[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                  OVERSIGHT OF THE U.S. POSTAL SERVICE

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            OCTOBER 21, 1999

                               ----------                              

                           Serial No. 106-110

                               ----------                              

       Printed for the use of the Committee on Government Reform


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

                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                  OVERSIGHT OF THE U.S. POSTAL SERVICE



                  OVERSIGHT OF THE U.S. POSTAL SERVICE

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 21, 1999

                               __________

                           Serial No. 106-110

                               __________

       Printed for the use of the Committee on Government Reform






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

                                 ______



                    U.S. GOVERNMENT PRINTING OFFICE
63-821 CC                   WASHINGTON : 2000



                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                   Subcommittee on the Postal Service

                   JOHN M. McHUGH, New York, Chairman
MARSHALL ``MARK'' SANFORD, South     CHAKA FATTAH, Pennsylvania
    Carolina                         MAJOR R. OWENS, New York
BENJAMIN A. GILMAN, New York         DANNY K. DAVIS, Illinois
STEVEN C. LaTOURETTE, Ohio
DAN MILLER, Florida

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Robert Taub, Staff Director
                      Heea Vazirani-Fales, Counsel
               Jane Hatcherson, Professional Staff Member
                       Abigail D. Hurowitz, Clerk
           Denise Wilson, Minority Professional Staff Member



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 21, 1999.................................     1
Statement of:
    Corcoran, Karla W., Inspector General, U.S. Postal Service, 
      accompanied by Thomas Coogan, legal counsel; and Richard 
      Chambers, Assistant Inspector General for Audit, U.S. 
      Postal Service.............................................     8
    Henderson, William J., Postmaster General and Chief Executive 
      Officer....................................................   115
    Ungar, Bernard L., Director, Government Business Operations 
      Issues, U.S. General Accounting Office, accompanied by 
      Teresa Anderson, Assistant Director; and Gerald Barnes, 
      Assistant Director, U.S. General Accounting Office.........    33
Letters, statements, et cetera, submitted for the record by:
    Corcoran, Karla W., Inspector General, U.S. Postal Service:
        Followup questions and responses.........................    78
        Prepared statement of....................................    12
    Henderson, William J., Postmaster General and Chief Executive 
      Officer:
        Followup questions and responses.........................   134
        Prepared statement of....................................   117
    LaTourette, Hon. Steven C., a Representative in Congress from 
      the State of Ohio, June 30, 1999, Report to Congress.......   412
    McHugh, Hon. John M., a Representative in Congress from the 
      State of New York, prepared statement of...................     4
    Ungar, Bernard L., Director, Government Business Operations 
      Issues, U.S. General Accounting Office:
        Followup questions and responses.........................   108
        Prepared statement of....................................    36



                  OVERSIGHT OF THE U.S. POSTAL SERVICE

                              ----------                              


                       THURSDAY, OCTOBER 21, 1999

                  House of Representatives,
                Subcommittee on the Postal Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2154, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Sanford, LaTourette, 
Miller, Fattah, Owens, and Davis.
    Staff present: Robert Taub, staff director; Heea Vazirani-
Fales, counsel; Jane Hatcherson, professional staff member; 
Abigail D. Hurowitz, clerk; Denise Wilson, minority 
professional staff member; and Earley Green, minority staff 
assistant.
    Mr. McHugh. Good morning. The hearing will come to order. 
On behalf of the subcommittee members, I'm pleased to welcome 
everyone here as we continue the oversight agenda for the 106th 
Congress.
    Let me begin by saying to those who have suggested our 
Postal Service ain't broke, I think today's GAO testimony will 
serve as a wake-up call as we will hear GAO explain first class 
mail volume is expected to decline at an average annual rate of 
2.5 percent in fiscal years 2003 to 2008. Such a decline would 
be unprecedented. Let me say that again. Unprecedented in the 
Service's history and will likely create severe financial and 
performance challenges. According to the Postmaster General, 
not only will this erosion place nearly $17 billion of total 
revenue at risk, but even worse, the Service's environment is 
changing so rapidly that we simply can't predict precisely when 
or to what extent competitive pressures may affect the 
Service's revenues. As a postal commentator by the name of Gene 
Del Polito recently quipped, ``In today's world, Internet years 
are more akin to dog years than the Julian calendar.''
    So indeed we need to take heed when the GAO states again, 
``The Postal Service may be nearing the end of an era.'' 
Irrespective of Congress's progress in modernizing the Nation's 
postal laws, it is clear that these developments make it 
imperative for the Postal Service to resolve long-standing 
performance challenges that will be detailed by our first panel 
of witnesses.
    Our first panel today will include Ms. Karla Corcoran, the 
Postal Service's Inspector General, and Mr. Bernard Ungar, the 
Director of Government Business Operations Issues for the 
General Accounting Office. Both the IG and GAO are on the front 
lines as America's postal watchdogs, and they have proven to be 
valuable partners with the subcommittee in reporting to us on a 
broad range of postal operations. Although the GAO has been 
evaluating postal operations since the days of the Post Office 
Department, the Inspector General is still a relatively new 
player on the post scene. Unlike every other major Federal 
agency, when it came to the Postal Service, the American public 
did not have the benefit of the oversight provided by an 
independent Inspector General. Fortunately, in my opinion, we 
remedied that problem in 1996 when we enacted legislation to 
create the postal IG.
    In that regard, the subcommittee certainly looks forward to 
hearing from Ms. Corcoran on the progress of establishing her 
office since her last presentation to this subcommittee in 
1998. It is important that the American postal consumer be 
assured that the Inspector General has the necessary staff and 
resources to vigorously carry out all of her responsibilities 
under the IG Act. With a budget of some $62 billion and nearly 
900,000 employees, the Postal Service rivals only the 
Department of Defense as the largest Federal agency. It would 
thus seem appropriate that the postal IG's budget would be 
comparable to the budgets of the Offices of Inspector General 
within the Department of Defense and other such agencies. I 
look forward to Ms. Corcoran's update on this matter today.
    It is important as well to note that both the IG and the 
GAO have identified a number of initiatives that the Postal 
Service could undertake to improve its own performance. I look 
forward to Ms. Corcoran and Mr. Ungar highlighting these 
initiatives, especially the extent to which the Service has 
followed up on the questions raised by the IG and GAO in 
reports to Congress. Further, they have a number of assignments 
pending. I hope Ms. Corcoran and Mr. Ungar can report to us on 
the status of these assignments and the impact these reports 
will have in assessing the productivity and the efficiency of 
the Postal Service.
    Our second panel consists of a single, yet a very 
important, individual, the Postmaster General, Mr. William 
Henderson. As Mr. Henderson notes in his written statement, 
mail delivery scores and net income appear today to be fine. 
However, he also underscores that the Postal Service faces 
considerable challenges in sustaining its current performance 
in maintaining a competitive role in providing mail service to 
the American public in the future. As both the IG and the GAO 
have found, the Postal Service requires significant attention 
to such areas as labor-management relations, internal controls, 
and revenue protection. The subcommittee looks forward to 
hearing Mr. Henderson's plans to develop innovative and 
workable solutions to these and other problems facing the 
Postal Service.
    While today's hearing is not specifically devoted to 
initiatives regarding reform, the GAO's message makes clear 
that time appears to be growing short for the Postal Service to 
successfully address these challenges. Unless the Service can 
adopt to a rapidly changing communications environment and 
growing competition, we are facing a major crisis in the postal 
sector. Inevitably the issues of modernizing our postal laws 
will prove inherent in evaluating the operations of the Postal 
Service itself, and the subcommittee is interested in hearing 
Mr. Henderson's assessments of developments in the reform 
debate.
    We thank all three of our panels of witnesses here today 
for joining with us.
    With that, I would be happy to yield to the distinguished 
ranking member for any comments he may wish to make at this 
time.
    [The prepared statement of Hon. John M. McHugh follows:]
  
    [GRAPHIC] [TIFF OMITTED] T3821.001
    
    [GRAPHIC] [TIFF OMITTED] T3821.002
    
    Mr. Fattah. Thank you, Mr. Chairman. I'm pleased to join 
you today for a general oversight hearing on the U.S. Postal 
Service and in welcoming our distinguished panelists.
    Our focus on the Postal Service is timely. Two days ago the 
House Subcommittee on Regulatory Reform and Paperwork Reduction 
held a hearing on the U.S. Postal Service regulations regarding 
commercial mail receiving agencies. Last week the Postal 
Service Office of Inspector General released some 51 reports 
and agreed to savings of over $1.1 billion. A number of these 
reports, six to be exact, address the treatment of postal 
workers by their supervisors.
    As a member of the subcommittee concerned, as we all are, 
with labor-management issues, I can tell you I'm concerned 
about the state of affairs at the Postal Service, particularly 
as it impacts better workplace relations. With over 826,000 
employees, the Postal Service must move forward with real 
improvement in the way it treats its employees and improving 
labor-management relations.
    Two weeks ago our staff was briefed by the Postal Service 
about e-commerce initiatives. The Postal Service is very 
interested in having every household connected to an e-mail 
address. This foray into e-commerce must first grapple with a 
report just issued by the IG on computer security within the 
Postal Service. The report identified many significant 
weaknesses in computer security. As the IG states, ``the 
backbone of any successful e-commerce program must be built 
upon a secure and trustworthy computer network. Addressing 
deficiencies and shortcomings in the Postal Service's own 
computer system obviously must come first.''
    Diversity and equal employment opportunity are two issues I 
am most interested in seeing resolved. To that end, I've asked 
the GAO to review and report back to this subcommittee the 
progress of the Postal Service in achieving diversity in the 
Postal Career Executive Service. These are senior, high-level, 
high-paying positions which must adequately reflect the 
diversity of the work force.
    With regards to OSHA, in the 105th Congress we enacted the 
Postal Employee Safety Enhancement Act. The Postal Service can 
now be cited, fined, and referred for criminal prosecution by 
OSHA for health and safety violations. Are postal facilities 
safe? Is the Postal Service in compliance with OSHA? I believe 
my colleagues on this subcommittee will agree that all postal 
employees deserve a safe working environment. I look forward to 
exploring this issue further with the IG and with the 
Postmaster General.
    Recently, we have been hearing rumblings that a postal rate 
increase is looming. I just got used to paying 33 cents for a 
stamp. I wish to examine how, given enormous profits touted by 
the Postal Service, how we can be in a position again to face 
an increase in the price of a postage stamp. The dialog on this 
matter must continue.
    Mr. Chairman, I can raise further issues forever. Suffice 
it to say that the general oversight of the Postal Service 
could not have come at a better time. I wish to thank the IG 
and the GAO for their time and reports and willingness to 
explore new issues and to find problems. I look forward to 
hearing how the Postal Service will tackle its current 
challenges and better position itself. Thank you.
    Mr. McHugh. I thank the gentleman.
    Any other Members seeking recognition at this time?
    Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman, and I want to 
thank you for convening this hearing regarding oversight of the 
U.S. Postal Service. Today's hearing is timely and very 
important. In fact, this is our second hearing concerning the 
Postal Service and its operations this Congress.
    There are a number of issues that have emerged since our 
last oversight hearing. Among those issues include a report 
issued by the General Accounting Office concerning diversity 
within EAS 17 and above positions. In addition, there have been 
serious complaints and concerns regarding the number and amount 
of advertising dollars that are spent with small business 
vendors and in minority communities.
    The diversity issue is one that concerns me greatly, and 
making sure that minorities and women are represented at every 
level of the Postal Service must continue to be a priority. In 
addition, ensuring the minorities and women receive an adequate 
share of contracts must continue to remain high.
    Recently I had the opportunity to address a diversity forum 
sponsored by the Postal Service. At that forum were managers 
and senior managers discussing the importance of diversity. The 
Postal Service has been moving in the right direction with 
regard to this issue, and I want to commend them for that and 
urge that we continue with this progress.
    The question of advertising dollars and how they are spent 
concerns me. I requested the Congressional Research Service 
provide to me a breakdown of the total advertising budget for 
the Postal Service and how it is spent. In particular, I wanted 
to see what dollars were being spent in what communities and 
with minority vendors. I was told by CRS that the Postal 
Service did not have such a breakdown. Now, if that is true, I 
would like for us to move in the direction of seeing how we can 
put one together. This is a question that I posed with the 
Census Bureau not long ago, and we were successful in passing 
an amendment that would target advertising dollars to minority 
communities and with minority vendors. I will be interested in 
hearing the Postal Service's views on this issue.
    Finally, I, too, am concerned about the article that 
appeared in the USA Today newspaper yesterday that suggested 
that first-class mail could be in jeopardy by the year 2003 
because of advances in technology and more people paying bills 
via e-commerce. The article also went on to say that the Postal 
Service could lose more than $17 billion in revenue over the 
next decade due to e-commerce. I'm interested in knowing what 
plans are being made to ensure the long-term competitiveness 
and viability of the Postal Service to continue providing 
universal service. I look forward to hearing GAO's full 
analysis of this issue, and again, Mr. Chairman, I thank you 
for convening this hearing and look forward to hearing all of 
the witnesses.
    Mr. McHugh. I thank the gentleman for his comments.
    I know his question relates to what the Postal Service is 
doing because the Postal Subcommittee has been working on H.R. 
22 for 5 years. I just wanted to make sure we understood that.
    Let me now call forward our first panel. Karla Corcoran, 
the Inspector General of the U.S. Postal Service, who, I 
understand--if you'd just please come up while I'm doing your 
introductions--who, I understand, is accompanied by Mr. Thomas 
Coogan, who is a legal counsel for the IG, and Richard 
Chambers, who is Assistant Inspector General for Audit, and 
also Bernard L. Ungar, the Director of the Government Business 
Operations Issues Office of the U.S. General Accounting Office, 
who, I understand, is accompanied by Teresa Anderson, Assistant 
Director, and Gerald Barnes, also Assistant Director. You can 
see they're veterans because they have not been seated, and 
they know they have to take the oath.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all of the witnesses 
responded to the oath in the affirmative. And again, once more, 
we welcome you all here. Thank you for joining us.
    Starting from right to left because why not. Why don't we 
start with the Inspector General, and we do have your written 
testimony. I have read all of the testimony today in its 
entirety. It was all very interesting, and all of that will be 
submitted in its entirety for the record. We now turn our 
attention to you for your personal comments today.

STATEMENT OF KARLA W. CORCORAN, INSPECTOR GENERAL, U.S. POSTAL 
   SERVICE, ACCOMPANIED BY THOMAS COOGAN, LEGAL COUNSEL; AND 
 RICHARD CHAMBERS, ASSISTANT INSPECTOR GENERAL FOR AUDIT, U.S. 
                         POSTAL SERVICE

    Ms. Corcoran. Thank you, Mr. Chairman.
    Chairman McHugh, Congressman Fattah and members of the 
subcommittee, I'm pleased to be here today to discuss with you 
the progress of the OIG and what we've seen as we started 
looking at the Postal Service. Joining me are my counsel, Tom 
Coogan, and my Assistant Inspector General for Audits Richard 
Chambers. With your permission, I'm going to ask that we enter 
the full statement into the record.
    Mr. McHugh. Without objection.
    Ms. Corcoran. As you know, this is our third year as an 
independent Inspector General within the Postal Service. In the 
first year, we spent most of our time creating a separate 
mission from the Inspection Service. Our second year, we 
focused on hiring and initiating audits and investigations. You 
might be interested in knowing that we've identified over 1,000 
projects that we believe need to be done within the Postal 
Service. And this is our third year we have spent reviewing key 
postal programs.
    We are a new organization by almost any standard. However, 
we have numerous accomplishments and have made remarkable 
progress. In the last 6 months alone, we've issued over 100 
reports with $1.1 billion, that's a B for billion, in savings 
and cost avoidance over the next several years. We have 190 
ongoing investigations. Our investigations have yielded 17 
criminal charges and $2.1 million in fines and recoveries. We 
also have proactive investigations that are targeting fraud and 
corruption.
    In the last 6 months, our office has grown from 178 to 
400--I'm sorry, in the last 18 months our office has grown from 
178 to 400 and from four offices to six offices. With the 
Governor-approved budget for year 2000, we will grow to 648 
staff. We will have 5 additional offices for a total of 11 
offices. I'm very excited about our diversity statistics. Our 
staff consists of 43 percent women and 42 percent minorities.
    Each year the Inspector General community recognizes 
outstanding accomplishments within the community. I'm proud to 
say that this year, in fiscal year 1999, we received a total of 
eight Executive Council on Integrity and Efficiency Awards. 
This included four awards for excellence for our work in Y2K, 
labor-management, and developing a computer intrusion course 
for the entire community. This is the most awards received by 
any Inspector General within the community.
    Today I'd like to highlight for you the work we have done 
in five areas. Those areas are performance, technology, 
financial management, labor-management, and oversight of the 
Inspection Service.
    In the first area of performance, we have conducted 49 
reviews of critical core business areas within the last 18 
months. In the Corporate Call Management area, we identified 
nearly $1 billion in cost avoidances over the next several 
years by changing technology. In the transportation area, we 
issued two reviews identifying over $150 million in savings 
over a 5-year period. These were in the highway transportation 
contract area and the rail detention management area.
    We also looked at the Priority Mail Processing Center. We 
found that the contractor network had not significantly 
improved on-time delivery, yet it cost $100 million more than 
processing that mail in-house.
    Our investigators identified in the international arena as 
much as $20 million in revenue that could have been collected. 
However, the Postal Service had negotiated lower international 
rates even though the mail was processed totally within the 
United States.
    We've also performed work in the environmental area. We 
reviewed Postal Service's use of natural gas vehicles, and 
found that these vehicles have been placed in areas where there 
is no supply of natural gas.
    In the second area, technology, as you know, we have 
focused much of our work over the last 18 months in the Y2K 
area. We've issued nine reports. We testified before a joint 
committee subcommittee hearing in February. At that time we 
said Postal had a lot of work to do to be ready. Since then, 
with our assistance, Postal has made tremendous progress. 
However, challenges remain. In our latest report on Business 
and Continuity Plans, we identify many of our concerns about 
their plans and the testing of those plans.
    In addition, in the technology area, we are doing work in 
electronic commerce, computer intrusion, and developmental 
projects.
    We are also doing work in the financial management area. We 
include contracting and facilities in this area. We've done a 
total of 31 reports over the last 18 months.
    In the Dinero Seguro money transfer program, we identified 
ways to reduce the risk of money laundering. You asked us, Mr. 
Chairman, whether the indictment of Postal Service's Mexican 
business bank partner would jeopardize the integrity of the 
program. We said that it would not. However, as a result of our 
review, we did identify a previously unknown scheme, whereby 
drug traffickers would wire drug proceeds to Mexico. By 
partnering with other Federal agencies, we have made five 
arrests, and seized 25 kilograms of marijuana and 3 kilograms 
of cocaine.
    The Postal Service purchases over $8 billion of goods and 
services each year. Therefore, we've done quite a bit of work 
in the contracting area, much of it for Congressman Fattah. For 
example, one of the reviews we have done is to look at why 
there has been a decline in minority contracting. In another 
review, we recommended that three contractors for the Postal 
Service be suspended and/or debarred for various improprieties.
    Postal Service has 38,000 facilities. This makes Postal one 
of America's largest owners, developers, and managers of real 
estate. At your request, Mr. Chairman, we reviewed the Olympic 
facilities in Atlanta. We found that inappropriate approval and 
oversight had cost at least $9 million more than their original 
projections.
    Postal Service has identified labor-management as key to 
achieving their goals into the 21st century. This has been one 
of the toughest areas for us to address, first, because of the 
sheer magnitude of complaints we have received--over 2,500 
individual complaints. Second, this is an area that we get push 
back from management. We have more recommendations that have 
not been agreed to in this area than in any other area.
    We're also extremely concerned about retaliation against 
employees that have assisted or worked with the OIG. Whenever 
we have allegations that employees are being retaliated against 
for working with the OIG, we immediately review them. We have 
11 current investigations in this area under way, and 3 that we 
have completed.
    In the labor-management area, we focus on systemic reviews. 
In the last 18 months we've done 30 reports and 60 
congressionals. A major report in this area has been to look at 
the threat assessment program. We have found that violence 
prevention and response policies within the Postal Service have 
not been followed in three districts. We are extending that 
review now to look at 26 additional districts so that we can 
make Postal-wide recommendations for improvement.
    The last area that I'd like to talk to you about is 
oversight of the Inspection Service. As you well know, that is 
one of the principal reasons why an independent Inspector 
General was created within the Postal Service. We have done 18 
Inspection Service reports. These include crime lab 
certification, abuse of authority, and disciplinary actions. At 
your request, Mr. Chairman, we reviewed the classification of 
postal inspectors performing audits. We found that 250 
inspectors who were performing audits were not spending at 
least 50 percent of their time in law enforcement as required 
by the Office of Personnel Management. The Inspection Service 
has agreed with our findings and has told us that they will no 
longer perform ``Yellow Book'' audits.
    This will have a major impact on the OIG. We currently are 
reviewing this with a task force, and we will be getting back 
with the Governors and you to let you know what impact this 
will have on us.
    One of our greatest challenges is continuing to develop 
effective relationships with the Inspection Service. I'm 
looking forward to working with the new Chief Inspector. We 
both have the same goal of improving postal operations. We have 
agreed to renew teambuilding to increase communication, trust, 
and coordination.
    In summary, I'd like to thank you for allowing us to serve 
the Postal Service. We have been a truly independent voice and 
a venue for all stakeholders to confidentially report 
allegations. We have delivered objective information and 
analysis of postal programs, and we have provided greater 
economy, efficiency, and integrity to Postal Service programs. 
I look forward to continuing to serve you and the Postal 
community. This concludes my statement. I'd be pleased to 
answer any questions.
    Mr. McHugh. Thank you very much both for your statement 
here today and, as I've mentioned earlier, your service over 
the past 3 years.
    [The prepared statement of Ms. Corcoran follows:]
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    Mr. McHugh. I believe rather than breaking up the panel, if 
it's agreeable to the Members, we'd like to go to Mr. Ungar for 
his testimony, and then we can return to questions for both the 
witnesses.
    So, Mr. Ungar, welcome to you again also. Thank you for 
being here, and we're looking forward to your comments.

 STATEMENT OF BERNARD L. UNGAR, DIRECTOR, GOVERNMENT BUSINESS 
OPERATIONS ISSUES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED 
  BY TERESA ANDERSON, ASSISTANT DIRECTOR; AND GERALD BARNES, 
       ASSISTANT DIRECTOR, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Ungar. Thank you, Mr. Chairman, members of the 
subcommittee. We're pleased to be here today to assist the 
subcommittee in carrying out its oversight function over the 
Postal Service.
    In our written statement, we really discuss three broad 
areas: the Service's historical performance, major challenges 
it faces in the next few years, and the results of our work 
since the last oversight hearing that the subcommittee had. In 
my summary, I would like to focus on the major challenges that 
we see and the change that we see over the horizon that the 
Postal Service is facing.
    First, I would like to note that our work as well as work 
of the Inspector General and information from the Postal 
Service would indicate that the Postal Service's performance 
currently and in the recent years has been notable. It's earned 
profits consecutively over the last 6 years, which is kind of a 
first since it was established as the modern Postal Service. It 
reports improvements in on-time delivery in both overnight 
mail, first-class overnight mail, and 2- and 3-day mail. It's 
made some progress in the labor-management area and some 
progress in work force diversity, particularly after the report 
that Mr. Davis mentioned. It's in better shape today now than 
it was a few months ago for the Y2K situation, and it's 
improved controls that we previously found to be deficient in 
the areas of changing addresses when people move and the 
acceptance of business mail. It also, last but not least, has 
made notable progress, in our view, in implementing the Results 
Act over the last year.
    However, as we indicated in our written statement, we see 
that the Postal Service may be nearing the end of an era. While 
the performance has been notable, we see formidable challenges 
in the future, first of which and foremost in our mind is 
sustaining its financial viability in the face of competition, 
increased use of electronic communications, and increased 
customer demands for more service, better, and cheaper.
    Historically, increasing postal rates and increasing mail 
volume have provided the Service with additional revenues which 
have enabled it to take care of and finance wage increases, 
modernization, and improvements in the quality of service. 
However, as figure 1 in our statement shows, and as indicated 
by the board over to my right, first-class mail volume, as you 
indicated, Mr. Chairman, may be in for a downturn. The growth 
rate of mail volume has increased, as we have in the chart laid 
out by decade. During the 1970's, it was increasing. It 
continues to increase in the 1980's. However, in the 1990's, 
the rate of increases started to come down, and the latest 
projection from the Postal Service is that during the next 
decade it's going to basically come down below where it was. In 
other words, not only will the rate decline, but the actual 
first-class mail is projected to volume decrease starting 
around 2003 and then continuing to go down from there as a 
result of electronic communication and technology.
    In addition, the Postal Service faces increased 
competition, as you know, from a variety of sources, and this 
certainly could also affect the volume of first-class mail and 
the revenue that's associated with first-class mail.
    Now, why is this important? One of the main reasons it's 
important is because first-class mail generates a large 
proportion of the Postal Service revenue overall, and it covers 
about--at least it has covered about--two-thirds of the Postal 
Service's overhead cost. So, if the volume of first-class mail 
goes down, the revenue goes down; it's going to have to make up 
that amount of money from someplace or cut costs substantially 
or both in order to cover the overhead, or the revenues from 
other classes of mail will have to increase.
    Just to give you an idea as to the type of challenge that 
we see the Postal Service facing, let's take the year 2000, for 
example, and the goal the Postal Service has which is currently 
to earn $2 million--excuse me, $100 million in 2000. To achieve 
this goal, the Postal Service says it must realize a 1 percent 
reduction in work hours of its employees and increase 
productivity by 3.1 percent. Now, how is this going to happen? 
It faces, at the same time it wants to achieve this goal, a 
situation in which mail volume in 2000 is expected to grow 
nearly 4 percent, and the number of delivery points that its 
carriers make is expected to grow as well as it has over the 
last few years.
    To top that off, if you look at the chart to my right 
again, looking at productivity historically since the modern 
Postal Service was established, it's only gone up 9 percent 
overall since 1972. And in 4 of the last 5 years, it has not 
gone up. It's gone down. And it's only gone up 3 percent on 
four occasions, 4 years over the entire period that's on the 
chart. So that puts in perspective its goal of 3 percent next 
year. That's not to say it's not achievable. I think, as we 
indicated, it's going to be a fairly significant and formidable 
challenge for the Postal Service to do this.
    The second challenge that we see deals with maintaining its 
service delivery. Our discussions with some of its large 
customers indicate they are very concerned about the Postal 
Service's ability to do this in the future. And this largely 
will depend upon new indicators--the Service now doesn't 
measure all classes of mail. It's in the process of developing 
indicators for a number of those, and I think it's going to be 
very important for the Service to continue that to make sure it 
does have indicators for all its major classes of mail so its 
customers and stakeholders, including Congress, can see just 
how well it's doing, and hopefully it will be improving.
    But both addressing its financial performance challenges 
and its service delivery performance challenges hinges heavily, 
in our view, and I think in terms of also the Inspector 
General, on its ability to forge a partnership or a better 
partnership with its employees. And as we've indicated in the 
past, as well as others, labor-management relations has been a 
very difficult problem in the Postal Service. We have seen some 
progress since our last report. The Postal Service and its 
unions and management associations have been meeting. However, 
we haven't seen a whole lot of substantial progress. We're glad 
to note that there was a negotiated agreement with some of its 
unions. However, as you know, with the city carriers, that 
wasn't the case. And the implications of that for the future 
may not be positive in terms of how the Service is going to be 
able to deal with that.
    Second, there is some indication from Postal Service data 
that the number of grievances has not gone down. As a matter of 
fact, it appears to have gone up, which is not a good sign in 
terms of improving the partnership with its employees, and it's 
going to be difficult, we think, for the Postal Service to 
accomplish its goals and meet the challenges if it can't forge 
a much better relationship with its employees.
    Finally, the last challenge I'd like to summarize has to do 
with the integrity of the data that the Postal Service uses for 
both measuring performance and for ratemaking. It's critical, 
we think, that the Service has reliable data to report to its 
stakeholders and to its customers on its on-time delivery in 
all classes of mail as well as other indicators. It's also very 
important for the Service to provide reliable data for 
ratemaking purposes.
    Mr. Chairman, this is an issue that you raised several 
years ago, as you know. The contract--excuse me, the Postal 
Service at your behest and urging--hired a contractor to assess 
the data. The report is issued. The contractor made 40--over 40 
recommendations--as to improvements that could and should be 
made in the ratemaking data process. Unfortunately, when we've 
talked to the Postal Service, we can't get a clear signal from 
the Postal Service as to what specific actions it plans to take 
with respect to those recommendations and a timeframe. So in 
our testimony, we are making a formal recommendation to the 
Postmaster General to develop a plan and come up with some 
specific actions that it would propose to take. Obviously, it 
may not be able to address all those in the short term; so I 
would presume there would be some that the Postal Service could 
address in the short term and perhaps some that would take more 
time and effort.
    That, Mr. Chairman, concludes my summary. We'd be happy to 
answer any questions that you may have.
    Mr. McHugh. Thank you, Mr. Ungar.
    [The prepared statement of Mr. Ungar follows:]
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    Mr. McHugh. I recognize Mr. Fattah.
    Mr. Fattah. I just want to put this on the record. We have 
to go to vote. Immediately after the vote Title I is coming 
back to the floor. I have two amendments scheduled for debate 
on the floor. I may not be back with you for a while, but you 
are in capable hands. I will have some written questions that 
my staff will submit to the panel.
    Mr. McHugh. We thank the gentleman. I appreciate his work 
on Title I. That's a very important bill. So we will go vote. 
It's a Journal vote, so it doesn't take a lot of time or 
thought. It's yes or no. And try--if I could ask those Members 
that can, return as soon as they can. We stand in recess. Thank 
you.
    [Recess.]
    Mr. McHugh. I'm here. You're here. Let's start.
    Mr. Ungar, let's begin with you. Obviously your report has 
created some interest, and I think that's a good thing. I think 
it can help us to focus on the challenges that many of us had 
thought were certainly on their way, but most of us thought, I 
believe, that they were a little bit further away than what 
we're now hearing.
    The projections you used are from the Postal Service 
itself. Did you have an opportunity to examine the probable 
validity, the accuracy, the level of confidence on those, and 
if so, how do you evaluate that? Pretty good projection, do you 
think? Reasonable?
    Mr. Ungar. We didn't do a full evaluation of that, Mr. 
Chairman. It seemed reasonable on the surface, but again, I'd 
have to say we did not certainly independently verify the 
information, and I think it's difficult to predict the future. 
I think the Service looked at the--looked historically at what 
the situation has been, and certainly what the current 
scenarios are, and what the likely trends are given electronic 
communication and competition, and put the estimate together.
    Mr. McHugh. For your purposes, you took that figure as 
moderately reliable; might be higher, might be a little lower, 
but as far as we can tell sitting here today, 2\1/2\ percent 
within the next 3 years seems reasonable?
    Mr. Ungar. It's in the ballpark. Again, predicting exactly 
in what year, at what point in time and exact percent I think 
is going to be very difficult. It certainly seems to be 
reasonable given the scenarios.
    Mr. McHugh. I remember when I graduated from high school 
that was an end of an era. It was the end of a not-so-good era 
and the beginning of a pretty good one. When I decided not to 
run for reelection in the New York State Senate, that was the 
end of an era. I came down here. It was the start of not such a 
good era. How do you phrase ``end of an era'' in your report?
    Mr. Ungar. Mr. Chairman, Mr. Davis, Mr. LaTourette, 
basically we're using it in the context of a major change. Now, 
whether it's positive or negative I think depends upon, as in 
your experience, how the Service and the Congress deal with the 
formidable challenges that the country faces in terms of what's 
facing the Postal Service. Obviously its performance in recent 
times is good. The Service may feel good at the end of one era, 
but as we approach the next millennium, I think the competitors 
are here. They're probably here in this room. They're out 
there.
    Mr. McHugh. They're always out there.
    Mr. Ungar. That's right, yes. They're not only domestic 
competitors, but they're foreign competitors, too, as you know, 
who are here and there may be more on the way. That is coupled 
with electronic commerce, coupled with the kind of unique 
organization that the Postal Service is, sort of half 
governmental and half private, and some of the constraints it 
faces, it doesn't have, on the one hand, some of the 
flexibility that the private sector firms have. On the other 
hand, it has some protections. It doesn't have to do some 
things that the private sector has to do, although that's 
dwindling in some cases like in the area of worker safety. So 
it really is a situation in which the Service is going to have 
to face the challenge. It's going to probably have to change--I 
don't know if I should use the word reform.
    Mr. McHugh. Go ahead.
    Mr. Ungar. But I think it can't do it certainly alone. I 
think the Congress is going to really have to work with the 
Postal Service, and as we mentioned in our statement, I think 
it's going to be very important for the Postal Service to 
effectively work with the human capital, the employees in the 
Postal Service, and somehow in some way, and I'm not quite sure 
how, to do better in terms of working relationships with the 
unions, particularly the clerks and the city letter carriers, 
than it has in the past. It's been very confrontational.
    I think as we testified before, the implementation of 
delivery point sequencing was a major dilemma and a major 
difficulty for the Postal Service working with the unions, with 
the city letter carrier union. In the future there undoubtedly 
are going to be changes. I don't know exactly what those 
changes are going to be. We don't see how the Postal Service is 
going to make progress without more of a cooperative effort. We 
think the Results Act and the goals that the Postal Service has 
set and the goals it will set working with the stakeholders, 
including the unions, might be a vehicle to try to reach 
agreement on some common goals relative to its future viability 
for both the well being of its employees and its financial 
viability.
    Mr. McHugh. You really segued into just the last part 
before I turn it over to my colleagues, and then if we have 
time, I'd like obviously to get back to Ms. Corcoran and also 
to you. This is what the Postmaster General later will 
describe, and I'm assuming you agree with this generalization 
as well. It could put at risk $17 billion of Postal Service 
revenues. That's almost 30 percent of its current operating 
stream. That's an enormous challenge.
    I'm hearing you say that the Postal Service has certain 
inherent problems in House problems that it needs to stand up 
to. But as well, it probably can't go it alone; that the 
Congress and, I would assume, this subcommittee and this House 
has a role as well to try to--let's not use the word reform--
reposition the Postal Service. I think I heard you say as well 
there are two things about that. One, to allow the Postal 
Service to respond to this new era in a way that all of us 
agree is appropriate, whatever that way may be, but also 
perhaps to level the playing field as that activity interfaces 
with the private sector. Is that a fair description of what you 
said?
    Mr. Ungar. Yes, sir. I think it will be, of course, a 
public policy decision on that level playing field and how far 
one goes and the consequences for the public in terms of 
universal service.
    Mr. McHugh. Absolutely. I don't want to presume to ask you 
to help us there. That's supposedly what we get paid for. Thank 
you.
    Let me yield to Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Ms. Corcoran, I was very intrigued by your testimony, 
especially the level of progress that you indicate in being 
able to identify areas of need and then coming up with movement 
toward some resolution of those. Did I understand that by 
contracting out priority services, that that had not been an 
increase in on-time delivery?
    Ms. Corcoran. A very small increase, less than 2 percent, I 
believe.
    Mr. Chambers. About 1 to 4 percent.
    Ms. Corcoran. About 1 to 4 percent.
    Mr. Davis. Did I understand that this system, though, saved 
the Service $100 million?
    Ms. Corcoran. No, it cost an additional $100 million over 
doing it in-house because they have to put their own 
infrastructure together, the contractor does, to do this.
    Mr. Davis. So we spent an additional $100 million to 
contract out priority services and yet did not experience much 
in the way of an increase of on-time delivery.
    Ms. Corcoran. That's correct.
    Mr. Davis. That is, in discussions or conversations, did 
you get anything relative to what the rationale had been for 
making the decision to contract those services out?
    Ms. Corcoran. Yes, we did. The Postal Service realized at 
the time that they were doing the contracting that it was going 
to cost more to contract, and that's one of the things that 
they pointed out to us numerous times, that they had been aware 
of this from the start.
    Mr. Chambers has been involved in a lot of the discussions 
with Postal Service, so I'd like him to address that.
    Mr. Chambers. Actually, as our report indicates, this 
really stemmed from a problem earlier in the decade with 
delivery rates for priority mail. This was an initiative on the 
part of the Postal Service. This network was created to try and 
get the on-time performance scores for priority mail to 
increase. They felt that a dedicated network that would be 
operated primarily on the east coast would increase those 
scores. In the process, they contracted out to a vendor, and 
again, as we've said, that is a more expensive proposition. We 
really haven't been able to document that it's increased the 
performance a lot. Part of that stems from the fact that they 
didn't create a baseline of performance in that area, so it's 
kind of hard to say that the performance in that region today 
is much better than it was before. So what we did was to 
compare the performance in that region with similar regions of 
the Postal Service where they operated without a contractor. 
That's the basis on which we say there was very little increase 
in performance.
    Mr. Davis. Did we find that their projections were off or 
the analysis just was not good from the beginning? Were there 
changes in the environment which took place that had not been 
foreseen that could have resulted in the lack of performance?
    Mr. Chambers. Well, again, the performance in that region 
today is comparable to what it is in other regions of the 
Postal Service. Also there is really no evidence that before 
the network there was a significantly lower performance in that 
region before. They were trying to get scores higher. The 
percentage of on-time delivery, they're trying to get that up 
to like 95-96 percent. It's coming close to that, but again 
it's not much lower than that in other highly developed urban 
type areas of the United States.
    Mr. Davis. Thank you. Ms. Corcoran it is also my 
understanding that the Postal Service failed to collect $20 
million in revenue because they charged a lower negotiated 
international rate for mail actually processed as domestic 
mail. If that is the case, is there something that they need to 
do? What can they do to get this under control?
    Ms. Corcoran. This, I believe, is a one-time instance as 
far as we know. We're certainly going to be looking at that. 
They do have rules and procedures in place. The mail was to be 
put in the mail stream outside the country; instead it was 
actually trucked into the country and put into the mail stream 
here. Had it been put into the mail stream outside of the 
country, the international rates would have been appropriate. 
But we even found they were losing revenue even at that, 
because it was costing them more than what it would have.
    Mr. Davis. But you would think that the corrective action 
has been taken that would prevent any recurrence.
    Ms. Corcoran. We just issued that report at the end of 
September. We will be going back and working with them to 
assure that they have taken corrective action on it.
    Mr. Davis. Thank you very much.
    Mr. Ungar, the IG has identified a problem with the quality 
and integrity of data provided by the Postal Service. 
Obviously, this is some of the information that they would have 
used to make the prediction or the projection that there's 
going to be a substantial decline in first class volume in the 
next decade. How reliable do you find this data to be or think 
that it is?
    Mr. Ungar. Mr. Davis, as we indicated, we didn't make an 
independent verification of the data. I think the data we're 
really talking about relate to the future, the predictions for 
the future in terms of mail volume that's expected. So again, 
we aren't in a position to verify that, but on the other hand, 
I'm not sure how you verify a prediction. All you can do is 
ask, does it appear reasonable, do the assumptions appear 
reasonable?
    And it's certainly clear that the competition is there. I 
don't think anybody would argue with that. I think the, you 
know, the trend toward more and more use of electronic 
communications, electronic commerce, and the Internet is there.
    Now, again we certainly can't say with any certainty that 
the exact percent is accurate down to the tenth of a point, or 
we can't certainly say that the exact day or the time is there. 
But it's certainly--the direction that the Postal Service is 
projected--reasonable, based on all that information.
    Mr. Davis. On page 16 of your testimony, you state, and I 
quote, that the Service reported that it has made aggressive 
capital investments in technology and infrastructure to improve 
the distribution and delivery of mail as well as reduce labor 
cost. How much have we been able to reduce labor costs or is 
that something that we've been able to determine?
    Mr. Ungar. Mr. Davis, I think it's come down slightly as a 
percentage of overall costs. I don't believe that labor costs 
have come down absolutely; is that correct?
    Ms. Anderson. They have come down as a percentage slightly.
    Mr. Ungar. They've come down as a percentage of total 
costs. I don't believe they've come down in absolute terms.
    I think that's going to be a fairly significant challenge 
for the Postal Service. I think the customers of the Postal 
Service, particularly the business mailers, have been expecting 
to see an actual drop in the cost of operations in the Postal 
Service and greater efficiency as a result of these capital 
investments. Unfortunately, it doesn't appear as though the 
actual savings have materialized as quickly or as greatly as 
the Postal Service had predicted.
    Now one area that we specifically looked at and reported on 
last year was the delivery point sequencing initiative. There 
were significant problems in getting that going on schedule and 
keeping it on schedule. So there were some areas there where 
the Postal Service didn't realize as much savings as it 
expected.
    Mr. Davis. Finally Mr. Chairman, if I might, Ms. Corcoran, 
you indicated that you had discovered, or that your office 
found $1.1 billion during the last 6 months in monetary 
benefits. Do you have any idea of what's actually out there, 
how much more there might be or how much more one could look 
for?
    Ms. Corcoran. I wish I did, but I don't. $1.1 billion--the 
cost avoidance through fiscal year 2007--is fairly significant 
to have found in a 6-month period. In all honesty, I would hope 
that we don't find that much every 6 months because it would 
indicate that things aren't going as well within the Postal 
Service as you would hope. But we will continue to look and to 
work with them to try to improve things, so there's not that 
type of monetary savings.
    Mr. Davis. Well, I think you've done an outstanding job in 
that area. And I would hope also that you don't find much more 
because it's not there.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    The gentleman from Ohio, Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman, and thank you for 
having the hearing. Ms. Corcoran, I, having been a member of 
this subcommittee now for a few years, want to give you and 
your office praise--for every time you appear before the 
subcommittee first, and second of all, for the fine work that 
you've done and the reports that you've issued.
    I do want to talk to you about your written testimony in 
two parts, one on page 4. There was a conclusion reached by you 
and your office that found that the international business unit 
of the Postal Service did not have key processes in place to 
achieve projected revenue goals and that some initiatives fell 
short of revenue projections. And then on page 8, in the list 
of reports that you've issued, the second bullet point on page 
8 indicates that your office examined the financial 
profitability of international mail and determined that 
international mail contributed positively to the financial 
position of the Postal Service and is not subsidized by 
domestic mail service.
    I guess--can you reconcile those two paragraphs for me? Do 
I understand, in the international mail arena, the Postal 
Service has 14 what are called outbound mail services. And if I 
understand what you're saying on page 4, you're saying that not 
all of those are operating in a revenue positive position for 
the Postal Service, but on page 8 are you saying, overall, that 
the Postal Service's international mail operation is--it's 
covering its costs and it's not being subsidized by domestic 
mail?
    Ms. Corcoran. This is a little confusing when you compare 
those two. On page 8 what we're talking about there was a 
question that was asked quite often a year ago about whether or 
not international mail was cross-subsidized by domestic mail. 
And page 8 we did a review, and we found that that was not 
occurring.
    The review that we talk about on page 4 was really a review 
of the international business unit as a whole, not necessarily 
of their products, but of their initiatives. We were looking at 
this separate business unit. In fact up until this point in 
time, I believe it was the only business unit that the Postal 
Service had identified as a separate unit. We took a look to 
see whether or not what they were expecting from this business 
unit was really going to occur and whether or not the 
projections in revenues that they had were really appropriate. 
We found that, as it says here, they fell short of some of the 
revenue projections.
    Mr. LaTourette. My question is spurred by a report from 
June of this year to the Congress by the Postal Rate Commission 
that examined the 14 outbound international mail products, and 
they indicated that of the 14, four they found to be 
noncompensatory; that is, they didn't make as much money as it 
cost for the Postal Service to be involved in them. And I'm 
wondering if that squares with what you found, and if it does, 
in order to have the paragraph of the bullet point on page 8 
make sense, are the other 10 making so much money that it 
covers the deficits in costs for the four that are not? And the 
four that are cited by the Postal Rate Commission are the 
surface printed matter and small packet surface periodicals, 
global priority mail and global package link.
    Mr. Chambers. I would like to answer that one for you. 
Actually when we completed our work, looking at international 
mail, the possible cross-subsidization, we concluded that there 
is not cross-subsidization between domestic and international; 
that is, as a whole, the international products are paying 
their way. We did, however, I believe in our report raise the 
possibility that there could be cross-subsidization within the 
international products; that is, one might not be paying its 
way and another would.
    At the time we concluded our work, we planned to do a 
second phase. It was about the same time that the Congress gave 
the Postal Rate Commission additional oversight 
responsibilities in the international mail arena at which point 
we deferred to them to take a look at the possibility of cross-
subsidization within those products.
    Mr. LaTourette. Thank you.
    Mr. Ungar, is that something you all looked at at GAO?
    Mr. Ungar. We didn't look, Mr. LaTourette, at revenue and 
expenses in the depth of the Inspector General. We looked at 
the GPL program last year and reported on that.
    Did you want to say anything?
    Ms. Anderson. We didn't look at whether or not it was being 
cross-subsidized. Again, we've been working with the PRC and 
with the Postal Service in looking at the general issue of the 
quality of ratemaking data, but we did not look specifically at 
the international area.
    Mr. LaTourette. Did you make any recommendations relative 
to GPO?
    Mr. Ungar. Excuse me?
    Mr. LaTourette. Did you make any recommendations as a 
result of your analysis, or are you deferring to the PRC in 
terms of rate?
    Mr. Ungar. Not on GPL. We did, however, make a 
recommendation to the Postal Service on ratemaking domestically 
in terms of the Postal Service's response to the contractor's 
recommendations. I think they only dealt with domestic rates; 
the contractor didn't look at the international area.
    Mr. LaTourette. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    I'll come back to that line because I think the gentleman 
from Ohio has raised some very interesting points that I would 
like to pursue a little bit further.
    But let me yield to my fellow colleague from the great 
State of New York, Mr. Owens.
    Mr. Owens. Thank you very much, Mr. Chairman. 
Unfortunately, we have a major bill on the floor for the 
Education and Labor Committee that I serve on; I won't be able 
to stay. But I have a couple questions related to the work 
force.
    I'm the ranking Democrat on the Subcommittee on the Work 
Force, and you acknowledge--we would like to acknowledge the 
fact that we have seen some impressive efforts in identifying 
systemic problems in the labor-management area. Specifically I 
want to ask, has the Postal Service been receptive to your 
reviews on how to improve the grievance arbitration procedure, 
reduce the backlog of grievances, and improve the labor 
climate? And if they have not, why not? If so, what's changed, 
what's different?
    Mr. Chambers. I believe, as we took a look at the grievance 
and arbitration area, we actually did two or three different 
reports on that and found that there was an opportunity to 
review those processes. In fact, we found----
    Mr. Owens. Can you get closer to the mic, please.
    Mr. Chambers. We did take a look at the grievance and 
arbitration area. We issued a couple of reports. One report on 
the management information data found that they really needed 
to improve the information they had in the grievance and 
arbitration area. They agreed with us on our work and said that 
they would improve that area.
    I think our second report dealt more with how the grievance 
and arbitration cases were handled in terms of working with the 
unions. If I'm not mistaken, I believe there was not a 
consensus on how those issues could be resolved. I don't have 
those details at my fingertips.
    Mr. Owens. Did you not have some reports on conditions in 
the workplace?
    Mr. Chambers. Yes, I believe we have issued a number of 
those reports as well. Again, specific reports don't come to 
mind right off, but I know we have issued several reports in 
those areas.
    Mr. Owens. You're not familiar with the one that deals with 
the Suncoast district?
    Mr. Chambers. Yes, I'm sorry. That's the district-wide 
review we did on the labor-management climate, and we did find 
a number of areas where there could be improvement. In fact, it 
was on that basis that we recommended expansion of our work; 
and we're now doing it nationally, we're looking at an 
additional 26 districts.
    We did not get an agreement out of--it was an interesting 
situation, because we actually got more agreement at the local 
level on the issues than we did as we moved up to the area 
level within the Postal Service.
    Mr. Owens. Can you explain a little more, if the Postal 
Service has a zero tolerance for violence, how could that 
situation be so prevalent? I mean, can you explain?
    Mr. Chambers. Well, much of, I think, what we've disclosed 
dealt with the issue of the labor climate assessments and the 
fact that those climate assessments were not being done, and 
that some of the issues that were arising from them were not 
being corrected. It's on that basis, as we said, we want to do 
a more nationwide effort on that.
    Mr. Owens. But there was resistance as you went up the 
chain, you said.
    Mr. Chambers. That's my recollection on that particular 
one. I would have to double-check it, but as I recall--and this 
is something that's not uncommon--we have, in some cases, 
gotten more cooperation from management on labor-management 
issues at the lower levels than when we move up. In fact, the 
most consistent resistance we get on our labor-management 
recommendations actually comes at the headquarters level and at 
the area vice president level.
    Mr. Owens. What is the response of the Postmaster General 
to that?
    Ms. Corcoran. I have mentioned this to Mr. Henderson. We 
have been hoping that a Deputy Postmaster General would be put 
in place so we could start working with them. Now they have put 
in an executive vice president for Human Resources, and that 
was done last week. We will be addressing those issues with 
her.
    Mr. Owens. Would you say that massive labor-management 
problems are still not a priority, have not been made a 
priority?
    Ms. Corcoran. They are a priority, by all means. In fact, 
we have devoted a substantial amount of our resources to 
looking at these issues.
    Mr. Owens. On another subject, last year Representative 
Fattah contacted your office and requested an investigation of 
Postal Service minority procurement opportunities. Your report 
revealed that the Postal Service did not enforce its 
requirements that contractors submit subcontracting plans and 
encourage including minority subcontracts. It also showed that 
contracting officers use their discretion in deciding when to 
comply with requirement, and that minority contracts have 
declined annually since fiscal year 1994.
    To your knowledge, has the Postal Service begun to reverse 
the decline of the minority contracting opportunities? Has the 
Postal Service adopted any of the recommendations contained in 
your report?
    Ms. Corcoran. Yes, they have. While we have not done a 
followup review as of yet, we have been keeping tabs on this, 
what the Postal Service has done in this area, while we've been 
doing other contracting areas. We will eventually be doing a 
followup audit, probably toward, spring of next year. We want 
to give Postal Service long enough to actually put processes in 
place.
    Also, Congressman Davis, you had mentioned earlier today 
your concern about minority contracting for advertising. We are 
going to be doing a local advertising job this year. We will be 
looking at whether or not minorities are given the same 
opportunity to compete for advertising as well as other 
individuals.
    Mr. Owens. You'll be recommending those things, or there is 
already a commitment from the top that those things will be 
done?
    Ms. Corcoran. We will be looking to see whether or not 
Postal has an adequate program in place to assure that 
minorities are included in local advertising.
    Mr. Owens. The commitment has been made; they have said 
they would put an adequate program in place to correct this. 
That commitment has been made already.
    Ms. Corcoran. No, not to my knowledge.
    Mr. Owens. You're going to recommend it.
    Ms. Corcoran. Well, I cannot say what we will recommend 
until we've done the review. But we will look to see whether or 
not they have adequate controls in place. And if they don't, 
then we certainly will make recommendations to assure that 
minorities are adequately included within the contract's 
consideration.
    Mr. Owens. Thank you.
    Mr. McHugh. The vice chairman of the subcommittee, the 
gentleman from South Carolina, Mr. Sanford.
    Mr. Sanford. Thank you, Mr. Chairman. I want to apologize. 
I may have to run in just a second.
    I guess my question would be for you, Mr. Ungar, that if 
you look at this as a theoretical question, but H.R. 22, for 
instance, the whole debate about the bill has been tied to, you 
know, what do we do to prepare the Post Office for what's 
coming its way; and I think that John created the perfect bill 
given the political confines he had to deal with.
    In other words, I don't think you could have crafted a 
finer bill, given the political reality that exists on the Hill 
and with the different constituents tied to Postal. My question 
would be, assume you're just a raging idealogue, which is where 
I would be, not tied to the political reality that John has to 
deal with on a daily basis, if you were to look at it from that 
perspective and you look at the problems confronting the Post 
Office, would your goal be, in this perfect world, to deal more 
with the cost side or on the revenue side, increasing revenue 
as a way of fixing the problem or decreasing cost?
    Mr. Ungar. That's a tough question. I think I would focus 
first on cost, but let me ask Ms. Anderson to address that more 
fully.
    Ms. Anderson. I would think that the Postal Service would 
really need to focus on both. And you'll find that they have 
goals and they have strategies in their performance plans that 
I think really go to trying to achieving gains in both areas. 
And obviously the more successful they are in reducing their 
costs, that would put less pressure on the need to find 
additional revenues. But I think the efforts really have to go 
toward both sides.
    Mr. Sanford. One of my struggles has been, if you look at 
the cost part of the equation and you look at labor costs as 
measured against other private sector competitors--and again 
it's not a perfect match-up, given universal service and other 
constraints that the Postal Service has--would you really focus 
in on the labor portion of the cost segment?
    Would that be a big star as you look at cost structure, Mr. 
Ungar?
    Mr. Ungar. Well, it has to be looked at, sir, because 
obviously there are different percentages, but it's roughly in 
the 80 percent area, plus or minus, that constitutes a cost. So 
I don't know how the Postal Service would be able to make any 
substantial progress without somehow addressing that.
    Now, exactly how it's going to do that is a real challenge. 
As we indicated, productivity over the last many years hasn't 
significantly improved despite, you know, the amount of money 
that's gone into automation and capital improvement. Maybe that 
will change somewhat in the future as more progress is made. 
But I don't know how it's going to make substantial progress 
without looking somehow at the labor portion of that.
    Mr. Sanford. What would be benchmarks that you would see in 
the private sector in terms of productivity gains with private 
sector competitors in mail-related businesses?
    Mr. Ungar. I would presume you would have to look at 
organizations like Federal Express. If you are talking about 
individual companies, I would presume it would be those 
organizations that are involved in the same type of activity. 
Now, maybe foreign counterparts might be another.
    Mr. Sanford. Do you have any of those? Would you have any 
feel for what kind of productivity gains they've been looking 
at?
    Mr. Ungar. We have not addressed that, sir.
    Ms. Anderson. We haven't looked at the private sector.
    Mr. Ungar. We haven't looked at that aspect of foreign 
postal organizations and what kind of data they have.
    Mr. Sanford. I thank the chairman.
    Mr. McHugh. I thank the gentleman.
    Mr. Ungar, as I said in my earlier comments, many of us 
expected this type of challenge that you generally outline in 
your report. But most of us thought it was some time away; we 
thought the wolf was out in the woods. I think you're showing 
us that if the wolf isn't at the door, he may in fact be coming 
up to the front steps.
    I want to probe what you said a little bit earlier, because 
it may be worse than that. If I heard you correctly, you talked 
about the Postal Service's financial plan for next year, 2000, 
their projection of $100 million net revenue. I believe I heard 
you say that the factors on which that $100 million is 
predicated are, shall we say, optimistic, a 1 percent reduction 
in work hours, which goes against everything that we see in the 
workplace structure, in the numbers of stops, numbers of 
employees; 3.1 percent productivity increase, as opposed to an 
entire 9 percent increase since 1972, or 25 years.
    So I believe what you're suggesting in your very judicious 
way is that $100 million based on $62 billion of revenue--I 
wish I had a $100 million in my back pocket. But if your entire 
budget is $62 billion, $100 million is not an enormous amount 
of money, so that's pretty optimistic.
    Is that what I heard you say?
    Mr. Ungar. In our conservative way, I think so, yes. 
Although, again, predicting the future is awfully difficult, as 
you know. That's why we label this as a challenge and a fairly 
formidable challenge, because the forces seem to be going in 
the opposite direction.
    Now, maybe there will again be some very big payoff that 
we're not seeing in some of the automation and capital 
improvements. But it would certainly seem to take--I hate to 
use the word ``miracle,'' but it would certainly take some 
significant event or series of events that would appear to 
enable the Service to achieve its goal. Again, it certainly may 
do that, but it looks like a fairly significant challenge for 
all the reasons that we both cited.
    Mr. McHugh. I understand that. I have been in government 
for nearly 30 years now and I know what it is to make 5-year 
budget projections and look 6 years back and laugh like crazy, 
no doubt about it, but we have to make certain assumptions.
    But the point that I think needs to be kept in mind here is 
that a lot of good folks are here this morning because of, in 
large measure, what your analysis found. And I think they're 
here because they wanted to try to better understand how it is 
that now, within a timeframe as short as 3 years, we could have 
a problem facing the Postal Service that could total $17 
billion, nearly 30 percent of its total operating revenues.
    What I'm suggesting is, if you just forget about the 3 
years from now when that $17 billion is driven largely by the 
challenge from electronic commerce and electronic 
communication, you've actually got a Postal Service that could 
be in big, big trouble starting as early as next year. I think 
in terms of what this subcommittee has been trying to do for 
the past 5 years, and, as the vice chairman said, as we've 
tried to react to the practical and the political realities of 
passing a bill in this town, 3 years, 2003 is just around the 
corner. Next year, for all intents and purposes, is here today.
    So I think the message for this morning has to be, we don't 
have a lot of time anymore. The Congress has to be a part of 
this. We owe it to the Postal Service, but more importantly, we 
owe it to the American people.
    The Postal Service itself has problems that it needs to 
meet head on. As Ms. Anderson said, there are certain cost 
constraints and cost problems that they can and should meet 
internally. But this is going to take some serious resolve by 
this Congress and by the Postal stakeholders, a lot of whom are 
in this room today and a lot of whom I don't think truly 
believe the urgency of the problem. But I hope they're 
beginning to reassess this morning.
    So, with that, we do have the Postmaster General. We've 
taken up almost 2 hours of your time, and I deeply appreciate 
your being here.
    Ms. Corcoran, particularly, I've got a whole lot of 
questions I want to ask you. But with both of your indulgence, 
we'll submit those for the record.
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    Mr. McHugh. I want to thank Ms. Corcoran, who, I think, is 
doing an amazing job in establishing an office, and yet at the 
same time, not spending a lot of time getting acclimated, but 
rather going out, and as her testimony so adequately and, I 
think, accurately details, making a real difference in the 
quality of service that the Postal Service provides.
    Thank you for that effort and that initiative.
    And, Mr. Ungar, to all of you in the GAO, thanks for your 
partnership and you'll be hearing from us. Thank you so much.
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    Mr. McHugh. The next person to testify, of course, is the 
Postmaster General and Chief Executive Officer of the U.S. 
Postal Service, Mr. William J. Henderson.
    General Henderson, welcome. Raise your right hand.
    [Witness sworn.]
    Mr. McHugh. The record will show the Postmaster General 
responded to the oath in the affirmative, as I knew he would, 
because he's always a truthful man.
    Mr. Postmaster General, Bill, welcome. Thank you for being 
here. Thank you for your patience. As you can see, we have a 
few topics to talk about. The stage has been set, and we're 
looking forward to your comments. I have read your testimony; 
it will be submitted in its entirety for the record. We now 
look forward to your presentation this morning.

STATEMENT OF WILLIAM J. HENDERSON, POSTMASTER GENERAL AND CHIEF 
                       EXECUTIVE OFFICER

    Mr. Henderson. I won't read back my testimony to you. I'll 
just make a few brief comments, and then we'll go to the 
questions, if that's what you like.
    First of all, thank you for all the help you've been. We've 
had--in a short term, we've had a very good year. In the Postal 
Service this fiscal year we set record goals in service and we 
also received a record rating of 94 percent by the consumers 
across America in rating the Postal Service good, very good and 
excellent.
    We expect in this fiscal year to do about $100 million 
better than what we planned, so somewhere the neighborhood of 
$300-plus million. That's in spite of the fact--and you've been 
talking about it--the fact that we missed our revenue plan by 
$620 million. In other words, when we postponed the rates 
increase in June--that was scheduled for June, to January, we 
gave the American public an $800 million deficit. We didn't 
expect at that time to also have to make up another $620 
million in revenue.
    So, from an operating point of view, it was a difficult, 
but successful year.
    We also, on the employee front, were very proud of the fact 
that we negotiated two labor agreements, one with the American 
Postal Workers Union, one with the Mail Handlers Union, that 
set the stage, I believe, for much better labor relations. 
We're in the process of negotiating, as we speak, with the 
National Letter Carriers Association. And we regrettably went 
to arbitration with the National Association of Letter 
Carriers, but that is now behind us. So I think it's been a 
very successful year for the Postal Service.
    But I, like you, do not think that the future is 
potentially as good unless the Postal Service does something 
about the Internet, gets involved in it, gets active in it. And 
I also think that H.R. 22 is a very important piece of 
legislation that will help the Postal Service in its future.
    I've talked about $17 billion which is the amount of money 
that people pay postage for to get bills and payments to one 
another. And there's no question all you have to do is read the 
paper: The conditions are springing up every day trying to put 
partnerships together in order to get that lucrative piece of 
business. So it's not a matter of if, but when, and the impact 
on the Postal Service will be substantial when that occurs.
    So I think all of the posts of the world face this and all 
of the posts of the world, with the exception of the U.S. 
Postal Service, all the industrialized posts, are actively 
engaged in reformation, including a major move toward 
privatization. So I think your work on this subcommittee is 
very important to the lifeblood and future of the Postal 
Service.
    And I might add that you can't wait until the thing 
crashes, because by the time you recover from a crash, you will 
have injured a lot of businesses in America with forced higher 
rates.
    So thank you.
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    Mr. McHugh. Thank you. I think that's certainly one of the 
messages here today insofar as the Congress' role in this. 
Three years is the blink of an eye; it takes us 3 years to 
decide what day of the week it is, and then we don't all agree. 
So the point being, I think, the challenge is immediately upon 
us.
    I'm sure my colleagues are going to want to ask you about 
what you can do internally to make it up. But let me ask a 
broader-based question, just to begin. You're talking in your 
testimony and in other venues about at risk in this decline of 
first-class mail, $17 billion roughly. That is about 30 
percent. If nothing else were to change, you've had no 
legislative relief, you've now had to go to this service 
cutback size, because you're locked in on contracts, et cetera, 
what does 30 percent in terms of cutbacks mean to an 
organization like the Postal Service? Are you even able to 
dream of such a thing?
    Mr. Henderson. Well, it would be very traumatic not just 
for the Postal Service's workers; it would be traumatic for the 
American public. I mean, the Postal Service is forced by law to 
break even. So you would begin a huge cost-cutting effort, but 
you would also begin raising prices. I mean, I've used as a 
metaphor many times the Sears problems in the 1980's where they 
lost traffic in their stores across America. And if they had 
had the postal laws governing them, they would have had to 
raise their prices, which would have just sent them into a 
spiral.
    So it's very important that these issues be addressed prior 
to this happening, not after it happens.
    Mr. McHugh. Generally, for rate cases, I understand you 
roughly equate a 1-cent increase in the cost of a first-class 
stamp as a billion dollars in revenue; is that right?
    Mr. Henderson. Right.
    Mr. McHugh. That probably would not be true anymore, 
however, in the future, if your first class volume is coming 
down like that; but let's use that. If it were even 
semipractical to raise the price of a first-class stamp 17 
cents above, making it 50 cents, have you projected or looked 
at what that might do to the volume of first-class usage? 
Wouldn't you just be digging your own hole deeper and causing 
more problems, and the higher you're forced to raise the cost, 
the less the return, diminishing return?
    Mr. Henderson. That's absolutely right. We are looking at 
scenarios, operational scenarios, but as a general proposition, 
you can see it from prior rate increases, when you raise the 
rates, there's a deflation of volume for a period of time until 
stamps become a better bargain. It would be disastrous for the 
American community to have that happen, absolutely disastrous, 
and we would try every possibility not to allow it to happen. 
But $17 billion is a lot of money.
    Mr. McHugh. Have you had an opportunity to prioritize your 
least favorite options? In other words, what do you do first? 
Let me pose the question that you never want to answer: Do you 
begin to close Post Offices or do you cut back on Saturday mail 
delivery or----
    Mr. Henderson. We are in the process of developing those 
scenarios now. I don't have the priority today, but I mean you 
would look at every cost center you had. You would have to look 
at everything. Service reductions, you would have to look at it 
across the board in order to make up a 30 percent drop in your 
revenues.
    Mr. McHugh. You operate 38,000 post offices roughly across 
America. If you were forced to a point by which you had to 
close some, I would assume a large segment of the least 
efficient or most costly are probably in rural communities. Is 
that a fair statement?
    Mr. Henderson. Yes.
    Mr. McHugh. We do have some bells, for a vote, but before 
we do that, let me yield to Mr. Davis and maybe he can complete 
his questioning before we go vote.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Mr. Henderson, we discussed a great deal with Ms. 
Corcoran--cost savings, cost-cutting, finding revenue that 
could be enhanced. Given the fact that we spent the $101 
million contracting out Priority Service without any real 
discernible improvements, is there any rethinking of that 
decision?
    Mr. Henderson. Well, let me say for the record that we 
don't agree that there was not any substantial improvement. We 
have an independently measured service, independent measure of 
service, that shows the PMPC network substantially higher than 
the rest of the country. The IG based that finding on the fact 
that we did not have a baseline. But if you look at absolute 
scores between what the PMPC network is doing and the rest of 
the country, there's a substantial improvement; and that 
improvement is based on the fact that we've created a network, 
hubs for processing of priority mail, not the fact that whether 
or not it's done in house or by private sector.
    Mr. Davis. You indicate that they weren't looking 
necessarily at all of the factors in terms of a baseline. There 
has been some question relative to data generated and the 
integrity of data generated by the service and that data being 
used to make certain projections and analysis.
    Is there any change taking place relative to the data-
gathering process that you're using?
    Mr. Henderson. Across the board, the answer is yes. I mean, 
we did--had an independent study done that generally gave the 
Postal Service a clean bill of health, but made a lot of 
recommendations for tightening up data collection. And we are 
in the process of implementing those recommendations. That 
doesn't relate to the PMPC, which is measured--it's not our--
it's an independent measure of service data.
    Mr. Davis. We raised the question earlier. As a matter of 
fact, I believe that Representative Owens raised the question 
to an investigation of minority procurement opportunities, and 
while that information was not available and forthcoming from 
the IG, do you have information relative to the changes that 
have occurred in relationship to that?
    Mr. Henderson. Yes. We have a substantial effort to involve 
more minority businesses in purchasing, and it has been under 
way for some time; and we think when the IG goes back in and 
reviews, they'll see substantial progress being made.
    Mr. Davis. I would like to yield to Representative Owens.
    Mr. Owens. I thank the gentleman for yielding. I have an 
amendment on the floor. I won't be able to return.
    But you had mentioned a 94 percent consumer rating. Did I 
hear that correctly?
    Mr. Henderson. Uh-huh.
    Mr. Owens. Can you explain that a little bit?
    Mr. Henderson. We do an independent measure across the 
United States; we call it the customer satisfaction index. It's 
done by Gallup, and 94 percent rated the Postal Service good, 
very good and excellent on that. It's an overall question. It's 
a very detailed questionnaire.
    Mr. Owens. Is that broken down by districts or cities, or 
can I see a----
    Mr. Henderson. Yes, it's broken down by districts, by major 
metropolitan areas. We would be happy to provide you the data.
    Mr. Owens. I would be very thankful.
    Mr. Davis. Maybe the last question before we have to go, 
Mr. Chairman.
    Mr. Henderson, would your office have the time that you 
could perhaps provide us with your own report of the 
procurement practices and changes that have occurred?
    Mr. Henderson. Yes, absolutely. I'll provide it to you.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. McHugh. We have about 8 minutes for this vote. I 
understand it's just a single vote.
    Mr. Postmaster General, with your forbearance, we'll be 
back very shortly.
    [Recess.]
    Mr. McHugh. As much as I'm tempted, I think we had better 
wait a moment for another responsible adult.
    As you've heard here this morning, we do have a series of 
very important education bills that it happens a good number of 
the subcommittee members are very interested in and wanted to 
be on the floor. So I'm not certain when they'll get back.
    So I will exercise the prerogative of the Chair and 
reconvene our discussion here. If they come back, I'll yield to 
them. In the meantime, why don't we talk?
    Mr. Henderson. Sure.
    Mr. McHugh. You have mentioned--I believe Mr. Ungar 
mentioned the letter carrier agreement that came about as a 
ruling of an arbitrator. What is the likely total financial 
impact of that agreement, including what it is likely to do in 
the future--and I'm not asking you to reveal your hand, but it 
does have significant implications for the first time. It 
decouples a number of the various employee units in a pay 
perspective that I assume the other employees units are going 
to want to reestablish, and it's probable that you're going to 
have to respond in some way.
    If you're working on a ballpark figure, what do you think 
the total cost of that one ruling is going to be?
    Mr. Henderson. Within the confines of the ruling itself, 
it's $2.4 billion. If you take it out--I mean, everybody in the 
internal postal community is very interested in that because it 
changes the relationship. So you'll have the rest of the unions 
going to reestablish that relationship, which means they want a 
higher level. You then have postmasters who have an existing 
differential with craft employees that will have--will want 
some differential, and then you'll have supervisors wanting 
some differential. So we haven't tried to--I don't know if I 
could swallow that number; I haven't tried to calculate it yet. 
But it did have, you know, a ripple effect throughout all of 
the labor deals. It's affected the current negotiations that 
we're in.
    Mr. McHugh. I not only understand, I certainly accept that. 
But the ball park, are we talking, more likely, tens of 
millions or, more likely, hundreds of millions of dollars?
    Mr. Henderson. Hundreds of millions. Billions of dollars.
    Mr. McHugh. Billions of dollars from this one ruling?
    Mr. Henderson. Yeah.
    Mr. McHugh. Your fiscal plan that Mr. Ungar referred to 
that is projecting $100 million net revenue based on some 
productivity assumptions, based on some work-hour assumptions, 
did that include anything to accommodate this ruling?
    Mr. Henderson. No. No, it didn't. And this fiscal year will 
not be impacted because the level increase doesn't occur until 
next year.
    I was interested in hearing him call making this budget 
this fiscal year a ``miracle.''
    Mr. McHugh. Well, we're getting near the season of 
miracles. I believe he said he did not want to use the word 
``miracle,'' but he decided on ``some major development.''
    But the point I wanted to make--and I believe you would 
agree, and if you don't, please respond. I'm not trying in any 
way to minimize what I think has been a string of remarkable 
net revenue years for the Postal Service, truly historic. But 
on a $62 billion revenue plan, $100 million is thin--a lot 
better than the reds that piled up year after year in previous 
times, but still thin.
    So if you then have something thrown at you, so to speak, 
that is totally beyond your power, really totally beyond your 
ability to forecast, that only makes the picture more 
difficult. And when we're talking about hundreds of millions, 
billions of dollars, added onto your revenue projections and 
loss of first-class income of $17 billion, you've got a serious 
problem.
    Mr. Henderson. Yes.
    Mr. McHugh. And it's here today.
    Mr. Henderson. And I would add that the activity in e-
commerce, the Internet is very suppressed, and it's suppressed 
because of Y2K. You've got large corporations like IBM, large 
organizations like the U.S. Postal Service are really strapped 
down right now. In other words, we've frozen new projects until 
we get through Y2K. And that's been a common practice 
throughout industry and the public sector.
    After January, after the Y2K problem starts to dissipate, 
or the potential problem, you're going to see much more 
activity than we predict on the Internet, than has been 
experienced thus far.
    Mr. McHugh. And I agree. There's a likely technological 
snowball building here that is unleashed in certain part past 
Y2K and people's concerns about it, but continues to roll as 
more and more Americans find themselves wired into the 
Internet. As more communities across this country have Internet 
access, opportunities increase; and as people become more 
comfortable in engaging in that kind of commerce. A lot of 
folks today peruse the pages of the Internet, looking at 
product, and then pick up the phone and call in the order 
because they're not just quite comfortable. But that's going to 
lessen as time goes on.
    So the problem isn't something where you take the hit, you 
hunker down, accommodate it and you go on. It's something 
that's going to continue to increase and put more, rather than 
less, pressure on you.
    Let me ask you one final question, and I'll yield to Mr. 
LaTourette. A lot of people say, well, electronic commerce did 
have its challenges, but it has its benefits as well. If you 
call up--if you wire in, call up on the Internet a mail order 
house, order a pair of snow boots or whatever it is, then the 
possibility of the Postal Service serving as the carrier 
certainly is there and increases your opportunity.
    Have you been able to weigh or project revenue losses on 
first-class versus what you might pick up? I know those are 
total estimates, but----
    Mr. Henderson. We think that the Postal Service would be 
used as a majority move for e-commerce because of the low-cost, 
high-quality service that's provided. The answer to the 
question depends on the rate of erosion. If it's--it erodes 
like business-to-business mail did, in which we made it up in 
other products, then it's OK. But if it's like what they call 
the ``hockey stick,'' and that is, there's just enormous 
adoption of electronic bill payment that doesn't involve the 
Postal Service, then I don't think there's any way you can make 
up a $20 billion, $17 billion organization.
    So it really is the--the key is the rate of erosion. And 
it's eroding right now, just so you'll know, at between 1 and 2 
percent. But--less than 1 percent of all Americans pay their 
bills electronically today, but as I say, that's--the Internet 
is looking for sources of revenue. And clearly you and I have 
to pay our bills and there's a clear opportunity here to tap 
in. And I think, after the Y2K fiasco is over, then you'll see 
one heck of a move for a lot of players to get into this.
    Mr. McHugh. Thank you.
    The gentleman from Ohio, Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman.
    And, General, it's nice to see you again. I have about four 
areas of concern that I want to talk with you about. They're 
not all connected, so I apologize for skipping around. But I 
want to begin where the chairman left off, and that is that I 
know it's tough to guess after Y2K, but there has been some 
speculation and I think when you appeared over at the Senate at 
a similar hearing there was discussion about the fact that your 
priority mail services and your package services with the 
advent of e-commerce do--you do look at that as a potential to 
offset some of the losses in first-class mail.
    I understood the ``hockey stick'' examination. But I know 
that I was startled when I read U.S.A. Today yesterday and saw 
the projection, and certainly all of us in the subcommittee 
take the GAO's testimony here seriously and recognize the 
chairman and all of the good work that he's done in postal 
reform to move through this Congress at a good rate, to 
position the Postal Service for the next century.
    However, it would not be--rather than just being doom and 
gloom, couldn't the users of the Postal Service and the fans of 
the Postal Service take some comfort in the fact that people 
will not only be paying their bills over the Internet in the 
future, but if they order snow boots up in New York, that the 
Postal Service will be the dominant carrier of the snow boots 
to their homes. And that will, in fact, sort of be both a 
blessing and a curse of the Internet for the Postal Service in 
the next century.
    Mr. Henderson. Yes. And if I painted that, I'll clear that 
up. I don't want to paint the Internet as a curse. The Internet 
is the Internet. It is a new channel into the home. It's how 
you leverage it that's going to determine whether it's a 
positive or negative impact. And we have people working very 
actively to make it a very positive impact on the Postal 
Service.
    Mr. LaTourette. The second area of concern that I have, I 
believe in August of this year, the Postal Service launched its 
new PC postage program, which I think is a very exciting 
program and a great example of how the Postal Service can use 
new technologies to move forward. If I understand my history 
right, it hasn't been since 1928 that the Postal Service has 
taken a look at the postage meter market. In that line, I think 
on August 9th you had a press event and you actually have 
awarded some contracts to vendors.
    Mr. Henderson. Yes, to two vendors.
    Mr. LaTourette. And who are those?
    Mr. Henderson. Stamps.com and e-stamp. We didn't award 
contracts; we certified that their encryption met our 
standards. There are two more, Pitney Bowes and Neopost, that 
will be coming out there and are in the testing phases now. So 
there are four companies in the world that we know about that 
are going for postage online.
    Mr. LaTourette. And that actually leads into the question 
that I had. It was my understanding that there are two vendors 
that are looking for that seal of approval or that 
certification, and because this is such an exciting 
opportunity, I think if you look--you go back in time and say, 
this hasn't happened since 1928 that this market has been open 
to competition.
    Do you have any qualms or difficulties or questions in 
indicating to the subcommittee that--and I say this because 
it's my understanding that the DOJ has an investigation dealing 
with some monopolistic practices dealing with postage meters at 
present. Is there any concern that you have that the opening of 
this new market is going to somehow be constrained, be anything 
but fair, and everybody that has the ability to meet your 
standards is going to have the ability to compete, which 
obviously is going to benefit consumers and the service?
    Mr. Henderson. That's our goal, to make sure that it's open 
and fair. There's no indication to me, anyway, that there's 
anything but really open competition in the PC postage. You've 
got two unknown players right out of the box. I mean, they 
didn't exist; they're new companies.
    Mr. LaTourette. I think that's what's exciting about it. 
You would think when this program, when I first read about it 
and saw that this program--you would think that the old 
standbys would be the ones that would be jumping on it. So when 
two firms that I don't think I was familiar with get the first 
certifications, I think that that adds to some of the 
excitement by some of us that that is going to be a good, 
competitive growth area.
    The second--or maybe it's third, I've lost track, but this 
subcommittee recently had the opportunity to look at 
legislation called Honesty in Sweepstakes Act of 1999. And the 
part of the issues that we discussed had to do with what 
happens when Federal regulation would somehow preempt or invade 
the jurisdiction of the States relative to what their postal 
regulations are or their regulations regarding mail coming into 
their States are.
    Can you indicate just what procedures you have in place 
when your customers, the mailers, are subject to conflicting 
postal regulations as they relate to State laws? Is that 
something that you've taken a look at?
    Mr. Henderson. I have to submit that for the record. That's 
a little beyond my range.
    Mr. LaTourette. Then if you could, I'll send you a quick 
note, and I would appreciate that.
    The last one has to do with what I was talking to the 
Inspector General about. You know from some of the hearings on 
H.R. 22, competition is something that is of concern to me. I 
talked to her about the international mail arena and 
specifically the Postal Rate Commission's report from June of 
this year, that if I had my numbers right, there are 14 
international products, and that, at least as I understood the 
PRC's evaluation, four of those, at the moment at least, aren't 
carrying their weight, that they're being subsidized if not by 
domestic mails, as was indicated by the IG. The money has to be 
coming from somewhere. Is it correct that those four products, 
at the moment at least, are being subsidized by other 
international mail products? International mail is paying its 
own way, but you have----
    Mr. Henderson. They are at the moment. I don't know at this 
moment, but there were four products. Most of the impact for 
those products occurred as a result of Asian flu where they 
were profitable, and their volume is sensitive. When the volume 
goes down, your infrastructure costs overwhelm your revenue. 
And we--it's not important who the customers were, but we 
talked with the customers, and they asked us to hold out to see 
if those markets would improve. We held out for quite a while, 
and then we were forced to raise the rates, and then we lost 
some of the business as a result of that. So it----
    Mr. LaTourette. Of those, and again, if you want me to 
submit this one because you don't have the report in front of 
you, I don't want to sandbag you and ask you a question that's 
unfair, but that seemed to be the finding of the PRC relative 
to global package link. When it comes to global priority mail, 
they indicated that although the suppressed foreign markets may 
have been a factor, one of the things the Postal Service has 
indicated was that the loss was due to a rather high 
advertising budget for that product. And so in addition to not 
only raising rates, I think 14 percent in the instance of that 
particular product, there was going to be a suppression of the 
advertising budget for what was now deemed to be a product that 
wasn't carrying its weight. Has that occurred since the PRC 
report has come out?
    Mr. Henderson. Yes, as far as I know, that has occurred. 
That was factual, what you just said. When you have a product, 
if I'm selling one box and I'm trying to sell it all over the 
country, the revenue generated from one package doesn't cover 
that infrastructure cost. There's a point at which you have to 
reach a certain volume, and they decided to pull back on the 
advertising and try some other technique.
    Mr. LaTourette. The overall question, I think, that comes 
up in postal reform and also relative to the international 
mail, is there a procedure in place that when you launch a new 
product, you have 14 international products, four aren't making 
it, is there a time when you sort of cut them loose and say, we 
thought this was a good idea, but it doesn't appear to be that 
way? If the answer is yes, and I would hope it's yes because 
you wouldn't want to continue to lose--pour money down the hole 
that isn't yielding a result, have you reached that conclusion 
with any other foreign products cited by the Postal Rate 
Commission at this point?
    Mr. Henderson. No, not yet, but we do look at that monthly. 
It's been difficult not only for us, but it's been difficult 
for the private sector and the international market, too. We 
have had companies that have gone as long as 7 or 8 years 
without making money, but there's a belief that American goods 
and services are going to be demanded in foreign countries, and 
the carrier of choice is going to be the folks that make the 
money, and we're very interested in making the money.
    Mr. LaTourette. And then last, and then I'll get off of 
this subject and stop asking questions, again, going the global 
package link, as I understood, I think, the last time you might 
have been here and when you were over at the Senate a little 
earlier, there was some discussion about the fact that the 
rates are set because there's a requirement that a shipper send 
at least 10,000 packages a year. Somewhere recently I'd seen 
published up to one-third of the customers--and you're right, 
it isn't important who the customers are, but those who are 
enrolled or signed up for those discounted rates indicating 
that they would ship up to 10,000 packages a year, up to a 
third of them have not fulfilled that mark. Is that a correct 
report?
    Mr. Henderson. Generally speaking, there's--they have a 
cutback. I don't know if the numbers are--I don't know that 
they're inaccurate. I just don't know. But there was a pullback 
because much of that mail was headed to Asia, and they are just 
pulling out of that market. They're pulling back trying to 
reduce the impact of the Asian flu.
    Mr. LaTourette. If the rate structure is predicated on 
volume, which I assume--you know, you say I'm going to give you 
this rate to ship something overseas, but you've got to agree 
to send 10,000 pieces, for whatever reason if they find that 
not economically practical, has the Postal Service adjusted its 
rates upward for that product to reflect the fact that the 
premise upon which it's based, that you're going to use so much 
of our business, has not occurred?
    Mr. Henderson. We did adjust the rates separate not because 
the volume didn't materialize, but because we were trying to 
cover more of our costs. It's a negotiated deal with various 
individual customers. We try to be accommodating to them. We 
don't want to just pull out and leave them high and dry. That 
doesn't give us a good business reputation. So to the degree 
possible, we try to hang in there with them. They're certainly 
not in the business of losing money, and matter of fact, I 
think every indication is Asia is starting to come back.
    Mr. LaTourette. So would it be your expectation that that 
particular program, which has a 10,000-piece-per-year floor, if 
the economy improves, that the Postal Service will make money 
on that product?
    Mr. Henderson. We hope to. That's why we're here. That's my 
expectation.
    Mr. LaTourette. Thank you.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman. Excellent line of 
questioning, which also, by the way, would be covered under 
H.R. 22. It's been an unpaid political advertisement.
    Mr. Sanford.
    Mr. Sanford. Let me go from the universal to the very 
parochial, if I may, and it may be inappropriate that I even 
ask you this question, in which case I just ask that you hand 
it off to whoever might know. That is, recently the Postal 
Service announced that they were canceling plans to build a 
facility at the old Air Force base in Myrtle Beach, SC. That 
sent up all kinds of red flags, with folks back home calling 
me. The reason that the Postal Service said that they were 
going to do this is because of the distance between Florence, 
SC, and Myrtle Beach. The logical question that people ask back 
home of me was, well, Myrtle Beach didn't move over the 12 
months of them negotiating this site, tying down the land, 
whatnot; we stayed in the same spot. We don't understand this 
reasoning. And so my question would be, could you offer any 
insights that I could offer to my constituents back home on the 
change?
    The other thing I think just procedurally, I think this is 
a very legitimate point, was one of the things that the Postal 
Service folks brought up back home was after the operational 
review, they decided the site no longer made sense, but in the 
process they got all kinds of people excited, thinking there 
were 200 jobs coming to Myrtle Beach. Shouldn't the operational 
review come first before communities, whether it might be--
whether it's Myrtle Beach or L.A., get excited about the 
prospect of a postal facility coming to their neighborhood, and 
it turns out at the end of the operational review that doesn't 
happen?
    Mr. Henderson. You're absolutely right. I'll give you the 
rationale for the record, the details to your office on what 
the reason for changing their minds. I do know that they are 
still looking in Myrtle Beach for an operating facility, but it 
is unfortunate when a community anticipates something that as a 
result of an operational review might not occur. So we--they 
should have done the operational review first. That's right.
    Mr. Sanford. If there's any way--because apparently it was 
talked about at the beginning of October, some sort of press 
release from the Postal Service just to squelch it, because 
people keep calling--not that I'm selfish about this, but I 
am--our office saying why this happened, some kind of 
explanation from the Postal Service to the local media outlets 
back home just so that they feel like the question has been 
answered, because from their perspective it feels like it's 
still hanging out there, and they don't quite understand why.
    Mr. Henderson. We'll put out a press release. We'll show it 
to you before we release it.
    Mr. McHugh. Mention him.
    Mr. Sanford. I appreciate it.
    I don't want to burn up any more of your time, but going 
back to this cost conversation we briefly had, any further 
insights that you could offer me or others on the committee on 
how to get ahold of the cost part of the income statement with 
Postal Service?
    Mr. Henderson. It's substituting capital for labor. It's 
automation. If you take the productivity in the Postal Service 
in 1988 and assume that same productivity today, you'd have to 
add over 100,000 people to the rolls. There's a huge impact.
    The thing that we have enjoyed over the last 25 years, 28 
years I've been in the Postal Service, is continuous growth. In 
other words, you're just like an automobile plant with enormous 
demand that keeps escalating up. You keep expanding. That's 
what happens in the Postal Service. We have been in the past 
growing. We've made money in the last 5 years, and our expenses 
each year have been somewhere in the neighborhood of 5 percent. 
So that's good growth. These charts don't predict that for the 
future, but there was never anticipation that the Postal 
Service's absolute costs would go down because you have a 
growing workload, growing demand, and it shows up on your 
bottom line.
    Mr. Sanford. I thank the Chair.
    Mr. McHugh. I thank the gentleman.
    General Henderson, you may have heard Mr. Ungar in the 
response to one of the subcommittee members--I'm sorry, I don't 
remember which one--who asked about ratemaking data. Mr. Ungar 
cited the report that made some 40 recommendations, I believe 
he said, and then he went on to suggest that GAO had not yet 
been successful getting a response from you folks as to how, if 
at all, you were going to respond to any or all of those 40 
recommendations. Are you familiar with where that might be?
    Mr. Henderson. We're in the process of implementing those 
recommendations. I'll clear the problem up with GAO.
    Mr. McHugh. Is it your plan to issue a response to the 
report or an implementing plan to the recommendations? In other 
words, how might we on the subcommittee be advised as to what 
you're going to do to pursue that?
    Mr. Henderson. We didn't plan on it, but after this today, 
we'll put together a timeline and some milestones and provide 
you the report.
    Mr. McHugh. Great.
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    Mr. McHugh. Anyone else on the subcommittee?
    Mr. LaTourette.
    Mr. LaTourette. I don't have any more questions, but if I 
could just make a request to the chairman. In my questions to 
the Postmaster General, I referenced a report from the Postal 
Rate Commission to the Congress dated June 30, 1999. For some 
reason--it doesn't look quite as bad as some of the redacted 
documents I used to get when I was a prosecutor--some of the 
figures have been redacted. I would ask unanimous consent if 
that's an appropriate request, the unredacted version of this 
report be made a part of the record of this hearing.
    Mr. McHugh. Without objection, so ordered.
    Mr. LaTourette. Thank you.
    Mr. McHugh. Do you have the unredacted?
    Mr. LaTourette. I was hoping that maybe Robert, who is so 
resourceful, can find it for us.
    Mr. McHugh. We'll have to put a codicil on that. If we can 
get it, we'll put it in the record. I don't believe we redacted 
it, did we? We're not like that. Oh, it's being litigated. When 
it's litigated, if we can get the unredacted report, without 
objection it will be entered into the record in its entirety. I 
thank the gentleman.
    [The information referred to follows:]
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    Mr. McHugh. General Henderson, we thank you for your time. 
I think we've established, if nothing else, we have some very 
significant challenges in front of us. There are obviously 
differing opinions as to how those challenges should be met, 
what role both you and the Congress should play. If nothing 
else, I hope we've taken a step closer to the realization that 
this is not theory any longer, that the Postal Service that 
tens of millions of Americans rely upon each and every day is 
entering a new era, as we've heard, and that associated with 
that is going to have to come some sorts of changes. Depending 
on the eye of the beholder, it may be beautiful or otherwise, 
but something needs to be done that is different than status 
quo.
    Toward that end, and I know I can speak for all of the 
members on this subcommittee, both sides of the aisle, we want 
to engage with you in an honest and open and, we hope, 
productive dialog on how we can make those changes happen so 
that communications in America are continued to be conducted 
under an umbrella of confidence and reliability on postal 
services provided for some 200 plus years in this country, and 
we thank you for your effort. We particularly thank the postal 
workers, the folks we see on the streets every day and who sort 
and route the mail. They do a tremendous job.
    We will be submitting questions for the record. You've 
kindly offered to provide some information to some of the 
Members. We welcome your response on that as well.
    With that, the hearing is adjourned.
    [Whereupon, at 12:45 p.m., the subcommittee was adjourned.]

                                   - 
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