[Senate Hearing 107-70]
[From the U.S. Government Publishing Office]
S. Hrg. 107-70
THE FINANCIAL OUTLOOK OF THE U.S. POSTAL SERVICE
=======================================================================
HEARING
before the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 15, 2001
__________
Printed for the use of the Committee on Governmental Affairs
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73-392 WASHINGTON : 2002
_____________________________________________________________________________
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COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
SUSAN M. COLLINS, Maine CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi ROBERT G. TORRICELLI, New Jersey
JUDD GREGG, New Hampshire MAX CLELAND, Georgia
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
JEAN CARNAHAN, Missouri
Hannah S. Sistare, Staff Director and Counsel
Dan G. Blair, Senior Counsel
Ann C. Fisher, Professional Staff Member,
Subcommittee on International Security, Proliferation, and Federal Services
Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
Susan E. Propper, Democratic Counsel
Yvonne Sanchez, Democratic GAO Detailee
Nanci E. Langley, Democratic Deputy Staff Director,
Subcommittee on International Security, Proliferation, and Federal
Services
Darla D. Cassell, Chief Clerk
C O N T E N T S
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Page
Opening statements:
Senator Thompson............................................. 1
Senator Carper............................................... 2
Senator Cochran.............................................. 3
Senator Stevens.............................................. 4
Senator Collins.............................................. 5
Senator Carnahan............................................. 9
Prepared statements:
Senator Akaka................................................ 7
Senator Cleland.............................................. 8
WITNESSES
Tuesday, May 15, 2001
Hon. David M. Walker, Comptroller General, U.S. General
Accounting Office.............................................. 11
Hon. William J. Henderson, Postmaster General, U.S. Postal
Service........................................................ 13
Hon. Robert F. Rider, Chairman, Board of Governors, U.S. Postal
Service........................................................ 14
Hon. George A. Omas, Vice Chairman, Postal Rate Commission....... 16
Alphabetical List of Witnesses
Henderson, Hon. William J.:
Testimony.................................................... 13
Prepared statement........................................... 77
Omas, Hon. George A.:
Testimony.................................................... 16
Prepared statement........................................... 88
Rider, Hon. Robert F.:
Testimony.................................................... 14
Prepared statement........................................... 83
Walker, Hon. David M.:
Testimony.................................................... 11
Prepared statement........................................... 48
Appendix
Senator Byron L. Dorgan, a U.S. Senator from the State of North
Dakota, prepared statement..................................... 47
Responses from Postmaster General Henderson to questions asked
during the hearing............................................. 108
Karla W. Corcoran, Inspector General, U.S. Postal Service,
prepared statement............................................. 118
Ruth Y. Goldway, Commissioner, Postal Rate Commission, prepared
statement...................................................... 137
Thomas Schatz, President, Council for Citizens Against Government
Waste, letter dated May 9, 2001, sent to Chairman Thompson..... 141
``Future Directions in Postal Reform,'' edited by Michael A.
Crew, Center for Research in Regulated Industries, Graduate
School of Management, Rutgers University, and Paul R.
Kleindorfer, Risk Management and Decision Process Center, The
Wharton School, University of Pennsylvania..................... 142
Post-hearing questions and responses from:
Comptroller General Walker................................... 146
Postmaster General Henderson................................. 149
Mr. Rider.................................................... 178
Mr. Omas with attached letter................................ 193
THE FINANCIAL OUTLOOK OF THE U.S. POSTAL SERVICE
----------
TUESDAY, MAY 15, 2001
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. Fred Thompson,
Chairman of the Committee, presiding.
Present: Senators Thompson, Carper, Cochran, Stevens,
Collins, and Carnahan.
OPENING STATEMENT OF SENATOR THOMPSON
Chairman Thompson. Let's come to order, please. I want to
welcome everyone to the Committee on Governmental Affairs this
morning, our hearing on the financial outlook of the U.S.
Postal Service, along with Senator Cochran and his
Subcommittee, who have done so much fine work in this area. We
are here this morning because of our increasing concern over
the financial condition of the Postal Service. The Committee
welcomes our witnesses, Comptroller General David Walker,
Postmaster General William Henderson, Postal Service Board of
Governors Chairman Robert Rider, and Postal Rate Commission
Vice Chairman George Omas. I hope our assembled panel can shed
some light on the course the postal finances have taken over
the past year.
While we will discuss many aspects of this problem in hopes
of achieving a better understanding of the reason for the
current situation, certain things seem to be clear. The Postal
Service framework, established by Congress in 1970, appears to
be near a breaking point. We established a system whereby the
Postal Service would have the characteristics of a Federal
agency and the characteristics of a business enterprise. On the
one hand, we require that the Postal Service provide universal
service to every home and business in America. We give them
little control over the rates they charge and their labor cost.
We require that they leave unprofitable post offices open. We
leave them open to the swings in the economy, along with
fluctuations in transportation and fuel cost. Finally, we
require them to break even.
On the other hand, we provide the Postal Service with an
absolute monopoly on the delivery of letter mail. We provide
that they do not have to pay taxes or be subject to antitrust
laws, the way that businesses are. This system worked for
several years. However, circumstances changed. Two trends
developed that changed the face of the Postal Service. First
was a technological revolution, which is in the process of
changing the way in which people communicate with each other.
That technology is rapidly finding business applications in all
aspects of society.
The second change was that the Postal Service eventually
and inevitably began to take on the characteristics of most
Federal agencies. It continued to grow without a focused
strategic plan. It developed serious financial management
problems, including wildly fluctuating projections of cost and
income. It is unable to utilize technology to increase its
efficiency and productivity even after spending billions of
dollars. It wastes tremendous sums of money due to
mismanagement. A combination of these factors results in the
difficulties that we see before us, as laid out by the GAO--
billions of dollars in deficits in the coming years and an
inability to deliver the services we want and costs that are
sustainable.
Clearly, the Postal Service must address its productivity
and its management issues. An 11 percent growth in productivity
over the course of 30 years is not good, to say the least.
Reports by the Postal Service Inspector General of $1.4 billion
in waste and mismanagement fuel further cynicism about agency
operations. Just as clear, however, is the recognition that
Congress must revisit the 30-year-old statutory framework under
which the Service now operates. As we proceed, we must ask
ourselves some pointed questions.
We, in Congress, must ask what services we want the Postal
Service to provide and what price we are willing to pay for
them, and do we really expect the Postal Service to hold costs
at a reasonable level when we are mandating so many things that
make that impossible. The Postal Service must ask itself if it
really expects reform that gives it more discretion when it has
not demonstrated the ability to make financial projections,
hold down costs, or increase productivity. Stakeholders should
ask themselves, even though they may be more comfortable under
the current situation, where will they be if the Postal Service
falls apart?
I approach this issue with no preconceived notion as to the
precise measures that should be taken. There is a lot that we
need to understand about the nature of this problem. However,
it is my belief that nothing should be left off the table,
including the future of the postal monopoly itself.
Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Mr. Chairman, thank you very much. To our
witnesses today, welcome. It is nice to see some of you again.
One of you looks really familiar. Mr. Rider, where are you
from?
Mr. Rider. Rehoboth Beach, Delaware, sir.
Senator Carper. A lot of people who work over in this part
of the country are going to be heading for your hometown in
about 2 weeks, when Memorial Day weekend is upon us. We look
forward to seeing some of you this summer, and as they make
their way to Rehoboth Beach, they can go through Bridgeville,
where I believe your business is, for the Apple-Scrapple
Festival later this year. That is a great combination, as I am
sure you can tell everybody. I understand your testimony
focuses on that very thing. We are really pleased to see you
here--you and I used to be the same thing. We use to be
governors together, and now you are chairman of the governors,
and I am just a former Governor, but we are delighted that you
are with us.
To our other witnesses today, Mr. Henderson, I understand
you are going to be stepping down as Postmaster General after
several years of Service, and I just want to say publicly,
thank you for your work and your leadership of the men and
women who are part of the Postal Service.
Mr. Walker, we look forward to being with you here today.
Your people are doing great work, and we are looking forward to
your comments.
Just a couple of quick comments. I really look forward to
your comments and to the give and take that we have here today.
Mr. Rider and I had a chance to chat on the phone not too long
ago about a couple of things, and as you look for ways to raise
revenues and to hold down your cost, I would again urge you to
focus on workplace safety. The cost that I think we discussed
on the phone was about $1.5 billion, and some of that is hard
to control. Some of that is more easily controlled. We talked a
bit about the good work that has taken place at Alcoa, under
the leadership of the fellow who is now our Secretary of the
Treasury. We talked a bit about, closer to home, the work that
goes on at the duPont Company, where my wife works, and a lot
of other Delawareans work, as well, and stay focused on
workplace safety to help to drive down their cost.
I understand that is a focal point, but as you look for Mr.
Henderson's successor, I sure hope that you will keep in mind
it would be great to have a leader who understands how much
money actually could be saved, is being saved, and could be
saved. The other thing I would say is my hope is, as we go
through our testimony today, we will have the opportunity to
find out some ways that you are raising revenues, would like to
raise revenues, and ways that you are raising productivity and
would like to raise productivity, some ways you are trying to
hold down your costs and would like to further hold down your
costs.
What I am looking for are ideas where we can be a partner,
where we can help to assist you in those efforts and ultimately
provide better service to the folks that we represent. Again, I
am glad that you are here and we look forward to this give and
take. This is an important hearing for everybody in every
State, and we thank you for joining us today, especially Mr.
Rider, who I think may have been in Hawaii visiting his
daughter, and it was good of you to come back here. We have
offered you some great weather, so you should not be
complaining, my friend. But we thank you for making this trip
and we apologize for disrupting your plans with your family.
Chairman Thompson. We are holding our hearing today in
conjunction with Senator Cochran's Subcommittee, so I will call
on Senator Cochran next for any comments.
OPENING STATEMENT OF SENATOR COCHRAN
Senator Cochran. Mr. Chairman, it is a pleasure to join you
this morning in convening this hearing. We think it is an
important and timely hearing. There are all kinds of
suggestions even being made in advertisements in the Washington
Post this morning about what the Postal Service needs to do to
get its house in order financially, and to turn a profit rather
than a deficit, and therefore obviate the need for a postal
rate increase. It would be good to hear the witnesses' reaction
to that suggestion.
I think the underlying message is that the Postal Service
has too many people and it can solve all its problems by
cutting down the number of employees it has. That will be an
interesting thing for you to respond to, as well.
Mr. Omas, it is a pleasure to recognize you, specifically.
What State are you from?
Mr. Omas. Mississippi.
Senator Cochran. I just wanted to be sure I remembered that
right. Who was your dormitory manager when you were at Guess
Hall, at the University of Mississippi?
Mr. Omas. I think his name was Thad Cochran. [Laughter.]
Senator Cochran. It is good that you remembered all that,
as well, and we look forward to visiting with you further on
these issues.
Thank you, Mr. Chairman.
Chairman Thompson. All right.
Mr. Henderson, where did you used to be a postmaster?
Mr. Henderson. Memphis, Tennessee. [Laughter.]
Chairman Thompson. Beg your pardon?
Mr. Henderson. Memphis, Tennessee.
Chairman Thompson. That's what I thought you said.
[Laughter.]
Chairman Thompson. While we are at it, Senator Stevens?
Senator Stevens. Mr. Henderson, what State have you spent
more time in, in the last 5 years?
Mr. Henderson. Alaska. [Laughter.]
OPENING STATEMENT OF SENATOR STEVENS
Senator Stevens. Mr. Chairman, I am delighted that you are
having this hearing. I have three going on this morning, but I
did want to come and participate here, particularly to thank
again the Postmaster General for his service. I have worked
with all the gentlemen at the table, but Postmaster General
Henderson has come to Alaska quite often to try and see what we
can do to solve the problems of postal delivery and the deficit
that they run up there, which is a matter of necessity, and
that is one of the reasons I am here.
We have no roads. There is only one main road in Alaska.
Seventy-five percent of our transportation of goods is by air,
and that is primarily by parcel post. The system that the
Constitution guaranteed for maintenance of post offices and
post roads has real meeting in my State, and Postmaster General
Henderson, you have recognized that and we appreciate that.
Beyond that, I came because I listened to the statement of the
Chairman and I have great respect for him, but I hope he would
keep in mind that it is 30 years ago now that I tried to get
the Post Office to be involved in something that we now call E-
mail. This Committee decided that was not proper. That was a
system that was going to grow in the private sector, and it was
probably a good decision, because it has grown very well. But
it competes highly with the Postal Service, and I do not think
that the monopoly and the printed word is one thing. I do not
think the Post Office has a monopoly anymore in terms of mail.
But that is a generational thing, and I would hope you keep
that in mind. It is an urban thing. The capability of my people
to go on the Internet is not yours, because we automatically
changed long distance rules. Intrastate calls in Alaska are
long-distance calls. Our competition here is with the printed
word and the generational concept that I mention to you is in
an aging population, and our population is aging. The majority
of those people who are aging are not computer capable, and
they are still dependent upon this postal system.
I am going to oppose any radical change in the Postal
Service until we are assured that the access is not limited to
the younger generations, in terms of capability to communicate.
Just think of it. All of you can think about it. The mail you
primarily get, the personal letters you primarily get today, if
you are computer-capable, are from your relatives that are my
age. Now, I happen to be fortunate and communicate with my
children by E-mail. But not many people do that, and I think we
have to keep in mind this postal system must be maintained to
deliver the printed word, so long as a substantial portion of
the population is dependent upon that service.
I know that there are losses out there. I know that there
are things that can be changed. But every year we look at a
deficit in the Postal Service revenue for our State, and you
all know it is there, and I know it is there, but the
difference is if you want to eliminate it, then give us about
$3 billion a year to build roads, and remove the opposition in
the environmental community to building those roads.
That is the same in other areas of the country,
particularly the rural areas of the country, that do not have
access to the Internet, at least equal access to the Internet.
On another Committee, we are working on this concept, Mr.
Chairman, of equal access to the Internet, and I believe the
day will come when the printed word, as far as personal
communication, will be gone. But until that day comes, the
Postal Service will be our way of complying with the
Constitution; and I hope we all keep that in mind as we look at
this.
Mr. Walker, I am interested in your report, and I am not
criticizing the report, but I think some of the things that are
analyzed as being losses are expenses of being involved in a
business that is not bottom-line cost effective. So I hope we
can keep that in mind. Again, I welcome you all and I thank you
for the courtesy, because I have to go to another meeting.
Thank you very much
Chairman Thompson. Thank you very much.
Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you very much, Mr. Chairman.
Gentlemen, which State would you most like to spend August
in? [Laughter.]
After Senator Stevens leaves, I can get a unanimous answer
of Maine from each of you.
Mr. Chairman, I have a lengthy statement which I would like
to submit for the record in the interest of time.
Chairman Thompson. It will be made a part of the record.
Senator Collins. I just want to say that I am troubled by
how quickly the financial picture of the Postal Service has
darkened. It was only in February 2000 that the Postal Service
still had a net income of $1 billion, and yet now we are seeing
projections of very significant losses, and I am further
troubled that the first response to those losses is to seek
higher rates, to look at eliminating Saturday delivery, and to
look again at closing small post offices, which, in many parts
of my State, are absolutely critical and are truly the heart of
a community.
So I look forward to exploring these issues with our
witnesses today. The Postal Service in Maine, as in Alaska, is
absolutely critical. We need to maintain the universal service
requirement, and I am very concerned about the financial stakes
that we now face. So, Mr. Chairman, I would put my statement in
the record, and I look forward to hearing from our witnesses.
[The prepared statement of Senator Collins follows:]
OPENING PREPARED STATEMENT OF SENATOR SUSAN M. COLLINS
Thank you, Mr. Chairman.
The U.S. Postal Service has origins that predate the birth of the
United States itself. In 1775, the Continental Congress appointed
Benjamin Franklin as the first Postmaster General. The value of a
national postal service was so apparent to our nation's founders that
the power to establish post offices and roads comprises one of only 18
clauses of legislative authority explicitly granted to Congress in our
Constitution.
This is not to say, Mr. Chairman, that the Postal Service has not
changed with the times. Under congressional statute, it expanded
service via navigable waterways in 1823 and the railroads in 1838.
Airmail followed as early as 1918. The Postal Service apparently even
experimented with an even more spectacular form of delivery--``missile
mail''--in 1959. Though missile-borne cross-country mail proved rather
less successful than other forms, the episode certainly demonstrated
the Postal Services' willingness to try new innovations.
Another, far more successful Postal Service innovation occurred in
1863: the institution of universal postage rates without regard to
distance. This system would eventually allow all Americans to reach out
to one another easily and effectively, regardless of where they lived
or how far the mail had to travel. For a short journey or a long one,
the Postal Service would charge a single, affordable rate. Even in the
middle of a terribly destructive and divisive civil war, the Postal
Service recognized that we were one nation and took important steps to
help bring that nation together as one. Combining this single-rate
service with its near-universal penetration of the American
countryside, the Postal Service helped knit together the nation we know
today.
Since 1971, the Postal Service has been organized as a separate
entity, albeit one different than any other government agency. As such,
it receives no general fund revenues. Instead, it relies upon sound
business practices and a watchful Board of Governors to ensure that it
carries out its mandate to deliver the people's mail in a convenient,
efficient and uniform manner.
Still, much has changed in the three decades since we established
the modern United States Postal Service. The advent of new technologies
has proven to be a special challenge to the fulfillment of the Postal
Service's traditional role. Recently, a confluence of factors ranging
from high gas prices to the advent of E-mail and electronic bill
payments have caused some to question whether the Postal Service can
continue to do ``business as usual.''
From September of last year through this February, the Postal
Service lost $260 million. Today, the Service estimates it may lose
between $1.6 billion and $2.4 billion for this year, and perhaps even
more in 2002. These trends, therefore, call into question the Postal
Service's ability to continue to provide its current level of services
at uniform prices and reasonable rates. Alarmingly, the Postal Service
has accumulated so much debt that it is now approaching its statutory
borrowing limit of $15 billion.
Many Postal Service stakeholders have told Congress that the
Service needs changes in the law to allow it to be more efficient in
its pricing, labor relations, and financing operations. GAO recently
testified that the USPS had increased its efficiency by only 11 percent
over the past three decades--during a time in which the productivity of
the private sector has been exploding.
To cope with these its tremendous problems, the Postal Service is
considering a reduction of core services--including the closing of
smaller postal facilities and the elimination of Saturday mail
delivery. At the same time, however, it continues to carry on non-core
services, such as E-commerce operations, that we are told lose
substantial sums of money.
According to a 1998 GAO study, for example, the Postal Service had
instituted 19 outside business ventures since 1991. During the first
three quarters in 1998, only four were reported to be profitable. GAO
found in their 1998 report that, during the seven year period it
reviewed, the Postal Service lost approximately $85 million on such
things as coffee mugs, ties, and phone cards. Because the Postal
Service has not released current information showing whether these non-
core services are actually profitable, this is a contradiction that
needs to be explored further, Mr. Chairman. When most businesses lose
revenue, providing less service for higher prices and forsaking core
services for money-losing side ventures is usually not their response.
I am especially concerned about the impact of closing post offices
in smaller communities. It would be unfortunate indeed if the Postal
Service's failure to meet today's challenges results in its abandonment
of aspects of the core service that made the service indispensable to
so many Americans, especially in rural areas. We cannot allow this to
occur.
I have no doubt that the Postal Service may need some reforms. The
world has changed significantly since 1971. Other nations are also
carrying out interesting postal experiments that bear watching. Ours is
a large nation, and what works in one country may not work here.
Nevertheless, we must be open to the idea that things can be done
better than they are today--and aware that we can learn from the
experiences of other nations to provide the best postal service for the
American people.
I agree with our outgoing Postmaster General when he says that ``a
seriously weakening postal system would find it more and more difficult
to carry the full load of universal service.'' It is for that reason
that this hearing is so important. A weakening postal system must
concern us all. In the end, we all want the same thing: the best postal
delivery system for all Americans that we can possibly have.
I look forward to the testimony of the witnesses and thank you for
calling this important hearing today, Mr. Chairman.
Chairman Thompson. Thank you very much. I understand that
Senator Akaka has been delayed and wishes to have his statement
made a part of the record. Senator Cleland has also submitted a
statement for the record.
[The prepared statements of Senators Akaka and Cleland
follow:]
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Given the Postal Service's projected $2-$3 billion deficit this
year, it is crucial that Congress examine the actions of the Service
which affect each and every American. I hope this hearing will assure
Hawaii's consumers and businesses that Congress is taking their
concerns seriously.
Last week's decision by the Postal Board of Governors to modify the
2000 rate increase has ignited a new round of debate. Some believe
raising rates may put the Postal Service in a death spiral. What we do
know is that rate increases alone will not fix the serious cash flow
and debt problems facing the Postal Service. A good indicator of the
seriousness of the situation is that the Postal Service has been
reported to be preparing for yet another rate increase filing this
summer. I am interested in learning from the Board whether this report
is true and learning from management exactly how the Service plans to
make up its possible $2-$3 billion projected loss.
The U.S. mail is a basic and fundamental public service. Hawaii's
postal patrons and those of other states are entitled to reliable and
efficient mail service at a fair and reasonable cost. With a dedicated
workforce of over 800,000 employees, it is the largest federal civilian
employer and operates more postal facilities than the number of
McDonalds, Wal-Marts, Blockbuster Videos and Starbucks, combined. This
infrastructure fuels the private mailing industry that generates $155
billion nationwide annually and employs 6.2 million people.
It is essential that an organization the size of the Postal Service
be governed by short and long-term financial goals that support its
core mission--providing universal mail service to all Americans at
affordable prices.
Because the Service has appropriately sounded the alarm over
declining volume and decreasing revenue, I am pleased to have the
Comptroller General with us. By placing the Postal Service on the list
of high-risk federal programs, Mr. Walker has spotlighted the serious
financial and operational problems facing the Service.
The Postal Service has received a lot of attention in the last
several months after announcing a freeze on new construction projects,
studying the elimination of Saturday mail deliveries, and raising
rates. While I support reviewing all options and believe it is prudent,
I want to make it clear that before Congress grants the Postal Service
greater flexibility, we should understand why the Service is facing a
$2-$3 billion projected loss, and what can be done differently.
I wish to invite my colleagues to join the newly formed
Congressional Postal Caucus, on which I serve as the vice chairman.
Congress should shoulder some of the responsibilities. I am confident
that by offering a forum to educate and brief members of Congress on
postal matters and concerns, we will be better prepared to work with
all stakeholders in finding solutions to our common concerns. I look
forward to reviewing the testimony presented at this hearing.
__________
PREPARED STATEMENT OF SENATOR MAX CLELAND
Thank you Mr. Chairman for giving me the opportunity to speak at
today's hearing and address the Postmaster General, Mr. William
Henderson, the Vice Chairman of the Postal Rate Commission, Mr. George
Omas, the Chairman of the Board of Governors, Mr. Robert Rider and the
Comptroller General of the United States General Accounting Office, Mr.
David Walker. As you know, the United States Postal Service (USPS) was
established by the Postal Reorganization Act of 1970. This act
chartered the USPS to perform as a business enterprise, with the
freedom to provide ``non-postal services,'' ensuring that USPS could
provide universal service reliably, efficiently and as inexpensively as
possible for years to come. Furthermore, the USPS was mandated to
operate on a self-supporting, break-even basis, with particular
emphasis on restraining postal rate increases and providing ``honest,
efficient, and economical management.''
The Postal Service is an amazing organization. Its Universal
Service program binds the country together by providing inexpensive and
reliable First Class mail delivery for every American and every
business. The USPS stops at approximately 134 million addresses six
days a week and delivers approximately 670 million pieces of mail every
day. The Postal Service generates approximately $64 billion in revenue,
ranking it 8th in the United States in the Fortune 500 Global listing.
In addition, the Postal Service employs approximately 800,000
individuals giving it the nation's second largest payroll, and USPS
operates approximately 38,000 postal facilities. Managing any
organization this size can be a very difficult challenge, but it was
done profitably for much of the latter half of the 1990's.
In 1997 the Postal Service turned a $1.2 billion profit, and had
been profitable for the years 1995-1999. But in 2000, the Service
showed a net loss of $199 million. The Service originally predicted a
deficit for 2001 of approximately $500 million. Early in 2001 that
projected loss was revised to between $2 to $3 billion, and with a new
rise in rates effective July 1, 2001, the loss is expected to be
between $1.6 and $2.4 billion. The Service has gone from profitability
to billion dollar losses in less than two years. In order to cut costs
and pay its bills the Postal Service has frozen all existing capital
construction projects, it is studying the feasibility of eliminating
Saturday delivery, the Board of Governors voted to modify the most
recent rate decision by raising certain rates, and the Service expects
to save $3 to $4 billion by 2005 through its ``breakthrough
productivity'' plan. I applaud several of the efforts of the Postal
Service in attempting to meet this challenge, however, I am concerned
about the need to promptly eliminate waste and how these cost cutting
measures will affect postal consumers.
The Inspector General found approximately $1.4 billion in waste,
fraud and mismanagement within the Postal Service. I am aware that
eliminating such waste will not alone keep the Postal Service out of
debt. However, I would like assurances that USPS is addressing the
problems that the Inspector General identified, and I would like to
know specifically what USPS is doing to address these issues.
Successful attention to these matters could appreciably increase the
credibility of the Service in the eyes of the public and could help
USPS meet its financial crisis without decreasing service to postal
consumers.
I have heard from many communities across Georgia that they are
experiencing service problems at their existing Post Offices. The lines
are too long, there is not enough parking or the Post Office is not big
enough to handle the volume of mail going through its facility. Georgia
has experienced one of the largest growth rates in the country and many
existing facilities are being squeezed in their effort to provide
prompt, efficient and reliable service. I have been informed by USPS
that projects in Buena Vista, Butler, Columbus-Beallwood, Cotton,
Darien, Gray, Guyton, Hawkinsville, Kathleen, Lyons, Macon-Downtown,
Marble Hill, Marshallville, McCaysville, Monroe, Monticello, Pine
Mountain, Pooler, Pulaski, Roberta, Rupert, Sharpsburg and Townsend
will be affected by the freeze. I am very concerned about what the
freeze in capital construction projects will mean to these growing
communities in Georgia and how long it will last. Furthermore, USPS is
studying the feasibility of eliminating Saturday delivery in order to
cut costs. While eliminating such delivery may decrease transportation
and labor costs, the amount of mail will not decrease and mail delivery
will either be delayed or carriers will be paid overtime in order to
deliver the mail efficiently in five days instead of six. I would like
assurances from the Postal Service that efforts will be made to
eliminate waste and increase productivity before any services are cut.
Once again, I would like to thank the Chairman and the participants
in this hearing for allowing me to speak to you about my concerns. I
will review the report for this hearing when it is released and I look
forward to working with you in the future on these and other important
issues.
Senator Carper. If we could do that, we would be grateful,
sir.
Chairman Thompson. Without objection. Senator Carnahan.
OPENING STATEMENT OF SENATOR CARNAHAN
Senator Carnahan. Thank you, Mr. Chairman. I would feel
remiss if I did not ask you gentlemen which State you would go
to, to watch Mark McGwire hit a home run, eat the best
barbecue, and enjoy the best country western music?
Chairman Thompson. Now, wait a minute. [Laughter.]
We will discuss this later. [Laughter.]
Senator Carnahan. Thank you, Mr. Chairman. I would like to
thank each of the witnesses for being here today. I can
remember, as a young girl growing up, the excitement I felt
when the postman would arrive with our mail everyday. He might
bring us messages from as far away as New York or Los Angeles.
He would deliver a letter to any of my relatives, even those
who lived in the rural areas. It is an idea as old as the
country itself, a National Postal Service, efficient and
convenient--connecting every American to every other American.
It is a part of our collective experience, but increasingly
this idea is in danger.
At the recent House Government Reform Committee hearing,
Mr. Walker, you testified that the Postal Service is at growing
risk of not being able to continue providing universal postal
service, vital to the national economy, while maintaining
reasonable rates and remaining self-supporting through postal
revenue. I am deeply troubled by the current estimates of the
U.S. Postal Service's financial situation. I am particularly
concerned at the prospect that the Postal Service may reach its
$15 billion debt ceiling in just 2 years.
I believe that, overall, the Postal Service does an
excellent job in delivering the mail. Postal workers in
Missouri and all over the country are dedicated and hard-
working, but when Americans see postal rates rise twice in 6
months and hear that Saturday service may be eliminated, the
Postal Service's reputation is badly undermined. Before we
eliminate services, we should ask if the Postal Service can be
run more efficiently. Before we raise rates, we should think
about the impact on our families and businesses. This situation
is serious and warrants attention, both by the management of
the Postal Service and by Congress, which is why we are here
today.
I believe there are three fundamental principles the U.S.
Postal Service must abide by. It must provide universal service
to the public. It must offer reasonable rates, and it must be
self-supporting. If the Postal Service doesn't live up to these
three principles, then it's failing its mission and failing the
American people.
The first principle is that postal delivery is a public
service and must be available to all. People depend on it. From
those operating small businesses to seniors living in rural
areas, who receive life-sustaining medication through the mail.
The second principles in ensuring reasonable rates. This is
important on many levels, from the individual consumer who
mails a few items a week, to the large company, whose
livelihood depends on shipping its products to its customers.
The Postal Service is an integral part of our Nation's economy.
Any changes in postal rates, no matter how small, have ripple
effects across Missouri and every State in the Nation. While
sometimes rate increases are warranted, they should be
carefully considered and evaluated with discretion.
The third principle is that the Postal Service must be
self-supporting. The Postal Service is a business. There are
certain budget realities and constraints that come with that. I
sympathize that rising fuel costs make delivery more expensive.
This is an issue that businesses and families across the
country are struggling with, but fuel costs are not the only
factor. We need to look at both the long-term and short-term. I
look forward to hearing each of the witnesses' testimony on how
costs can be reduced without displacing workers or eliminating
services.
There are two points that I would like to leave the
panelists today. First, such drastic changes in financial
projections in such a short amount of time are unacceptable.
Our families have to balance their checkbooks and pay their
bills, and they expect the same from our government agencies.
This service is too important for the books not to be kept in
top order. I am eager to learn what steps the Postal Service
can take to prevent this from happening again.
Second, 6-day mail delivery service must be maintained.
This service is essential for Missourians, particularly those
in rural areas. It is also important for thousands of small
businesses struggling to make it on a very small profit margin.
That is why I am supporting Senator Harkin's Senate resolution
regarding the need to preserve 6-day mail delivery. The
resolution opposes the elimination of Saturday home and
business delivery. It calls on the Postal Service to take all
the necessary steps to assure that these services are not
reduced.
Just last week, the Postal Rate Commission approved yet
another rate increase. If we cut services while raising rates,
we're asking our citizens to pay more for less. We owe them
better than that. While I will not be able to stay for the
entire hearing, as I have a prior commitment for this same time
period. I look forward to reviewing each of the witnesses'
testimony and learning from your expertise.
Thank you, Mr. Chairman.
Chairman Thompson. Thank you very much. Mr. Walker.
TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S.
GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman. I have a full
statement which, with your permission, I would live to have
inserted into the record and I will move now to summarize.
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\1\ The prepared statement of Mr. Walker appears in the Appendix on
page 48.
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Chairman Thompson. It will be made a part of the record,
without objection.
Mr. Walker. Thank you, Mr. Chairman. I am pleased to be
here today to participate in this joint hearing on the
financial outlook and transformational challenges of the U.S.
Postal Service. Overall, the Service faces major challenges
that collectively call for a structural transformation if it is
to remain viable in the 21st Century. A structural
transformation of the Service is called for because the Service
faces major financial, operational and human capital
challenges.
It is a growing risk of not being able to continue
providing universal postal service, vital to the national
economy, at reasonable rates, while remaining self-supporting
from postal revenues, the three criteria that Senator Carnahan
articulated. Accordingly, in April 2001, GAO placed the
Service's transformational efforts and its long-term outlook on
our high-risk list. This inclusion on our high-risk list will
focus needed attention on the dilemmas facing the Service
before the situation escalates into a crisis where the options
for action may be more limited and costly.
The key factors that contributed to our decision to place
the Service's transformational efforts and its long-term
outlook on our high-risk list included the following: The
Service's financial outlook has deteriorated significantly. Its
borrowing is increasing, and the Service's debt is approaching
the $15 billion statutory limit without having a specified debt
reduction plan in place. In addition, the large number of
retirements expected over the next several years will place
even more pressure on the Service's expenses and its need for
cash.
The Service recently deferred capital investments to
conserve cash, thus delaying certain needed infrastructure
improvements. These deferrals appear likely to continue in the
current environment. In March 2001, the Postal Service Board of
Governors wrote to the President and the Congress, asking for a
comprehensive review of postal laws, and noting that the threat
was serious and significant with regard to whether or not the
Postal Service would be able to continue to achieve its mission
in future years.
Potential losses in First-Class mail volume over the next
decade could create large financial deficits, leading to a
situation where universal postal service could ultimately be
threatened, prices would likely increase at a much faster rate,
and other options would need to be explored. The Service is
subject to several statutory and other restrictions that serve
to limit its transformational efforts; the binding arbitration
requirement, the rates-setting process and the facility closure
restrictions being examples of these restrictions.
The Service has also had periodic conflicts with some of
its key stakeholders, including the postal unions and the
Postal Rate Commission. We have noted longstanding labor-
management relations problems that have hindered improvement
efforts, including three labor agreements that cover over half
of the Postal Service's workforce, that expired in November
2000, and will now evidently be resolved through binding
arbitration. In addition, the Postal Service and the Postal
Rate Commission have had long-standing disagreements concerning
pricing decisions.
Finally, two key leadership positions need to be filled
regarding postal operations and rate setting; namely, a
successor to Postmaster General Henderson and a successor to
the chair of the Postal Rate Commission. Although the Service
has announced some steps to address its growing challenges, it
does not have a comprehensive plan to address the numerous
financial, operational or human capital challenges that we have
noted.
In April 2001, we recommended that the Postal Service
provide quarterly reporting on its financial and operating
results and projections, in order to enhance transparency and
improve accountability in connection with these matters. In
addition, we also recommended that the Postal Service develop a
transformation plan in conjunction with Congress and other key
stakeholders that would address the major challenges facing the
Service. Postal Service officials told us that they generally
agree with our recommendations, and in that regard I recently
met with Deputy Postmaster General Nolan, and we discussed ways
in which the Service could move to begin to address our
recommendations.
We appreciate the difficulty of this task, given the long-
standing nature of the structural problems and major
differences in stakeholder views, many of which are outlined in
my statement. As I mentioned, we at GAO have already started to
reach out to some of the affected stakeholders, to try to
obtain an understanding as to their current positions. Some of
that is outlined in my statement, and I think you will note
that there are some significant differences of opinion in that
regard.
But the sense of urgency in connection with the Postal
Service is growing. The basic statutory framework that governs
the Postal Service has not changed since 1970, despite the fact
that there have been significant developments in technology and
a much more competitive marketplace that provide alternative
forms of communication and delivery choices to both businesses
and consumers, and these are likely to continue to escalate in
the future.
The Service's ability to provide universal postal service
at reasonable rates will be increasingly threatened unless
changes are made, both within the constructure of current law,
as well as through relooking at the legal and regulatory
framework that governs the Service.
I thank you, Mr. Chairman. I would be more than happy to
answer any questions at your pleasure.
Chairman Thompson. Thank you very much. Mr. Henderson.
TESTIMONY OF HON. WILLIAM J. HENDERSON,\1\ POSTMASTER GENERAL,
U.S. POSTAL SERVICE
Mr. Henderson. Thank you, Mr. Chairman. First, I want to
thank the Senate for its cooperation. I have 17 days left after
30 years of public service in the Postal Service, and I have
enjoyed it very much. It has been an interesting job, from
being postmaster of Memphis, Tennessee for several years, to
postmaster of Greensboro, postmaster of Stockton, California,
and running plants all across America. It has been very
interesting.
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\1\ The prepared statement of Mr. Henderson appears in the Appendix
on page 77.
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Let me say a couple of things, and I will submit my
statement for the record. First of all, we agree with the
General Accounting Office on their assessment of the Postal
Service and of the Postal Service's future. There is no
disagreement there, and it is something we have had extensive
discussions on. Second, and let me try to put the future of the
Postal Service in kind of precise terms. What do you do when
your revenues decline and your labor costs are controlled by an
independent arbitrator?
If you look at the structure of the expenses, you have 14
Presidentially-appointed individuals. That is the Board of
Governors and the Postal Rate Commission, whose primary job it
is, is to ensure affordable prices for the American public, 14
Presidential appointees, constructed in 1970 by the Postal
Reorganization Act. In effect, when you look back 30 years, and
you look at what controls the price of postage--it has been the
cost per hour, which has been determined by an independent
arbitrator; and that fact is something that needs to be
changed.
I am not opposing collective bargaining, and no one in the
Postal Service is; but the fact that when we constructed--the
United States constructed--the Congress constructed the PRA,
one of the most important aspects of that construction was how
do you control postage rates? How do you do that? Do you set it
up with administrative law judges? How do you do that? The
major mandate, the major obligation, of nine Presidentially-
appointed Governors and five Presidentially-appointed Postal
Rate Commissioners, is to set the rate of postage, and, in
effect, causally, that rate is set by an independent
arbitrator, and that is something that creates a problem for
the Postal Service.
You put that in the context of now what do you do when your
revenues--that is, the demand for postage--goes down? You have
whatever it be, mergers and acquisitions, Internet as opposed
to standard A, competitors as opposed to packages--how do you
respond to that? It is very difficult for the Postal Service to
respond to a lessening of demand. For example, your letter
carrier delivers, on the average, about $1.75 postage to every
household in America today. That is to break even. So what
happens when you get 20 percent less postage? You do not stop
delivering mail. You do not do those sorts of things. You do
not go from overnight to 2- or 3-day service. You simply absorb
that cost.
What happens when the price of fuel--how long has the price
of fuel been going up now? A year-and-a-half? I bought a Dodge
Durango 3 years ago, and I filled it up with regular gas at 99
cents a gallon. Today, that is almost $2 a gallon. For every
penny in gasoline, it costs the Postal Service $5 million. It
does not have the ability to put a surcharge, like our
competitors have, or like the airlines have, or even now, I
went into a hotel--I stayed in a hotel the other day; had a
surcharge on my room for energy cost. The Postal Service does
not have that ability. It accumulates those costs and then
dumps them at a point when it changes prices.
Those are antiquated ways of dealing with the future, I
would urge you to look at that in the coming days, to look at
the statutory construction of the Postal Service, because it is
my belief that it is very important to America to have
universal service, to have affordable rates, to have an access
system. We talk about the digital divide. One of the things
that we are doing with Senator Stevens in Alaska is providing
access vehicles, small devices in lobbies and certain places,
testing them, so that Alaskans who cannot afford to buy
computers or cannot afford to buy access modems, can go to
their post office and cross that digital divide without having
a barrier of $1,500 or $1,000 for an Internet device, and I
think that is very important.
So I think the Postal Service is relevant today. It has a
strong ubiquity all across America, and it needs to be
reexamined in light of its statutory construction. Thank you,
Mr. Chairman. I would be happy, at the appropriate time, to
answer any questions.
Chairman Thompson. Thank you very much. Mr. Rider.
TESTIMONY OF HON. ROBERT F. RIDER,\1\ CHAIRMAN, BOARD OF
GOVERNORS, U.S. POSTAL SERVICE
Mr. Rider. Good morning, Mr. Chairman and Members of the
Committee. I am Bob Rider. I am Chairman of the Postal Service
Board of Governors. I appreciate very much this opportunity to
discuss the challenging universal mail service and the
necessity for legislative reform. However, before I start, I
would like to publicly recognize the 30 years of service given
to the U.S. public by our Postmaster General, Bill Henderson.
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\1\ The prepared statement of Mr. Rider appears in the Appendix on
page 83.
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Bill, as you are all well aware, is retiring on May 31, and
we all want to wish you well.
Mr. Henderson. Thank you.
Mr. Rider. The mission entrusted to the Postal Service by
Congress is to provide universal mail service to every address
in all communities and neighborhoods throughout the United
States at affordable prices. This mission of inclusion and
facilitation for the Nation's business and personal life is as
fresh and relevant today as in the country's beginning. The
American people have always enjoyed among the lowest rates and
best service in the world. Throughout its history, the Postal
Service has grown with the Nation. We still add over 30,000 new
addresses each week to the distribution and delivery network,
while keeping average price increases below the rate of
inflation.
This is the equivalent of a brand new city of Chicago every
year. We have had only two rate filings since 1995, both times
just a penny on First-Class rate. We have done this by
restraining cost and improving productivity, as service
networks expand to handle the Nation's growth. In recent
months, several forces have combined to upset the balance
between revenue and cost for this year. Postal revenue growth
has slowed with a weak economy, accounting for an expected
shortfall between $500 million and $1.5 million.
The Postal Rate Commission recommended rates lower than
those the Postal Service had proposed and our financial plan
had assumed, increasing our net loss by $100 million. Other
costs, such as fuel, have grown due to rising prices, adding
about $150 million in this fiscal year. Taking these factors in
combination, we currently believe the fiscal year 2001 net loss
could exceed $2 billion.
The law provides us a limited opportunity to deal with this
shortfall. As finances have suffered, the board has attacked
the problem with the tools that we have available to us.
Earlier this month, the Governors reluctantly decided we must
exercise our authority on the record of the most recent rate
case, to modify postage rates to adjust a shortfall of about $1
billion, through a rate adjustment averaging 1.6 percent. We
took this action to protect the financial integrity of the
universal mail system.
Because the adjustment comes so late in the fiscal year,
this move yields only about $200 million in a shortfall in the
remainder of this fiscal year. In recent years, the Postal
Service has had good success with programs for managing work
hours and other controllable cost elements. Last year's
productivity improvement of 2.5 percent was the best since
1993. In current circumstances, however, extraordinarily and,
unfortunately, painful additional measures are essential.
First, we have eliminated $1 billion from the capital
commitment budget for this fiscal year in order to conserve the
cash to pay our bills, and to reduce future commitments to
match cash flow.
Next, we have directed management to prepare another rate
filing, to get the Postal Service back on a pay-as-you-go
footing, maintain financial viability and achieve breakeven, as
the law mandates. Also, we have directed management to take a
fresh look at all operating expenses, to realize additional
savings. A number of these actions are now in place, among
these are a hiring freeze at headquarters. Management has
eliminated over 1,100 headquarters and headquarters-related
positions since the beginning of this fiscal year, along with
20 percent, or 232 of the positions in our area offices.
These reductions are continuing at headquarters, area and
district offices. Also, a nationwide freeze in the hiring of
processing and distribution clerks. So far, we have over 7,000
fewer career clerks on the rolls than at the end of last fiscal
year; also, a series of comprehensive area mail processing
studies, which identify opportunities to consolidate operations
and to reduce expenses. Many of the delayed capital projects
are badly needed. Their postponement will make it difficult to
meet the needs of our customers and our employees. The board's
responsibilities, nevertheless, require us to make sure that
financial resources are on hand to pay bills when they come
due.
Every 2 weeks, these bills include one of the Nation's
largest payrolls, providing the livelihood of more than 800,000
postal families. In the years ahead, cost-cutting and rate
increases within our current statutory framework are not
sufficient for the Postal Service to keep pace with today's
market dynamics. More businesslike management is required to
maintain the financial integrity of the Postal Service and the
foundation for universal mail service. The outdated statutory
framework both contributes to current financial problems and
severely limits what can be done about them.
The Postal Service has limited authority over its prices,
services, wages and other management levers in the postal
system. The cumbersome history of the recent rate case, which
took almost 2 years to complete, from preparation to finish,
spending periods of both economic boom and economic slowdown,
illustrates part of our problem. None of the private firms
whose services compete with or substitute for the mail go to
every household every day. The Postal Service delivers to 136
million addresses 6 days a week. To break even, we need an
average of about $1.75 to $2.00 in postage for each delivery
point every day. Three-quarters of all households do not
receive that much mail each day.
If universal service does not remain economically viable,
many Americans will not get the level of service or the
affordable prices they are accustomed to receive. The most
advanced nations around the world are rapidly modernizing and
reorienting their postal systems. The Postal Service delivers
40 percent of the world's mail, but America lags far behind in
postal reform. The overseas posts are reorganizing to protect
their universal service and keep their rates affordable. Many
now come over here to compete for some of our mail. Without
vigorous postal reform in the United States, this country faces
increasing pressure on the economic foundation for universal
service at affordable prices.
The American people should not have to face this result.
The United States should continue to have the best, most modern
postal structures and services in the world. We pledge that the
Postal Service will do all that we can, both to manage the
current challenge and to contribute to the success of a
comprehensive postal reform measure.
Thank you, Mr. Chairman. I would be pleased to respond to
any questions at the appropriate time.
Chairman Thompson. Thank you very much. Mr. Omas.
TESTIMONY OF HON. GEORGE A. OMAS,\1\ VICE CHAIRMAN, POSTAL RATE
COMMISSION
Mr. Omas. Thank you, Mr. Chairman. My name is George Omas.
With me today are my fellow commissioners, Danny Covington,
Ruth Goldway,\2\ and Trey LeBlanc. As you know, and has already
been mentioned, the position of Chairman of the Postal Rate
Commission is currently vacant. I was elected vice chairman by
my colleagues and have been performing the administrative
functions of the chairman since February.
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\1\ The prepared statement of Mr. Omas appears in the Appendix on
page 88.
\2\ The prepared statement of Ms. Goldway appears in the Appendix
on page 137.
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Mr. Chairman, at this point, I would like to request the
Committee accept my written testimony that I submitted in
advance of this morning.
Chairman Thompson. It will be made a part of the record.
Mr. Omas. I would like to focus my statement this morning
on responding to a specific question; the letter inviting me to
testify here today asked whether I concurred with the Postal
Service's projection of a $2 billion to $3 billion deficit. The
short answer to that is that I cannot evaluate that estimate.
The Postal Service has not provided any systematic explanation
of its multi-billion dollar projections. The imprecision of its
forecasts makes it impossible to evaluate their reliability.
The Postal Service may have detailed analyses that justify
these forecasts, but such analysis have not be made available
to the public or to the Postal Rate Commission. The
Commission's primary function is to respond to the Service's
requests for rate and classification decisions. The Postal
Service provides detailed supporting cost data when it asks the
Commission to recommend rates. However, after the Commission
provides its recommendation, the Commission does not have ready
access to data that would enable it to know what portion of the
Postal Service's rate case cost projections were mis-estimated.
From the limited data available to the Commission, it
appears that the major causes of the current losses are costs
that are substantially higher than the Service projected just a
few months ago. Some of those who think that drastic
legislative action is necessary, think that projected deficits
may have resulted from a decline in volume caused by growth of
electronic communication, but mail volumes are not declining.
It also has been suggested that the mix of mail has changed and
that the Service is now delivering less-expensive mail. But
from the data currently available to the Commission, it appears
that the major cause of operating losses are costs that are
higher than the Postal Service expected.
The Commission has examined the Postal Service's limited
preliminary cost reports for the first half of fiscal year
2001. We have annualized these results for the first six
accounting periods of 2001 data and compared those figures with
the revised annual projections estimated for fiscal year 2001
at the end of the most recent case. This comparison is quite
revealing. Comparing seven important cost elements, the
Commission finds that if current cost patterns continue, the
Postal Service is likely to incur $1.8 billion more in cost in
2000 than it had estimated to the Commission in July 2000.
My written testimony, on page 14, includes a table that
shows the seven cost elements and how inaccurate the Postal
Service cost projections may have been. To me, this result
undermines many of the arguments suggesting that radical reform
of price-setting mechanism is necessary. Mr. Chairman,
skyrocketing costs are not the result of volume losses to
electronic mail. Skyrocketing costs are not the result of
mailers doing more work sharing or switching to less-expensive
postal products. Skyrocketing costs, again, are not the result
of a failure to rapidly bring new products to the market.
I thank you, Mr. Chairman. I would be pleased to answer any
questions.
Chairman Thompson. Thank you very much. Well, you have
touched on a lot of things that we need to get into today, but
I would like to try to lay a little groundwork. Most of our
conversation, when we talk to you gentlemen, has to do with
rate increases. We demand that you do not increase rates, nor
cut any services, and I am sure we will go through all of that.
But what I am interested in, is about our particular
State--our neck of the woods--I want to make sure nothing has
changed there. We have got to protect ourselves, protect our
constituents--but even that is really the tip of the iceberg. I
think what today can do is provide us a useful forum for
discussing the reasons for these cost increases. It can help us
get underneath some of the causes of what is going on with the
Postal Service, fundamentally, and what we need to do about it.
It seems to me at the outset that, clearly, Congress is
going to have to recognize that we cannot continue to demand
the same kind and quality of services that we have always
demanded. We cannot make such demands while putting
requirements on the Postal Service that drive up costs and
mandate losing operations, such as post offices and things of
that nature, which are desirable, but just not cost-effective.
We have got to revisit these issues.
On the one hand, there are certain things that you have no
control over like requirements we put on the Postal Service. On
the other hand, there are also certain things that you do have
control over. And as far as labor and other groups that are
interested--competitors, customers and so forth--we all have
our interests. We are all going to have to come to the table
and do something different, because it is quite obvious, if you
know the GAO and read the reports, and know Mr. Walker, you
know that he is not given to hyperbole. I read between the
lines. It is obvious that the ox is in the ditch, big-time.
Mr. Walker, just for a minute, let's project out as to what
we are dealing with here and what we are looking at. What do we
know? Well, first of all, we know that there have been two rate
increases already this year. The estimates of where they are
have wildly fluctuated, from a surplus at the beginning of last
year to estimates of a $2 to $3 billion deficit in February of
this year. Now, they are talking about somewhere in the
neighborhood of a $2 billion deficit, even after the rate
increases, somewhere between $1.6 billion and $2.4 billion for
2001; is that correct, basically?
Mr. Walker. That's correct, Mr. Chairman.
Chairman Thompson. This assumes more optimistic economic
forecasts, otherwise the numbers would be worse. It also
assumes meeting certain aggressive revenue growth and cost
reduction objectives; doesn't it?
Mr. Walker. It does make certain assumptions.
Chairman Thompson. Objectives that have never been met
before; have they?
Mr. Walker. Not consistently.
Chairman Thompson. So I think the $2.4 billion possibility
is probably low, if you look historically. We have two rate
increases. It looks like we are probably going to have another
one in July, right, Mr. Henderson? Is that the way it is
looking?
Mr. Henderson. Actually, it depends on what the economy
does, and, as you were talking about, where the losses end up.
I think July is probably a bit early, based on current
information, but certainly it is looking at another rate
increase in the near-term.
Chairman Thompson. The near-term would certainly be
sometime later this year?
Mr. Henderson. That is correct.
Chairman Thompson. The speculation has been in the 10 to 15
percent range. Is that reasonable?
Mr. Henderson. Based on the existing economy, that is in
the range of what it looks like, although we do have a
committee that is looking to some alternatives to that type of
a rate increase, to try to minimize the impact on the customer.
That is being headed up by the Deputy Postmaster General, John
Nolan.
Chairman Thompson. So, again, getting back to the
groundwork. That will be three rate increases in 1 year, a
multi-billion-dollar deficit. No real feeling as to what effect
that is going to have on business. Some of your postal
business, of course, is very cost sensitive, and when your
rates go up, your business goes down in some of these areas. Is
that not correct?
Mr. Henderson. That is correct.
Chairman Thompson. So we will have to figure that in, too,
which will again exacerbate the problem. As I say, this is
based on, to me--these are my words--kind of rosy estimates in
terms of revenue growth and cost reduction objectives. So that
is where we are. Looking out into the future, Mr. Walker,
correct me if my analysis is wrong here. But it is not really
an analysis, it is really a rendition of the factors that we
are going to have to deal with. One is that in all probability
we are going to see a decrease in First-Class mail. First-Class
mail is about two-thirds your revenue, is it not, Mr.
Henderson?
Mr. Henderson. Right.
Chairman Thompson. We will probably see a decrease in
First-Class mail. Your labor situation is not going to get any
better, is it, Mr. Henderson?
Mr. Henderson. No.
Chairman Thompson. And certainly not in the near-term. The
thing that jumped out at me, too, along those lines, Mr.
Walker, is the retirement cost that you do not hear a lot of
talk about. You say in your report, ``The Service has mounting
debt and many billions of dollars in liability for future
retirement and worker's compensation expenses. These
liabilities have increased in part because the Service was
statutorily mandated to assume responsibility for funding all
cost of living adjustments and health benefits for its retirees
since July 1, 1971. For the remainder of this decade, these
liabilities will continue to have an increasing impact on the
Service's future cash flows, placing the Service under growing
financial pressure.''
We talk a lot about the fact that many government workers,
almost half, are going to be eligible to retire in 5 years. It
is certainly true with regard to the Postal Service. You are
going to have a high rate of potential retirement in the near-
term, and that is going to have a major impact. You are already
up to some high numbers, in terms of retirement benefits, which
are projected to reach $14 billion in fiscal year 2010. So
these retirement payments are going to have a major impact, in
addition to everything else that we are talking about. It is
going to be an additional load on the back of the Postal
Service; is it not, Mr. Walker? What is the significance of
that?
Mr. Walker. There will be a significant cash flow drain
associated with being able to make the payments for these
retirement benefits. There is about a $30 billion liability
that the Service has right now, I believe, attributable to
unfunded past service-related cost for CSRS. The $14 billion, I
believe you referred to, Mr. Chairman, is the Service's
anticipated future annual retirement cost in fiscal year 2010,
which also includes employees that are under FERS and the
Federal Thrift Savings Plan, as well.
Mr. Henderson. Mr. Chairman, if I could add to that, there
is a talent drain, too. The executive ranks of the Postal
Service, which account for about the top 1,000 executives, 71
percent of those are over the age of 50. There are only nine
executives in the Postal Service under the age of 40--no,
seven. I take that back--seven executives under the age of 40.
So not only is it a financial trade, you are going to have a
huge brain drain here.
Chairman Thompson. Mr. Walker has been telling us and
trying to explain to us for some time now that this is a
government-wide problem. We have reduced our workforce with no
strategic plan. We have a requirement for more and more
qualified people, highly-qualified people, especially in the
technical branches. We have been reducing our workforce with no
plan toward what the government needs to do. I am sure that
this is true in the Postal Service, as well as everywhere else.
So, again the factors we are going to continue to see are
probably rate increases, if we go on the current pattern. That
has got to affect the bottom line in these areas that are cost
sensitive. Some people are going to quit using the Postal
Service because of the price. We are going to see a decline in
First-Class mail continue. You are going to see continuing
labor problems. Your labor situation is built-in, and the
retirement part of all of that is going to be increasingly
onerous. Your productivity, while you are trying, has been a
real failure of the Postal Service. I mean, it does not look
like to me like you are going to increase our productivity
enough to make any measurable difference.
While you have increased productivity 11 percent since
1970, your productivity has actually declined in 5 of the last
7 years. This occurred even though the Postal Service has spent
billions of dollars in automation and technology trying to
improve productivity. With regard to the Postal Service's
efforts to have other businesses to generate alternative
streams of income, such as e-commerce and things of that
nature, you budgeted $230 million. You wound up making $2
million for fiscal year 2001. There does not seem to be any
Lone Ranger coming over the horizon to save that day, in terms
of making money in these new ventures.
There is no plan, as I understand, Mr. Walker, with regard
to these financial problems that the Postal Service has. Either
with regard to the finances, or the costs, or the projections,
or the human capital part of the equation, there is no plan, is
that correct?
Mr. Walker. There is not a comprehensive, integrated plan
that would include transformational proposals, as well. No,
there is not.
Chairman Thompson. We are losing our Postmaster General and
we are losing the Chairman of the Rate Commission. Other than
that, everything is all right. [Laughter.]
So the idea that we can spend all of our time on these
details and not recognize that we have got serious underlying
problems is really keeping our head in the sand.
Mr. Walker.
Mr. Walker. If I may, Mr. Chairman, I think the bottom line
is the status quo is not sustainable. We must recognize that
there are a variety of structural problems that need to be
addressed. The answer is not merely to increase rates or merely
pursue incrementalism, to do a little bit more here, a little
bit more there. We need to engage in a fundamental
reexamination and transformation debate in connection with the
Postal Service. Quite frankly, we need to be able to put on the
table things that historically have not been put on the table.
For example, what is the definition of universal postal
service? Right now, the definition might be 6 days a week
everywhere.
Clearly, whatever that definition is has to be met in rural
Maine, rural Alaska, and other remote areas, irrespective of
the cost. That is essential, because it is part of the
fundamental definition. But what is the appropriate definition
of universal postal service, given changes in technology, given
alternative forms of communication that exist today?
Chairman Thompson. And what are we willing to pay for it?
Mr. Walker. And what are we willing to pay for it, and
should one size fit all? For example, in many areas such as
health care, you have a basic guarantee and you have options.
If you want more than the basic, you can get it, but the
question is at what price? So what we need to do is rather than
looking back--yes, we need to learn from the past--but the
status quo is unsustainable. We need to basically engage in a
fundamental examination and we need to look forward, in light
of not just today, but the changes that we know are coming
tomorrow, some of which you mentioned; the fact that more and
more bills are being transmitted and paid electronically. Other
countries have already seen this.
A lot of that involves First-Class postage, the 34-cent
postage, the transmittal of payments. First-Class postage
covers about 70 percent of the Postal Service's overhead costs.
So there are fundamental issues here that we have got to deal
with, and we are not going to be able to deal with then through
incrementalism. We are going to have to put some proposals on
the table, with pros and cons, that you have to look at as a
package, because if we look at each element by itself, it can
easily be torn down; but then again, we have to keep in mind,
the status quo is unsustainable.
It is like Social Security and Medicare; the status quo is
unsustainable. Ultimately, we have to do something.
Chairman Thompson. You have touched on something very
important about government, and that is the fact that there are
some areas where that is true, and the status quo is
unsustainable. The question is not whether or not it is
unsustainable, because it clearly is. The question is whether
or not it has to get a lot worse before it gets any better.
Whether or not the whole thing has to collapse and we have got
to have a massive infusion of appropriated funds up here
overnight someday. It is going to be a surprise to everyone. Or
whether or not we can go about doing something before then.
We are going to be here for awhile, but I do not want to
take all the time this morning. So I am going to wait till my
next turn for some other questions.
Senator Carper.
Senator Carper. Thank you, Mr. Chairman. Hockey great Wayne
Gretzky was once asked, ``Why are you such a good hockey
player,'' and he replied, as some of you have heard, ``I go
where the puck will be, not where the puck is.''
We have talked today about what your business was like 30
years ago, Mr. Henderson, when you joined up, and 20 years ago,
10 years ago, today, the environment in which you compete.
Let's talk about what it is going to be like a few years down
the line. I turned to the Chairman during, I think, Mr. Rider's
comments, and I said, ``You know, it would be interesting if we
had a futurist here, who actually thought about these kinds of
issues and could look down the road and take us with him or
her.''
Let me just ask each of you to put on your futurists hats
for a minute, a minute apiece, and we will start over here with
Mr. Omas. But I am just going to ask you, put on your hat as a
futurist. Where are we going to be 10 years from now? What is
the environment that the Postal Service is going to be
competing in 10 years from now?
Mr. Omas. Well, I think that one of the places the Postal
Service should look is at its core business, that is, of
delivering mail. Many of the new markets, whether it be in
electronic mail or whatever, have not really--as we all know--
turned any revenue for them. In fact, it has cost the Postal
Service a great deal of money. As one GAO report said a couple
of years ago, I think they lost over $88 million on several
endeavors like T-shirts. I think that in the future the Postal
Service should look at--it has a tremendous ability to
deliver--they have the household--they have the structure, and
I think they should look at that core business and expand on
developing other products or whatever to be delivered by the
Postal Service.
Senator Carper. Thank you. Mr. Rider, what will be the
competitive environment 10 years from now for the Postal
Service?
Mr. Rider. Well, looking back, Senator, we have not done
such a bad job. In 1971, when the Postal Reorganization Act was
passed, postage was 8 cents. It has gone up 325 percent since
then, but the CPI has gone up 343 percent. In the last 10
years, postage went up 36 percent and the CPI went up 37
percent. In the last 5 years, postage went up 6 percent----
Senator Carper. Excuse me. This is all well and good. I
appreciate your setting the record straight. These are
important things to get straight, but that is not what I am
asking. What I am asking is where are we going to be 10 years
from now? What will the competitive environment be like 10
years from now?
Mr. Rider. We are mandated to give universal service, and I
think it is very important, as the Senator from Alaska has
stated. We need to give universal service, but we have got to
have the tools to work with, in order to provide that, and
those tools have to come through reform.
Senator Carper. You have answered two questions, neither of
which I have asked. [Laughter.]
And those are good answers, but unfortunately not the
question I am asking. Just think about it for a minute.
Mr. Rider. What is it in the future?
Senator Carper. Ten years from now, what do you think it is
going to be like out here--to compete with? Are we going to
have more E-mail, more fax machines?
Mr. Rider. You will be ordering stuff over the Internet
just like that, but you cannot deliver it over the Internet. It
is going to have to come from point A to point B to get to your
house. That is where we should come in.
Senator Carper. Mr. Henderson, 10 years from now, you will
have your feet up somewhere.
Mr. Henderson. That is right. I will be looking at a
partially-privatized Postal Service. I think that the Congress,
over the next decade, will privatize the Postal Service and
make it an independent organization. I think a monopoly will be
gradually reduced and open to competition. The reason I say
that is not because of any insight into the U.S. Postal
Service, but insight into the Postal Service's world. If you
look at the Deutsche Post, which has testified before Congress,
they are on the open market. I think that is going to happen,
and I think there is a lot of resistance to it today. It is
kind of like speaking about the devil, but eventually that is
going to happen and this Congress is going to do that.
Senator Carper. Thank you. Mr. Walker.
Mr. Walker. I think evolving technologies will continue to
have an adverse effect on the traditional services provided by
the Postal Service. I think competition will increase, and I
think because of that, the Postal Service needs to step back
and say what is core? What are the core products and services
that need to be provided? What is universal service? To what
extent should non-core services be provided, and, if they are
going to be provided, based upon what market analysis? What
competitive advantage does the Postal Service have to be able
to do that, verses private sector entities?
In many cases, I think there will be more public-private
partnerships. I think, as Postmaster General Henderson
mentioned, whether or not the Postal Service will ever be
privatized or partially privatized is obviously a major issue,
and I am not going to comment on whether it should be or not.
That is not my job. But I will tell you we have to look
overseas and find out what other countries are doing. We are a
much larger country. We are much more geographically dispersed,
and we have different wants and needs than other countries do,
but we can learn from what some other countries have done in
this area.
Chairman Thompson. Excuse me, but their postal services are
now over here, competing with us in some instances, isn't that
correct?
Mr. Walker. That is right, for international bulk mail, and
presumably they could try to expand that, to compete in other
areas where they could skim.
Senator Carper. If you would turn to your employees, the
folks who are out there sorting mail today, the people that are
out there delivering mail today, and say to them, ``Help us
solve this dilemma,'' any kind of idea what kind of
recommendations they would make, the people actually close to
it, do it every day? What kind of recommendations would they
make?
Mr. Henderson. I think they would say put pay-for-
performance in, which is an issue; incentivize both revenue and
cost-reduction efforts.
Senator Carper. Have you had the opportunity to experiment
with that at all?
Mr. Henderson. We have in management, but not with the
unions. We are pursuing that right now with the unions, in
collective bargaining.
Senator Carper. Is there any interest on the other side, on
the labor side?
Mr. Henderson. There is a discussion. I would not call it
an interest. There is a discussion. I would say that they would
say have more self-management, cut back supervision because
everybody is an adult. They would say take out the monotonous
tasks, capitalize it--when I say capitalize it, I mean automate
it, the monotonous tasks, because people really want to--they
want to be involved in their work. They want to contribute. The
average postal worker is a very dedicated, educated individual.
So they want to contribute. It is the system where they do not
contribute.
It is the fact that you stack mail on a sorter, and that is
what you do. That is a job we ought to eliminate. They would
say reengineer some of that work. It is much like the
automobile industry where you are putting a lug on a wheel. You
want to eliminate that job, because that is not something that
a human being wants to do all day long. They would give you
that kind of feedback. But they are very dedicated to service.
My father was a railway mail clerk for 38 years, and
service was just--if you missed a pouch at a post office on a
train, he would go nuts. They would try to stop the train, and
I think you have that attitude, especially amongst letter
carriers and rural carriers in America. That is why you have
mail service at the high levels that it is today, measured by
Price Waterhouse. It is because of a lot of dedication.
Senator Carper. Let me ask, and I am not sure who to direct
this question to, and this will be my last one, Mr. Chairman,
and then I will pass it on. In terms of initiatives that have
been launched by the Postal Service in the last several years,
where you have attempted to be more entrepreneurial, can you
cite for me some examples where you think you have been pretty
successful, maybe an example or two where you think you could
be if we would allow you to be?
Mr. Henderson. I think the area where we could be, if you
would allow us to be entrepreneurial, is in negotiated rates
with customers who provide efficiencies in mail preparation
that we could pass on. Right now, it is essentially one-rate-
fits-all, and, I mean, you have all been in business at some
level or another. You know that if you do not control your
pricing or do not have the ability to control your pricing on a
near-term basis, you are very limited in what you can deal
with, and I think that is a fundamental problem with the Postal
Service.
The other thing in being entrepreneurial is speed-to-market
is very important. I have been in business prior to the Postal
Service. If you do not have speed-to-market, you are not going
to be entrepreneurial, and we have no ability to really have
speed-to-market. We have to go through a public hearing, and if
we are going to sell a very entrepreneurial service and you
have to have a public hearing, somebody is going to beat you to
the market. So the limit of pricing and speed-to-market are two
inhibitors that are just obvious to anybody who has run a
business.
Senator Carper. Mr. Rider.
Mr. Rider. I was just going to say that freedom in pricing
does not necessarily mean the freedom to raise rates. It means
the freedom to reduce them during periods of low-volume. We
have periods during the year when our volume is just normally
low. We have periods when the volume is high. If we had the
freedom of pricing flexibility, we could encourage people to
mail during that off-season and raise the rates during the
heavy season, to help even out that mail flow.
Senator Carper. Mr. Omas.
Mr. Omas. Senator Carper, I think that the statute, Title
39, as it now stands, allows for flexibility. There is nothing
in the law that says that they cannot innovate. Because it is a
monopoly, before the Service can negotiate a contract, it
should be brought out in the public so that competitors--to see
what effect it will have on the stakeholders that do the
mailing. As far as--we have done a number of expedited cases in
the last couple of years that, in essence, are a form of
negotiated service contracts. We did the ride-along and things
like this that specifically hit a market.
So there is flexibility now, except that the law requires
that it be brought to the public's attention before these
services are negotiated.
Senator Carper. Thank you. Mr. Walker, the last word?
Mr. Walker. One of the problems, Senator Carper, is if you
look at the cost structure of the Postal Service, a very high
percentage of their costs are fixed costs, rather than variable
costs, which means that they have very little ability to be
able to adapt quickly to changes in revenue streams, and that
is one of the things that is going to have to be looked at.
They have a significant fixed cost structure, and it goes
beyond just the issue of infrastructure, which, quite frankly,
is not just a Postal Service issue. It is a government-wide
issue, in light of technological changes that have occurred
over the years, but it is also in the area of labor cost, as
well.
I know, for example--at least it is my understanding--
correct, me if I am wrong, Mr. Henderson, that they have, for
example, a policy whereby when people are hired in, they are on
probation for 2 years. So theoretically they can do something
with regard to headcount with regard to those individuals, but
for people that have more than 2 years, they have very limited
flexibility. The problem is the last thing in the world you
want to do, in light of the retirement eligibility rates that
the Postmaster General mentioned earlier, is to say if you have
just been here for 2 years, you are going to be the first one
to go. That compounds your problem, and so one of the things
that has to be looked at are some of these structural issues
and how they can gain more flexibility over some of these.
Senator Carper. Well, Mr. Chairman, I find this whole issue
just fascinating. I do not know who on this Committee is
interested in leading the charge, if it is you or Mr. Cochran
over there or others, but I want to sign up to be a part of the
solution and to work with folks here at the table, the people
who will be taking your seats, and those who represent the
employees of the Postal Service. This is an important issue and
it is one that I look forward to joining you.
Chairman Thompson. Thank you very much. I now call on the
Subcommittee on International Security, Proliferation and
Federal Service's Chairman, Senator Cochran.
Senator Cochran. That is quite a title. It is hard to live
up to all that.
Mr. Rider, you mentioned the time it took to respond to the
last rate increase request. It seemed like a long period of
time to me. One question that I have is whether or not we
should impose a statutory limitation of time within which a
request for a rate increase must either be denied or approved.
Mr. Rider. Well, that would certainly help, but with the
regulations as they are today, it takes us 6 months or more to
prepare for a rate case. With the Postal Rate Commission, it
usually takes them----
Mr. Omas. The statutes allow 10 months.
Mr. Rider. Ten months.
Senator Cochran. So there is a limitation.
Mr. Omas. There is a limitation.
Senator Cochran. Should it be shorter? Is that justified?
Why does it take so long?
Mr. Omas. The problem is that when the Postal Service
submits their rate recommendation or a rate case, it is the
first time that we have ever seen the figures, and by the time
those figures are published and you get them out to the
stakeholders and those who are in the mailing community have a
stake in what the rates will be, they must then present a case,
and then that takes about 3 months, and then the Postal Service
rebuts their case. So the thing we get from the stakeholders
and the community all the time is there is not enough time.
Actually, at the end of the 3 months for the stakeholders
and approximately 3 months for the Postal Service to review the
case, we at the Commission have about 6 weeks actually to put
together and to analyze the public record to make our decision.
Senator Cochran. Let me ask a question on another subject.
We have had an interest in the new businesses that the Postal
Service has gotten into, and Mr. Henderson and Mr. Walker will
realize that we have had a couple of hearings. We have had two
GAO reports on this subject, specifically dealing with the e-
commerce activity of the Postal Service. One question that I
have is how much revenue is the Service counting on from its
new products and services, such as e-commerce? Is the Service
on track to achieve this target? I should ask Mr. Henderson.
Mr. Henderson. It is minuscule. The Postal Service is a $65
billion organization. It is not going to reinvent itself into
another $65 billion organization. If you look at what the
Internet does--I will tell you in a nutshell what the strategy
is. The biggest strategy the Postal Service has for the
Internet, and it is what large businesses across America are
doing, is using the Internet to take friction out of itself. In
other words, take personnel. Do it on a Web site instead of
going to a personnel system. Take purchasing, do it
electronically instead of talking to a purchasing agent. It has
nothing to do with selling a business. It has everything to do
with cost-cutting.
The second thing that the Postal Service is doing with the
Internet is creating an information platform that allows
customers to watch their mail, and that adds value. Whether or
not we charge for that insight or not is yet to be determined.
It develops an activity-based accounting system, and it allows
managers to have better information about things that are going
on in the Postal Service so they can make better decisions.
Those are the two biggest initiatives of the new technology
age, and it is not really about selling services. There has
been a lot of hype. We have experimented with some of that.
We have eBill Pay, for example, the largest electronic bill
payment site. The major use of that is to see what the trends
are, because we have $17 billion of our $65 billion in bill
payments and presentment. We think that is going to go away.
The GAO has talked about that, about the potential for that,
and we learn from that site. We learn about consumer habits and
what drives them in one direction or the other, and it has been
misconstrued in the media. We are not trying to reinvent
ourselves into some e-commerce organization. We use e-commerce
constructively, but we are, at our core business, a mail
delivery system, and that is what we will be in the future.
Senator Cochran. The GAO report indicated some actions that
could be taken by the Postal Service to eliminate some
inconsistencies with its estimates of cost and revenues with
respect to e-commerce activity. Has there been any action taken
by the Postal Service to respond to those suggestions?
Mr. Henderson. We agreed with all those suggestions.
Actually, we worked very closely with GAO. They were very
helpful in looking at our fledgling e-commerce business. We
made some mistakes in the beginning, when we launched it, and
they were very helpful in suggesting procedures to be put in
place, and we have implemented those procedures, and I am
almost positive that Mr. Walker will have a follow-up review of
the Postal Service in those areas, and we are prepared for
that.
Senator Cochran. Is there ever any decision made to abandon
a service or a product if it fails to meet its revenue?
Mr. Henderson. Yes, under the e-commerce areas, we will--
the Board of Governors has put very strict mandates on us to
have a lifecycle of the products. We have a learning curve, and
then we make some decisions on whether or not to stay in it or
get out of it. So, yes, there are some strict guidelines on
management.
Senator Cochran. Are these decisions made by the Board of
Governors or made by you? Who makes those decisions?
Mr. Henderson. Well, they are made by management in most
instances, as a result of the board requiring certain
restrictions on us. We agree to stay in a business so long or
get out of it. If it does not have a net income opportunity or
it does not have a learning situation, in which we are learning
a lot about our core business, then we are going to get out of
that sort of thing.
Senator Cochran. Have any products of this kind, or
services, been canceled?
Mr. Henderson. Yes, in fact, I will provide a list of all
the products and services we have, and those that have been
canceled and those that have positive net incomes.
Senator Cochran. That would be good to have for the record.
Thank you very much.\1\
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\1\ Responses from Postmaster General Henderson appears in the
Appendix on page 108.
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One other sort of macro question: Both Mr. Walker and Mr.
Henderson talked about the statutory framework, and the fact
that there has not been change to this framework since the
Postal Service was created in 1970. What changes should be
made, based on your knowledge of what is happening and the
evolution of technology, demand, and cost? Mr. Walker, do you
have in your reports to the Committee any specific suggestions
for statutory framework changes?
Mr. Walker. We have not gotten to the point, Senator, where
we outlined specific recommendations. Frankly, we have
recommended, however, a process that needs to be followed in
order to come up with that. My view is, if you look at the
statutory framework, there are several problems. One problem is
it is cost-based. It is cost-based from the standpoint of
determining what revenues are. One key question is how do you
define cost? Second, if it is cost-based, how do you define
labor cost. Obviously, I am a strong believer in collective
bargaining, as I am sure you and others are.
Basically, what has happened over time is it has been cost-
based, without enough market-based principles. There is binding
arbitration, which I understand might have been done as a
trade-off back in 1970, in order to avoid the possibility of a
strike. Obviously, needless to say, Postal Service workers are
dedicated professionals and they are essential to our economy.
There is no question about it.
But there are other important elements, as well. There are
issues with regard to inability to close facilities in some
circumstances, even in urban areas where there can be clear and
compelling cases they are not needed, and therefore they do not
really affect the ability to reach remote areas and to meet any
reasonable definition of universal service, even under the
current definition of universal service.
So I think there are a number of things; and candidly,
Senator, I think what has to happen is there has to be a set of
proposals come up, a package that comes up to the Congress,
that deals with these major problems, with various pros and
cons, so that you can engage in a debate about what needs to be
done, and to look at it as a package, rather than individual
elements, and as compared to the status quo, because everything
is relative, and I think that is what we think has to happen
here.
Senator Cochran. One other statement that you made to the
Committee in your prepared statement was the need for a
comprehensive plan. I think that was your phrase. Is this the
same thing as a strategic plan? Somebody else mentioned a
strategic plan. Is that the same thing?
Mr. Walker. I think it is more than that, Mr. Chairman. The
issue is that clearly there is a lot of opportunity to help
make progress in the existing law by focusing on people,
process, and technology, to reduce cost and increase
productivity. There is clearly opportunity to do that, but that
is only going to delay the day of reckoning before the Postal
Service has to deal with the underlying structural problems.
Clearly, you need a strategic plan as to where you are going
and how you are going to get there, but I think the
transformational plan also embodies, not just actions that
could be taken within the context of current law, but also
possibly what type of legislative changes might be necessary.
A strategic plan typically is what enterprises are going to
do within the context of current law, and we need to come up
with specific options, pros and cons, with regard to how do you
deal with some of the underlying structural problems associated
with the Service. I think, frankly, the board has a major
responsibility for leadership in that regard. I mean, they need
to be involved in strategic planning. They need to be involved
in succession planning, and I think they need to help
facilitate this public dialogue and debate, because we are on a
path that is not a positive path.
Senator Cochran. Is the GAO capable or are you qualified as
an agency to help develop this comprehensive plan?
Mr. Walker. Well, candidly, I believe, Mr. Chairman, it
would be better if the plan was developed by management or in
consultation with stakeholders or by an independent business-
oriented authority. We would be happy to review that and
comment on it, but I do not know that it is appropriate for the
GAO to come up with, ``the plan.'' We can clearly contribute to
it. My personal view is that it should not be a single plan. It
should be various options, and there may be more than one
alternative that could be looked at, with various pros and cons
that then could be discussed and debated.
I think the idea that you are going to come up with one
plan that you are going to get a consensus on just does not
exist. So, in the end, we are going to end up having to come up
with what is the best of available options.
Senator Cochran. What is your reaction to that, Mr.
Henderson?
Mr. Henderson. I agree with it.
Senator Cochran. How about you, Mr. Rider?
Mr. Rider. I agree with it, and we are working on it.
Senator Cochran. You are working on a comprehensive plan?
Mr. Henderson. Yes.
Senator Cochran. When can we expect to hear about it, and
what the details may be, and will it require congressional
action to implement?
Mr. Henderson. Yes. In fact, we can provide you with a copy
of our initial efforts. We will provide that for the record. It
is signed by the chairman.
Senator Cochran. So it has been completed? You have
completed a comprehensive plan and you are ready to submit it
to the Congress; is that it?
Mr. Henderson. Preliminary efforts on statutory reform.
Senator Cochran. I see.
Mr. Rider. That is one part.
Senator Cochran. Who is doing the other part?
Mr. Rider. We are working on the other part, too.
Senator Cochran. This is beginning to sound George
Orwellian here, Kafkaesque.
Mr. Rider. The legislative reform package we have done, it
will----
Senator Cochran. All right. We will talk about it some
more. I am using up too much time.
Mr. Chairman, thank you.
Chairman Thompson. Thank you very much. Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Mr. Henderson, I want to talk with you about an area of
avoidable cost. Before I do so, I do want to thank you for your
many years of service to the Postal Service and your country,
and before I launch into this issue, which concerns me greatly,
I want to make clear that I do not think, in any way, that you
condone the issue I am about to discuss. As you may know, the
Postal Service in southern Maine has been sued at least five
times since 1998 for sexual harassment of female employees,
producing jury awards and settlements that have exceeded $2.6
million.
Those are just the settlements that we know about. In three
of the cases, the settlement amounts were not disclosed
publicly. So, undoubtedly, the cost is even higher. Obviously,
the vast majority of postal employees in Maine and elsewhere do
not participate in sexual harassment. They do not condone or
tolerate it in any way. But clearly there is a serious pattern
and problem when you have five cases in that short of a time,
that produce awards totaling more than $2.6 million. That is an
area of avoidable cost.
It also, obviously, more fundamentally concerns me because
it harms the employees of the Postal Service, who have been
subjected to absolutely unacceptable sexual harassment. What is
the Postal Service doing to prevent these kind of cases in the
future, which obviously have an adverse impact on morale, are
unfair to the employees, and cost the Postal Service real money
to settle?
Mr. Henderson. Well, first of all, let me say we have a
zero tolerance for sexual harassment. I have actually fired
four or five people in my career for sexual harassment. I was
an investigator 25 years ago in those instances. These cases
crop up, and they are terrible, and we do not like this, but
when you have 800,000-plus employees, you have these situations
exist. It takes an incredible amount of communications and
training to tell people, to show people, what the work place
should be and what the standard is, and we constantly have
this.
I actually go through the training myself. We have a
requirement that all of our managers go through sexual
harassment training. In the case of Maine, we have had to put
special teams in there, sensitivity teams. We are in the
process of reviewing whether or not disciplinary action should
be taken against individuals. It is a day-in and day-out issue
in any large organization in America, and we are very vigilant
about it. We are very apologetic when it occurs, and where we
find culprits, we take very swift and decisive action with
regard to that.
Senator Collins. What concerns me is there appears to be a
disturbing pattern here when you have five essential successful
cases--five cases settled for millions of dollars in a period
of 3 years. That is just not acceptable.
Mr. Henderson. No, I agree with that. I absolutely agree
with that.
Senator Collins. Do you know how much the Postal Service is
spending nationwide to settle sexual harassment cases?
Mr. Henderson. Yes, we track all of those settlements. I
will be happy to provide that for the record. I do not happen
to know off the top of my head what it is, but we do track all
of our settlements, both in-court and out-of-court settlements,
with regard to complainants.\1\
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\1\ Responses from Postmaster General Henderson appears in the
Appendix on page 108.
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Senator Collins. Obviously, as an employer, the Postal
Service would not want to, in any way, tolerate sexual
harassment, but there is a monetary implication here when you
are paying out millions of dollars to settle cases that never
should have occurred in the first place. So this is something
that I think deserves more attention by senior managers at the
Postal Service, because no employees should be subjected to
sexual harassment. Also, at a time when you are facing such
financial constraints, you should not have to be paying out
this kind of money every year to settle cases that should never
be occurring in any work environment.
Mr. Henderson. I actually agree with that. I think there is
a greater moral principle than there is a financial principle.
Senator Collins. I agree. I wanted to link it to the
purpose of this hearing, but it is of great concern to me.
Mr. Rider, it is my understanding, and I think you referred
to this, that the Postal Service in March wrote to the
President and the Congress, asking for a comprehensive review
of postal laws. The letter that you sent was provided to me
first by the President of L.L. Bean, probably Maine's best-
known company and a company whose future depends on an
efficient Postal Service. The President of L.L. Bean wrote to
me and not only provided me with the letter that the Board of
Governors had sent to the President, but also suggested that
perhaps it would be helpful to have some sort of Presidential
Commission created to look at the operation of the Postal
Service and provide specific recommendations. Could you give me
your reaction to that recommendation by L.L. Bean?
Mr. Rider. Yes, we would certainly agree to that--any way
that we can get the job done. The danger in doing that would be
the time that it would take to organize a Commission and bring
them up to speed and get it done. We have sent a reform
package, as I mentioned earlier, to the House, and that will be
provided to you right away, and that is what we had in the way
of reform. We are also working on our strategic planning
committee, to get a strategic plan to go along with the reform.
Senator Collins. But do you think that an independent look
by an outside Presidential Commission would be helpful?
Mr. Rider. That would be fine.
Senator Collins. Thank you.
Mr. Walker, I want to follow up on the issue that the
Chairman raised about productivity in the Postal Service. GAO
has testified that, at a time when we have seen unprecedented
technological advancement and really an explosion in private-
sector productivity that has helped keep inflation down and
prices down, that the Postal Service has increased its
productivity by only 11 percent over the past 3 decades; and,
indeed, the Chairman noted that during one period--I think it
was between 1993 through 1999--that productivity actually
declined in the Postal Service, which is contrary to the
experience of many large private organizations.
It is my understanding that the GAO is studying whether or
not the Postal Service's breakthrough productivity plan will
produce the kinds of cost savings, which I think are in the
neighborhood of $3 to $4 billion over the next 5 years, that
the Postal Service is projecting. Do you have any preliminary
findings or any assessment of whether that plan is a realistic
one that could help break this disturbing trend?
Mr. Walker. We do not have the preliminary findings yet,
Senator Collins. I will tell you, as you pointed out, that
while the Postal Service has had a near record year this past
year in productivity increases, about 2.5 percent, it has been
a roller coaster. Since 1970--it is only an 11 percent increase
since 1970. There are a variety of reasons for that. In some
cases, as we pointed out in prior reports, we have noticed that
there has not been enough focus on the design of this
technology and the implementation of these technologies in a
universal manner throughout the Postal Service.
There are other issues that we have raised, as well,
including the incentives associated with it, down to the level
of people who are actually doing the work. We will be looking
at this area, and I will be happy to provide back to you and
the Committee our findings, but it is too early to have
preliminary conclusions yet.
Senator Collins. Thank you. I look forward to receiving
those results. Thank you, Mr. Chairman.
Chairman Thompson. Thank you very much. Gentlemen,
primarily Mr. Henderson, Mr. Rider, and Mr. Omas, I want to
talk a bit about your rate case procedure and the facts leading
to these last, most recent rate increases. I want to discuss
how they came about, because there is clearly a disagreement or
difference of views between the Postal Service and the Rate
Commission on this. I think most people would probably be
surprised to know exactly how it works. That is, that the
Postal Service goes before the Rate Commission and presents a
requested rate increase. Then, if the Postal Service does not
get what it wants, it can come back to them again. If it still
does not get what it wants, it can come back to the Rate
Commission a third time. Finally, if it still does not get what
it wants, the Postal Service, by unanimous vote, can do what it
wants to do anyway, right?
Mr. Henderson. That is right.
Chairman Thompson. So that is one thing that might bear a
little discussion--whether or not that is what happened here in
this particular case. Within that framework, what happened in
this latest instance was that, in January of last year, you
filed your case with the Commission. You asked for a 6 percent
increase, including a $1.7 million contingency amount; is that
correct?
Mr. Henderson. That is right.
Chairman Thompson. At that time, you were projecting a
surplus of $500 million for fiscal year 2001. As has been
pointed out, the Commission has 10 months to consider this. I
can only imagine how laborious this process is. I have read a
little bit about it. There have got to be huge law firms doing
nothing in this town except handling rate cases. It reminds me
of the old transportation cases, back when that was regulated.
As I understand, there are over 70 parties to the procedure--
everybody has got a dog in the fight. Everybody has witnesses.
Two-ton trucks pull up with documents. I mean, literately,
right? You go through that for 10 months. So you went through
that, and in November, you, Mr. Omas, and the Commission,
decided against a 6 percent increases. You decided instead on a
4.6 percent increase, and instead of a $1.7 billion contingency
amount, you decided on a $700 million contingency amount. Is
that correct?
Mr. Omas. That is correct, $1 billion contingency is what
we actually gave them. They asked for $1.7 billion and----
Chairman Thompson. You cut it by $700 billion.
Mr. Omas. Yes, sir.
Chairman Thompson. That is right. The Governors agreed to
allow the recommended rates to be implemented, but to do so
under protest. So, they implemented the new rates and then the
Postal Service came back to the Commission and requested that
the full revenue request be restored. Is that correct?
Mr. Omas. That is correct.
Chairman Thompson. Here is where we have an issue, at least
one or two. As I understand it, your position is, the Postal
Service did not give you any material that would indicate to
you the need for what it was asking for.
Mr. Omas. That is correct.
Chairman Thompson. At the time you first turned the Postal
Service down, it is your position that the evidence before you
did not justify that kind of increase.
Mr. Omas. That is correct.
Chairman Thompson. You turned them down, then they came
back to you again and did not supplement the record with
additional information; is that correct?
Mr. Omas. That is correct.
Chairman Thompson. To justify the increase----
Mr. Omas. And we had offered them the opportunity to reopen
the case, and they declined to reopen the case.
Chairman Thompson. Let's stop right there before we
continue on our little chronology. Let's ask Mr. Henderson and/
or Mr. Rider to comment up to this point, as to whether or not
that is true.
Mr. Henderson. Well, we obviously do not agree or we would
not be in the controversy right here. I will give this to you,
for the record, as the testimony on what the current situation
was in the Postal Service.
Chairman Thompson. Let me ask you some specific questions.
Then you can comment however you want to, but break it down a
little bit. Do you disagree that you were projecting at that
point, in January 2000, a $500 million dollar surplus?
Mr. Henderson. No--you are correct.
Chairman Thompson. And you supplied information to the
Commission, and with those projections, they turned you down.
When you came back to them again, did you supplement the record
or did you open up the proceedings, as was your right? Did you
supplement the record with any additional figures or numbers or
projections?
Mr. Henderson. We did not reopen the record, but we gave
sufficient testimony, in our opinion, to have an accurate view
of what the economy was doing at the time. I will say that in
the year 2000 we began to see shortfalls in revenues, which we
reported to the Commission, of about $240 million. We then were
forced--we reduced, using good business judgment, our revenue
forecast in 2001 by $630 million, and then we were hit with
fuel inflation on the order of magnitude of--in the case of
$300 million, and we had an unexpected cost of living
adjustment, because fuel drives our COLA cost, of about $430
million.
Chairman Thompson. As I recall, your transportation costs
constitute about 10 percent of your costs, is that correct?
Mr. Henderson. That is right.
Chairman Thompson. And fuel is a part of that?
Mr. Henderson. Every penny, as I testified earlier, costs
the Postal Service $5 million, every penny of gasoline.
Chairman Thompson. So what percentage of your overall costs
does fuel constitute? We know it is less than 10 percent.
Mr. Henderson. It is a major driver in our transportation
costs, and transportation, as you said, runs about 10 percent
of our costs.
Chairman Thompson. Do we know how much of that 10 percent
is fuel?
Mr. Henderson. Yes, I can provide that for the record. I do
not know it off the top of my head.\1\
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\1\ Responses from Postmaster General Henderson appears in the
Appendix on page 108.
---------------------------------------------------------------------------
Chairman Thompson. You understand that you are mentioning
some facts here that would indicate that some circumstances
were in the process of changing. Mr. Omas' position, as I
understand it, is that you did not lay out sufficient facts to
him at that time to justify a reconsideration. Is that what you
are saying?
Mr. Omas. Mr. Chairman, in July 2000, just prior to the
last of the hearings of the case, we asked the Postal Service
to give us updated, accurate figures for 1999, cost and revenue
analysis for fiscal year 1999, which they did. At that time, we
adjusted their original request by approximately $587 million,
somewhere along in there, which included the ECI, which is the
employment index. In the case, we usually did ECI minus one. In
this instance, we gave them a full ECI. We took into
consideration fuel costs, and we took into consideration the
recently concluded labor contract negotiations, which they had
brought up, that they would be going in there. So, the total
package that we gave them----
Chairman Thompson. Also productivity fluctuations, too----
Mr. Omas. Yes, and we added that to the case. That was in
the decision we issued in November.
Chairman Thompson. You understand what Mr. Henderson is
saying is that, after November, some circumstances changed. As
I understand what he is saying, they brought oral testimony to
your attention. You are saying they did not open up the record
and supply it. What's the gap here? Where are we missing each
other on this?
Mr. Omas. There was no oral testimony, Mr. Chairman. They
submitted to us a request, on remand, that we restore the
contingency, which we had cut, and several other things. There
were a total of about $1 billion, which they eventually
restored. On the first remand, we offered them the opportunity
to open up the case and we would try to expedite it. They
declined to take that. They did a second request, and in the
second request, they again declined to open up the case.
Chairman Thompson. Between that request and the second
request, they came out with some revised projections,
projecting a $2-$3 billion deficit for 2001. I think that was
February of this year.
Mr. Omas. That is right.
Chairman Thompson. Then they came back after that. They
came back to the Commission again to ask for reconsideration.
Mr. Omas. But they never presented new data. As far as we
are concerned, as I said in my opening statement and in my full
statement, we have no analyses of where they are losing the
money exactly, and we must--we are charged with following the
evidentiary record, and we had no record established as to what
the new shortfalls, the loss of $2-$3 billion, were coming
from.
Chairman Thompson. Mr. Henderson, do you take issue with
any of that?
Mr. Henderson. I, frankly, do not know. When I say that, I
say that from--I am not in the lawyering process in the Rate
Commission. I do know that what was going on was obvious, and
our appeal stated quite clearly what was happening in the
Postal Service. These were not projections. This is what was
actually happening. I mean, our revenues just went south, and
we were saying to the Postal Rate Commission, ``Look, we need
more money. Your revenue projections are not accurate.''
Chairman Thompson. See, the problem that a lot of us have
is that these are very formal proceedings. Testimony is taken
under oath, and you go through them every 2, 3, or 4 years. You
go to all this trouble and all this expense, and take all this
time in 10 months. You cannot, just in the middle of it or at
the end of it, start sending stuff over the transom. If you
have got stuff like this that is relevant and that is clear,
you open up the proceedings. You make that a part of the
record, because the Commission can only make their decision
based on what is in the formal record.
Mr. Henderson. I agree with you, but I think if you were to
examine the formal record, you would see that these things
occurred before the record had closed. In other words, in our
opinion, the sufficient evidence was on the record to justify
the revenue requirement. I do not mean to say these things
happened after the record closed.
Chairman Thompson. But you will agree that there was no
formal opening up of the record or live witnesses presented
with this new information?
Mr. Henderson. Yes, we did not feel that we needed it, and
we did not want to start the process over again, so that the
10-month period would re-click. We needed the money. As it is,
the Governors went through the statutory process that allows
them to implement the rate case after two submissions and
denials by the Rate Commission.
Chairman Thompson. What happened and the reasons why you
did it are two different things. I am just trying to get, first
of all, at what happened. It would seem to me that having been
turned down twice and with all these things happening, that you
would dot the i's and cross the t's necessary to get this
before the people. One might think you were not comfortable
with your own projections. We talk about economic downturns and
so forth. We know that, at the last quarter of last year, that
we were growing at 1 percent. And at the first quarter of this
year, we are growing at 2 percent. So it is hardly a recession,
but you had your cost fluctuations, labor costs and fuel, and
all of that in the record as of July of last year.
The issue is, when you were projecting a surplus, what
circumstances changed so dramatically, so that you were, the
next day, as it were, projecting huge deficits? I do not know
why. There is obviously more here than meets the eye, and I am
not smart enough to figure it out. It does not make a whole lot
of sense to me.
Senator Cochran.
Senator Cochran. Mr. Chairman, you mentioned and one of the
witnesses did, as well, the statutory borrowing limit of $15
billion, and that this might pose a problem in the near future.
The borrowing up to the end of fiscal year 2000 has amounted to
$9.3 billion. My question is, when do you think, Mr. Walker or
Mr. Henderson or both, the Service is likely to reach its
borrowing limit?
Mr. Walker. My understanding is without an additional rate
increase, above and beyond the one that has recently been
approved by the Board of Governors, it would be in 2003.
Senator Cochran. Mr. Henderson, is that your estimate, as
well?
Mr. Henderson. I think, yes, 2002, September 2002 or 2003.
Yes, we will have a problem. Yes.
Senator Cochran. What is the practical consequence of that?
If you reach that limit, what happens? Does Congress have to
raise the limit or do we have to excuse----
Mr. Henderson. No, you have to raise the limit.
Senator Cochran. We have to raise the limit.
Mr. Henderson. If you look at the limit, $10 billion was
set in 1970. We are in the year 2001, and it has only been
raised to $15 billion. You say what do we do with the capital?
What does that mean? We either raise capital through net income
or we borrow it. We use capital to substitute for labor, that
is to mechanize the Postal Service and to upgrade its
infrastructure. So, it would put handcuffs on both the
infrastructure upgrades and on the further mechanization or
automation of the Postal Service.
Senator Cochran. Does the Board of Governors come into play
here? Do you have a role to play in connection with the
statutory borrowing limit?
Mr. Rider. I believe they did. That was before my time.
Mr. Henderson. They approve, they being the Board of
Governors, approves every capital expenditure of $10 million or
over. They have a role in spending the money. They have no role
in setting the limit. That is purely the purview of Congress.
That is a statutory----
Senator Cochran. And the board has to approve the
borrowing?
Mr. Henderson. That is right, $10 million and over. That is
correct.
Senator Cochran. Does the board have a position on whether
or not this limitation ought to be changed?
Mr. Rider. I am confused. The limit of $10 million we have
is on projects we approve, capital projects we approve.
Everything over $10 million, the board approves. Less than
that, we do not. So, we have control over the capital
expenditures that are being made.
Mr. Henderson. That is not a statutory limit. That is
something they approve by bylaws.
Senator Cochran. We are mixing up two things.
Mr. Rider. The $15 billion is set by Congress, as I
understand it.
Senator Cochran. Mr. Walker.
Mr. Walker. Mr. Chairman, the $15 billion limit on
borrowing, the statutory limit, is an action-forcing event.
That is going to occur sometime between 2002 and 2003,
depending upon what actual experience is versus projected
experience. That means, among other things, that we have some
time to be able to come up with a set of comprehensive
proposals. Obviously, one of the things that needs to be looked
at is, part of that set of comprehensive proposals, is whether
and to what extent that limit should be raised. But, at some
point in time, as Postmaster General Henderson said, something
has got to give.
When you end up coming up and you have negative cash flows,
you can cut back your capital spending only so far. Some of
that is only a timing difference. Some of that hurts your
productivity improvement efforts. But, hopefully, what can
happen is, if we can have a comprehensive set of plans or
proposals that will consider what is to be done structurally
before you hit this wall, because that is basically what the
limit is. It is a wall that is going to require congressional
action.
Mr. Henderson. That is right.
Mr. Rider. Let me also indicate that the board does not
favor raising the debt ceiling.
Senator Cochran. That was my question. That is what I was
wondering.
Mr. Rider. We do not favor raising. We would like not to do
that, because if we raise the debt ceiling, we are raising our
interest cost. That is just digging our hole a little deeper.
Senator Cochran. But if you do not raise the ceiling, what
happens?
Mr. Rider. We hope that we are going to be able to get
reform and be able to operate within those constraints.
Senator Cochran. So you think it would be something that
would put pressure on the Congress, to enact statutory reforms
that are needed; is that correct?
Mr. Rider. It is not a matter of putting pressure on. It is
a matter of trying to get the job done so that we can stay in
business.
Senator Cochran. Either that or the Postal Service can
change the way it is managing its business, in order to keep
the costs from increasing. Is that the other answer?
Mr. Rider. Yes, that is, sir.
Senator Cochran. But why hasn't that been done?
Mr. Rider. We are working on that now, sir.
Senator Cochran. One of the suggestions is that the costs
of operating the business are out of control. I have heard that
from critics who have come to see me, to say that it is time
for the Postal Service to change the way it operates, so that
it does not permit these costs to run out of control. Do you
share that view, Mr. Rider?
Mr. Rider. No response.
Senator Cochran. Can cost be cut further without statutory
reforms or new authorities by Congress?
Mr. Rider. We are in the process of cutting those costs
just as much as we can, but 76 percent of our cost is labor--76
percent of our total cost is in labor. With that, we have to
have the mailmen deliver to every house every day. We cannot
cut back on that end. We are cutting back on headquarters and
right on down to that. There is a point beyond which we can cut
and still provide universal service and good service. Our
customer satisfaction is quite high. It is in the 90 percent--
93 precent----
Mr. Henderson. Right.
Mr. Rider [continuing]. Percent customer satisfaction. In
the capital business, part of the capital that we spend is for
machinery which has a good ROI. Part of it is for facilities,
and that gives us no ROI whatsoever. With adding on the volume
of deliveries and the business that we are doing, it requires
some of these antiquated facilities to be expanded, and we do
not get an ROI for that.
Mr. Walker. Mr. Chairman, if I may?
Senator Cochran. Mr. Walker.
Mr. Walker. There is unquestionably an opportunity to be
able to further cut costs and enhance productivity; however,
without underlying structural reforms, you are not going to
solve the problem. You are not going to solve the problem,
because even if you end up spending more money on, for example,
capital improvements, to enhance technology, to further
automate a number of activities that might be able to be
automated, in order to achieve the savings on that, you have
got to do something with the labor costs. Under the current
structure, it is difficult to do that. You also have to look at
the infrastructure costs associated with the Postal Service.
Ultimately, something has got to be done with that. We are not
going to change evolving technologies. We are not going to
change the competitive climate. The day of reckoning is going
to come, and the question is when do we want to deal with it.
Mr. Henderson. I would add--I would agree with everything
that Mr. Walker said, and just point out that last year we had
the best productivity we have had in almost a decade, and we
lost $199 million, primarily due to softening demand. This
year, we have better-than-planned productivity, and we have
costs under our plan, and we are losing money because of
softening demand for postal products, in other words, our
revenues, and we are not even being hit by the Internet today.
As I said earlier, $17 billion of our $65 billion are bill
payment and presentment. We all know it is not if, but when,
that is going to go electronic. AT&T, for example, spends $1.75
or somewhere in that neighborhood, to send you a bill. If they
could take that out of their cost structure, they could save $1
billion on the bottom line. Somebody is going to figure out how
to do that. It is not going to happen tomorrow, it is not going
to happen maybe 3 years from now, but it is going to happen.
And, when it happens, you are going to have this same
phenomenon of how does the Postal Service--as the Chairman
mentioned, continue to do what is mandated under universal
service, which is regularly scheduled mail delivery in urban
and rural areas, 6 days a week across America, and opening post
offices, keeping post offices opened--this is not a matter of
good and evil, where it is not cost-effective? I will give you
a classic example of that. Cape Cod has 7 townships, 53 post
offices. President Kennedy had a great hand in that.
Chairman Thompson. Is that Massachusetts? Several of them
ought to be closed.
Mr. Henderson. I will not go any further.
Senator Cochran. Thank you, Mr. Chairman.
Chairman Thompson. Thank you very much. Mr. Henderson, you
talk about softening demand, but how much more is demand going
to soften as these rates continue to increase?
Mr. Henderson. It is a problem. I agree with you.
Chairman Thompson. It is a Catch-22, isn't it?
Mr. Henderson. That is exactly right. It really represents
what your opening statement said. It is a Catch-22.
Chairman Thompson. Let's get back to that for a minute. Mr.
Walker, sitting here listening to this and listening to you, we
have had this conversation before with regard to other
governmental agencies. It seems to me that we have the same
problems here that we have in most all governmental agencies--
financial management problems, projections, trying to determine
where you are, information technology problems, inability to
use technology to help themselves, capital management problems,
same kinds of difficulty in changing the culture. What we have
done here is tried to combine a Federal agency entity with a
private entity. To put them all together and give them
characteristics of both.
It worked for a while and now it is not working anymore.
Factors such as the technological revolution that is going on
and because the bigger it gets, the more it begins to behave
like other governmental entities. The Postal Service has
900,000 employees and we cannot seem to do very much about it.
Obviously, part of that is because of the mandates. If we are
going to keep all these post offices opened, somebody has got
to be in them, and therein lies your employee situation to a
great extent. Aren't these just the kind of characteristics
that should not surprise us at all? The question is, in some
sense, why haven't these problems happened sooner than they
have?
Mr. Walker. The Postal Service is a major and important
case study in the two questions, as you know, Mr. Chairman,
that I have raised before; and that is, now is the time that we
need to ask what the government should do and how should the
government do business in the 21st Century. We have to move
beyond incrementalism. Minor changes here, minor changes
there--we have to recognize it is a new ballgame and we need to
fundamentally re-examine some issues, not just with regard to
the Postal Service, which is why we are here today, and it is
very pressing and is very important, but in a whole range of
areas, as well, because many of the challenges they face are
shared by other entities. The Postal Service is supposed to
achieve a specifically-defined mission and they are supposed to
be self-supporting. So, it is more visible with them and it is
more universal with them, because every American can identify
with the Postal Service.
Chairman Thompson. Mr. Henderson, you were very candid in
your statement awhile ago about how you saw the future. You saw
a total or partially privatized Post Office. I said in my
opening statement that everything ought to be on the table,
including the question of the postal monopoly. What makes sense
in the kind of world that we live in? You and I both know that
if that were to come about, it is certainly going to have to
get--well, that is not going to come about in short order, if
ever. And whether it should or not is what we are going to be
discussing here.
Mr. Rider, what would be your ideas, and Mr. Omas, also,
what would be your ideas about something that might right the
ship. Or, less than that, something that might be more
politically doable than going in that direction? Is it worth
the effort or should we just wait until we can revolutionize it
before we do anything? I know that you have had certain reform
ideas. Congress ought to do something about your labor
situation. You ought to be able to raise rates whenever you
want to, essentially, is the way I read it. Are those the only
proposals that you have that might be done, that might be
doable, less than privatization?
Mr. Henderson. Well, let me comment, because you raised the
issue of privatization and monopoly. You cannot talk about
monopoly without talking about universal service. Universal
service is an obligation we have, and it is an obligation to go
into areas of rural Tennessee and rural Mississippi, where we
do not make any money. There are 40,000 post offices. The
26,000 smallest ones, it costs over $2 to take in a dollar. So,
there is an infrastructure in place that is called universal
service, that is there, and it is protected by a monopoly, and
the two cannot--you cannot break one without breaking the other
one.
You also have an issue of affordable rates. It costs the
same amount of money to send a First-Class letter from Dresden,
Tennessee, to Memphis, as it does to Anchorage, Alaska. That is
something people accept as a fundamental right of living in
America. So those are at the core of the U.S. Postal Service,
and I agree with you, we are not going to break those tomorrow.
You are not going to break them for a long time, and I think we
all recognize that because of the impact on America.
As to the changes that can be made, yes, I think you can
get price freedom, but as the chairman of the board pointed
out, it is not just to raise prices, it is to lower prices. We
make all our money--the Postal Service has a business cycle. It
begins in September. Halfway through the year, we make all the
money we are going to make. The last half of the year, we lose
money. It is purely a function of volume. The first half of the
year is robust. The Postal Service is very efficient with that
robust volume. Last half of the year, the volume goes away, and
the Postal Service scrambles. It is impossible to say you are
going to have 800,000 people in the first half of the year and
500,000 at the last half of the year. It does not work. There
is a trade-off. Pricing freedoms--to change that business cycle
in the last half of the year just like a retail store does. At
the end of their business cycle, what do they do? They put
their clothes on sale. That sounds strange, but we could
incentivize mailers in that fashion. We could incentivize large
mailers. Senator Collins talked about my good friend, Leon
Gorman at L.L. Bean. If he gave us packages for Japan--well,
Japan is a bad example. If he gave us packages for the United
States in a certain fashion, we could give him certain
discounts, having more freedoms. It is not just a matter--do
not think of it as a model of just increasing prices, it is
being able to adjust your prices.
In the final analysis, unless you change the accountability
of the labor conflict solution at the Postal Service--I am
talking about the wage increases--unless that has a different
criteria, where the voice of the customer is heard, you are not
changing anything. We can incentivize some growth, maybe. I
actually question in my own mind how much we can incentivize.
If you look back 30 years, mail volume growth has mirrored GDP.
The correlation is almost a plus-one. So, if you do not get
control over the work-hour cost----
Chairman Thompson. When you say have the customer have a
bigger input in that, what are you talking about?
Mr. Henderson. Well, today, the customer has no input in
it. It is an arbitrator who makes an independent decision, and
he makes a decision without regard to what that impact will be
on the price of postage. And if you look back 30 years, you see
that the cost per hour and the revenue per piece, which is
postage, correlate. In effect, you have an arbitrator driving
postage rates.
Chairman Thompson. I have read where management-negotiated
contracts were not much different than the ones that
arbitrators----
Mr. Henderson. In the 1970's, that was true. In the 1970's,
there was a belief that the postal workers were underpaid. I
participated in the 1973, 1975, 1978, 1981, and 1984
negotiations, not as a principal, but as a person there. There
was a belief in the 1970's that postal workers were underpaid,
and they did put in provisions that were in the private sector
at that time. In the 1980's, most of those provisions were
taken out of the private sector, like cost-of-living
allowances, for example. Some took strikes----
Chairman Thompson. Do all postal workers have COLAs?
Mr. Henderson. Yes, all craftworkers have COLAs, not
management. Arbitrators have a tendency not to take out
provisions that have been agreed to, and have been in there for
long periods of time.
Chairman Thompson. What do you think, philosophically, as
you go along? You are talking about things that might make you
more competitive and Congress might be able to help you out in
that regard. But, philosophically, what do you think, as you
see these businesses around you who are beginning to provide
some of the same services you are? They say they can do it,
that they can compete with one another and hold down prices,
and maybe they can. What do you think about that? Should we
shut them out? Should government be doing something that
private enterprise can do? Should we carve certain portions of
it out? In every other aspect of government, we are outsourcing
an awful lot. What are your thoughts about that?
Mr. Henderson. I think that is actually the key question of
the future of the Postal Service, and that is, what is the role
of this quasi-government agency in the future, and should it
compete where the private sector competes? I think the answer
to that lies in the answer to another question, and that is, is
a healthy Postal Service important to America? If the answer to
the question is yes, then you do take steps to allow it to
compete. If the answer to that is no, that a healthy Postal
Service is not necessarily important, and you want to shrink it
down--and there is a sale, there are two philosophical camps--
then you do not do that and you just say size down. My own view
is that a healthy Postal Service is very important to America
and will be for a long time to come, and that the Congress
ought to act in unison and make reforms that allow the Postal
Service to be more competitive. But, you can choose a different
ideology. That is legitimate.
Chairman Thompson. Mr. Rider, what are your thoughts on all
of this in terms of what we can feasibly do?
Mr. Rider. I agree, and I was just thinking on our labor
situation. We are not allowed labor differentials in areas.
Some of our postal workers in cities like New York, or Los
Angeles, California, for example, are paid the same as those in
Dresden, Tennessee, which is not right.
Chairman Thompson. I understand that your position is, or
that there has been testimony to the fact, that there is a 23
percent wage premium, in terms of the private sector, that the
postal employees have. Is that correct?
Mr. Rider. I have not seen that figure. Have you?
Mr. Henderson. Well, we will provide that economic
information, but I will say that we are not saying that postal
workers are overpaid. We do not talk like that about our
employees. Our employees do a very fine job every day and earn
their money. We will let the economists fight over that.
Chairman Thompson. I agree. I used to be one of them. One
of the multifaceted jobs I have had. When I dropped out of
college 1 year to work a couple of different jobs, to save a
little money, one of them where I worked was the Post Office in
Lawrenceburg, Tennessee.
Mr. Henderson. Oh, really?
Chairman Thompson. Yes, I think the wage was about a
dollar-and-a-quarter then, as I recall, but it was better than
anybody else was making. Mr. Rider, do you have anything
further?
Mr. Omas, do you have any thoughts?
Mr. Omas. Well, Mr. Chairman, that is a bit of a difficult
question. I think there may be certain areas in the Postal
Service that could be privatized to make it more efficient, and
I think all of that needs to be looked at in the overall--where
the Postal Service is going to go and what we want the Postal
Service to look like. But I go back to what I said earlier, to
Senator Carper, is I think the Postal Service's main business
is its core business, and that is the delivery of mail. They
have the network. They have the ability and there are companies
now who are doing a great deal of work-sharing, which I think
saves money for the Postal Service. We think it does. They
bring their mail down to sectional center facilities for drop-
shipping. In other words, they take a lot of work out of
processing the mail. So maybe encouraging that is something the
Postal Service should look at expanding.
Chairman Thompson. Senator Cochran.
Senator Cochran. One final question. There is a requirement
in the statute that you have to break even, not that you have
to make a profit. It is still the Postal Service, not the
Postal Business, in the statute. Should either one of these
concepts be changed in the comprehensive reform that we
undertake?
Mr. Henderson. That is an interesting question. I really do
not have an answer to that question today. I will say it is
much easier to manage a business for profit than it is to break
even. You say how does that make a difference? Well, in 1997,
in July, we were given the authority to raise rates, and
because we were making so much money at that time, we decided
to postpone that decision of implementing that rate increase
until January. If we would have been operating for a profit, we
would have put those rates in in July, and just increase our
profit. Because we were making so much money, we decided to
postpone it for a year.
So, it does have an impact on you. I think, from a public
policy point of view, for our customers, it is probably a good
notion to have a not-for-profit Postal Service. From a
management point of view, I would much rather manage an
organization that runs for profit than one that does not run
for profit. It is much easier.
Mr. Rider. May I add that we do need to have some way--if
we are going to be breakeven, we have to have some way of
raising capital to take care of our capital needs, both
facilities and machinery. If we are just in a breakeven
situation, the only thing we can do there is fund it out of
depreciation, and depreciation does not take care of even
replacement today.
Senator Cochran. Mr. Walker, do you have any observations
about that issue?
Mr. Walker. I think it is one of the issues that has to be
looked at as part of comprehensive reform. In my view, in
sitting here and listening today, to me, there were several
things that were evident right off. First, there is a need for
additional transparency and accountability with regard to the
Postal Service's financial and operating results and
projections. There is a need for enhanced communication and
coordination between the board, management, the unions and the
Postal Rate Commission on these issues. There is a need to try
and consider additional contingencies, with regard to variances
that could exist with regard to either the revenue side or the
cost side in order to minimize the frequency of postal rate
increases. There is a need to continue to push, to try to
improve productivity and minimize cost and minimize rate
increases, but there is also a need to get on with the effort
to develop a comprehensive transformation plan, because, in the
end, we are not going to be able to change the trends that are
impacting the Postal Service; the technology, the competition.
In the end, there is going to have to be much more
comprehensive change to deal with the underlying structural
problems.
Senator Cochran. Thank you, Mr. Chairman.
Chairman Thompson. I think that pretty well says it all.
That is probably a good place to end right there. I think what
you have laid out for us is a job for Congress and a job for
the Postal Service. Clearly, we have laid some requirements on
the Postal Service that are important. Universal service is
important and it is going to remain so, regardless of what it
costs, probably. Mr. Rider talks about the need to raise
capital. The direction we are going in, you are going to be
raising it right up here, before the Appropriations Committee.
I might just ask Mr. Walker, what is the significance--if
they are about to reach their debt limit of $15 billion--if we
continue anywhere near where we are going right now? I think
the picture is probably a little worse than what we are laying
out because of these assumptions that are not going to pan out,
but let's say next year, or the year after that, we reach the
debt limit, what is the significance of that? Obviously, they
will have to start paying expenses in cash. I mean, in terms of
retirement payments and all of that, that is a significant
landmark; isn't it? Congress could, obviously, come in and
throw a few billion dollars into the pot, but, short of that--
--
Mr. Walker. You could take some fairly dramatic and, some
would argue, Draconian actions. You could freeze all capital
spending. You could end up engaging in massive layoffs for
people who you have the ability to lay off. I do not think any
of these are desirable. You could end up taking some short-term
actions that might end up dealing with the problem in the
short-term, but it could exacerbate your long-term challenge.
We have a window of opportunity here, because one of the issues
that the Congress is going to have to deal with--it is going to
have to deal with this debt limit issue, the way things are
going right now. So one of the things we hopefully will do is
to be able to take a look at this window of opportunity, do
what you can in the context of current law, and come up with a
more fundamental transformation plan, including any necessary
restructuring, before you hit that limit.
Chairman Thompson. And, as a part of that, and because it
needs to be done, and because it can help the bottom line, and
because it gives us the political ability to get something more
done, the Postal Service is going to have to do something
better. In terms of productivity, in terms of managing its
costs, in terms of financial management and things of that
nature the Postal Service must do better. I think it is not to
lay blame on anyone, it is just a matter of fact.
I hate to leave on that note, as a matter of fact,
especially with Mr. Henderson. You have given a lot of good
public service to your country over the years, and I want you
to know we appreciate it. As I say, this is probably not the
best way to go out, unless you have another hearing or two you
are going to have to go to on the other side.
Mr. Henderson. I enjoy the hearings. I would like to enter
into the record the statement of Karla Corcoran, Inspector
General.\1\
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\1\ The prepared statement of Ms. Corcoran appears in the Appendix
on page 118.
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Chairman Thompson. You are in a position now, and will be,
to have a perspective to look back on all this. To really give
some candid advice to us, as to some things that we can do and
maybe as to what your successor can do, some of the things you
have done and some of the things you wish you had done. Thank
you for your service, and, gentlemen, thank all of you as we
proceed to try to make progress in this area.
The record will remain open for a week after the close of
the hearing. If there is nothing further, we are adjourned.
[Whereupon, at 12:26 p.m., the Committee was adjourned.]
A P P E N D I X
----------
PREPARED STATEMENT OF SENATOR BYRON L. DORGAN, A U.S. SENATOR FROM THE
STATE OF NORTH DAKOTA
Mr. Chairman and Members of the Committee:
I thank you for the opportunity to share my views with you. As you
know, the Postal Service recently announced that it will be facing a
projected deficit in the range of $2 to $3 billion during fiscal year
2001.
A number of options have been proposed to help the Postal Service
become more financially stable. Construction projects, affecting more
than 800 postal facilities, were put on hold earlier this year. Also,
last week the Postal Service announced yet another set of rate
increases in an effort to curtail the projected deficit. In April, the
Board of Governors called for a study of one of these proposals,
namely, to cut delivery by the Postal Service to five days a week. This
is particularly troubling to me because of the negative impact this
would have on rural areas.
I understand the many challenges facing the Postal Service. Not
only are some costs rising--such as fuel prices for delivery vehicles--
but other methods of communicating and doing business have caused a
decrease in the volume of First-Class mail. Many people are using the
Internet to pay their bills, to go shopping, and to contact their
friends and family.
However, not all Americans have enjoyed the benefits of these
technological advances. People in rural areas, like much of North
Dakota, are hampered by limited access to these technologies. These
people depend heavily on the Postal Service.
It seems to me that eliminating Saturday mail service affects rural
areas disproportionately. To those in rural areas, Saturday mail
service gives people one more day to receive mail, conduct business,
order and receive prescription drugs, send bill payments, and read the
news from local and national newspapers. Furthermore, while those in
urban areas have easy access to other delivery services, such as the
United Parcel Service (UPS) or Fed Ex, it is often not convenient for
those in rural areas to use these services or they may not be offered
at all. Doing away with Saturday delivery from the Postal Service is
just another way that rural America would be left behind.
It's also important to remember that taking away Saturday delivery
won't take away the mail that is now being delivered on Saturday.
Instead, mail carriers would be forced to deliver a larger volume of
mail each day. Anytime we have a national holiday, the mail backs up,
creating delays and higher workloads for carriers. Carriers may be
forced to work overtime, just to keep up with the steady stream of
mail.
The idea to reduce mail delivery to five days a week is not a new
one. Back in the early 1980's, there were substantial reforms relating
to the Postal Service, and at that time, some suggested that delivery
service be reduced to five days a week. Federal subsidies for the
Postal Service were greatly reduced in the budget, and Members of
Congress were looking for ways to cut costs. But five day service was a
bad idea then, and it's a bad idea now.
In response to those proposals, language was inserted into the
Treasury/Postal Appropriations bill, requiring the Postal Service to
maintain service at 1983 levels. As the Ranking Member of the Senate
Subcommittee on Treasury/Postal Appropriations, I intend to work with
my colleagues to ensure that this language is retained.
Limiting mail delivery to five days a week would be detrimental to
rural communities which must already overcome the obstacle of
isolation. I will work to prevent this misguided proposal to cut
delivery service from becoming reality. I commend this Committee for
holding this hearing and I look forward to working with you on this
important issue.
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