My company is not immune to the continued impact of the recession. We have had to make job reductions, plant closures, and complete other restructuring actions.

Quad/Graphics is encouraged by the cost reduction realized by

the Postal Service during the last 10 years, but it has not been

enough to offset the decrease in mail. The Postal Service currently

maintains a network that was built to support 300 billion pieces of

mail annually. Total mail volume in 2011 will be closer to 170 billion. Its network needs to be right-sized despite resistance from

local communities and their U.S. congressional representatives.

To survive and better serve its customers, the Postal Service

must be allowed to close and consolidate processing facilities and

5

post offices and right-size its payroll. Quad/Graphics fully supports

the Postal Service in that process.

Congress has an opportunity to help the Postal Service resolve

its financial shortfall by returning to the Postal Service the more

than $50 billion that have been overfunded for the civil service retirement system. This money belongs to the ratepayers since nearly

all revenues of the Postal Service come from postage, of which 90

percent comes from businesses. Additionally, legislative changes

are needed to modify or eliminate the mandated $51⁄2 billion annual payment to retiree health care.

We recommend that the retirement system’s overpayment should

be transferred from the pension fund to the retiree health benefits

fund to fully prefund those obligations. Quad/Graphics encourages

Congress to act in this manner.

The Postal Service must also grow mail volume and revenue. It

can do this by offering incentives to mailers. For years we have

said the Post Office needs to be more businesslike. We have asked

the Postal Service to be more creative in its pricing strategy and

to use rightful pricing flexibility.

In 2011, we are seeing a different approach by the Postal Service

to incentives that are based on value-added products and services,

and partnerships with mailers. Quad/Graphics fully supports these

efforts.

My company believes that print is a key element in effective

marketing campaigns that use multiple forms of media. More than

half of marketers are successfully utilizing three or more types of

media, including print, in their marketing campaigns, according to

a 2010 study. Quad/Graphics intends to keep print relevant and

cost-effective as an important way for U.S. companies to conduct

business. We are helping our U.S. customers reduce their postal

costs through investments in our innovative distribution network.

In conclusion, if the Postal Service can manage its costs and

maintain an acceptable pricing structure, its business can be maintained and growth will be realized in certain classes of mail. Quad/

Graphics will continue to do everything it can to help the Postal

Service be successful. We encourage Congress to do the same.

Thank you, Mr. Chairman and the subcommittee, for allowing

me the opportunity to share with you information about Quad/

Graphics and the role we play in the mailing industry. I would be

happy to answer any questions. Thank you.

[The prepared statement of Mr. Riebe follows:]

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Mr. ROSS. Thank you, Mr. Riebe.

Mr. Cerasale, you are recognized for 5 minutes.

STATEMENT OF JERRY CERASALE

Mr. CERASALE. Thank you very much. Good morning, Chairman

Ross and members of the subcommittee. I am Jerry Cerasale. I am

the senior vice president for government affairs for the Direct Marketing Association and we appreciate the opportunity to be here.

Director Marketing Association is a trade association for marketers and nonprofits to use communication channels to reach customers and potential donors directly. Our members represent about

70 to 80 percent of all the mail in the U.S. Postal Service and

about 85 percent of Postal Service revenues.

As you said, Mr. Chairman, the Envelope Manufacturers Associa- tion has found that mail has an economic impact of $1.1 trillion,

employing 8.4 million Americans. It is a very important channel of

communication for our members.

Marketers have always had to adapt to technology changes to

survive, and so must the Postal Service, and the Postal Service has

done so in the past; you go from horse drawn carriages to Pony Express to the rail to the auto to the air, and hopefully now to electronic.

The technology really affects direct marketers and our members

in four distinct ways: internally what happens at the Postal Service, internally in their own operations, customer preferences, and

disposal of the mail as an important factor with technology. The

Postal Service has automation and it has improved productivity.

Some of the productivity gains, some of the help has been lost,

however, with requirements that are placed on mailers for preparation and IT requirements. The increased costs are exactly like a

postage increase, so some of that has been lost, and we really hope

that internally the Postal Service can do more with electronic

means to accept the mail and take postage, to try and reduce paperwork there and make some savings.

For mailers, the new electronic communications really open up a

new avenue to reach customers and donors, but it is also an avenue

that we can use to complement the mail. New print technologies

allow multiple pieces of mail in one print run, so we can take advantage of presort and also different demographic considerations

for the recipients.

We can complement electronic shopping. Something goes in a

shopping cart, it is removed from a shopping cart. You can print

a postcard or a catalog with that item that was removed from the

shopping cart and send it to them and increase sales with a new

offer.

Members are using electronic messages to say, hey, take a look,

look out for this catalog, it is coming in the mail tomorrow, and

that is an important thing. Mail is used to drive traffic to Web

sites. Our catalog members don’t have to be told when the catalog

reaches the home, they just take a look at traffic on their Web site;

it is a driver to Web sites.

There are companies out there that will find out what my preference is for receiving communications, and a marketer can go to

them and they will send to me an electronic message, to Dave a

16

mail message, so it can all be done at once. These kinds of complementary activities of electronic and print are there, and we hope

it is being used. And it all depends on the return on investment,

the return on investment for the advertising dollar. Wherever it is

greater, that is where the marketers are going to go.

On the environmental side, it is interesting. You want to improve

the value of the mail and the idea of the thoughts of the importance of mail to consumers, and by technological improvements in

paper and so forth you reduce the environmental imprint. But you

also have increased recycling, and we are working to try and get

more and more mail recycled. The EPA said 64 percent of standard

mail was recycled in 2009. We want that to increase so it increases

the value of the mail in the minds of the American consumers.

There is a consumer preference. Clearly, they like bill pays and

that saves marketers money. That first class mail is going to go.

They are incentives. They are happy to receive the bill electronically. That saves marketers money and it meets consumer preferences. That mail is going to be gone. But banks have found electronic customers, they retain them more if they send them a piece

of mail.

I know my time is just about up. And we need postal delivery.

We do applaud the Postal Service for looking for a summer sale

for mail pieces that have a QR code to try and complement mobile

communications with print. It all comes down to the return on investment, postage. You have to figure out the retirement and the

health issue and the Postal Service has to downsize, however. We

have to have that straight.

Thank you very much for your time.

[The prepared statement of Mr. Cerasale follows:]

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Mr. ROSS. Thank you, Mr. Cerasale.

Mr. Melton, you are recognized for 5 minutes. Thank you.

STATEMENT OF ROB MELTON

Mr. MELTON. Chairman Ross, Ranking Member Lynch, and

members of the subcommittee, my name is Rob Melton and I am

the vice president of converting papers for Domtar. Domtar is the

No. 1 producer of printing and writing papers in North America,

and we employ 8,500 people across the United States and Canada.

I very much appreciate the opportunity to appear before you this

morning to provide a paper manufacturer’s perspective on the Postal Service and the mail supply chain.

As Chairman Ross and others have mentioned this morning, the Postal Service is the engine that drives the $1.1 trillion mailing industry and provides 8.3 million jobs. As you know, the Postal Service is on the brink of insolvency. Through our active membership

with EMA and customer relationships, we clearly understand the

devastating impact on the mail industry if the Postal Service issues

are not resolved.

Regulatory and legislative decisions that result in changes to the

reliability, level of service, and cost to deliver mail all influence

how our customers choose paper as their communication medium

over other technology options. With approximately 30 percent of

printing papers produced by our industry traveling through the

mail stream, these choices have a dramatic impact on our bottom

line. Uncertainty about the viability of the Postal Service will negatively impact mailer and marketer decisions to choose mail, so the

urgency to restore confidence that the Postal Service is a dependable partner is great.

Our industry has been forced to respond to economic challenges.

The paper industry has faced very similar challenges to the Postal

Service. Structural decline in paper consumption since 2004 has

averaged 4 percent per year. Part of this is due to the cyclical nature of our business and the economy, but primarily due to the

changes in the way people communicate and conduct business. This

has left us with excess capacity and a cost structure that cannot

be supported by current or expected demand.

We have focused on cost, including making difficult decisions to

close higher cost machines and facilities, in order to be more efficient and to maintain critical balance between supply and demand.

Since 2007, Domtar has closed machines in Maine, Ontario, Wisconsin, and North Carolina. In fact, a few weeks ago we announced

yet another pending closure of a machine in Arkansas. This is one

of four machines that exist in the facilities and will have a negative

impact on 110 people.

These are real jobs in rural America with wages and benefits in

the six figures, jobs that are not easily replaced. To put in context,

U.S. paper and paperboard has declined 10 percent over the past

3 years. Fifty-two paper mills have been closed; the paper industry

work force has been reduced by 31 percent, losing nearly 400,000

jobs.

However, we have not just focused on cutting costs; we have focused on meeting the evolving needs of our customers to try to

mitigate the trend of structural demand decline. Examples of this

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include developing products for new print technologies that will

allow marketers to digitally print images to be more customized

and variable to drive response rates and improve their returns. We

also are reducing overall paper consumption by making lighter

weight papers that have similar attributes to current products that

allow mailing costs to go down, but yet deliver the same results.

One fact that I think needs to be known is that we are fighting

back. We are making sure that consumers and perception of the

paper-based communications are well known. Sixty-three percent of

all paper produced in our industry is recovered. That includes

paper that is produced that goes into archival applications, such as

books or archives, but also toilet and towel and tissue, so they are

not recoverable.

We have also introduced a paper campaign, Domtar has, that

heavily raises awareness of the intrinsic value and sustainable nature of paper through our Paper Because campaign. We have a

Web site, PaperBecause.com, which has a great deal of information

about this, and I encourage you to check it out.

One example of where Paper Because campaign is focusing is on

raising awareness of consumers of some misguided attempts to convert paper-based mail recipients to electronic transactions, often

without choice. Recent polling data by Wilson Research found that

66 percent of Americans preferred receiving paper bills and statements, while only 13 percent preferred electronic delivery.

Yet institutions are increasingly switching customers to electronic statements without choice and in many cases are charging

for paper statements to manage their accounts. For example, the

Social Security Administration is no longer mailing annual statements. While we appreciate the cost savings, this is not without

risk. We don’t dispute that some customers prefer electronic statements, but consumers should have a choice and shouldn’t be penalized for preferring paper-based statements.

The short-term decisions that are acted upon to save the Postal

Service and control costs and deal with statutory fraud, pension,

and health care obligation funding rules will underestimate the impact on mail volume and may accelerate volume decline further.

The paper industry has been forced to make difficult decisions.

We have the ability to adapt, to change our cost structure, to anticipate customer needs, and set about a task to resolve them. The

Postal Service should do the same. Failure is not an option, as we

have many industries and so many jobs depend upon the well functioning reliable Postal Service.

Thank you for your time. I am happy to answer any questions.

[The prepared statement of Mr. Melton follows:]

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Mr. ROSS. Thank you, Mr. Melton.

Mr. Haycock, you are recognized for 5 minutes.

STATEMENT OF TODD HAYCOCK

Mr. HAYCOCK. Good morning, Mr. Chairman and members of the

committee. My name is Todd Haycock, and I am the director of

postal services for 3i Infotech North America. Thank you for the

opportunity to speak to you today about the changes that I have

seen over the past few years in this industry and what I expect to

see in the future.

As the Nation’s largest outsource remittance processing provider

and one of the largest first class mailers in the industry, mailing

approximately half a billion mail pieces annually, the U.S. Postal

Service is one of our largest partners.

It wasn’t that long ago that the U.S. Postal Service was the only

choice for sending and receiving bills, invoices, statements, and

other transactional documents. However, this shift away from

physical mail delivery to other forms of bill presentment and payment has increased pace in recent years as the number of alternative consumer billing and payment options has grown. You may

be familiar with online bill presentment and payment, but other

channels are emerging, such as secure email billing and payment,

electronic mailboxes tied to physical street addresses, mobile presentment and payment, text-based billing and payment, and more.

The shift to alternative channels is coming at the detriment of

the U.S. Postal Service-handled remittance mail, and the decline in

postal remittance mail has caused 3i Infotech to close processing

facilities in Tampa, Florida, Baltimore, Maryland, and Des Moines,

Iowa. At the same time, other remittance processors have decided

to exit the business entirely, to focus on their core financial services. We have acquired and consolidated both JP Morgan Chase’s

and First Tennessee Bank’s remittance processing operations. I anticipate that other consolidations will continue to occur in the industry as providers find they can’t maintain the scale or efficiencies

necessary to remain profitable.

When paired with trend directions and analyst predictions, this

continuing shift indicates that postal mail is changing from being

the dominant channel for bill and payment delivery to being one

of many channels available. Print bills and paper remittance exist

alongside all the other electronic channels, with all measuring relatively equal levels of importance to the biller.

At 3i Infotech, we follow these trends very closely and, therefore,

focus on providing new and expanded products and services to

serve the changing billing and payment market. There are two

sides to the equation: the bill and the payment. I see this change

in how payments are being made as being driven by the consumer.

The ease of making payments on a computer or on a mobile device,

where a few clicks can complete the transaction, is a very appealing option to time-pressed consumers.

On the other hand, the presentment of these documents has not

been subject to as vast of a shift away from the Postal Service to

electronic bill delivery. I believe this is mainly because the shift is

not being driven by the consumer, but by businesses. I personally

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prefer to receive a paper statement and then go online to make my

payment, as do many individuals that I know.

For businesses, however, there is good reason for trying to drive

consumers to electronic presentment. The biggest concern is the

cost. With postage rates increasing and the demand on large mailers to make expensive changes to the mailing process in order to

meet changing postal requirements, businesses have to make hard

choices as to where to assign their resources and capital. I am seeing more of my business customers pushing hard to drive consumers away from paper. As an example, one of my customers is

currently planning on charging consumers $1.50 per month if they

wish to continue to receive paper statements. And they are in the

process of informing customers of this pending change.

But this organization is not alone in pushing for electronic adoption. As an example, between 2008 and 2009, one of our customers

saw a 51⁄2 percent increase in the number of monthly statements

being presented electronically. In 2010, it grew to an 8.3 percent

increase. This means that electronic presentment represents 11.3

percent of their total volume, and will probably grow even more in

2011.

On the other hand, one of my other customers introduced electronic presentment and payment in July 2008 and now, in March

2011, they have 147,328 consumers receiving electronic statements

every month. That represents 16 percent of their total volume.

Every study and analyst group predicts that the volume of paper

bills mailed through the U.S. Postal Service will continue to decline

in coming years in favor of electronic alternatives. But the rate at

which that decline occurs is dependent on what actions the U.S.

Postal Service takes over the next couple of years. The ball is already rolling, and reversing the current trend will be difficult.

However, I think if the U.S. Postal Service focused on what the

mailers in the industry need, the value the mail can provide, and

decreasing the complexity and cost of the mailing process, businesses will divert their capital and resources to more oppressing

projects instead of trying to move away from physical mail in an

effort to cut costs.

The U.S. Postal Service faces substantial changes, both financially and structurally, that need to be addressed directly. However, I have observed that the new U.S. Postal Service management team is willing to address these issues and increase their

focus on mailers. This is very encouraging and I feel will be key

in keeping the U.S. Postal Service as an indispensable medium of

commerce and communications.

Thank you, and I look forward to your questions.

[The prepared statement of Mr. Haycock follows:]

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Mr. ROSS. Thank you, Mr. Haycock.

We will now move into the series of questions and I will recognize myself for 5 minutes.

It is interesting because we talk about the Postal Service, and I

equate it to the original information highway that over the last 200

years has provided, by way of infrastructure, the flow of information to households and to businesses everywhere, and yet, over the

last 20 years, predominantly with the use of the Internet, we have

seen times change. But I don’t think we have seen the Postal Service adapt to the market trends that have happened as a result of

additional information highways that have been developed out

there.

My first question would go to those that are in the manufacturing arena, or not manufacturing, but in the mailing arena.

Mr. Riebe, what percent, can you say, of your total cost is labor

cost for your business?

Mr. RIEBE. I actually don’t know that right off the top of my

head.

Mr. ROSS. OK.

Mr. Cerasale, any of your members, do you have any idea, in

your association, what percent labor cost is of the total cost?

Mr. CERASALE. I don’t. I know that some other delivery companies, the labor cost is about 50 percent of their total cost.

Mr. ROSS. OK.

And, Mr. Melton, can you say?

Mr. MELTON. About one-third.

Mr. ROSS. About one-third, so about 33 percent is labor cost?

Mr. MELTON. Yes.

Mr. ROSS. Mr. Haycock.

Mr. HAYCOCK. I am not exactly sure, but I know it is less than

50 percent.

Mr. ROSS. OK. And what we have seen, the testimony here

today, we have seen the U.S. Postal Service post a $2.2 billion loss

for the last quarter, $2.6 billion for the year-to-date. Eighty percent

of their cost is labor cost. It almost makes it cost-prohibitive to do

business unless some significant systemic changes are made. Your

businesses have had to make those changes.

Could you describe, Mr. Riebe, some of the changes that you

have had to make? Did it include layoffs? Did it include product

reformation and marketing changes or things of that nature?

Mr. RIEBE. Yes, thank you. Absolutely. When we hit the recession, we are actually in an industry that just had too much capacity, which is similar to other industries, and we have put a big

focus on looking at automation, which actually reduces labor cost,

and focusing on taking out equipment that is not efficient, and we

have seen a reduction in the overall capacity that we have. Whereas, in some plants, we were running at 50 percent capacity, today,

through consolidation, we were able to raise up the plants that

weren’t shut down to a capacity rate of 85 to 90 percent, which is

much more economically efficient.

Mr. ROSS. Thank you.

Mr. Melton, I know you mentioned, I think, that you have had

to undergo some changes, furloughs.

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Mr. MELTON. Yes. In the last few years, we have laid off a significant amount of people as a result of having excess capacity and

machine and facility closures, probably in the neighborhood of

3,000 people, 2,000 to 3,000 people.

Mr. ROSS. Mr. Haycock.

Mr. HAYCOCK. On our manufacturing side where we produce the

invoices and statements, we have continued to increase our productivity and, thus, having to lay off employees as we increase the productivity using automation and equipment to do that. On the remittance side, we have also closed facilities and consolidated because that volume has dropped dramatically.

Mr. ROSS. Mr. Cerasale, go ahead.

Mr. CERASALE. We have seen studies show that during the recession we had a reduction within the mailing industry of about 25

percent for employees.

Mr. ROSS. And what you have done, I guess, is to adapt to a market change in order to stay solvent, and my question to each one

of you, with my last minute here, is do you think that the Postal

Service is doing enough to reduce their cost to avoid insolvency?

Mr. Riebe.

Mr. RIEBE. I don’t, but I think they are being restricted by some

outside influences as well.

Mr. ROSS. And what would those be?

Mr. RIEBE. Well, I think the ability to be able to right-size their

facilities. There are definitely facilities out there that are not supporting themselves and don’t make good business sense, but there

is lobbying to keep them open anyway.

Mr. ROSS. I understand.

Mr. Cerasale.

Mr. CERASALE. We can’t afford the excess capacity; they should

be moving much more rapidly and reducing the excess capacity of

the Postal Service.

Mr. ROSS. Mr. Melton.

Mr. MELTON. Agreed. It is not going to get any better, and you

need to make tough decisions now to viable for the future.

Mr. ROSS. And that includes consolidation?

Mr. MELTON. Yes.

Mr. ROSS. OK.

Mr. Haycock.

Mr. HAYCOCK. It is interesting to me that years ago the cost of

manufacturing the statements to present for our customers and the

cost of postage were very similar, and now the differential there is

much bigger. We have reduced the cost for manufacturing, but the

postal costs have just continued to go up, which brings attention

to those costs that businesses want to then stop mailing.

Mr. ROSS. Thank you.

I see my time is up. I now recognize the ranking member from

Massachusetts, Mr. Lynch, for questions for 5 minutes.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. Riebe, I agree with a lot of your testimony; we will get to

that part. I am just concerned, are you aware of the labor contract

recently ratified by the American Postal Workers Union?

Mr. RIEBE. I am aware of it.

39

Mr. LYNCH. OK. The agreement, as you know, will reduce Postal

Service labor costs by instituting a 2-year pay freeze and introduces a new career pay schedule that is below the existing schedule

and substantially increases the use of non-career employees. Overall, this will result in over $3 billion in savings over the term of

the agreement, and the Postal Service is looking forward to executing similar agreements with the other postal unions going forward.

Would you agree that is a significant cost saving that will result

from this contract?

Mr. RIEBE. I would say it is a step in the right direction. Whether or not significant is the word I would use based on their overall

labor costs, I don’t know if I could get there.

Mr. LYNCH. I mean, you do agree that sorting mail, 40 billion

pieces of mail, handling those packages and actually physically delivering the mail is a labor-intensive process. I don’t know how you

get away from that. If you are going to actually take the mail and

deliver it to every home and business in America, that is labor-intensive. We don’t have robots that can do that. So it is a labor-intensive business. I just don’t see how you get away from that.

Let’s go to something that we agree on. We have been in a debate over the overpayment made by the U.S. Postal Service for employee service that was outside of the U.S. Postal Service. This is

for employees who were under the Federal system. And I agree

with your testimony that the overpayments have been made and

they have been funded by postal customers.

I also believe that the U.S. Postal Service employees, the postal

clerks, the letter carriers, both rural and urban, our mail handlers,

the supervisors and postmasters, they have earned those pension

credits. So they have been shortchanged because what they are

working for is being syphoned over to a Federal system. So we actually have a system right now under this current formula that the

U.S. Postal Service, its customers and employees are subsidizing

the Federal system.

Now, we have had a debate about this in committee and with the

representatives on the Federal Government side, and they are saying that you were aware of this, that this was the plan all along,

and that you all understood that you were going to be overcharged

to pay for Federal employees who don’t work for you. That is the

response I am getting from the Federal side, and I am just curious.

Were you told at the beginning that your operations were going to

subsidize employees who don’t work for the Postal Service? This is

the relationship you have. Were you told that, Mr. Riebe?

Mr. RIEBE. Not to the best of my knowledge.

Mr. LYNCH. Mr. Cerasale.

Mr. CERASALE. No. And I wasn’t around, I might look it, but I

wasn’t around in 1972, during that, so I am not sure what was told

back then.

Mr. LYNCH. I think you were around in 1972.

Mr. CERASALE. I was around, but not in the postal area, yes.

Mr. LYNCH. All right. I was going to say you must have had a

rough life. [Laughter.]

Mr. Melton? I am no spring chicken either, sir, so.

40

Mr. MELTON. I can say I wasn’t around in 1972, but I don’t believe that would be the case.

Mr. LYNCH. All right.

Mr. Haycock.

Mr. HAYCOCK. I am in agreement, I don’t believe that was the

case.

Mr. LYNCH. I mean, I don’t get this. That is the argument that

they are making, that the unions here, the mailing houses, that the

formula is the formula and that you were all part of this, that you

were going to subsidize the pensions for folks that don’t work for

you or aren’t in this business relationship in the current configuration.

And I just scratch my head on how they came up with that. They

cannot argue that the formula doesn’t favor the Federal Government and put a greater burden on you, so they are arguing that

this was the deal. I would just say, if I was sitting in your chair,

I would be thinking about a lawsuit saying, wait a minute, you

can’t take our revenues and pay the pensions of folks that we don’t

have a relationship with, that aren’t servicing our businesses. And

I don’t know if your associations have ever thought about that, but

I would say now is the time to start thinking about it. I really do,

because I agree with you.

I also agree on the consolidation of postal services. I am running

out of time here, but we have asked, and it is not outside pressure,

I don’t believe, that is fighting against these closures; I think it is

institutional resistance. We have 38,000 post offices in America

today. We have been spending on the floor here inordinate amounts

of time naming additional post offices. I think we are going to run

out of names before we run out of post offices, to be honest with

you.

But I agree that we have a lot of post offices out there that are

close together, and we could do a better job of consolidating and

closing some of those that have several close together, clustered,

where it would just a matter of walking up the street and using

the other post office, especially in some of our densely populated

urban areas. So I am with you on that, but I have run out of time.

Thank you, Mr. Chairman. I yield back.

Mr. ROSS. Thank you, Mr. Lynch.

I now recognize the Vice Chair of the subcommittee from Michigan, Mr. Amash.

Mr. AMASH. Thank you, Mr. Chair.

Mr. Riebe, you mentioned that the total mail volume for the

Postal Service is 170 billion pieces, and yet the infrastructure is

built to support 300 billion pieces. Due to technology and electronic

diversion, and given that mail volume has declined steadily for the

past 4 years, is it safe to say that the Postal Service is wasting

money to keep these systems operating?

Mr. RIEBE. In some ways they are required to keep some of these

systems running. Yes, absolutely I would say that.

Mr. AMASH. Would it be sustainable for your company to have

twice the production capacity that you actually needed and to

spend money that you don’t have on equipment that is hardly being

used?

Mr. RIEBE. Absolutely not.

41

Mr. AMASH. And I would ask the same question of the other witnesses here.

Mr. CERASALE. There is excess capacity that should be removed,

and we would not. We can’t afford to maintain that excess capacity,

and my members wouldn’t survive if they maintained that excess

capacity within their operations.

Mr. MELTON. We are in that exact same position and we have

closed facilities to match our demand.

Mr. HAYCOCK. In our manufacturing, similar thing; we try to

maximize the equipment we have and not have excess capacity,

just to keep our efficiencies and our costs down.

Mr. AMASH. And I assume each of you would also give the recommendations to the Postal Service that we need to reduce excess

capacity.

Mr. RIEBE. Yes.

Mr. CERASALE. Yes.

Mr. MELTON. Yes.

Mr. HAYCOCK. Yes.

Mr. AMASH. Mr. Riebe, you talked about prefunding health care

with pension fund. Could you talk about that a little more?

Mr. RIEBE. Well, I think the belief is it is just to try to create

an economic environment for the Post Office that makes them

stronger. We just saw the quarterly results yesterday and trying to

find a way to use that funding to give them a stronger foundation

is kind of the theory behind it.

Mr. AMASH. Mr. Riebe, in your company you also print stuff that

is not mailed, am I right?

Mr. RIEBE. Correct.

Mr. AMASH. And what percentage of your business would that

be?

Mr. RIEBE. I would say 20 percent.

Mr. AMASH. Has that changed over the past few years?

Mr. RIEBE. Yes.

Mr. AMASH. It has gone up or down?

Mr. RIEBE. Well, it has gone up because we did a major acquisition about a year ago, so that brought some product lines into our

business that weren’t mailed directly.

Mr. AMASH. Mr. Cerasale, what is the level of coordination between direct marketers and the Postal Service? I guess what I am

asking is do they have personnel at direct marketing facilities?

What is generally the scheme?

Mr. CERASALE. For our larger members, they have a fairly significant relationship with the Postal Service, particularly at the

plant level. Some of our members actually have postal operations

within the plant attached, mail units there, so postal employees are

there to accept the mail in the plant. Now, some of our smaller

members work with customer service representatives and work

through us, through the association.

We have a fairly consistent dialog with headquarters, not down

in the field level here, but with headquarters of the Postal Service

to try and work with them. So they have a relationship with sales

forces. Many of them use suppliers like printers such as Quad, who

print the mail for them, for many members, and then enter it in

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the mail stream, and they have relationships with the Postal Service.

Mr. AMASH. Are there any alternatives that direct marketers use

besides the Postal Service?

Mr. CERASALE. Oh, absolutely. They are multi-channeled. You

use electronic, they use telephone, they use direct response TV and

radio, even broadcast kind of ads. But the Internet and eventually

moving to mobile. You have to use them all, or else you are going

to fail.

Mr. AMASH. Mr. Melton, do you have any data to support your

suggestion that using paper is actually more efficient than communicating electronically? I think you had said that people prefer

paper?

Mr. MELTON. Yes. A study would show, in terms of bill presentment, that people prefer a paper-based statement rather than an

electronic statement.

Mr. AMASH. How much of your paper volume is related to the

Postal Service?

Mr. MELTON. Approximately 40 percent.

Mr. AMASH. And when you said that 63 percent is recoverable,

what does that mean exactly, is it that it is recyclable?

Mr. MELTON. That means that of the paper that is produced in

North America, 63 percent of that is recovered and brought back

in to be produced into products that would be called recycled.

Mr. AMASH. So 37 percent would come from trees?

Mr. MELTON. Yes. That would be what we call virgin. But it is

also renewable.

Mr. AMASH. Well, thank you. My time has expired. Thank you.

Mr. ROSS. Thank you, Mr. Amash.

We are going to go around again with a few more questions, if

you all have time.

Let’s talk about the electronic diversion and the Internet because

for so many businesses out there the Internet has been a boost, but

for, apparently, the U.S. Postal Service. So what I would I would

like you to do is to kind of put on a role of you are postmaster for

a day, and don’t concern yourself with prefunding or retirement,

OK? Let’s concern ourselves with marketing ideas, innovation, and

how we utilize the new avenues of information age out there, the

Internet, electronic diversion, to enhance the Postal Service. I know

we have talked about consolidation.

Mr. Cerasale, in some of your comments, your opening statement, you talked about how using digital media to physical media,

I guess is a way to put it. The Postal Service came up with, just

a couple years ago with a if it fits, it ships program. These are innovative ideas. These are entrepreneurial ideas. They come better

from the marketplace than they do from government.

So what I would ask you to do, if you could, think about and explain to me or to this committee what you think could be done in

conjunction with the electronic media that is out there today to enhance the Postal Service. Because even if we do take care of the

prefunding and the health care thing, we still have a systemic

issue that we have to deal with with the Postal Service, and that

systemic issue is how do we adapt them to the changes in the marketplace, to the changes in the information age so that we don’t

43

have to be back here again, as Congress, trying to fix something

that is antiquated.

Mr. Riebe.

Mr. RIEBE. Yes. Part of it I brought up earlier. I think volumetype discounts, getting creative with pricing, incentivizing people to

do more than what they are doing. From my perspective, the electronic media world is still trying to find itself, and for those of us

who are on email, or if you go on the Web, we still view print as

the most unintrusive way, print and mail, as the most unintrusive

way to solicit somebody to buy something for you. But complement

it. Let people use the Internet as the vehicle to order.

Now, that does have a negative impact on the Post Office, but

the belief is that when you are on the computer, and we all get

them now, you get a lot more emails than you ever used to get; you

don’t know how you are getting them or why you are getting them.

And it is intrusive to me. Where mail, although people try to make

it seem intrusive, it is really not; it comes in your mailbox and you

have an opportunity to make a choice at that point. But you don’t

have to deal with it when you are at work, you don’t have to deal

with it when you are trying to relax; you deal with it at your convenience. And I still think that is a huge opportunity for the Post

Office to take advantage of the fact that it is unintrusive.

Mr. ROSS. Thank you.

Mr. CERASALE. Well, I think, to start, we have to look at mobile

as well, and I think that this new summer sale they had with the

QR codes is a great idea for the Postal Service to look at. I do think

that the Postal Service should partner with the private sector with

information we have.

As I said before, if you know that I want to receive things electronically and that Dave wants to receive things in paper and Mr.

Melton wants to receive things over the phone or mobile, and you

have that information and to work with marketers so a marketer

can go to one place and its message gets sent out to paper to me

or paper to him, email to me, on the Web, through a mobile phone

and have it go out. That is how you can complement communications.

We have to look at this as a whole communications structure and

trying to reach customers, donors, potential customers, potential

donors and try and find the preferences that the consumers want

and get it out. That increases the ROI across the board.

And I think the Postal Service is part of that mix. It is going to

be a changing part of the mix, and it is clearly going to change how

the mail is sent in, what is sent in. It may not be a catalog, it

might be a postcard, it may be a smaller catalog, different things.

That type of thing, I think, is happening today, can happen today,

provided Congress doesn’t really hit privacy legislation that harms

this kind of information. But that can happen now. That is where

I would look immediately.

Mr. ROSS. Thank you.

Mr. Melton.

Mr. MELTON. I think the most unique thing about the U.S. Postal

Service is it has, by mandate, the ability and requirement to reach

every household in the United States, and that is a very unique infrastructure that I don’t think has been exploited properly.

44

Mr. ROSS. I agree.

Mr. MELTON. And some of that is due to statute, the types of

services and products it can offer as not to compete with the private sector, I believe. As an example, you can walk into a post office and you can buy packaging and you can buy postage, but you

can’t buy the service to pack that package; you need to go to a private store for that. So those are the sorts of things I think that I

would look to try to change. I also think the ability to time delivery

of packages with the other channels that are there are a unique opportunity, particularly with the technology that exists now to very

targeted make an offer to a consumer.

Mr. ROSS. Thank you.

Mr. Haycock, briefly?

Mr. HAYCOCK. I agree with what has been said here. I think as

the Postal Service focuses on what they core competency is and the

value of the mail, as has been said, something along the lines of

rather than paying an extra charge for 2 ounces, include that in

the overall price, so 1 ounce and 2 ounce is the same price so you

can add more marketing and reach those customers, as has been

mentioned.

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

Mr. Lynch, you are recognized.

Mr. LYNCH. Thank you, Mr. Chairman.

I agree with the chairman’s suggestion that we need systemic

change, there is no doubt about that. And that is notwithstanding

the need for a reset on the health care payments and a correction

for the pension overpayment. But what those two items do, though,

is buy us time, because the pension overpayment is anywhere between $55 and $75 billion, and the health benefit contribution here

for retirees is $51⁄2 billion per year.

So if we look at the trend—and I give the Postal Service some

credit here, and I give the unions a lot of credit as well. If you look

at what they have done, since 2008 the Postal Service has reduced

its work force by 120,000 people. Since 2008 they have cut 120,000

positions. And since 2009 it has reduced its total cost by $11 billion. Some of that is by automation, but $4 billion is savings coming from reductions in labor costs. And if you add the $3 billion in savings

that is going to come out of the American Postal Workers Union

recent contract going forward for the term of that contract, you are

talking about $7 billion in labor cost savings and you are talking

about $14 billion in reduction in cost. So they are making significant progress.

And what I am saying is with the correction to the pension overpayment and the fast-track health benefit for retiree payments, we

could make much more progress if we give ourselves more time.

Now let me turn to a blatantly self-serving question. Each of you

has briefly mentioned your concern for the financial condition of

the Postal Service, and you mentioned the retiree health benefit

payment of $51⁄2 billion and also the Postal Service overfunding, which is anywhere between $50 and $75 billion. Last month I introduced H.R. 1351, the U.S. Postal Service Pension Obligation Recalculation and Restoration Act. It just kind of rolls right off your

tongue there. [Laughter.]

45

The act directs the Office of Personnel Management to update

the actuarial methodology to be used in allocating the CSRS retirement benefits liabilities between the U.S. Postal Service and the

Federal Government. So we are trying to reset that and correct it.

Any resulting surplus from this recalculation, if it is $55 or $50 or

$75 billion, would then be transferred over to the Postal Service retiree health benefit fund and, further, the act would require that

the Postal Service $7 billion refund would be refunded immediately

and applied to the 2011 retiree health benefit payment and worker’s compensation fund.

Now, it is sort of what you were talking about to start this off,

Mr. Riebe. Is that something that you think would get this thing

going in the right direction, get the Postal Service going in the

right direction and be helpful to you and your businesses?

Mr. RIEBE. Absolutely.

Mr. LYNCH. OK.

Mr. Cerasale.

Mr. CERASALE. It would, and we support it.

Mr. LYNCH. Thank you.

Mr. Melton.

Mr. MELTON. [Remarks made off mic.]

Mr. LYNCH. Thank you.

Mr. Haycock.

Mr. HAYCOCK. Yes, it would.

Mr. LYNCH. OK, thank you. I told you it was self-serving.

[Laughter.]

I appreciate that.

Look, in all seriousness, I appreciate you are in business. It takes

a lot of courage to put yourself out there. You have been very helpful with the committee in giving us your perspectives. I appreciate

greatly that you came here, you took the time to come here to testify before Congress to give us the perspective that you have and

to provide some more impetus for change in this system that we

all rely upon. So I appreciate you coming in and helping the committee with its work. Thank you.

I yield back.

Mr. ROSS. Thank you, Mr. Lynch.

I now recognize Mr. Amash for further questioning.

Mr. Amash. Thank you, Mr. Chair.

Mr. Haycock, can you tell us a little more about your company?

Mr. HAYCOCK. Sure. We are the largest outsource remittance

processing provider, so all remittance statements, you send your

coupon in with your check, we process those, as well as doing electronic processing of payments; and then we also do the bill presentment, so we send out bills in the mail stream, invoices, statements.

We also provide other channels for our customers, electronic channels as well.

Mr. AMASH. You said the Postal Service is one of your biggest

partners. What other sorts of organizations would be big partners?

Mr. HAYCOCK. Software providers that help us do operations;

equipment manufacturers that provide us with equipment to do our

processing.

Mr. AMASH. One of the things I found interesting, you said you

were encouraged by the new Postal Service management team, but

46

expenses this year are up $100 million over the first 6 months. Can

you explain why you are encouraged and what you think about

that?

Mr. HAYCOCK. I am encouraged because what I am seeing is

more customer focus. They are reaching out. They seem to be looking at new ideas, not trying to do business as usual, but looking

at out-of-the-box items. I know there have been some discussions

within the Postal Service about new options or new incentives and

other ways of looking at adding value to the mail. So even though

those haven’t been implemented yet, I am encouraged that they are

looking at those items, looking at the mailers.

Mr. AMASH. So is it your belief that the expenses will gradually

go down as time goes on?

Mr. HAYCOCK. I don’t know if that is the case.

Mr. AMASH. According to USPS data, it appears that for the first

time less than half of USPS’s revenues will come from first class

mail this fiscal year. Ten years from now—and this is a question

to all of you—do you think first class mail will continue to be the

dominant revenue source at the Postal Service?

Mr. Riebe.

Mr. RIEBE. I do not.

Mr. CERASALE. I agree, it will not be the dominant revenue

source.

Mr. MELTON. It will not.

Mr. HAYCOCK. Well, the current trends show that is the case. I

think if we continue the same path it will definitely not. I think

there is an opportunity to change that trend by accommodating the

mailers that do first class mail and using that value that the mail

has could slow that trend, anyway.

Mr. AMASH. And again this would be a question for all of you.

Are mailers preparing for a post-first class mail world and do you

think that the Postal Service’s current business model will work if

first class declines from 78 billion pieces in 2010 to 46 billion pieces

in 2020?

Mr. RIEBE. I do not.

Mr. CERASALE. I believe it has to change.

Mr. AMASH. And do you think mailers are prepared for this

world?

Mr. RIEBE. It depends how it changes.

Mr. CERASALE. They are prepared in the sense of looking a return on investment, and they are going to use alternative means

if it is not there. Mailers are prepared, marketers are prepared to

use the mail, and advertising mail is going to be dominant. The

Postal Service has to downsize to meet that new need, its marketers needs, and they will remain a viable channel for us. But they

are prepared in the sense of they will go to alternative means if

the return is better elsewhere. It is not at the moment, that is why

they are in the mail. The mail is still a good response vehicle. But

that will change if the Postal Service doesn’t change on its own.

Mr. MELTON. Yes, I think that the standard mail side of it will

continue to grow and I think the value of that has been proven,

and the returns are there and I think it is only going to improve

as technology allows them to be more targeted. I also believe that

on the statement presentment side that there is an opportunity for

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transpromotional advertising and goes along with the bill. You

have a relationship with a customer already, the opportunity to sell

them more is there and technology is allowing that.

Mr. HAYCOCK. In my business, that is what we do, is first class

mail, and I do see that shift away from first class mail happening,

and for my business, we offer other alternatives, other channels

and opportunity for our customers to choose which channels they

want to use. And we have to kind of go down that path in order

for us to keep a viable business.

Mr. AMASH. Thank you. I am going to yield back.

Mr. ROSS. Thank you.

I now recognize the gentleman from Virginia, Mr. Connolly. Welcome.

Mr. CONNOLLY. Thank you, Mr. Chairman.

I would sort of like to pick up on where our colleague from Michigan left off. You know, in and of itself, the decline in first class

mail doesn’t mean anything. There were companies in 1900 who

were making a lot of profit producing buggy whips, but if they

didn’t see the future, they were in trouble, even though in 1900 it

looked like a profitable business for quite some time to come. The

fact that we have a shifting market, in and of itself, the question

is can we create, as you suggest, a new business model—by the

way, I have some legislation I hope you will look at that does just

that—that helps take cognizance of the changes in the market.

For example, companies like Amazon.com have become very profitable with online sales. They have to, however, get those products

to market. And the Postal Service, 1 percent now of its business

is packages like that, but it is 2 percent of its profit. So the margin

is pretty good.

Mr. Melton, Mr. Haycock, do you think that there could be a future in expanding that kind of niche business for the Postal Service

at some level of profitability?

Mr. MELTON. Absolutely. And I think there are opportunities to

perhaps share some routes, as an example. If we are going to reach

every household in the United States, you might as well take advantage of sharing some of those routes.

Mr. CONNOLLY. If we are serious about making the Postal Service successful as we move forward in this century—and I know my

colleague, Mr. Lynch, has introduced legislation I certainly support

and supported in the previous Congress in this whole prefunding

issue, which is very substantial and it is an onus on the Postal

Service that is unique to the Postal Service, Congress does not require it of anyone else, and it is costing them billions of dollars

every year. So when we look at a figure that says you are losing

$7 billion a year, but if we amortized, for example, the estimated

overpayments and continuing 100 percent requirement, frankly, we

could probably substantially change that number in a positive direction.

But beyond that, that buys us some time, substantial amount of

time in which to figure out the business model. Mr. Melton, you

mentioned something about why not let the Postal Service, for example, engage in packaging services. Is that correct?

Mr. MELTON. Yes.

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Mr. CONNOLLY. Are there other areas anyone on the panel thinks

that might be something that come into the Postal Service as a

niche market for them or something they ought to get into? And

before you answer, I point out Congress is part of the problem. The

2006 legislation, God knoweth why, proscribes the Postal Service

from entering certain kinds of business. Given the situation were

are in today, if we really mean what we say about caring about its

fiscal plight, why wouldn’t we rescind those restrictions and let

1,000 flowers bloom to see what works?

Mr. Melton.

Mr. MELTON. Yes, I agree it is tough to run a business when you

have restrictions on controlling your costs and also limited in meeting some market demands that may be there. So I would encourage

that those things are looked at.

Mr. CONNOLLY. Mr. Haycock.

Mr. HAYCOCK. The only concern I would have about opening everything up would be losing focus on their core, what they do best

at. Now, I would agree that if there are other areas that could use

that core business and utilize their infrastructure, what they have

today, then I would be open definitely for them to do that.

Mr. CONNOLLY. Sure. But can I just engage you on that? I have

a very large postal office in my district, in Merrifield, it is sort of

a regional post office. People go there all the time for all kinds of

things. Why not let them have a Starbucks outlet there so that people, when they go there to do their other core business, can also

get a cup of coffee? You are able to do that at the grocery store

these days. You are also able to do banking at the grocery store,

even though neither one of those are core missions of the grocery

store. But in terms of convenience and making it a focal point in

terms of retail activity, you enhance the viability of the enterprise.

Wouldn’t that be some kind of model we ought to be looking at

for the Postal Service?

Mr. HAYCOCK. That seems very reasonable, absolutely.

Mr. CONNOLLY. Thank you.

Anyone else on the panel? I have 30 seconds left.

Mr. CERASALE. I think co-location, as you explained, is valuable.

They can even try and locate it at another facility and have a post

office there and open more times. You also have the ability to colocate State and local government things in a government facility

there as well, so that is an area, looking at the 38,000 of them, or

it could be less, postal facilities, you can try and enhance that real

estate footprint.

Mr. CONNOLLY. Mr. Chairman, my time is up, but the gentleman

makes a very good point I commend to my colleagues, because as

someone who ran a local government for a long time, historically,

a lot of post offices have the stovepipe model; we are separate unto

ourselves and sovereign, and don’t bother us. And a new model

would suggest this kind of co-location with State and local services

and government, there could be cost-sharing, there could be huge

efficiencies, and again you are making that post office, which already exists, a more focal point for the community, which, by the

way, my legislation also addresses.

Thank you.

Mr. ROSS. Thank you, Mr. Connolly. I appreciate that input.

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I want to thank the panel members for being here today. We are

grateful for your input and this subcommittee now stands adjourned. Thank you.

[Whereupon, at 10:45 a.m., the subcommittee was adjourned.]

[The prepared statements of Hon. Justin Amash and Hon. Gerald

E. Connolly, and additional information submitted for the hearing

record follow:]

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