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





              OVERSIGHT HEARING OF THE U.S. POSTAL SERVICE

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 19, 2000

                               __________

                           Serial No. 106-170

                               __________

       Printed for the use of the Committee on Government Reform


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

                                 ______


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
67-996                     WASHINGTON : 2001


                     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
                        Robert A. Briggs, 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
               Jane Hatcherson, Professional Staff Member
                      Heea Vazirani-Fales, Counsel
                          Matthew Batt, Clerk
                     Tony Haywood, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 19, 2000...............................     1
Statement of:
    Corcoran, Karla W., Inspector General, U.S. Postal Service, 
      accompanied by Colleen McAntee, Acting Assistant Inspector 
      General for Audit..........................................    29
    Henderson, William J., Postmaster General and Chief Executive 
      Officer, U.S. Postal Service...............................    22
    Ungar, Bernard L., Director, Government Business Operations 
      Issues, accompanied by Teresa Anderson and Gerald Barnes, 
      Assistant Directors, General Government Division, General 
      Accounting Office..........................................    66
Letters, statements, et cetera, submitted for the record by:
    Corcoran, Karla W., Inspector General, U.S. Postal Service, 
      prepared statement of......................................    31
    Fattah, Hon. Chaka, a Representative in Congress from the 
      State of Pennsylvania:
        Letter dated September 18, 2000..........................   102
        Prepared statement of....................................     6
    Henderson, William J., Postmaster General and Chief Executive 
      Officer, U.S. Postal Service, prepared statement of........    23
    LaTourette, Hon. Steven C., a Representative in Congress from 
      the State of Ohio, information concerning a court case.....   124
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............    99
    Ungar, Bernard L., Director, Government Business Operations 
      Issues:
        Chart on mail volume.....................................    67
        Prepared statement of....................................    70

 
              OVERSIGHT HEARING OF THE U.S. POSTAL SERVICE

                              ----------                              


                      TUESDAY, SEPTEMBER 19, 2000

                  House of Representatives,
                Subcommittee on the Postal Service,
                            Committee on Government Reform,
                                                    Washington, DC.

    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2154, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Sanford, LaTourette, 
Fattah, Owens, and Davis.
    Also present: Representatives Tierney and Biggert.
    Staff present: Robert Taub, staff director; Heea Vazirani-
Fales and Loren Sciurba, counsels; Matthew Batt, clerk; Jane 
Hatcherson, professional staff member; Robin Butler, office 
manager, Committee on Government Reform; Dana Johnson, deputy 
chief of staff, personal staff; Abigail Hurowitz, 
communications assistant, personal staff; Tony Haywood, 
minority counsel; Denise Wilson, minority professional staff 
member; and Earley Green, minority assistant clerk.
    Mr. McHugh. I want to apologize at the outset. There are 
all kinds of new electronic gimmicks up here, and fail-safe 
systems, and I have not been cleared for flying this machine. 
So if there is any breakdown, I apologize for that.
    Let me welcome you all here. I don't see a gavel, so I will 
call the meeting to order.
    Thank you so much for being here in such strong numbers. 
Certainly, as we all know, our witnesses today are not 
newcomers. They have, to a person, all testified before this 
subcommittee on previous occasions, and I want to thank them 
again for participating in this, our annual oversight hearing.
    Of course, they include the Postmaster General, Bill 
Henderson; the Inspector General of the U.S. Postal Service, 
Carla Corcoran; and again, Mr. Bernard Ungar of the General 
Accounting Office. I know I speak for all of the members of the 
subcommittee when I express our appreciation to you all for 
your help and your cooperation over these past years. Certainly 
we are very interested in what you are going to share with us 
today.
    I would also like to state my appreciation to the 
Postmaster General, for most of you who have had the time to 
read his opening statement, for the kind things he has to say 
about me in that presentation. I am not certain they are 
deserved, but they are greatly appreciated. I think he 
describes very well the road that we have traveled these past 6 
years in trying to modernize our postal laws.
    It has been a road that has been filled with detours and 
potholes and distractions. Indeed, to the detriment of many 
Americans, I fear that postal reform may not in fact be enacted 
in the year 2000. But we are fooling ourselves if we think that 
with the growing cost pressures and shrinking revenue base of 
the Postal Service, that this Congress can continue to delay 
addressing this most important matter.
    Sustained volume declines, coupled with early delivery cost 
increases, ensure that the postal laws will have to undergo, I 
think, a major adjustment. My fear is that rather than 
undertaking reasonable and gradual changes, as we have 
attempted to accomplish, we will instead find ourselves dealing 
with the worst crisis and be left with choices of desperation 
in our duty to provide affordable universal mail delivery that 
binds the Nation together.
    Let's not kid ourselves: The crisis is upon us. In the past 
year, the Postal Service has encountered increasing financial 
difficulties as mail volumes have grown more slowly than 
expected and as postal costs have increased greatly and have 
been proven difficult to restrain. With just days left in the 
fiscal year, the Postal Service is facing its first money-
losing performance since 1974. The Postmaster General stated 
last month that the service could be as much as $300 million in 
the red when the books are tallied a few days from now.
    The testimony of the nonpartisan independent General 
Accounting Office I feel focuses like a laser on the key policy 
challenges facing Congress and the American people. I would 
like to quote from that report briefly, if I may.

    the Postal Service faces an uncertain future. Can the 
Postal Service maintain and, where necessary, improve on the 
quality of mail delivery service? Can the Service continue to 
provide affordable postal rates? Can the Service remain self-
supporting through postal revenues? Can the Service continue in 
the long term to provide the current level and scope of 
universal postal service?

    The Postal Service is lumbering along under a 30-year-old 
legislative framework and it may not be able to overcome the 
problems it faces. As the Inspector General will underscore, 
the Service faces major management challenges in its attempts 
to grow revenues and to compete in a rapidly changing market, 
maintain affordability, improve the workplace climate, and 
enhance productivity.
    It is no surprise that the Postal Service is seeking 
innovative approaches to dealing with these challenges. About 2 
weeks ago, the Postal Service announced the possibility of a 
strengthening alliance with Federal Express. Questions have 
and, I suspect, will continue to a rise from this pronouncement 
and we will be interested in further explanation and evaluation 
from our witnesses on that topic today.
    There is plenty to be discussed in this oversight hearing. 
Both the IG and the GAO are on the front lines as America's 
postal watchdogs, and they have proven to be valuable partners 
with the Congress in reporting to us on a broad range of postal 
operations. We look forward to their testimony today and our 
review of initiatives they have indicated to the Postal Service 
that they could undertake to improve its own performance.
    As both the IG and the GAO have found, the Postal Service 
requires significant attention to such areas as labor 
management relations, internal controls and revenue 
projections; and the subcommittee looks forward it hearing from 
them and from the Service as to plans to develop innovative 
solutions to these long-standing problems.
    Furthermore, a troubling finding of the GAO is its negative 
assessment of the Postal Service's efforts under the Government 
Performance and Results Act. The performance plans and reports 
that are required under the act should allow Congress, postal 
managers and the American public to easily determine how well 
the Postal Service is improving its performance and achieving 
its goals. Unfortunately, it appears that the latest reports 
are not as clear and understandable as they might be, and we 
look forward to discussing this important issue today.
    Those are just a few of the topics that I suspect we will 
be venturing into. There may, in fact, probably will be others. 
Let me go off script for a moment.
    As I suspect the number of people here suggest, many of you 
are aware that this will be our final oversight hearing in this 
Congress. As I understand the rules, as I understand the 
vagaries of elections, it will probably be my last as chairman. 
I want to express my deepest appreciation to all those who have 
been so helpful to me.
    Of course, Mr. Fattah here, the gentleman from 
Pennsylvania, and his very active role in assisting us, along 
with our staffs, in trying to undertake, I have to say, one of 
the more bipartisan efforts in committee in Congress, this very 
important challenge. It has been a pleasure to all the 
subcommittee members on both sides. I appreciate all of the 
help, all of the insights and hard work that they have put 
together; to the Postmaster General, Bill Henderson and his 
successor, for putting up with me and my well-intended but 
nevertheless I suspect far too often misguided and misdirected 
efforts; and to the folks here at the panel.
    I want to thank those of you in the audience, many of whom 
I have gotten to know so very well over the past 6 years. I 
have said repeatedly that I did not recognize the scope of what 
the Postal Service means in America when Bill Clinger called me 
that first day and asked me to take up this position. I am 
amazed at how this network of sometimes very different 
organizations and interests works so well together, and even 
when there is disagreement, the focus remains upon the critical 
nature of delivering our Nation's mail to virtually every 
household in America.
    It is a humbling experience, and I can only express in very 
inadequate words the admiration I have for the more than 
800,000 postal workers in this Nation who deliver tens of 
millions of pieces of mail each and every hour of each and 
every day to America. It is something that most of us take for 
granted, because they have done it so well for so long, but I 
would hope that would be an opinion and a perspective that in 
the future this subcommittee not adopt, because it doesn't just 
happen. It takes a lot of hard work and a lot of cooperation, 
and we need to be productive players in that.
    Last, and certainly not least, I want to express both my 
deepest thanks and my highest admiration for the subcommittee 
staff members, the folks who are seated here who really are 
remarkable in their understanding and their dedication to this 
initiative. I understand that government employees, staff 
people, whether they be here on the Hill or located in a 
bureaucracy, are often maligned, and I think very unfairly so. 
But I have never in now nearly 30 years of public service been 
associated with a finer group of individuals.
    I get into trouble if I start mentioning names, but I do 
want to mention a few: Dan Blair, who was our first committee 
director, who has now moved on to bigger and brighter things, 
he tells us, over in the Senate. I am sure that that is true. 
Of course, Steve Williams, who has moved on to better things. I 
saw Steve earlier here today, who was so helpful in those early 
days.
    We now have some folks who started with the subcommittee, 
who have moved on, who may be in the room today: Ken John, who 
went on to the GAO, Abby Hurowitz, who definitely took a 
demotion and came to work on my personal staff, but who remains 
such a joy and a delight. We have Tom Sharkey, who was first a 
detailee from GAO to the subcommittee and then from the IG to 
the subcommittee, and Loren Sciurba and Matthew Batt; and of 
course Heea Vazirani-Fales, who has been with the subcommittee 
for so many years, who brings a sense of focus to us; and Jane 
Hatcherson and others who are here.
    I save, in my humble opinion, the best for last. I really 
want to thank the gentleman on my left, Robert Taub, who is now 
the director, and as my chief of staff is continuing to give me 
the opportunity to work with one of the brightest people I have 
met in my life and one of the nicest guys I have met in my 
life.
    These people, taken collectively, have given me invaluable 
insight and assistance at those times when I was too far off 
point--it was because I didn't listen to them well enough; 
those times when I came out looking fairly well, it is because 
I listened to them very well. I want to thank them and all of 
you.
    With that little trip of nostalgia, I would now be happy to 
yield to the ranking member, the gentleman from Philadelphia, 
PA, for any opening comments he might wish to make.
    Mr. Fattah. Thank you, Mr. Chairman.
    Let me first indicate that I think that when the entire 
story is written on postal reform, the gentleman from New York 
will have been the impetus for reforming the Postal Service 
here in these United States. Your work, even though you may not 
realize a result immediately, in the short-term future does set 
the context in which this country will go forward in terms of 
trying to respond to the set of uncertainties that exists in 
which the Postal Service has to operate.
    I want to commend you for your work. For those of us in the 
minority, we have never felt we were in the minority working 
with you. We felt it was a partnership, and we want to thank 
you for your leadership on these critical issues.
    I do want to recognize many who are in the audience, but in 
particular, a Board of Governor member from my State of 
Pennsylvania, Ms. Daniels. I want to recognize her presence.
    I have a formal statement that I will enter into the 
record, but it is obvious that the Postal Service has, as I 
think the Postmaster General will lay out, a multiprong 
strategy to deal with the issues that it confronts, cost 
containment and growing revenues and the question of 
legislative reform. I don't want to delay us from hearing from 
the Postmaster General and from the other witnesses.
    I will enter my statement for the record, and will be very 
interested to hear not just on the broader subjects that the 
Postmaster General will outline, but also on an emerging new 
set of interests and concerns relative to the FedEx 
discussions. And even though there has been no formal material 
provided or, perhaps, even agreed upon at the moment, this 
committee and its work will have to be informed by those 
discussions as we go forward.
    I would thank you, Mr. Chairman, and I will provide my 
formal remarks for the record.
    [The prepared statement of Hon. Chaka Fattah follows:]

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    Mr. McHugh. I thank the gentleman for his kind comments and 
the feelings are mutual.
    We do have a request from two nonsubcommittee members, 
committee members who would like in; and the procedure we have 
followed in the past is to allow those folks, without 
objection, to have an opportunity to pose questions after the 
subcommittee members do. So we have Mr. Tierney from 
Massachusetts, and Mrs. Biggert has also suggested that she 
would wish to drop by.
    So I would ask that, as we have in the past, those two full 
committee members be extended that courtesy after the 
presentations of our witnesses and the questioning by the 
regular members.
    Without objection, so ordered.
    With that, and all the niceties out of the way, let's kick 
some butt here. If you want to please rise, we will administer 
the oath.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all of the witnesses 
responded to the oath in the affirmative.
    With that, as is our custom, I am happy to yield to the 
Postmaster General of the United States, Mr. William Henderson, 
for his testimony. Thank you for being with us.

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

    Mr. Henderson. Thank you, Mr. Chairman. I won't read my 
testimony to you. I will ask that it be introduced for the 
record.
    But I would like to say that I appreciate your leadership. 
I think you have started a dialog on reform. Whether it is 
concluded this year or not, I think you will be credited with 
the vision that could have saved the Postal Service if it 
doesn't wait until a crisis occurs.
    I agree with your assessment that these are troubling 
times. Affordability becomes more and more difficult as 
revenues soften, and affordability is the cornerstone of the 
Postal Service. Growth, just in this accounting period alone, 
which at the conclusion of the fiscal year was flat--there is 
no growth over last year. We estimate that we will miss the 
revenue plan by as much as $790 million under plan in revenue 
this fiscal year.
    We are having to adjust our plans for the next fiscal year 
because of this softening in growth.
    So the problem exists today, and the solutions of raising 
prices are just killing off the market. So we have to figure 
out something else to do, and that something else, I believe, 
starts with postal reform.
    So I appreciate your leadership in that and I look forward 
to working with you as this Congress winds down.
    [The prepared statement of Mr. Henderson follows:]

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    Mr. McHugh. Thank you very much, Bill. I appreciate your 
brevity. That will give us more time for discussion afterwards.
    We move to the Inspector General, Ms. Corcoran.

STATEMENT OF KARLA W. CORCORAN, INSPECTOR GENERAL, U.S. POSTAL 
   SERVICE, ACCOMPANIED BY COLLEEN McANTEE, ACTING ASSISTANT 
                  INSPECTOR GENERAL FOR AUDIT

    Ms. Corcoran. Good afternoon, Chairman McHugh and members 
of the subcommittee. I appreciate this opportunity to discuss 
the accomplishments of the Office of Inspector General. Joining 
me today is Colleen McAntee, the Acting Assistant Inspector 
General for Audit. With your permission, I would like to submit 
my long statement for the record.
    Mr. McHugh. Long. It was complete. I read it.
    Without objection, so ordered.
    Ms. Corcoran. The Postal Service is challenged now more 
than ever to maintain its reputation for reliability. Although 
it faced challenges this year, the Postal Service also had many 
notable achievements, such as the Year 2000 Initiative. My 
office has identified over one quarter of a billion dollars in 
savings this year. In addition, our investigations have yielded 
26 arrests, 11 indictments, 3 convictions, approximately $10 
million in recoveries, and 35 contractor suspensions and 
debarments.
    My testimony today will highlight work we have done over 
the past year to help the Postal Service meet what we believe 
to be its major challenges. We have examined relocation 
benefits paid to postal executives. Our first audit questioned 
whether the moves were in the best interests of the Postal 
Service.
    Our second review questioned why the amount of 
miscellaneous expenses paid to executives was up to five times 
higher than those paid by comparable private companies.
    In both reviews we questioned whether these relocation 
payments were used to augment the statutory pay cap.
    We reviewed the external first-class mail measurement 
system. We found customers were not fully informed that on-time 
delivery scores did not measure postal-wide performance.
    We investigated a major telecommunications contractor. Our 
investigation resulted in the Postal Service recovering $12.2 
million in mischarges and avoiding up to $96 million in 
additional costs over the remaining life of the contract. We 
also identified $36 million in questioned contract costs with 
the assistance of a contract audit agency.
    In a joint investigation, we found two postal managers were 
able to defraud the Postal Service of $3.2 million.
    We reviewed the budget formulation process and found that 
it was difficult for the Postal Service to manage its program 
costs because accounting records only reflect expenses after 
they are paid at the program level.
    Now I would like to turn to the important issue of labor-
management relations. We were pleased that the Califano study 
referenced much of our work. We have continued the work that we 
discussed with you last year concerning postal implementation 
of the violence prevention and response programs by looking at 
the program in 26 district offices. In the area of workplace 
safety, we issued our first video report, which allowed postal 
management and the Governors to see firsthand the conditions of 
the facility.
    Enhancing whistleblower protections within the Postal 
Service has been of interest to you, Mr. Chairman. The 
Postmaster General recently agreed with me that the protections 
provided by the Whistleblower Protection Act should be adopted 
in the Postal Service as a matter of policy.
    In the area of technology, we salute the Postal Service's 
efforts to automate its processes. We believe this is a 
direction the Postal Service needs to go in the 21st century. 
Our reviews have been directed toward assuring that postal 
management has accurate and reliable information to base their 
decisions on technology investments. While the benefits of 
technology are enormous, proper computer security safeguards 
are extremely important.
    In recent e-commerce testimony, we cautioned that the 
Postal Service needs to address lessons learned from more 
traditional programs, such as contracting, which could also 
affect the e-commerce area. We are working with the Postal 
Service to ensure that the OIG has appropriate access to 
information while recognizing the need for confidentiality.
    As you know, our enabling legislation requires us to 
conduct oversight of the Inspection Service. One of the 
initiatives successfully completed this year was the revised 
designation of functions that generally provides that OIG will 
perform all audits and procurement fraud investigations within 
the Postal Service.
    Now I would like to update the subcommittee on my office's 
progress.
    We have worked to educate postal managers and other 
stakeholders about our mission and the importance of our 
independence in carrying out that mission. Therefore, we 
reacted quickly when changes were proposed by the General 
Accounting Office that challenged our independence. We voiced 
our concerns, and I am pleased to report that the Comptroller 
General recently advised me our office would continue to be 
viewed as organizationally independent.
    Mr. Chairman, we are extremely proud of the diverse talent, 
skills and professional experience of our staff. Of the 660 
individuals on board as of today, 50 percent are women and 48 
percent are minority.
    Mr. Chairman and Mr. Fattah, I would like to thank you for 
your support in establishing this office. I would also like to 
thank you and the Governors for recognizing the continued 
benefits of our work. The approval of our fiscal year 2001 
budget will help increase our visibility to Postal Service 
stakeholders.
    In closing, I would like to thank you for this opportunity 
to testify before the subcommittee. We will continue to assist 
the Postal Service, the Governors, and Congress by providing 
accurate information to help you make important decisions.
    This concludes my statement.
    Mr. McHugh. Thank you very much, Mrs. Corcoran. We 
appreciate it and appreciate all your work as well.
    [The prepared statement of Ms. Corcoran follows:]

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    Mr. McHugh. Finally, and certainly not least, Mr. Bernard 
Ungar, Director of Government Business Operations Issues for 
the General Accounting Office.
    Let me say a special thanks to you and to the GAO for being 
so responsive to our many requests, issued by both sides here, 
to try to assist us in understanding the issues and the 
challenges that face the Postal Service. You have been a 
tremendously supportive coplayer in this process, and we are 
deeply appreciative for that.
    With that, Mr. Ungar, our attention is yours.

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

    Mr. Ungar. Thank you, Mr. Chairman, for those kind words, 
and members of the subcommittee. We are certainly appreciative 
of being here today to assist the subcommittee in its oversight 
efforts with respect to the Postal Service.
    As the Inspector General and Postmaster General did, I too 
would like to submit a formal statement for the record and 
summarize our statement.
    Before I do that, I would like to mention I am accompanied 
by Teresa Anderson and Gerald Barnes, Assistant Directors in 
our General Government Division, who have worked on postal 
matters for longer than I have, so they are quite in tune on 
those issues.
    In brief, over the last 5 years, the Postal Service's 
performance has certainly had a number of quite positive 
aspects to it in terms of profits that it had not heretofore 
made, delivery performance, and high rankings of customer 
satisfaction. These are certainly noteworthy achievements.
    As the Postmaster General indicated, on the other hand, all 
the news is not good. Mail volume and mail revenues have not 
grown as much as expected and costs have increased more than 
expected. This obviously has put the Postal Service into a very 
uncertain situation.
    The Postal Service's most recent strategic plan paints a 
more pessimistic scenario in terms of the volume or expected 
volume growth and revenue growth than the picture that it 
presented to us last year and that we presented to the 
subcommittee last year. While the future is certainly difficult 
to predict and it is very difficult to say what exactly is 
going to take place, that does not mean that the Postal Service 
or the subcommittee should sit by and let events take shape 
without aggressive and innovative interaction.
    With that, I would like to show a graphic that we have 
distributed in advance that shows what the dilemma is with 
respect to first class mail volume. If first class mail volume 
does not grow as expected, or it grows less than expected or 
doesn't grow at all, it presents a real predicament for the 
Postal Service. I think this graphic shows why.
    [The information referred to follows:]

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    Mr. Ungar. Looking at first class mail volume, it 
constitutes 51 percent of the volume, 58 percent of the 
revenue, but contributes two-thirds of the overhead costs. 
These overhead costs in the short term generally do not vary 
with volume; over the long term they could.
    Thus, if first class volume goes down or doesn't grow very 
much, the Postal Service is going to have a difficult time 
trying to capture the funds to cover the overhead, and over 
time is certainly going to have to look at the price structure, 
look at service, or a combination thereof.
    This certainly raises the question that H.R. 22 has 
addressed, and other folks have addressed; and that is, what 
kind of organization does the Congress want the Postal Service 
to be in the future? What kind of flexibility should it have, 
what kind of constraints should it operate under, what kind of 
rules and regulations should it be subject to? This is 
certainly a question with the Federal Express announcement that 
was made earlier. That is really what we see as the key policy 
issue facing this Congress and probably the next Congress and 
maybe the one after that.
    In the oversight area, there are three issues that I would 
just like to briefly summarize. They are closely related to the 
public policy issues.
    The first issue has to do with the Postal Service's 
progress in improving productivity and cutting costs, certainly 
a very important area. Here, for example, we are encouraged by 
the growth in productivity that the Postal Service expected 
this last year, 2.2 percent. This is very positive 
encouragement considering it has not improved productivity in 
recent years; in fact, productivity declined in a number of 
years before this year.
    It is also encouraging that the Postal Service has embarked 
on a series of cost-cutting initiatives, including breakthrough 
productivity. We think it is very important for the 
subcommittee to ask the Postal Service about these particular 
measures--what are they, when are they going to take place and 
what kind of progress is being made?
    The second area relates closely to an area that the 
Inspector General mentioned as well, the human capital area. 
There are three specific elements to that we would like to 
highlight.
    One is the long-standing problem the Postal Service has 
faced in the labor-management relations area. We are encouraged 
some progress has been made, but there is still a long way to 
go in that area.
    There are a large number of grievances the Postal Service 
has to deal with, as recently reported by the Violence 
Commission. While these are certainly important to the work 
force, they also detract from the main mission of delivering 
the mail, and certainly absorb a substantial amount of costs, 
which have been estimated at over $200 million a year, to deal 
with.
    The question here is, do the postal unions, the management 
associations, and the Postal Service itself share the same 
sense of urgency that labor relations have to be improved, have 
to be worked on, so that the Postal Service and its 
stakeholders can get on with the business of addressing the 
major challenges that the Service faces?
    Also, the Postmaster General recently said that a very 
large percentage of the Postal Service's executives are over 
the age of 50, and succession planning is a very key ingredient 
in the future of the Postal Service. It is going to be 
important for the subcommittee to oversee the Service's efforts 
to deal with this issue, as well as assure that its diversity 
goals are achieved at the same time.
    Finally, the last issue that I would like to briefly 
mention has to do with the reliability and the credibility of 
the information--performance information--that the Postal 
Service has been reporting. Today, we issued to you, to this 
subcommittee, our report on enhancements needed in the Postal 
Service's Results Act efforts.
    Here, as well as in the recent effort that we did for this 
subcommittee and the Senate Subcommittee on Electronic 
Commerce, we were distressed to see that some of the 
information that the Service had been reporting in terms of its 
financial performance was unreliable and not credible, and some 
of the information that had been reported on its overall 
performance in its 1999 performance report was, in our view, 
quite misleading.
    We are pleased that the Postal Service has recognized that 
these are areas that need to be improved and has promised 
prompt and swift corrective action.
    That concludes my summary, Mr. Chairman.
    I would also like to, as others have done, thank you 
personally and the rest of this subcommittee for the support 
that you have shown for GAO, particularly in those years when 
we were going through some fairly challenging budget 
reductions. We certainly appreciate your support then and your 
continuing support.
    [The prepared statement of Mr. Ungar follows:]

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    Mr. McHugh. Our pleasure. Thank you.
    As a lifelong New York Giant fan, I immensely enjoyed the 
performance last night at FedEx Field. But speaking of FedEx, 
Mr. Postmaster General, it is no secret that your discussions 
with Federal Express have gained some attention. As I 
understand it, it was not your intention to make any 
announcement at the time the media came upon and reported your 
discussions, but nevertheless, we have a new reality there 
where a lot of questions have been raised.
    In short, what can you tell us about that alliance as it is 
being called?
    Mr. Henderson. We, for the record, did not announce a 
strategic alliance with Federal Express. The discussions were 
leaked to the media and we decided, Fred and I, rather than to 
have no comment, that we would actually comment on what we were 
discussing.
    The cornerstone of our discussion revolves around the use 
of Federal Express's air transportation network, which is not 
something new to the Postal Service. We today use Emery Air, a 
subsidiary of CNF, so we are just in discussions with them 
talking about the possibility of using their air transportation 
network, which is the finest and most extensive in this 
country.
    As a part of that discussion, we have had discussions with 
RPS, which is now FedEx ground service, for several years, 
about the possibility of using a drop-ship rate that exists in 
the current rate structure for residential delivery of 
packages. We have continued that discussion with FedEx ground 
service, and again, that is not something new. It is something 
that has been ongoing.
    The new part is that we did talk to Federal Express about 
the possibility of selling retail in post offices, allowing 
post offices to sell FedEx products, and also in the return 
business to pick up FedEx products if those who use that 
merchandise want to return it, with the exposure of e-commerce 
that we would use our residential America delivery network to 
return those to Federal Express.
    These are all just topics that we are discussing. We have 
reached no agreements yet. We would like to do this in the 
framework of a strategic alliance. There is no exclusivity 
involved in this. Anyone who wants to come to the table and 
talk is welcome to come to the table. We are talking of a 
similar arrangement to what we have with DHL.
    Mr. McHugh. On the exclusivity question, you may be aware, 
for example, that Judiciary Chairman Hyde has written the 
Justice Department asking them to look at and report back on 
possible antitrust concerns that evolve out of this proposal. I 
suspect that is a little hard to do, having no details, but the 
concept and the question itself, I think, is central to many of 
the concerns, understandably, that have been expressed.
    Did you--let me back up. Obviously, I and others, I assume, 
like Senator Daschle, who has endorsed H.R. 22, believe that 
the Postal Service in its unique position is pretty well free 
of antitrust requirements. That is why we put in H.R. 22 
provisions very specifically that would subject the Postal 
Service to antitrust requirements as they apply to the private 
sector.
    But, nevertheless, did you or anyone in the Postal Service 
discuss antitrust or legality questions with the Justice 
Department prior to entering the discussions, or did you intend 
to do that upon completion of the framework?
    Mr. Henderson. We intended to go to the Justice Department 
when we reached an agreement. And independent of that, our 
general counsel looked at the concept; even though there is no 
concrete agreement, looked at the concept and concluded with 
the help of independent counsel that there was no antitrust 
issue here.
    Mr. McHugh. You do have strategic alliance guidelines that 
frankly evolved out of, I believe, in part, the recognition 
that the General thought the antitrust provisions do not apply, 
but there had to be some framework and guidelines by which you 
could enter these.
    Was this agreement--and it is hard to say, because it is 
not complete, but are you putting it together in a way that is 
consistent with those strategic alliance guidelines; or how are 
you approaching that?
    Mr. Henderson. That is our proposal to Federal Express, 
that we follow those guidelines, similar to the ones that were 
tested in court earlier, a couple of years ago. But I don't 
have a response from Federal Express.
    Mr. McHugh. I guess the answer was, you will, but you 
haven't, because you are not done?
    Mr. Henderson. Right.
    Mr. McHugh. OK. I am going to step out of normal course 
here, because this is an issue that is of concern to other 
members. I would yield to other members of the subcommittee at 
this time if they have a question they would like to pose now. 
They can certainly pose it on their own time, but now, in this 
regard.
    No members down here? However you want to do it. I don't 
want to get bad feelings on the last day.
    Mr. Fattah. Well, two things. This is housekeeping. I have 
an opening statement from Congressman Tierney that I would like 
to have placed in the record.
    Mr. McHugh. Without objection, that will be entered in its 
entirety.
    [The prepared statement of Mr. Tierney follows:]

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    Mr. Fattah. I would like to reference Chairman Hyde's 
letter and ask that it be entered into the record, because I 
think the chairman's letter indicated that it was his opinion 
that the Postal Service would not be encumbered by antitrust 
laws, presently, under its configuration. That is how I 
remember the letter, at least.
    If we could agree it would be entered into the record----
    Mr. McHugh. We agree on both points. I do think that was 
the chairman's position--however, he was asking for formal 
review--and it will be entered without objection into the 
record.
    [The information referred to follows:]
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    Mr. Fattah. Now, the Postmaster General.
    These discussions that you are having with Federal Express, 
you say, do not have any exclusivity associated with them. You 
have had discussions with others or are willing to entertain 
discussions with others vis-a-vis what you see as the viability 
and the profitability of strategic alliances with entities that 
may have a capacity similar to Federal Express, like UPS or 
others; is that correct?
    Mr. Henderson. That is correct. Yes, we have had--off and 
on, over the years, we have kept in contact with people like 
UPS and Federal Express and have had informal discussions about 
a whole range of topics. So, actually, I had started this 
conversation with Federal Express some time ago, and it kind of 
lay dormant for a while; and suddenly we were both interested 
in it, and we put teams together.
    But we are open to discuss with anybody. There is no 
exclusivity here.
    Mr. Fattah. I think that is an important point. Also, I 
would imagine it is difficult to have these kinds of 
discussions, however, in the context of a congressional 
hearing.
    Mr. Henderson. It is a little awkward.
    Mr. Fattah. But I think that you can understand the general 
concern that has been raised when such an alliance between the 
Postal Service and Federal Express is at least broached in the 
media. It suggests to the people perhaps that there would be 
some concern.
    But I think that you should be taken at your word that the 
Postal Service is looking for partnerships among and between 
any number of different entities to the degree that it helps 
you meet your goals.
    So I want to yield at this time, Mr. Chairman, and revisit 
this as we go forward.
    Mr. McHugh. Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman. I appreciate your 
courtesy so we can talk about this issue all at one time. 
Something I didn't get to say at the beginning of the hearing 
is when we were doing the Contract with America and we 
Republicans thought up term limits for subcommittee chairmen 
and chairmen, it was a good campaign issue, but in practice it 
hasn't turned out to be so good.
    I would say that the reason I volunteered for this 
subcommittee the last two Congresses has been your leadership, 
and although I apologize to you for being a burr under your 
saddle from time to time, I have done nothing but benefit from 
your guidance; and even when chastised by you, I know it has 
been in a way to make me a better Member of Congress, and I 
appreciate your kindness. Thank you.
    Mr. Postmaster General, I have some questions, too. I guess 
it came as a little bit of a surprise to me. I understand, now 
that you have described it, but I read about it in the 
newspapers, and I suppose other Members did. And the reason it 
came as a surprise is, during our August recess the Postal 
Service in Cleveland was kind enough to have us all in for a 
congressional briefing to tell us what was going on with the 
Postal Service, and I don't remember this specifically being on 
the list.
    But as I heard you respond to the chairman, apparently not 
only general counsel but an independent counsel has looked at 
the issue of exclusivity. I understand that.
    Let me ask you this: Does the information you have received 
back from general counsel and the independent counsel spell out 
what law, regulation or other authority exists for the Postal 
Service to enter into such an agreement?
    Mr. Henderson. I don't know that off the top of my head, 
but I will be glad to provide it to you.
    Mr. LaTourette. If you could provide that for the 
subcommittee, I would appreciate that.
    Aside from exclusivity, I come to this a little bit as an 
old county official, and not just exclusive contracts, but 
noncompetitively bid contracts.
    Are you of the opinion that the Postal Service, to enter 
into a strategic alliance, does not have to come up with an 
idea; that is, we want someone to do--we are going to take your 
stuff the last mile and use your air service. Are you of the 
opinion they don't have to bid that service, you can enter into 
these discussions?
    Mr. Henderson. The last mile, there is really no way to bid 
that. We have a rate that anyone can use today to drop packages 
at a post office, and we will deliver them the last mile, 
whether they are FedEx or UPS or DHL. In fact, we do have DHL 
packages today.
    Mr. LaTourette. To enter into such a strategic alliance, 
however, is there any belief that this has to be bid, that you 
have to come up with a proposal and then bid, that this is the 
service or the deal you want to enter into with somebody and 
have somebody come back with the lowest and best price?
    Or doesn't that apply to the Postal Service?
    Mr. Henderson. No, entering into a strategic alliance does 
not have to be put out for open bid, no.
    Mr. LaTourette. OK. And I understand that there are 
discussions, but can you sort of spell out for the subcommittee 
where you think it is going to go from here? By that I mean, 
not are you going to make a deal or not, but say you reach a 
deal. What review and approval processes for this proposed 
strategic alliance is this deal going to be subjected to before 
it is finalized, and everybody signs off on it?
    Mr. Henderson. Well, obviously it would come to the 
management committee of the Postal Service. I am not personally 
negotiating the arrangement with Fred Smith. Then, following 
that, I have made a commitment I would take it to the board of 
Governors for approval.
    Mr. LaTourette. OK. And you mentioned Emery in your remarks 
as well. I am aware of not only the agreement that the Postal 
Service has with Emery, but also there apparently was a 
difficulty recently with negotiated amounts in terms of what 
Emery thought it was going to undertake on behalf of the Postal 
Service, and they thought they needed more money for--not only 
the regulation, but the volume that the Postal Service was 
providing. The agreement was renegotiated; that it is the 
subject of litigation. That is an accurate statement, right?
    Mr. Henderson. The litigation has concluded. They filed a 
lawsuit. ``they,'' being Emery, filed a lawsuit to terminate 
the contract, and a judge ruled that they could not terminate 
the contract, and we are back in negotiations with Emery. The 
crux of the issue with Emery is the fact that we planned and 
budgeted on one rate, and their costs were simply higher. And 
so we feel their costs are too high, and we are going to 
mutually agree to a way to get out of an arrangement with one 
another.
    Mr. LaTourette. I had understood the judge had granted 
summary judgment and basically said that the Postal Service had 
until a date certain, October 12, if I remember right, to come 
back and comply with the agreement, found you out of compliance 
with the agreement. I am wrong in that?
    Mr. Henderson. Well, the subject of the lawsuit was to 
terminate the agreement. The judge said that Emery could not 
just terminate the agreement. He asked us to go back to an 
interim rate which we used at one point when we felt that Emery 
really did have some costs--that we wanted to have a win-win 
situation, we didn't want a win-lose situation. That is not the 
way you audit.
    But we did an audit of Emery and we found some cost 
discrepancies; and we asked the IG to do a complete audit, and 
we told Emery that as soon as that audit is completed that we 
will settle whatever obligations we both have.
    Mr. LaTourette. And the strategic alliance or the agreement 
you have with Emery is smaller in scope than what is being 
discussed with FedEx, though; is that accurate?
    Mr. Henderson. It is a different type of arrangement--parts 
of it are similar. The air transportation piece is similar. 
There is no plan to have FedEx do distribution as Emery does 
today. That is contracted out. So it is just a different 
arrangement in its totality, than Emery. But as I say, the 
cornerstone is air transportation for both Emery and for 
Federal Express strategic alliances.
    Mr. LaTourette. The last question I have, and again I thank 
the chairman, if I understand your discussions with FedEx 
ground and the sale of FedEx packages and the return of things 
ordered over e-commerce through FedEx, are you contemplating 
that there would be a FedEx box, delivery box, parcel drop-off 
box, located in the lobby or somewhere within the physical 
confines of the U.S. post offices in this country? Is that in 
the scope of your discussions?
    Mr. Henderson. That is a subject they are discussing with 
us that we haven't agreed to.
    Mr. LaTourette. I would be interested in your feeling about 
that. I understand you have not agreed to it, but how do you 
feel about that?
    Mr. Henderson. Well, I would not want a box in the lobby to 
be perceived by our employees as a complete threat, and it 
would depend on how much money we can make off of something 
like that. We are very open to having Federal Express or UPS or 
anybody else at our counters.
    The devil is in the details. How much money can we make off 
of it?
    Mr. LaTourette. But, again, the advice you received from 
general counsel or independent counsel or from whomever you 
rely on for legal advice is, you could reach a strategic 
alliance that would allow FedEx, for payment, to put their 
positions in the lobbies of post offices across the country, 
and no one else's, unless there was a similar agreement in 
place, unless you reached a deal with somebody else to do the 
same thing.
    Mr. Henderson. Right. If we don't reach a deal, we won't be 
able to do it.
    Yes, we feel we have the right to sell whatever we want to 
sell, within reason. We are not selling packaged meat products 
and things like that, but a strategic alliance is certainly 
something that we would look at as another source for revenue. 
We are very much interested in improving our revenue picture. 
That is an obligation we have as management, and we think this 
is an interesting way to do it.
    Mr. LaTourette. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman. I didn't know he was 
trying to be a burr under the saddle. I thought he was trying 
to help me strive toward excellence. I appreciated his untiring 
efforts in that regard.
    Let me go back to revenues, because--I am sorry, Mr. Davis 
from Illinois. I did not see any indication earlier.
    My apology, sir. I am happy to yield to you.
    Mr. Davis. Thank you very much, Mr. Chairman. I want to 
thank you for yielding. I also want to share the compliments 
that have been made relative to the manner in which you have 
conducted the affairs of the committee. I too feel like Ranking 
Member Fattah, that you have made this side feel much less like 
a minority and more of a partner, and we certainly appreciate 
that.
    I also want to compliment you, Mr. Henderson, and your 
colleagues, on keeping the Postal Service in the black, moving 
ahead, although there are changes in the business climate and 
certainly changes in technology.
    I appreciate the fact that we have the opportunity to 
discuss the FedEx question right now. Obviously it is a great 
concern of mine, as well as it is a great concern to some of 
its competitors. People like United Parcel, who are 
constituents of mine, in a real way have some serious concerns 
in terms of not knowing what the details are going to be and 
having some feeling that there might end up being some 
disadvantage at which they are placed; and we certainly do not 
want to see that happen.
    As I understand it, FedEx provides very specific delivery 
and money back guarantees on both its air and its home delivery 
service. The Postal Service's delivery and refund guarantees 
are much more limited. How are these differences going to be 
resolved in the context of shipments that originate in one 
place or on one network, and then terminate on the other?
    Have you gotten into any discussions, do you have ideas 
about that?
    Mr. Henderson. We are not commingling the products. We, at 
this point, don't have any cobranded products, so FedEx will 
operate the way it normally does, and we will likewise operate 
the way we normally do.
    Mr. Davis. Are you saying there would not be instances 
where there would be joint movement, or where there would be 
movement at one level part of the way and movement at the other 
level by a different entity, the Postal Service in one instance 
and FedEx in another?
    Mr. Henderson. FedEx, it is my understanding--and I don't 
like to answer questions for Federal Express; that is not 
really what I do--but Federal Express does not intend to share 
their product, transportation or delivery of overnight packages 
with us. That is their core business; that is completely 
separate.
    They have talked about using our drop-ship rate at the 
Destination Delivery Unit [DUI], which is open to anyone, and 
that discussion began before FedEx bought RPS. That has been 
ongoing for a long time. The only thing that we would do in 
that instance would be if it is their decision, we would be 
delivering the last mile, so to speak, to the residents.
    Other than that, the only relationship would be the air 
transportation of U.S. Postal Service products, much like Emery 
does today, we would lease their planes for a per-pound rate. 
Just as a matter of information, we do that with UPS today at 
Christmastime. We will lease planes that are available.
    I mean, that is how the deal works, and it would be 
constituted under a strategic alliance like we did with DHL.
    Mr. Davis. It is also my understanding that it is generally 
the case that the Postal Service requires payment up front of 
postage before it processes and delivers mail. Is that the 
general policy that would be applied to FedEx shipments that 
are handed off to the post office for final delivery?
    I am saying the Postal Service, you generally pay first, 
and then you get the service. Is that going to be the 
arrangement with FedEx?
    Mr. Henderson. Well, to the degree that we can, it would 
probably be some sort of electronic manifesting to tell us how 
much money they owe us. We haven't worked out the details yet.
    But the DDU rate is available today, and right off the top 
of my head, I am not sure how the customers actually reimburse 
us for the postage. But it would be a similar guideline for 
Federal Express. We both have corporate accounts, so all the 
money isn't paid up front. You have a corporate account where 
the Postal Service--for example, on Express Mail, for which we 
can bill you for the postage.
    Mr. Davis. I have also been trying to figure out in my own 
mind and determine how much difference there is between a 
strategic alliance and a contract.
    Mr. Henderson. Well, a strategic alliance is a little 
broader. A contract is a fiduciary document that agrees on 
price; a strategic alliance, you continue to have discussions 
about where you can have synergy, where you can build off of 
other folks--off your infrastructure. It is just a broader 
arrangement.
    It is not like a vendor-supplier arrangement. It is a 
better way, in my opinion, to do business, because you have an 
ongoing relationship. It is not just about money and service.
    Mr. Davis. So you maintain that relationship. Does that 
ongoing relationship in any way preclude--it is almost like 
being married, I guess, in a way.
    Mr. Henderson. A little like polygamy. More than one wife 
in a marriage.
    Mr. Davis. I mean, but you are precluded from having that 
same relationship with other entities?
    Mr. Henderson. No, we are not precluding anyone. If you are 
talking about UPS, we are happy to talk to UPS. The phone is 
silent, though.
    Mr. Davis. So----
    Mr. Henderson. I can't get them to go out on a date, much 
less marry them.
    Mr. Davis. I am not really a promoter of polygamy, but I 
would think in this instance that it certainly gives me a 
different level of feeling and assurance that we are not 
talking about closing the door, that we are talking about other 
approaches to doing business, but letting the door remain open 
to competition and opportunity for others to come in.
    Mr. Henderson. That is correct.
    Mr. Davis. Thank you very much.
    I have got some other questions, Mr. Chairman, if we get to 
them, fine. If not, I certainly want to submit those and ask 
that we get written responses to them.
    Mr. McHugh. Well, if they are as creative as in your last 
round, we are looking forward to them.
    Back to numbers, and as a personal closure remark or remark 
of closure on this issue for the moment, obviously this is of 
great interest to this subcommittee, and I think it is fair to 
say, through many sectors of government and the private sector 
as to how this is going to play out. We are looking forward to 
working with you as it unfolds further.
    Back to numbers: It was in this subcommittee room about a 
year ago that we talked about potential revenue losses to the 
Postal Service deriving from a variety of sources, not the 
least of which was diversion of first class mail to the 
Internet. The figure that was used as the extreme was $17 
billion potential losses. Some scoffed at that.
    In my opinion, some folks who theretofore showed a great 
deal of knowledge about the issue lost a lot of credibility in 
suggesting that there was virtually no threat at all. I have 
never wanted to be more wrong about a question in my life than 
the fears that I have expressed repeatedly about the potential 
revenue losses to the Postal Service that, sad to say, we see 
accruing already.
    Mr. Ungar, in your written comments, you cited a couple of 
figures and examples. You talked about 880 million Social 
Security checks, tax refunds and other payments normally sent 
by the Treasury Department that in 1998, 68 percent of that 
total were sent electronically rather than mailed, and the 
calculation is $180 million in lost first class mail revenue in 
that one segment alone.
    You then go and discuss a figure supplied, as I understand 
it by the American Bankers Association, where banks through a 
concerted effort, and understandably from their business 
practices perspective, had reduced their mail volume in 1999 by 
nearly 18 percent compared to just 2 years the previous, their 
1996 levels.
    My first question, because I didn't see it and I would be 
interested, do you have a dollar figure for lost revenues that 
that 18 percent represents as compared to the $180 million on 
the Treasury mailings?
    Mr. Ungar. No, Mr. Chairman, we do not have that.
    Mr. McHugh. Mr. Henderson, are you familiar with that 
figure? Would you have any idea?
    Mr. Henderson. Would you repeat the question?
    Mr. McHugh. Yes, sir. The American Bankers Association has 
reported that in 1998, versus 1996, they had reduced their 
mailings by first class by 18 percent. I was just curious, how 
much money does that mean that you, the Postal Service, have 
lost because they are no longer putting that 18 percent in the 
mail?
    Mr. Henderson. They estimate--and I will make this more 
accurate if my memory is incorrect--about 1 percent of first 
class mail has been marauded as a result of--I wouldn't call 
that electronic diversion, but it is changing the business 
model out there where banks are consolidating.
    There are 30 percent fewer banks today than there were in 
1990 as a result of bank consolidations. So those two, 
combined, have had a very slowing impact on the growth of first 
class mail. You can see, as I said earlier, the growth right 
now is about 1.3 percent, and it is flat in the last part of 
the year.
    So there is an impact. It is hard to quantify, to reach in 
there, because we don't have any measure of that. We have a 
measure, when I say that, of what bills and payments are doing 
other than by sampling. We are doing the household diary this 
fall again, where we measure households across the United 
States. We use that for ratemaking information, and we will get 
an indication on how much electronic diversion from that survey 
exists out there.
    Mr. McHugh. Well, back to Mr. Ungar--I appreciate your 
comments--is there any reason to expect that that 18 percent by 
the banks, or that 64--or 68 percent, I guess it was--that were 
electronically mailed, is the high watermark or is the low 
watermark? It seems to me intuitively, banks are going to try 
to reduce that figure more, that both from the perspective of 
the Treasury service what they would like to see happen, as 
well as how more and more of their recipients, customers, are 
going to want to have electronic transfer, that that figure is 
going to grow.
    This is the beginning, rather than the end. Is that a fair 
statement?
    Mr. Ungar. Yes, Mr. Chairman, I think it probably is a fair 
statement.
    As you are probably aware, there is legislation Federal 
Government-wide that requires Federal agencies to go more and 
more electronic in the next several years. So that is certainly 
going to have a large impact.
    In the private sector, I am sure that cost-cutting and 
efficiency are certainly things that many companies are 
interested in and that they will certainly pursue; and with 
greater and greater use of the Internet and more and more 
competitors out there, wanting and encouraging people to do 
transactions electronically and pay bills electronically, it is 
probably going to rise rather than fall.
    Exactly where this is going to all end up is a little 
unclear, but it certainly doesn't appear to be the low mark.
    Mr. McHugh. Last year I asked you, as I recall, you took 
the $17 billion figure at, relatively, face value, that that is 
what the Postal Service suggested could be their ultimate, 
extreme revenue loss; and as I recall, you said, well, we 
didn't verify that, but have no reason to suspect that it is 
particularly out of line either.
    Mr. Ungar. One point of clarification. We didn't directly 
deal with the $17 billion. We were addressing the potential or 
expected decline in volume. I think it was the Postal Service 
or another organization that really entered into the picture 
the $17 billion. But it was clear that mail volume was expected 
to go down and that would translate into some revenue 
shortfall.
    Mr. McHugh. You are right. I stand corrected. But it was a 
reasonable step from mail volume to revenues when you are 
dealing with first class.
    Bill, you spoke about, I believe the figure you stated was 
a $790 million loss from your fiscal plan for this year?
    Mr. Henderson. Yes, that is correct.
    Mr. McHugh. That puts you how much in the hole?
    Mr. Henderson. Probably in the neighborhood of $100 to $200 
million. That is very close on $65 billion in revenue--it could 
swing either way, but we are pretty sure there is going to be a 
net loss this year.
    I will just give you some numbers. If $790 million is what 
we missed our plan by in revenue, the growth is down to about 
1.3 percent in first class mail.
    On the expense side, the gasoline prices, which most 
surcharge for--we couldn't because we had this elongated rate 
process--that is going to be about $350 million in surcharges 
or in higher gasoline prices. Workers' Comp has gone up another 
couple of hundred million dollars.
    So we could have ended this year with over $1.5 billion in 
the hole. Fortunately, we sensed that in time, and we have cut 
costs over $1 billion. So getting down as low as a $100 million 
to $250 million loss was a Herculean effort that the Postal 
Service accomplished at all levels, especially in the field.
    Mr. McHugh. Let's talk about what the next step is.
    All of us, certainly those people in my district, we 
measure trips not in miles but by hours, and we hope very 
dearly that gasoline prices will stabilize. So let's--I don't 
know if you can do this, but for the moment let's take it out 
of that equation.
    You have other realities, it seems to me, that probably 
aren't going to go away in the short term. Mail volumes I 
expect will continue on their current trend, if not become more 
drastic, and other costs where you have now squeezed quite a 
bit out.
    How are you approaching your fiscal plan for next year? 
What are you looking at and how do you plan to accommodate it?
    Mr. Henderson. It is going to be very difficult to break 
even next year, given the unanticipated costs we have and the 
softening of the revenue. We haven't included that and taken it 
to the Governors. We are trying to figure out a way through 
cost-cutting to at least break even, but right now it is dim, 
from my perspective, looking at all the cuts we have already 
made, the administrative cuts that we plan, the productivity 
numbers.
    We have the highest productivity this year that we have had 
in nearly a decade, and to have a $100 million loss or $200 
million loss with that kind of productivity tells you the kind 
of pressure that the U.S. Postal Service is being placed under.
    Mr. McHugh. Mr. Ungar, can you give my friend, the 
Postmaster General, any reason for optimism, or do you pretty 
much concur with the things he is seeing?
    Mr. Ungar. Mr. Chairman, I think we pretty much concur. I 
think there are going to be additional pressures.
    We know, for example, and certainly Mr. Henderson knows, 
that negotiations are currently going on with three of the 
unions. It is probably unlikely that wages will go down. We 
know that retirement costs are going up, health care costs are 
also going up. So it doesn't look too encouraging.
    It is a positive note, though, that the Service has 
announced a breakthrough productivity initiative and has 
recognized it really is going to have to focus on cost-cutting 
and productivity in order to assure that it can remain 
affordable and carry out its mission.
    Mr. McHugh. Cost-cutting, productivity, do you agree that 
is pretty much--I mean, there are rates.
    Mr. Henderson. That is right. If we were a private 
business, you can't live forever off of cost-cutting, and that 
is how we have lived in the last couple of years. At some point 
in time, I will be the first to admit there is always 
opportunity for cost-cutting, but you have to, in order to be 
viable, be in a business that grows.
    As we have said earlier, we view ourselves as a wholly 
owned government business. We are a business. We have a profit 
and loss use just like a private company has, and we have a 
market worth just like anybody else would, and that asset is 
going to dwindle, in my opinion, unless we have some sort of 
substantive postal reform.
    When I go to meet with foreign postal administrations, they 
are dumbstruck over the fact that the United States, which is 
the leader in most every area in the world, for some reason is 
blind to the requirement of postal reform. The Germans will go 
private in November, as an example. You talk about alliances, 
FedEx just announced an alliance with la Poste, the French 
postal service. Deutsche Poste is buying over 70 percent of 
DHL; and TPG, the Dutch, they own TNT. So the whole world is 
changing, and we sit on a 30-year-old structure, and it makes 
it very difficult for us to operate in this environment.
    Mr. McHugh. I commend you on this year's--and I commend the 
workers particularly--on this year's productivity increases.
    I have to wonder, given the structure of your business, how 
much you can rely upon productivity increases to fill this gap? 
Even under the most rosy of scenarios, technology and such, as 
rapidly as it is changing, can only go so far. Rates become a 
point of diminishing return. If your rates go too high, then it 
affects very dramatically your volume, so it becomes actually a 
losing proposition.
    Therefore, as you mentioned, I believe, in some comments 
you were making a few weeks ago, there are other cost factors 
that go to the heart of service, 6-day-a-week delivery, the 
question of, do you keep a postal infrastructure that I think 
in an ideal world is very beneficial, particularly in rural 
communities, where most communities enjoy a postal facility.
    Are you looking at those kinds of questions yet as a way by 
which to address your dilemma?
    Mr. Henderson. Not yet. We are trying to maintain the 
obligation of what we define as universal service. That is, we 
go by your house every day, 6 days a week, whether you have one 
letter or you have 50 letters, but ultimately, down the road, 
the issue of universal service and affordability--you know, we 
have talked about affordability, growth and reform, but the 
issue is affordability. I believe there will be serious 
discussion of postal reform based on price increases, that 
people, customers, just will not want to tolerate the general 
price increase being X amount, and then there will be a hue and 
cry for reform.
    Unfortunately, that could have been avoided if we had had 
postal reform earlier. But it has in the past, and it appears 
this country now is going to require a crisis before we have 
serious action on reform.
    Mr. McHugh. Thank you. I appreciate the members bearing 
with me.
    Mr. Fattah.
    Mr. Fattah. I think that hopefully we will not need a major 
crisis before we move forward, and obviously the specter of a 
strategic alliance, as it has been termed, between the Postal 
Service and FedEx, I assume part of the nature of having such a 
discussion in public in some ways suggests that you seek to 
entice others to be more forthcoming and engaged in these 
discussions. Needless to say, I think that the Congress is 
obviously grappling with where we are in the sense that, on one 
hand, we want the Postal Service to be an independent agency; 
on the other hand, we--at least speaking for myself, and I 
think for the majority of the Members of the U.S. Congress--
fully intend that universal service be continued under all 
circumstances, irrespective of cost efficiencies associated 
there within the most rural areas of these lands. So there are 
some stresses and strains as we go forward.
    I think I heard you say, that cost containment is the first 
prong of your strategy. You think you have reached a point of 
diminishing returns relative to how much costs can be cut 
within the Postal Service operation, even though, obviously, 
just in terms of from a rationale basis, there is always 
something more you can cut. But you are getting close to that 
point.
    The other side of this is revenue growth. I would like to 
hear you speak a little more about your view about how you grow 
revenues within the context of e-business and all these other 
problems that exist, since that is part of the challenge you 
are going to have to meet.
    Mr. Henderson. Yes. Let me correct something on the cost-
cutting side.
    I think there are plenty of costs that can be taken out of 
the Postal Service; it just happens to be painful when you do 
it. But I think there is a lot of money to be made in cost-
cutting and productivity improvement.
    In revenue, it is kind of a mixed image of what the future 
holds. Last fiscal year, we lost substantial volumes to the 
Internet in advertising mail. The Internet became the darling 
of the business world, and a lot of money was diverted from 
direct mail advertising to Internet advertising. And it was not 
very successful, especially during the fall mailing season. 
Last year, a lot of cataloguers used the Internet without a 
catalog via direct mail, and the results were disastrous. So to 
some degree that mail has returned to the Postal Service. We 
are seeing growth in direct mail.
    We think there was opportunity prior to the Internet 
revolution to continue to grow advertising mail in first class. 
Historically, it had been--the fastest growing segment of first 
class mail had been ad mail. So we see advertising as still 
having a strong future.
    I don't think it is ``if,'' but ``when'' bill payment and 
presentment migrates to the electronic platform. The reason I 
say that, I think the large billers--not necessarily the banks, 
but--I think the banks are in here, but the large billers of 
America, the AT&Ts and American Expresses and Visa's and 
companies like that, there is a real financial advantage for 
them to go public. AT&T, it costs them about $1.75 to send you 
a bill. That doesn't include the postage you put on to return 
it. I think the estimate at AT&T was, $1 billion could go to 
the bottom line if they could get all of the bills electronic.
    The adoption of that is a whole other bag. There are 
varying numbers of opinions. So depending on what happens with 
electronic bill payment and presentment, that will determine 
the fate of first class mail, and it will have a huge financial 
impact on the U.S. Postal Service.
    Mr. Fattah. You have in a tentative way moved into that 
sector, right?
    Mr. Henderson. That is correct.
    Mr. Fattah. At least in terms of billing, how is that 
coming, or what could you tell the committee about that?
    Mr. Henderson. Well, that is just a part of what you have 
to do in today's business model. You have to eat your young 
every once in a while. We had e-bill payment and presentment.
    Mr. Fattah. From polygamy to cannibalism.
    Mr. Henderson. It is a vicious world out there. We have 
about 15,000 customers now on electronic bill payment. I don't 
have the revenue figures off the top of my head. But all of the 
e-commerce initiatives are probably, if you total them all up, 
somewhere in the neighborhood of $10 million. So really no one 
is making a whole lot of money out there on e-commerce today 
except for the people that build the infrastructure.
    Mr. Fattah. And the last prong is legislative reform, on 
which we have heard your views today. Let me yield back to the 
chairman.
    Mr. McHugh. I thank the gentleman, the gentleman from 
Ohio's forbearance. I would like to yield to the vice chair of 
the committee, the gentleman from South Carolina, Mr. Sanford, 
if he has any questions at this time.
    Mr. Sanford. Let's see here.
    Mr. McHugh. You could say nice things about me.
    Mr. Sanford. That is exactly right.
    Mr. LaTourette. I tried that. It didn't work so good.
    Mr. Sanford. I will hop in for a minute. I thank the 
chairman very much. I would say thanks because this may be one 
of the last chances I will get simply to say thank you. It has 
been awfully, awfully impressive to see the way that the 
chairman has handled this committee, and in particular, the way 
he has consistently pushed toward making the Postal Service 
more competitive. I admire that, and I just wanted to publicly 
say that, since this will be one of the last chances I get.
    Mr. McHugh. Thank you, Mr. Sanford.
    Mr. Sanford. Just a couple of different thoughts.
    I have been awfully impressed during a couple of different 
visits, Bill, with your commitment to the Postal Service and to 
its employees in making a difference. The one thing, though, I 
would take exception with is--one of your comments just as I 
walked in, and I apologize for being late, was, we are just a 
business wholly owned by the U.S. Government. We are just a 
business.
    I would actually, unfortunately, have to take great 
exception to that. And what is interesting to me about that, if 
that was the case, apparently before I got here we were asking 
a bunch of questions about this proposed FedEx, Bill, and I 
don't think if you were just a business, you would be answering 
those questions; you would just be doing it.
    Similarly in a business, I think about going out and 
dropping a product line, you just drop the product line because 
it doesn't make sense and you move on. Your hands are tied; 
with universal service, you cannot drop unprofitable routes, 
though in a business sense or a business model, you would 
certainly do that.
    So I think you are somewhere between being just a business 
and being something else. I don't know what that something else 
is. That is what puts a number of us in a real confusing spot, 
because we have agreed very much with the chairman's efforts to 
move to making the Postal Service more competitive; and yet had 
an internal struggle, as a conservative, with how do you give 
this something else--businesslike responsibilities, 
businesslike freedoms--but recognize the fact that in essence 
it is something else? And it does have some monopolistic powers 
and some advantages that nobody in the private business world 
has?
    So I also wanted to touch on that theme, just because it 
has been a very frustrating spot to be in as one who has been 
sort of gumming up the works of your very valid efforts, and 
your very valid efforts to make this place more competitive.
    On that front, I would say this: If you think about what 
happened in, let's say, Norway or Germany or Australia or New 
Zealand and how they moved toward privatization, what was it 
that they did differently, or have they just sort of merged 
public with private? What was it that they did differently so 
they were able to pull this off politically without private 
interests going wild?
    Do you have any insight to help me understand that a little 
bit?
    Mr. Henderson. Let me go back to the business part. I agree 
with you that there is ambiguity in the nature of the 
definition of the Postal Service. Even though we are forced to, 
within our own regulatory environment, operate like a business, 
there are things we don't do, you are absolutely correct, 
because of our unique status. So I would agree with that 
assessment.
    Most of the postal services that are going private have 
been given broad pricing freedoms, they have reduced the size 
of their monopolies, to eventually phase them out, and they 
have been allowed, prior to going public, to act just as you 
were describing earlier, as a business. But there have been 
unique circumstances to each one.
    The Dutch post, for example, is a very small entity and it 
has gobbled up outside businesses and it is just a part of the 
privatization of their government. The German post received an 
infusion of money at the consolidation of East and West Germany 
in which they had all the property, and I think they testified 
at one of the hearings that they received all the property that 
the East Germans had and they were able to use that cash to 
make acquisitions. They are one of the largest logistics 
companies in the world today.
    The New Zealand post moved because there was an economic 
crisis and they had to change all of government. Australia had 
a problem with labor that had to be solved, and in the course 
of that, their post was liberalized.
    So there are kind of unique reasons. And the private sector 
does scream when that occurs. I can understand that; if I were 
in the private sector, I wouldn't want a $65 billion giant cut 
loose on my market. That is perfectly reasonable to understand 
they will do that.
    I look at it through postal eyes and say, if we are not 
given some freedom, then this Postal Service you enjoy today is 
going to be damaged in the future.
    It is a difficult position to be in, I understand that. I 
have talked with UPS about that, and I have talked with Federal 
Express about that, and they have grave concerns about what we 
would be allowed to do. But I think all would agree that a 
healthy Postal Service is in the best interests of the American 
public, and we think you really need to take a close look at 
this.
    Mr. Sanford. I would say toward that end, I was looking at 
the numbers here, which was first class mail accounts for 67 
percent of your contribution rate, and yet the rate of growth 
of that first class mail is basically somewhere between 1.5 and 
2.5 percent, yet you look at cost structure going against you. 
It is a trap; unless you change something, you have a math trap 
coming your way.
    That brings me back to, if you don't grow the revenue 
size--Letterman has his Top 10 list. What would be your Top 10 
list in terms of expenses that you would look at; in a strictly 
hypothetical sense, what would be the Top 10?
    Mr. Henderson. We have already targeted that. One would be 
administration, just the size of our infrastructure and 
overhead. A second one is transportation; we have a $4 billion 
transportation budget. We could take eventually--and I am not 
saying we are going to do this, but we could take everything 
out of the air. We could have only surface transportation in 
this country, which is a lot cheaper than air transportation, 
which would impact the organization. Finally, we could close 
processing centers and consolidate them.
    We right now are guided by service requirements. In other 
words, we, as all of you know, have very high scores on our 
externally measured first class mail service. We prided 
ourselves on that and over the last few years, we have shown an 
11-point improvement.
    We are ranked the highest agency in government in public 
approval. We have 94 percent ratings. We are trying not to put 
any of that in jeopardy. We don't want to be viewed in a 
negative way. But somewhere down the road we are going to have 
to raise prices or cut into the quick of the Postal Service, so 
to speak.
    I will give you an example just one off the top of my head. 
If you look at the financials of the Postal Service, our net 
income goes like this. It looks like a hump; in the middle of 
the year--we make all of our money by the middle of the year 
primarily because the infrastructure is full of volume. If 
there was some way to incentivize the volume in the last half 
of the year to keep that infrastructure full, you are looking 
at the difference between making $100 and making $2 billion or 
$3 billion, which would be, I guess, very useful for 
maintaining the Postal Service.
    So it is not like you are just being cut loose in the 
private sector to go take packages away from the package 
delivery companies. I am talking about improving the pricing 
methodology for our own products. Ad mail would be a great 
product to reduce the price on in the last half of the year in 
order to stimulate the use of direct mail by businesses around 
America, so that you could fill up your tank, so to speak, and 
make some money.
    We don't get inefficient in the last part of the year. We 
just can't adjust the infrastructure enough to offset the 
decline in the growth of volume.
    Mr. Sanford. Thank you.
    Mr. Fattah. Could I ask you one quick question? We have 
40,000 post offices, right? How many letter carrier routes do 
we have?
    Mr. Henderson. I am going to say 350,000 city carriers.
    Mr. Fattah. How many of those are profitable?
    Mr. Henderson. I couldn't give you that information off the 
top of my head.
    Mr. Fattah. A percentage?
    Mr. Henderson. I can tell you that of the 40,000 post 
offices, the 26,000 smallest post offices, it costs over $2 
bucks to bring in $1. That is just the math.
    Mr. Fattah. Essentially what we have is, we have urban post 
offices subsidizing rural post offices?
    Mr. Henderson. To some degree, that is right.
    Mr. Sanford. Now you are getting personal.
    Mr. Fattah. I am not trying to be personal, I am just 
trying to followup on some of the questions that were asked. 
Because, one of the ways to get at some of this--since some 
part of what you are doing is a public service, is to try to 
isolate what those costs really are and to deal with them as a 
public good or a public service and not have them hidden in the 
apparatus of the Postal Service.
    So I would be--we will have some future discussions about 
this. Thank you.
    Mr. McHugh. Will the gentleman yield to me?
    The ranking member raises an excellent point, and that has 
been the point that we have been trying to illustrate for 6 
years with respect to this particular aspect.
    Let me say to Mr. Sanford and Mr. LaTourette, I have no 
problem at all with your concerns. Both of you gentlemen have 
dealt openly and honestly with me and with the subcommittee, 
and where we have not been able to agree, that is life. But I 
do have a concern about some members who are turning their 
backs on meeting this challenge because they either don't 
recognize or refuse to admit the very point that the ranking 
member just made.
    If we allow this to continue, there are going to have to be 
some extraordinarily painful decisions made, and they will 
particularly affect rural areas. Because, you are right, if you 
look from a cost and income perspective in general terms, urban 
areas are subsidizing those rural post offices.
    Now, I happen to think that is perfectly acceptable, but 
you cannot enjoy that kind of cross-subsidy, if you will, you 
cannot expect high cost, low volume, low revenue routes and 
deliveries, i.e., rural areas, to experience the same kinds of 
services they enjoy today absent our doing something different. 
And I represent rural areas, and it is invaluable both as a 
means of communication and as a means of social and economic 
fabric in those communities, and I don't want to see them go 
away. But that is where we are headed, and that is why the 
general issue of postal reform is so very important.
    And we have spent 6 years probing it. The Postal Service 
does too good a job to say, thanks, see you later. I don't 
think our constituents, the American public, will allow us to 
do that. I pray to God they will not. But as the Postmaster 
General said, and as Mr. Sanford I think rightly underscores, 
there are legitimate concerns expressed by the private sector 
that that reform should be attended with changes that level 
that playing field that Mr. Henderson has admitted time and 
time again is skewed in certain aspects to their unfair 
benefit.
    That is what it is about. That is just an editorialization.
    With that, I would go to Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman. I, too, as I 
listened to the discussion, have a great deal of concern about 
the generalized condition of the Service and the complexity of 
tough decisions that are going to have to be made if we are to 
keep the system alive, and especially if we are to continue to 
guarantee or even provide some semblance of universal service.
    I have a need to shift a bit in terms of something that is 
currently taking place and ongoing.
    Mr. Postmaster, I have recently been made aware of, and I 
am greatly concerned about, what appears to be a very 
controversial procurement for the Postal Service's direct 
marketing sales support advertising contract. I have been told 
that an incumbent DraftWorldwide, which is a constituent of 
mine, was prohibited from participating in the final 
solicitation round of competition due to their refusal to 
provide what their attorneys deemed to be confidential 
information that would put them in violation of their 
contractual relationship with other clients.
    My question is, if that was the case, did they bring that 
to the attention of the Service and did they provide any 
alternative way of the Service getting that information?
    Mr. Henderson. They didn't bring it to the attention of the 
service during the process. They did later on. In fact, I 
talked to the president of DraftWorldwide. The problem is they 
should have raised that issue if it were a legitimate issue in 
the beginning. There was a guideline that said, and the other 
responders to the RFP provided this kind of information, that 
if you did have a confidentiality agreement that you could 
blank out any references to the organization and you could 
submit it just as a case study without naming anyone. That 
specific question was in the guidelines.
    They have then filed a complaint over the process, and we 
will legitimately process that complaint. You have my 
assurances on that. If there was any impropriety, we will 
correct it. But to my knowledge, and I've had the general 
counsel look at this, the IG is now looking at it I think maybe 
at your request. If there is, we will get to the bottom of it.
    Mr. Davis. Yes, we were so concerned about it that we 
actually did, in fact, request a full IG investigation. It just 
sort of appeared to me that even--and I guess all of the other 
entities did in fact comply. But if you white out the name, I 
am not sure to what extent that that really guarantees still 
confidentiality. I'm saying, if I'm talking about a person who 
might be running for President whose father was President--I 
don't have a name but----
    Mr. McHugh. Adams.
    Mr. Davis [continuing]. A person who is Vice President and 
currently running for President or something that wobbles 
like--it just seems to me that I don't know how confidential 
that might end up being. I would really like to see if I could, 
and I don't know if it is possible, the responses from the 
others who were in fact in competition.
    The other question that I've got, if a company has been 
determined the top of the line for 5 years and has been 
determined to be No. 1 by the experts in the field, it seems to 
me that it would be very difficult for them not to reach the 
point of being in the final solicitation based upon their track 
record of performance, based upon what they have consistently 
done. Do you have any response to that?
    Mr. Henderson. Well, it's based on their proposal, the fact 
that they were a contractor prior with Postal Service doesn't 
necessarily assure they are going to be a contractor in the 
future.
    I happened to look at the scores, because you had raised 
this issue with me, of the six individuals who were cross 
functional who reviewed their package, and they were 
consistently low and in fact were the lowest rated. So there 
was something wrong with that submission. Whether it was they 
felt they had the contract because they had done the business--
but in advertising it really is about new ideas and new 
thoughts and what you bring to the table in brainstorming. So, 
absent some different information from the IG, I just assumed 
that they took our business for granted and didn't do as good 
of a job as they might have on the submission, because there 
was no one source of low grading. It was across the board.
    I looked at the notes the folks used, and then I 
interviewed one of them--I say interviewed. I had a 
conversation with one of them in passing. I said, describe for 
me what happened here. And he said it was a very poor 
submission. And you can't overlook the hard work of a new 
organization because one that you have existing took you for 
granted. I think that is what happened. I know they're upset. 
But we do this every few years. We have our advertising 
agencies up for renewal. We let other agencies have a shot at 
it.
    Mr. Davis. Let me ask, I understand that the process 
suggests that if there is a formal complaint--I understand that 
they have actually formalized a complaint--that this stops the 
action for the moment. Has the contract now been let or is work 
being done?
    Mr. Henderson. Yes, it is my understanding--let me go back 
to the first point. When a formal complaint is filed, the 
process is not stopped unless there is an obvious--unless 
everybody sees that there's a real problem. In this case, 
before the complaint was filed we had the general counsel 
review the entire process. Actually, the IG participated in the 
process as kind of a watchdog. So we would not stop the process 
as a result of their complaint because we don't think there is 
anything to it. And we began negotiations with the successful 
folks. I assume that they are either near conclusion or are 
concluded and it has just not been pubically announced.
    Mr. Davis. So you're saying that that doesn't automatically 
stop the process. It stops it if you determine----
    Mr. Henderson. If we found a complaint was legitimate, we 
would rectify it. As I say, they complained to us informally 
first; and since I know the players who are involved here I had 
it reviewed by our general counsel.
    For example, they had a whistle-blower, so we interviewed 
that person and promised no retribution of any type. And there 
was just nothing there. And, as I said, I talked with one of 
the people who interviewed--who was on that review team, and I 
looked at the notes of everybody. And there's no substance to 
what they're saying. It would be inappropriate for us to hold 
up awarding a contract since we're dark now really. We are out 
of a contract. We need to advertise in this period.
    Mr. Davis. So the contract is actually awarded? People are 
now doing work?
    Mr. Henderson. I think it's been assigned. I'm not sure. 
Which means it's awarded but not publically announced. There 
has been no public announcement on it yet.
    Mr. McHugh. Does the gentleman yield?
    Mr. Davis. Yes.
    Mr. McHugh. I have a Postal Service news release here dated 
September 11 entitled, Postal Service Announces New Ad Agency 
Contracts, listing one, two, three, four, five, six, seven----
    Mr. Henderson. That's the minority based contracts. We had 
an Asian, a black and a Hispanic company that we announced out 
at the postal forum at the press conference, but that's not 
the----
    Mr. McHugh. That is not all total?
    Mr. Henderson. That's not what our discussion is about.
    Mr. McHugh. Well, then I apologize. Some are listed clearly 
as minorities; others are not. But if that's what they are, 
that's what they are. I yield back.
    Mr. Davis. Let me just--am I understanding that this news 
release is strictly for minority contracts?
    Mr. Henderson. Let me read that news release before I say 
that. I know we had a news conference. I apologize. I just did 
not attend the news conference out at Anaheim in which we 
announced Bravo----
    Is this the news release? That one wasn't released.
    Mr. McHugh. This one?
    Mr. Henderson. Yeah. That's what they're telling me. I 
don't know. I haven't read it.
    We did not release this news release. This thing 
inadvertently went to our Web page. We pulled it off after 
about 50 minutes. This is not supposed to be in the public 
view. The contracts had not been negotiated as of this point in 
time.
    It's amazing. You get information I haven't seen.
    Mr. Davis. Well, I guess that happens sometimes.
    But let me--after the IG investigation, should the 
investigation turn up a mis-step or something that might have 
occurred, even unintentional or whatever, what happens then? I 
mean----
    Ms. Corcoran. We would send a report to the appropriate 
party--probably in this case it would be the Vice President for 
Purchasing--with recommendations as to what should happen. It 
is management who then takes whatever action is appropriate, 
based on our recommendations. If they disagree with our 
recommendations, we would go back and we would talk to 
management and we would raise it through the appropriate levels 
within Postal Service if we thought it was serious enough.
    Mr. Davis. So it's possible that, even though an 
investigation might turn up something, the process could take 
so long until much of the action would have been completed? Is 
that sort of what I am hearing? Kind of like an election, you 
know, when you question the outcome. I have never known anybody 
to get put back in office even though they--in the outcome they 
have turned up that a few votes were lost here, there, 
whatever.
    Ms. Corcoran. We were called into this about a week or so 
ago even before we had gotten the call from your office. Bill 
had actually talked to me and said that there were some issues. 
So we put some people on it. We have dealt with various parts 
of it, and we're still looking at the systemic part. The 
systemic view of the overall operation and what happens is 
something that would be a longer type review.
    You are correct that, in terms of an election, no one gets 
put back in office. I mean, we might say that there has been 
something done that was incorrect and we would make more 
systemic recommendations to Postal as to how they would decide 
that they needed to deal with the issues. Your constituent 
could decide that they wanted to pursue it further through 
court using some of the information that we had in our report--
as evidence to support this claim but that would not be a short 
thing.
    Mr. Davis. So the only real possibility of serious redress 
would seemingly be that the contracts not implemented or not be 
implemented without the assurance that everything was 
appropriate and was done appropriately.
    Ms. Corcoran. Well, it is my understanding that they're 
currently in an appeal process and that appeal process should 
identify anything that might have been irregular within the 
entire process. The Postal Service would have their own process 
for dealing with that.
    Mr. Henderson. As I say, we have looked at all their 
allegations, and there was nothing there. They're dead wrong 
from our perspective. We have a financial obligation when we 
sign these contracts with these other organizations to begin 
doing work with them. So you're almost damned if you do and 
damned if you don't kind of deal. We're going to get sued one 
way or the other. We know that. We would like to be on the side 
of justice here instead of on the other side.
    Mr. Davis. So you're saying that your preliminary findings 
suggest that there isn't much, but the IG investigation goes 
more in depth, and even with that there is an appeals process 
that is under way. And if there is no resolution, ultimately, 
in all likelihood that would become a case for our judicial 
system.
    Ms. Corcoran. I really think we're talking about a number 
of different issues here. The appeal process is one process, 
and it's a Postal Service process. And as we go about doing our 
various reviews, we'll take a look at that overall appeals 
process; not just for this particular job but, overall, does 
that appeal process work appropriately?
    Then to meet the request that you have, we're doing some 
additional work, and we will see what we can do there. We've 
also done some work with what Postal Service had brought to our 
attention 2 weeks ago. We've given them some information, and 
told them we didn't see any issues on that.
    So we're continuing on several different directions. But 
the ultimate is that right now, I don't think any of us are 
seeing something that's going to bring any immediate relief 
based on what we're seeing.
    Mr. Davis. Thank you very much.
    Mr. Chairman, I understand Mr. Fattah has some questions 
that he wanted to submit, written questions for the record that 
he would like to get a response to.
    Mr. McHugh. As our normal practice we will a have a number 
of those to which we'll append Mr. Fattah's questions.
    I would say as well Mr. Davis was very forthcoming in his 
association with this particular firm as a constituent 
organization of his. To my knowledge, I have never heard of 
DraftWorldwide prior to this issue. And admitting that a little 
knowledge is a dangerous thing and I therefore am a very 
dangerous person in this regard, we have their side of the 
story. But, in reviewing it, it does raise some concerns, a 
logical question about a company who provided this service for 
5 years and is not even qualified to submit a bid. We weren't 
talking about awarding the bid but submitting it.
    The other particular question that I had was relating to a 
phase two pre-qualification that was never contemplated 
originally. And having had a little experience in municipal 
contract negotiations, you do that that buys you a lawsuit no 
matter which way you turn. So I think it has some important 
ramifications, obviously, for DraftWorldwide, but I think, as 
the Inspector General just pointed out, to ensure that the 
contract process used across the Postal Service universe is as 
appropriate as it can be. I know that the Postmaster General 
shares that concern, and it was for that reason that I signed 
that letter happily with Mr. Davis. And we're looking forward 
to your report, Miss Corcoran.
    Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman. And if I could go 
back for a minute I would like to ask unanimous consent to 
submit for the record a copy of Judge Reginald Gibson's 
decision of August 25th this year in the case of Emery 
Worldwide versus the United States.
    Mr. McHugh. Without objection, it is so ordered.
    [The information referred to follows:]

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    Mr. LaTourette. Mr. Postmaster, the questions that I was 
asking about that before, I guess the crux of my concern--and I 
had a chance to read it while others were engaged in questions, 
and I think I was right, and I would invite you maybe to take a 
look at the opinion, too, but the question I have with the 
strategic alliances is, if Emery Worldwide had been successful, 
they not only ask that you go back and pay them money that they 
said that you negotiated and should have paid them, but they 
also wanted out of the contract, and that for the moment has 
not been granted. That's not settled, according to the judge's 
decision.
    What sort of disruption by going outside of the Postal 
Service and contracting with this type of alliance would that 
have caused to the delivery of mail in this country if Emery 
had been successful in court last month? And here's the context 
in which I ask it. Because it's my understanding, for instance, 
if FedEx has--its pilots belong to a labor organization, which 
is certainly OK. But if you entered into such a strategic 
alliance and the FedEx pilots have difficulty, not with you but 
with FedEx, and decide to go on strike, I'm wondering how you 
factor that into the strategic alliance discussions you have 
with these outside entities.
    Mr. Henderson. That's a liability that we have with 
everyone. We fly mail on United Airlines, for example, and we 
have to have contingency plans when that airline goes on 
strike. We have a contingency plan. You basically put priority 
mail on the surface, and you truck it. To the degree that we 
could get space, which is very limited on the commercial 
airlines, we would contract it, but you just have alternate 
transportation arrangements.
    Mr. LaTourette. During the time since I had a chance to ask 
you a question as well, I talked to my chief of staff, and 
she's a lot smarter than I am, and she said that I was asking 
the exclusivity and competition in bidding question improperly, 
so let me put it as clearly as she thinks it should be put. 
That is, let's say you enter an agreement with FedEx or anybody 
else on a strategic alliance along the lines of your 
discussions. Are you indicating that if somebody else comes 
along and says I want that exact same deal, too, that it's your 
position that because it's a moneymaking venture or whatever 
the incentives are for the Postal Service that you would enter 
into it with that other guy or gal as well or that the first in 
sort of has a leg up and others would be excluded from having 
the exact same four-cornered deal?
    Mr. Henderson. Well, the only part of the deal that you 
couldn't do would be to contract with an equal amount of air 
transportation. But keep in mind when we put the Emery contract 
out for RFP, the one in which Emery was successful, in the end 
there was only one qualified bidder because of the size and 
scope of it, who was one person in the whole country who was 
interested and one person who was qualified. So the answer to 
it is, yes, we'd be open to discussions with anybody.
    Mr. LaTourette. Mr. Chairman, what do you want to do about 
votes?
    Mr. McHugh. I don't plan on voting. How about you?
    I had contemplated adjourning the hearing. However, Mr. 
Davis suggests that he has at least two more questions he 
wishes to pose. So I think perhaps we should vote and come 
back. It sounds as though you have----
    Mr. Davis. My questions can be in writing. They're just two 
issues.
    Mr. LaTourette. I have two more that aren't related to this 
FedEx thing that I can submit in writing and have answered, and 
that's fine with me.
    Mr. McHugh. If you're comfortable with that.
    Mr. LaTourette. I'm more than comfortable.
    Mr. McHugh. Well, then, with that let me say we will have, 
as we usually do but I really mean it this time, a wide variety 
of questions.
    I apologize to Miss Corcoran. We really didn't get to her. 
She submitted very thorough, comprehensive testimony that made 
some I think very important points that need to be pursued; and 
we will submit those in writing and also to Mr. Ungar to such 
things as the Government Performance Review Act and the 
suggestion of some shortcomings that we very much want the 
Postmaster General and the USPS to address. They're very 
important. That's a very important process. So you will, all of 
you, be receiving that; and, as you've done so faithfully in 
the past, we'd appreciate your cooperation.
    With that, again, a closing word of truly my deepest 
appreciation to all of you. It has been a hell of a ride; and, 
until we meet again, keep those cards and letters coming out.
    The meeting is adjourned.
    [Whereupon, at 3 p.m., the subcommittee was adjourned.]
    [Additional information subcommitted for the hearing record 
follows:]

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